1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended December 31, 1996

[ ] 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 principal executive offices) (zip code)

(818) 886-9819
Registrant's telephone number, including area code

N/A
Former name, former address and former fiscal year, if changed since last
report

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
--- ---

The number of shares outstanding of the Registrant's Common Stock as of
December 31, 1996 was 2,969,799.

CALNETICS CORPORATION

INDEX

Part I. Financial Information Page Number
- ------------------------------ -----------

Item 1. Financial Statements

Condensed Consolidated Statements of Income (Unaudited)
Three Months and Six Months Ended December 31, 1996 and 1995 . . . 3

Condensed Consolidated Balance Sheets (Unaudited)
December 31, 1996 and June 30, 1996 . . . . . . . . . . . . . . . 4

Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended December 31, 1996 and 1995 . . . . . . . . . . . 6

Notes to Condensed Consolidated
Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . 8

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . 11

Part II. Other Information
- ---------------------------

Item 4. Submission of Matters to a Vote of Security Holders . . . . 13

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 13

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Page 2 of 44
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PART I - FINANCIAL INFORMATION

CALNETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

Three Months Ended Six Months Ended
December 31, December 31,
---------------------------------- -----------------------------------

1996 1995 1996 1995
------------ ------------ -------------- -------------

Net Sales $ 8,586,411 $ 7,627,663 $17,032,431 $16,398,938
Cost of Sales 6,461,118 5,829,512 12,789,017 12,637,091
------------ ------------ -------------- -------------

Gross Profit 2,125,293 1,798,151 4,243,414 3,761,847
------------ ------------ -------------- -------------

Selling, general
and administrative
expenses 1,420,870 1,219,614 2,750,511 2,551,887
Other expense, net, including
interest 88,218 115,308 176,989 239,827
------------ ------------ -------------- -------------
Total costs and
expenses 1,509,088 1,334,922 2,927,500 2,791,714
Income from operations
before income taxes 616,205 463,229 1,315,914 970,133
Provision for
income taxes 257,000 192,300 553,000 403,000
------------ ------------ -------------- -------------

Net income $ 359,205 $ 270,929 $ 762,914 $ 567,133
============ ============ ============== =============
Earnings per common
share and common
share equivalent $ 0 .11 $ 0.09 $ 0.24 $ 0.19
Weighted average common
shares and common
share equivalents
outstanding 3,119,688 3,059,416 3,124,347 3,063,260
============ ============ ============== =============

No dividends were paid during the periods set forth above.

See accompanying notes to condensed consolidated financial statements.

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CALNETICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

ASSETS

December 31, 1996 June 30, 1996
----------------- -----------------

CURRENT ASSETS:
Cash and cash equivalents $ 1,215,305 $ 1,877,633
Accounts receivable, net 4,774,713 4,997,471
Inventories 5,808,606 5,470,710
Prepaid expenses 321,416 254,608
Deferred income taxes 342,000 342,000
------------ ------------

Total current assets 12,462,040 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 5,114,725 4,587,322
Furniture and fixtures 266,283 248,220
------------ ------------
8,125,059 7,571,355
Less--accumulated depreciation
and amortization 3,745,571 3,399,998
------------ ------------

Property, plant and equipment,
net 4,379,488 4,171,357
------------ ------------

Deposits and other assets 173,211 171,245
Goodwill 1,364,968 1,401,268
------------ ------------

Total assets $18,379,707 $18,686,292
============ ============

See accompanying notes to condensed consolidated financial statements.

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CALNETICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

LIABILITIES AND SHAREHOLDERS' EQUITY

December 31, 1996 June 30, 1996
----------------- -------------

CURRENT LIABILITIES:
Current portion of
long-term debt $ 287,556 $ 247,187
Accounts payable 3,027,940 3,214,786
Accrued liabilities 1,000,993 1,167,707
Income taxes payable 69,021 386,021
------------ ------------
Total current liabilities 4,385,510 5,015,701
------------ ------------

LONG-TERM DEBT,
net of current portion 4,287,132 4,740,820
------------ ------------

DEFERRED INCOME TAXES 57,000 57,000
------------ ------------

SHAREHOLDERS' EQUITY:
Preferred stock: authorized-
2,000,000 shares, none issued --- ---
Common stock, no par value:
authorized - 20,000,000 shares;
issued and outstanding --
2,969,799 at December 31, 1996
and 2,959,799 at June 30, 1996 2,476,725 2,462,345

Retained earnings 7,173,340 6,410,426
------------ ------------

Total shareholders' equity 9,650,065 8,872,771
------------ ------------

Total liabilities and
shareholders' equity $18,379,707 $18,686,292
============ ============

See accompanying notes to condensed consolidated financial statements.

