Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Annual Report -- [x] Reg. S-K Item 405 38 225K
2: EX-3.1 Articles of Incorporation/Organization or By-Laws 22 62K
3: EX-3.2 Articles of Incorporation/Organization or By-Laws 20 74K
4: EX-10.1 Material Contract 9 43K
5: EX-10.2 Material Contract 12 52K
6: EX-23.1 Consent of Experts or Counsel 1 6K
7: EX-27.1 Financial Data Schedule 1 8K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 0-1817
NETWORKS ELECTRONIC CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (818) 341-0440
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $0.25 PAR VALUE
TITLE OF CLASS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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)
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1998 1997 1996 1995 1994
------ ------ ------ ------ ------
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
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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.
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YEAR HIGH LOW
---- ---- ---
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
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.
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APPROXIMATE NUMBER OF RECORD HOLDERS
TITLE OF CLASS (AS OF SEPTEMBER 25, 1998)
-------------- ------------------------------------
Common stock, $.25 par value.......................... 920*
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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)
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YEARS ENDED JUNE 30,
-----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ -------
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
------ ------ ------ ------ -------
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
8
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
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
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
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
ITEM 8. FINANCIAL STATEMENTS
INDEX
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PAGE
----
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
14
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
NETWORKS ELECTRONIC CORP.
BALANCE SHEETS
ASSETS
[Enlarge/Download Table]
JUNE 30,
------------------------
1998 1997
---------- ----------
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
========== ==========
The accompanying notes are an integral part of these financial statements.
16
NETWORKS ELECTRONIC CORP.
STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
YEARS ENDED JUNE 30,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
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
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
17
NETWORKS ELECTRONIC CORP.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
[Enlarge/Download Table]
RETAINED
COMMON COMMON ADDITIONAL STOCK STOCK EARNINGS/
STOCK STOCK PAID-IN OPTIONS SUBSCRIPTIONS ACCUMULATED ADJUSTMENTS
SHARES AMOUNT CAPITAL EXERCISABLE RECEIVABLE DEFICIT TO EQUITY TOTAL
--------- -------- ---------- ----------- ------------- ----------- ----------- ---------
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
========= ======== ======== ====== ======== ========= ========= =========
The accompanying notes are an integral part of these financial statements.
18
NETWORKS ELECTRONIC CORP.
STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
YEARS ENDED JUNE 30,
-------------------------------------
1998 1997 1996
--------- ----------- ---------
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
========= =========== =========
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
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
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
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:
[Enlarge/Download Table]
JUNE 30,
------------------------
1998 1997
---------- ----------
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
========== ==========
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
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:
[Enlarge/Download Table]
JUNE 30,
------------------------
1998 1997
---------- ----------
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
========== ==========
Maturities of long-term debt in each of the next five years are as follows:
[Download Table]
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
==========
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
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
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:
[Enlarge/Download Table]
YEARS ENDED JUNE 30,
-------------------------------
1998 1997 1996
-------- -------- -------
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)
======== ======== =======
25
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:
[Enlarge/Download Table]
YEARS ENDED JUNE 30,
---------------------------------
1998 1997 1996
--------- -------- --------
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)
========= ======== ========
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:
[Enlarge/Download Table]
YEARS ENDED JUNE 30,
-------------------------------
1998 1997 1996
--------- -------- --------
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)
========= ======== ========
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
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:
[Download Table]
1998 1997
-------- ---------
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
======== =========
The respective deferred tax benefits at the June 30, 1998 and June 30, 1997
balance sheet dates are presented as follows:
[Download Table]
1998 1997
------- --------
Current portion............................................. $65,000 $ 24,000
Non-current portion......................................... 16,701 119,571
------- --------
Total............................................. $81,701 $143,571
======= ========
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:
[Download Table]
1998 1997 1996
--------- --------- ---------
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
========= ========= =========
27
NETWORKS ELECTRONIC CORP.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE RETIREMENT PLAN (CONTINUED)
The status of the plan is as follows:
[Enlarge/Download Table]
1998 1997
----------- -----------
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)
=========== ===========
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
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.
