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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, 1996
[_] 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
(Name of registrant as specified in its charter)
CALIFORNIA 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) 792-7079
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Indicate by checkmark whether the registrant (1) filed all reports required to
be filed by Section 12 or 15(d) of the Exchange Act during the past 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 in this form, 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 November 22, 1996, based upon the closing price of a share of the Common
Stock on The Nasdaq National Market, was $12,705,000. The number of shares of
registrant's Common Stock outstanding as of November 22, 1996, was 4,073,411.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
PART I
ITEM 1. BUSINESS.
GENERAL
Summa Industries ("Summa") was incorporated in the State of California in
1942, and is a publicly-owned corporation whose Common Stock is registered
under Section 12(g) of the Securities Exchange Act of 1934, as amended, and
traded on The Nasdaq National Market under the symbol, "SUMX". Through its
three wholly-owned operating subsidiaries, Summa designs and manufacturers
injection-molded plastic optical components for OEM customers in the lighting
industry, material handling components, some of which Summa initially developed
in plastic, including plastic chains, belts, customized components, and water
cannons for fire fighting in harsh environments, and proprietary
pneumatic/hydraulic actuators and other components for defense aircraft.
The principal executive offices of Summa are located at 21250 Hawthorne
Boulevard, Suite 500, Torrance, California 90503, its telephone number is (310)
792-7024, and its telecopier number is (310) 792-7079.
GROWTH THROUGH ACQUISITIONS STRATEGY
Through 1990, the principal business of Summa was limited to the design,
manufacture and sale of chemical process equipment, which was unprofitable from
1983 to 1990, in which year it had revenues of only $3,257,000. In 1991, Summa
adopted 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 will 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 shareholders by increasing
the number of outstanding shares in the public float and the trading activity in
the stock. Typically, it is expected that Summa's corporate staff will not
direct operations of the acquired subsidiaries on an ongoing basis, but, in
addition to planning and financial oversight, will provide financing, conduct
the acquisition program and business development activities, 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.
The first acquisition consummated by Summa following the adoption of this
strategy occurred in October 1991, when Summa purchased all of the outstanding
capital stock of GST Industries, Inc. ("GST"). GST has two divisions, the Stang
Industrial Products Division which manufactures and sells water cannons for
firefighting and the GST Industries Division which manufactures and sells
proprietary sub-systems and components for the defense aircraft industry,
primarily for the F-16 and derivative aircraft. Summa paid the GST shareholders
an aggregate $2.3 million in cash, and gave them subordinated promissory notes
in an aggregate principal amount of $200,000, with interest only payable thereon
at the rate of 10% per annum at the end of the first and second years and all
principal payable at the end of the second year following the closing. In
addition, through August 31, 1996, the former shareholders of GST have earned
contingent performance payments totalling $2,026,000. The obligation for the
contingent payments expires October 31, 1996. The acquisition was partially
funded by borrowings under Summa's credit facility with Community Bank, which
were subsequently repaid.
In July 1993, Summa acquired all of the outstanding capital stock of KVP
Systems, Inc. which designs, manufactures and markets material handling
components, including 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 was issued to the shareholders of KVP in a
transaction registered under the Securities Act. In addition, Karl V. Palmaer,
the founder of KVP, joined and continues to serve on the Board of Directors of
Summa.
On July 18, 1996, Summa and LexaLite entered into an Agreement and Plan of
Reorganization providing for the acquisition by Summa of all of the outstanding
capital stock of LexaLite through the merger (the "Merger") of a newly formed
and wholly-owned subsidiary of Summa with and into LexaLite. On November 21,
1996, following approval of the Merger by the stockholders of LexaLite, the
shareholders of Summa approved the Merger and it was consummated
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on that date. As a consequence of the Merger, the stockholders of LexaLite
received shares of Summa's Common Stock which together constituted approximately
60% of the shares of Summa's Common Stock outstanding immediately after the
Merger. Since LexaLite operates as a wholly-owned operating subsidiary of Summa,
headquartered in Charlevoix, Michigan, the achievement of most of the perceived
advantages of the Merger will not be measured by the ability of the combined
companies to eliminate overlapping facilities or personnel or achieve other
efficiencies or economies of scale. Rather, the success of the acquisition will
depend more on the continuing compatibility of the management of both Summa and
LexaLite. It is anticipated, however, that a number of administrative issues
such as tax and legal, personnel policies, and shareholder relations will be
handled primarily at the Summa level, thereby permitting the management of
LexaLite to devote more time and attention to sales and marketing, product
development, and customer service. There can be no assurance that there will be
future changes in LexaLite's operations, marketing or sales, or that the other
perceived benefits of the Merger will be realized.
In evaluating future acquisitions, Summa will endeavor to identify target
companies that manufacture industrial products which have a proprietary
advantage because of patent protection, brand recognition, unique manufacturing
requirements, 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 affect
on post-acquisition, consolidated earnings per share. Since it is intended that
each acquired company will be maintained as a separate operating unit in most
instances, 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 continuing day to day
operations following the acquisition. Perhaps most importantly, Summa will seek
to determine that there is a significant likelihood that a sustainable increase
in earnings per share within 12 months of the closing can reasonably be
expected.
Implementation of Summa's strategy for growth through acquisitions 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 Summa and the shareholders of Summa, and supervising the
management of a variety of operating subsidiaries. Furthermore, with a
developing focus on businesses which manufacture engineered plastic components,
the number of opportunities which meet this acquisition criteria will be
smaller. In addition, with the increased size of Summa, larger acquisition
candidates will have to be sought in the future to sustain the growth rate of
Summa and the number of such candidates will be 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. 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.
SALE OF DISCONTINUED OPERATIONS
On June 17, 1996, Summa completed the sale of all of the outstanding
capital stock of Morehouse-COWLES, Inc. to a private investment group based in
Michigan. Summa was paid $750,000 in cash and will be paid an additional
$1,771,000 pursuant to a subordinated note that provides for payments of
interest monthly at the rate of 7% per annum through June, 2001, and at the rate
of 9% per annum through June 2006. Monthly principal payments commence July
2001 utilizing a 10-year amortization schedule with all unpaid interest and
principal due and payable by June 30, 2006. The note is subordinated to the
investors' bank credit agreement, permits optional prepayments, contains certain
covenants and default provisions and remedies, is secured by a pledge of all of
the outstanding capital stock of Morehouse-COWLES purchased by the investors, as
well as by the assets of Morehouse-COWLES, Inc. Additionally, the investment
group entered into a lease of the Fullerton facilities in which the operations
of Morehouse-COWLES had been conducted. The lease is for a period of ten years,
with an option to extend the lease for an additional five years. Monthly rent,
on a "triple-net basis", will be $4,000 during the first five years of the
lease, increasing to $5,500 per month during the second five years of the
original term.
PRODUCTS
The principal products currently offered by Summa, through its three
operating subsidiaries, include engineered injection-molded plastic optical
components for OEM customers in the lighting industry produced by LexaLite,
material handling components manufactured by KVP Systems, Inc., industrial
firefighting equipment produced by the Stang division of GST Industries, Inc.
("GST"), and aerospace assemblies fabricated by GST.
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Plastic Optical Components. LexaLite's original products were plastic lamp
covers for street lights, used to replace glass covers which were subject to
vandalism. Subsequently, LexaLite developed 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. On a selective basis, LexaLite
also makes non-optical molded plastic products. Most of the products are
injection molded from optical grade polycarbonate or acrylic. The principal
advantages of LexaLite's injection molded plastic components over more
traditional glass or metal components are lighter weight, superior optical
performance and in certain instances, lower cost.
Plastic Material Handling Components. Summa's material handling components
business is conducted by its wholly-owned subsidiary, KVP Systems, Inc., located
in Rancho Cordova, California. Its products are engineered plastic components
which form conveyer belts and chains. The components in KVP'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 are available in materials which can
withstand temperatures ranging from 150 degrees Fahrenheit below zero to 350
degrees Fahrenheit, a temperature typically required for sterilization. The
components do not require lubrication and thus offer the advantage of operation
free from contaminants such as grease, oil, and metal particles. Because KVP's
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.
Industrial Firefighting Equipment. The industrial firefighting business is
conducted by the STANG Industrial Products Division ("Stang") of GST Industries,
Inc., which was acquired by Summa in November 1991. Stang products have been
sold in the market for over 20 years. Stang designs, manufactures and sells
monitors, also known as water cannons, that are used for firefighting and to
disperse toxic gas clouds, as well as in hydraulic mining and digester cleaning.
These monitors are designed to equalize reactive forces so that the monitors can
be aimed with minimal force. Summa believes that Stang has proprietary designs
which provide superior performance to products offered by competitive
manufacturers. Stang monitors can be mounted on vehicles, standpipes, hydrants
or vessels, including fireboats, and can be controlled manually or hydraulically
via remote actuators provided by Stang as options.
Aerospace Components and Assemblies. Summa's aerospace business is
conducted by GST Industries, Inc., a wholly-owned subsidiary located in Santa
Ana, California, which was acquired in November 1991. GST has been in this
business of designing, manufacturing and selling hydraulic actuators and other
parts and sub-assemblies for use in aircraft and similar activities for more
than 20 years.
RESEARCH AND DEVELOPMENT
Through its subsidiaries, Summa invests significantly in the development of
products for new applications. 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. Most
of Summa's research and development efforts are for engineered plastic
components.
LexaLite consistently invests heavily in research and development of
products and manufacturing methods. LexaLite independently develops many
products for sale to multiple customers, and also develops products to
specifications with customers on a confidential basis, which may provide for
sales by the customer on an exclusive basis or for a license to LexaLite to make
sales to third parties. For the years ended June 30, 1994, 1995 and 1996,
LexaLite spent $554,000, $671,000 and $885,000, respectively, on research and
development. At its state of the art Lighting Research Center ("LRC"), optical
surfaces are designed using computer aided design techniques, prototypes of
products are fabricated, and photometric performance testing is conducted. The
LexaLite Scientific Center ("LSC") was created in 1994 to develop confidential
products and methods. Currently, LexaLite is developing an automated vapor-
deposition coating process for its own use, which is expected to materially
reduce the cost and increase the photometric performance of development plastic
"canister" components to be used in recessed lighting fixtures. If successful,
this product could result in a significant increase in LexaLite sales because
these components are generally made of metal by others.
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PRODUCTION
Summa's principal manufacturing operation is injection molding of plastic
parts. Some products are molded by third-party vendors. The Company performs
additional production operations including machining and welding of both metal
and plastic parts, coating, assembly and testing. Most of Summa's production
takes place in company-owned LexaLite plants in Michigan and Tennessee.
Injection molds and tools are made by a division of LexaLite at the main
plant, where the staff has developed the injection molding capability to produce
specialized optical components using the complex tooling required for the
manufacture of injection molding to close tolerances. Products are made on
modern molding machines which range from 28 to 1500 tons clamping force.
Ancillary equipment and special operations include automatic resin feed systems,
two color molding, insert molding, robotics, painting, vacuum deposition coating
with reflective metallic films, assembly, packaging and warehousing. LexaLite
operates on a just-in-time system with many of its customers, and inventories
are managed to minimal levels. Inventory turns approximately 17 times a year.
All of LexaLite's manufacturing plants are registered to ISO 9002. LexaLite
monitors environmental compliance via a full-time environmental engineer,
reporting directly to a vice-president. LexaLite believes that it is in
compliance with all requirements set forth by the E.P.A. and the states of
Michigan and Tennessee relating to air quality, water quality and hazardous
waste management and disposal.
MARKETING
LexaLite products are installed in high-bay manufacturing plants,
warehouses, retail stores, gasoline stations, parking lots, and other types of
buildings, in traffic signals, in marine navigation aids and in vehicles.
Because the products are components, they are virtually always sold to OEM
manufacturers such as Hubbell, Lithonia division of National Service Industries,
Inc., Cooper, Thomas Industries, and GE, as well as many less well recognized
companies, many of whom have been active accounts for more than ten years. For
the year ended June 30, 1996, LexaLite had 322 active accounts, with sales to
the largest five customers representing 15.4%, 12.8%, 9.6%, 8.5% and 3.6% of
product and tooling sales, respectively. Product sales comprise 92.6% and
tooling sales accounted for 7.4% of LexaLite's net sales during the year ended
June 30, 1996. LexaLite seeks to maintain a "strategic partnership"
relationship with its customers and has a direct sales force of seven persons
who operate out of two manufacturing plants in Michigan and Tennessee. Sales of
all optical components are considered strategic, while non-optical products are
manufactured to expand the relationships with customers or to balance
utilization of manufacturing capacity. LexaLite also sells its products through
commissioned sales representatives in selected domestic and international
geographic areas and for specialized business situations. For the year ended
June 30, 1996, 91% of sales were made directly and 9% of sales were through
commercial manufacturers' representatives. Of product sales for June 30, 1996,
50.4% of sales were of products made from LexaLite proprietary tooling, 31.5%
were of optical components manufactured for a single customer using tooling
owned by others, and 14.6% of product sales were of non-optical components.
