<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, 1996 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 De Soto 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>
<CAPTION>
CLASS 1,671,221
----- ---------
<S> <C>
Common Stock - $.25 par value Outstanding at November 5, 1996
</TABLE>
<PAGE> 2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
NETWORKS ELECTRONIC CORP.
BALANCE SHEET
September 30, 1996 and June 30, 1996
<TABLE>
<CAPTION>
Sept. 30, June 30,
1996 1996
(unaudited) (audited)
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 126,961 $ 99,114
Trade accounts receivable - net 685,144 753,159
Other receivables 93,572 68,000
Inventories - net 1,095,196 1,043,256
Prepaid expenses and deposits 64,799 19,577
Deferred income taxes 9,469 9,469
---------- ----------
Total current assets 2,075,141 1,992,575
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Land 131,773 131,773
Building and improvements 2,756,635 2,194,703
Machinery and equipment 4,351,013 4,335,926
---------- ----------
7,239,421 6,662,402
Less accumulated depreciation 5,657,918 5,627,847
---------- ----------
Property and equipment, net 1,581,503 1,034,555
---------- ----------
DEFERRED INCOME TAXES,
NON-CURRENT PORTION 217,595 254,795
---------- ----------
Total assets $3,874,239 $3,281,925
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
NETWORKS ELECTRONIC CORP.
BALANCE SHEET
September 30, 1996 and June 30, 1996
<TABLE>
<CAPTION>
Sept. 30, June 30,
1996 1996
(unaudited) (audited)
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt $ 120,000 $ 120,000
Notes payable, related parties -
current portion 172,667 50,667
Accounts payable 568,664 535,013
Curr. portion of pre-petition debt:
Adjudication award payable 56,609 56,059
Accrued pension liability 196,000 188,800
Other Payables 31,315 31,315
Income taxes payable 309 -
Other accrued expenses 160,014 175,840
---------- -----------
Total current liabilities 1,305,578 1,157,694
---------- -----------
LONG-TERM DEBT:
Long-term debt, less current
maturities 2,290,556 1,890,236
Notes payable, related parties 16,889 29,555
Accrued pension liability 447,150 446,850
---------- -----------
Commitments and Contingencies - -
---------- -----------
STOCKHOLDERS' DEFICIENCY IN ASSETS:
Common stock, par value $.25 per
share; authorized 10,000,000
shares, issued and outstanding
1,671,221 shares 417,805 417,805
Additional paid-in capital 280,985 280,985
Accumulated deficit (517,258) (573,734)
Stock subscriptions receivable (14,063) (14,063)
Pension liability adjustment (353,403) (353,403)
----------- ----------
Total stockholders'
deficiency in assets (185,934) (242,410)
----------- ----------- Total liabilities and stockholders'
deficiency in assets $ 3,874,239 $ 3,281,925
=========== ===========
</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,
1996 1995
------------------- ------------------
<S> <C> <C>
Sales $ 929,383 $1,133,005
Cost of sales 681,741 751,214
--------- ----------
Gross profit 247,642 381,791
Selling, adminis-
trative and other
operating expenses 177,608 164,303
--------- ----------
Operating income 70,034 217,488
Other income (exp.):
Gain on disposition
of property - 13,500
CRA debt forgiveness 75,939 -
Interest and non-
operating expenses,
net (51,497) (55,018)
--------- ----------
Income before
income taxes 94,476 175,970
Provision for
income taxes 38,000 65,800
--------- ----------
Net income $ 56,476 $ 110,170
========= ===========
Net income
per share $ .03 $ .07
========= ===========
Average weighted
number of shares
outstanding 1,671,221 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 Three Months Ended
September 30, September 30,
1996 1995
------------------ -------------------
<S> <C> <C>
Cash flows from operating
activities:
Net income $ 56,476 $ 110,170
--------- ---------
Adjustments to reconcile net income
to net cash used in
operating activities:
Non-cash items included
in net income:
Depreciation and
amortization 30,071 31,128
Gain on disposition
of property - (13,500)
Deferred income taxes 37,200 63,500
Changes in:
Receivables 42,443 345,913
Inventories (51,940) 21,739
Prepaid expenses and deposits (45,222) (94,796)
Accounts payable and
accrued expenses 18,375 1,817
Income taxes 309 (6,276)
Accrued pension liability 7,500 (1,200)
--------- ---------
Total adjustments 38,736 348,325
Net cash provided by
operating activities 95,212 458,495
--------- ---------
