UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED
December 26, 1998.
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Commission File Number 0-7207
National Micronetics, Inc.
(Exact name of registrant as specified in its charter)
Delaware 14-1507019
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
71 Smith Avenue
Kingston, New York 12401
( Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 338-0333
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to filing requirements for
the past 90 days.
Yes X No
As of December 26, 1998, the registrant had 22,312,524 shares
of Common Stock issued and outstanding.
NATIONAL MICRONETICS, INC.
INDEX
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statement of Net Liabilities - In
Liquidation - December 26, 1998................ 3
Consolidated Statement of Changes in Net Liabilities
In Liquidation for the period from December 2, 1998
to December 26, 1998............................... 4
Consolidated Statements of Operations - For the
period from September 27, 1998 to December 1, 1998
and Three Month period ended December 27, 1997 and
for the period from June 29, 1998 to December 1,
1998 and Six Month period ended December 27, 1997..5
Consolidated Statements of Cash Flows - For the
period from June 29, 1998 to December 1, 1998 and
Six Month period ended December 27, 1997...........6
Notes to Consolidated Financial Statements .......7-9
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations ..10-13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ..................................... 13
Part II. Other Information
Item 1. Legal Proceedings ................................ 14
Item 3. Defaults upon Senior Securities .................. 14
Item 6. Exhibits and Reports on Form 8-K ................. 15
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET LIABILITIES
In Process of Liquidation
(In Thousands)
December 26, 1998
(unaudited)
Cost Current
Basis Value Basis
ASSETS
Cash and cash equivalents $ 11 $ 11
Other current assets 7 7
Property under sale contract 2,397 2,400
Other property, plant and
equipment, net (note 1) 186 186
$ 2,601 $ 2,604
LIABILITIES
Current portion of long-term
debt $ 1,419 $ 1,419
Accounts Payable 625 485
Accrued salaries and related
expenses 41 41
Other accrued expenses 432 432
Short-term debt 8,397 8,397
Due to related parties, net 2,170 2,170
Total liabilities $ 13,083 $ 12,944
Net liabilities $ 10,482 $ 10,340
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Net Liabilities
In Process of Liquidation
(In Thousands)
From the Period December 2, 1998 to December 26, 1998
(unaudited)
Current
Cost Value
Basis Basis
Net liabilities, December 2, 1998 $ 10,414 $ 10,272
Add:
Salary expense 47 47
Interest expense 50 50
Overhead expense 70 70
Depreciation expense 29 29
$ 196 $ 196
Deduct:
Sale of equipment 10 10
Funds received from related parties 13 13
Adjustment of property taxes paid 20 20
Write-off of accrued expense 85 85
$ 128 $ 128
Net liabilities, December 26, 1998 $ 10,482 $ 10,340
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share amounts)
From From From From
Sept. 27, Sept. 28, June 29, June 28,
1998 to 1997 to 1998 to 1997 to
Dec. 01, Dec. 27, Dec. 01, Dec. 27,
1998 1997 1998 1997
Net Sales $ - $ 73 $ - $ 73
Cost and expenses:
Cost of products sold 97 146 245 474
Research, development
and engineering 14 13 31 42
Selling and administration 38 67 98 179
149 226 374 695
Income (Loss) from
operations (149) (226) (374) (622)
Other deductions (income):
Interest expense 94 158 300 345
Interest income - - - -
Other (income) expense,net ( 4) ( 81) (79) (190)
$ (90) $ 77 $ (221) $ (155)
Net loss $ (239) $ (474) $ (595) $ (777)
Net loss per common share $ (0.01) $ (0.02) $(0.02) $ (0.03)
Average common shares
outstanding 22,313 22,313 22,313 22,313
See accompanying notes to consolidated financial statements.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
From From
June 29, June 28,
1998 to 1997 to
Dec. 01, Dec. 27,
1998 1997
Cash flows from operating activities:
Net income (loss) $ (595) $ (777)
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 150 190
Retirements of property and equipment 38 96
Changes in operating assets and liabilities:
Decrease (Increase) in inventories - 9
Decrease (Increase) in other current assets 33 ( 59)
Increase (Decrease) in accounts payable
and accrued expenses 65 58
Increase (Decrease) in due to related parties 298 (254)
Net cash provided (used) by
operating activities (47) (229)
Cash flows from investing activities:
Additions to property and equipment - (306)
Cash flows from financing activities:
Repayment on long-term debt and
capitalized lease obligations - (42)
Payment of revolving loan by related party - (2,741)
Increase in short-term debt to related parties 60 3,341
Net cash provided (used) by
financing activities 60 252
Net increase (decrease) in cash and cash
equivalents 13 23
Cash and cash equivalents at beginning
of period 22 35
Cash and cash equivalents at end of period $ 35 $ 58
See accompanying notes to consolidated financial statements.
