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 engineers and representatives 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
Its 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 and Lockheed Martin. Only the Department of Defense (33%) and Industria Engineering (12%) contributed 10% or more of the Bearing Division's revenues during the fiscal year ended June 30, 1996.
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: Hughes Missile Systems and Textron. These customers accounted for 33%, and 18%, respectively, of the Ordnance Division's revenues for the fiscal year ended June 30, 1996. 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, 1996 was approximately $1,350,000, compared with $2,800,000 at June 30, 1995. The backlog at September 27, 1996 has increased to approximately $2,000,000.
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 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. Throughout the past year, the Company has increased its research and development efforts in both divisions. The estimated amount spent during the years ended June 30, 1996, 1995, and 1994 on such activities was approximately $97,000, $2,000, and $24,000, 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, 1996, the Company had approximately 64 employees, as compared with 59 at June 30, 1995.
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 Rodica Patrichi (Mihai Patrichi's wife). 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 On 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.
ITEM 2.

ITEM 2. PROPERTIES The Company's administrative, engineering and manufacturing activities are all performed from an 85,000 square foot building located on 7.25 acres of land in a light industrial area of Chatsworth, California. Currently approximately 50,000 square feet are under renovation. Such facilities are adequate for the Company's current manufacturing needs. Subsequent to June 30, 1996, the Company has leased approximately 35,000 square feet of the premises under renovation to a third party. See Note 17 of the notes to the Financial Statements. In January 1996, the Company sold its residential condominium in Orlando, Florida (which was not used for business).
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. - -----------------------------------------------------------------
*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 were declared during any of the years ended June 30, 1996, 1995, and 1994. 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)
No cash dividends have been paid or accrued during the past five years.
* Restated to reflect a 5% common stock dividend issued during the year ended June 30, 1993.
- ----- 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
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 continues to attempt 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. Although the interest rate environment remains favorable, interest expense may increase in the coming fiscal year, as the Company's short-term borrowing needs are also expected to increase.
Despite a limited research and development budget ($97,000 in 1996, and $2,000 in 1995) the Company has developed new products in both divisions. The Bearing Division has been actively involved in designing, and recently qualified new bearings for a Space Shuttle program. A number of new items have been designed for a major aircraft manufacturer and the Company has been in conversation with other OEMs in hopes of selling its parts directly to them.
Even though the Ordnance Division was adversely affected by a convenience cancellation, it had significant success in qualifying new items. Over twenty new switches were qualified, a redesigned cord cutter was qualified and a new piston actuator was designed and qualified for another prime contractor.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company has accomplished an overall streamlining, and has improved efficiency in its operations. A combination of new recruits and longer-term employees rising through the ranks into management positions has allowed the Company to develop a strong sense of cohesiveness, both internally and with its existing customers. This "teaming concept," combined with improved automation, is central to management's effort to provide value-added services to its customer base.
Although the Company's backlog at June 30, 1996 (totalling about $1,350,000) was diminished compared with the previous year, it is important to note that a significant portion of the 1995 backlog was delinquent. In working with the government on the PROCAS program, the Company has been successful in its efforts to reduce its delinquencies.
Furthermore, there has been a recent increase in orders. Backlog has increased by more than 40% (about $600,000) since year-end. The Company remains committed to increasing its bookings and, in this regard, it has hired an established sales representative, and continues to work with its distributors and OEMs to help it secure new orders.
Another positive note relates to the rental of space in the north wing of the Company's Chatsworth facility. The Company (lessor) has finalized a long-term lease agreement which should net the Company more than $210,000 annually in rental income for at least the next five years.