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CALNETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

Six Months Ended
December 31,
----------------------------------
1996 1995
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 762,914 $ 567,133
------------ ------------

Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 385,866 303,703
Provision for doubtful accounts --- 11,000
Changes in operating assets and
liabilities:
Accounts receivable 222,758 278,361
Inventories (337,896) (349,454)
Prepaid expenses (66,808) 4,551
Deposits and other assets (1,966) (49,213)
Accounts payable (186,846) (147,836)
Customer deposits --- (103,934)
Accrued liabilities (166,714) (178,763)
Income taxes payable (317,000) (193,172)
------------ ------------

Total adjustments (468,606) (424,757)
------------ ------------

Net cash provided by
operating activities 294,308 142,376
------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (557,697) (345,957)
------------ ------------
Net cash used in investing activities (557,697) (345,957)
------------ ------------

See accompanying notes to condensed consolidated financial statements.

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CALNETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CONTINUED)

Six Months Ended
December 31,
----------------------------------

1996 1995
------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt $ (413,319) $ (421,222)
Net proceeds from issuance of
common stock 14,380 ---
------------ ------------

Net cash used in financing
activities (398,939) (421,222)
------------ ------------

NET DECREASE IN CASH AND
CASH EQUIVALENTS (662,328) (624,803)

CASH AND CASH EQUIVALENTS,
beginning of period 1,877,633 1,580,974
------------ ------------

CASH AND CASH EQUIVALENTS,
end of period $ 1,215,305 $ 956,171
============ ============

Supplemental disclosures of cash flow
information:
Cash paid for interest $ 176,989 $ 243,790
============ ============

Cash paid for income taxes $ 678,000 $ 597,000
============ ============

See accompanying notes to condensed consolidated financial statements.

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CALNETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1996

1. General.

In the opinion of the management of Calnetics Corporation (the
"Company"), the accompanying condensed consolidated unaudited financial
statements contain all adjustments, consisting of only normal recurring
accruals, necessary to present fairly the Company's financial position at
December 31, 1996, the results of its operations for the three and six months
ended December 31, 1996 and 1995 and the cash flows for the six months ended
December 31, 1996 and 1995. Certain information and footnote disclosures
normally included in financial statements that would have been prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission, although management of the Company believes that the disclosures in
these financial statements are adequate to make the information presented
therein not misleading. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's June 30, 1996 Form 10-K filed with the
Securities and Exchange Commission.

The results of operations for the three and six months ended December
31, 1996 are not necessarily indicative of the results of operations to be
expected for the full fiscal year ending June 30, 1997.

2. Receivables.

The following tabulation shows the elements of receivables:

December 31, 1996 June 30, 1996
----------------- -----------------

Trade accounts receivable $5,090,713 $5,313,471

Less allowance for doubtful

accounts 316,000 316,000
------------ ------------

Total $ 4,774,713 $ 4,997,471
============ ============

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3. Income Taxes.

Income taxes for the six-month period ended December 31, 1996
were computed using the effective tax rate estimated to be applicable for the
full fiscal year. This rate is subject to ongoing evaluation and review by
management.

4. Long-term debt.

At December 31, 1996 and June 30, 1996, long-term debt
consisted of the following:

December 31, 1996 June 30, 1996
----------------- -------------

Term loans payable to banks,
unsecured, interest at the
banks' reference rate (8.25
percent at December 31, 1996)
plus 0.25 percent, due in
various monthly install-
ments of principal and
interest through July 1,
1999, with balloon payments
totaling $1,458,462 due on
August 1, 1999 $2,483,297 $2,949,948

Industrial revenue bonds 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
(3.4 percent at December 31,
1996), secured by a letter of
credit issued by a bank with
an annual fee of 1.125 percent 1,420,000 1,440,000

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Long-term debt (cont'd)

December 31, 1996 June 30, 1996
----------------- -------------

Loans payable to former Agricultural
Products, Inc. ("API") shareholders,
unsecured, interest payable
semi-annually at 7.50 percent,
principal payable in three equal
annual installments through June
1999 301,532 301,532

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 (8.25 percent at
December 31, 1996), with
a balloon payment of $201,415
due on March 5, 2000 264,697 274,687

Other 105,162 21,840
------------ ------------

$4,574,688 $4,988,007
Current portion of long-term debt 287,556 247,187
------------ ------------

Long-term portion $4,287,132 $4,740,820
============ ============

The 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.

5. Earnings per common share and common share equivalent.

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.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Financial condition.

