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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, 1999
[ ] 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
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
---- ----
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, 1999, based upon the closing price of a share of the Common
Stock on The Nasdaq National Market on that date, was $41,467,633. The number of
shares of registrant's Common Stock outstanding as of October 15, 1999 was
4,323,687.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's Proxy Statement
for the Annual Meeting of Stockholders to be held on December 13, 1999 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.
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 1998. Since 1946, 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; molded plastic coil forms
("bobbins") for use in transformers, motors, relays and switches; extruded
plastic sheet with smooth or textured surfaces in various colors and sizes for
diverse industrial applications; 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.
HISTORY OF RECENT ACQUISITIONS -- CONTINUING OPERATIONS
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.
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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, 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 $1,870,000 and was recorded as goodwill which is
being amortized on a straight-line basis over 30 years.
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.
PLASTRON INDUSTRIES, INC. In March 1999, Summa acquired substantially all of the
assets of Plastron Industries, L.P. ("Plastron"). The aggregate purchase price
paid for Plastron consisted of $19,525,000 in cash; a four-year warrant
exercisable to purchase up to 200,000 shares of the Company's common stock at
$11.75 per share valued at $278,000; investment banking fees consisting of a
$125,000 cash payment and stock options, valued at $32,000; and the assumption
of certain liabilities, principally trade payables and accrued obligations of
$2,220,000. The transaction 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 values of the net assets acquired amounted to
$13,781,000 and has been recorded as goodwill which is being amortized on a
straight line basis over 35 years.
3
BROADVIEW INJECTION MOLDING, INC. In September 1999, Summa acquired
substantially all of the assets of Broadview Injection Molding Co., Inc.
("Broadview"). The aggregate purchase price paid for Broadview consisted of
$1,640,000 in cash and obligations to make future payments to the former owners
of Broadview in the amount of $100,000 plus working capital at closing. The
transaction 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. No goodwill was recorded in this
transaction.
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 twelve months of the
closing can reasonably be expected. For a history of recent divestitures, see
Note 15 in the "Notes to Consolidated Financial Statements" of the Company in
this Annual Report on Form 10-K.
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. 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 continue 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 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.
4
SEGMENTS; PRODUCTS
Summa manufactures diverse plastic products in two segments:
ENGINEERED POLYMER COMPONENTS
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 specially compounded lighting 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.
IRRIGATION COMPONENTS. Summa's irrigation components include injection-molded
fittings, valves, filters and accessories 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.
WINDING CORES. Summa's winding cores are thermoplastic and thermoset coil forms
or "bobbins" used in the manufacture of magnetic devices including transformers,
relays, switches, power supplies and small electro motors. These devices are
utilized in controls, appliances, vehicles, telecommunications equipment and
many other applications.
In addition, the Company molds components for electronic products and
miscellaneous parts for diverse industrial and commercial markets.
EXTRUDED PLASTIC PRODUCTS
SHEET. Summa extrudes plastic sheet with smooth or textured surfaces in various
colors and sizes for diverse industrial applications.
TUBING. Summa extrudes plastic tubing for use in irrigation and industrial
applications.
For financial information by segment, see Note 13 in the "Notes to Consolidated
Financial Statements" of the Company in this Annual Report on Form 10-K.
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
INJECTION MOLDING. Summa's principal manufacturing operation is injection
molding of plastic parts. Some products are molded by third-party vendors.
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, using a wide variety of plastic resins. Ancillary equipment and special
operations include automatic resin feed systems, insert molding, robotics,
painting, vacuum deposition coating with reflective metallic films, assembly,
packaging and
5
warehousing.
EXTRUSION. Summa extrudes plastic sheet and tubing products. The Company's sheet
products are made of polycarbonate, acrylic and polystyrene, while the tubing is
extruded from polyethylene and polyvinylchloride (PVC).
In addition to injection molding and extrusion, Summa performs additional
production operations including machining and welding of plastic parts, coating,
assembly and testing. Summa operates on a just-in-time basis with many of its
customers, and inventories are managed to minimal levels. Three of Summa's
manufacturing plants are ISO 9002 registered.
MARKETING AND DISTRIBUTION
Summa manufactures plastic products 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 8.1%, 5.4% and 4.6% of sales in
fiscal 1999. 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 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, Dupont, 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 1999. Although
prices were relatively stable during fiscal 1998, during fiscal 1999 there have
been several increases in prices for certain types of resin.
BACKLOG AND SEASONALITY
On August 31, 1999, Summa's continuing businesses had a backlog of orders,
believed to be firm, in the amount of $9,338,000, as compared to a backlog of
$7,198,000 from continuing businesses as of August 31, 1998. The increase is
primarily attributable to acquisitions. See "Business -- History of Recent
Acquisitions -- Continuing Operations" above. The open order backlog is
comprised of orders for components, spare parts and tooling, with scheduled
deliveries from September 1999 through fiscal 2001. 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 acquisitions, the Company would
expect sales, as a percentage of fiscal year's sales, to occur approximately as
follows:
Quarter Percent of Sales
------- ----------------
1st quarter....................... 24%
2nd quarter....................... 24%
3rd quarter....................... 26%
6
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, 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 2016. 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. At August 31, 1999, Summa had 47 effective patents
and 8 patent applications pending. The Company does not capitalize expenses
related to product development and patent applications. Summa also 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, Illinois, 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 detected in the subsurface of the property and that the
current owner has been requested by a state agency to undertake additional
investigation at the property. The Company is also aware that the property has
been subject to a general notice letter issued by the United States
Environmental Protection Agency under the federal Superfund law. The Company, as
the successor to one of several prior tenants of the property, may be held
responsible for the contamination at the site regardless of whether its
subsidiary caused the
7
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 the Company 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, 1999, Summa had 762 employees, including four employees who
comprise the Company's corporate staff. None of Summa's employees is covered by
a collective bargaining agreement. The Company considers its relationship with
its employees to be good.
EXPORT SALES
For information regarding Summa's foreign and domestic operations and 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.
8
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
ENGINEERED POLYMER COMPONENTS:
Charlevoix, Michigan 94,000 Injection Molding Owned
Charlevoix, Michigan 27,500 R&D Owned
Dickson, Tennessee 55,000 Injection Molding Owned
Ontario, California 30,000 Warehouse, Assembly Owned
Ontario, California 25,000 Warehouse December 1999
Rancho Cordova, California 48,000 Warehouse, Assembly February 2001
Corona, California 53,000 Injection Molding May 2004
Visalia, California 4,500 Warehouse, Assembly December 1999
Oklahoma City, Oklahoma 22,000 Warehouse, Assembly May 2003
Bensenville, Illinois 76,500 Injection Molding, Assembly Owned
Broadview, Illinois 24,000 Injection Molding Owned
EXTRUDED PLASTIC PRODUCTS:
Ontario, California 72,000 Extrusion, Warehouse August 2009
Ontario, California 20,000 Extrusion, Assembly Owned
Winter Haven, Florida 28,000 Extrusion, Assembly Owned
In addition, the Company owns 63,000 square feet of factory and office space in
Fullerton, California, and 15,000 square feet of office and warehouse space in
Charlevoix, Michigan, which are leased to unrelated parties. The Fullerton lease
expires in July 2006 and the Charlevoix leases expires in November 2000.