[Enlarge/Download Table]
INCOME
BEFORE
INCOME TAX
PROVISION CAPITAL
SALES* (BENEFIT) ASSETS EXPENDITURES DEPRECIATION
---------- ---------- ---------- ------------ ------------
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
==========
---------------
* 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
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
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
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:
[Enlarge/Download Table]
DIRECTOR
EXPIRES IN
NAME OF DIRECTOR DECEMBER
AND POSITION AT COMPANY AGE (1) BUSINESS EXPERIENCE DURING LAST FIVE YEARS(2)
----------------------- --- ---------- ---------------------------------------------
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.
---------------
(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.
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NAME, AGE AND POSITION BUSINESS EXPERIENCE DURING PAST FIVE YEARS
---------------------- ------------------------------------------
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.
32
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:
[Enlarge/Download Table]
OTHER RESTRICTED ALL
NAME OF INDIVIDUAL ANNUAL STOCK OPTIONS/ LTIP OTHER
AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS SARS PAYMENTS COMPENSATION
---------------------- ---- -------- ------ ------------ ---------- -------- -------- ------------
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
---------------
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 $18,130.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
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POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS PRICE APPRECIATION OF
------------------------------------------------------------------------------------------------- INDIVIDUAL GRANTS FOR
% OF TOTAL OPTIONS/SARS NUMBER OF SECURITIES OPTION TERM
NAME OF INDIVIDUAL AND GRANTED TO EMPLOYEES IN UNDERLYING EXERCISE OR EXPIRATION ----------------------
PRINCIPAL POSITION FISCAL YEAR OPTIONS/SARS GRANTED BASE PRICE DATE 5% 10%
---------------------- ----------------------- -------------------- ----------- ---------- ------- -------
David Wachtel, CEO... N/A N/A N/A N/A N/A N/A
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
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NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FY-END OPTIONS/SARS AT FY END
NAME OF INDIVIDUAL AND SHARES ACQUIRED VALUE ------------------------- -------------------------
PRINCIPAL POSITION ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---------------------- --------------- -------- ------------------------- -------------------------
David Wachtel, CEO............ N/A N/A N/A N/A
33
Retirement benefits payable under the Company's defined benefit pension
plan have been frozen since August 31, 1992. Accrued annual benefits payable at
retirement age under the plan are set forth in the following pension plan table,
which does not incorporate vesting or joint and survivor factors. Amounts
reported are straight-life annuity amounts, which are not offset by social
security.
[Download Table]
YEARS OF SERVICE
-------------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 30
------------ ------- ------- ------- ------- ------- --------
50$,000.... $ 3,333 $ 6,667 $10,000 $13,333 $16,667 $ 20,000
75,000.... 5,000 10,000 15,000 20,000 25,000 30,000
100,000... 6,667 13,333 20,000 26,667 33,333 40,000
125,000... 8,333 16,667 25,000 33,333 41,667 50,000
150,000... 10,000 20,000 30,000 40,000 50,000 60,000
175,000... 11,667 23,333 35,000 46,667 58,333 70,000
200,000... 13,333 26,667 40,000 53,333 66,667 80,000
225,000... 15,000 30,000 45,000 60,000 75,000 90,000
250,000... 16,667 33,333 50,000 66,667 83,333 100,000
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:
[Enlarge/Download Table]
NAME OF INDIVIDUAL COVERED COMPENSATION ESTIMATED CREDITED SERVICE
------------------ -------------------- --------------------------
David Wachtel........................................ $ 0(*) 0
Mihai D. Patrichi (deceased)......................... 235,527(**) 40
---------------
(*) 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
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.
[Enlarge/Download Table]
NAME AND ADDRESS OF AMOUNT BENEFICIALLY PERCENTAGE
CATEGORY BENEFICIAL OWNER OWNED OF CLASS(4)
-------- -------------------------------- ------------------- -----------
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
---------------
(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
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
[Download Table]
(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.
36
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
[Enlarge/Download Table]
BALANCE CHARGED TO CHARGED BALANCE,
BEGINNING COSTS AND TO OTHER END OF
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS PERIOD
--------- ---------- -------- ---------- --------
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
======== ========= == ====== ========
37
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:
[Enlarge/Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/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
38
Dates Referenced Herein and Documents Incorporated by Reference
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