SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934 (Amendment No. )
Check the appropriate box:
|_| Preliminary Information Statement
|_| Confidential, for Use of Commission Only (as permitted by Rule 14c-
5(d)(2))
|X| Definitive Information Statement
NATIONAL MICRONETICS, INC.
(Name of Registrant As Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|X| Fee computed on table below per Exchange Act Rules 14c- 5(g) and 0-11
1) Title of each class of securities to which transaction applies:
Common Stock, Par Value Ten Cents ($0.10) Per Share
2) Aggregate number of securities to which transaction applies:
22,315,524 Shares
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
Estimated Aggregate Cash To Be Received By Registrant:
$3,000,000 is the sum of the $2,400,000 to be received by the
Registrant from the City of New York plus the estimated value of
$600,000 of the remaining assets to be sold by the Registrant in an
illiquid realty market.
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4) Proposed maximum aggregate value of transaction:
Valuation by Registrant of Assets To Be Sold:
$3,000,000 is the sum of the $2,400,000 to be received by the
Registrant from the City of New York for part of its real property
assets plus the estimated value of $600,000 of the remaining real
property assets to be sold by the Registrant in an illiquid realty
market.
5) Total fee paid: $600.00
|X| Fee paid previously with preliminary materials
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, for
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
$600.00
2) Form, Schedule or Registration Statement No.:
Schedule 14C Information Statement
3) Filing Party:
National Micronetics, Inc.
4) Date Filed:
December 21, 1998
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NATIONAL MICRONETICS, INC.
71 Smith Avenue
Kingston, New York 12401
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
February 5, 1999
The annual meeting of stockholders of National Micronetics, Inc., a
Delaware corporation (the "Company"), will be held at the offices of Gersen,
Wood & Blakeman LLP, 270 Madison Avenue, 7th Floor, New York, New York 10016 on
Friday, February 26, 1999 at 11:00 a.m.
As set forth in the attached information statement, the meeting will be
held for the following purposes:
1. The election of two directors,
2. Action on a proposal for the ratification of the selection of an
independent public accountant,
3. Consideration of a resolution authorizing the sale of real estate of
the Company to the City of New York,
4. Consideration of a resolution authorizing the sale of the remaining
property and assets of the Company,
5. Action on a proposal to approve the dissolution of the Company,
6. The transaction of any other business which properly may be brought
before the meeting.
It is requested that you read carefully the attached information statement
which contains detailed information on the matters to be considered and acted
upon.
While the Company is holding an annual meeting, approval by the
stockholders of the Company of the proposals listed above is assured, because
Newmax Co., Ltd. and Dae Bang Investment Finance Corp., which hold in the
aggregate a majority of the outstanding shares of common stock of the Company,
already have undertaken to vote in favor of the proposals.
Stockholders will not receive any proceeds from the proposed sale of real
estate of the Company to the City of New York or the proposed sale of the
remaining property and assets of the Company, because the debts of the Company
far exceed the fair market value of its assets.
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Some insiders of the Company potentially will be benefiting from the
proposed dissolution, the proposed sale of real estate of the Company to the
City of New York and the proposed sale of the remaining property and assets of
the Company. Those insiders include Mr. K. H. Chung and Dr. Heehwan Lee, the
current directors of the Company, and Dr. Yoon H. Choo, a former director of the
Company, and companies which are associated with them.
The Company plans to use most of the net proceeds of the sale of real
estate of the Company to the City of New York to repay a mortgage loan which is
guaranteed by Mr. K. H. Chung and by Newmax Co., Ltd. and Tae Il Media Co.,
Ltd., companies that are associated with Mr. K. H. Chung and Dr. Heehwan Lee.
The Company plans to use some of those net proceeds and some of the net
proceeds, if any, from the proposed sales, if any, of the remaining property and
assets of the Company to pay debts to Gigamax Corporation and Tae Il USA, Inc.,
companies that are associated with Dr. Yoon H. Choo, to pay debts to Newmax Co.,
Ltd., Tae Il Media Co., Ltd. and Techmedia International Corporation, companies
that are associated with Mr. K. H. Chung and Dr. Heehwan Lee, and to pay debts
to Tae Il Magnetics Co., Ltd., a company which is affiliated with Mr. K. H.
Chung.
See "Interests of Directors and Associates of Directors in Matters to be
Voted on" on pages 10 to 12 of the information statement, "Interest of Directors
in Matters to be Voted on" on pages 13 to 15 of the information statement and
"Interests of Associates of Directors in Matters to be Voted on" on pages 15 to
18 of the information statement.
Dr. Heehwan Lee, a director, the chairman of the board of directors, the
president, the chief executive officer, the secretary and the treasurer of the
Company, will be present at the meeting to discuss the liquidation of the
Company and to answer questions.
Stockholders of record at the close of business on January 8, 1999 will be
entitled to notice of, and to vote at, the meeting. We Are Not Asking You for a
Proxy and You Are Requested Not To Send Us a Proxy.
By Order of the Board of Directors,
Kingston, New York Heehwan Lee
February 5, 1999 Secretary
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TABLE OF CONTENTS
NOTICE OF ANNUAL MEETING 1
TABLE OF CONTENTS 3
LACK OF COMPLIANCE WITH REGULATION S-X, ARTICLE 2 6
1999 ANNUAL MEETING OF STOCKHOLDERS
OF NATIONAL MICRONETICS, INC. 6
SUMMARY OF STOCKHOLDER ACTIONS 7
VOTE REQUIRED FOR APPROVAL 8
NO DISSENTERS' RIGHTS OF APPRAISAL 10
INTEREST OF DIRECTORS AND ASSOCIATES OF DIRECTORS
IN MATTERS TO BE VOTED ON 10
INTEREST OF DIRECTORS IN MATTERS TO BE VOTED ON 13
INTEREST OF ASSOCIATES OF DIRECTORS
IN MATTERS TO BE VOTED ON 15
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF 18
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 18
SECURITY OWNERSHIP OF MANAGEMENT 20
DIRECTORS AND EXECUTIVE OFFICERS: LEGAL PROCEEDINGS 21
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 25
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 27
INDEBTEDNESS OF MANAGEMENT 29
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 30
CERTAIN BUSINESS RELATIONSHIPS 30
BOARD AND COMMITTEE MEETINGS 33
COMPENSATION OF DIRECTORS AND OFFICERS 33
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TABLE OF CONTENTS (C0NTINUED)
BOARD INTERLOCKS AND INSIDER PARTICIPATION 35
NOMINATION AND ELECTION OF DIRECTORS 37
SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS 38
STOCKHOLDER ACTION REQUIRED TO SELECT ACCOUNTANT 38
SALE OF CERTAIN REAL ESTATE OF THE COMPANY 39
SUMMARY OF MATERIAL TERMS 40
DETERMINATION OF CONSIDERATION FOR THE REAL ESTATE 42
PURPOSES OF SALE OF REAL ESTATE BY THE COMPANY 44
RESULTS OF SALE OF REAL ESTATE BY THE COMPANY 46
INFORMATION ABOUT THE COMPANY 48
FORMER BUSINESS OF THE COMPANY 48
PROPERTIES OF THE COMPANY 53
LEGAL PROCEEDINGS 54
MARKET PRICE OF COMMON STOCK OF THE COMPANY
AND RELATED STOCKHOLDER MATTERS 54
AUDITED ANNUAL FINANCIAL STATEMENTS OF THE COMPANY 55
UNAUDITED QUARTERLY FINANCIAL STATEMENTS OF THE COMPANY 57
UNAUDITED PRO FORMA BALANCE SHEET OF THE COMPANY 63
SELECTED FINANCIAL DATA 65
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 66
LIQUIDITY AND CAPITAL RESOURCES 70
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 72
RELATIONSHIPS AND BENEFICIAL INTERESTS 72
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TABLE OF CONTENTS (C0NTINUED)
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE 73
TRANSACTIONS WITH MANAGEMENT AND OTHERS 73
BOARD AND COMMITTEE MEETINGS 73
COMPENSATION OF DIRECTORS AND OFFICERS 73
BOARD INTERLOCKS AND INSIDER PARTICIPATION 73
STOCKHOLDER ACTION REQUIRED FOR SALE OF REAL ESTATE 73
DISPOSITION OF REMAINING ASSETS AND PROPERTY 74
DETERMINATION OF POTENTIAL VALUE OF REMAINING ASSETS 75
LACK OF PRESENT PROSPECTS FOR SALE OF REMAINING ASSETS 76
POSSIBLE RESULTS OF SALE OF REMAINING ASSETS 77
STOCKHOLDER ACTION REQUIRED FOR SALE OF REMAINING ASSETS 78
DISSOLUTION OF THE COMPANY 78
STOCKHOLDER ACTION REQUIRED FOR DISSOLUTION 80
UNDERTAKING TO FURNISH EXHIBITS TO FORM 10-K 80
PROPOSALS BY SECURITY HOLDERS 81
EXHIBITS 82
EXHIBIT 2: AGREEMENT OF PURCHASE AND SALE BETWEEN
THE CITY OF NEW YORK AND NATIONAL MICRONETICS, INC. 83
EXHIBIT 13: ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 27, 1998 BOUND SEPARATELY
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INFORMATION STATEMENT
We Are Not Asking You for a Proxy and
You Are Requested Not To Send Us a Proxy
LACK OF COMPLIANCE WITH REGULATION S-X, ARTICLE 2
The audit reports of Mr. Sung I. Rhee decline to express an opinion in
respect of the financial statements of the Company for the fiscal years ended
June 27, 1998 and June 28, 1997. The audit reports of KPMG Peat Marwick LLP
decline to express an opinion in respect of the financial statements of the
Company for the fiscal years ended June 29, 1996, June 24, 1995, June 25, 1994,
June 26, 1993, June 27, 1992 and June 29, 1991. Therefore, the annual reports of
the Company on Form 10-K for the fiscal years ended June 27, 1998, June 28,
1997, June 29, 1996, June 24, 1995, June 25, 1994, June 26, 1993, June 27, 1992
and June 29, 1991 do not comply with Regulation S-X, Article 2, which requires
that the audit reports express an opinion in respect of the financial
statements, according to the Securities and Exchange Commission. See "Lack of
Opinions of Independent Public Accountants" on page 56 and "Lack of Compliance
with Regulation S-X, Article 2" on page 56.
1999 ANNUAL MEETING OF STOCKHOLDERS OF NATIONAL MICRONETICS, INC.
Date, Time and Place of Annual Meeting of Stockholders. The annual meeting
of stockholders of National Micronetics, Inc., a Delaware corporation (the
"Company"), will be held on Friday, February 26, 1999 at 11:00 a.m. at the
offices of Gersen, Wood & Blakeman LLP, 270 Madison Avenue, 7th Floor, New York,
New York 10016.
Address of the Company. The mailing address of the principal executive
offices of the Company is 71 Smith Avenue, Kingston, New York 12401. The
telephone number of the Company is (914) 338-0333.
Mailing Date of Information Statement. February 5, 1999 is the approximate
first date upon which this Information Statement and the accompanying Annual
Report on Form 10-K of the Company are being sent to stockholders of the
Company.
Authority for Information Statement. This information statement and the
accompanying notice of annual meeting are sent pursuant to authority of a
unanimous written consent of the board of directors of the Company, effective on
December 1, 1998. No director intends to oppose any action to be taken by the
Company at the meeting.
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Actions To Be Taken at the 1999 Annual Meeting. The only matters which the
board of directors of the Company intends to present for action on February 26,
1999 at the annual meeting of the stockholders of the Company are as follows:
1. the election of two directors,
2. action on a proposal for the ratification of the selection of an
independent public accountant,
3. consideration of a resolution authorizing the sale of real estate of the
Company to the City of New York,
4. consideration of a resolution authorizing the sale of the remaining
property and assets of the Company,
5. action on a proposal to approve the dissolution of the Company,
6. action on such other matters as properly may come before the meeting, as
described below.
SUMMARY OF STOCKHOLDER ACTIONS
Election of Directors. The board of directors of the Company proposes that
the stockholders should nominate Mr. K. H. Chung and Dr. Heehwan Lee for
election by the stockholders as the two directors of the Company.
Ratification of Independent Accountants. The board of directors of the
Company has recommended that the stockholders approve the retention by the
Company of Mr. Sung I. Rhee as the independent certified public accountant to
audit its books and records for the fiscal year ending June 26, 1999.
Sale of Real Estate to the City of New York. The board of directors of the
Company has deemed that the sale of part of the real estate owned by the Company
to the City of New York for a price of $2,400,000 on the terms and conditions
which are set forth in the Agreement of Purchase and Sale dated as of November
4, 1998 between the City of New York and the Company is expedient and for the
best interests of the Company and has recommended that the stockholders of the
Company adopt a resolution authorizing that sale.
Sale of Remaining Assets of the Company. The board of directors of the
Company has deemed that the sale of the remaining property and assets of the
Company, including its goodwill and corporate franchises, at whatever prices,
for whatever consideration and on whatever terms and conditions may be
negotiated by the officers of the Company pursuant to a plan of complete
liquidation of the Company is expedient and for the best
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interests of the Company and has recommended that the stockholders adopt a
resolution authorizing that sale.
Dissolution of the Company. The board of directors of the Company has
deemed it advisable in its judgment that the Company should be dissolved and has
adopted a resolution to that effect and has recommended that the stockholders
vote for the proposed dissolution of the Company in the State of Delaware.
VOTE REQUIRED FOR APPROVAL
Quorum. Holders of a majority of the issued and outstanding shares of
common stock of the Company are required to be present or represented by proxy
at the 1999 annual meeting of stockholders of the Company to constitute a
quorum. According to Section 216 of the general corporation law of the state of
Delaware and section 2.06 of the by-laws of the Company, the holders of a
majority of the stock issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, shall constitute a quorum at all
meetings of the stockholders for the transaction of business, except as
otherwise provided by statute of by the certificate of incorporation.
Vote Required for Approval. According to section 216 of the general
corporation law of the state of Delauare and section 2.07 of the by-laws of the
Company, when a quorum is present at any meeting, the vote of the holders of a
majority of the shares having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provisions of the statutes or of the certificate
of incorporation, a different vote is required in which case such express
provision shall govern and control the decision of such question.
Election of Directors. According to section 216 of the general corporation
law of the state of Delaware and section 2.02 of the by-laws of the Company, a
plurality vote of the quorum of the holders of the issued and outstanding shares
of common stock of the Company present or represented at the 1999 annual meeting
of stockholders is required to elect Mr. K. H. Chung and Dr. Heehwan Lee as the
board of directors of the Company.
Approval of Public Accountant. A majority vote of the quorum of the
holders of the issued and outstanding shares of common stock of the Company
present or represented at the 1999 annual meeting of stockholders is required to
approve and ratify the selection of Mr. Sung I. Rhee as the independent public
accountant of the Company for the fiscal year ending June 26, 1999.
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Approval of Sale of Real Estate to the City of New York. According to
Section 271(a) of the general corporation law of the state of Delaware, a
resolution authorizing the sale of certain real estate of the Company to the
City of New York for a price of $2,400,000 on the terms and conditions which are
set forth in the Agreement of Purchase and Sale dated as of November 4, 1998
between the City of New York and the Company must be adopted by the holders of a
majority of the outstanding stock of the Company at a meeting duly called upon
at least 20 days notice.
Approval of Sale of Remaining Property and Assets. According to Section
271(a) of the general corporation law of the state of Delaware, a resolution
authorizing the sale of all of the remaining property and assets of the Company
on whatever terms and conditions the officers of the Company may deem expedient
and for the best interests of the Company must be adopted by the holders of a
majority of the outstanding stock of the Company at a meeting duly called upon
at least 20 days notice.
Approval of Dissolution of the Company. According to section 275(b) and
section 275(a) of the general corporation law of the state of Delaware, a
resolution for the proposed dissolution of the Company must be adopted by the
holders of a majority of the outstanding stock of the Company entitled to vote
at a meeting duly called by the board of directors upon notice of the adoption
of the resolution of the board of directors deeming it advisable that the
Company should be dissolved and of the 1999 annual stockholders meeting of the
Company to take action upon the resolution.
Action on Other Matters Properly Coming Before the Meeting. A majority
vote of the quorum of the holders of the issued and outstanding shares of common
stock of the Company present or represented at the 1999 annual meeting of
stockholders is required to approve action on other matters properly coming
before the 1999 annual meeting of stockholders of the Company, unless otherwise
required by statute or by the certificate of incorporation or the by-laws of the
Company.
Method by Which Votes Will Be Counted. Ballots with respect to the
election of directors and as to each of the matters to be voted upon will be
distributed to stockholders or representatives of stockholders attending the
meeting. The times for the polls to open and to close will be announced after
the discussion of each item of business. Ballots will be counted by counsel for
the Company by consulting a list of stockholders of record as of January 8, 1999
to be furnished by the transfer agent and registrar of the Company, Chase Mellon
Shareholder Services, 450 West 33rd Street, 10th Floor, New York, New York
10001. Abstentions and broker non-votes, if any, will be counted neither as
affirmative votes nor as negative votes.
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NO DISSENTERS' RIGHTS OF APPRAISAL
No Dissenters' Rights of Appraisal. The general corporation law of the
state of Delaware provides no dissenters' rights of appraisal with respect to
any matter to be acted upon at the 1999 annual meeting of stockholders of the
Company.
INTERESTS OF DIRECTORS AND ASSOCIATES OF DIRECTORS
IN MATTERS TO BE VOTED ON
Directors of the Company. Mr. K. H. Chung and Dr. Heehwan Lee are
directors of the Company, and Dr. Yoon H. Choo until December 1, 1998 was a
director of the Company. See "Directors and Executive Officers of the Company"
on pages 25 to 27.
Associates of Directors of the Company. Mr. K. H. Chung owns 1.0 percent
of the capital stock of Tae Il Media Co., Ltd. and is the representative
director of Tae Il Media Co., Ltd. Dr. Heehwan Lee owns 0.3 percent of the
capital stock of Tae Il Media Co., Ltd. and is a director of Tae Il Media Co.,
Ltd. Tae Il Media Co., Ltd. owns 12.2% of the capital stock of Newmax Co., Ltd.
Mr. K. H. Chung owns 6.2% of the capital stock of Tae Il Magnetics Co., Ltd.,
which owns 16% of the capital stock of Newmax Co., Ltd. Newmax Co., Ltd. owns
47.1% of the outstanding shares of common stock of the Company. Tae Il Media
Co., Ltd. owns 100% of the capital stock of Techmedia International Corporation.
See "Security Ownership of Certain Beneficial Owners" on pages 18 to 19 and
"Security Ownership of Management" on pages 20 to 21.
Seniority of Claims of Creditors of the Company. The following creditors
have claims against the Company in the amounts set forth beside their names or
descriptions below. The directors and the former director of the Company and
their associates and affiliates may benefit from the satisfaction by the Company
of the claims of the institutional lender (only because Mr. K. H. Chung, Newmax
Co., Ltd. and Tae Il Media Co., Ltd. are guarantors of its claims), the claims
for directors fees and termination pay, the claims of Gigamax Corporation, Tae
Il USA, Inc., Techmedia International Corporation, Newmax Co., Ltd, and Tae Il
Magnetics Co., Ltd. and the claims of John Conklin and Nancy Conklin for the
reasons summarized in the footnotes and developed more fully in other parts of
the information statement. Nevertheless, after satisfaction of the senior and
junior secured creditors identified in the following chart, the Company will not
have sufficient net proceeds of sale of its assets to satisfy the claims for
directors fees and termination pay, the claims of Gigamax Corporation, Tae Il
USA, Inc., Techmedia International Corporation, Newmax Co., Ltd, and Tae Il
Magnetics Co., Ltd. and the claims of John Conklin and Nancy Conklin. See "Net
Proceeds Receivable by the Company" on page 40.
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Name or Type of Creditor Amount of Claim
Senior Secured Creditor:
Institutional lender 1,408,000
Interest to 2/26/99 221,967
$1,629,967 (1)
Junior Secured Creditors:
Mechanics lien holders $ 61,650
Tax lien holders $ 158,534
Affiliated Unsecured Creditors:
Gigamax Corporation and
Tae Il USA, Inc. 5,596,000
Interest to 6/24/95 1,370,000
Interest to 2/26/99 338,799
$7,304,799 (2)
Tae Il Magnetics Co., Ltd. 2,741,000
Interest to 2/26/99 325,005
$3,066,005 (3)
Tae Il Media Co., Ltd. $ 293,596 (4)
Newmax Co., Ltd. $ 125,400 (5)
Techmedia International Corporation $ 35,000 (6)
Directors:
Annual Fees $ 191,000 (7)
Employees:
Severance Pay $ 150,000 (8)
Vacation Pay $ 42,000
Unaffiliated Unsecured Creditors:
General creditors $ 437,816
Claimants:
John Conklin and Nancy Conklin $7,700,000 (9)
Superfund $ 7,077 (10)
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(1) Mr. K. H. Chung, Tae Il Media Co., Ltd. and Newmax Co., Ltd. are
guarantors of payment by the Company of the $1,408,000 principal amount
plus interest owed to its institutional lender.
(2) Dr. Yoon H. Choo is the president of Gigamax Corporation and of Tae Il
USA, Inc.
(3) Mr. K. H. Chung owns 6.2% of the capital stock of Tae Il Magnetics Co.,
Ltd., which owns 16% of the capital stock of Newmax Co., Ltd., which owns
47.1% of the outstanding shares of common stock of the Company.
(4) Mr. K. H. Chung owns 1.0 percent of the capital stock of Tae Il Media Co.,
Ltd. and is the president and representative director of Tae Il Media Co.,
Ltd. and Dr. Heehwan Lee owns 0.3 percent of the capital stock of Tae Il
Media Co., Ltd. and is a vice president and a director of Tae Il Media
Co., Ltd.
(5) Tae Il Media Co., Ltd. owns 12.2% of the capital stock of Newmax Co.,
Ltd., which owns 47.1% of the outstanding shares of common stock of the
Company.
