UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From ________________ to ________________
COMMISSION FILE NUMBER 0-27748
OCAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4544569
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14538 KESWICK STREET
VAN NUYS, CALIFORNIA 91405
(Address of principal executive offices)
Registrant's telephone number, including area code: (818) 782-0711
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter periods that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's
knowledge, in definitive proxy information statements
incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
As of February 28, 1997, the aggregate market value of the
voting stock held by non-affiliates of the registrant, based
upon the last reported sales price of the Common Stock as
reported by Nasdaq, was approximately $8,140,000. Shares of
Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
There were 5,780,000 shares of the Registrant's Common Stock
outstanding as of February 28, 1997.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of the Registrant for
the Registrant's 1997 Annual Meeting of Stockholders, which
definitive proxy statement will be filed with the Securities and
Exchange Commission not later than 120 days after the
Registrant's fiscal year end of December 31, 1996, are
incorporated by reference into Part III.
<PAGE>
PART I
This Report contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995
which involve risks and uncertainties. The actual results of
Ocal, Inc. (together with its wholly-owned subsidiaries, "Ocal"
or the "Company") could differ materially from those anticipated
in these forward-looking statements as a result of certain
factors, including, without limitation, competition, product
pricing and gross margin, nominal growth in the industry,
dependence on suppliers, and risks due to potential future
acquisitions, as well as other factors set forth in this Form 10-K
and the Company's other Securities and Exchange Commission
filings. See Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
ITEM 1. BUSINESS.
GENERAL
Ocal, Inc., a Delaware corporation, is a leading domestic
manufacturer of polyvinyl chloride ("PVC") coated rigid steel
conduit ("PVC-coated conduit"), elbows, and fittings. The
Company's products are primarily used in the new construction
and maintenance of plants operating in highly corrosive
environments which require the highest level of protection of
electrical wiring systems against corrosion and physical damage,
such as sewage treatment, water treatment, electric power, oil
refining, chemical and pharmaceutical, pulp and paper, and food
processing plants.
INDUSTRY OVERVIEW
Market Demand. The demand for conduit stems from the need to
comply with building codes in the United States which require
protection for electrical wiring systems. Alternative forms of
protection include PVC-coated conduit, rigid steel conduit
("RSC"), plastic conduit, aluminum conduit, cable tray (metal or
fiberglass trays in which wire is laid, but not enclosed), pre-
wired armored cable integrating the functions of electrical wire
and conduit into one system, thinner-walled versions of metal
conduit called intermediate metallic conduit ("IMC") and
electrical metallic tubing ("EMT"). Of the various commercially
available forms of protection for electrical wiring systems, PVC-
coated conduit is the most expensive. It is also the most
durable in corrosive environments due to the combination of the
corrosion protection of PVC coating and galvanizing with the
physical protection of steel pipe. Although alternative
products generally have an initial product and installation cost
advantage over PVC-coated conduit, the Company's PVC-coated
conduit compares favorably on a life-cycle cost basis in
corrosive environments.
Sales and Distribution in the Electrical Industry. The sales
and distribution structure in the electrical industry consists
of independent sales representatives, distributors, electrical
contractors, end users and project engineers. End users include
industrial companies such as International Paper Company, Exxon
Corporation, Georgia Pacific Corporation, Weyerhaeuser Company
and Merck & Company, Inc. When an end user is planning to build
a new plant, it hires an engineering firm to design, among other
things, the infrastructure and electrical system for the plant.
The end user will then hire an electrical contractor through a
bidding process. Each bidding electrical contractor generally
requests one or more distributors to price the components needed
to construct the electrical system, and the distributors bid for
the contractor's order. In the electrical industry,
substantially all sales of conduit, elbows, fittings and related
products are made by the manufacturer to the distributor, who in
turn sells the products to the contractor or end user.
BUSINESS STRATEGY
The Company's business strategy is designed to increase
penetration of its traditional corrosive environment market
while expanding into other markets where the life-cycle cost and
additional features of its products provide a cost-effective,
efficient solution to customer needs. The Company seeks to
implement this strategy based upon the following strengths:
Industry Leadership. The Company believes it is the nation's
leading manufacturer of PVC-coated conduit, elbows, and fittings.
The Company's total sales for the year ended December 31, 1996
were $25.0 million, which management believes are the largest
sales of any domestic manufacturer of PVC-coated conduit in the
industry.
Marketing Focus. The Company focuses its marketing on
engineers and end users to educate them regarding the
technological advantages and long-term savings of PVC-coated
conduit as compared to alternative conduit products, and to
illustrate the features of the Company's products which its
competitors do not provide. The Company's goal is to have PVC-
coated conduit generally, and, where possible the features of
the Company's products in particular, specified by engineers and
end users in engineering designs for particular projects.
Leadership in product quality. The Company's products have
protection features which its competitors do not provide. The
Company believes it is the only manufacturer of conduit that hot
dip galvanizes its own conduit after threading, increasing the
corrosion protection and life of electrical conduit systems. In
addition, the Company double coats its fittings with both blue
urethane and PVC, providing additional protection unavailable
elsewhere in the industry.
Low-cost, proprietary manufacturing. Management believes the
Company's proprietary manufacturing technology used in its
equipment and processes allows it to be one of the lowest-cost
producers in the industry. Much of the machinery used in the
Company's manufacturing process was designed and constructed by
company personnel with minimal capital investment, labor, and
material costs. In addition, because the Company galvanizes its
own pipe, and purchases ungalvanized pipe in large volumes, the
Company is often able to negotiate advantageous purchase prices.
Comprehensive customer service. The Company provides a broad
range of customer support services, including assistance from
senior Company employees with respect to installation and
maintenance of conduit, free installation training, and a toll-
free installation hotline.
Expansion into related or complementary businesses. The
Company intends to explore expansion into related or
complementary businesses internally or through acquisitions,
building on its expertise in marketing and manufacturing in the
electrical conduit industry.
PRODUCTS
The Company sells and manufactures a full line of PVC-coated
conduit, elbows, fittings, RSC, PVC-coated aluminum conduit and
uncoated conduit elbows, all of which range in diameter from 1/2"
to 6", as well as installation tools. The following is a more
detailed description of the product lines the Company offers.
Rigid Steel Conduit is the heaviest wall conduit in use in
the world and provides the highest level of physical protection
commercially available for electrical systems. It can be used
underground, in concrete, and wherever a high level of physical
protection of electrical wiring is required. The Company
believes it is the only manufacturer producing this conduit that
hot dip galvanizes the threads together with the rest of the
pipe. The RSC manufactured by the Company is threaded at both
ends, is 10' in length, and overall wall thicknesses range from
.109" to .280". The Company is one of the few suppliers of 6"
diameter RSC and PVC-coated conduit made from domestically
produced steel pipe. Some of Ocal's customers for this product
need domestically produced 6" conduit in order to comply with
the requirements of projects funded by the federal government.
All federally-funded or federally-aided projects must comply
with the Buy American Act, which requires that more than 50% of
the total cost of a given product's components be attributable
to components mined, produced, or manufactured in the United
States.
PVC-Coated Rigid Steel Conduit is RSC coated with 40 mils of
bonded PVC on the exterior of the pipe and 2 mils of blue
urethane on the interior. It is used in environments that are
too corrosive to use RSC, but where the physical protection
offered by RSC is required or prudent.
