<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended September 30, 1997 COMMISSION FILE NUMBER 0-1817
NETWORKS ELECTRONIC CORP.
-------------------------------------------------------------------
(exact name of registrant as specified in its charter)
CALIFORNIA 95-1770469
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation of organization) Number)
9750 De Soto Avenue, Chatsworth, California 91311
-----------------------------------------------------------------
(Address or principal executive offices)
(818) 341-0440
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
-------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of business of
CLASS 1,671,221
- ----------------------------- -------------------------------
Common Stock - $.25 par value Outstanding at November 7, 1997
1
<PAGE> 2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
NETWORKS ELECTRONIC CORP.
BALANCE SHEET
September 30, 1997 and June 30, 1997
<TABLE>
<CAPTION>
Sept. 30, June 30,
1997 1997
(unaudited) (unaudited)
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 211,647 $ 185,144
Trade accounts receivable, net 737,004 707,709
Other receivables 49,530 79,354
Inventories, net 1,369,556 1,189,802
Prepaid expenses and deposits 76,017 39,832
Deferred income taxes 24,000 24,000
---------- ----------
Total current assets 2,467,754 2,225,841
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Land and improvements 138,773 131,773
Building and improvements 3,511,150 3,438,250
Machinery and equipment 4,367,555 4,367,555
---------- ----------
8,017,478 7,937,578
Less accumulated depreciation 5,754,592 5,723,480
---------- ----------
Property and equipment, net 2,262,886 2,214,098
---------- ----------
DEFERRED INCOME TAXES,
NON-CURRENT PORTION 82,571 119,571
DEFERRED CHARGES, NET 75,347 81,152
---------- ----------
Total assets $4,888,558 $4,640,662
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
NETWORKS ELECTRONIC CORP.
BALANCE SHEET
September 30, 1997 and June 30, 1997
<TABLE>
<CAPTION>
Sept. 30, June 30,
1997 1997
(unaudited) (unaudited)
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt $ 237,000 $ 220,000
Note payable, related party -
current portion 100,000 100,000
Accounts payable 520,818 479,384
Customer advances and deposits 2,834 2,834
Curr. portion of pre-petition debt:
Adjudication award payable 40,488 41,951
Accrued pension liability 274,279 279,079
Other payables 29,997 29,997
Income taxes payable 800 -
Other accrued expenses 178,782 190,262
---------- ----------
Total current liabilities 1,384,998 1,343,507
---------- ----------
LONG-TERM DEBT:
Long-term debt, less current
maturities 3,099,044 3,042,193
Accrued pension liability 369,209 366,209
---------- ----------
Commitments and Contingencies - -
---------- ----------
STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS):
Common stock, par value $.25 per
share; authorized 10,000,000
shares, issued and outstanding
1,671,221 shares 417,805 417,805
Additional paid-in capital 280,985 280,985
Accumulated deficit (265,557) (412,111)
Stock subscriptions receivable (14,063) (14,063)
Pension liability adjustment (383,863) (383,863)
---------- ----------
Total stockholders' equity
(deficiency in assets) 35,307 (111,247)
---------- ----------
Total liabilities and stockholders'
equity (deficiency in assets) $4,888,558 $4,640,662
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
NETWORKS ELECTRONIC CORP.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, September 30,
1997 1996
------------------ ------------------
<S> <C> <C>
Sales $1,222,442 $ 929,383
Cost of sales 856,626 681,741
---------- ----------
Gross profit 365,816 247,642
Selling, adminis-
trative and other
operating expenses 160,408 177,608
---------- ----------
Operating income 205,408 70,034
Other income (exp.):
CRA debt forgiveness - 75,939
Rental income, net 45,590 -
Interest and non-
operating expenses,
net (66,644) (51,497)
---------- ----------
Income before
income taxes 184,354 94,476
Provision for
income taxes 37,800 38,000
---------- ----------
Net income $ 146,554 $ 56,476
========== ==========
Net income
per share $ .09 $ .03
========== ==========
Average weighted
number of shares
outstanding 1,671,221 1,671,221
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE> 5
NETWORKS ELECTRONIC CORP.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, September 30,
1997 1996
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 146,554 $ 56,476
--------- ---------
Adjustments to reconcile net income
to net cash used in
operating activities:
Non-cash items included
in net income:
Depreciation and
amortization 36,917 30,071
Deferred income taxes 37,000 37,200
Changes in:
Receivables 529 42,443
Inventories (179,754) (51,940)
Prepaid expenses and deposits (36,185) (45,222)
Accounts payable and
accrued expenses 28,491 18,375
Income taxes 800 309
Accrued pension liability (1,800) 7,500
--------- ---------
Total adjustments (114,002) 38,736
Net cash provided by
operating activities 32,552 95,212
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
NETWORKS ELECTRONIC CORP.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, September 30,
1997 1996
------------------ ------------------
<S> <C> <C>
Cash flows from investing activities:
Capital expenditures $ (79,900) $(577,019)
--------- ---------
Net cash used in
investing activities (79,900) (577,019)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings 129,900 430,320
Proceeds from notes payable,
related parties - 122,000
Mortgage debt reduction (30,000) (30,000)
Other payments of long-term debt (26,049) -
Payments on notes payable,
related parties - (12,666)
--------- ---------
Net cash provided by
financing activities 73,851 509,654
--------- ---------
Net increase in
cash and cash equivalents 26,503 27,847
Cash and cash equivalents
at beginning of period 185,144 99,114
--------- ---------
Cash and cash equivalents
at end of period $ 211,647 $ 126,961
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ - $ -
========= =========
Interest paid $ 67,821 $ 50,764
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly its
financial position and the results of its operations and cash flows for
the periods shown.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The results of
operations for the three month period are not necessarily indicative of
the results to be expected for a full year of operations.
