<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended September 30, 1995 COMMISSION FILE NUMBER 0-1817
NETWORKS ELECTRONIC CORP.
(exact name of registrant as specified in its charter)
CALIFORNIA 95-1770469
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation of organization) Number)
9750 DESOTO AVENUE, CHATSWORTH, CALIFORNIA 91311
(Address or principal executive offices)
(818) 341-0440
(Registrant's telephone number, including area code)
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 such filing requirements for the past 90
days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of business of
CLASS 1,596,221
Common Stock - $.25 par value Outstanding at September 30, 1995
1
<PAGE> 2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
NETWORKS ELECTRONIC CORP.
BALANCE SHEET
September 30, 1995 and June 30, 1995
<TABLE>
<CAPTION>
Sept. 30, June 30,
1995 1995
(unaudited) (audited)
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 527,117 $ 117,494
Trade accounts receivable - net 431,658 538,984
Receivable from officer 27,228 27,228
Receivable from insurance company - 234,687
Other receivables 1,600 5,500
Inventories - net 1,040,207 1,061,946
Prepaid expenses and deposits 102,836 8,040
Deferred income taxes 15,096 15,096
---------- ----------
Total current assets 2,145,742 2,008,975
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Land 131,773 131,773
Building and improvements 2,037,112 1,994,439
Machinery and equipment 4,364,449 4,345,213
---------- ----------
6,533,334 6,471,425
Less accumulated depreciation 5,584,393 5,553,265
---------- ----------
Property and equipment, net 948,941 918,160
---------- ----------
DEFERRED INCOME TAXES,
NON-CURRENT PORTION 184,806 248,306
---------- ----------
Total assets $3,279,489 $3,175,441
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
NETWORKS ELECTRONIC CORP.
BALANCE SHEET
September 30, 1995 and June 30, 1995
<TABLE>
<CAPTION>
Sept. 30, June 30,
1995 1995
(unaudited) (audited)
----------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt $ 122,001 $ 121,953
Note payable, related party -
current portion 50,667 50,667
Accounts payable 446,715 417,773
Customer advances and deposits 11,585 11,585
Curr. portion of pre-petition debt:
Adjudication award payable 52,525 52,525
Accrued pension liability 28,800 28,800
Other payables 20,000 20,000
Income taxes payable - 6,276
Other accrued expenses 144,483 171,608
---------- ----------
Total current liabilities 876,776 881,187
---------- ----------
LONG-TERM DEBT:
Long-term debt, less current
maturities 1,875,518 1,863,363
Note payable, related party 67,556 80,222
Accrued pension liability 381,731 382,931
---------- ----------
Commitments and Contingencies - -
---------- ----------
STOCKHOLDERS' DEFICIENCY IN ASSETS:
Common stock, par value $.25 per
share; authorized 10,000,000
shares, issued and outstanding
1,596,221 shares 399,055 399,055
Additional paid-in capital 285,672 285,672
Accumulated deficit (494,148) (604,318)
Pension liability adjustment (112,671) (112,671)
---------- ----------
Total stockholders' equity
deficiency in assets 77,908 (32,262)
---------- ----------
Total liabilities and stockholders'
deficiency in assets $3,279,489 $3,175,441
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
NETWORKS ELECTRONIC CORP.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, September 30,
1995 1994
------------------ ------------------
<S> <C> <C>
Sales $1,133,005 $ 532,471
Cost of sales 751,214 368,042
---------- ----------
Gross profit 381,791 164,429
Selling, adminis-
trative and other
operating expenses 164,303 234,773
---------- ----------
Operating income (loss) 217,488 (70,344)
Other income (exp.):
Gain on disposition
of property 13,500 530,857
Interest and non-
operating expenses,
net (55,018) (64,909)
---------- ----------
Income before
income taxes 175,970 395,604
Provision for
income taxes 65,800 20,800
---------- ----------
Net income $ 110,170 $ 374,804
---------- ----------
Net income
per share $ .07 $ .23
========== ==========
Average weighted
number of shares
outstanding 1,596,221 1,596,221
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
NETWORKS ELECTRONIC CORP.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating
activities:
Net income $ 110,170 $ 374,804
--------- ---------
Adjustments to reconcile net income
to net cash used in
operating activities:
Non-cash items included
in net income:
Depreciation and
amortization 31,128 43,242
Gain on disposition
of property (13,500) (530,857)
Deferred income taxes 63,500 -
Changes in:
Receivables 345,913 213,623
Inventories 21,739 (135,986)
Prepaid expenses and deposits (94,796) 3,791
Accounts payable and
accrued expenses 1,817 (22,363)
Customer advances and deposits - (6,551)
Income taxes (6,276) 20,800
Accrued pension liability (1,200) 6,000
--------- ---------
Total adjustments 348,325 (408,301)
Net cash provided by (used in)
operating activities 458,495 (33,497)
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
NETWORKS ELECTRONIC CORP.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from investing
activities:
Capital expenditures $ (61,909) $ -
Net proceeds from disposition
of property 13,500 574,453
--------- ---------
Net cash provided by (used in)
investing activities (48,409) 574,453
--------- ---------
Cash flows from financing
activities:
Credit line pay off - (570,000)
Proceeds from long-term borrowings 42,673 -
Mortgage debt reduction (30,470) (20,424)
Payments on note payable,
related party (12,666) -
--------- ---------
Net cash used in
financing activities (463) (590,424)
--------- ---------
Net increase (decrease) in
cash and cash equivalents 409,623 (49,468)
Cash and cash equivalents
at beginning of period 117,494 164,786
--------- ---------
Cash and cash equivalents
at end of period $ 527,117 $ 115,318
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 9,500 $ -
========= =========
Interest paid $ 59,206 $ 34,661
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
September 30, 1995
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly its
financial position and the results of its operations and cash flows of the
Company for the periods shown.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
The results of operations for the three month period are not necessarily
indicative of the results to be expected for a full year of operations.
