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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
COMMISSION FILE NUMBER 0-1817
NETWORKS ELECTRONIC CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 95-1770469
(STATE OR OTHER JURISDICTION OF INCORPORATION
OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
9750 DE SOTO AVENUE
CHATSWORTH, CALIFORNIA 91311
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (818) 341-0440
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<S> <C>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
NONE NONE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $0.25 PAR VALUE
TITLE OF CLASS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
The aggregate market value of the shares of common stock (based on the
closing sales price of these shares on September 25, 1998) held by nonaffiliates
of the registrant was $2,292,192.
The number of shares outstanding of the registrant's common stock, $.25 par
value, was 1,672,221 at September 25, 1998.
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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 US Government defense prime contractors.
The Company was incorporated in the State of California in October 1953. The
Company operates two divisions:
1. US Bearing Division
The US Bearing Division designs, engineers and fabricates spherical,
self-aligned, self-lubricating and specialized bearings used primarily in the
aerospace and defense industries. In many cases these high precision bearings
(including rod-ends, journals, bushings and connecting links) are designed and
fabricated under demanding quality standards in order to support extreme load
and temperature criteria. These parts are used in numerous applications in both
aircraft as well as space applications, including space shuttles and the Space
Station. Examples of usage are in door and window structures, landing gear,
wings, engines and turbo-thrust support. The Company utilizes its engineering
capability to support its marketing efforts by maintaining an ongoing rapport
with engineers at numerous Original Equipment Manufacturers ("OEMs"). This
cooperative engineering relationship provides the US Bearing Division the
opportunity to win approvals to manufacture many new items.
The Division competes primarily in an arena where the items are non-catalog
items, termed "specials." In this arena, it is necessary to be pre-approved to
manufacture the parts by having the Company's name listed as an approved
manufacturer on the OEM drawing. The US Bearing Division holds thousands of such
approvals, and is in constant communication with many OEMs on cooperative
engineering projects. Once approvals are obtained the Division is able to sell
its product both in the production and after market cycles. The Division sells
its products through agents, manufacturers' representatives, distributors and
its own in-house sales effort.
2. Ordnance Technology Division
The Ordnance Technology Division designs, engineers and fabricates high
precision miniature pyrotechnic devices. These devices are mostly sold to prime
defense contractors for munitions applications. These highly specialized
electro-mechanical devices, such as squib switches, piston actuators, cord and
wire cutters, initiator-igniters, and thermal relay switches are all single use
items and are used in numerous custom applications to cut cords and wires,
initiate subsequent charges, pull pins, ignite fuel cells, and change the state
of switch contacts for power bus transfers. As in the US Bearing Division the
marketing of the Division's products is supported by ongoing cooperative
engineering relationships. These efforts have resulted in the creation of many
new approvals over the years. Currently in excess of 30% of the Ordnance
Division backlog of unfilled orders are from approvals received in the past 24
months. The Division sells its products through agents, distributors and its own
in-house sales effort.
PRODUCT DEPENDENCY
For fiscal year 1998, Ordnance Division igniters represented approximately
15% of the total revenue for the year, and spherical bearings represented
approximately 29% of the Company's total revenue. For fiscal year 1997, Ordnance
Division igniters represented approximately 20%, switches and relays represented
approximately 15% of the Company's revenue while spherical bearings represented
30% of the Company's total revenue. For fiscal year 1996 the Ordnance Division
switches and relays represented approximately 20% of the Company's revenue and
spherical bearings represented approximately 38% of the Company's revenue.
The Company uses a self-lubricating teflon based liner system on many of
its bearings. Specifications for this liner system are governed by the military
standard MIL-B-81820. It is necessary for the Company to
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requalify this system once every five years. The Company is currently undergoing
the necessary testing to achieve this certification and has no reason to believe
that it will not do so. However, failure to achieve this certification could
adversely affect the Company's business.
Many of the Company's parts including various bearings, igniters, and
actuators are sold as sub-components of larger systems. The Company is not
always able to track the actual placement of these items and therefore may be
affected by cancellations of any programs that use these parts as
sub-components.
CUSTOMER DEPENDENCY
The Company's Bearing Division manufactures specialized bearings for sale
to the defense and aerospace industries either directly to the US Government or
to Government prime contractors, such as: The Boeing Company and Lockheed Martin
Corporation. Only the Department of Defense (27%) and National Precision Bearing
(11%) contributed 10% or more of the Bearing Division's revenues during the
fiscal year ended June 30, 1998. The Company's Ordnance Division manufactures
electro-pyrotechnic devices for the defense and aerospace industries. Its
products are sold to a few prime contractors such as: Eagle Picher and Textron
Systems. These customers accounted for 35% and 34%, respectively, of the
Ordnance Division's revenues for the fiscal year ended June 30, 1998. No other
customer accounted for 10% or more of the Ordnance Division's revenues. Most of
the items sold to Textron Systems are for a significant smart missile program.
The Company has in place a long-term supplier agreement through 2003 whereby the
Company may supply parts to Textron Systems for this and similar programs. While
the Company has no reason to believe it will lose any of its key customers, or
that any key programs might be cancelled, the loss of business of any key
customer, or program cancellation could adversely affect the Company's overall
business.
The Company does a significant amount of business with government agencies
and prime contractors of the Government. In many of these contracts the
customers have the ability to terminate these contracts at their convenience.
Even though these contracts may be terminated under this provision, the
customers are generally liable for all incurred expenses plus a pro-rata profit
on the contracts.
BACKLOG
At June 30, 1998, the Company's backlog was approximately $5,100,000,
compared with $3,900,000 at June 30, 1997. It is expected that substantially all
of these orders will be fulfilled by June 30, 1999.
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. The Company is dependent on a single vendor, Sargent
Controls, for the adhesive used in the liner system on some of the bearings it
manufactures. This item is readily available and the Company has never
experienced difficulty in obtaining it.
PATENTS
While the Company has historically carried numerous patents, it is not
dependent on these for its current business. Rather, it depends primarily upon
technical know-how, product technology, customer service and product approvals
to protect its position.
COMPETITION
The Company encounters varied degrees of competition depending upon the
division involved. While some of the Company's competitors are of similar size
and capacity, most of the Company's competitors are divisions or segments of
large diversified companies with financial resources greater than those of the
Company.
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The Bearing Division sells its product lines in competitive markets on the
basis of a combination of price, delivery, and product quality, while products
in the Ordnance Division are sold on a less competitive basis due to the highly
specialized and technical nature of its product lines.
The Company's two Divisions sell a number of products for which they are
the sole source.
Additionally, the Company has vertical capabilities including, engineering
support, a full machine shop, a plating facility, furnaces for glass-to-metal
sealing, powder-mixing capabilities and testing equipment, which the Company
believes serve to distinguish the Company from many of its competitors. These
capabilities allow the Company to rapidly complete Research and Development on
new items as well as offer extremely competitive lead times.
The Company is currently engaged in an implementation of the ISO 9001
quality standard and expects that this Certification, if and when achieved, will
enhance its competitive standing in its markets.
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, 1998, 1997, and 1996 on such activities
was approximately $51,000, $6,000, and $97,000, respectively. A significant
portion of the 1998 and 1996 expenditures related to the qualification process
for new Ordnance devices.
ENVIRONMENTAL CONTINGENT LIABILITIES
In its normal course of business the Company uses materials which require
specialized handling and disposal and subject the Company to higher levels of
environmental scrutiny. The Company believes it is in compliance with all
material applicable regulations.
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, 1998, the Company had approximately 71 employees, as compared
with 60 at June 30, 1997. The Bearings Division has 36 employees, the Ordnance
Division, 26, with the remaining employees filling general sales and
administration positions.
CORPORATE SUMMARY OF RESULTS BY DIVISION
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Bearing Division:
Sales*...................................... $3,338 $2,087 $2,383 $1,895 $1,530
Pretax income (loss)**...................... 474 51 212 1,117 (398)
Identifiable assets......................... 3,434 2,892 1,984 2,133 1,759
Ordnance Division:
Sales*...................................... 2,662 1,923 1,550 1,112 1,253
Pretax income (loss)**...................... 1,068 457 47 633 (146)
Identifiable assets......................... 2,247 1,749 1,298 1,042 844
Capital expenditures of each segment:
Bearings.................................... 216 856 181 28 2
Ordnance.................................... 110 442 138 17 3
</TABLE>
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* No intersegment sales.
** Does not include interest expense in any of the five years presented.
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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 16 of the notes to the
financial statements.
ITEM 3. LEGAL PROCEEDINGS
See Note 15 of the notes to the financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
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>
1997
1st Quarter............................................... 1 3/8 7/8
2nd Quarter............................................... 1 3/8
3rd Quarter............................................... 7/8 3/8
4th Quarter............................................... 1 5/16 5/8
1998
1st Quarter............................................... 11/16 5/8
2nd Quarter............................................... 1 5/16 1
3rd Quarter............................................... 2 9/16 1 1/8
4th Quarter............................................... 3 7/8 2 1/16
</TABLE>
Networks Electronic Corp. stock was formerly listed on NASDAQ, the
over-the-counter market, as NWRK. As of May 7, 1993, the stock has been quoted
on the OTC electronic bulletin board.
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF RECORD HOLDERS
TITLE OF CLASS (AS OF SEPTEMBER 25, 1998)
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<S> <C>
Common stock, $.25 par value.......................... 920*
</TABLE>
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* 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. No common
stock dividends have been declared during the last five years. Payment of future
dividends will be within the discretion of the
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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.
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL HISTORY
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------
1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Operations
Net sales.................................. $6,000 $4,010 $3,933 $3,007 $ 2,783
------ ------ ------ ------ -------
Net income (loss).......................... 980 162 31 1,767 (800)
------ ------ ------ ------ -------
Net income (loss) per common share......... .59 .10 .02 1.11 (.50)
------ ------ ------ ------ -------
Financial position
Working capital (deficiency)............... 1,467 882 835 1,128 (1,004)
------ ------ ------ ------ -------
Stockholders' equity (deficiency in
assets).................................... 945 (111) (242) (32) (1,877)
------ ------ ------ ------ -------
Total assets............................... 5,681 4,641 3,282 3,175 2,603
------ ------ ------ ------ -------
Long-term debt............................. 3,009 3,408 2,367 2,327 1,966
------ ------ ------ ------ -------
</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.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Currently pending in the Superior Court of California for the county of Los
Angeles is the probate matter of In Re: Mihai D. Patrichi Trust (Case No.
BP03796). The court has tentatively ruled that the trustees of the Mihai D.
Patrichi Trust (the "Trust") must dispose of the Trust's shares in the Company.
The Trust presently owns of record approximately 47.3% of the Company's
outstanding voting stock. Accordingly, the Trust is, as a practical matter, 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. Sale by the Trust
of its interest in the Company would effect a change in the control of the
Company.
As a result of the improved performance of the Company over the last three
years, management believes that the Company is favorably positioned to
investigate investment opportunities and evaluate strategic alternatives that
may enhance shareholder value while mitigating the possible effects of the sale
of the Trust's interest in Networks.
The Board of Directors has established a special committee (the "Special
Committee") to examine these issues and to make recommendations to the Board of
Directors as to what actions the Company should take. The Special Committee is
in the process of retaining the services of an investment-banking firm to
determine the course of conduct to be adopted by the Company and to investigate
methods of enhancing shareholder value.
The Company believes that there is a significant possibility that the
Special Committee may make a recommendation to the Board of Directors to pursue
a transaction that may result in a change of control, and that absent any action
by the Board of Directors, a change of control would likely occur in connection
with a sale by the Trust of its interest in the Company.
1998 AND 1997
RESULTS OF OPERATIONS
Company net sales for the year ended June 30, 1998 increased approximately
50% to $6,000,000 from $4,010,000 for the prior year. The Bearing Division's net
sales, comprising approximately 56% of the current year's sales mix, increased
by 60% and the Ordnance Division's net sales increased by 38%. For the quarter
ended June 30, 1998, net sales increased by 65% to $1,713,000 from $1,034,000
for the comparable period of the previous year.
The Company believes that with the current backlog of unfilled orders in
excess of $5,000,000 and with the increased capacity resulting from the new
machine shop, along with improved vendor relations, this higher level of sales
activity can be sustained through the current fiscal year. This is evidenced by
the strong performance, relative to prior periods, for the recently completed
first quarter of fiscal year 1999. At June 30, 1998 the backlog of unfilled
orders was approximately $5,100,000. In contrast, the backlog at June 30, 1997
was $3,900,000.
Gross profits improved to 31.7% from 25.7% in the prior year, due to both
increased sales volume and numerous efficiencies brought about through
organizational improvements. The Bearing Division margins increased by
approximately 5 percentage points from the year ended June 30, 1997, while the
Ordnance Division margins increased by approximately 9 percentage points from
the year ended June 30, 1997.
Selling, general, and administrative expenses declined by approximately 28%
($218,000), due mostly to a decrease in legal and professional fees and an
increased allocation of resources to the manufacturing process. The possibility
of continued sales growth in the coming quarters, general wage increases and the
expenses associated with the retention of an investment banking firm will serve
to push general and administrative expenses higher during the year ending June
30, 1999.
Operating income continued to improve for the fourth straight year,
reaching $1,326,000, an increase of over $1,000,000 from the year ended June 30,
1997.
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Non-operating income declined by about $57,000, as an increase in net
rental income of $125,000 resulting from a full year's tenant lease activity did
not fully offset the prior year's non-recurring gain of $162,000 from debt
forgiveness granted by the Community Redevelopment Agency upon completion of
earthquake repairs and additional chapter 11 vendor debt forgiveness of $20,000.
Interest expense was higher by $39,000 from the prior year, as average
aggregate borrowings increased by about $717,000; although the effective annual
interest rate declined to 7.7% from 8.2%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at June 30, 1998 was $1,470,000 compared to
$880,000 at June 30, 1997, an increase of approximately $590,000. The
improvement in working capital was primarily the result of net income earned in
the year of $980,000, plus non-cash expenses of $155,000 and the
reclassification of $80,000 in balance sheet items as current assets, partially
offset by $150,000 in additional pension plan obligations and $490,000 of
long-term debt reclassified as short-term.
The Company is currently in the process of refinancing its mortgage note at
a favorable interest rate (i.e., a savings of more than 300 basis points). The
new note will be amortized over 15 years and will allow the Company to forego a
balloon payment of approximately $1,340,000 scheduled in June 2000.
Additionally, the Company is establishing a revolving line-of-credit in the
neighborhood of $1,000,000 - $1,250,000. The line will supplement cash reserves
and provide the Company with some financial flexibility in meeting certain mid-
term obligations, namely, pension plan funding, and the maturity of other debt.
In this regard, the Company is also pursuing other short-term funding.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
Potential risks and uncertainties that could affect the Company's future
operating results and financial condition include, without limitation, the
following factors:
HISTORY OF LOSSES; VARIABILITY OF OPERATING RESULTS
The Company emerged from bankruptcy protection in November 1994. Despite
historical losses, the Company experienced its first operating profit in four
years during the year ended June 30, 1995, in the amount of approximately
$47,000, and has recorded operating profits during the years ended June 30,
1996, 1997, and 1998 in the amounts of approximately $175,000, $235,000, and
$1,326,000, respectively. 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 past financial condition and to restore confidence in the Company.
Although the research and development expenditures of the Company have
increased, its financial condition limits its ability to engage in large scale
research and development.
Future 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 Company's
ability to successfully manufacture its products, the ability of the Company to
develop distribution and marketing channels, develop and introduce new products
or to create new markets for its existing products as well as the successful
implementation of its planned marketing strategies. If the Company is not able
to achieve its operating and business objectives, the Company may find it
necessary to reduce its expenditures for sales, marketing, and research and
development, or undertake other such actions as may be appropriate, and may be
otherwise unable to achieve its goals or continue its operations.
COMPETITION
Certain of the Company's existing and potential competitors have
substantially greater financial, marketing and other resources than the Company.
These competitors have also been able to market their products successfully to
the Company's existing and potential customers in the defense and aerospace
industries. Increased competition could result in price reductions, reduced
margins and loss of market share, all of which could materially adversely affect
the Company. The Company has determined to follow a strategy
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of continuing product development to the extent permitted by the financial
resources of the Company to protect its competitive position to the extent
practicable. Although in recent years the Company has shown increases in
revenue, 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
Advances in technology characterize the markets for specialized bearings
and ordnance products. 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 1998, 1997 and 1996, sales to the Department of Defense
by the Company constituted 15%, 14% and 20%, respectively, of the Company's
sales. Sales to Eagle-Picher Industries accounted for approximately 16% and 11%
of sales in 1998 and 1997, respectively. Sales to Textron Systems accounted for
approximately 15% of sales in 1998. Sales to Hughes Missile Systems accounted
for approximately 13% of sales in 1996. A significant decline in sales to 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 of decreases or shifts in defense appropriations for programs
in which the Company's products are incorporated.
PRODUCT LIABILITY AND RISK MANAGEMENT
As a manufacturer of ordnance products and specialized bearings for the
defense and aerospace industries, the Company is subject to the risk of claims
arising from injuries to persons or property. The Company maintains both general
liability insurance and limited 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 that sustained damage from
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. The Company does not maintain key man life insurance on Mr. Wachtel
or any other employee.
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CONTROL OF COMPANY
The Mihai D. Patrichi Trust presently owns of record approximately 47.3% of
the Company's outstanding voting stock. Accordingly, the Trust is, as a
practical matter, 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.
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, the
court has tentatively ruled that the Trust must dispose of all of its shares in
the Company. Sale by the Trust of its interest in the Company would effect a
change in the control of the Company.
The Board of Directors of the Company has established a special committee
(the "Special Committee") to examine and make a recommendation to the Board of
Directors, as to what actions the Company should take in connection with the
Trust's sale of all of its interest in the Company. The Special Committee is in
the process of engaging an investment banking firm to determine the course of
conduct to be adopted by the Company and to investigate methods of enhancing
shareholder value, including the possible sale of the Company, merger or
consolidation of the Company with complimentary businesses, acquisition and
recapitalizations.
The Company believes that there is a significant possibility that the
Special Committee may recommend to the Board of Directors that the Company
pursue one or more transactions that may result in a change of control, and that
absent any action by the Board of Directors, a change of control would likely
occur in connection with a sale by the Trust of its interest in the Company.
There can be no assurance that such a change of control would be
accomplished smoothly or that the Company will be successful in retaining key
members of management. The ability of the Company to make the change of control
successfully will depend on its capability to make the transition in an
efficient, effective and timely manner and on its ability to retain key
management, marketing and production personnel. Making the change in control an
efficient and timely process will also require the dedication of management
resources, which may temporarily distract management's attention from the
day-to-day business of the Company. The inability of management to make the
change of control smoothly could have an adverse effect on the business and
operational results of the Company.
In addition, there can be no assurance that the present and potential
customers of the Company will continue their current utilization patterns
without regard to a change of control. A loss of key members of management could
affect business relations with the Company's customers. Any significant
reduction in utilization patterns by the Company's customers could have an
adverse effect on the near-term business and results of operations of the
Company's business.
The Company expects that the costs related to the retention of investment
bankers by the Special Committee, as well as additional legal and accounting
fees expected to be incurred, will impact the Company's earnings during the
fiscal year.
Also, 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 Company's Common Stock and
could impair the Company's ability to raise capital through the sale of its
equity securities.
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
10
<PAGE> 11
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.
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.
GOVERNMENTAL REGULATION
The Company's operations are subject to, and substantially affected by,
extensive federal, state and local laws, regulations, orders and permits which
govern environmental protection, health and safety, zoning and other matters.
These regulations may impose restrictions on the Company's operations that could
adversely affect the Company's results, such as limitations on the expansion of
metals plating facilities of the Company, and limitations on or banning disposal
of hazardous waste generated by the Company's operations. Because of heightened
public concern, companies in the metals plating business, including the Company,
may become subject to judicial and administrative proceedings involving federal,
state or local agencies. These governmental agencies may seek to impose fines on
the Company or to revoke or deny renewal of the Company's waste generation and
disposal permits or licenses for violations of environmental laws or regulations
or to require the Company to remediate environmental problems resulting from its
operations, all of which could have a material adverse effect on the Company.
The Company may also be subject to actions brought by individuals or community
groups in connection with the permitting or licensing of its operations, any
alleged violations of such permits and licenses, or other such matters.
YEAR 2000
The Year 2000 readiness issue, which is common to most businesses, arises
from the inability of information systems, and other time and date sensitive
products and systems, to properly recognize and process date-sensitive
information or system failures. Assessments of the potential cost and effects of
Year 2000 issues vary significantly among businesses, and it is extremely
difficult to predict the actual impact. Recognizing this uncertainty, management
is continuing to actively analyze, assess and plan for various Year 2000 issues
across its businesses.
The Year 2000 issue has an impact on both information technology ("IT")
systems and non-IT systems, such as its manufacturing systems and physical
facilities including, but not limited to, security systems and utilities.
Although management believes that a majority of the Company's IT systems are
Year 2000 ready, such systems still have to be tested for Year 2000 readiness.
The Company is replacing or upgrading those systems that are identified as
non-Year 2000. Certain IT systems previously identified as non-Year 2000
compliant are being upgraded or replaced which should be complete by June 30,
1999. Non-IT system issues are more difficult to identify and resolve. The
Company is actively identifying non-IT Year 2000 issues concerning its products
and services, as well as its physical facility locations. As non-IT areas are
identified, management formulates the necessary actions to ensure minimal
disruption to its business processes.
11
<PAGE> 12
Although management believes that its efforts will be successful and the costs
will be immaterial (i.e. less than $10,000) to its consolidated financial
position and results of operations, it also recognizes that any failure or delay
could cause a potential impact.
The Company has initiated efforts to ensure Year 2000 readiness of its
products and services. The Company is currently migrating to a Year 2000
compliant Network Operating System, and its key financial, manufacturing and
other in-house systems are already materially compliant.
The Year 2000 readiness of its customers varies, and the Company is
encouraging its customers to evaluate and prepare their own systems. These
efforts by customers to address Year 2000 issues may affect the demand for
certain products and services; however, the impact to the revenue of any change
in revenue patterns is highly uncertain.
The Company has also initiated efforts to assess the Year 2000 readiness of
its key suppliers and business partners. The Company's direction of this effort
is to ensure the adequacy of resources and supplies to minimize any potential
business interruptions. Management plans to complete this part of its Year 2000
readiness plan in the early part of calendar 1999.