ITEM 3. LEGAL PROCEEDINGS.
The Company encounters lawsuits from time to time in the ordinary course of
business and, at August 31, 1999, 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.
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, 1999 to a vote of Summa's stockholders, through solicitation of
proxies or otherwise.
9
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." During the year ended August 31, 1999, the average weekly trading volume
was approximately 74,000 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 for the periods indicated.
QUARTER ENDED
11/30/97 2/28/98 5/31/98 8/31/98 11/30/98 2/28/99 5/31/99 8/31/99
-------- ------- ------- ------- -------- ------- ------- -------
HIGH $10.50 $13.13 $15.00 $12.50 $11.50 $10.50 $12.25 $16.63
LOW $6.13 $9.00 $11.25 $7.00 $7.00 $8.25 $8.75 $10.94
On October 15, 1999, the closing price on The Nasdaq National Market for a share
of Summa Common Stock was $12.12.
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, 1999, 4,313,481 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, 1999 was 453. In addition, Summa estimates that there are 1,800
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.
WARRANTS. As of August 31, 1999, there were warrants outstanding exercisable to
purchase up to 200,000 shares
10
of the Company's Common Stock at a price of $11.75 per share. The warrants were
issued as partial consideration in the Company's acquisition of Plastron on
March 5, 1999. Unless exercised, the warrants expire on March 5, 2003. The
warrants possess certain rights, including demand and piggyback registration
rights and the right to exercise via a cashless or net exercise under certain
circumstances.
ANTI-TAKEOVER DEVICES. In addition to the ability to issue Preferred Stock,
Summa's Certificate of Incorporation and Bylaws specifically prohibit cumulative
voting and the right of stockholders to call a special stockholders meeting,
provide for the classification of the Board of Directors into three classes with
one class elected annually, require a two-thirds supermajority stockholder vote
to amend certain provisions of the Certificate of Incorporation and Bylaws, and
include 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. Further, neither the Company's Certificate of
Incorporation and Bylaws nor Delaware law prohibit the Company from adopting a
stockholders' rights plan, or poison pill.
SHARES ISSUABLE UPON EXERCISE OF OPTIONS
As of August 31, 1999, 1,328,715 shares of Summa common stock are 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. 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.
RECENT ISSUANCE
On March 31, 1999, following consummation of the acquisition of assets of
Plastron, the Company sold 24,267 restricted shares of the Company's common
stock to certain management employees of Plastron, at the then current market
price, for a total consideration of $231,800, and granted non-qualified stock
options to certain Plastron employees, at the then current market price. The
options will vest based on the percentage obtained by dividing the cumulative
net income of Plastron after March 5, 1999 by $3.0 million, or fully in nine
years. The shares were issued without registration pursuant to the exemption
from registration provided in Rule 505 of the Securities Act rules and
regulations promulgated by the Securities and Exchange Commission.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below for the three years ended August 31,
1997, 1998 and 1999 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, 1995 and 1996 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.
11
AT AND FOR THE FISCAL YEARS ENDED AUGUST 31,
1995 1996 1997 1998 1999
------------------ ------------------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF INCOME DATA:
Net sales ................................................... $ 6,567 $ 8,124 $ 39,093 $ 85,704 $106,723
Costs and expenses:
Cost of sales ............................................ 3,474 4,339 27,097 59,197 73,947
Selling, general, administrative, other .................. 2,487 3,174 9,021 17,127 19,898
Interest, net ............................................ -- (15) 275 1,607 2,280
-------- -------- -------- -------- --------
Total costs and expenses of continuing operations ........... 5,961 7,498 36,393 77,931 96,125
-------- -------- -------- -------- --------
Income from continuing operations before provision for taxes 606 626 2,700 7,773 10,598
Provision for income taxes .................................. 217 253 1,088 3,215 4,043
-------- -------- -------- -------- --------
Income from continuing operations ........................... 389 373 1,612 4,558 6,555
Income from discontinued operations, net of income tax effect 259 195 640 316 --
-------- -------- -------- -------- --------
Net income .................................................. $ 648 $ 568 $ 2,252 $ 4,874 $ 6,555
======== ======== ======== ======== ========
Earnings per common share:
Basic
Continuing operations ............................ $ 0.25 $ 0.24 $ 0.47 $ 1.09 $ 1.53
Discontinued operations ......................... 0.17 0.12 0.18 0.07 --
Net income ...................................... $ 0.42 $ 0.36 $ 0.65 $ 1.16 $ 1.53
======== ======== ======== ======== ========
Diluted
Continuing operations ........................... $ 0.25 $ 0.23 $ 0.46 $ 1.03 $ 1.46
Discontinued operations ......................... 0.17 0.12 0.18 0.07 --
Net income ...................................... $ 0.42 $ 0.35 $ 0.64 $ 1.10 $ 1.46
======== ======== ======== ======== ========
Weighted average number of shares
Basic ............................................... 1,538 1,565 3,450 4,199 4,278
Diluted ............................................. 1,553 1,603 3,521 4,420 4,488
BALANCE SHEET DATA:
Assets ...................................................... $ 10,756 $ 10,963 $ 35,651 $ 63,983 $ 87,654
Working capital ............................................. 1,090 2,423 7,209 10,854 10,326
Long-term debt .............................................. 400 300 5,571 18,675 27,987
Stockholders' equity ........................................ $ 7,930 $ 8,644 $ 20,965 $ 28,118 $ 35,373
Common shares outstanding ................................... 1,542 1,603 4,099 4,257 4,313
12
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 manufactures diverse plastic products in two segments: Engineered Polymer
Components and Extruded Plastic Products. See "Business -- Segments; Products"
above. Summa designs and manufactures injection-molded plastic optical
components for OEM customers in the lighting industry; modular plastic conveyor
belt and chain for the food processing industry; engineered plastic fittings,
valves, filters and tubing for the agricultural irrigation industry; molded
plastic coil forms ("bobbins") for use in transformers, motors, relays and
switches; extruded plastic sheet with smooth or textured surfaces in various
colors and sizes for diverse industrial applications, and other molded and
extruded plastic components for diverse industries. See "Business -- Segments;
Products" above, "Results of Continuing Operations - Segment Information" below,
and Note 13 in the "Notes to Consolidated Financial Statements" of the Company
in this Annual Report on Form 10-K.
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 -- Continuing Operations" 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, materials, 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
internationally, the introduction of new products by Summa or its competitors,
the need to make material capital expenditures, the timing of the Summa's
advertising and promotional campaigns, and other factors.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth certain information derived from Summa's
consolidated statements of income from continuing operations as a percentage of
sales for the three years ended August 31, 1999, as well as the Company's
effective income tax rate for each period presented. For a description of
acquisitions during the periods presented, see "Business--History of Recent
Acquisitions -- Continuing Operations" above.