PVC-Coated Aluminum Conduit is aluminum pipe coated with 40
mils of bonded PVC on the exterior of the pipe and 2 mils of
blue urethane on the interior. It is used in environments where
lighter weight conduit is required.
Conduit Elbows are short lengths of curved RSC or PVC-coated
conduit, bent to 90, 60, 45, or 30 degrees and threaded at both
ends. Various radiuses are available.
PVC-Coated Fittings and Accessories include couplings (which
have PVC sleeves to seal the connection), sealtight connectors,
conduit bodies, beam clamps, pulling elbows, nipples, and strut
accessories. The Company's fittings are coated with blue
urethane on the inside and both blue urethane and PVC on the
outside, which provides added protection. The ability to bond
PVC to blue urethane is achieved through a proprietary process
developed by the Company. All of the accessories are PVC-coated
and provide a complete corrosion protection solution for the
Company's end users.
Installation Tools offered by the Company include electric
benders used for bending PVC-coated conduit of 1/2" to 2",
threaders for 1/2" to 4" conduit, hickeys to bend 1/2" to 1"
PVC-coated conduit, impact sockets, wrenches and other tools
to assist in the installation of conduit.
MARKETING, DISTRIBUTION AND CUSTOMER SERVICE
In-House Marketing. The Company established an in-house
marketing group in 1993, which has now grown to include four
individuals, all experienced in sales and marketing in the
electrical industry. The Company specifically focuses marketing
efforts at the project engineer and end user level, educating
them as to the technological advantages and lower life-cycle
cost of the Company's PVC-coated conduit as compared to
alternative conduit products.
Independent Sales Agents. In addition to education of
engineers and contractors so that Ocal products will be
specified, the Company's marketing group works hand-in-hand with
independent regional sales agents. The Company markets and
sells its products to approximately 600 distributors or chains
of distributors through approximately 35 independent regional
sales agents. Independent sales agents are the functional
equivalent of a manufacturer's internal sales force in other
industries. The agents market the Company's products to
distributors and handle the purchase orders from the
distributors. Some agents warehouse the Company's products,
which can expedite delivery since inventory is stored at various
locations throughout the United States. Sales agents do not
market the Company's products exclusively, but they do not sell
products which are in direct competition with the Company's
products. The Company has one international sales agent
covering all exports which are not purchased through U.S.
distributors. Sales agents receive commissions, with higher
commissions paid to those agents that warehouse the Company's
products at their facilities.
The Company permits the return of products within certain
time limits and under certain conditions subject to a restocking
charge. The Company warrants all of its products from defect
for one year.
Customer Service. Another key aspect of the Company's
marketing is the customer support services it provides. Senior
management and other Company employees are available to answer
questions from contractors, end users and engineers regarding
installation procedures, maintenance, product applications and
other technical areas. The Company offers free training on
proper installation of its products, sells a variety of
installation tools designed to assist in the installation of its
products, and has recently established a toll-free installation
hotline.
CUSTOMERS
The Company's four largest customers are multiple location
distributors. During 1996 and 1994, sales to any individual
customer did not exceed 10% of the Company's net sales. During
1995, there were two individual customers that represented 15.3%
and 11.4%, respectively, of the Company's net sales. Management
believes that the loss of any one of these distributors would
not have a material adverse effect on the Company. These
customers are comprised of chains of individual distributors who
make independent purchasing decisions.
BACKLOG AND SEASONALITY
The Company's business is characterized by short-term order
and shipment schedules rather than volume purchase contracts.
After a distributor sends a purchase order to the Company, the
product is typically shipped within 10 to 15 days. Accordingly,
the Company does not consider backlog at any given date to be
indicative of future sales. The short term delivery
requirements and the nature of the Company's business preclude
any significant backlog. The Company's business is not
seasonal.
MANUFACTURING
Raw Materials and Suppliers. The Company's principal raw
materials are carbon steel pipes which it obtains from a number
of domestic primary steel pipe producers, conduit fittings,
plastics and chemicals for coating, and zinc for galvanizing.
Because the Company galvanizes its own pipe, it can purchase
pipe directly from a number of steel pipe manufacturers.
Wherever practical, vendor purchases are made in large volumes
to maximize volume discounts and optimize payment terms. The
Company believes that the market is extremely competitive, and
that its relationship with suppliers is good.
COMPETITION
The Company's principal competitors in the PVC-coated conduit
business are Robroy Industries, Inc. ("Robroy") and Perma-Cote
Industries. Robroy is a diversified business and has greater
financial resources than the Company. The Company faces
substantial competition in its RSC business from large,
established companies such as Allied Tube & Conduit Company,
Wheatland Tube Company, the LTV Corporation, and Western Tube,
all of which have greater financial and managerial resources
than the Company. These competitors also produce IMC and EMT.
Companies which produce alternative conduit products include
Easco Aluminum, Inc. and VAW of America, Inc. in aluminum
conduit; Certain Teed Incorporated and Carlon in plastic
conduit; T.J. Cope, B-Line Systems, Inc. and Enduro Fiberglass
Systems in cable tray; and AFC Cable Systems and Alflex
Corporation in armored cable.
With respect to PVC-coated conduit, RSC, IMC, and EMT, as
well as alternative conduit products, the Company competes based
upon product performance, quality, availability of product,
speed of delivery, customer support, and price. The Company
believes it is competitive with respect to each of these factors
and that its principal competitive advantages are product
performance, quality, and price.
EMPLOYEES
As of December 31, 1996, the Company employed 170 persons,
including 153 in manufacturing, 4 in marketing and sales, and 13
in administration. All of these were full-time employees. None
of the Company's employees is represented by labor unions and
the Company believes that its relations with its employees are
good.
ITEM 2. PROPERTIES
The Company leases all of its facilities, including its
manufacturing plant. The Company believes that its facilities
are adequately maintained, in good operating condition and
adequate for the Company's present needs.
The Company's principal executive office is located in Van Nuys,
California, consisting of approximately 3,000 square feet of
office space, which the Company leases from a partnership in
which the Company's major stockholder is the general partner, at
an annual rental of $36,000 per year, expiring on December 31,
1998.
The Company's 300,000 square foot manufacturing facility is
located in Mobile, Alabama, and contains an approximately
100,000 square foot building on the property. The lease
contains certain rent escalation clauses and provides the
Company with an option to extend the lease through December 31,
2002.
The Company leases approximately 1,000 square feet of office
space in Houston, Texas at an annual rental of approximately
$13,000 per year. The lease contains certain escalation clauses
and expires August 14, 2000. The facility had been used as the
Company's marketing and sales office; however, no personnel are
currently occupying the space. At the end of January 1997, the
Company implemented a new telecommuting plan for its marketing
personnel and is currently working with the landlord to
negotiate a subrental or early termination of the lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various lawsuits arising in the
ordinary course of business. The Company does not believe that
the outcome of any of these lawsuits will have a material
adverse effect on the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of
the Company during the fourth quarter of 1996.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock commenced trading on the Nasdaq
National Market under the symbol "OCAL" on March 18, 1996. The
following table sets forth the high and low last reported sales
prices of the Common Stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
Year Ended December 31, 1996 ________ ________
<S> <C> <C>
First Quarter (commencing March 18, 1996)..... $ 6-7/8 $ 6-1/4
Second Quarter................................ 6-7/8 5
Third Quarter................................. 5-1/2 3-1/16
Fourth Quarter................................ 4 3
</TABLE>
As of February 28, 1997, there were approximately 34 holders
of record of Common Stock. Based on the broker searches
conducted for the annual meeting of stockholders, the Company
believes that the number of beneficial owners is substantially
greater than the number of record holders because a large
portion of the Common Stock is held of record in "street name"
for the benefit of individual investors.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common
Stock since its formation and does not anticipate paying any
such dividends in the foreseeable future. The Company plans to
reinvest earnings and other cash resources of the Company in the
development and expansion of its business. The declaration of
dividends in the future will be at the discretion of the Board
of Directors and will depend upon earnings, capital
requirements, the financial position of the Company, general
economic conditions and other pertinent factors. The terms of
the Company's bank line of credit restrict the payment of cash
dividends. Future credit agreements may contain restrictions on
the Company's ability to pay dividends.