(6) Tae Il Media Co., Ltd. owns 100% of the capital stock of Techmedia
International Corporation.
(7) Mr. K. H. Chung may an interest in some of these accrued but unpaid
directors fees, since he is not employed by the Company.
(8) Dr. Yoon H. Choo is the beneficiary of this employment contract severance
pay provision.
(9) Dr. Heehwan Lee's son, Mr. Montgomery Lee, may be deemed to benefit from
any amounts paid by the Company in settlement of claims against the
Company and Mr. Montgomery Lee.
(10) Future annual contributions are unknown. No claims have been made against
the directors, officers, employees or stockholders of the Company.
See "Transactions with Management and Others" on pages 27 to 29, "INTERESTS OF
DIRECTORS IN MATTERS TO BE VOTED ON" on pages 13 to 15, "INTERESTS OF ASSOCIATES
OF DIRECTORS IN MATTERS TO BE VOTED ON" on pages 15 to 18, "Compensation of
Directors" and "Employment Contracts and Termination of Employment and
Change-in- Control Arrangements" on page 34, "Net Proceeds Receivable by the
Company" on page 40 and "Satisfaction of Unsecured Liabilities in Connection
with Sale of Real Estate" on page 47.
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INTEREST OF DIRECTORS IN MATTERS TO BE VOTED ON
Dr. Heehwan Lee. Dr. Heehwan Lee has been a director of the Company since
December 1990, the vice president and the chief operations officer of the
Company since March 1, 1992 until his resignation on December 1, 1998 and has
been the chairman of the board, president, chief executive officer, secretary
and treasurer of the Company since December 1, 1998.
Status of Dr. Heehwan Lee as an Associate of Tae Il Media Co., Ltd.,
of Techmedia International Corporation and of Newmax Co., Ltd. The
interest of Dr. Heehwan Lee in the sale of certain real estate of the
Company and in the sale of the remaining assets of the Company is
attributable to his being an associate of Tae Il Media Co., Ltd., of which
he is a vice president and director and a 0.3% stockholder, of Techmedia
International Corporation, of which Tae Il Media Co., Ltd. is a 100%
stockholder, and of Newmax Co., Ltd., of which Tae Il Media Co., Ltd. is a
12.2% stockholder, because the Company hopes to use part of the net
proceeds of those sales of its assets to repay part of the loans of the
Company from Tae Il Media Co., Ltd., Techmedia International Corporation
and Newmax Co., Ltd. Dr. Heehwan Lee is the son-in-law of Mr. Yoon K.
Choo, who is the chairman of the board of directors and a director of Tae
Il Media Co., Ltd.
Status of Dr. Heehwan Lee as Father of Co-Defendant of the Company.
Dr. Heehwan Lee's son, Mr. Montgomery Lee, may be deemed to benefit from
any amounts paid by the Company or its insuror in settlement of claims of
$7,700,000 against the Company and Mr. Montgomery Lee by Mr. John Conklin
and Mrs. Nancy Conklin. See "Automobile Accident Lawsuit against the
Company" on pages 22 to 24.
Mr. K. H. Chung. Mr. K. H. Chung has been a director of the Company since
December 1990.
Guaranty by Mr. K. H. Chung of Term Note of the Company. Mr. K. H.
Chung is a guarantor of the $1,408,000 principal balance plus $221,967 of
accrued interest as of February 26, 1999 plus interest accruing thereafter
at the rate of 10.5% per year owed by the Company to its lending
institution pursuant to a promissory note dated November 26, 1996 (the
"term note"). See "Guaranty by Mr. K. H. Chung, Tae Il Media Co., Ltd. and
Newmax Co., Ltd. of Term Note of the Company" on pages 28 to 29. The
Company plans to satisfy the term note out of the net proceeds of the sale
of certain real estate to the City of New York.
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Status of Mr. K. H. Chung as an Affiliate of Tae Il Magnetics Co.,
Ltd. The interest of Mr. K. H. Chung in the sale of certain real estate of
the Company and in the sale of the remaining assets of the Company is
attributable to his being an affiliate of Tae Il Magnetics Co., Ltd.,
because the Company hopes to use part of the net proceeds of those sales
of its assets to pay debts of the Company to Tae Il Magnetics Co., Ltd.
Mr. K. H. Chung is a 6.2% stockholder of Tae Il Magnetics Co., Ltd. and
Tae Il Magnetics Co., Ltd. is a 16% stockholder of Tae Il Media Co., Ltd.
Tae Il Magnetics Co., Ltd. has a claim against the Company for $2,741,000
of principal and $325,005 of interest accrued as of February 26, 1999 on
account of its posting of its Korean factory as collateral for a letter of
credit which the lending institution of the Company drew down to satisfy
the revolving credit note of the Company after its default. See "Draw-
Down of Letter of Credit from Newmax Co., Ltd." on page 28 and
"Indebtedness of the Company to Tae Il Magnetics Co., Ltd." on pages 32 to
33.
Status of Mr. K. H. Chung as an Associate of Tae Il Media Co., Ltd.,
of Techmedia International Corporation and of Newmax Co., Ltd. The
interest of Mr. K. H. Chung in the sale of certain real estate of the
Company and in the sale of the remaining assets of the Company is
attributable to his being an associate of Tae Il Media Co., Ltd., of which
he is the representative director, the president and a 1.0% stockholder,
of Techmedia International Corporation, of which Tae Il Media Co., Ltd. is
a 100% stockholder, and of Newmax Co., Ltd., of which Tae Il Media Co.,
Ltd. is a 12.2% stockholder, because the Company hopes to use part of the
net proceeds of those sales of its assets to pay debts of the Company to
Tae Il Media Co., Ltd., Techmedia International Corporation and Newmax
Co., Ltd. Mr. K. H. Chung is the son-in-law of Mr. Yoon K. Choo, who is
the chairman of the board of directors and a director of Tae Il Media Co.,
Ltd.
Dr. Yoon H. Choo. Dr. Yoon H. Choo has been a director of the Company
since December 1990, chairman of the board of directors of the Company since
January 1991, and the president, chief executive officer, secretary and
treasurer of the Company since February 11, 1991 until his resignation as a
director, chairman, president, chief executive officer, secretary and treasurer
on December 1, 1998.
Status of Dr. Yoon H. Choo as an Associate of Gigamax Corporation
and Tae Il U.S.A., Inc. The interest of Dr. Yoon H. Choo in the sale of
certain real estate of the Company and in the sale of the remaining assets
of the Company is attributable to his being an associate of Gigamax
Corporation and Tae Il U.S.A., Inc. Gigamax Corporation and Tae Il USA,
Inc. are associates of Dr. Yoon H. Choo, because he is the
14
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president of Gigamax Corporation and Tae Il U.S.A., Inc. As of February
26, 1999, the Company will owe Gigamax Corporation and Tae Il USA, Inc.
$5,596,000 in principal, plus $1,708,799 of net accrued expenses
(primarily interest accrued at the rate of 8 percent per year prior to
June 24, 1995 and subsequent to June 27, 1998). See "Indebtedness of the
Company to Gigamax Corporation and Tae Il U.S. A., Inc." on page 32. The
Company hopes to pay to Gigamax Corporation and Tae Il U.S.A., Inc. a
portion of the net proceeds of its sales of its real estate and other
assets in partial payment of the debts of the Company to them.
Status of Dr. Yoon H. Choo as an Associate of Mr. Yoon K. Choo. The
interest of Dr. Yoon H. Choo in the sale of certain real estate of the
Company and in the sale of the remaining assets of the Company is
attributable to his being an associate of his brother, Mr. Yoon K. Choo,
who is the chairman of the board of directors and a director of Tae Il
Media Co., Ltd., because the Company hopes to use part of the net proceeds
of those sales of its assets to repay part of the loans of the Company
from Tae Il Media Co., Ltd., Techmedia International Corporation, of which
Tae Il Media Co., Ltd. owns 100% of tghe capital stock, and Newmax Co.,
Ltd., of which Tae Il Media Co., Ltd. owns 12.2% of the capital stock.
INTERESTS OF ASSOCIATES OF DIRECTORS IN MATTERS TO BE VOTED ON
Yoon K. Choo. Mr. Yoon K. Choo is an associate of Dr. Yoon H. Choo, Mr. K.
H. Chung, Dr. Heehwan Lee and Tae Il Media Co., Ltd., because Mr. Yoon K. Choo
is the brother of Dr. Yoon H. Choo, is the father-in-law of Mr. K. H. Chung, is
the father-in-law of Dr. Heehwan Lee and is a director and the chairman of the
board of directors of Tae Il Media Co., Ltd., which may be deemed to be a parent
of the Company.
Loans of the Company from Tae Il Media Co., Ltd., Techmedia
International Corporation and Newmax Co., Ltd. The interest of Mr. Yoon K.
Choo in the sale of certain real estate of the Company and in the sale of
the remaining assets of the Company is attributable to his being an
associate of Tae Il Media Co., Ltd. because the Company hopes to use part
of the net proceeds of those sales of its assets to repay loans of the
Company from Tae Il Media Co., Ltd., Techmedia International Corporation,
of which Tae Il Media Co., Ltd. owns 100% of the capital stock, and Newmax
Co., Ltd., of which Tae Il Media Co., Ltd. owns 12.2% of the capital
stock.
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Interests of Mr. K. H. Chung, Dr. Heehwan Lee and Dr. Yoon H. Choo.
The interest of Mr. Yoon K. Choo in the sale of certain real estate of the
Company and in the sale of the remaining assets of the Company also is
attributable to his being an associate of Dr. Yoon H. Choo, Dr. Heehwan
Lee and Mr. K. H. Chung, as explained in "Status of Dr. Yoon H. Choo as an
Associate of Gigamax Corporation and Tae Il USA, Inc." on pages 14 to 15,
"Status of Dr. Heehwan Lee as an Associate of Tae Il Media Co., Ltd.,
Techmedia International Corporation and Newmax Co., Ltd." on page 13,
"Status of Dr. Heehwan Lee as Father of a Co-Defendant with the Company in
a Lawsuit" on page 13, "Guaranty by Mr. K. H. Chung of Term Note of the
Company" on page 13, "Status of Mr. K. H. Chung as an Associate of Tae Il
Media Co., Ltd., Techmedia International Corporation and Newmax Co., Ltd."
on page 14, "Guaranty by Tae Il Media Co., Ltd. of Term Note of the
Company" on page 16 and "Guaranty by Newmax Co., Ltd. of Term Note of the
Company" on page 17.
Tae Il Media Co., Ltd. and Techmedia International Corporation. Tae Il
Media Co., Ltd. is an associate of Mr. K. H. Chung and Dr. Heehwan Lee, because
Mr. K. H. Chung owns approximately 1% of the capital stock of Tae Il Media Co.,
Ltd. and is a representative director and the president of Tae Il Media Co.,
Ltd. and because Dr. Heehwan Lee is a director and a vice president of Tae Il
Media Co., Ltd. Techmedia International Corporation is an associate of Mr. K. H.
Chung and Dr. Heehwan Lee, because it is a wholly-owned subsidiary of Tae Il
Media Co., Ltd.
Guaranty by Tae Il Media Co., Ltd. of Term Note of the Company. Tae
Il Media Co., Ltd. is a guarantor of the $1,408,000 principal balance plus
$221,967 of accrued interest as of February 26, 1999 plus any additional
interest accruing at the rate of 10.5% per year owed by the Company to its
lending institution pursuant to the term note. See "Guaranty by Mr. K. H.
Chung, Tae Il Media Co., Ltd. and Newmax Co., Ltd. of Term Note of the
Company" on pages 28 to 29. The Company plans to satisfy the term note out
of the net proceeds of the sale of certain real estate to the City of New
York.
Debts of the Company to Tae Il Media Co., Ltd. In addition, the
Company owed Tae Il Media Co., Ltd. $293,596 on January 20, 1999. See
"Indebtedness of the Company to Tae Il Media Co., Ltd." on page 33. The
Company hopes to pay to Tae Il Media Co., Ltd. a portion of the net
proceeds of its sales of its real estate and other assets in partial
payment of the debts of the Company to Tae Il Media Co., Ltd.
16
<PAGE>
Debts of the Company to Techmedia International Corporation. The
Company owed Techmedia International Corporation $35,000 on January 20,
1999. See "Indebtedness of the Company to Techmedia International
Corporation" on page 33. The Company hopes to pay to Techmedia
International Corporation a portion of the net proceeds of its sales of
its real estate and other assets in partial payment of the debts of the
Company to Techmedia International Corporation.
Newmax Co., Ltd. Newmax Co., Ltd. is an associate of Mr. K. H. Chung and
Dr. Heehwan Lee, because, as directors and executive officers of Tae Il Media
Co., Ltd., Mr. K. H. Chung and Dr. Heehwan Lee are deemed to be beneficial
owners of approximately 12.2% of the capital stock of Newmax Co., Ltd.
Guaranty by Newmax Co., Ltd. of Term Note of the Company. Newmax
Co., Ltd. is a guarantor of the $1,408,000 principal balance plus $221,967
of accrued interest as of February 26, 1999 plus additional interest
accruing at the rate of 10.5% per year owed by the Company to its lending
institution pursuant to the term note. See "Guaranty by Mr. K. H. Chung,
Tae Il Media Co., Ltd. and Newmax Co., Ltd. of Term Note of the Company"
on pages 28 to 29. The Company plans to satisfy the term note out of the
net proceeds of the sale of certain real estate to the City of New York.
Debts of the Company to Newmax Co., Ltd. In addition, the Company
owed Newmax Co., Ltd. $125,400 on January 20, 1999. See "Indebtedness of
the Company to Newmax Co., Ltd." on page 32. The Company hopes to pay to
Newmax Co., Ltd. a portion of the net proceeds of its sales of its real
estate and other assets in partial payment of the debts of the Company to
Newmax Co., Ltd.
Tae Il Magnetics Co., Ltd. Tae Il Magnetics Co., Ltd. is an affiliate of
Mr. K. H. Chung, because Mr. K. H. Chung is the beneficial owner of
approximately 6.2% of the capital stock of Tae Il Magnetics Co., Ltd. and may be
deemed to control Tae Il Magnetics Co., Ltd.
Collateral for Letter of Credit for Revolving Credit Note of the
Company. Furthermore, Tae Il Magnetics Co., Ltd., which is an affiliate of
Tae Il Media Co., Ltd. and Newmax Co., Ltd., granted a lending institution
in Korea a mortgage on its factory in Korea in order to obtain a letter of
credit in the amount of $2,789,000 as collateral for the revolving credit
promissory note dated November 18, 1996 in the principal amount of
$2,741,000 payable by the Company to its lending institution (the
"revolving credit note"). The lending institution completed collection
proceedings against that letter of credit because the revolving credit
note of the Company was in default before it matured on November 18, 1997.
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See "Draw-Down of Letter of Credit from Newmax Co., Ltd." on page 28 and
"Indebtedness of the Company to Tae Il Magnetics Co., Ltd." on pages 32 to
33.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Number of Outstanding Shares of Common Stock. The number of outstanding
voting securities of the Company at the close of business on January 8, 1999 was
22,312,524 shares of common stock, ten cents ($0.10) par value, each share
having one vote.
Record Date. January 8, 1999 is the record date which the board of
directors of the Company established to determine the stockholders entitled to
notice of or to vote at the 1999 annual meeting of stockholders of the Company.
No Cumulative Voting Rights. The holders of shares of common stock of the
Company do not have any cumulative voting rights with respect to the election of
directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Security Ownership of Certain Beneficial Owners. The following table
presents the information as to the persons who have reported themselves or
otherwise are known to the Company to be the beneficial owners of more than five
percent (5%) of the outstanding shares of common stock of the Company as of
January 8, 1999:
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership of Class
- ------------------- ----------------------- --------
Newmax Co., Ltd. 10,500,000 (1) 47.1% (1)
27-15 Song Jeong-Dong Direct owner
Cheongju, Chungbuk Sole voting power
360-290 Korea Sole investment power
Jung Kyun Bae 10,500,000 (1) 47.1% (1)
Jeong Soo Choi Indirect owner (2)
Dong Myung Lee Shared voting power
Kuk Gyo Jeong Shared investment power
In Soo Kim
Byung In Kang
456-1 Moknae-Dong
Ansan, Kyunggi-Do
425-100 Korea
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Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership of Class
- ------------------- ----------------------- --------
Dae Bang Investment 1,575,000 7.1%
Finance Corp. Direct owner
1-181 Chagin-Dong Sole voting power
Iri-Si, Jullabuk-Do Sole investment power
Korea
S. Y. Choi 1,575,000 7.1%
C. S. Choi Indirect owner (2)
C. H. Lee Shared voting power
K. W. Choi Shared investment power
D. H. Coue
C. D. Um
Y. W. Kim
J. M. Lee
J. Y. Joo
O. J. Kwon
D. K. Lee
KWTC Building, Suite 4202
Samsung-Dong
Kangnam-Gu, Seoul, Korea
(1) Pursuant to the Stock Purchase Agreement dated November 30, 1990 between
the Company and Newmax Co., Ltd., Newmax Co., Ltd. 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 Co., Ltd. to
own more than fifty (50) percent of the issued and outstanding shares of
common stock of the Company. If Newmax Co., Ltd. were to exercise that
right, then Newmax Co., Ltd. would be the direct owner with sole voting
power and sole investment power, and the directors and executive officers
of Newmax Co., Ltd. might be deemed to be the indirect owners with shared
voting power and shared investment power, over 12,500,000 shares or 50.1%
of the outstanding shares of common stock of the Company.
(2) The persons who, solely by reason of being directors or executive officers
either of Newmax Co., Ltd. or of Dae Bang Investment Finance Corp., may be
deemed to be indirect owners possessing shared voting power and shared
investment power expressly disclaim that any of them is at present the
beneficial owner of any shares of common stock of the Company for the
purposes of Sections 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.
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SECURITY OWNERSHIP OF MANAGEMENT
Security Ownership of Management. According to Rule 13d-3 of the
Securities and Exchange Commission, the directors and nominees for election as
directors of the Company and the directors and executive officers of the Company
as a group are not beneficial owners of any class of the equity securities of
the Company or of its subsidiaries. The following table presents information as
to each class of the equity securities of the parents of the Company
beneficially owned by all directors and nominees for election as directors of
the Company and by all directors and officers of the Company as a group.
Title Name of Amount and Nature Percent
of Beneficial of Beneficial of
Class Owner Ownership Class
- ----- ----- --------- -----
Capital K. H. Chung 137,746 1.0%
Stock of Direct owner (2)
Tae Il Sole voting power
Media Sole investment power
Co., Ltd. (1)
Capital K. H. Chung 37,396 6.2%
Stock of Direct owner (2)
Tae Il Sole voting power
Magnetics Sole investment power
Co., Ltd. (3)
Capital K. H. Chung 574,008 12.2%
Stock of Indirect owner (2)
Newmax Shared voting power
Co., Ltd. (4) Shared investment power
Capital Heehwan Lee 45,393 0.3%
Stock of Direct owner (2)
Tae Il Sole voting power
Media (1) Sole investment power
Co., Ltd.
Capital Heehwan Lee 574,008 12.2%
Stock of Indirect owner (2)
Newmax Shared voting power
Co., Ltd. (4) Shared investment power
Capital Directors and 574,008 12.2%
Stock of officers of Indirect owner (2)
Newmax the Company Shared voting power
Co., Ltd. (4) as a group Shared investment power
(1) Tae Il Media Co., Ltd. owns approximately 12.2% of the capital stock of
Newmax Co., Ltd. as of January 8, 1999.
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(2) The persons who are the direct owners possessing sole voting power and
sole investment power of shares of the capital stock of Tae Il Media Co.,
Ltd. and Tae Il Magnetics Co., Ltd., which may be deemed to be parents of
the Company, and the persons who may be deemed to be the indirect owners
possessing shared voting power and shared investment power of shares of
capital stock of Newmax Co., Ltd., which is 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 of them is at the present time able to exercise
a controlling influence over the Company.
(3) Tae Il Magnetics Co., Ltd. owns approximately 16.0% of the capital stock
of Newmax Co., Ltd. as of January 20, 1999.
(4) Newmax Co., Ltd. owns approximately 47.1% of the common stock of the
Company as of January 20, 1999 and has the right to acquire from the
Company additional shares of the common stock of the Company in sufficient
numbers to own 50.1% of the common stock of the Company. The 574,000
shares of capital stock of Newmax Co., Ltd. attributable to Mr. K. H.
Chung, Dr. Heehwan Lee and the directors and officers of the Company as a
group may be deemed to be beneficially owned by them because they are
directors of Tae Il Media Co., Ltd., which directly owns those shares.
Changes in Control. The Company is not aware of any arrangements the
operation of which may at a subsequent date result in a change in control of the
Company. The Company is aware of changes in the membership of the boards of
directors of Newmax Co., Ltd. and Dae Bang Investment Finance Corp. during the
twelve months prior to the filing of its annual report on Form 10-K for the
fiscal year ended June 27, 1998.
DIRECTORS AND EXECUTIVE OFFICERS: LEGAL PROCEEDINGS
Legal Proceedings. The following legal proceedings are described because
they may be deemed to involve potential material interests adverse to the
Company of Newmax Co., Ltd., Tae Il Media Co., Ltd., Mr. K. H. Chung and Dr.
Heehwan Lee.