2. INVENTORIES
Inventories are valued at the lower of cost (FIFO) or market. The
inventories at September 30, 1995 and June 30, 1995 consisted of the
following:
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995
(unaudited) (audited)
------------- ----------
<S> <C> <C>
Raw materials $ 183,269 $ 162,352
Work in process 662,124 574,006
Finished goods and components 376,036 491,810
---------- ----------
1,221,429 1,228,168
Less applied to customer deposit (16,222) (16,222)
Less reserve for obsolescence (165,000) (150,000)
---------- ----------
Total $1,040,207 $1,061,946
========== ==========
</TABLE>
7
<PAGE> 8
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
September 30, 1995
3. LONG-TERM DEBT
At September 30, 1995 and June 30, 1995, the Company's long-term debt
consisted of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995
(unaudited) (audited)
------------- ----------
<S> <C> <C>
Note payable to bank, secured
by deed of trust on land and
building, with interest payable
monthly at a reference rate
(11% at September 30, 1995), and
principal payable in monthly
installments of $10,000 through
June 2000, at which time a
balloon payment of $1,342,528
will become due. $1,912,528 $1,942,528
Note payable to bank, secured
by real estate, payable in monthly
installments of $348 (including
interest at 10% per annum)
through September 2003. 22,656 23,126
Note payable to Community
Redevelopment Agency ("CRA"),
non-interest bearing, secured by
real estate, no principal payments
required through June 1996, at
which time the note is to be
converted into a long-term CRA
construction loan. 62,335 19,662
---------- ----------
1,997,519 1,985,316
Less current maturities 122,001 121,953
---------- ----------
Total $1,875,518 $1,863,363
========== ==========
</TABLE>
8
<PAGE> 9
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
September 30, 1995
4. NOTE PAYABLE, RELATED PARTY
In January 1995, the Company received a $152,000 loan from the estate of
its former president and chief executive officer, secured by specific
machinery and equipment. The loan is being repaid in equal monthly
principal installments of $4,222 (plus interest at 10%) over a three year
period. A loan fee of $2,000 was charged to consummate the transaction.
The outstanding loan balance at September 30, 1995 and June 30, 1995 was
$118,223 and $130,889, respectively.
5. GAINS ON DISPOSITION OF PROPERTY
During the quarter ended September 30, 1995, the Company sold fully
depreciated machinery for $13,500.
In September 1994, the Company sold its Palm Desert property, consisting of
two acres of unimproved land, for approximately $575,000 (net of
approximately $40,000 in fees and expenses), recognizing a gain of
approximately $530,000 on the transaction. The net proceeds from the sale
were used to fully pay off the Company's bank line of credit in the amount
of $570,000.
6. BANKRUPTCY EMERGENCE
The order confirming the Company's plan for reorganization under chapter 11
of the United States Bankruptcy Code was entered on November 9, 1994 and
contemplates full repayment of all pre-petition liabilities over a twelve
year period. These obligations, consisting primarily of a 1993 jury award
and the unfunded portion of the Company's defined benefit pension plan,
totalled approximately $1,200,000. Additionally, the Company's term bank
note was extended for six years. In June 1995, the Company received a
favorable adjudication ruling, effectively reducing its obligation on the
1993 jury award by more than $750,000.
7. SUBSEQUENT EVENT
In October 1995, the Company's chief executive officer exercised 75,000
non-qualified stock options to purchase the Company's common stock at a
price of $0.1875 per share.
9
<PAGE> 10
NETWORKS ELECTRONIC CORP.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Sales for the three months ended September 30, 1995 increased 113% to
$1,133,000 from $532,000 for the comparable period of the prior year. The
increase can be attributed to the implementation of a new management team
(which initiated a program to jump-start production), and the emergence of the
Company from chapter 11 bankruptcy status. Ordnance Division sales were
particularly affected, increasing by approximately 285% from depressed
prior-year levels, while Bearing Division sales, comprising 52% of the total
sales mix, increased by 51%.
