<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, 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
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:
Name of Each Exchange on
Title of Each Class Which Registered
None None
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 26, 1997) held by
nonaffiliates of the registrant was $414,472.
The number of shares outstanding of the registrant's common stock, $.25 par
value, was 1,671,221 at September 26, 1997.
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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 staff,
representatives and specialized distributors 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
The Company's 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, Lockheed Martin,
Textron and Hughes. Only the Department of Defense (27%) contributed 10% or
more of the Bearing Division's revenues during the fiscal year ended June 30,
1997.
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: Eagle Picher, Hughes Training and Missile Systems, and
Textron. These customers accounted for 22%, 16%, and 13%, respectively, of the
Ordnance Division's revenues for the fiscal year ended June 30, 1997. No other
customer accounted for 10% or more of the Ordnance Division's revenues.
Backlog
The Company's backlog of unfilled orders at June 30, 1997 was approximately
$3,900,000, compared with $1,350,000 at June 30, 1996.
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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, numerous qualifications
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. The estimated amount
spent during the years ended June 30, 1997, 1996, and 1995 on such activities
was approximately $6,000, $97,000, and $2,000, 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, 1997, the Company had approximately 60 full time employees, as
compared with 64 at June 30, 1996.
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.
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Corporate Summary of Results by Division (In Thousands)
- -------------------------------------------------------
<TABLE>
<CAPTION>
------- ------- ------- ------- -------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Bearing Division
Sales* $ 2,087 $ 2,383 $ 1,895 $ 1,530 $ 3,067
Pretax income (loss)** 51 212 1,117 (398) (1,407)
Identifiable assets 2,892 1,984 2,133 1,759 2,399
Ordnance Division:
Sales* 1,923 1,550 1,112 1,253 1,543
Pretax income (loss)** 457 47 633 (146) (173)
Identifiable assets 1,749 1,298 1,042 844 1,283
Capital expenditures of each segment:
Bearings 856 181 28 2 37
Ordnance 442 138 17 3 7
</TABLE>
* No intersegment sales.
** Does not include interest expense in any of the five years
presented.
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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 the wife of David Wachtel, the President
and CEO of the Company) and Rodica Patrichi (Mihai Patrichi's widow). 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
In 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. In June 1997, the Court
ordered that the chapter 11 case be closed; however, the Company will not be
discharged until complete performance of its reorganization plan has been
achieved.
ITEM 2. PROPERTIES
The Company's administrative, engineering and manufacturing activities are all
carried on from an 85,000 square foot building located on 7.25 acres of land in
a light industrial area of Chatsworth, California, of which approximately
35,000 square feet have been leased to a tenant. See Note 17 of the notes to
the financial statements.
ITEM 3 LEGAL PROCEEDINGS
See Note 16 of the notes to the financial statements.
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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.
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>
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
1997
1st Quarter 1 3/8 0 7/8
2nd Quarter 1 0 3/8
3rd Quarter 0 7/8 0 3/8
4th Quarter 1 5/16 0 5/8
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</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.
- -----------------------------------------------------------------
Approximate Number of
<TABLE>
<CAPTION>
Approximate Number of
Record Holders (As of
Title of Class September 26, 1997)
- -----------------------------------------------------------------
<S> <C>
Common stock, $.25 par value 944*
</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 have
been declared during any subsequent year. 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
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ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR FINANCIAL HISTORY
(In thousands of dollars except per share data)
- --------------------------------------------------------------------------------
Years Ended June 30,
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Operations
Sales $ 4,010 $ 3,933 $ 3,007 $ 2,783 $ 4,610
------- ------- ------- ------- -------
Net income (loss) 162 31 1,767 (800) (1,885)
------- ------- ------- ------- -------
Net income (loss) per common share
.10 0.02 1.11 (.50) (1.18)
------- ------- ------- ------- -------
Financial position
Working capital (deficiency) $ 882 $ 835 $ 1,128 $(1,004) $(2,173)
------- ------- ------- ------- -------
Stockholders' (deficiency in assets)
equity (111) (242) (32) (1,877) (887)
------- ------- ------- ------- -------
Total assets 4,641 3,282 3,175 2,603 3,682
------- ------- ------- ------- -------
Long-term debt 3,408 2,367 2,327 1,966 25
------- ------- ------- ------- -------
</TABLE>
No cash dividends have been paid or accrued during the past five years.
Reference is made to the financial statements and notes thereto included
elsewhere herein.
- --------------------------------------------------------------------------------
6
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1997 and 1996
Results of Operations
The Company's revenues increased by approximately $80,000 to $4,010,000 during
the year ended June 30, 1997. Ordnance sales increased $380,000 and Bearings
sales decreased by $300,000. The change in mix was caused partly by increased
demand for the Company's Ordnance products, while the Bearings sales were
impacted by the limitations on internal capacity plus the decreased
availability of products and services in the supply chain. The limitations on
internal capacity caused by the Northridge Earthquake are now significantly
reduced, as we have recently completed the construction of a new 15,000 square
feet facility which increases our production capacity. This facility will house
equipment that has been idle since the earthquake. Furthermore, the recent
upsurge in the aerospace industry impacted our supply chain, both increasing
costs and affected our ability to achieve our estimated delivery targets. The
Division has adjusted to these pressures by pushing out the lead time for
delivery of our bearing products and establishing a smaller, but more reliable
supplier base.
Gross profits improved to 25.7% from 18.9% in the prior year. This was
primarily due to the increase in sales volume in the Ordnance Division, which
traditionally enjoys higher margins. The reduced Bearing Division volume
resulted in higher costs, as overhead was spread over fewer sales.