In general, there were no significant changes in current
assets or current liabilities or the overall financial condition of the Company
between December 31, 1996, the end of the second quarter, and June 30, 1996.
However, cash and cash equivalents decreased by approximately $662,000 due in
part to purchases of equipment and the voluntary payment of $150,000,
representing three monthly installments, of the Company's long-term bank loan,
the payment of which was in addition to the regular scheduled monthly payments.

Liquidity and Capital Resources.

At December 31, 1996, the Company's working capital was
$8,076,530 compared to $7,367,826 at the same time a year ago.

The Company has a working capital agreement with a bank under
which the Company may borrow up to $2,500,000 on an unsecured basis at the
bank's prime rate. As of December 31, 1996, the entire amount of $2,500,000
was available under this credit arrangement, which is scheduled to expire on
December 31, 1997.

The Company has no immediate plans for any significant capital
expenditures and the Company believes that its available funds and internally
generated cash from operations will be sufficient to meet its working capital
needs in fiscal 1997. Certain loan agreements limit capital expenditures to
$1,000,000 in the fiscal year ending June 30, 1997 and also contain limits on
subsequent years.

The Company was pleased with the operating results for the
first half of the fiscal year, but there is concern about the adverse effect
the floods are having in northern California and the resulting likelihood, in
the next several months, of the deferral of incoming orders and shipments for
the Company's agricultural irrigation products.

Certain statements made herein that are not related to
historical results are forward-looking in nature within the meaning of the
Private Securities Litigation Reform Act of 1995 and involve risks and
uncertainties. Such forward-looking statements are based upon assumptions as
to the future events that may not prove to be accurate, and actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, a change in the need to make capital expenditures based on market
factors, a decrease in internally generated cash due to a downturn in market
conditions, and a different effect than anticipated on orders or shipments of
the Company's agricultural irrigation products due to the floods.

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Results of Operations.

Three months ended December 31, 1996 compared to three months ended December
31, 1995

Net sales for the three-month period ended December 31, 1995
increased 13% from $7,627,663 in 1995, to $8,586,411 in 1996. The increase is
attributed to improved business conditions.

Cost of sales as a percentage of sales decreased to 75.2%
during the three-month period ended December 31, 1996, as compared to 76.4% for
the same period in the prior year. The decrease is attributed to decreases in
raw material resin prices.

Selling, general and administrative expenses increased to
$1,420,870 as compared with $1,219,614 for the same period in the prior year,
an increase of 16.5%. The increase due mainly to increased sales volume.

Net income for the current three-month period was $359,205 as
compared with $270,929 for the same period in the prior year after provisions
for income taxes of $257,000 and $192,300, respectively. Earnings per share
increased to $0.11 from $0.09 per share for the three months ended December 31,
1996 and 1995, respectively. The increase in net income is attributed to
increased sales volume during the three months ended December 31, 1996.

Six Months ended December 31, 1996 compared to six months ended December 31,
1995

Net sales for the six-month period ended December 31, 1996
increased 3.9% from $16,398,938 in 1995, to $17,032,431 in 1996. The increase
is attributed to improved business conditions.

Cost of sales as a percentage of sales decreased to 75.1%
during the six-month period ended December 31, 1996, as compared to 77.1% for
the same period in the prior year. The decrease is attributed to increases in
sales volumes and the resultant lower fixed expenses per unit sold.

Selling, general and administrative expenses increased to
$2,750,511 as compared with $2,551,887 for the same period in the prior year.
The increase was mainly attributed to increased sales volume.

Net income for the current six-month period was $762,914 as
compared with $567,133 for the same period in the prior year after provisions
for income taxes of $553,000 and $403,000, respectively. The improvement in
net income is attributed to increased sales volume in the current period.

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PART II - OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Shareholders of the Company was held on November
8, 1996. At such meeting, the following persons were elected as
directors of the Company by the votes indicated:

Abstentions
and Broker
Name For Against Withheld Non-votes
---- -------------- ------- -------- ----------

Clinton G. Gerlach 2,797,610 0 510 0
Fred E. Edward 2,797,610 0 510 0
Peter H. Griffith 2,797,610 0 510 0
Michael A. Hornak 2,797,610 0 510 0
Steven L. Strawn 2,797,610 0 510 0

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) 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

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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).

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).

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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
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

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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.

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.

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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.

10.34* Hazardous Materials and Enviromental
Indemnity Agreement between Union Bank of
California, N.A. and API.

27.1* Financial Data Schedule

(b) Reports on Form 8-K

None.

- -------------------------------------------------------------------------------
* Filed herewith

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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
(Registrant)

Dated: February 7, 1997 /s/ Clinton G. Gerlach
------------------------------------
Clinton G. Gerlach
President

Dated: February 7, 1997 /s/ Teresa S. Louie
------------------------------------
Teresa S. Louie
Treasurer

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