<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended June 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
incorporation or organization) Identification Number)
9750 De Soto Avenue
Chatsworth, California 91311
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (818) 341-0440
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange on
Title of Each Class Which Registered
<S> <C>
None None
</TABLE>
Securities registered pursuant to section 12(g) of the Act:
Common Stock $0.25 Par Value
Title of Class
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 / /
The aggregate market value of the shares of common stock (based on the closing
sales price of these shares on September 27, 1996) held by nonaffiliates of the
registrant was $605,794.
The number of shares outstanding of the registrant's common stock, $.25 par
value, was 1,671,221 at September 27, 1996.
1
<PAGE> 2
PART I
ITEM 1. BUSINESS
Principal Business
The Principal business of Networks Electronic Corp., hereinafter called the
"Company" or "Networks", is the design, fabrication, assembly and sale of high
technology components for aerospace and U.S. Government defense prime
contractors. The Company was incorporated in the State of California in October
1953. The Company operates two divisions: (1) U.S. Bearing Division whose
products are spherical, self-aligned, self-lubricating and specialized bearings
used chiefly in the aerospace industry, and (2) Ordnance Division whose products
include miniaturized electro-pyrotechnic devices such as switches,
initiator-igniters for missile subsystems, thermal relay switches, and glass-to-
metal seals used solely in the defense and aerospace industries. The products of
each division are sold by Company-employed sales engineers and representatives
to domestic and overseas customers.
Competition
The Company encounters varied degrees of competition depending upon the division
involved. The Bearing Division sells its product lines in competitive markets,
on the basis of a combination of price, delivery, and product quality. Many of
the Division's competitors are divisions or segments of large diversified
companies with financial resources greater than those of Networks. The Ordnance
Division sells its products on a less competitive basis than does the Bearing
Division, although they do compete with about 4-6 ordnance component
manufacturers with similar capacity to Networks' Ordnance Division. The
Company's two divisions sell a number of products for which they are the sole
source. See section entitled "Patents."
Customer Dependency
Its Bearing Division manufactures specialized bearings for sale to the defense
and aerospace industries either directly to the U.S. Government or to Government
prime contractors, such as: McDonnell Douglas and Lockheed Martin. Only the
Department of Defense (33%) and Industria Engineering (12%) contributed 10% or
more of the Bearing Division's revenues during the fiscal year ended June 30,
1996.
The Ordnance Division of the Company manufactures electro- pyrotechnic devices
for the defense and aerospace industries. Its products are sold to a few prime
contractors such as: Hughes Missile Systems and Textron. These customers
accounted for 33%, and 18%, respectively, of the Ordnance Division's revenues
for the fiscal year ended June 30, 1996. No other customer accounted for 10% or
more of the Ordnance Division's revenues.
2
<PAGE> 3
Backlog
The Company's backlog of unfilled orders at June 30, 1996 was approximately
$1,350,000, compared with $2,800,000 at June 30, 1995. The backlog at September
27, 1996 has increased to approximately $2,000,000.
Raw Materials
The principal raw materials used by the Company are readily available from many
sources. However, the Company is dependent upon the ability of its suppliers to
meet raw material specification requirements, quality standards, and delivery
schedules in order to fulfill the Company's commitments to its customers. To
date, the Company has not experienced any shortages of raw materials nor has it
stockpiled a significant amount of raw materials in anticipation of shortages.
Patents
Although the Company does have a substantial number of patents, it depends
primarily upon technical know-how, product technology and service to its
customers to protect its position.
Research and Development
During the last three fiscal years, the Company has engaged in limited
Company-sponsored research and development activities. Throughout the past year,
the Company has increased its research and development efforts in both
divisions. The estimated amount spent during the years ended June 30, 1996,
1995, and 1994 on such activities was approximately $97,000, $2,000, and
$24,000, respectively. A significant portion of the 1996 expenditures related to
the qualification process for new Ordnance devices.
Environmental Contingent Liabilities
Federal, state and local provisions which have been enacted or adopted
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, have had no adverse effect on
capital expenditures, earnings or the competitive position of the Company since
the previous year.
Employees
At June 30, 1996, the Company had approximately 64 employees, as compared with
59 at June 30, 1995.
Material Changes in Business
There have been no material changes in business done by the
Company since the previous year.
Lines of Business
The Company has been engaged in more than one line of business during its last
five fiscal years.
3
<PAGE> 4
Corporate Summary of Results by Division (In Thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bearing Division
Sales* $2,383 $1,895 $ 1,530 $ 3,067 $ 4,346
Pretax income (loss)** 212 1,117 (398) (1,407) (224)
Identifiable assets 1,984 2,133 1,759 2,399 3,639
Ordnance Division:
Sales* 1,550 1,112 1,253 1,543 2,249
Pretax income (loss)** 47 633 (146) (173) 157
Identifiable assets 1,298 1,042 844 1,283 1,845
Capital expenditures of each segment:
Bearings 181 28 2 37 34
Ordnance 138 17 3 7 6
</TABLE>
* No intersegment sales.
** Does not include interest expense in any of the five years
presented.
- --------------------------------------------------------------
Parents
The Mihai D. Patrichi Trust owns 790,383 shares (approximately 47%) and
beneficially controls 895,053 shares (approximately 54%) of the Company's common
stock. By reason of this ownership of such common stock, the Mihai D. Patrichi
Trust is deemed to be a parent of the Company for the purposes of the Securities
Act of 1934, as amended. The trust is administered by Ileana Wachtel (Mihai
Patrichi's daughter) and Rodica Patrichi (Mihai Patrichi's wife). There is no
such other person who owns 10% or more of the Company's common stock, and who
might be deemed a "parent" of the Company.
Bankruptcy Status
On July, 1993, the Company filed a voluntary petition for reorganization under
chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Central District of California, and subsequently operated its
business as a debtor- in possession, subject to the supervision of the
Bankruptcy Court. The order confirming the Company's plan for reorganization was
entered on November 9, 1994, contemplating full repayment of all pre-petition
liabilities over a twelve year period.
ITEM 2. PROPERTIES
The Company's administrative, engineering and manufacturing activities are all
performed from an 85,000 square foot building located on 7.25 acres of land in a
light industrial area of Chatsworth, California. Currently approximately 50,000
square feet are under renovation. Such facilities are adequate for the Company's
current manufacturing needs. Subsequent to June 30, 1996, the Company has leased
approximately 35,000 square feet of the premises under renovation to a third
party. See Note 17 of the notes to the Financial Statements. In January 1996,
the Company sold its residential condominium in Orlando, Florida (which was not
used for business).
ITEM 3. LEGAL PROCEEDINGS
See Note 16 of the notes to the financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were
submitted to a vote of security holders during the fourth quarter of the fiscal
year covered by this report.
4
<PAGE> 5
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
Price Range of Common Stock
The following table shows the range of transaction prices for trades of the
common stock in the over-the-counter market for the fiscal quarters indicated,
as reported by the OTC electronic bulletin board.
<TABLE>
<CAPTION>
- -------------------------------------
Year High Low
- -------------------------------------
<S> <C> <C>
1994
1st Quarter 0 5/16 0 1/16
2nd Quarter 0 5/16 0 1/16
3rd Quarter 0 5/16 0 1/16
4th Quarter 0 5/16 0 1/16
1995
1st Quarter 0 1/4 0 1/16
2nd Quarter 0 3/16 0 1/16
3rd Quarter 0 7/16 0 1/16
4th Quarter 0 5/8 0 1/16
1996
1st Quarter 1 1/2 0 5/8
2nd Quarter 1 1/2 0 1/2
3rd Quarter 1 3/4 1
4th Quarter 1 0 3/4
</TABLE>
- ----------------------------------------------------------------
Networks Electronic Corp. stock was formerly listed on NASDAQ,
the over-the-counter market, as NWRK. As of May 7, 1993, the
stock has been quoted on the OTC electronic bulletin board.
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
Approximate Number of
Record Holders (As of
Title of Class September 27, 1996)
- -----------------------------------------------------------------
<S> <C>
Common stock, $.25 par value 967*
</TABLE>
*Included in the number of stockholders of record are shares held
in "nominee" or "street" name.
- -----------------------------------------------------------------
Dividends
The Company has never paid cash dividends on its common stock. During each of
the years ended June 30, 1993 and 1992, respectively, a 5% common stock dividend
was declared and distributed to stockholders. No common stock dividends were
declared during any of the years ended June 30, 1996, 1995, and 1994. Payment of
future dividends will be within the discretion of the Company's Board of
Directors and will depend, among other factors, on retained earnings, capital
requirements and the operating and financial condition of the Company.
