<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
[ ] 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: 0-8767
CALNETICS CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2303687
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20401 PRAIRIE STREET, CHATSWORTH, CALIFORNIA 91311
(Address of principle executive offices) (zip code)
(818) 886-9819
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ------------------------
None ---
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant is $10,270,617 as of September 10, 1997.
3,038,799
---------
(number of shares of common stock outstanding as of September 10, 1997)
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS.
RECENT DEVELOPMENTS
On July 2, 1997, Calnetics Corporation ("Calnetics" or the "Company")
entered into an Agreement and Plan of Acquisition, as amended ("Agreement"),
with Summa Industries, a California corporation ("Summa"), pursuant to which
Calnetics will be acquired by Summa through the merger of Calnetics with a new
wholly-owned subsidiary of Summa (the "Merger"). As a result of the Merger,
each share of Calnetics Common Stock will be converted into the right to
receive $7.35 in cash and Calnetics will be a wholly-owned subsidiary of Summa.
Consummation of the Merger is subject to satisfaction of various conditions,
including approval by the Calnetics shareholders and Summa's ability to obtain
financing. The Company currently anticipates that a Special Meeting of
Shareholders will be held in October to vote upon approval of the Agreement and
the transactions contemplated thereby, including the Merger.
GENERAL
Calnetics, founded in 1960, is a California corporation with its headquarters
located at 20401 Prairie Street, Chatsworth, California 91311 (telephone number
(818) 886-9819). The Company's Common Stock is listed on The Nasdaq National
Market under the symbol "CALN", and its fiscal year-end is June 30th.
All of the manufacturing operations of Calnetics are conducted through its
three wholly-owned subsidiaries (the "Calnetics Subsidiaries"). Manchester
Plastics Co., Inc. ("Manchester Plastics") is a California corporation located
in Chatsworth, California that manufactures proprietary items and custom
products of acrylic, polycarbonate and polystyrene plastic sheet, principally
for the building materials and industrial plastics industries. Ny-Glass
Plastics, Inc. ("Ny-Glass") is a California corporation located in Corona,
California that manufactures plastic parts, principally by use of injection
molding and structural foam molding techniques, and performs certain
value-added services for customers in a variety of industries. Agricultural
Products, Inc. ("API") is a California corporation with locations in Ontario,
California and Winter Haven, Florida, that manufactures fittings, filters,
plastic tubing and accessories, principally for irrigation use in the
agricultural industry. For the fiscal year ended June 30, 1997, approximately
70% of Calnetics' net sales of approximately $36.6 million were of proprietary
products. The remaining portion of net sales for such fiscal year were of
custom fabrication and production parts manufactured to each individual
customer's specifications. Such custom parts are produced for a wide variety
of industries, including the electronics industry.
HISTORY; GROWTH STRATEGY
In March 1988, Mr. Clinton G. Gerlach, the Chairman of the Board and President
of Calnetics, either directly or through Gerlach Holding Corporation, a
Delaware corporation of which Mr. Gerlach was then the sole shareholder
("GHC"), acquired an aggregate of 682,004 shares of Calnetics Common Stock.
GHC purchased 300,000 newly-issued shares directly from Calnetics, and the
remaining shares were purchased by Mr. Gerlach and GHC from individual
shareholders of Calnetics. In February 1992, GHC acquired all 403,500 shares
of Calnetics Common Stock then-owned by Mr. Larry Sacks, a former officer and
Director of Calnetics, resulting in aggregate ownership by GHC and Mr. Gerlach
of 1,085,504 shares, representing approximately 36% of the total shares of
Calnetics Common Stock outstanding as of
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the date hereof. Currently, the Gerlach Family Trust owns 52% of GHC, with the
remaining 48% owned by Mr. Gerlach's son and daughter.
Beginning in 1988, as part of its growth strategy, the new management of the
Company began to actively review and pursue potential merger and acquisition
candidates consisting principally of privately-held manufacturers in the
plastics industry. As a result of such strategy, the Company has made three
acquisitions since 1988. The following paragraphs provide a brief description
of each such acquisition in chronological order.
MANCHESTER PLASTICS. In September 1989, the Company acquired all of the
outstanding capital stock of Manchester Plastics for a purchase price of
approximately $525,000 in cash, a $110,000 promissory note and approximately
444,000 shares of the Company's Common Stock. Manchester Plastics was then and
currently is located in Chatsworth, California in a leased building. The lease
on such premises is scheduled to expire in December 1999.
NY-GLASS. In June 1992, the Company acquired substantially all of the assets
of Plastic Science, Inc. ("PSI") for a purchase price of approximately $320,000
in cash. In connection with the purchase of such assets, the Company entered
into a ten-year lease for the building in Corona, California where PSI had
formerly conducted its injection molding operations. In September 1992, the
Ny-Glass division of the Company, then located in Paramount, California, was
relocated to Corona, California and consolidated with the assets of PSI,
forming the business currently conducted by the Ny-Glass subsidiary of the
Company.
API. Effective April 1994, the Company acquired all of the outstanding capital
stock of API for a purchase price of approximately $4.4 million, payable $4.0
million in cash and $0.4 million in unsecured notes to the former API
shareholders. In connection with the acquisition, the Company obtained $4.5
million in cash from long-term bank financing from two lenders. At the time of
this acquisition, API had an outstanding principal balance of approximately
$1.44 million of industrial revenue bonds, the majority of which are still
outstanding as of the date hereof.
PRODUCTION
Through the Calnetics Subsidiaries, the principal manufacturing operations of
the Company are the extrusion of plastic sheet and tubing and injection and
structural foam molding of numerous plastic parts using various types of
resins. Through its API subsidiary, the Company also assembles certain parts
using sonic welding techniques. Although substantially all extrusions are
performed in-house by the Company, a material amount of injection molding of
plastic parts is performed by third parties, principally for API. Although the
Company designs, repairs, services and maintains molds for its own products and
those of its customers, it does not perform mold-making services. In addition
to the extrusion of sheet and tubing and the injection molding of clear and
colored plastic parts, the Company performs a variety of value-added services,
such as pin-insertion, heat stamping, silk screening, assembly, packaging and
short-term warehousing.
All production occurs at the Company's plants located in Chatsworth, Corona and
Ontario, California and in Winter Haven, Florida. Sheet products are made on
extrusion lines located at the Manchester Plastics plant. Tubing is made on
extrusion lines located at API's two plants, while the sonic welding of
fittings and other agricultural products occurs principally at API's Ontario
plant. All injection molding and structural foam molding occurs at the
Ny-Glass plant, which is ISO 9002 and UL certified, on molding machines ranging
from 75 to 800 tons clamping force.
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RAW MATERIALS; INVENTORIES
The Company maintains an inventory of raw materials and finished goods for sale
at levels determined to be desirable to enable each Calnetics Subsidiary to
quickly respond to customer demand. Although such raw materials and finished
goods on hand represent a substantial commitment of working capital, the
Company believes that a rapid response to customer catalog orders is essential
and that its inventory practices are not unusual in the industries in which it
competes.
The principal raw materials used by the Company with respect to the manufacture
of its products are resins for producing plastic parts. Each Calnetics
Subsidiary maintains what it considers to be a reasonable supply of raw
material resins, typically ranging from 30 to 60 days' supply. These amounts
are not increased except in times of expected shortages. Such resins are
purchased in pelletized form from several different suppliers, such as Dow
Chemical, Muehlstein, Cyro, Union Carbide, DuPont and GE Plastics. The Company
is not currently a party to any long-term agreements for the purchase of
resins. None of the Calnetics Subsidiaries is dependent upon any one supplier
for its present requirements of such resins nor are any such Subsidiaries
experiencing any shortages in supply, although Manchester Plastics experienced
nominal shortages of polycarbonate resin in the 1996 fiscal year. However,
there can be no assurance that shortages in one or more types of resin will not
occur from time to time.
CUSTOMERS AND MARKETING
The Company's largest customer, which is a customer of Ny-Glass, represented
less than five percent of the Company's combined net sales for the last fiscal
year. Although export sales of certain of the Company's products are
increasing, such sales represented less than five percent of the Company's
combined net sales for the last fiscal year. API sells a large percentage of
its products to customers in the Central Valley of California. Although the
Company had previously believed that the floods in such area earlier this
calendar year would have an adverse impact on sales of agricultural irrigation
products, a reduction in sales did not materialize. The Company does not have
any government contracts or any other contracts which are subject to the
renegotiation of profits or termination at the election of the government.
The Company markets its products at all four facilities by use of in-house
sales personnel and a limited number of outside sales representatives and
independent manufacturers representatives.
BACKLOG; SEASONALITY
Backlog orders consist of written purchase orders and telephone orders
generally confirmed in writing or by substantially concurrent delivery and
acceptance of product. The Company estimates that approximately 90% of its
sales orders are written. The Company normally does not offer cancellation
rights and considers its backlog of orders to be firm. As of June 30, 1997 and
1996, the Company's backlog for all products was approximately $2,497,000 and
$2,508,000, respectively. The backlog as of the end of the fiscal year on June
30, 1995 was $2,290,000. Typically, the Company anticipates that approximately
95% of its backlog at any given time will be filled during the subsequent 12
months.
Historically prior to the 1995 fiscal year, the Company's business was
not of a seasonal nature as neither the Manchester Plastics nor Ny-Glass
subsidiaries experienced seasonality in the sale of their products. However,
the business of the API subsidiary, which was purchased effective two months
prior to the 1995 fiscal year, has historically been seasonal in nature, with
demand for its irrigation products highest during the spring and early summer.
In fiscal 1997, the business of the Company reflected this
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trend, with approximately $17,032,000 of revenue in the first half of the
fiscal year (July through December) and approximately $19,584,000 during the
remainder of the fiscal year (January through June).
COMPETITION
Each of the Calnetics Subsidiaries encounters extensive competition from many
competitors, a substantial number of which are larger and have greater
financial and marketing resources. In addition, the Company believes that the
number of international entities attempting to compete in its markets is
increasing. Although it is difficult to estimate the number of businesses in
the plastic manufacturing industry with which the Company competes, the
injection molding business operated by Ny-Glass appears to have the most
competitors, ranging from numerous small proprietorships to large corporations,
while Manchester Plastics competes principally with a lesser number of large
corporations and API competes principally with a lesser number of corporations
of similar and larger size.
Competition is based principally on price, product quality, customer service
and the ability to timely deliver products. The Company believes that each
Calnetics Subsidiary has good relationships with its customers, and that such
Subsidiaries have developed a good following in the respective markets they
serve, including a favorable reputation for prompt and reliable customer
service and quality of products.
PATENTS AND TRADEMARKS
Although the Company has a limited number of domestic patents and trademarks
held by API as well as several trademark applications currently in process, the
Company does not believe that any such patents or trademarks are material to
its businesses or operations.
