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U.S. Securities and 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
AUGUST 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from N/A to N/A
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Commission file no. 1-7755
SUMMA INDUSTRIES
(Exact name of registrant as specified in its charter)
DELAWARE 95-1240978
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
21250 HAWTHORNE BOULEVARD, SUITE 500, TORRANCE, CALIFORNIA 90503
(Address of principal executive offices, including zip code)
Registrant's telephone number: (310) 792-7024
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Indicate by checkmark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and disclosure will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of registrant's Common Stock held by
non-affiliates as of October 15, 1998, based upon the closing price of a share
of the Common Stock on The Nasdaq National Market on that date, was $27,891,154.
The number of shares of registrant's Common Stock outstanding as of October 15,
1998 was 4,264,807.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's Proxy Statement
for the Annual Meeting of Stockholders to be held on December 10, 1998 to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K are incorporated by reference in
Part III hereof.
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PART I
ITEM 1. BUSINESS.
GENERAL
Summa Industries ("Summa" or the "Company") was incorporated as Southern
California Plastics Co. in the State of California in 1942 and subsequently
reincorporated in the State of Delaware in April 1998. Since before 1970, Summa
has been a publicly-owned corporation whose Common Stock is registered under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and is currently traded on The Nasdaq National Market under the symbol
"SUMX". Growth has been achieved by acquisition, development of new products and
expansion of the Company's sales organization. Summa designs and manufactures
injection-molded plastic optical components for original equipment manufacturer
("OEM") customers in the lighting industry; molded plastic modular conveyor belt
and chain for the food processing industry; plastic fittings, valves, filters
and tubing for the agricultural irrigation industry; and other molded and
extruded plastic components for diverse industries.
The principal executive offices of the Company are located at 21250
Hawthorne Boulevard, Suite 500, Torrance, California 90503; its telephone number
is (310) 792-7024; its facsimile number is (310) 792-7079; and its website is
www.SummaIndustries.com.
STRATEGY
Summa has a strategy of growth through acquisitions of profitable
manufacturing companies with proprietary products or protected market niches,
with the intent of expanding its operations by acquiring additional product
offerings, enhancing gross profit margins, increasing combined sales so that
general and administrative costs would constitute a smaller percentage of total
revenues, enhancing overall profitability, and increasing the market value of
Summa's Common Stock to provide liquidity and value for its stockholders by
increasing the number of outstanding shares in the public float and the trading
activity in the stock. In 1995, the Company refined the strategy to focus on
manufacturers of plastic components for industrial and commercial markets.
Typically, it is expected that Summa's corporate staff will not direct
operations of acquired subsidiaries on an ongoing basis, but, in addition to
planning, financial and legal oversight, will provide financing, conduct the
acquisition program and business development activities, implement purchasing
programs utilizing economies of scale, and handle investor relations matters.
From time to time, the corporate staff also will be active in non-operational
business activities such as risk management and employee benefit program
management. Corporate charges are assessed on a basis established annually,
related to asset utilization by each operating subsidiary.
Although the existing management of an acquired company typically would
be retained to manage day to day operations, it is anticipated that the business
of the acquired company could be expanded through the support of Summa's
corporate staff described above. Any such expansion could place a significant
strain on Summa's management and resources, require Summa to implement
additional operating, marketing and financial controls, and necessitate that
Summa hire additional personnel, which could have a significant adverse effect
on Summa's operating results. It is also likely that any such acquisition would
require Summa to raise additional capital to finance the acquisition or provide
working capital to the acquired company. If this additional capital were raised
through debt financings, Summa would incur substantial additional interest
expense; sales of additional equity to raise the needed capital would dilute, on
a pro-rata basis, the percentage ownership of all holders of Summa Common Stock.
There can, however, be no assurance that sufficient financing will be available
to Summa to implement its acquisition strategy on terms and conditions that are
acceptable to Summa.
Continued implementation of the Company's strategy will depend to a
significant extent upon the ability of Summa's top management in identifying
appropriate candidates for acquisition, negotiating deals acceptable to the
Board of Directors and stockholders of the Company, including obtaining
acceptable acquisition prices in the current environment of dramatically higher
asking prices, and supervising the management of operating subsidiaries.
Furthermore, with a focus on businesses which manufacture plastic components,
the number of opportunities which meet this acquisition criteria is smaller. In
addition, with the increased size of the Company, larger acquisition candidates
would have to be sought in the
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future to sustain the growth rate of Summa and the number of such candidates is
smaller. Competition for such acquisitions may be greater and there is no
assurance Summa will be able to successfully compete with larger companies and
buyer groups to consummate additional acquisitions. There can be no assurance
that the terms upon which a prospective company can be acquired will be
favorable to Summa, or that Summa will not encounter unforeseen difficulties and
liabilities in connection with any such acquisition.
HISTORY OF RECENT ACQUISITIONS AND DIVESTITURES
KVP FALCON PLASTIC BELTING, INC. In July 1993, Summa acquired all of the
outstanding capital stock of KVP Systems, Inc., a California corporation renamed
KVP Falcon Plastic Belting, Inc. in May 1998 after its acquisition of Falcon
Belting, Inc. described below ("KVP"), which designs, manufactures and markets
injection-molded plastic conveyor belting. Belts which can operate on a curve
were pioneered by KVP. In connection with this acquisition, which was
accomplished through the merger of KVP with and into a newly formed and
wholly-owned subsidiary of Summa, an aggregate of 555,275 shares of Summa's
Common Stock were issued to the shareholders of KVP in a transaction registered
under the Securities Act of 1933, as amended (the "Securities Act"). The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to identifiable tangible and
intangible assets purchased and liabilities assumed or incurred based upon their
fair value at the date of acquisition. The excess of the purchase price over the
fair value of the net assets acquired amounted to $302,000 and was recorded as
goodwill which is being amortized on a straight-line basis over 25 years.
ARMENCO ENGINEERING. In May 1994, Summa acquired substantially all of
the assets of A&D Armendariz Corp., a California corporation doing business as
Armenco Engineering ("Armenco"). The operations of Armenco were promptly
consolidated with Morehouse-COWLES, Inc. (see below). The total acquisition cost
was approximately $500,000, consisting of $400,000 in cash and obligations to
make future payments to the former owners of Armenco and liabilities assumed or
incurred of $100,000.
MOREHOUSE-COWLES, INC. In June 1996, Summa sold all of the outstanding
capital stock of Morehouse-COWLES, Inc., a California corporation ("Morehouse"),
which manufactures industrial process machinery produced from non-plastic
materials, to a private investment group based in Michigan. The total purchase
price paid by the buyers was $2,521,000, consisting of $750,000 in cash and a
ten-year $1,771,000 subordinated, secured promissory note bearing interest at 7%
per annum. The subordinated note was subsequently prepaid in full in August 1998
in connection with the merger of Morehouse and certain other entities.
LEXALITE INTERNATIONAL CORPORATION. In November 1996, Summa acquired all
of the outstanding capital stock of LexaLite International Corporation, a
Delaware corporation ("LexaLite"), which manufactures injection molded plastic
prismatic components for lighting fixtures, through the merger of a newly formed
and wholly-owned subsidiary of Summa with and into LexaLite. In connection with
the transaction, the former stockholders of LexaLite received shares of Summa's
Common Stock which in the aggregate constituted approximately 58% of the shares
of Summa's Common Stock outstanding immediately after the merger in a
transaction registered under the Securities Act. The acquisition was accounted
for using the purchase method of accounting and, accordingly, the purchase price
was allocated to identifiable tangible and intangible assets purchased and
liabilities assumed or incurred based upon their fair value at the date of
acquisition. The excess of the purchase price over the fair value of the net
assets acquired amounted to $905,000 and was recorded as goodwill which is being
amortized on a straight-line basis over 25 years.
CALNETICS CORPORATION. In October 1997, Summa acquired all of the
outstanding capital stock of Calnetics Corporation, a California corporation
("Calnetics"), through a merger of a newly formed and wholly-owned subsidiary of
Summa with and into Calnetics. As a result, Summa acquired the following
operating subsidiaries of Calnetics: Agricultural Products, Inc., a California
corporation ("API"), which manufactures plastic fittings, filters, tubing and
accessories, principally for agricultural irrigation; Ny-Glass Plastics, Inc., a
California corporation ("Ny-Glass"), which manufactures plastic parts,
principally by use of injection molding and structural foam molding techniques,
and performs certain value-added services for customers in a variety of
industries; and Manchester Plastics Co., Inc., a California corporation
("Manchester Plastics"), which manufactures proprietary and custom acrylic,
polycarbonate and polystyrene plastic sheet products, principally for the
building materials and industrial plastics industries. The total acquisition
cost was $31,792,000,
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consisting of cash due to former Calnetics shareholders of $22,335,000,
acquisition costs of $50,000, liabilities assumed or incurred of $8,062,000 and
an estimated fair value of $1,345,000 for options issued in conjunction with the
transaction, primarily replacement options issued to Calnetics employees who
continued with the Company. The acquisition was accounted for using the purchase
method of accounting and, accordingly, the purchase price was allocated to
identifiable tangible and intangible assets purchased and liabilities assumed or
incurred based upon their fair value at the date of acquisition. The excess of
the purchase price over the fair value of the net assets acquired amounted to
$13,974,000 and was recorded as goodwill which is being amortized on a
straight-line basis over 40 years.
FALCON BELTING, INC. In May 1998, Summa acquired all of the outstanding
capital stock of Falcon Belting, Inc., an Oklahoma corporation ("Falcon"), which
manufactures modular plastic conveyor belting used in food processing
industries. The operations of Falcon were promptly consolidated with KVP. The
total acquisition cost was $5,125,000, consisting of $2,636,000 in cash and the
present value of obligations to make future payments to the former owner of
Falcon and liabilities assumed or incurred of $2,489,000. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
purchase price was allocated to identifiable tangible and intangible assets
purchased and liabilities assumed or incurred based upon their fair value at the
date of acquisition. The excess of the purchase price over the fair value of the
net assets acquired amounted to $1,995,000 and was recorded as goodwill which is
being amortized on a straight-line basis over 30 years.
GST INDUSTRIES, INC. In June 1998, Summa sold all of the outstanding
capital stock of GST Industries, Inc., a California corporation, ("GST"), which
manufactures industrial firefighting and defense aerospace equipment produced
from non-plastic materials, to a private investment group based in California.
While GST had been profitable, it was not expected to grow significantly in the
near term. The total purchase price paid by the buyers was $2,700,000,
consisting of $1,200,000 in cash and a $1,500,000 seven-year subordinated,
convertible, secured promissory note bearing interest at 10% per annum. In
addition, the Company may receive a maximum of $2,000,000 in royalty payments
over the next five years based upon a percentage of future sales in excess of a
base amount. It is expected that the royalties actually received, if any, will
be substantially less than $2,000,000, and the value of the conversion rights of
the note is highly speculative.
CANYON MOLD. In September 1998, Summa acquired substantially all of the
assets of Canyon Mold, Inc., a California corporation. The operations of Canyon
Mold were promptly relocated to and integrated into the Company's molding
facility in Corona, California. Canyon Mold had provided tool design and
manufacturing services almost exclusively for the Company. The total acquisition
cost was approximately $200,000 in cash and assumed liabilities.
In evaluating future acquisitions, Summa will endeavor to identify
target companies that manufacture plastic components which have a proprietary
advantage because of patent protection, brand recognition, unique manufacturing
processes or other comparable characteristics. It is anticipated that target
companies typically will have been profitable in recent periods, particularly if
the acquisition is to be made through the issuance of Summa Common Stock, so
that the acquisition will not have an immediate dilutive effect on
post-acquisition, consolidated earnings per share. Since it is usually intended
that each acquired company will be maintained as a separate operating unit,
existing management of each target company will be extensively evaluated in an
attempt to ascertain whether such management possesses the capability and
compatibility to continue to manage the day to day operations following the
acquisition. Perhaps most importantly, Summa will seek to determine that there
is a significant likelihood that a sustainable increase in earnings per share
within 12 months of the closing can reasonably be expected.
PRODUCTS
Summa manufactures diverse plastic products. Key product categories
include:
OPTICAL COMPONENTS. Summa's optical components include prismatic lenses,
refractors and reflectors molded from clear plastic, which are used in
commercial and industrial lighting fixtures and in similar applications such as
lighted navigational aids, traffic signals and vehicles. Most of the products
are injection molded from optical grade polycarbonate or acrylic. The principal
advantages of Summa's injection molded plastic components over more traditional
glass or metal components are superior optical performance, lighter weight, and
in certain instances, lower cost.
