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 [FEE REQUIRED]
For the fiscal year ended June 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the transition period from ____________ to ____________
Commission File Number: 0-8767
CALNETICS CORPORATION
(Exact name or registrant as specified in its charter)
CALIFORNIA 95-2303687
(State or 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. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant is $5,618,000 as of August 3, 1995.
2,914,799
(number of shares of common stock outstanding as of August 3, 1995)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the Annual Meeting of Stockholders,
to be held November 9, 1995, are incorporated by reference in Part III hereof.
Exhibit Index Located on Pages 34 through 38.
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PART I
ITEM 1. BUSINESS.
GENERAL
Calnetics Corporation, a California corporation ("Calnetics") and its
wholly-owned subsidiaries, Manchester Plastics Co., Inc., a California
corporation ("Manchester"), Ny-Glass Plastics, Inc., a California corporation
("Ny-Glass"), and Agricultural Products, Inc., a California corporation
("API"), are hereinafter referred to together as the "Company". Calnetics was
incorporated under the laws of the State of California on July 18, 1960. The
Company's headquarters are located in Chatsworth, California.
Manchester manufactures proprietary items and custom products of acrylic,
polycarbonate and polystyrene plastic sheet that serve the building materials
and industrial plastics industries. Ny-Glass manufactures plastic parts,
specializing in injection molding. Ny-Glass operations include the operations
of Plastic Science, Inc. ("PSI"), which were acquired in June 1992 and Ny-Glass
was subsequently consolidated with PSI in Corona, California in September 1992.
API, which was acquired as of April 30, 1994, manufactures plastic tubing,
fittings, filters and accessories that serve the agricultural irrigation
industry.
Approximately 70% of the Company's net sales of $29,172,000 are of
proprietary products. The remaining portion of the Company's sales consist of
custom fabrication and production parts to individual customers' specifications
and are produced for a wide variety of industries.
MERGERS AND ACQUISITIONS
In March 1988, Mr. Clinton G. Gerlach, either directly or through Gerlach
Holding Corporation ("GHC"), a Delaware corporation of which Mr. Gerlach was
the sole shareholder, 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 of
the Calnetics' Common Stock holdings owned by Larry Sacks, a former officer and
Director of Calnetics, consisting of 403,500 common shares, resulting in an
aggregate ownership by GHC of 1,085,504 shares, representing 37% of the total
shares outstanding as of June 30, 1995. As of June 30, 1995, Mr. Gerlach owned
52% of the outstanding shares of GHC, with the remaining 48% owned by Mr.
Gerlach's son and daughter.
Since 1989, Calnetics has actively reviewed and pursued potential merger and
acquisition candidates with a goal of increasing revenues and profitability.
Calnetics intends to continue reviewing potential merger and acquisition
candidates in the future and to pursue mergers and acquisitions where
warranted. Acquisitions since the beginning of 1989 are described in the
following paragraphs.
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On September 18, 1989, Calnetics acquired all of the capital stock of
Manchester. Manchester, located in Chatsworth, California, now operates as a
wholly-owned subsidiary of Calnetics.
On June 3, 1992, Calnetics completed the cash acquisition of substantially
all of the assets of PSI, a manufacturer of plastic injection molding
components located in Corona, California. The acquisition was accomplished
through a subsidiary of the Company, Ny-Glass, which continued the business of
PSI under the Ny-Glass name in Corona, California. At the time of the
acquisition, Ny-Glass entered into a ten (10) year building lease with respect
to the premises formerly occupied by PSI. In September 1992, the Ny-Glass
division of the Company, located in Paramount, California, moved to Corona,
California and consolidated with the Ny-Glass subsidiary.
As of April 30, 1994, Calnetics acquired all of the capital stock of API for
$4,402,144 by payment of $4,000,102 in cash obtained from long-term bank
financing, and $402,042 in unsecured notes payable to the API shareholders.
API owns two plants, consisting of 50,000 square feet in Ontario, California
and 30,000 square feet in Winter Haven, Florida. API's executive offices are
located on site with the plant in Ontario, California.
CUSTOMERS AND MARKETING
No customer accounted for ten (10%) percent or more of the Company's net
sales and export sales accounted for less than five (5%) percent of total
sales.
The Company's marketing efforts at all four facilities are conducted by
in-house personnel and a limited number of outside sales personnel and
independent manufacturers representatives.
RAW MATERIALS
The principal raw materials used by the Company with respect to the
manufacture of its products are resins for producing plastic parts. Based on
market and economic conditions, as of July 31, 1995, the Company was not
experiencing shortages in supply, other than nominal shortages of polycarbonate
resin at Manchester, but was experiencing increases in the price of resins.
However, there can be no assurances that additional shortages will not result.
All items, except polycarbonate resin, necessary for the production of the
Company's products are purchased from a variety of suppliers.
PATENTS
The Company presently does not hold any patents, trademarks, franchises,
licenses, or concessions which are material to its operations.
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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 local, state and federal
regulations. The Company does not currently anticipate that any assertions of
noncompliance with such laws will materially adversely affect its earnings or
competitive position, or will require any material capital expenditures during
fiscal 1996.
SEASONALITY
The Company's business (excluding API) is not of a seasonal nature. The
Company is diversified across numerous industry lines and customers, and it has
not experienced any substantial seasonal variation to date. API's business
historically has been seasonal in nature, with demand for its irrigation
products being highest during the spring and early summer. In fiscal 1995, the
Company's revenue reflected this trend, with $12,922,762 of revenue in the
first half of the fiscal year (July - December) and $16,249,344 during the
remainder of the fiscal year.
INVENTORY
The Company maintains what it considers a normal supply of its raw material
resins ranging from 30 to 60 days' supply in inventory. These amounts are not
increased except in times of expected shortages.
The Company maintains an inventory of raw materials and finished goods for
sale in order to respond quickly to customer demand. (See Note 2 of Notes to
Consolidated Financial Statements.) While such raw materials and finished
goods on hand represent a significant commitment of the Company's working
capital, the Company believes that a rapid response to customer catalog orders
is essential and that its inventory practices are typical of the industry in
which it competes.