RESEARCH AND DEVELOPMENT
The Company has not expended a material amount on research and development of
proprietary products in the past several years and currently does not
anticipate any material expenditures in this area. However, the Company does
conduct routine product line analysis to develop additional catalog and custom
products as part of its normal operations, particularly at API and, to a lesser
extent, at Ny-Glass.
LEGAL PROCEEDINGS
In the ordinary course of its business, the Company and/or one or more of the
Calnetics Subsidiaries may become involved in legal proceedings from time to
time. As of the date of mailing of this Proxy Statement, neither the Company
nor any of the Calnetics Subsidiaries is a party to any material pending legal
proceedings.
TAX EXAMINATION
API is in the process of an Internal Revenue Service ("IRS") examination
regarding the tax-exempt status of its industrial revenue bond. The IRS has
informed the Company that preliminary findings indicate that the bond may not
be tax exempt and thus API may be required to pay additional interest. The
Company believes it has recorded adequate reserves to cover any potential
liability that may result from the final resolution of this matter.
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ENVIRONMENTAL MATTERS
The Company believes that its policy in controlling the use and discharge of
hazardous materials is in compliance with applicable federal, state and local
regulations. As of the date of the filing of this Form 10-K, the Company has
not received notice from any governmental authority of any assertion of
material non-compliance with any such laws.
The Company formerly operated a facility on property within an area
subsequently designated as a federal Superfund site located in Southern
California. The Company operated at this facility prior to October 1986. The
Company has learned that hazardous substances have been identified in the
subsurface of the property and that the current owner has been requested by a
state agency to undertake additional investigation at the property. The
Company is also aware that the property has been subject to a general notice
letter issued by the United States Environmental Protection Agency under the
federal Superfund law. The Company, as one of several prior operators of the
property, may be held responsible for the contamination at the site to the
extent the Company caused the contamination. The Company does not believe it
is responsible for any material contamination at the property, and has not been
notified or contacted by any governmental authority in that regard, nor named
in any proceeding relating to the property. However, if the Company were held
liable under federal Superfund law, or other environmental law, the
consequences could be material to the results of operations of the Company.
The potential liability associated with this property cannot be reasonably
determined at this time.
EMPLOYEES
At June 30, 1997, the Company employed approximately 262 employees, consisting
of three employees at corporate headquarters, approximately 12 salaried and 39
hourly employees at Manchester Plastics, approximately nine salaried and 48
hourly employees at Ny-Glass and approximately 25 salaried, 91 hourly and 35
temporary employees at API. None of the foregoing employees is subject to a
collective bargaining agreement. The Company considers the relationship with
its employees to be good, and has not experienced any work stoppage from any
labor dispute.
ITEM 2. PROPERTIES.
The Company headquarters and the Manchester Plastics corporate offices are
located in the Manchester Plastics plant in Chatsworth, California, consisting
of approximately 60,000 square feet of office and manufacturing space under a
lease that is scheduled to expire in December 1999.
The Ny-Glass corporate offices and plant are located in Corona, California, in
a building consisting of approximately 30,000 square feet of office and
manufacturing space under a lease that is scheduled to expire in May 2002.
The API corporate offices and California plant are located in Ontario,
California, in a building consisting of approximately 50,000 square feet of
office and manufacturing space owned by API, subject to repayment of industrial
revenue bonds. API's Florida plant is located in Winter Haven, Florida, in two
buildings consisting of approximately 28,000 square feet of office and
manufacturing space owned by API, subject to payment of existing mortgages.
In addition to the foregoing properties, additional space has been leased by
the Company at three locations and is being used principally for the
warehousing and storage of inventory. The largest location consists of
approximately 15,000 square feet of space leased by API in Ontario, California.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently subject to any legal actions which are
expected to have a material adverse effect on its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
(a) Market Information
Until June 19, 1996, Calnetics Common Stock was traded on The Nasdaq
Smallcap Market, but began trading on The Nasdaq National Market on June 20,
1996. The stock is quoted in the National Daily Quotation Service under the
symbol CALN. The following table sets forth the high and low bid and asked
quotations for the periods indicated. Quotations represent prices between
dealers, without retail markups, markdowns or commissions and may not
necessarily represent actual transactions.
Common Stock price information (in dollars):
<TABLE>
<CAPTION>
BID ASKED
----------------- -----------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
Year Ended June 30, 1997
First Quarter 8-5/8 6-3/4 9-3/8 7-1/2
Second Quarter 8 5-3/8 8-1/4 5-7/8
Third Quarter 7-1/2 6-1/8 7-5/8 6-3/8
Fourth Quarter 6-3/8 5 6-3/4 5-5/8
Year Ended June 30, 1996
First Quarter 4 3-3/4 4-3/4 4-1/2
Second Quarter 3-1/4 3 4-1/4 3-3/4
Third Quarter 4-3/4 4-1/2 5-1/8 5-1/8
Fourth Quarter 9-1/2 4-7/8 10-1/4 5-1/4
</TABLE>
(b) There were 285 shareholders of record as of September 19, 1997. The Nasdaq
National Market maintenance standards require that Calnetics has at least 400
shareholders or 300 shareholders of round lots. Based solely upon the number
of sets of proxy materials requested by brokers, dealers and other entities for
the Special Meeting of Shareholders expected to be held in October 1997,
Calnetics believes that the actual number of beneficial owners of Calnetics
Common Stock is in excess of 700.
(c) To date the Company has not paid any dividends, and the Company currently
does not intend to pay any dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected consolidated financial data of
the Company for each of the years in the five-year period ended June 30, 1997.
The selected consolidated financial data should be read in conjunction with (i)
the Company's consolidated financial statements and the notes thereto as set
forth in Item 14 below, and (ii) "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 below.
<TABLE>
<CAPTION>
=====================================================================================================
YEAR ENDED JUNE 30
(IN DOLLARS)
- -----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 36,616,238 35,193,973 29,172,106 17,996,617 16,564,448
- -----------------------------------------------------------------------------------------------------
Net income 2,031,022 1,671,915 1,006,066 616,975 502,176
- -----------------------------------------------------------------------------------------------------
Earnings per 0.66 0.55 0.33 0.21 0.17
common share
- -----------------------------------------------------------------------------------------------------
Capital 670,929 995,026 512,153 113,884 340,617
expenditures
- -----------------------------------------------------------------------------------------------------
Total assets 19,262,165 18,686,292 17,122,578 16,376,776 7,484,777
- -----------------------------------------------------------------------------------------------------
Long-term debt, 3,745,697 4,740,820 5,551,284 6,284,524 ---
net
- -----------------------------------------------------------------------------------------------------
Shareholders' 11,187,395 8,872,771 7,136,146 6,099,882 5,296,342
equity
=====================================================================================================
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's consolidated
financial statements and notes thereto in Item 14 below and the unaudited
"Selected Financial Data" in Item 6 above.
The businesses of the Company are principally concentrated on the manufacture
of various types and sizes of plastic parts, sheet and tubing using several
types of resins. Such parts, sheet and tubing are manufactured using injection
molding, structural foam molding, extrusion and other processes. The sonic
welding of certain parts is performed by the API subsidiary, principally at its
plant in Ontario, California. In addition to the manufacture and molding of
plastic parts, sheet and tubing, each business provides certain value-added
services for its customers, such as mold maintenance and repair, coloring,
pin-insertion, heat stamping, silk screening, assembly, packaging and short-term
warehousing. For an overview as to how and when the Company became involved in
the businesses it currently conducts, see Item 1 "Business - History; Growth
Strategy" above.
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Effective July 1, 1994, the Company changed its method of pricing finished
goods inventories at Manchester Plastics from FIFO to LIFO. The change in
method was made to more properly match current expenses with revenues. At June
30, 1997, 1996 and 1995, if the FIFO method had been used to value Manchester
Plastics' finished goods inventories, the stated value of such inventories would
have been approximately $129,000, $421,000 and $408,000 higher, respectively,
and the effect on fiscal 1997 operations would have decreased income before
provision for income taxes by $292,000, and increased such amount by $13,000 and
$408,000 in fiscal 1996 and 1995, respectively, and decreased net income by
$175,000 in fiscal 1997, and increased such amount by $7,000 and $230,000 in
fiscal 1996 and 1995, respectively.
RESULTS OF OPERATIONS
The following table sets forth certain information derived from the
Company's consolidated statements of income as a percentage of sales for the
three years ended June 30, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
--------------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net sales ..................................................... 100.0% 100.0% 100.0%
Gross profit .................................................. 25.5% 25.4% 27.4%
Selling, general and
administrative expense ..................................... 17.8% 16.0% 17.5%
Income before provision
for income taxes ........................................... 6.0% 8.3% 9.2%
Net income .................................................... 3.5% 4.8% 5.6%
</TABLE>
NET SALES. For the fiscal year ended June 30, 1996, net sales increased
21%, from $29,172,106 in the 1995 fiscal year to $35,193,973. The increase is
attributed to broader customer acceptance of the Company's products
proportionally obtained by all three subsidiaries.
For the fiscal year ended June 30, 1997, net sales increased 4%, from
$35,193,973 in the 1996 fiscal year to $36,616,238. The increase is principally
attributed to increased orders for API's products in the agricultural
irrigation industry and better economic conditions and growth in the economy as
a whole. Contrary to the Company's expectations, sales of irrigation products
at API were not adversely affected by the floods in the Central Valley in
California in early 1997.
COST OF SALES. As a percentage of sales, cost of sales amounted to 74.6% in
fiscal 1996, as compared to 74.5% for the prior fiscal year.
For the fiscal year ended June 30, 1997, costs of sales, as a percentage of
sales, decreased to 72.6%, as compared to 74.6% for the prior fiscal year. The
decrease is
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primarily attributed to increased sales volume in the current year versus the
prior fiscal year and the benefits of pricing Manchester Plastics' finished
goods inventory using the LIFO method.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased during the fiscal year ended June 30, 1996 to
$5,627,299, as compared with $5,187,534 for the prior fiscal year. The increase
is attributed to the increased sales volume in fiscal 1996 as compared with
fiscal 1995.
For the fiscal year ended June 30, 1997, selling, general and administrative
expenses increased to $6,400,237, as compared with $5,627,299 for the prior
fiscal year. The increase is primarily attributed to the increased sales volume
in the current fiscal year versus the prior fiscal year and the aborted merger
costs associated with the attempted merger between the Company and Summa
terminated in May 1997.
NET INCOME. For the fiscal year ended June 30, 1996, net income amounted to
$1,671,915 after provision for income taxes of $1,262,000, as compared with
$1,006,066 after a provision for income taxes of $739,000 in the previous fiscal
year. Income per share increased from $0.33 per share in fiscal 1995 to $0.55
per share in fiscal 1996. The increase in net income and income per share is
primarily attributed to increased sales volume at all three Calnetics
subsidiaries.