5
<PAGE> 6
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL HISTORY
(In thousands of dollars except per share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Years Ended June 30,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations
Sales $ 3,933 $ 3,007 $ 2,783 $ 4,610 $ 6,595
------- ------- ------- ------- -------
Net income (loss) 31 1,767 (800) (1,885) (260)
------- ------- -------
Net income (loss) per common share .02 1.11 (.50) (1.18) (.16)*
------- ------- ------- ------- -------
Financial position
Working capital (deficiency) $ 835 $ 1,128 $(1,004) $(2,173) $ (659)
------- ------- ------- ------- -------
Stockholders' (deficiency in
assets) equity (242) (32) (1,877) (887) 991
------- ------- ------- ------- -------
Total assets 3,282 3,175 2,603 3,682 5,484
------- ------- ------- ------- -------
Long-term debt 2,367 2,327 1,966 25 26
------- ------- ------- ------- -------
</TABLE>
No cash dividends have been paid or accrued during the past five years.
* Restated to reflect a 5% common stock dividend issued during the year ended
June 30, 1993.
- -----
Reference is made to the financial statements and notes thereto included
elsewhere herein.
6
<PAGE> 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1996 AND 1995
Results of Operations
Sales increased overall by approximately 31% to $3,933,000 during the year ended
June 30, 1996 from $3,007,000 in 1995. Both the Company's divisions enjoyed
strong sales gains, with the Bearing Division up approximately 26% and the
Ordnance Division up approximately 39%.
Gross margins in both divisions were down slightly, due to a series of factors,
resulting in a Company-wide decline to approximately 18.9% from 19.5% the
previous year. While the Company continues to attempt to cut costs, the impact
of normalizing wages did have an effect on the Company's margins, as compared
with the previous year. Additionally, the Ordnance Division diverted resources
toward the successful qualification of specific devices for a program that was
eventually canceled.
As anticipated, general and administrative expenses increased by approximately
5% ($29,000) during the year ended June 30, 1996, due mostly to the addition of
new staff and the continued implementation of the Company's wage normalization
policies.
Despite the cost pressures, the Company succeeded in posting its second
consecutive operating profit, after three years of losses. Operating income, in
fact, increased approximately $128,000 from the previous year to $175,000.
Interest expense was approximately 4% lower in 1996 than that of the previous
year, because of a reduction in average aggregate borrowings. Although the
interest rate environment remains favorable, interest expense may increase in
the coming fiscal year, as the Company's short-term borrowing needs are also
expected to increase.
Despite a limited research and development budget ($97,000 in 1996, and $2,000
in 1995) the Company has developed new products in both divisions. The Bearing
Division has been actively involved in designing, and recently qualified new
bearings for a Space Shuttle program. A number of new items have been designed
for a major aircraft manufacturer and the Company has been in conversation with
other OEMs in hopes of selling its parts directly to them.
Even though the Ordnance Division was adversely affected by a convenience
cancellation, it had significant success in qualifying new items. Over twenty
new switches were qualified, a redesigned cord cutter was qualified and a new
piston actuator was designed and qualified for another prime contractor.
7
<PAGE> 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company has accomplished an overall streamlining, and has improved
efficiency in its operations. A combination of new recruits and longer-term
employees rising through the ranks into management positions has allowed the
Company to develop a strong sense of cohesiveness, both internally and with its
existing customers. This "teaming concept," combined with improved automation,
is central to management's effort to provide value-added services to its
customer base.
Although the Company's backlog at June 30, 1996 (totalling about $1,350,000) was
diminished compared with the previous year, it is important to note that a
significant portion of the 1995 backlog was delinquent. In working with the
government on the PROCAS program, the Company has been successful in its efforts
to reduce its delinquencies.
Furthermore, there has been a recent increase in orders. Backlog has increased
by more than 40% (about $600,000) since year-end. The Company remains committed
to increasing its bookings and, in this regard, it has hired an established
sales representative, and continues to work with its distributors and OEMs to
help it secure new orders.
Another positive note relates to the rental of space in the north wing of the
Company's Chatsworth facility. The Company (lessor) has finalized a long-term
lease agreement which should net the Company more than $210,000 annually in
rental income for at least the next five years.
Liquidity and Capital Resources
The Company had working capital of approximately $835,000 at June 30, 1996 as
compared to working capital of approximately $1,128,000 at June 30, 1995, which
represented a decline of $293,000. The decrease was primarily due to a
difference in non-recurring receivables between the two years of $172,000, along
with an increase in the current portion of the Company's accrued pension
liability of $160,000 in the current year. This increase was a result of the
Company having received a waiver by IRS of the minimum funding standard for the
year ended June 30, 1995. Correspondingly, the Company's current ratio shrank
from 2.3 to 1.7. Excluding inventory, the ratio declined from 1.1 to 0.8. These
trends reflect the fact that the Company is having some temporary difficulty in
meeting its short-term cash obligations.
8
<PAGE> 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
The financing for the Company's rental project (as discussed above) is
particularly favorable. The Community Redevelopment Agency ("CRA") has provided
$1,300,000 for the project. This is a zero percent interest loan with no
payments for five years and level principal payments over the remaining twenty
years. Fifteen percent ($195,000) of this funding is a grant and will not have
to be paid back. This financing arrangement will save the Company approximately
$100,000 per year over the next twenty-five years as compared to a conventional
loan. In addition, the tenant will directly contribute $100,000 and lend the
Company up to $288,000 (at 10% per annum) to pay for the necessary construction
improvements.
With the CRA loan and grant commitment and the recent signing of its tenant
lease agreement at its Chatsworth facility, management believes that the Company
can generate enough earnings to meet medium term financing needs. Management is
seeking to refinance its mortgage and possibly establish a line of credit in the
near future to support current operating requirements. There can however, be no
assurances that management will be successful in its efforts.
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. Future revenues and
profits, if any, will depend upon various factors,
9
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition
(Continued)
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.
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.
10
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition
(Continued)
Dependence on Key Customers
During fiscal years 1996, 1995 and 1994, sales to the Department of Defense by
the Company constituted 20%, 29% and 24%, respectively, of the Company's sales.
Sales to Hughes Missile Systems accounted for approximately 13% of sales in
1996. Sales to Eagle-Picher Industries accounted for approximately 17% and 18%
os sales in 1995 and 1994, respectively. Industria Engineering accounted for
approximately 10% of sales in 1994. 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.
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.
11
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition
(Continued)
Key Personnel
The Company's success is highly dependent on the efforts and abilities of its
Chairman, David Wachtel and a number of key employees. The loss of services of
Mr. Wachtel or these key employees 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.
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-
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition
(Continued)
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 LAT failures resulting from human error or technical
problems. Occurrence of LAT 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.
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
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition
(Continued)
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.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
1995 AND 1994
Results of Operations
The Company's sales improved by approximately 8% to $3,007,000 during the year
ended June 30, 1995 from $2,783,000 in 1994. Approximately $1,863,000 (62%) of
sales for the 1995 year occurred during the six month period between January 1,
1995 and June 30, 1995 (corresponding to the arrival of a new management team),
which represented an increase of approximately $620,000 from the comparable six
month period of the prior year.
The Company still felt the effects of cutbacks in defense spending and in the
aerospace industry. In spite of these pressures, the Company's combined backlog
increased about 40% to approximately $2,800,000 at June 30, 1995 from $2,000,000
at June 30, 1994, boosted in large measure by management's efforts to revive
past relationships.
The Company continued with its austerity program in compliance with its chapter
11 reorganization plan, reducing its selling, general, and administrative
expenses by approximately 51% ($560,000) from amounts incurred in the 1994 year.
Almost $400,000 of this reduction reflected both a significant decline in staff
payroll expenses and considerable savings in legal costs due to the winding down
of court filings related to the Company's chapter 11 status.
A series of non-recurring income items contributed approximately $1,700,000 to
pre-tax income during 1995. Specifically, the Company had a lawsuit judgement
reduced from approximately $820,000 to $53,000 and settled other litigation at
or below expected amounts. The Company sold raw land in Palm Desert for
approximately $581,000, resulting in a pre-tax profit of about $537,000, and its
insurance carrier agreed to settle claims arising from the Northridge Earthquake
for approximately $385,000.
Interest expense was approximately 6% lower in 1995 than that of the previous
year. A reduction in average aggregate borrowings was partly offset by a higher
effective interest rate on the Company's mortgage note.
Liquidity and Capital Resources
The Company had working capital of approximately $1,128,000 at June 30, 1995 as
compared to a deficit of $1,004,000 at June 30, 1994, which represented an
improvement of $2,132,000. The improvement was primarily due to approximately
$1,700,000 in non-recurring items, along with the reclassification of
approximately $383,000 of the Company's pension plan obligation as a long-term
liability.