Debt Restructuring Proceedings of Newmax Co., Ltd. Newmax Co., Ltd. is the
record and beneficial owner of 47.1% of the outstanding shares of common stock
of the Company, an affiliate of the Company and an associate of Mr. K. H. Chung
and Dr. Heehwan Lee. Newmax Co., Ltd. is a party to a debt restructuring
proceeding in the Cheongju District Court in Korea. On September 15, 1998, that
court approved the debt restructuring plan which had been accepted by the
creditors of Newmax Co., Ltd. and thus granted a two-year moratorium on the
repayment of certain obligations to
21
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certain creditors of Newmax Co., Ltd. Newmax Co., Ltd. and Mr. K. H. Chung are
guarantors of the Company's term note having a principal balance of $1,408,000
and interest in the amoung of $221,967 accrued and accruing as of February 26,
1999, which was in default before it matured on November 26, 1997. It is
possible that the lending institution may be frustrated by that moratorium in
seeking to enforce that guaranty against Newmax Co., Ltd., so the lending
institution may seek to enforce that guaranty against Mr. K. H. Chung in an
amount exceeding $1,629,967 if the term note is not satisfied out of part of the
net proceeds of the proposed sale of certain real estate of the Company to the
City of New York. If the guaranty were to be enforced against Mr. K. H. Chung,
then principles of subrogation may entitle Mr. K. H. Chung to seek to collect
from the Company all amounts which may be paid by him to the lending institution
of the Company. See "Involvement in Certain Legal Proceedings" on page 27.
Debt Restructuring Proceedings of Tae Il Media Co., Ltd. Tae Il Media Co.,
Ltd., which may be deemed to be an affiliate of the Company and is an associate
of Mr. K. H. Chung and Dr. Heehwan Lee, is a party to a debt restructuring
proceeding in the Suwon District Court in Korea. On September 4, 1998, that
court approved the debt restructuring plan which had been accepted by the
creditors of Tae Il Media Co., Ltd. and thus granted a two-year moratorium on
the repayment of certain obligations to certain creditors of Tae Il Media Co.,
Ltd. Tae Il Media Co., Ltd. and Mr. K. H. Chung are guarantors of the Company's
term note having a principal balance of $1,408,000 and interest in the amoung of
$221,967 accrued and accruing as of February 10, 1999, which was in default
before it matured on November 26, 1997. It is possible that the lending
institution may be frustrated by that moratorium in seeking to enforce that
guaranty against Tae Il Media Co., Ltd., so the lending institution may seek to
enforce that guaranty against Mr. K. H. Chung in an amount exceeding $1,629,967
if the term note is not satisfied out of part of the net proceeds of the
proposed sale of certain real estate of the Company to the City of New York. If
the guaranty were to be enforced against Mr. K. H. Chung, then principles of
subrogation may entitle Mr. K. H. Chung to seek to collect from the Company all
amounts which may be paid by him to the principle lending institution of the
Company. See "Involvement in Certain Legal Proceedings" on page 27.
Automobile Accident Lawsuit of the Company. The Company since October 15,
1997 and Mr. Montgomery Lee, the minor son and therefore an associate of Dr.
Heehwan Lee, the chairman of the board, the president, the secretary and the
treasurer of the Company, have been defendants in a suit brought by John Conklin
and Nancy Conklin in the Supreme Court of the State of New York for the County
of New York involving claims of alleged damages aggregating $7,700,000 alleged
to be attributable to an automobile accident involving Mr. Montgomery Lee and an
automobile which the Company leased. The Company has filed an answer and is
cooperating with
22
<PAGE>
discovery. Depositions which had been scheduled in October 1998 have been
postponed indefinitely.
No Provision for Liability. The Company's insurer has assumed
responsibility and is defending the Company; however, the damages claimed
exceed the $300,000 policy limits. 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. Without the net proceeds of the sale of its assets, which are
expected to be substantially less than the aggregate amount claimed by the
plaintiffs, the Company is not financially capable of making any provision
for payment on account of any judgment which ultimately may be entered
against it in this lawsuit.
Liability of Others Unknown. The Company is not aware of any other
person who would be liable to satisfy any judgment which may be obtained
against the Company if the Company should be unable to satisfy such a
judgment by means of its insurance coverage or otherwise.
Recovery of Funds from Transferees. If a person were deemed to be
the recipient of funds of the Company as an alleged preference in a
bankruptcy proceeding involving the Company or in a suit to set aside an
alleged fraudulent conveyance or an alleged transfer in fraud of
creditors, it is conceivable but speculative that the recovered funds
might be applied to pay on account of such a judgment if it should exceed
the amount of the insurance coverage.
Potential Attachment or Appointment of Receiver. New York law
entitles the plaintiffs to apply to seek to attach the assets of the
Company if the Company, with intent to defraud its creditors or frustrate
the enforcement of a judgment that might be rendered in favor of the
plaintiffs, has assigned or disposed of property or is about to do so.
Delaware law entitles a creditor or any other person who shows good cause
to apply to the Court of Chancery in Delaware for the appointment of a
receiver to take charge of the property of the Company, and to collect the
debts and property due and belonging to the Company, and to take other
steps that may be necessary for the final settlement of the unfinished
business of the Company. The Company vigorously would defend any such
applications for attachment of its assets or for appointment of a
receiver. Either an attachment or a receiver could jeopardize the ability
of the Company to sell part of its assets to the City of New York and to
sell the balance of its assets to others.
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<PAGE>
Discetionary Notice of Dissolution. Delaware law allows the Company
to give its creditors, except persons such as plaintiffs in the pending
lawsuit, notice of its dissolution and to publish notice of its
dissolution, but does not require the Company to give such a notice. If
the Company should decide to give its creditors notice of its dissolution
and publish notice of its dissolution, however, then Delaware law would
require the Company to mail a copy of the notice to the plaintiffs in the
pending lawsuit. The Company has not decided whether to give such a notice
of its dissolution to its creditors.
No Other Lawsuits. Other people who were injured in the accident
which is the subject of the lawsuit have not brought suit against the
Company.
Potential Interest of Dr. Heehwan Lee. The vigorousness of the
defense by the Company of that lawsuit and any settlement which the
Company may make of the claims in that lawsuit indirectly may be deemed to
inure to the benefit of Dr. Heehwan Lee.
Superfund Site in Southington, Connecticut. The Company has been notified
that 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.
One of Over 1,600 Potentially Responsible Parties. 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, in addition to the Company.
Payment of Proportionate Share of Remedial Costs. 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, $50,696, and owes
$7,077 as its share for 1999.
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<PAGE>
Unpredictable Outcome of the Proceeding. 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.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Size of the Board of Directors of the Company. On December 1, 1998, the
board of directors of the Company amended the Company's by-laws to provide that
the board of directors of the Company may consist of one or more members as the
board of directors may determine. Simultaneously, the board of directors of the
Company determined that there would be only two members of the board of
directors of the Company.
Directors and Executive Officers of the Company. The following chart
reflects the names and ages of both of the Company's directors and of the only
executive officer of the Company. Both directors originally had been designated
by Newmax Co., Ltd. in connection with its acquisition from the Company of a
controlling interest in the outstanding shares of common stock of the Company in
December, 1990. They will be nominated for re-election as the two directors and
as the only executive officer of the Company. The chart indicates all positions
and offices with the Company held by each of them and the periods during which
each has served in those positions and offices. Dr. Heehwan Lee had served as
vice president and chief operations officer of the Company from March 1, 1992
until December 1, 1998. It also reflects the principal occupation of Mr. K. H.
Chung, who has never been an officer of the Company. Both Mr. K. H. Chung and
Dr. Heehwan Lee were selected by Newmax Co., Ltd. to serve as directors of the
Company continuously since December 1990 pursuant to the terms of the Stock
Purchase Agreement dated November 30, 1990 between the Company and Newmax Co.,
Ltd.
Position with Director Shares Owned
Company or Since As a Percentage
Principal and of Outstanding
Name and Age Occupation Until Shares
- ------------ ---------- ----- ------
Dr. Heehwan Lee Chairman, 1990 - (1)(2)
48 President, 2000
Secretary,
Treasurer
of the Company
since November
23, 1999
25
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Position with Director Shares Owned
Company or Since As a Percentage
Principal and of Outstanding
Name and Age Occupation Until Shares
- ------------ ---------- ----- ------
Mr. K. H. Chung Representative 1990 - (1)(2)
53 Director and 2000
President of
Tae Il Media
Co., Ltd.,
Ansan City and
Seoul, Korea
(1) See "Security Ownership of Management" on pages 20 to 21 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
"Security Ownership of Certain Beneficial Owners" on pages 18 to 19. 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.
Family Relationships of Directors of the Company. Dr. Heehwan Lee and Mr.
K. H. Chung are brothers-in-law of each other's wives, who are sisters whose
father, Mr. Yoon K. Choo, is the brother of Dr. Yoon H. Choo. Mr. Yoon K. Choo
is the chairman of the board of directors and a director of Tae Il Media Co.,
Ltd. Dr. Yoon H. Choo until December 1, 1998 had been a director, the chairman
of the board, the president, the chief executive officer, the secretary and the
treasurer of the Company.
Business Experience of Directors: Dr. Heehwan Lee. Dr. Heehwan Lee had
been the vice president and chief operations officer of the Company between
March 1, 1992 and December 1, 1998, has been the chairman of the board, the
president, the chief executive officer, the secretary and the treasurer of the
Company since December 1, 1998, has been a director of the Company since
December 1990 and has been a director and a vice president of Tae Il Media Co.,
Ltd. since August 1986. Dr. Heehwan Lee also had been a director and vice
president of Newmax Co., Ltd. from August 1990 until March 29, 1994.
Business Experience of Directors: Mr. K. H. Chung. Mr. K. H. Chung has
been a director of the Company since December 1990 and has been a representative
director and the president of Tae Il Media Co., Ltd. since October 1983. Mr. K.
H. Chung also had been
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a representative director and the president of Tae Il Magnetics, Inc. from July
1987 until March 29, 1994 and a representative director and the president of
Newmax Co., Ltd. from August 1990 until March 29, 1994.
Tae Il Media Co., Ltd. Mr. K. H. Chung and Dr. Heehwan Lee are directors
and stockholders of Tae Il Media Co., Ltd. Tae Il Media Co., Ltd., Ansan City
and Seoul, Korea, is engaged in the computer equipment components business,
which includes the ferrite core and magnetic recording head businesses which the
Company had been engaged in until September 1997, and may be deemed to be an
affiliate and a parent of the Company.
Tae Il Magnetics Co., Ltd. Mr. K. H. Chung is a stockholder of Tae Il
Magnetics Co., Ltd. Tae Il Magnetics Co., Ltd., Ansan City and Seoul, Korea, is
engaged in the computer equipment components business and may be deemed to be an
affiliate and a parent of the Company.
Newmax Co., Ltd. Tae Il Media Co., Ltd. and Tae Il Magnetics Co., Ltd. are
stockholders of Newmax Co., Ltd. Newmax Co., Ltd., Cheongju, Korea, is engaged
in the computer equipment components business and is an affiliate and a parent
of the Company.
Involvement in Certain Legal Proceedings. On October 14, 1997, Tae Il
Media Co., Ltd., of which Mr. K. H. Chung is the chief executive officer and
both he and Dr. Heehwan Lee are directors, and Newmax Co., Ltd. and their
affiliated companies in Korea had obtained waivers of defaults in the payment of
amounts due pursuant to their indebtedness from their institutional lenders and
on November 8, 1997 had filed debt restructuring plans with the Suwon District
Court and the Cheongju District Court in Korea to obtain a two-year moratorium
on the repayment of certain obligations to certain creditors. On September 4,
1998 and on September 15, 1998, after acceptance of both plans by the creditors
of Tae Il Media Co., Ltd. and of Newmax Co., Ltd., those debt restructuring
plans were approved by those courts in Korea. See "Debt Restructuring
Proceedings of Newmax Co., Ltd." on pages 21 to 22 and "Debt Restructuring
Proceedings of Tae Il Media Co., Ltd." on page 22.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others. Prior to the fiscal year ended
June 27, 1998, Tae Il Media Co., Ltd., Tae Il Magnetics Co., Ltd., Newmax Co.,
Ltd. and their affiliated companies engaged in numerous material transactions
with the Company, both in the ordinary course of the conduct of the computer
component and other businesses of the Company and outside the ordinary course of
its business, as disclosed in the annual reports of the Company on Form 10-K for
those prior fiscal years. Although negotiated in good faith, the impact of the
following transactions between the Company and Tae Il Media Co., Ltd., Tae Il
Magnetics Co., Ltd., Newmax Co.,
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Ltd., Gigamax Corporation, Tae Il USA, Inc. and Techmedia International
Corporation on the financial statements of the Company may be significantly
different than had the transactions been negotiated at arms-length with
unrelated parties. The Company believes that the terms in general were more
favorable to the Company than terms which unrelated parties would have
negotiated at arms length, since unrelated parties usually refused to deal with
the Company.
Debts of the Company to Gigamax Corporation and Tae Il USA, Inc. See
"Status of Dr. Yoon H. Choo as an Associate of Gigamax Corporation and Tae
Il U.S.A., Inc." on pages 14 to 15 and "Indebtedness of the Company to
Gigamax Corporation and Tae Il U.S.A., Inc." on page 32.
Draw-Down of Letter of Credit from Newmax Co., Ltd. During the
fiscal year ended June 27, 1998, the institutional lender of the Company
drew down $2,789,000 pursuant to a letter of credit which Newmax Co., Ltd.
had arranged from a Korean institutional lender (the "letter of credit")
in order to satisfy the $2,741,000 principal balance and some of the
accrued interest ($325,005 as of February 26, 1999) in respect of the
revolving credit note dated November 18, 1996 (the "revolving credit
note") which had been in default prior to its maturity on November 18,
1997. Tae Il Magnetics Co., Ltd., which is an affiliated company of Newmax
Co., Ltd. and of Tae Il Media Co., Ltd., had provided a mortgage on its
Korean real estate as collateral for that letter of credit. The Company
owes Tae Il Magnetics Co., Ltd. all amounts collected by the Korean
institutional lender out of the mortgaged assets. Both Mr. K. H. Chung and
Dr. Heehwan Lee may be beneficial owners of 12.2% of the capital stock of
Newmax Co., Ltd. and Mr. K. H. Chung is the beneficial owner of 6.2% of
the capital stock of Tae Il Magnetics Co., Ltd.
Guaranty by Mr. K. H. Chung, Tae Il Media Co., Ltd. and Newmax Co.,
Ltd. of Term Note of the Company. Mr. K. H. Chung, Tae Il Media Co., Ltd.
and Newmax Co., Ltd. are guarantors of the $1,408,000 principal balance
plus $221,967 of accrued interest as of Bebruary 26, 1999 plus additional
interest accruing at the rate of 10.5% per year owed by the Company to its
lending institution pursuant to a promissory note dated November 26, 1996
(the "term note"). The term note was in default before it matured on
November 26, 1997. Payment of the term note is secured by a mortgage on
all of the real estate, equipment and other assets of the Company. The
lending institution will not enforce those guaranties against Mr. K. H.
Chung, Tae Il Media Co., Ltd. and Newmax Co., Ltd. if the Company carries
out its plan to satisfy its entire debt to its lending institution with
part of the net proceeds of its sale of part of its real estate to the
City of New York. Otherwise, it is possible that the lending
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institution may seek to enforce that guaranty against Mr. K. H. Chung,
because the lending institution may be frustrated in seeking to enforce
that guaranty against Tae Il Media Co., Ltd. and Newmax Co., Ltd. It is
not known whether the guaranty will be enforceable against Tae Il Media
Co., Ltd. or against Newmax Co., Ltd. for more than a year, since Tae Il
Media Co., Ltd. has obtained an order dated September 4, 1998 from the
Suwon District Court in Korea and Newmax Co., Ltd. have obtained an order
dated September 15, 1998 from the Cheongju District Court in Korea
approving a two year moratorium on repayment of certain obligations based
on approvals by their creditors of the moratorium pursuant to Korean debt
restructuring laws. See "Debt Restructuring Proceedings of Newmax Co.,
Ltd." on pages 21 to 22 and "Debt Restructuring Proceedings of Tae Il
Media Co., Ltd." on page 22. Mr. K. H. Chung is the representative
director and president and Dr. Heehwan Lee is a director and a vice
president of Tae Il Media Co., Ltd. Both Mr. K. H. Chung and Dr. Heehwan
Lee may be beneficial owners of 12.2% of the capital stock of Newmax Co.,
Ltd. See "Mr. K. H. Chung" on pages 13 to 14 and "Dr. Heehwan Lee" on page
13.
Sales to Newmax Co., Ltd. Since the beginning of the fiscal year
ended June 27, 1998, the Company sold goods totalling $73,000 to Newmax
Co., Ltd. Both Mr. K. H. Chung and Dr. Heehwan Lee may be deemed to be
beneficial owners of 12.2% of the capital stock of Newmax Co., Ltd.
Debts to Newmax Co., Ltd., Tae Il Media Co., Ltd. and Techmedia
International Corporation. The Company owed Newmax Co., Ltd. $125,400 as
of January 20, 1999. The Company owed Tae Il Media Co., Ltd. $293,596 as
of January 20, 1999. The Company owed Techmedia International Corporation
$35,000 as of January 20, 1999. See "Debts of the Company to Tae Il Media
Co., Ltd." on page 16, "Debts of the Company to Techmedia International
Corporation" on page 17, "Debts of the Company to Newmax Co., Ltd." on
page 17, "Indebtedness of the Company to Newmax Co., Ltd." on page 32,
"Indebtedness of the Company to Techmedia International Corporation" on
page 33 and "Indebtedness of the Company to Tae Il Media Co., Ltd." on
page 33.
NO INDEBTEDNESS OF MANAGEMENT
No Indebtedness of Management. The directors and officers of the Company,
directly or indirectly, are not indebted to the Company in any material
respects.
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COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended. Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company pursuant to Section 16a-3(e) of the Securities and
Exchange Commission during its most recent fiscal year ended June 27, 1998 and
any written representation from a reporting person that no Form 5 is required,
no person who, at any time during the fiscal year ended June 27, 1998, was a
director, officer or beneficial owner of more than ten percent (10%) of any
class of equity securities of the Company failed to file on a timely basis, as
disclosed in the above Forms, reports required by Section 16(a) of the
Securities Exchange Act of 1934, as amended, during the most recent fiscal year
ended June 27, 1998 or prior fiscal years, except certain new directors of
Newmax Co., Ltd. The directors of Newmax Co., Ltd. may be deemed to be
beneficial owners of more than ten percent (10%) of the outstanding shares of
common stock of the Company, as disclosed under "Security Ownership of Certain
Beneficial Owners" above. The new directors of Newmax Co., Ltd. have failed to
file Forms 3 reflecting their election as directors of Newmax Co., Ltd.
CERTAIN BUSINESS RELATIONSHIPS
Certain Business Relationships. See "INTERESTS OF DIRECTORS AND ASSOCIATES
OF DIRECTORS IN MATTERS TO BE VOTED ON" on pages 10 to 12, "INTEREST OF
DIRECTORS IN MATTERS TO BE VOTED ON" on pages 13 to 15, "INTEREST OF ASSOCIATES
OF DIRECTORS IN MATTERS TO BE VOTED ON" on pages 15 to 18, and "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, Transactions with Management and Others"
on pages 27 to 29 above.
Payments to the Company for Property or Services. Newmax Co., Ltd., Tae Il
Media Co., Ltd., Tae Il Magnetics Co., Ltd., or their affiliates have made
payments to the Company or its subsidiaries for property or services. Although
negotiated in good faith, the impact of these transactions on the financial
statements may be significantly different than had the transactions been
negotiated at arms length with unrelated parties. The Company believes that the
terms in general were more favorable to the Company than terms which unrelated
parties would have negotiated at arms length, since unrelated parties usually
refused to deal with the Company.
Payments to the Company by Newmax Co., Ltd. for Equipment. In
particular, the Company sold to Newmax Co., Ltd. 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
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equipment.
Payments to the Company by Newmax Co., Ltd. for Goods. Net sales of
the Company for the fiscal years ended June 27, 1998, June 28, 1997 and
June 29, 1996 included sales of goods totalling $73,000, $2,487,000 and
$2,763,000, respectively, to Newmax Co., Ltd. of products made to
specification of Newmax Co., Ltd.'s customers. These products required
significant additional value added before sale to the ultimate customer.
Payments to the Company by Tae Il Media Co., Ltd. for Goods. The
Company also sold products to Tae Il Media Co., Ltd. ("Tae Il") totaling
approximately $40,000 in the fiscal year ended June 29, 1996.
Payments by the Company for Property or Services. The Company or its
subsidiaries have made payments to Newmax Co., Ltd., Tae Il Media Co., Ltd., Tae
Il Magnetics Co., Ltd. or their affiliates for property or services in amounts
material to the Company. Although negotiated in good faith, the impact of the
following transactions between the Company and Tae Il Media Co., Ltd. and Tae Il
Magnetics Co., Ltd. on the financial statements of the Company may be
significantly different than had the transactions been negotiated at arms-length
with unrelated parties.
Payments by the Company to Tae Il Magnetics Co., Ltd. for Equipment.
The Company purchased equipment during the fiscal year ended June 29, 1996
at the request of an affiliated company, Tae Il Magnetics Co., Ltd. to be
sold to and used by Tae Il Magnetics Co., Ltd. The Company earned a fee of
$33,000 for these services.
Payments by the Company to Tae Il Media Co., Ltd. for Goods. Tae Il
Media Co., Ltd. sold the Company approximately $211,000 of electrical
light fixture ballasts during the fiscal year ended June 29, 1996. The
unsold ballast inventory was returned for credit on June 9, 1997. Tae Il
Media Co., Ltd. sold the Company approximately $500,000 of non-electronic
consumer goods for resale during the fiscal year ended June 29, 1996.
Indebtedness of the Company. The Company or its subsidiaries have obtained
long-term credit, advances or loans from Gigamax Corporation, Tae Il USA, Inc.,
Newmax Co., Ltd., Tae Il Media Co., Ltd., Tae Il Magnetics Co., Ltd. or their
affiliates in amounts material to the Company. Although negotiated in good
faith, the impact of the following transactions between the Company and Gigamax
Corporation, Tae Il USA, Inc., Tae Il Media Co., Ltd., Tae Il Magnetics Co.,
Ltd., Newmax Co., Ltd. and Techmedia International Corporation on the financial
statements of the Company may be significantly different than had the
transactions been negotiated at arms-length with unrelated parties.