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. On December 1, 1998, the board of directors of the Company
adopted a resolution to approve the dissolution of the Company
and has recommended that the stockholders vote to approve the
proposed dissolution at the annual meeting of stockholders of
the Company on February 26, 1999. As the liquidation is
imminent, the Company has changed its basis of accounting for
periods subsequent to December 1, 1998, from the going-concern
basis to the liquidation basis. Accordingly, the carrying value
of the remaining assets(except for other property, plant and
equipment) as of December 26, 1998, are presented at estimated
realizable values and all liabilities are presented at estimated
settlement amounts. Other property, plant and equipment were
not adjusted because, in the opinion of the Company, it was not
possible to estimate their realizable value.
In the opinion of the Company, except for the effect, if any,
of not adjusting the carrying value of other property, plant and
equipment as discussed in the proceeding paragraph, the
accompanying unaudited consolidated financial statements contain
all adjustments necessary to present fairly the net liabilities
in liquidation of the Company as of December 26, 1998, the
changes in its net liabilities in liquidation for the period
from December 2, 1998 to December 26, 1998, and the results of
its operations and the changes in cash flows from June 29, 1998
to December 1, 1998.
The current value amounts are based on estimates of fair values
at December 1, 1998, as follows:
Property under sale contract - sales contract amount
Accounts payable - at cost basis amounts minus accounts
payable which are six years or more old and have no
actions commenced within the last six years.
All other assets and liabilities - at cost basis amounts
that approximate estimated fair values.
The accounting policies applied for the cost basis amounts 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. Unaudited Pro Forma Statement of Net Liabilities. Set forth
below is an unaudited pro forma consolidated statement of net
liabilities of the Company and its subsidiaries as of December
26, 1998 prepared by the Company in order to show the effects
of the proposed sale of part of its real estate to the City of
New York and the related use of proceeds. Prior to December
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 statement of net liabilities reflects these
transactions as if they occurred at December 26, 1998:
NATIONAL MICRONETICS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA STATEMENT OF NET LIABILITIES (UNAUDITED)
(In Thousands)
December 26, 1998
Current Value
Basis Pro Forma
ASSETS
Cash and cash equivalents: $ 11 $ 100
Other current assets 7 7
Property, plant and equipment, net 2,586 186
$ 2,604 $ 293
LIABILITIES
Current portion of long-term debt $ 1,419 $ -
Short-term debt 8,397 8,397
Accounts payable and accrued
expense 958 223
Due to related parties, net 2,170 2,170
Total liabilities $ 12,944 $10,790
Net liabilities $ 10,482 $10,497
3. Fifteen months of interest payments totaling approximately
$199,000 were due the primary lending institution at December
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.
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 $294,000 at December 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 December 26, 1998 and December
27,
1997 there was no dilutive effect from common stock options
or
warrants.
5. The Company is a defendant in a lawsuit brought as the result
of an accident involving a Company automobile. The total of the
damages claimed in the causes of action is $7,700,000. The
summons designates the Supreme Court State of New York, County
of New York, as the place of trial. The Company's insurer has
assumed responsibility and is defending the Company; however
the damages claimed exceed the $300,000 policy limits.
