<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended December 31, 1996 COMMISSION FILE NUMBER 0-1817
NETWORKS ELECTRONIC CORP.
-----------------------------------------------------------------
(exact name of registrant as specified in its charter)
CALIFORNIA 95-1770469
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation of organization) Number)
9750 De Soto Avenue, Chatsworth, California 91311
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(Address or principal executive offices)
(818) 341-0440
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business of
CLASS 1,671,221
----------------------------- -------------------------------
Common Stock - $.25 par value Outstanding at February 1, 1997
1
<PAGE> 2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
NETWORKS ELECTRONIC CORP.
BALANCE SHEET
December 31, 1996 and June 30, 1996
<TABLE>
<CAPTION>
Dec. 31, June 30,
1996 1996
(unaudited) (audited)
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 132,014 $ 99,114
Trade accounts receivable - net 522,683 753,159
Other receivables 64,283 68,000
Inventories - net 1,145,433 1,043,256
Prepaid expenses and deposits 78,102 19,577
Deferred income taxes 9,469 9,469
---------- ----------
Total current assets 1,951,984 1,992,575
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Land 131,773 131,773
Building and improvements 2,791,585 2,194,703
Machinery and equipment 4,356,477 4,335,926
---------- ----------
7,279,835 6,662,402
Less accumulated depreciation 5,687,991 5,627,847
---------- ----------
Property and equipment, net 1,591,844 1,034,555
---------- ----------
DEFERRED INCOME TAXES,
NON-CURRENT PORTION 200,395 254,795
---------- ----------
Total assets $3,744,223 $3,281,925
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
NETWORKS ELECTRONIC CORP.
BALANCE SHEET
December 31, 1996 and June 30, 1996
<TABLE>
<CAPTION>
Dec. 31, June 30,
1996 1996
(unaudited) (audited)
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt $ 120,000 $ 120,000
Notes payable, related parties -
current portion 150,667 50,667
Accounts payable 441,588 535,013
Customer advances and deposits 20,684 -
Current portion of pre-petition debt:
Adjudication award payable 4,742 56,059
Accrued pension liability 193,600 188,800
Other Payables 29,135 31,315
Other accrued expenses 133,632 175,840
---------- -----------
Total current liabilities 1,094,048 1,157,694
---------- -----------
LONG-TERM DEBT:
Long-term debt, less current maturities 2,324,202 1,890,236
Notes payable, related parties 4,223 29,555
Accrued pension liability 443,050 446,850
Adjudication award payable 38,664 -
---------- -----------
COMMITMENTS AND CONTINGENCIES - -
---------- -----------
STOCKHOLDERS' DEFICIENCY IN ASSETS:
Common stock, par value $.25 per
share; authorized 10,000,000
shares, issued and outstanding
1,671,221 shares 417,805 417,805
Additional paid-in capital 280,985 280,985
Accumulated deficit (491,288) (573,734)
Stock subscriptions receivable (14,063) (14,063)
Pension liability adjustment (353,403) (353,403)
----------- ----------
Total stockholders'
deficiency in assets (159,964) (242,410)
----------- ----------
Total liabilities and stockholders'
deficiency in assets $ 3,744,223 $ 3,281,925
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
NETWORKS ELECTRONIC CORP.
STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1996 1995 1996 1995
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 978,629 $ 891,614 $1,908,012 $2,024,619
Cost of sales 738,327 605,168 1,420,068 1,356,382
--------- --------- ---------- ----------
Gross profit 240,302 286,446 487,944 668,237
Selling, adminis-
trative and other
operating expenses 159,597 166,130 337,205 330,433
--------- --------- ---------- ----------
Operating income 80,705 120,316 150,739 337,804
Other income (exp.):
Loss on disposition
of property - (20,773) - (7,273)
CRA debt forgiveness 11,231 - 87,170 -
Interest and non-
operating expenses,
net (48,766) (53,754) (100,263) (108,772)
--------- --------- ---------- ----------
Income before
income taxes 43,170 45,789 137,646 221,759
Income tax provision 17,200 24,000 55,200 89,800
--------- --------- ---------- ----------
Net income $ 25,970 $ 21,789 $ 82,446 $ 131,959
========= ========= ========== ==========
Net income
per share $ .02 $ .01 $ .05 $ .08
========= ========= ========== ==========
Average weighted
number of shares
outstanding 1,671,222 1,596,221 1,671,221 1,596,221
========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
NETWORKS ELECTRONIC CORP.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
December 31, December 31,
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 82,446 $ 131,959
--------- ---------
Adjustments to reconcile net income
to net cash used in
operating activities:
Non-cash items included
in net income:
Depreciation and
amortization 60,144 62,256
Loss on disposition
of property - 7,273
Deferred income taxes 54,400 87,500
Changes in:
Receivables 234,193 213,597
Inventories (102,177) (112,091)
Prepaid expenses and deposits (58,525) (100,182)
Accounts payable and
accrued expenses (150,466) (22,486)
Customer advances and deposits 20,684 -
Income taxes - (6,276)
Accrued pension liability 1,000 (2,400)
--------- ---------
Total adjustments 59,253 127,191
Net cash provided by
operating activities 141,699 259,150
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
NETWORKS ELECTRONIC CORP.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
December 31, December 31,
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from investing activities:
Capital expenditures $(617,433) $ (85,500)
Net proceeds from disposition
of property - 13,500
--------- ---------
Net cash used in
investing activities (617,433) (72,000)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings 493,966 58,914
Proceeds from notes payable,
related parties 122,000 -
Mortgage debt reduction (60,000) (60,950)
Payments on notes payable,
related parties (47,332) (25,333)
--------- ---------
Net cash provided by (used in)
financing activities 508,634 (27,369)
--------- ---------
Net increase in
cash and cash equivalents 32,900 159,781
Cash and cash equivalents
at beginning of period 99,114 117,494
--------- ---------
Cash and cash equivalents
at end of period $ 132,014 $ 277,275
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 800 $ 9,500
========= =========
Interest paid $ 101,226 $ 116,167
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. BASIS OF PRESENTATION
---------------------
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly its
financial position and the results of its operations and cash flows for
the periods shown.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The results of
operations for the respective three and six month periods are not
necessarily indicative of the results to be expected for a full year of
operations.
2. INVENTORIES
-----------
Inventories are valued at the lower of cost (FIFO) or market. The
inventories at December 31, 1996 and June 30, 1996 consisted of the
following:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
(unaudited) (audited)
---------- ----------
<S> <C> <C>
Raw materials $ 183,803 $ 133,818
Work in process 566,399 376,998
Finished goods and components 585,231 742,091
---------- ----------
1,335,433 1,252,907
Less progress payments - (49,651)
Less reserve for obsolescence (190,000) (160,000)
---------- ----------
Total $1,145,433 $1,043,256
========== ==========
</TABLE>
7
<PAGE> 8
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
3. LONG-TERM DEBT
--------------
At December 31, 1996 and June 30, 1996, the Company's long-term debt
consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
(unaudited) (audited)
----------- -----------
<S> <C> <C>
Note payable to bank, secured by deed of
trust on land and building, principal
payable in monthly installments of
$10,000 through June 2000, with
interest payable at a reference rate
(10.50% at both December 31, 1996 and
June 30, 1996, respectively). A balloon
payment is due in June 2000. $1,762,528 $1,822,528
Note payable to Community Redevelopment
Agency ("CRA"), non-interest bearing,
construction loan, secured by real
estate, no principal payments required
through April 2001, with level monthly
principal payments applicable over
20 years through April 2021. 681,674 187,708
---------- ----------
2,444,202 2,010,236
Less current maturities 120,000 120,000
---------- ----------
Total $2,324,202 $1,890,236
========== ==========
</TABLE>
8
<PAGE> 9
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
4. NOTES PAYABLE, RELATED PARTIES
------------------------------
(a) In January 1995, the Company received a $152,000 loan from the
estate of its former president and chief executive officer, secured by
specific machinery and equipment. The loan is being repaid in equal
monthly principal installments of $4,222 (plus interest at 10%) over a
three year period. A loan fee of $2,000 was charged to consummate the
transaction. The outstanding loan balance at December 31, 1996 and June
30, 1996 was $54,890 and $80,222, respectively. The current portion of
the debt at both December 31, 1996 and June 30, 1996 was $50,667.
