ITEM 1. BUSINESS
Principal Business The Principal business of Networks Electronic Corp., hereinafter called the "Company" or "Networks", is the design, fabrication, assembly and sale of high technology components for aerospace and U.S. Government defense prime contractors. The Company was incorporated in the State of California in October 1953. The Company operates two divisions: (1) U.S. Bearing Division whose products are spherical, self-aligned, self- lubricating and specialized bearings used chiefly in the aerospace industry, and (2) Ordnance Division whose products include miniaturized electro-pyrotechnic devices such as switches, initiator-igniters for missile subsystems, thermal relay switches, and glass-to-metal seals used solely in the defense and aerospace industries. The products of each division are sold by Company-employed sales staff, representatives and specialized distributors to domestic and overseas customers.
Competition The Company encounters varied degrees of competition depending upon the division involved. The Bearing Division sells its product lines in competitive markets, on the basis of a combination of price, delivery, and product quality. Many of the Division's competitors are divisions or segments of large diversified companies with financial resources greater than those of Networks. The Ordnance Division sells its products on a less competitive basis than does the Bearing Division, although they do compete with about 4-6 ordnance component manufacturers with similar capacity to Networks' Ordnance Division. The Company's two divisions sell a number of products for which they are the sole source. See section entitled "Patents."
Customer Dependency
The Company's Bearing Division manufactures specialized bearings for sale to the defense and aerospace industries either directly to the U.S. Government or to Government prime contractors, such as: McDonnell Douglas, Lockheed Martin, Textron and Hughes. Only the Department of Defense (27%) contributed 10% or more of the Bearing Division's revenues during the fiscal year ended June 30, 1997.
The Ordnance Division of the Company manufactures electro-pyrotechnic devices for the defense and aerospace industries. Its products are sold to a few prime contractors such as: Eagle Picher, Hughes Training and Missile Systems, and Textron. These customers accounted for 22%, 16%, and 13%, respectively, of the Ordnance Division's revenues for the fiscal year ended June 30, 1997. No other customer accounted for 10% or more of the Ordnance Division's revenues.
Backlog The Company's backlog of unfilled orders at June 30, 1997 was approximately $3,900,000, compared with $1,350,000 at June 30, 1996.
Raw Materials The principal raw materials used by the Company are readily available from many sources. However, the Company is dependent upon the ability of its suppliers to meet raw material specification requirements, quality standards, and delivery schedules in order to fulfill the Company's commitments to its customers. To date, the Company has not experienced any shortages of raw materials nor has it stockpiled a significant amount of raw materials in anticipation of shortages.
Patents Although the Company does have a substantial number of patents, it depends primarily upon technical know-how, product technology, numerous qualifications and service to its customers to protect its position.
Research and Development During the last three fiscal years, the Company has engaged in limited Company-sponsored research and development activities. The estimated amount spent during the years ended June 30, 1997, 1996, and 1995 on such activities was approximately $6,000, $97,000, and $2,000, respectively. A significant portion of the 1996 expenditures related to the qualification process for new Ordnance devices.
Environmental Contingent Liabilities Federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, have had no adverse effect on capital expenditures, earnings or the competitive position of the Company since the previous year.
Employees At June 30, 1997, the Company had approximately 60 full time employees, as compared with 64 at June 30, 1996.
Material Changes in Business There have been no material changes in business done by the Company since the previous year.
Lines of Business The Company has been engaged in more than one line of business during its last five fiscal years.
Corporate Summary of Results by Division (In Thousands) - -------------------------------------------------------
* No intersegment sales. ** Does not include interest expense in any of the five years presented. - --------------------------------------------------------------------------------
Parents The Mihai D. Patrichi Trust owns 790,383 shares (approximately 47%) and beneficially controls 895,053 shares (approximately 54%) of the Company's common stock. By reason of this ownership of such common stock, the Mihai D. Patrichi Trust is deemed to be a parent of the Company for the purposes of the Securities Act of 1934, as amended. The trust is administered by Ileana Wachtel (Mihai Patrichi's daughter and the wife of David Wachtel, the President and CEO of the Company) and Rodica Patrichi (Mihai Patrichi's widow). There is no such other person who owns 10% or more of the Company's common stock, and who might be deemed a "parent" of the Company.
Bankruptcy Status In July 1993, the Company filed a voluntary petition for reorganization under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Central District of California, and subsequently operated its business as a debtor-in possession, subject to the supervision of the Bankruptcy Court. The order confirming the Company's plan for reorganization was entered on November 9, 1994, contemplating full repayment of all pre-petition liabilities over a twelve year period. In June 1997, the Court ordered that the chapter 11 case be closed; however, the Company will not be discharged until complete performance of its reorganization plan has been achieved.
ITEM 2.
ITEM 2. PROPERTIES The Company's administrative, engineering and manufacturing activities are all carried on from an 85,000 square foot building located on 7.25 acres of land in a light industrial area of Chatsworth, California, of which approximately 35,000 square feet have been leased to a tenant. See Note 17 of the notes to the financial statements.
ITEM 3
ITEM 3 LEGAL PROCEEDINGS See Note 16 of the notes to the financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
ITEM 5.
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.