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IRRIGATION COMPONENTS. Summa's irrigation components include engineered
fittings, valves, filters and accessories, including tubing for drip irrigation
systems. The use of drip irrigation systems conserves water and allows more
precise control of delivery of water and soluble nutrients to plants than is
possible with spray, sprinkler or flood irrigation techniques.
CONVEYOR COMPONENTS. Summa's conveyor components include engineered
plastic components which form conveyer belts and chains. The components in
Summa's product line, many of which are patented, are constructed of non-toxic,
non-corrosive plastic materials and are designed to be easily cleaned, meeting
FDA-USDA requirements and specifications. The components do not require
lubrication and thus offer the advantage of operation free from contaminants
such as grease, oil and metal particles. Because these components are
lightweight, they require less energy to operate than steel belts, and are
quieter in operation and easier to service in place than metal belts.
In addition, the Company molds bobbins and circuit board components for
electronic products and miscellaneous industrial and consumer components and
other parts for OEM's, and extrudes plastic sheet for industrial, commercial and
do-it-yourself markets.
RESEARCH AND DEVELOPMENT
Summa invests significantly in the development of new products and
manufacturing processes. Only direct costs associated with tooling for new
products are capitalized. All other costs, including salaries and wages of
employees involved in research and development, are expensed as incurred.
PRODUCTION
Summa's principal manufacturing operation is injection molding of
plastic parts. Some products are molded by third-party vendors. Summa performs
additional production operations including extrusion, machining and welding of
plastic parts, coating, assembly and testing.
Injection molds and tools are made by Summa and outside vendors.
Products are made on modern molding machines which range from 28 to 1500 tons
clamping force. Ancillary equipment and special operations include automatic
resin feed systems, two color molding, insert molding, robotics, painting,
vacuum deposition coating with reflective metallic films, assembly, packaging
and warehousing. The Company also operates sheet extrusion and tube extrusion
lines. Summa operates on a just-in-time basis with many of its customers, and
inventories are managed to minimal levels. Inventory turns approximately 10
times a year. Three of Summa's manufacturing plants are ISO 9002 registered.
MARKETING AND DISTRIBUTION
Summa manufactures plastic materials and components which are generally
sold to other manufacturers who incorporate Summa's materials and components in
their products, and to businesses which incorporate the Company's products in
systems assembled for their own use or for their customers' use. The Company
generally considers its customers to be OEM's, "end users" and distributors.
Most sales are made directly by employees of the Company, although Summa
utilizes several independent manufacturers' representatives and certain sales
are made through distribution channels. In recent years, the Company has
expanded the size of its direct sales staff substantially and has also increased
its export sales, primarily to Europe. The Company distributes its products
principally by truck through the use of independent freight entities and, to a
lesser extent, by air and sea transport.
Summa's largest three customers accounted for 7.1%, 5.5% and 5.0% of
sales in fiscal 1998. The Company has thousands of active accounts including
many Fortune 1,000 and large privately held businesses.
RAW MATERIALS
Summa's principal raw material is pelletized plastic resin which is
delivered in bulk by truck or in large boxes, typically weighing 1,000 pounds
("Gaylords"). The Company is a large user of resin and does not rely on any
single vendor
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for more than 15% of its raw material. Every material used is available from
several vendors. Primary resins used include polycarbonate, acrylic,
polystyrene, polyethelyne, polyvinylchloride, polypropylene, acetal and nylon.
Principal vendors include Atohaus, Bayer, Continental Polymers, Cyro, Dow, GE
Plastics, ICI and Union Carbide, among others. The resins used by the Company
are crude oil or natural gas derivatives and may be affected to some extent by
the supply, demand and price trends in the petroleum industry. The Company did
not incur any material shortages or unavailability during fiscal 1998. Prices
have been relatively stable, some rising modestly and some falling modestly.
Some vendors unsuccessfully attempted to raise industry prices during 1998. The
Company does not have any fixed price supply contracts with its vendors but has
two such contracts with customers which do not represent a significant portion
of the Company's sales.
BACKLOG AND SEASONALITY
On August 31, 1998, Summa's continuing businesses had a backlog of
orders, believed to be firm, in the amount of $7,198,000, as compared to a
backlog of $4,622,000 from continuing businesses as of August 31, 1997. The
increase is primarily attributable to acquisitions. See "Business--History of
Recent Acquisitions and Divestitures" above. The open order backlog is comprised
of orders for components, spare parts and tooling, with scheduled deliveries
from September 1998 through fiscal 2000. Because the length of time between
entering an order, shipping the product and recording a sale can vary
significantly from order to order, backlog levels should not be relied upon as
an indicator of future sales volume.
Summa's sales exhibit modest seasonality, principally for its irrigation
components. Excluding the effects of growth and new businesses, the Company
would expect sales, as a percentage of fiscal year's sales, to occur
approximately as follows:
Quarter Percentage of Sales
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1st quarter................................. 24%
2nd quarter................................. 23%
3rd quarter................................. 27%
4th quarter................................. 26%
---
100%
===
Because a portion of overhead is fixed and, therefore, does not vary
with sales volume, profit may vary from quarter to quarter with more volatility
than sales volume.
COMPETITIVE CONDITIONS
The markets for the products currently manufactured and sold by Summa
are characterized by extensive competition. There are a number of companies that
currently offer competing products nationally and internationally, and in
certain geographic areas the Company has competition from local manufacturers as
well. It can be expected that additional competing products will be introduced
by other companies in the future. Many existing and potential competitors have
greater financial, marketing and research capabilities than Summa. Some of
Summa's largest customers have the resources to internally manufacture products
comparable to those currently purchased from Summa, and some of Summa's
customers also compete with the Company in certain areas.
Summa believes that its trade names and reputation are significant to
its competitive position. In addition, Summa believes that price is a
significant element of competition. However, factors such as engineering,
performance, availability and reliability are considered in the purchasing
process. The performance of Summa in the future will depend on the ability of
its operating subsidiaries to develop and market new products that will gain
customer acceptance and loyalty, as well as its ability to adapt its product
offerings to meet changing pricing considerations and other market factors. The
Company's operating performance would be adversely affected if its operating
subsidiaries were to incur delays in developing new products or if such products
did not gain market acceptance. There can be no assurance that existing or
future products will be sufficiently successful to enable Summa's operating
subsidiaries to effectively compete in their respective markets or,
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should new product offerings meet with significant customer acceptance, that one
or more current or future competitors will not introduce products that render
the Company's products noncompetitive.
PATENTS, TRADEMARKS AND LICENSES
The Company owns and licenses many domestic and foreign patents on
products which it has developed or acquired that expire on dates ranging to
2015. In addition, several patent applications are currently in process. The
extent to which patents provide a commercial advantage or inhibit the
development of competing products varies. To a large extent, however, Summa
relies upon common law concepts of confidentiality and trade secrets, as well as
economic barriers created by the required investments in tooling and technical
personnel and the development of customer relationships, to protect its
proprietary products. Summa also has foreign and domestic trade name and
trademark registrations covering many of the names and logos which appear on its
products which are helpful in enabling the Company to maintain its present
competitive position.
ENVIRONMENTAL MATTERS
The Company is subject to various environmental laws and regulations
governing air quality, water quality and hazardous waste management and
disposal, including such laws and regulations of the federal government and the
states of California, Michigan, Oklahoma, Florida and Tennessee. The Company
does not anticipate that future expenditures for the compliance with such laws
and regulations will have a material effect on its capital expenditures or
financial condition or, except as set forth below, its results of operations.
Prior to October 1986, a previously owned business unit of one of the
Company's subsidiaries operated a facility on property within an area
subsequently designated as a federal Superfund site. The Company learned that
hazardous substances have been identified in the subsurface of the property and
that the current owner has been requested by a state agency to undertake
additional investigation at the property. The Company is also aware that the
property has been subject to a general notice letter issued by the United States
Environmental Protection Agency under the federal Superfund law. Summa, as the
successor to one of several prior operators of the property, may be held
responsible for the contamination at the site regardless of whether its
subsidiary caused the contamination. The Company does not believe it is
responsible for any contamination at the property, and has not been notified or
contacted by any governmental authority in that regard, nor named in any
proceeding relating to the property. However, if Summa were held liable under
federal Superfund law, or other environmental law, or had to defend itself
against such a claim, the consequences could be material to the Company's
financial statements.
EMPLOYEES
At August 31, 1998, Summa had 675 employees, including four employees
who comprise the Company's corporate staff. None of Summa's employees are
covered by a collective bargaining agreement. The Company considers its
relationship with its employees to be good.
EXPORT SALES
For information regarding Summa's export sales by geographic area for
the past three fiscal years, see Note 12 in the "Notes to Consolidated Financial
Statements" of the Company in this Annual Report on Form 10-K.
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ITEM 2. PROPERTIES.
The Company operates primarily at the following facilities:
LOCATION SQ. FT. PRINCIPAL ACTIVITY LEASE EXPIRES
-------- ------- ------------------ -------------
Torrance, California 280 Corporate Office Month to Month
Charlevoix, Michigan 94,000 Injection Molding Owned
Charlevoix, Michigan 27,500 R&D Owned
Dickson, Tennessee 55,000 Injection Molding Owned
Chatsworth, California 62,000 Extrusion December 1999
Ontario, California 50,000 Extrusion, Assembly Owned
Ontario, California 25,000 Warehouse December 1999
Rancho Cordova, California 48,000 Warehouse, Assembly February 2001
Corona, California 30,000 Injection Molding May 2004
Corona, California 10,000 Warehouse December 1998
Visalia, California 4,500 Warehouse, Assembly December 1998
Oklahoma City, Oklahoma 22,000 Warehouse, Assembly May 2003
Winter Haven, Florida 28,000 Extrusion, Assembly Owned
In addition, the Company owns approximately 63,000 square feet of
factory and office space in Fullerton, California, and approximately 15,000
square feet of office and warehouse space in Charlevoix, Michigan, which it
leases to unrelated parties. The leases expire in July 2006 and November 1999,
respectively.
ITEM 3. LEGAL PROCEEDINGS.
The Company encounters lawsuits from time to time in the ordinary course
of business and, at August 31, 1998, the Company and/or its affiliates were
parties to several civil lawsuits. Summa does not expect that the resolution of
these lawsuits will have a material adverse impact on future results of
operations. Certain lawsuits filed against the Company in the past have
contained claims not covered by insurance, or sought damages in excess of policy
limits, and such claims could be filed in the future. Any losses that Summa may
suffer from such lawsuits, and the effect such litigation may have upon the
reputation and marketability of Summa's products, could have a material adverse
impact on the future results of operations, financial condition and/or prospects
of the Company. See also "Business--Environmental Matters" above.
Laitram, et. al. v. KVP Systems, Inc., et. al. was filed in the U.S.
District Court in Eastern Louisiana in September 1993. The plaintiffs
unsuccessfully claimed KVP infringed upon two patents. The venue was changed to
the Federal District Court in Sacramento, California. On April 24, 1997, the
District Court ruled that KVP's products do not infringe plaintiff's patents and
also dismissed KVP's counterclaims. The parties appealed, and on May 5, 1998,
the Court of Appeals affirmed the District Court's ruling in its entirety. The
time for any further appeals or rehearings on this matter expired in August 1998
and this lawsuit is finally resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year
ended August 31, 1998 to a vote of Summa's stockholders, through solicitation of
proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
RECENT MARKET PRICES
Summa's Common Stock is traded on The Nasdaq National Market under the
symbol "SUMX." Historically, there had been a limited public market for Summa's
Common Stock. During the year ended August 31, 1998, the average weekly trading
volume increased to approximately 112,000 shares. The stock markets have
experienced extreme price and volume fluctuations during certain periods. These
broad market fluctuations and other factors may adversely affect the market
price of Summa's Common Stock for reasons unrelated to Summa's operating
performance. The following table sets forth the high and low prices for a share
of Summa's Common Stock on The Nasdaq National Market and the trading volume for
the periods indicated.
QUARTER
ENDED 11/30/96 2/28/97 5/31/97 8/31/97 11/30/97 2/28/98 5/31/98 8/31/98
------- -------- -------- ------- ------- ---------- --------- --------- --------
HIGH $6.50 $6.25 $6.00 $6.63 $10.50 $13.13 $15.00 $12.50
LOW $5.50 $5.25 $4.75 $4.88 $6.13 $9.00 $11.25 $7.00
VOLUME 125,000 257,159 297,257 661,413 1,040,983 1,301,111 2,450,327 1,085,519
On October 20, 1998, the closing price on The Nasdaq National Market for
a share of Summa Common Stock was $9.00.