13
Fiscal Years Ended August 31
----------------------------
1997 1998 1999
---- ---- ----
Net sales .................................. 100.0% 100.0% 100.0%
Cost of sales .............................. 69.3 69.1 69.3
----- ----- -----
Gross profit ............................... 30.7 30.9 30.7
S,G, & A and other expense ................. 23.1 20.0 18.6
----- ----- -----
Operating income from continuing operations 7.6 10.9 12.1
Interest expense, net ...................... 0.7 1.8 2.2
----- ----- -----
Income from continuing operations before tax 6.9 9.1 9.9
Provision for income taxes ................. 2.8 3.8 3.8
----- ----- -----
Income from continuing operations .......... 4.1% 5.3% 6.1%
===== ===== =====
Effective tax rate ......................... 40.3% 41.4% 38.1%
NET SALES. 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 -- Continuing Operations" above.
Comparative trailing twelve months' sales from continuing businesses grew 8% in
the Engineered Polymer Components segment, 1% in the Extruded Plastic Product's
segment, and 6% on a consolidated basis, in fiscal 1998.
For the year ended August 31, 1999, net sales from continuing operations
increased by $21,019,000, or 25%, over the prior fiscal year, due primarily to
the inclusion of sales of newly acquired operations. See "Business -- History of
Recent Acquisitions -- Continuing Operations" above. Comparative trailing twelve
months' sales from continuing businesses grew at 5% in the Engineered Polymer
Components segment, declined 5% in the Extruded Plastic Products segment, and
grew at 3% on a consolidated basis in fiscal 1999. The decline in sales in the
Extruded Plastic Products segment is not apparent from footnote 13 in the "Notes
to Consolidated Financial Statements", as the extrusion operations were acquired
during fiscal 1998 and results were included for ten months thereof. The decline
was attributable to management turnover at a sheet extrusion plant and
preparations for the relocation of that plant, which is expected to be completed
in the first quarter of fiscal 2000.
COST OF SALES. 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 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 -- Continuing Operations " and "Business -- Segments;
Products" above.
For the year ended August 31, 1999, cost of sales from continuing operations
increased by $14,750,000, or 25%, over the prior fiscal year, due primarily to
the inclusion of expenses of newly acquired operations, and increased sales
volume and related expenses. See "Business -- History of Recent Acquisitions --
Continuing Operations" above.
GROSS PROFIT. 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, which historically had
lower margins than those of Summa's other operations. See "Business -- History
of Recent Acquisitions -- Continuing Operations" and "Business -- Segments;
Products"
14
above.
For the year ended August 31, 1999, gross profit from continuing businesses
increased by $6,269,000 to $32,776,000, an increase of 24% 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. As a
percentage of sales, the gross profit margin decreased from 30.9% for the year
ended August 31, 1998 to 30.7% for the year ended August 31, 1999, due primarily
to the inclusion of newly acquired operations, which had historically lower
gross margins. See "Business -- History of Recent Acquisitions -- Continuing
Operations" above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expenses from continuing businesses for the year ended August 31, 1998 increased
by $8,106,000, or 90%, when compared to such expenses for the prior fiscal year,
due primarily to the inclusion of several newly acquired operations, and
continued growth in sales and expenses relating to certain of the Company's
products. As a percentage of sales, selling, general and administrative expenses
decreased from 23.1% to 20.0%, due mostly to the inclusion of several newly
acquired operations, which historically had lower operating expenses as a
percentage of sales. See "Business -- History of Recent Acquisitions --
Continuing Operations " and "Business -- Segments; Products" above.
For the year ended August 31, 1999, selling, general and administrative expenses
from continuing businesses increased by $2,771,000, or 16%, when compared to
such expenses for the prior fiscal year, due primarily to the inclusion of
several newly acquired operations, and continued growth in sales and expenses.
As a percentage of sales, selling, general and administrative expenses decreased
from 20.0% to 18.6%, due mostly to the inclusion of several newly acquired
operations, which historically had lower operating expenses as a percentage of
sales. See "Business --History of Recent Acquisitions -- Continuing Operations"
above.
INTEREST EXPENSE, NET. Interest expense increased from $275,000 for the fiscal
year ended August 31, 1997 and $1,607,000 for fiscal 1998 to $2,280,000 for
fiscal 1999. Interest expense relates primarily to interest on debt owed to the
Company's primary lenders pursuant to the borrowing arrangement described in the
"Liquidity and Capital Resources" section below. Most of the outstanding
borrowings under this arrangement were for acquisitions.
EFFECTIVE TAX RATE. The effective income tax rate, which is a composite of
federal and state income taxes, increased from 40.3% in the fiscal year ended
August 31, 1997 to 41.4% in the fiscal year ended August 31, 1998, due primarily
to non-deductible amortization of goodwill related to acquisitions offset by a
lower effective combined state income tax rate. For the fiscal year ended August
31, 1999, the effective tax rate decreased to 38.1%, due primarily to a lower
effective combined state income tax rate and increased foreign sales corporation
tax benefit.
INCOME FROM CONTINUING OPERATIONS. As a result of the above described changes,
income from continuing operations for fiscal 1998 increased by $2,946,000 to
$4,558,000, an increase of 183%, over fiscal 1997 and increased by $1,997,000 in
fiscal 1999 to $6,555,000, an increase of 44% over fiscal 1998.
INFLATION. Inflation did not have 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.
SEGMENT INFORMATION. The following tables set forth the relative contribution of
each segment to the sales and operating income of the entire Company and the
operating margins of each segment. This data was derived from Summa's
consolidated statements of income for the three years ended August 31, 1999.
15
RELATIVE CONTRIBUTION BY SEGMENT
1997 1998 1999
---- ---- ----
Net sales
Engineered polymer components..................... 100.0% 79.5% 81.3%
Extruded plastic products......................... -- 20.5 18.7
------- ------- -------
Consolidated...................................... 100.0% 100.0% 100.0%
Operating profit
Engineered polymer components..................... 136.3% 103.8% 101.1%
Extruded plastic products......................... -- 11.2 9.2
All other......................................... (36.3) (15.0) (10.3)
------ ------ ------
Consolidated...................................... 100.0% 100.0% 100.0%
OPERATING MARGIN BY SEGMENT
1997 1998 1999
---- ---- ----
Engineered polymer components..................... 10.4% 14.3% 15.0%
Extruded plastic products......................... -- 6.0% 5.9%
Consolidated...................................... 7.6% 10.9% 12.1%
From the foregoing discussion and above tables, it is apparent that the
Engineered Polymer Component segment comprises approximately 80% of the
Company's sales and approximately 90% of the Company's operating profit, and is
growing faster than the Extruded Plastic Products segment, a trend which is
expected to continue for the operations which currently comprise the Company.
See also, Note 13 in the "Notes to Consolidated Financial Statements" of the
Company in this Annual Report on Form 10-K.
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,
1999, net cash provided by operating activities was $3,597,000 in 1997,
$8,441,000 in 1998 and $11,788,000 in 1999. The improved cash flows for the last
three fiscal years are primarily due to inclusion of newly acquired operations
and increasing profitability.