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 of $172,000, along with an increase in the current portion of the Company's accrued pension liability of $160,000 in the current year. This increase was a result of the Company having received a waiver by IRS of the minimum funding standard for the year ended June 30, 1995. Correspondingly, the Company's current ratio shrank from 2.3 to 1.7. Excluding inventory, the ratio declined from 1.1 to 0.8. These trends reflect the fact that the Company is having some temporary difficulty in meeting its short-term cash obligations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
The financing for the Company's rental project (as discussed above) is particularly favorable. The Community Redevelopment Agency ("CRA") has provided $1,300,000 for the project. This is 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 is a grant and will not have to be paid back. This financing arrangement will save the Company approximately $100,000 per year over the next twenty-five years as compared to a conventional loan. In addition, the tenant will directly contribute $100,000 and lend the Company up to $288,000 (at 10% per annum) to pay for the necessary construction improvements.
With the CRA loan and grant commitment and the recent signing of its tenant lease agreement at its Chatsworth facility, management believes that the Company can generate enough earnings to meet medium term financing needs. Management is seeking to refinance its mortgage and possibly establish a line of credit in the near future to support current operating requirements. There can however, be no assurances that management will be successful in its efforts.
Factors That May Affect Future Results and Financial Condition
Potential risks and uncertainties that could affect the Company's future operating results and financial condition include, without limitation, the following factors:
History of Losses; Variability of Operating Results
The Company is in the process of emerging from bankruptcy protection. Despite historical losses, the Company experienced its first operating profit in four years during the year ended June 30, 1995, in the amount of approximately $47,000, and a second consecutive operating profit during the year ended June 30, 1996 in the amount of approximately $175,000. The Company's revenues and operating results have varied substantially from period to period. There can be no assurance that the Company will be profitable in the future or that future revenues and operating results will not also vary substantially. New management has expended and continues to expend substantial time and resources in attempting to resolve problems arising from the Company's financial condition and to restore confidence in the Company. Although the research and development expenditures of the Company have increased, its financial condition limits its ability to engage in large scale research and development. Future revenues and profits, if any, will depend upon various factors,
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)
including, but not limited to, management's ability to restore confidence in the Company, continued market acceptance of the Company's current products, the ability of the Company to develop distribution and marketing channels and develop and introduce new products or to develop new markets for its existing products and the successful implementation of its planned marketing strategies. If the Company is not able to achieve its operating objectives, the Company may find it necessary to reduce its expenditures for sales, marketing, and research and development, or undertake other such actions as may be appropriate, and may be otherwise unable to achieve its goals or continue its operations.
Competition
Certain of the Company's existing and potential competitors have substantially greater financial, marketing and other resources than the Company. These competitors have also been able to market their products successfully to the Company's existing and potential customers in the defense and aerospace industries. Increased competition could result in price reductions, reduced margins and loss of market share, all of which could materially adversely affect the Company. The Company has determined to follow a strategy of continuing product development to the extent permitted by the financial resources of the Company to protect its competitive position to the extent practicable. There can be no assurance that the Company will be able to maintain its position in the field or continue to compete successfully against current and future sources of competition or that the competitive pressures faced by the Company will not adversely affect its profitability or financial performance.
Technological Change
The markets for specialized bearings and ordnance products are characterized by advances in technology. Accordingly, the Company's ability to compete in those markets may depend in large part on its success in enhancing its existing products and in developing new products. There can be no assurance that the Company will succeed in such efforts or that any of its products will not be rendered obsolete or uneconomical by technological advances made by others.
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)
Dependence on Key Customers
During fiscal years 1996, 1995 and 1994, sales to the Department of Defense by the Company constituted 20%, 29% and 24%, respectively, of the Company's sales. Sales to Hughes Missile Systems accounted for approximately 13% of sales in 1996. Sales to Eagle-Picher Industries accounted for approximately 17% and 18% os sales in 1995 and 1994, respectively. Industria Engineering accounted for approximately 10% of sales in 1994. A significant decline in sales of any of these key customers could adversely affect the Company.