Interest expense on this note during the six month periods ended
December 31, 1996 and 1995 was $3,346 and $5,936, 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. Through December 31, 1996,
interest expense on this loan amounted to $4,630.
(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.
5. GAIN ON DISPOSITION OF PROPERTY
-------------------------------
During the six months ended December 31, 1995, the Company sold fully
depreciated machinery for $13,500.
6. FORGIVENESS OF DEBT
-------------------
During the six months ended December 31, 1996, the Community
Redevelopment Agency ("CRA") disbursed funds in the amount of
approximately $581,136 for the retrofit and repair of the Company's
damaged building at its Chatsworth site. The damage was sustained as a
result of the Northridge Earthquake in January 1994. Of this
commitment, 15% or approximately $87,170 was a grant and was recorded
as forgiveness of debt income for the period. At December 31, 1996,
cumulative funds disbursed by the CRA since the inception of the loan
agreement in April 1996 amounted to approximately $801,969, of which
$120,295 has been recognized as forgiveness of debt income and $681,674
as long-term debt (see Note 3 above). An additional $433,663 in
construction costs for building improvements related to a lease
agreement (see Note 8 below) have been incurred through January 27,
1997 and have been submitted
9
<PAGE> 10
NETWORKS ELECTRONIC CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
6. FORGIVENESS OF DEBT (continued)
-------------------
to the CRA for approval and payment. $12,032 of these additional costs
were incurred through December 31, 1996. Subsequent disbursement of
funds covering the additional costs would bring cumulative CRA payments
to approximately $1,235,632 out of a total $1,300,000 commitment, along
with the recognition of another $65,049 in debt forgiveness income.
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.
During the year ended June 30, 1996, the Company's chief executive
officer exercised 75,000 stock options which had been granted outside
of the Company's existing Stock Option Plan, at an exercise price of
$.1875 per share. Accordingly, an outstanding stock subscription
receivable in the amount of $14,063 has been recorded at both the
December 31, 1996 and June 30, 1996 balance sheet dates.
8. LEASE AGREEMENT
---------------
The Company has negotiated the lease of approximately 35,000 square
feet of its Chatsworth facility. The lease agreement calls for monthly
base rent to be approximately $17,850, with 2 months free and a cost of
living increase every 18 months over the initial 62 month period. The
lessee will have an option to extend the original lease term for an
additional 60 months. Additionally, the lessee has contributed a
nonrefundable deposit of $100,000 toward the Company's cost of
constructing improvements to its Chatsworth property and will loan the
Company up to $288,000 at an annual rate of 10% to fund additional
improvements. The loan will be amortized monthly over 5 years, with the
monthly payment netted against the lessee's rent. In October 1996, the
lessee reimbursed the Company for $26,775 in broker fees and $23,175 in
other costs incurred in connection with negotiating the lease
arrangement, and also paid the initial month's base rent of $17,850. In
December 1996, the lessee paid $22,419 for additional professional fees
associated with the completion of the finalized lease agreement. The
commencement date of the tenancy will be approximately February 23,
1997.
10
<PAGE> 11
NETWORKS ELECTRONIC CORP.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Results of Operations
- ---------------------
Overall sales for the quarter ended December 31, 1996, increased by about 10%
from the prior year, reflecting the general pick-up in orders occurring
throughout the aerospace industry. Bearing Division sales increased 5%, while
Ordnance Division sales increased a robust 18%.
Sales for the six months ended December 31, 1996 decreased 6% to $1,908,000 from
$2,025,000 for the comparable period of the prior year. The decrease can be
attributed largely to a partial payment on a time and materials contract in the
Ordnance Division that was subsequently canceled for the customer's convenience
in September 1995. This billing generated approximately $239,000 in sales
revenue in the year-ago period. As a result, Ordnance Division sales decreased
by approximately 5%. The Bearing Division sales (comprising 57% of the total
sales mix) decreased by approximately 6%, largely as the result of delays in
some shipments from the December 1996 quarter to the March 1997 quarter.