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. Cash used for certain
investing activities for the three fiscal years ended August 31, 1999 is
summarized in the following table:
16
Fiscal Years Ended August 31,
-----------------------------
1997 1998 1999
---- ---- ----
Financing of acquisitions of businesses .......... $ -- $23,322,000 $19,650,000
Investment in capital improvements ............... $ 1,626,000 $ 3,033,000 $ 4,153,000
Capital investment as a % of depreciation ....... 80.1% 94.2% 104.1%
Increased levels of investment are a result of higher new product tooling
activity, manufacturing equipment upgrades and new computer systems. Although
Summa expects to continue making substantial investments in tooling for new
products, at August 31, 1999, 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 information relating to
acquisitions, see "Business -- History of Certain Acquisitions -- Continuing
Operations" above.
WORKING CAPITAL; ASSET UTILIZATION. At fiscal year end August 31, working
capital was $7,209,000 in 1997, $10,854,000 in 1998 and $10,326,000 in 1999,
representing an increase in working capital of 51% from 1997 to 1998 and a
decrease of 5% from 1998 to 1999. The increase in working capital in fiscal 1998
was primarily due to the inclusion of several additional newly acquired
operations. Working capital decreased in 1999 in spite of increases in accounts
receivable and inventory associated with acquisitions, due to the increase in
the current portion of long-term debt of $3.1 million.
Asset utilization for the three fiscal years ended August 31, 1999 is
illustrated in the following table:
Fiscal Years Ended August 31,
-----------------------------
1997 1998 1999
---- ---- ----
Average working capital turnover..................... 8.1 times 9.5 times 10.0 times
Average accounts receivable turnover................. 10.2 times 8.8 times 7.4 times
Average inventory turnover........................... 12.4 times 9.6 times 7.0 times
The downward trend in turnover of accounts receivable and inventory is not a
result of changes in operations. It is a result of the blending of newly
acquired businesses and, particularly in 1999, the timing of acquisitions during
the year.
FINANCING ARRANGEMENTS. Summa has several debt relationships in place as
described below. Substantially all of the Company's assets are pledged to secure
debt. The term debt and revolving line of credit require compliance with various
bank covenants.
17
Summary of the Company's debt at August 31, 1999:
Weighed Average Additional
Description of Debt Balance Interest Rate Availability Due
------------------- ------- ------------- ------------ ---
Bank line of credit.............................. $8,016,000 7.6% $8,814,000 2001
Bank term loans.................................. $19,017,000 7.7% -- 2000-2004
Industrial revenue bonds and other............... $6,748,000 6.5% -- 2000-2021
----------- ----
Total debt....................................... $33,781,000 7.5%
============ ====
Interest rates on bank debt, which are based on Libor and subject to market
fluctuation, are subject to reduction as the Company achieves certain financial
milestones. See also Note 8 in the "Notes to Consolidated Financial Statements"
of the Company in this Annual Report on Form 10-K.
The Company announced a stock buy-back program September 28, 1998, under which
it was authorized to purchase its common stock in an aggregate amount of up to
$2,000,000. During fiscal 1999, the Company repurchased and retired 18,000
shares of its common stock in block trades, at an average price of $8.48 per
share. Additionally, the Company acquired and retired 10,046 shares of its stock
at $12.57 per share and 2,084 shares at $14.06 directly from certain former
employees who received distributions from the Summa Industries Employee Stock
Ownership Plan upon their retirement.
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. 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 4,313,481
shares were outstanding at August 31, 1999 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 or enter into new or revised
borrowing arrangements 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 has analyzed substantially all of its operations to determine Year
2000 status and is currently implementing the procedures necessary to ensure
timely Year 2000 compliance. The Company has also identified and contacted its
key customers, vendors and suppliers to request confirmation of timely external
Year 2000 compliance. Although such survey is not yet complete, to date there
are no indications that key customers, vendors or suppliers will be materially
affected by Year 2000 related problems.
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 has purchased and installed 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 has identified
such property to determine Year 2000 compliance. Where necessary, such items are
either being repaired or replaced. To date, costs of such repairs and
replacements have not been material.
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
18
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. 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.
The Company's market risk relates to interest rate exposure on long-term
borrowings. The Company does not use financial instruments for trading or other
speculative purposes. Excess cash is primarily used to pay down the revolving
line of credit and bank term loans. Borrowings against the revolving line of
credit and bank term loans are at variable interest rates. All other borrowings
are at fixed rates.
At August 31, 1999, the Company had $27,033,000 outstanding against the
revolving line of credit and bank term loans at variable rates ranging from 7.6
percent to 7.7 percent. Management believes that a hypothetical adverse movement
in the interest rates of ten percent of such recent rates would not have a
material effect on the Company's consolidated financial position, results of
operations, or cash flows.
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.
19
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.
20
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, 1998 and 1999 and for each of the three years ended
August 31, 1999 (including the notes thereto which contain unaudited quarterly
financial data for the two-year period ended August 31, 1999), 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)
2.6 Asset Purchase Agreement dated February 17, 1999 among Plastron
Industries, Inc., Plastron Industries L.P., the Company and
Plastron Management, Inc. relating to the acquisition of Plastron
by the Company(5)
2.7 Asset Purchase Agreement dated August 18, 1999 among Broadview
Injection Molding, Inc., Broadview Injection Molding Co., Inc.,
the Cervenka and Hetzel Joint Venture, Marvin E. Hetzel and Joseph
J. Cervenka relating to the acquisition of Broadview by the
Company (*)
3.1 Certificate of Incorporation of the Company(6)
3.2 Bylaws of the Company(6)
4.1 Warrant dated March 5, 1999 issued by the Company to Plastron
Industries, L.P., providing for the issuance from time to time of
up to 200,000 shares of the Company's common stock at an exercise
price of $11.75 per share, including registration rights(5)
10.1 Amended and Restated Loan Agreement dated March 5, 1999 between
the Company and a group of lenders(5)
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 1991 Stock Option Plan of the Company(7)
10.4 1995 Stock Option Plan of the Company(8)
10.5 1999 Stock Option Plan of the Company(9)
21
10.6 Employment Agreement dated March 1994 between the Company and
James R. Swartwout (10)
10.7 Amendment No. 1 to Employment Agreement between the Company and
James R. Swartwout dated January 1, 1998(10)
10.8 Change in Control Agreement dated January 26, 1997 between
Calnetics Corporation and Trygve M. Thoresen (11)
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 exhibits to the Company's Current
Report on Form 8-K dated March 5, 1999.
(6) 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 Company's Registration
Statement on Form S-8 filed with the Commission on April 15, 1993.
(8) Incorporated by reference from exhibits to the Company's Registration
Statement on Form S-8 filed with the Commission on January 30, 1997.
(9) Incorporated by reference from exhibits to the Company's Registration
Statement on Form S-8 filed with the Commission on December 15, 1998.
(10) Incorporated by reference from exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 1998.
(11) 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, 1999:
None.