Dependence Upon Defense Industry
The Company has been supplying components for United States defense programs for over forty years. Reliance upon defense programs has certain inherent risks, including the uncertainty of economic conditions, dependence on Congressional appropriations and administrative allotment of funds, changes in governmental policies that may reflect military and political developments and other factors characteristic of the defense industry. The Company is unable to predict the impact on defense appropriations for programs in which the Company's products are incorporated.
Product Liability and Risk Management
As a manufacturer of ordnance products and specialized bearings for the defense and aerospace industries, the Company is subject to the risk of claims arising from injuries to persons or property. The Company maintains general liability insurance but does not maintain product liability insurance. Although the Company has instituted quality control procedures that it believes produce products of the highest quality, the Company may become subject to future proceedings alleging defects in its products.
No Earthquake Insurance
The Company's principal executive offices are located in a facility owned by the Company in Chatsworth, California - an area which was damaged in the 1994 Northridge, California earthquake. The Company does not currently carry insurance against earthquake-related risks. The Company suffered approximately $1.2 million in damages, costs and renovations to its facility resulting from that earthquake, and recovered only approximately $384,000 from insurers as a result of insured flood damage caused by the earthquake.
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)
Key Personnel
The Company's success is highly dependent on the efforts and abilities of its Chairman, David Wachtel and a number of key employees. The loss of services of Mr. Wachtel or these key employees could have material adverse effect on the Company.
Control of Company
The Mihai D. Patrichi Trust (the "Trust") presently owns of record approximately 47.3% of the Company's outstanding voting stock. Accordingly, the Trust is able to control the election of a majority of the directors, and, therefore, the business and affairs of the Company and approve or disapprove any corporate action submitted to a vote of the Company's shareholders, in each case regardless of how other shareholders of the Company may vote. The provisions of the Trust provide that the trustees act in a prudent manner to dispose of the Trust's interest in the Company. In the matter of In Re: Mihai D. Patrichi Trust (Case No. BP03796), now pending in the Superior Court of California for the County of Los Angeles, Michael Patrichi, one of the beneficiaries of the Trust, is attempting to remove and replace the co-trustees of the Trust, Ileana Wachtel and Rodica Patrichi. Sale by the Trust of its interest in the Company would effect a change in the control of the Company. Sales of substantial amounts of Common Stock in the public market under Rule 144 or otherwise, or even the potential for such sales, could adversely affect the prevailing market prices for the Common Stock and could impair the ability to raise capital through the sale of its equity securities.
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-
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)
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 LAT failures resulting from human error or technical problems. Occurrence of LAT 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 certain categories of waste, or mandates regarding the disposal of hazardous waste generated by the Company's operations. Because of heightened public concern, companies in the metals plating business, including the Company, may become subject to judicial and administrative proceedings involving federal, state or local agencies. These governmental agencies may seek to impose fines on the Company or to revoke or deny renewal of the Company's waste generation and disposal permits or licenses for violations of environmental laws or regulations or to require the Company to remediate environmental problems resulting from its operations, all of which could have a material adverse effect on the Company. The Company may also be subject to
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)
actions brought by individuals or community groups in connection with the permitting or licensing of its operations, any alleged violations of such permits and licenses, or other such matters.
Premises Build-out
The Company has commenced retrofitting and repairing of the north building of its Premises which was damaged in the Northridge Earthquake. This project is being funded by loans and grants from the Community Redevelopment Agency of the City of Los Angeles. The Company has entered into a construction contract to accomplish the retrofit and repair of the north building and anticipates that the funding procured from the Community Redevelopment Agency will be sufficient to fund all anticipated costs under the contract. However, the Company will be required to fund any unanticipated cost overruns from operating reserves or with additional financing. There can be no assurance that additional financing would be available on terms acceptable to the Company. If the Company is required to fund construction with its cash reserves, resulting cash constraints could limit the Company's ability to improve the remainder of its plant and equipment and to fund other operating requirements of the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
1995 AND 1994
Results of Operations
The Company's sales improved by approximately 8% to $3,007,000 during the year ended June 30, 1995 from $2,783,000 in 1994. Approximately $1,863,000 (62%) of sales for the 1995 year occurred during the six month period between January 1, 1995 and June 30, 1995 (corresponding to the arrival of a new management team), which represented an increase of approximately $620,000 from the comparable six month period of the prior year.