Networks Electronic Corp. stock was formerly listed on NASDAQ, the over-the-counter market, as NWRK. As of May 7, 1993, the stock has been quoted on the OTC electronic bulletin board. - ----------------------------------------------------------------- Approximate Number of
*Included in the number of stockholders of record are shares held in "nominee" or "street" name. - -----------------------------------------------------------------
Dividends The Company has never paid cash dividends on its common stock. During each of the years ended June 30, 1993 and 1992, respectively, a 5% common stock dividend was declared and distributed to stockholders. No common stock dividends have been declared during any subsequent year. Payment of future dividends will be within the discretion of the Company's Board of Directors and will depend, among other factors, on retained earnings, capital requirements and the operating and financial condition of the Company.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR FINANCIAL HISTORY (In thousands of dollars except per share data) - -------------------------------------------------------------------------------- Years Ended June 30,
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. - --------------------------------------------------------------------------------
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1997 and 1996
Results of Operations
The Company's revenues increased by approximately $80,000 to $4,010,000 during the year ended June 30, 1997. Ordnance sales increased $380,000 and Bearings sales decreased by $300,000. The change in mix was caused partly by increased demand for the Company's Ordnance products, while the Bearings sales were impacted by the limitations on internal capacity plus the decreased availability of products and services in the supply chain. The limitations on internal capacity caused by the Northridge Earthquake are now significantly reduced, as we have recently completed the construction of a new 15,000 square feet facility which increases our production capacity. This facility will house equipment that has been idle since the earthquake. Furthermore, the recent upsurge in the aerospace industry impacted our supply chain, both increasing costs and affected our ability to achieve our estimated delivery targets. The Division has adjusted to these pressures by pushing out the lead time for delivery of our bearing products and establishing a smaller, but more reliable supplier base.
Gross profits improved to 25.7% from 18.9% in the prior year. This was primarily due to the increase in sales volume in the Ordnance Division, which traditionally enjoys higher margins. The reduced Bearing Division volume resulted in higher costs, as overhead was spread over fewer sales.
Orders for both divisions continues to be strong. The backlog of orders for both divisions as of June 30, 1997 is approximately $3,750,000, with the bookings in the Bearings Division up by close to $1,700,000 and bookings in the Ordnance Division up by approximately $1,400,000, when compared to the previous year. The Bearings Division backlog as at June 30, 1997 was approximately $3,000,000, and the Ordnance Division backlog was $750,000. This is in contrast to last year when the backlog for both divisions totaled $1,350,000. As of June 30, 1997 the book to bill ratio was 1.48, compared to 0.77 for the same period the previous year. Management anticipates that the healthy backlogs and the increase in manufacturing capacity will allow for an increase in sales in the forthcoming year.
As anticipated, general and administrative costs were up 40% as more engineering and sales staff were added to improve the Company's capabilities and market penetration. The year ended June 30, 1997 had numerous non- recurring charges associated with professional fees for the closing of the bankruptcy, leasing and repairing the building, and resolving a dispute with Hughes Missile Systems. Management expects wage costs to go up in the next fiscal year as part of the wage normalization policy. The chapter 11 bankruptcy has been removed from court supervision, so that the related court fees and attorney costs should be eliminated in the coming fiscal year.
Operating Income has continued to improve for the third straight year. Operating Income has increased by approximately 34% to $235,000 compared to $175,000 in the prior year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Non-operating income has improved due to recognition of a large, non-recurring gain on completion of the Community Redevelopment Agency requirements for forgiveness of $162,000 of debt on the earthquake repairs. Completion of the earthquake repairs also allowed the Company to lease a portion of the building to another enterprise, bringing in approximately $60,000 in net rental income during the last four months of the year. The lease calls for net rental income of approximately $190,000 in the year ended June 30, 1998, and will provide approximately $1,000,000 of Rental Income over the next five years.
Interest expense was substantially unchanged as the Company's long-term debt pay-down counter-balanced the higher rates on new short-term borrowings. Management is planning to obtain additional financing, through refinancing the building loans or obtaining a working capital line of credit.
The Company is striving to capitalize on the rising market in both Bearings and Ordnance. The volume of quotes is higher than in the past six years and the backlog has increased to $3,900,000, the highest level since 1990.
Liquidity and Capital Resources
The Company's working capital at June 30, 1997 was $880,000 compared to $835,000 at June 30, 1996. A $400,000 improvement in working capital as a result of pre-tax income earned in the year (excluding depreciation) was largely offset by $55,000 in equipment purchases, $90,000 in deferred charges incurred, $100,000 of increased near-term maturity of long-term debt, and a $90,000 increase in pension contributions. The pension liability of $290,000 is due March 1998 and will not be deferred by the Internal Revenue Service. The short-term operating liquidity appears to remain tight for the first part of the new fiscal year, but Management expects the cash generated from the rental for a full year and increased gross profit from higher sales to be sufficient to meet its obligations and near-term capital requirements.
The Company is working to refinance the building and replace the existing term loan with Wells Fargo. Management expects that transaction to yield sufficient funds to meet the Company's working capital needs for the medium term.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition
Potential risks and uncertainties that could affect the Company's future operating results and financial condition include, without limitation, the following factors:
History of Losses; Variability of Operating Results
The Company has recently emerged from bankruptcy protection. Despite historical losses, the Company experienced its first operating profit in four years during the year ended June 30, 1995, in the amount of approximately $47,000, and recorded operating profits during the years ended June 30, 1996 and 1997 in the amounts of approximately $175,000 and $235,000, respectively. Nevertheless, the Company's revenues and operating results have varied substantially from period to period. There can be no assurance that the Company will be profitable in the future or that future revenues and operating results will not also vary substantially. Management has expended and continues to expend substantial time and resources in attempting to resolve problems arising from the Company's financial condition and to restore confidence in the Company. Although the research and development expenditures of the Company have increased, its financial condition limits its ability to engage in large scale research and development. Also, the Company's financial condition has limited the ability of the Company to modernize its equipment. Future profits, if any, will depend upon various factors, including, but not limited to, management's ability to restore confidence in the Company, continued market acceptance of the Company's current products, the ability of the Company to develop distribution and marketing channels as well as develop and introduce new products or to develop new markets for its existing products and the successful implementation of its planned marketing strategies. If the Company is not able to achieve its operating objectives, the Company may find it necessary to reduce its expenditures for sales, marketing, and research and development, or undertake other such actions as may be appropriate, and may be otherwise unable to achieve its goals or continue its operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition (Continued)
Competition
Certain of the Company's existing and potential competitors have substantially greater financial, marketing and other resources than the Company. These competitors have also been able to market their products successfully to the Company's existing and potential customers in the defense and aerospace industries. Increased competition could result in price reductions, reduced margins and loss of market share, all of which could adversely affect the Company. The Company has determined to follow a strategy of continuing product development to the extent permitted by the financial resources of the Company to protect its competitive position to the extent practicable. There can be no assurance that the Company will be able to maintain its position in the field or continue to compete successfully against current and future sources of competition or that the competitive pressures faced by the Company will not adversely affect its profitability or financial performance.
