-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MkopltNHwDiRPlyznQgU51RoJuYs6S/kbAt4FcsOFzXK0FP3L5g3soTEwDd/McLp Pn0BXczzmPuipwZtb3wghw== 0001000189-98-000002.txt : 19980326 0001000189-98-000002.hdr.sgml : 19980326 ACCESSION NUMBER: 0001000189-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OCAL INC CENTRAL INDEX KEY: 0001000189 STANDARD INDUSTRIAL CLASSIFICATION: COATING, ENGRAVING & ALLIED SERVICES [3470] IRS NUMBER: 954544569 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27748 FILM NUMBER: 98572395 BUSINESS ADDRESS: STREET 1: 14538 KESWICK ST CITY: VAN NUYS STATE: CA ZIP: 91405 BUSINESS PHONE: 8187820711 MAIL ADDRESS: STREET 1: 14538 KESWICK ST CITY: VAN NUYS STATE: CA ZIP: 91405 10-K 1 UNITED STATES SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________________ FORM 10-K _________ [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From __________ to __________ COMMISSION FILE NUMBER 0-27748 ______________________________ OCAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4544569 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 14538 KESWICK STREET VAN NUYS, CALIFORNIA 91405 (Address of principal executive offices) Registrant's telephone number, including area code: (818) 782-0711 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.001 PAR VALUE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [ ] As of March 2, 1998, the aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the last reported sales price of the Common Stock as reported by Nasdaq, was approximately $4,271,000. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. There were 5,691,000 shares of the Registrant's Common Stock outstanding as of March 2, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement of the Registrant for the Registrant's 1998 Annual Meeting of Stockholders, which definitive proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the Registrant's fiscal year end of December 31, 1997, are incorporated by reference into Part III. PART I This Report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 which involve risks and uncertainties. The actual results of Ocal, Inc. (together with its wholly-owned subsidiaries, "Ocal" or the "Company") could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, competition from other manufacturers of PVC- coated conduit and from manufacturers of alternative conduit products, downward pressure on product pricing and gross margin, nominal growth in the Company's industry, dependence on key personnel, control by the Company's majority stockholder, cyclicality of plant expansion activities by the Company's end users, general economic conditions, and risks associated with the financing and integration of potential future acquisitions (including the potential dilutive effect and other financial impact of such acquisitions), as well as the factors set forth under the caption "Risk Factors" in the Company's IPO Prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) on March 12, 1996, and in this Form 10-K and the Company's other Securities and Exchange Commission filings. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 1. BUSINESS. GENERAL _______ Ocal, Inc., a Delaware corporation, is a leading domestic manufacturer of polyvinyl chloride ("PVC") coated rigid steel conduit ("PVC-coated conduit"), elbows, and fittings. The Company's products are primarily used in the new construction and maintenance of plants operating in highly corrosive environments which require the highest level of protection of electrical wiring systems against corrosion and physical damage, such as sewage treatment, water treatment, electric power, oil refining, chemical and pharmaceutical, pulp and paper, and food processing plants. INDUSTRY OVERVIEW _________________ MARKET DEMAND. The demand for conduit stems from the need to comply with building codes in the United States which require protection for electrical wiring systems. Alternative forms of protection include PVC-coated conduit, rigid steel conduit ("RSC"), plastic conduit, aluminum conduit, cable tray (metal or fiberglass trays in which wire is laid, but not enclosed), pre-wired armored cable integrating the functions of electrical wire and conduit into one system, thinner-walled versions of metal conduit called intermediate metallic conduit ("IMC") and electrical metallic tubing ("EMT"). Of the various commercially available forms of protection for electrical wiring systems, PVC-coated conduit is the most expensive. It is also the most durable in corrosive environments due to the combination of the corrosion protection of PVC coating and galvanizing with the physical protection of steel pipe. Although alternative products generally have an initial product and installation cost advantage over PVC-coated conduit, the Company's PVC-coated conduit compares favorably on a life-cycle cost basis in corrosive environments. SALES AND DISTRIBUTION IN THE ELECTRICAL INDUSTRY. The sales and distribution structure in the electrical industry consists of independent sales representatives, distributors, electrical contractors, end users and project engineers. End users include industrial companies such as International Paper Company, OxyChem, Weyerhaeuser Company, and Merck & Company, Inc. When an end user is planning to build a new plant, it hires an engineering firm to design, among other things, the infrastructure and electrical system for the plant. The end user will then hire an electrical contractor through a bidding process. Each bidding electrical contractor generally requests one or more distributors to price the components needed to construct the electrical system, and the distributors bid for the contractor's order. In the electrical industry, substantially all sales of conduit, elbows, fittings and related products are made by the manufacturer to the distributor, who in turn sells the products to the contractor or end user. BUSINESS STRATEGY _________________ The Company's business strategy is designed to increase penetration of its traditional corrosive environment market while expanding into other markets where the life-cycle cost and additional features of its products provide a cost-effective solution to customer needs. The Company seeks to implement this strategy based upon the following strengths: INDUSTRY LEADERSHIP. The Company believes it is a leading manufacturer of PVC-coated conduit, elbows, and fittings. In terms of sales volume, management believes the Company's total sales of $24.3 million for the year ended December 31, 1997 place it among the two largest domestic manufacturers of PVC-coated conduit in the industry. MARKETING FOCUS. The Company focuses its marketing on engineers and end users to educate them regarding the technological advantages and long-term savings of PVC-coated conduit as compared to alternative conduit products, and to illustrate the features of the Company's products which its competitors do not provide. The Company's goal is to have PVC-coated conduit generally, and where possible, the features of the Company's products in particular, specified by engineers and end users in engineering designs for particular projects. LEADERSHIP IN PRODUCT QUALITY. The Company's products have protection features which its competitors do not provide. The Company believes it is the only manufacturer of conduit that hot dip galvanizes its own conduit after threading, increasing the corrosion protection and life of electrical conduit systems. In addition, the Company double coats its fittings with both blue urethane and PVC, providing additional protection unavailable elsewhere in the industry. LOW-COST, PROPRIETARY MANUFACTURING. Management believes the Company's proprietary manufacturing technology used in its equipment and processes allows it to be one of the lowest-cost producers in the industry. Much of the machinery used in the Company's manufacturing process was designed and constructed by company personnel with minimal capital investment, labor, and material costs. The Company galvanizes its own pipe, and purchases ungalvanized pipe in large volumes, which often enables the Company to negotiate advantageous purchase prices. In addition, the Company compounds its own PVC, primer, and urethane, which allows the Company to provide these features at a lower cost than its competitors. COMPREHENSIVE CUSTOMER SERVICE. The Company provides a broad range of customer support services, including assistance from senior Company employees with respect to installation and maintenance of conduit, free installation training, and a toll-free installation hotline. EXPANSION INTO RELATED OR COMPLEMENTARY BUSINESSES. The Company intends to explore expansion into related or complementary businesses internally or through acquisitions, building on its expertise in marketing and manufacturing in the electrical conduit industry. PRODUCTS ________ The Company sells and manufactures a full line of PVC-coated conduit, elbows, fittings, RSC, PVC-coated aluminum conduit and uncoated conduit elbows, all of which range in diameter from 1/2" to 6", as well as installation tools. The following is a more detailed description of the product lines the Company offers: RIGID STEEL CONDUIT is the heaviest wall conduit in use in the world and provides the highest level of physical protection commercially available for electrical systems. It can be used underground, in concrete, and wherever a high level of physical protection of electrical wiring is required. The Company believes it is the only manufacturer producing this conduit that hot dip galvanizes the threads together with the rest of the pipe, a process developed by the Company. The RSC manufactured by the Company is threaded at both ends, is 10' in length, and overall wall thicknesses range from .109" to .280". The Company is one of the few suppliers of 6" diameter RSC and PVC-coated conduit made from domestically produced steel pipe. Some of Ocal's customers for this product need domestically produced 6" conduit in order to comply with the requirements of projects funded by the federal government. All federally-funded or federally-aided projects must comply with the Buy American Act, which requires that more than 50% of the total cost of a given product's components be attributable to components mined, produced, or manufactured in the United States. PVC-COATED RIGID STEEL CONDUIT is RSC coated with .040 inches ("40 mils") of bonded PVC on the exterior of the pipe and 2 mils of blue urethane on the interior. It is used in environments that are too corrosive to use RSC, but where the physical protection offered by RSC is required or prudent. PVC-COATED ALUMINUM CONDUIT is aluminum pipe coated with 40 mils of bonded PVC on the exterior of the pipe and 2 mils of blue urethane on the interior. It is used in environments where lighter weight conduit is required. CONDUIT ELBOWS are short lengths of curved RSC or PVC-coated conduit, bent to 90, 60, 45, or 30 degrees and threaded at both ends. Various radiuses are available. PVC-COATED FITTINGS AND ACCESSORIES include couplings (which have PVC sleeves to seal the connection), liquidtight connectors, conduit bodies, beam clamps, pulling elbows, nipples, and strut channel accessories. The Company's fittings are coated with blue urethane on the inside and both blue urethane and PVC on the outside, which provides added protection. The ability to bond PVC to blue urethane is achieved through a proprietary process developed by the Company. All of the accessories are PVC-coated and provide a complete corrosion protection solution for the Company's end users. INSTALLATION TOOLS offered by the Company include electric benders used for bending PVC-coated conduit of 1/2" to 2", threaders for 1/2" to 4" conduit, hickeys to bend 1/2" to 1" PVC-coated conduit, impact sockets, wrenches and other tools to assist in the installation of its conduit. MARKETING, DISTRIBUTION AND CUSTOMER SERVICE ____________________________________________ IN-HOUSE MARKETING. The Company established an in-house marketing group in 1993 with individuals experienced in sales and marketing in the electrical industry. The group currently consists of three individuals. The Company specifically focuses marketing efforts at the project engineer and end user level, educating them as to the technological advantages and lower life-cycle cost of the Company's PVC-coated conduit as compared to alternative conduit products. INDEPENDENT SALES AGENTS. In addition to education of engineers and contractors so that Ocal products will be specified, the Company's marketing group works hand-in-hand with independent regional sales agents. The Company markets and sells its products to approximately 700 distributors or chains of distributors through approximately 35 independent regional sales agents throughout the United States and Canada. Shipments to customers outside of the United States and Canada are done through an international sales agent experienced in the exportation of electrical materials. Independent sales agents are the functional equivalent of a manufacturer's internal sales force in other industries. The agents market the Company's products to distributors and handle the purchase orders from the distributors. Some agents warehouse the Company's products, which can expedite delivery since inventory is stored at various locations throughout the United States. Sales agents do not market the Company's products exclusively, but they do not sell products which are in direct competition with the Company's products. Sales agents receive commissions, with higher commissions paid to those agents that warehouse the Company's products at their facilities. The Company permits the return of products within certain time limits and under certain conditions subject to a restocking charge. The Company warrants all of its products from defect for six years. CUSTOMER SERVICE. Another key aspect of the Company's marketing is the customer support services it provides. Senior management and other Company employees are available to answer questions from contractors, end users and engineers regarding installation procedures, maintenance, product applications and other technical areas. The Company offers free training on proper installation of its products, sells a variety of installation tools designed to assist in the installation of its products, and has established a toll-free installation hotline. CUSTOMERS _________ The Company's four largest customers are multiple location distributors. These customers are comprised of chains of individual distributors who make independent