The Company's gross profit margins increased to approximately 34% during the
three months ended September 30, 1995, from approximately 31% during the three
months ended September 30, 1994, due to a large concentration of effort and
involvement by executive personnel in the manufacturing process. The results
of the Company's new operating plan continue to demonstrate a trend of
increased sales and profitability over prior year levels through at least the
end of calendar 1995.
General, administrative and selling expenses decreased by 30% (approximately
$70,000) compared to the three month period ended September 30, 1994. The
significant decrease was due primarily to a reduction in legal fees incurred
pertaining to the administration of the Company's chapter 11 reorganization
filing and to lower staff payroll costs. It is anticipated, however, that
comparisons will be less favorable in the months ahead, because of the ongoing
process of staff wage normalization and the hiring of a full-time CEO and
additional personnel.
Net interest expense declined by 11% (approximately $7,000) compared to the
three months ended September 30, 1994. The decrease was due to a lower average
outstanding loan balance (resulting mainly from the combined effects of the
Company's $570,000 bank line of credit being paid off in September 1994,
payments of mortgage principal in amounts exceeding $130,000 during the last
twelve months, and the addition of a new $152,000 loan obtained from a related
party in January 1995), which more than offset a higher effective interest rate
on the Company's installment mortgage note.
10
<PAGE> 11
NETWORKS ELECTRONIC CORP.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (Continued)
Backlog as of September 30, 1995 was approximately $1,300,000 for the Bearing
Division and approximately $900,000 for the Ordnance Division. With the
Military's continuing policy of reducing parts inventories, the total backlog
still resulted in an overall increase of approximately $50,000 from September
30, 1994 amounts, although it represented a substantial decline of about
$600,000 from the level attained at June 30, 1995. Management is currently
making a high priority of increasing its book-to-bill ratio through the hiring
of sales and marketing personnel, as replenishment of bookings clearly did not
keep pace with the high level of shipments occurring in the September 1995
quarter.
Financial Condition
The Company had working capital of approximately $1,269,000 at September 30,
1995, as compared to $1,128,000 at June 30, 1995. The improvement of $141,000
was due primarily to the net income generated in the September 1995 quarter.
With the Community Redevelopment Agency loan commitment, management believes
that the Company can continue to generate enough earnings to meet medium-term
financing needs.
The Company's cash position increased by approximately $410,000 from June 30,
1995 levels, to about $527,000 at the September 30, 1995 balance sheet date.
The increase was largely related to the collection of a settlement amount from
the Company's insurance carrier resulting from water damages sustained in the
1994 Northridge Earthquake, and to the collection of a customer time and
materials billing. There is a possibility that the Company may have to utilize
a portion of its cash reserves to make pension plan contributions, if the
Internal Revenue Service does not approve the Company's request for waiver of
the minimum funding standard.
11
<PAGE> 12
NETWORKS ELECTRONIC CORP.
PART II
OTHER INFORMATION
Item 2. Shareholders Stock Information
Through January 4, 1993, Networks Electronic Corp.'s stock was traded in NASDAQ
OVER-THE-COUNTER MARKETS and was listed in NATIONAL MARKET ISSUES under NWRK.
Subsequent to that date, due to certain size and activity requirements, the
stock of Networks Electronic Corp. was removed from trading on the NASDAQ
national market system. The stock is currently traded on the OTC Electronic
Bulletin Board.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: There were no reports on Form 8-K filed for the three
months ended September 30, 1995.
12
<PAGE> 13
NETWORKS ELECTRONIC CORP.
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.
NETWORKS ELECTRONIC CORP.
(Registrant)
BY: DAVID WACHTEL
--------------------------
DAVID WACHTEL
Chairman of the Board,
Chief Executive Officer,
President, Chief Financial
Officer
Date: November 16, 1995
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 527,117
<SECURITIES> 0
<RECEIVABLES> 465,486
<ALLOWANCES> 5,000
<INVENTORY> 1,040,207
<CURRENT-ASSETS> 2,145,742
<PP&E> 6,533,334
<DEPRECIATION> 5,584,393
<TOTAL-ASSETS> 3,279,489
<CURRENT-LIABILITIES> 876,776
<BONDS> 2,324,805
<COMMON> 399,055
0
0
<OTHER-SE> (321,147)
<TOTAL-LIABILITY-AND-EQUITY> 3,279,489
<SALES> 1,133,005
<TOTAL-REVENUES> 1,146,505
<CGS> 751,214
<TOTAL-COSTS> 915,517
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,018
<INCOME-PRETAX> 175,970
<INCOME-TAX> 65,800
<INCOME-CONTINUING> 110,170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 110,170
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