The Year 2000 issue presents a number of other risks and uncertainties that
could impact the Company, such as public utilities failures, potential claims
against it for damages arising from products and services that are not Year 2000
compliant, and the response ability of certain government commissions of the
various jurisdictions where the Company conducts business. While the Company
continues to believe the Year 2000 issues described above will not materially
affect its consolidated financial position or results of operations, it remains
uncertain as to what extent, if any, the Company may be impacted.
1997 AND 1996
RESULTS OF OPERATIONS
The Company's revenues increased 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 in part by increased
demand for the Company's products and services in its Ordnance Division and by
the reconfiguration of the Bearings Division shop floor resulting from the
leasing of a portion of the building, the completion of earthquake repairs, and
moving equipment to take advantage of the new space available.
Gross profits improved to 25.7% from 18.9% in the prior year due to the
change in mix toward the more profitable Ordnance Division. Reduced margins in
the Bearing Division were part of a pricing strategy pointed at increasing
market share and spreading overhead costs by increasing volume by decreasing
prices. The benefit of the volume increase was mostly reflected in an increase
in the Bearings backlog of over $1,500,000.
As anticipated, general and administrative expenses 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 higher professional fees
than usual due to the closing of the bankruptcy, leasing the building,
overseeing the repairs of the building, and resolving a dispute with Hughes
Missile Systems. Operating revenues continued to improve for the third straight
year, reaching $235,000.
The non-operating income 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.
Interest expense was substantially unchanged as the Company's long-term
debt pay-down counter-balanced the higher rates on new short-term borrowings.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at June 30, 1997 was $880,000 compared to
$835,000 at June 30, 1996. The $400,000 improvement in working capital as the
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.
13
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountant........... 15
Balance Sheets -- Assets.................................... 16
Balance Sheets -- Liabilities and Stockholders' Equity 16
(Deficiency in Assets)....................................
Statements of Operations.................................... 17
Statement of Stockholders' Equity (Deficiency in Assets).... 18
Statements of Cash Flows.................................... 19
Notes to the Financial Statements........................... 20
</TABLE>
14
<PAGE> 15
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
I have audited the accompanying balance sheets of Networks Electronic Corp.
as of June 30, 1998 and 1997, and the related statements of operations,
stockholders' equity (deficiency in assets) and cash flows for each of the three
years in the period ended June 30, 1998. 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 referred to above present fairly,
in all material respects, the financial position of Networks Electronic Corp. as
of June 30, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 1998, 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
August 28, 1998
Granada Hills, California
15
<PAGE> 16
NETWORKS ELECTRONIC CORP.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 338,666 $ 185,144
---------- ----------
Receivables:
Trade accounts receivable............................... 1,308,501 712,709
Less allowance for doubtful accounts.................... 5,000 5,000
---------- ----------
1,303,501 707,709
---------- ----------
Other receivables......................................... 7,787 79,354
Due from officer.......................................... 15,093 --
Inventories, less reserve for obsolescence of $375,000 and
$180,000, respectively.................................. 1,432,781 1,189,802
Prepaid expenses and deposits............................. 30,576 39,832
Deferred income taxes, current portion.................... 65,000 24,000
---------- ----------
Total current assets............................... 3,193,404 2,225,841
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Land and improvements..................................... 146,664 131,773
Buildings and improvements................................ 3,698,588 3,438,250
Machinery and equipment................................... 4,418,639 4,367,555
---------- ----------
8,263,891 7,937,578
Less accumulated depreciation............................. 5,854,878 5,723,480
---------- ----------
2,409,013 2,214,098
---------- ----------
DEFERRED INCOME TAXES, NON-CURRENT PORTION.................. 16,701 119,571
DEFERRED CHARGES, NET OF ACCUMULATED AMORTIZATION
OF $29,444 AND $7,495, RESPECTIVELY....................... 61,387 81,152
---------- ----------
$5,680,505 $4,640,662
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY/(DEFICIENCY IN ASSETS)
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt.... $ 492,000 $ 220,000
Note payable, related party -- current portion............ 100,000 100,000
Accounts payable.......................................... 291,619 479,384
Customer advances and deposits............................ 238,318 2,834
Current portion of pre-petition debt:
Adjudication award payable.............................. -- 41,951
Accrued pension liability............................... 152,157 279,079
Other payables.......................................... 6,689 29,997
Other accrued expenses.................................... 213,419 190,262
Income taxes payable...................................... 232,295 --
---------- ----------
Total current liabilities.......................... 1,726,497 1,343,507
---------- ----------
LONG-TERM DEBT:
Long-term debt, less current maturities................... 2,829,329 3,042,193
Long-term portion of accrued pension liability............ 179,633 366,209
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTES 12 AND 15)............. -- --
---------- ----------
STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS):
Common stock -- par value $.25 per share; authorized
10,000,000 shares, issued and outstanding 1,671,221
shares.................................................. 417,805 417,805
Additional paid-in capital................................ 280,985 280,985
Stock options exercisable................................. 6,750 --
Retained earnings (accumulated deficit)................... 567,698 (412,111)
Stock subscriptions receivable............................ -- (14,063)
Pension liability adjustment.............................. (328,192) (383,863)
---------- ----------
Total stockholders' equity (deficiency in
assets).......................................... 945,046 (111,247)
---------- ----------
$5,680,505 $4,640,662
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 17
NETWORKS ELECTRONIC CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES.............................................. $6,000,054 $4,009,719 $3,932,925
COST OF SALES.......................................... 4,098,050 2,980,518 3,189,521
---------- ---------- ----------
GROSS PROFIT......................................... 1,902,004 1,029,201 743,404
SELLING, ADMINISTRATIVE AND OTHER...................... 575,749 794,202 568,560
---------- ---------- ----------
OPERATING INCOME..................................... 1,326,255 234,999 174,844
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense..................................... (264,327) (225,023) (229,291)
Loss on disposition of assets........................ -- -- (7,273)
CRA debt forgiveness................................. -- 161,875 33,125
Vendor debt forgiveness.............................. 19,551 40,296 --
Rental income, net................................... 181,920 57,583 --
Other, net........................................... 14,426 13,386 58,489
---------- ---------- ----------
(48,430) 48,117 (144,950)
---------- ---------- ----------
INCOME BEFORE INCOME TAX PROVISION (BENEFIT)......... 1,277,825 283,116 29,894
INCOME TAX PROVISION (BENEFIT)......................... 298,016 121,493 (690)
---------- ---------- ----------
NET INCOME........................................... $ 979,809 $ 161,623 $ 30,584
========== ========== ==========
NET INCOME PER SHARE -- BASIC.......................... $ .59 $ .10 $ .02
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING -- BASIC........... 1,671,221 1,671,221 1,647,515
========== ========== ==========
NET INCOME PER SHARE -- DILUTED........................ $ .59 $ .10 $ .02
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING -- DILUTED......... 1,672,399 1,671,848 1,648,284
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 18
NETWORKS ELECTRONIC CORP.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
RETAINED
COMMON COMMON ADDITIONAL STOCK STOCK EARNINGS/
STOCK STOCK PAID-IN OPTIONS SUBSCRIPTIONS ACCUMULATED ADJUSTMENTS
SHARES AMOUNT CAPITAL EXERCISABLE RECEIVABLE DEFICIT TO EQUITY TOTAL
--------- -------- ---------- ----------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 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)
Net Income............ -- -- -- -- -- 979,809 -- 979,809
Stock options
Issued.............. -- -- -- 6,750 -- -- -- 6,750
Reclass stock
Subscription
Receivable to
Current Asset....... -- -- -- -- 14,063 -- -- 14,063
Pension liability
Adjustment.......... -- -- -- 55,671 55,671
--------- -------- -------- ------ -------- --------- --------- ---------
Balance, June 30,
1998.................. 1,671,221 $417,805 $280,985 $6,750 $ -- $ 567,698 $(328,192) $ 945,046
========= ======== ======== ====== ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 19
NETWORKS ELECTRONIC CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
1998 1997 1996
--------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 979,809 $ 161,623 $ 30,584
--------- ----------- ---------
Adjustments to reconcile net income to net cash provided
by operations:
Noncash items included in net income:
Depreciation and amortization........................ 153,347 126,221 130,307
Deferred income taxes................................ 61,870 120,693 (862)
Loss on disposition of assets........................ -- -- 7,273
Changes in:
Accounts receivable and refundable Income taxes...... (525,255) 34,096 (14,760)
Inventories.......................................... (242,979) (146,546) 18,690
Prepaid expenses and deposits........................ 9,256 (20,255) (11,537)
Deferred charges..................................... (2,184) (88,647) --
Accounts payable and accrued expenses................ (487,694) (77,455) 119,508
Income taxes payable................................. 232,295 -- (6,276)
Customer advances and deposits....................... 235,484 2,834 (11,585)
--------- ----------- ---------
TOTAL ADJUSTMENTS................................. (565,860) (49,059) 230,758
--------- ----------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 413,949 112,564 261,342
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (326,313) (1,261,318) (318,602)
Proceeds from disposition of assets....................... -- -- 64,627
--------- ----------- ---------
NET CASH USED IN INVESTING ACTIVITIES............. (326,313) (1,261,318) (253,975)
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Mortgage debt reduction................................... (120,000) (120,000) (143,125)
Other payments of long-term debt.......................... (141,488) (19,661) --
Proceeds from long-term borrowings........................ 320,624 1,354,667 168,045
Proceeds from notes payable, related parties.............. -- 122,000 --
Payments on notes payable, related parties................ -- (102,222) (50,667)
Stock options issued...................................... 6,750 -- --
--------- ----------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... 65,886 1,234,784 (25,747)
--------- ----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 153,522 86,030 (18,380)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 185,144 99,114 117,494
--------- ----------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 338,666 $ 185,144 $ 99,114
========= =========== =========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
In the fiscal year ended June 30, 1998, a stock subscription receivable in
the amount of $14,063 that was subsequently collected was reclassified as a
current asset.
In the fiscal year ended June 30, 1998, the Company reduced its additional
minimum pension liability in the amount of $55,671 by increasing stockholders'
equity for the same amount.
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.
19
<PAGE> 20
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, net operating loss carryforwards (when applicable),
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).
REVENUE RECOGNITION
The Company recognizes sales revenue when parts are shipped to customers.
EARNINGS PER SHARE
In the quarter ended December 31, 1997, the Company adopted SFAS No. 128,
"Earnings Per Share," for all periods presented. This standard specifies the
computation, presentation, and disclosure requirements for earnings per share.
Basic earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted-average number of shares of
common stock outstanding during the period. Diluted earnings per share
calculations reflect the assumed exercise and conversion of employee stock
options.
20
<PAGE> 21
NETWORKS ELECTRONIC CORP.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed in the period incurred.
Research and development expense amounted to $50,874, $6,207, and $97,009 during
the years ended June 30, 1998, 1997, and 1996, respectively.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to determine
such amounts.
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument; they
are subjective in nature and involve uncertainties, matters of judgment, and,
therefore, cannot be determined with precision. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular instrument. Changes in assumptions
could significantly affect the estimates. Since the fair value is estimated at
June 30, 1998, the amounts that will actually be realized or paid at settlement
of the instruments could be significantly different.
The carrying amount of cash and cash equivalents is assumed to be the fair
value because of the liquidity of these instruments. Accounts receivable,
accounts payable, and accrued expenses approximate fair value because of the
short maturity of these instruments. The recorded balances of notes payable and
long-term debt (with the exception of the Company's non-interest bearing CRA
loan) are assumed to be the fair value since the rates specified in the notes
approximate current borrowing rates available for financing with similar terms
and maturities.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS No. 130 "Reporting Comprehensive Income" in June 1997
which established standards for reporting and displaying comprehensive income
and its components in a full set of general purpose financial statements. In
addition to net income, comprehensive income includes all changes in equity
during a period, except those resulting from investments by and distributions to
owners. The Company will adopt SFAS 130, which is effective for fiscal years
beginning after December 15, 1997, in the first quarter of the year ending June
30, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" that establishes standards for reporting
information about operating segments in annual and interim financial statements.
SFAS 131 also establishes standards for related disclosures about products
21
<PAGE> 22
NETWORKS ELECTRONIC CORP.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and services, geographic areas, and major customers. SFAS 131 is effective for
fiscal years beginning after December 15, 1997. The Company will adopt SFAS 131
in the first quarter of the year ending June 30, 1999. Reporting and disclosures
under SFAS 131 are not expected to be materially different than present
disclosures.
SFAS No. 132 "Employers' Disclosures about Pensions and Other
Post-retirement Benefits" was issued in February 1998 and standardizes
disclosure requirements for pension and other post-retirement benefit plans to
the extent practicable. Adoption of this standard for fiscal years beginning
after December 15, 1997, and restatement of prior period comparative disclosures
is required. The Company will adopt SFAS 132 in the fiscal year ending June 30,
1999.
2. INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Raw materials............................................... $ 132,287 $ 93,843
Work in process............................................. 629,592 523,711
Finished goods and components............................... 1,045,902 752,248
---------- ----------
1,807,781 1,369,802
Less reserve for obsolescence............................... (375,000) (180,000)
---------- ----------
$1,432,781 $1,189,802
========== ==========
</TABLE>
3. DEFERRED CHARGES
Deferred charges consist of costs associated with the lease of space at the
Company's facility in Chatsworth (See Note 16 below) in the amount of $78,647,
loan fees of $10,000 pertaining to additional financing obtained in March 1997,
plus an additional $2,184 in loan fees paid in March 1998. Amortization expense
related to these costs amounted to $21,949 and $7,495 for the years ended June
30, 1998 and 1997, respectively.
22
<PAGE> 23
NETWORKS ELECTRONIC CORP.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT, NOTES PAYABLE
Long-term debt and notes payable consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Note payable to bank, secured by first 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 both June 30, 1998
and June 30, 1997, respectively). A balloon payment for
$1,342,528 is due in June 2000 (See Notes 5 and 17)......... $1,582,528 $1,702,528
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 of $4,604 applicable over the
remaining 20 years through August 2021...................... 1,105,000 1,105,000
Notes payable to lessee, secured by assignment of rents,
principal payable in monthly installments totaling $7,663
through March 2002, with interest payable monthly at annual
rates ranging from 7.0% to 10.0% (blended rate 8.88% at June
30, 1998)................................................... 344,840 185,635
Note payable to financial institution, secured by machinery
and equipment, principal payable in monthly installments of
$5,667 along with interest at a reference rate plus 2.75%
(11.25% at both June 30, 1998 and June 30, 1997,
respectively) through March 1999, with a balloon payment for
the balance also due in March 1999. A 7.5% prepayment
penalty applies on the outstanding balance if this loan is
refinanced prior to maturity................................ 268,500 237,500
Note payable to finance company, secured by telephone
equipment, payable in monthly installments of $656 including
interest at an annual rate of approximately 17.3%. Matures
in October 1999............................................. 8,259 14,453
Note payable to vendor, secured by office equipment, payable
in monthly installments of $395 including interest at an
annual rate of approximately 12.4%. Matures in December
2001........................................................ 12,202 17,077
---------- ----------
3,321,329 3,262,193
Less current maturities..................................... 492,000 220,000
---------- ----------
$2,829,329 $3,042,193
========== ==========
</TABLE>
Maturities of long-term debt in each of the next five years are as follows:
<TABLE>
<S> <C>
Year ending June 30,
1999..................................................... $ 492,000
2000..................................................... 1,561,000
2001..................................................... 95,000
2002..................................................... 115,000
2003..................................................... 55,000
Thereafter............................................... 1,003,329
----------
$3,321,329
==========
</TABLE>
5. CREDIT AGREEMENTS
The Company reached an agreement with its bank, as confirmed by the
Company's plan for reorganization entered into 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
23
<PAGE> 24
NETWORKS ELECTRONIC CORP.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
5. CREDIT AGREEMENTS (CONTINUED)
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 Company is currently in the process of refinancing this debt
(See Note 17).
The Los Angeles City Council approved the funding of $1,300,000 through the
Community Redevelopment Agency for the retrofit and repair of the Company's
Chatsworth building (damaged as a result of the Northridge Earthquake in January
1994) and the remodeling of the north building site, 35,000 square feet of which
were subsequently leased to a tenant beginning 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 $3,425,000, $2,708,000, and
$2,047,000, at weighted average interest rates of 7.7%, 8.2%, and 10.7% in 1998,
1997, and 1996, respectively. The average aggregate borrowings and weighted
average interest rate computations include notes payable to related parties
during these years. Interest paid amounted to $263,689, $231,536, and $225,301
during the fiscal years ended June 30, 1998, 1997, and 1996, 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 and 1996 was $4,296 and $8,391, 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. The loan maturity date has been extended through December 1998, with
interest payable monthly, although the Company intends to repay the loan at an
earlier date in conjunction with a pending refinance (See Note 17). Interest
expense on this loan during the years ended June 30, 1998 and 1997 was $12,999
and $11,077, respectively.
(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.
7. STOCK OPTION PLAN
The Company's Board of Directors adopted the Networks Electronic Corp. 1996
Stock Incentive Plan (the "1996 Plan"), providing for the grant of up to 100,000
shares of the Company's common stock to directors, officers, employees and
consultants of the Company. The 1996 Plan was submitted to and approved by the
shareholders of the Company at the Annual Meeting of Shareholders held on
December 13, 1996. Under the 1996 Plan, 9,000 options have been issued to
officers and other key employees at the Company. These options were issued at
market ($1.58) on November 21, 1997, and have been valued at approximately
$6,750 under the Black-Scholes pricing model. They become exercisable on a
quarterly pro-rata basis over a three-year period and have an expiration date
for exercise of November 21, 2002.
24
<PAGE> 25
NETWORKS ELECTRONIC CORP.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTION PLAN (CONTINUED)
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 recorded a stock subscription
receivable for $14,063. During the year ended June 30, 1998, the Company
reclassified the receivable to a current asset, as the receivable was collected
in July 1998. A total of 1,500 stock options awarded to three of the five key
employees expired due to cessation of employment; the remaining 1,000 stock
options issued (to two officers) became fully vested on March 31, 1998 and were
subsequently exercised in August 1998. All of these non-qualified stock options
were issued outside of the existing stock option plan. Currently, no other
options are outstanding nor have any been previously granted.
8. INCOME TAXES
Income taxes (benefits) consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Federal income tax (benefit)........................ $184,192 $ 93,413 $(1,490)
California franchise tax............................ 113,824 28,080 800
-------- -------- -------
$298,016 $121,493 $ (690)
======== ======== =======
Current............................................. $236,146 $ 800 $ 172
Deferred............................................ 61,870 120,693 (862)
-------- -------- -------
$298,016 $121,493 $ (690)
======== ======== =======
</TABLE>
25
<PAGE> 26
NETWORKS ELECTRONIC CORP.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The differences between the effective income tax rate and the statutory
federal income tax rate are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Computed statutory federal income tax............. $ 434,460 $ 93,665 $ 4,484
Increases (decreases) resulting from:
California franchise tax, net of federal tax
benefit...................................... 75,124 18,533 1,391
Tax credits..................................... (3,862) -- (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... (210,000) -- 10,000
Other........................................... 2,294 6,701 (10,141)
--------- -------- --------
Income tax provision (benefit).................... $ 298,016 $121,493 $ (690)
========= ======== ========
</TABLE>
Net income taxes paid amounted to $800, $800, and $9,500 during the fiscal
years ended June 30, 1998, 1997, and 1996, 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 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Change in temporary difference:
Depreciation...................................... $ 3,448 $ 2,606 $ (2,901)
Inventory obsolescence............................ (82,710) (8,660) (4,330)
Pension plan...................................... 47,919 134,300 (1,521)
Litigation........................................ (2,619) 6,109 19,253
Other............................................. 35 2,525 (44)
Accrued vacation and sick leave................... (3,051) (8,002) (3,511)
Uniform capitalization............................ 1,753 1,298 4,327
Alternative minimum tax credits................... -- -- 628
Other tax credits................................. 53,524 (3,000) (12,104)
California franchise tax.......................... (38,429) (9,275) 382
Utilization of federal and California NOL
carryforwards.................................. 292,000 2,792 --
Benefit of federal and California NOL
carryforwards.................................. -- -- (11,041)
Valuation allowance, due to estimate of future
realization.................................... (210,000) -- 10,000
--------- -------- --------
Deferred income tax provision (benefit)............. $ 61,870 $120,693 $ (862)
========= ======== ========
</TABLE>
During the fiscal year ended June 30, 1998, the Company fully utilized the
tax benefits (approximately $292,000) of its federal and California net
operating loss (NOL) carryforwards in the amounts of approximately $636,000 and
$817,000, respectively. The Company also reversed a cumulative valuation
allowance of $210,000 due to the certainty of the NOL realization. Additionally,
the Company utilized the balance of its federal general business credit
carryover of approximately $29,000, its alternative minimum tax credit carryover
of approximately $5,000, as well as (effectively all of) its California tax
credit carryovers of approximately $20,000.
26
<PAGE> 27
NETWORKS ELECTRONIC CORP.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
at June 30, 1998 and June 30, 1997 are:
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Liabilities
Depreciable property, plant and equipment................. $ 67,299 $ 63,851
Pension plan.............................................. 60,558 12,639
California franchise tax.................................. 2,432 40,861
Litigation................................................ -- 2,619
-------- ---------
Gross deferred tax liabilities............................ 130,289 119,970
-------- ---------
Assets
Inventory................................................. 173,372 92,415
Accounts receivable....................................... 2,142 2,165
Other employee benefits................................... 35,767 32,728
Alternative minimum tax credits........................... 709 5,648
Other tax credits......................................... -- 48,585
NOL carryforwards......................................... -- 292,000
-------- ---------
Gross deferred tax assets................................. 211,990 473,541
-------- ---------
Deferred income tax asset................................. 81,701 353,571
Valuation allowance....................................... -- (210,000)
-------- ---------
Deferred income tax asset -- net.......................... $ 81,701 $ 143,571
======== =========
</TABLE>
The respective deferred tax benefits at the June 30, 1998 and June 30, 1997
balance sheet dates are presented as follows:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Current portion............................................. $65,000 $ 24,000
Non-current portion......................................... 16,701 119,571
------- --------
Total............................................. $81,701 $143,571
======= ========
</TABLE>
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 $39,987, $41,380, and $32,311 for the years ended June
30, 1998, 1997, and 1996, 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, 1998, 1997, and 1996
are summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost.................................... $ -- $ -- $ --
Interest cost................................... 189,233 191,664 193,558
Actual return on plan assets.................... (231,859) (144,607) (116,942)
Net amortization and deferral................... 82,613 (5,677) (44,305)
--------- --------- ---------
Total pension expense................. $ 39,987 $ 41,380 $ 32,311
========= ========= =========
</TABLE>
27
<PAGE> 28
NETWORKS ELECTRONIC CORP.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE RETIREMENT PLAN (CONTINUED)
The status of the plan is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits.......................................... $(2,404,153) $(2,420,450)
Nonvested benefits....................................... (20,563) (25,403)
----------- -----------
Accumulated benefit obligation........................... (2,424,716) (2,445,853)
Effect of future salary increases........................ -- --
----------- -----------
Projected benefit obligation............................. (2,424,716) (2,445,853)
Fair value of plan assets................................ 2,092,926 1,800,565
----------- -----------
Projected benefit obligation in excess of fair value of
plan assets........................................... (331,790) (645,288)
Unrecognized net loss.................................... 328,192 383,863
----------- -----------
Accrued pension cost..................................... (3,598) (261,425)
Minimum pension adjustment............................... (328,192) (383,863)
----------- -----------
Accrued pension liability................................ (331,790) (645,288)
Less current portion..................................... (152,157) (279,079)
----------- -----------
Long-term portion........................................ $ (179,633) $ (366,209)
=========== ===========
</TABLE>
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, 1998 and 1997 through the
recording of an increase to stockholders' equity of $55,671 at June 30, 1998,
and an increase to stockholders' deficiency in assets of $30,460 at June 30,
1997, respectively.
