<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 December 31, 1995 COMMISSION FILE NUMBER 0-1817
NETWORKS ELECTRONIC CORP.
- -------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-1770469
- ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation of organization) Number)
</TABLE>
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
<TABLE>
<S> <C>
CLASS 1,671,221
- ----------------------------- --------------------------------
Common Stock - $.25 par value Outstanding at December 31, 1995
</TABLE>
1
<PAGE> 2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
NETWORKS ELECTRONIC CORP.
BALANCE SHEET
December 31, 1995 and June 30, 1995
<TABLE>
<CAPTION>
Dec. 31, 1995 June 30, 1995
(unaudited) (audited)
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 277,275 $ 117,494
Accounts receivable - net 563,974 538,984
Receivable from officer 27,228 27,228
Receivable from insurance company - 234,687
Other receivables 1,600 5,500
Inventories 1,174,037 1,061,946
Prepaid expenses and deposits 108,222 8,040
Building held for sale 51,127 -
Deferred income taxes 15,096 15,096
---------- ----------
Total current assets 2,218,559 2,008,975
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Land 131,773 131,773
Building and improvements 1,983,015 1,994,439
Machinery and equipment 4,370,237 4,345,213
---------- ----------
6,485,025 6,471,425
Less accumulated depreciation 5,615,521 5,553,265
---------- ----------
Property and equipment, net 869,504 918,160
---------- ----------
DEFERRED INCOME TAXES,
NON-CURRENT PORTION 160,806 248,306
---------- ----------
Total assets $3,248,869 $3,175,441
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
NETWORKS ELECTRONIC CORP.
BALANCE SHEET
December 31, 1995 and June 30, 1995
<TABLE>
<CAPTION>
Dec. 31, 1995 June 30, 1995
(unaudited) (audited)
---------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt $ 142,176 $ 121,953
Note payable, related party -
current portion 50,667 50,667
Accounts payable 437,661 417,773
Customer advances and deposits 11,585 11,585
Curr. portion of pre-petition debt:
Adjudication award payable 52,525 52,525
Accrued pension liability 48,800 28,800
Other payables 20,000 20,000
Income taxes payable - 6,276
Other accrued expenses 129,234 171,608
---------- -----------
Total current liabilities 892,648 881,187
---------- -----------
LONG-TERM DEBT:
Long-term debt, less current
maturities 1,841,104 1,863,363
Note payable, related party 54,889 80,222
Accrued pension liability 360,531 382,931
---------- -----------
Commitments and Contingencies - -
---------- -----------
STOCKHOLDERS' EQUITY (DEFICIENCY
IN ASSETS):
Common stock, par value $.25 per
share; authorized 10,000,000
shares, issued and outstanding
1,671,221 and 1,596,221 shares,
respectively 417,805 399,055
Additional paid-in capital 280,985 285,672
Accumulated deficit (472,359) (604,318)
Stock subscriptions receivable (14,063) -
Pension liability adjustment (112,671) (112,671)
---------- -----------
Total stockholders' equity
(deficiency in assets) 99,697 (32,262)
---------- -----------
Total liabilities and
stockholders' equity
(deficiency in assets) $3,248,869 $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 Six Months Ended
December 31, December 31,
1995 1994 1995 1994
----------------------- ------------------------
<S> <C> <C> <C> <C>
Sales $ 891,614 $ 612,381 $2,024,619 $1,144,852
Cost of sales 605,168 543,233 1,356,382 911,275
---------- --------- ---------- ----------
Gross profit 286,446 69,148 668,237 233,577
Selling, adminis-
trative and other
operating expenses 166,130 177,129 330,433 411,902
---------- --------- ---------- ----------
Operating
income (loss) 120,316 (107,981) 337,804 (178,325)
Other income (exp.):
Gain (loss) on
disposition
of property (20,773) - (7,273) 530,857
Insurance reimb. - 50,000 - 50,000
Interest and non-
operating expense,
net (53,754) (44,138) (108,772) (109,047)
---------- --------- ---------- ----------
Income (loss)
before
income taxes 45,789 (102,119) 221,759 293,485
Provision for
income taxes 24,000 - 89,800 20,800
---------- --------- ---------- ----------
Net income
(loss) $ 21,789 $(102,119) $ 131,959 $ 272,685
========== ========= ========== =========
Earnings (loss)
per share $ .01 $ (.06) $ .08 $ .17
========== ========= ========== ==========
Average weighted
number of shares