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company and its consolidated subsidiaries, as described in
Note 1 to the Financial Statements appearing elsewhere herein (amounts in thousands except per share data). The selected
statement of operations data for the years ended December 31, 1996, 1995, and 1994 and the selected balance sheet data as of
December 31, 1996 and 1995 have been derived from the audited consolidated financial statements of the Company appearing
elsewhere in this Report. This information should be read in conjunction with such consolidated financial statements and the
notes thereto. The remainder of the selected financial data has been derived from audited financial statements of the Company
which are not included herein.
<CAPTION>
FIVE MONTHS
ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, JULY 31,
_______________________ ____________ __________
STATEMENT OF OPERATIONS DATA: 1996 1995 1994 1993<F1> 1993 1992
________ ________ ________ ________ ________ ________
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 25,000 $ 24,885 $ 19,123 $ 8,361 $ 17,165 $ 17,494
Gross margin 7,859 8,240 6,842 2,906 4,801 4,790
Stockholders' compensation<F2> 313 2,806 1,605 879 2,108 385
Operating income (loss) 3,519 1,489 1,700 481 (236) 1,694
Provision (benefit) for income taxes<F3> 1,180 22 8 (11) 208 22
Net income (loss) 2,356 1,081 1,384 410 (310) 1,249
Net income per share 0.45 0.33
PRO FORMA STATEMENT OF OPERATIONS DATA<F4>:
Net income 2,116 2,158
Net income per share 0.41 0.66
Weighted average common shares outstanding 5,224 3,250
<CAPTION>
BALANCE SHEET DATA: DECEMBER 31, JULY 31,
______________________________________ __________________
1996 1995 1994 1993 1993 1992
________ ________ ________ ________ ________ ________
<S> <C> <C> <C> <C> <C> <C>
Working capital $ 13,018 $ 3,373 $ 2,632 $ 1,134 $ 1,002 $ 1,499
Total assets 18,282 14,298 10,379 8,911 8,432 9,811
Total debt 3,257 6,179 4,320 4,851 3,796 4,678
Stockholders' equity 12,715 5,259 4,175 2,791 2,381 2,909
<FN>
<F1>
Effective August 1, 1993, the Company changed its fiscal year end from July 31 to December 31.
<F2>
Stockholders' compensation consists of salaries and bonuses paid to certain stockholders whose compensation is classified
as such in the financial statements.
<F3>
The net income (loss) attributable to Ocal Alabama and Ocal Data, S corporations, does not include a provision (benefit)
for federal income taxes since Ocal Alabama and Ocal Data were not subject to federal income taxes, and reflects
provisions for state income taxes based upon income tax rates applicable to S corporations. The net income (loss)
attributable to Occidental and Ocal Transport, C corporations, includes federal and state income tax provisions based
upon corporate income tax rates.
<F4>
Pro forma statement of operations include adjustments (i) to reflect levels of stockholders' compensation for certain
stockholders whose compensation is classified as stockholders' compensation in the accompanying consolidated statements
of income (based upon the $312,500 of salaries and bonuses paid to those stockholders for the year ending December 31,
1996) and (ii) to provide related income taxes as if all of the Company's income were taxed at C corporation rates based
upon pro forma income before income taxes. Weighted average common shares outstanding for the year ended December 31,
1995 is based upon the assumed issuance of 3,250,000 shares of Common Stock at the beginning of the year.
</FN>
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following section contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform
Act of 1995 which involve risk and uncertainties. The Company's
actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors,
including, without limitation, competition, product pricing and
gross margin, nominal growth in the industry, dependence on
suppliers, and risks due to potential future acquisitions, as
well as those set forth under the caption "Risk Factors" in the
Company's Registration Statement on Form S-1 declared effective
on March 12, 1996 and elsewhere in this Form 10-K.
OVERVIEW
In March and April of 1996, the Company completed an initial
public offering ("IPO") of its stock. Prior to the IPO, the
Company's operations were conducted by a number of affiliated
companies formed at various times in the past. The most
significant of these operating entities elected to be taxed as S
corporations under the provisions of the Internal Revenue Code.
Pursuant to such elections, stockholders of these companies
included their proportionate share of the taxable income of
these companies in their personal tax returns and the operating
results of these companies reflected no provision for federal
taxes. Stockholders' compensation expense for 1995 and 1994
includes amounts to facilitate the payment by these stockholders
of their personal income taxes.
Occidental Coating Company ("Occidental"), a California
corporation, was incorporated on December 15, 1965 to
manufacture and sell PVC-coated conduit and fittings. On
November 30, 1987, OCAL, Incorporated, an Alabama corporation
("Ocal Alabama") was formed in Mobile, Alabama initially as a
place for the importation and distribution of conduit
manufactured in Costa Rica by an affiliate of Occidental. In
1988, the California and Costa Rica plants were consolidated and
relocated to Mobile, Alabama, when the Company determined that
the advantages of manufacturing in Costa Rica could not be fully
realized. On August 1, 1993, the operations of Occidental and
Ocal Alabama were consolidated through the acquisition by Ocal
Alabama of substantially all of the assets and liabilities of
Occidental at net book value. On August 24, 1995, the Company
was incorporated in Delaware under the name Ocal, Inc.
On March 18, 1996, all of the outstanding capital stock of
Ocal Alabama, Occidental, Ocal Data Company ("Ocal Data"), and
Ocal Transport Co. ("Ocal Transport") was acquired by the
Company through capital contributions by the respective
stockholders in exchange for an aggregate of 3,250,000 shares of
the Company's common stock (the "Reorganization"). As part of
this Reorganization, Ocal Alabama declared a $4,600,000
distribution to its former stockholders, which represented
estimated undistributed S corporation retained earnings, and the
total amount of the distribution was finalized as $4,900,000
upon completion of the final tax return for Ocal Alabama. There
was a cash distribution of $1,600,000 paid in March of 1996 in
part to enable the former stockholders to satisfy their tax
liabilities, and the remainder of the distribution was reflected
in the form of notes and other payables.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. The Company's net sales for 1996 were $25,000,000,
which represented an increase of $115,000 (0.5%) compared to
sales of the prior year. Although unit volumes in 1996
increased compared to 1995, there was an offsetting decline in
selling prices due to competitive product pricing. The Company
lost an account which represented approximately 4% of 1995 sales
during 1996, and replaced the lost sales by obtaining new
customers with aggressive product pricing.