2. INVENTORIES
Inventories are valued at the lower of cost (FIFO) or market. The
inventories at September 30, 1997 and June 30, 1997 consisted of the
following:
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
(unaudited) (unaudited)
---------- ----------
<S> <C> <C>
Raw materials $ 108,516 $ 93,843
Work in process 831,267 523,711
Finished goods and components 624,773 752,248
--------- ----------
1,564,556 1,369,802
Less reserve for obsolescence (195,000) (180,000)
--------- ----------
Total $1,369,556 $1,189,802
========== ==========
</TABLE>
7
<PAGE> 8
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
3. LONG-TERM DEBT
At September 30, 1997 and June 30, 1997, the Company's long-term debt
consisted of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Note payable to bank, secured by
deed of trust on land and building,
principal payable in monthly
installments of $10,000 through
June 2000, with interest payable at
a reference rate plus 2.25% (10.75%
at both September 30, 1997 and
June 30, 1997, respectively). A
balloon payment is due in June 2000. $1,672,528 $1,702,528
Note payable to Community
Redevelopment Agency ("CRA"),
non-interest bearing construction
loan, secured by second deed of
trust on land and building, no
real estate, no principal payments
required through August 2001, with
level monthly principal payments of
$4,604 applicable over 20 years
through August 2021. 1,105,000 1,105,000
Note payable to lessee, secured by
third deed of trust on land and
building and assignment of rents,
principal payable in monthly
installments of $4,716 through March
2002, with interest payable at an
annual rate of 10.0%. 254,639 185,635
</TABLE>
8
<PAGE> 9
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
3. LONG-TERM DEBT (Continued)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Note payable to financial institution,
secured by machinery and equipment,
principal payments in monthly
installments of $4,167 along with
interest at a reference rate plus
2.75% (11.25% at both September 30,
1997 and June 30, 1997, respectively)
through March 1999, with a balloon
payment for the balance also due
in March 1999. 275,000 237,500
Note payable to finance company,
secured by telephone equipment,
payable in monthly installments of
$656 including interest at an annual
rate of approximately 17.3%. Matures
in October 1999. 12,389 14,453
Note payable to vendor, secured by
office equipment, payable in monthly
installments of $395 including
interest at an annual rate of 12.4%.
Matures in December 2001. 16,488 17,077
---------- ----------
3,336,044 3,262,193
Less current maturities 237,000 220,000
---------- -----------
Total $3,099,044 $3,042,193
========== ==========
</TABLE>
9
<PAGE> 10
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
4. NOTES PAYABLE, RELATED PARTIES
(a) In January 1995, the Company received a $152,000 loan from the
estate of its former president and chief executive officer, secured by
specific machinery and equipment. The loan was 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. In March 1997, the Company obtained other financing and
paid off the remaining principal balance of $42,222. Interest expense
on this note during the three months ended September 30, 1996 was
$1,835.
(b) In August 1996 the Company's vice president loaned the Company
$100,000 at an annual interest rate of 13%, secured by the Company's
accounts receivable. Interest is payable monthly with the principal
fully due and payable on September 1, 1997. As of November 7, 1997, the
principal had not yet been repaid. Interest expense on this loan during
the three months ended September 30, 1997 and 1996 amounted to $3,216
and $1,353, respectively.