Orders for both divisions continues to be strong. The backlog of orders for
both divisions as of June 30, 1997 is approximately $3,750,000, with the
bookings in the Bearings Division up by close to $1,700,000 and bookings in the
Ordnance Division up by approximately $1,400,000, when compared to the previous
year. The Bearings Division backlog as at June 30, 1997 was approximately
$3,000,000, and the Ordnance Division backlog was $750,000. This is in
contrast to last year when the backlog for both divisions totaled $1,350,000.
As of June 30, 1997 the book to bill ratio was 1.48, compared to 0.77 for the
same period the previous year. Management anticipates that the healthy
backlogs and the increase in manufacturing capacity will allow for an increase
in sales in the forthcoming year.
As anticipated, general and administrative costs were up 40% as more
engineering and sales staff were added to improve the Company's capabilities
and market penetration. The year ended June 30, 1997 had numerous non-
recurring charges associated with professional fees for the closing of the
bankruptcy, leasing and repairing the building, and resolving a dispute with
Hughes Missile Systems. Management expects wage costs to go up in the next
fiscal year as part of the wage normalization policy. The chapter 11
bankruptcy has been removed from court supervision, so that the related court
fees and attorney costs should be eliminated in the coming fiscal year.
Operating Income has continued to improve for the third straight year.
Operating Income has increased by approximately 34% to $235,000 compared to
$175,000 in the prior year.
7
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Non-operating income has improved due to recognition of a large, non-recurring
gain on completion of the Community Redevelopment Agency requirements for
forgiveness of $162,000 of debt on the earthquake repairs. Completion of the
earthquake repairs also allowed the Company to lease a portion of the building
to another enterprise, bringing in approximately $60,000 in net rental income
during the last four months of the year. The lease calls for net rental income
of approximately $190,000 in the year ended June 30, 1998, and will provide
approximately $1,000,000 of Rental Income over the next five years.
Interest expense was substantially unchanged as the Company's long-term debt
pay-down counter-balanced the higher rates on new short-term borrowings.
Management is planning to obtain additional financing, through refinancing the
building loans or obtaining a working capital line of credit.
The Company is striving to capitalize on the rising market in both Bearings and
Ordnance. The volume of quotes is higher than in the past six years and the
backlog has increased to $3,900,000, the highest level since 1990.
Liquidity and Capital Resources
The Company's working capital at June 30, 1997 was $880,000 compared to
$835,000 at June 30, 1996. A $400,000 improvement in working capital as a
result of pre-tax income earned in the year (excluding depreciation) was
largely offset by $55,000 in equipment purchases, $90,000 in deferred charges
incurred, $100,000 of increased near-term maturity of long-term debt, and a
$90,000 increase in pension contributions. The pension liability of $290,000 is
due March 1998 and will not be deferred by the Internal Revenue Service. The
short-term operating liquidity appears to remain tight for the first part of
the new fiscal year, 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. Management expects that transaction to yield sufficient
funds to meet the Company's working capital needs for the medium term.
8
<PAGE> 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 has recently emerged 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 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 assurance that the
Company will be profitable in the future or that future revenues and operating
results will not also vary substantially. 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 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 as well as 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.
9
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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)
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 adversely affect the
Company. The Company has determined to follow a strategy of continuing product
development to the extent permitted by the financial resources of the Company
to protect its competitive position to the extent practicable. There can be no
assurance that the Company will be able to maintain its position in the field
or continue to compete successfully against current and future sources of
competition or that the competitive pressures faced by the Company will not
adversely affect its profitability or financial performance.
Technological Change
The markets for specialized bearings and ordnance products are characterized by
advances in technology. Accordingly, the Company's ability to compete in those
markets may depend in large part on its success in enhancing its existing
products and in developing new products. There can be no assurance that the
Company will succeed in such efforts or that any of its products will not be
rendered obsolete or uneconomical by technological advances made by others.
Dependence on Key Customers
During fiscal years 1997, 1996 and 1995, sales to the Department of Defense by
the Company constituted 14%, 20% and 29%, respectively, of the Company's sales.
Sales to Eagle-Picher Industries accounted for approximately 11% and 17% of
sales in 1997 and 1995, respectively. Sales to Hughes Missile Systems
accounted for approximately 13% of sales in 1996. A significant decline in
sales of any of these key customers would 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.
10
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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)
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 as well as 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 that
allege defects in its products.
No Earthquake Insurance
The Company's principal executive offices are located in a facility owned by
the Company in Chatsworth, California - an area which was damaged in the 1994
Northridge, California earthquake. The Company does not currently carry
insurance against earthquake-related risks. The Company suffered approximately
$1.2 million in damages, costs and renovations to its facility resulting from
that earthquake, and recovered only approximately $384,000 from insurers as a
result of insured flood damage caused by the earthquake.
Key Personnel
The Company's success is highly dependent on the efforts and abilities of its
Chairman, David Wachtel 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 n 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.
11
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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)
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.
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 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.
12
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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)
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.
13
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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)
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 continued 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.
Despite a limited research and development budget, the Company has continued to
develop new products in both of its divisions. The Bearing Division was
actively involved in designing and qualifying new bearings for the X33 Space
Shuttle. Even though the Ordnance Division was adversely affected by a
convenience cancellation, it also had significant success in qualifying new
items. Over twenty new switches were qualified for Hughes Missile Systems,
cord and wire cutters were qualified for Textron's SFW program, and new piston
actuators were designed and qualified for Humphrey/Remec. The Company
accomplished an overall streamlining and improved efficiency in its operations.
Committed to increasing its bookings, the Company hired an established sales
representative.
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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)
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 in the amount of
$172,000, along with an increase in the current portion of the Company's
accrued pension liability of $160,000 in the 1996 year. This increase was a
result of the Company having received a waiver by the IRS of the minimum
funding standard for the year ended June 30, 1995.