15
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountant 19
Balance Sheets - Assets 20
Balance Sheets - Liabilities and Stockholders'
Deficiency in Assets 21
Statements of Operations 22
Statement of Stockholders' Deficiency in Assets 24
Statements of Cash Flows 26
Notes to the Financial Statements 30
</TABLE>
16
<PAGE> 17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
I have audited the accompanying balance sheets of Networks Electronic Corp. as
of June 30, 1996 and 1995 and the related statements of operations,
stockholders' deficiency in assets and cash flows for each of the three years in
the period ended June 30, 1996. My audits also included the financial statement
schedule listed in the Index at Item 14. These financial statements and
financial statement schedule are the responsibility of the Corporation's
management. My responsibility is to express an opinion on these financial
statements and financial statement schedule based on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, such financial statements present fairly, in all material
respects, the financial position of Networks Electronic Corp. as of June 30,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles. Also, in my opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Hurley & Company
September 20, 1996
Granada Hills, California
17
<PAGE> 18
NETWORKS ELECTRONIC CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
June 30,
------------------------------
Assets 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 99,114 $ 117,494
---------- ----------
Receivables:
Trade accounts receivable 758,159 543,984
Less allowance for doubtful
accounts 5,000 5,000
---------- ----------
753,159 538,984
---------- ----------
Receivable from officer -- 27,228
Other receivables 68,000 240,187
Inventories, less reserve for
obsolescence of $160,000 and
$150,000, respectively 1,043,256 1,061,946
Prepaid expenses and deposits 19,577 8,040
Deferred income taxes,
current portion 9,469 15,096
---------- ----------
Total current assets 1,992,575 2,008,975
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Land 131,773 131,773
Buildings and improvements 2,194,703 1,994,439
Machinery and equipment 4,335,926 4,345,213
---------- ----------
6,662,402 6,471,425
Less accumulated depreciation 5,627,847 5,553,265
---------- ----------
1,034,555 918,160
---------- ----------
DEFERRED INCOME TAXES,
NON-CURRENT PORTION 254,795 248,306
---------- ----------
$3,281,925 $3,175,441
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 19
NETWORKS ELECTRONIC CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
--------------------------
Liabilities and Stockholders'
Deficiency in Assets 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt $ 120,000 $ 121,953
Note payable, related party -
current portion 50,667 50,667
Accounts payable 535,013 417,773
Customer advances and deposits -- 11,585
Curr. portion of pre-petition debt:
Adjudication award payable 56,059 52,525
Accrued pension liability 188,800 28,800
Other payables 31,315 20,000
Accrued income taxes payable -- 6,276
Other accrued expenses 175,840 171,608
----------- -----------
Total current liabilities 1,157,694 881,187
----------- -----------
LONG-TERM DEBT:
Long-term debt, less
current maturities 1,890,236 1,863,363
Note payable, related party 29,555 80,222
Long-term portion of
accrued pension liability 446,850 382,931
----------- -----------
COMMITMENTS AND CONTINGENCIES
(NOTES 12 AND 16) -- --
----------- -----------
STOCKHOLDERS' 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
in 1996 and 1995, respectively 417,805 399,055
Additional paid-in capital 280,985 285,672
Accumulated deficit (573,734) (604,318)
Stock subscriptions receivable (14,063) --
Pension liability adjustment (353,403) (112,671)
----------- -----------
Total stockholders'
deficiency in assets (242,410) (32,262)
----------- -----------
$ 3,281,925 $ 3,175,441
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 20
NETWORKS ELECTRONIC CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Years Ended June 30,
-----------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES $ 3,932,925 $ 3,007,473 $ 2,783,065
COST OF SALES 3,189,521 2,421,310 2,043,834
----------- ----------- -----------
GROSS PROFIT 743,404 586,163 739,231
SELLING, ADMINISTRATIVE AND OTHER 568,560 539,523 1,099,795
----------- ----------- -----------
OPERATING INCOME (LOSS) 174,844 46,640 (360,564)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (229,291) (239,661) (255,013)
Reduction of jury award -- 767,126 -
Gain (loss) on
disposition of assets (7,273) 545,007 -
Insurance and legal settlements -- 384,687 80,000
Earthquake expense -- -- (273,498)
Other, net 58,489 6,789 10,330
CRA debt forgiveness 33,125 -- -
----------- ----------- -----------v
(144,950) 1,463,948 (438,181)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION (BENEFIT) 29,894 1,510,588 (798,745)
INCOME TAX PROVISION (BENEFIT) (690) (256,326) 800
----------- ----------- -----------
NET INCOME (LOSS) $ 30,584 $ 1,766,914 $ (799,545)
=========== =========== ===========
NET INCOME (LOSS) PER SHARE $ .02 $ 1.11 $ (.50)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,647,515 1,596,221 1,596,221
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 21
NETWORKS ELECTRONIC CORP.
STATEMENT OF STOCKHOLDERS' DEFICIENCY IN ASSETS Years Ended June 30, 1996, 1995,
and 1994
<TABLE>
<CAPTION>
Common Stock Additional Stock
-------------------- Paid-in Subscriptions Accumulated Adjustments
Shares Amount Capital Receivable Deficit To Equity Total
--------- -------- ---------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1993 1,596,221 $399,055 $285,672 $ - $(1,571,687) $ - $ (886,960)
Net loss - - - - (799,545) - (799,545)
Pension liability adjustment - - - - - (190,085) (190,085)
--------- -------- -------- -------- ----------- --------- -----------
Balance, June 30, 1994 1,596,221 399,055 285,672 - (2,371,232) (190,085) (1,876,590)
Net income - - - - 1,766,914 - 1,766,914
Pension liability adjustment - - - - - 77,414 77,414
--------- -------- -------- -------- ----------- --------- -----------
Balance, June 30, 1995 1,596,221 399,055 285,672 - (604,318) (112,671) (32,262)
Net income - - - - 30,584 - 30,584
Stock options exercised 75,000 18,750 (4,687) (14,063) - - -
Pension liability adjustment - - - - - (240,732) (240,732)
--------- -------- -------- -------- ----------- --------- -----------
Balance, June 30, 1996 1,671,221 $417,805 $280,985 $(14,063) $ (573,734) $(353,403) $ (242,410)
========= ======== ======== ======== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 22
NETWORKS ELECTRONIC CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Years Ended June 30,
-----------------------------------------------
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 30,584 $ 1,766,914 $ (799,545)
--------- ----------- -----------
Adjustments to reconcile
net income (loss) to net cash
provided by (used in) operations:
Noncash items included in
net income (loss):
Depreciation and amortization 130,307 176,048 222,184
Deferred income taxes (862) (263,402) -
Loss (gain) on disposition
of assets 7,273 (545,007) -
Changes in:
Accounts receivable and refundable
income taxes (14,760) (325,915) 206,863
Inventories 18,690 (212,695) 249,234
Prepaid expenses and deposits (11,537) 7,410 29,996
Accounts payable and accrued
expenses 119,508 (643,480) (7,416)
Income taxes payable (6,276) -- -
Customer advances and deposits (11,585) (9,966) (260,874)
--------- ----------- -----------
TOTAL ADJUSTMENTS 230,758 (1,817,007) 439,987
--------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 261,342 (50,093) (359,558)
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (318,602) (44,587) (4,935)
Proceeds from disposition of assets 64,627 588,603 -
--------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (253,975) 544,016 (4,935)
--------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 23
NETWORKS ELECTRONIC CORP.
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Credit line pay-off -- (570,000) -
Mortgage debt reduction (143,125) (121,766) (12,015)
Proceeds from revolving line of
credit and long-term borrowings 168,045 19,662 900
Proceeds from note payable,
related party -- 152,000 -
Payments on note payable,
related party (50,667) (21,111) -
--------- --------- ----------
NET CASH USED IN
FINANCING ACTIVITIES (25,747) (541,215) (11,115)
--------- --------- ----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (18,380) (47,292) (375,608)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 117,494 164,786 540,394
--------- --------- ----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 99,114 $ 117,494 $ 164,786
========= ========= ==========
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities
- -------------------------------------------------------------------
In the fiscal year ended June 30, 1996, the Company recognized an additional
minimum pension liability in the amount of $240,732 by increasing stockholders'
deficiency in assets for the same amount.
In the fiscal year ended June 30, 1995, the Company reduced an additional
minimum pension liability previously recognized (representing the excess of the
accumulated benefit obligation over the fair value of plan assets and
liabilities already accrued) by $77,414 and reduced stockholders' deficiency in
assets for the same amount.