Technological Change
The markets for specialized bearings and ordnance products are characterized by advances in technology. Accordingly, the Company's ability to compete in those markets may depend in large part on its success in enhancing its existing products and in developing new products. There can be no assurance that the Company will succeed in such efforts or that any of its products will not be rendered obsolete or uneconomical by technological advances made by others.
Dependence on Key Customers
During fiscal years 1997, 1996 and 1995, sales to the Department of Defense by the Company constituted 14%, 20% and 29%, respectively, of the Company's sales. Sales to Eagle-Picher Industries accounted for approximately 11% and 17% of sales in 1997 and 1995, respectively. Sales to Hughes Missile Systems accounted for approximately 13% of sales in 1996. A significant decline in sales of any of these key customers would adversely affect the Company.
Dependence Upon Defense Industry
The Company has been supplying components for United States defense programs for over forty years. Reliance upon defense programs has certain inherent risks, including the uncertainty of economic conditions, dependence on Congressional appropriations and administrative allotment of funds, changes in governmental policies that may reflect military and political developments and other factors characteristic of the defense industry. The Company is unable to predict the impact on defense appropriations for programs in which the Company's products are incorporated.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition (Continued)
Product Liability and Risk Management
As a manufacturer of ordnance products and specialized bearings for the defense and aerospace industries, the Company is subject to the risk of claims arising from injuries to persons or property. The Company maintains general liability insurance as well as product liability insurance. Although the Company has instituted quality control procedures that it believes produce products of the highest quality, the Company may become subject to future proceedings that allege defects in its products.
No Earthquake Insurance
The Company's principal executive offices are located in a facility owned by the Company in Chatsworth, California - an area which was damaged in the 1994 Northridge, California earthquake. The Company does not currently carry insurance against earthquake-related risks. The Company suffered approximately $1.2 million in damages, costs and renovations to its facility resulting from that earthquake, and recovered only approximately $384,000 from insurers as a result of insured flood damage caused by the earthquake.
Key Personnel
The Company's success is highly dependent on the efforts and abilities of its Chairman, David Wachtel and key members of staff. The loss of services of Mr. Wachtel or any of these key members could have a material adverse effect on the Company.
Control of Company
The Mihai D. Patrichi Trust (the "Trust") presently owns of record approximately 47.3% of the Company's outstanding voting stock. Accordingly, the Trust is able to control the election of a majority of the directors, and, therefore, the business and affairs of the Company and approve or disapprove any corporate action submitted to a vote of the Company's shareholders, in each case regardless of how other shareholders of the Company may vote. The provisions of the Trust provide that the trustees act in a prudent matter to dispose of the Trust's interest n the Company. In the matter of In Re: Mihai D. Patrichi Trust (Case No. BP03796), now pending in the Superior Court of California for the county of Los Angeles, Michael Patrichi, one of the beneficiaries of the Trust, is attempting to remove and replace the co-trustees of the Trust, Ileana Wachtel and Rodica Patrichi. Sale by the Trust of its interest in the Company would effect a change in the control of the Company. Sales of substantial amounts of Common Stock in the public market under Rule 144 or otherwise, or even the potential for such sales, could adversely affect the prevailing market prices for the Common Stock and could impair the ability to raise capital through the sale of its equity securities.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition (Continued)
Contracts
The Company generates substantially all of its revenues pursuant to procurement contracts for custom designed or manufactured bearings or ordnance products. The ability of the Company to generate additional revenues will depend upon its ability to obtain additional contracts. Substantially all of the Company's contracts are on a fixed-fee basis. Accordingly, the Company is subject to the risk of cost overruns. Because the Company manufactures ordnance and specialized bearings for the defense and aerospace industries, the Company is subject to extremely stringent quality control standards and testing. These standards are implemented through internal operational quality control procedures of the Company and through customer audits. Furthermore, lot acceptance test procedures ("LATs") are required by the Company's customers. These LATs include environmental testing and detonation and non-detonation tests. Generally, the Company's ordnance products are manufactured in batches and then subjected to LATs under standards that result in rejection of an entire manufactured batch if a single unit fails. From time to time, the Company has experienced LATs failures resulting from human error or technical problems. Occurrence of LATs failures of this type on large contracts could adversely impact the revenues of the Company and no assurance can be given that such failures will not occur in the future.
Volatility of Workload
To remain profitable, the Company is highly dependent on its ability to maintain a suitably sized staff of qualified technical personnel commensurate with a fluctuating volume of work. New contracts often arise at unscheduled or unanticipated times. The Company endeavors to maintain adequate staff to respond to these unscheduled opportunities. If the Company overestimates its projected workload, the resulting financial burden can reduce profitability. Occasionally, the Company is faced with the opposite problem - a shortage of suitable technical personnel - or the funds to pay premium rates to obtain the necessary skilled labor that is in short supply, and is unable to timely perform contracts, potentially resulting in cost overruns or late delivery penalties.