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BACKLOG
The Company's backlog of orders consists 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
80% of its sales orders are written. The Company normally does not offer
cancellation rights and considers its backlog to be firm. The Company's
backlog at June 30, 1995 and at the end of the preceding fiscal year was as
follows:
JUNE 30
---------------------------
1995 1994
---------------------------
All Company Products $2,290,000 $2,365,000
It is anticipated that approximately 95% of the backlog at June 30, 1995 will
be filled during the 1996 fiscal year.
GOVERNMENT CONTRACTS
The Company does not have any government contracts or any other contracts
which are subject to renegotiation of profits or termination at the election of
the government.
CURRENT BORROWING ARRANGEMENTS
Calnetics, Ny-Glass and Manchester have a credit agreement for a $2,000,000
bank unsecured line of credit, subject to certain conditions. As of June 30,
1995, no outstanding balances existed on this bank credit line. The credit
agreement expires November 30, 1995 and bears interest at the bank's reference
rate at June 30, 1995 plus 1/2% (9.25% at June 30, 1995). (See Notes 3 and 4
to the Consolidated Financial Statements.)
To finance the acquisition of API, the Company entered into two five-year
collateralized bank term loans with two banks for a total of $4.5 million, with
one such loan bearing interest at the bank's reference rate at June 30, 1995
(9% at June 30, 1995) plus 3/4%, and the other loan bearing interest at the
bank's prime rate at June 30, 1995 (9% at June 30, 1995) plus 3/4%. As part
of the API purchase price, the Company also executed unsecured promissory
notes totaling $402,042, payable to the former API shareholders, with interest
payable semi-annually at a rate of 7.50% per annum and principal payable in
four equal annual installments beginning June 1996. (See Note 4 to the
Consolidated Financial Statements.)
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As part of the acquisition of API, the Company assumed an industrial revenue
bond payable of $1,455,000 at June 30, 1995, principal due in annual sinking
fund installments ranging from $15,000 to $130,000 through December 2021, plus
interest due monthly with an adjustable interest rate, which was 4.7% at June
30, 1995. In addition, the Company assumed mortgages payable to a bank of
$294,663 at June 30, 1995, secured by the related building and land, payable
in monthly installments at an interest rate of three-quarter percent (3/4%)
over the bank's prime rate with a balloon payment of $201,415 due on March 5,
2000. (See Note 4 to the Consolidated Financial Statements.)
COMPETITION
The Company encounters competition from many competitors, many of which are
larger and have greater financial resources. The number of businesses in the
plastics manufacturing industry in which the Company competes is impossible to
estimate, but it consists of numerous small and large corporations and
proprietorships. To the Company's knowledge, no single competitor is dominant.
Competition is principally based on price, product quality, customer service
and the ability to deliver products on schedule. The Company believes it has
developed a good following in the industries it serves including a favorable
reputation for product quality and prompt and reliable customer service.
RESEARCH AND DEVELOPMENT
The Company conducts routine product analysis to develop additional catalog
and custom products as part of its normal operations; however, the expenditures
required for such developments have not been and are not anticipated to be
material to the Company's operations.
IMPACT OF ENVIRONMENTAL REGULATIONS
The Company does not expect any assertions of noncompliance of environmental
issues with respect to local and Federal regulations nor does it expect that
such laws will materially adversely affect the Company's earnings or
competitive position or require material expenditures in fiscal 1996.
EMPLOYEES
At June 30, 1995, the Company employed approximately 220 employees, none of
which are 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.
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ITEM 2. PROPERTIES.
The Company operates from leased facilities in Chatsworth, California and
Corona, California. The Chatsworth facilities consist of a one-floor, 56,600
square foot building and the Corona facilities consist of a one-floor, 30,000
square foot building. At the Manchester facility in Chatsworth, the lease
expires on December 6, 1999. At the Ny-Glass facility in Corona, the lease
expires on May 31, 2002.
The Company also operates from two plants owned by API, consisting of
facilities of 50,000 square feet in Ontario, California and 30,000 square feet
in Winter Haven, Florida.
The Company believes the above facilities are in good repair, adequate for
the Company's current operations, and sufficient to accommodate up to a forty
(40%) percent increase of present production levels, which would, however,
require additional equipment, and in certain cases, additional semi-skilled
labor.
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.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The names, ages and positions of all the executive officers of the Company as
of August 3, 1995 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.
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NAME AGE POSITION
------------------ --- -----------------------
Clinton G. Gerlach 69 President and Chairman
of the Board
Michael A. Hornak 52 Vice President
Steven L. Strawn 41 Vice President
Teresa S. Louie 41 Treasurer
Mary Livingston 56 Secretary
Lon Schultz 61 President and Director of API
Clinton G. Gerlach has served as the President, Chairman of the Board and
Chief Executive Officer of the Company since March of 1988 and the Chairman of
the Board and Director of Manchester since September 1989, and Director,
Chairman of the Board and Chief Executive Officer of Ny-Glass since June 1992,
and 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 is
also a Director of Zero Corporation (a manufacturer of cases, cabinets, cooling
and cargo enclosures).
Michael A. Hornak has been a Vice President of the Company since 1974 and a
Director of the Company since 1984. Mr. Hornak has also been President of the
Ny-Glass Plastics division of the Company since 1985, President, Director and
Chief Financial Officer of Ny-Glass since June 1992, and was President of the
Hydro Flight division of the Company from 1983 to 1985.
Steven L. Strawn has been a Vice President of the Company since September
1989 and Director since February 1992. Mr. Strawn has also been President and
Chief Operating Officer of Manchester since 1989 and has held various other
positions with its predecessor, Manchester Products, from 1980 to 1989.
Teresa S. Louie has been with the Company since August 1973 and was appointed
Treasurer of Calnetics in February 1992, and has held various offices with the
Company including Assistant Treasurer, Assistant Secretary and Controller.