The Company still felt the effects of cutbacks in defense spending and in the aerospace industry. In spite of these pressures, the Company's combined backlog increased about 40% to approximately $2,800,000 at June 30, 1995 from $2,000,000 at June 30, 1994, boosted in large measure by management's efforts to revive past relationships.
The Company continued with its austerity program in compliance with its chapter 11 reorganization plan, reducing its selling, general, and administrative expenses by approximately 51% ($560,000) from amounts incurred in the 1994 year. Almost $400,000 of this reduction reflected both a significant decline in staff payroll expenses and considerable savings in legal costs due to the winding down of court filings related to the Company's chapter 11 status.
A series of non-recurring income items contributed approximately $1,700,000 to pre-tax income during 1995. Specifically, the Company had a lawsuit judgement reduced from approximately $820,000 to $53,000 and settled other litigation at or below expected amounts. The Company sold raw land in Palm Desert for approximately $581,000, resulting in a pre-tax profit of about $537,000, and its insurance carrier agreed to settle claims arising from the Northridge Earthquake for approximately $385,000.
Interest expense was approximately 6% lower in 1995 than that of the previous year. A reduction in average aggregate borrowings was partly offset by a higher effective interest rate on the Company's mortgage note.
Liquidity and Capital Resources
The Company had working capital of approximately $1,128,000 at June 30, 1995 as compared to a deficit of $1,004,000 at June 30, 1994, which represented an improvement of $2,132,000. The improvement was primarily due to approximately $1,700,000 in non-recurring items, along with the reclassification of approximately $383,000 of the Company's pension plan obligation as a long-term liability.
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, 1996 and 1995 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, 1996. 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, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1996, 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 20, 1996 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, 1996, 1995, and 1994
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, 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.
In the fiscal year ended June 30, 1994, the Company recognized an additional minimum pension liability in the amount of $190,085 by increasing 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.
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)
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 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," will be adopted by the Company during the year ended June 30, 1997 as required by this statement. When adopted, SFAS No. 123 will not have any effect on the Company's financial position or results of operations, but may require the Company to provide expanded disclosure.
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, totalled 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 Notes 5 and 16).
3. INVENTORIES
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 10.50%), $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. Of the total commitment, 15% is a grant and 85% is an interest-free loan to be repaid over 20 years, beginning 5 years from the date of the loan. A predevelopment loan agreement was entered into in June 1995 in the amount of $98,925, to pay the Company's costs incurred in preparing construction drawings and related documents, as well as in obtaining necessary approvals and permits. $19,662 of these costs were incurred by June 30, 1995.
Total predevelopment costs were rolled over into the finalized loan package when the Agency Loan Agreement was signed in April 1996.
Of the $800,000 initial commitment, $220,833 had been expended at June 30, 1996, leaving an unutilized balance of $579,167. Of the disbursed funds at June 30, 1996, $33,125 (15%) was recognized as forgiveness of debt income, and the balance of $187,708 as long-term debt.
5. CREDIT AGREEMENTS (Continued)
Subsequent to June 30, 1996, the CRA approved an additional funding amount of $500,000, which was amended onto the initial Agency Loan Agreement, thereby bringing the total CRA commitment to $1,300,000 (of which $195,000 is a grant).
The Company's average aggregate borrowings were $2,047,000, $2,217,000, and $2,658,000, at weighted average interest rates of 10.7%, 10.7%, and 9.6% in 1996, 1995, and 1994, respectively. The average aggregate borrowings and weighted average interest rate computations include a note payable to a related party during the years ended June 30, 1996 and 1995, respectively. Interest paid amounted to $225,301, $242,196, and $252,640 during the fiscal years ended June 30, 1996, 1995, and 1994, respectively.