Governmental Regulation
The Company's operations are subject to, and substantially affected by, extensive federal, state and local laws, regulations, orders and permits, which govern environmental protection, health and safety, zoning and other matters. These regulations may impose restrictions on the Company's operations that could adversely affect the Company's results, such as limitations on the expansion of metals plating facilities of the Company, limitations on or banning disposal of hazardous waste generated by the Company's operations. Because of heightened public concern, companies in the metals plating business, including the Company, may become subject to judicial and administrative proceedings involving federal, state or local agencies.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition (Continued)
These governmental agencies may seek to impose fines on the Company or to revoke or deny renewal of the Company's waste generation and disposal permits or licenses for violations of environmental laws or regulations or to require the Company to remediate environmental problems resulting from its operations, all of which could have a material adverse effect on the Company. The Company may also be subject to actions brought by individuals or community groups in connection with the permitting or licensing of its operations, any alleged violations of such permits and licenses, or other such matters.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition (Continued)
1996 AND 1995
Results of Operations
Sales increased overall by approximately 31% to $3,933,000 during the year ended June 30, 1996 from $3,007,000 in 1995. Both the Company's divisions enjoyed strong sales gains, with the Bearing Division up approximately 26% and the Ordnance Division up approximately 39%.
Gross margins in both divisions were down slightly, due to a series of factors, resulting in a Company-wide decline to approximately 18.9% from 19.5% the previous year. While the Company continued to cut costs, the impact of normalizing wages did have an effect on the Company's margins, as compared with the previous year. Additionally, the Ordnance Division diverted resources toward the successful qualification of specific devices for a program that was eventually canceled.
As anticipated, general and administrative expenses increased by approximately 5% ($29,000) during the year ended June 30, 1996, due mostly to the addition of new staff and the continued implementation of the Company's wage normalization policies.
Despite the cost pressures, the Company succeeded in posting its second consecutive operating profit, after three years of losses. Operating income, in fact, increased approximately $128,000 from the previous year to $175,000.
Interest expense was approximately 4% lower in 1996 than that of the previous year, because of a reduction in average aggregate borrowings.
Despite a limited research and development budget, the Company has continued to develop new products in both of its divisions. The Bearing Division was actively involved in designing and qualifying new bearings for the X33 Space Shuttle. Even though the Ordnance Division was adversely affected by a convenience cancellation, it also had significant success in qualifying new items. Over twenty new switches were qualified for Hughes Missile Systems, cord and wire cutters were qualified for Textron's SFW program, and new piston actuators were designed and qualified for Humphrey/Remec. The Company accomplished an overall streamlining and improved efficiency in its operations.
Committed to increasing its bookings, the Company hired an established sales representative.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Factors That May Affect Future Results and Financial Condition (Continued)
Liquidity and Capital Resources
The Company had working capital of approximately $835,000 at June 30, 1996 as compared to working capital of approximately $1,128,000 at June 30, 1995, which represented a decline of $293,000. The decrease was primarily due to a difference in non-recurring receivables between the two years in the amount of $172,000, along with an increase in the current portion of the Company's accrued pension liability of $160,000 in the 1996 year. This increase was a result of the Company having received a waiver by the IRS of the minimum funding standard for the year ended June 30, 1995.
The Community Redevelopment Agency ("CRA") provided favorable funding in the amount of $1,300,000 for the Company's rental project. Terms included a zero percent interest loan with no payments for five years and level principal payments over the remaining twenty years. Fifteen percent ($195,000) of this funding was a grant and does not have to be paid back. This financing arrangement should save the Company approximately $100,000 per year over the next twenty-five years as compared to a conventional loan. In addition, the tenant agreed to directly contribute $100,000 and to lend the Company up to $288,000 (at 10% per annum) to pay for the necessary construction improvements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS INDEX
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
I have audited the accompanying balance sheets of Networks Electronic Corp. as of June 30, 1997 and 1996 and the related statements of operations, stockholders' deficiency in assets and cash flows for each of the three years in the period ended June 30, 1997. My audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Corporation's management. My responsibility is to express an opinion on these financial statements and financial statement schedule based on my audits.
I conducted my audits in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis for my opinion.
In my opinion, such financial statements present fairly, in all material respects, the financial position of Networks Electronic Corp. as of June 30, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. Also, in my opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Hurley & Company
September 26, 1997 Granada Hills, California
NETWORKS ELECTRONIC CORP. BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
NETWORKS ELECTRONIC CORP. BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
NETWORKS ELECTRONIC CORP. STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
NETWORKS ELECTRONIC CORP. STATEMENT OF STOCKHOLDERS' DEFICIENCY IN ASSETS Years Ended June 30, 1997, 1996, and 1995
The accompanying notes are an integral part of these financial statements.
NETWORKS ELECTRONIC CORP. STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
NETWORKS ELECTRONIC CORP. STATEMENTS OF CASH FLOWS (Continued)
Supplemental Schedule of Noncash Investing and Financing Activities In the fiscal year ended June 30, 1997, the Company entered into capital leases for telephone and office equipment. Total assets and related lease obligations pertaining to these transactions amounted to $36,951.
In the fiscal year ended June 30, 1997, the Company recognized an additional minimum pension liability in the amount of $30,460 by increasing stockholders' deficiency in assets for the same amount.
In the fiscal year ended June 30, 1996, the Company recognized an additional minimum pension liability in the amount of $240,732 by increasing stockholders' deficiency in assets for the same amount.
In the fiscal year ended June 30, 1995, the Company reduced an additional minimum pension liability previously recognized (representing the excess of the accumulated benefit obligation over the fair value of plan assets and liabilities already accrued) by $77,414 and reduced stockholders' deficiency in assets for the same amount.
NETWORKS ELECTRONIC CORP. NOTES TO THE FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit and highly liquid debt instruments with original maturities of three months or less. Substantially all cash is on deposit with one financial institution.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or market.
Property and Equipment
Depreciation is computed by using the declining-balance and straight-line methods over the estimated service lives of the assets which range from three years for tooling to forty years for the building. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and improvements are capitalized. Deduction is made for retirements resulting from renewals or improvements.
Income Taxes
Deferred income taxes are provided for the estimated tax effects of timing differences between financial and taxable income with respect to depreciation, pension costs, California franchise tax, reserve for inventory obsolescence, capitalized inventory costs, and other items.