</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 Three Months Ended
September 30, September 30,
1996 1995
----------------- ------------------
<S> <C> <C>
Cash flows from investing
activities:
Capital expenditures $(577,019) $ (61,909)
Net proceeds from disposition
of property - 13,500
--------- ---------
Net cash used in
investing activities (577,019) (48,409)
--------- ---------
Cash flows from financing
activities:
Proceeds from long-term borrowings 430,320 42,673
Proceeds from notes payable,
related parties 122,000 -
Mortgage debt reduction (30,000) (30,470)
Payments on notes payable,
related parties (12,666) (12,666)
--------- ---------
Net cash provided by (used in)
financing activities 509,654 (463)
--------- ---------
Net increase in
cash and cash equivalents 27,847 409,623
Cash and cash equivalents
at beginning of period 99,114 117,494
--------- ---------
Cash and cash equivalents
at end of period $ 126,961 $ 527,117
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ - $ 9,500
========= =========
Interest paid $ 50,764 $ 59,206
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
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 for
the periods shown.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles necessarily requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. 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, 1996 and June 30, 1996 consisted of the
following:
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
(unaudited) (audited)
---------- ----------
<S> <C> <C>
Raw materials $ 187,318 $ 133,818
Work in process 466,343 376,998
Finished goods and components 666,186 742,091
--------- ----------
1,319,847 1,252,907
Less progress payments (49,651) (49,651)
Less reserve for obsolescence (175,000) (160,000)
--------- ----------
Total $1,095,196 $1,043,256
========== ==========
</TABLE>
7
<PAGE> 8
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
3. LONG-TERM DEBT
At September 30, 1996 and June 30, 1996, the Company's
long-term debt consisted of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
(unaudited) (audited)
------------- ----------
<S> <C> <C>
Note payable to bank, secured by
deed of trust on land and building,
principal payable in monthly
installments of $10,000 through
June 2000, with interest payable at
a reference rate (10.50% at both
September 30, 1996 and June 30, 1996,
respectively). A balloon payment is
due in June 2000. $1,792,528 $1,822,528
Note payable to Community
Redevelopment Agency ("CRA"),
non-interest bearing, construction
loan, secured by real estate, no
principal payments required through
April 2001, with level monthly
principal payments applicable over
20 years through April 2021. 618,028 187,708
---------- ----------
2,410,556 2,010,236
Less current maturities 120,000 120,000
---------- ----------
Total $2,290,556 $1,890,236
========== ==========
</TABLE>
8
<PAGE> 9
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
4. NOTES PAYABLE, RELATED PARTIES
(a) 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, 1996 and
June 30, 1996 was $67,556 and $80,222, respectively. The current
portion of the debt at both September 30, 1996 and June 30, 1996 was
$50,667.
(b) In August 1996 the Company's vice president loaned the Company
$100,000 at an annual interest rate of 13%, secured by the Company's
accounts receivable. Interest is payable monthly with the principal
fully due and payable on September 1, 1997.
(c) In September 1996 a director advanced the Company $22,000 for a
fee of $200. The money was subsequently repaid by the Company in
October 1996.
5. GAIN ON DISPOSITION OF PROPERTY
During the quarter ended September 30, 1995, the Company sold fully
depreciated machinery for $13,500.
6. FORGIVENESS OF DEBT
During the three months ended September 30, 1996, the Community
Redevelopment Agency ("CRA") disbursed funds in the amount of
approximately $506,260 for the retrofit and repair of the Company's
damaged building at its Chatsworth site. The damage was sustained as
a result of the Northridge Earthquake in January 1994. Of this
commitment, 15% or approximately $75,939 was a grant and was recorded
as forgiveness of debt income for the period. At September 30, 1996,
cumulative funds disbursed by the CRA since the inception of the loan
agreement in April 1996 amounted to approximately $727,092, of which
$109,064 has been recognized as forgiveness of debt income and
$618,028 as long-term debt (see Note 3 above).