DESCRIPTION OF SECURITIES
The authorized capital stock of Summa consists of 10,000,000 shares of
Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001
par value. As of August 31, 1998, 4,257,307 shares of the Company's Common Stock
were issued and outstanding and no shares of Preferred Stock had been issued or
were outstanding. The number of holders of record of Summa's Common Stock as of
August 31, 1998 was 562. In addition, Summa estimates that there are 1,700
additional stockholders whose shares are held in "street name."
COMMON STOCK. Holders of Common Stock are entitled to one vote per share
on each matter submitted to a vote of the stockholders of Summa, and there is no
cumulative voting for the election of directors. Subject to preferences that may
be applicable to the holders of any outstanding Preferred Stock, each holder of
Common Stock is entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefor. Upon
the liquidation, dissolution or winding up of Summa, holders of Common Stock are
entitled to share ratably in all assets of Summa which are legally available for
distribution, after payment of all debts and other liabilities and the
liquidation preference of any outstanding Preferred Stock. Holders of Common
Stock have no preemptive, subscription, redemption or conversion rights. The
transfer agent and registrar for the Common Stock is U. S. Stock Transfer
Corporation, 1745 Gardena Avenue, Glendale, California 91204, and its telephone
number is: (800) 835-8778.
PREFERRED STOCK. The Board of Directors is authorized, subject to any
limitations prescribed by the laws of the State of Delaware, but without further
action by Summa's stockholders, to provide for the issuance of Preferred Stock
in one or more series, to establish from time to time the number of shares to be
included in each such series, to fix the designations, powers, preferences and
rights of the shares of each such series and any qualifications, limitations or
restrictions thereof, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then outstanding)
without any further vote or action by the stockholders. Although Summa has no
present plans to issue any additional shares of Preferred Stock, the issuance of
Preferred Stock in the future could provide voting or conversion rights that
would adversely affect the voting power or other rights of the holders of Common
Stock and thereby reduce the value of the Common Stock. In addition, the
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of Summa. In particular, specific rights granted
to future holders of Preferred Stock could be used to restrict Summa's ability
to merge with or sell its assets to a third party, or otherwise delay,
discourage or prevent a change in control of Summa.
9
10
ANTI-TAKEOVER DEVICES. In addition to the ability to issue Preferred
Stock, Summa's Certificate of Incorporation and Bylaws (i) specifically prohibit
cumulative voting and the right of stockholders to call a special stockholders
meeting, and (ii) provide for the classification of the Board of Directors into
three classes with one class elected annually, a requirement of a two-thirds
supermajority stockholder vote to amend certain provisions of the Certificate of
Incorporation and Bylaws, and other provisions which are also likely to delay,
discourage or prevent a change in control of Summa not approved by the Board of
Directors and the Company's stockholders.
SHARES ISSUABLE UPON EXERCISE OF OPTIONS
Summa has 847,633 shares issuable upon exercise of options granted
and/or available to be granted under its stock option plans and in connection
with acquisitions, most of which are registered under the Securities Act, and
the Board of Directors has approved, subject to stockholder approval at the
Annual Meeting of Stockholders to be held on December 10, 1998, the Summa 1999
Stock Option Plan which authorizes the issuance of options exercisable for an
additional 500,000 shares. The existence of such stock options may adversely
affect the terms on which Summa can obtain additional financing, and the holders
of such options can be expected to exercise or convert such options at a time
when Summa, in all likelihood, would be able to obtain additional capital by
offering shares of its Common Stock on terms more favorable to Summa than those
provided by the exercise or conversion of such options.
DIVIDEND POLICY
Summa has not paid a cash dividend since the fiscal year ended August
31, 1983. Summa intends to retain earnings, if any, for use in its business,
currently does not intend to pay cash dividends on its Common Stock in the
foreseeable future, and is prohibited from doing so by the loan agreement with
its primary bank.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below for the three years ended
August 31, 1996, 1997 and 1998 have been derived from the audited consolidated
financial statements of Summa included elsewhere herein. The selected financial
data set forth below for the years ended August 31, 1994 and 1995 have been
derived from audited consolidated financial statements of Summa that are not
included herein. The selected financial data set forth below should be read in
conjunction with those financial statements (including the notes thereto) and
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operation" in Item 7 below.
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11
STATEMENT OF INCOME DATA:
FISCAL YEARS ENDED AUGUST 31,
--------------------------------------------------------------
1994 1995 1996 1997 1998
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ................................................ $ 5,061 $ 6,567 $ 8,124 $ 39,093 $ 85,704
Cost and expenses:
Cost of sales ......................................... 2,685 3,474 4,339 27,097 59,197
Selling, general, administrative, other ............... 1,925 2,487 3,174 9,021 17,127
Interest, net ......................................... -- -- (15) 275 1,607
-------- -------- -------- -------- --------
Total costs and expenses of continuing operations ........ 4,610 5,961 7,498 36,393 77,931
-------- -------- -------- -------- --------
Income from continuing operations before provisions for
taxes and cumulative effect of accounting change ...... 451 606 626 2,700 7,773
Provision for income taxes ............................... 218 217 253 1,088 3,215
-------- -------- -------- -------- --------
Income from continuing operations before cumulative effect
of accounting change .................................. 233 389 373 1,612 4,558
Income (loss) from discontinued operations, net of income
tax effect ............................................ 386 259 195 640 316
Cumulative effect of accounting change ................... 100 -- -- -- --
-------- -------- -------- -------- --------
Net income ............................................... $ 719 $ 648 $ 568 $ 2,252 $ 4,874
======== ======== ======== ======== ========
Earnings per common share:
Basic
Continuing operations before cumulative
effect of accounting change ................ $ 0.15 $ 0.25 $ 0.24 $ 0.47 $ 1.09
Discontinued operations ...................... 0.25 0.17 0.12 0.18 0.07
Cumulative effect of accounting change ....... 0.07 -- -- -- --
-------- -------- -------- -------- --------
Net income ................................... $ 0.47 $ 0.42 $ 0.36 $ 0.65 $ 1.16
======== ======== ======== ======== ========
Diluted
Continuing operations before cumulative effect
of accounting change ...................... $ 0.15 $ 0.25 $ 0.23 $ 0.46 $ 1.03
Discontinued operations ...................... 0.25 0.17 0.12 0.18 0.07
Cumulative effect of accounting change ....... 0.06 -- -- -- --
-------- -------- -------- -------- --------
Net income ................................... $ 0.46 $ 0.42 $ 0.35 $ 0.64 $ 1.10
======== ======== ======== ======== ========
Weighted average number of shares:
Basic ............................................ 1,530 1,538 1,565 3,450 4,199
Diluted .......................................... 1,548 1,553 1,603 3,521 4,420
BALANCE SHEET DATA:
Assets ................................................... $ 9,171 $ 10,756 $ 10,963 $ 35,651 $ 63,983
Working capital .......................................... 1,484 1,090 2,423 7,209 10,854
Long-term debt ........................................... 305 400 300 5,571 18,675
Stockholders' equity ..................................... 7,224 7,930 8,644 20,965 28,118
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Statements contained in this Annual Report on Form 10-K, which are not
purely historical, are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including but not limited to statements regarding Summa's expectations,
hopes, beliefs, intentions or strategies regarding the future, such as those set
forth in "Business--Legal Proceedings" above. Actual results could differ
materially from those projected in any forward-looking statements as a result of
a number of factors, including those detailed in this "Management's Discussion
and Analysis" section (including, without limitation, the potential material
adverse consequences to the Company of the Year 2000 issue) and elsewhere in
this Annual Report on Form 10-K. The forward-looking statements are made as of
the date hereof, and the Company assumes no obligation to update the
forward-looking statements, or to update the reasons why actual results could
differ materially from those projected in the forward-looking statements.
Summa designs and manufactures injection-molded plastic optical
components for OEM customers in the lighting industry; molded plastic modular
conveyor belt and chain for the food processing industry; engineered plastic
fittings, valves, filters and tubing for the agricultural irrigation industry;
and other molded and extruded plastic components for diverse industries. See
"Business" above. Growth has been achieved by acquisition, development of new
products and expansion of the Company's sales organization. There can be no
assurance that Summa will be able to continue to consummate acquisitions,
develop new products or expand sales to sustain rates of revenue growth and
profitability in future periods comparable to those experienced in the past
several years. See "Business--History of Recent Acquisitions and Divestitures"
above.
Any future success that the Company may achieve will depend upon many
factors including factors which may be beyond the control of Summa or which
cannot be predicted at this time. These factors may include changes in the
markets for the products offered by the Company through its operating
subsidiaries, increased levels of competition including the entry of additional
competitors and increased success by existing competitors, reduced margins
caused by competitive pressures and other factors, increases in operating costs
including costs of production, supplies, personnel, equipment, import duties and
transportation, increases in governmental regulation imposed under federal,
state or local laws, including regulations applicable to environmental, labor
and trade matters, changing customer profiles and general economic and industry
conditions that affect customer demand and sales volume, both domestically and
in international markets such as the current crises in Asia, Russia and
elsewhere, the introduction of new products by the Summa or its competitors, the
need to make material capital expenditures, the timing of the Summa's
advertising and promotional campaigns, and other factors.
RECENT EVENTS
ACQUISITION OF SECOND CONVEYOR COMPONENTS MANUFACTURER. In May 1998, the
Company acquired all of the outstanding capital stock of Falcon Belting, Inc.,
an Oklahoma corporation ("Falcon"), which manufactures modular plastic conveyor
belting used in food processing industries. The operations of Falcon were
promptly consolidated with KVP. See "Business--History of Recent Acquisitions
and Divestitures" above.
ACQUISITION OF ASSETS OF MOLD MAKER. In September 1998, the Company
acquired substantially all of the assets of mold maker, Canyon Mold, Inc. See
"Business--History of Recent Acquisition and Divestitures" above.
DIVESTITURE OF LAST NON-PLASTIC SUBSIDIARY. In June 1998, the Company
sold all of the outstanding capital stock of GST Industries, Inc., a California
corporation ("GST"), which manufactures industrial firefighting and defense
aerospace equipment made of non-plastic materials, to a private investment group
based in California. See "Business--History of Recent Acquisitions and
Divestitures" above.
SUCCESSFUL DEFENSE OF INTELLECTUAL PROPERTY LAWSUIT. In August 1998, the
time for any appeals or petitions for rehearing relating to the previously
reported Laitram, et. al. v. KVP Systems, Inc., et. al. lawsuit expired, leaving
intact the Court of Appeals ruling that certain of the Company's conveyor
components products do not infringe plaintiff's patents. See Item 3 "Legal
Proceedings" above.
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13
PREPAYMENT IN FULL OF SUBORDINATED PROMISSORY NOTE. In August 1998, the
purchasers of Morehouse-COWLES, Inc., a former Summa subsidiary, prepaid in full
their ten-year $1,771,000 subordinated, secured promissory note due June 2006
bearing interest at 7% per annum. The cash received in the prepayment was used
to reduce Summa's outstanding indebtedness to its primary bank. See
"Business--History of Recent Acquisitions and Divestitures" above.
SETTLEMENT OF BOND TAXABILITY ISSUE WITH THE INTERNAL REVENUE SERVICE.
In August 1998, the Company and the Internal Revenue Service entered into a
settlement of their previously reported dispute regarding the tax exempt status
of one of the Company's industrial revenue bonds. Under the terms of the
settlement, the bond remains outstanding and tax exempt. The settlement did not
materially affect the Company's results of operations or financial position.
INJUNCTION AGAINST FORMER OFFICER OF SUBSIDIARY AND COMPETING BUSINESS.
In July 1998, the Company filed a civil lawsuit in the Los Angeles Superior
Court against Steven L. Strawn, former president of Manchester Plastics Co.,
Inc., a Summa subsidiary, his recently formed company, Waypoint LLC, and several
other individuals. In late August 1998, the Los Angeles Superior Court issued a
temporary injunction against Strawn and Waypoint LLC. The defendants agreed to
the injunction. Among other restrictions, the injunction bars the defendants
from soliciting and selling to Manchester's customers, contacting or hiring
Manchester employees and using or disclosing Manchester trade secrets.