Deferred Charges
The Company recognizes as deferred charges certain loan fees and lease costs, which are being amortized over periods ranging from approximately two to five years.
Pension Plan
The Company funds accrued pension costs on its noncontributory pension plan covering substantially all employees. Unrecognized prior service cost, previously amortized over thirty years, was expensed in the year ended June 30, 1993, due to the fact that participants' accrued benefits under the plan were frozen as of August 31, 1992. (See Note 9).
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
The Company recognizes sales revenue when completed parts are shipped to customers.
Net Income (Loss) Per Share
Net income (loss) per share has been computed based on the weighted average common shares outstanding during each year.
Research and Development
Research and Development expenditures are expensed in the period incurred.
Reclassifications
Certain amounts from prior years have been reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of the Company's financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
During the year ended June 30, 1996, the Company elected early adoption of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." Historically, the Company has complied with the requirements of SFAS No. 121. This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity must be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Also, in general, long-lived assets and certain identifiable intangibles to be disposed of should be reported at the lower of carrying amount or fair value less cost to sell.
Accounting for Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," was adopted by the Company during the year ended June 30, 1997, as required by this statement. As adopted, SFAS No. 123 did not have any effect on the Company's financial position or results of operations, and no expanded disclosure was operative.
2. BASIS OF PRESENTATION
An order confirming the Company's plan for reorganization under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Central District of California was entered on November 9, 1994, which contemplates full repayment of all pre-petition liabilities over a twelve year period. These obligations, consisting primarily of the unfunded portion of the Company's defined benefit pension plan, totaled approximately $450,000 (as adjusted downward by approximately $750,000 due to a favorable ruling on a wrongful termination claim). Additionally, the Company's term loan with its bank was extended for six years (See Note 5).
The accompanying financial statements have been prepared on a going concern basis, which assumes continuity of operations, realization of assets, and liquidation of liabilities in the ordinary course of business. However, due to historically inconsistent earnings from operations, contributing to periodic cash shortfalls, such realization of assets and liquidation of liabilities are subject to uncertainty. The financial statements do not reflect any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of the Company's inability to comply with the plan of reorganization and other financing agreements.
3. INVENTORIES
Inventories consisted of:
4. LONG-TERM DEBT, NOTES PAYABLE
Long-term debt and notes payable consisted of the following:
4. LONG-TERM DEBT, NOTES PAYABLE (Continued)
Maturities of long-term debt in each of the next five years are as follows:
5. CREDIT AGREEMENTS
The Company reached an agreement with its bank, as confirmed by the Company's plan for reorganization entered on November 9, 1994. Terms of the agreement include the payment of interest at the bank's reference rate plus 2.25% (currently 10.75%), $10,000 per month principal payments until maturity, and a balloon payment of $1,342,528 in June 2000. Additionally, in the event of default, the entire outstanding principal balance of the note will become immediately due and payable and will bear interest equal to 4 percentage points above the applicable interest rate as defined above. The Los Angeles City Council approved the funding of $800,000 through the Community Redevelopment Agency for the retrofit and repair of the Company's damaged building at the Chatsworth site. The damage was sustained as a result of the Northridge Earthquake in January 1994. During the year ended June 30, 1997, the CRA approved an additional funding amount of $500,000, which was amended onto the initial Agency Loan Agreement, thereby bringing the total CRA
5. CREDIT AGREEMENTS (Continued)
commitment to $1,300,000. These additional funds enabled the Company to complete the remodeling of its north building, 35,000 square feet of which were leased to a tenant beginning in March 1997 (See Note 17 below).
Of the total $1,300,000 commitment, 15% ($195,000) is a grant and 85% ($1,105,000) is an interest-free loan to be repaid over 20 years, beginning 5 years from the effective date of the loan, which was August 26, 1996. At June 30, 1996, $220,833 was expended, resulting in the recognition of $33,125 (15%) as forgiveness of debt income, and the balance of $187,708 as long-term debt. The remainder of the commitment was disbursed during the year ended June 30, 1997; accordingly, an additional $161,875 was recorded as forgiveness of debt income.
The Company's average aggregate borrowings were $2,708,000, $2,047,000, and $2,217,000, at weighted average interest rates of 8.2%, 10.7%, and 10.7% in 1997, 1996, and 1995, respectively. The average aggregate borrowings and weighted average interest rate computations include notes payable to related parties during these years. Interest paid amounted to $231,536, $225,301, and $242,196 during the fiscal years ended June 30, 1997, 1996, and 1995, respectively.
6. NOTES PAYABLE, RELATED PARTIES
(a) In January 1995, the Company received a $152,000 loan from the estate of its former president and chief executive officer, secured by specific machinery and equipment. The loan was being repaid in equal monthly principal installments of $4,222 (plus interest at 10%) over a three year period. A loan fee of $2,000 was charged to consummate the transaction. The outstanding loan balance at June 30, 1996 was $80,222, of which $50,667 was the current portion. In March 1997, the Company obtained other financing and paid off the remaining principal balance of $42,222. Interest expense on this note during the years ended June 30, 1997, 1996, and 1995 was $4,296, $8,391, and $7,321, respectively.
(b) In August 1996, the Company's vice president loaned the Company $100,000 at an annual interest rate of 13%, secured by the Company's accounts receivable. Interest is payable monthly with the principal fully due and payable on September 1, 1997. As of September 26, 1997, the principal had not yet been repaid. Interest expense on this loan during the year ended June 30, 1997 amounted to $11,077.
(c) In September 1996, a director advanced the Company $22,000 for a fee of $200. The money was repaid by the Company in October 1996.
7. STOCK OPTION PLAN
The Company's Board Of Directors has adopted the Networks Electronic Corp. 1996 Stock Incentive Plan (the "1996 Plan") which provides for the grant of up to 100,000 shares of the Company's common stock to directors, officers, employees and consultants of the Company. The 1996 Plan was submitted to and approved by the shareholders of the Company at the Annual Meeting of Shareholders held on December 13, 1996.