The expected long-term rate of return on plan assets was 9% for both 1998
and 1997. The discount rate used in determining the actuarial present value of
accumulated benefit obligations was 8% for both 1998 and 1997. There was no rate
of increase in future compensation levels at both June 30, 1998 and June 30,
1997 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. In addition, a balloon payment of approximately
$262,000 was made in March 1998 to cover the following: (1) a funding deficiency
of approximately $123,000 carried over from the Plan year ended June 30, 1996,
(2) the balance of the minimum funding standard charges (including interest)
totaling approximately $79,000 for the Plan year ended June 30, 1997, and (3)
the second annual installment of approximately $60,000 due on approximately
$240,000 in plan contributions for the Plan year ended June 30, 1995. The 1995
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 total minimum funding requirement for the year ended June 30, 1998 is
approximately $152,000, which includes an annual waiver installment (as noted
above) of approximately $60,000, and an additional $92,000 in minimum funding
standard charges for the current year. The Company currently has more than
sufficient liquidity to meet this obligation, which must be fully paid by March
15, 1999 to avoid an IRS-imposed 10% excise tax.
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
28
<PAGE> 29
NETWORKS ELECTRONIC CORP.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE RETIREMENT PLAN (CONTINUED)
retirement benefits to eligible participants in accordance with the terms of the
Networks Electronic Corporation Pension Plan.
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) US 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, 1998:
Bearings....................... $3,337,949 $ 474,497 $3,433,794 $ 216,402 $ 78,832
Ordnance....................... 2,662,105 1,067,655 2,246,711 109,911 52,566
---------- ---------- ---------- ---------- --------
$6,000,054 1,542,152 $5,680,505 326,313 $131,398
========== ---------- ========== ========== ========
Interest expense................. 264,327
----------
$1,277,825
==========
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>
- ---------------
* All sales were made to unaffiliated customers and there were no inter-segment
sales.
11. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 1996, the Company recorded significant
adjustments to its accounts, which resulted in reducing net income by
approximately $50,000. The adjustments were principally to correct the Company's
year-end inventory accounts.
12. EMPLOYMENT AGREEMENT, RELATED PARTY RECEIVABLE
The Company has an employment agreement effective May 1, 1998 with David
Wachtel, its President and Chief Executive Officer. The agreement provides for
an annual base salary of $175,000, payable through
29
<PAGE> 30
NETWORKS ELECTRONIC CORP.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYMENT AGREEMENT, RELATED PARTY RECEIVABLE (CONTINUED)
the close of business on the later of April 30, 1999 or 180 days following
delivery of written notice of the Company's intent to terminate the agreement.
Mr. Wachtel's prior employment contract expired April 30, 1998, and called for
minimum annual compensation of $150,000 for a period of three years. 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, 1998, a stock subscription receivable from
the Company's President in the amount of $14,063 was reclassified as a current
asset. The receivable was collected in July 1998. The total receivable due from
the officer at June 30, 1998 was $15,093, including $1,030 in personal expenses.
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.
13. MAJOR CUSTOMERS
Sales to the Department of Defense accounted for approximately 15% of sales
in 1998, 14% of sales in 1997, and 20% of sales in 1996. Sales to Eagle-Picher
Industries accounted for approximately 16% and 11% of sales in 1998 and 1997,
respectively. Sales to Textron Systems accounted for approximately 15% of sales
in 1998. 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, 1998, 1997, and 1996, 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.
15. LITIGATION
The Company reached final settlement and pay-off of a judgment on a
wrongful discharge lawsuit. The agreed-upon payment of $52,525 was made in April
1998. Separately, the Company's insurance carrier provided a $47,000
reimbursement to the Company.
There were other wrongful discharge claims, but negotiated settlements were
reached. Networks agreed to settle these cases by making payments totaling
$40,000 over a period of one to three years. At June 30, 1998, there were no
unpaid balances remaining on these claims.
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.
16. LEASE AGREEMENT
In March 1997, the Company ("Lessor") leased approximately 35,000 square
feet of its Chatsworth facility. The lease agreement requires monthly base rent
at $17,850, with approximately 2 1/2 months free rent and a cost of living
increase every 18 months over the initial 62-month term of the lease.
Accordingly, the scheduled rent increase in September 1998 will incorporate a
cost of living increase of approximately 2.4%. 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. Rental
income under this agreement, net
30
<PAGE> 31
NETWORKS ELECTRONIC CORP.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
16. LEASE AGREEMENT (CONTINUED)
of allocated depreciation and amortized deferred lease costs, amounted to
$181,920 and $57,583 for the years ended June 30, 1998 and June 30, 1997,
respectively.
Additionally, the tenant reimbursed the Company $23,175 for 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
$185,635 of the available loan commitment had been utilized. The remainder of
the initial commitment was borrowed in September and November 1997. In December
1997, the tenant loaned the Company an additional $130,000 at an annual interest
rate of 7% to fund roof repairs. At June 30, 1998, the outstanding aggregate
balance remaining on the loans was $344,840. The loans are being amortized
monthly over 5 years (requiring level principal payments currently totaling
$7,663), with the monthly payment netted against the lessee's rent (See Note 4).
17. SUBSEQUENT EVENTS
(a) In July 1998, shipments approximating $238,000 were returned by an
Ordnance customer. The Company has recorded the customer payments received as
advance deposits which will be recognized as revenue as the order is re-shipped.
The returned parts have an inventory value of approximately $100,000 (net of an
$85,000 reserve) and are functional for other customer applications. The Company
has completed customer-requested modifications to the item and the testing
environment to ensure that future deliveries will be compatible with the
customer's system.
(b) In August 1998, the Company received approval from City National Bank
for a Real Estate Secured Loan (the "Term Loan") and a Revolving Line of Credit
(the "Revolver"). The Term Loan is approved for a maximum amount of $1,550,000
or the amount owing under the existing first trust deed secured loan with Wells
Fargo Bank (See Notes 4 and 5 above), whichever is less, and is to be secured by
a first trust deed on the Chatsworth facility. The loan is to be fully amortized
over 15 years and is set at an effective annual interest rate of 2.50% over the
rate applicable on Ten Year Treasury Notes at the time of the execution of the
loan documents (currently approximately 7.27%). The Term Loan will not be
assumable and a pre-payment penalty will apply. The Revolver allows for advances
not to exceed the lesser of $1,250,000 or 80% of eligible accounts receivable,
and is to be secured by a senior lien and perfected security interest on all
personal property of the Company. The principal will mature on October 1, 1999,
with interest payable monthly at a variable annual interest rate equivalent to a
bank reference rate plus 1.50% (currently 10.00%). Various financial covenants
pertaining to a minimum level of working capital, net worth, etc. will apply. It
is anticipated that bank fees on these transactions will approximate $35,000.
(c) In August 1998, the Community Development Commission of the County of
Los Angeles (the "CDC") approved a $650,000 business loan to the Company, the
proceeds of which are to be used to payoff the Company's unfunded pension
liability (See Note 9) and as a source of permanent working capital. The loan is
to be fully amortized over a five year (60 month) period at a fixed annual
interest rate of 7.50%. Monthly payments will approximate $13,025, with loan
fees totaling approximately $13,000. The loan is to be collateralized by a first
security interest in all equipment, and by a junior security interest in all
other assets. Additionally, the obligation is to be guaranteed by the Mihai D.
Patrichi Trust, and there is to be an assignment of life insurance in the amount
of $650,000 on the life of David Wachtel, the Company's chief executive officer.
The Company also agrees to attain certain employment goals in the 36 months
following the funding of the loan.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
31
<PAGE> 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information as of June 30, 1998 is provided with respect to
each director:
<TABLE>
<CAPTION>
DIRECTOR
EXPIRES IN
NAME OF DIRECTOR DECEMBER
AND POSITION AT COMPANY AGE (1) BUSINESS EXPERIENCE DURING LAST FIVE YEARS(2)
----------------------- --- ---------- ---------------------------------------------
<S> <C> <C> <C>
David Wachtel, .......... 39 1998 He is the son-in-law of the Company's founder, the
Chief Executive late Mihai Patrichi. He was formerly the Managing
Officer, Partner at Investech Systems, and was previously
Chairman of the Board, President of Synergetic Solutions and Talsarn Pty.
President, Ltd. He also served as Manager of Information
Chief Financial Officer Systems (MIS) at the Company.
Glenn Linderman ......... 39 1998 Since April 1, 1998 he is the Director of Reporting
(None) at Ares Leverage Investment Fund. From January
1997, through March 1998, he was the Senior
Investment Systems Consultant. From December 1995
through January 1997 he was a Sr. Investment
Analyst for Glendale Federal Bank and from 1992
through 1995 was Vice President, Research
Investment Analyst at Libra Investments, Inc.
Rodica Patrichi, ........ 59 1998 She is the widow of Mihai Patrichi and is a trustee
(None) of the Mihai D. Patrichi Trust.
Ileana Wachtel, ......... 39 1998 She is a trustee of the Mihai D. Patrichi Trust and
(None) the daughter of the Company's founder, the late
Mihai Patrichi, and wife of David Wachtel. She is a
political consultant involved in political research
and media strategy.
Jack Friery ............. 50 1998 He has resigned as a Company director effective
(None) August 31, 1998, due to his re-location.
</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.
The names, ages and positions of all of the executive officers of the
Company for the year ended June 30, 1998 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>
NAME, AGE AND POSITION BUSINESS EXPERIENCE DURING PAST FIVE YEARS
---------------------- ------------------------------------------
<S> <C>
David Wachtel, 39 Chairman since 1994. Responsible primarily for the formation
Chairman of the Board, of corporate policy including planning and finance, research
Chief Executive Officer, and development; supervisor of client relations.
President, Chief
Financial Officer
Mohammad Tabassi, 50 Vice President since 1994. Manager of the Ordnance Division
Vice President since 1993. Other duties include engineering and price
quoting. Joined the Company in January 1987 as Ordnance
Quality Test Engineer.
Robert Shearin, 50 Vice President -- Quality Operations since 1997. He
Vice President -- previously served as Machine Shop Supervisor, Bearings
Quality Operations Manager and Quality Assurance Manager, and he currently
oversees the Bearings Division. He began his career at the
Company in March 1991 as a CNC programmer.
</TABLE>
32
<PAGE> 33
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table provides an overview of each item
of compensation paid, earned, or awarded to the CEO of the Company for the
fiscal years ended June 30, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
OTHER RESTRICTED ALL
NAME OF INDIVIDUAL ANNUAL STOCK OPTIONS/ LTIP OTHER
AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS SARS PAYMENTS COMPENSATION
---------------------- ---- -------- ------ ------------ ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David Wachtel, CEO....... 1998 $155,279* $4,350 $ 7,338(1) $0 0 $0 $0
1997 149,989 2,408 9,981(2) 0 0 0 0
1996 149,989 0 5,742(3) 0 0 0 0
Mihai D. Patrichi, CEO... 1997 0 0 2,242(4) 0 0 0
(deceased)
1996 0 0 18,130(5) 0 0 0 0
</TABLE>
- ---------------
No other executive officers were employed by the Company with annual
compensation greater than $100,000, at June 30, 1998, 1997, or 1996.
* Currently employed under an executive employment agreement commencing May 1,
1998 and expiring the later of April 30, 1999 or 180 days following written
notice of the Company's intent to terminate the agreement, calling for an
annual base salary of $175,000 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 $7,189 and other benefits of $149.
(2) Includes medical-related benefits of $9,981.
(3) Includes medical-related benefits of $5,742.
(4) Includes medical-related benefits of $2,242.
(5) Includes medical-related benefits of $18,130.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS PRICE APPRECIATION OF
- ------------------------------------------------------------------------------------------------- INDIVIDUAL GRANTS FOR
% OF TOTAL OPTIONS/SARS NUMBER OF SECURITIES OPTION TERM
NAME OF INDIVIDUAL AND GRANTED TO EMPLOYEES IN UNDERLYING EXERCISE OR EXPIRATION ----------------------
PRINCIPAL POSITION FISCAL YEAR OPTIONS/SARS GRANTED BASE PRICE DATE 5% 10%
- ---------------------- ----------------------- -------------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
David Wachtel, CEO... N/A N/A N/A N/A N/A N/A
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FY-END OPTIONS/SARS AT FY END
NAME OF INDIVIDUAL AND SHARES ACQUIRED VALUE ------------------------- -------------------------
PRINCIPAL POSITION ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---------------------- --------------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
David Wachtel, CEO............ N/A N/A N/A N/A
</TABLE>
33
<PAGE> 34
Retirement benefits payable under the Company's defined benefit pension
plan have been frozen since August 31, 1992. Accrued annual benefits payable at
retirement age under the plan are set forth in the following pension plan table,
which does not incorporate vesting or joint and survivor factors. Amounts
reported are straight-life annuity amounts, which are not offset by social
security.
<TABLE>
<CAPTION>
YEARS OF SERVICE
- -------------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 30
- ------------ ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
50$,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>
NAME OF INDIVIDUAL COVERED COMPENSATION ESTIMATED CREDITED SERVICE
------------------ -------------------- --------------------------
<S> <C> <C>
David Wachtel........................................ $ 0(*) 0
Mihai D. Patrichi (deceased)......................... 235,527(**) 40
</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 10% of a registered
class of the Company's equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC").
Executive officers, directors, and greater-than-ten percent stockholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
received by it and written representations from certain reporting persons that
have complied with the relevant filing requirements, the Company believes that
during the year ended June 30, 1998, all relevant Section 16(a) filing
requirements were complied with.
COMPENSATION OF DIRECTORS
During the year ended June 30, 1998, the Board of Directors met four times.
The Company paid director fees totaling $16,000, which consisted of $4,000 each
to Jack Friery, Glenn Linderman, Rodica Patrichi, and Ileana Wachtel,
respectively. 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.
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.
34
<PAGE> 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At September 25, 1998 there were four 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>
NAME AND ADDRESS OF AMOUNT BENEFICIALLY PERCENTAGE
CATEGORY BENEFICIAL OWNER OWNED OF CLASS(4)
-------- -------------------------------- ------------------- -----------
<S> <C> <C> <C>
Director Ileana Wachtel 872,660(1)(2)(3) 52.2%
9750 De Soto Avenue
Chatsworth, CA 91311
Director Rodica Patrichi 791,486(2) 47.3%
73095 Shadow Mt. Drive
Palm Desert, CA 92260
Director/ Officer David Wachtel 872,660(3) 52.2%
9750 De Soto Avenue
Chatsworth, CA 91311
Director Glenn Linderman 4,000 0.2%
2101 Robinson, #1
Redondo Beach, CA 90278
Officer Mohammad Tabassi 25,513 1.5%
19442 Romar St.
Northridge, CA 91324
Officer Robert Shearin 1,500 0.1%
14164 Terra Bella Street
Arleta, CA 91331
------- ----
All directors and officers as a group (7 persons) 904,776 54.0%
======= --------
--------
Other Moldovita Church 90,909(5) 5.4%
c/o --------------
73095 Shadow Mt. Drive --------------
Palm Desert, CA 92260
</TABLE>
- ---------------
(1) Ileana Wachtel is the wife of David Wachtel, the CEO of the Company.
(2) For each of these individuals, approximately 156,076 shares (166,076 shares
for Ileana Wachtel) 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 on 1,672,221 shares of common stock outstanding as of September 25,
1998, plus beneficial owner's exercisable stock options, if applicable.
(5) Rodica Patrichi is a co-trustee along with an unrelated party of a trust
that has voting power over these shares.
As of September 25, 1998, 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, 1998, which have not been reported on Forms 3, 4, or 5, respectively.
35
<PAGE> 36
The Mihai D. Patrichi Trust (the "Trust") owns 790,383 shares
(approximately 47%) and beneficially controls 895,053 shares (approximately 54%)
of the Company's common stock. By reason of this ownership of such common stock,
the Mihai D. Patrichi Trust is deemed to be a parent of the Company for the
purposes of the Securities Act of 1934, as amended. The Trust is administered by
Ileana Wachtel (Mihai Patrichi's daughter) and Rodica Patrichi (Mihai Patrichi's
widow). In a probate matter before the Superior Court of California, the court
has tentatively ruled that the trustees of the Mihai D. Patrichi Trust (the
"Trust") must dispose of the Trust's shares in the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1996, the Company received a $100,000 loan from its Vice
President, Mohammed Tabassi, secured by accounts receivable, with interest
payable monthly at an annual rate of 13%. The loan has been extended to December
31, 1998, at which time all principal is fully due and payable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) Index to Exhibits
EXHIBIT
NO. DOCUMENT DESCRIPTION
------- ------------------------
3.1 Amended Articles of Incorporation of the Registrant
3.2 By-Laws of the Registrant
10.1 Executive Employment Agreement Amended and Restated
as of May, 1998, entered into by Registrant and David
Wachtel.
10.2 Networks Electronic Corp. Amended 1996 Stock Incentive
Plan
23.1 Consent of Hurley & Company
24.1 Power of Attorney (included on signature page attached
to this Form 10-K).
27.1 Financial Data Schedule
(b)(1) The following financial statements are included in Part II,
Item 8:
Page
----
Report of Independent Certified Public Accountant 15
Balance Sheets -- Assets 16
Balance Sheets -- Liabilities and Stockholders Equity
(Deficiency in Assets) 16
Statements of Operations 17
Statement of Stockholders' Equity
(Deficiency in Assets) 18
Statement of Cash Flows 19
Notes to the Financial Statements 20
(2) The following financial statement schedule for the years
1998, 1997, and 1996 is submitted herewith:
Schedule VIII -- Valuation and Qualifying Accounts 37
All other schedules are omitted because they are not required, inapplicable, or
the information is otherwise shown in the financial statements or notes thereto.
(c) 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.
</TABLE>
36
<PAGE> 37
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
BALANCE CHARGED TO CHARGED BALANCE,
BEGINNING COSTS AND TO OTHER END OF
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS PERIOD
--------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
1998
Allowance for doubtful accounts....... $ 5,000 $ -- $-- $ -- $ 5,000
======== ========= == ====== ========
Reserve for slow-moving inventory..... $180,000 $ 195,000 $-- $ -- $375,000
======== ========= == ====== ========
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
======== ========= == ====== ========
</TABLE>
37
<PAGE> 38
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: /s/ DAVID WACHTEL
------------------------------------
DAVID WACHTEL
Chairman of the Board,
Chief Executive Officer,
President,
Chief Financial Officer
Date: October 9, 1998
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ DAVID WACHTEL Chairman of the Board, October 9, 1998
- --------------------------------------------------- Chief Executive Officer,
David Wachtel President,
Chief Financial Officer
/s/ GLENN LINDERMAN Director October 9, 1998
- ---------------------------------------------------
Glenn Linderman
/s/ ILEANA WACHTEL Director October 9, 1998
- ---------------------------------------------------
Ileana Wachtel
/s/ RODICA PATRICHI Director October 9, 1998
- ---------------------------------------------------
Rodica Patrichi
</TABLE>
38
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
NETWORKS ELECTRONIC CORP.
No. 278 942
One: The name of this corporation is: NETWORKS ELECTRONIC CORP.
Two: The primary business in which this corporation intends to initially engage
is to manufacture, lease, assemble, and sell electronic parts and devices,
particularly to aircraft companies.
Three: The additional purposes for which this corporation is formed are as
follows:
(a) To conduct any business necessary or customarily carried on in
connection with the primary purposes or that may be related thereto.
(b) To carry on any business whatsoever which this corporation may deem
proper or convenient in connection with any of the foregoing purposes or
otherwise, or which may be calculated to enhance the value of its property or
business.
(c) To borrow money, to lend money, to own real property, to own
personal property, to deal in real property, to deal in personal property, to
have and to exercise all the powers conferred by the laws of the State of
California upon corporations formed under the laws pursuant to and under which
this corporation is formed, as such laws are not in effect or may at any time
hereafter be amended.
The foregoing statement of purposes shall be construed as a statement of
both purposes and powers, and the purposes and powers stated in each clause
shall, except where otherwise expressed, be in nowise limited or restricted by
reference to or inference from the terms or provisions of any other clause, but
shall be regarded as independent purposes.
Four: The county in the State of California where the principal office for the
transaction of the business of this corporation is to be located is Los Angeles
County. The principal office of the corporation is to be located at 14806 Oxnard
Boulevard, Van Nuys, California.
<PAGE> 2
Page 2
Articles of Incorporation
Networks Electronic Corp.
October 5, 1953
Five: This corporation is authorized to issue only one class of shares of stock;
the total number of such shares shall be twenty thousand (20,000), and all such
shares of stock are to be without par value.
Six: The number of directors of this corporation shall be three; the names and
addresses of the persons who are appointed to act as the first directors of this
corporation are:
Mihai Patrichi, 2313 W. Olive Street, Burbank, California
William D. Gordon, 1521 N. Rosewood, Santa Ana, California
Glendon Tremaine, 458 S. Spring St., Los Angeles, California
Seven: (a) Each shareholder or subscriber to shares of this corporation shall
be entitled to full preemptive or preferential rights, such as rights have been
heretofore defined at common law, to purchase and/or subscribe for his
proportionate part of any shares which may be issued at any time by this
corporation.