22
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants..........................................................................F-1
Consolidated Balance Sheets as of August 31, 1998 and 1999........................................................F-2
Consolidated Statements of Income for each of the three years ended August 31, 1997, 1998, 1999...................F-3
Consolidated Statements of Stockholders' Equity for each of the three years ended
August 31, 1997, 1998 and 1999...............................................................................F-4
Consolidated Statements of Cash Flows for each of the three years ended August 31, 1997, 1998,1999................F-5
Notes to Consolidated Financial Statements........................................................................F-6
Report of Independent Public Accountants........................................................................F-20
Schedule II - Valuation and Qualifying Accounts..................................................................F-21
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, 1998 and 1999 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended August 31, 1999. 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, 1998 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1999, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
October 6, 1999
F-1
SUMMA INDUSTRIES
CONSOLIDATED BALANCE SHEETS AT AUGUST 31
- ------------------------------------------------------------------------------------ --------------------- ----------------
ASSETS 1998 1999
- ------------------------------------------------------------------------------------ --------------------- ----------------
Current assets:
Cash and cash equivalents $293,000 $1,148,000
Accounts receivable, net of allowances of $620,000 in 1998 and $626,000 in 1999 12,975,000 16,075,000
Inventories 9,392,000 11,714,000
Prepaid expenses and other 777,000 597,000
Deferred tax asset 662,000 --
Prepaid income tax -- 686,000
- ------------------------------------------------------------------------------------ --------------------- ----------------
Total current assets 24,099,000 30,220,000
- ------------------------------------------------------------------------------------ --------------------- ----------------
Property, plant and equipment, at cost:
Land 2,080,000 2,870,000
Building and leasehold improvements 9,371,000 11,617,000
Machinery and equipment 15,226,000 20,577,000
Office furniture and equipment 1,119,000 1,755,000
- ------------------------------------------------------------------------------------ --------------------- ----------------
Total property, plant and equipment, at cost 27,796,000 36,819,000
Less: accumulated depreciation and amortization 7,132,000 11,098,000
- ------------------------------------------------------------------------------------ --------------------- ----------------
Net property, plant and equipment 20,664,000 25,721,000
- ------------------------------------------------------------------------------------ --------------------- ----------------
Other assets
Goodwill and other intangibles, net 1,006,000 585,000
18,214,000 31,128,000
- ------------------------------------------------------------------------------------ --------------------- ----------------
Total assets $63,983,000 $87,654,000
==================================================================================== ===================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------ --------------------- ----------------
Current liabilities:
Current maturities of long-term debt $2,667,000 $5,794,000
Accounts payable 5,299,000 7,054,000
Accrued salaries, wages and benefits 2,418,000 3,359,000
Other accrued liabilities 2,861,000 3,687,000
- ------------------------------------------------------------------------------------ --------------------- ----------------
Total current liabilities 13,245,000 19,894,000
Long-term debt, net of current maturities 18,675,000 27,987,000
Deferred tax liability -- 493,000
Other long-term liabilities 3,945,000 3,907,000
- ------------------------------------------------------------------------------------ --------------------- ----------------
Total liabilities 35,865,000 52,281,000
- ------------------------------------------------------------------------------------ --------------------- ----------------
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:
4,257,307 at August 31, 1998 and 4,313,481 at August 31, 1999 18,505,000 19,205,000
Retained earnings 9,613,000 16,168,000
- ------------------------------------------------------------------------------------ --------------------- ----------------
Total stockholders' equity 28,118,000 35,373,000
- ------------------------------------------------------------------------------------ --------------------- ----------------
Total liabilities and stockholders' equity $63,983,000 $87,654,000
==================================================================================== ===================== ================
See accompanying notes to consolidated financial statements.
F-2
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED AUGUST 31
1997 1998 1999
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $39,093,000 $85,704,000 $106,723,000
Cost of sales 27,097,000 59,197,000 73,947,000
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 11,996,000 26,507,000 32,776,000
Selling, general, administrative and other expenses 9,021,000 17,127,000 19,898,000
- ---------------------------------------------------------------------------------------------------------------------------
Operating income from continuing operations 2,975,000 9,380,000 12,878,000
Interest expense, net 275,000 1,607,000 2,280,000
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
provision for taxes 2,700,000 7,773,000 10,598,000
Provision for income taxes 1,088,000 3,215,000 4,043,000
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 1,612,000 4,558,000 6,555,000
Income from discontinued operations, net of the
effect of income tax of $426,000 in 1997 and
$210,000 in 1998 640,000 316,000 --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $2,252,000 $4,874,000 $6,555,000
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per common share
- ---------------------------------------------------------------------------------------------------------------------------
Basic
Continuing operations $.47 $1.09 $1.53
Discontinued operations $.18 $ .07 $ --
Net income $.65 $1.16 $1.53
- ---------------------------------------------------------------------------------------------------------------------------
Diluted
Continuing operations $.46 $1.03 $1.46
Discontinued operations $.18 $ .07 $ --
Net income $.64 $1.10 $1.46
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding
Basic 3,450,000 4,199,000 4,278,000
Diluted 3,521,000 4,420,000 4,488,000
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Common Common Retained
Shares Stock Earnings Total
- ---------------------------------------------------------------------------------------------------------------------------
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
Cashout of odd lots (4) -- -- --
Exercise of options 62,041 465,000 -- 465,000
Repurchase of stock (30,130) (306,000) -- (306,000)
Value of options and warrants issued in
connection with acquisition of Plastron -- 310,000 -- 310,000
Sale of stock 24,267 231,000 -- 231,000
Net Income 6,555,000 6,555,000
- ---------------------------------------------------------------------------------------------------------------------------
Balance at August 31, 1999 4,313,481 $19,205,000 $16,168,000 $35,373,000
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31
1997 1998 1999
- ---------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $2,252,000 $4,874,000 $6,555,000
- ---------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 2,029,000 3,221,000 3,989,000
Amortization 96,000 452,000 742,000
Change in net deferred income taxes 138,000 26,000 1,574,000
(Gain) loss on disposition of equipment -- 30,000 (17,000)
Net change in assets and liabilities, net of effects of
acquisitions:
Accounts receivable 258,000 (488,000) (1,042,000)
Inventories 101,000 (389,000) (1,002,000)
Prepaid expenses and other assets (275,000) 75,000 (325,000)
Accounts payable (385,000) 443,000 163,000
Accrued liabilities (617,000) 197,000 1,151,000
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustments 1,345,000 3,567,000 5,233,000
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,597,000 8,441,000 11,788,000
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Investing activities:
Acquisitions of businesses -- (23,322,000) (19,650,000)
Capital expenditures:
Purchases of property and equipment (1,626,000) (3,033,000) (4,153,000)
Cash paid for patents (13,000) -- --
Sales of subsidiaries, net of fees and of cash held -- 1,185,000 --
Net proceeds from the sale of equipment 16,000 86,000 23,000
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 (539,000) (22,942,000) (23,780,000)
- ---------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net proceeds from (payments on) line of credit (275,000) 2,734,000 5,282,000
Proceeds from issuance of long term debt -- 13,994,000 13,997,000
Payments on long term debt (1,012,000) (5,751,000) (6,715,000)
Proceeds from the exercise of stock options 227,000 934,000 358,000
Proceeds from sale of common stock -- -- 231,000
Purchase of common stock -- -- (306,000)
Cash received in the acquisition of business, net of cash paid 318,000 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (742,000) 11,911,000 12,847,000
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,316,000 (2,590,000) 855,000
Cash and cash equivalents, beginning of year 567,000 2,883,000 293,000
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the year $2,883,000 $293,000 $1,148,000
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
Summa Industries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended August 31, 1999
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Summa Industries, a Delaware corporation ("Summa" or the "Company"), develops
and manufactures proprietary plastic products for diverse industrial and
commercial markets, primarily located in the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Summa and its
wholly-owned subsidiaries. The results of operations of acquired companies have
been included in the consolidated statements of income and cash flows of the
Company since the dates of acquisitions. See Note 16. All intercompany account
balances and transactions have been eliminated in consolidation. Certain
reclassifications of 1997 and 1998 amounts have been made to conform to 1999
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
LONG-LIVED ASSETS
The Company has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of". This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. The carrying value of existing assets are reviewed when events
or changes in circumstances indicate that an impairment test is necessary in
order to determine if an impairment has occurred. No impairment occurred during
fiscal 1999.