purchasing decisions. In 1997, sales to one customer represented 10.2% of the Company's net sales. During 1996, sales to any individual customer did not exceed 10% of the Company's net sales. During 1995, there were two individual customers that represented 15.3% and 11.4%, respectively, of the Company's net sales. Management believes that the loss of any one of these distributors would not have a material adverse effect on the Company. BACKLOG AND SEASONALITY _______________________ The Company's business is characterized by short-term order and shipment schedules rather than volume purchase contracts. After a distributor sends a purchase order to the Company, the product is typically shipped within 10 to 15 days. Accordingly, the Company does not consider backlog at any given date to be indicative of future sales. The short term delivery requirements and the nature of the Company's business preclude any significant backlog. The Company's business is not seasonal. MANUFACTURING _____________ RAW MATERIALS AND SUPPLIERS. The Company's principal raw materials are carbon steel pipes which it obtains from a number of domestic primary steel pipe producers, conduit fittings, plastics and chemicals for coating, and zinc for galvanizing. Because the Company galvanizes its own pipe, it can purchase pipe directly from a number of steel pipe manufacturers. Wherever practical, vendor purchases are made in large volumes to maximize volume discounts and optimize payment terms. The Company believes that the market is extremely competitive, and that its relationship with suppliers is good. COMPETITION ___________ The Company's principal competitors in the PVC-coated conduit business are Robroy Industries, Inc. ("Robroy") and Perma-Cote Industries. Robroy is a diversified business and has greater financial resources than the Company. The Company faces substantial competition in its RSC business from large, established companies such as Allied Tube & Conduit Company, Wheatland Tube Company, the LTV Corporation, and Western Tube, all of which have greater financial and managerial resources than the Company. These competitors also produce IMC and EMT. Companies which produce alternative conduit products include Easco Aluminum, Inc. and VAW of America, Inc. in aluminum conduit; Certain Teed Incorporated and Carlon in plastic conduit; T.J. Cope, B-Line Systems, Inc. and Enduro Fiberglass Systems in cable tray; and AFC Cable Systems and Alflex Corporation in armored cable. With respect to PVC-coated conduit, RSC, IMC, and EMT, as well as alternative conduit products, the Company competes based upon product performance, quality, availability of product, speed of delivery, customer support, and price. The Company believes it is competitive with respect to each of these factors and that its principal competitive advantages are product performance, quality, and price. EMPLOYEES _________ As of December 31, 1997, the Company employed 159 people, comprised of 142 in manufacturing, 14 in administration, and 3 in marketing and sales. All of these were full-time employees. None of the Company's employees is represented by labor unions and the Company believes that its relations with its employees are good. ITEM 2. PROPERTIES The Company leases its corporate office and manufacturing plant. The Company believes that its facilities are adequately maintained, in good operating condition, and adequate for the Company's present needs. The Company's principal executive office is located in Van Nuys, California, consisting of approximately 3,000 square feet of office space, which the Company leases from a partnership in which the Company's majority stockholder is the general partner, at an annual rental of $36,000 per year. The lease for this property expires on December 31, 1998. The Company's 300,000 square foot manufacturing facility is located in Mobile, Alabama, and contains a building of approximately 100,000 square feet on the property. The lease contains certain rent escalation clauses and provides the Company with an option to extend the lease through December 31, 2002. ITEM 3. LEGAL PROCEEDINGS The Company is a party to various lawsuits arising in the ordinary course of business. The Company does not believe that the outcome of any of these lawsuits will have a material adverse effect on the Company's business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders of the Company during the fourth quarter of 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION __________________ The Company's Common Stock commenced trading on the NASDAQ National Market System under the symbol "OCAL" on March 18, 1996, and no established public trading market existed prior to that date. The quarterly market price ranges of the Common Stock were as follows:
1997 1996 ____________________ ____________________ HIGH LOW HIGH LOW ____ ___ ____ ___ First Quarter ................. $ 4-1/4 $ 3-1/4 $ 6-7/8 $ 6-1/4 Second Quarter................. 3-15/16 3 6-7/8 5 Third Quarter.................. 3-1/2 2-3/8 5-1/2 3-1/16 Fourth Quarter................. 3-1/4 2-3/8 4 3
As of March 2, 1998, there were approximately 45 holders of record of Common Stock, and the Company estimates that there were approximately 1,500 beneficial owners holding stock in nominee or "street" name on that date. DIVIDEND POLICY _______________ The Company has not paid any cash dividends on its Common Stock since its formation and does not anticipate paying any such dividends in the foreseeable future. The Company plans to reinvest earnings and other cash resources of the Company in the development and expansion of its business. The declaration of dividends in the future will be at the discretion of the Board of Directors and will depend upon earnings, capital requirements, the financial position of the Company, general economic conditions and other pertinent factors. The terms of the Company's bank line of credit restrict the Company's ability to pay cash dividends. Future credit agreements may also contain restrictions on the Company's ability to pay dividends. ITEM 6. SELECTED FINANCIAL DATA The following is a summary of selected financial data of the Company and its subsidiaries, as described in Note 1 of the consolidated financial statements appearing elsewhere herein (amounts in thousands except per share data). The financial data for the years ended December 31, 1997, 1996, and 1995 and as of December 31, 1997 and 1996 have been derived from the audited financial statements of the Company appearing elsewhere herein, and should be read in conjunction with such statements and the notes thereto. The remainder of the financial data has been derived from audited financial statements of the Company which are not included herein.
FIVE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, JULY 31, ______________________________________ STATEMENT OF OPERATIONS DATA: 1997 1996 1995 1994 1993 1993 ________ ________ ________ ________ ________ ________ Net sales $ 24,279 $ 25,000 $ 24,885 $ 19,123 $ 8,361 $ 17,165 Gross margin 6,651 7,859 8,240 6,842 2,906 4,801 Stockholders' compensation 347 313 2,806 1,605 879 2,108 Operating income (loss) 2,316 3,519 1,489 1,700 481 (236) Provision (benefit) for income taxes 867 1,180 22 8 (11) 208 Net income (loss) 1,508 2,356 1,081 1,384 410 (310) Basic and diluted earnings per share 0.26 0.45 0.33 -- -- -- PRO FORMA STATEMENT OF OPERATIONS DATA: Net income 2,116 2,158 Basic and diluted earnings per share 0.41 0.66 Weighted average shares - basic and diluted 5,762 5,224 3,250 BALANCE SHEET DATA: AS OF DECEMBER 31, AS OF ________________________________________________ JULY 31, 1997 1996 1995 1994 1993 1993 ________ ________ ________ ________ ________ ________ Working capital $ 14,170 $ 13,018 $ 3,373 $ 2,632 $ 1,134 $ 1,002 Total assets 17,635 18,282 14,298 10,379 8,911 8,432 Total debt 1,757 3,257 6,179 4,320 4,851 3,796 Stockholders' equity 13,992 12,715 5,259 4,175 2,791 2,381 ___________________________ Effective August 1, 1993, the Company changed its fiscal year end from July 31 to December 31. Stockholders' compensation expense consists of salaries and bonuses paid to certain stockholders whose compensation is classified as such in the financial statements. Prior to March 18, 1996, Ocal Alabama and Ocal Data were S corporations, and their net income (loss) did not include a provision (benefit) for federal income taxes since they were not subject to federal income taxes. Their net income (loss) for those periods included a provision for state income taxes based upon income tax rates applicable to S corporations. Net income (loss) attributable to Occidental and Ocal Transport, C corporations for all periods, includes federal and state income taxes based upon statutory rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview." The earnings per share amounts prior to 1997 have been recalculated to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share," which did not change amounts previously reported. For further discussion of earnings per share and the impact of Statement No. 128, see note 2 of the consolidated financial statements. Pro forma statement of operations data includes adjustments (i) to reduce stockholders' compensation expense, relating to salaries and bonuses paid to certain stockholders, by $2,493,000 for the year ended December 31, 1995 and (ii) to provide for related income taxes as if all of the Company's income during the pro forma periods presented were taxed at C corporation rates based upon pro forma income before income taxes. Weighted average common shares outstanding for the year ended December 31, 1995 is based upon the assumed issuance of 3,250,000 shares of Common Stock at the beginning of the year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW ________ In March and April of 1996, the Company completed an initial public offering ("IPO") of its stock. Prior to the IPO, the Company's operations were conducted by a number of affiliated companies formed at various times in the past. The most significant of these operating entities elected to be taxed as S corporations under the provisions of the Internal Revenue Code. Pursuant to such elections, stockholders of these companies included their proportionate share of the taxable income of these companies in their personal tax returns and the operating results of these companies reflected no provision for federal taxes. Stockholders' compensation expense for 1995 includes amounts distributed to these stockholders to facilitate the payment of their personal income taxes. Occidental Coating Company ("Occidental"), a California corporation, was incorporated on December 15, 1965 to manufacture and sell PVC-coated conduit and fittings. On November 30, 1987, OCAL, Incorporated, an Alabama corporation ("Ocal Alabama"), was formed in Mobile, Alabama initially as a place for the importation and distribution of conduit manufactured in Costa Rica by an affiliate of Occidental. In 1988, the California and Costa Rica plants were consolidated and relocated to Mobile, Alabama, when the Company determined that the advantages of manufacturing in Costa Rica could not be fully realized. On August 1, 1993, the operations of Occidental and Ocal Alabama were consolidated through the acquisition by Ocal Alabama of substantially all of the assets and liabilities of Occidental at net book value. On August 24, 1995, the Company was incorporated in Delaware under the name Ocal, Inc. On March 18, 1996, all of the outstanding capital stock of Ocal Alabama, Occidental, Ocal Data Company ("Ocal Data"), and Ocal Transport Co. ("Ocal Transport") was acquired by the Company through capital contributions by the respective stockholders in exchange for an aggregate of 3,250,000 shares of the Company's common stock (the "Reorganization"). As part of this Reorganization, Ocal Alabama declared a $4,600,000 distribution to its former stockholders, which represented estimated undistributed S corporation retained earnings. Of this distribution, $1,600,000 was paid by the Company in cash in March 1996 and the remainder of the distribution was in the form of $3,000,000 of interest- bearing notes payable. The total amount of the distribution was finalized as $4,900,000 upon completion of the final tax return for Ocal Alabama, and the additional $300,000 distribution was paid in cash to the former stockholders in February 1997. In September of 1997, $1,500,000 principal amount of the notes was repaid in cash and at December 31, 1997, $1,500,000 principal amount of the notes (which is due on March 18, 1999) remained outstanding. RESULTS OF OPERATIONS _____________________ YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 NET SALES. The Company's net sales for 1997 were $24,279,000, which represented a decrease of $721,000 (2.9%) compared to net sales of the prior year. The decrease in net sales is due primarily to a general slowdown in the Company's industry, which has caused an increase in the competitive nature of the pricing. Average selling prices of Company products decreased by approximately 3% from 1996 to 1997. Unit shipment volumes were approximately the same in 1997 as in 1996, with decreases of approximately 5% in pipe volumes being offset by equivalent increases in the volumes of fittings. Sales volume is also impacted by major end user and project activity. Net sales to a major end user decreased from approximately $1,100,000 in 1996 to $400,000 in 1997, a decrease of $700,000. While the end user continues to do business with the Company, it had fewer plant expansions in 1997 than in 1996. GROSS MARGIN. The Company's gross margin for 1997 was $6,651,000, which represented a decrease of $1,208,000 (15.4%) compared to gross margin of the prior year. The Company's gross margin as a percentage of sales decreased to 27.4% in 1997 from 31.4% in 1996 due to a combination of a 3% decrease in average selling prices due to competition, and increased factory labor costs. At the beginning of the second quarter of 1997, the Company implemented wage increases of approximately 20% for factory personnel in order to remain competitive with wages paid by other local employers and to help reduce employee turnover. As part of the Company's strategy to maintain and increase its market share, it has reduced prices in competitive situations and may continue to do so in 1998. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). SG&A expenses for 1997 were $3,988,000, which represented a decrease of $39,000 (1.0%) compared to SG&A expenses of the prior year. As a percentage of net sales, SG&A expenses were 16.4% in 1997 compared to 16.1% in 1996. The net decrease in expenses from 1997 to 1996 is due to a reduction in legal expenses, partially offset by higher sales and administrative salaries and expenses associated with the Company's first annual report. During 1997, the Company received a one-time insurance refund of approximately $80,000 relating to legal expenses incurred in 1996. Without this refund, SG&A expenses would have been 16.8% of sales in 1997. SG&A expenses in absolute dollars for 1998 are expected to be higher than in 1997 due to the absence of the insurance refund. STOCKHOLDERS' COMPENSATION. Stockholders' compensation expenses for 1997 were $347,000, which represented an increase of $34,000 (10.9%) compared to the prior year. During the second quarter of 1997, the Company's Compensation Committee approved salary increases to these former stockholders of Ocal Alabama. INTEREST EXPENSE. Interest expense for 1997 was $184,000, which represented a decrease of $74,000 (28.7%) compared to the prior year. During 1996, the Company had outstanding bank debt until its IPO. During 1997, the Company had no outstanding bank debt and also paid off the current portion ($1,500,000) of notes payable to former stockholders of Ocal Alabama on September 18, 1997. INTEREST INCOME. Interest income for 1997 was $243,000, which represented a decrease of $32,000 (11.7%) compared to the prior year. During the fourth quarter of 1996, the Company decided to invest excess cash in federally tax- free instruments, which had a lower pre-tax yield than taxable investments which were made during the second and third quarters of 1996. INCOME TAX EXPENSE. Income tax expense for 1997 was $867,000, which represented a decrease of $313,000 (26.5%) compared to the prior year, primarily due to reduced income before income taxes. The Company's effective income tax rate increased to 36.5% for 1997 compared to 33.4% for 1996. In the first quarter of 1996, prior to the Company's Reorganization and IPO, Ocal Alabama and Ocal Data were taxed as S corporations under the provisions of the Internal Revenue Code, and accordingly, no provision was made for federal income taxes for these operations. Subsequent to that date, the Company and all of its subsidiaries became C corporations subject to state and federal income taxes at statutory rates. NET INCOME. Net income for 1997 of $1,508,000 decreased by $848,000 (36.0%) compared to net income for the prior year. The decrease was due primarily to reduced gross margin, partially offset by lower income taxes. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 NET SALES. The Company's net sales for 1996 were $25,000,000, which represented an increase of $115,000 (0.5%) compared to sales of the prior year. Although unit volumes in 1996 increased compared to 1995, there was an offsetting decline in selling prices due to competitive product pricing. The Company lost an account which represented approximately 4% of 1995 sales during 1996, and replaced the lost sales by obtaining new customers with aggressive product pricing. GROSS MARGIN. The Company's gross margin for 1996 was $7,859,000, which represented a decrease of $381,000 (4.6%) compared to gross margin of the prior year. The Company's gross margin as a percentage of sales decreased to 31.4% in 1996 from 33.1% in 1995 due to competitive pricing pressures on the Company's net sales, as well as increased costs of raw materials. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). SG&A expenses for 1996 were $4,027,000, which represented an increase of $82,000 (2.1%) compared to SG&A expenses of the prior year. The increase was due to certain expenses associated with being a public company, such as public relations costs and directors and officers liability insurance, as well as increased expenses of the in-house marketing group. Overall SG&A expenses as a percentage of net sales increased to 16.1% in 1996 from 15.9% in the prior year. STOCKHOLDERS' COMPENSATION. Stockholders' compensation expenses for 1996 were $313,000, which represented a decrease of $2,493,000 (88.8%) compared to expenses of the prior year. The decrease was due to a reduction in salaries and bonuses paid to those stockholders in 1996. As described in the Overview section above, the 1995 expense includes amounts to facilitate the payment by these stockholders of their personal income taxes, mainly attributable to S corporation income on their personal tax returns. INTEREST EXPENSE. Interest expense for 1996 was $258,000, a reduction of $128,000 (33.2%) compared to the prior year. The reduction was due to the repayment of bank debt with a portion of the cash proceeds from the Company's IPO. INTEREST INCOME. Interest income for 1996 was $275,000, earned from excess cash proceeds available after the Company's IPO. In 1995, all excess cash from operations was used to pay down the Company's bank debt, and therefore, no interest income was recognized. INCOME TAX EXPENSE. Income tax expense for 1996 was $1,180,000 (an effective rate of 33.4%) compared to $22,000 for the prior year. Prior to the Company's Reorganization and IPO, Ocal Alabama and Ocal Data were taxed as S corporations under the provisions of the Internal Revenue Code, and accordingly, no provision was made for federal income taxes for these operations. Subsequent to that date, the Company and all of its subsidiaries became C corporations subject to state and federal income taxes at statutory rates. NET INCOME. Net income for 1996 was $2,356,000, which represented an increase of $1,275,000 (117.9%) compared to the prior year. The increase was due primarily to reduced stockholders' compensation expense, partially offset by an increased provision for income taxes. LIQUIDITY AND CAPITAL RESOURCES _______________________________ Historically, working capital needed to finance the Company's operations and growth has been provided by cash flows from operations, bank debt, and long- and short-term notes from related parties and a supplier. In March and April of 1996, the Company completed an initial public offering of 2,530,000 shares of its common stock, which resulted in net proceeds to the Company, after deduction of underwriters' discounts, commissions, and expenses, of $10,000,000. In March of 1996, a portion of the proceeds of the IPO was used to pay off the $3,948,000 balance remaining on the Company's revolving bank line of credit and to pay the $1,600,000 cash portion of Ocal Alabama's $4,600,000 distribution of its S corporation retained earnings to prior S corporation stockholders. The balance of the proceeds was added to the Company's working capital during March and April of 1996. As part of the Reorganization which occurred immediately prior to the IPO, Ocal Alabama declared the above-mentioned $4,600,000 distribution to its former stockholders. Of this amount, $1,600,000 was paid by the Company in cash in March 1996 and the remaining $3,000,000 was paid by the issuance of notes payable bearing interest at the rate of 6.5% per annum, with $1,500,000 principal amount due (and paid in cash) on September 18, 1997 and $1,500,000 principal amount due on March 18, 1999. The total amount of the distribution was finalized as $4,900,000 upon completion of the final tax return for Ocal Alabama, and the additional $300,000 distribution was paid in cash to the former stockholders in February 1997. At December 31, 1997, working capital was $14,170,000, compared to $13,018,000 at December 31, 1996, an increase of $1,152,000 (8.9%). The most significant components of the increase were increases in inventories of $813,000 and prepaid taxes of $253,000, decreases in distributions and current notes payable to former S corporation stockholders of $1,800,000, partially offset by a decrease in cash and cash equivalents of $2,090,000. During 1997, the Company was able to obtain advantageous pricing of steel pipe by purchasing large quantities on a periodic basis. The parts purchased are regular stock items with little or no risk of obsolescence, and the Company intends to continue to make such purchases in the future. Inventory turnover decreased from 2.6 times in 1996 to 2.3 times in 1997. The Company generated net cash from operating activities of $558,000 in 1997, compared to $2,148,000 in 1996 and $483,000 in 1995. The $1,590,000 decrease from 1996 to 1997 was due primarily to a decrease in net income of $848,000 and an increase in inventory of $813,000. The $1,665,000 increase from 1995 to 1996 was due primarily to an increase in net income of $1,275,000 and reductions in accounts receivable and inventories, which were offset by increases in accounts payable and accrued expenses. Net cash used by investing activities was $617,000 in 1997, compared to net cash provided by investing activities of $1,256,000 in 1996 and net cash used by investing activities of $1,804,000 in 1995. Capital expenditures in 1997 were $617,000, compared to $389,000 in 1996 and $159,000 in 1995. During 1997, the Company made significant investments to increase its production workflow and output, acquiring machinery that enables in-house production of tooling and automatic injection molding of parts formerly produced manually. Prior to 1996, due to cash constraints, the Company did not make significant capital investments unless absolutely necessary. The Company expects capital expenditures during 1998 to be in the range of $400,000 to $600,000. During March of 1996, in conjunction with the Reorganization, the majority stockholder repaid a $1,645,000 loan from the Company made during 1995. The loan was used by the majority stockholder in 1995 to purchase a $2,000,000 certificate of deposit which was pledged as a personal guarantee to secure the Company's revolving bank line of credit. Net cash used by financing activities was $2,031,000 in 1997, compared to net cash provided by financing activities of $3,088,000 in 1996 and $1,369,000 in 1995. During 1997, the Company paid in cash $1,800,000 of distributions and notes payable to prior S corporation stockholders and also purchased 79,000 shares of treasury stock at a cost of $231,000 under a stock repurchase program. In January of 1997, the Company's Board of Directors approved the stock repurchase program under which the Company is authorized to purchase up to $500,000 of Company stock from time to time on the open market. The Company intends to continue to make purchases of Company stock from time to time under the terms of this program. In 1996, the Company generated $3,088,000 of cash from financing activities, consisting of $10,490,000 of proceeds from the issuance and sale of common stock in the Company's IPO, offset in part by repayment of bank debt of $5,802,000 and the distribution of $1,600,000 of Ocal Alabama's S corporation retained earnings to prior S corporation stockholders. The Company has a revolving bank line of credit with SouthTrust Bank, National Association that expires on July 31, 2000 and provides for maximum borrowings of $6,500,000 (subject to certain specified percentages of the Company's accounts receivable and inventories). The related credit agreement requires the maintenance of certain financial ratios and tangible net worth amounts and provides for various restrictions, including limitations on capital expenditures, additional indebtedness, salaries of certain officers of the Company, and payment of dividends by the Company. Interest on borrowings outstanding under the bank line is based, at the Company's option, on the London Interbank Offered Rate ("LIBOR") or the bank's prime rate (8.5% at December 31, 1997). At December 31, 1997, the annual interest rate based on the LIBOR pricing option was LIBOR plus 2.0%, and the annual interest rate based on the prime rate was prime. At December 31, 1997, there were no borrowings outstanding under the bank line of credit, and the amount of unused credit available, based upon the Company's collateral, was $4,861,000. The Company believes that cash provided by operating activities, existing cash and cash equivalents, and available credit will be sufficient to fund the Company's future operating and capital cash needs for the next 12 to 18 months. The Company intends to pursue a strategy of growth by selective acquisitions that complement the Company's strengths in the electrical conduit industry. Such acquisitions may necessitate the issuance of additional debt or equity securities of the Company. The Company intends to pursue this strategy with careful regard for profitability, the need for liquidity, and the potential dilutive effect of any additional issuance of equity securities. There can be no assurance, however, that any acquisitions will occur or that an acquisition that does occur will not adversely affect the Company's net income or liquidity. The Company's principal commitments at December 31, 1997 consisted of obligations under operating leases for facilities. IMPACT OF THE YEAR 2000 _______________________ The Company has completed a study of the impact of the year 2000 on its business and operational systems. A solution was developed and implemented during 1997 and the cost did not have a material impact on the Company's financial results. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA. REPORT OF INDEPENDENT AUDITORS To the Stockholders and Board of Directors of Ocal, Inc. We have audited the accompanying consolidated balance sheets of Ocal, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ocal, Inc. as of December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP January 27, 1998 Los Angeles, California OCAL, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
For the Years Ended December 31, ________________________________ 1997 1996 1995 ____ ____ ____ Net sales $ 24,279 $ 25,000 $ 24,885 Cost of goods sold 17,628 17,141 16,645 ________ ________ ________ Gross margin 6,651 7,859 8,240 Operating expenses: Selling, general and administrative 3,988 4,027 3,945 Stockholders' compensation 347 313 2,806 ________ ________ ________ Operating income 2,316 3,519 1,489 Interest expense 184 258 386 Interest income (243) (275) -- ________ ________ ________ Income before income taxes 2,375 3,536 1,103 Provision for income taxes 867 1,180 22 ________ ________ ________ Net income $ 1,508 $ 2,356 $ 1,081 ======== ======== ======== Basic and diluted earnings per share $ 0.26 $ 0.45 $ 0.33 ======== ======== ======== Pro forma net income $ 2,116 $ 2,158 ======== ======== Pro forma basic and diluted earnings per share $ 0.41 $ 0.66 ======== ======== The accompanying notes are an integral part of these statements.