Ultimate users of KVP components in food processing include companies such
as Beatrice/Hunt Wesson, Campbell Soup, Comstock Food, Kellogg's and Jeno's. In
bakery applications, the ultimate users include Sara Lee, Pepperidge Farms and
Lenders. In poultry applications, ultimate users include Foster Farms, Tyson
Foods, Pilgrims Pride and Con Agra. In freezing applications, ultimate users
include Baskin Robbins, Tombstone Pizza, Stouffer's and Swanson's. The
components also have applications in the pharmaceutical, industrial and
electronics industries. GST sells aerospace assemblies, primarily for the F-16
and derivative aircraft, to a foreign government engaged in a U.S. sanctioned
cooperative aircraft manufacturing program, Lockheed Aircraft, and the U.S.
Department of Defense. The primary markets for Stang products are the oil, gas
and petrochemical industry, municipalities which use fireboats, the mining
industry, and the municipal waste water treatment market. Products are sold
directly and through independent representatives and distributors, world-wide.
Summa does not believe that revenues attributable to sales of any of the
products manufactured by its industrial firefighting equipment or material
handling components subsidiaries are dependent upon sales to one or a small
number of customers, although in a given year one or a small number of customers
may account for a significant portion of sales. In the fiscal year ended August
31, 1996, the largest customer in either segment accounted for 5% of
consolidated net sales, while in fiscal years 1995 and 1994, sales to a single
customer accounted for 7% and 4% of total consolidated net respectively.
Because the F-16 is a mature program which is being phased out, GST faces a
possible loss of most of its defense related business over the next several
years. Sales of aerospace assemblies represented 21%, 15% and 15% of Summa's
consolidated net sales for 1994, 1995 and 1996, respectively, with sales of
aerospace assemblies to GST's largest customer constituting 10%, 7% and 6% of
consolidated net sales for the three most recently completed fiscal years.
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The following table sets forth the dollar amount of Summa's export sales by
geographic area for the three fiscal years ended August 31, 1996, prior to the
acquisition of LexaLite:
1996 1995 1994
---------- ---------- ----------
Canada $ 724,000 $ 341,000 $ 220,000
Latin America 72,000 -0- 101,000
Asia 938,000 800,000 1,868,000
Europe 909,000 769,000 186,000
Other 125,000 131,000 56,000
---------- ---------- ----------
$2,768,000 $2,041,000 $2,431,000
========== ========== ==========
For the fiscal year ended June 30, 1996 sales by LexaLite to customers
located outside of the United States constituted approximately 8.2% of total
sales.
RAW MATERIALS
KVP and Stang purchase materials and parts, including pelletized plastic
resins, castings, forgings, steel, valves and controls from various suppliers.
Summa does not believe that either of these subsidiaries is dependent upon any
single supplier or manufacturer for any of its present principal requirements
for materials or parts, and neither experienced significant difficulty in
obtaining such parts and materials during the fiscal year ended August 31, 1996.
Lead times for special components, such as custom hydraulic power units, can be
as long as four months. LexaLite purchases pelletized resins from major
suppliers such as Bayer, GE Plastics, ICI and others. Certain of these resins
may be in short supply from time to time, but LexaLite has been able to obtain
an adequate supply of resin during such periods to meet its manufacturing
commitments, because it is a significant consumer of the materials. LexaLite
believes it is one of the largest users of optical grade polycarbonate and
acrylic in the world. Occasionally, LexaLite uses smaller quantities of other
resins such as ABS, polypropylene and nylon.
BACKLOG
On August 31, 1996, Summa's continuing businesses had a backlog of orders,
believed to be firm, in the amount of $2,475,000, as compared to a backlog of
$2,924,000 as of August 31, 1995. Of the backlog at the end of fiscal 1996,
$280,000 was attributable to orders for material handling components, $487,000
was attributable to orders for firefighting equipment and $1,708,000 was
attributable to orders for aerospace assemblies. A portion of Summa's August
31, 1996 backlog consisted of products to be manufactured to custom designs
suited for a particular customer's application or physical requirements.
Because the length of time between entering an order, shipping the product and
recording a sale can vary significantly from product to product, Summa believes
that its backlog levels should not necessarily be relied upon as an indicator of
sales volume for a specific future period. The aerospace assembly backlog is
comprised of some long-term contracts, which are scheduled to ship through 1997.
Since LexaLite's lead time for producing components is only two to four weeks,
backlog historically has been minimal and typically represents approximately one
and one-half months of product sales. The backlog of orders for tooling, as
opposed to products, varies widely with the lead time ranging from four to ten
months. At June 30, 1996, the backlog of firm orders for new tooling was
$804,000, approximately six months of planned tooling sales. Tooling sales
typically are about 3.5% of product sales.
COMPETITIVE CONDITIONS
The markets for the products currently manufactured and sold by each of
Summa's operating subsidiaries are characterized by extensive competition. There
are a number of companies that currently offer competing products nationally and
internationally, and in certain geographic areas from local manufacturers. 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. A significant
number of custom injection molders, some of which are larger than LexaLite, make
optical components. Management believes that none of these companies regards
optical components as a strategic business focus and none has developed optical
design expertise to a significant extent. On the other hand, virtually all of
LexaLite's customers have both optical design capability and injection molding
machines and also conduct operations for themselves which LexaLite regards as
within its strategic activity.
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Summa believes that its trade names and reputation are significant to its
competitive position in all segments. In addition, Summa believes that price is
a significant element of competition in all segments. 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. Summa'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 which render
Summa's products noncompetitive.
PATENTS, TRADEMARKS AND LICENSES
LexaLite and KVP hold numerous domestic and foreign patents on products
which they have developed or acquired that expire on dates ranging from the near
term to 2010. In addition, several active patent applications are being
processed. The extent to which patents provide a commercial advantage or inhibit
the development of competing products varies. To a large extent, however, Summa
is required to rely 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 the names and logos which appear on
its product which, in the opinion of management, are helpful in enabling Summa
to maintain its present competitive position.
EMPLOYEES
At August 31, 1996, Summa had 98 employees, including three employees who
comprise Summa's senior administrative staff, 64 employees at KVP, of whom 16
were involved in sales and marketing, 40 in manufacturing, 8 in general
administration, and 29 employees at GST, of whom 4 were involved in sales and
marketing, 21 in manufacturing, and 4 in general administration. At June 30,
1996, LexaLite had approximately 100 salaried and 168 hourly employees,
including 10 involved in sales and marketing, 5 in research and development, 227
in manufacturing, and 26 in general administration. LexaLite's headquarters is
located in a small town in Northwest Michigan that has a limited labor pool,
and LexaLite is one of the largest employers in the area. Occasionally,
LexaLite has had to recruit individuals for key positions from outside the area
and has incurred some delays in filling these positions. In 1985, LexaLite
opened a branch plant near Nashville, Tennessee, in an area which, at the time,
had a labor surplus. Subsequently, a number of other employers have opened
plants in that area and management currently does not consider a labor surplus
to exist there. No employees of any of Summa's operating subsidiaries are
covered by a collective bargaining agreement. Summa considers its relationship
with its employees to be good.
Implementation of Summa's strategy for growth through acquisitions will
continue to depend to a significant extent upon the continued services of Mr.
Swartwout. In addition, Summa will continue to depend upon other members of its
senior administrative staff, and upon the continuing services of the key
management employees of each of the companies it acquires. Several key
engineers who have designed many of Summa's products are in the latter stages of
their careers. Karl V. Palmaer was the founder of KVP Systems, Inc. and is now
a product development consultant to and a director of Summa. Robert L. Green
founded GST Industries, Inc. and is currently its President and a Vice President
of Summa. In connection with the Merger, Josh T. Barnes, the founder of
LexaLite, was elected to the Board of Directors of Summa, continues to serve
on a consulting basis at LexaLite. Messrs. Palmaer, Green and Barnes are 75, 74
and 68 years old, respectively. There can be no assurance that these key
individuals will continue to contribute at the same level in the future, and
there can be no assurance that the product inventors and designers within Summa
and its subsidiaries, or inventors and designers recruited in the future, can
perform those functions as innovatively and effectively as those three
individuals. Although each of LexaLite's executive officers has indicated an
intention to continue in his or her present positions following the Merger,
there can be no assurance that one or more of these executives will not leave
LexaLite in the foreseeable future. Moreover, there can be no assurance that
Summa will be successful in retaining the members of its administrative staff,
or the key management employees of its other operating subsidiaries, or in
attracting and retaining any additional personnel that may be required. The loss
of the services of one or more of members of Summa's senior administrative staff
or key management employees could have a material adverse affect upon Summa.
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ITEM 2. PROPERTIES.
Summa's principal executive offices are located in approximately 300 square
feet of office space in Torrance, California, under a lease that expires in June
1997. In January 1996, KVP relocated to a larger leased facility in an
industrial park in Rancho Cordova, California, which contains 48,000 square foot
office and manufacturing space, to provide for expanding operations of its
material handling component business. The lease expires in February 2001. GST
leases 28,000 square feet of office and manufacturing space in an industrial
park in Santa Ana, California. The lease expires in October 1997. Summa
believes that in general all of the facilities currently used by each operating
subsidiary are adequate for present and foreseeable needs, and that expiring
leases can be renegotiated or alternate facilities can be leased on favorable
terms, as necessary.
LexaLite's original plant and corporate headquarters, which has been
expanded several times, comprises 94,000 square feet of manufacturing and office
space on 14 acres of land on the shore of Lake Michigan in Charlevoix, Michigan.
The LRC comprises 14,700 square feet of office, testing and light manufacturing
area on three-quarters of an acre of land in Charlevoix, Michigan, and the LSC
comprises 27,500 square feet of office and manufacturing area on 11 acres of
land in a business park in Charlevoix. This facility was constructed with
utilities in place so that it can be modularly expanded as required. The
Tennessee plant comprises 55,000 square feet of office and manufacturing area on
24 acres of land in Dickson, Tennessee. All four facilities are owned by
LexaLite, substantially of all which are pledged to secure debt. The LSC was
built with the proceeds of a Michigan Industrial Revenue Bond.
Summa also owns approximately 63,000 square feet of factory and office
space on approximately 3.4 acres in Fullerton, California which it leases to
Morehouse-COWLES, Inc., a former subsidiary of Summa. The lease expires in July
2006. See Item 1, "Sale of Discontinued Operations".
ITEM 3. LEGAL PROCEEDINGS.
Summa encounters lawsuits from time to time in the ordinary course of its
business, and at August 31, 1996, each of KVP and GST/Stang was party to a
civil lawsuit described below. Summa has obtained liability insurance coverage
for each of the past five years, such insurance may not be available in the
future at economically feasible premium rates. Additionally, some lawsuits
filed against Summa 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 current or future 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 financial
condition and prospects of Summa. LexaLite was not a party to any material
pending or threatened litigation at August 31, 1996.
In Laitram, et al. v. KVP Systems, Inc., and counterclaims filed in the
-------------------------------------
U.S. District Court in Eastern Louisiana in September 1993. The plaintiffs
claim KVP has infringed upon two patents. The venue has been changed to Federal
District Court in Sacramento, California. Summa contends the claims are
invalid, and has filed counterclaims that Laitram has sued in bad faith and has
acted in restraint of free trade. The case is in the advanced stage of
discovery and is expected to be heard in court during fiscal 1997. Since the
case involves a number of complex factual and legal issues, it is impossible to
predict the outcome. Although Summa believes it has a reasonable expectation of
prevailing, because no reserve therefor has been established, and in the absence
of applicable insurance, the consequences of an adverse determination would be
borne by Summa.
In Wright v. Stang, et al., a piece of pipe, to which a water cannon
-----------------------
manufactured by Stang was attached, broke, knocking a fireman down. Since Stang
did not make or supply the pipe which failed, the case was dismissed.
Subsequently, the plaintiff filed an appeal of the dismissal.
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, 1996 to a vote of Summa's shareholders, through solicitation of
proxies or otherwise.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
RECENT MARKET PRICES
Summa's Common Stock is traded on The Nasdaq National Market under the
symbol "SUMX." Historically, here has been a limited public market for Summa's
Common Stock. During the year ended August 31, 1996, the average weekly
trading volume was approximately 17,600 shares. Although the number of shares
outstanding in the public float, as well as the number of Summa's shareholders,
increased significantly following the Merger, there can be no assurance that a
more active trading market for the Summa Common Stock will develop or be
sustained in the future. 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 closing prices for a share of Summa's Common Stock on
The Nasdaq National Market for the periods indicated.