Gross margin. The Company's gross margin for 1996 was
$7,859,000, which represented a decrease of $381,000 (4.6%)
compared to gross margin of the prior year. The Company's gross
margin as a percentage of sales decreased to 31.4% in 1996 from
33.1% in 1995 due to continued competitive pricing pressures on
the Company's net sales, as well as increased costs of raw
materials.
Selling, general and administrative ("SG&A"). SG&A expenses
for 1996 were $4,027,000, which represented an increase of
$82,000 (2.1%) compared to SG&A expenses of the prior year. The
increase was due to certain expenses associated with being a
public company, such as public relations costs and directors and
officers liability insurance, as well as increased expenses of
the in-house marketing group. Overall SG&A expenses as a
percentage of net sales increased to 16.1% in 1996 from 15.9% in
the prior year.
Stockholders' compensation. Stockholders' compensation
expenses for 1996 were $313,000, which represented a decrease of
$2,493,000 (88.8%) compared to expenses of the prior year. The
decrease was due to a reduction in salaries and bonuses paid to
those stockholders in 1996.
Interest income (expense), net. Interest income (net) for
1996 was $17,000, compared to interest expense of $386,000 for
the prior year. The interest income for 1996 was generated by
investments of excess cash generated after the Company's initial
public offering, at which time the Company liquidated the unpaid
balance on the bank revolving credit line.
Income tax expense. Income tax expense for 1996 was
$1,180,000, compared to $22,000 for the prior year. Prior to
the Company's Reorganization and IPO, Ocal Alabama and Ocal Data
had elected to be taxed as S corporations under the provisions
of the Internal Revenue Code, and accordingly, no provision was
made for federal income taxes for these operations. Subsequent
to that date, the Company and all of its subsidiaries became
C corporations subject to state and federal income taxes at
statutory rates. The Company's effective tax rate for 1996 was
33.4%, and is expected to be approximately 40% in 1997, as 1997
will reflect a full year of taxation at C corporation rates.
Net income. Net income for 1996 was $2,356,000, which
represented an increase of $1,275,000 (117.9%) compared to the
prior year. The increase was due primarily to reduced
stockholders' compensation expense, partially offset by an
increased provision for income taxes.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales. The Company's net sales for 1995 were $24,885,000,
which represented an increase of $5,762,000 (30.1%) compared to
the prior year. Management believes the increase in net sales
is due to greater penetration of its products in its traditional
markets, achieved principally as a result of the activities of
the Company's in-house marketing group.
Gross margin. The Company's gross margin for 1995 was
$8,240,000, which represented an increase of $1,398,000 (20.4%)
compared to the prior year. The Company's gross margin as a
percentage of sales decreased to 33.1% in 1995 from 35.8% in
1994 due to competitive pricing pressures on the Company's net
sales.
Selling, general and administrative ("SG&A"). SG&A expenses
for 1995 were $3,945,000, which represented an increase of
$408,000 (11.5%) compared to the prior year. The increase was
due principally to increased sales commissions related to higher
sales volume. Overall SG&A expenses as a percentage of net
sales decreased to 15.9% in 1995 from 18.5% in the prior year as
the Company was able to increase its net sales without incurring
proportionately increased SG&A expenses, including marketing
costs, other than sales commissions.
Stockholders' compensation. Stockholders' compensation
expenses for 1995 were $2,806,000, which represented an increase
of $1,201,000 (74.8%) compared to the prior year. The increase
was due to higher bonuses. As an S corporation, Ocal Alabama
paid bonuses to its stockholders each year primarily to provide
stockholders with funds to pay their income taxes on the
Company's income.
Interest expense. Interest expense for 1995 was $386,000,
which represented an increase of $78,000 (25.3%) compared to the
prior year. The increase was due to increased levels of
borrowing.
Net income. Net income for 1995 was $1,081,000, which
represented a decrease of $303,000 (21.9%) compared to the prior
year. The decrease was due principally to increased
stockholders' compensation.
LIQUIDITY AND CAPITAL RESOURCES
Historically, working capital needed to finance the Company's
growth has been provided by cash flows from operations, bank
debt, and long- and short-term notes from related parties and a
supplier. In March and April of 1996, the Company completed an
initial public offering of 2,530,000 shares of its common stock.
The net proceeds of the IPO, after deduction of underwriters'
discounts, commissions, and expenses, were $10,000,000. A
portion of the expenses, $490,000, was paid in 1995. The
proceeds of the offering were used principally to pay off the
$3,948,000 balance remaining on the Company's revolving bank
line of credit and to pay the $1,600,000 cash portion of Ocal
Alabama's distribution of its S corporation retained earnings to
prior S corporation stockholders. The balance of the proceeds
were added to the Company's working capital. As of December 31,
1996, the Company had working capital of $13,018,000, an
increase of $9,645,000 over the balance as of December 31, 1995.
Through its subsidiaries Ocal Alabama and Occidental (jointly
and severally, the "Borrower"), the Company has a revolving bank
line of credit which provides for maximum borrowings of
$6,500,000 (subject to certain specified percentages of the
Borrower's accounts receivable and inventories). The related
agreement requires the maintenance of certain financial ratios
and tangible net worth amounts and provides for various
restrictions, including limitations on capital expenditures,
additional indebtedness, salaries of certain officers of the
Company, and payment of dividends by the Company. The bank has
the right to demand the repayment of the note, thereby
terminating the line of credit, with 180 days' prior written
notice. Interest is payable at the bank's prime interest rate
plus .75% (9.0% at December 31, 1996). There were no borrowings
outstanding at December 31, 1996. In the future, however, the
Company intends to borrow against this or a subsequent line of
credit. The amount of unused credit available at December 31,
1996, based upon the Company's collateral, was $3,978,000.
As part of the Reorganization which occurred immediately prior
to the IPO, Ocal Alabama declared a distribution to its then
stockholders in an amount of $4,600,000, which was an estimate
of all its undistributed S corporation retained earnings as of
that date. On March 25, 1996, $1,600,000 of the distribution
was paid in cash to the former stockholders in part to enable
them to satisfy their tax liabilities associated with the S
corporation earnings. Notes payable bearing interest at the
rate of 6.5% per annum were established for the $3,000,000
unpaid portion of the distribution, with $1,500,000 due on
September 18, 1997 and $1,500,000 due on March 18, 1999. The
distribution amount was finalized as $4,900,000 after Ocal
Alabama's final income tax return was completed. The additional
$300,000, classified as a distribution payable at December 31,
1996, was paid to the former stockholders in February 1997.
The Company believes that cash provided by operating
activities, existing cash and cash equivalents, and available
credit will be sufficient to fund the Company's future operating
and capital cash needs for at least the next 12 to 18 months.
The Company intends to pursue a strategy of growth by selective
acquisitions that complement the Company's strengths in low-
cost, high-quality manufacturing and knowledge of the electrical
conduit industry. Such acquisitions may necessitate the
issuance of additional debt or equity securities of the Company.
The Company intends to pursue this strategy with careful regard
for profitability, the need for liquidity, and the potential
dilutive effect of any additional issuance of equity securities.
There can be no assurance, however, that any acquisitions will
occur or that an acquisition that does occur will not affect the
Company's net income or liquidity.