6. NOTE PAYABLE, RELATED PARTY
In January 1995, the Company received a $152,000 loan from the estate of its former president and chief executive officer, secured by specific machinery and equipment. The loan is being repaid in equal monthly principal installments of $4,222 (plus interest at 10%) over a three year period. A loan fee of $2,000 was charged to consummate the transaction, and interest paid on the note during the years ended June 30, 1996 and 1995 amounted to $10,947 and $6,230, respectively. The outstanding loan balance at June 30, 1996 was as follows:
7. STOCK OPTION PLAN
Stock Option Plan
The Company has a stock option plan, as amended October 15, 1974, (the "Stock Option Plan") 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 the Stock Option 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 the Stock Option Plan to an officer and a director, exercisable at a price of $1.00 per share. The officer's stock options have since expired due to cessation of employment. The director's options, if not exercised, will expire on October 22, 1996, due to his resignation from the board in July 1996.
The Company's Board of Directors has adopted the 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 will be submitted to the shareholders of the Company for approval at the next Annual Meeting of Shareholders. As of September 27, 1996 no options have been granted under the 1996 Plan.
Options Granted Outside of the Company's Stock Option Plan
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, at the year-end balance sheet date, the Company recorded a stock subscription receivable for $14,063. A total of 1,000 stock options awarded to two of the five key employees have expired due to cessation of employment; the remaining 1,500 stock options will fully vest after three years of continuous employment. All of these options 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 (refunded) amounted to $9,500, $800, and $(34,814) during the fiscal years ended June 30, 1996, 1995, and 1994, 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 1996, 1995, and 1994 is as follows:
At June 30, 1996 the Company had an unused federal net operating loss carryforward of approximately $660,000, with $630,000 expiring in the year ending June 30, 2009 and the balance of $30,000 in the year ending June 30, 2011. Also at June 30, 1996, the Company had an unused California net operating loss carryforward of approximately $880,000, with $520,000 expiring in the year ending June 30, 1998, $10,000 expiring in the year ending June 30, 2001,and the balance of $350,000 expiring in the year ending June 30, 2004.
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 a California tax credit carryover of approximately $15,500, with $4,000 expiring in the year ending June 30, 2006, $8,500 expiring in the year ending June 30, 2007, and the remaining $3,000 expiring in the year ending June 30, 2111.
Significant components of the Company's deferred tax liabilities and assets at June 30, 1996 and June 30, 1995 are:
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 $32,311, $24,733, and $10,628 for the years ended June 30, 1996, 1995, and 1994, 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, 1996, 1995, and 1994 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, 1996 and 1995 through the recording of an increase to stockholders' deficiency in assets in the amount of $240,732 and $112,671, respectively.
The expected long-term rate of return on plan assets was 9% for both 1996 and 1995. The discount rate used in determining the actuarial present value of accumulated benefit obligations was 8% for both 1996 and 1995. There was no rate of increase in future compensation levels at both June 30, 1996 and June 30, 1995 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 $25,000 was made in March 1996 to prevent the assessment of a federal excise tax and further penalties for the plan year ended June 30, 1994. Additionally, the IRS granted the Company's request for waiver of the minimum funding standard for the plan year ended June 30, 1995. The waiver allows for the deferral of approximately $240,000 in plan contributions (plus interest), which are now to be paid over a statutory five year period, beginning with the plan year ended June 30, 1996.
In order to meet the current year's minimum funding requirement, a balloon payment of approximately $160,000 (including approximately $59,000 owed as a result of the June 30, 1995 funding waiver) will be required in March 1997. The total 1995/96 minimum annual funding requirement is approximately $183,000, which increased approximately $19,000 because the mortality assumption table was changed from the 1971 to the 1983 year. However, future annual minimum contributions should decrease significantly over the next several years, due to the expiration of the five year amortization period for actuarial plan losses sustained in prior years.