Mary Livingston rejoined the Company in March of 1995 and had worked
previously as Mr. Gerlach's Executive Secretary from 1984 through 1990. Ms.
Livingston owned and operated a retail shop in Marina del Rey, California from
1990 through 1994. Prior to employment with the Company, Ms. Livingston was an
Executive Secretary at Continental Airlines.
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Lon Schultz is the Founder, President and a Director of API. API was formed
in 1973 and Mr. Schultz has been the Chief Executive Officer of API since the
date of inception. Mr. Schultz has also been a Director of Story Plastics,
Inc. since 1975.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
(a) Market Information
Calnetics common stock is traded in the over-the-counter market and is quoted
in the National Daily Quotation Service, under the CALN symbol. 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):
BID ASKED
--------------------------------
HIGH LOW HIGH LOW
----- ----- ----- -----
Year Ended June 30, 1995
First Quarter 3-1/4 2-3/4 3-1/2 3
Second Quarter 4 2-3/4 4-1/2 3
Third Quarter 5-3/4 3-1/4 6-1/4 3-3/4
Fourth Quarter 5-1/4 3-1/2 5-3/4 4
Year Ended June 30, 1994
First Quarter 2-3/8 2-3/8 2-3/4 2-3/4
Second Quarter 3 2-3/4 3-1/8 3-1/8
Third Quarter 2-7/8 1-3/4 3-3/8 2-1/8
Fourth Quarter 3 2-1/2 3-1/4 2-7/8
(b) Number of shareholders of record as of August 3, 1995 - 270.
(c) To date the Company has not paid any dividends.
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ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED JUNE 30
(IN DOLLARS)
----------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
Net sales 29,172,106 17,996,617 16,564,448 13,570,688 13,388,753
Net income 1,006,066 616,975 502,176 407,222 422,324
Earnings per .33 .21 .17 .14 .15
common share
Capital 512,153 113,884 340,617 180,549 246,950
expenditures
Total assets 17,122,578 16,376,776 7,484,777 7,894,373 7,006,003
Long-term debt 5,551,284 6,284,524 --- 234,375 667,630
Shareholders' 7,136,146 6,099,882 5,296,342 4,794,166 4,382,569
equity
========== ========== ========== ========== ==========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
MANCHESTER ACQUISITION
In September 1989, the Company acquired Manchester. The acquisition expanded
the Company's operations to include the manufacturing of acrylic, polycarbonate
and polystyrene plastic sheet that serves the building materials and industrial
plastics industries. Prior to the acquisition, the Company was primarily
engaged in the manufacturing of molded plastic components by injection,
transfer and compression processes.
PSI ACQUISITION
On June 3, 1992, the Company acquired for cash substantially all of the
assets of PSI, a manufacturer of plastic injection molding components located
in Corona, California. The acquisition was accomplished through a subsidiary
of the Company, Ny-Glass, which continued the business of PSI, under the
Ny-Glass name in Corona, California.
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The cash purchase price paid for the assets acquired amounted to $320,100,
$250,000 of which was obtained from a short-term bank loan, utilizing the
Company's then existing credit line of $1,000,000.
Current assets acquired as part of the acquisition amounted to $354,182 and
current liabilities assumed totaled $306,081.
API ACQUISITION
In fiscal 1994, the Company completed the acquisition of all of the
outstanding stock of API of Ontario, California from the API shareholders
effective as of April 30, 1994. The purchase price was $4,402,144, consisting
of cash of $4,000,102 and unsecured promissory notes payable to the selling
shareholders of $402,042. API, which was a closely held private company, is a
manufacturer of plastic water handling products, including tubing, filters and
drip system accessories with manufacturing plants in Ontario, California and
Winter Haven, Florida.
Net assets acquired totaled $3,528,341, resulting in recording of goodwill of
$873,803 which is being amortized on a straight-line basis over 20 years.
CHANGE IN INVENTORY PRICING
Beginning July 1, 1994, the Company changed its method of pricing finished
goods inventories at Manchester from FIFO to LIFO. The change in method was
made to more properly match current expenses with revenues and to improve cash
flow which was reduced due to the effects of increases in certain costs of raw
materials.
At June 30, 1995, if the FIFO method had been used to value Manchester
finished goods inventories, the stated value of inventories would have been
approximately $408,000 higher and the effect on 1995 operations would have
increased income before provision for income taxes by $408,000, net income by
$230,000 and earnings per common share and common share equivalent by $.07 (See
Note 2 to the Consolidated Financial Statements).
RESULTS OF OPERATIONS
1995 COMPARED WITH 1994
Net sales for the fiscal year ended June 30, 1995 increased 62% from
$17,996,617 to $29,172,106. The increase is principally attributed to the
Company's ownership of API. API operating results were included for only two
months in fiscal 1994 as compared to twelve months in fiscal 1995.
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Cost of sales, as a percentage of sales, decreased to 74.5% for the twelve
months ended June 30, 1995, as compared to 75.7% for the same period in the
prior year. The decrease is primarily attributed to the increased sales volume
in 1995 as compared with 1994.
Selling, general and administrative expenses increased during the twelve
months ended June 30, 1995 to $5,187,534, as compared with $3,253,056 for the
same period in the prior fiscal year. The increase is attributed to the
increased sales volume in 1995 as compared with 1994 in large part due to the
addition of API.
Net income for the year ended June 30, 1995 amounted to $1,006,066 after
provision for income taxes of $739,000, as compared with $616,975 after a
provision for income taxes of $522,000 in the previous year. Income per share
increased from $0.21 per share in 1994 to $0.33 per share in 1995. The
increase in net income and income per share is primarily attributed to
increased sales volume primarily from the API acquisition.
RESULTS OF OPERATIONS
1994 COMPARED WITH 1993
Net sales for the twelve months ended June 30, 1994 increased 9% from
$16,564,448 to $17,996,617. The increase was primarily attributed to the
acquisition of API and the resultant inclusion of API's sales for May and June,
1994 as well as the record performance in sales by Manchester.