OCAL, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
December 31, December 31, 1997 1996 ____________ ____________ ASSETS CURRENT ASSETS Cash and cash equivalents $ 4,529 $ 6,619 Accounts receivable, net of allowance for doubtful accounts of $127 ($122 in 1996) 2,751 2,580 Inventories 7,760 6,947 Prepaid expenses and other current assets 201 171 Prepaid income taxes 253 -- Deferred income taxes 275 293 ____________ ____________ Total current assets 15,769 16,610 Property and equipment, net 1,819 1,524 Other assets 47 148 ____________ ____________ TOTAL ASSETS $ 17,635 $ 18,282 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 922 $ 1,167 Commissions payable 534 452 Accrued expenses 143 136 Income taxes payable -- 37 Distribution payable - stockholders -- 300 Current maturities of notes payable - stockholders -- 1,500 ____________ ____________ Total current liabilities 1,599 3,592 Long-term notes payable - stockholders 1,757 1,757 Deferred income taxes 287 218 ____________ ____________ Total liabilities 3,643 5,567 Commitments and contingencies -- -- STOCKHOLDERS' EQUITY Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued -- -- Common stock, $.001 par value; 15,000,000 shares authorized; 5,704,000 shares issued and outstanding (5,780,000 in 1996) 6 6 Additional paid-in capital 10,486 10,708 Retained earnings 3,509 2,001 Treasury stock at cost, 3,000 shares (9) -- ____________ ____________ Total stockholders' equity 13,992 12,715 ____________ ____________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,635 $ 18,282 ============ ============ The accompanying notes are an integral part of these statements.
OCAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the Years Ended December 31, ____________________________________________ 1997 1996 1995 ____________ ____________ ____________ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,508 $ 2,356 $ 1,081 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 322 261 306 Deferred income taxes 87 (75) -- Changes in assets and liabilities: Accounts receivable, net (171) 510 (963) Inventories (813) 301 (851) Prepaid expenses and other 71 (137) (65) Accounts payable (245) (908) 808 Commissions payable 82 (24) 138 Accrued expenses 7 (162) 18 Income taxes (290) 26 11 ____________ ____________ ____________ Net cash provided by operating activities 558 2,148 483 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (617) (389) (159) Repayment by (loan to) stockholder and related parties -- 1,645 (1,645) ____________ ____________ ____________ Net cash provided by (used in) investing activities (617) 1,256 (1,804) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings from (repayment of) notes payable - bank -- (5,802) 4,959 Repayment of notes payable - supplier -- -- (700) Repayment of notes payable - related parties -- -- (2,400) Net proceeds from (costs of) issuance of common stock -- 10,490 (490) Purchases of treasury stock (231) -- -- Distribution of S corporation retained earnings to prior S corporation stockholders (300) (4,900) -- Additions to (repayment of) notes payable - stockholders (1,500) 3,300 -- ____________ ____________ ____________ Net cash provided by (used in) financing activities (2,031) 3,088 1,369 Net increase (decrease) in cash and cash equivalents (2,090) 6,492 48 Cash and cash equivalents at beginning of year 6,619 127 79 ____________ ____________ ____________ Cash and cash equivalents at end of year $ 4,529 $ 6,619 $ 127 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 192 $ 242 $ 416 Income taxes $ 1,040 $ 1,229 $ 24 The accompanying notes are an integral part of these statements.
OCAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (In thousands)
Common Stock Additional Treasury Stock ________________ Paid-in Retained ______________ Shares Amount Capital Earnings Shares Amount Total _______ _______ __________ __________ ______ _______ __________ Balance at December 31, 1994 3,250 $ 3 $ 711 $ 3,464 -- $ -- $ 4,178 Net income -- -- -- 1,081 -- -- 1,081 _______ _______ __________ __________ ______ _______ __________ Balance at December 31, 1995 3,250 3 711 4,545 -- -- 5,259 Shares issued in initial public offering 2,530 3 9,997 -- -- -- 10,000 Distributions of S corporation retained earnings to prior S corporation stockholders -- -- -- (4,900) -- -- (4,900) Net income -- -- -- 2,356 -- -- 2,356 _______ _______ __________ __________ ______ _______ __________ Balance at December 31, 1996 5,780 6 10,708 2,001 -- -- 12,715 Purchases of treasury stock -- -- -- -- 79 (231) (231) Retirements of treasury stock (76) -- (222) -- (76) 222 -- Net income -- -- -- 1,508 -- -- 1,508 _______ _______ __________ __________ ______ _______ __________ Balance at December 31, 1997 5,704 $ 6 $ 10,486 $ 3,509 3 $ (9) $ 13,992 ======= ======= ========== ========== ====== ======= ========== The accompanying notes are an integral part of these statements.
OCAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Basis of Presentation: Concurrent with the closing of the Company's initial public offering of common stock on March 18, 1996 (Note 4), all of the outstanding capital stock of OCAL, Incorporated ("Ocal Alabama"), Occidental Coating Company ("Occidental"), Ocal Data Company ("Ocal Data"), and Ocal Transport Co. ("Ocal Transport") was acquired by the Company through capital contributions by their respective prior stockholders in exchange for an aggregate of 3,250,000 shares of the Company's common stock (the "Reorganization"). The Company's Chairman, CEO and President was the sole or majority stockholder of each of the contributed companies and is the 53.8% stockholder of the Company as of December 31, 1997. The accounts of Ocal Alabama, Occidental, Ocal Data and Ocal Transport are included in the accompanying consolidated financial statements of the Company on their historical basis. The stockholders' equity section of the consolidated financial statements for prior periods has been retroactively restated from that reported in the Registration Statement and Prospectus related to the Company's initial public offering to reflect the Company's capital structure and the Reorganization with the common stock of these entities classified as paid-in capital. All significant intercompany accounts and transactions have been eliminated in consolidation. (B) Description of Business: The Company manufactures PVC-coated rigid steel conduit, elbows and fittings which are sold principally in the United States to distributors who resell the products for ultimate use principally in new construction or as replacement parts. (C) Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (D) Cash and Cash Equivalents: At December 31, 1997, cash equivalents include highly liquid investments of approximately $4,200,000 invested primarily in tax-exempt municipal securities and high-grade commercial paper. These investments are stated at cost which approximates fair value. The Company considers all highly liquid instruments purchased with a remaining maturity of three months or less to be cash equivalents. (E) Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market and consist of the following (amounts in thousands):
December 31, ____________ 1997 1996 _______ _______ Raw materials $ 3,344 $ 3,038 Finished goods 4,416 3,909 _______ _______ $ 7,760 $ 6,947 ======= =======
(F) Property and Equipment: Property and equipment are recorded at cost and are depreciated using the straight-line method over the following estimated useful lives: Galvanizer 20 years Other manufacturing equipment and molds 7 years Office equipment 5-7 years Vehicles 3 years Leasehold improvements Remaining life of lease (G) Revenue Recognition: The Company recognizes revenue from product sales to customers upon shipment. The Company warrants its products against defects for six years and has policies permitting customers to return products under certain circumstances. In addition, certain of the Company's distributors and agents are entitled to rebates upon attaining specified sales levels. A provision has been made for the estimated amount of product returns and rebates that may occur under these programs. (H) Income Taxes: The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than enactments of changes in the tax law or rates. Prior to the Reorganization, Ocal Alabama had elected to be taxed as an S corporation under the provisions of the Internal Revenue Code. Under those provisions, Ocal Alabama did not pay federal or state corporate income taxes on its taxable income. Instead, the stockholders were liable for federal and state income taxes on Ocal Alabama's taxable income. The State of California adopted the provisions of the S corporation election but charged a franchise tax at the corporate level. In connection with the Company's initial public offering, Ocal Alabama's Subchapter S election was terminated, and accordingly, the Company then became subject to federal and state income taxes. For information purposes, the pro forma financial information (see Note 3) includes pro forma amounts for the income taxes that would have been recorded as if all of the Company's income during the pro forma periods presented were taxed at C corporation rates. (I) Fair Value of Financial Instruments: The carrying values of the Company's financial instruments, which consist of cash and cash equivalents and notes payable - stockholders, approximate their fair values. (J) Reclassifications: Certain previously reported amounts have been reclassified to conform to the current period presentation. (K) New Accounting Standard: In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts presented have been recalculated to comply with Statement 128's requirements, which did not change amounts previously reported. The effect of adopting Statement 128 was not material. 2. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (amounts in thousands, except per share data):
1997 1996 1995 _______ _______ _______ Numerator: Net income for basic and diluted earnings per share $ 1,508 $ 2,356 $ 1,081 Denominator: Weighted average shares 5,762 5,224 3,250 Effect of dilutive securities: Warrants -- -- -- Stock options -- -- -- _______ _______ _______ Dilutive potential common shares -- -- -- Denominator for basic and diluted earnings per share 5,762 5,224 3,250 ======= ======= ======= Basic and diluted earnings per share $ 0.26 $ 0.45 $ 0.33 ======= ======= =======
For additional disclosures regarding the stock options and warrants, see Note 8. All options and warrants were excluded from the computation of diluted earnings per share because the exercise prices for both the options and warrants were greater than the average market price of the common shares during the relevant periods, and therefore, the effect would be antidilutive. 3. PRO FORMA FINANCIAL INFORMATION (UNAUDITED) The pro forma financial information is prepared on a basis consistent with pro forma information disclosed in the Registration Statement and Prospectus related to the Company's initial public offering. The pro forma financial information includes adjustments (i) to reduce stockholders' compensation expense, relating to salaries and bonuses paid to certain stockholders, by $2,493,000 for the year ended December 31, 1995, and (ii) to provide for related income taxes as if all of the Company's income during the pro forma periods presented were taxed at C corporation rates based upon pro forma income before income taxes. Reconciliations between historical and pro forma results of operations follow (in thousands except per share amounts):
For the Years Ended December 31, ________________________________ 1996 1995 _______ _______ Income before income taxes $ 3,536 $ 1,103 Pro forma adjustments (described above) (i) Stockholders' compensation -- 2,493 _______ _______ Pro forma income before income taxes 3,536 3,596 (ii) Tax provision (1,420) (1,438) _______ _______ Pro forma net income $ 2,116 $ 2,158 ======= ======= Pro forma basic and diluted earnings per share $ 0.41 $ 0.66 ======= ======= Weighted average shares outstanding 5,224 3,250 ======= =======