In the fiscal year ended June 30, 1994, the Company recognized an additional
minimum pension liability in the amount of $190,085 by increasing stockholders'
deficiency in assets for the same amount.
23
<PAGE> 24
NETWORKS ELECTRONIC CORP.
NOTES TO THE FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit and highly liquid
debt instruments with original maturities of three months or less. Substantially
all cash is on deposit with one financial institution.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
Property and Equipment
Depreciation is computed by using the declining-balance and straight-line
methods over the estimated service lives of the assets which range from three
years for tooling to forty years for the building. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the accounts, and any resulting gain or loss is recognized in income for
the period. The cost of maintenance and repairs is charged to income as
incurred; significant renewals and improvements are capitalized. Deduction is
made for retirements resulting from renewals or improvements.
Income Taxes
Deferred income taxes are provided for the estimated tax effects of timing
differences between financial and taxable income with respect to depreciation,
pension costs, California franchise tax, reserve for inventory obsolescence,
capitalized inventory costs, and other items.
Pension Plan
The Company funds accrued pension costs on its noncontributory pension plan
covering substantially all employees. Unrecognized prior service cost,
previously amortized over thirty years, was expensed in the year ended June 30,
1993, due to the fact that participants' accrued benefits under the plan were
frozen as of August 31, 1992. (See Note 9).
24
<PAGE> 25
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Income (Loss) Per Share
Net income (loss) per share has been computed based on the weighted average
common shares outstanding during each year.
Research and Development
Research and development expenditures are expensed in the period incurred.
Reclassifications
Certain amounts from prior years have been reclassified to conform to the
current year's presentation.
Use of Estimates
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.
Impairment of Long-Lived Assets
During the year ended June 30, 1996, the Company elected early adoption of SFAS
No. 121, "Accounting for the Impairment of Long- Lived Assets and Long-Lived
Assets to be Disposed Of." Historically, the Company has complied with the
requirements of SFAS No. 121. This statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Also, in general, long-lived
assets and certain identifiable intangibles to be disposed of should be reported
at the lower of carrying amount or fair value less cost to sell.
Accounting for Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," will be adopted by the
Company during the year ended June 30, 1997 as required by this statement. When
adopted, SFAS No. 123 will not have any effect on the Company's financial
position or results of operations, but may require the Company to provide
expanded disclosure.
25
<PAGE> 26
2. BASIS OF PRESENTATION
An order confirming the Company's plan for reorganization under chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
Central District of California was entered on November 9, 1994, which
contemplates full repayment of all pre-petition liabilities over a twelve year
period. These obligations, consisting primarily of the unfunded portion of the
Company's defined benefit pension plan, totalled approximately $450,000 (as
adjusted downward by approximately $750,000 due to a favorable ruling on a
wrongful termination claim). Additionally, the Company's term loan with its bank
was extended for six years (see Notes 5 and 16).
3. INVENTORIES
<TABLE>
<CAPTION>
Inventories consisted of:
June 30,
------------------------
1996 1995
------------------------
<S> <C> <C>
Raw materials $ 133,818 $ 162,352
Work in process 376,998 574,006
Finished goods and components 742,091 491,810
---------- ----------
1,252,907 1,228,168
Less progress payments (49,651) -
Less applied against customer deposit - (16,222)
Less reserve for obsolescence (160,000) (150,000)
---------- ----------
$1,043,256 $1,061,946
========== ==========
</TABLE>
26
<PAGE> 27
4. LONG-TERM DEBT, NOTES PAYABLE
Long-term debt and notes payable consisted of the following:
<TABLE>
<CAPTION>
June 30,
------------------------
1996 1995
- --------------------------------------------------------------------
<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 monthly
at a reference rate (10.50% at June
30, 1996). A balloon payment for
$1,342,528 is due in June 2000 (See
Note 5) $1,822,528 $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. Paid-off in January
1996 - 23,126
Note payable to Community Redevelopment
Agency, City of Los Angeles ("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 187,708 19,662
---------- ----------
2,010,236 1,985,316
Less current maturities 120,000 121,953
---------- ----------
$1,890,236 $1,863,363
========== ==========
</TABLE>
27
<PAGE> 28
4. LONG-TERM DEBT, NOTES PAYABLE (Continued)
Maturities of long-term debt in each of the next five years are as follows:
<TABLE>
<CAPTION>
Year ending June 30,:
<S> <C>
1997 $ 120,000
1998 120,000
1999 120,000
2000 1,462,528
2001 1,564
Thereafter 186,144
----------
$2,010,236
==========
</TABLE>
5. CREDIT AGREEMENTS
The Company reached an agreement with its bank, as confirmed by the Company's
plan for reorganization entered on November 9, 1994. Terms of the agreement
include the payment of interest at the bank's reference rate plus 2.25%
(currently 10.50%), $10,000 per month principal payments until maturity, and a
balloon payment of $1,342,528 in June 2000. Additionally, in the event of
default, the entire outstanding principal balance of the note will become
immediately due and payable and will bear interest equal to 4 percentage points
above the applicable interest rate as defined above.
The Los Angeles City Council approved the funding of $800,000 through the
Community Redevelopment Agency for the retrofit and repair of the Company's
damaged building at the Chatsworth site. The damage was sustained as a result of
the Northridge Earthquake in January 1994. Of the total commitment, 15% is a
grant and 85% is an interest-free loan to be repaid over 20 years, beginning 5
years from the date of the loan. A predevelopment loan agreement was entered
into in June 1995 in the amount of $98,925, to pay the Company's costs incurred
in preparing construction drawings and related documents, as well as in
obtaining necessary approvals and permits. $19,662 of these costs were incurred
by June 30, 1995.
Total predevelopment costs were rolled over into the finalized loan package when
the Agency Loan Agreement was signed in April 1996.
Of the $800,000 initial commitment, $220,833 had been expended at June 30, 1996,
leaving an unutilized balance of $579,167. Of the disbursed funds at June 30,
1996, $33,125 (15%) was recognized as forgiveness of debt income, and the
balance of $187,708 as long-term debt.
28
<PAGE> 29
5. CREDIT AGREEMENTS (Continued)
Subsequent to June 30, 1996, the CRA approved an additional funding amount of
$500,000, which was amended onto the initial Agency Loan Agreement, thereby
bringing the total CRA commitment to $1,300,000 (of which $195,000 is a grant).
The Company's average aggregate borrowings were $2,047,000, $2,217,000, and
$2,658,000, at weighted average interest rates of 10.7%, 10.7%, and 9.6% in
1996, 1995, and 1994, respectively. The average aggregate borrowings and
weighted average interest rate computations include a note payable to a related
party during the years ended June 30, 1996 and 1995, respectively. Interest paid
amounted to $225,301, $242,196, and $252,640 during the fiscal years ended June
30, 1996, 1995, and 1994, respectively.
6. 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, and interest paid on the note during the
years ended June 30, 1996 and 1995 amounted to $10,947 and $6,230, respectively.
The outstanding loan balance at June 30, 1996 was as follows:
<TABLE>
<S> <C>
Total loan outstanding $ 80,222
Less current portion 50,667
--------
Long-term portion $ 29,555
========
The debt matures as follows:
Year ending June 30,:
1997 $ 50,667
1998 29,555
--------
$ 80,222
========
</TABLE>
29
<PAGE> 30
7. STOCK OPTION PLAN
Stock Option Plan
The Company has a stock option plan, as amended October 15, 1974, (the "Stock
Option Plan") under which options to purchase up to an aggregate of 185,200
shares of the Company's common stock may be granted to key employees at a price
not less than the fair market value at the date of grant. Options issued under
the Stock Option Plan will expire unless exercised within five years of the
grant date. During the year ended June 30, 1993, the Company issued 20,000 stock
options (10,000 each) under the Stock Option Plan to an officer and a director,
exercisable at a price of $1.00 per share. The officer's stock options have
since expired due to cessation of employment. The director's options, if not
exercised, will expire on October 22, 1996, due to his resignation from the
board in July 1996.
The Company's Board of Directors has adopted the the Networks Electronic Corp
1996 Stock Incentive Plan (the "1996 Plan") which provides for the grant of up
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. As of September 27, 1996 no options have been granted under the
1996 Plan.
Options Granted Outside of the Company's Stock Option Plan
During the year ended June 30, 1995, the Company's Board of Directors awarded
75,000 fully-vested stock options to its chief executive officer, exercisable at
a price of $.1875 per share, and 2,500 additional stock options (500 each) to
five other key employees, exercisable at a price of $.25 per share. The exercise
price, in each instance, corresponded to the mid-point of the closing bid and
ask price of the Company's common stock on the date of grant, which was November
1, 1994 for the chief executive officer's options and March 31, 1995 for the
other key employees' options.