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Indebtedness of the Company to Gigamax Corporation and Tae Il
U.S.A., Inc. Nearly $6 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, who resigned as a director, the
chairman of the board, the president, the chief executive officer, the
secretary and the treasurer of the Company on December 1, 1998.
Specifically, Gigamax has made short-term loans averaging $5,596,000 for
the fiscal year ended June 27, 1998 and $4,896,000 for fiscal the fiscal
years ended June 28, 1997 and June 29, 1996. As of June 27, 1998 and June
28, 1997, the Company also owed $1,370,000 to Gigamax Corporation and Tae
Il USA, Inc. for interest on short-term borrowing accrued at the rate of 8
percent per year prior to the last three fiscal years and other charges.
Payment of interest accrued at the rate of 8 percent per year in the
amounts of $435,000 and $392,000 with respect to the fiscal years ended
June 27, 1998 and June 28, 1997, however, was forgiven by Gigamax
Corporation and Tae Il U.S.A., Inc. As of February 26, 1999, the Company
also will owe $338,799 to Gigamax Corporation and Tae Il USA, Inc. for
interest on short-term borrowing accrued at the rate of 8 percent per year
with respect to the period subsequent to June 27, 1998. See "Status of Dr.
Yoon H. Choo as an Associate of Gigamax Corporation and Tae Il U.S.A.,
Inc." on pages 14 to 15.
Indebtedness of the Company to Newmax Co., Ltd. The Company owed
Newmax Co., Ltd. $125,400 as of January 20, 1999, $163,400 at June 27,
1998 and $30,000 at June 28, 1997. Newmax Co., Ltd. is a guarantor of the
Company's term loan note having a principal balance of $1,408,000, unpaid
accrued interest of $221,967 as of February 26, 1999 plus additional
interest accruing at the rate of 10.5% per year.
Indebtedness of the Company to Tae Il Magnetics Co., Ltd. Newmax
Co., Ltd. provided in effect a quaranty via a $2,789,000 letter of credit
from a Korean bank to assist the Company in obtaining a revolving credit
from its primary lending institution; however, that revolving credit loan
in the principal amount of $2,741,000, plus interest, had been in default
since before its maturity on November 18, 1997, so that $2,789,000 letter
of credit was drawn down by the primary institutional lender of the
Company late in 1997. An affiliated company, Tae Il Magnetics Co., Ltd.,
had provided a mortgage on its Korean real estate as collateral for the
Korean bank letter of credit. The Company now owes to Tae Il Magnetics
Co., Ltd. $2,741,000 of principal plus $325,005 of interest accrued as of
February 26, 1999.
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Indebtedness of the Company to Techmedia International Corporation.
Techmedia International Corporation ("Techmedia"), which is wholly owned
by Tae Il Media Co., Ltd. and has the same president as Newmax Co., Ltd.,
has occasionally advanced funds to the Company, including $35,000 during
the fiscal year ended June 28, 1997, which remains payable at January 20,
1999.
Indebtedness of the Company to Tae Il Media Co., Ltd. The Company
owed Tae Il Media Co., Ltd. $293,596 at January 20, 1999, but only
$210,000 at June 27, 1998 and June 28, 1997. Tae Il Media Co., Ltd. is a
guarantor of the Company's term loan note having a principal balance of
$1,408,000, unpaid accrued interest of $221,967 as of February 26, 1999
plus additional interest accruing at the rate of 10.5% per year.
BOARD AND COMMITTEE MEETINGS
Committees. The board of directors of the Company does not have an audit
committee, nominating committee or compensation committee.
Board of Directors Meetings. The board of directors of the Company held no
meetings during the fiscal year ended June 27, 1998. Subsequently, however, the
board of directors of the Company acted twice by unanimous written consent and
plans to act again either by unanimous written consent or by telephone meeting
following the annual meeting of stockholders of the Company.
Resignation of Director. Dr. Yoon H. Choo resigned as a director, as the
chairman of the board, as the president, as the secretary and as the treasurer
of the Company on December 1, 1998; however, his resignation was not because of
a disagreement with the Company on any matter relating to the operations,
policies or practices of the Company.
COMPENSATION OF DIRECTORS AND OFFICERS
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 Fiscal Year Annual Salary
- -------- ----------- -------------
Dr. Yoon H. Choo 1998 $80,000
Chairman, President, 1997 $80,000
Secretary, Treasurer 1996 $80,000
until December 1, 1998
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Name and Principal
Position Fiscal Year Annual Salary
- -------- ----------- -------------
Dr. Heehwan Lee 1998 $13,846
Chairman, President, 1997 -0-
Secretary, Treasurer 1996 -0-
after December 1, 1998
Vice President
before December 1, 1998
There are no other officers whose total annual salary and bonus exceeds
$100,000. Dr. Yoon H. Choo and Dr. Heehwan Lee received no other annual
compensation or long-term compensation or other compensation from the Company,
except that Dr. Heehwan Lee received health benefits costing $8,500 during the
fiscal year ended June 27, 1998, $8,400 during the fiscal year ended June 28,
1997 and $8,200 during the fiscal year ended June 29, 1996.
See "BOARD INTERLOCKS AND INSIDER PARTICIPATION" on pages 35 to 37 below.
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 were $191,000 as of June 27, 1998. Board members are eligible to receive
stock options. See "Board Interlocks and Insider Participation" above.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements. The Company entered into a compensation agreement with Dr. Yoon H.
Choo on April 17, 1991 for a one year period, which has been renewed
automatically for successive one year periods on each anniversary date. As
renegotiated on November 18, 1991, the compensation agreement requires annual
salary payments of $80,000 per year. The compensation agreement provides for
payment of one year's salary, which originally was $150,000 per year, in the
event of contract non-renewal or termination of employment. Dr. Yoon H. Choo
consented to the termination of his compensation agreement with the
understanding that the Company will owe him one year's salary of $150,000 on
account of that termination when he resigned as a director, the chairman of the
board, the president, the secretary and the treasurer of the Company on December
1, 1998.
No Compensation Committee. The Company has no compensation committee. See
"Board Interlocks and Insider Participation" above.
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Board of Directors Report on Executive Compensation. The board of
directors of the Company follows the policy of compensating the executive
officers of the Company at a level which will assure their continuing provision
of services to the Company, regardless of the performance of the Company. The
basis for the compensation of Dr. Yoon H. Choo during the fiscal year ended June
27, 1998 was the same as the bases during the five and one-half preceding fiscal
years, and bore only one relationship to the Company's performance during any of
those fiscal years. That relationship simply was that the sales, the losses and
the cash flow of the Company in those six and one-half fiscal years inhibited
the Company from paying a $150,000 salary, so the Company paid only an $80,000
salary. Moreover, the ability of the Company to make those salary payments
during the fiscal year ended June 27, 1998 was attributable primarily to
financing provided by its affiliated companies. That policy was known to and
approved by Mr. K. H. Chung and Dr. Heehwan Lee, as well as by Dr. Yoon H. Choo.
BOARD INTERLOCKS AND INSIDER PARTICIPATION
Board Interlocks and Insider Participation of Directors and Officers. Dr.
Yoon H. Choo and Dr. Heehwan Lee served as officers and as directors of the
Company and Mr. K. H. Chung served as a director of the Company for the fiscal
year ended June 27, 1998. As such, Dr. Yoon H. Choo, Dr. Heehwan Lee and Mr. K.
H. Chung were entitled to participate in deliberations of the board of directors
concerning executive officer compensation. Newmax Co., Ltd. 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.
Gigamax Corporation and Tae Il USA, Inc. Dr. Yoon H. Choo is a director
and the president of Gigamax Corporation and Tae Il USA, Inc., which are
affiliates of the Company.
Stock Ownership of Affiliates of the Company. Tae Il Media Co., Ltd. and
its affiliate, Tae Il Magnetics Co., Ltd., own 28 percent of the outstanding
shares of capital stock of Newmax Co., Ltd. and 21 percent of the outstanding
shares of capital stock of Dae Bang Investment Finance Corp. Newmax Co., Ltd.
owns 47.1% and Dae Bang Investment Finance Corp. owns 7.1% of the outstanding
shares of common stock of the Company.
Tae Il Media Co., Ltd. Dr. Heehwan Lee is a director and a vice president
of Tae Il Media Co., Ltd., and Mr. K. H. Chung is a representative director and
the president of Tae Il Media Co., Ltd. Tae Il Media Co., Ltd. may be deemed to
be a parent of the Company and an associate of Dr. Heehwan Lee and Mr. K. H.
Chung. Tae Il Media Co., Ltd. owned 12.2 percent of the capital stock of Newmax
Co., Ltd. as of June 27, 1998.
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Tae Il Magnetics Co., Ltd. Mr. K.H. Chung owned approximately 6 percent
of the common stock of Tae Il Magnetics Co., Ltd., which owned 16 percent of the
capital stock of Newmax Co., Ltd. as of June 27, 1998.
Transactions with Management and Others. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" on pages 27 to 29.
Ownership by Newmax Co., Ltd. of Common Stock of the Company. Newmax Co.,
Ltd. owns 47.1 percent of the common stock of the Company. Newmax Co., Ltd. may
be deemed to be an associate of Dr. Heehwan Lee and Mr. K. H. Chung. Pursuant to
the Stock Purchase Agreement dated November 30, 1990 between Newmax Co. Ltd. and
the Company, Newmax Co., Ltd. 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 Co., Ltd. to own more than 50 percent of the issued and
outstanding shares of common stock of the Company. Such an agreement to purchase
additional shares of common stock of the Company would inure directly to the
benefit of Newmax Co., Ltd. and indirectly to the benefit of Tae Il Media Co.,
Ltd., Tae Il Magnetics, Co., Ltd., Mr. K.H. Chung, Dr. Heehwan Lee, and Mr. Yoon
K. Choo.
Mr. Yoon K. Choo. Mr. Yoon K. Choo is a director and the chairman of the
board of directors of Tae Il Media Co., Ltd. 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. Thus, Mr. Yoon K. Choo is related by blood or marriage to Mr. K.H.
Chung and Dr. Heehwan Lee, who are directors of the Company, and to Dr. Yoon H.
Choo, who was a director of the Company until December 1, 1998.
Dae Bang Investment Finance Corp. As of June 27, 1998, Tae Il Media Co.,
Ltd. owned almost 19 percent of the capital stock of Dae Bang Investment Finance
Corp., which owns 7.1 percent of the common stock of the Company.
Mr. K. H. Chung. Mr. K. H. Chung is a director of the Company, a
representative director, the president and a 1 percent stockholder of Tae Il
Media Co., Ltd., a son-in-law of Mr. Yoon K. Choo and a 6 percent stockholder of
Tae Il Magnetics Co., Ltd.
Guaranties of Term Loan Note of the Company. Mr. K. H. Chung has a direct
material interest in his own guaranty and an indirect material interest in the
guaranties by Tae Il Media Co., Ltd. and by Newmax Co., Ltd. of the $1,408,000
principal balance and accrued interest of the term loan note which has been in
default and is payable by the Company to its principal lending institution,
which issued a notice of default on December 16, 1997.
Dr. Heehwan Lee. Dr. Heehwan Lee is a director, the chairman of the board,
the president, the chief executive officer, the secretary and the treasurer of
the Company, until December 1, 1998
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had been the vice president and chief operations officer of the Company, is a
director, a vice president and a 0.3% stockholder of Tae Il Media Co., Ltd. and
is a son-in-law of Mr. Yoon K. Choo.
Transactions between the Company and Tae Il Media Co., Ltd. and Newmax
Co., Ltd. Mr. K. H. Chung and Dr. Heehwan Lee have an indirect interest in the
sales of $73,000 of goods by the Company to Newmax Co., Ltd. during the fiscal
year ended June 27, 1998, as well as in transactions between the Company and Tae
Il Media Co., Ltd. and Newmax Co., Ltd. in prior years.
Debts of the Company to Tae Il Media Co., Ltd., Techmedia International
Corporation and Newmax Co., Ltd. Mr. K. H. Chung and Dr. Heehwan Lee have an
indirect material interest in the debts of the Company to Tae Il Media Co.,
Ltd., to Newmax Co., Ltd. and to Techmedia International Corporation. See "Debts
of the Company to Tae Il Media Co., Ltd." on page 16, "Debts of the Company to
Techmedia International Corporation" on page 17, "Debts of the Company to Newmax
Co., Ltd." on page 17, "Indebtedness of the Company to Newmax Co., Ltd." on page
32, "Indebtedness of the Company to Techmedia International Corporation" on page
33 and "Indebtedness of the Company to Tae Il Media Co., Ltd." on page 33. Also
see "Draw-Down of Letter of Credit from Newmax Co., Ltd." on page 28.
Dr. Yoon H. Choo. Dr. Yoon H. Choo until December 1, 1998 was a director,
the chairman of the board, the president and chief executive officer, the
secretary and the treasurer of the Company, is a director and the president of
Gigamax Corporation and Tae Il USA, Inc. and is a brother of Mr. Yoon K. Choo.
Debts of the Company to Gigamax Corporation and Tae Il USA, Inc. 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. See "Status of Dr. Yoon H.
Choo as an Associate of Gigamax Corporation and Tae Il U.S.A., Inc." on pages 14
to 15 and "Indebtedness of the Company to Gigamax Corporation and Tae Il U.S.A.,
Inc." on page 32.
NOMINATION AND ELECTION OF DIRECTORS
Stockholder Action Regarding Election of Directors. The board of directors
has decided to recommend the nomination of Mr. K. H. Chung and Dr. Heehwan Lee
for election as directors of the Company by the stockholders. Directors shall be
elected by a plurality of shares voted by holders present, or represented,
entitled to vote at the meeting. If the stockholders do not nominate or elect
Mr. K. H. Chung and Dr. Heehwan Lee as directors, their terms of office will
continue after the annual meeting until their successors shall be elected and
shall qualify.
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Anticipated Nomination and Election of Directors. Newmax Co., Ltd. and Dae
Bang Investment Finance Corp. will instruct their proxies to nominate Mr. K. H.
Chung and Dr. Heehwan Lee as directors and will vote or will cause to be voted
their 12,075,000 shares of common stock of the Company in favor of the election
of Mr. K. H. Chung and Dr. Heehwan Lee as directors of the Company. As a result,
the Mr. K. H. Chung and Dr. Heehwan Lee will be elected as directors of the
Company by a plurality of the outstanding shares of common stock of the Company.
SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
Independent Public Accountant. The board of directors of the Company has
selected Mr. Sung I. Rhee as its principal accountant and is recommending Mr.
Sung I. Rhee to its common stockholders for approval and ratification as its
independent public accountant to audit its books, records and accounts for the
fiscal year ending June 26, 1999. As the principal independent public accountant
of the Company, Mr. Sung I. Rhee has audited its books, records and accounts for
the two fiscal years ended June 28, 1997 and June 27, 1998. Previously, KPMG
Peat Marwick LLP had done so. See "Lack of Opinions of Independent Public
Accountants" on page 56 and "Lack of Compliance with Regulation S-X, Article 2"
on page 56.
Attendance of Principal Accountant at Annual Meeting. Mr. Sung I. Rhee,
who was the principal accountant of the Company for the two fiscal years ended
June 28, 1997 and June 27, 1998, plans to be present at the 1999 annual meeting
of stockholders of the Company. The Company will provide Mr. Sung I. Rhee an
opportunity to make a statement at the 1999 annual meeting of stockholders if he
desires to do so. Mr. Sung I. Rhee is expected to be available at the 1999
annual meeting of stockholders to respond to appropriate questions.
STOCKHOLDER ACTION REQUIRED TO SELECT ACCOUNTANT
Stockholder Action Regarding Independent Public Accountant. The selection
of Mr. Sung I. Rhee as the independent public accountant of the Company is being
presented to the stockholders for ratification. The affirmative vote of the
holders of a majority of the shares present, or represented, entitled to vote at
the meeting is required for favorable action on the ratification of the
selection of an independent public accountant. If the stockholders do not ratify
this appointment, the selection of other certified public accountants will be
considered by the board of directors of the Company.
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Anticipated Ratification of Selection of Independent Public Accountant.
Newmax Co., Ltd. and Dae Bang Investment Finance Corp. will vote or will cause
to be voted their 12,075,000 shares of common stock of the Company in favor of
the ratification of the selection of Mr. Sung I. Rhee as the independent public
accountant to audit the books, records and accounts of the Company and its
subsidiaries for the fiscal year ending June 26, 1999. As a result, the
selection of Mr. Sung I. Rhee will be ratified by a majority of the issued and
outstanding shares of common stock of the Company.
SALE OF CERTAIN REAL ESTATE OF THE COMPANY
General Character and Location of the Property. The property consists of
real estate located at 71-85 Smith Avenue, Kingston, New York and improved with
83,000 square feet of factory, engineering, research, cafeteria, security, shop
and office space in a two story, steel frame, high tech, sprinklered, climate
controlled, light manufacturing building, a 1,560 square foot detached storage
building, real estate located at 41-45 Railroad Avenue, Kingston, New York and
improved with a parking lot and real estate located at 91 Smith Avenue,
Kingston, New York. The underlying land includes a maximum of 3.445 acres which
are not in a flood plain. The use of the real estate conforms with its M-1 and
M-2 zoning classifications for manufacturing purposes. Certificates of occupancy
and street letters have been issued by the City of Kingston.
Name and Address of the Transferor. The seller of the real estate is the
Company, National Micronetics, Inc. The principal executive offices of National
Micronetics, Inc. are located at 71 Smith Avenue, Kingston, New York 12401,
telephone (914) 338-0333.
Name and Address of Transferee. The buyer of the real estate is the City
of New York. The principal executive offices of the City of New York are located
at 1 Centre Street, 20th Floor North, New York, New York 10007, Attention:
Assistant Commissioner for Acquisitions, telephone (212) 669-7293 (the "City of
New York").
No Material Relationship of Transferee to the Company. The transferee has
no material relationship with the Company or with any affiliate of the Company.
General Nature of the Business Conducted by the City of New York. The City
of New York governs land and the people located in the Counties of Bronx,
Queens, Kings, Richmond and New York in the State of New York.
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SUMMARY OF MATERIAL TERMS
Summary of Material Features of the Proposed Sale of Real Estate. The
Company will convey to the City of New York real estate located in the City of
Kingston, New York containing primarily a building designed for use as offices,
a laboratory and a factory and parking lots. The City of New York will pay to
the Company $2,400,000. The terms of the transaction are set forth in an
agreement of purchase and sale dated November 4, 1998 between the Company and
the City of New York, Department of Citywide Administrative Services.
Net Proceeds Receivable by the Company. The Company will apply the gross
proceeds of $2,400,000 first to pay secured creditors, including its
institutional lender which has a mortgage, local governments which have tax
liens and creditors which have mechanics liens, because those debts must be
satisfied in order to convey good and marketable title to the City of New York.
The Company will apply the remaining gross proceeds to pay brokerage
commissions, legal and accounting fees and other expenses of sale, because those
commissions, fees and expenses customarily are paid in connection with real
estate conveyances. After paying all liens against the real estate, brokerage
commissions, legal and accounting fees and other expenses of sale, the Company
hopes to realize $350,000 to apply toward the payment of accrued vacation
payments to its employees, payment of some of its general creditors and
establishment of a cash reserve to pay its day to day expenses. Of course,
general creditors of the Company may seek to alter that plan by exercising their
claims against the assets of the Company. That $350,000 amount is computed as
follows:
Type of Lien or Expense Amount
Principal of mortgage note $1,408,000
Interest of mortgage note 215,553
Tax liens 157,532
Mechanics' liens 61,642
Realtors' commissions 96,000
Costs of demolition and repair 12,000
Legal fees 40,000
Accounting fees 10,000
Surveyors' fees 2,000
Closing costs 20,000
----------
TOTAL $2,022,727
See "Pro Forma Balance Sheet" on pages 63 and 64.
Federal and State Regulatory Requirements. The Company must demonstrate
compliance with federal and New York state environmental protection laws, labor
laws and health laws, City of Kingston zoning laws, construction and building
codes, fire safety
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ordinances and other laws.
Other Material Features of the Contract or Transaction. The Company must
demolish and repair a passageway between the building to be sold and an adjacent
building at an aggregate cost estimated to be $12,000. In addition, the Company
must assure that good and marketable title to the real estate will be conveyed
to the City of New York to the satisfaction of its title insurance company. See
"Mortgage", "Arrears of Real Estate Taxes" and "Mechanics' Liens" on page 41.
Mortgage. The Company will pay the outstanding principal balance of
$1,408,000, plus accrued interest estimated to aggregate about $221,967 as of
February 26, 1999, in respect to the term note payable to its institutional
lender out of the proceeds of sale of the real estate to the City of New York.
Brokerage Commissions. The Company will pay commissions to Julien J.
Studley, Inc. in the amount of $48,000 or 2 percent of the $2,400,000 contract
price and commissions to Wm. Morrison Realty in the amount of $48,000 or 2
percent of the $2,400,000 contract price for their services as brokers out of
the proceeds of sale of the real estate to the City of New York.
Arrears of Real Estate Taxes. The Company will pay all accrued and unpaid
real estate taxes presently aggregating $157,532.33, interest and penalties out
of the proceeds of sale of the real estate to the City of New York.
Mechanics' Liens. The Company will pay all mechanics' liens aggregating
$61,649.84, plus accrued interest out of the proceeds of the sale of the real
estate to the City of New York.
Violations. The Company must cure and will pay any outstanding violations
with respect to the real estate out of the proceeds of sale of the real estate
to the City of New York.
Subdivision Map. The Company satisfied its obligation to obtain approval
by the City of Kingston of a subdivision map. The City of Kingston Planning
Board on November 12, 1998 approved the subdivision map, which the Company must
file with the Recorder of Ulster County upon receipt of confirmation from the
Treasurer of the City of Kingston that arrears of real estate taxes, interest
and penalties will have been paid by the Company.