Company backlogs as of February 1, 1997 have increased to approximately
$2,700,000 for both divisions. The Bearings Division backlog is approximately
$2,000,000 and the Ordnance Division backlog is approximately $700,000. This
represents a total increase of approximately $700,000 from year-ago levels.
Bookings for the Company show a positive growth trend. Total backlogs have
approximately doubled since June 30, 1996, reflecting the results of the
rebuilding plan to market and sell the Company's products and services. The book
to bill ratio for the period ending December 31, 1996 was approximately 1.64
compared to approximately 0.9 for the same period last year. This positive trend
in bookings has continued into the current period and will translate into
increased sales for the Company in the forthcoming months.
The Company's gross profit margins decreased to approximately 26% during the six
months ended December 31, 1996, from approximately 33% during the six months
ended December 31, 1995, due in large measure to ongoing competitive price
pressures throughout the industry, preventing the Company from passing on
increased labor costs (as part of the Company's wage normalization policy) to
its customers.
While gross margins are down from the similar period last year, the Company
continues to improve its operating efficiencies. This positive trend is shown by
the return on revenue ratio (operating income as a percentage of Sales), which
has climbed steadily since the Company's return to profitability. For fiscal
year ending June 1995, the Company's return on revenue ratio was 1.55%, for
fiscal year ending June 1996 it was 4.45% and for the current six-month
reporting period it was 7.9%.
11
<PAGE> 12
NETWORKS ELECTRONIC CORP.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Results of Operations (Continued)
- ---------------------------------
General, administrative and selling expenses increased by 2% (approximately
$7,000) compared to the six month period ended December 31, 1995. The increase
was due primarily to higher wages paid to administrative personnel, as well as
to increased fees for professional services associated with corporate legal and
administrative matters. Expectations that selling and G & A expenses will level
off in the months ahead should be tempered somewhat by the possibility that the
Company may undergo a period of more sustained sales growth, calling for the
hiring of additional personnel.
Net interest expense declined by 9% (approximately $10,000) compared to the six
months ended December 31, 1995. Although average aggregate borrowings climbed
compared to a year ago (by about $250,000), the fact that the CRA loan is
non-interest bearing served to reduce the effective interest rate to
approximately 9% during the six month period ended December 31, 1996 from
approximately 11% for the six month period ended December 31, 1995. Excluding
the possible effects of terms applicable to a loan refinance or a new credit
line, the effective interest rate should continue to decline in the months
ahead, due to additional CRA construction financing at 0%.
Liquidity and Capital Resources
- -------------------------------
The Company had working capital of approximately $860,000 at December 31, 1996,
as compared to approximately $835,000 at June 30, 1996. The increase of
approximately $25,000 was due primarily to pre-tax income for the six month
period of $110,000 (excluding debt forgiveness and depreciation), plus the
reclassification of $38,000 of an adjudication award liability from short to
long- term, less $87,000 in net payments made on long-term debt, less roughly
$36,000 in capital expenditures made for new phone and computer systems (as part
of a modest program of office modernization). With the Community Redevelopment
Agency loan commitment and the commencement of a 5 year tenant lease for a
portion of the Chatsworth facility, management believes that the Company can
continue to generate enough earnings to meet short and medium-term financing
needs.
The Company's cash position increased by approximately $33,000 from June 30,
1996 levels, to about $132,000 at the December 31, 1996 balance sheet date. The
increase was largely related to the Company's increased diligence in the
collection of its accounts receivable. Management is continuing to seek the
refinance of its mortgage and the establishment of a line of credit to support
its operating requirements, the largest of which is a defined benefit pension
plan contribution of approximately $160,000 due by March 1997 which, if not paid
timely, could result in the imposition of a 10% excise tax by the Internal
Revenue Service.