(b) Before there can be a valid sale or transfer of any of the shares of
this corporation by the holders thereof, the holder of the shares to be sold or
transferred shall first give notice in writing to the secretary of this
corporation of his intention to sell or transfer such shares. Said notice shall
specify the number of shares to be sold or transferred, the price per share, and
the terms upon which such holder intends to make such sale or transfer. The
secretary shall, within five (5) days thereafter, mail or deliver a copy of said
notice to each of the other shareholders of record of this corporation. Such
notice may be delivered to such shareholders personally or may be mailed to the
last known address of such shareholders, as the same may appear on the books
of this corporation. Within (10) days after the mailing or delivering of said
notices to such shareholders, any such shareholder or shareholders desiring to
acquire any part of all of the shares referred to in said notice shall deliver
by mail or otherwise to the secretary of state of this corporation a written
offer or offers to purchase a specified number of such shares at the price and
under the terms stated in said notice.
If the total number of shares specified in such offers exceed the number
of shares referred to in said notice, each offering shareholder shall be
entitled to purchase such proportion of the shares referred to in said notice to
the secretary, as the number of shares of this corporation which he holds bears
to the total number of shares held by all such shareholders desiring to purchase
the shares referred to in said notice to the secretary.
<PAGE> 3
Page 3
Articles of Incorporation
Networks Electronic Corp.
October 5, 1953
If all of the shares referred to in said notice to the secretary are not
disposed of under such apportionment, each shareholder desiring to purchase
shares in a number in excess of his proportionate share, as provided above,
shall be entitled to purchase such proportion of those shares which remain thus
undisposed of as the total number of shares which he holds bears to the total
number of shares held by all of the shareholders desiring to purchase shares in
excess of those to which they are entitled under such apportionment.
If none or only a part of the shares referred to in said notice to the
secretary is purchased, as aforesaid, in accordance with offers made within said
ten (10) day period, the shareholders desiring to sell or transfer may dispose
of all shares of stock referred to in said notice to the secretary not so
purchased by the other shareholders, to any person or persons he may so desire;
provided, however, that he shall not sell or transfer such shares at a lower
price or on terms more favorable to the purchaser or transferee than those
specified in said notice to the secretary.
Any sale or transfer, or purported sale or transfer, of the shares of said
corporation shall be null and void unless the terms, conditions and provisions
of this Article Seven (b) are strictly observed and followed.
IN WITNESS WHEREOF, for the purpose of forming this corporation under
the laws of the State of California, the undersigners, constituting the
incorporators of this corporation, including the persons named hereinabove as
the first directors of this corporation, have executed these Articles of
Incorporation this 2nd day of October, 1953.
/s/ MIHAI PATRICHI
------------------------------------
Mihai Patrichi
/s/ WILLIAM D. GORDON
------------------------------------
William D. Gordon
/s/ GLENDON TREMAINE
------------------------------------
Glendon Tremaine
STATE OF CALIFORNIA
COUNTY OF LOS ANGELES - All signatures were notarized by E. K. Miles Notary
Public in and for the Country of Los Angeles, State of California on 10-2-53
<PAGE> 4
Filed October 10, 1958
with the Secretary of the
State of California
CERTIFICATE OF AMENDMENT
OF ARTICLES OF INCORPORATION OF
NETWORKS ELECTRONIC CORP.
The undersigned, HAROLD J. MOCK and GLENDON TREMAINE, do hereby certify that
they are, respectively, and have been at all times herein mentioned, the duly
elected and acting vice president and secretary of NETWORKS ELECTRONIC CORP., a
California corporation, and, further that:
One: At the Special Meeting of the Board of Directors of said
corporation, duly held at Room 535 Rowan Building, 458 South Spring Street, Los
Angeles, California, at the hour of 2:00 p.m., on the 25th day of September,
1958, at which meeting: there was at all times present and acting a quorum of
the members of the said Board, the resolutions as set forth in Exhibit "A",
attached hereto and made a part hereof, were duly adopted.
Two: The Directors' Resolutions were approved and adopted by all the
shareholders. The number of shares owned by the stockholders consenting to this
Amendment of the Articles is 200; the total number of shares owned by
stockholders entitled to consent of the stockholders is attached hereto as
Exhibit "B" and made a part hereof.
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Amendment this 3rd day of October, 1958.
/s/ HAROLD J. MOCK
------------------------------------
Harold J. Mock, Vice President
/s/ GLENDON TREMAINE
------------------------------------
Glendon Tremaine, Secretary
<PAGE> 5
STATE OF CALIFORNIA
COUNTY OF LOS ANGELES
HAROLD J. MOCK and GLENDON TREMAINE, being first duly sworn each for
himself, deposes and says: that HAROLD J. MOCK is, and at all times mentioned in
the foregoing Certificate of Amendment, the Vice President of NETWORKS
ELECTRONIC CORP., the California corporation therein mentioned, and GLENDON
TREMAINE is, and at all times herein mentioned was the secretary of said
corporation that each has read said Certificate and that the statements made
therein are true of his own knowledge, and that the signatures purporting to be
the signatures of said vice president and secretary thereto are genuine
signatures of said vice president and secretary respectively.
/s/ HAROLD J. MOCK
------------------------------------
Harold J. Mock
/s/ GLENDON TREMAINE
------------------------------------
Glendon Tremaine
Subscribed and sworn to before me
this 3rd day of October, 1958
Signed by Patricia K. Wiegard
- ------------------------------------
Notary Public in and for said County
and State
<PAGE> 6
DIRECTORS' RESOLUTION ON AMENDMENT
TO ARTICLES OF INCORPORATION OF
NETWORKS ELECTRONIC CORP.
WHEREAS, it is deemed by the Board of Directors of this corporation to
be its best interests and to the best interests of its shareholders, that its
Articles of Incorporation be amended as hereinafter provided:
NOW, THEREFORE, BE IT RESOLVED that Article Five of the Articles of
Incorporation of this corporation shall be amended to read as follows:
"Five. This corporation is authorized to issue only one class of shares
of stock; the total number of said shares shall be two million
(2,000,000); the aggregate par value of all those said shares
shall be One Million Dollars ($1,000,000.00); and the par value
of each of said shares shall be $0.50.
RESOLVED FURTHER that Article Six of the Articles of Incorporation of
this corporation shall be amended to read as follows:
"Six. (a) The number of directors of this corporation shall be four (4).
(b) The names and addresses of the persons who acted as the first
Directors of this corporation are:
Mihai Patrichi
2313 W. Olive Street
Burbank, California
William D. Gordon
1521 N. Rosewood
Santa Ana, California
Glendon Tremaine
458 S. Spring Street
Los Angeles, California
RESOLVED FURTHER that Article Seven of the Articles of Incorporation be
amended to read as follows:
"Seven. No shares of stock of this corporation now or hereafter
issued shall be entitled to any pre-emptive or
preferential right to purchase or subscribe for shares."
<PAGE> 7
Page 2
Directors Resolutions on Amendment
to Articles of Incorporation
October 3, 1958
RESOLVED FURTHER that that the Board of Directors of this corporation
hereby adopts and approves said amendments to its Articles of Incorporation; and
RESOLVED FURTHER that the president or a vice president and the
secretary or an assistant secretary of this corporation be and they hereby are
authorized and directed to procure the adoption and approval of the foregoing
amendment by the vote or written consent of shareholders of this corporation
holding at least a majority of the voting power, and thereafter to sign and
verify by their oaths and to file a Certificate in the form and manner required
by Section 3672 of the California Corporation Code and in general to do any and
all things necessary to effect said Amendments in accordance with said Section
3672.
/s/ HAROLD J. MOCK
------------------------------------
Harold J. Mock
/s/ GLENDON TREMAINE
------------------------------------
Glendon Tremaine
Exhibit "A"
<PAGE> 8
Page 2
Written Consent of Shareholders
of Amendment of Articles of
Incorporation of Networks Electronic Corp.
October, 1958
IN WITNESS WHEREOF, each of the undersigned has hereunto signed his name
and, following his name, the date of signing and the number of shares of said
corporation held by him of record on said date entitled to vote upon amendments
of said Articles of Incorporation of the character of the foregoing amendment.
<TABLE>
<CAPTION>
Name Date No. of Shares
<S> <C> <C>
Mihai Patrichi October 1, 1958 152
Harold J. Mock October 1, 1958 40
Glendon Tremaine October 3, 1958 8
</TABLE>
Exhibit "B"
<PAGE> 9
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
NETWORKS ELECTRONIC CORP.
The undersigned, MIHAI D. PATRICHI and GLENDON TREMAINE, do hereby certify that
they are, respectively, and have been at all times herein mentioned, the duly
elected and acting President and Secretary of NETWORKS ELECTRONIC CORP., a
California corporation; and further that:
ONE: At a Special Meeting of the Board of Directors of said corporation
duly held for the transaction of business at Room 535 Rowan Building, 458 South
Spring Street, Los Angeles, California on the 20th day of September, 1960, at
the hour of 3:00 p.m., Pacific Daylight Time, at which meeting there was at all
times present and acting a quorum of the members of said Board, the following
resolution was duly adopted:
WHEREAS, it is deemed by the Board of Directors of this corporation to
be to its best interests and to the best interests of its shareholders
that its Articles of Incorporation be amended as hereinafter provided;
NOW, THEREFORE, BE IT RESOLVED, that Article Six, (a) of the Articles of
Incorporation of this corporation shall be amended to read as follows:
"(a) The number of directors of the corporation shall not be
less than five (5) nor more than (8), the exact number of
which shall be fixed by a by-law duly adopted by the
shareholders or by the Board of Directors."
RESOLVED FURTHER, that the Board of Directors of this corporation hereby
adopts and approves said amendment of its Articles of Incorporation,
and;
RESOLVED FURTHER, that the President or Vice President and the Secretary
or Assistant Secretary of this corporation be and they hereby are
authorized and directed to procure the adoption and approval of the
foregoing amendment by the vote or written consent of shareholders of
this corporation holding at least a majority of the voting power, and
thereafter to sign and verify by their oaths and to file a certificate
in the form and manner required by Section 3672 of the California
Corporations Code, and in general to do any and all things necessary to
effect said amendment in accordance with said Section 3672.
TWO: At the Annual Meeting of stockholders of said corporation duly held
at the Sunset Room, Ambassador Hotel, 3400 Wilshire Boulevard, Los Angeles,
California, on the 20th of October, 1960, at 3:00 P.M., Pacific Standard Time,
the following resolution was adopted:
<PAGE> 10
Page 2
Amendment to the Articles
of Incorporation of
Networks Electronic Corp.
WHEREAS, the Board of Directors of Networks Electronic Corp. has
declared it advisable that Article Six (a) of the Articles of
Incorporation be amended and altered as hereinafter set forth; and
WHEREAS, the stockholders of Networks Electronic Corp. do hereby approve
of the said proposed amendment;
NOW, THEREFORE, BE IT RESOLVED, that Subdivision (a) of Article Six of
the Articles of Incorporation be amended, changed and altered as to read
as follows:
"(a) The number of directors of the corporation shall not be less
than five (5) nor more than eight (8), the exact number of which
shall be fixed by a "by-law" duly adopted by the shareholders or
by the Board of Directors."
RESOLVED FURTHER, that the amendment of the Articles of Incorporation of
this corporation be, and the same hereby is, adopted and approved by the
shareholders of this corporation, and that Subdivision (a) of Article
Six, of the Articles of Incorporation of this corporation be, and the
same is hereby amended to read as set forth herein.
THREE: The foregoing amendment was adopted and approved stockholders'
meeting by a vote of:
APPROVAL: 772,996
-------
AGAINST: 4,475
-------
FOUR: The total number of shares of said corporation entitled to vote at
or consent to the adoption of said amendment is 994,040.
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Amendment this 20th day of October 1960.
/s/ MIHAI D. PATRICHI
-----------------------------------
Mihai D. Patrichi, President
/s/ GLENDON TREMAINE
-----------------------------------
Glendon Tremaine, Secretary
<PAGE> 11
Page 3
Amendment to the Articles
of Incorporation of
Networks Electronic Corp.
STATE OF CALIFORNIA
COUNTY OF LOS ANGELES
Mihai D. Patrichi and Glendon Tremaine, being first duly sworn, each of
himself, deposes and says:
that Mihai D. Patrichi is, and was at all of the times mentioned in the
foregoing Certificate of Amendment, the President of NETWORKS ELECTRONIC CORP.,
the California corporation herein mentioned, and Glendon Tremaine is, and was at
all times, the Secretary of said corporation; that each has read said
Certificate and that the statements therein made are true of his own knowledge,
and the signature purporting to be the signatures of said President and
Secretary thereto are the genuine signatures of said President, respectively.
/s/ MIHAI D. PATRICHI
-----------------------------------
Mihai D. Patrichi, President
/s/ GLENDON TREMAINE
-----------------------------------
Glendon Tremaine, Secretary
Subscribed and sworn to before me
this 20th day of October 1960.
/s/ ZOLTAN A. HARASTY
- --------------------------
Zoltan A. Harasty
Notary Public and for said
County and State
<PAGE> 12
CERTIFICATE OF AMENDMENT
OF ARTICLES OF INCORPORATION OF
NETWORKS ELECTRONIC CORP.
The undersigned, MIHAI D. PATRICHI and GLENDON TREMAINE, do hereby certify that
they are, respectively, and have been at all times herein mentioned, the duly
elected and acting president and secretary of NETWORKS ELECTRONIC CORP., a
California corporation, and further states that:
ONE: At the Special Meeting of the Board of Directors of said
corporation, duly held at the principal office of the corporation located at
14806 Oxnard Street, Van Nuys, California, at the hour of 9:00 A.M. on the 1st
day of December, 1958, at which meeting there was at all times present and
acting a quorum of the members of said Board, the resolutions as set forth in
Exhibit "A", attached hereto and made a part hereof, were duly adopted.
TWO: The Directors' Resolutions were approved and adopted by all the
stockholders. The number of shares owned by the stockholders consenting to this
Amendment of the Articles is 193; the total number of shares owned by
stockholders entitled to consent to the adoption of the Amendment is 200. The
Consent of the Stockholders is attached hereto as Exhibit "B" and made a part
hereof.
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Amendment this 1st day of December 1958.
/s/ MIHAI D. PATRICHI
-----------------------------------
Mihai D. Patrichi, President
/s/ GLENDON TREMAINE
-----------------------------------
Glendon Tremaine, Secretary
Filed: December 24, 1958
Frank Jordan, Deputy
Secretary of State
STATE OF CALIFORNIA
COUNTY OF LOS ANGELES
MIHAI D. PATRICHI, and GLENDON TREMAINE, being first duly sworn each for
himself, deposes and says: That MIHAI D. PATRICHI is, and at all times mentioned
in the foregoing Certificate of Amendment, the President of NETWORKS ELECTRONIC
CORP., the California corporation herein mentioned, and that GLENDON TREMAINE
is, and at all times herein mentioned was the secretary of said corporation;
that each has read said Certificate and that the statements made therein are
true of his own knowledge, and that the signatures purporting to be the
signatures of said
<PAGE> 13
Page 2
Certificate of Amendment of
Articles of Incorporation of
Networks Electronic Corp.
president and secretary thereto are genuine signatures of said president and
secretary respectively.
/s/ MIHAI D. PATRICHI
-----------------------------------
Mihai D. Patrichi
/s/ GLENDON TREMAINE
-----------------------------------
Glendon Tremaine
Subscribed and sworn to before me this
10th day of December, 1958
/s/ PATRICIA K. WIEGARD
- -----------------------------------
Patricia K. Wiegard
Notary Public in and for Said County
and State.
<PAGE> 14
DIRECTORS' RESOLUTIONS ON AMENDMENT
TO ARTICLES OF INCORPORATION
OF NETWORKS ELECTRONIC CORP.
WHEREAS, it is deemed by the Board of Directors of this corporation to
be to its best interests and to the best interests of its shareholders, that its
Articles of Incorporation be amended in their entirety as hereinafter provided:
NOW, THEREFORE, BE IT RESOLVED that the Articles of Incorporation of
this corporation be and they hereby are amended to read as herein set forth in
full as follows:
ONE: The name of this corporation is: NETWORKS ELECTRONIC CORP.
TWO: The primary business in which this corporation intends to initially
engage is to manufacture, lease. assemble, and sell electronic parts and
devices, particularly to Aircraft Companies.
THREE: The additional purposes for which this corporation is formed are
as follows:
(a) To conduct any business necessary or customarily carried on
in connection with the primary purposes or that may be related thereto.
(b) To carry on any business whatsoever which this corporation
may deem proper or convenient in connection with any of the foregoing purposes
or otherwise, or which may be calculated directly or indirectly to promote the
interest of this corporation or to enhance the value of its property or
business.
(c) To borrow money, to lend money, to own real property, to own
personal property, to deal in personal property, to have and to exercise all the
powers conferred by the laws of the State of California upon corporations formed
under the laws pursuant to and under which this corporation is formed, as such
laws are now in effect or may at any time hereafter be amended.
The foregoing statement of purposes shall be construed as a statement of
both purposes and powers, and the purposes and powers stated in each clause
shall, except where otherwise expressed, be in nowise limited or restricted by
reference to or inference from the terms and provisions of any other clause, but
shall be regarded as independent purposes.
FOUR: The county in the State of California where the principal office
for the transaction of the business of this corporation is to be located in Los
Angeles County. The principal office of the corporation is to be located at
14806 Oxnard Boulevard, Van Nuys, California.
<PAGE> 15
Page 2
Directors Resolutions on Amendment
to Articles of Incorporation
of Networks Electronic Corp.
FIVE: This corporation is authorized to issue only one class of shares
of stock; the total number of said shares shall be two million (2,000,000); the
aggregate par value of all those said shares shall be One Million Dollars
($1,000,000.00); and the par value of each of said shares shall be $0.50.
On the effective date of this amendment each share of the outstanding no
par value stock immediately preceding the effective date of this amendment is
subdivided, converted, and reclassified into 3,250 shares of Common Stock of the
par value of $0.50 each.
SIX: (a) The number of Directors of this corporation shall be four (4)
(b) The names and addresses of the persons who acted as the first
directors of this corporation are:
Mihai D. Patrichi
2313 W. Olive Street
Burbank, California
William D. Gordon
1521 N. Rosewood
Santa Ana, California
Glendon Tremaine
458 S. Spring Street
Los Angeles, California
SEVEN: No shares of stock of this corporation now or hereafter issued
shall be entitled to any pre-emptive or preferential right to purchase or
subscribe for shares.
RESOLVED FURTHER that the Board of Directors of this corporation hereby
adopts and approves said amendments to its Articles of Incorporation; and
RESOLVED FURTHER that the president or a vice president and the
secretary or an assistant secretary of this corporation be and they hereby are
authorized and directed to procure the adoption and approval of the foregoing
amendment by the votes or written consent of shareholders of this corporation
holding at least a majority of the voting power and thereafter to sign and
verify by their oaths and to file a Certificate in the form and manner required
by Section 3672 of the California Corporations Code, and
<PAGE> 16
Page 3
Directors Resolutions on Amendment
to Articles of Incorporation
of Networks Electronic Corp.
in general, to do any and all things necessary to effect said Amendments in
accordance with said Section 3672.
IN WITNESS WHEREOF, each of the undersigned has hereunto signed his
name, and following his name, the date of singing and the number of shares of
said corporation held by him of record on said date entitled to vote upon
amendments of said Articles of Incorporation of the character of the foregoing
amendments.
<TABLE>
<CAPTION>
Name Date No. of Shares
<S> <C> <C>
Mihai D. Patrichi 12-01-58 14,668
William Gordon 12-01-58 3,860
Glendon Tremaine 12-01-58 772
</TABLE>
<PAGE> 17
CERTIFICATE OF MERGER
Networks Electronic Corp.
(Surviving Corporation)
The undersigned hereby certify:
1. That they are, respectively, the duly elected and acting President
and Secretary of NETWORKS ELECTRONIC CORP.
2. That the Board of Directors of the Corporation at a Special Meeting
duly held on the 11th day of July, 1962, 2:00 P.M. at Room 535, 458 South Spring
Street, Los Angeles, California, at which meeting a quorum was present, adopted
the following resolutions, all directors voting in favor:
WHEREAS, this Board of Directors deems it to be in the best interests of
this Corporation and its shareholders that this Corporation enter into an
Agreement providing for the merger of this corporation with U.S. BEARING
CORPORATION, which Agreement has been submitted to this meeting, it is
RESOLVED, that the merger of this Corporation and the terms and
conditions of this Agreement are approved, and
FURTHER RESOLVED, that the President or any Vice President and the
Secretary or any Assistant Secretary of this Corporation are hereby authorized
and directed to execute and deliver in the name of this Corporation an agreement
of merger complying substantially with the agreement approved at this meeting
with such changes as the officers executing the agreement may deem appropriate;
and
FURTHER RESOLVED, that the officers of this Corporation are hereby
authorized and instructed to obtain the approval of the shareholders of this
Corporation to said merger at a Special Meeting called for the 8th day of
August, 1962, at 4:30 P.M. at the principal office of this Corporation at 9750
DeSoto Avenue, Chatsworth, California, at which approval of the shareholders is
to be obtained; and
FURTHER RESOLVED, that the date as of which shareholders of record are
entitled to vote on the proposed merger is hereby fixed at the close of
business, Wednesday, July 11, 1962; and
FURTHER RESOLVED, that the officers of this Corporation are hereby
authorized and directed to apply to the Commissioner of Corporations for the
necessary permits, to make all necessary and proper action to carry out the
purpose of these resolutions.
<PAGE> 18
Page 2
Certificate of Merger
Networks Electronic Corp./
US Bearing Corporation
3. That the shareholders of this Corporation, at a Special Meeting duly
held on the 8th day of August, 1962, at 4:30 P.M., at 9750 DeSoto Avenue,
Chatsworth, California, approved the terms and conditions of the merger
agreement referred to in the foregoing Directors' Resolution by the votes of
783,043 shares, constituting the vote of not less than two-thirds of the issued
and outstanding shares of common stock. There is only one class of stock
outstanding. The number of outstanding shares is 1,147,368;
4. That notice of the time, place, and purpose of the shareholders'
meeting was mailed to each shareholder at least 20 days before the date of the
meeting and that there are enclosed with the notice, a statement of the general
terms of the proposed merger agreement;
5. That the name of the surviving corporation is NETWORKS ELECTRONIC
CORP.;
6. That the Agreement of Merger filed with the Secretary of State
concurrently with this certificate pursuant to Section 4113 of the Corporations
Code is the agreement and sets forth the terms and conditions approved by the
resolutions of the Directors and shareholders herein referred to:
Dated: October 4, 1962
/s/ MIHAI D. PATRICHI
-----------------------------------
Mihai D. Patrichi, President
/s/ GLENDON TREMAINE
-----------------------------------
Glendon Tremaine, Secretary
Subscribed and sworn to before me this 5th day of October, 1962.