Depositions were scheduled for October 1998, but were postponed
and no new date was scheduled. After consulting with counsel
the Company has determined that it is not possible, at this
time, to estimate the amount of damage, if any, that may
ultimately be incurred. Accordingly no provision has been made
in the financial statements of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Material Changes in Results of Operations
The following table sets forth, for the periods indicated the
relative percentages that certain items in the Company's Consolidated
Statements of Operations bear to net sales. On December 1, 1998, the
Company decided to discontinue all business operations, to wind up
its affairs and to dissolve, subject to stockholder approval, which
is assured.
Six Months Ended December 27, 1997
Five Months Ended December 1, 1998
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 297 649 ( 54)
Gross Profit (loss) (297) (549) ( 86)
Research, development & engineering 38 58 ( 34)
Selling and administration 60 245 ( 76)
Other deductions (income) 268 212 ( 26)
Net earnings (loss) (663)%(1,064)% ( 38)%
Sales volume has decreased 100% during the five months ended December
1, 1998 from the six months ended December 27, 1997.
Efforts have been made to reduce selling and administration costs as
much as possible while maintaining all necessary services. This cost
has decreased 76% from the prior year.
Material Changes in Financial Condition
The consolidated statement of net liabilities at December 26, 1998
shows $2,170,000 of due to related parties. This balance increased
since fiscal year end by $335,000 as a result of increases in
interest expense on related party debt remaining unpaid.
Liquidity and Capital Resources
Revolving Credit Loan Agreement. The Company entered into a
revolving credit loan 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 Co., Ltd. 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 $397,000 at December 26, 1998 and $423,000
at February 9, 1999 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 the
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 as of December 26, 1998 and February 9, 1999.
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 $199,000 as of December
26, 1998 and $215,000 as of February 9, 1999. 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 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 amount
due pursuant to their indebtedness from their institutional lenders
and on November 8, 1997 had filed for reorganization pursuant to
bankruptcy laws in Korea so that they might become entitled to a
two-year moratorium on the repayment of certain obligations to
certain
creditors. The debt restructuring plan of Tae Il Media Co., Ltd. was
accepted by its creditors and was approved by Suwon District Court
in Korea on September 4, 1998. The debt restructuring plan of Newmax
Co., Ltd. was accepted by its creditors and was approved by Cheongju
District Court in Korea on September 15, 1998. The Company can make
no assurance that its primary lending institution will continue to
forebear from foreclosing on the mortgage if its agreement to sell
part of the collateral for that mortgage to the City of New York for
$2,4000,000 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 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 and that the net
proceeds from the sale of certain real estate of the Company to the
City of New York may provide a reserve of $100,000 for working
capital needs.
Sources of Liquidity. The Company is hopeful that funds generated
by facility sales proceeds and received from Newmax or other
affiliated companies will be adequate to fund debt service and other
winding up 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 expected to advance funds on a short-term as needed basis
to offset operational cash shortfalls. The Company will not commence
production on its former sealed lead acid battery manufacturing
line.
Management believes that the combination of sales of manufacturing
facilities, reduction in overhead spending, continued cooperation of
parent companies and their affiliates, and cooperation of the
institutional lender will enable the Company to remain viable for the
next three months.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
According to Item 305(e) of Regulation S-K and Rule 12b-2, the
Company need not provide the information required by Item 305 about
quantitative and qualitative disclosures about market risk, because
the Company is a small business issuer.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See note 5 to the consolidated financial statements included herein
on page 7 for a discussion of current legal proceedings. See pages
22 to 24 of the Information statement on Schedule 14C of the company
filed of February 10, 1999, Commission file Number 0-7207.
The Company and Herzog Supply Company, Inc. a/k/a Herzog Supply Co.,
Inc., Bank Bros. Plumbing & Heating Inc. and J & J Sass Electric,
Inc., which are three holders of mechanics liens aggregating
approximately $51,000 against the Company, are defendants in a
lawsuit to collect an alleged $10,556.50 unpaid account brought by
Robert Carey Company, Inc., a fourth mechanics lien holder, on
January 29, 1999 in the Supreme Court of the State of New York for
the County of Ulster in order to prevent the expiration of the lien
obtained. On February 5, 1999, counsel stipulated to extend until
March 11, 1999 the time of the company to answer the complaint, since
the Company hopes to satisfy those four mechanics liens before that
time expires. The Company, however, can make no assurance that the
sale of part of its real estate and the satisfaction of those
mechanics liens will occur prior to March 11, 1999.