Quarter Ended High Low
------------- --------- --------
November 1994 .............................. $6.50 $5.25
February 1995............................... 6.00 4.75
May 1995.................................... 5.50 4.75
August 1995................................. 5.25 4.75
Quarter Ended
-------------
November 1995............................... 5.25 3.75
February 1996............................... 5.00 3.88
May 1996.................................... 6.25 5.13
August 1996................................. 6.00 5.50
Quarter Ended
-------------
November 1996 (through November 22)........ 6.50 5.50
On November 22, 1996, the closing price for a share of Summa's Common Stock
was $5.75
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 November 22, 1996, 4,073,411 shares of Summa's Common Stock
were issued and outstanding, including a total of 2,209,651 shares held by
non-affiliates of Summa, and no shares of Preferred Stock had been issued or
were outstanding. The approximate number of holders of record of Summa's Common
Stock as of November 22, 1996, was 528. In addition, Summa estimates that
there are approximately 600 additional shareholders whose shares are held in
"street name."
Common Stock. Holders of Summa's Common Stock are entitled to one vote per
share on each matter submitted to a vote of shareholders, 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 Summa's 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, the
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 Summa's Common Stock have no preemptive, subscription,
redemption or conversion rights. The transfer agent and registrar for Summa's
Common Stock is U. S. Stock Transfer Corporation, 1745 Gardena Avenue, Glendale,
California 91204, telephone number, (818) 502-1404.
9
Preferred Stock. The Board of Directors is authorized, subject to any
limitations prescribed by the laws of the State of California, but without
further action by Summa's shareholders, 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 shareholders. 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.
Anti-Takeover Devices. In addition to the ability to issue Preferred
Stock, Summa's Articles of Incorporation and bylaws provide for elimination of
cumulative voting and the classification of the Board of Directors, provisions
which are also likely to delay, discourage, or prevent a change in control of
Summa. In approving the Merger, the shareholders of Summa also approved an
amendment to the Articles of Incorporation of Summa to establish a 9-member
Board of Directors divided into three classes serving staggered 3-year terms,
with one-third of the members elected at each annual meeting. Accordingly,
the period of time required for Summa shareholders who oppose the policies of
Summa's Board of Directors to remove a majority of the Board will be extended
from two to three years, unless they can show cause and obtain the required vote
under California law.
SHARES ELIGIBLE FOR FUTURE SALE; RIGHTS TO ACQUIRE SHARES
The shares of Summa's Common Stock issued in the Merger to the former
LexaLite stockholder generally are freely tradeable, and a number of former
LexaLite stockholders have indicated an intention to sell, as soon as
practicable, all or a portion of their shares. In addition, 1,312,926
outstanding shares of Summa's Common Stock issued more than three years ago are
held by "non-affiliates" of Summa and can therefore be sold pursuant to Rule
144 adopted by the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Securities Act"), without regard to the volume
limitations of Rule 144. Sales of substantial amounts of Summa's Common Stock
by the former stockholders of LexaLite, under Rule 144, or otherwise, or even
the potential for such sales, could have a depressive effect on the market price
of Summa's Common Stock and could impair Summa's ability to raise capital
through the sale of its equity securities.
At the time of the Merger, LexaLite had two stock option programs, a non-
qualified stock option plan pursuant to which options to purchase 24,500 shares
were outstanding. and a qualified plan pursuant to which options to purchase
26,050 shares were outstanding. In addition, options to purchase 54,000 shares
were issued to the former participants in the LexaLite Stock Award Bonus Plan in
consideration of the termination of the Plan effective upon consummation of the
Merger. In connection with the Merger, both option plans were terminated and
all outstanding options to purchase shares of LexaLite's common stock were
converted into options to purchase 1.625 shares of Summa's Common Stock for each
LexaLite share, for the same aggregate exercise price. Accordingly, the former
holders of LexaLite options currently hold options to purchase an aggregate of
169,894 shares of Summa's Common Stock, at a weighted average exercise price of
$5.01 per share, including options to purchase as aggregate of 30,062 shares of
Summa's Common Stock, at a weighted average exercise price of $5.55 per share,
held by Josh T. Barnes, currently a director of Summa. All of the shares
issuable upon the exercise of these options have been registered for issuance
under the Securities Act. Summa has also registered under the Securities Act
421,000 shares issuable upon exercise of options granted and to be granted under
its stock option plans. The existence of outstanding 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 and
currently does not intend to pay cash dividends on its Common Stock in the
foreseeable future.
10
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below for the three years ended
August 31, 1994, 1995 and 1996 has been derived from the audited consolidated
financial statements of Summa included under Item 14(a) below and should be read
in conjunction with those financial statements (including the notes thereto) and
with the "Summa Management's Discussion and Analysis of Summa's Results of
Operations and Financial Condition" included under Item 7 below. The selected
financial data set forth below for the years ended August 31, 1992 and 1993 have
been derived from audited consolidated financial statements of Summa that are
not included herein.
STATEMENT OF INCOME DATA: FISCAL YEARS ENDED AUGUST 31,
- ------------------------ --------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(in thousands, except per share amounts)
Net sales ............................... $4,095 $5,284 $10,279 $10,247 $12,742
Cost and expenses:
Cost of sales .......................... 2,406 3,016 5,510 5,609 6,847
Selling, general and administrative
Interest-net ......................... 1,285 1,700 3,623 3,480 4,566
16 -- -- -- (15)
Total costs and expenses from ------ ------ ------- ------- -------
continuing operations................. 3,707 4,716 9,133 9,089 11,398
------ ------ ------- ------- -------
Income from continuing operations
before provision for taxes,
extraordinary item and cumulative
effect of accounting change ............ 388 568 1,146 1,158 1,344
Provision for income taxes .............. 150 355 645 482 541
------ ------ ------- ------- -------
Income from continuing operations
before extraordinary item and
cumulative effect of accounting change.. 238 213 501 676 803
Income (loss) from discontinued
operations, net of the effect
of income tax .......................... 152 179 118 (28) (235)
Extraordinary item, tax benefit of
net operating loss carryforward ........ 208 321 --- --- ---
Cumulative effect of accounting change. --- --- 100 --- ---
------ ------ ------- ------- -------
Net income .............................. $ 598 $ 713 $ 719 $ 648 $ 568
====== ====== ======= ======= =======
Weighted average number of shares ....... 973 1,020 1,548 1,553 1,603
Income per common and equivalent share:
Income from continuing operations
before extraordinary item and
cumulative effect of accounting change.. $ .24 $ .21 $ .32 $ .44 $ .50
Income (loss) from discontinued
operations,
net of the effect of income tax ........ .16 .18 .08 (.02) (.15)
Extraordinary item ..................... .21 .31 --- --- ---
Cumulative effect of accounting change.. --- --- .06 --- ---
------ ------ ------- ------- -------
Net income per common and
equivalent share ...................... $ .61 $ .70 $ .46 $ .42 $ .35
====== ====== ======= ======= =======
BALANCE SHEET DATA: AUGUST 31,
1992 1993 1994 1995 1996
--------------------------------------------------------------
Assets .................................. $4,628 $8,758 $10,009 $11,278 $11,825
Working capital ......................... 1,315 2,203 2,086 1,882 2,975
Long-term debt .......................... 450 415 305 400 300
Shareholders' equity .................... 3,009 6,505 7,224 7,930 8,644
11
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 that 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. 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 and elsewhere in this Annual
Report on Form 10-K. The forward-looking statements are made as of the date
hereof, and Summa 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.
As discussed in more detail under Item 1 above, Summa has adopted a
strategy of growth by acquisitions. Although GST and KVP had each been
established for over 15 years prior to their acquisition by Summa, the
continuing businesses of Summa have been operating under their current ownership
structure for only five years and three years respectively. LexaLite, in turn,
has operated as a wholly-owned subsidiary of Summa only since November 21, 1996.
There can be no assurance that Summa will be able to sustain rates of revenue
growth and profitability in future periods which are comparable to those
experienced in the past two years.
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 enhanced financial, marketing
and administrative support to be furnished by the executive officers of Summa.
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. There can however, be no assurance
that sufficient financing will be available to Summa to implement its
acquisition strategy on terms and conditions that are acceptable to Summa, if at
all.
LexaLite sells its products and services primarily to manufacturers of
lighting fixtures, of which there are a limited number. As a consequence, a
significant portion of LexaLite sales are to relatively few customers. Most of
GST's sales of aerospace assemblies are for the F-16 and derivative aircraft,
and are made to a foreign government engaged in a U.S. sanctioned cooperative
aircraft manufacturing program, to Lockheed Aircraft, and to the Department of
Defense. Because the F-16 is a mature program which is being phased out, GST
faces a possible loss of most of its defense related business over the next
several years. The sales of the aerospace assemblies segment represented 15%,
15% and 21% of Summa's consolidated net sales for 1996, 1995 and 1994,
respectively, with sales to the largest customer for the years ended August 31,
1996, 1995 and 1994 constituting 6%, 7% and 10% of consolidated net sales,
respectively. The largest customer of any operating subsidiary following the
Merger is expected to represent approximately 10% of consolidated net sales, and
there can be no assurance that the loss of more than one of these significant
customers would not occur simultaneously.
Summa's consolidated backlog increased slightly during fiscal 1995, to
$2,924,000 at August 31, 1995. By August 31, 1996, backlog had decreased to
$2,475,000 primarily as a result of decreased backlog in the defense business.
The open order backlog, believed to be firm, is comprised of orders for
components and spare parts, with scheduled deliveries from September 1996
through fiscal 1998. However, Summa faces a probable loss of most of its
defense related business over the next several years, as mature programs are
wound down. Because Summa has historically booked some disproportionately large
orders during its fiscal years, and because backlog is usually not material
except in the defense business, the amount of firm order backlog at year-end
cannot necessarily be used as an indicator of future sales volume.
During the fiscal year ended August 31, 1996, Summa completed the
divestiture of its industrial process equipment subsidiary, Morehouse-COWLES,
Inc., which is described in more detail under Item 1 above. Since Summa
announced on January 30, 1996 that it had entered into a letter of intent to
sell Morehouse-COWLES to a prospective purchaser, Morehouse-COWLES, Inc. has
been treated for accounting purposes as a discontinued operation in Summa's
12
interim financial statements since that date. For the nine months ended May 31,
1996, Morehouse-COWLES lost $421,000 before income taxes on sales of $5,638,000,
compared to net income of $7,000 before taxes on sales of $6,048,000 for the
nine months ended May 31, 1995.
Although none of the businesses currently conducted by Summa's operating
subsidiaries is considered to be seasonal, each involves the sale of components
to be incorporated into capital equipment provided by its customers, the demand
for which depends upon a number of factors beyond the control of Summa. Among
other factors which would affect the demand for the products offered by Summa,
it can be expected that economic conditions generally, the availability of
credit, as well as industry conditions in the markets for Summa's products,
could have a significant impact upon the decisions of prospective customers as
to the timing of purchases of additional or replacement products. For these and
other reasons, it is possible that Summa's quarterly revenues and profitability
on a consolidated basis may fluctuate from time to time, although the likelihood
of extreme changes may be mitigated by the fact that the operating subsidiaries
sell components into several different markets. Moreover, there can be no
assurance that a major economic downturn or severe tightening of credit would
not adversely affect the demand for all of Summa's products concurrently.
Any future success that Summa might enjoy 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 Summa through its operating subsidiaries, increased
levels of competition including the entry of additional competitors and
increased success by existing competitors, reduced margins caused by competitive
pressures and other factors, increases in operating costs including costs of
production, supplies, personnel, equipment, import duties and transportation,
increases in governmental regulation imposed under federal, state or local laws,
including regulations applicable to environmental, labor and trade matters,
changing customer profiles and general economic and industry conditions that
affect customer demand, the introduction of new products by the Company or its
competitors, the timing of the Company's advertising and promotional campaigns,
and other factors.