Cost of sales, as a percentage of sales, decreased to 75.7% for the twelve
months ended June 30, 1994, as compared with 77.3% for the same period in the
prior year. The decrease was primarily attributed to the higher profit margins
generated by API for May and June, 1994, the period which includes API's
operating results.
Selling, general and administrative expenses increased during the current
fiscal year to $3,253,056 as compared with $2,868,729 for the twelve months
ended June 30, 1994. The increase was primarily attributed to the inclusion of
API's expenses for May and June, 1994.
Net income for the year ended June 30, 1994 was $616,975 after provision for
income taxes of $522,000, as compared with net income of $502,176 after a
provision for income taxes of $368,300 in the previous year. Income per share
increased from $0.17 per share in 1993 to $0.21 per share in 1994.
The increases in net income and income per share are, in part, attributed to
the acquisition of API as of April 30, 1994, and the resultant inclusion of
API's income for the months of May and June, 1994 as well as the record
performance in income by Manchester.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995, the primary source of liquidity for the Company was cash
generated from operations.
Working capital at June 30, 1995 increased to $7,234,385 as compared with
$6,789,446 at June 30, 1994, and current ratios are 2.7 and 2.8 at June 30,
1995 and 1994, respectively.
Expenditures for property and equipment were $512,153 for the fiscal year
ended June 30, 1995 as compared with $113,884 (except for property and
equipment acquired in connection with the acquisition of API) for the fiscal
year ended June 30, 1994. The Company has no immediate plans for any
significant capital expenditures in fiscal 1996. The Company believes that its
available funds and internally generated cash from operations will be
sufficient to meet its working capital needs in fiscal 1996. Certain loan
agreements limit capital expenditures to $500,000 in 1996 and thereafter.
The Company has a credit agreement with a bank under which the Company may
borrow up to $2,000,000 on an unsecured basis. No borrowings were made against
this credit line in fiscal 1995. The agreement expires on November 30, 1995
and bears interest at the bank's reference rate plus 1/2% (9.50% at June 30,
1995).
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 acquisitions of companies in the thermoplastics industry and in other
industries which management believes offer significant growth opportunities.
The Company has no present understanding or commitment with respect to any
acquisition.
The Company expects to finance any future acquisitions through either cash
flow from operations, borrowings under existing or future credit facilities or
the issuance of debt or equity securities. The Company also may consider the
issuance of long-term convertible subordinated debentures or the issuance of
convertible preferred stock to enhance long-term liquidity.
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 ACCOUNTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not applicable
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS OF THE COMPANY
The information under "Election of Directors" in the 1995 Proxy Statement is
incorporated herein by reference.
EXECUTIVE OFFICERS OF THE COMPANY
The "Executive Officers of the Company" are discussed under Part I, Item 4A
of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the captions "Information Regarding the Board of
Directors," "Committees" and "Executive Compensation" in the 1995 Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Clinton G. Gerlach (1) 1,185,504 (2)(6) 39%
Fred E. Edward (1) 202,064 (3)(6) 6
Raymond H. Heller (1) 71,230 (4)(6) 2
Michael A. Hornak (1) 144,500 (5)(8) 5
Lon Schultz (1) 51,500 (9) 2
Steven L. Strawn (1) 140,000 (6)(7)(8) 5
Teresa S. Louie (1) 10,200 (5) __
Mary Livingston (1) 5,100 __
All Directors and
Officers as a Group
(8 persons) 1,810,098 59%
(1) 20401 Prairie Street, Chatsworth, California 91311
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(2) Includes 1,085,504 shares held of record by GHC, a Delaware corporation
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) 90,000 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").
(4) Held of record by the Raymond H. and Hollyce O. Heller Revocable Trust
of 1982 (the "Heller Trust").
(5) Jointly owned with spouse.
(6) Mr. Gerlach has the right of first refusal on a prorata basis covering
the 71,230 shares of Common Stock owned by the Heller Trust and the
202,064 shares of Common Stock owned by Edward Trust, pursuant to
certain right of first refusal agreements, dated as of September 18,
1989. In addition, pursuant to agreements Mr. Gerlach, through GHC, has
rights of first refusal covering (i) 40,000 shares of Common Stock owned
by Steven L. Strawn, a Vice President and Director of the Company and
(ii) 70,000 shares of Common Stock owned by other shareholders of the
Company.
(7) Includes currently exercisable options with the Company to acquire
45,000 shares of Common Stock at an exercise price of $1.438 per share.
(8) Includes currently exercisable options with the Company to acquire
16,667 shares of Common Stock at an exercise price of $2.00 per share, a
portion of a 50,000 share option grant, which is exercisable in
one-third increments in March of 1995, 1996 and 1997.
(9) Includes currently exercisable options with the Company to acquire
16,667 shares of Common Stock at an exercise price of $3.00 per share, a
portion of a 50,000 share option grant, which is exercisable in
one-third increments in July of 1995, 1996 and 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not Applicable.
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PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page reference to
this Form 10-K
-----------------
1. EXHIBITS
See Exhibit Index on pages 34 through 38 of this Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report F-2
Consolidated Balance Sheets,
June 30, 1995 and 1994 F-3
Consolidated Statements of Income
and Retained Earnings for the Years
Ended June 30, 1995, 1994 and 1993 F-5
Consolidated Statements of Shareholders' Equity
Years ended June 30, 1995, 1994 and 1993 F-6
Consolidated Statements of Cash Flows for
the Years Ended June 30, 1995, 1994 and 1993 F-7
Notes to Consolidated Financial
Statements F-9
Schedule II - Valuation and Qualifying Accounts F-18
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, 1995, the Company did not file a Form 8-K.
Page 16
17
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, 1995 and
1994, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended June 30, 1995.
These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1995, 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.