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 to
employees and directors in accordance with Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock issued to Employees." The Company has
adopted the appropriate disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation" (see Note 11).
RECENT ACCOUNTING PRONOUNCEMENTS
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. The Company adopted this standard for the 1999 fiscal year.
There are no adjustments to net income required in order to derive comprehensive
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 was adopted
by the Company for the 1999 fiscal year. The adoption had no effect on reported
income (see Note 13).
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. 137,
"Deferral of the Effective Date of FASB Statement No. 133," requires SFAS No.
133 to be adopted for all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company has not yet adopted SFAS No. 133, but if it had been
adopted, there would not have been any effect on reported income because the
Company had not entered into any derivative or hedging financial contracts.
F-7
2. DILUTED EARNINGS PER SHARE
For the year ended August 31, 1997 1998 1999
---- ---- ----
Income from continuing operations ............................................. $1,612,000 $4,558,000 $6,555,000
Net income .................................................................... $2,252,000 $4,874,000 $6,555,000
Weighted average shares outstanding during the period-basic ................... 3,450,000 4,199,000 4,278,000
Effect of dilutive securities:
Impact of common shares to be issued under stock option
plans ................................................................ 71,000 221,000 204,000
Impact of common shares to be issued with respect to
warrants ............................................................. -- -- 6,000
---------- ---------- ----------
Weighted average shares outstanding-diluted (1) (2) ........................... 3,521,000 4,420,000 4,488,000
========== ========== ==========
- ----------------------------------
(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 209,624 common shares in 1997, 166,328 common shares in
1998, and 16,500 common shares in 1999 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:
1997 1998 1999
---- ---- ----
Interest.............................. $395,000 $1,986,000 $1,892,000
Income taxes.......................... $1,414,000 $3,478,000 $3,064,000
Non-cash investing and financing activities:
1997 1998 1999
---- ---- ----
Common stock issued for acquisition (Note 16): $9,842,000 $ -- $ --
========== ==== ====
Details of acquisitions (Note 16):
Fair value of assets acquired............................... $23,943,000 $36,917,000 $22,180,000
Liabilities assumed or incurred ............................ (13,906,000) (10,844,000) (2,220,000)
Common stock and value of options and
warrants issued.......................................... (9,842,000) (1,345,000) (310,000)
----------- ----------- ---------
Cash paid........................................................ 195,000 24,728,000 19,650,000
Less cash acquired............................................... (513,000) (1,406,000) --
--------- ----------- ---------
Net cash (acquired) used in acquisition.......................... $(318,000) $23,322,000 $19,650,000
========== =========== ===========
F-8
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, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE - The
carrying amount is a reasonable estimate of fair value.
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:
1998 1999
---- ----
Finished goods....................................... $3,611,000 $4,588,000
Work in process...................................... 111,000 458,000
Materials and parts.................................. 5,670,000 6,668,000
--------- ---------
$9,392,000 $11,714,000
========== ===========
6. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consisted of the following at August 31:
1998 1999
---- ----
Goodwill............................................ $17,176,000 $30,832,000
Other intangibles................................... 1,700,000 1,700,000
--------- ---------
18,876,000 32,532,000
Less: accumulated amortization...................... (662,000) (1,404,000)
--------- -----------
Goodwill and other intangibles, net................. $18,214,000 $31,128,000
=========== ===========
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:
1997 1998 1999
---- ---- ----
Provision for taxes at statutory rates.......... $918,000 $2,643,000 $3,603,000
State tax, net of federal benefit............... 116,000 332,000 420,000
Amortization of nondeductible goodwill.......... 24,000 147,000 189,000
Other,net....................................... 30,000 93,000 (169,000)
------ ------- ---------
Provision for income taxes...................... $1,088,000 $3,215,000 $4,043,000
========== ========== ==========
F-9
The provision for income taxes consisted of the following for the years ended
August 31:
1997 1998 1999
---- ---- ----
Current:
Federal ............................................. $ 802,000 $2,500,000 $2,055,000
State ............................................... 245,000 450,000 414,000
---------- ---------- ----------
1,047,000 2,950,000 $2,469,000
---------- ---------- ----------
Deferred:
Federal ............................................. 35,000 208,000 1,410,000
State ............................................... 6,000 57,000 164,000
---------- ---------- ----------
41,000 265,000 1,574,000
---------- ---------- ----------
Provision for income taxes ............................. $1,088,000 $3,215,000 $4,043,000
========== ========== ==========
Changes in components of the Company's net deferred tax asset (liability) were
as follows:
1997 1998 1999
---- ---- ----
Effect of performance payments ................................ $ 141,000 $ -- $ --
State taxes ................................................... (85,000) (103,000) 65,000
Reserves ...................................................... (603,000) 238,000 1,422,000
Depreciation .................................................. 567,000 107,000 109,000
Amortization .................................................. 21,000 (17,000) (22,000)
Other ......................................................... -- 40,000 --
----------- ----------- -----------
$ 41,000 $ 265,000 $1,574,000
=========== =========== ==========
The components of the Company's deferred tax asset at August 31, 1998 and
deferred tax liability at August 31, 1999 were as follows:
1998 1999
---- ----
State taxes ............................ $ 217,000 $ 152,000
Reserves ............................... 2,186,000 764,000
----------- -----------
Total deferred tax assets .............. 2,403,000 916,000
----------- -----------
Depreciation ........................... (1,197,000) (1,306,000)
Amortization ........................... (125,000) (103,000)
----------- -----------
Total deferred tax liabilities ......... (1,322,000) (1,409,000)
----------- -----------
Net deferred tax asset (liability) ..... $ 1,081,000 $ (493,000)
=========== ===========
Included in other assets at August 31, 1998 is a $419,000 balance representing
noncurrent deferred income taxes.