BUSINESS SEGMENT INFORMATION
Prior to the acquisition of LexaLite, Summa's continuing operations
(excluding the discontinued operations of Morehouse-COWLES) were conducted in
three business segments through two operating subsidiaries, KVP and GST. The
following table sets forth certain information with respect to the contribution
to consolidated net sales and operating income generated by, and the dollar
value of assets identified to, each of KVP and GST during the three years ended
August 31, 1996, as well as the impact of the parent company's operations on
consolidated operating income and the dollar value of assets identified to the
parent company:
MATERIAL
HANDLING FIREFIGHTING AEROSPACE CORPORATE
COMPONENTS EQUIPMENT ASSEMBLIES AND OTHER TOTAL
------------------------------------------------------------------
FISCAL YEAR ENDED AUGUST 31, 1996
Net sales $8,124,000 $2,740,000 $1,878,000 $ --- $12,742,000
Operating income 850,000 327,000 391,000 (224,000) 1,344,000
Identifiable assets 5,696,000 771,000 691,000 4,667,000 11,825,000
FISCAL YEAR ENDED AUGUST 31, 1995
Net sales $6,567,000 $2,096,000 $1,584,000 $ --- $10,247,000
Operating income 903,000 158,000 388,000 (291,000) 1,158,000
Identifiable assets 4,554,000 683,000 669,000 5,372,000 11,278,000
FISCAL YEAR ENDED AUGUST 31, 1994
Net sales $5,061,000 $3,075,000 $2,143,000 $ --- $10,279,000
Operating income 591,000 260,000 435,000 (140,000) 1,146,000
Identifiable assets 3,903,000 729,000 884,000 4,483,000 9,999,000
===========================================================================================
During the most recent fiscal year of LexaLite which ended on June 30,
1996, prior to the acquisition of LexaLite by Summa, LexaLite's net sales and
operating income, and the dollar value of LexaLite's assets were $36,089,000,
$3,239,000, and $24,109,000, respectively.
13
RESULTS OF OPERATIONS
The following table sets forth certain statements of income information for
Summa's continuing operations as a percentage of sales for the three years ended
August 31, 1994, 1995 and 1996, as well as Summa's effective income tax rate for
each period presented. As discussed below, Summa's statements of income have
been restated to reflect the discontinuance of operations and subsequent sale of
the Morehouse-COWLES industrial process equipment business.
FISCAL YEARS ENDED AUGUST 31,
--------------------------------
1994 1995 1996
--------- --------- --------
Net sales 100.0% 100.0% 100.0%
Gross profit 46.4% 45.3% 46.3%
S,G & A expense 35.3% 34.0% 35.7%
Profit from continuing operations before tax 11.1% 11.3% 10.5%
Income from continuing operations before
cumulative effect of accounting change 4.9% 6.6% 6.3%
Effective tax rate 56.3% 41.6% 40.3%
Sales. For the year ended August 31, 1995, total sales were virtually
unchanged from the prior fiscal year. A decrease in the sales of Stang (without
benefit of a large 1994 contract) and a decrease in the shipments of the defense
business were offset by strong growth in the material handling components
business of KVP Systems, Inc. KVP's sales growth is attributable to growing
acceptance of its products and the market for its products, an expanded sales
organization and new product development.
For the year ended August 31, 1996, sales increased by $2,495,000, or 24%,
over the prior fiscal year, primarily due to continued growth in sales in the
material handling components business and increased sales by Stang as a result
of participation in increased building and expansion activity in the
petrochemical industry.
Gross Profit. Gross profit decreased both in dollar amount (by $131,000,
or 3%,) and as a percentage of sales (by 1%) during the year ended August 31,
1995. This decrease in the gross profit and gross margin was attributable
primarily to the absence in fiscal 1995 of the higher than normal gross margins
on the large 1994 Stang contract.
Gross profit for the year ended August 31, 1996 was $5,895,000, an increase
of $1,257,000, or 27%, over the level of gross profit generated during the year
ended August 31, 1995. The increase in gross profit is primarily due to the
growth in the material handling components business and increased sales by
Stang. As a percentage of sales, the gross profit margin increased from 45.3%
for the year ended August 31, 1995 to 46.3% for the year ended August 31, 1996,
primarily due to improved margins at Stang related to higher volume.
Selling, General and Administrative Expense. For the year ended August 31,
1995, selling, general and administrative expense decreased by $143,000, or 4%.
This reduction in net selling, general and administrative expense was the result
of a decrease of $442,000 in the amount of contingent performance payments
accrued for the former shareholders of GST as a consequence of decreased sales
and profitability of Stang and the GST defense business, along with a decrease
in commissions on the reduced level of Stang sales, partially offset by
increased sales and marketing costs incurred by KVP in expanding its sales
organization.
Selling, general and administrative expenses for the year ended August 31,
1996 increased by $1,071,000, or 31%, when compared to total operating expenses
for fiscal year 1995, and as a percentage of sales, increased from 34.0% to
35.7%, largely reflecting increases in sales and marketing expenses at KVP
associated with expanding the sales organization and due to increased contingent
performance payments related to increased sales and profitability at GST and
Stang.
Effective Tax Rate. The effective income tax rate, which is a composite of
federal and state taxes, decreased from 56.3% for fiscal 1994 to 41.6% in fiscal
1995, primarily as a result of a decrease in non-deductible contingent
performance accruals due the former shareholders of GST. In fiscal 1996, the
effective tax rate decreased further to 40.3% as there were no non-deductible
contingent consideration accruals.
14
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities is Summa's most important source of
liquidity. During the year ended August 31, 1995, Summa used $235,000 of cash,
primarily because cash used by discontinued operations of $894,000 related to
inventory growth more than offset cash provided by continuing operations of
$659,000. Net cash provided by operating activities for the year ended August
31, 1996 was $1,577,000, substantially from continuing operations. The improved
cash flows are primarily attributable to lower growth in inventories, lower
payments of accrued contingent performance payments and lower required tax
payments. Additionally, $608,000, net of fees and cash retained by Morehouse-
COWLES, was received as partial consideration for the sale of Morehouse-COWLES,
Inc.
Summa has a revolving line of credit facility of $2,000,000 with an
expiration date of January 1, 1997. The line of credit is secured by all the
assets of Summa. The outstanding balance bears interest at one-quarter
percentage point above the bank's prime rate. There were no borrowings under
the Company's line of credit at August 31, 1996, a reduction of $938,000 from
the August 31, 1995 amount due.
Working capital of Summa's continuing operations decreased by $204,000, or
10%, from $2,086,000 at August 31, 1994 to $1,882,000 at August 31, 1995. This
decrease was attributable primarily to increased utilization of Summa's line of
credit to finance the working capital needs of the discontinued business unit,
which more than offset increases in inventories and accounts receivable
associated with higher levels of sales by KVP Systems, Inc. Accordingly,
Summa's working capital increased by $1,093,000, or 58%, to $2,975,000 at August
31, 1996, reflecting decreased utilization of the line of credit. Over this two-
year period, Summa's current ratio increased from 1.9 to 2.4 and the quick ratio
increased from .8 to 1.1.
Asset utilization in Summa's continuing operations for the fiscal years
ended August 31, 1995 and 1996, is illustrated in the following table:
YEAR ENDED AUGUST 31,
---------------------
1995 1996
--------- ---------
Average working capital turnover 5.2 times 5.2 times
Average accounts receivable turnover 7.8 times 8.4 times
Average inventory turnover 3.7 times 3.5 times
Summa's investment in property, plant and equipment in the years ended
August 31, 1995 and 1996 relates primarily to the acquisition of molds for new
products in the material handling components business. Summa expects to
continue to invest heavily in tooling for new products. At August 31, 1996,
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 for the materials handling components business, will be
sufficient to meet demand for its products with competitive lead times while
producing quality products in a cost-effective manner. Cash flows from
operations are anticipated to be sufficient to fund the working capital and
planned capital expenditure requirements of KVP and GST for the next twelve
months.
The Company is involved in or has recently settled certain legal
proceedings described under Item 3. However, it is not anticipated that these
proceedings will have any significant adverse effect upon the Company's
liquidity or capital resources, since management believes that the Company is
adequately insured against reasonably anticipated costs and expenses that might
be incurred in connection therewith.
LexaLite's most important sources of liquidity are cash provided by
operating activities and credit arrangements with a bank. Cash flow from
operations has been $3,327,000 and $2,754,000 during 1996 and 1995,
respectively. In addition, LexaLite has available credit facilities totaling
$4,250,000. Plans for capital additions of approximately $2,600,000 in 1997 are
anticipated to be financed through cash flows from operations and the existing
credit facilities.
15
SUMMARY LEXALITE HISTORICAL FINANCIAL INFORMATION
The following table summarizes (in thousands) information set forth in the
audited financial statements of LexaLite and the notes thereto which are
included under Item 14(a) of this Annual Report on Form 10-K, and should be read
in conjunction with those financial statements and the related notes.
YEAR ENDED JUNE 30,
----------------------------
INCOME STATEMENT DATA: 1994 1995 1996
---------------------- -------- ------- -------
Net Sales.................................. $26,771 $33,235 $36,089
Income before provision for income taxes... 1,814 2,224 2,551
Net income................................. $ 1,183 $ 1,422 $ 1,588
======= ======= =======
Weighted average number of shares.......... 1,385 1,427 1,477
AS OF JUNE 30,
----------------------------
BALANCE SHEET DATA: 1994 1995 1996
------------------- ------- ------- -------
Total assets............................... $17,147 $23,388 $24,109
Working capital............................ 2,249 3,060 3,599
Long-term debt............................. 5,670 10,490 8,264
Stockholders' equity....................... $ 5,983 $ 7,714 $ 9,505
SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION
The following information has been derived from and should be read in
conjunction with the separate audited historical financial statements of Summa
and LexaLite, the unaudited pro forma combined financial statements of Summa and
LexaLite, and the respective notes thereto, which are included under Item 14(a)
of this Annual Report on Form 10-K. The pro forma combined income statement
data gives effect to the Merger as if it had occurred on September 1, 1995. The
pro forma combined balance sheet gives effect to the Merger as if it had
occurred on August 31, 1996. The pro forma financial information should not be
construed to be indicative of the actual financial condition or results of
operations of Summa on a consolidated basis after consummation of the Merger.
YEAR ENDED
INCOME STATEMENT DATA: AUGUST 31, 1996
--------------------- ---------------
Net sales......................................... $48,831
Income from continuing operations before
provision for taxes.............................. 3,758
Net income from continuing operations............. 2,309
Net income per share from continuing operations... $ .57
Weighted average number of shares............... 4,033
AS OF
BALANCE SHEET DATA: AUGUST 31, 1996
------------------ ---------------
Total assets...................................... $39,234
Working capital................................... 6,124
Long-term debt.................................... 8,564
Shareholders' equity.............................. 19,149
Book value per share.............................. $ 4.79
16
PENDING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable based on
the estimated future cash flows (undiscounted and without interest charges).
SFAS No. 121 also requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less costs to sell. Summa plans to adopt SFAS No. 121 as of
September 1, 1996 and believes the effect of adoption will not be material to
the financial statements.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation." Under SFAS No. 123, companies
have the option to implement a fair value-based accounting method or continue to
account for employee stock options and stock purchase plans using the intrinsic
value-based method of accounting as prescribed by Accounting Principles Board
(APB) Opinion No. 25 "Accounting for Stock Issued to Employees." Entities
electing to remain under APB Opinion No. 25 must make pro forma disclosures of
net income or loss and earnings per share as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied. SFAS No. 123 is effective
for financial statements for fiscal years beginning after December 15, 1995.
The Company has tentatively determined it will continue to account for stock
options under APB Opinion No. 25.
ITEM 8 CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS.
None.
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The following table sets forth certain information concerning Summa's
executive officers and directors:
Name Positions with Summa Age
---- -------------------- ---
James R. Swartwout Chairman, President, Chief Executive 50
Officer and Chief Financial Officer
Coalson C. Morris Director 80
Dale H. Morehouse Director 63
Michael L. Horst Director 50
William R. Zimmerman Director 69
David McConaughy Director 64
Karl V. Palmaer Director 75
Byron C. Roth Director 33
Josh T. Barnes Director 68
Paul A. Walbrun Vice President, Controller
and Secretary 54
James R. Swartwout has been Chairman of the Board of Directors since August
1990, and Chief Executive Officer since July 1990. Previously, he had been the
President and Chief Operating Officer since August 1989, after joining Summa in
October 1988 as Executive Vice President and Chief Operating Officer. Before
joining Summa, Mr. Swartwout was a principal in a private leveraged buyout
venture. From April, 1985 to October, 1988, he served as Executive Vice
President of Delphian Corporation, Sunnyvale, California, a manufacturer of
analytical instruments, and held management positions at Farr Company, El
Segundo, California, a manufacturer of industrial filtration systems.
Coalson C. Morris has been a director of Summa since 1968. He also
currently serves on the Board of Directors of PMC Mortgage Corporation.