The Company also has a qualified stock option plan, as amended October 15, 1974, under which options to purchase up to an aggregate of 185,200 shares of the Company's common stock may be granted to key employees at a price not less than the fair market value at the date of grant. Options issued under this plan will expire unless exercised within five years of the grant date. During the year ended June 30, 1993, the Company issued 20,000 stock options (10,000 each) under this plan to an officer and director, exercisable at a price of $1.00 per share. These stock options have since expired due to the officer's cessation of employment and the director's resignation from the board.
During the year ended June 30, 1995, the Company's Board of Directors awarded 75,000 fully-vested stock options to its chief executive officer, exercisable at a price of $.1875 per share, and 2,500 additional stock options (500 each) to five other key employees, exercisable at a price of $.25 per share. The exercise price, in each instance, corresponded to the mid-point of the closing bid and ask price of the Company's common stock on the date of grant, which was November 1, 1994 for the chief executive officer's options and March 31, 1995 for the other key employees' options.
The chief executive officer exercised his 75,000 options during the year ended June 30, 1996; accordingly, the Company has recorded a stock subscription receivable for $14,063. A total of 1,500 stock options awarded to three of the five key employees have since expired due to cessation of employment; the remaining 1,000 stock options are scheduled to fully vest on March 31, 1998. All of these non-qualified stock options were issued outside of the existing stock option plan and will expire if not exercised within five years from the date of the grant.
No other options are currently outstanding nor have any been previously granted.
8. INCOME TAXES
Income taxes (benefits) consisted of the following:
The differences between the effective income tax rate and the statutory federal income tax rate are as follows:
8. INCOME TAXES (Continued)
Net income taxes paid amounted to $800, $9,500, and $800 during the fiscal years ended June 30, 1997, 1996, and 1995, respectively.
The Company's current income tax provision (benefit) is based on current year taxable income (loss). The deferred income tax provision (benefit) is based on the temporary differences between the book basis and tax basis of assets and liabilities at the end of each year and the expected reversal of those differences. The deferred tax provision (benefit) in 1997, 1996, and 1995 is as follows:
At June 30, 1997 the Company had an unused federal net operating loss carryforward of approximately $370,000, with $290,000 expiring in the year ending June 30, 2009 and the balance of $80,000 in the year ending June 30, 2011. Also at June 30, 1997, the Company had an unused California net operating loss carryforward of approximately $555,000, with $175,000 expiring in the year ending June 30, 1998, $345,000 expiring in the year ending June 30, 1999, and the balance of $35,000 expiring in the year ending June 30, 2001.
8. INCOME TAXES (Continued)
Additionally, the Company has a federal general business credit carryover of approximately $29,000, with $21,000 expiring in the year ending June 30, 2007 and the balance of $8,000 expiring in the year ending June 30, 2111, and California tax credit carryovers of approximately $20,000, of which $4,000 expires by June 30, 2007, with the remainder available indefinitely.
Significant components of the Company's deferred tax liabilities and assets at June 30, 1997 and June 30, 1996 are:
The respective deferred tax benefits at the June 30, 1997 and June 30, 1996 balance sheet dates are presented as follows:
9. EMPLOYEE RETIREMENT PLAN
The Company has a defined benefit pension plan covering substantially all of its employees. The plan has been modified through amendment, with all participants' accrued benefits frozen as of August 31, 1992. The freeze was necessitated primarily as a means of reducing annual pension funding requirements.
Pension expense was $41,380, $32,311, and $24,733 for the years ended June 30, 1997, 1996, and 1995, respectively, and was determined in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 87 "Employers' Accounting for Pension Plans." Periodic pension costs for the years ended June 30, 1997, 1996, and 1995 are summarized below:
9. EMPLOYEE RETIREMENT PLAN (Continued)
A minimum pension liability equal to the excess of the accumulated benefit obligation over the fair value of plan assets and liabilities already accrued was reflected in the balance sheets at June 30, 1997 and 1996 through the recording of an increase to stockholders' deficiency in assets in the amount of $30,460 and $240,732, respectively.
The expected long-term rate of return on plan assets was 9% for both 1997 and 1996. The discount rate used in determining the actuarial present value of accumulated benefit obligations was 8% for both 1997 and 1996. There was no rate of increase in future compensation levels at both June 30, 1997 and June 30, 1996 because of the plan curtailment.
Since the court confirmation of its Chapter 11 reorganization plan in November 1994, the Company continues to make pension plan contributions in the amount of $2,400 per month. A balloon payment of approximately $36,000 was also made in March 1997 to cover the balance of the annual installment due on approximately $240,000 in plan contributions for the plan year ended June 30, 1995. These plan contributions have been deferred and are currently being amortized over a statutory five year period (beginning with the year ended June 30, 1996), as the result of IRS granting the Company's request for waiver of the minimum funding standard.
The Company has a funding deficiency of approximately $123,000 carried over from the plan year ended June 30, 1996. The total minimum funding requirement for the year ended June 30, 1997 is approximately $272,000, which includes this deficiency, along with an annual waiver installment (as noted above) of approximately $60,000, and an additional $89,000 in minimum funding standard charges for the current year. The Company currently plans to meet this obligation through the refinance of its existing building loan.
The plan assets are held by Connecticut General Life Insurance Company ("CIGNA"), through a guaranteed group annuity contract (an immediate participation guarantee) established in 1980. The contract stipulates that CIGNA pay benefits and invest funds which have been contributed for the purpose of providing retirement benefits to eligible participants in accordance with the terms of the Networks Electronic Corporation Pension Plan.
10. BUSINESS SEGMENTS
The principal business of the Company is the design, fabrication, assembly and sale of high technology assemblies for aerospace and defense prime contractors. The Company operates two divisions: (1) U.S. Bearing Division whose products are spherical, self-aligned, self-lubricating and specialized bearings used chiefly in the aircraft and space industries, and (2) Ordnance Division whose products include miniaturized electro-pyrotechnic devices such as switches, initiator-igniters for missile subsystems, thermal relay switches, and glass-to-metal seals used solely for the defense and aerospace industries.