F-10
8. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT
The Company has bank term loans in the aggregate amount of $19,017,000. Monthly
principal payments are due as follows: $377,000 through March 2003, $127,000
through October 2003; and $159,000 through October 2004.
The Company has a three year revolving line of credit, expiring in December
2001, in an amount of up to $17 million, based on eligible collateral.
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,
1999, the average interest rate was 7.7% on the term loan and 7.6% on the
revolver. The bank loans, which require compliance with various covenants, are
secured by substantially all of the Company assets which are not security for
other loans.
The Company has industrial revenue bond ("IRB") financing in the amount of
$3,000,000 in connection with a facility in Michigan, secured by a letter of
credit. Principal payments of $1,000,000 are due on November 1, 1999, 2000 and
2001. Interest is payable semi-annually at an average effective interest rate of
6.8% at August 31, 1999.
The Company has IRB financing in connection with a California facility in the
amount of $1,380,000. 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 4.1% at August 31, 1999.
Other debt consists of equipment and property loans secured by the related
equipment or property. These loans mature between 2000 and 2004 and have
interest rates ranging from 7.2% to 8.0%.
Long-term debt consisted of the following at August 31:
1998 1999
---- ----
Revolving line of credit.............................. $2,734,000 $8,016,000
Bank term loans....................................... 12,667,000 19,017,000
Industrial revenue bonds.............................. 5,077,000 4,380,000
Other................................................. 864,000 2,368,000
----------- -----------
Total................................................. 21,342,000 33,781,000
Less: current maturities.............................. 2,667,000 5,794,000
----------- -----------
Long-term............................................. $18,675,000 $27,987,000
=========== ===========
Future maturities of long-term debt at August 31, 1999 were as follows:
Fiscal Year Amount
----------- ------
2001....................................... $5,813,000
2002....................................... 13,840,000
2003....................................... 4,284,000
2004....................................... 2,482,000
2005 and thereafter........................ 1,568,000
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
2009. Rental expense charged to operations was approximately $367,000 in 1997,
$1,160,000 in 1998 and $1,430,000 in 1999.
F-11
The aggregate minimum future lease payments under these leases at August 31,
1999 are approximately as follows:
Fiscal Year Amount
----------- ------
2000........................................ $1,281,000
2001........................................ 949,000
2002........................................ 723,000
2003........................................ 626,000
2004........................................ 520,000
2005 and thereafter......................... 1,799,000
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
$349,000 in 1997,$529,000 in 1998 and $699,000 in 1999.
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, $180,000 in 1998 and $278,000 in 1999.
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 detected 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 tenants 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.
F-12
EMPLOYMENT AGREEMENTS
The Company has various employment agreements with officers, some of which
include bonuses, stock options, and change in control provisions.
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, $150,000 in 1998,
and 172,000 in 1999. The agreements continue until 2009.
The Company purchased $1,340,000 in 1998 and $1,079,000 in 1999, of injection
molding services from a business in which a former officer of one of the
Company's subsidiaries is a director and part owner. The amounts paid are
considered to be commercially competitive.
11. STOCK-BASED COMPENSATION PLANS
The Company has four stock option plans which have been approved by the
Stockholders and are administered by its Board of Directors. Under these plans,
options to acquire shares of common stock may be granted to key employees,
directors, consultants, vendors and others in the following amounts:
Shares Remaining and Available
Plan Total Shares Authorized for Grant at August 31, 1999
----- ----------------------- ----------------------------
1984 Plan 25,000 --
1991 Plan 150,000 350
1995 Plan 350,000 277
1999 Plan 500,000 459,000
In addition, options have been issued in conjunction with acquisitions. The fair
value of these options is included in the purchase price.
The Company accounts for stock options issued to employees and directors under
APB Opinion No. 25. Under APB 25, if the exercise price of the stock option
equals the market price of the underlying stock on the issuance date, no
compensation expense is recognized. Consequently, no compensation expense was
recognized under these plans for fiscal years 1997, 1998 and 1999. The Company
is required by SFAS No. 123 "Accounting for Stock-Based Compensation" to provide
proforma disclosures under an alternate fair value method of accounting.
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,
1997 1998 1999
---- ---- ----
Income from continuing operations
As Reported............................... $1,612,000 $4,558,000 $6,555,000
Proforma.................................. $1,534,000 $4,424,000 $6,383,000
Diluted earnings per share:
As Reported............................... $.46 $1.03 $1.46
Proforma.................................. $.44 $1.00 $1.42
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, 1997, 1998
and 1999, and changes during
F-13
the years then ended, is presented in the following table:
August 31, 1997 August 31, 1998 August 31, 1999
--------------- --------------- ---------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year.......... 237,473 $4.21 445,873 $4.81 790,506 $6.32
Granted under Stockholder
approved plans......................... 157,650 $6.33 180,328 $11.74 111,000 $9.37
Granted in conjunction with
acquisitions........................... 169,912 $4.73 346,267 $3.77 55,500 $9.46
Exercised................................. (50,441) $3.72 (167,318) $2.68 (64,041) $5.58
Forfeited/expired......................... (68,721) $5.42 (14,644) $7.87 (23,877) $12.08
-------- -------- --------
Outstanding at end of year................ 445,873 $4.81 790,506 $6.32 869,088 $6.81
======= ======= =======
Exercisable at end of year................ 236,249 $4.28 452,179 $4.31 518,592 $5.10
Weighted average fair value of
options granted........................ $2.25 $4.63 $3.23
The following table summarizes information about stock options outstanding at
August 31, 1999:
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 4.8 96,230 $2.07 96,230 $2.07
$2.72 - 3.61 4.4 89,425 3.35 89,425 3.35
$4.25 - 5.75 6.5 315,717 5.17 241,528 5.06
$7.75 - 12.75 8.0 292,140 9.41 73,265 9.21
$13.72 - 14.56 7.5 75,576 13.75 18,144 13.72
------- ----- ------- -----
869,088 $6.81 518,592 $5.10
======= ===== ======= =====
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 1997,1998 and 1999:
1997 1998 1999
---- ---- ----
Weighted average risk-free interest rate............... 6.2% 5.7% 4.9%
Volatility............................................. 35% 35% 35%
Expected dividend yields............................... -- -- --
Weighted average expected life in years................ 4.4 3.2 4.3
12. SALES
Sales to the Company's largest single customer represented 9.3% in 1997, 7.1% in
1998 and 8.1% in 1999 of total
F-14
sales.
Export sales by geographic area were as follows for the years ended August 31:
1997 1998 1999
---- ---- ----
Europe............................................ $1,994,000 $5,057,000 $6,362,000
Mexico and Canada................................. 1,928,000 4,518,000 6,304,000
Latin America..................................... 472,000 1,083,000 1,229,000
Asia.............................................. 675,000 665,000 1,008,000
Other............................................. 486,000 794,000 1,060,000
---------- ----------- -----------
$5,555,000 $12,117,000 $15,963,000
========== =========== ===========
13. SEGMENT REPORTING
Effective September 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information, which establishes revised standards for the manner in which
public business enterprises report information about operating segments.