The chief executive officer exercised his 75,000 options during the year ended
June 30, 1996; accordingly, at the year-end balance sheet date, the Company
recorded a stock subscription receivable for $14,063. A total of 1,000 stock
options awarded to two of the five key employees have expired due to cessation
of employment; the remaining 1,500 stock options will fully vest after three
years of continuous employment. All of these options will expire if not
exercised within five years from the date of the grant.
No other options are currently outstanding nor have any been previously granted.
30
<PAGE> 31
8. INCOME TAXES
Income taxes (benefits) consisted of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------
1996 1995 1994
- ----------------------------------------------------------------
<S> <C> <C> <C>
Federal income
(benefit) $ (1,490) $(161,591) $ -
California franchise tax
(benefit) 800 (94,735) 800
-------- --------- ---------
$ (690) $(256,326) $ 800
======== ========= =========
Current $ 172 $ 7,076 $ 800
Deferred (862) (263,402) -
-------- --------- ---------
$ (690) $(256,326) $ 800
======== ========= =========
</TABLE>
The differences between the effective income tax rate and the statutory federal
income tax rate are as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------
1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C>
Computed statutory federal
income tax (benefit) $ 4,484 $513,600 $(271,573)
Increases (decreases)
resulting from:
California franchise tax,
net of federal tax
benefit 1,391 93,727 528
Tax credits (12,104) - -
Rate differential due to
expected utilization of
federal NOL carryforward
to future year at higher
effective tax rate 5,680 - -
Valuation allowance, due to
unlikelihood of future
realization of deferred
tax benefit 10,000 (864,802) 270,464
Other (10,141) 1,149 1,381
---------- --------- ---------
Income tax provision
(benefit) $ (690) $(256,326) $ 800
========== ========= =========
</TABLE>
31
<PAGE> 32
8. INCOME TAXES (Continued)
Net income taxes paid (refunded) amounted to $9,500, $800, and $(34,814) during
the fiscal years ended June 30, 1996, 1995, and 1994, respectively.
The Company's current income tax provision (benefit) is based on current year
taxable income (loss). The deferred income tax provision (benefit) is based on
the temporary differences between the book basis and tax basis of assets and
liabilities at the end of each year and the expected reversal of those
differences. The deferred tax provision (benefit) in 1996, 1995, and 1994 is as
follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------
1996 1995 1994
- ------------------------------------------------------------------
Change in temporary difference:
<S> <C> <C> <C>
Depreciation $ (2,901) $ (11,959) $ (27,076)
Inventory obsolescence (4,330) 32,042 (25,980)
Pension plan (1,521) 1,761 15,604
Litigation 19,253 347,321 (15,155)
Other (44) (510) (4,010)
Accrued vacation and sick leave (3,511) (4,008) 2,258
Uniform capitalization 4,327 17,910 904
Alternative minimum tax credits 628 (6,276) -
Other tax credits (12,104) - -
California franchise tax 382 (47,600) 53,734
Utilization of federal and
California NOL carryforwards - 272,719 -
Benefit of federal and
California NOL carryforwards (11,041) - (270,743)
Valuation allowance, due to
estimate of future
realization 10,000 (864,802) 270,464
-------- --------- ---------
Deferred inc. tax provision
(benefit) $ (862) $(263,402) $ -
======== ========= =========
</TABLE>
At June 30, 1996 the Company had an unused federal net operating loss
carryforward of approximately $660,000, with $630,000 expiring in the year
ending June 30, 2009 and the balance of $30,000 in the year ending June 30,
2011. Also at June 30, 1996, the Company had an unused California net operating
loss carryforward of approximately $880,000, with $520,000 expiring in the year
ending June 30, 1998, $10,000 expiring in the year ending June 30, 2001,and the
balance of $350,000 expiring in the year ending June 30, 2004.
32
<PAGE> 33
8. INCOME TAXES (Continued)
Additionally, the Company has a federal general business credit carryover of
approximately $29,000, with $21,000 expiring in the year ending June 30, 2007
and the balance of $8,000 expiring in the year ending June 30, 2111, and a
California tax credit carryover of approximately $15,500, with $4,000 expiring
in the year ending June 30, 2006, $8,500 expiring in the year ending June 30,
2007, and the remaining $3,000 expiring in the year ending June 30, 2111.
Significant components of the Company's deferred tax liabilities and assets at
June 30, 1996 and June 30, 1995 are:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Liabilities
Depreciable property, plant and equipment $ 61,245 $ 64,146
California franchise tax 50,136 49,754
--------- ---------
Gross deferred tax liabilities 111,381 113,900
--------- ---------
Assets
Inventory 85,053 85,050
Accounts receivable 2,165 2,165
Pension plan 121,661 120,140
Other employee benefits 24,726 21,216
Litigation 3,490 22,743
Alternative minimum tax credits 5,648 6,276
Other tax credits 45,585 33,481
NOL carryforwards 293,627 282,585
Other 3,690 3,646
--------- ---------
Gross deferred tax assets 585,645 577,302
--------- ---------
Deferred income tax asset 474,264 463,402
Valuation allowance (210,000) (200,000)
--------- ---------
Deferred income tax asset - net $ 264,264 $ 263,402
========= =========
The respective deferred tax benefits at the June 30, 1996 and June 30, 1995
balance sheet dates are presented as follows:
1996 1995
--------- ---------
Current portion $ 9,469 $ 15,096
Non-current portion 254,795 248,306
--------- ---------
Total $ 264,264 $ 263,402
========= =========
</TABLE>
33
<PAGE> 34
9. EMPLOYEE RETIREMENT PLAN
The Company has a defined benefit pension plan covering substantially all of its
employees. The plan has been modified through amendment, with all participants'
accrued benefits frozen as of August 31, 1992. The freeze was necessitated
primarily as a means of reducing annual pension funding requirements.
Pension expense was $32,311, $24,733, and $10,628 for the years ended June 30,
1996, 1995, and 1994, respectively, and was determined in accordance with the
requirements of Statement of Financial Accounting Standards (SFAS) No. 87
"Employers' Accounting for Pension Plans." Periodic pension costs for the years
ended June 30, 1996, 1995, and 1994 are summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost $ - $ - $ -
Interest cost 193,558 182,659 184,531
Actual return on
plan assets (116,942) (283,845) (31,304)
Net amortization and
deferral (44,305) 125,919 (142,599)
--------- --------- ---------
Total pension expense $ 32,311 $ 24,733 $ 10,628
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
The status of the plan is as follows: 1996 1995
<S> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefits $(2,449,049) $(2,334,957)
Nonvested benefits (28,429) (2,775)
----------- -----------
Accumulated benefit obligation (2,477,478) (2,337,732)
Effect of future salary increases - -
----------- -----------
Projected benefit obligation (2,477,478) (2,337,732)
Fair value of plan assets 1,841,828 1,926,001
----------- -----------
Projected benefit obligation in
excess of fair value of plan assets (635,650) (411,731)
Unrecognized net loss 353,403 112,671
----------- -----------
Accrued pension cost (282,247) (299,060)
Minimum pension adjustment (353,403) (112,671)
----------- -----------
Accrued pension liability $ (635,650) $ (411,731)
=========== ===========
</TABLE>
34
<PAGE> 35
9. EMPLOYEE RETIREMENT PLAN (Continued)
A minimum pension liability equal to the excess of the accumulated benefit
obligation over the fair value of plan assets and liabilities already accrued
was reflected in the balance sheets at June 30, 1996 and 1995 through the
recording of an increase to stockholders' deficiency in assets in the amount of
$240,732 and $112,671, respectively.
The expected long-term rate of return on plan assets was 9% for both 1996 and
1995. The discount rate used in determining the actuarial present value of
accumulated benefit obligations was 8% for both 1996 and 1995. There was no rate
of increase in future compensation levels at both June 30, 1996 and June 30,
1995 because of the plan curtailment.
Since the court confirmation of its Chapter 11 reorganization plan in November
1994, the Company continues to make pension plan contributions in the amount of
$2,400 per month. A balloon payment of approximately $25,000 was made in March
1996 to prevent the assessment of a federal excise tax and further penalties for
the plan year ended June 30, 1994. Additionally, the IRS granted the Company's
request for waiver of the minimum funding standard for the plan year ended June
30, 1995. The waiver allows for the deferral of approximately $240,000 in plan
contributions (plus interest), which are now to be paid over a statutory five
year period, beginning with the plan year ended June 30, 1996.