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.
* 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 AGREEMENTS, 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 Company previously had an employment agreement with Mihai D. Patrichi, the Company's Founder, and former President and Chief Executive Officer, who passed away in November 1994. The agreement provided for minimum compensation of $180,000 per year until the end of Mr. Patrichi's life. However, effective September 1994, Mr. Patrichi took a salary reduction to $153,000 per year as a condition of the Company's chapter 11 reorganization plan. The Board of Directors has also agreed to pay all medical and dental insurance premiums for its corporate officers, plus the deductible expense portions operative under the respective plans.
During the year ended June 30, 1996, the Company's outstanding advances previously made to Mr. Patrichi (totalling $27,228) were repaid by the Mihai D. Patrichi Trust. Interest earned (generally at 7% per annum) on the officer receivable amounted to $0, $1,781, and $1,773 for the fiscal years ended June 30, 1996, 1995, and 1994, respectively.
13. MAJOR CUSTOMERS
Sales to the Department of Defense accounted for approximately 20% of sales in 1996, 29% of sales in 1995, and 24% of sales in 1994. Sales to Hughes Missile Systems accounted for approximately 13% of sales in 1996. Sales to Eagle-Picher Industries accounted for approximately 17% and 18% of sales in 1995 and 1994, respectively. Industria Engineering accounted for approximately 10% of sales in 1994. No other customer had sales exceeding 10% of total revenue during the years ended June 30, 1996, 1995, and 1994, 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.
14. GAINS AND LOSSES ON DISPOSITIONS OF PROPERTY (Continued)
In September 1994, the Company sold its Palm Desert property, consisting of two acres of unimproved land, for approximately $580,603 (net of $34,397 in fees and expenses), recognizing a gain of approximately $537,007 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 CLAIMS
The Company has a claim pending with its insurance company pertaining to an accident occurring at the plant in February 1996. The claim seeks reimbursement for electrical repairs required to restore power to the facility and for loss of business due to the temporary shut-down of the plant. The insurance company has not, as yet, specifically agreed to pay for any of these costs. The matter should be resolved in the December 1996 quarter. The Company also has a claim pending with its insurance company regarding a theft of raw material which took place in June 1996. During the year ended June 30, 1995, the Company recorded income from its insurance carrier totalling $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. No receivable was previously booked at June 30, 1994, due to the fact that covered amounts were not quantifiable or estimable until midway through the year ended June 30, 1995.
16. LITIGATION
During the previous several years, the Company 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.
16. LITIGATION (Continued)
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 accrued interest at an annual rate of 4%. The Company's insurance carrier may participate to cover all or part of this liability.
Regarding the other claims, negotiated settlements were reached. Networks agreed to settle these cases by making payments totalling $40,000 over a period of one to three years. The balance remaining on these claims at June 30, 1996 was approximately $14,000.
In another matter, the Company was the plaintiff in a suit against a prime contractor. This case was also settled, resulting in a pre-tax gain to the Company of $100,000 for the year ended June 30, 1994.
The Company, during its normal course of business, may be subjected from time to time with legal proceedings against it. Management does not expect that the ultimate outcome of any current claims will have a material adverse effect on the Company's financial statements.
17. SUBSEQUENT EVENTS
(a) In August 1996 the Company received a $100,000 loan from its Vice President, secured by accounts receivable. The note matures on September 1, 1997, with interest payable monthly at an annual rate of 13%.
(b) 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 over the past year in an attempt to reach a negotiated settlement for additional amounts due the Company under the agreement. The contractor has made a proposal to pay the Company a total of approximately $45,000 plus settlement costs of approximately $30,000. The $75,000 has been recorded as a trade account receivable in the financial statements at June 30, 1996. Management is hopeful of obtaining an additional amount upon final resolution.