10. BUSINESS SEGMENTS (Continued)
* All sales were made to unaffiliated customers and there were no intersegment 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 with David Wachtel, its President and Chief Executive Officer. The agreement provides for minimum annual compensation of $150,000 for a period of three years, expiring April 30, 1998. The Board of Directors has also agreed to pay all medical and dental insurance premiums for the Company's corporate officers, plus the deductible expense portions operative under the respective plans.
During the year ended June 30, 1996, the Company's outstanding advances totaling $27,228 previously made to Mihai D. Patrichi, the Company's Founder and former President and Chief Executive Officer (who passed away in November 1994), were repaid by the Mihai D. Patrichi Trust. Interest earned (generally at 7% per annum) on the officer receivable amounted to $0 and $1,781 for the fiscal years ended June 30, 1996 and 1995, respectively.
13. MAJOR CUSTOMERS
Sales to the Department of Defense accounted for approximately 14% of sales in 1997, 20% of sales in 1996, and 29% of sales in 1995. Sales to Eagle-Picher Industries accounted for approximately 11% and 17% of sales in 1997 and 1995, respectively. Sales to Hughes Missile Systems accounted for approximately 13% of sales in 1996. No other customer had sales exceeding 10% of total revenue during the years ended June 30, 1997, 1996, and 1995, respectively.
14. GAINS AND LOSSES ON DISPOSITIONS OF PROPERTY
During the year ended June 30, 1996, the Company sold fully depreciated machinery for $13,500. In January 1996, the Company completed the sale of its Florida condominium property, recognizing a loss of $20,773. The net proceeds from the transaction were approximately $51,000. Of this amount, approximately $22,500 was utilized to pay off the related mortgage debt, with the balance used for general administrative purposes. In September 1994, the Company sold its Palm Desert property, consisting of two acres of unimproved land, for approximately $575,000 (net of $40,000 in fees and expenses), recognizing a gain of approximately $530,000 on the transaction. The net proceeds from the sale were used to fully pay off the Company's bank line of credit in the amount of $570,000. The Company also reported a gain of $8,000 from the sale of a fully depreciated automobile.
15. INSURANCE CLAIM
During the year ended June 30, 1995, the Company recorded income from its insurance carrier totaling $384,687, representing reimbursements in full settlement of the Company's claim for losses sustained to its property (primarily parts and tooling inventories). These losses resulted from water damage to the Company's premises which had occurred following the Northridge Earthquake in January 1994.
16. LITIGATION
During the previous several years, the Company has had litigation pending based upon complaints filed by several former officers and employees of the Company alleging wrongful termination and other causes of action. Such complaints sought substantial general and punitive damages. In June of 1993, despite finding in favor of the Company and its president on a claim of intentional infliction of emotional distress, a jury awarded a former officer of the Company approximately $820,000 for past and future earnings and benefits, after concluding that Networks Electronic Corp. breached an implied employment agreement.
However, in May 1995, the Honorable Alan Ahart, United States Bankruptcy Judge for the Central District of California, ruled, in any event, that damages arising from a wrongful termination claim filed against a chapter 11 debtor were limited to one year of compensation under the employment contract. Accordingly, the Company wrote-down its recognized obligation at June 30, 1995 by approximately $767,000, resulting in an estimated total adjudication award payable of $52,525. The outstanding balance at June 30, 1996 was $56,059, inclusive of $3,534 in cumulative accrued interest at an annual rate of 4%. The obligation at June 30, 1997 was reduced to $41,951, as the result of additional accrued interest of $1,328 and payments totaling $15,436 made during the fiscal year. The Company's insurance carrier may participate to cover all or part of the remaining liability.
Regarding the other claims, negotiated settlements were reached. Networks agreed to settle these cases by making payments totaling $40,000 over a period of one to three years. The balance remaining on these claims at June 30, 1997 was approximately $5,000.
The Company, during its normal course of business, may be subjected from time to time with legal proceedings against it. Both counsel and management do not expect that the ultimate outcome of any current claims will have a material adverse effect on the Company's financial statements.
17. LEASE AGREEMENT
In March 1997, the Company leased approximately 35,000 square feet of its Chatsworth facility. The lease agreement calls for monthly base rent to be $17,850, with approximately 2 1/2 months free and a cost of living increase every 18 months over the initial 62 month period. The tenant also reimburses the Company for pro-rata utilities, property taxes, and insurance. The lessee has an option to extend the original lease term for an additional 60 months.
Additionally, the tenant reimbursed the Company for $23,175 in costs incurred in connection with negotiating the lease arrangement, contributed $100,000 toward the Company's cost of constructing improvements to its Chatsworth property, and agreed to loan the Company up to $288,000 at an annual interest rate of 10% to fund additional improvements. At June 30, 1997, approximately $187,000 of the available loan commitment had been utilized. The loan is being amortized monthly (with level principal payments) over 5 years, with the monthly payment netted against the lessee's rent (See Note 4).
18. SUBSEQUENT EVENT
The Company had a time and materials contract with a prime contractor to produce squib switches. In September 1995, the contractor canceled the balance of the contract for convenience. Total revenue previously recognized under the agreement (which included a 15% profit guarantee) was approximately $239,000. Discussions have continued since that time in an attempt to reach a negotiated settlement for additional amounts due the Company under the agreement. The Company recorded an estimated trade account receivable for $75,000 (including $30,000 in settlement costs) in the financial statements at June 30, 1996. Subsequent to June 30, 1997, an agreement was reached, and the prime contractor paid the Company $183,765, representing agreed-upon consideration in exchange for settlement and release of all the Company's claims arising from the contract termination. Accordingly, the Company booked an additional trade account receivable for $108,765 (including another $26,607 in settlement costs) at June 30, 1997.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information as of June 30, 1997 is provided with respect to each director:
- -------------------
(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.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
The names, ages and positions of all of the executive officers of the Company for the year ended June 30, 1997 are listed below, along with their business experience during the past five years. Officers are appointed annually by the Board of Directors at the meeting of Directors immediately following the annual meeting of the shareholders. There are no arrangements or understandings between any officer and any other person pursuant to which the officer was selected.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table provides an overview of each item of compensation paid, earned, or awarded to the CEO and the other most highly paid executive officers of the Company for the fiscal years ended June 30, 1997, 1996, and 1995:
No other executive officers were employed by the Company at June 30, 1997, 1996, or 1995.