In order to meet the current year's minimum funding requirement, a balloon
payment of approximately $160,000 (including approximately $59,000 owed as a
result of the June 30, 1995 funding waiver) will be required in March 1997. The
total 1995/96 minimum annual funding requirement is approximately $183,000,
which increased approximately $19,000 because the mortality assumption table was
changed from the 1971 to the 1983 year. However, future annual minimum
contributions should decrease significantly over the next several years, due to
the expiration of the five year amortization period for actuarial plan losses
sustained in prior years.
35
<PAGE> 36
10. BUSINESS SEGMENTS
The principal business of the Company is the design, fabrication, assembly and
sale of high technology assemblies for aerospace and defense prime contractors.
The Company operates two divisions: (1) U.S. Bearing Division whose products are
spherical, self- aligned, self-lubricating and specialized bearings used chiefly
in the aircraft and space industries, and (2) Ordnance Division whose products
include miniaturized electro-pyrotechnic devices such as switches,
initiator-igniters for missile subsystems, thermal relay switches, and
glass-to-metal seals used solely for the defense and aerospace industries.
<TABLE>
<CAPTION>
Income (Loss) Before
Income Tax Provision Capital
Sales* (Benefit) Assets Expenditures Depreciation
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1996:
Bearings $2,383,133 $ 211,870 $1,984,455 $180,328 $100,269
Ordnance 1,549,792 47,315 1,297,470 138,274 30,038
---------- ----------- ---------- -------- --------
$3,932,925 259,185 $3,281,925 $318,602 $130,307
========== ========== ======== ========
Interest expense 229,291
-----------
$ 29,894
===========
Year ended June 30, 1995:
Bearings $1,895,408 $ 1,116,982 $2,132,782 $ 28,090 $114,508
Ordnance 1,112,065 633,267 1,042,659 16,497 61,540
---------- ----------- ---------- -------- --------
$3,007,473 1,750,249 $3,175,441 $ 44,587 $176,048
========== ========== ======== ========
Interest expense 239,661
-----------
$ 1,510,588
===========
Year ended June 30, 1994:
Bearings $1,530,141 $ (397,826) $1,758,816 $ 2,302 $163,878
Ordnance 1,252,924 (145,906) 844,372 2,633 58,306
---------- ----------- ---------- -------- --------
$2,783,065 (543,732) $2,603,188 $ 4,935 $222,184
========== ========== ======== ========
Interest expense 255,013
-----------
$ (798,745)
===========
</TABLE>
* All sales were made to unaffiliated customers and there
were no intersegment sales.
11. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 1996, the Company recorded significant
adjustments to its accounts which resulted in reducing net income by
approximately $50,000. The adjustments were principally to correct the Company's
year-end inventory accounts.
36
<PAGE> 37
12. EMPLOYMENT AGREEMENTS, RELATED PARTY RECEIVABLE
The Company has an employment agreement with David Wachtel, its President and
Chief Executive Officer. The agreement provides for minimum annual compensation
of $150,000 for a period of three years, expiring April 30, 1998. The Company
previously had an employment agreement with Mihai D. Patrichi, the Company's
Founder, and former President and Chief Executive Officer, who passed away in
November 1994. The agreement provided for minimum compensation of $180,000 per
year until the end of Mr. Patrichi's life. However, effective September 1994,
Mr. Patrichi took a salary reduction to $153,000 per year as a condition of the
Company's chapter 11 reorganization plan. The Board of Directors has also agreed
to pay all medical and dental insurance premiums for its corporate officers,
plus the deductible expense portions operative under the respective plans.
During the year ended June 30, 1996, the Company's outstanding advances
previously made to Mr. Patrichi (totalling $27,228) were repaid by the Mihai D.
Patrichi Trust. Interest earned (generally at 7% per annum) on the officer
receivable amounted to $0, $1,781, and $1,773 for the fiscal years ended June
30, 1996, 1995, and 1994, respectively.
13. MAJOR CUSTOMERS
Sales to the Department of Defense accounted for approximately 20% of sales in
1996, 29% of sales in 1995, and 24% of sales in 1994. Sales to Hughes Missile
Systems accounted for approximately 13% of sales in 1996. Sales to Eagle-Picher
Industries accounted for approximately 17% and 18% of sales in 1995 and 1994,
respectively. Industria Engineering accounted for approximately 10% of sales in
1994. No other customer had sales exceeding 10% of total revenue during the
years ended June 30, 1996, 1995, and 1994, respectively.
14. GAINS AND LOSSES ON DISPOSITIONS OF PROPERTY
During the year ended June 30, 1996, the Company sold fully depreciated
machinery for $13,500. In January 1996, the Company completed the sale of its
Florida condominium property, recognizing a loss of $20,773. The net proceeds
from the transaction were approximately $51,000. Of this amount, approximately
$22,500 was utilized to pay off the related mortgage debt, with the balance used
for general administrative purposes.
37
<PAGE> 38
14. GAINS AND LOSSES ON DISPOSITIONS OF PROPERTY (Continued)
In September 1994, the Company sold its Palm Desert property, consisting of two
acres of unimproved land, for approximately $580,603 (net of $34,397 in fees and
expenses), recognizing a gain of approximately $537,007 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. The Company also reported a gain of $8,000
from the sale of a fully depreciated automobile.
15. INSURANCE CLAIMS
The Company has a claim pending with its insurance company pertaining to an
accident occurring at the plant in February 1996. The claim seeks reimbursement
for electrical repairs required to restore power to the facility and for loss of
business due to the temporary shut-down of the plant. The insurance company has
not, as yet, specifically agreed to pay for any of these costs. The matter
should be resolved in the December 1996 quarter. The Company also has a claim
pending with its insurance company regarding a theft of raw material which took
place in June 1996. During the year ended June 30, 1995, the Company recorded
income from its insurance carrier totalling $384,687, representing
reimbursements in full settlement of the Company's claim for losses sustained to
its property (primarily parts and tooling inventories). These losses resulted
from water damage to the Company's premises which had occurred following the
Northridge Earthquake. No receivable was previously booked at June 30, 1994, due
to the fact that covered amounts were not quantifiable or estimable until midway
through the year ended June 30, 1995.
16. LITIGATION
During the previous several years, the Company had litigation pending based upon
complaints filed by several former officers and employees of the Company
alleging wrongful termination and other causes of action. Such complaints sought
substantial general and punitive damages. In June of 1993, despite finding in
favor of the Company and its president on a claim of intentional infliction of
emotional distress, a jury awarded a former officer of the Company approximately
$820,000 for past and future earnings and benefits, after concluding that
Networks Electronic Corp. breached an implied employment agreement.
38
<PAGE> 39
16. LITIGATION (Continued)
However, in May 1995, the Honorable Alan Ahart, United States Bankruptcy Judge
for the Central District of California, ruled, in any event, that damages
arising from a wrongful termination claim filed against a chapter 11 debtor were
limited to one year of compensation under the employment contract. Accordingly,
the Company wrote-down its recognized obligation at June 30, 1995 by
approximately $767,000, resulting in an estimated total adjudication award
payable of $52,525. The outstanding balance at June 30, 1996 was $56,059,
inclusive of $3,534 in accrued interest at an annual rate of 4%. The Company's
insurance carrier may participate to cover all or part of this liability.
Regarding the other claims, negotiated settlements were reached. Networks agreed
to settle these cases by making payments totalling $40,000 over a period of one
to three years. The balance remaining on these claims at June 30, 1996 was
approximately $14,000.
In another matter, the Company was the plaintiff in a suit against a prime
contractor. This case was also settled, resulting in a pre-tax gain to the
Company of $100,000 for the year ended June 30, 1994.
The Company, during its normal course of business, may be subjected from time to
time with legal proceedings against it. Management does not expect that the
ultimate outcome of any current claims will have a material adverse effect on
the Company's financial statements.
39
<PAGE> 40
17. SUBSEQUENT EVENTS
(a) In August 1996 the Company received a $100,000 loan from its Vice
President, secured by accounts receivable. The note matures on
September 1, 1997, with interest payable monthly at an annual rate
of 13%.
(b) The Company had a time and materials contract with a prime
contractor to produce squib switches. In September 1995, the
contractor canceled the balance of the contract for convenience.
Total revenue previously recognized under the agreement (which
included a 15% profit guarantee) was approximately $239,000.
Discussions have continued over the past year in an attempt to
reach a negotiated settlement for additional amounts due the
Company under the agreement. The contractor has made a proposal to
pay the Company a total of approximately $45,000 plus settlement
costs of approximately $30,000. The $75,000 has been recorded as a
trade account receivable in the financial statements at June 30,
1996. Management is hopeful of obtaining an additional amount upon
final resolution.