/s/ ZOLTAN HARASTY
------------------------------------
Zoltan Harasty, Notary Public in and for the County of Los Angeles and
in the State of California
<PAGE> 19
Before the
Department of Investment
DIVISION OF CORPORATIONS
of the
STATE OF CALIFORNIA
In the matter of the application of CERTIFICATION OF
NETWORKS ELECTRONIC CORP, ISSUANCE OF PERMIT
File No. 112975LA
Receipt No. LA291015
I, JOHN G. SOBIESKI, Commissioner of Corporations of the State of
California, do hereby certify that a copy of the Agreement of Merger dated July
11, 1962, between NETWORKS ELECTRONIC CORP., a California corporation and U.S.
BEARING CORPORATION, a California corporation is on file and or record in my
office and that a permit was issued to NETWORKS ELECTRONIC CORP. (a California
corporation) with respect thereto on October 4, 1962.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed by official seal
this 4th day of October, 1962, at Los Angeles, California.
/s/ John G. Sobieski
-----------------------------------
Commissioner of Corporations
By: /s/ William Green
---------------------------------
Supervising Deputy
<PAGE> 20
Filed July 1, 1981
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
NETWORKS ELECTRONIC CORP.
( a California Corporation )
MIHAI D. PATRICHI and MICHAEL D. P. PATRICHI certify that:
1. They are the duly elected acting Chairman and Secretary, respectively
of said Corporation.
2. The Articles of Incorporation of said Corporation shall be amended by
revising Article Five to read as follows:
"Article Five: The total number of shares which this Corporation is
authorized to issue is four million (4,000,000), all of the same class,
designated, "Common Stock" and having a par value of twenty-five cents
($0.25) per share. Upon the amendment of this Article Five, each
outstanding share of Common Stock is divided into two (2) shares of
Common Stock.
3. The foregoing amendment has been approved by the Board of Directors
Directors of said Corporation.
4. The foregoing amendment is one which may be adopted with the approval
of the Board of Directors alone pursuant to California Corporations Code Section
902 (c).
IN WITNESS WHEREOF, the undersigned have executed this Certificate on
June 26, 1981.
/s/ MIHAI D. PATRICHI
-----------------------------------
Mihai D. Patrichi
/s/ MICHAEL D. P. PATRICHI
-----------------------------------
Michael D. P. Patrichi
The undersigned, MIHAI D. PATRICHI and MICHAEL D. P. PATRICHI, the
Chairman and Secretary, respectively, of Networks Electronic Corp. declares
under penalty of perjury that the matters set out in the foregoing Certificate
are true of his own knowledge.
<PAGE> 21
Page 2
Certificate of Amendment of
Articles of Incorporation of
Networks Electronic Corp.
Executed at: 9750 DeSoto Avenue
Chatsworth, CA 91311
Networks Electronic Corp.
State of California, on June 26, 1981
/s/ MIHAI D. PATRICHI
-----------------------------------
Mihai D. Patrichi
/s/ MICHAEL D. P. PATRICHI
-----------------------------------
Michael D. P. Patrichi
<PAGE> 22
CERTIFICATE OF CORRECTION
OF
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
NETWORKS ELECTRONIC CORP.
(a California Corporation)
MIHAI D. PATRICHI and HERMAN J. LANDOLT hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of NETWORKS ELECTORNIC CORP.
2. The name of the corporation is NETWORKS ELECTRONIC CORP.
3. The instrument being corrected is entitled `CERTIFICATE OF
AMENDMENT OF ARTICLES OF INCORPORATION OF NETWORKS ELECTRONIC CORP. a California
corporation", and said instrument was filed with the Secretary of State of the
State of California on November 14, 1986.
4. Paragraph "2" of said Certificate of Amendment, as corrected,
should read as follows:
"FIVE. The total number of shares which this corporation is
authorized to issue is ten million (10,000,000), all of the same
class designated as "Common Stock" and having a par value of
twenty-five cents ($.25) per share."
5. Said Paragraph "2", as corrected, confirms the wording of the
amended article to that adopted by the Board of Directors and the Shareholders.
IN WITNESS WHEREOF, the undersigned have executed this
Certificate on April 1, 1987.
/s/ MIHAI D. PATRICHI
-----------------------------------
Mihai D. Patrichi
President
/s/ HERMAN J. LANDOLT
-----------------------------------
Herman J. Landolt
Secretary
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
NETWORKS ELECTRONICS CORP.
(A CALIFORNIA CORPORATION)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I OFFICES.....................................................................1
SECTION 1 PRINCIPAL EXECUTIVE OFFICE..................................................1
SECTION 2 OTHER OFFICES...............................................................1
ARTICLE II SHAREHOLDERS................................................................1
SECTION 1 PLACE OF MEETINGS...........................................................1
SECTION 2 ANNUAL MEETINGS.............................................................1
SECTION 3 SPECIAL MEETINGS............................................................1
SECTION 4 NOTICE OF ANNUAL OR SPECIAL MEETINGS........................................2
SECTION 5 QUORUM......................................................................2
SECTION 6 ADJOURNED MEETINGS AND NOTICE THEREOF.......................................2
SECTION 7 VOTING......................................................................3
SECTION 8 RECORD DATE.................................................................4
SECTION 9 CONSENT OF ABSENTEES........................................................5
SECTION 10 ACTION WITHOUT MEETING. ....................................................5
SECTION 11 PROXIES.....................................................................5
SECTION 12 INSPECTORS OF ELECTION......................................................6
SECTION 13 CONDUCT OF MEETING..........................................................6
ARTICLE III DIRECTORS...................................................................6
SECTION 1 POWERS......................................................................6
SECTION 2 NUMBER OF DIRECTORS.........................................................7
SECTION 3 ELECTION AND TERM OF OFFICE.................................................7
SECTION 4 VACANCIES...................................................................7
SECTION 5 PLACE OF MEETING............................................................8
SECTION 6 REGULAR MEETINGS............................................................8
SECTION 7 SPECIAL MEETINGS............................................................8
SECTION 8 QUORUM......................................................................9
SECTION 9 PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE...........................9
SECTION 10 WAIVER OF NOTICE............................................................9
SECTION 11 ADJOURNMENT.................................................................9
SECTION 12 FEES AND COMPENSATION.......................................................9
SECTION 13 ACTION WITHOUT MEETING......................................................9
SECTION 14 RIGHTS OF INSPECTION........................................................9
SECTION 15 COMMITTEES.................................................................10
ARTICLE IV OFFICERS...................................................................10
SECTION 1 OFFICERS...................................................................10
SECTION 2 ELECTION...................................................................10
SECTION 3 SUBORDINATE OFFICERS.......................................................10
SECTION 4 REMOVAL AND RESIGNATION....................................................11
SECTION 5 VACANCIES..................................................................11
SECTION 6 CHAIRMAN OF THE BOARD......................................................11
SECTION 7 PRESIDENT..................................................................11
SECTION 8 VICE PRESIDENTS............................................................11
SECTION 9 SECRETARY..................................................................11
SECTION 10 TREASURER..................................................................12
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE V OTHER PROVISIONS...........................................................12
SECTION 1 INSPECTION OF CORPORATE RECORDS............................................12
SECTION 2 INSPECTION OF BYLAWS.......................................................13
SECTION 3 ENDORSEMENT OF DOCUMENTS; CONTRACTS........................................13
SECTION 4 CERTIFICATES OF STOCK......................................................13
SECTION 5 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.............................14
SECTION 6 STOCK PURCHASE PLANS.......................................................14
SECTION 7 CONSTRUCTION AND DEFINITIONS...............................................14
SECTION 8 AMENDMENTS.................................................................14
SECTION 9 ANNUAL REPORT TO SHAREHOLDERS..............................................15
ARTICLE VI INDEMNIFICATION............................................................15
SECTION 1 DEFINITIONS................................................................15
SECTION 2 INDEMNIFICATION IN ACTIONS BY THIRD PARTIES................................15
SECTION 3 INDEMNIFICATION IN ACTIONS BY OR IN THE RIGHT OF THE CORPORATION...........15
SECTION 4 INDEMNIFICATION AGAINST EXPENSES...........................................16
SECTION 5 REQUIRED DETERMINATIONS....................................................16
SECTION 6 ADVANCE OF EXPENSES........................................................16
SECTION 7 OTHER INDEMNIFICATION......................................................16
SECTION 8 FORMS OF INDEMNIFICATION NOT PERMITTED.....................................17
SECTION 9 INSURANCE..................................................................17
SECTION 10 NONAPPLICABILITY TO FIDUCIARIES OF EMPLOYEE BENEFIT PLANS..................17
</TABLE>
ii
<PAGE> 4
BYLAWS
for the regulation, except
as otherwise provided by statute or
its Articles of Incorporation,
of
Networks Electronic Corp.
(a California corporation)
ARTICLE I. OFFICES.
Section 1. PRINCIPAL EXECUTIVE OFFICE. The principal executive office
of the corporation is fixed and located at 9750 DeSoto Avenue, Chatsworth,
California. The Board of Directors (herein called the "Board") is granted full
power and authority to change said principal executive office from one location
to another. Any such change shall be noted on the Bylaws opposite this Section,
or this Section may be amended to state the new location.
Section 2. OTHER OFFICES. Branch or subordinate offices may be
established at any time by the Board at any place or places.
ARTICLE II. SHAREHOLDERS.
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held
either at the principal executive office of the corporation or at any other
place within or without the State of California which may be designated either
by the Board or by the written consent of all persons entitled to vote thereat,
given either before or after the meeting and filed with the Secretary.
Section 2. ANNUAL MEETINGS. The annual meetings of shareholders shall
be held on such date and at such time as may be fixed by the Board. At such
meetings, directors shall be elected and any other proper business may be
transacted.
Section 3. SPECIAL MEETINGS. Special meetings of the shareholders may
be called at any time by the Board, the Chairman of the Board, the President,
any Vice President, or by the holders of shares entitled to cast not less than
ten percent of the votes at such meeting. Upon request in writing to the
Chairman of the Board, the President, any Vice President or the Secretary by any
person (other than the Board) entitled to call a special meeting of
shareholders, the officer forthwith shall cause notice to be given to the
shareholders entitled to vote that a meeting will be held at a time requested by
the person or persons calling the meeting, not less than thirty-five nor
1
<PAGE> 5
more than sixty days after the receipt of the request. If the notice is not
given within twenty days after receipt of the request, the persons entitled to
call the meeting may give the notice.
Section 4. NOTICE OF ANNUAL OR SPECIAL MEETINGS. Written notice of
each annual or special meeting of shareholders shall be given not less than ten
nor more than sixty days before the date of the meeting to each shareholder
entitled to vote thereat; provided, however, if the notice is sent by
third-class mail, the notice shall be given not less than thirty nor more than
sixty days before the date of the meeting. Such notice shall state the place,
date and hour of the meeting and (i) in the case of a special meeting, the
general nature of the business to be transacted, and no other business may be
transacted, or (ii) in the case of the annual meeting, those matters which the
Board, at the time of the mailing of the notice, intends to present for action
by the shareholders, but, subject to the provisions of applicable law, any
proper matter may be presented at the meeting for such action. The notice of any
meeting at which directors are to be elected shall include the names of nominees
intended at the time of the notice to be presented by management for election.
Notice of a shareholders' meeting shall be given either
personally or by mail or by other means of written communication, addressed to
the shareholder at the address of such shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice, or, if no such address appears or is given, at the place where the
principal executive office of the corporation is located or by publication at
least once in a newspaper of general circulation in the county in which the
principal executive office is located. Notice by mail shall be deemed to have
been given at the time a written notice is deposited in the United States mails,
postage prepaid. Any other written notice shall be deemed to have been given at
the time it is personally delivered to the recipient or is delivered to a common
carrier for transmission, or actually transmitted by the person given the notice
by electronic means, to the recipient.
Section 5. QUORUM. A majority of the shares entitled to vote,
represented in person or by proxy, shall constitute a quorum at any meeting of
shareholders. If a quorum is present, the affirmative vote of a majority of the
shares represented and voting at the meeting (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the shareholders, unless the vote of a greater number or voting by classes is
required by law or by the Articles, except as provided in the following
sentence. The shareholders present at a duly called or held meeting at which a
quorum is present may continue to do business until adjournment, notwithstanding
the withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.
Section 6. ADJOURNED MEETINGS AND NOTICE THEREOF. Any shareholders'
meeting, whether or not a quorum is present, may be adjourned from time to time
by the vote of a majority of the shares represented either in person or by
proxy, but in the absence of a quorum (except as provided in Section 5 of this
Article) no other business may be transacted at such meeting.
It shall not be necessary to give any notice of the time and place of
the adjourned meeting or of the business to be transacted thereat, other than by
announcement at the meeting at
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which such adjournment is taken; provided, however, when any shareholders'
meeting is adjourned for more than 45 days or, if after adjournment a new record
date is fixed for the adjourned meeting, notice of the adjourned meeting shall
be given as in the case of an original meeting. In accordance with Section 8 of
this Article, the Board shall fix a new record date if a meeting is adjourned
for more than forty-five days.
Section 7. VOTING. The shareholders entitled to notice of any meeting
or to vote at any such meeting shall be only persons in whose name shares stand
on the stock records of the corporation on the record date determined in
accordance with Section 8 of this Article.
Subject to the following sentence and to the provisions of Section 708
of the California General Corporation Law, every shareholder entitled to vote at
any election of directors may cumulate such shareholder's votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the shareholder's shares are
entitled, or distribute the shareholder's votes on the same principle among as
many candidates as the shareholder thinks fit. No shareholder shall be entitled
to cumulate votes for any candidate or candidates pursuant to the preceding
sentence unless such candidate or candidates' names have been placed in
nomination prior to the voting and the shareholder has given notice at the
meeting prior to the voting of the shareholder's intention to cumulate the
shareholder's votes. If any one shareholder has given such notice, all
shareholders may cumulate their votes for candidates in nomination.
Elections need not be by ballot; provided, however, that all elections
for directors must be by ballot upon demand made by a shareholder at the meeting
and before the voting begins.
In any election of directors, the candidates receiving the highest
number of votes of the shares entitled to be voted for them up to the number of
directors to be elected by such shares are elected.
Voting shall in all cases be subject to the provisions of Chapter 7 of
the California General Corporation Law, and to the following provisions:
(a) Subject to clause (g), shares held by an administrator executive,
guardian, conservator or custodian may be voted by such holder either in person
or by proxy, without a transfer of such shares into the holder's name; and
shares standing in the name of a trustee may be voted by the trustee, either in
person or by proxy, but no trustee shall be entitled to vote shares held by such
trustee without a transfer of such shares into the trustee's name.
(b) Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into the receiver's name if authority
to do so is contained in the order of the court by which such receiver was
appointed.
(c) Subject to the provisions of Section 705 of the California General
Corporation Law and except where otherwise agreed in writing between the
parties, a shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
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(d) Shares standing in the name of a minor may be voted and the
corporation may treat all rights incident thereto as exercisable by the minor,
in person or by proxy, whether or not the corporation has notice, actual or
constructive, of the nonage, unless a guardian of the minor's property has been
appointed and written notice of such appointment given to the corporation
(e) Shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxyholder as the bylaws of
such other corporation may prescribe or, in the absence of such provision, as
the Board of Directors of such other corporation may determine or, in the
absence of such determination, by the chairman of the board, president or any
vice president of such other corporation, or by any other person authorized to
do so by the chairman of the board, president or any vice president of such
other corporation. Shares which are purported to be voted or any proxy purported
to be executed in the name of a corporation (whether or not any title of the
person signing is indicated) shall be presumed to be voted or the proxy executed
in accordance with the provisions of this clause, unless the contrary is shown.
(f) Shares of the corporation owned by any subsidiary shall not be
entitled to vote on any matter.
(g) Shares held by the corporation in a fiduciary capacity, and shares
of the issuing corporation held in a fiduciary capacity by any subsidiary, shall
not be entitled to vote on any matter, except to the extent that the settlor or
beneficial owner possesses and exercises a right to vote or to give the
corporation binding instructions as to how to vote such shares.
(h) If shares stand of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
husband and wife as community property, tenants by the entirety, voting
trustees, persons entitled to vote under a shareholder voting agreement or
otherwise, or if two or more persons (including proxyholders) have the same
fiduciary relationship respecting the same shares, unless the secretary of the
corporation is given written notice to the contrary and is furnished with a copy
of the instrument or order appointing them or creating the relationship wherein
it is so provided, their acts with respect to voting shall have the following
effect:
(i) If only one votes, such act binds all;
(ii) If more than one vote, the act of the majority so
voting binds all;
(iii) if more than one vote, but the vote is evenly split on
any particular matter, each faction may vote the securities in
question proportionately.
If the instrument so filed or the registration of the shares shows that any such
tenancy is held in unequal interests, a majority or even split for the purpose
of this section shall be a majority or even split in interest.
Section 8. RECORD DATE. The Board may fix, in advance, a record date
for the determination of the shareholders entitled to notice of any meeting or
to vote or entitled to receive payment of any dividend or other distribution, or
any allotment of rights, or to exercise rights in respect of any other lawful
action. The record date so fixed shall be not more than 60 days nor less
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than 10 days prior to the date of the meeting nor more than 60 days prior to any
other action. When a record date is so fixed, only shareholders of record on
that date are entitled to notice of and to vote at the meeting or to receive the
dividend, distribution, or allotment of rights, or to exercise the rights, as
the case may be, notwithstanding any transfer of shares on the books of the
corporation after the record date. A determination of shareholders of record
entitled to notice of or to vote at a meeting of shareholders shall apply to any
adjournment of the meeting unless the Board fixes a new record date for the
adjourned meeting. The Board shall fix a new record date if the meeting is
adjourned for more than forty-five days.
If no record date is fixed by the Board, the record date for
determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the business day next
preceding the day on which notice is given or, if notice is waived, at the close
of business on the business day next preceding the day on which the meeting is
held. The record date for determining shareholders for any purpose other than
set forth in this Section 8 or Section 10 of this Article shall be at the close
of business on the day on which the Board adopts the resolution relating
thereto, or the sixtieth day prior to the date of such other action, whichever
is later.
Section 9. CONSENT OF ABSENTEES. The transactions of any meeting of
shareholders, however called and noticed, and wherever held, are as valid as
though had at a meeting duly held after regular call and notice, if a quorum is
present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, not present in person or by
proxy, signs a written waiver of notice, or a consent to the holding of the
meeting or an approval of the minutes thereof. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting. Attendance of a person at a meeting shall constitute a
waiver of notice of and presence at such meeting, except when the person
objects, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened and except that
attendance at a meeting is not a waiver of any right to object to the
consideration of matters required by the California General Corporation Law to
be included in the notice but not so included, if such objection is expressly
made at the meeting. Neither the business to be transacted at nor the purpose of
any regular or special meeting of shareholders need be specified in any written
waiver of notice, consent to the holding of the meeting or approval of the
minutes thereof, except as provided in Section 601(f) of the California General
Corporation Law.
Section 10. ACTION WITHOUT MEETING. Subject to Section 603 of the
California General Corporation Law, any action which, under any provision of the
California General Corporation Law, may be taken at any annual or special
meeting of shareholders, may be taken without a meeting and without prior notice
if a consent in writing, setting forth the action so taken, shall be signed by
the holders of outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. Unless a
record date for voting purposes be fixed as provided in Section 8 of this
Article, the record date for determining shareholders entitled to give consent
pursuant to this Section 10, when no prior action by the Board has been taken,
shall be the day on which the first written consent is given.
Section 11. PROXIES. Every person entitled to vote shares has the
right to do so either in person or by one or more persons authorized by a
written proxy executed by such shareholder and filed with the Secretary. Any
proxy duly executed is not revoked and continues in
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full force and effect until revoked by the person executing it prior to the vote
pursuant thereto. Such revocation may be effected either, (i) by a writing
delivered to the Secretary of the Corporation stating that the proxy is revoked,
or (ii) by a subsequent proxy executed by the person executing the prior proxy
and presented to the meeting, or (iii) by attendance at the meeting and voting
in person by the person executing the proxy; provided, however, that no proxy
shall be valid after the expiration of eleven months from the date of its
execution unless otherwise provided in the proxy.
Section 12. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the Board may appoint inspectors of election to act at such
meeting and any adjournment thereof, if inspectors of election be not so
appointed, or if any persons so appointed fail to appear or refuse to act, the
chairman of any such meeting may, and on the request of any shareholder or
shareholder's proxy, shall, make such appointment at the meeting. The number of
inspectors shall be either one or three. If appointed at a meeting on the
request of one or more shareholders or proxies, the majority of shares present
shall determine whether one or three inspectors are to be appointed.
The duties of such inspectors shall be as prescribed by Section 707(b)
of the California General Corporation Law and shall include determining the
number of shares outstanding and the voting power of each; determining the
shares represented at the meeting; determining the existence of a quorum;
determining the authenticity, validity and effect of proxies; receiving votes,
ballots or consents; hearing and determining all challenges and questions in any
way arising in connection with the right to vote; counting and tabulating all
votes or consents; determining when the polls shall close; determining the
result; and doing such acts as may be proper to conduct the election or vote
with fairness to all shareholders. If there are three inspectors of election,
the decision, act or certificate of a majority is effective in all respects as
the decision, act or certificate of all.
Section 13. CONDUCT OF MEETING. The President shall preside as
chairman at all meetings of the shareholders. The chairman shall conduct each
such meeting in a businesslike and fair manner, but shall not be obligated to
follow any technical, formal or parliamentary rules or principles of procedure.
The chairman's rulings on procedural matters shall be conclusive and binding on
all shareholders, unless at the time of a ruling a request for a vote is made to
the shareholders holding shares entitled to vote and which are represented in
person or by proxy at the meeting, in which case the decision of a majority of
such shares shall be conclusive and binding on all shareholders. Without
limiting the generality of the foregoing, the chairman shall have all of the
powers usually vested in the chairman of a meeting of shareholders.
ARTICLE III. DIRECTORS.