The Community Redevelopment Agency ("CRA") provided favorable funding in the
amount of $1,300,000 for the Company's rental project. Terms included 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 was a grant and does not have to be paid back. This financing
arrangement should save the Company approximately $100,000 per year over the
next twenty-five years as compared to a conventional loan. In addition, the
tenant agreed to directly contribute $100,000 and to lend the Company up to
$288,000 (at 10% per annum) to pay for the necessary construction improvements.
15
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ITEM 8. FINANCIAL STATEMENTS INDEX
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT . . . . . . . . . . . . 17
BALANCE SHEETS - ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 18
BALANCE SHEETS - LIABILITIES AND STOCKHOLDER'S DEFICIENCY IN ASSETS . . . 19
STATEMENTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . 20
STATEMENT OF STOCKHOLDERS' DEFICIENCY IN ASSETS . . . . . . . . . . . . . 21
STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . . . . . . . . 22
NOTES TO THE FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . 24
</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, 1997 and 1996 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, 1997. 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,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 1997, 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 26, 1997
Granada Hills, California
17
<PAGE> 18
NETWORKS ELECTRONIC CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
---------- ----------
Assets 1997 1996
- ---------------------------------------------------------- ---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 185,144 $ 99,114
---------- ----------
Receivables:
Trade accounts receivable 712,709 758,159
Less allowance for doubtful accounts 5,000 5,000
---------- ----------
707,709 753,159
---------- ----------
Other receivables 79,354 68,000
Inventories, less reserve for obsolescence of
$180,000 and $160,000, respectively 1,189,802 1,043,256
Prepaid expenses and deposits 39,832 19,577
Deferred income taxes, current portion 24,000 9,469
---------- ----------
Total current assets 2,225,841 1,992,575
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Land 131,773 131,773
Buildings and improvements 3,438,250 2,194,703
Machinery and equipment 4,367,555 4,335,926
---------- ----------
7,937,578 6,662,402
Less accumulated depreciation 5,723,480 5,627,847
---------- ----------
2,214,098 1,034,555
---------- ----------
DEFERRED INCOME TAXES,
NON-CURRENT PORTION 119,571 254,795
DEFERRED CHARGES, NET OF
ACCUMULATED AMORTIZATION OF
$7,495 AND $0, RESPECTIVELY 81,152 --
---------- ----------
$4,640,662 $3,281,925
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 19
NETWORKS ELECTRONIC CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
----------- -----------
Liabilities and Stockholders'
Deficiency in Assets 1997 1996
- ------------------------------------------- ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt $ 220,000 $ 120,000
Note payable, related party -
current portion 100,000 50,667
Accounts payable 479,384 535,013
Customer advances and deposits 2,834 -
Curr. portion of pre-petition debt:
Adjudication award payable 41,951 56,059
Accrued pension liability 279,079 188,800
Other payables 29,997 31,315
Other accrued expenses 190,262 175,840
----------- -----------
Total current liabilities 1,343,507 1,157,694
----------- -----------
LONG-TERM DEBT:
Long-term debt, less
current maturities 3,042,193 1,890,236
Note payable, related party - 29,555
Long-term portion of
accrued pension liability 366,209 446,850
----------- -----------
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 shares 417,805 417,805
Additional paid-in capital 280,985 280,985
Accumulated deficit (412,111) (573,734)
Stock subscriptions receivable (14,063) (14,063)
Pension liability adjustment (383,863) (353,403)
----------- -----------
Total stockholders'
deficiency in assets (111,247) (242,410)
----------- -----------
$ 4,640,662 $ 3,281,925
=========== ===========
</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,
--------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
SALES $ 4,009,719 $ 3,932,925 $ 3,007,473
COST OF SALES 2,980,518 3,189,521 2,421,310
----------- ----------- -----------
GROSS PROFIT 1,029,201 743,404 586,163
SELLING, ADMINISTRATIVE AND OTHER 794,202 568,560 539,523
----------- ----------- -----------
OPERATING INCOME 234,999 174,844 46,640
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (225,023) (229,291) (239,661)
Reduction of jury award - - -
Loss on
disposition of assets - (7,273) 767,126
Insurance and legal settlements - - 545,007
CRA debt forgiveness 161,875 33,125 384,687
Vendor debt forgiveness 40,296 - -
Rental income, net 57,583 - -
Other, net 13,386 58,489 6,789
----------- ----------- -----------
48,117 (144,950) 1,463,948
----------- ----------- -----------
INCOME BEFORE INCOME TAX
PROVISION (BENEFIT) 283,116 29,984 1,510,588
INCOME TAX PROVISION (BENEFIT) 121,493 (690) (256,326)
----------- ----------- -----------
NET INCOME $ 161,623 $ 30,584 $ 1,766,914
----------- ----------- -----------
NET INCOME PER SHARE $ .10 $ .02 $ 1.11
----------- ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING 1,671,221 1,647,515 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, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Common Common Additional Stock
Stock 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, 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)
Net income - - - - 161,623 - 161,623
Pension liability adjustment - - - - - (30,460) (30,460)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1997 1,671,221 $ 417,805 $ 280,985 $ (14,063) $ (412,111) $ (383,863) $ (111,247)
=========== =========== =========== =========== =========== =========== ===========
</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,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 161,623 $ 30,584 $ 1,766,914
----------- ----------- -----------
Adjustments to reconcile
net income to net cash
provided by (used in) operations:
Noncash items included in
net income (loss):
Depreciation and amortization 126,221 130,307 176,048
Deferred income taxes 120,693 (862) (263,402)
Loss (gain) on disposition of assets - 7,273 (545,007)
Changes in:
Accounts receivable and 34,096 (14,760) (325,915)
refundable income taxes
Inventories (146,546) 18,690 (212,695)
Prepaid expenses and deposits (20,255) (11,537) 7,410
Deferred charges (88,647) - -
Accounts payable and accrued expenses (77,455) 119,508 (643,480)
Income taxes payable - (6,276) -
Customer advances and deposits 2,834 (11,585) (9,966)
----------- ----------- -----------
TOTAL ADJUSTMENTS (49,059) 230,758 (1,817,007)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 112,564 261,342 (50,093)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,261,318) (318,602) (44,587)
Proceeds from disposition of assets - 64,627 588,603
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (1,261,318) (253,975) 544,016
----------- ----------- -----------
</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>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Credit line pay-off - - (570,000)
Mortgage debt reduction (120,000) (143,125) (121,766)
Other payments of long-term debt (19,661) - -
Proceeds from revolving line of
credit and long-term borrowings 1,354,667 168,045 19,662
Proceeds from notes payable,
related parties 122,000 -
Payments on notes payable, 152,000
related parties (102,222) (50,667) (21,111)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,234,784 (25,747) (541,215)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 86,030 (18,380) (47,292)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 99,114 117,494 164,786
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 185,144 $ 99,114 $ 117,494
=========== =========== ===========
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities
In the fiscal year ended June 30, 1997, the Company entered into capital leases
for telephone and office equipment. Total assets and related lease obligations
pertaining to these transactions amounted to $36,951.