The Company generated net cash of $2,296,000 and $483,000 from
operating activities in 1996 and 1995, respectively. The
primary sources of operating cash in 1996 were the Company's net
income and reductions in accounts receivable and inventories,
which were offset by increases in accounts payable and accrued
expenses. During 1995, the primary sources of operating cash
were the Company's net income and increases in accounts payable
and commissions payable, which were largely offset by increased
levels of accounts receivable and inventories.
Net cash provided by investing activities was $1,108,000 in
1996, compared to net cash used by investing activities of
$1,804,000 in 1995. During 1995, the major stockholder of the
Company borrowed $1,645,000 from the Company in order to
purchase a $2,000,000 certificate of deposit which was used as a
personal guarantee to secure the Company's revolving bank line
of credit. During March of 1996, in conjunction with the
Reorganization, the major stockholder repaid the loan to the
Company. Capital expenditures during 1996 were $389,000,
compared to $159,000 in 1995, with the increase relating
primarily to purchases of injection molding equipment.
In 1996, the Company generated $3,088,000 of cash from
financing activities, consisting of $10,490,000 of proceeds from
the issuance and sale of common stock in the Company's IPO,
offset in part by repayment of bank debt of $5,802,000 and the
distribution of $1,600,000 of Ocal Alabama's S corporation
retained earnings to prior S corporation stockholders. In 1995,
the Company generated $1,369,000 of cash from financing
activities, consisting of additional bank borrowings of
$4,959,000, offset in part by repayments of notes payable to
suppliers and related parties totaling $3,100,000 and IPO-
related costs of $490,000.
The Company's principal commitments at December 31, 1996
consisted of obligations under operating leases for facilities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of Ocal, Inc.
We have audited the accompanying consolidated balance sheets
of Ocal, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit 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. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Ocal, Inc. as of December 31, 1996 and
1995, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
January 20, 1997
Los Angeles, California
<PAGE>
<TABLE>
OCAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<CAPTION>
For the Years Ended December 31,
________________________________
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Net sales $ 25,000 $ 24,885 $ 19,123
Cost of goods sold 17,141 16,645 12,281
________ ________ ________
Gross margin 7,859 8,240 6,842
Operating expenses:
Selling, general and administrative 4,027 3,945 3,537
Stockholders' compensation 313 2,806 1,605
________ ________ ________
Operating income 3,519 1,489 1,700
Interest income (expense), net 17 (386) (308)
________ ________ ________
Income before income taxes 3,536 1,103 1,392
Provision for income taxes 1,180 22 8
________ ________ ________
Net income $ 2,356 $ 1,081 $ 1,384
Average common and common
equivalent shares outstanding 5,224 3,250 3,250
Net income per share $ 0.45 $ 0.33 $ 0.43
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
OCAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
December 31, December 31,
1996 1995
____________ ____________
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,619 $ 127
Accounts receivable, net of allowance for doubtful
accounts of $122 in 1996 and $109 in 1995 2,580 3,090
Notes receivable - stockholder and related parties - 1,765
Inventories 6,947 7,248
Prepaid expenses and other current assets 171 182
Deferred income taxes 293 -
____________ ____________
Total current assets 16,610 12,412
Property and equipment at cost less accumulated
depreciation and amortization 1,524 1,396
Other assets
Deferred offering costs - 490
Other noncurrent assets 148 -
____________ ____________
Total other assets 148 490
____________ ____________
TOTAL ASSETS $ 18,282 $ 14,298
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,167 $ 2,075
Commissions payable 452 476
Accrued expenses 136 298
Income taxes payable 37 11
Notes payable - bank - 5,802
Distribution payable - stockholders 300 -
Current maturities of notes payable - stockholders 1,500 377
____________ ____________
Total current liabilities 3,592 9,039
Other liabilities
Long-term notes payable - stockholders 1,757 -
Deferred income taxes 218 -
____________ ____________
Total other liabilities 1,975 -
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, 5,000,000 shares authorized,
no shares issued - -
Common stock, $.001 par value, 15,000,000 shares authorized,
issued and outstanding: 5,780,000 shares at 1996 and
3,250,000 shares at 1995 6 3
Additional paid-in capital 10,708 711
Retained earnings 2,001 4,545
____________ ____________
Total stockholders' equity 12,715 5,259
____________ ____________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,282 $ 14,298
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
OCAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
For the Years Ended December 31,
____________________________________________
1996 1995 1994
<S> ____________ ____________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES <C> <C> <C>
Net income $ 2,356 $ 1,081 $ 1,384
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 261 306 241
Deferred income taxes (75) - -
Changes in assets and liabilities:
Accounts receivable, net 510 (963) (85)
Inventories 301 (851) (1,422)
Prepaid expenses and other 11 (65) (10)
Accounts payable (908) 611
Commissions payable (24) 138 41
Accrued expenses (162) 18 (60)
Income taxes payable 26 11 -
____________ ____________ ____________
Net cash provided by operating activities 2,296 483 700
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (389) (159) (128)
Repayment by (loan to) stockholder and related parties 1,645 (1,645) -
Other items, net (148) - -
____________ ____________ ____________
Net cash provided by (used in) investing activities 1,108 (1,804) (128)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from (repayment of) notes payable - bank (5,802) 4,959 (1,163)
Repayment of notes payable - supplier - (700) -
Borrowings from (repayment of) notes payable -
related parties - (2,400) 655
Net proceeds from (costs of) sale of common stock 10,490 (490) -
Distribution of S corporation retained earnings
to prior S corporation stockholders (4,900) - -
Additions to notes and distribution payable - stockholders 3,300 - -
____________ ____________ ____________
Net cash provided by (used in) financing activities 3,088 1,369 (508)
Net increase in cash and cash equivalents 6,492 48 64
Cash and cash equivalents at beginning of year 127 79 15
____________ ____________ ____________
Cash and cash equivalents at end of year $ 6,619 $ 127 $ 79
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 242 $ 416 $ 99
Income taxes $ 1,229 $ 24 $ 79
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
OCAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(In thousands)
<CAPTION>
Common Stock Additional
________________ Paid-in Retained
Shares Amount Capital Earnings Total
_______ _______ __________ __________ __________
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 3,250 $ 3 $ 711 $ 2,080 $ 2,794
Net income 1,384 1,384
_______ _______ __________ __________ __________
Balance at December 31, 1994 3,250 3 711 3,464 4,178
Net income 1,081 1,081
_______ _______ __________ __________ __________
Balance at December 31, 1995 3,250 3 711 4,545 5,259
Shares issued in initial public offering 2,530 3 9,997 10,000
Distributions of S corporation retained
earnings to prior S corporation stockholders (4,900) (4,900)
Net income 2,356 2,356
_______ _______ __________ __________ __________
Balance at December 31, 1996 5,780 $ 6 $ 10,708 $ 2,001 $ 12,715
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
OCAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Basis of Presentation: Concurrent with the closing of
the Company's initial public offering of common stock on March 18,
1996 (Note 3), all of the outstanding capital stock of OCAL,
Incorporated ("Ocal Alabama"), Occidental Coating Company
("Occidental"), Ocal Data Company ("Ocal Data"), and Ocal
Transport Co. ("Ocal Transport") was acquired by the Company
through capital contributions by their respective prior
stockholders in exchange for an aggregate of 3,250,000 shares of
the Company's common stock (the "Reorganization"). The
Company's Chairman, CEO and President was the sole or majority
stockholder of each of the contributed companies and is the
53.0% stockholder of the Company as of December 31, 1996.