Section 1. POWERS. Subject to limitations of the Articles, of these
Bylaws and of the California General Corporation Law relating to action required
to be approved by the shareholders or by the outstanding shares, the business
and affairs of the corporation shall be managed and all corporate powers shall
be exercised by or under the direction of the Board. The Board may delegate the
management of the day-to-day operation of the business of the corporation to a
management company or other person provided that the business and affairs of the
corporation shall be managed and all corporate powers shall he exercised under
the ultimate direction of the Board. Without prejudice to such general powers,
but subject to the same limitations, it is hereby
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expressly declared that the Board shall have the following powers in addition to
the other powers enumerated in these Bylaws:
(a) To select and remove all the other officers, agents and employees
of the corporation, prescribe the powers and duties for them as may not be
inconsistent with law, the Articles or these Bylaws, fix their compensation and
require from them security for faithful service.
(b) To conduct, manage and control the affairs and business of the
corporation and to make such rules and regulations therefor not inconsistent
with law, the Articles or these Bylaws, as they may deem best.
(c) To adopt, make and use a corporate seal, and to prescribe the
forms of certificates of stock, and to alter the form of such seal and of such
certificates from time to time as they may deem best.
(d) To authorize the issuance of shares of stock of the corporation
from time to time, upon such terms and for such consideration as may be lawful.
(e) To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations or other evidences of debt and securities therefor.
Section 2. NUMBER OF DIRECTORS. The authorized number of directors
shall be not less than three (3) nor more than five (5) until changed by
amendment of the Articles. The exact number of directors shall be set, within
the limits specified, by amendment of the next sentence duly adopted either by
the Board or the shareholders. The exact number of directors shall be four (4)
until changed as provided in this Section 2.
Section 3. ELECTION AND TERM OF OFFICE. The directors shall be elected
at each annual meeting of the shareholders, but if any such annual meeting is
not held or the directors are not elected thereat, the directors may be elected
at any special meeting of shareholders held for that purpose. Each director
shall hold office until the next annual meeting and until a successor has been
elected and qualified.
Section 4. VACANCIES. Any director may resign effective upon giving
written notice to the Chairman of the Board, the President, the Secretary or the
Board, unless the notice specifies a later time for the effectiveness of such
resignation. If the resignation is effective at a future time, a successor may
be elected to take office when the resignation becomes effective.
Vacancies in the Board, except those existing as a result of a removal
of a director, may be filled by a majority of the remaining directors, though
less than a quorum, or by a sole remaining director, and each director so
elected shall hold office until the next annual meeting and until such
director's successor has been elected and qualified.
A vacancy or vacancies in the Board shall be deemed to exist in case
of the death, resignation or removal of any director, or if the authorized
number of directors be increased, or if
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the shareholders fail, at any annual or special meeting of shareholders at which
any director or directors are elected, to elect the full authorized number of
directors to be voted for at that meeting.
The Board may declare vacant the office of a director who has been
declared of unsound mind by an order of court or convicted of a felony.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors. Any such election by
written consent other than to fill a vacancy created by removal requires the
consent of a majority of the outstanding shares entitled to vote. Any such
election by written consent to fill a vacancy created by removal requires
unanimous consent.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of the director's term
of office.
Subject to the provisions of Section 303(a) of the General Corporation
Law, any or all of the directors may be removed from office, without cause, if
such removal is approved by a vote of a majority of the outstanding shares
entitled to vote.
Section 5. PLACE OF MEETING. Regular or special meetings of the Board
shall be held at any place within or without the State of California which has
been designated from time to time by the Board. In the absence of such
designation, regular meetings shall be held at the principal executive office of
the corporation.
Section 6. REGULAR MEETINGS. Immediately following each annual meeting
of shareholders the Board shall hold a regular meeting for the purpose of
organization, election of officers and the transaction of other business.
Other regular meetings of the Board shall be held without call on such
dates and at such times as may be fixed by the Board. Call and notice of all
regular meetings of the Board are hereby dispensed with.
Section 7. SPECIAL MEETINGS. Special meetings of the Board for any
purpose or purposes may be called at any time by the Chairman of the Board, the
President, any Vice President, the Secretary or by any two directors.
Special meetings of the Board shall be held upon four days' written
notice or forty-eight hours' notice given personally or by telephone, telegraph,
telex or other similar means of communication. Any such notice shall be
addressed or delivered to each director at such director's address as it is
shown upon the records of the corporation or as may have been given to the
corporation by the director for purposes of notice or, if such address is not
shown on such records or is not readily ascertainable, at the place in which the
meetings of the directors are regularly held.
Notice by mail shall be deemed to have been given at the time a
written notice is deposited in the United States mails, postage prepaid. Any
other written notice shall be deemed to have been given at the time it is
personally delivered to the recipient or is delivered to a common carrier for
transmission, or actually transmitted by the person giving the notice by
electronic means, to the recipient. Oral notice shall be deemed to have been
given at the time it is communicated, in
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person or by telephone or wireless, to the recipient or to a person at the
office of the recipient who the person giving the notice has reason to believe
will promptly communicate it to the recipient.
Section 8. QUORUM. A majority of the authorized number of directors
constitutes a quorum of the Board for the transaction of business, except to
adjourn as provided in Section 11 of this Article. Every act or decision done or
made by a majority of the directors present at a meeting duly held at which a
quorum is present shall be regarded as the act of the Board, unless a greater
number be required by law or by the Articles. A meeting at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority
of the required quorum for such meeting.
Section 9. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members
of the Board may participate in a meeting through use of conference telephone or
similar communications equipment, so long as all members participating in such
meeting can hear one another.
Section 10. WAIVER OF NOTICE. Notice of a meeting need not be given to
any director who signs a waiver of notice or a consent to holding the meeting or
an approval of the minutes thereof, whether before or after the meeting, or who
attends the meeting without protesting, prior thereto or at its commencement,
the lack of notice to such director. All such waivers, consents and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
Section 11. ADJOURNMENT. A majority of the directors present, whether
or not a quorum is present, may adjourn any directors' meeting to another time
and place. Notice of the time and place of holding an adjourned meeting need not
be given to absent directors if the time and place be fixed at the meeting
adjourned, except as provided in the next sentence. If the meeting is adjourned
for more than 24 hours, notice of any adjournment to another time or place shall
be given prior to the time of the adjourned meeting to the directors who were
not present at the time of the adjournment.
Section 12. FEES AND COMPENSATION. Directors and members of committees
may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by the Board.
Section 13. ACTION WITHOUT MEETING. Any action required or permitted
to be taken by the Board may be taken without a meeting if all members of the
Board shall individually or collectively consent in writing to such action. Such
consent or consents shall have the same effect as a unanimous vote of the Board
and shall be filed with the minutes of the proceedings of the Board.
Section 14. RIGHTS OF INSPECTION. Every director shall have the
absolute right at any reasonable time to inspect and copy all books, records and
documents of every kind and to inspect the physical properties of the
corporation and also of its subsidiary corporations, domestic or foreign. Such
inspection by a director may be made in person or by agent or attorney and
includes the right to copy and obtain extracts.
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Section 15. COMMITTEES. The Board may appoint one or more committees,
each consisting of two or more directors, and delegate to such committees any of
the authority of the Board except with respect to
(a) The approval of any action for which the California General
Corporation Law also requires shareholders' approval or approval of the
outstanding shares;
(b) The filling of vacancies in the Board or on any committee;
(c) The fixing of compensation of the directors for serving on the
Board or on any committee;
(d) The amendment or repeal of bylaws or the adoption of new bylaws;
(e) The amendment or repeal of any resolution of the Board which by
its express term is not so amendable or repealable;
(f) A distribution to the shareholders of the corporation except at a
rate or in a periodic amount or within a price range determined by the Board; or
(g) The appointment of other committees of the Board or the members
thereof. Any such committee must be designated, and the members or alternate
members thereof appointed, by resolution adopted by a majority of the authorized
number of directors and any such committee may be designated an Executive
Committee or by such other name as the Board shall specify. Alternate members of
a committee may replace any absent member at any meeting of the committee. The
Board shall have the power to prescribe the manner in which proceedings of any
such committee shall be conducted. In the absence of any such prescription, such
committee shall have the power to prescribe the manner in which its proceedings
shall be conducted. Unless the Board or such committee shall otherwise provide,
the regular and special meetings and other actions of any such committee shall
be governed by the provisions of this Article applicable to meetings and actions
of the Board. Minutes shall be kept of each meeting of each committee.
ARTICLE IV. OFFICERS.
Section 1. OFFICERS. The officers of the corporation shall be a
President, a Secretary and a Treasurer. The corporation may also have, at the
discretion of the Board, a Chairman of the Board, one or more additional Vice
Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers,
and such other officers as may be elected or appointed in accordance with the
provisions of Section 3 of this Article.
Section 2. ELECTION. The officers of the corporation, except such
officers as may be elected or appointed in accordance with the provisions of
Section 3 or Section 5 of this Article, shall be chosen annually by, and shall
serve at the pleasure of, the Board, and shall hold their respective offices
until their resignation, removal, or other disqualification from service, or
until their respective successors shall be elected.
Section 3. SUBORDINATE OFFICERS. The Board may elect, and may empower
the President to appoint, such other officers as the business of the corporation
may require, each of
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whom shall hold office for such period, have such authority and perform such
duties as are provided in these Bylaws or as the Board may from time to time
determine.
Section 4. REMOVAL AND RESIGNATION. Any officer may be removed, either
with or without cause, by the Board at any time or, except in the case of an
officer chosen by the Board, by any officer upon whom such power of removal may
be conferred by the Board. Any such removal shall be without prejudice to the
rights, if any, of the officer under any contract of employment of the officer.
Any officer may resign at any time by giving written notice to the
corporation, but without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party. Any such resignation shall
take effect at the date of the receipt of such notice or at any other time
specified therein and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 5. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular election or appointment to such
office.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there
shall be such an officer, shall, if present, preside at all meetings of the
Board and exercise and perform such other powers and duties as may be from time
to time assigned by the Board.
Section 7. PRESIDENT. Subject to such powers, if any, as may be given
by the Board to the Chairman of the Board, if there be such an officer, the
President is the general manager and chief executive officer of the corporation
and has, subject to the control of the Board, general supervision, direction and
control of the business and officers of the corporation. The President shall
preside at all meetings of the shareholders and, in the absence of the Chairman
of the Board, or if there be none, at all meetings of the Board. The President
has the general powers and duties of management usually vested in the office of
president and general manager of a corporation and such other powers and duties
as may be prescribed by the Board.
Section 8. VICE PRESIDENTS. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board or,
if not ranked, the Vice President designated by the Board, shall perform all the
duties of the President and, when so acting, shall have all the powers of, and
be subject to all the restrictions upon, the President. The Vice Presidents
shall have such other powers and perform such other duties as from time to time
may be prescribed for them respectively by the Board.
Section 9. SECRETARY. The Secretary shall keep or cause to be kept, at
the principal executive office and such other place as the Board may order, a
book of minutes of all meetings of shareholders, the Board and its committees,
with the time and place of holding, whether regular or special, and if special,
how authorized, the notice thereof given, the names of those present at Board
and committee meetings, the number of shares present or represented at
shareholders' meetings, and the proceedings thereof. The Secretary shall keep,
or cause to be kept, a copy of the Bylaws of the corporation at the principal
executive office or business office in accordance with Section 213 of the
California General Corporation Law.
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The Secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the corporation's transfer agent or
registrar, if one be appointed, a share register, or a duplicate share register,
showing the names of the shareholders and their addresses, the number and
classes of shares held by each, the number and date of certificates issued for
the same, and the number and date of cancellation of every certificate
surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the Board and any committees thereof required by
these Bylaws or by law to be given, shall keep the seal of the corporation in
safe custody, and shall have such other powers and perform such other duties as
may be prescribed by the Board.
Section 10. TREASURER. The Treasurer is the chief financial officer of
the corporation and shall keep and maintain, or cause to be kept and maintained,
adequate and correct accounts of the properties and business transactions of the
corporation, and shall send or cause to be sent to the shareholders of the
corporation suck financial statements and reports as are by law or these Bylaws
required to be sent to them. The books of account shall at all times be open to
inspection by any director.
The Treasurer shall deposit all moneys and other valuables in the name
and to the credit of the corporation with such depositaries as may be designated
by the Board. The Treasurer shall disburse the funds of the corporation as may
be ordered by the Board, shall render to the President and the directors,
whenever they request it, an account of all transactions as Treasurer and of the
financial condition of the corporation, and shall have such other powers and
perform such other duties as may be prescribed by the Board.
ARTICLE V. OTHER PROVISIONS.
Section 1. INSPECTION OF CORPORATE RECORDS.
(a) A shareholder or shareholders holding at least five percent in the
aggregate of the outstanding voting shares of the corporation or who hold at
least one percent of such voting shares and have filed a Schedule 14B with the
United States Securities and Exchange Commission relating to the election of
directors of the corporation shall have an absolute right to do either or both
of the following:
(i) Inspect and copy the record of shareholders' names and
addresses and shareholdings during usual business hours upon five
business days' prior written demand upon the corporation; or
(ii) Obtain from the transfer agent if any, for the
corporation, upon five business days prior written demand and upon the
tender of its usual charges for such a list (the amount of which
charges shall be stated to the shareholder by the transfer agent upon
request), a list of the shareholders' names and addresses who are
entitled to vote for the election of directors and their
shareholdings, as of the most recent record date for which it has been
compiled or as of a date specified by the shareholder subsequent to
the date of demand.
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(b) The record of shareholders shall also be open to inspection and
copying by any shareholder or holder of a voting trust certificate at any time
during usual business hours upon written demand on the corporation, for a
purpose reasonably related to such holder's interest as a shareholder or holder
of a voting trust certificate.
(c) The accounting books and records and minutes of proceedings of the
shareholders and the Board and committees of the Board shall be open to
inspection upon written demand on the corporation of any shareholder or holder
of a voting trust certificate at any reasonable time during usual business
hours, for a purpose reasonably related to such holder's interests as a
shareholder or as a holder of such voting trust certificate.
(d) Any inspection and copying under this Article may be made in
person or by agent or attorney.
Section 2. INSPECTION OF BYLAWS. The corporation shall keep in its
principal executive office in the State of California, or if its principal
executive office is not in such State at its principal business office in such
State, the original or a copy of these Bylaws as amended to date, which shall be
open to inspection by shareholders at all reasonable times during office hours.
If the principal executive office of the corporation is located outside the
State of California and the corporation has no principal business office in such
state, it shall upon the written request of any shareholder furnish to such
shareholder a copy of these Bylaws as amended to date.
Section 3. ENDORSEMENT OF DOCUMENTS; CONTRACTS. Subject to the
provisions of applicable law, any note, mortgage, evidence of indebtedness,
contract, share certificate, conveyance or other instrument in writing and any
assignment or endorsements thereof executed or entered into between the
corporation and any other person, when signed by the Chairman of the Board, the
President or any Vice President and the Secretary, any Assistant Secretary, the
Treasurer or any Assistant Treasurer of the corporation shall be valid and
binding on the corporation in the absence of actual knowledge on the part of the
other person that the signing officers had no authority to execute the same. Any
such instruments may be signed by any other person or persons and in such manner
as from time to time shall be determined by the Board, and, unless so authorized
by the Board, no officer, agent or employee shall have any power or authority to
bind the corporation by any contract or engagement or to pledge its credit or to
render it liable for any purpose or amount.
Section 4. CERTIFICATES OF STOCK. Every holder of shares of the
corporation shall be entitled to have a certificate signed in the name of the
corporation by the Chairman of the Board, the President or a Vice President and
by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary, certifying the number of shares and the class or series of shares
owned by the shareholder. Any or all of the signatures on the certificate may be
facsimile. If any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if such person were an
officer, transfer agent or registrar at the date of issue. Certificates for
shares may be issued prior to full payment under such restrictions and for such
purposes as the Board may provide; provided however, that on any certificate
issued to represent any partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Except as
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provided in this Section, no new certificate for shares shall be issued in lieu
of an old one unless the latter is surrendered and cancelled at the same time.
The Board may, however, if any certificate for shares is alleged to have been
lost, stolen or destroyed, authorize the issuance of a new certificate in lieu
thereof, and the corporation may require that the corporation be given a bond or
other adequate security sufficient to indemnify it against any claim that may be
made against it (including expense or liability) on account of the alleged loss,
theft or destruction of such certificate or the issuance of such new
certificate.
Section 5. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
President or any other officer or officers authorized by the Board or the
President are each authorized to vote, represent and exercise on behalf of the
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of the corporation. The authority herein
granted may be exercised either by any such officer in person or by any other
person authorized so to do by proxy or power of attorney duly executed by said
officer.
Section 6. STOCK PURCHASE PLANS. The corporation may adopt and carry
out a stock purchase plan or agreement or stock option plan or agreement
providing for the issue and sale for such consideration as may be fixed of its
unissued shares or of issued shares acquired or to be acquired, to one or more
of the employees or directors of the corporation or of a subsidiary, or to a
trustee on their behalf and for the payment for such shares in installments or
at one time, and may provide for aiding any. such persons in paying for such
shares by compensation for services rendered, promissory notes or otherwise.
Any such stock purchase plan or agreement or stock option plan or
agreement may include, among other features, the fixing of eligibility for
participation therein, the class and price of shares to be issued or sold under
the plan or agreement, the number of shares which may be subscribed for, the
method of payment therefor, the reservation of title until full payment
therefor, the effect of the termination of employment, an option or obligation
on the part of the corporation to repurchase the shares upon termination of
employment, restrictions upon transfer of the shares, the time limits of and
termination of the plan, and any other matters, not in violation of applicable
law, as may be included in the plan as approved or authorized by the Board or
any committee of the Board.
Section 7. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise
requires, the general provisions, rules of construction and definitions
contained in the General Provisions of the California Corporations Code and in
the California General Corporation Law shall govern the construction of these
Bylaws.
Section 8. AMENDMENTS. These Bylaws may be amended or repealed either
by approval of the outstanding shares (as defined in Section 152 of the
California General Corporation Law) or by the approval of the Board; provided,
however, that after the issuance of shares, a bylaw specifying or changing a
fixed number of directors or the maximum or minimum number or changing from a
fixed to a variable number of directors or vice versa may only be adopted by
approval of the outstanding shares, and a bylaw reducing the fixed number or the
minimum number of directors to a number less than five shall be subject to the
provisions of Section 212(a) of the California General Corporation Law.
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Section 9. ANNUAL REPORT TO SHAREHOLDERS. The annual report to
shareholders referred to in Section 1501 of the California General Corporation
Law is expressly waived, but nothing herein shall be interpreted as prohibiting
the Board from issuing annual or other periodic reports to shareholders.
ARTICLE VI. INDEMNIFICATION.
Section 1. DEFINITIONS. For the purposes of this Article, "agent"
means any person who is or was a director, officer, employee or other agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, or was a director,
officer, employee or agent of a foreign or domestic corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation; "proceeding" means any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative; and "expenses" includes without limitation
attorneys' fees and any expenses of establishing a right to indemnification
under Section 4 or 5(c) of this Article.
Section 2. INDEMNIFICATION IN ACTIONS BY THIRD PARTIES. The
corporation shall have power to indemnify any person who was or is a party or is
threatened to be made a party to any proceeding (other than an action by or in
the right of the corporation to procure a judgment in its favor) by reason of
the fact that such person is or was an agent of the corporation, against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with such proceeding if such person acted in
good faith and in a manner such person reasonably believed to be in the best
interests of the corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of such person was unlawful. The
termination of a proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which the
person reasonably believed to be in the best interests of the corporation or
that the person had reasonable cause to believe that the person's conduct was
unlawful.
Section 3. INDEMNIFICATION IN ACTIONS BY OR IN THE RIGHT OF THE
CORPORATION. The corporation shall have the power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that such person is or was an agent of the
corporation, against expenses actually and reasonably incurred by such person in
connection with the defense or settlement of such action if such person acted in
good faith, in a manner such person believed to be in the best interests of the
corporation and with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances.
No indemnification shall be made under this Section 3:
(a) In respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation in the performance of
such person's duties to the corporation, unless and only to the extent that the
court in which such proceeding is or was pending
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shall determine upon application that, in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for the
expenses which such court shall determine;
(b) Of amounts paid in settling or otherwise disposing of a threatened
or pending action, with or without court approval; or
(c) Of expenses incurred in defending a threatened or pending action
which is settled or otherwise disposed of without court approval.
Section 4. INDEMNIFICATION AGAINST EXPENSES. To the extent that an
agent of the corporation has been successful on the merits in defense of any
proceeding referred to in Sections 2 or 3 of this Article or in defense of any
claim, issue or matter therein, the agent shall be indemnified against expenses
actually and reasonably incurred by the agent in connection therewith.
Section 5. REQUIRED DETERMINATIONS. Except as provided in Section 4 of
this Article, any indemnification under this Article shall be made by the
corporation only if authorized in the specific case, upon a determination that
indemnification of the agent is proper in the circumstances because the agent
has met the applicable standard of conduct set forth in Sections 2 or 3 of this
Article, by:
(a) A majority vote of a quorum consisting of directors who are not
parties to such proceeding;
(b) Approval of the shareholders, with the shares owned by the person
to be indemnified not being entitled to vote thereon; or
(c) The court in which such proceeding is or was pending upon
application made by the corporation or the agent or the attorney or other person
rendering services in connection with the defense, whether or not such
application by the agent, attorney or other person is opposed by the
corporation.
Section 6. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by the corporation prior to the final disposition of
such proceeding upon receipt of an undertaking by or on behalf of the agent to
repay such amount unless it shall be determined ultimately that the agent is
entitled to be indemnified as authorized in this Article.
Section 7. OTHER INDEMNIFICATION. No provision made by the corporation
to indemnify its or its subsidiary's directors or officers for the defense of
any proceeding, whether contained in the Articles, Bylaws, a resolution of
shareholders or directors, an agreement or otherwise, shall be valid unless
consistent with this Article. Nothing contained in this Article shall affect any
right to indemnification to which persons other than such directors and officers
may be entitled by contract or otherwise.
Section 8. FORMS OF INDEMNIFICATION NOT PERMITTED. No indemnification
or advance shall be made under this Article, except as provided in Sections 4 or
5(c), in any circumstances where it appears
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(a) That it would be inconsistent with a provision of the Articles,
these Bylaws, a resolution of the shareholders or an agreement in effect at the
time of the accrual of the alleged cause of action asserted in the proceeding in
which the expenses were incurred or other amounts were paid, which prohibits or
otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
Section 9. INSURANCE. The corporation shall have power to purchase and
maintain insurance on behalf of any agent of the corporation against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such whether or not the corporation would have the
power to indemnify the agent against such liability under the provisions of this
Article.
Section 10. NONAPPLICABILITY TO FIDUCIARIES OF EMPLOYEE BENEFIT PLANS.