For the fiscal year ended June 30, 1997, net income amounted to $2,031,022
after provision for income taxes of $1,318,000, as compared with $1,671,915
after a provision for income taxes of $1,262,000 in the previous fiscal year.
Income per share increased from $0.55 per share in fiscal 1996 to $0.66 per
share in fiscal 1997. The increase in net income is primarily attributed to
increased sales volume, principally at API, as well as the benefits of using the
LIFO method of inventory valuation for finished goods at Manchester Plastics,
and the benefit of a California manufacturing tax credit.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the primary source of liquidity for the Company was cash
generated from operations. Working capital at June 30, 1997 increased to
approximately $9,341,000, as compared with approximately $7,926,000 at June 30,
1996, and current ratios were 3.20:1.0 and 2.58:1.0 at June 30, 1997 and 1996,
respectively.
Expenditures for property and equipment were approximately $671,000 for the
fiscal year ended June 30, 1997, as compared with approximately $994,000 for the
fiscal year ended June 30, 1996. The Company has no immediate plans for
significant capital expenditures in fiscal 1998. The Company believes that its
available funds and internally generated cash from operations will be sufficient
to meet its working capital needs in fiscal 1998. Certain loan agreements limit
capital expenditures by the Company to $1,000,000 in 1997 and thereafter.
The Company has a line of credit agreement with a bank under which the
Company may borrow up to $2,500,000 on an unsecured basis. No borrowings were
made against this credit line in fiscal 1997. The agreement expires on December
31, 1997 and bears interest at the bank's reference rate (8.50% at June 30,
1997).
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In 1994, Calnetics borrowed $4.5 million to finance the acquisition of its
API subsidiary from two banks at their respective prime rates plus 0.75%. This
term debt is due in installments with a balloon payment of approximately $1.46
million due in August 1999, and has been revised to be unsecured and to bear
interest at prime plus 0.25%. Due to a combination of regular scheduled
payments and certain prepayments, the principal balance of such debt at June 30,
1997 had been reduced to approximately $2,008,000. Calnetics also issued
unsecured notes payable to former API shareholders in the amount of $402,000 in
connection with the acquisition with a current principal balance of
approximately $201,000 and an interest rate of 7.5%, due in equal principal
payments on June of each of the next two years, interest payable quarterly.
In addition to the foregoing borrowings by Calnetics, the API subsidiary has
outstanding (i) an industrial revenue bond used to finance the building of the
Ontario plant with current principal balance of approximately $1.4 million, with
principal due in installments ranging from $20,000 to $130,000 through December
2021 and interest at an adjustable revenue bond rate (4.15% at June 30, 1997),
and (ii) mortgages payable used to finance the purchase of the Winter Haven
plant with current principal balance of approximately $255,000, principal due in
installments and a balloon payment of approximately $201,000 due in March 2000
and interest at the bank's prime rate plus 0.75%.
Although the impact of inflation is difficult to accurately assess,
management of the Company does not believe that inflation has had a significant
impact on the Company's net sales and revenues, or on income from continuing
operations in the current period, or in the two preceding fiscal years.
As part of the Company's business strategy, the Company frequently evaluates
potential mergers with or acquisitions of companies in the thermoplastics
industry and in other industries which management believes offer significant
growth opportunities. Other than the Merger, the Company has no present
understanding or commitment with respect to any merger or acquisition.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.
The financial statements are listed under Part IV, Item 14 in this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's Directors are elected at each annual meeting of shareholders.
The number of authorized Directors of the Company is between five and nine
Directors, and is currently set at five. If the Merger is not consumated, five
Directors will be elected at the 1997 annual meeting to serve until the annual
meeting of shareholders in 1998 and until their respective successors are
elected and qualified. Four of the persons listed below as Directors have
consented to serve as Directors if elected, and the Company knows of no reason
why any of the four would not be available for election or, if elected, would
not be willing or able to serve. Director Peter Griffith has resigned as
Managing Director of Wedbush Morgan Securities to become a partner at an
international accounting firm, effective on September 30, 1997 or soon
thereafter. Such firm does not permit its partners to be public company
directors. Therefore, the Company anticipates that Mr. Griffith will resign as
a Director in the near future. If the Merger is not consummated, the Board
will nominate a replacement for Mr. Griffith to be elected at the 1997 annual
meeting.
The names, ages and positions of all the Directors and executive officers
of the Company are listed below, followed by a brief account of their business
experience during the past five years. Officers are normally appointed
annually by the Board of Directors at a meeting of the Directors immediately
following the annual meeting of shareholders. There are no family
relationships among these officers or any arrangements or understandings
between any officers and any other person pursuant to which an officer was
selected. None of these officers has been involved in any court or
administrative proceeding within the past five years adversely reflecting on
his or her ability or integrity.
<TABLE>
<CAPTION>
NAME POSITIONS WITH THE COMPANY AGE
---- -------------------------- ---
<S> <C> <C>
Clinton G. Gerlach Chairman of the Board, President, 71
and Chief Executive Officer
Fred E. Edward Director 79
Peter H. Griffith Director 38
Michael A. Hornak Vice President and Director 54
Steven L. Strawn Vice President and Director 43
Trygve M. Thoresen Vice President - Finance, General 33
Counsel and Assistant Secretary
Teresa S. Louie Treasurer 43
Barbara Guyer Secretary 34
Lon Schultz President and Director of API 63
</TABLE>
Page 12
<PAGE> 13
Clinton G. Gerlach has served as the Chairman of the Board, President and
Chief Executive Officer of Calnetics since March of 1988 and as the Chairman of
the Board and Director of Manchester Plastics since September 1989, and as
Director, Chairman of the Board and Chief Executive Officer of Ny-Glass since
June 1992, and as Director and Chairman of the Board of API since June 1994. Mr.
Gerlach was the Chairman of the Board and Chief Executive Officer of Gerlach
Industries, Inc. from November 1983 to December 1986 and was the Chairman of the
Board and Chief Executive Officer of Tannetics, Inc. from August 1969 to
November 1983. From January 1987 to March 1988, Mr. Gerlach was self employed.
Mr. Gerlach retired effective July 24, 1996 as a Director of Zero Corporation
(a manufacturer of cases, cabinets, cooling and cargo enclosures).
Fred E. Edward has been a Director of Calnetics since 1971. Between May
1971 and March 1988, Mr. Edward held various offices with Calnetics, including
Chairman of the Board, President and Chief Executive Officer. For more than the
past five years, Mr. Edward has been and currently is a private investor.
Peter H. Griffith has served as Managing Director of Wedbush Morgan
Securities ("Wedbush Morgan") since November 1993. Mr. Griffith also serves as
the Head of Investment Banking and Equity Research for Wedbush Morgan. From
September 1992 to November 1993, Mr. Griffith served as Senior Vice President,
Investment Banking for Wedbush Morgan, and from October 1989 to September 1992
Mr. Griffith served as Vice President, Investment Banking for Wedbush Morgan.
Prior to October, 1989, Mr. Griffith was a Senior Manager with Ernst & Young LLP
and is a certified public accountant. Mr. Griffith was elected as a Director by
the Board of Directors of the Company on August 30, 1996 to fill a vacancy
created by the death of Raymond H. Heller.
Michael A. Hornak has been a Vice President of Calnetics since 1974 and a
Director of Calnetics since 1984. Mr. Hornak was the President of the Ny-Glass
division from 1985 to June 1992, President and Director of the Ny-Glass
subsidiary since June 1992, and was President of another division of Calnetics
from 1973 to 1985.
Steven L. Strawn has been a Vice President of Calnetics since September 1989
and Director since February 1992. Mr. Strawn has also been President, Director
and Chief Operations Officer of Manchester Plastics since 1989, the date of the
acquisition, and held various other positions with its predecessor, Manchester
Products, from 1980 to 1989.
Trygve M. Thoresen has been the Vice President-Finance, General Counsel and
Assistant Secretary of Calnetics since January 1997 and is currently a Vice
President and a Director of each subsidiary. From September 1992 until January
1997, Mr. Thoresen was a corporate, mergers and acquisitions and securities
attorney with Gibson, Dunn & Crutcher LLP. From August 1989 until May 1992, Mr.
Thoresen attended Hastings College of the Law. Prior to law school, Mr.
Thoresen was a senior accountant at KPMG Peat Marwick LLP. Mr. Thoresen is also
a certified public accountant in the State of California (currently inactive).
Teresa S. Louie has been with Calnetics since August 1973, was appointed
Treasurer of Calnetics in February 1992 and has held various offices with
Calnetics including Assistant Treasurer, Assistant Secretary and Controller.
Barbara Guyer joined Manchester Plastics in April 1985, was appointed
Treasurer and Controller of Manchester Plastics in February 1992 and was
appointed Secretary of Calnetics in May 1996.
Page 13
<PAGE> 14
Lon Schultz is the founder, President, Chief Financial Officer and a
Director of API. API was formed in 1973 and Mr. Schultz has been the President
of API since the date of inception. Mr. Schultz has also been a Director of
Story Plastics, Inc. since 1975.
COMMITTEES
During fiscal year 1997, there were nine (9) meetings of the Board of
Directors. Each Director attended at least 75% of the total number of meetings
of the Board of Directors and the committees of the Board of Directors on which
he serves. During fiscal 1997, Directors who are not employees of the Company
received, other than for meetings transacted only by written consent, $1,000
for each meeting of the Board of Directors attended and $500 for each
committee meeting attended. Directors who are not employees of the Company are
eligible for the grant of options under the 1993 Nonstatutory Stock Option
Plan. To date, options to purchase 10,000 shares of the Company's Common Stock
have been granted to Director Peter Griffith.
The Company has no standing committees of the Board of Directors, other
than the Audit Committee and the Stock Option Committee. The principal duties
of the Audit Committee are to nominate the firm of independent outside auditors
for appointment by the Board of Directors, to review the scope of their audit
engagement, and to meet with the Company's financial management and independent
outside auditors to discuss matters relating to internal accounting controls
and the results of audits performed by the Company's independent outside
auditors. The current members of the Audit Committee are Fred E. Edward,
Chairman, Peter H. Griffith and Clinton G. Gerlach. The Audit Committee held
one (1) meeting during fiscal 1997.