Environmental Matters. The Company has received a letter dated August 6,
1998 from the New York State Department of Environmental Conservation regarding
a visual site inspection by the New York State Department of Environmental
Conservation in November 1997 of the real estate of the Company, which was
considered to be in compliance with all environmental standards applied during
that inspection. The Company has responded to that
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letter and accordingly believes that there should be no environmental problems
hindering its sale of its real estate.
Irrelevance of Potentially Responsible Party Status for Superfund
Site in Southington, Connecticut. The Company's status as one of more that
1,600 potentially responsible parties ("PRP's") for an Environmental
Protection Agency ("EPA") Superfund site known as the Solvents Recovery
Service of New England Superfund site located on Lazy Lane in Southington,
Connecticut under the Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA) does not violate the terms of the agreement of
purchase and sale with the City of New York requiring the real property of
the Company to be in compliance with all state and federal environmental
laws and otherwise should not inhibit the sale of the real estate of the
Company to the City of New York. The status as a CERCLA PRP concerns
regulated substances which the Company had shipped to the Superfund site
in Southington, Connecticut, rather than the real estate of the Company.
See "Superfund Site in Southington, Connecticut" on pages 24 to 25.
Certificates of Occupancy and Street Letters. The Company will furnish to
the City of New York certificates of occupancy and street letters which it has
for the real estate. The Company will furnish smoke detector affidavits to the
City of New York.
DETERMINATION OF CONSIDERATION FOR THE REAL ESTATE
Nature and Amount of Consideration. The nature and amount of consideration
to be received by the Company from the City of New York in exchange for the real
estate is $2,400,000 in cash. See "Net Proceeds Receivable by the Company" on
page 40.
Appraisal of the Real Estate. On July 15, 1996, the City of New York
obtained from Griffin Valuation & Realty Services, Ltd, P. O. Box 3614, 96
Maiden Lane, Kingston, NY 12401, an appraisal of the fair market value of most
real estate owned by the Company in Kingston, New York, except two acres of
parking lot.
Qualifications of Appraiser. Griffin Valuation & Realty Services, Ltd. is
a certified general appraiser licensed in New York, New Jersey and Connecticut,
a licensed real estate broker in New York, a member of the American Institute of
Real Estate Appraisers and a senior real property appraiser designated by the
Society of Real Estate Appraisers.
Selection of Appraiser. The Company in 1994 had selected Griffin Valuation
& Realty Services, Ltd. as an appraiser because it had fifteen years of general
real estate business experience in Ulster County, New York and in nearby
counties.
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No Material Relationships between the Company and the Appraiser. During
the last two years there has been no material relationship between the Company
or its affiliates and Griffin Valuation & Realty Services, Ltd. or its
affiliates or unaffiliated representatives. No such material relationship is
contemplated. The Company had paid Griffin Valuation & Realty Services, Ltd. for
an appraisal in 1994.
Availability of Appraisal. The appraisal by Griffin Valuation & Realty
Services, Ltd. will be made available for inspection and copying at the
principal executive offices of the Company at 71 Smith Avenue, Kingston, NY
12401 during its regular business hours, which are 9:00 a.m. to 4:00 p.m. on
Monday, Tuesday and Wednesday, by any interested common stockholder of the
Company or his or her representative who has been so designated in writing. A
copy of the appraisal by Griffin Valuation & Realty Services, Ltd. (excluding
photographs) will be transmitted by the Company to any interested common
stockholder of the Company or his or her representative who has been so
designated in writing upon written request and at the expense of the requesting
common stockholder.
Comparative Sales Method Appraisal of Real Estate. The comparative sales
method of appraisal is based on recent sales prices of comparable properties in
the region. Griffin Valuation & Realty Services, Ltd. appraised the land and
building which are being sold to the City of New York at a fair market value of
$2,490,000 based on a sales comparison approach on July 15, 1996, plus a value
which is unsupported in the market of $625,000 due to the cost of special
construction improvements.
Capitalized Gross Income Appraisal of Real Estate. The capitalized gross
income method of appraisal is based on the capitalization of anticipated future
gross rents set forth in recent leases of comparable properties in the region.
The Company has deduced by extrapolating from the aggregate information in the
appraisal that Griffin Valuation & Realty Services, Ltd. appraised the building
which is being sold to the City of New York at a fair market value of less than
$3,820,000 based on a capitalized gross income approach on July 15, 1996, plus a
value which is unsupported in the market of $625,000 due to the cost of special
construction improvements. That capitalized gross income appraisal value would
be considerably less if usual expenses applicable to the building being sold to
the City of New York were deducted from annual estimated gross income prior to
dividing by the capitalization rate. Unfortunately, the appraisal did not
allocate the expenses attributable to all of the buildings owned by the Company
among them separately.
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Fairness of Consideration. The fairness of the consideration is based on
the results of the efforts which the Company has made to sell its real estate
with the professional assistance of the listing realtor and the advice which the
Company has received from another realtor, as well as upon the information
contained in the appraisal. The fairness of the consideration also must be
evaluated in terms of the need of the Company to satisfy its term note which has
been in default more than one year in order that its principal lending
institution will not foreclose its mortgage on terms and conditions which
possibly would be much less favorable to the Company.
PURPOSES OF SALE OF REAL ESTATE BY THE COMPANY
Benefits of the Transaction. The sale of certain real estate of the
Company to the City of New York for $2,400,000 is in the best interests of the
stockholders of the Company, even though the Company will have no net proceeds
available to distribute in respect of the outstanding shares of common stock of
the Company, for the following reasons:
Avoidance of Foreclosure and Bankruptcy. The Company hopes to
realize more by means of this agreement to sell part of its real estate to
the City of New York plus the opportunity to enter into agreements to sell
the remaining parts of its real estate than it would realize from a
foreclosure sale of all of the assets of the Company or from a voluntary
or involuntary proceeding in bankruptcy.
No Available Capital to Utilize the Building to Be Sold. The Company
has no more available sources of capital to operate its sealed lead acid
battery assembly line in the building being sold to the City of New York.
No Revenues to Pay the Expenses of Real Estate to Be Sold. The
Company has no revenues to pay the substantial expenses of owning and
protecting from the elements the real estate being sold to the City of New
York.
Partial Repayment of Loans from Associated Companies. The net
proceeds of the sale of certain real estate by the Company to the City of
New York may enable Newmax Co., Ltd. and its associated companies, Gigamax
Corporation, Tae Il USA, Inc., Tae Il Magnetics Co., Ltd., Tae Il Media
Co., Ltd. and Techmedia International Corporation to recoup some of the
funds which they have loaned to the Company since 1991 in an effort to
keep it in business.
Timeliness of the Transaction. The board of directors is recommending the
sale of certain real estate of the Company to the City of New York at this time,
because the prolonged negotiation and municipal approval of the agreement of
purchase and sale
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between the Company and the City of New York was completed on November 4, 1998
and the City of New York is anxious to close that transaction as soon as
stockholder approval lawfully may be obtained by the Company. The board of
directors authorized the Company to enter into the agreement of purchase and
sale with the City of New York at this time because during the years while the
real estate of the Company has been listed for sale, no other prospective
purchasers have expressed or, in the judgment of the Company, appear to be
likely in the future to express, such a strong interest in acquiring that real
estate of the Company at such a favorable price on such favorable terms and
conditions. The board of directors of the Company did not find any purchasers of
the business of the Company, because the Company has not been able to sustain
its own ferrite core magnetic recording head business by keeping up with
technological changes in the magnetic recording head industry or to develop any
new business based on other products without substantial loans from associated
companies. The board of directors of the Company believe that the proposed sale
of part of its real estate to the City of New York is the most valuable
opportunity which the Company possesses. Moreover, that sale is going to enable
the City of New York to provide the people in the Kingston, New York region with
employment opportunities which the Company has not been able to provide in its
facility.
Information About the Transaction. The transaction will enable the Company
to reduce its expenses of ownership of real estate which it no longer needs, but
at a substantial loss of many investments in the buildings to make them suitable
for high technology light manufacturing and recently for manufacturing sealed
lead acid batteries. The economic problems of the Company and of the affiliates
of the Company located in Korea prevented the Company from avoiding the
continuation of its default in paying the term loan note secured by a mortgage
on the real estate of the Company and from utilizing the building which is being
sold to the City of New York for manufacturing sealed lead acid batteries.
Reasons of the Company for Engaging in the Sale of Real Estate. The
Company is selling part of its real estate to the City of New York primarily in
order to satisfy the $1,408,000 principal balance, the $221,967 of accrued
interest as of February 26, 1999 plus the interest accruing subsequently at a
rate of 10.5 percent per year with respect to its amended term promissory note
dated November 26, 1996 payable by the Company to its lending institution (the
"term note"). The term note is secured by a mortgage which the Company had
granted to its lending institution on all of the real estate and tangible
personal property of the Company. The Company plans to use the rest of the net
proceeds of sale of its real estate to pay some of the other debts of the
Company. See "Interests of Directors and Associates of Directors of the Company
in Matters to Be Voted On" on pages 10 to 12, "Interests of Directors of the
Company in Matters to Be Voted On" on pages 13 to 15, and "Interests of
Associates of Directors of the Company in
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Matters to Be Voted On" on pages 15 to 18.
Reasons of the City of New York for Engaging in the Purchase of Real
Estate. The City of New York is buying part of the real estate of the Company in
order to consolidate in one location the laboratories and offices of its
Department of Environmental Protection exercising responsibility over the
reservoirs and watershed surrounding the reservoirs supplying water to the City
of New York.
No Other Contracts Between the Company and the City of New York. There are
no past, present or proposed material contracts, arrangements, understandings,
relationships, negotiations or transactions during the two fiscal years ended
June 28, 1997 and June 27, 1998 or during the current fiscal year ending June
26, 1999 between the Company and its affiliates and the City of New York and its
affiliates, except the agreement of purchase and sale dated November 4, 1998
between the Company and the City of New York as described above.
RESULTS OF SALE OF REAL ESTATE BY THE COMPANY
Rights of Common Stockholders as a Result of the Sale. The rights of the
common stockholders of the Company will not be different as a result of the sale
of part of its real estate to the City of New York. The debts of the Company are
payable primarily to affiliates of the Company and the primary lending
institution of the Company. See "Interests of Directors and Associates of
Directors in Matters To Be Voted On" on pages 10 to 12. The debts of the Company
exceed the fair market value of its assets, so the common stockholders of the
Company as stockholders will not realize any of the net proceeds of the sale of
real estate to the City of New York. See "Consolidated Balance Sheets" on page
58. No securities will be issued or changed in connection with the sale by the
Company of part of its real estate to the City of New York.
Accounting Treatment of the Sale of Real Estate. The Company expects to
report a loss on the sale to the City of New York of the non-depreciable land
and the depreciable buildings and improvements which comprise the part of its
real estate which the Company is selling to the City of New York. The sale may
yield a loss, because the sales price of $2,400,000 is $157,000 less than the
sum of the estimated $180,000 closing costs plus the $2,377,000 cost, net of
depreciation, of the Company in the land (which is not depreciable), buildings
and improvements to be sold as of September 26, 1998. See "Loss on Sale of Real
Estate" on page 64 and "Net Proceeds Receivable by the Company" on page 40. The
loss will be slightly smaller than $157,000 due to depreciation for the quarter
ended December 26, 1998 and part of the quarter ending March 27, 1999. See
"UNAUDITED PRO FORMA BALANCE SHEET" on pages 63 to 64.
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Satisfaction of Secured Liabilities in Connection with Sale of Real
Estate. The Company expects to satisfy the mortgage encumbering its real estate
and several mechanics liens and tax liens out of the net proceeds of sale of
certain of its real estate to the City of New York. See "Seniority of Claims of
Creditors of the Company" on pages 10 to 12, "Guaranty by Mr. K. H. Chung of
Term Note of the Company" on page 13, "Guaranty by Tae Il Media Co., Ltd. of
Term Note of the Company" on page 16, "Guaranty by Newmax Co., Ltd. of Term Note
of the Company" on page 17, "Guaranty by Mr. K. H. Chung, Tae Il Media Co., Ltd.
and Newmax Co., Ltd. of Term Note of the Company" on pages 28 to 29, "Net
Proceeds Receivable by the Company" on page 40 and "Mortgage" on page 41.
Satisfaction of Unsecured Liabilities in Connection with Sale of Real
Estate. The Company expects to apply the estimated $350,000 balance of the net
proceeds remaining after the payment of the estimated $180,000 expenses of sale
and the secured liabilities to keep a cash reserve of $100,000, to make payments
on account of about $42,000 of accrued vacation benefits of employees and on
account of other liabilities or obligations to general creditors of the Company,
including possibly some associates of directors of the Company. See "Status of
Dr. Yoon H. Choo as an Associate of Gigamax Corporation and Tae Il USA, Inc." on
pages 14 to 15, "Debts of the Company to Tae Il Media Co., Ltd." on page 16,
"Debts of the Company to Techmedia International Corporation" on page 17, "Debts
of the Company to Newmax Co., Ltd." on page 17, "Indebtedness of the Company to
Gigamax Corporation and Tae Il U.S.A., Inc." on page 32, "Indebtedness of the
Company to Newmax Co., Ltd." on page 32, "Indebtedness of the Company to
Techmedia International Corporation" on page 33 and "Indebtedness of the Company
to Tae Il Media Co., Ltd." on page 33.
Federal Income Tax Loss Realized on the Sale of Real Estate. The Company
may realize a loss on the sale of part of its land to the City of New York,
because the portion of the sales price of $2,400,000 to be allocated to the land
to be sold may be less than the basis of the Company in the land to be sold. The
Company may realize a loss on the sale of part of its buildings and improvements
to the City of New York, because the portion of the sales price of $2,400,000
allocated to the buildings and improvements to be sold may be less than the
adjusted basis of the Company in the buildings and improvements to be sold.
Characterization of Federal Income Tax Losses. The land retains its
character as a capital asset, while the buildings and improvements acquire the
character of section 1231 property for federal income tax purposes. Therefore,
for those purposes the Company may recognize a long term capital loss on the
sale of the non-depreciable land. For federal income tax purposes, the Company
may recognize ordinary loss on the sale of the depreciable buildings and
improvements which comprise the part of its real estate which the Company is
selling to the City of New York if the
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gains from the sale of Section 1231 property by the Company during the tax year
ending June 26, 1999 do not exceed the losses from the sale of Section 1231
property by the Company during the tax year ending June 26, 1999.
INFORMATION ABOUT THE COMPANY
Additional Information with Respect to the Company. In reliance upon Item
14(c) of Schedule 14A of the Securities and Exchange Commission, the Company
incorporates by reference in this information statement the annual report on
Form 10-K of the Company for the fiscal year ended June 27, 1998 (the "annual
report"), which was filed with the Securities and Exchange Commission on October
15, 1998, Commission File Number 0-7207. The annual report is being sent to
stockholders of the Company together with this information statement with
respect to the 1999 annual meeting of stockholders of the Company pursuant to
the requirement of Rule 14a-3 of the Securities and Exchange Commission. The
Company is modifying in the text of this information statement much of the
information contained in the text of the annual report, because the decisions
which the Company made on December 1, 1998 to liquidate and to dissolve made
those modifications desirable. Therefore, the annual report should be relied
upon primarily for the audited financial statements of the Company and its
subsidiaries. See "AUDITED ANNUAL FINANCIAL STATEMENTS OF THE COMPANY" on pages
55 to 57.
FORMER BUSINESS OF THE COMPANY
History of the Company. 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
was a significant customer of the Company. The Company historically had operated
exclusively in the magnetic recording head industry.
Decline and Cessation of Business. The Company had minimal revenues during
only the first quarter of its fiscal year ended June 27, 1998 and had serious
problems as a going concern due to increased obligations and a lack of working
capital during its fiscal year ended June 27, 1998. On December 1, 1998, the
Company decided to sell off its remaining assets and to dissolve. For several
years, the Company has been unable to generate sufficient revenues to sustain
itself. The debt restructuring proceedings
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involving its parent, affiliated and associated companies in Korea for nearly a
year ending in September, 1998 and the limitations on those companies resulting
from those debt restructuring proceedings and other financial exigencies gravely
restricted their ability to support the Company and to develop its new business
of manufacturing sealed lead acid batteries.
Consequences of Proposed Sales of Assets. As of June 28, 1998, the book
value of the assets of the Company, consisting almost entirely of property,
plant and equipment, was $2,807,000, whereas the total current liabilities of
the Company were $12,626,000, leaving a total stockholders' deficiency of
$9,819,000. Although the Company hopes to realize at least book value by selling
its assets, which have been appraised for more than $3,000,000, the Company can
make no assurances that its assets may be sold for more than the $2,400,000
price which the City of New York has agreed to pay for its main office,
laboratory and factory building in Kingston, New York. In any event, there will
be no funds to distribute to the stockholders of the Company.
Prior Dependence upon Associated Companies. 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 between May 10,
1991 and September 1997, the Company had been principally an integrated
manufacturer of magnetic recording heads primarily for computer disk drives. The
Company had been performing pilot projects concerning ferrite bars, cores and
recording head assemblies.
Termination of Proposal to Manufacture Sealed Lead Acid Batteries. The
Company had installed a sealed lead acid battery manufacturing line. However,
the Company had not been able to secure funding to cover the initial operating
expenses for the battery manufacturing, mainly due to the debt restructuring in
both Tae Il and Newmax, so the battery line never became operational. Moreover,
the Company on November 3, 1998 made a contract to sell to the City of New York
the building in which the sealed lead acid battery manufacturing line had been
installed. On December 1, 1998, the Company decided not to install that sealed
lead acid battery manufacturing line either in another vacant building which it
owns or in a building to be leased. The Company also decided not to carry on any
other business.
Sales and Customers. The Company had sales of $73,000 and a net loss of
$1,599,000 for the fiscal year ended June 27, 1998. The Company received no new
orders during the fiscal year ended June 27, 1998 or subsequently. The Company's
computer products had been sold to original equipment manufacturers. Because
product life cycles for computer products are relatively short, sales in
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one period were not necessarily indicative of future sales. At any given time,
the Company was likely to be dependent on sales of specific computer products to
specific customers.
Export Sales. Export sales of computer products comprised 100% of net
sales in fiscal 1998. Net sales of the United States operations of the Company
included export sales as follows:
Fiscal
Year Asia
------ ----
(in thousands)
1996 $ 3,101
1997 $ 2,517
1998 $ 73
Dispositions of Computer Product Assembly Line Equipment. 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.
Termination of Plans for Manufacturing Batteries. The Company had
contemplated selling sealed lead acid batteries at such time as funds needed to
commence operations could be made available by its affiliated companies or could
be supplemented by its selling some of its real estate; however, on December 1,
1998, upon learning that no funds would be made available for that purpose by
its parent or associated companies, the Company decided to give up its plans to
manufacture and sell batteries.
Important Customers. In fiscal 1998, one customer, Newmax, accounted for
100% of net sales on a consolidated basis. Newmax operates in South Korea and
has recently been subject to business disruptions caused by debt restructuring.
The following table demonstrates the dependence of the Company on two major
customers in terms of amount and percentage of net sales during its last three
fiscal years:
Products Fiscal Years Ended June
-------- -----------------------
($ in thousands)
1998 1997 1996
---- ---- ----
Newmax Co., Ltd. $ 73 -100% $ 2,487 - 93% $ 2,763 - 67%
Victas, Inc. $ - - $ 143 - 5% $ 543 13%
Related Party Transactions. Net sales for fiscal 1998, 1997 and 1996
included sales of goods totalling $73,000, $2,487,000 and $2,763,000,
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. The Company also sold products to Tae Il Media Co., Ltd.
50
<PAGE>
("Tae Il") totaling approximately $40,000 in fiscal 1996. 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. The Company believes that the terms in general were more
favorable to the Company than terms which unrelated parties would have
negotiated at arms length, since unrelated parties usually refused to deal with
the Company.
Backlog. A comparison of backlog at fiscal year-end is shown below:
June 27, 1998 June 28, 1997
------------- -------------
$ -0- (in thousands) $ 35
======= ======
Backlog (primarily Newmax orders at June 28, 1997) included only those orders
for which a delivery schedule had been specified by the customer, although such
orders might have been subject to cancellation or modification by the customer
without significant penalty. Sales fluctuations were not seasonal and often were
not anticipated. As of September 19, 1997, all backlog orders had been completed
and there have been no new orders since that date.
Competition for Computer Products. The Company's principal market had been
supplying recording heads primarily for computer disk drives. Newmax, Tae Il and
their related entities (see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" on
pages 27 to 29 and "CERTAIN BUSINESS RELATIONSHIPS" on pages 30 to 33) are
larger and better capitalized than the Company, which had become almost entirely
dependent upon them for working capital, assembly facilities, personnel, sales
revenue and bank loan financing. Physical proximity to customers did not
significantly affect competition for computer components due to low shipping
costs for this small and light product. Competition was principally in the areas
of price, quality and product performance.
Competition and the Failure of the Computer Products Business. Demand for
the products of the Company has fluctuated due to technological change in the
computer industry and the availability to potential customers of the Company of
products of competitors. For example, during the fiscal years ended June 25,
1994 and June 24, 1995, dramatic changes in disk drive design and ready
availability of thin-film recording heads combined to make a very difficult
market for selling double metal in glass (MIG) products of the Company. The
Company for several years had experienced difficulty in obtaining orders or
repeat orders from unaffiliated companies, so that during the fiscal years ended
June 28, 1997 and June 27, 1998, nearly all sales of computer products were to
Newmax. Research and development efforts to enhance its floppy disk drive and
tape drive recording head products proved unavailing. Demand from Newmax
disappeared during the fiscal year
51
<PAGE>
ended June 27, 1998, because of the failure of the Company to develop new types
of magnetic recording heads. The Company had curtailed production of certain
products due to the inability to obtain price increases and reduce costs.