In the fiscal year ended June 30, 1997, the Company recognized an additional
minimum pension liability in the amount of $30,460 by increasing stockholders'
deficiency in assets for the same amount.
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.
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.
Deferred Charges
The Company recognizes as deferred charges certain loan fees and lease costs,
which are being amortized over periods ranging from approximately two to five
years.
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)
Revenue Recognition
The Company recognizes sales revenue when completed parts are shipped to
customers.
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 must 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," was adopted by the
Company during the year ended June 30, 1997, as required by this statement. As
adopted, SFAS No. 123 did not have any effect on the Company's financial
position or results of operations, and no expanded disclosure was operative.
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, totaled 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 Note 5).
The accompanying financial statements have been prepared on a going concern
basis, which assumes continuity of operations, realization of assets, and
liquidation of liabilities in the ordinary course of business. However, due to
historically inconsistent earnings from operations, contributing to periodic
cash shortfalls, such realization of assets and liquidation of liabilities are
subject to uncertainty. The financial statements do not reflect any
adjustments to the carrying value of assets or amounts of liabilities that
might be necessary as a consequence of the Company's inability to comply with
the plan of reorganization and other financing agreements.
3. INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
June 30,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $ 93,843 $ 133,818
Work in process 523,711 376,998
Finished goods and components 752,248 742,091
----------- -----------
1,369,802 1,252,907
Less progress payments - (49,651)
Less reserve for obsolescence (180,000) (160,000)
----------- -----------
$ 1,189,802 $ 1,043,256
=========== ===========
</TABLE>
26
<PAGE> 27
4. LONG-TERM DEBT, NOTES PAYABLE
Long-term debt and notes payable consisted of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------
1997 1996
<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 plus 2.25%
(10.75% at June 30, 1997 and 10.50% at
June 30, 1996). A balloon payment
for $1,342,528 is due in June 2000
(See Note 5) $1,702,528 $1,822,528
Note payable to Community Redevelopment
Agency, City of Los Angeles ("CRA"),
non-interest bearing construction loan,
secured by second deed of trust on land
and building, no principal payments
required through August 2001, with
level monthly principal payments
applicable over 20 years through
August 2021 1,105,000 187,708
Note payable to lessee, secured by
third deed of trust on land and
building and assignment of rents,
principal payable in monthly
installments of $3,236 through March
2002, with interest payable at an
annual rate of 10.0% 185,635 -
Note payable to financial institution,
secured by machinery and equipment,
principal payable in monthly
installments of $4,167 along with
interest at a reference rate plus 2.75%
(11.25% at June 30, 1997) through
March 1999 237,500 -
Note payable to finance company,
secured by telephone equipment,
payable in monthly installments of
$656 including interest at
approximately 17.3%. Matures in
October 1999 14,453 -
</TABLE>
27
<PAGE> 28
4. LONG-TERM DEBT, NOTES PAYABLE (Continued)
<TABLE>
<CAPTION>
June 30,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
Note payable to vendor,
secured by office equipment,
payable in monthly installments
of $395 including interest at
approximately 12.4%. Matures in
December 2001 17,077 -
---------- ----------
3,262,193 2,010,236
Less current maturities 220,000 120,000
---------- ----------
$3,042,193 $1,890,236
========== ==========
</TABLE>
Maturities of long-term debt in each of the next five years are as follows:
<TABLE>
<CAPTION>
Year ending June 30,:
---------------------
<S> <C>
1998 $ 220,000
1999 356,000
2000 1,507,000
2001 42,000
2002 70,000
Thereafter 1,067,193
----------
$3,262,193
==========
</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 10.75%), $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. During the year ended June 30, 1997, the CRA
approved an additional funding amount of $500,000, which was amended onto the
initial Agency Loan Agreement, thereby bringing the total CRA
28
<PAGE> 29
5. CREDIT AGREEMENTS (Continued)
commitment to $1,300,000. These additional funds enabled the Company to
complete the remodeling of its north building, 35,000 square feet of which were
leased to a tenant beginning in March 1997 (See Note 17 below).
Of the total $1,300,000 commitment, 15% ($195,000) is a grant and 85%
($1,105,000) is an interest-free loan to be repaid over 20 years, beginning 5
years from the effective date of the loan, which was August 26, 1996. At June
30, 1996, $220,833 was expended, resulting in the recognition of $33,125 (15%)
as forgiveness of debt income, and the balance of $187,708 as long-term debt.