4. INITIAL PUBLIC OFFERING On March 18, 1996, the Company completed the initial public offering of 2,200,000 shares of its common stock at a price of $5.00 per share. On April 25, 1996, the underwriters exercised their overallotment option by purchasing an additional 330,000 shares of the Company's common stock at a price of $5.00 per share. After underwriters' discounts, commissions and expenses, the net proceeds of the offering and overallotment exercise to the Company were $10,000,000. 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following (amounts in thousands):
December 31, ____________ 1997 1996 _______ _______ Machinery and equipment $ 2,015 $ 1,556 Office equipment 377 365 Leasehold improvements 321 311 Molds 528 429 Vehicles 178 148 _______ _______ 3,419 2,809 Less accumulated depreciation and amortization (1,600) (1,285) _______ _______ Property and equipment - net $ 1,819 $ 1,524 ======= =======
6. REVOLVING BANK LINE OF CREDIT The Company has a revolving bank line of credit with SouthTrust Bank, National Association that expires July 31, 2000 and provides for maximum borrowings of $6,500,000 (subject to certain specified percentages of the Company's accounts receivable and inventories). The related credit agreement requires the maintenance of certain financial ratios and tangible net worth amounts and provides for various restrictions, including limitations on capital expenditures, additional indebtedness, salaries of certain officers of the Company, and payment of dividends by the Company. Interest on borrowings outstanding under the bank line is based, at the Company's option, on the London Interbank Offered Rate ("LIBOR") or the bank's prime rate (8.5% at December 31, 1997). At December 31, 1997, the annual interest rate based on the LIBOR pricing option was LIBOR plus 2.0%, and the annual interest rate based on the prime rate was prime. At December 31, 1997, there were no borrowings outstanding under the bank line of credit, and the amount of unused credit available, based upon the Company's collateral, was $4,861,000. 7. TRANSACTIONS WITH RELATED PARTIES Notes Payable Notes payable - stockholders consist of the following (amounts in thousands):
December 31, ____________ 1997 1996 _______ _______ 6.5% unsecured note payable to the majority stockholder of the Company, due on March 18, 1999 $ 257 $ 257 6.5% unsecured notes payable due to former stockholders of Ocal Alabama - see (ii) below 1,500 3,000 _______ _______ Total 1,757 3,257 Less: portion due within one year -- 1,500 _______ _______ Long-term portion $ 1,757 $ 1,757 ======= =======
As part of the Reorganization on March 18, 1996, Ocal Alabama declared a distribution to its then stockholders in an amount of $4,600,000, which was an estimate of all of its undistributed S corporation retained earnings as of that date. The distribution by the Company on Ocal Alabama's behalf was paid as follows: (i) $1,600,000 was paid in cash on March 25, 1996; and (ii) $3,000,000 in notes payable were issued to the stockholders of Ocal Alabama, bearing interest at the rate of 6.5% per annum. On September 18, 1997, $1,500,000 principal amount of the notes were repaid in cash, and the remaining $1,500,000 principal amount of the notes are payable on March 18, 1999. The amount of undistributed S corporation retained earnings as of March 18, 1996 was finalized as $4,900,000 after Ocal Alabama's income tax return for the period from January 1, 1996 through March 18, 1996 was completed. The additional $300,000 of undistributed S corporation retained earnings, classified as a distribution payable to stockholders, was paid in cash to former stockholders in February 1997 and reflected in current liabilities at December 31, 1996. Other The Company's corporate office is leased (at an annual rent of $36,000) from a partnership in which the Company's majority stockholder is the general partner, and the lease expires on December 31, 1998. Summary Amounts of these related party transactions charged to expense are as follows (amounts in thousands):
Years Ended December 31, ________________________________ 1997 1996 1995 _______ _______ _______ Rent expense $ 36 $ 36 $ 66 Interest expense $ 184 $ 170 $ 88
8. CAPITAL STOCK Preferred Stock The Company's Board of Directors is authorized to issue up to 5,000,000 shares of preferred stock, in series, to fix dividend rates, conversion rights, voting rights, terms of redemption, liquidation preferences, and to increase or decrease the number of shares in any series. No preferred stock is currently outstanding, and the Company has no present plans to issue any preferred stock. Specific rights granted to future holders of preferred stock could be used to restrict the Company's ability to merge with, or sell its assets to, a third party. The ability of the Board of Directors to issue preferred stock could discourage, delay or prevent a takeover of the Company, thereby preserving control of the Company by the current stockholders. Stock Options In August 1995, the Board of Directors adopted, and the stockholders of the Company approved, the Ocal, Inc. 1995 Stock Option Plan (the "Plan"). The Plan provides for the award of incentive stock options to employees and the award of non-qualified stock options to employees, independent contractors, directors and consultants. The Company reserved 400,000 shares of Common Stock under the Plan. Options to purchase Common Stock are generally conditioned upon continued employment or service to the Company, expire from five to ten years after the grant date, and become exercisable commencing with the first anniversary date of the grant. Stock options under the Plan are granted at prices not less than the fair market value on the date of the grant. There were no options outstanding prior to the Company's initial public offering on March 18, 1996. The following is a summary of stock option activity under the Plan:
1997 1996 ____________________ ____________________ Weighted Weighted Number Average Number Average of Exercise of Exercise Shares Price Shares Price _________ _________ _________ _________ Outstanding, beginning of year 105,000 $ 5.32 -- $ -- Granted 60,500 $ 3.19 108,000 $ 5.31 Expired or canceled (10,000) $ 5.00 (3,000) $ 5.00 _________ _________ Outstanding, end of year 155,500 $ 4.51 105,000 $ 5.32 ========= ========= Exercisable at year-end 31,667 $ 5.36 10,000 $ 5.00 ========= ========= Available for grant 244,500 295,000 ========= ========= Weighted-average fair value of options granted during the year $ 1.46 $ 2.50
The 155,500 options outstanding at December 31, 1997 have a weighted average remaining contractual life of 8.89 years and the exercise prices range from $3.19 to $5.94 per share. On February 17, 1998, the Stock Option Committee of the Company's Board of Directors passed a resolution to cancel all of the outstanding options under the Plan and replace them with new option grants, effective February 18, 1998. The new options expire ten years after the grant date, maintain the original vesting schedule of the options they replace, and have an exercise price of $2.375 per share. Pro Forma Fair Value Disclosures The Company accounts for its stock options using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees", and related Interpretations. Accordingly, no compensation expense related to these plans has been recognized in the Company's financial statements. The table below sets out the pro forma amounts of net income and net income per share that would have resulted if the Company accounted for its stock options under the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and excludes the effects of the above-mentioned cancellation and replacement of options (in thousands except per share amounts):
1997 1996 ________ ________ Net income as reported $ 1,508 $ 2,356 Net income - pro forma 1,435 2,310 Primary and diluted earnings per share - as reported 0.26 0.45 Primary and diluted earnings per share - pro forma $ 0.25 $ 0.44
For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options' vesting periods. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option- pricing model with the following assumptions:
1997 1996 ________ ________ Expected dividend yield 0.00% 0.00% Expected stock price volatility 43.0% 46.4% Risk-free interest rate 5.70% 6.70% Expected life of options 5 years 5 years Vesting assumption 33.3% per year 33.3% per year
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options. The Company's stock options have characteristics significantly different from those of traded options such as vesting restrictions and extremely limited transferability. In addition, the assumptions used in option valuation models are highly subjective, particularly the expected stock price volatility of the underlying stock. Because changes in these subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not provide a reliable single measure of the fair value of its stock options. Pro forma net income and earnings per share are the same as reported amounts prior to 1996, as no stock options were granted until the initial public offering on March 18, 1996. Because options generally vest over three years and new option grants are generally made each year, the pro forma amounts shown above may not be representative of the pro forma effect on reported net income in future years. Warrants At December 31, 1997, warrants to purchase up to 220,000 shares of Common Stock were outstanding. These warrants were issued to underwriters in connection with the Company's initial public offering, and are exercisable for a period of four years commencing March 18, 1997 at an exercise price of $6.50 per share. 9. INCOME TAXES Through March 18, 1996, the date of the Reorganization and the Company's initial public offering, Ocal Alabama and Ocal Data had elected to be taxed as S corporations under the provisions of the Internal Revenue Code. Pursuant to such elections, stockholders of these companies included their proportionate share of the taxable income of these companies in their personal tax returns. Accordingly, no provision for federal income taxes was required or provided for the operations of Ocal Alabama and Ocal Data through March 18, 1996. The State of California adopted the provisions of the S corporation election but charged a franchise tax at the corporate level. As of March 18, 1996, as a result of the Reorganization, the Company and all of its subsidiaries became C corporations subject to state and federal income taxes at statutory rates. Such income taxes are provided on the results of operations in the accompanying consolidated statements of income for the year ended December 31, 1997 and the period from March 18, 1996 through December 31, 1996. The components of the provision for income taxes are as follows (amounts in thousands):
Years ended December 31, _____________________________ 1997 1996 1995 _______ _______ _______ Current: Federal $ 581 $ 960 $ -- State 155 305 22 _______ _______ _______ 736 1,265 22 Deferred: Federal 113 (90) -- State 18 5 -- _______ _______ _______ 131 (85) -- _______ _______ _______ Total $ 867 $ 1,180 $ 22 ======= ======= =======
The reconciliation of income tax computed at the U.S. federal statutory tax rate to the Company's effective income tax rate is as follows (amounts in thousands): Years ended December 31, _____________________________ 1997 1996 1995 _______ _______ _______ [S] [C] [C] [C] Expected tax at U.S. federal statutory rate 34.0% 34.0% 34.0% State and local income taxes, net of U.S. federal benefit 4.7 5.8 2.0 Tax exempt interest income (2.3) (0.3) -- Exclusion of statutory taxes on income prior to Reorganization -- (6.7) (34.0) Other 0.1 0.6 -- _______ _______ _______ Total 36.5% 33.4% 2.0% ======= ======= ======= Deferred income taxes reflect the net tax effects of temporary differences between the reported amounts of certain assets and liabilities in the Company's financial statements and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