REINCORPORATION IN DELAWARE. Effective in April 1998, the Company was
reincorporated from the State of California to the State of Delaware (the
"Reincorporation"). The Reincorporation was previously approved by the requisite
vote of the Company's shareholders at the Annual Meeting of Shareholders held in
Torrance, California on January 26, 1998. The definitive proxy statement
describing the Reincorporation was filed with the Securities and Exchange
Commission on December 10, 1997.
ADOPTION OF STOCK REPURCHASE PLAN. In September 1998, the Company
announced that it had adopted a plan to repurchase up to $2 million of its stock
on The Nasdaq National Market. There is no deadline and no specified minimum
amount of stock to be repurchased.
PREPAYMENT OF TWO ABOVE MARKET RATE NOTES. In August 1998, the Company
prepaid, without penalty, two real estate loans in an aggregate principal amount
of approximately $450,000 bearing interest at above market rates.
QUALIFICATION FOR REDUCED INTEREST RATE WITH PRIMARY LENDER. The Company
recently achieved certain financial criteria set forth in the loan agreement
with its primary lender which qualified the Company for a .4% reduction in the
interest rate currently charged on borrowings with such lender.
CONSOLIDATION OF RISK INSURANCE. In June 1998, the Company consolidated
the various risk insurance policies then held by its subsidiaries into one
overall policy, providing for significant improvements in coverage at reduced
expense.
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14
RESULTS OF CONTINUING OPERATIONS
The following table sets forth certain information derived from Summa's
consolidated statements of income for continuing operations as a percentage of
sales for the three years ended August 31, 1996, 1997 and 1998, as well as the
Company's effective income tax rate for each period presented. For a description
of acquisitions and dispositions during the periods presented, see
"Business--History of Recent Acquisitions and Divestitures" above.
Fiscal Years Ended August 31
----------------------------
1996 1997 1998
----- ----- -----
Net sales ............................................. 100.0% 100.0% 100.0%
Cost of sales ......................................... 53.4 69.3 69.1
----- ----- -----
Gross profit .......................................... 46.6 30.7 30.9
S, G, & A expense ..................................... 38.7 22.4 19.6
----- ----- -----
Operating income from continuing operations ........... 7.9 8.3 11.3
Interest expense, net ................................. (0.2) 0.7 1.9
Other expense ......................................... 0.4 0.7 .3
----- ----- -----
Income from continuing operations before tax .......... 7.7 6.9 9.1
Provision for income taxes ............................ 3.1 2.8 3.8
----- ----- -----
Income from continuing operations ..................... 4.6% 4.1% 5.3%
===== ===== =====
Effective tax rate .................................... 40.4 40.3 41.4
NET SALES. For the year ended August 31, 1997, net sales from continuing
operations increased by $30,969,000 or 381%, over the prior fiscal year, due
primarily to the inclusion of sales of newly acquired operations and strong
continued growth in sales of certain of the Company's products, attributable to
growing acceptance of such products, the market for the products and use of an
expanded sales force. See "Business--History of Recent Acquisitions and
Divestitures" and "Business--Products" above.
Net sales from continuing operations for the year ended August 31, 1998
increased by $46,611,000 or 119%, over the prior fiscal year, due primarily to
the inclusion of sales of several newly acquired operations. See
"Business--History of Recent Acquisitions and Divestitures" and
"Business--Products" above. Comparative trailing twelve months' sales from
continuing businesses grew at 6%.
COST OF SALES. For the year ended August 31, 1997, cost of sales from
continuing operations increased by $22,758,000 or 524%, over the prior fiscal
year, due primarily to the inclusion of expenses for newly acquired operations
and increased sales volume and related expenses for certain of the Company's
products due to growth. See "Business--History of Recent Acquisitions and
Divestitures" and "Business--Products" above.
Cost of sales from continuing operations for the year ended August 31,
1998 increased by $32,100,000 or 118%, over the prior fiscal year, due primarily
to the inclusion of a full twelve months of expenses (segments) of several newly
acquired operations, and increased sales volume and related expenses for certain
of the Company's products due to growth. See "Business--History of Recent
Acquisitions and Divestitures" and Business--Products" above.
GROSS PROFIT. For the year ended August 31, 1997, gross profit from
continuing businesses increased by $8,211,000 to $11,996,000, an increase of
217% over the level of gross profit generated during the prior fiscal year. The
increase in gross profit is due primarily to the inclusion of operations of
newly acquired operations and growth in the sales of certain of the Company's
products. As a percentage of sales, the gross profit margin decreased from 46.6%
for the year ended
14
15
August 31, 1996 to 30.7% for the year ended August 31, 1997, due primarily to
the inclusion of sales of newly acquired operations at typically lower margins
than those of Summa's other operations at such time. Gross margin percentages of
Summa's other operations increased slightly, due primarily to price increases
and increased volume. See "Business--History of Recent Acquisitions and
Divestitures" and "Business--Products" above.
Gross profit from continuing businesses for the year ended August 31,
1998 increased by $14,511,000 to $26,507,000, an increase of 121% over the level
of gross profit generated during the prior fiscal year. The increase in gross
profit is due primarily to the inclusion of newly acquired operations, and
strong continued growth in the sales of certain of the Company's products. As a
percentage of sales, the gross profit margin increased from 30.7% for the year
ended August 31, 1997 to 30.9% for the year ended August 31, 1998, due to volume
benefits, productivity increases and cost reductions which more than offset the
inclusion of sales of several newly acquired operations at typically lower
margins than those of Summa's other operations. See "Business--History of Recent
Acquisitions and Divestitures" and "Business--Products" above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the year ended August
31, 1997, selling, general and administrative expenses from continuing
businesses increased by $5,623,000, or 179%, when compared to such expenses for
the prior fiscal year, due primarily to the inclusion of expenses of newly
acquired operations and growth in certain of the Company's products. As a
percentage of sales, selling, general and administrative expenses decreased from
38.7% to 22.4%, due mostly to the inclusion of newly acquired operations with
lower operating expenses as a percentage of sales. See "Business--History of
Recent Acquisitions and Divestitures" and "Business--Products" above.
Selling, general and administrative expenses from continuing businesses
for the year ended August 31, 1998 increased by $8,052,000, or 92%, when
compared to such expenses for the prior fiscal year, due primarily to the
inclusion of several newly acquired operations, and continued growth in the
sales and expenses relating to certain of the Company's products. As a
percentage of sales, selling, general and administrative expenses decreased from
22.4% to 19.6%, due mostly to the inclusion of several newly acquired operations
at typically lower operating expenses as a percentage of sales. See
"Business--History of Recent Acquisitions and Divestitures" and
"Business--Products" above.
INTEREST EXPENSE, NET. Interest expense increased from a minor amount
for the fiscal year ended August 31, 1996 to $275,000 for the fiscal year ended
August 31, 1997 to $1,607,000 for the fiscal year ended 1998. Interest expense
in the 1997 fiscal year relates primarily to interest on debt assumed in the
acquisition of new operations. Interest expense in the 1998 fiscal year relates
primarily to interest on debt assumed in acquisitions and interest paid on debt
owed to the Company's primary bank pursuant to the borrowing arrangement
described in the "Liquidity and Capital Resources" section below. The majority
of the outstanding borrowings under such arrangement were incurred in connection
with recent acquisitions of several operations.
EFFECTIVE TAX RATE. The effective income tax rate, which is a composite
of federal and state income taxes, decreased from 40.4% for the fiscal year
ended August 31, 1996 to 40.3% in the fiscal year ended August 31, 1997. For the
fiscal year ended August 31, 1998, the effective tax rate increased to 41.4%,
due primarily to non-deductible amortization of goodwill related to recent
acquisitions offset by a lower effective combined state income tax rate.
INCOME FROM CONTINUING OPERATIONS. As a result of the above described
changes, income from continuing operations for fiscal 1997 grew by $1,239,000 to
$1,612,000, an increase of 332%, over fiscal 1996 and increased by $2,946,000 in
fiscal year 1998 to $4,558,000, an increase of 183% over fiscal 1997.
INFLATION. Management of the Company does not believe that inflation has
had a significant impact on Summa's operations during the past three fiscal
years. No significant amount of sales or purchases are made pursuant to fixed
price, long-term agreements.
LIQUIDITY AND CAPITAL RESOURCES
SOURCE AND USE OF FUNDS. The Company's primary source of liquidity has
been cash generated from operating activities and borrowings from third parties.
See "-- Financing Arrangements" below. During the three fiscal years ended
August 31, 1998, net cash provided by operating activities was $1,577,000 in
1996, $3,597,000 in 1997, and $8,441,000 in 1998. The improved cash flows for
the last three fiscal years are primarily due to inclusion of newly acquired
operations and increasing profitability.
15
16
Summa's principal uses of cash have been the (i) support of operating
activities, (ii) financing of acquisitions of businesses, (iii) investment in
capital improvements, and (iv) reduction of debt. For information relating to
cash used in acquisitions and generated from dispositions, see
"Business--History of Certain Acquisitions and Divestitures" above. Investment
in capital improvements for the three years ended August 31, 1998 amounted to
$983,000 in 1996, $1,626,000 in 1997 and $3,033,000 in 1998, and was primarily
for tooling for new products and for molding equipment. Although Summa expects
to continue making substantial investments in tooling for new products, at
August 31, 1998, Summa was not committed to any outside supplier for major
capital expenditures, and believes its present capacity, augmented by
anticipated continued investment in new product tooling and equipment, will be
sufficient to meet demand for its products. For the three years ended August 31,
1998, the Company applied $1,038,000 in 1996, $1,287,000 in 1997 and $5,751,000
in 1998 to then-existing, interest bearing debt, even though overall
indebtedness may have increased due to acquisitions.
WORKING CAPITAL; ASSET UTILIZATION. At fiscal year end August 31,
working capital was $2,423,000 in 1996, $7,209,000 in 1997 and $10,854,000 in
1998, representing increases in working capital of 198% from the 1996 to 1997
fiscal year end, and 51% from the 1997 to 1998 fiscal year end. The increase in
working capital in the 1997 fiscal year was due primarily to the inclusion of
newly acquired operations, and the increase in working capital in the 1998
fiscal year was due primarily to the inclusion of several additional newly
acquired operations.
Asset utilization for the fiscal years ended August 31, 1996, 1997 and
1998 is illustrated in the following table:
Fiscal Years Ended August 31,
-----------------------------------
1996 1997 1998
--------- ---------- ---------
Average working capital turnover....... 4.6 times 8.1 times 9.5 times
Average accounts receivable turnover... 8.6 times 10.2 times 8.8 times
Average inventory turnover............. 3.7 times 12.4 times 9.6 times
FINANCING ARRANGEMENTS. Summa entered into a $34 million credit
agreement with a bank in the first quarter of the 1998 fiscal year, comprised of
a $13,500,000 term loan, a three year revolving line of credit of up to
$15,000,000 depending upon eligible accounts receivable and inventory, and a
$5,000,000 acquisition facility available for three years, repayable in monthly
installments over seven years. At August 31, 1998, total borrowings under the
credit agreement were $15,401,000, and the Company had additional debt of
$5,941,000. The weighted average interest rate for all of the Company's debt at
August 31, 1998 was 7.5%, and unused bank credit totaled $16,417,000. All of the
Company's assets which are not security for industrial revenue bonds or specific
equipment loans are pledged to secure the debt described above The term debt and
revolving line of credit require compliance with various bank covenants.
Loan balances and weighted average interest rates of the Company's debt
at August 31, 1998 were:
Description of Debt Balance Interest Rate
------------------- ----------- -------------
Bank term loan................................ $12,667,000 7.9%
Line of credit................................ $ 2,734,000 8.2%
Acquisition line.............................. $ -- --
Industrial revenue bonds and other............ $ 5,941,000 6.3%
----------- ---
Total debt.................................... $21,342,000 7.5%
=========== ===
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17
Summa believes that cash flows from operations and existing credit
facilities will be sufficient to fund working capital requirements, planned
capital expenditures and debt service for the next twelve months. As discussed
in "Business--Strategy" above, the Company has a strategy of growth by
acquisition. In the event an acquisition plan is adopted which requires funds
exceeding the availability described above, an alternate source of funds to
accomplish the acquisition would have to be developed. The Company has
10,000,000 shares of common stock authorized, of which 4,257,307 shares were
outstanding at August 31, 1998 and 5,000,000 shares of "blank check" preferred
stock authorized of which none is outstanding. The Company could issue
additional shares of common or preferred stock to raise funds.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 in the "Notes to Consolidated Financial Statements" in Part
IV of this Annual Report on Form 10-K.