Dale H. Morehouse has served as a director of Summa since 1975. He was
Chairman of the Board and Chief Executive Officer of Summa from February 1987
until August 1990, having previously held several offices of Summa from 1983 to
1987. Mr. Morehouse currently is retired.
Michael L. Horst has been a director of Summa since 1978. He is an
independent consultant specializing in strategic planning in real estate. He
was formerly a Senior Vice President of PBR, a community planning consulting
firm. Mr. Horst is a founding principal of International Tourism and Resort
Advisors, a resort development consulting firm, serves as a lecturer at the
University of Southern California, and is a founder of Shenoa, a retreat and
learning center.
William R. Zimmerman, the President of Zimmerman Holdings, Inc., a private
investment company, has served on the Board of Summa since 1987. He is a former
executive officer of Monogram Industries, Inc., Swedlow, Inc., and Avery
International.
David McConaughy, who has been on the Board of Summa since 1990, currently
is the majority owner and President of Data Management Resources, which supplies
and maintains integrated business management systems. Previously, Mr.
McConaughy was on the faculty of the University of Southern California Graduate
School of Business, and has had a strategic planning consulting practice.
18
Karl V. Palmaer, a founder of KVP Systems, Inc., has been on the Board of
Summa since 1993. Mr. Palmaer is active as a technical consultant to KVP
Systems, Inc.
Byron C. Roth has been President of Cruttenden Roth, Investment Bankers
since 1993. Previously, he was Managing Director of Corporate Finance there.
Prior to joining Cruttenden, Mr. Roth was Vice President, Corporate Finance,
with R.G. Dickinson and Company.
Josh T. Barnes is the founder of LexaLite and has been a director and
executive officer thereof since its formation in 1963. Previously, Mr. Barnes
served as a product developer and sales representatives for various thermoset
and thermoplastic manufacturers. Mr. Barnes is a registered professional
mechanical engineer (Michigan), holds degrees from Lawrence Institute of
Engineering (Civil) and the U.S. Army Corps of Engineers Officer Training
School, is a member of the Illuminating Engineering Society and the Society of
Plastic Engineers, and holds several lighting related patents. He has long been
active in the community of Charlevoix, Michigan and currently serves as its
Mayor.
Paul A. Walbrun has been Vice President, Controller and Secretary of Summa
since October 1994, and was Vice President, Controller of Summa's former
subsidiary, Morehouse-COWLES, Inc., from July 1994 until June 1996 when it was
sold. Before joining Summa, Mr. Walbrun was Director of Financial Reporting
with Bird Medical Technologies, Inc. and Controller of Stackhouse, Inc., a Bird
Medical Technologies manufacturing subsidiary.
Dale H. Morehouse and Michael L. Horst are cousins. Karl V. Palmaer is the
father of Eric K. Palmaer, a Vice President of Summa. There are no other family
relationships among any of Summa's executive officers and directors.
During the fiscal year ended June 30, 1996, Summa's Board of Directors held
__ meetings or otherwise took action by written consent. The Board has an Audit
Committee consisting of Messrs. McConaughy, Horst and Roth, whose function is
to advise the Board on audit matters affecting Summa, including recommendations
as to the appointment of independent auditors of Summa and reviewing with such
auditors the scope and result of their examination of the financial statements
of Summa. During the fiscal year ended August 31, 1995, this Committee held one
meeting attended by all members. The Board acts as a whole with respect to
compensation, administration of stock option plans, selection of nominees for
election to the Board of Directors, and all other matters, and there are no
other committees of the Board.
ITEM 11 EXECUTIVE COMPENSATION.
The following summary compensation table sets forth the information
regarding compensation for services in all capacities paid or accrued for the
fiscal years indicated by Summa to its Chief Executive Officer. No other
executive officer of the Company received cash compensation in excess of
$100,000 for the fiscal year ended August 31, 1996.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- ------------------------ ----------
NAME AND STOCK L/TIP ALL OTHER
- --------
PRINCIPAL POSITION YEAR SALARY $ BONUS $ OTHER $ AWARDS $(1) OPTIONS # PAYOUTS $ COMPENSATION (2)
- ------------------ ----- -------- ------- ------- ------------ --------- --------- ----------------
James R. Swartwout, 1996 135,000 - -0- -0- -0- -0- 9,152
Chairman, Chief 1995 132,083 26,250 -0- 23,500 -0- -0- 9,150
Executive Officer and 1994 121,792 33,600 -0- 12,000 -0- -0- 8,934
Chief Financial Officer
- -----------------------------
(1) Includes stock awards of 5,000 shares in 1995 and 2,000 shares in 1994,
valued at the average of the high and low trading price of Summa's Common
Stock on the respective dates of award.
(2) Includes payments for a long term disability insurance policy and
contributions under Summa's 401(k) Plan.
Non-employee directors receive a fee of $300 and are reimbursed for travel
expenses connected with each Board Meeting attended, but do not receive
additional fees serving on the Audit Committee. During the fiscal year ended
August 31, 1996, each of the seven outside directors was awarded an option to
purchase 2,500 shares of Summa's Common Stock at an exercise price of $4.75, the
closing price of the stock on the date of the grant.
19
Employment Arrangements.
- -----------------------
In March, 1994, the Company entered into an employment agreement with James
R. Swartwout under which he is to be paid an annual base salary to be determined
by the Board of Directors, and an annual bonus of up to 40% of his base salary,
to be determined by the Board of Directors based upon the performance of Summa
during the preceding fiscal year, payable in cash or stock at his election. In
the event of his termination, other than for cause, Mr. Swartwout is entitled to
severance pay equal to six months of his current compensations. In the event of
a "change in control" of Summa (defined as the acquisition by a person or group
of either 30% or more of Summa's voting power or the right to elect a majority
of the directors of Summa, the sale of 50% or more of the total fair market
value of the Company's assets, or a specified change in the composition of
Summa's Board of Directors), and regardless of whether his employment is
terminated as a result of such event, Mr. Swartwout would be entitled to receive
as a special bonus an amount equal to two year's base salary at the level then
being paid to him.
Josh T. Barnes currently serves on an "at will" basis as Executive Director
of LexaLite, at a current salary of $60,000 per year, subject to annual review
by the Boards of Directors of Summa and LexaLite. Mr. Barnes also is entitled
to reimbursement for his necessary expenses including the costs of suitable
transportation., and to receive incentive annual bonuses to be determined in
accordance with a specified formula. Both Mr. Barnes and LexaLite have the
right to terminate his employment at any time. in which event LexaLite would not
obligated to provide Mr. Barnes any specific severance compensation except that
his then current salary and benefits would continue for six months following
termination. However, it is understood that the manner, notice and terms of
termination of Mr. Barnes' employment by LexaLite would recognize the many
years of his service to LexaLite. Mr. Barnes also has entered into a Non-
Compete Agreement with LexaLite, which as modified in connection with the
Merger, will be triggered by and survive the termination of his employment with
LexaLite.
401(k) Plans
- ------------
Summa has adopted Section 401(k) Plans benefitting substantially all
employees in compliance with relevant ERISA regulations. The plans allow
employees to defer specified percentages of their compensation, as defined, in a
tax-exempt trust. The Company is required to make matching contributions, as
defined, to the plan and may make additional profit-sharing contributions at the
discretion of the Board of Directors. Total contributions to the 401(k)
accounts of employees of KVP, GST and the parent company for the year ended
August 31, 1996 was $83,000. During its fiscal year ended June 30, 1996,
LexaLite contributed a total of $289,500 to the accounts of all of its
participating employees.
Employee Stock Ownership Plan.
- ------------------------------
In approving the Merger, the shareholders of Summa also approved the
adoption by Summa of the Employee Stock Ownership Plan ("ESOP") of LexaLite, as
amended, so that the ESOP Trustee is required to purchase shares of Summa's
Common Stock in the market whenever it receives a cash contribution to the ESOP.
Alternately, Summa will be able to make direct contributions of Common Stock to
the ESOP as determined by Summa's Board of Directors. Benefits are payable to
substantially all of LexaLite's employees in the form of shares of Summa's
Common Stock. LexaLite provides discretionary contributions to the ESOP as
determined by the Summa and LexaLite Boards of Directors, which are then
allocated to the participants' accounts annually based on hours of service,
compensation and vesting parameters (typically 20% per year of service).
LexaLite employees who receive distributions of Summa's Common Stock ESOP during
the three full years following the Merger retain the option to cause the ESOP
Trust to purchase the shares at a price determined in accordance with a
specified formula, rather than receive a distribution of the shares which must
then be sold in the public marketplace. In the fiscal year ended June 30, 1996,
LexaLite's contributions to the ESOP totalled $143,000, with 191 active
participants.
NBD Bank, N.A., the trustee of the ESOP Trust which holds shares of Summa's
Common Stock for the ESOP, has voting and limited investment power over shares
held by the ESOP Trust that have not been allocated to individual accounts. The
ESOP is administered by an Administrator, currently Mr. Swartwout, who has the
power to direct the trustee as to the voting of shares held by the ESOP Trust
that have not been allocated to individual accounts, and has the power to direct
the trustee as to the voting of shares held by the ESOP Trust that have been
allocated to individual accounts unless the ESOP Trust receives a loan or other
extension of credit to purchase Summa's Common Stock or more than 10% of the
ESOP's assets are invested in Summa's Common Stock, in which event participants
are entitled to vote the shares allocated to their accounts on
20
the merger, consolidation, recapitalization, reclassification, liquidation or
dissolution, sale of substantially all of Summa's assets, or any similar
transaction. The trustee and Administrator each disclaim beneficial ownership of
shares held by the ESOP Trust, and the ESOP shares are not reported as
beneficially owned by either the trustee or the Administrator unless the shares
have been allocated to their respective individual accounts.
At the discretion of Summa's Board of Directors, the ESOP may expanded to
include employees of other operating subsidiaries of Summa on such terms and
provisions for contribution as may be adopted by the respective boards of
directors of Summa and its other operating subsidiaries, to provide that future
contributions thereto may be made either in cash or in shares of Summa's Common
Stock, and to authorize the ESOP to borrow money for the purchase of Common
Stock either in the public market or directly from ESOP participants.
Stock Option Plans
- ------------------
Summa has three stock option plans, all of which have been approved by the
shareholders of Summa and are administered by its Board of Directors. The 1984
Stock Option Plan (the "1984 Plan") provides for the grant of options to key
employees to purchase an aggregate of 25,000 shares of Summa's Common Stock. At
August 31, 1996, options to acquire 24,625 shares of Common Stock had been
granted, including options to purchase 12,500 shares previously granted to Mr.
Swartwout, at prices ranging from $1.50 to $5.00, the market price of the stock
on the date of grant. At August 31, 1996, options to purchase 5,375 shares had
been exercised and options to purchase 14,875 shares were exercisable. Under
the 1991 Stock Option Plan (the "1991 Plan"), options to purchase an aggregate
of 150,000 shares of Summa's Common Stock may be granted to key employees,
directors, consultants, vendors, and others. At August 31, 1996, options to
purchase 125,000 shares had been granted, including options to purchase 25,000
shares previously granted to Mr. Swartwout, at prices ranging from $2.72 to
$6.00. Of these options, options for 90,497 shares were exercisable but none
had been exercised, and options to purchase 25,000 shares remained available for
future grant. The 1995 Stock Option Plan (the "1995 Plan") provides for the
grant of options to purchase an aggregate of 250,000 shares of Summa's Common
Stock, which may be granted to key employees, directors, consultants, vendors,
customers and others. At August 31, 1996, options to purchase 101,223 shares,
at prices ranging from $3.613 to $5.10, had been granted to ten employees and
seven directors, of which options to purchase 96,207 shares were exercisable,
none of which had been exercised. Options to purchase 148,777 shares remained
available for future grant. No options were granted to Mr. Swartwout under the
1984 Plan, the 1991 Plan or the 1995 Plan during the fiscal year ended August
31, 1996.
The following table sets forth information regarding Summa options
exercised during the year ended August 31, 1996 by the executive officer of the
Company identified in the Summary Compensation Table set forth above, as well as
the aggregate value of unexercised options held by such executive officer at
August 31, 1996. The Company has no outstanding stock appreciation rights,
either freestanding or in tandem with options.
AGGREGATED OPTION EXERCISES LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
Value of Unexercised
Number of Unexercised in-the-money Options
Shares Options at Fiscal Year End at Fiscal Year End ($) (1)
Acquired on Value --------------------------- ---------------------------
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------- ------------ -------- ----------- ------------- ----------- -------------
James R. Swartwout -- -- 37,500 -- $113,350 --
- ---------------------
(1) Calculated based on the closing price of the Company's Common Stock as
reported on The NASDAQ National Market System on August 31, 1996, which was
$6.00 per share.