outstanding 1,596,221 1,596,221 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>
Six Months Ended
December 31,
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating
activities:
Net income $ 131,959 $ 272,685
--------- ---------
Adjustments to reconcile net income
to net cash used in
operating activities:
Non-cash items included
in net income:
Depreciation and
amortization 62,256 86,484
Loss (gain) on disposition
of property 7,273 (530,857)
Deferred income taxes 87,500 -
Changes in:
Receivables 213,597 60,749
Inventories (112,091) (110,031)
Prepaid expenses and deposits (100,182) 7,730
Accounts payable and
accrued expenses (22,486) 64,761
Customer advances and deposits - (6,551)
Income taxes (6,276) 20,000
Accrued pension liability (2,400) 12,000
--------- ---------
Total adjustments 127,191 (395,715)
Net cash provided by (used in)
operating activities 259,150 (123,030)
========= =========
</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>
Six Months Ended
December 31,
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from investing
activities:
Capital expenditures $ (85,500) $ -
Net proceeds from disposition
of property 13,500 574,453
--------- ---------
Net cash provided by (used in)
investing activities (72,000) 574,453
--------- ---------
Cash flows from financing
activities:
Credit line pay off - (570,000)
Proceeds from long-term borrowings 58,914 -
Mortgage debt reduction (60,950) (40,714)
Payments on note payable,
related party (25,333) -
--------- ---------
Net cash used in
financing activities (27,369) (610,714)
--------- ---------
Net increase (decrease) in
cash and cash equivalents 159,781 (159,291)
Cash and cash equivalents
at beginning of period 117,494 164,786
--------- ---------
Cash and cash equivalents
at end of period $ 277,275 $ 5,495
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 9,500 $ 800
========= =========
Interest paid $ 116,167 $ 103,847
========= =========
</TABLE>
6
<PAGE> 7
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
1. 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
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 six month period are not necessarily
indicative of the results to be expected for a full year of
operations.
INVENTORIES
-----------
2. Inventories are valued at the lower of cost (FIFO) or market. The
inventories at December 31, 1995 and June 30, 1995 consisted of the
following:
<TABLE>
<CAPTION>
Dec. 31, June 30,
1995 1995
(unaudited) (audited)
---------- ----------
<S> <C> <C>
Raw materials $ 188,778 $ 162,352
Work in process 652,238 574,006
Finished goods 529,243 491,810
---------- ----------
1,370,259 1,228,168
Less applied to customer deposit (16,222) (16,222)
Less reserve for obsolescence (180,000) (150,000)
---------- ----------
Total $1,174,037 $1,061,946
========== ==========
</TABLE>
7
<PAGE> 8
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
3. LONG-TERM DEBT
--------------
At December 31, 1995 and June 30, 1995, the Company's long-term debt
consisted of the following:
<TABLE>
<CAPTION>
Dec. 31, 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
(10.75% at December 31, 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. 1,882,528 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. Balance
paid off in January 1996. 22,176 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. 78,576 19,662
---------- ----------
1,983,280 1,985,316
Less current maturities 142,176 121,953
---------- ----------
Total $1,841,104 $1,863,363
========== ==========
</TABLE>
8
<PAGE> 9
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 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 December 31, 1995 and
June 30, 1995 was $105,556 and $130,889, respectively.
5. GAINS AND LOSSES ON DISPOSITIONS OF PROPERTY
--------------------------------------------
During the six months ended December 31, 1995, the Company sold fully
depreciated machinery for $13,500. The Company also recognized a loss
on the pending sale of its Florida condominium property (See Note 8).
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.
9
<PAGE> 10
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
7. STOCK OPTIONS EXERCISED
-----------------------
In October 1995, the Company's chief executive officer elected to
exercise 75,000 options to purchase the Company's common stock at a
price of $0.1875 per share.