ARTHUR ANDERSEN LLP
Los Angeles, California
July 27, 1995
Page 17
18
CALNETICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--JUNE 30, 1995 AND 1994
ASSETS
1995 1994
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 1,580,974 $ 1,853,091
Accounts receivable, net of allowances of $263,000
and $198,000 in 1995 and 1994, respectively 4,448,526 4,254,797
Inventories 4,962,037 4,176,531
Prepaid expenses 312,996 148,397
Deferred income taxes 272,000 232,000
----------- -----------
Total current assets 11,576,533 10,664,816
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 466,288 466,288
Buildings and leasehold improvements 2,204,992 2,177,356
Machinery and equipment 3,752,505 3,521,932
Furniture and fixtures 224,251 190,558
----------- -----------
6,648,036 6,356,134
Less--Accumulated depreciation and amortization 2,776,164 2,364,239
----------- -----------
3,871,872 3,991,895
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $259,938 and
$187,617 in 1995 and 1994, respectively 1,472,968 1,545,289
Deposits and other assets 201,205 174,776
----------- -----------
1,674,173 1,720,065
----------- -----------
$17,122,578 $16,376,776
=========== ===========
The accompanying notes are an integral part of these
consolidated balance sheets.
Page 18
19
CALNETICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--JUNE 30, 1995 AND 1994
LIABILITIES AND SHAREHOLDERS' EQUITY
1995 1994
----------- -----------
CURRENT LIABILITIES:
Current portion of long-term debt $ 338,000 $ 488,418
Accounts payable 2,650,651 1,880,127
Customer deposits 150,004 80,898
Accrued liabilities 707,503 884,875
Accrued compensation and benefits 437,797 345,086
Income taxes payable 58,193 195,966
----------- -----------
Total current liabilities 4,342,148 3,875,370
----------- -----------
LONG-TERM DEBT, net of current portion 5,551,284 6,284,524
----------- -----------
DEFERRED INCOME TAXES 93,000 117,000
----------- -----------
COMMITMENTS (Note 6)
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--2,914,799
and 2,893,799 shares in 1995
and 1994, respectively 2,397,635 2,367,437
Retained earnings 4,738,511 3,732,445
----------- -----------
Total shareholders' equity 7,136,146 6,099,882
----------- -----------
$17,122,578 $16,376,776
=========== ===========
The accompanying notes are an integral part of these
consolidated balance sheets.
Page 19
20
CALNETICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1995
1995 1994 1993
----------- ----------- -----------
NET SALES $29,172,106 $17,996,617 $16,564,448
COST OF SALES 21,739,246 13,628,257 12,799,046
----------- ----------- -----------
Gross profit 7,432,860 4,368,360 3,765,402
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 5,187,534 3,253,056 2,868,729
----------- ----------- -----------
Income from operatons 2,245,326 1,115,304 896,673
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of property and equipment 6,500 760 16,620
Interest and other income 27,345 65,127 10,786
Interest expense (534,105) (42,216) (37,279)
Other expense - - (16,324)
----------- ----------- -----------
(500,260) 23,671 (26,197)
----------- ----------- -----------
Income before provision for
income taxes 1,745,066 1,138,975 870,476
PROVISION FOR INCOME TAXES 739,000 522,000 368,300
----------- ----------- -----------
Net income $ 1,006,066 $ 616,975 $ 502,176
=========== =========== ===========
Earnings per common share and common
share equivalent $ .33 $ .21 $ .17
=========== =========== ===========
Weighted average number of shares
outstanding 3,030,283 2,921,854 2,879,096
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
Page 20
21
CALNETICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1995
Common Stock
------------------------- Total
Shares Retained Shareholders'
Outstanding Amount Earnings Equity
----------- ---------- ---------- -------------
BALANCE, June 30, 1992 2,793,799 $2,180,872 $2,613,294 $4,794,166
Net income - - 502,176 502,176
--------- ---------- ---------- ----------
BALANCE, June 30, 1993 2,793,799 2,180,872 3,115,470 5,296,342
Net income - - 616,975 616,975
Exercise of stock options 90,000 81,565 - 81,565
Shares issued for services 10,000 20,000 - 20,000
Extension of stock option
term (Note 7) - 85,000 - 85,000
--------- ---------- ---------- ----------
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
========= ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
Page 21
22
CALNETICS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1995
1995 1994 1993
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,006,066 $ 616,975 $ 502,176
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 704,497 444,833 375,562
Provision for doubtful accounts 93,521 52,521 55,000
Gain on sale of property, plant and
equipment (6,500) (760) (16,620)
Provision (benefit) for deferred
income taxes (64,000) 24,000 12,133
Common stock issued for services - 20,000 -
Extension of stock option term - 85,000 -
Change in operating assets and liabilities,
net of effects from acquisitions:
Decrease (increase) in:
Accounts receivable (287,260) 589,945 (49,997)
Inventories (785,506) (28,860) 80,207
Prepaid expenses (164,599) 75,472 (27,767)
Deposits and other assets (26,429) (66,232) 13,172
Increase (decrease) in:
Accounts payable 770,524 (683,303) (411,840)
Customer deposits 69,106 26,774 34,145
Accrued liabilities and compensation
and benefits (84,661) 518,890 (127,571)
Income taxes payable (137,773) 178,000 6,876
---------- ---------- ----------
Net cash provided by operating activities 1,086,996 1,853,255 445,476
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property, plant
and equipment 6,500 4,000 49,968
Purchases of property, plant and equipment (512,153) (113,884) (340,617)
Cash used in acquisitions - (4,000,102) -
---------- ---------- ----------
Net cash used in investing activities (505,653) (4,109,986) (290,649)
---------- ---------- ----------
Page 22
23
- 2 -
1995 1994 1993
---------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under line of credit
agreement $ - $ (100,000) $(150,000)
Proceeds from long-term debt - 4,500,000 -
Repayments of long-term debt (883,658) (897,887) (234,375)
Net proceeds from issuance of
common stock 30,198 81,565 -
---------- ----------- ---------
Net cash provided by (used
in) financing activities (853,460) 3,583,678 (384,375)
---------- ----------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (272,117) 1,326,947 (229,548)
CASH AND CASH EQUIVALENTS,
beginning of year 1,853,091 342,723 572,271
CASH OF ACQUIRED ENTITY - 183,421 -
---------- ----------- ---------
CASH AND CASH EQUIVALENTS,
end of year $1,580,974 $ 1,853,091 $ 342,723
========== =========== =========
The accompanying notes are an integral part of these consolidated statements.