(c) In September 1996 a director advanced the Company $22,000 for a fee
of $200. The money was subsequently repaid by the Company in October
1996.
5. STOCK OPTION PLAN
The Company's Board of Directors adopted the Networks Electronic Corp.
1996 Stock Incentive Plan (the "1996 Plan"), providing 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 was
submitted and approved by the shareholders of the Company at the annual
meeting of shareholders held on December 13, 1996.
6. INCOME TAXES
During the quarter ended September 30, 1997, the Company reduced its
income tax provision by $37,000, corresponding to a reduction in
valuation allowance applied against the Company's net deferred tax
benefit. This reduction reflects the increased likelihood of the
Company utilizing its net operating loss carryforward.
10
<PAGE> 11
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
7. LEASE AGREEMENT
In March 1997, the Company leased out approximately 35,000 square feet
of its Chatsworth facility. The lease agreement calls for monthly base
rent to be $17,850, with approximately 2 1/2 months free and a cost of
living increase every 18 months over the initial 62 month lease period.
The tenant also reimburses the Company for pro-rata utilities, property
taxes, and insurance. The lessee has an option to extend the original
lease term for an additional 60 months. Net rental income for the three
months ended September 30, 1997 was $45,590.
Additionally, the tenant reimbursed the Company for $23,175 in costs
incurred in connection with negotiating the lease arrangement,
contributed $100,000 toward the Company's cost of constructing
improvements to its Chatsworth property, and agreed to loan the Company
up to $288,000 at an annual interest rate of 10% to fund additional
improvements. At September 30, 1997 and June 30, 1997, the outstanding
balance on the loan commitment was $254,639 and $185,635, respectively.
The loan is being amortized monthly over 5 years (with level principal
payments currently $4,716), with the monthly payment netted against the
lessee's rent. Inclusive of loan payments previously made totaling
$12,636, the remaining borrowing capacity at September 30, 1997 was
approximately $20,725.
8. FORGIVENESS OF DEBT
During the three months ended September 30, 1996, the Community
Redevelopment Agency ("CRA") disbursed funds in the amount of
approximately $506,260 for the retrofit and repair of the Company's
damaged building at its Chatsworth site. The damage was sustained as a
result of the Northridge Earthquake in January 1994. Of this
commitment, 15% or approximately $75,939 was a grant and was recorded
as forgiveness of debt income for the period. By June 30, 1997, the
entire $1,300,000 CRA commitment was expended (including a second phase
in the amount of $500,000 pertaining to the tenant lease agreement
effective March 1997), resulting in cumulative forgiveness of debt
income of $195,000.
11
<PAGE> 12
NETWORKS ELECTRONIC CORP.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Company sales for the three months ended September 30, 1997 increased 32% to
$1,222,000 from $929,000 for the comparable period of the prior year. Bearing
Division sales, comprising approximately 56% of the current sales mix, increased
by 39% and Ordnance Division sales increased by 24%. The large increase in sales
in the Bearing Division was due to both a recent influx in orders and improved
production scheduling, allowing the Company to reduce shipping delays and to
more efficiently plan work orders. It is anticipated that this higher level of
sales activity will be sustained throughout the remainder of the current fiscal
year.
The increase in sales volume now being achieved is reflected in the overall
backlog of orders, which is up over $1,500,000 from the same period a year
before.
Gross profits during the quarter ended September 30, 1997 improved to 29.9% from
26.7% in the quarter ended September 30, 1996. Margins in the Ordnance division
were improved over the same period last year as a result of efficiencies in
production, while bearings margins, under pressure from cost increases and
capacity limitations, were down when compared to the same period a year before.
General and administrative costs actually declined by 10% (approximately
$17,000) compared to the three month period ended September 30, 1996, due mostly
to a decrease in legal and professional fees associated with the implementation
of a new stock option incentive plan, the winding down of chapter 11 bankruptcy
proceedings, and the completion of a tenant lease agreement. However, the
possibility of sales growth in the months ahead, along with the Company's
ongoing wage normalization policy, could serve to push G & A expenses higher in
the months ahead. Operating revenue during the quarter ended September 30, 1997
was over $205,000, representing an increase of $135,000 from the prior year.
This positive trend, complemented by the surge in new orders, provides further
evidence that the Company is about to exit its stabilization phase and enter a
new growth phase, in keeping with Management's long-range reorganization plan.