YEAR 2000 COMPLIANCE
The Company is continuing to analyze operations to determine and
implement the procedures necessary to ensure timely Year 2000 compliance. The
Company is also in the process of identifying and contacting key customers,
vendors and suppliers to request confirmation of timely external Year 2000
compliance.
Each of the Company's facilities utilizes and is dependent upon data
processing systems and software to conduct business. The Company has received
confirmation from vendors of most of the business software used by the Company
that such software is designed to be Year 2000 compliant. Further, for reasons
generally unrelated to the Year 2000 issue, the Company is in the process of
purchasing and installing new systems for certain operations at a cost of
several hundred thousand dollars. The Company currently anticipates that all
internally used software will be Year 2000 compliant in a timely manner.
Additionally, various machines and other types of personal property at each
facility have computer controls and/or contain integrated circuits that may be
affected, and the Company is in the process of identifying and analyzing such
property to determine Year 2000 compliance.
Although, the Company currently believes that it will be internally Year
2000 compliant in all material respects prior to January 1, 2000 and that the
effort to achieve Year 2000 compliance has not and will not have a significant
impact on the financial condition or results of future operations of the
Company, the Company remains concerned that the failure to comply by a
relatively small number of large customers and/or vendors, including banking
institutions, utilities, telecommunications and transportation companies, could
significantly disrupt operations at one or more of the Company's facilities.
Summa does not have a formalized Company-wide contingency plan covering worst
case scenarios in the event of Year 2000 non-compliance, but any such plan, if
and when formalized, would likely include technical contacts, access to backup
systems and alternative vendor sources, among other things. See " - - General"
above for forward looking statements disclaimer.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and related notes thereto of the Company filed
herewith are set forth in Item 14 and included in Part IV of this Annual Report
on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
17
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
Incorporated by reference from Summa's definitive Proxy Statement to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from Summa's definitive Proxy Statement to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from Summa's definitive Proxy Statement to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from Summa's definitive Proxy Statement to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
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19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits:
The following documents are either filed herewith or incorporated
herein by reference:
1. Financial Statements. The audited consolidated financial
statements of Summa as of August 31, 1997 and 1998 and for each of the three
years ended August 31, 1998 (including the notes thereto which contain unaudited
quarterly financial data for the two-year period ended August 31, 1998), and the
report of independent public accountants thereon, are included herein as set
forth in the "Index to Financial Statements" set forth below.
2. Financial Statement Schedules. The following financial
statement schedules:
Schedule II - Valuation and qualifying accounts.
3. Exhibits. The following exhibits to this Annual Report on Form
10-K are either filed herewith or incorporated herein by reference as indicated:
Exhibit
Number Document
------- --------
2.1 Agreement and Plan of Reorganization dated March 19, 1993 by
and between the Company and KVP Systems, Inc. relating to the
acquisition by the Company of KVP(1)
2.2 Agreement and Plan of Merger dated November 22, 1996 by and
among the Company, LexaLite International Corporation and
Charlevoix The Beautiful, Inc. relating to the acquisition by
the Company of LexaLite(2)
2.3 Agreement and Plan of Acquisition dated July 2, 1997 by and
between the Company and Calnetics Corporation relating to the
acquisition by the Company of Calnetics and its subsidiaries(3)
2.4 Stock Purchase Agreement and Amendment No. 1 thereto dated
April 8, 1998 and April 24, 1998, respectively, by and among
Mr. William G. Faulkner, KVP Systems, Inc. and the Company
relating to the acquisition by the Company of Falcon Belting,
Inc.(4)
2.5 Stock Purchase Agreement dated June 12, 1998 by and between P&L
Growth Industries, Inc., a California corporation, and the
Company relating to the divestiture by the Company of GST
Industries, Inc.(4)
3.1 Certificate of Incorporation of the Company(5)
3.2 Bylaws of the Company(5)
10.1 Loan Agreement dated October 21, 1997 between Summa and
Comerica Bank-California providing for $34 million credit
facility(6)
10.2 Subordinated Convertible Promissory Note, Security Agreement
and Guaranty dated June 26, 1998 by and among P&L Growth
Industries, Inc., GST Industries, Inc. and the Company relating
to the divestiture by the Company of GST Industries, Inc.(4)
10.3 Lease dated November 22, 1989 by and between Manchester
Plastics Co., Inc. and Tom and Arlene Schneider and Amendment
thereto dated December 5, 1989 for premises located in
Chatsworth, California(7)
10.4 1991 Stock Option Plan of the Company(8)
10.5 1995 Stock Option Plan of the Company(9)
10.6 Employment Agreement dated March 1994 between the Company and
James R. Swartwout(*)
10.7 Amendment No. 1 to Employment Agreement between the Company and
James R. Swartwout dated January 1, 1998(*)
19
20
10.8 Change in Control Agreement dated January 26, 1997 between
Calnetics Corporation and Trygve M. Thoresen (10)
21 Subsidiaries of the Registrant(*)
23 Consent of Arthur Andersen LLP(*)
27 Financial Data Schedule(*)
- -----------------------
(1) Incorporated by reference from the exhibits to the Company's Registration
Statement on Form S-4 filed with the Commission on May 24, 1993.
(2) Incorporated by reference from the appendices to the Company's definitive
Proxy Statement on Schedule 14A for the Annual Meeting of Shareholders held
November 21, 1996.
(3) Incorporated by reference from the appendices to the Calnetics' definitive
Proxy Statement on Schedule 14A for the Special Meeting of Shareholders
held October 28, 1997.
(4) Incorporated by reference from exhibits to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended May 31, 1998.
(5) Incorporated by reference from the appendices to the Company's definitive
Proxy Statement on Schedule 14A for the Annual Meeting of Shareholders held
January 26, 1998.
(6) Incorporated by reference from exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended August 31, 1997.
(7) Incorporated by reference from exhibits to the Calnetics' Annual Report on
Form 10-K for the fiscal year ended June 30, 1991.
(8) Incorporated by reference from exhibits to the Company's Registration
Statement on Form S-8 filed with the Commission on April 15, 1993.
(9) Incorporated by reference from exhibits to the Company's Registration
Statement on Form S-8 filed with the Commission on January 30, 1997.
(10) Incorporated by reference from exhibits to the Calnetics' Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 1997.
- -------------
* Filed herewith.
(b) Reports on Form 8-K filed during the last quarter of the fiscal year
ended August 31, 1998:
None.
20
21
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants.................................. F-1
Consolidated Balance Sheets as of August 31, 1997 and 1998................ F-2
Consolidated Statements of Income for each of the three years
ended August 31, 1996, 1997 and 1998.................................... F-3
Consolidated Statements of Stockholders' Equity for each of the
three years ended August 31, 1996, 1997 and 1998...................... F-4
Consolidated Statements of Cash Flows for each of the three
years ended August 31, 1996, 1997 and 1998........................... F-5
Notes to Consolidated Financial Statements................................ F-6
Report of Independent Public Accountants................................. F-19
Schedule II - Valuation and Qualifying Accounts........................... F-20
22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO: The Board of Directors and Stockholders of Summa Industries
We have audited the accompanying consolidated balance sheets of Summa
Industries (a Delaware corporation) and subsidiaries as of August 31, 1997 and
1998 and the related consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended August 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Summa Industries and
subsidiaries as of August 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
----------------------------
ARTHUR ANDERSEN LLP
Los Angeles, California
October 6, 1998
F-1
23
SUMMA INDUSTRIES
CONSOLIDATED BALANCE SHEETS AT AUGUST 31
---------------------------------------------------------------------------------------------------
ASSETS 1997 1998
---------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 3,020,000 $ 293,000
Accounts receivable, net of allowances of $195,000 in 1997
and $620,000 in 1998 6,603,000 12,975,000
Inventories 2,976,000 9,392,000
Prepaid expenses and other 607,000 777,000
Deferred tax asset 991,000 662,000
---------------------------------------------------------------------------------------------------
Total current assets 14,197,000 24,099,000
---------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost:
Land 1,380,000 2,080,000
Building and leasehold improvements 7,275,000 9,371,000
Machinery and equipment 10,709,000 15,226,000
Office furniture and equipment 634,000 1,119,000
---------------------------------------------------------------------------------------------------
Total property, plant and equipment, at cost 19,998,000 27,796,000
Less: accumulated depreciation and amortization 3,776,000 7,132,000
---------------------------------------------------------------------------------------------------
Net property, plant and equipment 16,222,000 20,664,000
---------------------------------------------------------------------------------------------------
Other assets 2,331,000 1,006,000
Net assets of discontinued operations 1,273,000 --
Goodwill and other intangibles, net 1,628,000 18,214,000
---------------------------------------------------------------------------------------------------
Total assets $35,651,000 $63,983,000
===================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long term debt $ 2,673,000 $ 2,667,000
Accounts payable 1,819,000 5,299,000
Accrued salaries, wages and benefits 1,522,000 2,418,000
Other accrued liabilities 974,000 2,861,000
---------------------------------------------------------------------------------------------------
Total current liabilities 6,988,000 13,245,000
---------------------------------------------------------------------------------------------------
Long-term debt, net of current maturities 5,571,000 18,675,000
Deferred income taxes 1,351,000 --
Other long-term liabilities 776,000 3,945,000
---------------------------------------------------------------------------------------------------
Total liabilities 14,686,000 35,865,000
Stockholders' equity:
Preferred stock, par value $.001; 5,000,000 shares authorized,
none outstanding -- --
Common stock, par value $.001; 10,000,000 shares authorized;
issued and outstanding: 4,099,004 at August 31, 1997 and
4,257,307 at August 31, 1998 16,226,000 18,505,000
Retained earnings 4,739,000 9,613,000
---------------------------------------------------------------------------------------------------
Total stockholders' equity 20,965,000 28,118,000
---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $35,651,000 $63,983,000
===================================================================================================
See accompanying notes to consolidated financial statements.
F-2
24
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED AUGUST 31
1996 1997 1998
- --------------------------------------------------------------------------------------------------------
Net sales $8,124,000 $39,093,000 $85,704,000
Cost of sales 4,339,000 27,097,000 59,197,000
- -------------------------------------------------------------------------------------------------------
Gross profit 3,785,000 11,996,000 26,507,000
Selling, general and administrative expenses 3,144,000 8,767,000 16,819,000
- -------------------------------------------------------------------------------------------------------
Operating income from continuing operations 641,000 3,229,000 9,688,000
Interest (income) (27,000) (200,000) (198,000)
Interest expense 12,000 475,000 1,805,000
Other (income) expense 30,000 254,000 308,000
- -------------------------------------------------------------------------------------------------------
Income from continuing operations before
provision for taxes 626,000 2,700,000 7,773,000
Provision for income taxes 253,000 1,088,000 3,215,000
- -------------------------------------------------------------------------------------------------------
Income from continuing operations 373,000 1,612,000 4,558,000
Income from discontinued operations, net of
the effect of income tax of $102,000 in 1996,
$426,000 in 1997, and $210,000 in 1998 195,000 640,000 316,000
- -------------------------------------------------------------------------------------------------------
Net income $ 568,000 $ 2,252,000 $ 4,874,000
- -------------------------------------------------------------------------------------------------------
Earnings per common share
- -------------------------------------------------------------------------------------------------------
Basic
Continuing operations $.24 $.47 $1.09
Discontinued operations $.12 $.18 $.07
Net income $.36 $.65 $1.16
=======================================================================================================
Diluted
Continuing operations $.23 $.46 $1.03
Discontinued operations $.12 $.18 $.07
Net income $.35 $.64 $1.10
=======================================================================================================
Weighted average common shares outstanding
Basic 1,565,000 3,450,000 4,199,000
Diluted 1,603,000 3,521,000 4,420,000
- -------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
25
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------
Common Common Retained
Shares Stock Earnings Total
- --------------------------------------------------------------------------------------------------------
Balance at August 31, 1995 1,541,930 $ 6,011,000 $1,919,000 $ 7,930,000
Cashout of odd lots (2) -- -- --
Exercise of options 35,923 179,000 -- 179,000
Stock redeemed in exercise of stock options (5,200) (33,000) -- (33,000)
Reserved shares, acquisition of KVP 30,832 -- -- --
Net Income -- -- 568,000 568,000
- --------------------------------------------------------------------------------------------------------
Balance at August 31, 1996 1,603,483 6,157,000 2,487,000 8,644,000
Cashout of odd lots (26) -- -- --
Exercise of options 50,441 227,000 -- 227,000
Acquisition of LexaLite 2,445,106 9,842,000 -- 9,842,000
Net Income -- -- 2,252,000 2,252,000
- --------------------------------------------------------------------------------------------------------
Balance at August 31, 1997 4,099,004 16,226,000 4,739,000 20,965,000
Cashout of odd lots (4) -- -- --
Exercise of options 167,318 1,044,000 -- 1,044,000
Stock redeemed in exercise of stock options (9,011) (110,000) -- (110,000)
Value of options issued in connection with
acquisition of Calnetics -- 1,345,000 -- 1,345,000
Net Income -- -- 4,874,000 4,874,000
- --------------------------------------------------------------------------------------------------------
Balance at August 31, 1998 4,257,307 $18,505,000 $9,613,000 $28,118,000
========================================================================================================
See accompanying notes to consolidated financial statements.