December 31, ____________ 1997 1996 ________ ________ Deferred tax assets: Receivables valuation $ 138 $ 126 Inventory valuation -- 51 State franchise taxes 75 105 Accrued commissions payable 35 -- Other 27 11 ________ ________ Total deferred tax assets $ 275 $ 293 ======== ======== Deferred tax liability - depreciation $ 287 $ 218 ======== ========
10. STOCKHOLDERS' COMPENSATION Stockholders' compensation in 1995 includes amounts distributed to former stockholders of Ocal Alabama to facilitate the payment of their personal income taxes which include the taxable income of Ocal Alabama for those years as a result of its election of S corporation status. 11. LEASE COMMITMENTS The Company leases its manufacturing facilities under an agreement expiring on December 31, 2001. The lease for the manufacturing facilities contains certain rent escalation clauses based upon changes in the Consumer Price Index and provides the Company with an option to extend the lease through December 31, 2002. The Company's majority stockholder has personally guaranteed the lease obligation for the manufacturing facilities. The Company's corporate office is leased from a partnership in which the Company's majority stockholder is the general partner (see Note 7), and the expiration date of that lease is December 31, 1998. The Company also leases autos under various agreements expiring in 2000. Future minimum lease payments under noncancelable operating leases as of December 31, 1997 are as follows (amounts in thousands):
Years ended December 31, ________________________ 1998 $ 235 1999 178 2000 168 2001 148 Thereafter -- ________ Total $ 729 ========
Rent expense was as follows (amounts in thousands):
Years ended December 31, ________________________ 1997 $ 199 1996 196 1995 167
Included in rent expense are amounts paid to a partnership for rental of the Company's corporate office in the amounts indicated in Note 7. 12. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents and trade receivables. The Company places its cash equivalents with high credit quality institutions. The primary users of the Company's products are electrical contractors and large industrial companies that obtain such products through a group of approximately 700 distributors and resellers who purchase the products directly from the Company. Credit is extended to these distributors and resellers based upon an evaluation of the customer's financial condition, and collateral is generally not required. Management does not believe significant credit risk exists at December 31, 1997. The Company's four largest customers are multiple location distributors. These customers are comprised of chains of individual distributors who make independent purchasing decisions. In 1997, sales to one customer represented 10.2% of the Company's net sales. During 1996, sales to any individual customer did not exceed 10% of the Company's net sales. During 1995, there were two individual customers that represented 15.3% and 11.4%, respectively, of the Company's net sales. Management believes that the loss of any of these distributors would not have a material adverse effect on the Company. 13. COMMITMENTS AND CONTINGENCIES The Company is a party to various lawsuits arising in the ordinary course of business. The Company does not believe that the outcome of any of these lawsuits will have a material adverse effect on the Company's business or financial condition. 14. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1997 and 1996 follow (in thousands of dollars except for per share amounts):
First Second Third Fourth Quarter Quarter Quarter Quarter Year 1997 _______ _______ _______ _______ ____ ____ Net sales $ 5,527 $ 6,350 $ 6,457 $ 5,945 $ 24,279 Gross profit 1,574 1,760 1,792 1,525 6,651 Net income 286 402 487 333 1,508 Basic and diluted earnings per share .05 .07 .08 .06 .26 1996 ____ Net sales $ 5,721 $ 6,011 $ 7,193 $ 6,075 $ 25,000 Gross profit 1,821 1,891 2,172 1,975 7,859 Net income 639 540 612 565 2,356 Pro forma net income 499 540 612 465 2,116 Basic and diluted earnings per share .18 .09 .11 .10 .45 Pro forma earnings per share .14 .09 .11 .08 .41
The pro forma financial information is prepared on a basis consistent with pro forma information appearing in the Registration Statement and Prospectus related to the Company's initial public offering. The pro forma financial information includes an adjustment to provide related income taxes as if all of the Company's income prior to the IPO had been taxed at C corporation rates based upon income before income taxes. The above earnings per share amounts have been recalculated to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share," which did not change amounts previously reported. ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by Items 10, 11, 12, and 13 is incorporated by reference to the Company's definitive proxy statement for the Company's 1998 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. PAGE (a) The following documents are filed as part of this report: ____ (1) FINANCIAL STATEMENTS: Report of Independent Auditors..................................14 Consolidated Statements of Income for the three years ended December 31, 1997...............................................15 Consolidated Balance Sheets as of December 31, 1997 and 1996....16 Consolidated Statements of Cash Flows for the three years ended December 31, 1997.........................................17 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1997.............................18 Notes to Consolidated Financial Statements......................19 (2) FINANCIAL STATEMENT SCHEDULES: All other schedules for which provision is made in the applicable rules and regulations of the Securities and Exchange Commission ("SEC") have been omitted as the schedules are not required under the related instructions, are not applicable, or the information required thereby is set forth in the consolidated financials statements or notes thereto. (3) EXHIBITS 3.1 Amended and Restated Certificate of Incorporation of the Company, as amended to date.(2) 3.2 Bylaws of the Company.(1) 4.1 Specimen Common Stock Certificate.(4) 4.2 Revised form of Representatives Warrants.(3) 10.1 Forms of Stock Option Agreements.(1) 10.2 Form of Indemnity Agreement between the Company and each of its officers and directors.(1) 10.3 1995 Stock Option Plan, As Amended.(5) 10.7 Loan and Security Agreement dated July 28, 1992, among OCAL, Incorporated, Occidental Coating Company ("Occidental"), and SouthTrust Bank of Alabama ("SouthTrust"), and related Guaranty Agreements with each of Ilan Bender and Mrs. Bender dated July 28, 1992, and Demand Promissory Note dated July 28, 1992 signed by OCAL, Incorporated and Occidental.(1) 10.8 Letter Agreement dated October 20, 1993 between OCAL, Incorporated, Occidental and SouthTrust re: waiver of loan covenant.(1) 10.9 Amendment to Loan and Security Agreement with SouthTrust dated July 1, 1994 to increase loan value of inventory.(1) 10.10 Amendment to Loan and Security Agreement dated June 27, 1995, among OCAL, Incorporated, Occidental, and SouthTrust increasing line of credit to $6.5 million, and related Guarantor's Consent; Letter Agreement dated June 27, 1995 releasing subordinated debts owed by Occidental and OCAL and relating to $2 million certificate of deposit.(1) 10.11 Consent of SouthTrust to payment of dividends and other matters, dated August 17, 1995.(1) 10.12 Lease dated June 22, 1988 between ADDSCO Industries, Inc. ("ADDSCO") and OCAL, Incorporated relating to lease of manufacturing facility in Mobile, Alabama, and related Personal Guaranty dated June 22, 1988 of Ilan Bender, Amendment No. 1 to Lease dated June 1, 1989 relating to the lease of additional land, and Letter dated December 19, 1991 from ADDSCO extending term of lease.(1) 10.13 Amended Lease dated August 28, 1995 between Ocal, Inc. and 14647 Lull Co. relating to California property.(3) 10.15 Forms of S Corporation Tax Allocation and Indemnification Agreement between the Company and the prior stockholders of OCAL, Incorporated and Ocal Data Company. (4) 10.16 Amendment to Loan and Security Agreement and Note Modification dated June 30, 1997 among Ocal, Inc., Occidental, OCAL, Incorporated, Ocal Data Company ("Ocal Data"), Ocal Transport Co. ("Ocal Transport") and SouthTrust Bank, National Association ("SouthTrust") adding Ocal, Inc., Ocal Data, and Ocal Transport as named borrowers and to add a LIBOR interest pricing option.(6) 10.17 Amendment to Loan and Security Agreement and Note Modification dated December 31, 1997 among Ocal, Inc., Occidental, OCAL, Incorporated, Ocal Data, Ocal Transport and SouthTrust increasing the loan value of inventory to $3,250,000 and converting the loan from a demand facility to a committed facility expiring on July 31, 2000.(7) 21. Subsidiaries.(3) 23. Consent of Ernst & Young LLP, Independent Auditors.(7) 27. Financial Data Schedule.(7) _____________ (1) Incorporated by reference to the exhibit with the same number in the Company's Registration Statement on Form S-1 (Registration No. 33-96336), filed with the SEC on August 29, 1995. (2) Incorporated by reference to Exhibit 3.3 in Amendment No. 2 to the Company's Registration Statement on Form S-1 (Registration No. 33-96336), filed with the SEC on December 26, 1995. (3) Incorporated by reference to the exhibit with the same number in Amendment No. 3 to the Company's Registration Statement on Form S-1 (Registration No. 33-96336), filed with the SEC on January 23, 1996. (4) Incorporated by reference to the exhibit with the same number in Amendment No. 4 to the Company's Registration Statement on Form S-1 (Registration No. 33-96336), filed with the SEC on March 8, 1996. (5) Incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 0-27748), filed with the SEC on November 14, 1997. (6) Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 0-27748), filed with the SEC on November 14, 1997. (7) Filed herewith. (b) REPORTS ON FORM 8-K: During the fourth quarter ended December 31, 1997, the Company did not file any reports on Form 8-K. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. OCAL, INC. By: /s/ Lida R. Frankel ___________________ Lida R. Frankel Chief Financial Officer Date: March 24, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated. Signature Title Date _______________ _________ __________ Director and Principal /s/ Ilan Bender Executive Officer March 24, 1998 _______________________ (Ilan Bender) /s/ Ronald Costa Director March 24, 1998 _______________________ (Ronald Costa) /s/ Carlos R. Espinosa Director March 24, 1998 _______________________ (Carlos R. Espinosa) /s/ Carlos V. Espinosa Director March 24, 1998 _______________________ (Carlos V. Espinosa) /s/ William T. Gross Director March 24, 1998 _______________________ (William T. Gross) /s/ Michael R. Peevey Director March 24, 1998 _______________________ (Michael R. Peevey) /s/ Lida R. Frankel Chief Financial Officer March 24, 1998 _______________________ (Principal Financial and (Lida R. Frankel) Accounting Officer) EX-10.17 2 AMENDMENT TO LOAN AND SECURITY AGREEMENT ---------------------------------------- THIS AMENDMENT TO LOAN AND SECURITY AGREEMENT made this 31st day of December, 1997, by and between OCAL, INC., a Delaware corporation, OCCIDENTAL COATING COMPANY, INC., a California corporation, OCAL, INCORPORATED, an Alabama corporation, OCAL DATA COMPANY, a California corporation, and OCAL TRANSPORT CO., a California corporation (jointly and severally, the "Borrower"), and SOUTHTRUST BANK, NATIONAL ASSOCIATION, a national banking association formerly known as SouthTrust Bank of Alabama, National Association, having its principal office in Birmingham, Alabama (the "Bank"). R E C I T A L S: - - - - - - - - Ocal, Inc., an Alabama corporation, and Occidental Coating Company, a California Corporation, entered into a Loan and Security Agreement with Bank dated as of July 28, 1992, whereby Bank established in favor of Borrower a line of credit and a term note in the aggregate initial principal amount of $4,000,000. Said agreement, as amended by instruments dated July 1, 1994, December 8, 1994, June 27, 1995, and June 30, 1997 is herein referred to as