This Article does not apply to any proceeding against any trustee, investment
manager or other fiduciary of an employee benefit plan in such person's capacity
as such, even though such person may also be an agent of the corporation as
defined in Section 1 of this Article. The corporation shall have power to
indemnify such trustee, investment manager or other fiduciary to the extent
permitted by subdivision (f) of Section 207 of the California General
Corporation Law.
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EXHIBIT 10.1
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
This Amended and Restated Executive Employment Agreement (this
"AGREEMENT") is made and entered into as of this 1st day of May, 1998, by and
between Networks Electronic Corp (the "COMPANY") and David Wachtel
("EXECUTIVE").
This Agreement amends, restates and supersedes that certain Employment
Agreement dated May 1, 1995 by and between Executive and the Company.
1. ENGAGEMENT AND DUTIES.
1.1. Upon the terms and subject to the conditions set forth in this
Agreement, the Company hereby engages and employs Executive as an officer of the
Company, with the title and designation of Chairman of the Board, President and
Chief Executive Officer of the Company. Executive hereby accepts such engagement
and employment.
1.2. Executive's duties and responsibilities shall be those which
are normally and customarily vested in the offices of Chairman of the Board,
President and Chief Executive Officer of a corporation, subject to the
supervision, direction and control of the Board of Directors (the "BOARD") of
the Company. In addition, Executive's duties shall include those duties and
services for the Company and its affiliates as the Board shall from time to time
reasonably direct. Executive shall report directly to the Board.
1.3. Executive agrees to devote his primary business time, energies,
skills, efforts and attention to his duties hereunder, and will not, without the
prior written consent of the Company, which consent will not be unreasonably
withheld, render any material services to any other business concern. Executive
will use his best efforts and abilities faithfully and diligently to promote the
Company's business interests.
1.4. Except for routine travel incident to the business of the
Company, Executive shall perform his duties and obligations under this Agreement
principally from an office provided by the Company in Chatsworth, California, or
such other location in Los Angeles County, California, as the Board may from
time to time determine. Notwithstanding the foregoing, Executive agrees to
perform such of his duties and obligations under this Agreement from the
Company's offices located in Chatsworth, California, as Executive, in
consultation with the Board, shall determine to be reasonably necessary.
2. TERM OF EMPLOYMENT. Executive's employment pursuant to this Agreement shall
commence on the date set forth above and shall terminate on the earliest to
occur of the following:
2.1. the close of business on the later of (x) April 30th , 1999, or
(y) such date as is [180] days following delivery to Executive of written notice
of the Company's intent to terminate this Agreement is provided to Executive;
<PAGE> 2
2.2. the death of Executive;
2.3. delivery to Executive of written notice of termination by the
Company if Executive shall suffer a physical or mental disability which renders
Executive, in the reasonable judgment of the Board, unable to perform his duties
and obligations under this Agreement for 90 days in any 12-month period; or
2.4. delivery to Executive of written notice of termination by the
Company "for cause," by reason of: (i) any act or omission knowingly undertaken
or omitted by Executive with the intent of causing damage to the Company, its
properties, assets or business or its stockholders, officers, directors or
employees; (ii) any act of Executive involving a material personal profit to
Executive, including, without limitation, any fraud, misappropriation or
embezzlement, involving properties, assets or funds of the Company or any of its
subsidiaries; (iii) Executive's consistent failure to perform his normal duties
or any obligation under any provision of this Agreement, in either case, as
directed by the Board; (iv) conviction of, or pleading nolo contendere to, (A)
any crime or offense involving monies or other property of the Company; (B) any
felony offense; or (C) any crime of moral turpitude; or (v) the chronic or
habitual use of drugs or consumption of alcoholic beverages.
2.5. delivery by Executive to the Company of notice of his
resignation.
3. COMPENSATION; EXECUTIVE BENEFIT PLANS.
3.1. The Company shall pay to Executive a base salary ("Base
Salary") at an annual rate of $175,000.00 during the term of his employment
pursuant to this Agreement. The base salary shall be payable in installments
throughout the year in the same manner and at the same times the Company pays
base salaries to other executive officers of the Company.
3.2. Executive shall be entitled each year to vacation for a minimum
of three calendar weeks, plus such additional period or periods as the Board may
approve in the exercise of its reasonable discretion, during which time his
compensation shall be paid in full.
3.3. Executive shall be entitled to reimbursement from the Company
for the reasonable costs and expenses which he incurs in connection with the
performance of his duties and obligations under this Agreement in a manner
consistent with the Company's practices and policies as adopted or approved from
time to time by the Board for executive officers.
3.4. The Company may deduct from any compensation payable to
Executive the minimum amounts sufficient to cover applicable federal, state
and/or local income tax withholding, old-age and survivors' and other social
security payments, state disability and other insurance premiums and payments.
3.5. The Company shall reimburse Executive and Executive's covered
dependents under any Company Executive Benefit Plan (as defined in Section 4
hereof) for the full amount of any cost, expense, deductible, co-payment or
other amount incurred or paid by Executive in connection with Executive's or any
of Executive's dependents' coverage under any such Executive Benefit Plans. The
Company further agrees to pay such costs directly if
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invoices or other appropriate documentation for such costs are submitted in
advance to the Company for approval. Nothing contained in this Section 3.6
shall, in any manner whatsoever, directly or indirectly, require or obligate the
Company to adopt or implement, or to prevent, preclude or otherwise prohibit the
Company from amending, modifying, curtailing, discontinuing or otherwise
terminating, any Company Executive Benefit Plan at any time (whether during or
after the term hereof).
4. SEVERANCE COMPENSATION.
4.1. If Executive's employment is terminated pursuant to Section 2.2
(death) or Section 2.3 (disability), the Company shall pay to the Executive or
his estate his full Base Salary through the end of the month of Executive's
death or disability, and Executive or his estate shall be entitled to a prorated
share of any bonus or benefits as provided under Section 3 hereof for the
calendar year during which his death or disability occurred.
4.2. If Executive's employment is terminated pursuant to Section 2.4
(by the Company For Cause) or, subject to Section 4.4 below, Section 2.5
(resignation by Executive), Executive's Base Salary and all benefits under
Section 3 shall cease as of the date of termination, and Executive shall not be
entitled to any bonus for the calendar year during which his employment shall be
terminated or at any time thereafter.
4.3. If Executive's employment is terminated by the Company other
than for cause prior to the end of the term of this Agreement, Executive shall
be entitled to continue to receive his Base Salary in accordance with Section
3.1 of this Agreement through the later of (i) the end of the Employment Term or
(ii) six months from the date of termination, payable at the same time and in
the same manner as if Executive's employment had not terminated. Executive shall
have no duty to seek other employment upon such termination, and if Executive
does so, any income therefrom shall not be credited against amounts due
hereunder. Executive's resignation from employment as following a breach by the
Company of any provision of this Agreement which remains uncured thirty days
following delivery of written notice by Executive to the Company describing such
breach shall constitute a termination of Executive's employment without cause
under this Section 4.3.
4.4. Change of Control. For purposes of this Agreement:
4.4.1. "Change of Control" shall mean the occurrence of one
or more of the following three events:
4.4.1.1. After the effective date of this Agreement,
any person becomes a beneficial owner (as such term is defined in Rule 13d-3
promulgated under the Securities Exchange Act of 1934) directly or indirectly of
securities representing 33% or more of the total number of votes that may be
cast for the election of directors of the Company;
4.4.1.2. Within two years after a merger,
consolidation, liquidation or sale of assets involving the Company, or a
contested election of a Company
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director, or any combination of the foregoing, the individuals who were
directors of the Company immediately prior thereto shall cease to constitute a
majority of the Board; or
4.4.1.3. Within two years after a tender offer or
exchange offer for voting securities of the Company, the individuals who were
directors of the Company immediately prior thereto shall cease to constitute a
majority of the Board.
4.4.2. "Person" shall mean any natural person, incorporated
entity, limited or general partnership, business trust, association, agency
(governmental or private), division, political sovereign, or subdivision or
instrumentality, including those groups identified as "persons" in
Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934.
4.4.3. Notwithstanding any provision of this Agreement to
the contrary, if any time during the term of this Agreement there is a Change of
Control and Executive resigns his employment with the Company within the greater
of one (1) year following the "Change in Control" or the remaining term of this
Agreement, the Company shall pay to Executive an amount equal to the monthly
portion of Base Compensation multiplied by six (6). This amount shall be paid to
Executive in one lump sum as soon as practicable, but in no event later than
thirty (30) days, after the date that Executive's employment terminated by the
Company or Executive. To the extent that Executive is not fully vested in
retirement benefits from any pension, profit sharing or any other retirement
plan or program (whether tax qualified or not) maintained by the Company, the
Company shall pay directly to Executive the difference between the amounts which
would have been paid to Employee had he been fully vested on the date that his
employment terminated and the amounts actually paid or payable to Employee
pursuant to such plans or programs.
5. OTHER BENEFITS. During the term of his employment hereunder, Executive shall
be eligible to participate in all operative employee benefit and welfare plans
of the Company then in effect from time to time and in respect of which all
executive officers of the Company generally are entitled to participate
("COMPANY EXECUTIVE BENEFIT PLANS"), including, to the extent then in effect,
group life, medical, disability and other insurance plans, all on the same basis
applicable to employees of the Company whose level of management and authority
is comparable to that of Executive.
6. CONFIDENTIALITY OF PROPRIETARY INFORMATION AND MATERIAL.
6.1. Industrial Property Rights. For the purpose of this Agreement,
"Industrial Property Rights" shall mean all of the Company's patents,
trademarks, trade names, inventions, copyrights, know-how or trade secrets, now
in existence or hereafter developed or acquired by the Company or for its use,
relating to any and all products which are developed, formulated and/or
manufactured by the Company.
6.2. Trade Secrets. For the purpose of this Agreement, "Trade
Secrets" shall mean any formula, pattern, device, or compilation of information
which is used in the Company's business which gives the Company an opportunity
to obtain an advantage over its competitors who do not know and/or do not use
it. This term includes, but is not limited to,
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<PAGE> 5
information relating to the marketing of the Company's products, including price
lists, pricing information, customer lists, customer names, the particular needs
of customers, information relating to their desirability as customers, financial
information, intangible property and other such information which is not in the
public domain.
6.3. Technical Data. For the purpose of this Agreement, "Technical
Data" shall mean all information of the Company in written, graphic or tangible
form relating to any and all products which are developed, formulated and/or
manufactured by the Company, as such information exists as of the date of this
Agreement or is developed by the Company during the term hereof.
6.4. Proprietary Information. For the purpose of this Agreement,
"Proprietary Information" shall mean all of the Company's Industrial Property
Rights, Trade Secrets and Technical Data. Proprietary Information shall not
include any information which (i) was lawfully in the possession of Executive
prior to Executive's employment with the Company, (ii) may be obtained by a
reasonably diligent businessperson from readily available and public sources of
information, (iii) is lawfully disclosed to Executive after termination of
Executive's employment by a third party which does not have an obligation to the
Company to keep such information confidential, or (iv) is independently
developed by Executive after termination of Executive's employment without
utilizing any of the Company's Proprietary Information.
6.5. Agreement Not To Copy Or Use. Executive agrees, at any time
during the term of his employment and for a period of two years thereafter, not
to copy, use or disclose (except as required by law after first notifying the
Company and giving it an opportunity to object) any Proprietary Information
without the Company's prior written permission. The Company may withhold such
permission as a matter within its sole discretion during the term of this
Agreement and thereafter.
6.6. Return of Corporate Property and Trade Secrets. Upon any
termination of this Agreement, Executive shall turn over to the Company all
property, writings or documents then in his possession or custody belonging to
or relating to the affairs of the Company or comprising or relating to any
Proprietary Information.
7. DISCOVERIES AND INVENTIONS.
7.1. Disclosure. Executive will promptly disclose in writing to the
Company complete information concerning each and every invention, discovery,
improvement, device, design, apparatus, practice, process, method, product or
work of authorship, whether patentable or not, made, developed, perfected,
devised, conceived or first reduced to practice by Executive, whether or not
during regular working hours (hereinafter referred to as "Developments"), either
solely or in collaboration with others, (a) prior to the term of this Agreement
while working for the Company, (b) during the term of this Agreement or (c)
within six months after the term of this Agreement, if relating either directly
or indirectly to the business, products, practices, techniques or confidential
information of the Company.
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7.2. Assignment. Executive, to the extent that he has the legal
right to do so, hereby acknowledges that any and all Developments are the
property of the Company and hereby assigns and agrees to assign to the Company
any and all of Executive's right, title and interest in and to any and all of
such Developments; provided, however, that, in accordance with California Labor
Code Sections 2870 and 2872, the provisions of this Section 7.2 shall not apply
to any Development that the Executive developed entirely on his own time without
using the Company's equipment, supplies, facilities or trade secret information
except for those Developments that either:
(a) relate at the time of conception or reduction to practice of
the Development to the Company's business, or actual or demonstrably anticipated
research or development of the Company; or
(b) result from any work performed by Executive for the Company.
7.3. Assistance of Executive. Upon request and without further
compensation therefor, but at no expense to Executive, and whether during the
term of this Agreement or thereafter, Executive will do all reasonable lawful
acts, including, but not limited to, the execution of papers and lawful oaths
and the giving of testimony, that, in the reasonable opinion of the Company, its
successors and assigns, may be necessary or desirable in obtaining, sustaining,
reissuing, extending and enforcing United States and foreign Letters Patent,
including, but not limited to, design patents, on any and all Developments and
for perfecting, affirming and recording the Company's complete ownership and
title thereto, subject to the proviso in Section 7.2 hereof, and Executive will
otherwise reasonably cooperate in all proceedings and matters relating thereto.
7.4. Records. Executive will keep complete and accurate accounts,
notes, data and records of all Developments in the manner and form requested by
the Company. Such accounts, notes, data and records shall be the property of the
Company, subject to the proviso in Section 7.2 hereof, and, upon request by the
Company, Executive will promptly surrender the same to it or, if not previously
surrendered upon its request or otherwise, Executive will surrender the same,
and all copies thereof, to the Company upon the conclusion of his employment.
7.5. Obligations, Restrictions and Limitations. Executive
understands that the Company may enter into agreements or arrangements with
agencies of the United States Government and that the Company may be subject to
laws and regulations which impose obligations, restrictions and limitations on
it with respect to inventions and patents which may be acquired by it or which
may be conceived or developed by employees, consultants or other agents
rendering services to it. Executive agrees that he shall be bound by all such
obligations, restrictions and limitations applicable to any such invention
conceived or developed by him during the term of this Agreement and shall take
any and all further action which may be required to discharge such obligations
and to comply with such restrictions and limitations.
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8. NON-SOLICITATION COVENANT.
8.1. Nonsolicitation and Noninterference. During the term of this
Agreement and for a period of two years thereafter, Executive shall not (a)
induce or attempt to induce any employee of the Company to leave the employ of
the Company or in any way interfere adversely with the relationship between any
such employee and the Company, (b) induce or attempt to induce any employee of
the Company to work for, render services or provide advice to or supply
confidential business information or trade secrets of the Company to any third
person, firm or corporation or (c) induce or attempt to induce any customer,
supplier, licensee, licensor or other business relation of the Company to cease
doing business with the Company or in any way interfere with the relationship
between any such customer, supplier, licensee, licensor or other business
relation and the Company.
8.2. Indirect Solicitation. Executive agrees that, during the term
of this Agreement and the period covered by Section 8.1 hereof, he will not,
directly or indirectly, assist or encourage any other person in carrying out,
directly or indirectly, any activity that would be prohibited by the provisions
of Section 8.1 if such activity were carried out by Executive, either directly
or indirectly; and, in particular, Executive agrees that he will not, directly
or indirectly, induce any employee of the Company to carry out, directly or
indirectly, any such activity.
8.3. Injunctive Relief. Executive hereby recognizes, acknowledges
and agrees that in the event of any breach by Executive of any of his covenants,
agreements, duties or obligations contained in Sections 5, 6, 7 and 8 of this
Agreement, the Company would suffer great and irreparable harm, injury and
damage, the Company would encounter extreme difficulty in attempting to prove
the actual amount of damages suffered by the Company as a result of such breach,
and the Company would not be reasonably or adequately compensated in damages in
any action at law. Executive therefore covenants and agrees that, in addition to
any other remedy the Company may have at law, in equity, by statute or
otherwise, in the event of any breach by Executive of any of his covenants,
agreements, duties or obligations contained in Sections 5, 6, 7 and 8 of this
Agreement, the Company shall be entitled to seek and receive temporary,
preliminary and permanent injunctive and other equitable relief from any court
of competent jurisdiction to enforce any of the rights of the Company, or any of
the covenants, agreements, duties or obligations of Executive hereunder, and/or
otherwise to prevent the violation of any of the terms or provisions hereof, all
without the necessity of proving the amount of any actual damage to the Company
or any affiliate thereof resulting therefrom; provided, however, that nothing
contained in this Section 9 shall be deemed or construed in any manner
whatsoever as a waiver by the Company of any of the rights which the Company may
have against Executive at law, in equity, by statute or otherwise arising out
of, in connection with or resulting from the breach by Executive of any of his
covenants, agreements, duties or obligations hereunder.
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9. MISCELLANEOUS.
9.1. Notices. All notices, requests and other communications
(collectively, "Notices") given pursuant to this Agreement shall be in writing,
and shall be delivered by personal service or by United States first class,
registered or certified mail (return receipt requested), postage prepaid,
addressed to the party at the address set forth below:
If to Company:
De Soto Ave.
Chatsworth, CA 91311
Attn: Chairman of the Board
If to Executive:
David Wachtel
Pacific Palisades
CA 90272
Any Notice shall be deemed duly given when received by the addressee
thereof, provided that any Notice sent by registered or certified mail shall be
deemed to have been duly given three days from date of deposit in the United
States mails, unless sooner received. Either party may from time to time change
its address for further Notices hereunder by giving notice to the other party in
the manner prescribed in this section.
9.2. Entire Agreement. This Agreement supersedes any employment
agreements entered into by and between the Company and Executive. This Agreement
contains the sole and entire agreement and understanding of the parties with
respect to the entire subject matter of this Agreement, and any and all prior
discussions, negotiations, commitments and understandings, whether oral or
otherwise, related to the subject matter of this Agreement are hereby merged
herein. No representations, oral or otherwise, express or implied, other than
those contained in this Agreement have been relied upon by any party to this
Agreement.
9.3. Attorneys' Fees. If any action, suit or other proceeding is
instituted to remedy, prevent or obtain relief from a default in the performance
by any party of its obligations under this Agreement, the prevailing party shall
recover all of such party's costs and reasonable attorneys' fees incurred in
each and every such action, suit or other proceeding, including any and all
appeals or petitions therefrom.
9.4. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD
TO CONFLICTS OF LAW PRINCIPLES THEREOF.
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9.5. Captions. The various captions of this Agreement are for
reference only and shall not be considered or referred to in resolving questions
of interpretation of this Agreement.
9.6. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
9.7. Business Day. If the last day permissible for delivery of any
Notice under any provision of this Agreement, or for the performance of any
obligation under this Agreement, shall be other than a business day, such last
day for such Notice or performance shall be extended to the next following
business day (provided, however, under no circumstances shall this provision be
construed to extend the date of termination of this Agreement).
In witness whereof, the parties have executed this Agreement as of the date
first set forth above.
Company: Executive:
Networks Electronic Corp
By: Jack Friery David Wachtel
By: Glenn Linderman Dated:
Dated:
By: Rodica Patrichi
By: Ileana Wachtel
Dated:
All Directors of
Networks Electronic Corp
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EXHIBIT 10.2
NETWORKS ELECTRONICS CORP.
AMENDED 1996 STOCK INCENTIVE PLAN
1. PURPOSES.
(a) The purpose of the amended 1996 Stock Incentive Plan (the "Plan") is
to provide a means by which Employees or Directors of or Consultants to Networks
Electronics Corp. (the "Company"), and its Affiliates, may be given an
opportunity to benefit from increases in value of the Common Stock of the
Company through the granting of Stock Awards.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of or Consultants to the Company, to
secure and retain the services of new Employees, Directors and Consultants, and
to provide incentives for such persons to exert maximum efforts for the success
of the Company.
(c) The Company intends that the Stock Awards issued under the Plan
shall, in the discretion of the Board or any Committee to which responsibility
for administration of the Plan has been delegated pursuant to Section 3(c), be
either Incentive Stock Options or Nonstatutory Stock Options granted pursuant to
Section 6 hereof. All Options shall be separately designated Incentive Stock
Options or Nonstatutory Stock Options at the time of grant and a separate
certificate or certificates will be issued for shares purchased upon exercise of
each type of Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CCSL" means the California Corporate Securities Law of 1968, as
amended.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a Committee appointed by the Board in accordance
with Section 3(c) of the Plan.
(f) "COMMON STOCK" means the common stock, par value $.25 per share, of
the Company.
(g) "COMPANY" means Networks Electronics Corp., a California
corporation.
<PAGE> 2
(h) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render bona fide consulting services and who is
compensated for such services, provided that the term "Consultant" shall not
include Directors who are paid only a director's fee by the Company or who are
not compensated by the Company for their services as Directors.
(i) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the
employment or relationship as an employee, a Director or Consultant is not
interrupted or terminated by the Company or any Affiliate. The Board, in its
sole discretion, may determine whether Continuous Status as an Employee,
Director or Consultant shall be considered interrupted in the case of: (1) any
leave of absence approved by the Board, including sick leave, military leave, or
any other personal leave; provided, however, that for purposes of Incentive
Stock Options, any such leave may not exceed ninety days, unless reemployment
upon the expiration of such leave is guaranteed by contract (including certain
Company policies) or statute; (2) transfers between locations of the Company or
between the Company, Affiliates or its successor; or (3) a change in the status
of the relationship from Employee to Director or Consultant, from Director to
Employee or Consultant, or from Consultant to Employee or Director.
(j) "COVERED EMPLOYEE" means the chief executive officer and the four
other highest compensated officers of the Company for whom total compensation is
required to be reported to shareholders under the Exchange Act, as determined
for purposes of Section 162(m) of the Code.
(k) "DIRECTOR" means a member of the Board.
(l) "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(m) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(o) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market, the Fair Market Value of a share of Common Stock shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in the Common Stock) on the last market trading day
prior to the day of determination, as reported in the Wall Street Journal or
such other source as the Board deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but
not on the Nasdaq National Market) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a share of Common Stock shall be the mean between
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the bid and asked prices for the Common Stock on the last market trading day
prior to the day of determination, as reported in the Wall Street Journal or
such other source as the Board deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the Board.