(c) 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 5 years. Additionally,
the lessee will contribute 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.
40
<PAGE> 41
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information as of June 30, 1996 is provided with respect to each
director:
<TABLE>
<CAPTION>
Term as
Director
Name of Director, Age Expires in Business Experience
and Position December (1) During Past Five Years
- -------------------------------------------------------------------
<S> <C> <C>
David Wachtel, 36 1996 He is the son-in-law of the
Chairman of the Board, Company's founder, Mihai
Chief Executie Officer, Patrichi. He was
President, Managing Partner at Chief
Financial Officer Investech Systems (Jan 1993
-Apr 1995), was previously
President of Synergetic
Solutions (Jul 1991-Jan
1993). He served as MIS
Manager at the Company
(April 1990-July 1991)
Barry Bartholomew, 45 1996 He is Managing Attorney of
(None) Barry Bartholomew &
Associates. Formerly he
was a Partner at Knapp,
Petersen & Clarke. Mr.
Bartholomew resigned as a
Director of in July 1996.
Glenn Linderman, 37 1996 He is Assistant Vice
(None) President of Glendale
Federal Bank, FSB (since
Jan 1996). He previously
served as Vice President of
Libra Investments Inc.
(Feb 1992-Dec 1995) and
Columbia Savings & Loan
(Feb 1988-Jan 1992)
Ileana Wachtel, 36 1996 She is a trustee of the
(None) Mihai D. Patrichi Trust
is the daughter of the
Company's founder, Mihai D.
Patrichi, and wife of David
Wachtel. She is a
political consultant
involved in political
research and media strategy.
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(Continued)
<S> <C> <C>
Rodica Patrichi, 57 1996 She was the wife of Mihai
(None) Patrichi and is a trustee
of the Mihai D. Patrichi
Trust.
- -------------------------------------------------------------------
</TABLE>
(1) Directors serve until the next annual meeting of stockholders and until
their successors are elected. However, Mr. Bartholomew resigned in July
1996.
(2) See below with respect to business experience of executive officers of the
Company.
The names, ages and positions of all of the executive officers of the Company
for the year ended June 30, 1996 are listed below, along with their business
experience during the past five years. Officers are appointed annually by the
Board of Directors at the meeting of Directors immediately following the annual
meeting of the shareholders. There are no arrangements or understandings between
any officer and any other person pursuant to which the officer was selected.
<TABLE>
<CAPTION>
Business Experience
Name, Age and Position During Past Five Years
- -------------------------------------------------------------------
<S> <C>
David Wachtel, 36 Chairman since 1994. Responsible
Chairman of the Board, primarily for the formation of
Chief Executive Officer, corporate policy including
President, Chief planning and finance,
Financial Officer research and development;
supervisor of client relations.
Edwin J. Turner, 63 Appointed in August 1983.
Executive Vice President, Responsible for the Bearing
Secretary Division sales and administration;
prior to this was responsible for
new product engineering and
development for Valley Todeco
from 1979 to 1982. Retired in
February 1996.
Mohammad Tabassi, 48 Vice President since 1994.
Vice President Manager of the Ordnance Division
since 1993. Other duties include
engineering and price quoting
functions. Joined the Company in
January 1987 as Ordnance Quality
Test Engineer.
</TABLE>
42
<PAGE> 43
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table provides an overview of each item of
compensation paid, earned, or awarded to the CEO and the other most highly paid
executive officers of the Company for the fiscal years ended June 30, 1996,
1995, and 1994:
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------ ----------------------------------
Awards Payouts
---------------------- --------
Name of Individual Other Restricted
and Annual Stock Options/ LTIP All Other
Principal Position Year Salary Bonus Compensation Awards SARs Payments Compensation
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David Wachtel 1996 $149,989* $ 0 $ 5,742 (1) $0 0 $0 $0
----
CEO 1995 35,884 865 16,283 (2) 0 75,000 0 0
----
Mihai D. Patrichi 1996 0 0 18,130 (3) 0 0 0 0
----
CEO (deceased) 1995 71,849 0 19,445 (4) 0 0 0 0
----
1994 252,585 0 82,029 (5) 0 0 0 0
----
Edwin J. Turner 1996 49,043 2,000 2,025 (6) 0 0 0 0
----
Executive Vice President 1995 80,326 692 0 0 500 0 0
----
(retired) 1994 81,864 0 0 0 0 0 0
----
Mohammad Tabassi 1996 72,841 1,000 0 0 0 0 0
----
Vice President 1995 70,621 606 0 0 500 0 0
----
</TABLE>
No other executive officers were employed by the Company at June 30, 1996, 1995,
or 1994.
* Currently employed under a three year executive employment agreement
expiring April 30, 1998, calling for an annual base salary of $150,000
during the term of the agreement. Entitled to a minimum of three weeks
vacation per year, along with Company-paid benefits for both self and
dependents under any Executive Benefit Plan.
(1) Includes medical-related benefits of $5,742.
(2) Includes consulting fees of $9,500, director fees of $4,000, and
medical-related benefits of $2,783.
(3) Includes medical-related benefits of $18,130.
(4) Includes medical-related benefits of $19,445.
(5) Includes medical-related benefits of $68,576 and other personal benefits of
$13,453.
(6) Includes medical-related benefits of $501 and a retirement gift of $1,524.
43
<PAGE> 44
ITEM 11. EXECUTIVE COMPENSATION (Continued)
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Potential Realizable Value at Assumed
Annual Rates of Stock Price Appreciation
Individual Grants for Option Term
- ------------------------------------------------------------------------------------------- -------------------------------------
Name of Individual % of Total Options/ Number of Securities
and SARs Granted to Underlying Exercise or Expiration
Principal Position Employees in Fiscal Year Options/SARs Granted Base Price Date 5% 10%
- ------------------------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
David Wachtel N/A N/A N/A N/A N/A N/A
CEO
Edwin J. Turner N/A N/A N/A N/A N/A N/A
Executive Vice President
(retired)
Mohammad Tabassi N/A N/A N/A N/A N/A N/A
Vice President
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Name of Individual Options/SARs at FY-End Options/SARs at FY-End
and Shares Acquired Value
Principal Position on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David Wachtel 75,000 $42,187 0/ 0 $ 0/$ 0
CEO
Edwin J. Turner 0 0 0/ 0 (1) 0/ 0
Executive Vice President
(retired)
Mohammad Tabassi 0 0 0/500 0/ 250
Vice President
</TABLE>
(1) A total of 10,500 stock options granted in previous years expired due to
cessation of employment.
44
<PAGE> 45
ITEM 11. EXECUTIVE COMPENSATION (Continued)
Retirement benefits payable under the Company's defined benefit pension plan
have been frozen since August 31, 1992. Accrued annual benefits payable at
retirement age under the plan are set forth in the following pension plan table,
which does not incorporate vesting or joint and survivor factors. Amounts
reported are straight-life annuity amounts, which are not offset by social
security.
<TABLE>
<CAPTION>
Years of Service
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Remuneration 5 10 15 20 25 30
- ------------
$ 50,000 $ 3,333 $ 6,667 $10,000 $13,333 $16,667 $ 20,000
75,000 5,000 10,000 15,000 20,000 25,000 30,000
100,000 6,667 13,333 20,000 26,667 33,333 40,000
125,000 8,333 16,667 25,000 33,333 41,667 50,000
150,000 10,000 20,000 30,000 40,000 50,000 60,000
175,000 11,667 23,333 35,000 46,667 58,333 70,000
200,000 13,333 26,667 40,000 53,333 66,667 80,000
225,000 15,000 30,000 45,000 60,000 75,000 90,000
250,000 16,667 33,333 50,000 66,667 83,333 100,000
</TABLE>
Additional pension benefits for credited service in excess of 30 years generally
do not accrue. Prospective benefits payable to executive officers under the
Company's defined benefit pension plan are applicable as follows:
<TABLE>
<CAPTION>
Name of Individual Covered Compensation Estimated Credited Service
- ------------------ -------------------- --------------------------
<S> <C> <C>
David Wachtel $ 0 (*) 0
Mihai D. Patrichi (deceased) 235,527 (**) 40
Edwin J. Turner 88,224 16
Mohammad Tabassi 53,962 6
</TABLE>
(*) Not eligible for plan participation due to plan benefit freeze at August
31, 1992.
(**) Beneficiary (wife), a current , is receiving $48,184 per year for life,
based on 100% joint and survivor factors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act requires the Company's executive
officers, directors and persons who own more than ten percent of a registered
class of the Company's equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC").