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the ownership
of Summa Common Stock as of November 22, 1996 by each shareholder known by Summa
to be the beneficial owner of more than 5% of its outstanding shares of Common
Stock, each director of Summa, and all executive officers and directors of Summa
as a group. Each of the shareholders has sole voting and investment power with
respect to the shares he beneficially owns, subject to applicable community
property laws. Unless otherwise indicated, the address of each shareholder
listed is in care of Summa, 21250 Hawthorne Boulevard, Suite 500, Torrance,
California 90503.
SHARES PERCENT
BENEFICIALLY OF
NAME OWNED CLASS (1)
-------------------------- ------------- ----------
Coalson C. Morris (2)...................................... 10,945 0.3
Dale H. Morehouse (2)(3)(4)................................. 99,622 2.4
Michael L. Horst (2)........................................ 13,057 0.3
William R. Zimmerman (2).................................... 10,025 0.2
James R. Swartwout (2)...................................... 73,479 1.8
David McConaughy (2)........................................ 12,500 0.3
Karl V. Palmaer (2)......................................... 140,228 3.4
Byron C. Roth (2)........................................... 10,000 0.2
Josh T. Barnes (2) (5)..................................... 269,596 6.6
Employee Stock Ownership Trust.............................. 815,746 20.0
Arthur R. Marshall (6)...................................... 268,125 6.6
Wilfred G. Cryderman (6).................................... 268,125 6.6
All directors and executive
officers as a group (9 persons)(2)(3)(4)(5)................. 639,452 15.2
- -----------------------------------
(1) Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission, based on information
furnished by each holder listed. The percentages shown include shares
which each named shareholder has the right to acquire within 60 days of the
date hereof. In calculating percentage ownership, all shares which a named
shareholder has the right to so acquire are deemed outstanding for the
purpose of computing the percentage ownership of that shareholder, but are
not deemed outstanding for the purpose of computing the percentage
ownership by any other shareholder. Listed persons may disclaim beneficial
ownership of certain shares.
(2) Includes currently exercisable stock options.
(3) Includes shares held as Trustee for the Morehouse Family Revocable Living
Trust.
(4) Includes shares held as Trustee for Dale H. Morehouse, Inc. Defined Benefit
Pension Trust.
(5) Includes shares held in one or more living trusts, in a Section 401(K)
Plan, and in the ESOP.
(6) Includes shares held in one or more revocable living trusts of which the
shareholder is a beneficiary.
22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Josh T. Barnes, a member of Summa's Board of Directors, owns and operates
Business Activities Corporation (B.A.C.), a Michigan corporation. LexaLite pays
commissions to B.A.C. for sales of "800 Series" proprietary product, pursuant to
a Design and Consulting Agreement effective January 1, 1993. LexaLite paid
B.A.C. commissions of $85,000, $107,000, and $131,000 for the fiscal years 1994,
1995 and 1996, respectively. In the opinion of the management of LexaLite, the
commissions paid to B.A.C. are comparable to those that could be arranged with
an unrelated party. Mr. Barnes also has a Non-Compete Agreement with LexaLite
which would become effective in the event of his termination of employment
and/or of the Consulting Agreement between LexaLite and B.A.C. The Non-Compete
Agreement provides for the payment to Mr. Barnes of $15,000 per quarter for 20
consecutive quarters from and after the date on which the Non-Compete Agreement
becomes effective. The Non-Compete Agreement expires ten (10) years following
the date of the first such payment.
Summa's Bylaws provide that Summa must indemnify its officers and
directors, and may indemnify its employees and other agents, to the fullest
extent permitted by California law. California law provides that directors of a
California corporation will not be personally liable for monetary damages for
breach of fiduciary duties as directors except for liability as a result of
their duty of loyalty to the corporation for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, unlawful
payments of dividends or stock transactions, unauthorized distributions of
assets, loans of corporate assets to an officer or director, unauthorized
purchase of shares, commencing business before obtaining minimum capital, or any
transaction from which a director derived an improper benefit. Such limitations
do not affect the availability of equitable remedies such as injunctive relief
or rescission. At present, there is no pending litigation or proceeding
involving any director, officer, employee, or agent of the Company where
indemnification will be required or permitted. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to officers,
directors or persons controlling Summa pursuant to the foregoing provisions,
Summa has been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Management believes that each of the foregoing transactions was in Summa's
best interests and on terms no less favorable than could have been receiveed
from an un-affiliated party in an arms-length transaction. As a matter of
policy, any future transactions between Summa and any of its executive officers,
directors, or principal shareholders, or any of their affiliates, will be on
terms that a majority of the independent, disinterested members of Summa's Board
of Directors believe to be no less favorable to Summa than could have been
obtained from an unaffiliated third party in an arms-length transaction.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The following documents are either filed herewith or
incorporated herein by reference:
(1) CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
--------------------------------------------------------
The audited consolidated financial statements of Summa as of August 31, 1995 and
1996 and for each of the three years ended August 31, 1996, (including the notes
thereto which contain unaudited quarterly financial data for the two-year period
ended August 31, 1996), the audited financial statements of LexaLite as of June
30, 1995 and 1996 and for each of the three years ended June 30, 1996 (including
the notes thereto), the unaudited financial statements of LexaLite as of
September 30, 1996 and for the three months then ended (including the notes
thereto), the respective reports of independent public accountants thereon, and
certain pro forma financial information which reflect the acquisition by Summa
of LexaLite, are included herein as set forth in the Index to Financial
Statements below.
23
(2) FINANCIAL STATEMENT SCHEDULES.
-----------------------------
Schedule VIII - Valuation and qualifying accounts.
(3) EXHIBITS.
--------
21. Subsidiaries.
23.1 Consent of Independent Public Accountants.
All other Exhibits previously filed with the Securities and Exchange
Commission in connection with the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1995 (File No. 1-7755) and the Company's
Registration Statement on Form S-4 (File No. 333-11571) are by this reference
incorporated herein.
(b) REPORTS ON FORM 8-K. None.
INDEX TO FINANCIAL STATEMENTS
SUMMA INDUSTRIES
Report of Independent Public Accountants................................................................... F-1
Consolidated Balance Sheets as of August 31, 1995 and 1996................................................. F-2
Consolidated Statements of Income for each of the three years ended August 31, 1994, 1995 and 1996......... F-3
Consolidated Statements of Shareholders' Equity for each of the three years ended
August 31, 1994, 1995 and 1996............................................................................. F-4
Consolidated Statements of Cash Flows for each of the three years ended August 31, 1994, 1995 and 1996..... F-5
Notes to Consolidated Financial Statements................................................................. F-6
LEXALITE INTERNATIONAL CORPORATION
Report of Independent Public Accountants................................................................... F-14
Balance Sheets as of June 30, 1995 and 1996................................................................ F-15
Statements of Income for each of the three years ended June 30, 1994, 1995 and 1996........................ F-17
Statements of Changes in Stockholders' Equity for each of the three years ended June 30, 1994, 1995, 1996.. F-18
Statements of Cash Flows for each of the three years ended June 30, 1994, 1995 and 1996.................... F-19
Notes to Financial Statements.............................................................................. F-20
Condensed Balance Sheets as of September 30, 1996.......................................................... F-28
Condensed Statements of Income for the three months ended September 30, 1995 and 1996 (unaudited).......... F-29
Condensed Statements of Cash Flows for the three months ended September 30, 1995 and 1996 (unaudited)...... F-30
Notes to Condensed Financial Statements.................................................................... F-31
SUMMA AND LEXALITE PRO FORMA INFORMATION
Summa Industries Unaudited Pro Forma Condensed Consolidated Financial Statements........................... F-32
Summa Industries Pro-Forma Condensed Consolidated Balance Sheet as of August 31, 1996...................... F-33
Summa Industries Pro-Forma Condensed Consolidated Statement of Income for the Year Ended
August 31, 1996.......................................................................................... F-34
24
Report of Independent Public Accountants
TO: THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SUMMA INDUSTRIES
We have audited the accompanying consolidated balance sheets of SUMMA INDUSTRIES
(a California corporation) and subsidiaries as of August 31, 1995 and 1996 and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended August 31, 1996. 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, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1996, in conformity with generally accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, effective
September 1, 1993, the Company changed its method of accounting for income
taxes.
ARTHUR ANDERSEN LLP
Orange County, California
October 3, 1996
F-1
SUMMA INDUSTRIES
Consolidated Balance Sheets at August 31
ASSETS 1995 1996
- --------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 182,000 $ 567,000
Accounts receivable, net of
allowance for doubtful accounts
of $59,000 in 1995 and $51,000 in
1996 1,396,000 1,627,000
Inventories 1,685,000 2,186,000
Prepaid expenses and other 318,000 212,000
Deferred tax asset 381,000 444,000
- --------------------------------------------------------------------
Total current assets 3,962,000 5,036,000
- --------------------------------------------------------------------
Property, plant and equipment, at cost:
Land 550,000 550,000
Building and leasehold improvements 1,208,000 1,278,000
Machinery and equipment 3,153,000 3,911,000
Office furniture and equipment 247,000 321,000
- --------------------------------------------------------------------
5,158,000 6,060,000
Less: Accumulated depreciation and
amortization 1,554,000 2,082,000
- --------------------------------------------------------------------
Net property, plant and equipment 3,604,000 3,978,000
- --------------------------------------------------------------------
Other assets 28,000 1,865,000
- --------------------------------------------------------------------
Net assets of discontinued operations 2,702,000 ---
- --------------------------------------------------------------------
Goodwill and other intangibles, net 982,000 946,000
- --------------------------------------------------------------------
$11,278,000 $11,825,000
====================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------
Current liabilities:
Revolving line of credit $ 938,000 $ ---
Accounts payable 486,000 812,000
Accrued salaries, wages and benefits 311,000 465,000
Accrued performance payments 178,000 478,000
Other accrued liabilities 167,000 119,000
Income tax payable --- 187,000
- --------------------------------------------------------------------
Total current liabilities 2,080,000 2,061,000
Long-term debt 400,000 300,000
Deferred income taxes 794,000 763,000
Other long-term liabilities 74,000 57,000
- --------------------------------------------------------------------
Total liabilities 3,348,000 3,181,000
- --------------------------------------------------------------------
Commitments and contingencies
- --------------------------------------------------------------------
Shareholders' equity:
Preferred stock, par value $.001;
5,000,000 shares authorized,
none outstanding --- ---
Common stock, par value $.001;
10,000,000 shares authorized,
1,541,930 and 1,603,483 shares
issued and outstanding
at August 31, 1995 and 1996,
respectively. 6,011,000 6,157,000
Retained earnings 1,919,000 2,487,000
- --------------------------------------------------------------------
Total shareholders' equity 7,930,000 8,644,000
- --------------------------------------------------------------------
$11,278,000 $11,825,000
====================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED AUGUST 31,
1994 1995 1996
- -------------------------------------------------------------------------------------
Net sales $10,279,000 $10,247,000 $12,742,000
Cost of sales 5,510,000 5,609,000 6,847,000
- -------------------------------------------------------------------------------------
Gross profit 4,769,000 4,638,000 5,895,000
Selling, general and administrative
expenses 3,623,000 3,480,000 4,551,000
- -------------------------------------------------------------------------------------
Income from continuing operations before
provision for taxes and cumulative
effect of accounting change 1,146,000 1,158,000 1,344,000
Provision for income taxes 645,000 482,000 541,000
- -------------------------------------------------------------------------------------
Income from continuing operations before
cumulative effect of accounting
change 501,000 676,000 803,000
Income (loss) from discontinued operations,
net of the effect of income tax of $79,000
in 1994, ($12,000) in 1995 and ($186,000)
in 1996 118,000 (28,000) (235,000)
Cumulative effect of accounting change 100,000 --- ---
- --------------------------------------------------------------------------------------
Net income $ 719,000 $ 648,000 $ 568,000
======================================================================================
Income per common and equivalent share
Income from continuing operations
before cumulative effect of accounting
change $ .32 $ .44 $ .50
Income (loss) from discontinued
operations, net of the effect of income
tax .08 (.02) (.15)
Cumulative effect of accounting
change .06 --- ---
- --------------------------------------------------------------------------------------
Net income per common and equivalent
share $ .46 $ .42 $ .35
======================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------
COMMON SHARES COMMON RETAINED TOTAL
STOCK EARNINGS
- -------------------------------------------------------------------------------------------------
Balance at August 31, 1993 1,529,895 $5,953,000 $ 552,000 $6,505,000
Cashout of odd lots (1,938) (12,000) --- (12,000)
Management bonus 2,000 12,000 --- 12,000
Net Income --- --- 719,000 719,000
- -------------------------------------------------------------------------------------------------
Balance at August 31, 1994 1,529,957 5,953,000 1,271,000 7,224,000
Cashout of odd lots (27) --- --- ---
Exercise of options 7,000 34,000 --- 34,000
Management bonus 5,000 24,000 --- 24,000
Net Income --- --- 648,000 648,000
- -------------------------------------------------------------------------------------------------
Balance at August 31, 1995 1,541,930 6,011,000 1,919,000 7,930,000
Cashout of odd lots (2) --- --- ---
Stock redeemed in exercise of stock
options (5,200) (32,500) --- (32,500)
Exercise of options 35,923 178,500 --- 178,500
Reserved shares, acquisition of KVP 30,832 --- --- ---
Net Income --- --- 568,000 568,000
=================================================================================================
Balance at August 31, 1996 1,603,483 $6,157,000 $2,487,000 $8,644,000
=================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31
1994 1995 1996
- ---------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 719,000 $ 648,000 $ 568,000
- ---------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Cumulative effect of change in
accounting principle (100,000) --- ---
Depreciation and amortization 616,000 727,000 744,000
Provision for doubtful accounts
receivable 22,000 (15,000) 53,000
Deferred income taxes --- 327,000 (94,000)
(Gain) loss on disposition of property
and equipment 13,000 (10,000) ---
Net change in assets and liabilities, net
of effects from purchase of Armenco
Engineering in fiscal 1994: (59,000)
Accounts receivable (644,000) (6,000) 34,000
Inventories 349,000 (1,617,000) (73,000)
Prepaid expenses and other assets (146,000) (203,000) 99,000
Accounts payable (389,000) 759,000 (114,000)
Accrued liabilities 365,000 (845,000) 419,000
- ---------------------------------------------------------------------------------------------------
Total adjustments 86,000 (883,000) 1,009,000
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 805,000 (235,000) 1,577,000
- ---------------------------------------------------------------------------------------------------
Investing activities:
Acquisition of Armenco Engineering in fiscal 1994,
net of cash acquired (400,000) --- ---
Sale of Morehouse-COWLES, Inc. in fiscal 1996, net
of fees and of cash held by Morehouse-COWLES,
Inc. --- --- 608,000
Capital expenditures:
Purchases of property and equipment (834,000) (836,000) (983,000)
Cash paid for patents (3,000) (16,000) (21,000)
Net proceeds from the sale of equipment 21,000 53,000 96,000
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,216,000) (799,000) (300,000)
- ---------------------------------------------------------------------------------------------------
Financing activities:
Net proceeds from (payments on) line of
credit --- 938,000 (938,000)
Payments on long term debt (7,000) --- (100,000)
Principal payments under capital lease (41,000) (14,000) ---
Proceeds from the exercise of stock
options --- 34,000 146,000
Proceeds from the issuance of common
stock --- 24,000 ---
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (48,000) 982,000 (892,000)
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (459,000) (52,000) 385,000
Cash and cash equivalents, beginning of
year 693,000 234,000 182,000
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the
year $ 234,000 $ 182,000 $ 567,000
===================================================================================================
Supplemental cash flow information:
Cash paid during the period for interest $ 49,000 $ 88,000 $ 107,000
===================================================================================================
Cash paid during the period for income
taxes $ 681,000 $ 427,000 $ 301,000
===================================================================================================
Supplemental disclosure of noncash investing activities:
The Company received a note receivable of $1,771,000 in 1996 as partial
consideration for the sale of Morehouse-COWLES, Inc.