9
<PAGE> 10
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
7. STOCK OPTION PLAN
The Company's Board of Directors has adopted the Networks Electronic
Corp. 1996 Stock Incentive Plan (the "1996 Plan") which provides for
the grant of p to 100,000 shares of the Company's common stock to
directors, officers, employees and consultants of the Company. The
1996 Plan will be submitted to the shareholders of the Company for
approval at the next Annual Meeting of Shareholders.
During the year ended June 30, 1996, the Company's chief executive
officer exercised 75,000 stock options which had been granted outside
of the Company's existing Stock Option Plan, at an exercise price
of $.1875 per share. Accordingly, an outstanding stock subscription
receivable in the amount of $14,063 has been recorded at both the
September 30, 1996 and June 30, 1996 balance sheet dates.
8. SUBSEQUENT EVENT
The Company has recently negotiated the lease of approximately 35,000
square feet of its Chatsworth facility. The lease agreement calls for
monthly base rent to be approximately $17,850, with 2 months free and
a cost of living increase every 18 months over the initial 62 month
period. The lessee will have an option to extend the original lease
term for an additional 60 months. Additionally, the lessee has
contributed a nonrefundable deposit of $100,000 toward the Company's
cost of constructing improvements to its Chatsworth property and will
loan the Company up to $288,000 at an annual rate of 10% to fund
additional improvements. The loan will be amortized monthly over 5
years, with the monthly payment netted against the lessee's rent. In
October 1996, the lessee reimbursed the Company for $26,775 in broker
fees and $23,175 in other costs incurred in connection with
negotiating the lease arrangement, and also paid the initial month's
base rent of $17,850. The commencement date of the tenancy will be
approximately February 1, 1997.
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 three months ended September 30, 1996 decreased 18% to $929,000
from $1,133,000 for the comparable period of the prior year. The decrease can
be attributed largely to a payment on a time and materials contract in the
Ordnance division that was subsequently canceled for the customer's convenience
in September 1995. This billing generated approximately $239,000 in sales
revenue in the year-ago period. As a result, Ordnance Division sales decreased
by approximately 19%. The Bearing Division sales (comprising 52% of the total
sales mix) decreased by approximately 17% largely as result of delay in some
shipments to the December 1996.
The Company's overall gross profit margins decreased to approximately 27%
during the three months ended September 30, 1996, from approximately 34% during
the three months ended September 30, 1995, due in large measure to continued
competitive price pressures in the industry, preventing the Company from
passing on increased labor costs (as part of the Company's wage normalization
policy) to its customers. The Ordnance Division was particularly impacted, as
the Company shifted resources and retooled in anticipation of increased
manufacturing activity associated with an increased backlog.
General, administrative and selling expenses increased by 8% (approximately
$14,000) compared to the three month period ended September 30, 1995. The
increase was due primarily to higher wages paid to administrative personnel, as
well as to increased attorney fees incurred in conjunction with the
implementation of a new stock option incentive plan and other ongoing corporate
legal matters. It is anticipated that selling and G & A expenses will level
off in the months ahead unless a period of sustained sales growth calls for the
hiring of additional personnel.
Net interest expense declined by 6% (approximately $3,500) compared to the
three months ended September 30, 1995. Although average aggregate borrowings
climbed substantially compared to a year ago (by about $250,000), the fact that
the CRA loan was (and continues to be) non-interest bearing served to reduce
the effective interest rate to approximately 9% at September 30, 1996 from
approximately 11% at September 30, 1995. Excluding the possible effects of
terms applicable to a loan refinance or a new credit line, the effective
interest rate should continue to decline in the months ahead, due to additional
CRA construction financing at 0%.