The remainder of the commitment was disbursed during the year ended June 30,
1997; accordingly, an additional $161,875 was recorded as forgiveness of debt
income.
The Company's average aggregate borrowings were $2,708,000, $2,047,000, and
$2,217,000, at weighted average interest rates of 8.2%, 10.7%, and 10.7% in
1997, 1996, and 1995, respectively. The average aggregate borrowings and
weighted average interest rate computations include notes payable to related
parties during these years. Interest paid amounted to $231,536, $225,301, and
$242,196 during the fiscal years ended June 30, 1997, 1996, and 1995,
respectively.
6. 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. The outstanding loan
balance at June 30, 1996 was $80,222, of which $50,667 was the current portion.
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 years
ended June 30, 1997, 1996, and 1995 was $4,296, $8,391, and $7,321,
respectively.
(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 September 26, 1997, the principal had not
yet been repaid. Interest expense on this loan during the year ended June 30,
1997 amounted to $11,077.
(c) In September 1996, a director advanced the Company $22,000 for a fee
of $200. The money was repaid by the Company in October 1996.
29
<PAGE> 30
7. STOCK OPTION PLAN
The Company's Board Of Directors has adopted the Networks Electronic Corp. 1996
Stock Incentive Plan (the "1996 Plan") which provides for the grant of 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 to and approved by
the shareholders of the Company at the Annual Meeting of Shareholders held on
December 13, 1996.
The Company also has a qualified stock option plan, as amended October 15,
1974, 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 this
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 this plan to an officer and director, exercisable at a price of
$1.00 per share. These stock options have since expired due to the officer's
cessation of employment and the director's resignation from the board.
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, the Company has recorded a stock subscription
receivable for $14,063. A total of 1,500 stock options awarded to three of the
five key employees have since expired due to cessation of employment; the
remaining 1,000 stock options are scheduled to fully vest on March 31, 1998.
All of these non-qualified stock options were issued outside of the existing
stock option plan and 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,
---------------------------------------
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Federal income
(benefit) $ 93,413 $ (1,490) $(161,591)
California franchise tax
(benefit) 28,080 800 (94,735)
--------- --------- ---------
$ 121,493 $ (690) $(256,326)
========= ========= =========
Current $ 800 $ 172 $ 7,076
Deferred 120,693 (862) (263,402)
--------- --------- ---------
$ 121,493 $ (690) $(256,326)
========= ========= =========
</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,
--------------------------------------
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Computed statutory federal
income tax $ 93,665 $ 4,484 $ 513,600
Increases (decreases)
resulting from:
California franchise tax,
net of federal tax
benefit 18,533 1,391 93,727
Tax credits - (12,104) -
Rate differential due to
expected utilization of
federal NOL carryforward
to future year at higher
effective tax rate 2,594 5,680 -
Valuation allowance, due to
unlikelihood of future
realization of deferred
tax benefit - 10,000 (864,802)
Other 6,701 (10,141) 1,149
--------- --------- ---------
Income tax provision
(benefit) $ 121,493 $ (690) $(256,326)
========= ========= =========
</TABLE>
31
<PAGE> 32
8. INCOME TAXES (Continued)
Net income taxes paid amounted to $800, $9,500, and $800 during the fiscal
years ended June 30, 1997, 1996, and 1995, 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 1997, 1996, and 1995 is
as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Change in temporary difference:
Depreciation $ 2,606 $ (2,901) $ (11,959)
Inventory obsolescence (8,660) 4,330) 32,042
Pension plan 20,934 (1,521) 1,761
Litigation 6,109 19,253 347,321
Other 2,525 (44) (510)
Accrued vacation and sick leave (8,002) 3,511) (4,008)
Uniform capitalization 1,298 4,327 ,910
Alternative minimum tax credits - 628 (6,276)
Other tax credits (3,000) (12,104) -
California franchise tax (9,275) 382 47,600)
Utilization of federal and
California NOL carryforwards 116,158 - 272,719
Benefit of federal and
California NOL carryforwards - (11,041) -
Valuation allowance, due to estimate of - 10,000 (864,802)
future realization
--------- --------- ---------
Deferred inc. tax provision
(benefit) $ 120,693 $ (862) $(263,402)
========= ========= =========
</TABLE>
At June 30, 1997 the Company had an unused federal net operating loss
carryforward of approximately $370,000, with $290,000 expiring in the year
ending June 30, 2009 and the balance of $80,000 in the year ending June 30,
2011. Also at June 30, 1997, the Company had an unused California net
operating loss carryforward of approximately $555,000, with $175,000 expiring
in the year ending June 30, 1998, $345,000 expiring in the year ending June 30,
1999, and the balance of $35,000 expiring in the year ending June 30, 2001.
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
California tax credit carryovers of approximately $20,000, of which $4,000
expires by June 30, 2007, with the remainder available indefinitely.