F-4
26
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31
1996 1997 1998
- -------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 568,000 $ 2,252,000 $ 4,874,000
- -------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 662,000 2,029,000 3,221,000
Amortization 82,000 96,000 452,000
Change in net deferred income taxes (94,000) 138,000 26,000
(Gain) loss on disposition of equipment (59,000) -- 30,000
Net change in assets and liabilities, net of effects
from purchase of LexaLite in fiscal 1997 and
Calnetics and Falcon in fiscal 1998:
Accounts receivable 87,000 258,000 (488,000)
Inventories (73,000) 101,000 (389,000)
Prepaid expenses and other assets 99,000 (275,000) 75,000
Accounts payable (114,000) (385,000) 443,000
Accrued liability 419,000 (617,000) 197,000
- -------------------------------------------------------------------------------------------------------------
Total adjustments 1,009,000 1,345,000 3,567,000
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,577,000 3,597,000 8,441,000
- -------------------------------------------------------------------------------------------------------------
Investing activities:
Acquisitions of businesses -- -- (23,322,000)
Capital expenditures:
Purchases of property and equipment (983,000) (1,626,000) (3,033,000)
Cash paid for patents (21,000) (13,000) --
Sales of subsidiaries, net of fees and of cash held 608,000 -- 1,185,000
Net proceeds from the sale of equipment 96,000 16,000 86,000
Net decrease in unexpended revenue bond proceeds -- 438,000 371,000
Proceeds from cash surrender value of life insurance -- 646,000 --
Collection of note receivable -- -- 1,771,000
- -------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (300,000) (539,000) (22,942,000)
- -------------------------------------------------------------------------------------------------------------
Financing activities:
Net proceeds from (payments on) line of credit (938,000) (275,000) 2,734,000
Proceeds from issuance of long term debt -- -- 13,994,000
Payments on long term debt (100,000) (1,012,000) (5,751,000)
Proceeds from the exercise of stock options 146,000 227,000 934,000
Cash received in the acquisition of business,
net of cash paid -- 318,000 --
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (892,000) (742,000) 11,911,000
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 385,000 2,316,000 (2,590,000)
Cash and cash equivalents, beginning of year 182,000 567,000 2,883,000
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the year $ 567,000 $ 2,883,000 $ 293,000
=============================================================================================================
See accompanying notes to consolidated financial statements.
F-5
27
SUMMA INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1996, 1997 AND 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Summa Industries ("Summa"), a Delaware corporation, develops and
manufactures proprietary plastic products for diverse industrial and commercial
markets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Summa
Industries and its wholly-owned subsidiaries. The results of operations of
acquired companies have been included in the consolidated results of operations
and the consolidated statements of cash flows of the Company since the dates of
acquisitions. See Note 15. All intercompany account balances and transactions
have been eliminated in consolidation. Certain reclassifications of 1996 and
1997 amounts have been made to conform to 1998 presentations.
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.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Cost includes material, labor and manufacturing
overhead.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is charged against earnings, principally using the
straight-line method, over the estimated useful lives of the related assets as
follows:
Building and improvements 10-40 years
Machinery and equipment 3-10 years
Office furniture and equipment 3-7 years
Leasehold improvements Lesser of remaining term of lease or
estimated useful life
Maintenance, repairs and minor renewals are charged directly to expense as
incurred. Additions and improvements to property, plant and equipment are
capitalized. When assets are disposed of, the related cost and accumulated
depreciation thereon are removed from the accounts, and any gain or loss is
included in operations.
INTANGIBLE ASSETS
Intangible assets include goodwill and other intangibles such as trade
names, patents and customer lists capitalized in connection with business
acquisitions. Other intangibles are being amortized over their estimated useful
lives of 10-17 years. Goodwill is amortized over 25-40 years (see Note 6).
F-6
28
EARNINGS PER COMMON SHARE
Basic earnings per common share (EPS) is based on income available to
common stockholders divided by the weighted average number of common shares
outstanding during the year. Diluted EPS is similar to the computation for Basic
EPS except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. See Note 2 for details of the computation.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less to be
cash equivalents.
INCOME TAXES
The Company accounts for income taxes in accordance with the Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes".
This statement requires that income taxes be accounted for using the liability
method.
STOCK BASED COMPENSATION
The Company has elected to continue to report stock based compensation in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock issued to Employees." The Company has adopted the appropriate disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (see Note 11).
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share,"
which requires the presentation of basic and diluted earnings per share on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of both the numerator and denominator of the basic
and dilutive earnings per share computations. SFAS No. 128 is effective for
financial statements for both interim and annual periods ending after December
15, 1997. The Company adopted this standard in the second quarter of fiscal year
1998 with no material impact on earnings per share. All prior period earnings
per share have been restated for the new disclosure.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components. This statement is effective for financial statements
for annual periods beginning after December 15, 1997 and will be adopted by the
Company for the 1999 fiscal year. The Company does not believe that the adoption
of this pronouncement will have a material effect on reported income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for
reporting and disclosure of financial information by segment. This statement
will be adopted by the Company for the 1999 fiscal year. The Company has not yet
determined the impact of adopting this pronouncement on its financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," which establishes standards for
reporting and disclosure of derivative and hedging instruments. SFAS No. 133 is
effective for annual reports beginning after June 15, 1999. The Company will not
be affected by this new standard because the Company has no derivative or
hedging financial instruments.
F-7
29
2. DILUTED EARNINGS PER SHARE
For the year ended August 31,
1996 1997 1998
- ------------------------------------------------------------------------------------------------------
Income from continuing operations $373,000 $1,612,000 $4,558,000
Net income $568,000 $2,252,000 $4,874,000
Weighted average shares outstanding during the
period -- basic 1,565,000 3,450,000 4,199,000
Effect of dilutive securities
Impact of common shares to be issued under stock
options plans 38,000 71,000 221,000
- ------------------------------------------------------------------------------------------------------
Weighted average shares outstanding-diluted (1) (2) 1,603,000 3,521,000 4,420,000
======================================================================================================
(1) Calculated using the "treasury stock" method as if diluted securities were
exercised and the funds were used to purchase Common shares at the average
market price during the period.
(2) Options to purchase 30,894 common shares in 1996, 209,624 common shares in
1997, and 338,327 common shares in 1998, were not included in the
computation of diluted earnings per share because the exercise price was
greater than the average fair market value of the common shares.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the years ended August 31:
1996 1997 1998
-----------------------------------------------------------------
Interest $107,000 $ 395,000 $1,986,000
Income taxes $301,000 $1,414,000 $3,478,000
-----------------------------------------------------------------
Noncash investing activities:
The Company received a note receivable of $1,771,000 in 1996 as partial
consideration for the sale of Morehouse-COWLES, Inc. (collected in 1998) and
received a note receivable of $1,500,000 in 1998 as partial consideration for
the sale of GST Industries, Inc.
1997 1998
- -------------------------------------------------------------------------------------
Non-cash investing and financing activities:
Common stock issued for acquisition (Note 15) $ 9,842,000 $ --
- -------------------------------------------------------------------------------------
Details of acquisitions (Note 15):
Fair value of assets acquired 23,943,000 36,917,000
Liabilities assumed or incurred (13,906,000) (10,844,000)
Common stock and value of options issued (9,842,000) (1,345,000)
- -------------------------------------------------------------------------------------
Cash paid (195,000) (24,728,000)
Less cash acquired 513,000 1,406,000
- -------------------------------------------------------------------------------------
Net cash acquired (used) in acquisition $ 318,000 $(23,322,000)
=====================================================================================
F-8
30
4. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate:
CASH AND CASH EQUIVALENTS - The carrying amount is a reasonable estimate of
fair value. These assets consist of short term certificates of deposit and
demand deposits.
LONG-TERM DEBT - The carrying value approximates fair value since the
interest rate on the long-term loan approximates the rate which is currently
available to the Company for the issuance of debt with similar terms and
maturities.
5. INVENTORIES
Inventories consisted of the following at August 31:
1997 1998
---------------------------------------------------------------
Finished goods $ 885,000 $3,611,000
Work in process 13,000 111,000
Materials and parts 2,078,000 5,670,000
---------------------------------------------------------------
$2,976,000 $9,392,000
===============================================================
6. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consisted of the following at August 31:
1997 1998
----------------------------------------------------------------
Goodwill $1,207,000 $17,176,000
Other intangibles 642,000 1,700,000
----------------------------------------------------------------
1,849,000 18,876,000
Less: accumulated amortization (221,000) (662,000)
----------------------------------------------------------------
Goodwill and other intangibles, net $1,628,000 $18,214,000
================================================================
7. INCOME TAXES
The following table provides a reconciliation between the provision for
taxes based on income included in the accompanying consolidated statements of
income and the provision for taxes computed by applying the statutory income tax
rate to income from continuing operations before taxes for the years ended
August 31:
1996 1997 1998
---------------------------------------------------------------------
Provision for taxes at
statutory rates $213,000 $ 918,000 $2,643,000
State tax, net of federal benefit 26,000 116,000 332,000
Goodwill amortization 15,000 24,000 147,000
Other-net (1,000) 30,000 93,000
---------------------------------------------------------------------
Provision for income taxes $253,000 $1,088,000 $3,215,000
=====================================================================
F-9
31
The provision for income taxes consisted of the following for the years
ended August 31:
1996 1997 1998
--------------------------------------------------------------------
Current:
Federal $225,000 $ 771,000 $1,994,000
State 94,000 240,000 360,000
--------------------------------------------------------------------
319,000 1,011,000 2,354,000
--------------------------------------------------------------------
Benefit of stock options
exercised:
Federal 24,000 31,000 506,000
State 4,000 5,000 90,000
--------------------------------------------------------------------
28,000 36,000 596,000
--------------------------------------------------------------------
Deferred:
Federal (80,000) 35,000 208,000
State (14,000) 6,000 57,000
--------------------------------------------------------------------
(94,000) 41,000 265,000
--------------------------------------------------------------------
Provision for income taxes $253,000 $1,088,000 $3,215,000
====================================================================
Changes in components of the Company's deferred tax provision (benefit) were as
follows:
1996 1997 1998
----------------------------------------------------------------------
Effect of performance payments $(101,000) $ 141,000 $ --
State taxes (39,000) (85,000) (103,000)
Reserves 77,000 (603,000) 238,000
Depreciation 10,000 567,000 107,000
Amortization (20,000) 21,000 (17,000)
Other (21,000) -- 40,000
----------------------------------------------------------------------
$ (94,000) $ 41,000 $ 265,000
======================================================================
F-10
32
The components of the Company's deferred tax asset (liability) at August 31,
1997 and 1998 were as follows:
1997 1998
-------------------------------------------------------------------
State taxes $ 157,000 $ 217,000
Reserves 834,000 2,186,000
-------------------------------------------------------------------
Total deferred tax assets 991,000 2,403,000
Depreciation (1,203,000) (1,197,000)
Amortization (148,000) (125,000)
-------------------------------------------------------------------
Total deferred tax liabilities (1,351,000) (1,322,000)
-------------------------------------------------------------------
Net deferred tax asset (liability) $ (360,000) $ 1,081,000
===================================================================
Included in other assets at August 31, 1998 is a $419,000 balance
representing noncurrent deferred income taxes.
8. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT
The Company has a seven-year bank term loan in the amount of $12,667,000.
Monthly principal payments are due as follows: $83,000 through October 1998;
$167,000 through October 2003; and $208,000 through October 2004.