Competition for Sealed Lead Acid Batteries. The plans of the Company to
enter the new, unrelated, highly competitive sealed lead acid battery market had
been frustrated not only by the lack of working capital from its affiliated
companies but also by its own efforts to avoid foreclosure by selling to the
City of New York for $2,400,000 the facility which had been modified in order to
manufacture sealed lead acid batteries. The net sales proceeds of that facility
would not have sufficed without additional capital from affiliated companies to
enable the Company to modify another facility and to commence production of
sealed lead acid batteries. The Company on December 1, 1998 decided that it
would not manufacture sealed lead acid batteries and it would not actively
compete in other markets, since working capital would not be made available for
that purpose by its affiliated companies. Two of those companies, Tae Il Media
Co., Ltd. and Newmax Co., Ltd., currently are subject to Korean judicial
proceedings pursuant to which moratoriums deferring payment of their creditors
have been granted by Korean courts after approval by creditors. See "Debt
Restructuring Proceedings of Newmax Co., Ltd." on pages 21 to 22 and "Debt
Restructuring Proceedings of Tae Il Media Co., Ltd." on page 22.
Research, Development and Engineering. During the fiscal years 1998 and
1997, the Company spent approximately $81,000 and $209,000, 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.
Employees. At January 20, 1999, the Company actively employed 5 persons
working three days per week without timely pay.
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 "DIRECTORS AND EXECUTIVE OFFICERS: LEGAL
PROCEEEDINGS: Superfund Site in Southington, Connecticut" on pages 24 to 25.
Since the Company has terminated all present and future operations, there will
be no future capital expenditures or earnings of the Company.
52
<PAGE>
Description of Export Sales. See "Export Sales" on page 50 for a
description of the export sales of the Company and its subsidiaries during the
fiscal year ended June 27, 1998.
Termination of Business. The proposal to dissolve the Company, of course,
reflects the decision made by the board of directors of the Company on December
1, 1998 to terminate all business operations and to wind up and liquidate the
Company.
PROPERTIES OF THE COMPANY
Properties. The Company's corporate offices are located at 71 Smith
Avenue, Kingston, New York, 12401, which is where all of its real properties are
located. Those properties either are to be sold to the City of New York or to
continue to be offered for sale pursuant to the authority to be conferred at the
1999 annual meeting by the stockholders of the Company.
Facilities to Be Sold to the City of New York. The Company's operations
had been conducted from 83,000 square feet of facilities which are located in
the same building as its corporate offices at 71 Smith Street, Kingston, New
York, owned by the Company, mortgaged to an institutional lender to secure a
term loan note having a principal balance of $1,408,000 which matured in
November 1997 and remains due and payable, and subject to an agreement of
purchase and sale with the City of New York, which has agreed to pay $2,400,000
for the facilities. Most of those facilities are not utilized. The Company has
inadequate cash flow to satisfy the notes secured by the mortgage matured in
November 1997 and to pay utilities and to make repairs needed to protect the
facilities from the elements. The agreed sale to the City of New York of that
facility, which had been set up for sealed lead acid battery production, is
planned in order to avoid foreclosure of the mortgage and for other reasons. The
net proceeds of sale will be used to pay off the mortgage note and accrued
interest; however, the Company can make no assurance that that sale will be
consummated.
Facilities Remaining for Sale. The adjacent 34,644 square foot vacant
facility in the vicinity of Railroad Avenue, the Conrail right of way, and Grand
Street in Kingston, New York used to be a bowling alley before it became a
factory for manufacturing the computer products of the Company. It has been
listed for sale by the Company. The Company believes that that facility is in
good working condition and had been adequate for the conduct of its business.
That facility will not be set up for purposes of manufacturing sealed lead acid
batteries. On December 1, 1998, the Company decided to terminate all business
operations, because affiliated companies of the Company advised the Company that
they will not supply adequate working capital for that purpose. For the same
reason, new equipment for battery production will not be leased from a related
party.
53
<PAGE>
Previously Sold Facilities. The Company sold a 5,400 square foot building
on September 7, 1995 and a 5,000 square foot building on August 22, 1997.
Previously Sold Equipment. The Company has sold or disposed of idle and
obsolete equipment and could not have returned to the computer component
production volumes of previous years without significant changes in operations
or use of subcontractors. The Company had been dependent upon its parent
companies for contract production computer component assembly facilities.
LEGAL PROCEEDINGS
Legal Proceedings. The legal proceedings of the Company are described
under the captions "Automobile Accident Lawsuit of the Company" on pages 22 to
24 and "Superfund Site in Southington, Connecticut" on pages 24 to 25.
MARKET PRICE OF COMMON STOCK OF THE COMPANY
AND RELATED STOCKHOLDER MATTERS
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. The range of high and low bid information
reported by market makers to National Quotation Bureau, LLC for the shares of
common stock of the Company for the fiscal quarter ended September 26, 1998 and
subsequently are as follows:
Fiscal Year (ending in June) High Low
---------------------------- ---- ---
1999
First Quarter $ .005 $ .003
Second Quarter .003 .003
1998
First Quarter .002 .002
Second Quarter .002 .002
Third Quarter .005 .002
Fourth Quarter .005 .002
1997
First Quarter .001 .001
Second Quarter .005 .001
Third Quarter .01 .001
Fourth Quarter .005 .002
54
<PAGE>
Approximate Number of Equity Security Holders. The approximate number of
record holders of shares of common stock of the Company as of January 8, 1999 is
2,500.
Dividends. The Company has not paid any cash dividends on its Common
Stock. Due in part to the working capital deficiency of nearly $13,000,000 and
the stockholders' deficiency of $9,819,000 as of June 27, 1998, the Company does
not anticipate paying dividends for the foreseeable future.
No Sales of Unregistered Equity Securities. Within the fiscal year ended
June 27, 1998 and thereafter, the Company has not sold any equity securities
which were not registered under the Securities Act of 1933, as amended.
AUDITED ANNUAL FINANCIAL STATEMENTS OF THE COMPANY
Financial Statements of the Company. The consolidated audited balance
sheets of the Company and its subsidiaries as June 27, 1998 and June 28, 1997
and the consolidated audited statements of income and changes in financial
position of the Company and its subsidiaries for the three fiscal years ended
June 27, 1998, June 28, 1997 and June 29, 1996 are set forth on pages 27 to 53
of the annual report. See "Lack of Opinions of Independent Public Accountants"
on page 56 and "Lack of Compliance with Regulation S-X, Article 2" on page 56.
Unaudited Quarterly Financial Statements of the Company. The consolidated
unaudited balance sheets of the Company and its subsidiaries as September 26,
1998 and June 27, 1998 and the consolidated unaudited statements of operations
and cash flows of the Company and its subsidiaries for the two fiscal quarters
ended September 26, 1998 and September 27, 1997 are set forth on pages 57 to 62.
Reasons for Lack of Predictability of Financial Statements. The proposed
sale of certain real estate of the Company to the City of New York, sale of the
remaining property and assets of the Company and dissolution of the Company and
the cessation of reliable working capital support for the Company from
affiliated and associated companies of the Company and the proposed change by
the Company to the liquidation method of accounting materially cause the
information reflected in the audited financial statements of the Company on
pages 27 to 53 of the annual report and the unaudited quarterly financial
statements of the Company set forth on pages 57 to 62 not to be indicative of
the Company's future financial condition. See "Anticipated Change to Liquidation
Basis of Accounting" on page 57 and "UNAUDITED PRO FORMA BALANCE SHEET" on pages
63 to 64.
55
<PAGE>
Lack of Opinions of Independent Public Accountants. Mr. Sung I. Rhee, who
audited the financial statements of the Company for the fiscal years ended June
27, 1998 and June 28, 1997, was unable to express an opinion on the consolidated
financial statements of the Company and its subsidiaries for the fiscal years
ended June 27, 1998 and June 28, 1997. See the third and fourth paragraphs of
the "Independent Auditors' Report" on page 28 of the annual report, the second
and third paragraphs of the "Independent Auditors' Report on Schedule" on page
47 of the annual report and the second and third paragraphs of the letter of
consent from Mr. Sung I. Rhee which is Exhibit 23.1 on page 52 of the annual
report. Moreover, KPMG Peat Marwick LLP, which audited the financial statements
of the Company for the fiscal years ended June 29, 1996, June 24, 1995, June 25,
1994, June 26, 1993, June 27, 1992 and June 29, 1991, was unable to express an
opinion on the consolidated financial statements of the Company for the fiscal
years ended June 29, 1996, June 24, 1995, June 25, 1994, June 26, 1993, June 27,
1992 and June 29, 1991. See the third and fourth paragraphs of the "Independent
Auditors' Report" on page 29 of the annual report, the second and third
paragraphs of the "Independent Auditors' Report on Schedule" on page 48 of the
annual report and the second and third paragraphs of the letter of consent from
KPMG Peat Marwick LLP which is Exhibit 23.2 on page 53 of the annual report. See
"Lack of Compliance with Regulation S-X, Article 2" on page 56.
Lack of Compliance with Regulation S-X, Article 2. The Securities and
Exchange Commission from time to time has advised the Company that the audit
reports of Mr. Sung I. Rhee in respect of the financial statements of the
Company for the fiscal years ended June 27, 1998 and June 28, 1997 and the audit
reports of KPMG Peat Marwick LLP in respect of the financial statements of the
Company for the fiscal years ended June 29, 1996, June 24, 1995, June 25, 1994,
June 26, 1993, June 27, 1992 and June 29, 1991, and therefore the annual reports
of the Company on Form 10-K for the fiscal years ended June 27, 1998, June 28,
1997, June 29, 1996, June 24, 1995, June 25, 1994, June 26, 1993, June 27, 1992
and June 29, 1991 do not comply with Regulation S-X, Article 2. Rule 2-02(c)(i)
of Regulation S-X, Article 2, provides that the accountant's report shall state
clearly the opinion of the accountant in respect of the financial statements
covered by the report. See "Lack of Opinions of Independent Public Accountants"
on page 56. Rule 2-02(d) of Regulation S-X, Article 2 provides that any matters
to which the accountant takes exception shall be clearly identified, the
exception thereto specifically and clearly stated, and, to the extent
practicable, the effect of each such exception on the related financial
statements given. See "Anticipated Change to Liquidation Basis of Accounting" on
page 57.
56
<PAGE>
Anticipated Change to Liquidation Basis of Accounting. For eight fiscal
years ended June 27, 1998, June 28, 1997, June 29, 1996, June 24, 1995, June 25,
1994, June 26, 1993, June 27, 1992 and June 29, 1991, the Company prepared
financial statements on a going concern basis in reliance upon the receipt of
financial support from affiliated and associated companies, even though its
independent auditor's reports declined to express an opinion essentially because
there was no legally enforceable obligation of the affiliated and associated
companies to provide that financial support. See "Lack of Opinions of
Independent Public Accountants" on page 56 and "Lack of Compliance with
Regulation S-X, Article 2" on page 56. Commencing with the quarterly report on
Form 10-Q for the fiscal quarter ended December 26, 1998, however, the Company
will prepare its financial statements on a liquidation basis. As a result, a
statement of net assets (liabilities) will replace the balance sheet. A
statement of changes in net assets (liabilities) and/or a deficiency account
will replace the statement of operations and will set forth the estimated gains
and losses on liquidation. Pursuant to the liquidation basis of accounting, the
carrying values of the remaining assets, to the extent feasible, may be revalued
from going concern basis values. If revalued, then the remaining assets will be
presented at estimated realizable values and the liabilities will be presented
at estimated settlement amounts. The liquidation basis of accounting will
require accruals to be made for the cost of liquidating the Company and for
income taxes payable or income tax refunds receivable.
UNAUDITED QUARTERLY FINANCIAL STATEMENTS OF THE COMPANY
Unaudited Quarterly Financial Statements. The unaudited quarterly
consolidated financial statements of the Company and its subsidiaries for the
fiscal quarter ended September 26, 1998 are set forth below:
INDEX
Consolidated Balance Sheets - September 26, 1998
and June 27, 1998 ............................... 57
Consolidated Statements of Operations - Three Months
Ended September 26, 1998, and
September 27, 1997 .............................. 58
Consolidated Statements of Cash Flows
Three Months Ended September 26, 1998 and
September 27, 1997 .............................. 59
Notes to Consolidated Financial Statements ....... 60
57
<PAGE>
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.
58
<PAGE>
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.
59
<PAGE>
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.
60
<PAGE>
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.
61
<PAGE>
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.
62
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
Unaudited Pro Forma Balance Sheet. Set forth below is an unaudited pro
forma consolidated balance sheet of the Company and its subsidiaries as of
September 26, 1998 prepared by the Company in order to show the effects of the
sale of part of its real estate to the City of New York and the related use of
proceeds. Subsequent to September 26, 1998, the Company agreed to sell its most
valuable office, laboratory and factory building to the City of New York for
$2,400,000. A major portion of the proceeds from this sale will be used to
retire the $1,408,000 principal balance and over $200,000 of accrued interest of
the term loan note secured by a mortgage on all of the assets of the Company.
The balance of the proceeds, after a cash reserve of $100,000, will be used for
closing expenses, accrued vacation expenses to its employees, and part of the
accounts payable of the Company. The following condensed pro forma balance sheet
reflects these transactions as if they occurred at September 26, 1998:
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA BALANCE SHEET (UNAUDITED)
(In Thousands)
September 26, 1998
Historical Pro Forma
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents: $ 26 $ 100
Property, plant and equipment, net 2,672 295
-------- --------
$ 2,698 $ 395
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,420 $ --
Short-term debt 8,397 8,397
Accounts payable and
accrued expense 1,054 328
Due to related parties, net 2,002 2,002
-------- --------
Total current liabilities 12,873 10,727
-------- --------
Stockholders' deficit:
Common stock $0.10 par value 2,231 2,231
Additional paid-in capital 59,785 59,785
Accumulated deficit (72,191) (72,348)
-------- --------
Total stockholders' deficit (10,175) (10,332)
-------- --------
$ 2,698 $ 395
======== ========
63
<PAGE>
Use of Proceeds of Sale of Real Estate. The increase in cash will be
attributable to the cash reserve to be set aside out of the proceeds of sale of
the real estate. The elimination of the current portion of long-term debt will
occur as the result of the satisfaction of the term loan mortgage indebtedness
with part of the proceeds of sale of the real estate. The reduction of accounts
payable and accrued expenses will result from using part of the proceeds of sale
of the real estate to pay closing expenses, accrued vacation payments to
employees and some accounts payable. See "Net Proceeds Receivable by the
Company" on page 40.
Loss on Sale of Real Estate. The net proceeds after deduction of closing
expenses estimated to be $180,000 of the sale of the real estate of the Company
to the City of New York for $2,400,000 will be $2,220,000, which will be
$157,000 less than the $2,377,000 net book value of that real estate. See
"Accounting Treatment of the Sale of Real Estate" on pages 46 to 47.
- ----------
Footnotes
(*) The expected estimated result from the sale of the other assets of the
Company would be a reduction of assets by the net book value of plant,
property and equipment, an increase in cash or notes receivable, and a
decrease in liabilities, such as accounts payable, short-term debt or due
to related parties.
64
<PAGE>
SELECTED FINANCIAL DATA
Selected Financial Data.
Selected Consolidated Statement of Operations Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended In June
--------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 73 $ 2,682 $ 4,151 $ 3,822 $ 7,227
Cost of products sold 803 2,556 3,605 3,849 7,777
Gross profit (loss) (735) 126 546 (27) (550)
Research, development
and engineering expense 81 209 231 259 481
Selling and administration
expense 314 489 849 712 816
Loss before
income taxes (1,599) (1,267) (1,336) (1,599) (2,699)
Net loss (1,599) (1,267) (1,336) (1,599) (2,699)
Net loss
per common share $ (0.07) $ (0.06) $ (0.06) $ (0.07) $ (0.12)
Weighted average shares
outstanding 22,313 22,313 22,313 22,313 22,313
Cash dividends -- -- -- -- --
</TABLE>
Selected Consolidated Balance Sheet Data
(in thousands)
<TABLE>
<CAPTION>
Year Ended In June
--------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital
deficiency $(12,584) $(11,431) $(11,069) $(10,806) $(11,267)
Total assets 2,807 2,977 4,817 5,400 5,449
Long-term debt
and lease
obligations,
including
current portion 1,420 4,191 4,363 4,626 4,494
Stockholders'
deficiency (9,819) (8,655) (7,933) (7,059) (6,514)
</TABLE>
Significant Changes in Operating Results and Assets. 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 "Management's Discussion and
Analysis of Financial Condition, and Results of Operations" on pages 66 to 69.
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Working Capital Deficiency. The reasons that had enabled the Company to
operate with a working capital deficiency are discussed in "Liquidity and
Capital Resources" on pages 70 to 72.
Lack of Comparability of Financial Data. The lack of any sales of computer
products during the last sixteen months make the financial information for the
four fiscal years ended June 28, 1997 of questionable comparability with the
financial information for the fiscal year ended June 27, 1998 and the unaudited
financial information for the fiscal quarter ended September 26, 1998.
Material Uncertainties. The agreement between the Company and the City of
New York to sell the facility where sealed lead acid battery equipment has been
installed and the decision of the Company on December 1, 1998 to terminate all
business operations, rather than to commence production and sales of sealed lead
acid batteries in another facility, are material uncertainties which make the
financial information for the five fiscal years ended June 27, 1998 and the
fiscal quarter ended September 26, 1998 not to be indicative of the future
financial condition of the Company.
Lack of Predictability. The proposed sale of certain real estate of the
Company to the City of New York, sale of the remaining property and assets of
the Company and dissolution of the Company materially cause the information
reflected in "SELECTED FINANCIAL DATE" on pages 65 to 66 not to be indicative of
the Company's future financial condition. See "Anticipated Change to Liquidation
Basis of Accounting" on page 57.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fiscal Year Ended June 29, 1996. 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 Year Ended June 28, 1997. 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 the battery
manufacturing line.
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Fiscal Year Ended June 27, 1998. Fiscal 1998 began with the installation
of the battery manufacturing line with equipment consigned from a related party,
and the production of recording head products was suspended. Consequently,
revenues from recording head products ceased, so obligations to its primary
institutional lender could not be satisfied by the Company and funds had to be
borrowed from related companies or had to be obtained from the disposal of
equipment, since no revenues were realized from the as yet non-operational
sealed lead acid battery manufacturing line. The installation was completed in
November 1997, but the Company could not proceed with the manufacturing
operation due to the discontinuation of the funding from a related party.
Fiscal Year Ended June 27, 1998 ("1998")
Compared to
Fiscal Year Ended June 28, 1997 ("1997")
Net Sales. The Company's net sales decreased by $2,609,000 or 97%, from
1997. The decrease is due to the suspension of sales of recording head products,
which caused a decline in sales to Newmax of $2,414,000 and a decline in sales
of ballast of $195,000.
Gross Profit. Gross profit, as a percentage of sales, declined
dramatically to (1,000%) from 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 8% in 1997 to 110%
in 1998. This is due to a cessation of sales after the first quarter, without a
cessation of development and engineering support.
Selling and Administration. Selling and administration expenses ("S&A"),
as a percent of sales, increased from 18% in 1997 to 430% in 1998. The increase
in S&A as a percent of sales is due to cessation of sales after the first
quarter, without a cessation of selling and administration expenses.
Interest Expense. Interest expense increased by $58,000 or 8% from 1997 to
1998. This is due to increases in related party debt and increases in the rate
of interest on bank debt due to the defaults in payment of bank debt.
Total Assets. Total assets declined by $170,000 or 6% from 1997 to 1998.
This is primarily due to a reduction of prepaid and other current assets, but
also due to the absence of inventories and a reduction of cash. Although
dispositions of nearly fully depreciated machinery and equipment materially
reduced property, plant and equipment, at cost and accumulated depreciation and
amortization, the impact on total assets of those old equipment dispositions was
offset
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by an increase in buildings and improvements attributable to the installation of
a line for manufacturing sealed lead acid batteries.
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 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.
Inflation. Prices in the peripheral data storage market do not ordinarily
increase to offset the effects of inflation. The Company has curtailed
production of certain products due to the inability to obtain price increases
and reduce costs.
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Fiscal Quarter Ended September 26, 1998
Compared to
Fiscal Quarter Ended September 27, 1997
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)%
==== ==== ====
Decline in Sales. 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.
Research. 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.
Reduced Selling and Administrative Costs. 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.
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LIQUIDITY AND CAPITAL RESOURCES
Revolving Credit Loan Agreement. 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. This
loan has been collateralized by a Newmax affiliate (guarantor) named Tae Il
Magnetics Co., Ltd.
Default of Revolving Credit Loan. The $2,741,000 loan was in default
before its maturity on November 18, 1997. The amount of interest in default and
in arrears was $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
named Tae Il Magnetics Co., Ltd. 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.
Term Loan Agreement. 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 $1,408,000 and $1,450,000 as of June
27, 1998 and June 28, 1997, respectively.
Default of Term Loan. Monthly interest payments have not been made since
August 1997. The lender has initiated collection. The amount of interest in
default and in arrears pursuant to the term loan note, which had matured on
November 26, 1997, was $126,000 as of June 27, 1998, $162,000 as of September
26, 1998 and $175,000 as of October 26, 1998. The rate of interest of the term
loan note was the prime rate of Citibank, N.A. until the earlier of November 26,
1997, which was its maturity date, or December 16, 1997, which was the date of
the demand for payment of $1,408,000 of principal and $30,252.44 of accrued
interest, and thereafter became two percent (2%) above the interest rate of
eight and one half percent (8.5%) in affect on that date. 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
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forbearance of this primary lending institution may be due to the agreement of
purchase and sale between the Company and the City of New York to sell part of
the real estate which is collateral for the mortgage securing the term loan note
at a price of $2,400,000 which, if obtained, would enable the Company to satisfy
the term loan note, but no assurance can be made that such sale will be
consummated.
Collateral and Guaranties for Term Loan. 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.