Messrs. Edward, Griffith and Gerlach currently serve on the Stock Option
Committee, the functions of which include making all determinations necessary
for the administration of the Company's 1993 Nonstatutory Stock Option Plan and
1995 Employee Stock Option Plan. The Stock Option Committee held one (1)
meeting during fiscal 1997.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Securities Exchange Act of 1934 and the
rules issued thereunder, the Directors and executive officers of the Company
are required to timely file with the Securities and Exchange Commission and
with the National Association of Securities Dealers reports of ownership and
changes in ownership of the Common Stock. Copies of such reports are required
to be furnished to the Company. Based solely on its review of the copies of
such reports furnished to the Company, or written representations that no
reports were required, the Company believes that during fiscal 1997, all of its
Directors and executive officers complied with Section 16(a) requirements.
Page 14
<PAGE> 15
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth all cash compensation paid or accrued by the
Company for services rendered during the three fiscal years ended June 30, 1997
by the President and Chief Executive Officer and the four other most highly
compensated executive officers of the Company. There were no other executive
officers of the Company whose total annual salary and bonus exceeded $100,000
in fiscal year 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------- SECURITIES
UNDERLYIN ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS OPTIONS COMPENSATION
---- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
Clinton G. Gerlach (1) ..... 1997 --- --- --- ---
President, Chief Executive . 1996 --- --- --- ---
Officer and Chairman ....... 1995 --- --- --- ---
of the Board
Michael A. Hornak (2) ...... 1997 $ 88,400 $ 13,500 --- $ 12,449
Vice President and President 1996 $ 81,861 $ 10,000 --- $ 8,216
of Ny-Glass Plastics ....... 1995 $ 77,246 $ 5,000 --- $ 7,594
Steven L. Strawn (3) ....... 1997 $105,000 $ 15,000 --- $ 10,473
Vice President and President 1996 $ 94,039 $ 10,000 --- $ 10,400
of Manchester Plastics ..... 1995 $ 96,181 $ 7,500 --- $ 10,351
Lon Schultz (4) ............ 1997 $346,181 $ 40,000 --- $ 32,949
President and Treasurer .... 1996 $360,734 $ 40,000 --- $ 34,804
of API ..................... 1995 $353,887 $ 20,000 50,000 $ 22,749
Trygve M. Thoresen (5) .... 1997 $ 45,385 $ 15,000 50,000 $ 4,152
Vice President-Finance ..... 1996 --- --- --- ---
and General Counsel ........ 1995 --- --- --- ---
- ---------------------
</TABLE>
(1) Receives no compensation for his services in such capacities. The
Company paid $72,000 to GHC during the fiscal year ended June 30,
1997, $60,000 to GHC during the fiscal year ended June 30, 1996 and
$56,000 to GHC during the fiscal year ended June 30, 1995, to
reimburse Mr. Gerlach for expenses incurred in connection with his
performance of services for the Company. In addition, Mr. Gerlach has
use of a vehicle owned by the Company.
(2) The Company provides a vehicle for Mr. Hornak and the operating
expense paid by the Company for such vehicle in the fiscal year ended
June 30, 1997 was $11,752, fiscal year ended June 30, 1996 was $7,708
and fiscal year ended June 30, 1995 was $7,145, and the Company paid
life insurance premiums of $697 for fiscal year ended June 30, 1997,
$508 for the fiscal year ended June 30,1996 and $449 for fiscal year
ended June 30, 1995.
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<PAGE> 16
(3) The Company provides a car allowance of $10,000 per fiscal year for
Mr. Strawn, and the Company paid life insurance premiums of $473 for
fiscal year ended June 30, 1997, $400 for the fiscal year ended June
30, 1996 and $351 for the fiscal year ended June 30, 1995.
(4) The Company provides a vehicle for Mr. Schultz and the operating
expense paid by the Company for such vehicle in fiscal year ended June
30, 1997 was $8,205, in fiscal year ended June 30, 1996 was $9,980 and
in fiscal year ended June 30, 1995 was $7,900, and the Company paid
life insurance premiums of $15,995 for the fiscal year ended June 30,
1997, $15,753 for fiscal year ended June 30, 1996 and $9,674 for
fiscal year ended June 30, 1995. Mr. Schultz also received profit
sharing of $8,748 for fiscal year ended June 30, 1997, $9,071 for
fiscal year ended June 30, 1996 and $5,175 for the fiscal year ended
June 30, 1995.
(5) Mr. Thoresen became an employee of the Company in January 1997. The
Company provides a vehicle for Mr. Thoresen and the operating expense
paid by the Company for such vehicle in the fiscal year ended June 30,
1997 was $3,942, and the Company paid life insurance premiums of $210
for the fiscal year ended June 30, 1997.
STOCK OPTION PLANS
The Company currently has in effect the 1993 Nonstatuatory Stock
Option Plan (the "1993 Plan") which was adopted by the Board of Directors of
the Company and approved at the 1993 Annual Meeting of Shareholders. The 1993
Plan provides for the grant of options to purchase up to 250,000 shares of
Common Stock, subject to adjustment in the event of a reorganization,
recapitalization, reclassification, stock dividend, stock split or reverse
stock split. Those eligible for the awards under the 1993 Plan are key
employees, including officers and directors. The 1993 Plan is administered by
a committee of three directors which have been appointed by the Board of
Directors. The exercise price for options granted under the 1993 Plan may not
be less than the fair market value of the stock on the date any such option is
granted. The 1993 Plan expires on March 1, 2003 unless previously terminated.
The Company currently has in effect the 1995 Employee Stock Option
Plan (the "1995 Plan") which was adopted by the Board of Directors of the
Company and approved at the 1995 Annual Meeting of Shareholders. The 1995 Plan
provides for the grant of options that qualify as incentive stock options
("ISOs") under the Internal Revenue Code of 1986 (the "Code"). The 1995 Plan
provides for the grant of options to purchase up to 250,000 shares of Common
Stock, subject to adjustment in the event of a reorganization,
recapitalization, reclassification, stock dividend, stock split or reverse
stock split. Those eligible for the awards under the 1995 Plan are key
employees, including officers and employee-directors. The 1995 Plan is
administered by a committee of three directors who have been appointed by the
Board of Directors. The exercise price for options granted under the 1995 Plan
may not be less than the fair market value of the stock on the date any such
option is granted (110% of the fair market value for optionees who are 10% or
more shareholders on the grant date). The term of each ISO may not exceed ten
years (five years for optionees who are 10% or more shareholders at time of
grant). The 1995 Plan expires on June 14, 2005 unless previously terminated.
10,000 options were granted under the 1993 Plan and 65,000 options
were granted under the 1995 Plan during the fiscal year ended 1997, and as of
June 30, 1997, options were available for grants of up to 90,000 and 185,000
shares under the 1993 Plan and 1995 Plan, respectively.
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<PAGE> 17
The following options were granted under the 1995 Plan during the year
ended June 30, 1997:
OPTION* GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% of Total Potential Realizable
Number of Options Value at Assumed Annual
Securities Granted Rates of Stock Price
Underlying to Exercise Appreciation for Option Term(2)
Options Employees Price Expiration -------------------------------
Name Granted(1) in 1997 per Share Date 5% 10%
- ------------------- ---------- --------- --------- ---- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Clinton G. Gerlach --- --- --- --- --- ---
Michael A. Hornak --- --- --- --- --- ---
Steven L. Strawn --- --- --- --- --- ---
Lon Schultz --- --- --- --- --- ---
Trygve M. Thoresen 50,000 67% $6.125 1/26/07 $153,125 $306,250
</TABLE>
_________________________
* The Company does not grant Stock Appreciation Rights.
(1) These options were granted pursuant to the 1995 Plan and the shares
vest in one-third increments in January 1998, 1999 and 2000.
(2) Potential realizable value is based on an assumption that the market
price of the stock appreciates at the stated rate, compounded
annually, from the date of grant to the expiration date. These values
are calculated pursuant to requirements promulgated by the SEC and do
not reflect the Company's estimate of future stock price appreciation.
Actual gains, if any, are dependent on the future market price of the
Common Stock.
AGGREGATED OPTION* EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED VALUE OPTIONS AT 6/30/97 AT 6/30/97(2)
NAME ON EXERCISE(#) REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- -------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Clinton G. Gerlach --- --- --- --- --- ---
Michael A. Hornak --- --- 50,000 --- $190,500 ---
Steven L. Strawn 25,000 $139,050 50,000 --- $190,500 ---
Lon Schultz --- --- 33,333 16,667 $ 93,666 $ 46,834
Trygve M. Thoresen --- --- --- 50,000 --- $ -0-
</TABLE>
_________________________
* The Company has not granted Stock Appreciation Rights.
(1) Represents the difference between the fair market value on the date of
exercise of the option and the exercise price of the option.
(2) Based on the closing price of $5.81 quoted on the Nasdaq National
Daily Quotation Service on June 30, 1997.
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
Pursuant to a June 1994 employment agreement, Mr. Schultz agreed to
serve as the President and as a Director of Calnetics' subsidiary, API, for an
initial term of three years commencing on June 20, 1994. The agreement
provided for a monthly salary of $29,167 and maintenance by API during the term
of the agreement of certain existing life insurance policies covering the life
of Mr. Schultz with a 50% beneficiary named by Mr. Schultz. Under the
agreement, Mr. Schultz was entitled to his monthly salary for the remainder of
the term of the agreement if he was terminated without cause. In the event Mr.
Schultz is terminated for cause or due to death or long-term disability, Mr.
Schultz or his estate would be entitled to receive a monthly salary of $16,667
for the remainder of the initial term of the agreement. Pursuant to an
amendment to Mr. Schultz's employment agreement entered into recently, the term
of such employment agreement has been extended by two years to expire in June
1999. Mr. Schultz has
Page 17
<PAGE> 18
agreed to serve in his present capacities for a monthly salary of $18,750 in
the first year of such extension and $25,000 in the second year.
Pursuant to a January 1997 change in control agreement, in the event
there is a change in control of Calnetics and, thereafter, Mr. Thoresen is
terminated without cause or resigns for "good reason," Calnetics or its
successor will be required to pay Mr. Thoresen a lump sum distribution equal to
one year's salary and bonus. The Merger constitutes a change in control as
defined in such agreement.
REPORT OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION
The Board of Directors generally administers the Company's executive
compensation programs as the Company does not have a compensation committee.
Individual directors who are also executive officers of the Company do not
participate in decisions regarding their compensation. The Company does have a
Stock Option Committee that is responsible for recommending to the Board and
administering all elements of stock option grants, including determination of
recipients of stock options under the Company's plans, the number of shares
underlying all option grants and the other terms applicable to each option.
The Board of Directors reviews and approves salaries of all elected officers,
including those of the executive officers named in the Summary Compensation
Table. The Company's executive compensation programs are designed to:
- provide competitive levels of base compensation in order to
attract, retain and motivate high-quality employees;
- tie individual total compensation to individual performance
and the success of the Company; and
- align the interests of the Company's executive officers with
those of its shareholders.