Page 23
24
CALNETICS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
1. Basis of Presentation
Calnetics Corporation (the Company) is engaged in manufacturing operations at
three wholly owned subsidiaries:
Manchester Plastics, Co., Inc. (Manchester), which is 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), formerly Plastic Science, Inc. (PSI), which
is located in Corona, California, and the former Ny-Glass Plastics Division,
formerly located in Paramount, 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), which has facilities in Ontario, California
and Winter Haven, Florida, manufactures and distributes various irrigation
hoses, fittings and other products primarily for the agriculture industry.
Effective April 30, 1994, the Company acquired all of the outstanding stock of
API for $4,402,144, which included a cash payment of $4,000,102 obtained for
long-term bank financing and $402,042 in notes payable to the former API
shareholders.
The API acquisition was accounted for using the purchase method of accounting,
and accordingly, the purchase price was allocated to assets acquired and
liabilities assumed based on their estimated fair values as follows:
Cash $ 183,421
Accounts receivable 2,491,788
Inventories 1,532,340
Other current assets 124,529
Property, plant and equipment, net 3,273,197
Other noncurrent assets 897,812
Current liabilities (1,840,121)
Long-term debt (2,260,822)
-----------
$ 4,402,144
===========
The other noncurrent assets include goodwill of $873,803 which is being
amortized on a straight-line basis over 20 years.
Page 24
25
The results of operations of API from April 30, 1994 have been included
in the accompanying consolidated financial statements. The following summarized
unaudited pro forma financial information assumes the acquisition occurred on
July 1, 1993:
Year Ended
June 30,
1994
-----------
(Unaudited)
Ne sales $26,849,000
===========
Net income $ 699,000
===========
Earnings per common share $ .24
===========
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
REVENUE RECOGNITION
Revenue on product sales is recognized at the time of shipment.
INVENTORIES
Inventories include costs of materials, labor and manufacturing
overhead, 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
$1,727,000. Inventories consist of the following:
1995 1994
---------- ----------
Raw materials $2,402,121 $1,954,757
Finished goods 2,559,916 2,221,774
---------- ----------
$4,962,037 $4,176,531
========== ==========
Beginning July 1, 1994, the Company changed its method of pricing
finished goods inventories at Manchester from FIFO to LIFO. The change in
method was made to more properly match current expenses with revenues and to
improve cash flow which was reduced due to the effects of increases in certain
costs of raw materials.
At June 30, 1995, if the FIFO method had been used to value Manchester
finished goods inventories, the stated value of inventories would have been
approximately $408,000 higher and the effect on 1995 operations would have
increased income before provision for income taxes by
Page 25
26
$408,000, net income by $230,000 and earnings per common share and common share
equivalent by $.07.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The Company follows
the policy of capitalizing expenditures which materially increase asset lives
and charging ordinary maintenance and repairs to operations as incurred.
Amounts expensed as maintenance and repairs were approximately $370,000,
$163,000 and $178,000 in 1995, 1994 and 1993, 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 depreciation and amortized using the
straight-line and accelerated methods over the following useful lives:
Building 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.
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 $932,000, $330,000 and
$349,000 in 1995, 1994 and 1993, respectively. Cash paid for interest was
approximately $511,000, $31,000 and $42,000 in 1995, 1994 and 1993,
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.
Page 26
27
3. SHORT-TERM BORROWINGS
The Company has a $2,000,000 unsecured line of credit with a bank. At
June 30, 1995, the entire amount of $2,000,000 was available under this credit
arrangement, which expires on November 30, 1995. Borrowings under this
facility bear interest at the bank's reference rate (9 percent at June 30,
1995) plus 0.5 percent. The line of credit agreement includes certain
restrictive covenants which are discussed in Note 4 below.
4. LONG-TERM DEBT
At June 30, 1995 and 1994, long-term debt consists of the following:
1995 1994
---------- ----------
Term loans payable to banks, secured by
inventory and receivables, interest at the
banks' reference rate (9 percent at June 30,
1995) plus .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 $3,683,316 $4,500,000
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 (4.7 percent at June 30, 1995),
secured by a standby letter of credit issued
by a bank with an annual fee of 1.25 percent 1,455,000 1,470,000
Loans payable to former API shareholders,
unsecured, interest payable semi-annually at
7.50 percent, principal payable in four equal
annual installments beginning June 1996 402,042 402,042
Mortgage payable to bank, secured by the related
building and land, pricipal payable in monthly
installments of $1,665 plus interest at the
bank's prime rate (9 percent at June 30, 1995)
plus .75 percent, with a balloon payment of
$201,415 due on March 5, 2000 294,663 314,336
Equipment term notes payable to banks, secured
by the related equipment, due in equal monthly
installments of principal and interest ranging
from $214 to $780, interest at rates ranging
from a bank's prime rate (9 percent at June 30,
1995) plus 1.0 percent to 11.87 percent
through October 1998 54,263 86,564
---------- ----------
5,889,284 6,772,942
Less--Current portion of long-term debt 338,000 488,418
---------- ----------
$5,551,284 $6,284,524
========== ==========
Page 27
28
The following is a schedule of future principal payments of long-term
debt as of June 30, 1995:
1996 $ 338,000
1997 800,374
1998 803,488
1999 836,748
2000 1,750,674
Thereafter 1,360,000
----------
$5,889,284
==========
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, 1995, the Company was in compliance with all
bank covenants.
5. Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109).