Debt Restructuring Proceedings in Korea. 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 amounts 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 forbear from foreclosing on the mortgage if its
agreement to sell part of the collateral for that mortgage to the City of New
York for $2,400,000 should not yield funds to satisfy the mortgage indebtedness
in a reasonable amount of time.
Lack of Working Capital. Working capital consists of very little current
assets as there was neither inventory nor orders for products at year-end.
Current assets will remain very low, since on December 1, 1998 the Company
decided not to commence battery production commences and not to seek orders for
other products. It is anticipated that related party assistance will be
necessary to finance working capital needs while the Company is liquidating its
assets.
Commitments for Capital Expenditures. The Company had commitments for
capital expenditures of $463,706 as of June 27, 1998. These capital expenditures
pertain to the installation of the sealed lead acid battery line, which the
Company decided to not to use on December 1, 1998. Capital expenditures exceeded
depreciation during the fiscal year ended June 27, 1998, but depreciation had
exceeded capital expenditures during the three prior fiscal years ended June 28,
1997 by at least $300,000 per year.
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Required Repayments of Long-Term Debt. Required repayments of long-term
debt for fiscal 1999 are around $1,600,000 so long as the Company may rely on
oral assurances that the Company will not be asked to repay the revolving credit
note. The primary lending institution has issued notices of default, but has not
initiated any legal action against the Company.
Sources of Liquidity. The Company is hopeful that funds generated by
facility sales proceeds and received from Newmax will be adequate to fund debt
service and other operational needs. Although there is no firm commitment and
experience since December 1, 1998 reflects serious difficulty and delays in
obtaining funds for the Company, affiliated parties and parents are being asked
by the Company to advance funds on a short-term as needed basis to offset cash
shortfalls. The Company will not commence production on its sealed lead acid
battery manufacturing line. Note 2 to the Company's consolidated financial
statements on page 39 of the annual report contains a further discussion of
liquidity and management's former action plan prior to December 1, 1998, when
the Company decided to liquidate and dissolve. The Company cannot assure that it
will receive funds needed from its affiliates to remain viable during the next
twelve months.
Reasons for Lack of Predictability. The proposed sale of certain real
estate of the Company to the City of New York, the proposed sale of the
remaining property and assets of the Company, the proposed dissolution of the
Company and the difficulties experienced by the Company since December 1, 1998
in obtaining working capital from its affiliated companies materially cause the
information reflected in management's discussion and analysis of financial
condition and results of operations in the annual report not to be indicative of
the Company's future financial condition. See "Anticipated Change to Liquidation
Basis of Accounting" on page 57.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Please see "DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY" on pages 25
to 27.
RELATIONSHIPS AND BENEFICIAL INTERESTS
Please see "INTEREST OF DIRECTORS IN MATTERS TO BE VOTED ON" on pages 13
to 15, "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" on pages 18 to 19,
especially footnote (1) to the chart, "SECURITY OWNERSHIP OF MANAGEMENT" on
pages 20 to 21 and "DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY" on pages 25
to 27, and "BOARD INTERLOCKS AND INSIDER PARTICIPATION" on pages 35 to 37.
Newmax Co., Ltd. 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
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combined owned 28 percent of the capital stock of Newmax as of June 27, 1998.
Tae Il Media Co., Ltd. Mr. K. H. Chung owns approximately 1 percent of the
capital 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 almost 19 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 27, 1998.
Tae Il Magnetics Co., Ltd. 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 27, 1998.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
See "COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT" on page 30.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" on pages 27 to 29 and
"CERTAIN BUSINESS RELATIONSHIPS" on pages 30 to 33. See also "LIQUIDITY AND
CAPITAL RESOURCES" on pages 70 to 72 for a discussion of loans obtained by the
Company with the assistance of guarantees provided by Newmax and other related
parties.
BOARD AND COMMITTEE MEETINGS
See "BOARD AND COMMITTEE MEETINGS" on page 33.
COMPENSATION OF DIRECTORS AND OFFICERS
See "COMPENSATION OF DIRECTORS AND OFFICERS" on pages 33 to 34.
BOARD INTERLOCKS AND INSIDER PARTICIPATION
See "BOARD INTERLOCKS AND INSIDER PARTICIPATION" on pages 35 to 37.
STOCKHOLDER ACTION REQUIRED FOR SALE OF REAL ESTATE
Stockholder Action Authorizing Sale of Certain Real Property of the
Company. The proposed resolution authorizing the sale of certain real property
of the Company to the City of New York has been deemed advisable and is being
recommended by the board of directors of the Company. A resolution for the
proposed sale of certain real property
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of the Company to the City of New York must be adopted by the holders of a
majority of the outstanding stock of the Company entitled to vote at a meeting.
If the sale of certain real property of the Company to the City of New York is
not approved by the stockholders of the Company, then the board of directors of
the Company will not be able to proceed with the sale of that real property of
the Company to the City of New York.
Anticipated Adoption of Resolution for Sale of Certain Real Property of
the Company. Newmax Co., Ltd. and Dae Bang Investment Finance Corp. will vote or
will cause to be voted their 12,075,000 shares of common stock of the Company in
favor of the adoption of the resolution authorizing the sale of certain real
property of the Company to the City of New York. As a result, the resolution
authorizing the sale of certain real property of the Company to the City of New
York will be adopted by a majority of the issued and outstanding shares of
common stock of the Company.
DISPOSITION OF REMAINING ASSETS AND PROPERTY
General Character and Location of the Property. The property consists of
approximately two acres of real estate in the vicinity of Railroad Avenue, the
Conrail right of way, and Grand Street in Kingston, New York. The property is
improved with a 34,644 square feet masonry factory building on Grand Street at
the end of Dederick Street in Kingston, New York and about two acres of parking
lots on the other side of the Conrail right of way. The use of the building
conforms with its M-1 and M-2 zoning classifications for manufacturing purposes.
The land is not in a flood plain. Certificates of occupancy and street letters
have been issued by the City of Kingston.
Benefits of Listing the Remaining Real Estate for Sale. The listing for
sale of the remaining real estate of the Company is in the best interests of the
stockholders of the Company, even though the Company will have no net proceeds
available to distribute in respect of the outstanding shares of common stock of
the Company if a prospective buyer or buyers should make reasonable offers to
buy that real estate, for the following reasons:
No Available Capital to Utilize the Building Listed for Sale. The
Company has no more available sources of capital to operate its sealed
lead acid battery assembly line in the 34,644 square foot building which
has been listed for sale.
No Revenues to Pay the Expenses of Real Estate Listed for Sale. The
Company has no revenues to pay the substantial expenses of owning the
remaining real estate of the Company which has been listed for sale.
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Partial Repayment of Loans from Associated Companies. If a
prospective buyer or buyers should make reasonable offers to buy the
remaining real estate of the Company, the net proceeds of sale may enable
Newmax Co., Ltd. and its associated companies to recoup some of the funds
which they have loaned to the Company since 1991 in an effort to keep it
in business.
Timeliness of the Transaction. The board of directors is recommending the
future sale of the remaining real estate of the Company at this time, because
the Company cannot afford to distribute another information statement to
stockholders in order to obtain approval if and when an offer or offers to
purchase the remaining real estate of the Company should be received by the
Company. Moreover, the Company wants to be in a position to close such an offer
to purchase its remaining real estate as quickly as possible without the delays
of distributing another information statement to its stockholders.
DETERMINATION OF POTENTIAL VALUE OF REMAINING ASSETS
Nature and Amount of Consideration. The nature and amount of consideration
to be received by the Company is unknown, since no offers have been received
while the property has been listed for sale with a real estate broker for over
five years.
Appraisal of the Real Estate. The Company obtained an appraisal on July
15, 1996 of the fair market value of all of its real estate located in Kingston,
New York, except the two acres of parking lot, from Griffin Valuation & Realty
Services, Ltd. See "Appraisal of the Real Estate", "Qualifications of
Appraiser", "Selection of Appraiser", "No Material Relationships between the
Company and the Appraiser," and "Availability of Appraisal" on pages 42 to 43
above.
Sales Comparison Approach Fair Market Value of Unsold Old Factory
Building. The comparative sales method is based on analysis of recent sales of
comparable properties in the region. Griffin Valuation & Realty Services, Ltd.
appraised the 34,644 square feet factory building which is not being sold to the
City of New York at a fair market value of $520,000 based on a sales comparison
approach on July 15, 1996.
Capitalized Gross Income Approach Fair Market Value of Unsold Old Factory
Building. The capitalized gross income method of appraisal is based on the
capitalization of anticipated future gross rents set forth in recent leases of
comparable properties in the region. The Company has deduced by extrapolating
from the aggregate information in the appraisal that Griffin Valuation & Realty
Services, Ltd. appraised the 34,644 square feet factory building which is not
being sold to the City of New York at a fair market value of $820,000 based on a
capitalized gross income approach on July 15, 1996. That capitalized gross
income value would be considerably less if usual expenses were deducted from
annual
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estimated gross income prior to dividing by the capitalization rate.
Unfortunately, the appraisal did not allocate the expenses attributable to all
of the buildings owned by the Company among them separately.
Listing Prices of Unsold Old Factory Building. In July 1993 the Company
had listed the 34,644 square feet factory building for sale for $859,900, but
the Company has reduced the listing price to $575,000.
Estimated Value of Unsold Parking Lot. The two acres of parking lot which
will not be sold to the City of New York are excluded from the appraisal by
Griffin Valuation & Realty Services, Ltd. The chief executive officer of the
Company estimates those two parking lots to have a fair market value of
$180,000, based on information supplied by realtors in Kingston, New York as to
the going rate for manufacturing zoned land in Kingston, New York.
Impossibility of Realizing or Ascertaining Values Without Sales. The
foregoing estimates of fair market value should not be relied upon, since the
real estate market lacks liquidity. Thus the Company may not be able to obtain
any offers to purchase the properties at any prices during the foreseeable
future. No assurance can be given that either the appraised or the estimated
fair market values of the properties which are not being sold to the City of New
York ever can be realized by the Company.
Fairness of Consideration. If an offer to purchase the property should be
received, then the fairness of the consideration will be based on the results of
the efforts which the Company has made to sell its real estate with the
professional assistance of the listing realtor and the advice which the Company
has received from another realtor, as well as upon the information contained in
the appraisal.
LACK OF PRESENT PROSPECTS FOR SALE OF REMAINING ASSETS
Name and Address of Transferor. The name and address of the transferor of
the property is National Micronetics, Inc., 71 Smith Avenue, Kingston, New York
12401.
Name and Address of Transferee. The name and address of the transferee of
the property is not known, since no offer to purchase the property has been
received by the Company.
Unknown Material Relationship of Transferee to the Company. Since the
transferee has not yet been determined, no one knows whether the transferee will
have any material relationship with the Company or with any affiliate of the
Company.
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Other Material Features of the Contract or Transaction. It is impossible
to describe the material features of the contract or transaction, since no one
has offered to purchase the property from the Company yet.
POSSIBLE RESULTS OF SALE OF REMAINING ASSETS
Accounting Treatment of the Sale of Remaining Property and Assets. The
Company does not know yet whether it will report a gain or a loss on the desired
sale of the non-depreciable land and the depreciable buildings and improvements
which comprise the part of its real estate which the Company is not selling to
the City of New York, because no offers to purchase have been received by the
Company, so consequently the sales prices are not known.
Federal Income Tax Treatment of the Sale of Remaining Property and Assets.
The Company does not know whether it will realize a gain or a loss on the
desired sale of part of its land which is not being sold to the City of New
York, because no offers to purchase that land have been received by the Company,
so consequently the portion of the sales price of to be allocated to the land is
not known. The Company does not know whether it will realize a gain or a loss on
the sale of part of its buildings and improvements which are not being sold to
the City of New York, because no offers to purchase those buildings and
improvements have been received, so consequently the portion of the sales price
to be allocated to the buildings and improvements to be sold is not known.
Characterization of Federal Income Tax Losses or Gains. For federal income
tax purposes, the Company will recognize a long term capital loss or a long term
capital gain on the sale of the non-depreciable land which is not being sold to
the City of New York, if that land ever can be sold. For federal income tax
purposes, the Company will recognize an ordinary loss or ordinary income on the
sale of the depreciable buildings and improvements which are not being sold to
the City of New York if the gains from the sale of depreciable assets by the
Company during the tax year during which those sales may occur do not exceed the
losses from the sale of depreciable assets by the Company during that tax year.
Otherwise, the Company will recognize a long-term capital loss or a long-term
capital gain on the sale of the depreciable buildings and improvements which the
Company is not selling to the City of New York if the gains from the sale of
depreciable assets by the Company during the tax year during which those sales
may occur exceed the losses from the sale of depreciable assets by the Company
during that tax year. The land retains its character as a capital asset, while
the buildings and improvements acquire the character of section 1231 property
for federal income tax purposes.
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STOCKHOLDER ACTION REQUIRED FOR SALE OF REMAINING ASSETS
Stockholder Action Authorizing Sale of Remaining Property and Assets of
the Company. The proposed resolution authorizing the sale of all of the
remaining property and assets of the Company on whatever terms and conditions
the officers of the Company may deem expedient and for the best interests of the
Company has been deemed advisable and is being recommended by the board of
directors of the Company. A resolution for the proposed sale of all of the
remaining property and assets of the Company on whatever terms and conditions
the officers of the Company may deem expedient and for the best interests of the
Company must be adopted by the holders of a majority of the outstanding stock of
the Company entitled to vote at a meeting. If the sale of all of the remaining
property and assets of the Company on whatever terms and conditions the officers
of the Company may deem expedient and for the best interests of the Company is
not approved by the stockholders of the Company, then the board of directors of
the Company will not be able to proceed with the sale of the remaining property
and assets of the Company.
Anticipated Adoption of Resolution for Sale of Remaining Property and
Assets of the Company. Newmax Co., Ltd. and Dae Bang Investment Finance Corp.
will vote or will cause to be voted their 12,075,000 shares of common stock of
the Company in favor of the adoption of the resolution authorizing the sale of
all of the remaining property and assets of the Company on whatever terms and
conditions the officers of the Company may deem expedient and for the best
interests of the Company. As a result, the resolution authorizing the sale of
all of the remaining property and assets of the Company on whatever terms and
conditions the officers of the Company may deem expedient and for the best
interests of the Company will be adopted by a majority of the issued and
outstanding shares of common stock of the Company.
DISSOLUTION OF THE COMPANY
Recommendation by Directors of Dissolution of the Company. On December 1,
1998, the board of directors of the Company adopted a resolution deeming it
advisable that the Company should be dissolved and called the 1999 annual
meeting of stockholders of the Company to take action upon the resolution.
Purpose of Dissolution of the Company. The purpose of the dissolution of
the Company is officially to notify the public that its business operations have
ceased and that its only purpose after its dissolution will be to dispose of its
assets and property and to pay as many of its liabilities and obligations as
possible with the net proceeds of dispositions of its assets. For three years
after its dissolution, the Company will continue as a body corporate for the
purpose of prosecuting and defending suits by or against it and of enabling it
gradually to settle and close its business, to dispose of and convey its
property and to discharge as many of its
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liabilities as possible. The board of directors of the Company anticipates that
there will not be any distribution of any remaining assets to the stockholders
of the Company.
Reasons for Dissolution of the Company. The controlling stockholders of
the Company decided to terminate their plans to provide working capital to
enable the Company to develop the business of manufacturing sealed lead acid
batteries or to develop any other businesses on November 11, 1998. Since the
Company has a large working capital deficit which is primarily attributable to
debts owed to affiliated companies, the Company is not in a position to seek
financing for the development of new businesses in the capital markets.
Therefore, the board of directors of the Company on December 1, 1998 decided
that the Company should be dissolved, since it has no reason for its continuing
existence except the disposition of its assets and the satisfaction of some of
its liabilities.
Provision for Creditors and Claimants. The assets of the Company will be
insufficient to pay all of the claims of its creditors and others, including
John Conklin and Nancy Conklin, who have sued the Company for $7,700,000. The
board of directors of the Company has decided to continue to defend the Company
against that lawsuit. No provision for the potential liability of the Company in
this lawsuit has been made in the financial statements of the Company, and the
independent public accountant has made an exception in his opinion about the
financial statements of the Company on that account. The dissolution of the
Company is merely the commencement of a long process to dispose of the remaining
assets of the Company and to satisfy as many of the claims of creditors and
others as the net proceeds of those dispositions may make available for that
purpose.
General Effect of Dissolution upon Existing Stockholders. The Company will
not have any cash or other assets remaining to distribute to stockholders after
satisfaction of some of its liabilities. The directors and officer of the
Company will remain in office after the dissolution for purposes of winding up
the affairs of the Company.
Income Tax Effect of Dissolution upon Existing Stockholders. Ordinarily, a
distribution in liquidation would be consideration for the sale or exchange by
the stockholders to the Company of their shares of its common stock. The plan of
liquidation of the Company, however, contemplates that upon completion of the
liquidation of the assets and payment of some of the liabilities of the Company,
there will be no distribution in liquidation.
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STOCKHOLDER ACTION REQUIRED FOR DISSOLUTION
Stockholder Action Regarding Dissolution of the Company. The proposed
dissolution of the Company has been deemed advisable and is being recommended by
the board of directors of the Company. A resolution for the proposed dissolution
of the Company must be adopted by the holders of a majority of the outstanding
stock of the Company entitled to vote at a meeting. If the dissolution of the
Company is not approved by the stockholders of the Company, then the board of
directors of the Company will not be able to proceed with its dissolution.
Anticipated Adoption of Resolution for Dissolution of the Company. Newmax
Co., Ltd. and Dae Bang Investment Finance Corp. will vote or will cause to be
voted their 12,075,000 shares of common stock of the Company in favor of the
adoption of the resolution for the dissolution of the Company. As a result, the
resolution for the dissolution of the Company will be adopted by a majority of
the issued and outstanding shares of common stock of the Company.
UNDERTAKING TO FURNISH EXHIBITS TO FORM 10-K
With this information statement, the Company is providing to each
stockholder of the Company, including each beneficial owner of the common stock
of the Company, without charge, a copy of the Company's annual report on Form
10-K, including the financial statements and the financial statement schedules
(the "annual report"), required to be filed with the Securities and Exchange
Commission, pursuant to Rule 13a-1 under the Securities Exchange Act of 1934, as
amended, for the Company's most recent fiscal year ended June 27, 1998.
The Company will provide to each stockholder of the Company who does not
receive a copy of such annual report, without charge, upon written or oral
request of such person and by first class mail or other equally prompt means
within one business day of receipt of such request, a copy of the Company's
annual report on Form 10-K, including the financial statements and the financial
statement schedules, required to be filed with the Securities and Exchange
Commission pursuant to Rule 13a-1 under the Securities Exchange Act of 1934, as
amended, for the Company's most recent fiscal year ended June 27, 1998.
The Company will furnish to each stockholder of the Company, on the
written request of that stockholder and by first class mail or other equally
prompt means within one business day of receipt of such request, a copy of any
exhibit to the Company's annual report on Form 10-K for the Company's most
recent fiscal year ended June 27, 1998, upon the payment of a fee of twenty-five
cents ($0.25) per page for duplication expenses plus $3.00 per document for
postage.
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Written and oral requests should be directed to Dr. Heehwan Lee, Chairman,
President, Chief Executive Officer, Treasurer and Secretary, National
Micronetics, Inc., 71 Smith Avenue, Kingston, NY 12401, telephone (914)
338-0333, telefax (914)
338-0377.
For purposes of the foregoing undertakings, a stockholder of the Company
shall include each beneficial owner making a written request setting forth a
good faith representation that, as of January 8, 1998, the person making the
request was a beneficial owner of the common stock of the Company.
PROPOSALS BY SECURITY HOLDERS
Proposals by Security Holders. No stockholder of the Company entitled to
vote at the 1999 annual meeting of stockholders of the Company has submitted to
the Company any proposal for action at the meeting, except Newmax Co., Ltd.,
which submitted the proposals to sell certain real estate of the Company, to
sell all the property and assets of the Company and to dissolve the Company. The
board of directors of the Company approved those proposals on December 1, 1998
and is presenting those proposals for adoption at the 1999 annual meeting of
stockholders.
Proposals by Security Holders for Next Annual Meeting. Proposals of
stockholders intended to be presented at the next annual meeting of stockholders
of the Company must be received at the office of the secretary, National
Micronetics, Inc., 71 Smith Avenue, Kingston, NY 12401 not later than October 1,
1999, for inclusion in the proxy statement of the Company and form of proxy for
that meeting. Proposals of stockholders will be considered untimely if submitted
after November 12, 1999. In view of the proposed dissolution of the Company and
the possibility that the Company may not need to solicit proxies if it should
hold another annual meeting of stockholders, the Company is not undertaking to
prepare and distribute a proxy statement for that purpose.
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EXHIBITS
2. Agreement of Purchase and Sale dated November 4, 1998
between National Micronetics, Inc. and the City of New
York, furnished simultaneously with this information
statement. 83
13. Annual Report on Form 10-K of National Micronetics, Inc.
for the fiscal year ended June 27, 1998, both furnished
simultaneously with this information statement as the
annual report to stockholders pursuant to Rule 14a-3 of
the Securities and Exchange Commission and incorporated by
reference to the Annual Report on Form 10-K of National
Micronetics, Inc. for the fiscal year ended June 27, 1998,
filed on October 15, 1998, Securities and Exchange
Commission File No. 0-7207. BOUND
SEPARATELY
By order of the Board of Directors,
Kingston, New York Heehwan Lee
February 5, 1999 Secretary
82
AGREEMENT OF PURCHASE AND SALE
THE CITY OF NEW YORK
DEPARTMENT OF CITYWIDE ADMINISTRATIVE SERVICES
1 CENTRE STREET, 20TH FLOOR NORTH
NEW YORK, NEW YORK 10007
&
NATIONAL MICRONETICS, INC.