BASE SALARY
Base salary is targeted to be moderate but competitive in relation to
salaries commanded by those in similar positions in comparable companies. The
Board reviews management recommendations for executives' salaries and examines
data for executives with similar responsibilities in comparable companies in
the Company's industry. Individual salary determinations are based on
experience, sustained performance and comparison to peers inside and outside
the Company.
STOCK OPTIONS
The Stock Option Committee administers the Company's option plans,
including the 1993 Plan and the 1995 Plan, and is responsible for the
recommendation to the Board of Directors of stock option grants. The 1993 and
1995 Plans are designed to align the interests of management with those of the
Company's shareholders. The number of stock options granted varies by fiscal
year in the discretion of the Stock Option Committee and is related to the
recipient's base compensation and level of responsibility. In past years,
option grants have typically been made to only one or two officers in a given
fiscal year.
Page 18
<PAGE> 19
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
At his election, Clinton G. Gerlach, the President, Chief Executive
Officer and Chairman of the Board of the Company, serves without compensation.
Mr. Gerlach is reimbursed by payment to GHC for various expenses incurred in
connection with his performance of services for the Company, and has use of a
vehicle owned by the Company.
BOARD OF DIRECTORS
Clinton G, Gerlach (Chairman)
Fred E. Edward
Peter H. Griffith
Michael A. Hornak
Steven L. Strawn
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following current members of the Company's Board of Directors are
current or former officers or employees of the Company: Clinton G. Gerlach
(President, Chief Executive Officer and Chairman of the Board); Fred E. Edward
(former President, Chief Executive Officer and Chairman of the Board); Michael
A. Hornak (Vice President); and Steven L. Strawn (Vice President). There are
no compensation committee interlocks between the Company's Board of Directors
and other entities involving the Company's executive officers and Board members
who serve as executive officers or board members of such other entities.
COMPARISON OF CUMULATIVE TOTAL RETURN
OF COMPANY, INDUSTRY INDEX AND BROAD MARKET
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
------------------------------------------------------
COMPANY 1992 1993 1994 1995 1996 1997
- ------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CALNETICS CORP 100 200.00 236.36 327.27 654.55 422.73
INDUSTRY INDEX 100 119.57 147.83 223.90 379.48 472.08
BROAD MARKET 100 122.76 134.61 157.88 198.73 239.40
</TABLE>
ASSUMES $100 INVESTED ON JULY 1, 1992
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING JUNE 30, 1997
Page 19
<PAGE> 20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of September 19, 1997 by each
shareholder known by Calnetics to be the beneficial owner of more than 5% of
its outstanding shares of Common Stock, each director of Calnetics, and all
executive officers and directors of Calnetics as a group. Except as otherwise
indicated in the footnotes to the following table, each of the persons listed
below has sole voting and investment power with respect to the shares of Common
Stock shown as beneficially owned by such person, subject to applicable
community property laws. Unless otherwise indicated, the address of each
shareholder listed is in care of Calnetics, 20401 Prairie Street, Chatsworth,
California 91311.
<TABLE>
<CAPTION>
Shares Percent of
Name Beneficially Owned Class (1)
- ---- ------------------ ---------
<S> <C> <C>
Clinton G. Gerlach (2)(4) ................................. 1,175,504 39
Fred E. Edward (3)(4) ..................................... 202,064 7
Peter H. Griffith (5) ..................................... -0- *
Michael A. Hornak (6) ..................................... 134,500 4
Steven L. Strawn (4)(6) ................................... 140,000 5
Lon Schultz (7) ........................................... 51,500 2
Trygve M. Thoresen (8) .................................... -0- *
All Directors and Executive Officers as a Group
(8 persons)(5)(9) ......................................... 1,721,568 57
</TABLE>
- ---------------------------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules and
regulations of the Commission, based upon information furnished by
each person listed. The percentages shown include shares which each
named shareholder has the right to acquire within 60 days of September
19, 1997. In calculating percentage ownership, all shares which a
named shareholder has the right to so acquire are deemed outstanding
for the purpose of computing the percentage ownership of that
shareholder, but are not deemed outstanding for the purpose of
computing the percentage ownership by any other shareholder. Listed
persons may disclaim beneficial ownership of certain shares.
(2) Includes 1,085,504 shares held of record by Gerlach Holding
Corporation, a Delaware corporation ("GHC"), owned by the following
entities or individuals by the percentages indicated: The Gerlach
Family Trust (52%) and Mr. Gerlach's son and daughter, Clinton G.
Gerlach, II (24%) and Kimberlee Ann Grot (24%). Each of the GHC
shareholders has a right of first refusal on a prorata basis covering
the GHC stock owned by the remaining GHC shareholders pursuant to a
right of first refusal agreement dated July 1, 1992. Also includes
(i) 10,000 shares of Common Stock held of record by the Gerlach Family
Trust and (ii) 80,000 shares of Common Stock held of record by Mr.
Gerlach's nephew, Charles Gerlach, as to which Mr. Gerlach has sole
voting power.
(3) Held of record by the Fred and Evelyn Edward Family Trust, Fred
Edward, Trustee (the "Edward Trust").
Page 20
<PAGE> 21
(4) GHC has a right of first refusal covering the 202,064 shares of Common
Stock owned by the Edward Trust pursuant to a certain right of first
refusal agreement dated as of March 11, 1988. In addition, pursuant
to agreements Mr. Gerlach, through GHC, has a right of first refusal
covering (i) 40,000 shares of Common Stock owned by Steven L. Strawn,
Vice President and Director of Calnetics and (ii) 71,230 shares of
Common Stock owned by another shareholder of Calnetics.
(5) Excludes an option to purchase 10,000 shares of Common Stock at an
exercise price of $5.875 per share which becomes exercisable in
November 1997.
(6) Includes presently exercisable options to acquire 50,000 shares of
Common Stock at an exercisable price of $2.00 per share held by each
and, in the case of Mr. Hornak, includes 3,000 shares held by his son.
(7) Includes presently exercisable options to acquire 50,000 shares of
Common Stock at an exercise price of $3.00 per share.
(8) Excludes an option to acquire 50,000 shares of Common Stock at an
exercise price of $6.125 per share which will become exercisable in
equal one-third increments in January 1998, 1999 and 2000 (such option
will become fully exercisable as a result of the Merger).
(9) Excludes an option held by Mr. Thoresen to acquire 50,000 shares of
Common Stock. See footnote 8 above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In connection with the acquisition of API in fiscal year 1994,
Calnetics issued to certain parties related to Mr. Lon Schultz (the Lon Schultz
Charitable Remainder Unitrust and Leslie Schultz) notes payable of approximately
$124,000 each as part of the consideration for their shares of API common stock.
The notes payable are five-year unsecured notes with interest payable
semi-annually and principal due in four equal annual installments commencing
June 1996.
On June 20, 1994, API and Story Plastics, Inc., a California corporation
("Story"), entered into a four-year Parts Purchase and Supply Agreement whereby
Story agreed to supply various injected molded parts to API and API agreed to
purchase such parts as it reasonably needs based on past purchases of such
parts. The agreement by API to purchase its reasonable needs of such parts
from Story decreases each year, such that by the fourth year API is only
required to purchase 25% of its reasonable needs from Story. Mr. Schultz is a
Director of Story, owns approximately 9% of its outstanding common stock and
has guaranteed certain payments to a financial institution. For the year
ending June 30, 1997, API purchased $1,581,387 in parts from Story.
Page 21
<PAGE> 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
1. EXHIBITS
See Index to Exhibits set forth in this form 10-K following the
financial statements below.
<TABLE>
<CAPTION>
Reference to
this Form 10-K
---------------
<S> <C> <C>
2. FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report 23
Consolidated Balance Sheets,
June 30, 1997 and 1996 24
Consolidated Statements of Income
and Retained Earnings for the Years
Ended June 30, 1997, 1996 and 1995 26
Consolidated Statements of Shareholders' Equity
for the Years Ended June 30, 1997, 1996 and 1995 27
Consolidated Statements of Cash Flows for
the Years Ended June 30, 1997, 1996 and 1995 28
Notes to Consolidated Financial
Statements 30
Schedule II - Valuation and Qualifying Accounts 40
</TABLE>
SCHEDULES OMITTED:
Schedules not listed above are omitted because of the absence of
conditions under which they are required or because the information is
included in the financial statement named above or in the notes
thereto.
3. REPORTS ON FORM 8-K
During the quarter ended June 30, 1997, the Company did not file a Form
8-K.
Page 22
<PAGE> 23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Directors and Shareholders of Calnetics Corporation:
We have audited the accompanying consolidated balance sheets of CALNETICS
CORPORATION (a California Corporation) and subsidiaries as of June 30, 1997 and
1996, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended June 30, 1997.