The Company has a three year revolving line of credit, expiring in October
2000, in an amount of up to $15 million, based on eligible receivables and
inventory. At August 31, 1998, the balance outstanding was $2,734,000 with
additional availability of $11,417,000.
The Company has an acquisition facility available through October 2000 of
$5,000,000, of which none is in use as of August 31, 1998.
Interest is due monthly on both the term loan and the revolving line of
credit and is based upon the banks prime rate plus a margin or the LIBOR plus a
margin, at the Company's option, and has provision for decreases in the
applicable margins based upon the senior debt to EBITDA ratio. At August 31,
1998, the average interest rate was 7.9% on the term loan and 8.2% on the
revolver. Effective September 1, 1998, the interest rate was reduced by .4% on
both facilities. The bank term loan and revolver, which require compliance with
various bank covenants, are secured by all of the Company assets which are not
security for other loans.
The Company has industrial revenue bond ("IRB") financing in the amount of
$3,677,000 in connection with a facility in Michigan. Principal payments,
secured by a letter of credit and the related property, are due annually on
November 1, 1998, 1999, 2000, 2001 in the amount of $677,000, $1,000,000,
$1,000,000 and $1,000,000, respectively. Interest is payable semi-annually at an
average effective interest rate of 6.7% at August 31, 1998.
The Company has IRB financing in connection with a California facility in
the amount of $1,400,000. Principal payments, secured by a letter of credit and
the related property, are due in annual installments ranging from $20,000 to
$130,000 through December 2021. Interest is due monthly at an average effective
interest rate of 4.2% at August 31, 1998.
The Company has equipment loans to a bank in the amount of $472,000 secured
by its related equipment. Principal payments of $5,926 are due monthly with
balloon payments due in January and March, 2003. Interest is due monthly at
7.7%.
The Company has an unsecured loan payable in the amount of $100,000 due in
June 1999. Interest is payable semi-annually at 7.5%.
The Company has an unsecured loan in the amount of $292,000 due in October
1999. Interest is due quarterly at the prime rate less 1%.
F-11
33
Long-term debt consisted of the following at August 31:
1997 1998
--------------------------------------------------------------
Term loan $ -- $12,667,000
Revolving line of credit -- 2,734,000
Industrial revenue bonds 5,000,000 5,077,000
Equipment loans 3,042,000 472,000
Other 202,000 392,000
--------------------------------------------------------------
Total 8,244,000 21,342,000
Less: current maturities 2,673,000 2,667,000
--------------------------------------------------------------
Long-term $5,571,000 $18,675,000
==============================================================
Future maturities of long-term at August 31, 1998 were as follows:
Years Amount
--------------------------------------------
1999 $2,667,000
2000 3,350,000
2001 5,800,000
2002 3,070,000
2003 2,337,000
2004 and thereafter 4,118,000
--------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
The Company leases office and manufacturing facilities and certain equipment
under non-cancelable operating leases which expire at various dates through May
2004. Rental expense charged to operations was approximately $159,000 in 1996,
$367,000 in 1997 and $1,160,000 in 1998.
The aggregate minimum future lease payments under these leases at August
31, 1998 are approximately as follows:
Years Amount
--------------------------------------------
1999 $1,379,000
2000 833,000
2001 528,000
2002 316,000
2003 249,000
2004 and thereafter 187,000
--------------------------------------------
F-12
34
The Company has adopted a retirement and savings plan. The plan, which
qualifies under Section 401(k) of the Internal Revenue Code, allow employees to
defer specified percentages of their compensation, in a tax-deferred trust. The
Company may elect to make matching contributions and discretionary
contributions. The cost of the Company matching contribution is partially offset
by a reduction in payroll taxes. Company contributions to the plan totaled
$75,000 in 1996, $349,000 in 1997 and $529,000 in 1998.
The Company has adopted and maintains an Employee Stock Ownership Plan
(the "ESOP") Under the ESOP, the Company may make contributions to the ESOP
trust for purchases of shares of the Company's Common Stock, or may contribute
Common Stock directly to the ESOP trust. The total cash contributions by the
Company to the ESOP were $135,000 in 1997 and $180,000 in 1998.
Prior to October 1986, a previously owned business unit of one of the
Company's subsidiaries operated a facility on property within an area
subsequently designed as a federal Superfund site. The Company learned that
hazardous substances have been identified in the subsurface of the property and
that the current owner has been requested by a state agency to undertake
additional investigation at the property. The Company is also aware that the
property has been subject to a general notice letter issued by the United States
Environmental Protection Agency under the federal Superfund law. Summa, as the
successor to one of several prior operators of the property, may be held
responsible for the contamination at the site regardless of whether its
subsidiary caused the contamination. The Company does not believe it is
responsible for any contamination at the property, and has not been notified or
contacted by any governmental authority in that regard, nor named in any
proceeding relating to the property. However, if Summa were held liable under
federal Superfund law, or other environmental law, or had to defend itself
against such a claim, the consequences could be material to the Company's
financial statements.
10. RELATED PARTY TRANSACTIONS
The Company is obligated to pay fees and commissions on certain products
to one of its directors, pursuant to pre-existing agreements with a subsidiary
acquired in 1997. The Company made a one-time payment of $365,000 in 1997 to
modify the agreements. Total fees and commissions were $148,000 in 1997 and
$150,000 in 1998. The agreements continue until 2009.
In fiscal year 1998, the Company purchased $1,340,000 in injection molding
services from a business in which an officer of one of the Company's recently
acquired subsidiaries is a director and part owner. The amounts paid are
considered to be commercially competitive.
The Company leases truck trailers from a company owned by an employee of
the Company under which the Company paid $25,000 in fiscal 1997 and $27,000 in
fiscal 1998 and under which the Company is obligated to pay approximately $2,000
per month through June 2001. Additionally, the Company paid that party $379,000
in fiscal 1997 and $517,000 in fiscal 1998 for trucking services which the
Company believes are commercially competitive under an agreement which is
renewable annually. Both agreements are cancelable with sixty days notice.
11. STOCK-BASED COMPENSATION PLANS
The Company has three stock option plans, all of which have been approved
by the Stockholders and are administered by its Board of Directors. The 1984
Stock Option Plan (the "1984 Plan") provides for the grant of options to key
employees to purchase an aggregate of 25,000 shares of Common Stock. Under the
1991 Stock Option Plan (the "1991 Plan"), options to purchase an aggregate of
150,000 shares of Common Stock may be grated to key employees, directors,
consultants, vendors and others. The 1995 Stock Option Plan (the "1995 Plan")
provides for the grant of options to purchase an aggregate of 350,000 shares of
Common Stock, which may be granted to key employees, directors, consultants,
vendors, customers and others. In addition, options have been issued in
conjunction with acquisitions, primarily to replace options held by employees of
acquired companies. The fair value of these options is included in the purchase
price.
F-13
35
The Company accounts for stock options issued to employees and directors
under APB Opinion No. 25. Under these plans no compensation cost was recognized
in fiscal years 1996, 1997 and 1998. SFAS No. 123 "Accounting for Stock-Based
Compensation" was issued by the FASB in 1995 and, if fully adopted, changes the
methods for recognition of cost on plans similar to those of the Company.
Adoption of FASB Statement No. 123 is optional; however, pro-forma disclosures
as if the Company had adopted the cost recognition method are required. Had
compensation cost for stock options awarded under these plans been determined
consistent with FASB Statement No. 123, the Company's net income and earnings
per share would have reflected the following pro-forma amounts:
August 31,
----------------------------------------------------------------
1996 1997 1998
----------------------------------------------------------------
Income from continuing
operations
As Reported $373,000 $1,612,000 $4,558,000
Pro Forma $278,000 $1,534,000 $4,424,000
Diluted earnings per share:
As Reported $.23 $.46 $1.03
Pro Forma $.17 $.44 $1.00
----------------------------------------------------------------
The Company has granted options of 523,123 shares under the above plans.
Under these plans, the options are generally issued at fair market value at the
grant date. Options become vested cumulatively over various periods, at the
discretion of the Board of Directors, up to five years from the grant date, are
exercisable in whole or in installments, and expire up to ten years from date of
grant. Options that are forfeited are again available for grant under the Plans.
A summary of the status of the Company's stock options at August 31, 1996,
August 31, 1997, August 31, 1998 and changes during the years then ended is
presented in the table and narrative below:
August 31, 1996 August 31, 1997 August 31, 1998
--------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------------------------
Outstanding at
beginning of year 191,250 $4.72 237,473 $4.21 445,873 $4.81
Granted (1)(2) 121,223 4.03 327,562 5.50 526,595 6.50
Exercised (35,923) 4.96 (50,441) 3.72 (167,318) 2.68
Forfeited/Expired (39,077) 5.55 (68,721) 5.42 (14,644) 7.87
--------------------------------------------------------------------------------------
Outstanding at end of
year 237,473 $4.21 445,873 $4.81 790,506 $6.32
Exercisable at end of
year 206,579 $4.13 236,249 $4.28 452,179 $4.31
Weighted average fair
value of options
granted $1.54 $2.25 $4.63
--------------------------------------------------------------------------------------
- -----------
(1) During fiscal 1997, the Company granted 157,650 options under shareholder
approved Plans and issued 169,912 options in conjunction with an
acquisition.
(2) During fiscal 1998, the Company granted 346,267 options under shareholder
approved Plans and issued 180,328 options in conjunction with acquisitions.
F-14
36
The following table summarizes information about stock options outstanding
at August 31, 1998:
Outstanding Exercisable
-------------------- ---------------------
Weighted Weighted Weighted
Exercise average Number of average Number of average
price remaining options exercise options exercise
range term (years) outstanding price outstanding price
---------------------------------------------------------------------------
$1.55 - 2.32 5.8 96,230 $2.07 91,012 $2.10
$2.72 - 3.61 5.4 89,425 3.35 89,425 3.35
$4.25 - 6.00 6.9 379,023 5.22 251,742 5.07
$9.00 - 13.12 8.5 144,500 9.76 20,000 9.01
$13.72 8.6 81,328 13.72 -- --
------- ----- ------- -----
790,506 $6.32 452,179 $4.31
======= ===== ======= =====
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes pricing model with the following assumptions used for grants
in fiscal years 1996, 1997 and 1998.
1996 1997 1998
----------------------------------------------------------------------
Weighted average risk-free
interest rate 5.7% 6.2% 5.7%
Volatility 30% 35% 35%
Expected dividend yields -- -- --
Weighted average expected life
in years 3.3 4.4 3.2
----------------------------------------------------------------------
12. SALES
Sales to the Company's largest single customer represented 8.6% in 1996,
9.3% in 1997 and 7.1% in 1998, of total sales.
Export sales by geographic area were as follows for the years ended
August 31:
1996 1997 1998
----------------------------------------------------------------------
Mexico and Canada $ 443,000 $1,928,000 $ 4,518,000
Europe 891,000 1,994,000 5,057,000
Latin America 19,000 472,000 1,083,000
Asia 43,000 675,000 665,000
Other 105,000 486,000 794,000
----------------------------------------------------------------------
$1,501,000 $5,555,000 $12,117,000
======================================================================
F-15
37
13. UNAUDITED QUARTERLY RESULTS
Quarters ended
----------------------------------------------------
Fiscal
November February May August Year
----------------------------------------------------------------------------------
(in thousands, except per share amounts)
Fiscal 1997:
Net sales $2,026 $12,585 $12,023 $12,459 $39,093
Gross profit 933 3,569 3,694 3,800 11,996
Income from continuing
operations 32 494 458 628 1,612
Net income $ 213 $ 629 $ 620 $ 790 $ 2,252
----------------------------------------------------------------------------------
Per Share:
Income from continuing
operations
Basic $.02 $.12 $.11 $.15 $.47(a)
Diluted $.02 $.13 $.11 $.15 $.46(a)
Net income
Basic $.13 $.16 $.15 $.19 $.65(a)
Diluted $.13 $.15 $.15 $.19 $.64(a)
----------------------------------------------------------------------------------
Fiscal 1998:
Net sales $16,434 $20,410 $23,854 $25,006 $85,704
Gross profit 5,099 6,001 7,477 7,930 26,507
Income from continuing
operations 866 880 1,334 1,478 4,558
Net income $ 1,020 $ 959 $ 1,400 $ 1,495 $ 4,874
==================================================================================
Per Share:
Income from continuing
operations
Basic $.21 $.21 $.32 $.35 $1.09
Diluted $.20 $.20 $.30 $.33 $1.03
Net income
Basic $.25 $.23 $.33 $.35 $1.16
Diluted $.24 $.22 $.31 $.33 $1.10
===================================================================================
- -------------
(a) The total of the earnings per share for each of the four quarters does not
equal the total earnings per share for the full year because the
calculations are based on the average shares outstanding during each of the
individual periods.