12
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Factors That May Affect Future Results and Financial Condition
- ---------------------------------------------------------------
Potential risks and uncertainties that could affect the Company's future
operating results and financial condition include, without limitation, the
following factors:
HISTORY OF LOSSES; VARIABILITY OF OPERATING RESULTS
The Company is in the process of emerging from bankruptcy protection. Despite
historical losses, the Company experienced its first operating profit in four
years during the year ended June 30, 1995, in the amount of approximately
$47,000, and a second consecutive operating profit during the year ended June
30, 1996 in the amount of approximately $175,000. The Company's revenues and
operating results have varied substantially from period to period. There can be
no assurance that the Company will be profitable in the future or that future
revenues and operating results will not also vary substantially. New management
has expended and continues to expend substantial time and resources in
attempting to resolve problems arising from the Company's financial condition
and to restore confidence in the Company. Although the research and development
expenditures of the Company have increased, its financial condition limits its
ability to engage in large scale research and development. Also, the Company's
financial condition has limited the ability of the Company to modernize its
plant and equipment which hinders the Company's marketing efforts. Future
revenues and profits, if any, will depend upon various factors, including, but
not limited to, management's ability to restore confidence in the Company,
continued market acceptance of the Company's current products, the ability of
the Company to develop distribution and marketing channels and develop and
introduce new products or to develop new markets for its existing products and
the successful implementation of its planned marketing strategies. If the
Company is not able to achieve its operating objectives, the Company may find it
necessary to reduce its expenditures for sales, marketing, and research and
development, or undertake other such actions as may be appropriate, and may be
otherwise unable to achieve its goals or continue its operations.
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Factors That May Affect Future Results and Financial Condition (Continued)
- --------------------------------------------------------------------------
COMPETITION
Certain of the Company's existing and potential competitors have substantially
greater financial, marketing and other resources than the Company. These
competitors have also been able to market their products successfully to the
Company's existing and potential customers in the defense and aerospace
industries. Increased competition could result in price reductions, reduced
margins and loss of market share, all of which could materially adversely affect
the Company. The Company has determined to follow a strategy of continuing
product development to the extent permitted by the financial resources of the
Company to protect its competitive position to the extent practicable. There can
be no assurance that the Company will be able to maintain its position in the
field or continue to compete successfully against current and future sources of
competition or that the competitive pressures faced by the Company will not
adversely affect its profitability or financial performance.
TECHNOLOGICAL CHANGE
The markets for specialized bearings and ordnance products are characterized by
advances in technology. Accordingly, the Company's ability to compete in those
markets may depend in large part on its success in enhancing its existing
products and in developing new products. There can be no assurance that the
Company will succeed in such efforts or that any of its products will not be
rendered obsolete or uneconomical by technological advances made by others.
DEPENDENCE ON KEY CUSTOMERS
During each of the six month periods ended December 31, 1996 and 1995, sales to
the Department of Defense by the Company constituted approximately 17%,
respectively, of the Company's sales. Sales to Hughes Missile Systems and
Industria Engineering accounted for approximately 17% and 12%, respectively, of
Company sales for the six months ended December 31, 1995. A significant decline
in sales of any of these key customers could adversely affect the Company.
DEPENDENCE UPON DEFENSE INDUSTRY
The Company has been supplying components for United States defense programs for
over forty years. Reliance upon defense programs has certain inherent risks,
including the uncertainty of economic conditions, dependence on Congressional
appropriations and administrative allotment of funds, changes in governmental
policies that may reflect military and political developments and other factors
characteristic of the defense industry. The Company is unable to predict the
impact on defense appropriations for programs in which the Company's products
are incorporated.
14
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Factors That May Affect Future Results and Financial Condition (Continued)
- --------------------------------------------------------------------------
PRODUCT LIABILITY AND RISK MANAGEMENT
As a manufacturer of ordnance products and specialized bearings for the defense
and aerospace industries, the Company is subject to the risk of claims arising
from injuries to persons or property. The Company maintains general liability
insurance but does not maintain product liability insurance. Although the
Company has instituted quality control procedures that it believes produce
products of the highest quality, the Company may become subject to future
proceedings alleging defects in its products.
NO EARTHQUAKE INSURANCE
The Company's principal executive offices are located in a facility owned by the
Company in Chatsworth, California an area which was damaged in the 1994
Northridge, California earthquake. The Company does not currently carry
insurance against earthquake-related risks. The Company suffered approximately
$1.2 million in damages, costs and renovations to its facility resulting from
that earthquake, and recovered only approximately $384,000 from insurers as a
result of insured flood damage caused by the earthquake.