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 financial position of Calnetics Corporation and
subsidiaries as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
July 25, 1997
Page 23
<PAGE> 24
CALNETICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,422,119 $ 1,877,633
Accounts receivable, net of allowances of
$316,000 in 1997 and 1996 5,220,127 4,997,471
Inventories 5,391,659 5,470,710
Prepaid expenses 105,487 254,608
Deferred income taxes 451,000 342,000
----------- -----------
Total current assets 13,590,392 12,942,422
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 466,288 466,288
Buildings and leasehold improvements 2,277,763 2,269,525
Machinery and equipment 5,292,340 4,587,322
Furniture and fixtures 278,193 248,220
----------- -----------
8,314,584 7,571,355
Less--Accumulated depreciation and
amortization 4,143,601 3,399,998
----------- -----------
4,170,983 4,171,357
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$403,938 and $331,638 in 1997 and 1996,
respectively 1,328,968 1,401,268
Deposits and other assets 171,822 171,245
----------- -----------
1,500,790 1,572,513
----------- -----------
$19,262,165 $18,686,292
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
Page 24
<PAGE> 25
CALNETICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1997 AND 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 150,846 $ 247,187
Accounts payable 2,413,551 3,214,786
Accrued liabilities 900,041 756,050
Accrued compensation and benefits 542,612 411,657
Income taxes payable 242,023 386,021
----------- -----------
Total current liabilities 4,249,073 5,015,701
----------- -----------
LONG-TERM DEBT, net of current portion 3,745,697 4,740,820
----------- -----------
DEFERRED INCOME TAXES 80,000 57,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 9)
SHAREHOLDERS' EQUITY:
Preferred stock:
Authorized--2,000,000 shares
Issued and outstanding--0 shares - -
Common stock, no par value:
Authorized--20,000,000 shares
Issued and outstanding--3,038,799
and 2,959,799 shares in 1997
and 1996, respectively 2,745,947 2,462,345
Retained earnings 8,441,448 6,410,426
----------- -----------
Total shareholders' equity 11,187,395 8,872,771
----------- -----------
$19,262,165 $18,686,292
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
Page 25
<PAGE> 26
CALNETICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 36,616,238 $ 35,193,973 $ 29,172,106
COST OF SALES 26,592,981 26,252,121 21,739,246
------------ ------------ ------------
Gross profit 10,023,257 8,941,852 7,432,860
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,400,237 5,627,299 5,187,534
------------ ------------ ------------
Income from operations 3,623,020 3,314,553 2,245,326
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Gain on sale of property
and equipment - 5,950 6,500
Interest and other income 49,086 29,803 27,345
Interest expense (323,084) (416,391) (534,105)
------------ ------------ ------------
(273,998) (380,638) (500,260)
------------ ------------ ------------
Income before provision
for income taxes 3,349,022 2,933,915 1,745,066
PROVISION FOR INCOME TAXES 1,318,000 1,262,000 739,000
------------ ------------ ------------
Net income $ 2,031,022 $ 1,671,915 $ 1,006,066
============ ============ ============
Earnings per common share and
common share equivalent $ .66 $ .55 $ .33
============ ============ ============
Weighted average number of shares
outstanding 3,095,219 3,057,984 3,030,283
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 26
<PAGE> 27
CALNETICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Common Stock
-------------------------------- Total
Shares Retained Shareholders'
Outstanding Amount Earnings Equity
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1994 2,893,799 $ 2,367,437 $ 3,732,445 $ 6,099,882
Net income - - 1,006,066 1,006,066
Exercise of stock options 21,000 30,198 - 30,198
----------- ----------- ----------- -----------
BALANCE, June 30, 1995 2,914,799 2,397,635 4,738,511 7,136,146
Net income - - 1,671,915 1,671,915
Exercise of stock options 45,000 64,710 - 64,710
----------- ----------- ----------- -----------
BALANCE, June 30, 1996 2,959,799 2,462,345 6,410,426 8,872,771
Net income - - 2,031,022 2,031,022
Exercise of stock options,
including related income
tax benefit 79,000 283,602 - 283,602
----------- ----------- ----------- -----------
BALANCE, June 30, 1997 3,038,799 $ 2,745,947 $ 8,441,448 $11,187,395
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 27
<PAGE> 28
CALNETICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,031,022 $ 1,671,915 $ 1,006,066
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 743,603 758,591 704,497
Provision for doubtful accounts 26,821 98,338 93,531
Gain on sale of property,
plant and equipment - (5,950) (6,500)
Benefit for deferred income taxes (86,000) (106,000) (64,000)
Change in operating assets and
Liabilities:
Decrease (increase) in:
Accounts receivable (249,477) (647,283) (287,260)
Inventories 79,051 (508,673) (785,506)
Prepaid expenses 149,121 58,388 (164,599)
Deposits and other assets (577) 29,960 (26,429)
Increase (decrease) in:
Accounts payable (801,235) 414,131 839,630
Accrued liabilities and
compensation and benefits 274,946 22,407 (84,661)
Income taxes payable (143,998) 327,828 (137,773)
----------- ----------- -----------
Net cash provided by
operating activities 2,023,277 2,113,652 1,086,996
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property,
plant and equipment - 14,600 6,500
Purchases of property, plant and
equipment (670,929) (995,026) (512,153)
----------- ----------- -----------
Net cash used in investing
activities (670,929) (980,426) (505,653)
----------- ----------- -----------
</TABLE>
Page 28
<PAGE> 29
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt $(1,091,464) $ (901,277) $ (883,658)
Net proceeds from issuance of
common stock, including related
income tax benefit 283,602 64,710 30,198
----------- ----------- -----------
Net cash used in financing
activities (807,862) (836,567) (853,460)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 544,486 296,659 (272,117)
CASH AND CASH EQUIVALENTS,
beginning of year 1,877,633 1,580,974 1,853,091
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year $ 2,422,119 $ 1,877,633 $ 1,580,974
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 29
<PAGE> 30
CALNETICS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. Basis of Presentation
Calnetics Corporation (the Company) is engaged in manufacturing
operations through three wholly owned subsidiaries:
Manchester Plastics, Co., Inc. (Manchester), located in Chatsworth,
California, primarily manufactures proprietary products consisting of
acrylic, polycarbonate and polystyrene plastic sheets for the building
material and industrial plastics industries.
Ny-Glass Plastics, Inc. (Ny-Glass), located in Corona, California,
manufactures custom plastic injection molding components for original
equipment manufacturers and high-quality, close-tolerance molded
plastic components for a wide variety of industries. Approximately
one-fifth of its production is proprietary, consisting of products for
the electronic, computer, automotive and other high-tech industries.
Agricultural Products, Inc. (API), located in Ontario, California and
Winter Haven, Florida, anufactures and distributes various irrigation
hoses, fittings and other products primarily for the agriculture
industry.
2. Summary of Significant Accounting Policies
Use of Estimates
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 revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its three wholly owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
Credit Risk
The Company's accounts receivable are unsecured and the Company is at
risk to the extent such amounts become uncollectible. Customers are
located primarily throughout the United States.
Page 30
<PAGE> 31
Revenue Recognition
Revenue on product sales is recognized at the time of shipment.
Inventories
Inventories include costs of materials, labor and manufacturing
overhead, and are stated at the lower of cost or market using the
first-in, first-out (FIFO) and the last-in, first-out (LIFO) methods.
The LIFO method is used for the finished goods inventory at Manchester
and totals approximately $1,165,000. Inventories consist of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $2,688,014 $2,661,261
Finished goods 2,703,645 2,809,449
---------- ----------
$5,391,659 $5,470,710
---------- ----------
</TABLE>
At June 30, 1997 and 1996, if the FIFO method had been used to value
Manchester finished goods inventories, the stated value of inventories
would have been higher by approximately $129,000 and $421,000,
respectively. Income before provision for income taxes would have
decreased by $292,000, increased by $13,000 and increased by $408,000
for 1997, 1996 and 1995, respectively. Net income would have
decreased by $175,000, increased by $7,000 and increased by $230,000
for 1997, 1996 and 1995, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company follows
the policy of capitalizing expenditures that materially increase asset
lives and charging ordinary maintenance and repairs to operations as
incurred. Amounts expensed as maintenance and repairs were
approximately $423,000, $336,000 and $370,000 in 1997, 1996 and 1995,
respectively.
When assets are sold or disposed of, the cost and related depreciation
are removed from the accounts and any resulting gain or loss is
included in income.
Property, plant and equipment are depreciated and amortized using the
straight-line and accelerated methods over the following useful lives:
Buildings and improvements 7 - 31.5 years
Leasehold improvements term of lease
Machinery and equipment 3 - 7 years
Furniture and fixtures 5 - 7 years
Goodwill
Goodwill resulted from the purchase of Manchester during 1989 and the
purchase of API in 1994. It is being amortized on a straight-line
basis over 30 years and 20 years, respectively.
Page 31
<PAGE> 32
Statements of Cash Flows
For the purposes of the statements of cash flows, the Company
considers all highly liquid investments with an original maturity date
of 90 days or less to be cash and cash equivalents.
Cash paid for income taxes was approximately $1,378,000, $1,041,000
and $932,000 in 1997, 1996 and 1995, respectively. Cash paid for
interest was approximately $340,000, $445,000 and $511,000 in 1997,
1996 and 1995, respectively.
Earnings Per Common Share
Earnings per common share and common share equivalent are based on the
weighted average number of shares of common stock and common stock
equivalents (dilutive stock options) outstanding during the related
periods. The weighted average number of common stock equivalent
shares includes shares issuable upon the assumed exercise of stock
options, less the number of shares assumed purchased with the proceeds
available from such exercise. Fully diluted net income per share does
not differ materially from net income per common share and common
share equivalent.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, and accounts
payable approximate fair value because of the short maturity of these
financial instruments. The carrying amounts of long-term debt
approximate fair value because either interest rates fluctuate based
on market rates or interest rates appear to approximate market rates
for similar instruments.
New Authoritative Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," which establishes new standards for computing
and presenting earnings per share. This statement will be adopted by
the Company for the 1998 fiscal year.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which establishes standards for
disclosing information about an entity's capital structure. This
statement will be adopted by the Company for the 1998 fiscal year.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components. This statement will be
adopted by the Company for the 1999 fiscal year.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes
standards for reporting and disclosure of financial information by
segment. This statement will be adopted by the Company for the 1999
fiscal year.
Page 32
<PAGE> 33
3. Line of Credit
The Company has a $2,500,000 unsecured line of credit with a bank. At June 30,
1997, the entire amount was available under this credit arrangement, which
expires on June 20, 1999. Borrowings under this facility bear interest at the
bank's reference rate (8.5 percent at June 30, 1997). The line of credit
agreement includes certain restrictive covenants which are discussed in Note 4
below.
4. Long-Term Debt
At June 30, 1997 and 1996, long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Term loans payable to banks, unsecured, interest
at the banks' reference rate (8.5 percent at June 30, 1997)
plus .25 or .75 percent, due in various monthly installments
of principal and interest through July 1, 1999, with balloon
payments totaling $1,458,462 due on August 1, 1999 $2,008,329 $2,949,948
Industrial revenue bond payable, principal due in annual
sinking fund installments ranging from $15,000 to $130,000
through December 2021, plus interest due monthly based on
the Issuer's Weekly Adjustable Interest Rates for Revenue
Bonds (4.15 percent at June 30, 1997), secured by a standby
letter of credit issued by a bank with an annual fee of 1.25
percent 1,420,000 1,440,000
Loans payable to former API shareholders, unsecured, interest
payable semi-annually at 7.50 percent, principal payable in
four equal annual installments of $100,510 through June 1999 201,022 301,532
Mortgage payable to bank, secured by the related building and
land, principal payable in monthly installments of $1,665 plus
interest at the bank's prime rate (8.5 percent at June 30, 1997)
plus .75 percent, with a balloon payment of $201,415 due on
March 5, 2000 254,712 274,687
Other 12,480 21,840
---------- ----------
3,896,543 4,988,007
Less--Current portion of long-term debt 150,846 247,187
---------- ----------
$3,745,697 $4,740,820
========== ==========
</TABLE>
Page 33
<PAGE> 34
The following is a schedule of future principal payments of long-term debt as
of June 30, 1997:
<TABLE>
<S> <C>
1998 $ 150,846
1999 614,700
2000 1,770,997
2001 25,000
2002 1,335,000
----------
$3,896,543
==========
</TABLE>
The line of credit agreement (see Note 3), term loans and notes payable include
certain restrictive financial and non-financial covenants, including certain
cash restrictions and limitations on payment of cash dividends and redemption
of stock. At June 30, 1997, the Company was in compliance with all bank
covenants.
5. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109.
Under SFAS No. 109, deferred income tax assets or liabilities are computed
based on the temporary difference between the financial statement and income
tax bases of assets and liabilities using the enacted marginal income tax rate
in effect for the year in which the differences are expected to reverse.