Under SFAS 109, deferredincome 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 components of the deferred income tax asset at June 30, 1995 and
1994 are as follows:
1995 1994
-------- --------
Allowance for bad debts $106,000 $ 83,000
Vacation accrual 56,000 47,000
State taxes 51,000 39,000
Inventory reserve 30,000 32,000
Warranty reserve 26,000 22,000
Other 3,000 9,000
-------- --------
$272,000 $232,000
======== ========
The primary component of the deferred income tax liability at June 30,
1995 and 1994 was depreciation.
Page 28
29
The components of the provision (benefit) for income taxes for the
years ended June 30, 1995, 1994 and 1993 are as follows:
1995 1994 1993
-------- -------- --------
Current - Federal $621,833 $392,437 $272,005
- State 181,167 105,563 84,162
-------- -------- --------
803,000 498,000 356,167
-------- -------- --------
Current - Federal (49,000) 19,000 9,100
- State (15,000) 5,000 3,033
-------- -------- --------
(64,000) 24,000 12,133
-------- -------- --------
Provision for income taxes $739,000 $522,000 $368,300
======== ======== ========
The components of the provision (benefit) for deferred income taxes for
the years ended June 30, 1995, 1994 and 1993 are as follows:
1995 1994 1993
-------- -------- --------
Allowance for doubtful accounts $(23,000) $ 9,000 $ -
Depreciation (4,000) 43,000 (29,007)
Accrued expenses and reserves (27,000) (12,000) -
Relocation expense - - 42,000
State taxes (12,000) (6,000) -
Other 2,000 (10,000) (860)
-------- -------- --------
$(64,000) $ 24,000 $ 12,133
======== ======== ========
A reconciliation of income taxes at the statutory federal income tax
rate and the provisions for income taxes for the years ended June 30, 1995,
1994 and 1993 are as follows:
1995 1994 1993
----------------- ----------------- -----------------
Amount % Amount % Amount %
-------- ---- -------- ---- -------- ----
Income tax at statutory
federal rate $593,322 34.0% $387,252 34.0% $295,962 34.0%
State and local income
taxes, net of federal
income tax effect 106,449 6.1 69,477 6.1 53,100 6.1
Amortization of goodwill 35,033 2.0 30,310 2.7 10,200 1.2
Other items, net 4,196 0.2 34,961 3.0 9,038 1.0
-------- ---- -------- ---- -------- ----
$739,000 42.3% $522,000 45.8% $368,300 42.3%
======== ==== ======== ==== ======== ====
Page 29
30
6. COMMITMENT
EMPLOYMENT
In June 1994, API entered into a three-year employment agreement with a
key employee. The agreement states that if the employee dies or becomes
disabled or is terminated for cause (as defined in the agreement) during the
employment period, the employee or the employee's beneficiary will receive
certain fixed payments as defined in the agreement.
NON-COMPETITION AGREEMENT
In June 1994, API entered into a non-competition agreement with the
former shareholders of API. The agreement expires in June 19999.
PURCHASE AGREEMENT
In June 1994, API entered into a four-year purchase agreement with one
of its vendors. The minimum purchase quantities are based on historical
purchase trends as defined in the agreement and the purchase price of the parts
will be 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 noncancelable operating leases which expire at various dates
through May 2002. The aggregate minimum future lease payments under these
leases at June 30, 1995 are approximately as follows:
1996 $ 661,000
1997 667,000
1998 682,000
1999 703,000
2000 145,000
Thereafter 279,000
----------
$3,137,000
==========
Rental expense charged to operations was approximately $641,000,
$595,000 and $624,000 for the years ended June 30, 1995, 1994 and 1993,
respectively.
7. EMPLOYEE STOCK OPTIONS
In 1988, the Company established an Employee Stock Option Plan under
which options to purchase a toal 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 date of the granting of the options. At June 30, 1995, options to
acquire 124,000 shares are outstanding and exercisable under this plan,
expiring at various dates through July 24, 1997.
Page 30
31
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. The 1993 plan is a non-statutory stock option plan and options to
purchase 150,000 shares have been granted and are outstanding under this plan
at June 30, 1995. Options granted to purchase 100,000 shares expire on March 1,
2003 and vest in three equal amounts on March 1, 1995, 1995, and 1997. The
remaining option granted to purchase 50,000 shares (granted in fiscal 1995)
expires on July 18, 2004 and vests in three equal amounts on July 19, 1995,
1996 and 1997.
In fiscal 1995, the board of directors approved the establishment of
the 1995 Stock Option Plan, which will provide for granting options to
purchase up to 250,000 shares of the Company's common stock.
At June 30, 1995, 274,000 stock options were outstanding and 157,334
options were exercisable at $1.438 or $2 per share. All options have been
granted at prices equal to the fair market value of the common stock at the
grant date. No options were granted, exercised or canceled during fiscal 1993.
The Company extended the expiration date for one year on 1998 options to
acquire 85,000 shares. This extension resulted in additional compensation
expense of $85,000 in 1994.
A summary of option activities is as follows:
Number Option
of Shares Prices
--------- ---------------
Balance, June 30, 1992 and 1993 235,000 $0.875 to 1.438
Granted 100,000 2.000
Exercised (90,000) 0.875 to 1.438
Canceled - -
------- ---------------
Balance, June 30, 1994 245,000 1.438 to 2.000
Granted 50,000 3.000
Exercised (21,000) 1.438
Canceled - -
------- ---------------
Balance, June 30, 1995 274,000 $1.438 to 3.000
======= ===============
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, 1995 and 1994 was $120,000 and $60,000,
respectively. There were no API contributions to the 401(k) plan for the
periods ended June 30, 1995 and 1994.