KEY PERSONNEL
The Company's success is highly dependent on the efforts and abilities of its
Chairman, David Wachtel and a number of key employees. The loss of services of
Mr. Wachtel or these key employees could have material adverse effect on the
Company.
CONTROL OF COMPANY
The Mihai D. Patrichi Trust (the "Trust") presently owns of record approximately
47.3% of the Company's outstanding voting stock. Accordingly, the Trust is able
to control the election of a majority of the directors, and, therefore, the
business and affairs of the Company and approve or disapprove any corporate
action submitted to a vote of the Company's shareholders, in each case
regardless of how other shareholders of the Company may vote. The provisions of
the Trust provide that the trustees act in a prudent manner to dispose of the
Trust's interest in the Company. In the matter of In Re: Mihai D. Patrichi Trust
(Case No. BP03796), now pending in the Superior Court of California for the
county of Los Angeles, Michael Patrichi, one of the beneficiaries of the Trust,
is attempting to remove and replace the co-trustees of the Trust, Ileana Wachtel
and Rodica Patrichi. Sale by the Trust of its interest in the Company would
effect a change in the control of the Company. Sales of substantial amounts of
Common Stock in the public market under Rule 144 or otherwise, or even the
potential for such sales, could adversely affect the prevailing market prices
for the Common Stock and could impair the ability to raise capital through the
sale of its equity securities.
15
<PAGE> 16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Factors That May Affect Future Results and Financial Condition (Continued)
- --------------------------------------------------------------------------
CONTRACTS
The Company generates substantially all of its revenues pursuant to procurement
contracts for custom designed or manufactured bearings or ordnance products. The
ability of the Company to generate additional revenues will depend upon its
ability to obtain additional contracts. Substantially all of the Company's
contracts are on a fixed-fee basis. Accordingly, the Company is subject to the
risk of cost overruns. Because the Company manufactures ordnance and specialized
bearings for the defense and aerospace industries, the Company is subject to
extremely stringent quality control standards and testing. These standards are
implemented through internal operational quality control procedures of the
Company and through customer audits. Furthermore, lot acceptance test procedures
("LATs") are required by the Company's customers. These LATs include
environmental testing and detonation and non-detonation tests. Generally, the
Company's ordnance products are manufactured in batches and then subjected to
LATs under standards that result in rejection of an entire manufactured batch if
a single unit fails. From time to time, the Company has experienced LATs
failures resulting from human error or technical problems. Occurrence of LATs
failures of this type on large contracts could adversely impact the revenues of
the Company and no assurance can be given that such failures will not occur in
the future.
VOLATILITY OF WORKLOAD
To remain profitable, the Company is highly dependent on its ability to maintain
a suitably sized staff of qualified technical personnel commensurate with a
fluctuating volume of work. New contracts often arise at unscheduled or
unanticipated times. The Company endeavors to maintain adequate staff to respond
to these unscheduled opportunities. If the Company overestimates its projected
workload, the resulting financial burden can reduce profitability. Occasionally,
the Company is faced with the opposite problem - a shortage of suitable
technical personnel - or the funds to pay premium rates to obtain the necessary
skilled labor that is in short supply, and is unable to timely perform
contracts, potentially resulting in cost overruns or late delivery penalties.
16
<PAGE> 17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Factors That May Affect Future Results and Financial Condition (Continued)
- --------------------------------------------------------------------------
GOVERNMENTAL REGULATION
The Company's operations are subject to, and substantially affected by,
extensive federal, state and local laws, regulations, orders and permits, which
govern environmental protection, health and safety, zoning and other matters.
These regulations may impose restrictions on the Company's operations that could
adversely affect the Company's results, such as limitations on the expansion of
metals plating facilities of the Company, limitations on or banning disposal of
certain categories of waste, or mandates regarding the disposal of hazardous
waste generated by the Company's operations. Because of heightened public
concern, companies in the metals plating business, including the Company, may
become subject to judicial and administrative proceedings involving federal,
state or local agencies. These governmental agencies may seek to impose fines on
the Company or to revoke or deny renewal of the Company's waste generation and
disposal permits or licenses for violations of environmental laws or regulations
or to require the Company to remediate environmental problems resulting from its
operations, all of which could have a material adverse effect on the Company.