The Company identifies its reportable segments based on similarities between
economic characteristics considering products, production processes, customers
and distribution. The Company's operations consist of two businesses segments -
engineered polymer components and extruded plastic products. A description and
financial data for the segments is summarized below:
In the Engineered Polymer Components segment, the Company designs and
manufactures, primarily by injection molding, sophisticated components, most of
which are proprietary. Many of the components are patented and/or approved by
government agencies such as the USFDA, or independent laboratories such as
Underwriters' Laboratories. The materials used in the manufacture are generally
known as engineered or high performance plastics. Most of the sales of the
components are made directly by Company employees to OEM accounts who
incorporate the components into their products.
In the Extruded Plastic Products segment, the Company continuously extrudes
plastic products, which are generally not differentiated from those of
competitors and are typically produced from materials known as commodity grade
plastic resins. Sales are made primarily through independent distribution
channels.
F-15
All figures below are in thousands.
1997 1998 1999
---- ---- ----
Net sales
Engineered polymer components $ 39,093 $ 68,131 $ 86,714
Extruded plastic products -- 17,573 20,009
--------- --------- ---------
Consolidated $ 39,093 $ 85,704 $ 106,723
Operating profit
Engineered polymer components $ 4,054 $ 9,739 $ 13,019
Extruded plastic products -- 1,053 1,186
All other (1,079) (1,412) (1,327)
--------- --------- ---------
Consolidated $ 2,975 $ 9,380 $ 12,878
Identifiable assets
Engineered polymer components $ 30,795 $ 45,887 $ 68,903
Extruded plastic products -- 15,806 16,490
All other 3,583 2,290 2,261
Discontinued operations 1,273 -- --
--------- --------- ---------
Consolidated $ 35,651 $ 63,983 $ 87,654
Capital expenditures
Engineered polymer components $ 1,504 $ 2,893 $ 3,231
Extruded plastic products -- 121 922
All other 10 7 --
Discontinued operations 112 12 --
--------- --------- ---------
Consolidated $ 1,626 $ 3,033 $ 4,153
Depreciation and amortization
Engineered polymer components $ 2,029 $ 3,119 $ 4,117
Extruded plastic products -- 457 558
All other 62 60 56
Discontinued operations 34 37 --
--------- --------- ---------
Consolidated $ 2,125 $ 3,673 $ 4,731
Interest expense and income taxes are not shown in the above table, as they are
not fully allocated by segment.
F-16
14. UNAUDITED QUARTERLY RESULTS
Quarters ended
Fiscal
November February May August Year
(in thousands, except per share amounts)
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
Fiscal 1999:
Net sales.................................. $23,271 $22,987 $30,203 $30,262 $106,723
Gross profit............................... 7,266 7,260 9,229 9,021 32,776
Income from continuing operations.......... 1,406 1,353 1,880 1,916 6,555
Net income................................. $1,406 $1,353 $1,880 $1,916 $6,555
Per Share:
Income from continuing operations
Basic................................... $.33 $.32 $.44 $.44 $1.53
Diluted ................................ $.32 $.30 $.42 $.42 $1.46
Net income
Basic.................................. $.33 $.32 $.44 $.44 $1.53
Diluted ............................... $.32 $.30 $.42 $.42 $1.46
15. DISCONTINUED OPERATIONS
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 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.
F-17
The following table presents the sales and results of operations of the
discontinued operations.
1997 1998 1999
---- ---- ----
Sales from discontinued operations: $4,144,000 $2,818,000 --
Income from discontinued operations: $640,000 $316,000 --
16. 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 adjusted 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.
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. During fiscal year 1999, a contingency was resolved which resulted
in a reduction of the total acquisition cost and of goodwill in the amount of
$125,000. The excess of the adjusted purchase price over the fair value of the
net assets acquired amounted to $1,870,000 and has been recorded as goodwill
which is being amortized on a straight-line basis over 30 years.
On March 5, 1999, the Company completed the acquisition of substantially all of
the assets of Plastron Industries, L.P. ("Plastron"). The aggregate purchase
price paid for Plastron consisted of (i) $19,525,000 in cash; (ii) a four-year
warrant exercisable to purchase up to 200,000 shares of the Company's common
stock at $11.75 per share valued at $278,000; (iii) investment banking fees
consisting of a $125,000 cash payment and stock options, valued at $32,000; and
(iv) the assumption of certain liabilities, principally trade payables and
accrued obligations of $2,220,000. The transaction 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 values of the net
assets acquired amounted to $13,781,000 and has been recorded as goodwill which
is being amortized on a straight line basis over 35 years.
The following proforma financial information presents the results of operations
of the continuing businesses of the Company with LexaLite, Calnetics and
Plastron as though the 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,
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.
F-18
For the years ended August 31, 1997 1998 1999
(unaudited) (unaudited) (unaudited)
----------- ----------- -----------
Net sales............................................. $102,448,000 $109,554,000 $115,789,000
Income from continuing operations..................... 3,099,000 5,185,000 6,889,000
Net income............................................ $3,739,000 $5,501,000 $6,889,000
Income per common share
Income from continuing operations
Basic.......................................... $.77 $1.23 $1.61
Diluted........................................ $.74 $1.17 $1.53
Net income
Basic.......................................... $.92 $1.31 $1.61
Diluted........................................ $.89 $1.24 $1.53
The above proforma 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-19
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 stockholders included in this Form 10-K, and have issued our
report dated October 6, 1999. 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
Los Angeles, California
October 6, 1999
F-20
Summa Industries
Schedule II
Valuation and Qualifying Accounts
Allowance for Doubtful Accounts
For the years ended August 31, 1999, 1998, 1997
Balance at Amounts
beginning charged to Acquired Amounts Balance at end
of period expense reserves written off of period
------------------- ---------- ----------------- --------------- --------------
1999 $620,000 $248,000 $25,000 $(267,000) $626,000
1998 195,000 79,000 385,000 (39,000) 620,000
1997 22,000 48,000 157,000 (32,000) 195,000
F-21
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, 1999 to be signed on its behalf by the undersigned,
thereunto duly authorized, on October 26, 1999.
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, 1999 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 26, 1999
- ------------------------------- & Chief Financial Officer
James R. Swartwout (Principal Executive and Financial Officer)
/s/ Michael L. Horst Director October 26, 1999
- ------------------------------
Michael L. Horst
/s/ William R. Zimmerman Director October 26, 1999
- ------------------------
William R. Zimmerman
/s/ David McConaughy Director October 26, 1999
- -------------------------------
David McConaughy
/s/ Byron C. Roth Director October 26, 1999
- -------------------------------
Byron C. Roth
/s/ Josh T. Barnes Director October 26, 1999
- -------------------------------
Josh T. Barnes
/s/ Jack L. Watts Director October 26, 1999
- -------------------------------
Jack L. Watts
/s/ Paul A. Walbrun Vice President & Controller October 26, 1999
- ------------------------------- (Principal Accounting Officer)
Paul A. Walbrun