The accounts of Ocal Alabama, Occidental, Ocal Data and Ocal
Transport are included in the accompanying consolidated
financial statements of the Company on their historical basis.
The stockholders' equity section of the consolidated financial
statements for prior periods has been retroactively restated
from that reported in the Registration Statement and Prospectus
related to the Company's initial public offering to reflect the
Company's capital structure and the Reorganization with the
common stock of these entities classified as paid-in capital.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(B) Description of Business: The Company manufactures PVC-
coated rigid steel conduit, elbows and fittings which are sold
principally in the United States to distributors who resell the
products for ultimate use principally in new construction or as
replacement parts. Ocal Data provides data processing services
to Ocal Alabama and unrelated parties. Ocal Transport and
Occidental have had no operations.
(C) Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
(D) Cash and Cash Equivalents: At December 31, 1996, cash
equivalents include highly liquid investments of approximately
$6,200,000 invested primarily in tax-exempt municipal securities
and high-grade commercial paper. These investments are stated
at cost which approximates fair value. The Company considers
all highly liquid instruments purchased with a remaining
maturity of three months or less to be cash equivalents.
(E) Inventories: Inventories are stated at the lower of cost
(first-in, first-out method) or market. Inventories are as
follows:
<TABLE>
<CAPTION>
December 31,
____________
1996 1995
_______ _______
<S> <C> <C>
Raw materials $ 3,038 $ 3,372
Finished goods 3,909 3,876
_______ _______
6,947 7,248
</TABLE>
(F) Property, Plant and Equipment: Property, plant and
equipment are recorded at cost and are depreciated using the
straight-line method over the following estimated useful lives:
Galvanizer 20 years
Other manufacturing equipment and molds 7 years
Office equipment 5-7 years
Vehicles 3 years
Leasehold improvements Remaining life of lease
(G) Revenue Recognition: The Company recognizes revenue from
product sales to customers upon shipment. The Company warrants
its products against defects for one year and has policies
permitting customers to return products under certain
circumstances. In addition, certain of the Company's
distributors and agents are entitled to rebates upon attaining
specified sales levels. Provision is made currently for the
estimated amount of product returns and rebates that may occur
under these programs.
(H) Income Taxes: Prior to the Reorganization, Ocal Alabama
had elected to be taxed as an S Corporation under the provisions
of the Internal Revenue Code. Under those provisions, Ocal
Alabama did not pay federal or state corporate income taxes on
its taxable income. Instead, the stockholders were liable for
federal and state income taxes on Ocal Alabama's taxable
income. The State of California adopted the provisions of
the S corporation election but charged a franchise tax at
the corporate level. In connection with its initial public
offering, Ocal Alabama's Subchapter S election was terminated,
and accordingly, the Company is now subject to federal and state
income taxes. For information purposes, the pro forma financial
information (see Note 2) includes pro forma amounts for the
income taxes that would have been recorded if the Company had
historically been a C corporation.
(I) Fair Value of Financial Instruments: The carrying values
of the Company's financial instruments, which consist of cash
and cash equivalents, notes receivable - stockholder and related
parties, notes payable - bank, and notes payable - related
parties, approximate their fair values.
(J) Net Income Per Share: Net income per share is computed by
dividing net income by the weighted average number of common
shares and common equivalent shares outstanding during the
periods, after giving effect to dilutive stock options and
warrants, if any.
(K) Reclassifications: Certain previously reported amounts
have been reclassified to conform to the current period
presentation.
(L) New Accounting Standard: In October 1995, the FASB issued
SFAS No. 123, "Accounting for Stock-Based Compensation". The
standard encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees," and related
Interpretations. The Company grants stock options for a fixed
number of shares with an exercise price not less than the fair
value of the shares at the date of grant and accordingly,
recognizes no compensation expense for the stock option grants.
See Note 7.
2. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The pro forma financial information is prepared on a basis
consistent with pro forma information appearing in the
Registration Statement and Prospectus related to the Company's
initial public offering. The pro forma financial information
includes adjustments (i) to reflect levels of stockholders'
compensation for certain stockholders whose compensation is
classified as stockholders' compensation in the accompanying
consolidated statements of income (based on the $312,500 of
salaries and bonuses paid to those stockholders for the year
ending December 31, 1996) and (ii) to provide related income
taxes as if all of the Company's income were taxed at
C corporation rates based upon pro forma income before income
taxes. Reconciliations between historical and pro forma results
of operations follow (in thousands except per share amounts):
<TABLE>
<CAPTION>
For the Years Ended December 31,
________________________________
1996 1995
_______ _______
<S> <C> <C>
Income before income taxes $ 3,536 $ 1,103
Pro forma adjustments (described above)
(i) Stockholders' compensation - 2,493
_______ _______
Pro forma income before income taxes 3,536 3,596
(ii) Tax provision (1,420) (1,438)
_______ _______
Pro forma net income $ 2,116 $ 2,158
Pro forma net income per share $ 0.41 $ 0.66
Weighted average shares outstanding 5,224 3,250
</TABLE>
3. INITIAL PUBLIC OFFERING
On March 18, 1996, the Company completed the initial public
offering of 2,200,000 shares of its common stock at a price of
$5.00 per share. On April 25, 1996, the underwriters exercised
their overallotment option by purchasing an additional 330,000
shares of the Company's common stock at a price of $5.00 per
share. After underwriters' discounts, commissions and expenses,
the net proceeds of the offering and overallotment exercise to
the Company were $10,000,000. Expenses of the offering charged
to paid-in capital aggregated $1,390,000, which included
$490,000, principally attorneys and accountants fees, which were
paid in 1995 and reflected as deferred offering costs at
December 31, 1995.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
____________
1996 1995
_______ _______
<S> <C> <C>
Machinery and equipment $ 1,556 $ 1,425
Office equipment 365 264
Leasehold improvements 311 311
Molds 429 346
Vehicles 148 123
_______ _______
2,809 2,469
Less accumulated depreciation and amortization (1,285) (1,073)
_______ _______
Property and equipment - net $ 1,524 $ 1,396
</TABLE>
5. REVOLVING BANK LINE OF CREDIT
Ocal Alabama and Occidental (jointly and severally, the
"Borrower") have a revolving bank line of credit which provides
for maximum borrowings of $6,500,000 (subject to certain
specified percentages of the Borrower's accounts receivable and
inventories). The related agreement requires the maintenance
of certain financial ratios and tangible net worth amounts and
provides for various restrictions, including limitations on
capital expenditures, additional indebtedness, salaries of
certain officers of the Company, and payment of dividends by
the Company. The bank has the right to demand the repayment of
the note, thereby terminating the line of credit, with 180 days'
prior written notice. Interest is payable at the bank's prime
interest rate plus .75% (9.0% at December 31, 1996). At December 31,
1995, there were $5,802,000 of borrowings outstanding at an
interest rate of 9.25%. There were no borrowings outstanding at
December 31, 1996. The amount of unused credit available at
December 31, 1996, based upon the Company's collateral, was
$3,978,000.