8. SUBSEQUENT EVENTS
-----------------
In January 1996, the Company completed the sale of its Florida
condominium property, recognizing a loss of $20,773. As a result of
the subsequent sale, the property's cost of $71,900, net of the above
loss amount, was separately identified as a current asset on the
Company's December 31, 1995 balance sheet. The net proceeds from the
sale (after payment of the related mortgage debt) will be utilized for
general corporate purposes.
In January 1996, the Internal Revenue Service granted the company its
requested waiver of the minimum funding requirement for its pension
plan. This amount will be amortized over a five year period.
10
<PAGE> 11
NETWORKS ELECTRONIC CORP.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------
Results of Operations
- ---------------------
Sales for the six months ended December 31, 1995 increased 77% to $2,025,000
from $1,145,000 for the comparable period of the prior year. The increase
resulted primarily from the implementation of a program by the new management
team to jump-start production. Ordnance sales were particularly affected,
increasing by approximately 244% from depressed prior-year levels, while
Bearing Division sales, comprising 57% of the total sales mix, increased by
46%. Overall sales for the three months ended December 31, 1995 were up
approximately 46% from prior year totals. The smaller increase in the December
1995 quarter was largely due to the convenience cancellation of an Ordnance
Division time and materials contract.
The Company's gross profit margins increased to approximately 33% during the
six months ended December 31, 1995, from approximately 20% during the six
months ended December 31, 1994, aided by the continued participation of
executive personnel in the production process. It is expected that the
Company's recent positive trends in both sales and profitability should
continue through the end of the current fiscal year, but at a less robust pace,
as the Company adjusts internally to a higher level of capacity utilization and
shifts its resources to longer-term production projects.
General, administrative and selling expenses declined by 20% (approximately
$81,000) compared to the six month period ended December 31, 1994, due to
reductions in legal fees pertaining to the administration of the Company's
chapter 11 reorganization and to lower staff payroll costs. The December 1995
quarter, however, only showed a 6% decrease, as the Company hired additional
personnel to accommodate the increased sales volume and continued with its
policy of staff wage normalization.
Net interest expense was flat at about $109,000 during the six months ended
December 31, 1995, as compared to the six months ended December 31, 1994. A
lower outstanding aggregate loan balance was offset by a higher effective
interest rate on the Company's installment mortgage note.
Research and Development programs in the Ordnance division have started to
produce results. In December 1995, the Company succesfully completed R&D and
on a line of squib switches that were qualified and shipped in the second
quarter.
11
<PAGE> 12
NETWORKS ELECTRONIC CORP.
Backlog as of December 31, 1995 was approximately $1,300,000 for the Bearing
Division and approximately $500,000 for the Ordnance Division. Overall, this
represents a decline of about $1,000,000 from levels attained at June 30, 1995.
In the second quarter, management has hired sales and marketing personnel and
has increased its book-to-bill ratio.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------
Financial Condition
- -------------------
The Company had working capital of approximately $1,326,000 at December 31,
1995, as compared to $1,128,000 at June 30, 1995. The improvement of $198,000
was due primarily to the net income generated during the six months ended
December 31, 1995 and the reclassification of a building held for sale as a
current asset. 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 $160,000 from June 30,
1995 levels, to about $277,000 at the December 31, 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 damage sustained in the
1994 Northridge Earthquake.
12
<PAGE> 13
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 December 31, 1995.
13
<PAGE> 14
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: January 29, 1996
----------------
14
<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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 277,275
<SECURITIES> 0
<RECEIVABLES> 597,802
<ALLOWANCES> 5,000
<INVENTORY> 1,174,037
<CURRENT-ASSETS> 2,218,559
<PP&E> 6,485,025
<DEPRECIATION> 5,615,521
<TOTAL-ASSETS> 3,248,869
<CURRENT-LIABILITIES> 892,648
<BONDS> 2,256,524
<COMMON> 417,805
0
0
<OTHER-SE> (318,108)
<TOTAL-LIABILITY-AND-EQUITY> 3,248,869
<SALES> 2,024,619
<TOTAL-REVENUES> 2,038,119
<CGS> 1,356,382
<TOTAL-COSTS> 1,686,815
<OTHER-EXPENSES> 20,773
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,772
<INCOME-PRETAX> 221,759
<INCOME-TAX> 89,800
<INCOME-CONTINUING> 131,959
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 131,959
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