The Company may also be subject to actions brought by individuals or community
groups in connection with the permitting or licensing of its operations, any
alleged violations of such permits and licenses, or other such matters.
PREMISES BUILD-OUT
The Company has commenced retrofitting and repairing of the north building of
its Premises which was damaged in the Northridge Earthquake. This project is
being funded by loans and grants from the Community Redevelopment Agency of the
City of Los Angeles. The Company has entered into a construction contract to
accomplish the retrofit and repair of the north building and anticipates that
the funding procured from the Community Redevelopment Agency will be sufficient
to fund all anticipated costs under the contract. However, the Company will be
required to fund any unanticipated cost overruns from operating reserves or with
additional financing. There can be no assurance that additional financing would
be available on terms acceptable to the Company. If the Company is required to
fund construction with its cash reserves, resulting cash constraints could limit
the Company's ability to improve the remainder of its plant and equipment and to
fund other operating requirements of the Company.
17
<PAGE> 18
NETWORKS ELECTRONIC CORP.
PART II
OTHER INFORMATION
Item 2. Shareholders Stock Information
- ---------------------------------------
Through January 4, 1993, Networks Electronic Corp.'s stock was traded in NASDAQ
OVER-THE-COUNTER MARKETS and was listed in NATIONAL MARKET ISSUES under NWRK.
Subsequent to that date, due to certain size and activity requirements, the
stock of Networks Electronic Corp. was removed from trading on the NASDAQ
national market system. The stock is currently traded on the OTC Electronic
Bulletin Board.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Annual Meeting of Shareholders for Networks Electronic Corp. took place on
Friday, December 13, 1996.
All four of the Company's directors, namely, David Wachtel (Chairman of the
Board), Glenn Linderman, Ileana Wachtel (Corporate Secretary), and Rodica
Patrichi were re-elected and will continue to act in their same capacities in
the ensuing year. Actual votes cast a the meeting were as follows: David Wachtel
- - 1,420,926 votes for, 18,812 votes withheld; Glenn Linderman - 1,422,381 votes
for, 17,357 votes withheld; Ileana Wachtel - 1,420,836 votes for, 18,902 votes
withheld, and Rodica Patrichi - 1,420,836 votes for, and 18,902 votes withheld.
The only other matter voted on at the meeting concerned the adoption of the
Company's 1996 Stock Incentive Plan, which was ratified and approved by
shareholders. The voting was as follows: 1,165,190 votes for the proposal,
25,902 votes against the proposal, and 8,375 abstentions, with approximately
240,271 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
Reports on Form 8-K: There were no reports on Form 8-K filed for the three
months ended December 31, 1996.
18
<PAGE> 19
NETWORKS ELECTRONIC CORP.
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETWORKS ELECTRONIC CORP.
(Registrant)
BY: DAVID WACHTEL
---------------------------
DAVID WACHTEL
Chairman of the Board,
Chief Executive Officer,
President, Chief Financial
Officer
Date: February 12, 1997
-----------------------
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF INCOME, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 132,014
<SECURITIES> 0
<RECEIVABLES> 591,966
<ALLOWANCES> 5,000
<INVENTORY> 1,145,433
<CURRENT-ASSETS> 1,951,984
<PP&E> 7,279,835
<DEPRECIATION> 5,687,991
<TOTAL-ASSETS> 3,744,223
<CURRENT-LIABILITIES> 1,094,048
<BONDS> 2,810,139
0
0
<COMMON> 417,805
<OTHER-SE> (577,769)
<TOTAL-LIABILITY-AND-EQUITY> 3,744,223
<SALES> 978,629
<TOTAL-REVENUES> 989,860
<CGS> 738,327
<TOTAL-COSTS> 897,924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,766
<INCOME-PRETAX> 43,170
<INCOME-TAX> 17,200
<INCOME-CONTINUING> 25,970
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,970
<EPS-PRIMARY> .02
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