Executive officers, directors and greater-than-ten percent stockholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
received by it and written representations
45
<PAGE> 46
ITEM 11. EXECUTIVE COMPENSATION (Continued)
from certain reporting persons that they have complied with the relevant filing
requirements, the Company believes that during the year ended June 30, 1996, all
relevant Section 16(a) filing requirements were complied with.
Compensation of Directors
During the year ended June 30, 1996, the Board of Directors met four times. All
of the Company's directors attended each of the meetings. The Company paid fees
totalling $16,000, which consisted of $4,000 each to Barry Bartholomew, Glenn
Linderman, Rodica Patrichi, and Ileana Wachtel, respectively. During the year
ended June 30, 1995, the Board of Directors met four times. The Company paid
fees totalling $13,000, which consisted of $5,000 to Barry Bartholomew, $4,000
to David Wachtel (as noted above), $2,000 to Glenn Linderman, and $1,000 each to
Ileana Wachtel and Rodica Patrichi. In addition, Glenn Linderman provided
financial consulting services to the Company in the amount of $9,281. During the
year ended June 30, 1994, fees paid totalled $12,000, consisting of $6,000 each
to Barry Bartholomew and David Wachtel. Barry Bartholomew resigned as a director
of the Company effective July 22, 1996.
Compensation of Executives
For information concerning employment agreement of Chief Executive Officer,
David Wachtel see Note 12 to Financial Statements included in Item 8.
46
<PAGE> 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
At September 27, 1996 there were six persons known to the Company who owned of
record or beneficially as much as 5% of the outstanding shares of its voting
common stock, $.25 par value. The following table reflects these holdings, as
well as the number of the Company's common shares owned directly or indirectly
by each of the Company's directors, by each of the officers specified in the
summary compensation table above, and by all directors and officers as a group.
In addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire the shares (for example, upon exercise of an
option) within 60 days of the date as of which the information is provided; in
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned by such
person (and only such person) by reason of these acquisition rights. As a
result, the percentage of outstanding shares of any person as shown in the
following table does not necessarily reflect the person's actual voting power at
any particular date.
<TABLE>
<CAPTION>
Amount
Name and Address Beneficially Percentage
Category of Beneficial Owner Owned of Class(4)
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Director Ileana Wachtel 797,660 (1)(2) 47.4%
9750 De Soto Avenue
Chatsworth, CA 91311
Director Rodica Patrichi 791,486 (2) 47.1%
73-095 Shadow Mt. Drive
Palm Desert, CA 92260
Director/Officer David Wachtel 75,000 (3) 4.5%
9750 De Soto Avenue
Chatsworth, CA 91311
Director Barry Bartholomew 10,000 (5) 0.6%
(resigned) 701 N. Brand Blvd.
Suite 800
Glendale, CA 91203
Director Glenn Linderman 0 0.0%
2101 Robinson, #1
Redondo Beach, CA 90278
Officer Edwin J. Turner 0 0.0%
(retired) 22015 Prairie St.
Chatsworth, CA 91311
Officer Mohammad Tabassi 14,213 0.8%
19442 Romar St.
Northridge, CA 91324
------- -----
All directors and officers as a group
(7 persons) (7) 897,976 53.4%
======= =====
</TABLE>
47
<PAGE> 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT (Continued)
(1) Ileana Wachtel is the wife of David Wachtel, the CEO of Networks Electronic
Corp.
(2) For each of these individuals, approximately 156,076 shares (166,076 shares
for Ileana Patrichi) are being held in the Mihai D. Patrichi trust (a total
of 790,383 shares) which currently has voting power over the holdings and in
which Ileana Wachtel and Rodica Patrichi are co-trustees.
(3) Does not include shares of common stock held by the Mihai D. Patrichi Trust
and controlled by trustees including Mr. Wachtel's spouse, Ileana Wachtel, a
beneficiary.
(4) Based on 1,671,221 shares of common stock outstanding as of September 27,
1996, plus 10,000 exercisable stock options.
(5) Includes 10,000 shares issuable upon exercise of currently exercisable
options.
(6) Ileana Wachtel and Rodica Patrichi are co-trustees along with an unrelated
third party of a committee which has voting power over these shares.
(7) Includes 10,000 shares of common stock which are exercisable or which will
become exercisable within 60 days of September 27, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) During the year ended June 30, 1996, the Company's outstanding
advances previously made to Mr. Patrichi (totalling $27,228) were
repaid by the Mihai D. Patrichi Trust. Interest earned (generally at
7% per annum) on the officer receivable amounted to $0, $1,781, and
$1,773 for the fiscal years ended June 30, 1996, 1995, and 1994,
respectively.
(b) During the year ended June 30, 1994, the Company's previous president
charged the Company $3,000 for the use of space in his home to
exclusively conduct Company business.
48
<PAGE> 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(Continued)
(c) In August 1996 the Company received a $100,000 loan from its Vice
President, Mohammed Tabassi, secured by accounts receivable. The note
matures on September 1, 1997, with interest payable monthly at an
annual rate of 13%.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) (1) The following financial statements are included in Part II, Item 8:
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Report of Independent Certified Public
Accountant 19
Financial Statements:
Balance Sheets -- June 30, 1996 and 1995 20
Statements of Operations --
Years Ended June 30, 1996, 1995, and
1994 22
Statement of Stockholders' Deficiency
in Assets --
Years Ended June 30, 1996, 1995, and 1994 24
Statements of Cash Flows --
Years Ended June 30, 1996, 1995, and
1994 26
Notes to the Financial Statements 30
(2) The following financial statement schedule
for the years 1996, 1995, and 1994 is submitted
herewith:
Schedule VIII -- Valuation and Qualifying
Accounts 57
</TABLE>
All other schedules are omitted because they are not required, inapplicable, or
the information is otherwise shown in the financial statements or notes thereto.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the Registrant during the
last quarter of the period covered by this report.
49
<PAGE> 50
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS Years Ended June 30, 1996,
1995, and 1994
<TABLE>
<CAPTION>
Balance, Charged to Charged to
Beginning Costs and Other Balance, End
of Year Expenses Accounts Deductions of Period
- ----------------------------------------------------------- ----------------------------------------
<S> <C> <C>
1996
Allowance for doubtful accounts $ 5,000 $ 4,745 $ - $ 4,745 (1) $ 5,000
======== ======== ========= ======== ========
Reserve for slow-moving inventory $150,000 $ 10,000 $ - $ - $160,000
======== ======== ========= ======== ========
1995
Allowance for doubtful accounts $ 5,000 $ 2,250 $ - $ 2,250 (1) $ 5,000
======== ======== ========= ======== ========
Reserve for slow-moving inventory $224,000 $(74,000) $ - $ - $150,000
======== ======== ========= ======== ========
1994
Allowance for doubtful accounts $ 5,000 $ - $ - $ - $ 5,000
======== ======== ========= ======== ========
Reserve for slow-moving inventory $164,000 $ 60,000 $ - $ - $224,000
======== ======== ========= ======== ========
</TABLE>
- -------
(1) Uncollectible accounts receivable written off
50
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Networks Electronic Corp.
(Registrant) has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized:
NETWORKS ELECTRONIC CORP.
By: David Wachtel
DAVID WACHTEL
Chairman of the Board,
Chief Executive Officer,
President,
Chief Financial Officer
Date: 10/14/96
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
David Wachtel Date: 10/14/96
- ----------------------
David Wachtel
Glenn Linderman Date: 10/14/96
- ----------------------
Glenn Linderman
Ileana Wachtel Date: 10/14/96
- ----------------------
Ileana Wachtel
Rodica Patrichi Date: 10/14/96
- ----------------------
Rodica Patrichi
51
<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> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 99,114
<SECURITIES> 0
<RECEIVABLES> 826,159
<ALLOWANCES> 5,000
<INVENTORY> 1,043,256
<CURRENT-ASSETS> 1,992,575
<PP&E> 6,662,402
<DEPRECIATION> 5,627,847
<TOTAL-ASSETS> 3,281,925
<CURRENT-LIABILITIES> 1,157,694
<BONDS> 2,366,641
0
0
<COMMON> 417,805
<OTHER-SE> (660,215)
<TOTAL-LIABILITY-AND-EQUITY> 3,281,925
<SALES> 3,932,925
<TOTAL-REVENUES> 4,024,539
<CGS> 3,189,521
<TOTAL-COSTS> 3,758,081
<OTHER-EXPENSES> 7,273
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 229,291
<INCOME-PRETAX> 29,894
<INCOME-TAX> (690)
<INCOME-CONTINUING> 30,584
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,584
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