Deferred income tax expenses or credits are based on the changes in the
deferred income tax assets or liabilities from period to period.
The exercise of stock options which have been granted under the Company's
various stock option plans give rise to compensation which is includable in the
taxable income of the applicable employees and deductible by the Company for
federal and state tax purposes. Such compensation results from increases in
the fair market value of the Company's common stock subsequent to the date of
grant of the applicable exercised stock options. Accordingly, in accordance
with Accounting Principles Board Opinion No. 25 (APB 25), such compensation is
not recognized as an expense for financial accounting purposes and the related
tax benefits are taken directly to shareholders' equity. The tax benefits
arising from the exercise of stock options were approximately $170,000 in 1997
and not material in 1996 and 1995.
The components of the deferred income tax asset at June 30, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Allowance for bad debts $127,000 $127,000
Vacation accrual 60,000 56,000
State taxes 95,000 103,000
Inventory reserve 30,000 30,000
Warranty reserve 24,000 26,000
Legal reserve 80,000 -
Other 35,000 -
-------- --------
$451,000 $342,000
-------- --------
</TABLE>
The primary component of the deferred income tax liability at June 30, 1997
and 1996 is accelerated tax depreciation.
Page 34
<PAGE> 35
The components of the provision (benefit) for income taxes for the years ended
June 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current - Federal $ 973,000 $ 1,048,000 $ 621,833
- State 261,000 320,000 181,167
----------- ----------- -----------
1,234,000 1,368,000 803,000
----------- ----------- -----------
Benefit of stock options
exercised - Federal 143,000 - -
- State 27,000 - -
----------- ----------- -----------
170,000 - -
----------- ----------- -----------
Deferred - Federal (71,000) (90,000) (49,000)
- State (15,000) (16,000) (15,000)
----------- ----------- -----------
(86,000) (106,000) (64,000)
----------- ----------- -----------
Provision for income taxes $ 1,318,000 $ 1,262,000 $ 739,000
=========== =========== ===========
</TABLE>
The components of the provision (benefit) for deferred income taxes for the
years ended June 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Allowance for doubtful accounts $ - $ (21,000) $(23,000)
Depreciation 23,000 (40,000) (4,000)
Accrued expenses and reserves (37,000) - (27,000)
Legal reserve (80,000) - -
State taxes 8,000 (52,000) (12,000)
Other - 7,000 2,000
-------- --------- --------
$(86,000) $(106,000) $(64,000)
======== ========= ========
</TABLE>
Page 35
<PAGE> 36
A reconciliation of income taxes at the statutory federal income tax rate and
the provisions for income taxes for the years ended June 30, 1997, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ----------------------- -----------------------
Amount % Amount % Amount %
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory
federal rate $ 1,138,667 34.0% $ 997,531 34.0% $ 593,322 34.0%
State and local income
taxes, net of federal
income tax effect 204,290 6.1 180,084 6.1 106,449 6.1
State manufacturing
credits (105,000) (3.0) - - - -
Amortization of goodwill 35,033 1.0 35,033 1.2 35,033 2.0
Other items, net 45,010 1.3 49,352 1.7 4,196 0.2
----------- ------ ----------- ------ ----------- ------
$ 1,318,000 39.4% $ 1,262,000 43.0% $ 739,000 42.3%
----------- ------ ----------- ------ ----------- ------
</TABLE>
6. Commitments
Purchase Agreement
API has a purchase agreement with one of its vendors through June 1998. The
minimum purchase quantities are based on historical purchase trends as defined
in the agreement and the purchase price of the parts is the list price as set
forth in the agreement and as adjusted in the future based on the mutual
agreement of the parties.
Lease Commitments
The Company leases certain office and manufacturing facilities and equipment
under noncancellable operating leases which expire at various dates through May
2002. The aggregate minimum future lease payments under these leases at June
30, 1997 are approximately as follows:
<TABLE>
<S> <C>
1998 $ 756,000
1999 740,000
2000 394,000
2001 158,000
2002 152,000
----------
$2,200,000
==========
</TABLE>
Rental expense charged to operations was approximately $717,000, $700,000 and
$641,000 for the years ended June 30, 1997, 1996 and 1995, respectively.
Page 36
<PAGE> 37
7. Employee Stock Options
In 1988, the Company established an Employee Stock Option Plan under which
options to purchase a total of 275,000 shares of common stock may be granted to
certain employees as determined by the Company's Board of Directors. Options
granted under this plan vest in equal amounts on the first and second
anniversary dates of the granting of the options. At June 30, 1997, there were
no options outstanding under this plan.
In 1993, the Company established the 1993 Stock Option Plan, which provides for
granting options to purchase up to 250,000 shares of the Company's common stock
to employees, officers, directors and consultants of the Company. Options to
purchase 160,000 shares have been granted and are outstanding under this plan
at June 30, 1997, of which 133,334 are exercisable, expiring at various dates
through November 11, 2006. These options generally vest over a three-year
period from the date of the grant.
In 1995, the Company established the 1995 Stock Option Plan, which provides for
granting options to purchase up to 250,000 shares of the Company's common
stock. Options to purchase 65,000 shares have been granted and are outstanding
under this plan at June 30, 1997, of which none are exercisable, expiring at
various dates through January 28, 2007. These options generally vest over a
three-year period from the date of the grant.
All options have been granted at prices equal to the fair market value of the
common stock at the grant date. A summary of option activities for all plans
is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number Option Exercise
of Shares Prices
-------- --------
<S> <C> <C>
Balance, June 30, 1994 245,000 $ 1.67
Granted 50,000 3.00
Exercised (21,000) 1.44
-------- --------
Balance, June 30, 1995 274,000 $ 1.93
Exercised (45,000) 1.44
-------- --------
Balance, June 30, 1996 229,000 2.02
Granted 75,000 6.05
Exercised (79,000) 1.44
-------- --------
Balance, June 30, 1997 225,000 $ 3.57
-------- --------
Exercisable, June 30, 1997 133,334 $ 2.25
-------- --------
</TABLE>
Page 37
<PAGE> 38
Information about stock options outstanding at June 30, 1997 is summarized as
follows:
<TABLE>
<CAPTION>
Options Outstanding Exercisable
------------------------------- -------------------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Exercise Price Number Contract Life Price Number Price
- -------------- ------- ------------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
$2.00 - $3.00 150,000 6.8 years $2.33 133,334 $2.25
5.88 - 6.13 75,000 9.6 years 6.05 - -
</TABLE>
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which applies the fair value-based method of accounting for
options granted under stock-based compensation plans beginning fiscal 1997. In
accordance with the issued standard, the Company has elected to continue to
account for stock-based compensation in accordance with APB 25.
The weighted average fair value of options granted during 1997 was $2.76. The
fair value of each option granted is estimated by using the Black-Scholes
pricing model on the date of grant. The following assumptions were used in the
calculation of present value: risk-free interest rate of 5.4 to 5.8 percent,
expected lives of five to six years, expected volatility of 37 percent and no
expected dividends.
Had compensation cost for the Company's stock option plans been determined
consistent with SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net income As reported $ 2,031,022 $ 1,671,915
Pro forma $ 1,980,022 $ 1,671,915
Earnings per share As reported $ .66 $ .55
Pro forma $ .65 $ .55
</TABLE>
8. Employee Benefit Plans
API provides a profit-sharing plan and 401(k) plan for its employees. The
Board of Directors can authorize discretionary contributions with no required
minimum contribution. API's contribution to the profit-sharing plan for the
periods ended June 30, 1997, 1996 and 1995 was $120,000 for each period. There
were no API contributions to the 401(k) plan for the periods ended June 30,
1997, 1996 and 1995.
9. Contingencies
Environmental Matters
The Company formerly operated a facility on property within the boundaries of a
federal Superfund site located in Southern California. The Company operated at
this site prior to October 1986. The Company has learned that hazardous
substances have been identified in the subsurface of the property and that the
Page 38
<PAGE> 39
current owner has been requested by a state agency to undertake additional
investigation at the property. The Company is also aware that the property has
been subject to a general notice letter issued by the United States
Environmental Protection Agency under the federal Superfund law. The Company
may be held responsible for the contamination at the site to the extent the
Company caused the contamination. The Company does not believe that it is
responsible for any material contamination and has not been notified or
contacted by the government or named in any proceeding relating to the
property. The potential liability associated with this property cannot be
reasonably determined at this time.
Tax Examination
API is in the process of an Internal Revenue Service (IRS) examination
regarding the tax-exempt status of its industrial revenue bond. The IRS has
informed the Company that preliminary findings indicate that the bond may not
be tax exempt and thus API may be required to pay additional interest. The
Company believes it has recorded adequate reserves to cover any potential
liability that may result from the final resolution of this matter.
10. Subsequent Event
On July 2, 1997, Summa Industries (Summa) signed a definitive agreement to
purchase all outstanding stock of the Company for $7.35 per share in cash.
This agreement is subject to shareholder approval and Summa's ability to obtain
financing for the transaction.
11. Unaudited Quarterly Results
Unaudited quarterly results of operations for each of the quarters in the three
years ended June 30, 1997 are presented below:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Year ended June 30,
<S> <C> <C> <C> <C>
1997
Net sales $ 8,446,000 $ 8,586,000 $ 9,261,000 $10,323,000
Gross profit 2,118,000 2,125,000 2,679,000 3,101,000
Net income 404,000 359,000 542,000 727,000
Earnings per share .13 .11 .17 .23
1996
Net sales $ 8,772,000 $ 7,627,000 $ 9,090,000 $ 9,705,000
Gross profit 1,965,000 1,797,000 2,345,000 2,835,000
Net income 296,000 271,000 444,000 661,000
Earnings per share .10 .09 .14 .22
1995
Net sales $ 6,647,000 $ 6,275,000 $ 7,705,000 $ 8,545,000
Gross profit 1,590,000 1,579,000 1,992,000 2,272,000
Net income 170,000 179,000 280,000 377,000
Earnings per share .06 .06 .09 .12
</TABLE>
Page 39
<PAGE> 40
SCHEDULE II
CALNETICS CORPORATION
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Balance Additions Balance
at Charged Deductions at End
Beginning to from of
of Period Expense Allowance Other Period
-------- -------- -------- ----- --------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts:
Year ended
June 30, 1997 $316,000 $ 26,821 $ 26,821 $ - $316,000
-------- -------- -------- ----- --------
Year ended
June 30, 1996 $263,015 $ 98,338 $ 45,353 $ - $316,000
-------- -------- -------- ----- --------
Year ended
June 30, 1995 $197,525 $ 93,531 $ 28,041 $ - $263,015
-------- -------- -------- ----- --------
</TABLE>
Page 40
<PAGE> 41
INDEX TO EXHIBITS
Number Description
3.1 Amended and Restated Articles of Incorporation of Calnetics
(Exhibit 3.1 to Form 10-K filed September 25, 1989).