71 SMITH AVENUE
KINGSTON, NEW YORK 12401
- --------------------------------------------------------------------------------
Premises: 71-85 Smith Avenue
A two-story steel-framed light manufacturing building
of approximately 82,678 square feet
(Section 56.025, Tax Block 4, Lot 39)
and a parking lot,
41-45 Railroad Avenue
(section 56.025, Tax Block 4, Lot P/O 45 ) and
91 Smith Avenue
(Section 56.025, Tax Block 4, Lot P/O 48.1)
Kingston, Ulster County, New York
- --------------------------------------------------------------------------------
*****
NOVEMBER 4, 1998
<PAGE>
THIS AGREEMENT, dated as of _______, between National Micronetics, Inc., a
corporation having an address at 71 Smith Avenue, Kingston, New York 12401
("Seller") and The City of New York, a municipality acting by and through the
Department of Citywide Administrative Services, having an address at One Centre
Street, New York, New York 10007 ("Purchaser").
W I T N E S S E T H:
Seller and Purchaser agree as follows:
1. Premises. Subject to, and in accordance with, all terms and conditions,
and based upon all representations and warranties set forth in this Agreement,
on the Closing Date (hereinafter defined), Seller shall sell and convey to
Purchase, and Purchaser shall purchase from Seller, the following (collectively,
the "Premises"):
(a) the land, more particularly described in Exhibit A and having
the street address of 71-85 Smith Avenue (Section 56.025, Tax Block 4, Lot
39), 41-45 Railroad Avenue (Section 56.025, Tax Block 4, P/O Lot 45) and
91 Smith Avenue (Section 56.025, Tax Block 4, P/O Lot 48.1) Kingston
(Ulster County), New York (known collectively as the "Land");
(b) all buildings and improvements situate on the Land
(collectively, the "Building");
(c) all right, title and interest of Seller, if any, in and to the
land lying in the bed of any street or highway in front of or adjoining
the Land to the center line thereof and to any unpaid award or any taking
by condemnation for any damage to the Land by reason of a change of grade
of any street or highway;
(d) the appurtenances and all the estate and rights of Seller in and
to the Land and Building; and
(e) all right, title and interest of Seller, if any, in and to the
fixtures and equipment that are attached to or appurtenant to the
Building.
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2. Purchase Price. The purchase price is Two Million Four Hundred Thousand
Dollars ($2,400,000), payable by Purchaser to Seller as follows:
On the Closing Date (as hereinafter defined), by bank check drawn on
a New York Clearing House member bank and payable to the direct
order of such payee or payees as Seller may designate by notice to
Purchaser delivered a reasonable time prior to the date of the
Closing.
3. Conditions Precedent.
a. The obligations of Seller to sell the Premises on the Closing
date shall be subject to the satisfaction, at the time of the Closing, of the
following conditions (any of which may be waived by Seller): that Purchaser
delivers to Seller each of the items required to be delivered by Purchaser and
takes all of the actions required to be taken by Purchaser under Section 6 and
(B) Purchaser shall have performed, observed and complied with all covenants,
agreements and conditions required by this Agreement to be performed, observed
and complied with on its part prior to or as of the Closing Date.
b. The obligations of Purchaser to purchase the Premises on the
Closing Date shall be subject to the satisfaction, at the time of such Closing,
of the following conditions (any of which may be waived by Purchaser): (A) that
the representations and warranties of Seller set forth in Section 8 were true
and correct in all material respects when made and are true and correct in all
material respects on the Closing Date, (B) that Seller delivers to Purchaser
each of the items required to be delivered by Seller and takes all of the
actions required to be taken by Seller under Section 6, and (C) Seller shall
have performed, observed and complied with all covenants, agreements and
conditions required by this Agreement to be performed, observed and complied
with on its part prior to or as of the Closing Date.
4. Title Exceptions. Purchaser shall obtain a title report from a
reputable title insurance company for the Premises and immediately deliver a
copy thereof to Seller within ten (10) days after mutual execution and delivery
of this Agreement. Purchaser waives any objection to and agrees to accept the
Permitted Exceptions set forth in Exhibit B hereto.
a. Upon receipt of such notice, Seller shall have the right, but not
the obligation, to seek to eliminate, cure or correct such exceptions to title.
Seller shall notify Purchaser of its election not later than seven (7) days
after receipt of Purchaser's notice. If Seller elects to seek to cure or correct
same, then (1) Seller shall have the right to adjourn
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<PAGE>
the Closing Date for the Premises for such period, not to exceed one hundred
twenty (120) days as shall, in Seller's discretion reasonably exercised, be
required in order to cure such exceptions to title, and (2) if such exceptions
to title can only be satisfied by the payment of money, Seller shall be entitled
to apply a portion of the purchase price payable on such Closing Date in order
to cure or correct same. If Seller fails to notify Purchaser of its election to
either seek or not to seek to cure such exceptions to title, Seller shall be
deemed to have elected to cure same.
b. If Seller elects not to cure all exceptions to title on the
Premises, Purchaser may, at its election, (1) proceed with the Closing and take
title to the Premises subject to such exceptions to title provided Purchaser and
Seller have agreed upon a reasonable reduction of the Purchase Price, or (2)
terminate this Agreement by written notice to Seller, in which case neither
party shall have any further obligation to the other under this Agreement.
5. Closing Date. The consummation of the sale of Premises (the "Closing")
shall take place at the offices of the Purchaser at 100 Church Street, New York,
NY 10007 at 10:00 A.M. on a day not later than ninety (90) days after mutual
execution of this Agreement on such date as may be determined by mutual
agreement between Seller and Purchaser.
6. Closing Deliveries. At the Closing, the following actions shall be
taken, all of which will be deemed taken simultaneously and no one of which will
be deemed completed until all have been completed:
A. Seller shall deliver to Purchaser:
(i) a bargain and sale deed with covenants against grantor's
acts, including the covenant in the form required by Subdivision 5 of
Section 13 of the Lien Law in proper statutory form for recording, duly
executed and acknowledged by Seller so as to convey title to the Purchaser
in fee simple absolute, free and clear of all liens and encumbrances
except as herein stated;
(ii) a check to the order of Purchaser or the appropriate
recording officers for the amount of the New York State transfer tax
payable by reason of delivery of the deed, together with any required tax
return executed by Seller;
(iii) a certification of Non-Foreign Status under FIRPTA;
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<PAGE>
(iv) the originals, to the extent in Seller's possession, of
all agreements affecting the Premises, plans, drawings, surveys,
warranties, licenses and permits;
(v) any and all documents, affidavits and agreements
reasonably required to issue a title policy from a reputable title
insurance company;
(vi) a Certificate of Occupancy valid for the existing use of
the Premises;
(vii) a Subdivision Map of Section 56.025, Tax Block 4, P/O
Lots 45 and 48.1 approved by the City of Kingston and all applicable
governmental authorities (the "Parking Lot"), which lot shall provide
Purchaser with at least one hundred sixty (160) parking spaces as shown on
the schematic plan attached hereto as Exhibit C. Seller acknowledges that
such Subdivision Map must comply with all applicable regulations or
ordinances with respect to the amount of parking spaces allocated to the
Premises. In the event the City of Kingston or applicable governmental
authority makes approval of the Subdivision Map subject to the provision
of additional parking spaces, then Seller shall revise the Subdivision
Map, subject to Purchaser's reasonable approval, to provide the required
additional parking spaces; and
(viii) demolish the passageway between the Premises and the
adjacent structure and repair per the scope of work attached hereto as
Exhibit D.
B. Purchaser shall (i) pay the purchase price and (ii) complete and
execute, to the extent necessary, the returns delivered by Seller and cause the
same, together with the checks delivered by Seller, to be remitted to the
appropriate offices promptly after the Closing.
5
<PAGE>
C. Purchaser agrees to accept a title such as a reputable title company
will insure, subject only to the exceptions and conditions contained in this
contract, at such title company's regular rates and without special endorsement.
D. Seller and Purchaser shall apportion the following on an accrual basis
as of midnight on the day preceding the Closing:
(a) real estate taxes, water charges and sewer rents; and
(b) utilities and fuel, if any, and vault charges, if any.
Seller shall furnish a reading to a date not more than ten (10) days
prior to the Closing for any water meter on the Premises and the unfixed meter
charge and sewer rent, if any, for the intervening time shall be apportioned on
the basis of such reading.
7. Violations. All notes or notices of violations of law or municipal
ordinances, orders or requirements noted in or issued by the Departments of
Housing Preservation and Development, Buildings, Fire, Labor, Health or any
other state or municipal department having jurisdiction against or affecting the
Premises shall be complied with by Seller and the Premises shall be conveyed
free of the same, and this provision shall survive the Closing. Seller shall
furnish Purchaser with any required authorizations to make the necessary
searches therefor. Any violations shall be considered a title exception and
allow Seller or Purchaser the same right to eliminate, cure or correct such
violation as if such violation was a title exception under Section 4.
8. Representations.
8.1 (a) The Seller has full power, authority, legal right and capacity to
enter into this Agreement and to consummate the transactions contemplated
hereby. This Agreement, including, without limitation, all agreements to be
executed in connection herewith by the Seller, have been or by closing will have
been effectively authorized by all necessary action, corporate or otherwise, by
the Seller, including, without limitation, any authorization by the board of
directors and shareholders of the Seller required by state law and constitute,
or upon execution will constitute, legal, valid and binding obligations of the
Seller enforceable in accordance with their respective terms.
(b) True and complete copies of all deeds, title insurance policies,
surveys, mortgages, agreements and other documents granting to Seller title to,
or an interest in, or otherwise affecting the Premises (the "Title Documents")
have been delivered to the Purchasers. With respect to the title Documents, no
breach or event of default on the part
6
<PAGE>
of Seller, no breach or event of default on the party of any other party thereto
and no event that, with the giving of notice or lapse of time or both, would
constitute such breach or event of default under any term, covenant or condition
of such Title Documents, have occurred and are continuing unremedied.
(c) Seller has good and marketable title in fee simple to the
Premises and to all plants, buildings and improvements thereon, free and clear
of any mortgages, liens, security interests, claims, charges imperfections of
title, encroachments, easements, rights-of-way, squatters' rights, encumbrances,
covenants, conditions or restrictions, except for the Permitted Exceptions or
which are disclosed in the title report and which are Seller's obligation to pay
at or prior to the Closing.
(d) The Premises and buildings and improvements being sold to the
Purchaser, and the operation or maintenance thereof as operated and maintained,
do not (i) contravene any zoning or building law or other administrative
regulation, including, but not limited to, fire, health and safety; or (ii)
violate any covenants or applicable federal, state or local law. All of the
equipment being sold to the Purchaser is in working order.
(e) There is no pending or threatened condemnation or eminent domain
proceeding with respect to, or that could affect, the Premises.
8.2 (a) (i) Seller, nor to best knowledge of Seller, has any previous
owner, tenant, occupant or user of the Premises, engaged in or allowed any
operation or activity upon, or any use or occupancy of, the Premises for the
purpose of, or in any way involving the handling, manufacture, treatment,
storage, use, generation, release, discharge, refining, dumping or disposal of
any Hazardous Materials as defined in Section 8.2(9b) on, under, in or in or
about the Premises, or transported any Hazardous Materials to, from or across
the Premises. No Hazardous Materials currently are produced, constructed,
deposited, stored or otherwise located on, under, in or about any premises.
(ii) No asbestos in any form is constructed, placed, deposited,
stored, disposed of or located on the Premises.
(iii) No Hazardous Materials have migrated or, due to their
location, threaten to migrate, from the Premises upon or beneath other
properties, and no Hazardous Materials have migrated or, due to their location,
threaten to migrate, from other properties upon or beneath the Premises.
(iv) No underground improvement, including, without limitation,
treatment
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<PAGE>
or storage tank or water, gas or oil well, is or ever has been located on the
Premises. All inoperable water, gas or oil wells, if any, have been filled
and/or capped in full compliance with all Environmental Requirements (as defined
in Section 8.2(b)). All underground storage tanks, if any, have been exhumed and
disposed of, and all contaminated portions of the Premises, if any, and ground
water have been remediated in full compliance with all Environmental
Requirements to the satisfaction of the appropriate Governmental Authority.
(v) No polychlorinated biphenyl ("PCBs") or transformer,
capacitor, ballast or other equipment containing PCBs at levels in excess of
fifty (50) parts per million or insulating material containing urea formaldehyde
is constructed, placed, deposited, stored, disposed of or located on the
Premises.
(vi) The Premises and all current and, to the best knowledge of
the Seller, past activities thereon, including without limitation, the use,
maintenance and operation of the Premises and all activities and conduct of
business related thereto, currently comply and, to the best knowledge of the
Seller, at all times in the past have complied with all Environmental
Requirements.
(vii) Seller, nor to the best knowledge of the Seller, has any
prior owner or occupant of the Premises, received any notice or other
communication concerning or has any knowledge of (A) any violation or alleged
violation of Environmental Requirements or (B) any liability or alleged
liability for environmental damages in connection with the Premises. No writ,
injunction, decree, order or judgment relating to the foregoing is outstanding.
To the best knowledge of the Seller, there is no lawsuit, claim, proceeding,
citation, directive, summons or investigation, pending or threatened relating to
the ownership, use, maintenance or operation of the Premises, or relating to any
alleged violation of any applicable Environmental Requirements or the presence
on the Premises of any Hazardous Materials.
(b) For the purposes of this Agreement, including without
limitation, all other agreements to be executed in connection herewith by the
Seller:
(i) "Hazardous Materials" means any substance: (A) the
presence of which requires investigation or remediation under any federal, state
or local statute, regulation, ordinance, order, action or policy or common law;
(B) that is or becomes defined as a "hazardous waste" or "hazardous substance"
under any federal, state or local state, regulation or ordinance; (C) that is
toxic, explosive, corrosive, flammable, ignitable, reactive, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes
regulated by any governmental authority, agency, department, commission, board
or
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<PAGE>
instrumentality; (D) the presence of which on the Premises causes or threatens
to cause a nuisance upon the Premises or to adjacent properties or poses or
threatens to pose a hazard to the health or safety of persons on or about the
Premises; (E) the presence of which on adjacent properties could constitute a
trespass by the Seller; (F) that contains gasoline, diesel fuel or other
petroleum hydrocarbons; provided, however, that this definition shall not
include gasoline, diesel fuel or other petroleum hydrocarbons that are used in
the ordinary course of the land user's operations in a manner consistent with
industry practice and in compliance with all Environmental Requirements; or (G)
that contains PCBs, asbestos or urea formaldehyde foam insulation.
(ii) "Environmental Requirements" means all applicable
statutes, regulations, rules, ordinances, codes, licenses, permits, orders,
approvals, plans, authorizations, concessions, franchises and similar items, now
in effect, for all governmental agencies, departments, commissions, boards,
bureaus or instrumen- talities, having jurisdiction and all covenants running
with the land that relate to the existence, handling, manufacture, treatment,
storage, use, generation, release, discharge, refining or disposal of Hazardous
Materials on, under, in or about the Premises.
(iii) "Governmental Authority" means any court, agency,
commission, board or other administrative or governmental body of the United
States.
(c) the Seller has complied in all material respects with all
Environmental Requirements. Following Closing, the Purchaser assumes all
responsibility for Environmental Requirements with respect to Hazardous
Materials brought upon the Premises after such Closing and Seller shall have no
responsibility or liability therefor following Closing.
9. Damages. In the event this Agreement is terminated due to either
party's default in the performance of its obligation hereunder, then, if Seller
is the defaulting party, Purchaser shall be entitled to pursue any and all
remedies available at law or in equity, including, but not limited to, specific
performance. In the event Purchaser is the defaulting party, then the parties
have agreed that three percent (3%) of the purchase price shall be paid to
Seller as agreed upon liquidated damages, it being acknowledged that Seller's
damages from Purchaser's default might be impossible to ascertain, and that this
amount constitutes a fair and reasonable amount for Seller's damages and is not
a penalty. Thereafter, neither party shall have any responsibility or obligation
to the other under or pursuant to this Agreement.
10. Entire Agreement. This Agreement is not to be recorded and may not be
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changed, modified or terminated except by written instrument executed by the
parties hereto. This Agreement, including the Exhibits attached hereto, contains
the entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior understandings, if any, with respect thereto.
This Agreement may not be modified, changed or supplemented, nor may any
obligations hereunder be waived, except by written instrument signed by the
party to be charged or by its agent duly authorized in writing or as otherwise
expressly permitted herein. The parties do not intend to confer any benefit
hereunder on any person, firm or corporation other than the parties hereto. This
provision shall survive the Closing.
11. Governing Law. This Agreement shall be governed by, interpreted under,
and construed and enforced in accordance with the laws of the State of New York.
12. Jurisdiction. The parties hereto irrevocably and unconditionally
submit themselves to the general jurisdiction of the courts of the State of New
York, the courts of the United States of America for the Southern District of
New York, and the appellate courts thereof, in any legal action or proceeding
arising under this Agreement or in any way related hereto.
13. Non-Waiver of Rights. No failure or delay of either party in the
exercise of any right given to such party hereunder shall constitute a waiver
thereof unless the time specified herein for exercise of such right has expired,
nor shall any single or partial exercise of any right preclude other or further
exercise thereof or of any other right. The waiver of any breach hereunder shall
not be deemed to be a waiver of any other or any subsequent breach hereof.
14. Rules of Construction. This Agreement shall be construed without
regard to any presumption or other rule requiring construction against the party
causing this Agreement to be drafted.
15. Exhibits. Each of the Exhibits and Schedules referred to herein and
attached hereto is an integral part of this Agreement and are incorporated
herein by this reference.
16. Pronouns; Joint and Several Liability. All pronouns and any variation
thereof shall be deemed to refer to the masculine, feminine or neuter, singular
or plural, as the identity of the parties may require. If the Purchaser consists
of two or more parties, the liability of such parties shall be joint and
several.
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17. Further Assurances. Seller and Purchaser each agree to do such further
acts and things and to execute and deliver such additional agreements and
instruments as the other may reasonably require to consummate, evidence or
confirm the sale or any other agreement contained herein in the manner
contemplated hereby.
18. No Assignment. Purchaser shall have no right to assign this Agreement
or its rights hereunder without the express written consent of Seller.
19. Notices. Any notice required to be given shall be in writing and shall
be sent by facsimile and certified mail return receipt requested, or by
facsimile and nationally recognized overnight carrier, and addressed to
Purchaser or to Seller at the addresses set forth below:
Assistant Commissioner for Acquisitions
Department of Citywide Administrative Services
Division of Real Estate Services
1 Centre Street, 20th Floor North
New York, NY 10007
Fax: (212) 669-2030
and
Heehwan Lee, Ph.D.
National Micronetics, Inc.
71 Smith Avenue
Kingston, NY 12401
Fax: (914) 338-0377
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Either party may change its address as set forth herein by notice to the other
in the manner provided for herein. Notice shall be deemed given as of the day of
mailing or, if by facsimile, then as of the time stamp confirmation of the
sending machine.
20. Attorney's Fees. Should either party institute any action or
proceeding to enforce this Agreement or any provision hereof, or for damages by
reason of any alleged default under or breach of this Agreement or of any
provision hereof, or for a declaration of rights hereunder, then, each party
shall bear the responsibility for its own fees and costs, including legal fees
incurred in any such action.
21. Titles and Headings. Titles and headings of Articles and Sections of
this Agreement are for convenience of reference only and shall not affect the
construction of any provision of this Agreement.
22. Binding Effect. This Agreement shall bind and inure to the benefit of
the parties and their respective successors and assigns.
23. Brokerage Fees. Seller represents to Purchaser that it has not dealt
with any broker in connection with this Agreement other than Julien J. Studley,
Inc., and Wm Morrison Realty (collectively, the "Brokers"). Seller shall pay any
commission owing to the Brokers pursuant to separate written agreements. Seller
hereby indemnifies and holds Purchaser harmless against all loss, damage,
liability, cost and expense of any nature (including reasonable attorney's fees
and disbursements) based on any claim by any party other than the Brokers with
whom Seller or its agent or representative have dealt for a commission or other
compensation in connection with this Agreement which is based on the actions of
Seller or its agents or representatives. The indemnified party shall (i)
cooperate with the indemnifying party in any defense and (ii) not settle a
claim, liability or action for which the indemnifying party has the obligation
to defend or indemnify without the indemnifying party's consent. The foregoing
indemnifications shall survive any expiration or termination of this Agreement.
24. Acknowledgements of Purchaser Re Inspection of Premises. Purchaser
acknowledges that: Purchaser has inspected the Premises, is fully familiar with
the physical condition and state of repair thereof and, subject to the
provisions of Section 7 and Section 8, shall accept the Premises "AS IS" and in
their present condition, except as set forth in Exhibit "D" and subject to
reasonable use, wear, tear and natural deterioration between now and the Closing
date, without any reduction in the Purchase Price for any change in such
condition by reason thereof subsequent to the date of this Agreement. Seller
shall bear risk
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of loss due to fire, flood or other casualty, and, in the event of such loss or
damage, Purchaser shall have the right to cancel the sale.
25. Limitation on Survival of Representations, Warranties, Covenants and
Other Obligations.
(a) Except as otherwise provided in this Agreement, no
representations, warranties, covenants or other obligations of Seller set forth
in this Agreement shall survive the Closing and no action based thereon shall be
commenced after the Closing.
(b) The delivery of the deed by Seller and the acceptance thereof by
Purchaser shall be deemed the full performance and discharge of every obligation
on the part of Seller to be performed hereunder, except those obligations of
Seller which are expressly stated in this Agreement to survive the Closing.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
on the date first above written.
SELLER: NATIONAL MICRONETICS, INC.
By:
---------------------------------
Name: Heehwan Lee
Title: Vice President and Chief
Operations Officer
PURCHASER: THE CITY OF NEW YORK
By:
---------------------------------
Name: Lori Fierstein
Title: Deputy Commissioner
Department of Citywide
Administrative Services
APPROVED AS TO FORM:
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Acting Corporation Counsel
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