11
<PAGE> 12
NETWORKS ELECTRONIC CORP.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (Continued)
Backlogs as of September 30, 1996 were approximately $1,300,000 for the Bearing
Division and approximately $550,000 for the Ordnance Division. Although the
total backlog decreased by approximately $250,000 from September 30, 1995
amounts, it represented a substantial increase of about $550,000 from the level
achieved at June 30, 1996. Total backlogs have increased another $300,000
subsequent to September 30, 1996, further improving its book-to-bill ratio.
Liquidity and Capital Resources
The Company had working capital of approximately $770,000 at September 30,
1996, as compared to approximately $835,000 at June 30, 1996. The decline of
approximately $65,000 was due primarily to payments made on the Company's
long-term debt of approximately $43,000 during the September 1996 quarter, an
increase of approximately $57,000 in the retainer owed the construction
contractor on the Company's renovation of its Chatsworth building, and the
purchase and implementation of a new phone system costing about $15,000, all
net of pre-tax income for the quarter of approximately $49,000 (excluding debt
forgiveness and depreciation). With the Community Redevelopment Agency loan
commitment and the commencement of a 5 year tenant lease for a portion of the
Chatsworth facility, management believes that the Company can continue to
generate enough earnings to meet short and medium-term financing needs.
The Company's cash position increased by approximately $28,000 from June 30,
1996 levels, to about $127,000 at the September 30, 1996 balance sheet date.
The increase was largely related to the Company's increased diligence in the
collection of its accounts receivable. Management is continuing to seek the
refinance of its mortgage and the establishment of a line of credit to support
its operating requirements, the largest of which is a defined pension plan
contribution of approximately $160,000 due by March 1997 which, if not paid
timely, could result in the imposition of a 10% excise tax by the Internal
Revenue Service.
12
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Factors That May Affect Future Results and Financial Condition
Potential risks and uncertainties that could affect the Company's future
operating results and financial condition include, without limitation, the
following factors:
HISTORY OF LOSSES; VARIABILITY OF OPERATING RESULTS
The Company is in the process of emerging from bankruptcy protection. Despite
historical losses, the Company experienced its first operating profit in four
years during the year ended June 30, 1995, in the amount of approximately
$47,000, and a second consecutive operating profit during the year ended June
30, 1996 in the amount of approximately $175,000. The Company's revenues and
operating results have varied substantially from period to period. There can
be no assurance that the Company will be profitable in the future or that
future revenues and operating results will not also vary substantially. New
management has expended and continues to expend substantial time and resources
in attempting to resolve problems arising from the Company's financial
condition and to restore confidence in the Company. Although the research and
development expenditures of the Company have increased, its financial condition
limits its ability to engage in large scale research and development. Also,
the Company's financial condition has limited the ability of the Company to
modernize its plant and equipment which hinders the Company's marketing
efforts. Future revenues and profits, if any, will depend upon various
factors, including, but not limited to, management's ability to restore
confidence in the Company, continued market acceptance of the Company's current
products, the ability of the Company to develop distribution and marketing
channels and develop and introduce new products or to develop new markets for
its existing products and the successful implementation of its planned
marketing strategies. If the Company is not able to achieve its operating
objectives, the Company may find it necessary to reduce its expenditures for
sales, marketing, and research and development, or undertake other such actions
as may be appropriate, and may be otherwise unable to achieve its goals or
continue its operations.
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Factors That May Affect Future Results and Financial Condition (Continued)
COMPETITION
Certain of the Company's existing and potential competitors have substantially
greater financial, marketing and other resources than the Company. These
competitors have also been able to market their products successfully to the
Company's existing and potential customers in the defense and aerospace
industries. Increased competition could result in price reductions, reduced
margins and loss of market share, all of which could materially adversely
affect the Company. The Company has determined to follow a strategy of
continuing product development to the extent permitted by the financial
resources of the Company to protect its competitive position to the extent
practicable. There can be no assurance that the Company will be able to
maintain its position in the field or continue to compete successfully against
current and future sources of competition or that the competitive pressures
faced by the Company will not adversely affect its profitability or financial
performance.