Such determination shall consider the price at which securities of reasonably
comparable corporations (if any) in the same industries are being traded,
subject to appropriate adjustments for the dissimilarities between the
corporations being compared, or, if no such comparisons are reasonable, the
valuation shall take into account the history, book value and prospects of the
Company in light of market conditions generally.
(p) "INCENTIVE STOCK OPTION" means an Option intended by the Board at
the time of grant to qualify as an incentive stock option within the meaning of
Section 422 of the Code and the regulations promulgated thereunder.
(q) "NON-EMPLOYEE DIRECTOR" means a director (1) who is not currently an
officer of the Company or any of its Affiliates or otherwise currently employed
by the Company or any of its Affiliates; (2) does not receive compensation,
either directly or indirectly from the Company or any of its Affiliates for
services rendered as a consultant or in any capacity other than as a director,
except for an amount that does not exceed the dollar amount for which disclosure
would be required pursuant to Item 404(a) of Regulation S-K; (3) does not
possess an interest in any other transaction for which disclosure would be
required pursuant to Item 404(a) of Regulation S-K; or (4) is not engaged in a
business relationship for which disclosure would be required pursuant to Item
404(b) of Regulation S-K.
(r) "NONSTATUTORY STOCK OPTION" means an Option not intended by the
Board at the time of grant to qualify as an Incentive Stock Option.
(s) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(t) "OPTION" means a stock option granted pursuant to the Plan.
(u) "OPTIONEE" means an Employee, Director or Consultant who holds an
outstanding Option.
(v) "PLAN" means this 1996 Stock Incentive Plan, as amended.
(w) "RULE 16b-3" means Rule 16b-3 under the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(x) "REGULATION S-K" means Regulation S-K of the Securities and Exchange
Commission.
(y) "SECURITIES ACT" means the Securities Act of 1933, as amended.
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(z) "STOCK AWARD" means any right granted under the Plan.
(aa) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
(bb) "TERMINATION" means, with respect to any person, the termination
for any reason of such person's Continuous Status as an Employee, Director or
Consultant.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in Section 3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how Stock Awards shall be
granted; whether a Stock Award will be an Incentive Stock Option or Nonstatutory
Stock Option, or a combination thereof; the provisions of each Stock Award
granted (which need not be identical), including, without limitation, the time
or times when a person shall be permitted to receive stock pursuant to a Stock
Award; and the number of shares with respect to which Stock Awards shall be
granted to each such person.
(ii) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement
and, subject to Section 13 hereof, otherwise amend the Plan in a manner and to
the extent it shall deem necessary.
(iii) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company and which are not in conflict with the provisions of the Plan.
(c) The Board may delegate administration of the Plan to a committee
composed of not fewer than two members (the "Committee"), and at least two of
the members of the Committee shall be Non-Employee Directors. If administration
is delegated to a Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by the Board (and
references in this Plan to the Board shall thereafter be to the Committee),
subject, however, to such resolutions, not inconsistent with the provisions of
the Plan, as may be adopted from time to time by the Board. The Board may
abolish the Committee at any time and revest in the Board the administration of
the Plan. Notwithstanding anything in this Section 3 to the contrary, at any
time the Board or the Committee may delegate to a committee of one or more
members of the Board the authority to grant Stock Awards to eligible persons who
(1) are not then subject to Section 16 of the Exchange Act and/or (2) are either
(i) not then Covered Employees
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<PAGE> 5
and are not expected to be Covered Employees at the time of recognition of
income resulting from such Stock Award or (ii) not persons with respect to whom
the Company wishes to avoid the application of Section 162(m) of the Code.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 12 relating to adjustments upon
changes in the Common Stock, the number of shares of Common Stock that may be
issued pursuant to Stock Awards under the Plan shall not exceed in the aggregate
100,000 shares. If any Stock Award or option granted under the terms of the Plan
shall for any reason expire or otherwise terminate without having been exercised
in full, the Common Stock not purchased shall again become available for
issuance under the Plan. Shares withheld by the Company to satisfy a federal,
state and/or local tax withholding obligation of a participant relating to the
exercise of a Stock Award shall not be available for subsequent issuance under
the Plan.
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees.
Nonstatutory Stock Options may be granted only to Employees, Directors or
Consultants.
(b) No person shall be eligible for the grant of an Incentive Stock
Option if, at the time of grant, such person owns (or is deemed to own pursuant
to Section 424(d) of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or of any
of its Affiliates unless the exercise price of such Incentive Stock Option is at
least one hundred ten percent (110%) of the Fair Market Value of the Common
Stock at the date of grant and such Incentive Stock Option is not exercisable
after the expiration of five years from the date of its grant.
6. OPTION PROVISIONS.
Each Option shall be approved by the Board and be in such form and shall
contain such terms and conditions as the Board shall deem appropriate. The
provisions of separate options need not be identical, but each Option shall
include (through incorporation of provisions hereof by reference in the Option
or otherwise) the substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten
years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock option shall be
not less than one hundred percent (100%) of the Fair Market Value of the Common
Stock subject to the Option on the date the Option is granted. The exercise
price of each Nonstatutory Stock Option shall be established at the discretion
of the Board. Notwithstanding the foregoing, the exercise price for the purchase
of Common Stock subject to an Option for which an exemption from the
qualification requirements of the CCSL is unavailable, shall be at least
eighty-five percent (85%) of the Fair Market Value of the Common Stock on the
date of grant; provided, if such Options are granted to a person who owns stock
possessing more than ten percent (10%) of the total combined voting
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power of all classes of stock of the Company or of any of its Affiliates, the
exercise price shall be at least one hundred ten percent (110%) of the Fair
Market Value of the Common Stock at the date of grant.
(c) CONSIDERATION. The exercise price of Common Stock acquired pursuant
to the exercise of an Option shall be paid, to the extent permitted by
applicable statutes and regulations, either (1) in cash at the time the Option
is exercised, or (2) at the discretion of the Board, either at the time of the
grant or exercise of the Option, (i) by delivery to the Company of other shares
of Common Stock, (ii) according to a deferred payment or other arrangement
(which may include, without limiting the generality of the foregoing, the use of
other shares of Common Stock) with the person to whom the Option is granted or
to whom the Option is transferred pursuant to Section 6(d), or (iii) in any
other form of legal consideration that may be acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be
payable at least annually and shall be payable at the minimum rate of interest
necessary to avoid the imputation of interest, under the applicable provisions
of the Code and Treasury Regulations.
(d) TRANSFERABILITY. An Incentive Stock Option shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Incentive Stock Option
is granted only by such person, or in the case of such person's disability by
such person's legal representative or guardian. A Nonstatutory Stock Option
shall not be transferable except by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order satisfying the
requirements of Rule 16b-3 and any administrative interpretations or
pronouncements thereunder (a "QDRO"), and shall be exercisable during the
lifetime of the person to whom the Option is granted only by such person or any
transferee pursuant to a QDRO.
(e) VESTING. The total number of shares of Common Stock subject to an
Option may, but need not, be allotted in periodic installments (which may, but
need not, be equal). The Option may provide that from time to time during each
of such installment periods, the Option may become exercisable ("vest") with
respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The vesting provisions of
individual Options may vary; however, in the case of an Option for which an
exemption from the qualification requirements of the CCSL is unavailable, the
vesting provisions must provide for vesting of at least twenty percent (20%) per
year of the total number of shares subject to the Option from the date the
Option was granted; provided, however, that Options granted to Officers,
Directors or Consultants of the Company may vest at a rate of less than twenty
percent (20%) per year. During the remainder of the term of the Option (if its
term extends beyond the end of the installment periods), the option may be
exercised from time to time with respect to any shares then remaining subject to
the Option. The provisions of this Section 6(e) are subject to any Option
provisions governing the minimum number of shares as to which an Option may be
exercised.
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(f) SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or
any person to whom an Option is transferred pursuant to Section 6(d), as a
condition of exercising any such Option, (1) to give written assurances
satisfactory to the Company as to the Optionee's knowledge and experience in
financial and business matters and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced in
financial and business matters, and that he or she is capable of evaluating,
alone or together with the purchaser representative, the merits and risks of
exercising the option; and (2) to give written assurances satisfactory to the
Company stating that such person is acquiring the Common Stock subject to the
Option for such person's own account and not with any present intention of
selling or otherwise distributing the Common Stock. These requirements, and any
assurances given pursuant to such requirements, shall be inoperative if (i) the
issuance of the shares upon the exercise of the Option has been registered under
a then currently effective registration statement under the Securities Act, or
(ii) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable securities laws.
(g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS AN EMPLOYEE, DIRECTOR
OR CONSULTANT. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates (other than upon the Optionee's death or
Disability), the Optionee may exercise his or her Option (to the extent that the
Optionee is entitled to exercise it at the date of Termination), but only within
such period of time as is determined by the Board, which period shall not be
longer than ninety days from the date of Termination for an Incentive Stock
Option nor less than thirty days from the date of Termination for an Option for
which an exemption from the qualification requirements of the CCSL is
unavailable; provided, however, that if an Optionee is terminated for cause, as
defined below, the Option may provide for an exercise period shorter than thirty
days, or may provide for expiration concurrent with such Termination. In no
event shall an Option be exercised later than the expiration of the term of such
Option as set forth in the Option. If, at the date of Termination, the Optionee
is not entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to the Plan. If, after
Termination, the Optionee does not exercise his or her Option within the time
specified in the Option, the Option shall terminate, and the shares covered by
such Option, to the extent unexercised, shall revert to the Plan. For purposes
of this Stock Incentive Plan, "for cause" shall mean the following to the extent
it results in substantial harm to the Company or could reasonably be expected to
result in substantial harm to the Company:
(i) the willful failure or refusal by Employee to perform
his duties to the Company; or
(ii) Employee's willful disobedience of any orders or
directives of the Board or any officers thereof acting under the authority
thereof or Employee's deliberate interference with the compliance by other
employees of the Company with any such orders or directives; or
(iii) the willful failure or refusal of Employee to abide
by or comply with the written policies, standard procedures or regulations of
the Company; or
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(iv) any willful or continued act or course of conduct by
Employee which the Board in good faith determines might reasonably be expected
to have a material detrimental effect on the Company or the business,
operations, affairs or financial position thereof; or
(v) the committing by the Employee of any fraud, theft,
embezzlement or other dishonest act against the Company; or
(vi) the determination by the Board, in good faith and in
the exercise of reasonable discretion, that Employee is not competent to perform
his duties of employment.
Nothing in the Plan, the Certificate or any Option
Agreement shall confer upon the Employee any right to continue in the employ of
the Company or any affiliates (as defined in the Plan) or shall affect the right
of the Company or any Affiliate to terminate the employment of the Employee,
with or without cause.
(h) DISABILITY OF OPTIONEE. If an Optionee's Continuous Status as an
Employee, Director or Consultant terminates as a result of the Optionee's
Disability, the Optionee may exercise his or her Option, but only within six
months from the date of such Termination (or such longer period, not exceeding
twelve months for Incentive Stock Options, as specified in the Option), and only
to the extent that the Optionee was entitled to exercise the Option at the date
of such Termination (but in no event later than the expiration of the term of
such Option as set forth in the Option). If, at the date of Termination, the
Optionee is not entitled to exercise his or her entire Option, the shares
covered by the unexercisable portion of the Option shall revert to the Plan. If,
after Termination, the Optionee does not exercise his or her Option within the
time specified therein, the Option shall terminate, and the shares covered by
such Option, to the extent unexercised, shall revert to the Plan.
(i) DEATH OF OPTIONEE. In the event of the death of an Optionee, the
Option may be exercised at any time within six months following the date of
death (or such longer period not exceeding twelve months, for Incentive Stock
Options, as specified in the Option), but in no event later than the expiration
of the term of such Option as set forth in the Option, by the Optionee's estate
or by a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent the Optionee was entitled to exercise the
Option at the date of death. If, at the time of death, the Optionee was not
entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to the Plan. If, after death,
the Optionee's estate or a person who acquired the right to exercise the Option
by bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the shares covered by such Option, to
the extent unexercised, shall revert to the Plan.
(j) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased shall be subject to a right to repurchase in favor of the Company upon
Termination of the Optionee, at a repurchase price equal to the exercise price
of the Option, payable in cash or cancellation of purchase money indebtedness
for the shares; provided, however,
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that for any Option for which an exemption from the qualification requirements
of the CCSL is unavailable, the Company's right to repurchase at the exercise
price of the Option shall lapse at a minimum rate of twenty percent (20%) per
year over five years from the date the Option was granted and such right shall
terminate to the extent not exercised within ninety days following Termination
of the Optionee. If the right of repurchase is exercised by the Board, it must
be for all such shares sold or awarded to the shareholder under the Plan to
which the right of repurchase has not so expired.
(k) WITHHOLDING. To the extent provided by the terms of an Option, the
Optionee may satisfy any federal, state or local tax withholding obligation
relating to the exercise of such Option by any of the following means or by a
combination of such means: (1) tendering a cash payment; (2) authorizing the
Company to withhold shares from the shares of the Common Stock otherwise
issuable to the Optionee as a result of the exercise of the Option; or (3)
delivering to the Company owned and unencumbered shares of Common Stock.
(l) RE-LOAD OPTIONS. Without in any way limiting the authority of the
Board to make or not to make grants of Options hereunder, the Board shall have
the authority (but not an obligation) to include as part of any Option a
provision entitling the Optionee to a further Option (a "Re-Load Option") in the
event the Optionee exercises the Option, in whole or in part, by surrendering
other shares of Common Stock in accordance with this Plan and the terms and
conditions of the Option. Any such Re-Load Option (1) shall be for a number of
shares equal to the number of shares surrendered as part or all of the exercise
price of such Option; (2) shall have an expiration date which is the same as the
expiration date of the Option the exercise of which gave rise to such Re-Load
Option; (3) shall have an exercise price of not less than 100% of the Fair
Market Value of the Common Stock on the date of the grant of such Re-Load
Option; and (4) in the case of a Re-Load Option which is an Incentive Stock
Option or an Option for which an exemption from the qualification requirements
of the CCSL is unavailable, and which is granted to a 10% shareholder (as
described in Section 5(c)), shall have an exercise price which is equal to one
hundred ten percent (110%) of the Fair Market Value of the Common Stock subject
to the Re-Load Option on the date of exercise of the original Option (which
shall be the date of grant of the Re-Load Option) and, with respect to Incentive
Stock Options, shall have a term which is no longer than five years.
Any such Re-Load Option may be an Incentive Stock Option or a
Nonqualified Stock Option, as the Board may designate at the time of the grant
of the original Option; provided, however, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollar ($100,000) annual limitation on exercisability of Incentive Stock Options
described in Section 12(d) of the Plan and in Section 422(d) of the Code. There
shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall
be subject to the availability of sufficient shares under Section 4(a) and shall
be subject to such other terms and conditions as the Board may determine which
are not inconsistent with the express provisions of the Plan regarding the terms
of the Options.
7. CANCELLATION AND REGRANT OF OPTIONS. The Board shall have the authority to
effect, at any time and from time to time, with the consent of the affected
holders of Options, (1) the repricing of any outstanding Options under the Plan
and/or (2) the cancellation of any
9
<PAGE> 10
outstanding Options under the Plan and the grant in substitution therefor of new
Options under the Plan covering the same or different numbers of shares of
Common Stock, but having an exercise price per share not less than eighty-five
percent (85%) of the Fair Market Value (one hundred percent (100%) of the Fair
Market Value in the case of an Incentive Stock Option or, in the case of an
Incentive Stock Option granted to a 10% shareholder as described in Section
5(c), not less than one hundred ten percent (110%) of the Fair Market Value) per
share of Common Stock on the new grant date.
8. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep
available at all times the number of shares of Common Stock required to satisfy
such Stock Awards up to the number of shares of Common Stock authorized under
the Plan.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
effect any Stock Award, and to issue and sell shares of Common Stock under the
Stock Awards; provided, however, that this undertaking shall not require the
Company to register under the Securities Act either the Plan, any Stock Award or
any stock issued or issuable pursuant to any such Stock Award. If, after
reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful issuance and sale of Common Stock under the Plan, the Company
shall be relieved from any liability for failure to issue and sell stock under
such Stock Awards unless and until such authority is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of Common Stock pursuant to Stock Awards shall
constitute general funds of the Company.
10. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which a
Stock Award may first be exercised or the time during which a Stock Award or any
part thereof will vest, notwithstanding the provisions in the Stock Award
stating the time at which it may first be exercised or the time during which it
will vest.
(b) Neither an Optionee nor any person to whom an Option is transferred
under Section 6(d) shall be deemed to be the holder of, or to have any of the
rights of a holder with respect to, any shares of Common Stock subject to such
Option unless and until such person has satisfied all requirements for exercise
of the Option pursuant to its terms.
(c) Nothing in the Plan or any instrument executed or Stock Award
granted pursuant thereto shall confer upon any Employee, Director, Consultant,
Optionee, or other holder of Stock Awards any right to continue in the employ of
the Company or any Affiliate (or to continue acting as a Director or Consultant)
or shall affect the right of the Company or any Affiliate to terminate
10
<PAGE> 11
the employment or relationship as a Director or Consultant of any Employee,
Director, Consultant or Optionee, with or without cause.
(d) To the extent that the aggregate Fair Market Value (determined at
the time of grant) of Common Stock with respect to which Incentive Stock Options
are exercisable for the first time by any Optionee during any calendar year
under all plans of the Company and its affiliates exceeds one hundred thousand
dollars ($100,000), the Options or portions thereof which exceed such limit
(according to the order in which they were granted) shall be treated as
Nonstatutory Stock Options.
(e) The Company shall deliver to the holders of Stock Awards, not later
than one hundred twenty days after the close of each of the Company's fiscal
years, a balance sheet and an income statement. This Section shall not apply
when the issuance of Stock Awards is limited to key employees whose duties in
connection with the Company assure them access to equivalent information.
11. ADJUSTMENTS UPON CHANGES IN THE COMMON STOCK.
(a) Subject to the provisions of Section 12(b), if any change is made in
the Common Stock subject to the Plan, or subject to any Stock Award, without
receipt of consideration by the Company (through merger, consolidation,
reorganization, recapitalization, reincorporation, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or other transaction
not involving the receipt of consideration by the Company) then the Boards shall
make such equitable adjustments to the Plan and the Awards thereunder
(including, without limitation, appropriate proportionate adjustments in (i) the
maximum number of shares subject to the Plan under Section 4(a), (ii) the
maximum number of shares subject to Options pursuant to Section 5(d) of the
Plan; and (iii) the maximum number of shares and price per share of stock
subject to such outstanding Stock Awards). Such adjustments shall be made by the
Board, the determination of which shall be final, binding and conclusive. (The
conversion of any convertible securities of the Company shall not be treated as
a "transaction of not involving the receipt of consideration by the Company".)
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Common
Stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise, then, at the sole discretion of the Board and to the extent permitted
by applicable law, such Stock Awards shall (i) terminate upon such event and may
be exercised prior thereto to the extent such Stock Awards are then exercisable
or (ii) continue in full force and effect and, if applicable, the surviving
corporation or an Affiliate of such surviving corporation shall assume any Stock
Awards outstanding under the Plan and/or shall substitute similar Stock Awards
for those outstanding under the Plan.
11
<PAGE> 12
12. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 12 relating to adjustments upon changes
in the Common Stock, no amendment shall be effective unless approved by the
shareholders of the Company within twelve months before or after the adoption of
the amendment, where the amendment will:
(i) Increase the number of shares of Common Stock reserved
for Stock Awards under the Plan;
(ii) Modify the requirements as to eligibility for
participation in the Plan to the extent such modification requires shareholder
approval in order for the Plan to satisfy the requirements of Section 422 of the
Code; or
(iii) Modify the Plan in any other way if such
modification requires shareholder approval in order for the Plan to satisfy the
requirements of Section 422 of the Code or to comply with the requirements of
Rule 16b-3. Rights and obligations under any Stock Award granted before
amendment of the Plan shall not be altered or impaired by any amendment of the
Plan unless (1) the Company requests the consent of the person to whom the Stock
Award was granted and (2) such person consents thereto in writing.
(b) The Board at any time, and from time to time, may amend the terms of
any one or more Stock Award; provided, however, that the rights and obligations
under any Stock Award shall not be impaired by any such amendment unless (1) the
Company requests the consent of the person to whom the Stock Award was granted
and (2) such person consents thereto in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on July 11, 2006. No Stock Awards
may be granted under the Plan while the Plan is suspended or after it is
terminated.
(b) Rights and obligations under any Stock Award granted while the Plan
is in effect shall not be altered or impaired by suspension or termination of
the Plan, except with the written consent of the person to whom the Stock Award
was granted.
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Stock
Awards granted under the Plan shall be exercisable unless and until the Plan has
been approved by the shareholders of the Company (and such approval by the
shareholders must be obtained within twelve months of the Plan being adopted by
the Board), and, for Stock Awards for which an exemption from the qualification
requirements of the CCSL is unavailable, an appropriate permit has been issued
by the Commissioner of Corporations of the State of California.
12
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
I consent to the incorporation by reference in previously filed registration
statements of Networks Electronic Corp., including, without limitation,
registration statements on Form S-8 (Registration No. 333-50839), together with
any and all amendments thereto, filed as of the date hereof, of my report dated
August 28, 1998 on my audits of the financial statements of Network Electronic
Corporation, as of and for the years ended June 30, 1998, 1997 and 1996, which
report is included in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998.
/s/ HURLEY & COMPANY
Hurley & Company
Granada Hills, California
October 13, 1998
<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-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 338,666
<SECURITIES> 0
<RECEIVABLES> 1,331,381
<ALLOWANCES> (5,000)
<INVENTORY> 1,432,781
<CURRENT-ASSETS> 3,193,404
<PP&E> 8,263,891
<DEPRECIATION> 5,854,878
<TOTAL-ASSETS> 5,680,505
<CURRENT-LIABILITIES> 1,726,497
<BONDS> 3,008,962
0
0
<COMMON> 417,805
<OTHER-SE> 945,046
<TOTAL-LIABILITY-AND-EQUITY> 5,680,505
<SALES> 6,000,054
<TOTAL-REVENUES> 6,215,951
<CGS> 4,098,050
<TOTAL-COSTS> 4,673,799
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 264,327
<INCOME-PRETAX> 1,277,825
<INCOME-TAX> 298,016
<INCOME-CONTINUING> 979,809
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 979,809
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
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