6. TRANSACTIONS WITH RELATED PARTIES
Notes receivable
Notes receivable - stockholder and related parties consist of
the following:
<TABLE>
<CAPTION>
December 31,
____________
1996 1995
_______ _______
<S> <C> <C>
6.5% unsecured note receivable from the major stockholder
of the Company, receivable on demand $ - $ 1,645
6.5% unsecured note receivable from a partnership in which
the major stockholder of the Company is a partner,
receivable on demand - 120
_______ _______
$ - $ 1,765
</TABLE>
Notes payable
Notes payable - stockholders consist of the following:
<TABLE>
<CAPTION>
December 31,
____________
1996 1995
_______ _______
<S> <C> <C>
6.5% unsecured note payable to the major stockholder
of the Company, payable on demand $ - $ 377
6.5% unsecured note payable to the major stockholder
of the Company, due on March 18, 1999 257 -
6.5% unsecured notes payable due to former stockholders
of Ocal Alabama - see (ii) below 3,000 -
_______ _______
Total $ 3,257 $ 377
Less: portion due within one year 1,500 377
_______ _______
Long-term portion $ 1,757 $ -
</TABLE>
As part of the Reorganization on March 18, 1996, Ocal Alabama
declared a distribution to its then stockholders in an amount of
$4,600,000, which was an estimate of all of its undistributed
S corporation retained earnings as of that date. The distribution
was paid as follows:
(i) $1,600,000 was paid in cash on March 25, 1996; and
(ii) $3,000,000 in notes payable were issued to the
stockholders of Ocal Alabama. These notes bear interest
at the rate of 6.5% per annum and are payable $1,500,000
on September 18, 1997 and $1,500,000 on March 18, 1999.
The amount of undistributed S corporation retained earnings as
of March 18, 1996 was finalized as $4,900,000 after Ocal
Alabama's income tax return for the period from January 1, 1996
through March 18, 1996 was completed. The additional $300,000
of distribution payable to stockholders is reflected in current
liabilities at December 31, 1996.
Other
The Company's corporate office is leased from a partnership in
which the Company's major stockholder is the general partner,
and the lease expires on December 31, 1998.
Summary
Amounts of these related party transactions charged to expense
are as follows:
<TABLE>
<CAPTION>
December 31,
____________
1996 1995
_______ _______
<S> <C> <C>
Rent expense $ 36 $ 66
Interest expense $ 170 $ 88
</TABLE>
7. CAPITAL STOCK
Preferred Stock
The Company's Board of Directors is authorized to issue up to
5,000,000 shares of preferred stock, in series, to fix dividend
rates, conversion rights, voting rights, terms of redemption,
liquidation preferences, and to increase or decrease the number
of shares in any series. No preferred stock is currently
outstanding, and the Company has no present plans for the
issuance of any preferred stock. Specific rights granted to
future holders of preferred stock could be used to restrict the
Company's ability to merge with, or sell its assets to, a third
party. The ability of the Board of Directors to issue preferred
stock could discourage, delay or prevent a takeover of the
Company, thereby preserving control of the Company by the
current stockholders.
Stock Options
In August 1995, the Board of Directors adopted, and the
stockholders of the Company approved, the Ocal, Inc. 1995 Stock
Option Plan (the "Plan"). The Plan provides for the award of
incentive stock options to employees and the award of non-
qualified stock options to employees, independent contractors,
directors and consultants. The Company has reserved 400,000
shares of Common Stock under the Plan. Options to purchase
Common Stock are generally conditioned upon continued employment
or service to the Company, expire from five to ten years after
the grant date, and become exercisable commencing with the first
anniversary date of the grant. Stock options under the Plan are
granted at prices not less than the fair market value on the
date of the grant.
There were no options outstanding prior to the Company's initial
public offering on March 18, 1996. Activity during the year was
as follows:
<TABLE>
<CAPTION>
Options
Outstanding
(in thousands) Price Range
______________ ______________
<S> <C> <C>
Balance, December 31, 1995 - -
Options granted 108 $3.91 to $5.94
Options canceled or expired (3) $5.00
___
Balance, December 31, 1996 105 $3.91 to $5.94
</TABLE>
At December 31, 1996, options for 10,000 shares were
exercisable.
The Company has adopted the disclosure-only provisions of SFAS
No. 123 and, accordingly, does not recognize compensation cost.
Had the Company elected to recognize compensation cost based on
the fair value of the options granted at the grant date as
prescribed by SFAS No. 123, net income and net income per share
for 1996 would have been reduced to the pro forma amounts
indicated in the table below (in thousands except per share
amounts):
<TABLE>
<CAPTION>
As Reported Pro Forma
___________ _________
<S> <C> <C>
1996 net income $ 2,356 $ 2,310
1996 net income per share $ 0.45 $ 0.44
</TABLE>
For purposes of pro forma disclosures, the estimated fair
value of the options is amortized over the options' vesting
periods. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
Expected dividend yield 0.00%
Expected stock price volatility 46.4%
Risk-free interest rate 6.70%
Expected life of options 5 years
Vesting assumption 33.3% per year
The weighted average fair value of options granted during
1996 is $2.50 per share.
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options. The
Company's stock options have characteristics significantly
different from those of traded options such as vesting
restrictions and extremely limited transferability. In
addition, the assumptions used in option valuation models are
highly subjective, particularly the expected stock price
volatility of the underlying stock. Because changes in these
subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do
not provide a reliable single measure of the fair value of its
stock options.
Pro forma net income and net income per share are the same
as reported amounts prior to 1996, as no stock options were
granted until the initial public offering on March 18, 1996.
Accordingly, the pro forma effect on net income of applying SFAS
123 for 1996 is not indicative of the effect for future years,
because it does not reflect a full year of expense.
Warrants
At December 31, 1996, warrants to purchase up to 220,000
shares of Common Stock were outstanding. These warrants are
exercisable for a period of four years commencing March 18, 1997
at an exercise price of $6.50 per share.
8. INCOME TAXES
Through March 18, 1996, the date of the Reorganization and the
Company's initial public offering, Ocal Alabama and Ocal Data
had elected to be taxed as S corporations under the provisions
of the Internal Revenue Code. Pursuant to such elections,
stockholders of these companies included their proportionate
share of the taxable income of these companies in their personal
tax returns. Accordingly, no provision for federal income taxes
was required or provided for the operations of Ocal Alabama and
Ocal Data through March 18, 1996. The State of California
adopted the provisions of the S corporation election but charged
a franchise tax at the corporate level.
As of March 18, 1996, as a result of the Reorganization, the
Company and all of its subsidiaries became C corporations
subject to state and federal income taxes at statutory rates.
Such income taxes are provided on the results of operations in
the accompanying consolidated statement of income for the period
from March 18, 1996 through December 31, 1996.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years ended December 31,
________________________
1996 1995 1994
_______ _______ _______
<S> <C> <C> <C>
Current provision -
Federal $ 960 $ - $ -
State 305 22 8
_______ _______ _______
1,265 22 8
Deferred provision -
Federal (90) - -
State 5 - -
_______ _______ _______
(85) - -
_______ _______ _______
Provision for taxes 1,180 22 8
</TABLE>
The following table reconciles the Company's provision for
income taxes to the statutory federal income tax rate of 34% for
the year ended December 31, 1996:
<TABLE>
<S> <C>
Federal income tax provision at statutory rate based upon the
Company's taxable income subsequent to March 18, 1996 $ 964
State income taxes, net of federal benefit, based upon the
Company's taxable income subsequent to March 18, 1996 180
Other, net 36
_______
$ 1,180
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the reported amounts of assets and
liabilities in the financial statements and the amounts used for
income tax purposes. Significant components of the Company's
deferred tax assets and liabilities at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
Receivables valuation $ 126
Inventory valuation 51
State franchise taxes 105
Other 11
_______
Total deferred tax assets 293
Deferred tax liability - depreciation 218
</TABLE>
9. STOCKHOLDERS' COMPENSATION
Stockholders' compensation in 1995 and 1994 includes amounts to
facilitate the payment by certain former stockholders of Ocal
Alabama of their personal income taxes which include the taxable
income of Ocal Alabama for those years as a result of its
election of S corporation status.