F-16
38
14. DISCONTINUED OPERATIONS
On June 17, 1996, the Company completed the divestiture of its
subsidiary, Morehouse-COWLES, Inc. for $2,521,000 consisting of cash of $750,000
and a $1,771,000 subordinated secured promissory note which was paid in fiscal
1998. Accordingly, this business unit has been accounted for as a discontinued
operation and results of its operations are segregated in the 1996 consolidated
statement of income. There was no gain or loss on the disposition of
Morehouse-COWLES. Interest expense of $93,000 was related to discontinued
operations and accordingly was allocated to discontinued operations for fiscal
year 1996.
On June 26, 1998, the Company completed the divestiture of its
subsidiary, GST Industries, Inc. for $2,700,000, consisting of $1,200,000 in
cash and a $1,500,000 seven-year subordinated, convertible, secured promissory
note bearing interest at 10% per annum. In addition, the Company may receive a
maximum of $2,000,000 in royalty payments over the next five years based upon a
percentage of future sales in excess of a base amount. It is expected that the
royalties actually received, if any, will be substantially less than $2,000,000,
and the value of the conversion rights of the note is highly speculative.
Accordingly, this business unit has been accounted for as a discontinued
operation and the results of its operation are segregated in the accompanying
consolidated statements of income. There was no gain or loss on the disposition
of GST and no interest expense was allocated to discontinued operations for
fiscal years 1996, 1997 and 1998.
Discontinued operations have not been segregated in the consolidated
statements of cash flows. The preceding notes to consolidated financial
statements have been revised, as necessary, to reflect the change in reporting
due to discontinued operations.
The following table presents the sales and results of operations of the
discontinued operations.
1996 1997 1998
- ---------------------------------------------------------------------------------------------------
Sales from discontinued operations:
Morehouse-COWLES, Inc. $ 5,630,000 $ -- $ --
GST Industries, Inc. 4,618,000 4,144,000 2,818,000
- ---------------------------------------------------------------------------------------------------
$10,256,000 $4,144,000 $2,818,000
===================================================================================================
Income (loss) from discontinued
operations:
Morehouse-COWLES, Inc. $ (235,000) $ -- $ --
GST Industries, Inc. 430,000 640,000 316,000
- ---------------------------------------------------------------------------------------------------
$ 195,000 $ 640,000 $ 316,000
===================================================================================================
15. ACQUISITIONS
On November 22, 1996, the Company completed the acquisition of LexaLite
International Corporation. The total acquisition cost was $23,943,000,
consisting of 2,415,106 shares of Summa Common Stock issued to LexaLite
shareholders and 30,000 shares issued to a broker valued at an estimated market
value of $9,842,000, acquisition costs of $315,000 and liabilities associated or
incurred of $13,906,000. The acquisition has been accounted for using the
purchase method of accounting and, accordingly, the purchase price has been
allocated to identifiable tangible and intangible assets purchased and the
liabilities assumed or incurred based upon their fair values at the date of
acquisition. The excess of purchase price over the fair values of the net assets
acquired amounted to $905,000 and has been recorded as goodwill which is being
amortized on a straight-line basis over 25 years.
On October 28, 1997, the Company completed the acquisition of Calnetics
Corporation ("Calnetics"). The total acquisition cost was $31,792,000,
consisting of cash due to former Calnetics shareholders of $22,335,000, (of
which $243,000 is due at August 31, 1998) acquisition costs of $50,000,
liabilities assumed or incurred of $8,062,000 and an estimated fair value of
$1,345,000 for options issued in conjunction with the transaction, primarily
replacement options issued to Calnetics employees who continued with the
Company. The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to
identifiable tangible and intangible assets purchased and liabilities assumed or
incurred based upon their fair value at the date of acquisition. The excess of
the purchase price over the fair value of the net assets acquired amounted to
$13,974,000 and has been recorded as goodwill which is being amortized on a
straight-line basis over 40 years.
F-17
39
On May 1, 1998, the Company completed the acquisition of Falcon Belting,
Inc. ("Falcon") of Oklahoma City, Oklahoma, a manufacturer of modular plastic
conveyor belting used in food processing industries. The operations of Falcon
have been consolidated with the Company's KVP Falcon Plastic Belting, Inc.
subsidiary (formerly KVP Systems, Inc.). The total acquisition cost was
$5,125,000, consisting of $2,636,000 in cash and the present value of
obligations to make future payments to the former owner of Falcon and
liabilities assumed or incurred of $2,489,000. The acquisition was accounted for
using the purchase method of accounting and, accordingly, the purchase price has
been allocated to identifiable tangible and intangible assets purchased and
liabilities assumed or incurred based upon their fair value at the date of
acquisition. The excess of the purchase price over the fair value of the net
assets acquired amounted to $1,995,000 and has been recorded as goodwill which
is being amortized on a straight-line basis over 30 years.
The following proforma financial information presents the results of
operations of the continuing businesses of the Company with LexaLite and
Calnetics as though both acquisitions had been made as of September 1, 1996.
Proforma adjustments have been made to give the effect to the amortization of
goodwill and other intangibles, adjustments in depreciation and inventory value,
a reduction in redundant operating expense, interest expense related to
acquisition debt, the related tax effects and the effect upon basic and diluted
earnings per share of the additional shares of stock given in exchange for
LexaLite stock and of stock options issued in conjunction with the acquisitions.
The following proforma financial information does not include adjustments to
give effect to the Falcon acquisition as such adjustments would not be material.
1997 1998
For the years ended August 31, (unaudited) (unaudited)
--------------------------------------------------------------------------
Net sales $84,316,000 $91,422,000
Income from continuing operations 2,522,000 4,726,000
Net income 3,162,000 5,042,000
==========================================================================
Income per common share
Income from continuing operations
Basic $ .62 $1.13
Diluted $ .60 $1.05
Net income
Basic $ .78 $1.20
Diluted $ .75 $1.12
==========================================================================
Such pro-forma results are not necessarily indicative of what the actual
consolidated results of operations might have been if the acquisition had been
effective at the beginning of the periods presented or of the results which may
be achieved in the future.
F-18
40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO: The Board of Directors and Stockholders of Summa Industries:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Summa Industries and subsidiaries'
annual report to shareholders included in this Form 10-K, and have issued our
report dated October 6, 1998. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. The schedule listed in the index
of consolidated financial statements is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
--------------------------------
ARTHUR ANDERSEN LLP
Los Angeles, California
October 6, 1998
F-19
41
SUMMA INDUSTRIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the years ended August 31, 1998, 1997, 1996
Amounts
Balance at charged Balance
beginning (credited) Acquired Amounts at end of
of period to expense reserves written off period
- -------------------------------------------------------------------------------------------------------
1998 Allowance for doubtful accounts $195,000 $79,000 $385,000 $(39,000) $620,000
1997 Allowance for doubtful accounts 22,000 48,000 157,000 (32,000) 195,000
1996 Allowance for doubtful accounts 30,000 39,000 -- (47,000) 22,000
- -------------------------------------------------------------------------------------------------------
F-20
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, as amended, Summa has duly caused this Annual Report on Form 10-K for
the fiscal year ended August 31, 1998 to be signed on its behalf by the
undersigned, thereunto duly authorized, on October 23, 1998.
Summa Industries
By: /s/ James R. Swartwout
--------------------------------
James R. Swartwout
President
Pursuant to the requirements of the Securities Act of 1934, as amended,
this Annual Report on Form 10-K for the fiscal year ended August 31, 1998 has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ James R. Swartwout Chairman of the Board, President October 23, 1998
- ---------------------------- and Chief Financial Officer
James R. Swartwout (Principal Executive and Financial Officer)
/s/ Coalson C. Morris Director October 23, 1998
- ----------------------------
Coalson C. Morris
/s/ Michael L. Horst Director October 23, 1998
- ----------------------------
Michael L. Horst
/s/ William R. Zimmerman Director October 23, 1998
- ----------------------------
William R. Zimmerman
/s/ David McConaughy Director October 23, 1998
- ----------------------------
David McConaughy
/s/ Byron C. Roth Director October 23, 1998
- ----------------------------
Byron C. Roth
/s/ Josh T. Barnes Director October 23, 1998
- ----------------------------
Josh T. Barnes
/s/ Paul A. Walbrun Vice President & Controller October 23, 1998
- ---------------------------- (Principal Accounting Officer)
Paul A. Walbrun
F-21
43
EXHIBIT INDEX
Exhibit Sequentially
Number Document Numbered Page
------- -------- -------------
2.1 Agreement and Plan of Reorganization dated March 19, 1993 by
and between the Company and KVP Systems, Inc. relating to the
acquisition by the Company of KVP(1)
2.2 Agreement and Plan of Merger dated November 22, 1996 by and
among the Company, LexaLite International Corporation and
Charlevoix The Beautiful, Inc. relating to the acquisition by
the Company of LexaLite(2)
2.3 Agreement and Plan of Acquisition dated July 2, 1997 by and
between the Company and Calnetics Corporation relating to the
acquisition by the Company of Calnetics and its subsidiaries(3)
2.4 Stock Purchase Agreement and Amendment No. 1 thereto dated
April 8, 1998 and April 24, 1998, respectively, by and among
Mr. William G. Faulkner, KVP Systems, Inc. and the Company
relating to the acquisition by the Company of Falcon Belting,
Inc.(4)
2.5 Stock Purchase Agreement dated June 12, 1998 by and between P&L
Growth Industries, Inc., a California corporation, and the
Company relating to the divestiture by the Company of GST
Industries, Inc.(4)
3.1 Certificate of Incorporation of the Company(5)
3.2 Bylaws of the Company(5)
10.1 Loan Agreement dated October 21, 1997 between Summa and
Comerica Bank-California providing for $34 million credit
facility(6)
10.2 Subordinated Convertible Promissory Note, Security Agreement
and Guaranty dated June 26, 1998 by and among P&L Growth
Industries, Inc., GST Industries, Inc. and the Company relating
to the divestiture by the Company of GST Industries, Inc.(4)
10.3 Lease dated November 22, 1989 by and between Manchester
Plastics Co., Inc. and Tom and Arlene Schneider and Amendment
thereto dated December 5, 1989 for premises located in
Chatsworth, California(7)
10.4 1991 Stock Option Plan of the Company(8)
10.5 1995 Stock Option Plan of the Company(9)
10.6 Employment Agreement dated March 1994 between the Company and
James R. Swartwout(*)
10.7 Amendment No. 1 to Employment Agreement between the Company and
James R. Swartwout dated January 1, 1998(*)
10.8 Change in Control Agreement dated January 26, 1997 between
Calnetics Corporation and Trygve M. Thoresen (10)
21 Subsidiaries of the Registrant(*)
23 Consent of Arthur Andersen LLP(*)
27 Financial Data Schedule(*)
- -----------------------
(1) Incorporated by reference from the exhibits to the Company's Registration
Statement on Form S-4 filed with the Commission on May 24, 1993.
(2) Incorporated by reference from the appendices to the Company's definitive
Proxy Statement on Schedule 14A for the Annual Meeting of Shareholders held
November 21, 1996.
(3) Incorporated by reference from the appendices to the Calnetics' definitive
Proxy Statement on Schedule 14A for the Special Meeting of Shareholders
held October 28, 1997.
(4) Incorporated by reference from exhibits to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended May 31, 1998.
(5) Incorporated by reference from the appendices to the Company's definitive
Proxy Statement on Schedule 14A for the Annual Meeting of Shareholders held
January 26, 1998.
(6) Incorporated by reference from exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended August 31, 1997.
(7) Incorporated by reference from exhibits to the Calnetics' Annual Report on
Form 10-K for the fiscal year ended June 30, 1991.
(8) Incorporated by reference from exhibits to the Company's Registration
Statement on Form S-8 filed with the Commission on April 15, 1993.
(9) Incorporated by reference from exhibits to the Company's Registration
Statement on Form S-8 filed with the Commission on January 30, 1997.
(10) Incorporated by reference from exhibits to the Calnetics' Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 1997.
- ----------------
* Filed herewith.