===============================================================================
The accompanying notes are integral part of these consolidated financial
statements.
F-5
SUMMA INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1994, 1995 AND 1996.
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
SUMMA INDUSTRIES ("SUMMA"), which was incorporated in California in 1942,
currently serves as a holding company whose businesses are conducted primarily
through its two wholly-owned subsidiaries, KVP Systems, Inc. and GST Industries,
Inc. Summa's subsidiaries manufacture proprietary industrial components.
Products include conveyor components for food manufacturing industries,
aerospace actuators and firefighting components for petrochemical plants. Sales
are domestic and worldwide (see Note 12).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include SUMMA and its
wholly-owned subsidiaries, GST Industries, Inc., KVP Systems, Inc. and Fullerton
Holdings, Inc. The consolidated financial statements also include Morehouse-
COWLES, Inc. (Morehouse-COWLES"), for the years ended August 31, 1994, 1995 and
for the nine month period ended May 31, 1996, when Morehouse-COWLES was
discontinued (see Note 15). All intercompany account balances and transactions
have been eliminated in consolidation. Certain reclassifications of 1994 and
1995 amounts have been made to conform to 1996 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.
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 10-20 years
Machinery and equipment 3-15 years
Office furniture and equipment 3-10 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 betterments 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 primarily include goodwill and other intangibles such as trade
names, patents and customer relationships 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 years (see
Note 6).
F-6
NET INCOME PER COMMON AND EQUIVALENT SHARE
Per share amounts are based on the weighted average number of common and
equivalent shares outstanding during each year. Common equivalent shares relate
to shares issuable upon the exercise of stock options (Note 11). Income per
common and equivalent share is the same as fully diluted earnings per share for
all years presented. Weighted average common and equivalent shares outstanding
were 1,548,000, 1,553,000, and 1,603,000 for 1994, 1995, and 1996, respectively
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.
PENDING ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable based on the estimated future cash flows (undiscounted and without
interest charges). SFAS No. 121 also requires that long-lived assets and
certain identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less costs to sell. Summa plans to adopt SFAS No.
121 as of September 1, 1996 and believes the effect of adoption will not be
material to the financial statements.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123
"Accounting for Stock-Based Compensation." Under SFAS No. 123, companies have
the option to implement a fair value-based accounting method or continue to
account for employee stock options and stock purchase plans using the intrinsic
value-based method of accounting as prescribed by Accounting Principles Board
(APB) Opinion No. 25 "Accounting for Stock Issued to Employees." Entities
electing to remain under APB Opinion No. 25 must make pro-forma disclosures of
net income or loss and earnings per share as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied. SFAS No. 123 is effective
for financial statements for fiscal years beginning after December 15, 1995.
The Company has tentatively determined it will continue to account for stock
options under APB Opinion No. 25.
2. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate:
CASH AND CASH EQUIVALENTS - The carrying amount is a reasonable estimate of
fair value. These assets consist of short term certificates of deposit and
demand deposits.
NOTE RECEIVABLE - The note receivable was received as partial consideration
for the sale of all of the stock of Morehouse-COWLES. The carrying value is
a reasonable estimate of fair value since the interest rate approximates
long-term interest rates available on government debt securities.
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.
3. INVENTORIES
Inventories consist of the following at August 31:
1995 1996
- -----------------------------------------------------------------------
Finished goods $ 538,000 $ 713,000
Work in process 71,000 81,000
Materials and parts 1,076,000 1,392,000
- -----------------------------------------------------------------------
$1,685,000 $2,186,000
=======================================================================
F-7
4. PROPERTY AND EQUIPMENT LEASED TO OTHERS AND RENTAL INCOME
Included in property, plant and equipment are certain land and buildings which
are being leased to Morehouse-COWLES. The cost of the land is $550,000 and the
cost of the building is $1,208,000 less accumulated depreciation of $916,000 at
August 31, 1996. The lease is for ten years with an option for an additional
five years. The monthly rent, on a "triple-net basis" is $4,000 during the
first five years of the lease, increasing to $5,500 per month during the second
five years of the original lease term.
5. OTHER ASSETS
Other assets consist primarily of a note receivable for $1,771,000 received as
partial consideration for the sale of all of the stock of Morehouse-COWLES. The
note is subordinated to the buyers' bank credit agreement and is secured by a
pledge of all of the outstanding capital stock of Morehouse-COWLES as well as by
the assets of Morehouse-COWLES. Under the terms of the note, interest is due
monthly at an annual rate of 7 percent until June 2001. Interest at 9 percent
and amortizing principal payments will be due monthly from June 2001 through
June 2006.
6. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consist of the following at August 31:
1995 1996
- -------------------------------------------------------------------
Goodwill, representing cost in excess
of the net assets of acquired businesses $ 615,000 $ 615,000
Other intangibles related to KVP 508,000 527,000
- -------------------------------------------------------------------
1,123,000 1,142,000
Less: accumulated amortization (141,000) (196,000)
- -------------------------------------------------------------------
Goodwill and other intangibles, net $ 982,000 $ 946,000
===================================================================
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:
1994 1995 1996
- --------------------------------------------------------------------------
Provision for taxes at statutory rates $390,000 $394,000 $457,000
State tax, net of federal benefit 107,000 70,000 82,000
Effect of performance payments 126,000 26,000 ---
Other-net 22,000 (8,000) 2,000
- --------------------------------------------------------------------------
Provision for income taxes $645,000 $482,000 $541,000
==========================================================================
The provision for income taxes consists of the following for the years ended
August 31:
1994 1995 1996
- --------------------------------------------------------------------------
Current:
Federal $433,000 $244,000 $493,000
State 140,000 81,000 142,000
- --------------------------------------------------------------------------
573,000 325,000 635,000
- --------------------------------------------------------------------------
Deferred: 72,000 157,000 (94,000)
- --------------------------------------------------------------------------
Provision for income taxes $645,000 $482,000 $541,000
==========================================================================
Effective September 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". This standard
requires income taxes to be accounted for under the liability method and
calculates deferred tax balances using tax rates in effect when the taxes will
be paid. Included in the consolidated statement of income for the year ended
August 31, 1994, is a cumulative benefit of $100,000, or $.06 per share, which
represents a cumulative adjustment to recalculate deferred tax balances. Prior
years' financial statements have not been restated as a result of this change.
F-8
The components of the Company's deferred tax asset (liability) at August 31,
1995 and 1996 are as follows:
1995 1996
- ------------------------------------------------------------------
Effect of performance payments $ 40,000 $ 141,000
State taxes 33,000 72,000
Reserves 308,000 231,000
Other items --- ---
- -----------------------------------------------------------------
Total deferred tax assets 381,000 444,000
- -----------------------------------------------------------------
Depreciation (626,000) (636,000)
Amortization (147,000) (127,000)
Other items (21,000) ---
- -----------------------------------------------------------------
Total deferred tax liabilities (794,000) (763,000)
- -----------------------------------------------------------------
Net deferred tax liability $(413,000) $(319,000)
=================================================================
Changes in components of the Company's deferred tax balances are as follows:
Effect of performance payments $ (69,000) $ 101,000
State taxes (24,000) 39,000
Reserves 114,000 (77,000)
Depreciation (98,000) (10,000)
Amortization 12,000 20,000
Other (92,000) 21,000
- -----------------------------------------------------------------
$(157,000) $ 94,000
=================================================================
8. NOTES PAYABLE AND LONG-TERM DEBT
The Company has a term loan from an officer of a subsidiary with an outstanding
balance in the amount of $300,000 at August 31, 1996, secured by the Company's
real estate in Fullerton, California. Interest payments on the term loan are
due monthly at 8 1/2 percent. The Company paid interest on the term loan of
$32,000, $32,000 and $33,000 for the years ended August 31, 1994, 1995 and 1996,
respectively.
Principal payments on the term loan are due in subsequent years as follows:
1998 $100,000
1999 100,000
2000 100,000
- -------------------------------------------
Total $300,000
===========================================
In January 1996, the Company renewed an agreement with a bank for a $2,000,000
line of credit of which none was in use at August 31, 1996. Interest is due
monthly at the rate of Prime (8.25% at August 31, 1996) plus 1/4%. The line of
credit is secured by all the assets of the Company and expires January 1, 1997.
The line of credit requires the maintenance of certain financial ratios and
minimum levels of working capital and net worth, as defined, as well as other
requirements.
9. COMMITMENTS AND CONTINGENCIES
The Company is a party to a civil lawsuit in which the plaintiffs have alleged
patent infringement. The Company contends the claims are invalid, and has filed
counterclaims. The case is in discovery and could go to trial during fiscal
1997. Since the case involves a number of complex factual and legal issues, it
is impossible to predict the outcome or estimate the loss, if any. Although the
Company believes it has a reasonable expectation of prevailing, because no
accrual for the case has been established, the consequences of an adverse
determination would impact the Company's financial statements.
The Company is involved in a product liability case which was dismissed. The
dismissal was appealed by the plaintiff. The Company believes it has adequate
product liability insurance in the event of an adverse outcome.