TECHNOLOGICAL CHANGE
The markets for specialized bearings and ordnance products are characterized by
advances in technology. Accordingly, the Company's ability to compete in those
markets may depend in large part on its success in enhancing its existing
products and in developing new products. There can be no assurance that the
Company will succeed in such efforts or that any of its products will not be
rendered obsolete or uneconomical by technological advances made by others.
DEPENDENCE ON KEY CUSTOMERS
During the quarters ended September 30, 1996 and 1995, sales to the Department
of Defense by the Company constituted approximately 19% and 16%, respectively,
of the Company's sales. Sales to Hughes Missile Systems and Industria
Engineering accounted for approximately 22% and 16%, respectively, of Company
sales for the quarter ended September 30, 1995. A significant decline in sales
of any of these key customers could adversely affect the Company.
DEPENDENCE UPON DEFENSE INDUSTRY
The Company has been supplying components for United States defense programs
for over forty years. Reliance upon defense programs has certain inherent
risks, including the uncertainty of economic conditions, dependence on
Congressional appropriations and administrative allotment of funds, changes in
governmental policies that may reflect military and political developments and
other factors characteristic of the defense industry. The Company is unable to
predict the impact on defense appropriations for programs in which the
Company's products are incorporated.
14
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Factors That May Affect Future Results and Financial Condition (Continued)
PRODUCT LIABILITY AND RISK MANAGEMENT
As a manufacturer of ordnance products and specialized bearings for the defense
and aerospace industries, the Company is subject to the risk of claims arising
from injuries to persons or property. The Company maintains general liability
insurance but does not maintain product liability insurance. Although the
Company has instituted quality control procedures that it believes produce
products of the highest quality, the Company may become subject to future
proceedings alleging defects in its products.
NO EARTHQUAKE INSURANCE
The Company's principal executive offices are located in a facility owned by
the Company in Chatsworth, California - an area which was damaged in the 1994
Northridge, California earthquake. The Company does not currently carry
insurance against earthquake-related risks. The Company suffered approximately
$1.2 million in damages, costs and renovations to its facility resulting from
that earthquake, and recovered only approximately $384,000 from insurers as a
result of insured flood damage caused by the earthquake.
KEY PERSONNEL
The Company's success is highly dependent on the efforts and abilities of its
Chairman, David Wachtel. The loss of services of Mr. Wachtel could have
material adverse effect on the Company.
CONTROL OF COMPANY
The Mihai D. Patrichi Trust (the "Trust") presently owns of record
approximately 47.3% of the Company's outstanding voting stock. Accordingly,
the Trust is able to control the election of a majority of the directors, and,
therefore, the business and affairs of the Company and approve or disapprove
any corporate action submitted to a vote of the Company's shareholders, in each
case regardless of how other shareholders of the Company may vote. The
provisions of the Trust provide that the trustees act in a prudent manner to
dispose of the Trust's interest in the Company. In the matter of In Re: Mihai
D. Patrichi Trust (Case No. BP03796), now pending in the Superior Court of
California for the county of Los Angeles, Michael Patrichi, one of the
beneficiaries of the Trust, is attempting to remove and replace the co-trustees
of the Trust, Ileana Wachtel and Rodica Patrichi. Sale by the Trust of its
interest in the Company would effect a change in the control of the Company.
Sales of substantial amounts of Common Stock in the public market under Rule
144 or otherwise, or even the potential for such sales, could adversely affect
the prevailing market prices for the Common Stock and could impair the ability
to raise capital through the sale of its equity securities.
15
<PAGE> 16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Factors That May Affect Future Results and Financial Condition (Continued)
CONTRACTS
The Company generates substantially all of its revenues pursuant to procurement
contracts for custom designed or manufactured bearings or ordnance products.
The ability of the Company to generate additional revenues will depend upon its
ability to obtain additional contracts. Substantially all of the Company's
contracts are on a fixed-fee basis. Accordingly, the Company is subject to the
risk of cost overruns. Because the Company manufactures ordnance and
specialized bearings for the defense and aerospace industries, the Company is
subject to extremely stringent quality control standards and testing.