Significant components of the Company's deferred tax liabilities and assets at
June 30, 1997 and June 30, 1996 are:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Liabilities
Depreciable property, plant and equipment $ 63,851 $ 61,245
California franchise tax 40,861 50,136
Litigation 2,619 -
--------- ---------
Gross deferred tax liabilities 107,331 111,381
--------- ---------
Assets
Inventory 92,415 85,053
Accounts receivable 2,165 2,165
Pension plan 100,727 121,661
Other employee benefits 32,728 24,726
Litigation - 3,490
Alternative minimum tax credits 5,648 5,648
Other tax credits 48,585 45,585
NOL carryforwards 177,469 293,627
Other 1,165 3,690
--------- ---------
Gross deferred tax assets 460,902 585,645
--------- ---------
Deferred income tax asset 353,571 474,264
Valuation allowance (210,000) (210,000)
--------- ---------
Deferred income tax asset-net $ 143,571 $ 264,264
========= =========
</TABLE>
The respective deferred tax benefits at the June 30, 1997 and June 30, 1996
balance sheet dates are presented as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current portion $ 24,000 $ 9,469
Non-current portion 119,571 254,795
-------- --------
Total $143,571 $264,264
======== ========
</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 $41,380, $32,311, and $24,733 for the years ended June 30,
1997, 1996, and 1995, 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, 1997, 1996, and 1995 are summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost $ - $ - $ -
Interest cost 191,664 193,558 182,659
Actual return on plan assets
(144,607) (116,942) (283,845)
Net amortization and
deferral (5,677) (44,305) 125,919
--------- --------- ---------
Total pension expense $ 41,380 $ 32,311 $ 24,733
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
The status of the plan is as follows: 1997 1996
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $(2,420,450) $(2,449,049)
Nonvested benefits (25,403) (28,429)
----------- -----------
Accumulated benefit obligation (2,445,853) (2,477,478)
Effect of future salary increases - -
----------- -----------
Projected benefit obligation (2,445,853) (2,477,478)
Fair value of plan assets 1,800,565 1,841,828
----------- -----------
Projected benefit obligation in excess
of fair value of plan assets (645,288) (635,650)
Unrecognized net loss 383,863 353,403
----------- -----------
Accrued pension cost (261,425) (282,247)
Minimum pension adjustment (383,863) (353,403)
----------- -----------
Accrued pension liability $ (645,288) $ (635,650)
=========== ===========
</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, 1997 and 1996 through the
recording of an increase to stockholders' deficiency in assets in the amount of
$30,460 and $240,732, respectively.
The expected long-term rate of return on plan assets was 9% for both 1997 and
1996. The discount rate used in determining the actuarial present value of
accumulated benefit obligations was 8% for both 1997 and 1996. There was no
rate of increase in future compensation levels at both June 30, 1997 and June
30, 1996 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 $36,000 was also made in
March 1997 to cover the balance of the annual installment due on approximately
$240,000 in plan contributions for the plan year ended June 30, 1995. These
plan contributions have been deferred and are currently being amortized over a
statutory five year period (beginning with the year ended June 30, 1996), as
the result of IRS granting the Company's request for waiver of the minimum
funding standard.
The Company has a funding deficiency of approximately $123,000 carried over
from the plan year ended June 30, 1996. The total minimum funding requirement
for the year ended June 30, 1997 is approximately $272,000, which includes this
deficiency, along with an annual waiver installment (as noted above) of
approximately $60,000, and an additional $89,000 in minimum funding standard
charges for the current year. The Company currently plans to meet this
obligation through the refinance of its existing building loan.
The plan assets are held by Connecticut General Life Insurance Company
("CIGNA"), through a guaranteed group annuity contract (an immediate
participation guarantee) established in 1980. The contract stipulates that
CIGNA pay benefits and invest funds which have been contributed for the purpose
of providing retirement benefits to eligible participants in accordance with
the terms of the Networks Electronic Corporation Pension Plan.
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 Before
Income Tax
Provision Capital
Sales* (Benefit) Assets Expenditures Depreciation
------ --------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997:
Bearings $2,086,521 $ 51,206 $2,891,596 $ 856,392 $ 80,080
Ordnance 1,923,198 456,933 1,749,066 441,877 38,646
---------- ---------- ---------- ---------- ----------
$4,009,719 508,139 $4,640,662 $1,298,269 $ 118,726
========== ========== ========== ========== ==========
Interest expense 225,023
----------
283,116
==========
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
==========
</TABLE>
36
<PAGE> 37
10. BUSINESS SEGMENTS (Continued)
<TABLE>
<CAPTION>
Income Before
Income Tax
Provision Capital
Sales* (Benefit) Assets Expenditures Depreciation
------ --------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
==========
</TABLE>
* All sales were made to unaffiliated customers and there were no intersegment
sales.
37
<PAGE> 38
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.
12. EMPLOYMENT AGREEMENT, 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 Board of Directors has also agreed to pay all medical and dental insurance
premiums for the Company's corporate officers, plus the deductible expense
portions operative under the respective plans.
During the year ended June 30, 1996, the Company's outstanding advances
totaling $27,228 previously made to Mihai D. Patrichi, the Company's Founder
and former President and Chief Executive Officer (who passed away in November
1994), were repaid by the Mihai D. Patrichi Trust. Interest earned (generally
at 7% per annum) on the officer receivable amounted to $0 and $1,781 for the
fiscal years ended June 30, 1996 and 1995, respectively.
13. MAJOR CUSTOMERS
Sales to the Department of Defense accounted for approximately 14% of sales in
1997, 20% of sales in 1996, and 29% of sales in 1995. Sales to Eagle-Picher
Industries accounted for approximately 11% and 17% of sales in 1997 and 1995,
respectively. Sales to Hughes Missile Systems accounted for approximately 13%
of sales in 1996. No other customer had sales exceeding 10% of total revenue
during the years ended June 30, 1997, 1996, and 1995, 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. In September 1994, the Company sold
its Palm Desert property, consisting of two acres of unimproved land, for
approximately $575,000 (net of $40,000 in fees and expenses), recognizing a
gain of approximately $530,000 on the transaction. The net proceeds from the
sale were used to fully pay off the Company's bank line of credit in the amount
of $570,000. The Company also reported a gain of $8,000 from the sale of a
fully depreciated automobile.
38
<PAGE> 39
15. INSURANCE CLAIM
During the year ended June 30, 1995, the Company recorded income from its
insurance carrier totaling $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 in January 1994.
16. LITIGATION
During the previous several years, the Company has 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.
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 cumulative accrued interest at an annual rate of 4%.