the "Loan Agreement". Capitalized terms used herein but not otherwise defined herein shall have the respective meanings ascribed to them in the Loan Agreement. The indebtedness referred to in the Loan Agreement is represented by a promissory note in the initial principal amount of $4,000,000, said note having been amended by instrument dated June 27, 1995, so that the maximum outstanding principal balance is now $6,500,000 (the "Note"). Borrower has requested that Bank convert the Loan from a demand facility to a committed facility and Bank has agreed to do so but only on the terms and conditions hereinafter set forth. Borrower and Bank desire to set forth their agreement with respect to these matters on the terms and conditions hereinafter set forth. NOW, THEREFORE, the Borrower and the Bank agree as follows: 1. Section 1.30 of the Loan Agreement, containing the definition of Loan Value of Inventory is hereby amended to read in its entirety as follows: 1.30. Loan Value of Inventory - an amount which is not more than 45% of Borrower's Inventory valued at the lesser of cost or current market value, which Inventory is, at any given time, (a) not damaged or defective in any way; (b) not sold or segregated for sale and reflected as an Account of Borrower; (c) not Consigned Inventory other than Perfected Consigned Inventory; (d) not located in a place other than at those locations listed in Section 5.10 of this Agreement which are within the states of Alabama, Florida, Georgia, California, Texas, and New Jersey; (e) not work-in-process inventory; (f) not Inventory evidenced by negotiable warehouse receipts or by non-negotiable warehouse receipts or documents of title which have not been issued in the name of the Bank; and (g) not Inventory deemed ineligible by Bank in its sole discretion; provided, however, the Loan Value of Inventory shall not at any time exceed the sum of $3,250,000, unless otherwise agreed in writing by Bank at any time in its sole discretion. 2. The Loan Agreement is hereby amended by adding following definition as Section 1.68: Commitment Period - shall mean that period during which Bank is obligated to make advances under the Line of Credit Loan hereunder, as provided in Section 2.1 hereof. The Commitment Period shall commence upon the date hereof and shall continue until July 31, 2000, unless sooner terminated according to the provisions hereof. 3. Section 2.1.1 of the Loan Agreement is hereby amended to read in its entirety as follows: 2.1.1. Subject to all terms set forth herein and only during the earlier to occur of expiration of the Commitment Period or occurrence of an Event of Default, Bank agrees, from time to time and on the terms hereinafter set forth, to loan to Borrower, when requested by Borrower, principal amounts aggregating up to the lesser of (i) $6,500,000 or (ii) the Aggregate Loan Values as determined by the Bank from the periodic reports submitted by Borrower to the Bank. Notwithstanding any other provision hereof, the Loan Value of Inventory shall not at any time exceed the sum of $3,250,000. Within the aforesaid limits, the Borrower may borrow, make payments, and reborrow under this Agreement, subject to the provisions hereof. 4. Section 2.1.2 of the Loan Agreement is hereby amended to read in its entirety as follows: 2.1.2. The obligation to repay the Loan shall be evidenced by a Note dated the date of this Agreement payable to the order of the Bank and maturing no later than the expiration of the Commitment Period, and amounts due under the Note and otherwise under this Agreement and under the Loan Documents shall be reflected in the Loan Account. 5. Section 2.1.7 of the Loan Agreement is hereby amended to read in its entirety as follows: 2.1.7. Notwithstanding the other provisions of this Agreement, the obligation of Bank to make the loans hereunder shall cease and all remaining principal, interest and other charges and fees due with respect to the Loans and the Notes shall be immediately due and payable by Borrower upon the earlier to occur of (i) expiration of the Commitment Period or (ii) the occurrence of an Event of Default. 6. Section 2.3.1 of the Loan Agreement is hereby amended to read in its entirety as follows: 2.3.1. Whenever Borrower desires to borrow pursuant to this Agreement (other than a borrowing resulting from a conversion or continuation pursuant to Section 2.3.3 below), Borrower shall give Bank prior written or telephonic notice of such borrowing request (a "Notice of Borrowing"). Such Notice of Borrowing shall be given by Borrower no later than 12:00 Noon, Central Time, at the office of Bank designated by Bank from time to time (i) on the Business Day of the requested date of such borrowing in the case of Base Rate Advances, and (ii) at least two Business Days prior to the requested date of such borrowing in the case of LIBOR Rate Advances. Notices received after 12:00 Noon shall be deemed received on the next Business Day. All Loans made on the date of initial funding of the Loan shall be made as Base Rate Advances and thereafter may be made, continued as or converted into Base Rate Advances or LIBOR Rate Advances. Each Notice of Borrowing shall be irrevocable and shall specify (i) the principal amount of the borrowing (which in the case of each LIBOR Rate Advance, shall be in minimum advances of at least $1,000,000 each and integral multiples of $500,000 in excess of $1,000,000), (ii) the date of borrowing (which shall be a Business Day), and (iii) whether the borrowing is to consist of Base Rate Advances, or LIBOR Rate Advances and the amount of each such Advance. Without limiting Bank's right to cease making any Advances when a default or Event of Default exists, it is expressly understood that Borrower may not request any LIBOR Rate Advances if the period would extend beyond expiration of the Commitment Period or if a default or Event of Default exists. All amounts outstanding with respect to which there has been no request by Borrower and approval by Bank of a LIBOR Rate Advance shall be deemed Base Rate Advances. The requirement of written notice of borrowings under this Section shall benefit Bank only and Bank may waive said requirement in one or more instances without waiving its rights to insist on strict compliance with this Section at any time thereafter. 7. Section 2.3.4 of the Loan Agreement is hereby amended to read in its entirety as follows: 2.3.4. In no event shall the number of LIBOR Rate Advances outstanding at any time exceed four (4) nor shall the aggregate principal balance of all outstanding LIBOR Rate Advances exceed $6,500,000, nor shall Borrower be entitled to request the making of a LIBOR Rate Advance after expiration of the Commitment Period or if the interest period selected would extend beyond expiration of the Commitment Period or during such time as an Event of Default has occurred and is continuing. 8. Section 2.15 of the Loan Agreement is hereby amended to read in its entirety as follows: 2.15. LIMITATIONS. Notwithstanding any provision in this Agreement, the Bank may, in its sole discretion, at any time, but only upon one hundred and eighty (180) days advance written notice to Borrower, limit the amount of the Loan advanced to the Borrower to an amount less than the Aggregate Loan Values. THE LOAN SHALL, NOTWITHSTANDING ANY COURSE OF DEALING OR CONDUCT ON THE PART OF THE PARTIES HERETO, OR ANY OTHER COVENANTS OR UNDERTAKINGS OF THE PARTIES HEREUNDER, BE FULLY DUE AND PAYABLE WITHOUT FURTHER NOTICE OR DEMAND FROM BANK UPON THE EXPIRATION OF THE COMMITMENT PERIOD. TIME IS OF THE ESSENCE OF THIS AGREEMENT. 9. Section 8.2 of the Loan Agreement is hereby amended to read in its entirety as follows: 8.2. SALE OF INVENTORY. Until the occurrence of an Event of Default hereunder, Borrower may use and dispose of the Inventory in the ordinary course of business where such is not inconsistent with this Agreement, provided that the ordinary course of business does not include a transfer in partial or total satisfaction of Debt nor a transfer (other than a sale on terms and conditions which would apply if disinterested parties were involved) to an Affiliate of Borrower. 10. Section 12.13 of the Agreement is hereby deleted in its entirety. 11. Contemporaneously herewith, Borrower is executing in favor of Bank a renewal note representing the Loan in the aggregate principal amount of $6,500,000. Upon execution and delivery of said Note, said Note shall constitute the Note under the Loan Agreement and shall be fully secured by said agreement and shall be entitled to the benefits enumerated therein and in the Loan Documents. 12. Borrower represents and affirms that no default or Event of Default exists with respect to the indebtedness referred to herein or will exist as a result of the amendments set forth herein, and Borrower further represents that no fact or circumstance presently exists, or will exist as a result of the amendments set forth herein, which could, with notice, or lapse of time, or otherwise, result in the occurrence of a default or Event of Default under the Loan Agreement or any related financing document. Borrower further represents and warrants that all representations and warranties of Borrower herein, in the Loan Agreement, and in the Loan Documents are true and correct as of the date hereof the same as if repeated on this date. 13. Borrower represents and warrants to the Bank that it has no defenses, setoffs, rights of recoupment, counterclaims or claims of any nature whatsoever in respect to the Loan Documents or the obligations due thereunder or secured thereby, and to the extent any such defenses, setoffs, rights of recoupment, counterclaims or claims may exist, the same are hereby expressly waived, released and discharged. 14. Except as herein amended, the Loan Agreement shall remain in full force and effect, and the Loan Agreement, as so amended, and each of the Loan Documents are hereby ratified and affirmed in all respects. 15. Borrower, and the officers of Borrower executing this agreement, jointly and severally, represent and warrant to the Bank that the Borrower has full power and authority to enter into this Agreement, that the execution and delivery of this Agreement has been authorized by all requisite corporate action, and that this Agreement constitutes the valid and legally binding obligation of the Borrower enforceable against Borrower in accordance with its terms. 16. Borrower agrees to pay to the Bank all expenses, including attorney's fees, incurred by the Bank in connection with the negotiation and preparation of this Amendment and the documents contemplated hereby. 