3.2 Bylaws of Calnetics (Exhibit 1.2 to Form 10-K filed September 21,
1978).
3.3 Amendment to Bylaws of Calnetics (Exhibit 3 to Form 8 filed
September 28, 1989).
10.1 Lease dated November 22, 1989 between Manchester and Tom
Schneider and Arlene Schneider and Amendment to said lease dated
December 5, 1989 (Exhibit 10.12 to Form 10-K dated June 30,
1991).
10.2 Lease dated June 2, 1992 by and between Honey Protas and Ny-Glass
(Exhibit 10.19 to Form 10-K dated June 30, 1992).
10.3 Addendum No. 1 to Lease dated June 2, 1992 (Exhibit 10.20 to Form
10-K dated June 30, 1992).
10.4 Lease Guaranty Agreement entered into as of June 2, 1992 by
Calnetics (Exhibit 10.21 to Form 10-K dated June 30, 1992).
10.5 Memorandum of Lease with Right of First Refusal and Option to
Purchase dated May 22, 1992 (Exhibit 10.22 to Form 10-K dated
June 30, 1992).
10.6 Side Letter Agreement re Standard Industrial Commercial Single
Tenant Lease by and between Honey Protas as lessor and Ny-Glass
as lessee dated May 22, 1992 (Exhibit 10.23 to Form 10-K dated
June 30, 1992).
10.7 Calnetics Corporation 1988 Employee Stock Option Plan (Exhibit
10.25 to Form 10-K dated June 30, 1993).
10.8 Calnetics Corporation 1993 Nonstatutory Stock Option Plan
(Exhibit 10.26 to Form 10-K dated June 30, 1993).
10.9 Business Loan Agreement dated June 28, 1993 among Bank of America
National Trust and Savings Association, Calnetics, Manchester and
Ny-Glass (Exhibit 10.27 to Form 10-K dated June 30, 1993).
Page 41
<PAGE> 42
10.10 First Amendment to Business Loan Agreement of June 28, 1993 dated
as of June 20, 1994 among Bank of America National Trust and
Savings Association, Calnetics, Manchester and Ny-Glass (Exhibit
10.17 to Form 10-K dated June 30, 1994).
10.11 Stock Purchase Agreement among Calnetics and the Selling
Shareholders of API effective as of April 30, 1994 (Exhibit 2 to
Form 8-K filed June 24, 1994).
10.12 Business Loan Agreement dated June 20, 1994 among The Bank of
California, N.A., Calnetics, Manchester, Ny-Glass and API
(Exhibit 10.19 to Form 10-K dated June 30, 1994).
10.13 Term Loan Note dated June 20, 1994 among The Bank of California,
N.A., Calnetics, Manchester, Ny-Glass and API (Exhibit 10.24 to
Form 10-K dated June 30, 1994).
10.14 Business Loan Agreement dated June 20, 1994 among Bank of America
National Trust and Savings Association, Calnetics, Manchester,
Ny-Glass and API (Exhibit 10.25 to Form 10-K dated June 30,
1994).
10.15 Noncompetition and Noninterference Agreement dated June 20, 1994
among Calnetics, API and Lon Schultz, individually and as trustee
of the Lon Schultz Charitable Remainder Unitrust (Exhibit 10.31
to Form 10-K dated June 30, 1994).
10.16 Employment Agreement dated June 20, 1994 between API and Lon
Schultz, an individual (Exhibit 10.32 to Form 10-K dated June 30,
1994).
10.17 Parts Purchase and Supply Agreement dated June 20, 1994 between
API and Story Plastics, Inc., a California corporation (Exhibit
10.33 to Form 10-K dated June 30, 1994).
10.18 Loan Agreement dated December 31, 1991 between California
Statewide Communities Development Authority and API (Exhibit
10.34 to Form 10-K dated June 30, 1994).
10.19 Reimbursement Agreement dated December 1, 1991 between API and
Union Bank (Exhibit 10.35 to Form 10-K dated June 30, 1994).
10.20 Renewal/Consolidation Promissory Note and Security Agreement
dated March 13, 1992 between API as borrower and First Union
National Bank of Florida as lender (Exhibit 10.38 to Form 10-K
dated June 30, 1994).
10.21 Amendment dated November 30, 1994 to Business Loan Agreement
dated June 20, 1994 among Bank of America National Trust and
Savings Association, Calnetics, Manchester, Ny-Glass and API
(Exhibit
Page 42
<PAGE> 43
10.31 to Form 10-K dated June 30, 1995).
10.22 Mortgage Modification, Consolidation, Spreader, and Extension
Agreement dated March 31, 1995 among First Union National Bank of
Florida, API and Calnetics (Exhibit 10.32 to Form 10-K Dated June
30, 1995).
10.23 API Profit Sharing Plan Adoption Agreement dated November 21,
1991 (Exhibit 10.39 to Form 10-K dated June 30, 1994).
10.24 API 401(k) Plan Adoption Agreement effective as of January 1,
1993 (Exhibit 10.40 to Form 10-K dated June 30, 1994).
10.25 Nonstatutory Stock Option Agreement between Calnetics and Michael
A. Hornak dated February 28, 1994 (Exhibit 10.41 to Form 10-K
dated June 30, 1994).
10.26 Nonstatutory Stock Option Agreement between Calnetics and Steven
L. Strawn dated February 28, 1994 (Exhibit 10.42 to Form 10-K
dated June 30, 1994).
10.27 Nonstatutory Stock Option Agreement between Calnetics and Lon
Schultz dated July 18, 1994 (Exhibit 10.37 to Form 10-K dated
June 30, 1995).
10.28 Amendment No.2 dated December 21, 1995 to Business Loan Agreement
dated June 20, 1994 among Bank of America National Trust and
Savings Association, Calnetics, Manchester, Ny-Glass and API
(Exhibit 10.38 to Form 10-K dated June 30, 1996).
10.29 Amendment No.3 dated June 28, 1996 to Business Loan Agreement
dated June 20, 1994 among Bank of America National Trust and
Savings Association, Calnetics, Manchester, Ny-Glass and API
(Exhibit 10.39 to Form 10-K dated June 30, 1996).
10.30 1995 Employee Stock Option Plan Dated September 27, 1995 (Exhibit
10.40 to Form 10-K dated June 30, 1996).
10.31 Amendment No.4 dated December 20, 1996 to Business Loan Agreement
dated June 20, 1994 among Bank of America National Trust and
Savings Association, Calnetics, Manchester, Ny-Glass and API
(Exhibit 10.31 to Form 10-Q dated December 31, 1996).
10.32 Amendment No.3 dated December 19, 1996 to Business Loan Agreement
dated June 20, 1994 among The Bank of California, a division of
Union Bank of California, N.A., Calnetics, Manchester, Ny-Glass
and API (Exhibit 10.32 to Form 10-Q dated December 31, 1996).
Page 43
<PAGE> 44
10.33 Amendment No.1 dated November 8, 1996 to Reimbursement Agreement
dated December 1, 1991 between Union Bank of California, N.A. and
API (Exhibit 10.33 to Form 10-Q dated December 31, 1996).
10.34 Hazardous Materials and Environmental Indemnity Agreement between
Union Bank of California, N.A. and API (Exhibit 10.34 to Form
10-Q dated December 31, 1996).
10.35 Amendment No.2 dated January 15, 1997 to Employment Agreement
dated June 20, 1994 between API and Lon Schultz.(Exhibit 10.35 to
Form 10-Q dated March 31, 1997).
10.36 Incentive Stock Option Agreement between Calnetics and Trygve
Thoresen dated January 28, 1997.(Exhibit 10.36 to Form 10-Q dated
March 31, 1997).
10.37 Change in Control Agreement dated January 27, 1997 between
Calnetics and Trygve Thoresen.(Exhibit 10.37 to Form 10- Q dated
March 31, 1997).
10.38 Form of Indemnity Agreement for directors and officers.(Exhibit
10.38 to Form 10-Q dated March 31, 1997).
10.39 Agreement and Plan of Reorganization dated March 26, 1997 between
Calnetics and Summa Industries.(Exhibit 10.39 to Form 10-Q dated
March 31, 1997).
10.40 Agreement and Plan of Acquisition between Calnetics and Summa
dated July 2, 1997. (Appendix I to preliminary Proxy Statement
filed August 1, 1997).
10.41 Amendment No.1 to the Agreement and Plan of Acquisition dated
July 30, 1997. (Appendix I to preliminary Proxy Statement dated
August 1, 1997).
27.1* Financial Data Schedule
- --------------------------------------------------------------------------------
* Filed herewith.
Page 44
<PAGE> 45
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.
CALNETICS CORPORATION
By: /s/ Teresa S. Louie Dated: September 23, 1997
------------------------- -------------------------
Teresa S. Louie
Treasurer
Pursuant to the requirements of Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Clinton G. Gerlach Dated: September 23, 1997
- --------------------------------------------- --------------------
Clinton G. Gerlach
Chairman of the Board, President
Director
/s/ Peter H. Griffith Dated: September 23, 1997
- ----------------------------------------------- ------------------
Peter H. Griffith
Director
/s/ Fred E. Edward Dated: September 23, 1997
- --------------------------------------------- --------------------
Fred E. Edward
Director
/s/ Michael A. Hornak Dated: September 23, 1997
- -------------------------------------------- --------------------
Michael A. Hornak
Vice President, Director
/s/ Steven L. Strawn Dated: September 23, 1997
- -------------------------------------------- --------------------
Steven L. Strawn
Vice President, Director
/s/ Teresa S. Louie Dated: September 23, 1997
- --------------------------------------------- --------------------
Teresa S. Louie
Treasurer (Principal Financial
and Accounting Officer)
</TABLE>
Page 45
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 2,422
<SECURITIES> 0
<RECEIVABLES> 5,589
<ALLOWANCES> 316
<INVENTORY> 5,392
<CURRENT-ASSETS> 13,590
<PP&E> 8,315
<DEPRECIATION> 4,144
<TOTAL-ASSETS> 19,262
<CURRENT-LIABILITIES> 4,249
<BONDS> 3,746
0
0
<COMMON> 2,746
<OTHER-SE> 8,441
<TOTAL-LIABILITY-AND-EQUITY> 19,262
<SALES> 36,616
<TOTAL-REVENUES> 36,665
<CGS> 26,593
<TOTAL-COSTS> 32,993
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 316
<INTEREST-EXPENSE> 323
<INCOME-PRETAX> 3,349
<INCOME-TAX> 1,318
<INCOME-CONTINUING> 3,349
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,031
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.66
</TABLE>