The obligation at June 30, 1997 was reduced to $41,951, as the result of
additional accrued interest of $1,328 and payments totaling $15,436 made during
the fiscal year. The Company's insurance carrier may participate to cover all
or part of the remaining liability.
Regarding the other claims, negotiated settlements were reached. Networks
agreed to settle these cases by making payments totaling $40,000 over a period
of one to three years. The balance remaining on these claims at June 30, 1997
was approximately $5,000.
The Company, during its normal course of business, may be subjected from time
to time with legal proceedings against it. Both counsel and management do 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. LEASE AGREEMENT
In March 1997, the Company leased 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 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.
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 June 30, 1997, approximately
$187,000 of the available loan commitment had been utilized. The loan is being
amortized monthly (with level principal payments) over 5 years, with the
monthly payment netted against the lessee's rent (See Note 4).
18. SUBSEQUENT EVENT
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 since that time in an attempt to reach a negotiated
settlement for additional amounts due the Company under the agreement. The
Company recorded an estimated trade account receivable for $75,000 (including
$30,000 in settlement costs) in the financial statements at June 30, 1996.
Subsequent to June 30, 1997, an agreement was reached, and the prime contractor
paid the Company $183,765, representing agreed-upon consideration in exchange
for settlement and release of all the Company's claims arising from the
contract termination. Accordingly, the Company booked an additional trade
account receivable for $108,765 (including another $26,607 in settlement costs)
at June 30, 1997.
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, 1997 is provided
with respect to each director:
<TABLE>
<CAPTION>
Name of Director, Term as Director Expires Business Experience During
Age and Position in December (1) Past Five Years
- ------------------ ------------------------ ----------------------------
<S> <C> <C>
David Wachtel, 38, Chief 1997 Since 1994 has served as and been the
Executive Officer, Chairman President/CEO and Chairman of the
of the Board President, Chief Company. Previously, he was a Partner
Financial Officer at Investech Systems.
Glenn Linderman, 38 (None) 1997 He is a financial analyst and
consultant for Investech System.
Formerly he was Assistant Vice
President of Glendale Federal Bank,
FSB. and served as Vice President of
Libra Investments Inc. and Columbia
Savings & Loan.
Ileana Wachtel, 38 (None) 1997 She is a trustee of the 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.
Rodica Patrichi, 58 (None) 1997 She is the widow of Mihai 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.
(2) See below with respect to business experience of Executive Officers of the
Company.
41
<PAGE> 42
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
The names, ages and positions of all of the executive officers of the Company
for the year ended June 30, 1997 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, 38, Chief Executive Chairman since 1994.
Officer, Chairman of the Board, Responsible primarily for the
President, Chief Financial Officer formation of corporate policy
including planning and
finance, research and
development, and supervisor of
client relations.
Mohammad Tabassi, 49, Vice President Vice President since 1994.
Manager of the Ordnance
Division since 1993. Since
joining the Company in 1987 as
a Test Engineer, he has also
served as a Project Engineer.
His other duties include
overall product design and
quality and he also performs
price quoting functions.
</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, 1997,
1996, and 1995:
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------------------- ----------------------------------
Awards Payouts
----------------------------------
Name of Individual Other Restricted All
and Annual Stock Options/ LTIP Other
Principal Position Year Salary Bonus Compensation Awards SARs Payments Compensation
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David Wachtel 1997 $149,989* $ 2,408 $ 9,981 (1) $ 0 0 $ 0 $ 0
----
CEO 1996 149,989 0 5,742 (2) 0 0 0 0
----
1995 35,884 865 16,283 (3) 0 75,000 0 0
----
Mihai D. Patrichi 1997 0 0 2,242 (4) 0 0 0 0
----
CEO (deceased) 1996 0 0 18,130 (5) 0 0 0 0
----
1995 71,849 0 19,445 (6) 0 0 0 0
----
Edwin J. Turner 1996 49,043 2,000 2,025 (7) 0 0 0 0
----
Executive Vice 1995 80,326 692 0 0 500 0 0
----
President (retired)
Mohammad Tabassi 1997 78,525 1,237 3,073 (8) 0 0 0 0
----
Vice President 1996 72,841 1,000 0 0 0 0 0
----
1995 70,621 606 0 0 500 0 0
----
</TABLE>
No other executive officers were employed by the Company at June 30, 1997,
1996, or 1995.
*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 $9,981.
(2) Includes medical-related benefits of $5,742.
(3) Includes consulting fees of $9,500, director fees of $4,000, and
medical-related benefits of $2,783
(4) Includes medical-related benefits of $2,242.
(5) Includes medical-related benefits of $18,130.
(6) Includes medical-related benefits of $19,445.
(7) Includes medical-related benefits of $501 and a retirement gift of $1,524.
(8) Includes medical-related benefits of $3,073.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Option/SAR Grants in Last Fiscal Year
- ------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Individual Grants Appreciation
- ------------------------------------------------------------------------------------------------------------ Individual Grants
for Option Term
Name of Individual and % of Total Options/SARs Number of Securities Exercise or Expiration --------------------
Principal Position Granted to Employees in Underlying Base Price Date 5% 10%
Fiscal Year Options/SARs Granted
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
David Wachtel N/A N/A N/A N/A N/A N/A
CEO
Mohammad Tabassi N/A N/A N/A N/A N/A N/A
Vice President
</TABLE>
43
<PAGE> 44
ITEM 11. EXECUTIVE COMPENSATION (Continued)
<TABLE>
<CAPTION>
===============================================================================================================
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
- ---------------------------------------------------------------------------------------------------------------
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 0 $0 0/ 0 $0/$ 0
CEO
Mohammad Tabassi 0 0 0/500 0/ 188
Vice President
</TABLE>
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
-----------------------------------------------------------------------------------------------------
Remuneration 5 10 15 20 25 30
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 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>
Estimated
Name of Individual Covered Compensation Credited Service
- ------------------ -------------------- ----------------
<S> <C> <C>
David Wachtel $ 0 (*) 0
Mihai D. Patrichi (deceased) 235,527 (**) 40
Edwin J. Turner (retired) 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 director, 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
44
<PAGE> 45
ITEM 11. EXECUTIVE COMPENSATION (Continued)
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 from certain reporting persons that
have complied with the relevant filing requirements, the Company believes that
during the year ended June 30, 1997, all relevant Section 16(a) filing
requirements were complied with.