Non-operating income decreased due to recognition of approximately $76,000 in
forgiveness of debt income during the quarter ended September 30, 1996. The debt
forgiveness arose from the Community Redevelopment Agency's commitment to fund
earthquake repairs. Completion of the earthquake repairs also allowed the
Company to lease a portion of the building to another enterprise, bringing in
approximately $45,000 in net rental income during the quarter ended September
30, 1997. The lease calls for net rental income of approximately $180,000
annually through at least March, 2002.
12
<PAGE> 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
Interest expense was significantly higher (about 29%) as compared to the prior
year's September quarter; however, total borrowing (including a non-interest
bearing loan of $1,105,000 from the Community Redevelopment Agency) at September
30, 1997 was up by approximately 38%, meaning that the effective interest rate
had declined markedly (to approximately 8% from approximately 9 1/8% during the
September quarter of the prior year). Management is planning to obtain
additional financing, through refinancing the building loans or obtaining a
working capital line of credit.
Liquidity and Capital Resources
The Company's working capital at September 30, 1997 was $1,080,000 compared to
$880,000 at June 30, 1997. The $200,000 improvement in working capital was
largely the result of pre-tax income earned in the quarter ended September 30,
1997 (excluding depreciation). The short-term operating liquidity appears to
remain tight for the next two quarters, but Management expects the cash
generated from the rental for a full year and increased gross profit from higher
sales to be sufficient to meet its obligations and near-term capital
requirements.
The Company is working to refinance the building and replace the existing term
loan with Wells Fargo with a revolving line of credit. Management expects that
transaction to yield sufficient funds to meet the Company's working capital
needs for the medium term.
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 emerged from bankruptcy protection in November 1994. 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 recorded operating profits during the years ended June 30, 1996 and
1997 in the amounts of approximately $175,000 and $235,000, respectively.
Nevertheless, the Company's revenues and operating results have varied
substantially from period to period. There can be no
13
<PAGE> 14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition
(Continued)
assurance that the Company will be profitable in the future or that future
revenues and operating results will not also vary substantially. New management
has expended and continues to expend substantial time and resources in
attempting to resolve problems arising from the Company's financial condition
and to restore confidence in the Company. Although the research and development
expenditures of the Company have increased, its financial condition limits its
ability to engage in large scale research and development. Also, the Company's
financial condition has limited the ability of the Company to modernize its
plant and equipment. Future profits, if any, will depend upon various factors,
including, but not limited to, management's ability to restore confidence in the
Company, continued market acceptance of the Company's current products, the
ability of the Company to develop distribution and marketing channels and
develop and introduce new products or to develop new markets for its existing
products and the successful implementation of its planned marketing strategies.
If the Company is not able to achieve its operating objectives, the Company may
find it necessary to reduce its expenditures for sales, marketing, and research
and development, or undertake other such actions as may be appropriate, and may
be otherwise unable to achieve its goals or continue its operations.
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.
14
<PAGE> 15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition
(Continued)
Technological Change
The markets for specialized bearings and ordnance products are characterized by
advances in technology. Accordingly, the Company's ability to compete in those
markets may depend in large part on its success in enhancing its existing
products and in developing new products. There can be no assurance that the
Company will succeed in such efforts or that any of its products will not be
rendered obsolete or uneconomical by technological advances made by others.
Dependence on Key Customers
During the quarters ended September 30, 1997 and 1996, sales to the Department
of Defense constituted 11% and 19%, respectively, of the Company's sales. Sales
to Textron Systems and National Precision Bearing accounted for approximately
17% and 14%, respectively, of Company sales for the quarter ended September 30,
1997. A significant decline in sales of any of these key customers could
adversely affect the Company. Additionally, export sales (denominated in U.S.
dollars) accounted for approximately 14% of sales revenue by the Company for the
quarter ended September 30, 1997.
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 both general
liability insurance and 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.
15
<PAGE> 16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition
(Continued)
No Earthquake Insurance
The Company's principal executive offices are located in a facility owned by the
Company in Chatsworth, California - an area which was damaged in the 1994
Northridge, California earthquake. The Company does not currently carry
insurance against earthquake-related risks. The Company suffered approximately
$1.2 million in damages, costs and renovations to its facility resulting from
that earthquake, and recovered only approximately $384,000 from insurers as a
result of insured flood damage caused by the earthquake.
Key Personnel
The Company's success is highly dependent on the efforts and abilities of its
Chairman, David Wachtel, and key members of staff. The loss of services of Mr.
Wachtel or any of these key members could have a 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 matter 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.