See pages 24 to 25 of the information statement on Schedule 14C of
the Company filed on February 10, 1999, Commission File Number
0-7207, for a description of the status of the Company as a
potentially
responsible party in an Environmental Protection Agency superfund
site in Southington, Connenticut.
Item 3. Defaults Upon Senior Securities.
Inadequate funds were generated by operations and received from
Newmax to fund debt service during the quarter ended December 26,
1998 and during the current quarter, so the Company defaulted on the
payment of accrued interest with respect to its term loan note to its
institutional lender. The amount of interest in default and in
arrears is $199,000 as of December 26, 1998 and is $215,000 as of
February 9, 1999, which is the date of this Quarterly Report. The
amount of $1,408,000 of principal of the term loan note has been
immediately due and payable since the maturity date of November 26,
1997, which was followed by a notice of default on December 16,
1997.
The Company does not have the funds to satisfy the principal amount
and accrued interest; however, the Company entered into an agreement
of purchase and sale dated November 4, 1998 with the City of New York
in order to sell part of its real estate for $2,400,000 so that the
Company hopes to obtain the funds necessary to satisfy the principal
amount and accrued interest upon settlement. The Company, however,
can make no assurance that the sale of part of its real estate and
the satisfaction of the term loan note will occur.
The institutional lender completed collection proceedings against the
letter of credit in the amount of $2,789,000 securing payment of the
revolving credit note, which had matured on November 18, 1997. The
amount of interest in default and in arrears as of December 26, 1998
is $397,000 and as of February 9, 1999 is $423,000 in respect of the
revolving credit note and the amount of the principal balance of the
revolving credit note is $2,741,000. An affiliated company, Tae Il
Magnetics, Co., Ltd., which had provided a mortgage on its real
estate in Korea as collateral for that Korean bank letter of credit
will become entitled to assert a claim against the Company for any
amounts which may be collected from it by the institutional lender
out of the pledge of its assets. It may be possible that the two
year moratorium on collection of certain debts from certain
affiliated companies of the Company, as approved by a Korean court
during September, 1998, may prolong those collection efforts.
See note 3 on page 8-9 and the caption Liquidity and Capital
Resources on page 11 and 12 for additional discussions concerning
defaults on the revolving credit and term loan.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
2 Agreement of Purchase and Sale dated
November 4, 1998 between National
Micronetics, Inc. and the City of New
York, which is incorporated by reference
to Exhibit 2 on Pages 83 to 95 of the
information statement Schedule 14C of
the Company filed on February 10, 1999,
Commission File Number 0-7207.
18 Letter dated February 12, 1999
from Mr. Sung I. Rhee, C.P.A.
20 Information statement Schedule 14C of
the Company filed on February 10, 1999,
Commission File Number 0-7207.
27 Financial data schedule
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NATIONAL MICRONETICS, INC.
By Dr. Heehwan Lee
Dr. Heehwan Lee
President, Chief
Executive Officer
and Treasurer
(Principal Financial
Officer)
Dated: February 12, 1999
February 12, 1999
Dr. Heehwan Lee
President
National Micronetics, Inc.
71 Smith Avenue
Kingston, NY 12401
Dear Dr. Lee:
This in response to your inquiry regarding the basis of presentation
of the financial statements of an enterprise in financial difficulty.
The basic of presentation depends on the circumstances. AICPA
Accounting Principles Board (APB) Statements No. 4, Basis Concepts
and Accounting Principles Underlying Financial Statements of Business
Enterprises, states that if liquidation of an entity appears
imminent, financial information may be prepared on the assumption
that liquidation will occur.
If an enterprise has adopted a plan of liquidation or liquidation is
imminent, it should change its accounting basis from the
going-concern basis to the liquidation basis. The statements should
present assets at their estimated net realizable value and
liabilities at their estimated settlement amounts.
If you need more help to this matter, please contact me.
Very truly yours,
Sung I. Rhee, CPA
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