(c) The Company has recently negotiated the lease of approximately 35,000 square feet of its Chatsworth facility. The lease agreement calls for monthly base rent to be approximately $17,850, with 2 months free and a cost of living increase every 18 months over the initial 62 month period. The lessee will have an option to extend the original lease term for an additional 5 years. Additionally, the lessee will contribute a nonrefundable deposit of $100,000 toward the Company's cost of constructing improvements to its Chatsworth property and will loan the Company up to $288,000 at an annual rate of 10% to fund additional improvements. The loan will be amortized monthly over 5 years, with the monthly payment netted against the lessee's rent.
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, 1996 is provided with respect to each director:
(1) Directors serve until the next annual meeting of stockholders and until their successors are elected. However, Mr. Bartholomew resigned in July 1996.
(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, 1996 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, 1996, 1995, and 1994:
No other executive officers were employed by the Company at June 30, 1996, 1995, or 1994.
* 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 $5,742. (2) Includes consulting fees of $9,500, director fees of $4,000, and medical-related benefits of $2,783. (3) Includes medical-related benefits of $18,130. (4) Includes medical-related benefits of $19,445. (5) Includes medical-related benefits of $68,576 and other personal benefits of $13,453. (6) Includes medical-related benefits of $501 and a retirement gift of $1,524.
ITEM 11. EXECUTIVE COMPENSATION (Continued)
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
(1) A total of 10,500 stock options granted in previous years expired due to cessation of employment.
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 , 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 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
ITEM 11. EXECUTIVE COMPENSATION (Continued)
from certain reporting persons that they have complied with the relevant filing requirements, the Company believes that during the year ended June 30, 1996, all relevant Section 16(a) filing requirements were complied with.
Compensation of Directors
During the year ended June 30, 1996, the Board of Directors met four times. All of the Company's directors attended each of the meetings. The Company paid fees totalling $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 fees totalling $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. During the year ended June 30, 1994, fees paid totalled $12,000, consisting of $6,000 each to Barry Bartholomew and David Wachtel. Barry Bartholomew resigned as a director of the Company effective July 22, 1996.
Compensation of Executives
For information concerning employment agreement of Chief Executive Officer, David Wachtel see Note 12 to Financial Statements included in Item 8.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At September 27, 1996 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) Does not include 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 1,671,221 shares of common stock outstanding as of September 27, 1996, plus 10,000 exercisable stock options.
(5) Includes 10,000 shares issuable upon exercise of currently exercisable options.
(6) Ileana Wachtel and Rodica Patrichi are co-trustees along with an unrelated third party of a committee which has voting power over these shares.
(7) Includes 10,000 shares of common stock which are exercisable or which will become exercisable within 60 days of September 27, 1996.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) During the year ended June 30, 1996, the Company's outstanding advances previously made to Mr. Patrichi (totalling $27,228) were repaid by the Mihai D. Patrichi Trust. Interest earned (generally at 7% per annum) on the officer receivable amounted to $0, $1,781, and $1,773 for the fiscal years ended June 30, 1996, 1995, and 1994, respectively.
(b) During the year ended June 30, 1994, the Company's previous president charged the Company $3,000 for the use of space in his home to exclusively conduct Company business.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
(c) In August 1996 the Company received a $100,000 loan from its Vice President, Mohammed Tabassi, secured by accounts receivable. The note matures on September 1, 1997, with interest payable monthly at an annual rate of 13%.
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, or 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, 1996, 1995, and 1994
- ------- (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
DAVID WACHTEL Chairman of the Board, Chief Executive Officer, President, Chief Financial Officer
Date: 10/14/96 - ------------------------------------------------------------------------------- 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:
David Wachtel Date: 10/14/96 - ---------------------- David Wachtel
Glenn Linderman Date: 10/14/96 - ---------------------- Glenn Linderman
Ileana Wachtel Date: 10/14/96 - ---------------------- Ileana Wachtel
Rodica Patrichi Date: 10/14/96 - ---------------------- Rodica Patrichi