16
<PAGE> 17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition
(Continued)
Contracts
The Company generates substantially all of its revenues pursuant to procurement
contracts for custom designed or manufactured bearings or ordnance products. The
ability of the Company to generate additional revenues will depend upon its
ability to obtain additional contracts. Substantially all of the Company's
contracts are on a fixed-fee basis. Accordingly, the Company is subject to the
risk of cost overruns. Because the Company manufactures ordnance and specialized
bearings for the defense and aerospace industries, the Company is subject to
extremely stringent quality control standards and testing. These standards are
implemented through internal operational quality control procedures of the
Company and through customer audits. Furthermore, lot acceptance test procedures
("LATs") are required by the Company's customers. These LATs include
environmental testing and detonation and non-detonation tests. Generally, the
Company's ordnance products are manufactured in batches and then subjected to
LATs under standards that result in rejection of an entire manufactured batch if
a single unit fails. From time to time, the Company has experienced LATs
failures resulting from human error or technical problems. Occurrence of LATs
failures of this type on large contracts could adversely impact the revenues of
the Company and no assurance can be given that such failures will not occur in
the future.
Volatility of Workload
To remain profitable, the Company is highly dependent on its ability to maintain
a suitably sized staff of qualified technical personnel commensurate with a
fluctuating volume of work. New contracts often arise at unscheduled or
unanticipated times. The Company endeavors to maintain adequate staff to respond
to these unscheduled opportunities. If the Company overestimates its projected
workload, the resulting financial burden can reduce profitability. Occasionally,
the Company is faced with the opposite problem - a shortage of suitable
technical personnel - or the funds to pay premium rates to obtain the necessary
skilled labor that is in short supply, and is unable to timely perform
contracts, potentially resulting in cost overruns or late delivery penalties.
17
<PAGE> 18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition
(Continued)
Governmental Regulation
The Company's operations are subject to, and substantially affected by,
extensive federal, state and local laws, regulations, orders and permits, which
govern environmental protection, health and safety, zoning and other matters.
These regulations may impose restrictions on the Company's operations that could
adversely affect the Company's results, such as limitations on the expansion of
metals plating facilities of the Company, and limitations on or banning disposal
of hazardous waste generated by the Company's operations. Because of heightened
public concern, companies in the metals plating business, including the Company,
may become subject to judicial and administrative proceedings involving federal,
state or local agencies. These governmental agencies may seek to impose fines on
the Company or to revoke or deny renewal of the Company's waste generation and
disposal permits or licenses for violations of environmental laws or regulations
or to require the Company to remediate environmental problems resulting from its
operations, all of which could have a material adverse effect on the Company.
The Company may also be subject to actions brought by individuals or community
groups in connection with the permitting or licensing of its operations, any
alleged violations of such permits and licenses, or other such matters.
18
<PAGE> 19
NETWORKS ELECTRONIC CORP.
PART II
OTHER INFORMATION
Item 2. Shareholders Stock Information
Through January 4, 1993, Networks Electronic Corp.'s stock was traded in NASDAQ
OVER-THE-COUNTER MARKETS and was listed in NATIONAL MARKET ISSUES under NWRK.
Subsequent to that date, due to certain size and activity requirements, the
stock of Networks Electronic Corp. was removed from trading on the NASDAQ
national market system. The stock is currently traded on the OTC Electronic
Bulletin Board.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: There were no reports on Form 8-K filed for the three
months ended September 30, 1997.
19
<PAGE> 20
NETWORKS ELECTRONIC CORP.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETWORKS ELECTRONIC CORP.
(Registrant)
BY: /s/ DAVID WACHTEL
---------------------------
David Wachtel
Chairman of the Board,
Chief Executive Officer,
President, Chief Financial
Officer
Date: November 10, 1997
-----------------------
20
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<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 STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 211,647
<SECURITIES> 0
<RECEIVABLES> 786,534
<ALLOWANCES> 5,000
<INVENTORY> 1,369,556
<CURRENT-ASSETS> 2,467,754
<PP&E> 8,017,478
<DEPRECIATION> 5,754,592
<TOTAL-ASSETS> 4,888,558
<CURRENT-LIABILITIES> 1,384,998
<BONDS> 3,468,253
0
0
<COMMON> 417,805
<OTHER-SE> (382,498)
<TOTAL-LIABILITY-AND-EQUITY> 4,888,558
<SALES> 1,222,442
<TOTAL-REVENUES> 1,268,032
<CGS> 856,626
<TOTAL-COSTS> 1,017,034
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,644
<INCOME-PRETAX> 184,354
<INCOME-TAX> 37,800
<INCOME-CONTINUING> 146,554
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 146,554
<EPS-PRIMARY> .09
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