10. LEASE COMMITMENTS
The Company leases its manufacturing facilities under an
agreement expiring on December 31, 2001. The lease for the
manufacturing facilities contains certain rent escalation
clauses and provides the Company with an option to extend the
lease through December 31, 2002. The Company's major
stockholder has personally guaranteed the lease obligation for
the manufacturing facilities. The Company's corporate office is
leased from a partnership in which the Company's major
stockholder is the general partner (see Note 6), and the
expiration date is December 31, 1998. The Company also leases
autos under various agreements expiring in 1998. Future minimum
lease payments under noncancelable operating leases as of
December 31, 1996 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
________________________
<S> <C>
1997 $ 225
1998 212
1999 162
2000 158
2001 148
Thereafter -
________
Total $ 905
</TABLE>
Rent expense was as follows (amounts in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
________________________
<S> <C>
1996 $ 196
1995 167
1994 221
</TABLE>
Included in rent expense are amounts paid to a partnership for
rental of the Company's corporate office in the amounts
indicated in Note 6.
11. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash
equivalents and trade receivables. The Company places its cash
equivalents with high credit quality institutions.
The primary users of the Company's products are electrical
contractors and large industrial companies which obtain such
products through a group of approximately 600 distributors and
resellers who purchase the products directly from the Company.
Credit is extended to these distributors and resellers based
upon an evaluation of the customer's financial condition, and
collateral is generally not required. Management does not
believe significant credit risk exists at December 31, 1996.
The Company's four largest customers are multiple location
distributors. During 1996 and 1994, sales to any individual
customer did not exceed 10% of the Company's net sales. During
1995, there were two individual customers that represented 15.3%
and 11.4%, respectively, of the Company's net sales. Management
believes that the loss of any of these distributors would not
have a material adverse effect on the Company. These customers
are comprised of chains of individual distributors who make
independent purchasing decisions.
12. COMMITMENTS AND CONTINGENCIES
The Company is a party to various lawsuits arising in the
ordinary course of business. The Company does not believe that
the outcome of any of these lawsuits will have a material
adverse effect on the Company's business or financial condition.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1996 and 1995 follow (in
thousands of dollars except for per share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
_______ _______ _______ _______ ____
1996
<S> <C> <C> <C> <C> <C>
Net sales $ 5,721 $ 6,011 $ 7,193 $ 6,075 $ 25,000
Gross profit 1,821 1,891 2,172 1,975 7,859
Net income 639 540 612 565 2,356
Pro forma net income 499 540 612 465 2,116
Net income per share .18 .09 .11 .10 .45
Pro forma net income per share .14 .09 .11 .08 .41
<CAPTION>
1995
<S> <C> <C> <C> <C> <C>
Net sales $ 6,025 $ 6,784 $ 5,987 $ 6,089 $ 24,885
Gross profit 2,051 2,367 1,939 1,883 8,240
Net income (loss) 575 777 787 (1,058) 1,081
Pro forma net income 601 706 485 366 2,158
Net income (loss) per share .18 .24 .24 (.33) .33
Pro forma net income per share .18 .22 .15 .11 .66
</TABLE>
The pro forma financial information is prepared on a basis
consistent with pro forma information appearing in the
Registration Statement and Prospectus related to the Company's
initial public offering. The pro forma financial information
includes adjustments (i) to reflect levels of stockholders'
compensation for certain stockholders whose compensation is
classified as stockholders' compensation in the accompanying
consolidated statements of income (based on the $312,500 of
salaries and bonuses paid to those stockholders for the year
ending December 31, 1996) and (ii) to provide related income
taxes as if all of the Company's income were taxed at
C corporation rates based upon pro forma income before
income taxes.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Items 10, 11, 12, and 13 is
incorporated by reference to the Company's definitive proxy
statement for the 1997 Annual Meeting of Stockholders to be filed
pursuant to Regulation 14A.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
The following documents are filed as part of this report:
PAGE
REFERENCE
FORM 10-K
_________
(a-1) FINANCIAL STATEMENTS:
Report of Independent Auditors 12
Consolidated Statements of Income for the three years ended
December 31, 1996 13
Consolidated Balance Sheets as of December 31, 1996 and 1995 14
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996 15
Consolidated Statements of Stockholders' Equity for the three
years ended December 31, 1996 16
Notes to Consolidated Financial Statements 17
(a-2) FINANCIAL STATEMENT SCHEDULES:
All supplemental schedules are omitted as inapplicable or
because the required information is included in the Consolidated
Financial Statements or the Notes to Consolidated Financial
Statements.
(a-3) EXHIBITS:
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K:
During the fourth quarter ended December 31, 1996, the Company
did not file any reports on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
OCAL, INC.
By: /s/ Lida R. Frankel
___________________
Lida R. Frankel
Chief Financial Officer
Date: March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of Registrant and in the capacities and on the dates
indicated.
Signature Title Date
_______________ _________ __________
Director and Principal
/s/ Ilan Bender Executive Officer March 21, 1997
_______________________
(Ilan Bender)
/s/ Ronald Costa Director March 21, 1997
_______________________
(Ronald Costa)
/s/ Carlos R. Espinosa Director March 21, 1997
_______________________
(Carlos R. Espinosa)
/s/ Carlos V. Espinosa Director March 21, 1997
_______________________
(Carlos V. Espinosa)
/s/ William T. Gross Director March 21, 1997
_______________________
(William T. Gross)
/s/ Michael R. Peevey Director March 21, 1997
_______________________
(Michael R. Peevey)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 6,619 127
<SECURITIES> 0 0
<RECEIVABLES> 2,580 3,090
<ALLOWANCES> 0 0
<INVENTORY> 6,947 7,248
<CURRENT-ASSETS> 16,610 12,412
<PP&E> 2,809 2,469
<DEPRECIATION> 1,285 1,073
<TOTAL-ASSETS> 18,282 14,298
<CURRENT-LIABILITIES> 3,592 9,039
<BONDS> 1,757 0
0 0
0 0
<COMMON> 6 3
<OTHER-SE> 12,709 5,256
<TOTAL-LIABILITY-AND-EQUITY> 18,282 14,298
<SALES> 25,000 24,885
<TOTAL-REVENUES> 25,000 24,885
<CGS> 17,141 16,645
<TOTAL-COSTS> 17,141 16,645
<OTHER-EXPENSES> 313 2,806
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (17) 386
<INCOME-PRETAX> 3,536 1,103
<INCOME-TAX> 1,180 22
<INCOME-CONTINUING> 2,356 1,081
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,356 1,081
<EPS-PRIMARY> 0.45 0.33
<EPS-DILUTED> 0 0
</TABLE>