Compensation of Directors
During the year ended June 30, 1997, the Board of Directors met three times.
The Company paid director fees totaling $10,000, which consisted of $3,000 each
to Glenn Linderman, Rodica Patrichi, and Ileana Wachtel, respectively, and
$1,000 to Barry Bartholomew, who resigned as a Company director in July 1996.
During the year ended June 30, 1996, the Board of Directors met four times.
The Company paid director fees totaling $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 director fees totaling $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.
Compensation of Executives
For information concerning the employment agreement of Chief Executive Officer,
David Wachtel, see Note 12 to the Financial Statements included in Item 8.
45
<PAGE> 46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At September 26, 1997 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 of Beneficially Percentage
Category Beneficial Owner Owned of Class
(4)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Director Ileana Wachtel
9750 De Soto Avenue
Chatsworth, CA 91311 872,660 (1)(2)(3) 52.2%
Director Rodica Patrichi
73095 Shadow Mt. Drive
Palm Desert, CA 92260 791,486 (2) 47.4%
Director David Wachtel
/Officer 9750 De Soto Avenue
Chatsworth, CA 91311 872,660 (3) 52.2%
Director Glenn Linderman
2101 Robinson, #1
Redondo Beach, CA 90278 4,000 0.2%
Officer Mohammad Tabassi
19442 Romar St.
Northridge, CA 91324 24,013 1.4%
------- ----
All directors and officers as
a group (5 persons) 992,685 54.0%
======= ====
Other Moldovita Church
c/o 73095 Shadow Mt. Drive
Palm Desert, CA 92260 90,909 (5) 5.4%
======= ====
</TABLE>
46
<PAGE> 47
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) Includes 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 1,671,221 shares of common stock outstanding as of September 26,
1997.
(5) Rodica Patrichi is a co-trustee along with an unrelated party of a trust
that has voting power of these shares.
As of September 26, 1997, there were no required filings under Section 16 of
the Exchange Act of 1934 with respect to changes in beneficial ownership of the
Company's common stock occurring during or subsequent to the year ended June
30, 1997, which have not been reported on Forms 3, 4, or 5, respectively.
47
<PAGE> 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) In August 1996, the Company received a $100,000 loan from its
Vice President, Mohammad Tabassi, secured by accounts
receivable, with interest payable monthly at an annual rate
of 13%.
(b) During the year ended June 30, 1996, the Company's outstanding
advances previously made to Mr. Patrichi (totaling $27,228)
were repaid by the Mihai D. Patrichi Trust. Interest earned
(generally at 7% per annum) on the officer receivable amounted
to $0, and $1,781 for the fiscal years ended June 30, 1996 and
1995, respectively.
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 17
Financial Statements:
Balance Sheets -- June 30, 1997 and 1996 18
Statements of Operations --
Years Ended June 30, 1997, 1996, and 1995 20
Statement of Stockholders' Deficiency in Assets --
Years Ended June 30, 1997, 1996, and 1995 21
Statements of Cash Flows --
Years Ended June 30, 1997, 1996, and 1995 22
Notes to the Financial Statements 24
(2) The following financial statement schedule for the years 1997, 1996,
and 1995 is submitted herewith:
Schedule VIII -- Valuation and Qualifying Accounts 49
</TABLE>
All other schedules are omitted because they are not required, inapplicable,
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.
48
<PAGE> 49
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
Years Ended June 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Balance Charged to Charged To Balance,
Beginning Costs and Other End Of
Of Year Expenses Accounts Deductions Period
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Allowance for doubtful accounts $ 5,000 $ - $ - $ - $ 5,000
======== ======== ========= ======== ========
Reserve for slow-moving inventory $160,000 $ 20,000 $ - $ - $180,000
======== ======== ========= ======== ========
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
======== ======== ========= ======== ========
</TABLE>
- -------
(1) Uncollectible accounts receivable written off
49
<PAGE> 50
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
Chairman of the Board,
Chief Executive Officer,
President,
Chief Financial Officer
Date:
------------------------
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:
Director Date: ----------
- ----------------------
David Wachtel
Director Date:-----------
- ----------------------
Glenn Linderman
Director Date:-----------
- ----------------------
Ileana Wachtel
Director Date:-----------
- ----------------------
Rodica Patrichi
50
<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-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 185,144
<SECURITIES> 0
<RECEIVABLES> 792,063
<ALLOWANCES> 5,000
<INVENTORY> 1,189,802
<CURRENT-ASSETS> 2,225,841
<PP&E> 7,937,578
<DEPRECIATION> 5,723,480
<TOTAL-ASSETS> 4,640,662
<CURRENT-LIABILITIES> 1,343,507
<BONDS> 3,408,402
0
0
<COMMON> 417,805
<OTHER-SE> (529,052)
<TOTAL-LIABILITY-AND-EQUITY> 4,640,662
<SALES> 4,009,719
<TOTAL-REVENUES> 4,282,859
<CGS> 2,980,518
<TOTAL-COSTS> 3,774,720
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225,023
<INCOME-PRETAX> 283,116
<INCOME-TAX> (121,493)
<INCOME-CONTINUING> 161,623
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 161,623
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