17. This Agreement may be executed in two or more counterparts, each of which when executed and delivered shall constitute an original, but all such counterparts together shall be deemed to be one and the same instrument. IN WITNESS WHEREOF, each of the parties hereto has caused this agreement of amendment to be executed by its duly authorized officer as of year and date first above written. BORROWER: _________ OCAL, INC. (a Delaware corporation) By: /s/Ilan Bender __________________ Its: PRESIDENT AND CEO _________________ Attest: /s/Lida R. Frankel ___________________ Its: SECRETARY _____________ OCCIDENTAL COATING COMPANY, INC. (a California corporation) By: /s/Ilan Bender __________________ Its: PRESIDENT AND CEO _________________ Attest: /s/Lida R. Frankel ___________________ Its: SECRETARY _____________ OCAL, INCORPORATED (an Alabama corporation) By: /s/Ilan Bender __________________ Its: PRESIDENT AND CEO _________________ Attest: /s/Lida R. Frankel ___________________ Its: SECRETARY _____________ OCAL DATA COMPANY (a California corporation) By: /s/Ilan Bender __________________ Its: PRESIDENT AND CEO _________________ Attest: /s/Lida R. Frankel ___________________ Its: SECRETARY _____________ OCAL TRANSPORT COMPANY (a California corporation) By: /s/Ilan Bender __________________ Its: PRESIDENT AND CEO _________________ Attest: /s/Lida R. Frankel ___________________ Its: SECRETARY _____________ BANK: _____ SOUTHTRUST BANK, NATIONAL ASSOCIATION By: /s/Shane McBride _________________________ Its: ASSISTANT VICE PRESIDENT ________________________ PROMISSORY NOTE _______________ $6,500,000.00 Birmingham, Alabama December 31, 1997 FOR VALUE RECEIVED, the undersigned, OCAL, INC., a Delaware corporation, OCCIDENTAL COATING COMPANY, INC., a California corporation, OCAL, INCORPORATED, an Alabama corporation, OCAL DATA COMPANY, a California corporation, and OCAL TRANSPORT CO., a California corporation, (hereinafter collectively referred to as the "Borrower"), jointly and severally promise to pay to the order of SouthTrust Bank, National Association, (the "Bank") at the main office of the Bank in Birmingham, Alabama, or at such other place as the holder of this note may from time to time designate in writing, the principal sum of Six Million, Five Hundred Thousand and No/100 Dollars ($6,500,000.00), or so much thereof as may have been advanced to Borrower from time to time and not repaid by the Borrower pursuant to the terms hereof, together with interest on the unpaid principal amount of such advances at a per annum rate equal to one percent (1%) in excess of the Base Rate of the Bank as in effect from time to time so long as the principal amount, or any part thereof, is outstanding, or at such lesser or greater rate as may be provided by the terms of that certain Loan and Security Agreement between Borrower and Bank dated as of July 28, 1992, as amended (the "Loan Agreement"). In addition, portions of the indebtedness represented shall bear interest at the Adjusted LIBOR Rate plus the applicable LIBOR Margin as provided for in the Loan Agreement. The principal amount of such advances shall bear interest from the date of each such advance. Interest provided for herein shall be due and payable monthly commencing on the first day of January, 1998, and continuing on the same day of each month thereafter through and until such time as there remains no unpaid principal balance on the amounts advanced to the Borrower hereunder or under the Loan Agreement. The applicable interest rate shall be determined by the Bank and shall, in the case of Base Rate Advances, change from time to time as and when the Base Rate of the Bank changes until the principal amount is paid in full. Principal and interest shall be payable in lawful money of the United States of America. Time is of the essence with respect to the amounts due hereunder. Interest on the principal amount shall be calculated on the basis of a 360 day year by multiplying the principal amount by the per annum rate set forth above, multiplying the product thereof by the actual number of days elapsed, and dividing the product so obtained by 360. The term "Base Rate" means the rate of interest designated by the Bank periodically as its Base Rate. The Base Rate is not necessarily the lowest rate charged by the Bank. During the Commitment Period, (as defined in the Loan Agreement), the Borrower may borrow, repay and reborrow the principal sum of this Note, all in accordance with the terms of the Loan Agreement but only in such amounts and to the extent therein provided. On July 31, 2000, or such earlier date as may be provided in the Loan Agreement, (the "Maturity Date"), this note shall mature and all principal, interest, and other fees and charges due with respect hereto, if not previously paid, shall be immediately due and payable. Borrower shall have the right at any time to prepay this Note at such time and in such manner as is provided in the Loan Agreement. This note is secured by and entitled to the benefits of the security set forth and/or referred to in said Loan Agreement. The principal sum evidenced by this Note, together with accrued but unpaid interest, shall be due and payable on the Maturity Date, but in any event at the option of Bank upon the occurrence of (1) any failure by Borrower to pay as and when due any installment of principal or interest due hereunder; (2) any default or Event of Default under the Loan Agreement or any other default or failure by Borrower to observe any covenant, condition or agreement under the terms of this Note, the Loan Agreement, any of the Loan Documents (as defined in the Loan Agreement) or any other security documents heretofore or hereafter executed by Borrower to secure this Note; (3) the expiration of the Commitment Period (as defined in the Loan Agreement); (4) the filing by Borrower or any Guarantor of a voluntary petition in bankruptcy, the adjudication of Borrower or any Guarantor as a bankrupt or insolvent, the filing by Borrower or any Guarantor of any petition or answer seeking or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency or other relief for debtors, or Borrower's or any Guarantor's seeking or consenting to or acquiescence in the appointment of any trustee, receiver or liquidator or the making of any general assignment for the benefit of creditors or its admission in writing of its inability to pay its or his debts generally as they become due; (5) the entry by a court of competent jurisdiction of an order, judgment, or decree approving a petition filed against Borrower or any Guarantor seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency, or other relief for debtors, which order, judgment or decree remains unvacated and unstayed for thirty (30) consecutive days from the date of entry thereof, or the appointment of any trustee, receiver or liquidator of Borrower or any Guarantor or of a substantial part of its or his property or of any or all of the rents, revenues, issues, earnings, profits or income thereof; (6) the death of any Guarantor; (7) the occurrence of any material adverse change in the financial condition or prospects of Borrower or any Guarantor. Upon any Event of Default (as defined in the Loan Agreement), Borrower agrees to pay interest to the Bank (or any holder) at the annual rate of four percent (4%) above the Base Rate as said Base Rate shall change from time to time on the aggregate indebtedness represented by this note, including interest earned to maturity, from maturity, whether or not resulting from acceleration, until such aggregate indebtedness is paid in full. The Bank (or any holder) shall be entitled to recover all expenses of collecting this note, including, without limitation, costs of court and reasonable attorney's fees. The acceptance by the Bank of any payment or payments due hereunder, or any part of such payment, after any default shall not constitute a waiver of such default by the Bank. With respect to the amounts due under this note, the Borrower waives the following: 1. All rights of exemption of property from levy or sale under execution or other process for the collection of debts under the Constitution or laws of the United States or any state thereof; 2. Demand, presentment, protest, notice of dishonor, notice of non-payment, suit against any party, diligence in collection, and all other requirements necessary to charge or hold the undersigned liable on any obligations hereunder; and 3. Any further receipt for or acknowledgment of any collateral now or hereafter deposited as security for the obligations hereunder. In no event shall the amount of interest due or payable hereunder exceed the maximum rate of interest allowed by applicable law, and in the event any such payment is inadvertently paid by the Borrower or inadvertently received by the Bank (or any holder), then such excess sum shall be credited as payment of principal, unless the Borrower elects to have such excess sum refunded to the Borrower forthwith. It is the express intent hereof that the Borrower not pay and the Bank (or any holder) not receive, directly or indirectly, interest in excess of that which may be legally paid by the Borrower under applicable law. Borrower and Bank hereby waive any right to trial by jury on any claim, counterclaim, setoff, demand, action or cause of action (a) arising out of or in any way pertaining or relating to this Note, the Loan Agreement, any Loan Document, or any other instrument, document or agreement executed or delivered in connection with this Note or (b) in any way connected with or pertaining or related to or incidental to any dealings of the parties hereto with respect to this Note, the Loan Agreement, any Loan Agreement, or any other instrument, document or agreement executed or delivered in connection herewith or in connection with the transactions related thereto or contemplated thereby or the exercise of either party's rights and remedies thereunder, in all of the foregoing cases whether now existing or hereafter arising, and whether sounding in contract, tort or otherwise. Borrower and Bank agree that either or both of them may file a copy of this paragraph with any court as written evidence of the knowing, voluntary and bargained agreement between the parties irrevocably to waive trial by jury, and that any dispute or controversy whatsoever between them shall instead be tried in a court of competent jurisdiction by a judge sitting without a jury. The Bank shall not by any act, delay, omission, or otherwise be deemed to have waived any of its rights or remedies, and no waiver of any kind shall be valid unless in writing and signed by the Bank. All rights and remedies of the Bank under the terms of this note and under applicable statutes or rules of law shall be cumulative and may be exercised successively or concurrently. The Borrower agrees that there are no defenses, equities or set offs in respect to the obligations set forth herein. The obligations of the Borrower hereunder shall be binding upon and enforceable against the Borrower's successors and assigns. The obligations of each person named as Borrower herein shall be joint and several obligations of all such persons. This note shall be governed by, and construed in accordance with, the laws of the State of Alabama. Any provision in this note which may be unenforceable or invalid under any law shall be ineffective to the extent of such unenforceability or invalidity without affecting the enforceability or validity of any other provision hereof. Any notice required to be given shall be deemed given if mailed, postage prepaid, to the Borrower at 14538 Keswick Street, Van Nuys, California 91405. IN WITNESS WHEREOF, the undersigned has caused this instrument to be executed by its duly authorized officer and its corporate seal affixed this 31ST day of DECEMBER, 1997. OCAL, INC. (a Delaware corporation) By: /s/Ilan Bender ______________ Its: PRESIDENT AND CEO _________________ Attest: /s/Lida R. Frankel __________________ Its: SECRETARY __________________ OCCIDENTAL COATING COMPANY, INC. (a California corporation) By: /s/Ilan Bender ______________ Its: PRESIDENT AND CEO _________________ Attest: /s/Lida R. Frankel __________________ Its: SECRETARY __________________ OCAL, INCORPORATED (an Alabama corporation) By: /s/Ilan Bender ______________ Its: PRESIDENT AND CEO _________________ Attest: /s/Lida R. Frankel __________________ Its: SECRETARY __________________ OCAL DATA COMPANY (a California corporation) By: /s/Ilan Bender ______________ Its: PRESIDENT AND CEO _________________ Attest: /s/Lida R. Frankel __________________ Its: SECRETARY __________________ OCAL TRANSPORT COMPANY (a California corporation) By: /s/Ilan Bender ______________ Its: PRESIDENT AND CEO _________________ Attest: /s/Lida R. Frankel __________________ Its: SECRETARY __________________ EX-23 3 EXHIBIT 23 CONSENT OF ERNST AND YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-41677) pertaining to the 1995 Stock Option Plan of Ocal, Inc. of our report dated January 27, 1998 with respect to the consolidated financial statements of Ocal, Inc. included in its Annual Report (Form 10-K) for the year ended December 31, 1997. ERNST & YOUNG LLP Los Angeles, California March 23, 1998 EX-27 4 ARTICLE 5 FINANCIAL DATA SCHEDULE FOR DEC-31-1997 10K
5 1000 12-MOS DEC-31-1997 DEC-31-1997 4,529 0 2,878 127 7,760 15,769 3,419 1,600 17,635 1,599 1,757 0 0 6 13,986 17,635 24,279 24,279 17,628 17,628 0 0 184 2,375 867 1,508 0 0 0 1,508 0.26 0
-----END PRIVACY-ENHANCED MESSAGE-----