*Currently employed under a three year executive employment agreement expiring April 30, 1998, calling for an annual base salary of $150,000 during the term of the agreement. Entitled to a minimum of three weeks vacation per year, along with Company-paid benefits for both self and dependents under any Executive Benefit Plan.
(1) Includes medical-related benefits of $9,981. (2) Includes medical-related benefits of $5,742. (3) Includes consulting fees of $9,500, director fees of $4,000, and medical-related benefits of $2,783 (4) Includes medical-related benefits of $2,242. (5) Includes medical-related benefits of $18,130. (6) Includes medical-related benefits of $19,445. (7) Includes medical-related benefits of $501 and a retirement gift of $1,524. (8) Includes medical-related benefits of $3,073.
ITEM 11. EXECUTIVE COMPENSATION (Continued)
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.
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:
(*) Not eligible for plan participation due to plan benefit freeze at August 31, 1992.
(**) Beneficiary (wife), a current director, is receiving $48,184 per year for life, based on 100% joint and survivor factors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act requires the Company's executive officers, directors, and persons who own more than ten percent of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Executive officers, directors, and greater-than-ten percent stockholders are
ITEM 11. EXECUTIVE COMPENSATION (Continued)
required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it and written representations from certain reporting persons that have complied with the relevant filing requirements, the Company believes that during the year ended June 30, 1997, all relevant Section 16(a) filing requirements were complied with.
Compensation of Directors
During the year ended June 30, 1997, the Board of Directors met three times. The Company paid director fees totaling $10,000, which consisted of $3,000 each to Glenn Linderman, Rodica Patrichi, and Ileana Wachtel, respectively, and $1,000 to Barry Bartholomew, who resigned as a Company director in July 1996. During the year ended June 30, 1996, the Board of Directors met four times. The Company paid director fees totaling $16,000, which consisted of $4,000 each to Barry Bartholomew, Glenn Linderman, Rodica Patrichi, and Ileana Wachtel, respectively. During the year ended June 30, 1995, the Board of Directors met four times. The Company paid director fees totaling $13,000, which consisted of $5,000 to Barry Bartholomew, $4,000 to David Wachtel (as noted above), $2,000 to Glenn Linderman, and $1,000 each to Ileana Wachtel and Rodica Patrichi. In addition, Glenn Linderman provided financial consulting services to the Company in the amount of $9,281.
Compensation of Executives
For information concerning the employment agreement of Chief Executive Officer, David Wachtel, see Note 12 to the Financial Statements included in Item 8.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At September 26, 1997 there were six persons known to the Company who owned of record or beneficially as much as 5% of the outstanding shares of its voting common stock, $.25 par value. The following table reflects these holdings, as well as the number of the Company's common shares owned directly or indirectly by each of the Company's directors, by each of the officers specified in the summary compensation table above, and by all directors and officers as a group. In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided; in computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person's actual voting power at any particular date.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (Continued)
(1) Ileana Wachtel is the wife of David Wachtel, the CEO of Networks Electronic Corp.
(2) For each of these individuals, approximately 156,076 shares (166,076 shares for Ileana Patrichi) are being held in the Mihai D. Patrichi trust (a total of 790,383 shares) which currently has voting power over the holdings and in which Ileana Wachtel and Rodica Patrichi are co- trustees.
(3) Includes shares of common stock held by the Mihai D. Patrichi Trust and controlled by trustees including Mr. Wachtel's spouse, Ileana Wachtel, a beneficiary.
(4) Based 1,671,221 shares of common stock outstanding as of September 26, 1997.
(5) Rodica Patrichi is a co-trustee along with an unrelated party of a trust that has voting power of these shares.
As of September 26, 1997, there were no required filings under Section 16 of the Exchange Act of 1934 with respect to changes in beneficial ownership of the Company's common stock occurring during or subsequent to the year ended June 30, 1997, which have not been reported on Forms 3, 4, or 5, respectively.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) In August 1996, the Company received a $100,000 loan from its Vice President, Mohammad Tabassi, secured by accounts receivable, with interest payable monthly at an annual rate of 13%.
(b) During the year ended June 30, 1996, the Company's outstanding advances previously made to Mr. Patrichi (totaling $27,228) were repaid by the Mihai D. Patrichi Trust. Interest earned (generally at 7% per annum) on the officer receivable amounted to $0, and $1,781 for the fiscal years ended June 30, 1996 and 1995, respectively.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following financial statements are included in Part II, Item 8:
All other schedules are omitted because they are not required, inapplicable, the information is otherwise shown in the financial statements or notes thereto.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the Registrant during the last quarter of the period covered by this report.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS Years Ended June 30, 1997, 1996, and 1995
- ------- (1) Uncollectible accounts receivable written off
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Networks Electronic Corp.
(Registrant) has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
NETWORKS ELECTRONIC CORP.
By: ------------------------------------
DAVID WACHTEL Chairman of the Board, Chief Executive Officer, President, Chief Financial Officer
Date: ------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Director Date: ---------- - ---------------------- David Wachtel
Director Date:----------- - ---------------------- Glenn Linderman
Director Date:----------- - ---------------------- Ileana Wachtel
Director Date:----------- - ---------------------- Rodica Patrichi