These standards are implemented through internal operational quality control
procedures of the Company and through customer audits. Furthermore, lot
acceptance test procedures ("LATs") are required by the Company's customers.
These LATs include environmental testing and detonation and non-detonation
tests. Generally, the Company's ordnance products are manufactured in batches
and then subjected to LATs under standards that result in rejection of an
entire manufactured batch if a single unit fails. From time to time, the
Company has experienced LATs failures resulting from human error or technical
problems. Occurrence of LATs failures of this type on large contracts could
adversely impact the revenues of the Company and no assurance can be given that
such failures will not occur in the future.
VOLATILITY OF WORKLOAD
To remain profitable, the Company is highly dependent on its ability to
maintain a suitably sized staff of qualified technical personnel commensurate
with a fluctuating volume of work. New contracts often arise at unscheduled or
unanticipated times. The Company endeavors to maintain adequate staff to
respond to these unscheduled opportunities. If the Company overestimates its
projected workload, the resulting financial burden can reduce profitability.
Occasionally, the Company is faced with the opposite problem - a shortage of
suitable technical personnel - or the funds to pay premium rates to obtain the
necessary skilled labor that is in short supply, and is unable to timely
perform contracts, potentially resulting in cost overruns or late delivery
penalties.
16
<PAGE> 17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Factors That May Affect Future Results and Financial Condition (Continued)
GOVERNMENTAL REGULATION
The Company's operations are subject to, and substantially affected by,
extensive federal, state and local laws, regulations, orders and permits, which
govern environmental protection, health and safety, zoning and other matters.
These regulations may impose restrictions on the Company's operations that
could adversely affect the Company's results, such as limitations on the
expansion of metals plating facilities of the Company, limitations on or
banning disposal of certain categories of waste, or mandates regarding the
disposal of hazardous waste generated by the Company's operations. Because of
heightened public concern, companies in the metals plating business, including
the Company, may become subject to judicial and administrative proceedings
involving federal, state or local agencies. These governmental agencies may
seek to impose fines on the Company or to revoke or deny renewal of the
Company's waste generation and disposal permits or licenses for violations of
environmental laws or regulations or to require the Company to remediate
environmental problems resulting from its operations, all of which could have a
material adverse effect on the Company. The Company may also be subject to
actions brought by individuals or community groups in connection with the
permitting or licensing of its operations, any alleged violations of such
permits and licenses, or other such matters.
PREMISES BUILD-OUT
The Company has commenced retrofitting and repairing of the north building of
its Premises which was damaged in the Northridge Earthquake. This project is
being funded by loans and grants from the Community Redevelopment Agency of the
City of Los Angeles. The Company has entered into a construction contract to
accomplish the retrofit and repair of the north building and anticipates that
the funding procured from the Community Redevelopment Agency will be sufficient
to fund all anticipated costs under the contract. However, the Company will be
required to fund any unanticipated cost overruns from operating reserves or
with additional financing. There can be no assurance that additional financing
would be available on terms acceptable to the Company. If the Company is
required to fund construction with its cash reserves, resulting cash
constraints could limit the Company's ability to improve the remainder of its
plant and equipment and to fund other operating requirements of the Company.
17
<PAGE> 18
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, 1996.
18
<PAGE> 19
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 12, 1996
19
<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-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 126,961
<SECURITIES> 0
<RECEIVABLES> 783,716
<ALLOWANCES> 5,000
<INVENTORY> 1,095,196
<CURRENT-ASSETS> 2,075,141
<PP&E> 7,239,421
<DEPRECIATION> 5,657,918
<TOTAL-ASSETS> 3,874,239
<CURRENT-LIABILITIES> 1,305,578
<BONDS> 2,754,595
0
0
<COMMON> 417,805
<OTHER-SE> (603,739)
<TOTAL-LIABILITY-AND-EQUITY> 3,874,239
<SALES> 929,383
<TOTAL-REVENUES> 1,005,322
<CGS> 681,741
<TOTAL-COSTS> 859,349
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,497
<INCOME-PRETAX> 94,476
<INCOME-TAX> 38,000
<INCOME-CONTINUING> 56,476
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,476
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
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