Page 31
32
9. UNAUDITED QUARTERLY RESULTS
Unaudited quarterly results of operations for each of the quarters in
the three years ended June 30, 1995 are presented below:
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Year ended June 30,
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
1994
Net sales 3,938,000 3,656,000 4,100,000 6,303,000
Gross profit 833,000 855,000 870,000 1,810,000
Net income 108,000 123,000 135,000 251,000
Earnings per share .04 .04 .05 .08
1993
Net sales 3,822,000 4,159,000 4,158,000 4,425,000
Gross profit 816,000 922,000 1,017,000 1,010,000
Net income 71,000 115,000 170,000 146,000
Earnings per share .02 .04 .06 .05
Page 32
33
SCHEDULE II
CALNETICS CORPORATION
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1995
Balance Additions
at Charged Deductions Balance
Beginning to from at End of
of Period Expense Allowance Other Period
--------- --------- --------- ------- ----------
Allowance for
doubtful accounts:
Year ended
June 30, 1995 $197,525 $93,531 $28,041 $ -- $263,015
======== ======= ======= ======= ========
Year ended
June 30, 1994 $141,399 $52,521 $76,385 $80,000(a) $197,525
======== ======= ======= ======= ========
Year ended
June 30, 1993 $144,292 $55,000 $57,893 $ -- $141,399
======== ======= ======= ======= ========
________________
(a) Represents Agricultural Products, Inc.'s allowance for doubtful accounts
balance at the date of acquisition.
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34
INDEX TO EXHIBITS
Page In
Exhibit Sequentially
Number Description Numbered Copy
- ------- ----------- -------------
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 Corporation *
(Exhibit 1.2 to Form 10-K filed
September 21, 1978).
3.3 Amendment to Bylaws of Calnetics *
Corporation (Exhibit 3 to Form 8
filed September 28, 1989).
10.1 Lease dated November 22, 1989 between *
Manchester Plastics Co., Inc. a subsidiary
of the Company 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 Plastics
Company, Incorporated, a subsidiary of
the Calnetics Corporation (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 Corporation
(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).
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35
10.6 Side Letter Agreement re Standard *
Industrial Commercial Single Tenant
Lease by and between Honey Protas as
lessor and Ny-Glass Plastics Company
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
Corporation, Manchester Plastics Co.,
Inc. and Ny-Glass Plastics, Inc. (Exhibit
10.27 to Form 10-K dated June 30, 1993).
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 Security Agreement (Receivables and Inventory) *
dated June 20, 1994 between Calnetics and The
Bank of California, N.A. (Exhibit 10.20 to
Form 10-K dated June 30, 1994).
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36
10.14 Security Agreement (Receivables and Inventory) *
dated June 20, 1994 between Ny-Glass and The
Bank of California, N.A. (Exhibit 10.21 to Form
10-K dated June 30, 1994).
10.15 Security Agreement (Receivables and Inventory) *
dated June 20, 1994 between Manchester and The
Bank of California, N.A. (Exhibit 10.22 to
Form 10-K dated June 30, 1994).
10.16 Security Agreement (Receivables and Inventory) *
dated June 20, 1994 between API and The Bank
of California, N.A. (Exhibit 10.23 to Form 10-K
dated June 30, 1994).
10.17 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).
10.18 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).
10.19 Security Agreement dated June 20, 1994 *
between Calnetics and Bank of America
National Trust and Savings Association (Exhibit 10.26
to Form 10-K dated June 30, 1994).
10.20 Security Agreement dated June 20, 1994 *
between Ny-Glass and Bank of America
National Trust and Savings Association
(Exhibit 10.27 to Form 10-K dated June 30, 1994).
10.21 Security Agreement dated June 20, 1994 *
between Manchester and Bank of America
National Trust and Savings Association
(Exhibit 10.28 to Form 10-K dated June 30, 1994).
10.22 Security Agreement dated June 20, 1994 *
between API and Bank of America National
Trust and Savings Association (Exhibit 10.29
to Form 10-K dated June 30, 1994).
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37
10.23 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).
10.24 Employment Agreement dated June 20, 1994 *
between API and Lon Schultz, an individual
(Exhibit 10.32 to Form 10-K dated June 30, 1994).
10.25 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).
10.26 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).
10.27 Reimbursement Agreement dated December 1, 1991 *
between API and Union Bank (Exhibit 10.35 to
Form 10-K dated June 30, 1994).
10.28 Standby Reimbursement Agreement dated *
December 1, 1991 between API and The Bank of
California, N.A. (Exhibit 10.36 to Form 10-K
dated June 30, 1994).
10.29 Sixth Amendment to the Standby Reimbursement *
Agreement of December 1, 1991 dated July
1, 1994 (Exhibit 10.37 to Form 10-K dated
June 30, 1994).
10.30 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).
10.31 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.
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38
10.32 Mortgage Modification, Consolidation, Spreader,
and Extension Agreement dated March 31, 1995
among First Union National Bank of Florida,
API and Calnetics.
10.33 API Profit Sharing Plan Adoption Agreement *
dated November 21, 1991 (Exhibit 10.39 to
Form 10-K dated June 30, 1994).
10.34 API 401(k) Plan Adoption Agreement effective *
as of January 1, 1993 (Exhibit 10.40 to Form
10-K dated June 30, 1994).
10.35 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).
10.36 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).
10.37 Nonstatutory Stock Option Agreement between
Calnetics and Lon Schultz dated
July 18, 1994
22. Subsidiaries of the Company
27. Financial Data Schedule
- -----------------------------------------------------
*Incorporated by reference to the document indicated.
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SIGNATURES
Pursuant to the requirement of Section 13 and 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 Louie Dated: September 4, 1995
---------------------------------- ---------------------
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.
/s/ Clinton Gerlach Dated: September 4, 1995
- --------------------------------------- ---------------------
Clinton G. Gerlach
Chairman of the Board, President
Director
/s/ Michael Hornak Dated: September 4, 1995
- -------------------------------------- ---------------------
Michael A. Hornak
Vice President, Director
/s/ Raymond H. Heller Dated: September 4, 1995
- ------------------------------------ ---------------------
Raymond H. Heller
Director
/s/ Fred Edward Dated: September 4, 1995
- -------------------------------------- ---------------------
Fred E. Edward
Director
/s/ Steven Strawn Dated: September 4, 1995
- ------------------------------------- ---------------------
Steven L. Strawn
Vice President, Director
Page 39