F-9
In connection with the acquisition of GST Industries, Inc. in fiscal 1992, the
Company is required to make annual payments to former shareholders of GST
related to GST's performance through October 29, 1996. Payments are equal to
75 percent of the amount by which annual operating profit of the subsidiary GST
Industries, Inc. exceeds a threshold of $500,000, up to an aggregate amount of
$1,500,000. Thereafter, additional consideration for covenants not to compete
with the Company can be earned at the rates of 75% of the amount by which annual
operating profit of subsidiary GST Industries, Inc. exceeds $500,000 up to an
aggregate amount of $500,000 and thereafter, 25%, up to a cumulative aggregate
amount of an additional $1,500,000. In the event that operating profit for any
fiscal year does not exceed the threshold for that year, the threshold for the
subsequent year will be increased by the amount of such deficit. No additional
performance payments shall be earned either after the aggregate of $1,500,000
has been earned or after October 1996. No additional non-compete covenant
consideration shall be earned either after the aggregate of $1,500,000 has been
earned or after October 1996. Payments of $620,000, $178,000 and $478,000 were
earned in fiscal 1994, 1995 and 1996, respectively. The cumulative amount
earned at August 31, 1996 was $2,026,000. Of the amounts of performance
payments paid, only 40 1/2% is deductible for income tax purposes. The amount
of non-compete covenant consideration paid is fully tax deductible.
The Company leases office and manufacturing facilities and certain equipment
under noncancelable operating leases which expire at various dates through April
2001. Rental expense charged to operations was approximately $199,000, $266,000
and $308,000 for the years ended August 31, 1994, 1995 and 1996, respectively.
The aggregate minimum future lease payments under these leases at August 31,
1996 are approximately as follows:
AMOUNT
----------
1997 $ 281,000
1998 229,000
1999 223,000
2000 219,000
2001 143,000
----------
Total $1,095,000
==========
10. CAPITAL STOCK
During the year ended August 31, 1996, 30,832 shares of common stock were issued
to former owners of KVP Systems, Inc. The shares represented a portion of the
purchase price in the July 1993 acquisition of KVP by the Company, which had
been reserved but which were not issued pending the resolution of a certain
lawsuit. The lawsuit was resolved during the period.
11. STOCK OPTION PLANS AND EMPLOYEE'S BENEFIT PLANS
STOCK OPTION PLANS
The Company has adopted Stock Option Plans (the "1984 Plan", the "1991 Plan"and
the "1995 Plan"), under which options to acquire an aggregate of 425,000 shares
of the Company's Common Stock may be granted to key employees, directors,
vendors, and consultants, as determined by the Board of Directors. The
following is a summary of stock option activity for the years ended August 31:
1995 1996
- -----------------------------------------------------------------------
Options outstanding at beginning of year 162,750 191,250
Granted 42,500 121,223
Canceled (7,000) (39,077)
Exercised (7,000) (35,923)
- -----------------------------------------------------------------------
Options outstanding at end of year 191,250 237,473
- -----------------------------------------------------------------------
Exercisable 151,582 206,579
=======================================================================
Option prices $1.50 to $6.50 $2.72 to $6.00
=======================================================================
The above table includes options issued in connection with the acquisition of
KVP Systems, Inc. in July 1993. The Company granted options of 55,000 shares of
stock at $5.20 to former directors and officers of KVP Systems, Inc. Of these,
33,173 were exercised during fiscal 1996 and 5,000 remained outstanding at
August 31, 1996.
F-10
401(k) PLAN
The Company has employee savings and investment plans at each of its
subsidiaries covering substantially all of its employees. The plans, which
qualify under Section 401(k) of the Internal Revenue Code, allow employees to
defer specified percentages of their compensation, as defined, in a tax-exempt
trust. The Company is required to make matching contributions, as defined, by
the plan and may make additional profit-sharing contributions at the discretion
of the Board of Directors. The cost of the Company matching contribution is
partially offset by a reduction in payroll taxes. Company contributions to the
plan totaled $42,000, $81,000 and $83,000 for the years ended August 31, 1994,
1995 and 1996, respectively.
12. SALES
Sales to the largest single customer represented 6.9%, 4.3% and 5.9% of total
sales during 1994, 1995, and 1996, respectively.
Export sales by geographic area were as follows for the years ended August 31:
(in thousands)
1994 1995 1996
- -----------------------------------------------------------------------
Canada $ 220 $ 341 $ 724
Latin America 101 --- 72
Asia 1,868 800 938
Europe 186 769 909
Other 56 131 125
- ------------------------------------------------------------------------
$2,431 $2,041 $2,768
========================================================================
13. BUSINESS SEGMENT INFORMATION
The following table sets forth certain information with respect to the
contribution to consolidated net sales and operating income generated by the
continuing businesses of the Company during each of the three years in the
period ended August 31, 1996, as well as the dollar value of the assets
identified to each subsidiary:
BUSINESS SEGMENT SUMMARY
Material Handling Firefighting Aerospace Corporate
Components Equipment Assemblies and Other Total
- --------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED AUGUST 31, 1996
Net sales $8,124,000 $2,740,000 $1,878,000 $ --- $12,742,000
Operating income 850,000 327,000 391,000 (224,000) 1,344,000
Identifiable assets 5,696,000 771,000 691,000 4,667,000 11,825,000
FISCAL YEAR ENDED AUGUST 31, 1995
Net sales $6,567,000 $2,096,000 $1,584,000 $ --- $10,247,000
Operating income 903,000 158,000 388,000 (291,000) 1,158,000
Identifiable assets 4,554,000 683,000 669,000 5,372,000 11,278,000
FISCAL YEAR ENDED AUGUST 31, 1994
Net sales $5,061,000 $3,075,000 $2,143,000 $ --- $10,279,000
Operating income 591,000 260,000 435,000 (140,000) 1,146,000
Identifiable assets 3,903,000 729,000 884,000 4,483,000 9,999,000
F-11
14. UNAUDITED QUARTERLY RESULTS
Quarters ended
- ---------------------------------------------------------------------------------------------------------------
November February May August
- ---------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Fiscal 1995:
Net sales $2,376 $2,503 $2,768 $2,600
Gross profit 1,068 1,109 1,302 1,159
Income from continuing operations 115 148 186 227
Net income 152 99 202 195
Per Share:
Income from continuing operations $ .07 $ .10 $ .12 $ .15
Net income $ .10 $ .06 $ .13 $ .13
===============================================================================================================
Fiscal 1996:
Net sales $2,839 $2,928 $3,136 $3,839
Gross profit 1,279 1,339 1,357 1,920
Income from continuing operations 177 157 207 262
Net income 91 22 193 262
Per Share:
Income from continuing operations $ .11 $ .10 $ .13 $ .16
Net income $ .06 $ .01 $ .12 $ .16
===============================================================================================================
15. DISCONTINUED OPERATIONS
On June 17, 1996, the Company completed the divestiture of its industrial
process equipment subsidiary, Morehouse-COWLES, Inc. Accordingly, this business
unit has been accounted for as a discontinued operation and results of its
operations are segregated in the accompanying consolidated statements of income.
There was no gain or loss on the disposition of Morehouse-COWLES. Interest
expense of $49,000, $87,000 and $93,000 was related to discontinued operations
and accordingly was allocated to discontinued operations for fiscal years 1994,
1995 and 1996, respectively. As a consequence of holding Morehouse-COWLES for
sale, the assets and liabilities of discontinued operations have been classified
in the consolidated balance sheets as, "Net assets of discontinued operations."
Discontinued operations have not been segregated in the consolidated statements
of cash flows. The preceding notes to consolidated financial statements have
been revised, as necessary, to reflect the change in reporting due to
discontinued operations.
The sales from these discontinued operations were $5,555,000, $8,097,000 and
$5,638,000 for the years ended August 31, 1994, 1995 and 1996, respectively.
The components of net assets of discontinued operations included in the
consolidated balance sheets at August 31, 1995 and 1996 are as follows:
August 31, 1995 August 31, 1996
ASSETS
Accounts receivable, net $ 986,000 $ ---
Inventory 2,372,000 ---
Prepaid expenses and other 89,000 ---
Property and equipment, net 388,000 ---
Goodwill and intangibles, net 297,000 ---
---------- ------
Total assets $4,132,000 $ ---
========== ======
LIABILITIES
Accounts payable 703,000 ---
Accrued liabilities 727,000 ---
---------- ------
Total liabilities 1,430,000 ---
---------- ------
Net assets of discontinued operations $2,702,000 $ ---
========== ======
F-12
16. MERGER INFORMATION
On July 18, 1996 the Company entered into a definitive agreement to acquire all
of the outstanding common stock of LexaLite International Corporation
("LexaLite"). Under the terms of the agreement, SUMMA will issue 1.5 shares of
SUMMA's common stock for each share of LexaLite's outstanding common stock,
subject to adjustment as provided in the agreement. The shares of SUMMA's common
stock will be registered for issuance under the Securities Act of 1933. The
transaction remains subject to the approval of shareholders of each company and
to certain other conditions.
F-13
Report of Independent Public Accountants
----------------------------------------
To the Shareholders and Board of Directors of
LexaLite International Corporation:
We have audited the accompanying balance sheets of LEXALITE INTERNATIONAL
CORPORATION (a Delaware corporation) as of June 30, 1996 and 1995, and the
related statements of income, shareholders' equity and cash flows for the three
years in the period ended June 30, 1996, as restated, see Note 9. 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 LexaLite International
Corporation as of June 30, 1996 and 1995, and the results of its operations and
its cash flows for the three years in the period ended June 30, 1996, in
conformity with generally accepted accounting principles.
As explained in Note 9 to the financial statements, the Company has given
retroactive effect to the change from the last-in, first-out to the first-in,
first-out method of determining the cost of its inventories.
ARTHUR ANDERSEN LLP
Grand Rapids, Michigan
August 15, 1996
F-14
LEXALITE INTERNATIONAL CORPORATION
BALANCE SHEETS AS OF JUNE 30,
ASSETS 1996 1995
------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 620,023 $ 72,884
Accounts receivable, less allowance of
approximately $77,000 and $60,000 in
1996 and 1995, respectively 6,364,820 5,385,821
Inventories 1,510,553 1,586,386
Deferred income taxes 253,300 265,000
Prepaid expenses and other 425,064 329,894
------------ -----------
9,173,760 7,639,985
------------ -----------
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements 8,412,041 6,297,451
Machinery and equipment 13,687,609 11,784,761
Office furniture and fixtures 1,203,858 1,165,952
Construction in progress 1,149,616 2,107,313
------------ -----------
24,453,124 21,355,477
Less -- Accumulated depreciation (11,427,542) (9,794,478)
------------ -----------
13,025,582 11,560,999
------------ -----------
OTHER ASSETS:
Bond proceeds held in trust 1,071,649 3,275,928
Cash surrender value of life
insurance, face value of
$2,400,000 622,500 555,000
Other 215,260 355,715
------------ -----------
1,909,409 4,186,643
------------ -----------
$ 24,108,751 $23,387,627
============ ===========
The accompanying notes to financial statements are an
integral part of these balance sheets.
F-15
LEXALITE INTERNATIONAL CORPORATION
BALANCE SHEETS AS OF JUNE 30, (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------------------------------ ---- ----
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,200,000 $ 1,003,000
Accounts payable 2,026,426 1,566,561
Accrued expenses -
Compensation 1,517,689 1,373,260
Taxes 134,764 295,837
Other 356,423 206,637
Billings on uncompleted tooling projects
in excess of cost 339,100 135,000
----------- -----------
5,574,402 4,580,295
----------- -----------
LONG-TERM DEBT, less current portion 8,263,784 10,489,906
----------- -----------
DEFERRED INCOME TAXES 765,300 603,900
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, par value $1 per share,
2,000,000 shares authorized, 1,459,478
and 1,426,160 shares issued and
outstanding for 1996 and 1995,
respectively 1,459,478 1,426,160
Additional paid-in capital 699,252 528,979
Retained earnings 7,346,535 5,758,387
----------- -----------
9,505,265 7,713,526
----------- -----------
$24,108,751 $23,387,627
=========== ===========
The accompanying notes to financial statements are an
integral part of these balance sheets.
F-16
LEXALITE INTERNATIONAL CORPORATION
STATEMENTS OF INCOME FOR THE YEARS ENDED JUNE 30,
1996 1995 1994
---- ---- ----
NET SALES $36,088,738 $33,235,276 $26,770,782
COST OF GOODS SOLD 26,963,328 25,321,031 20,099,640
----------- ----------- -----------
Gross profit 9,125,410 7,914,245 6,671,142
----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and
administrative 5,001,779 4,517,922 3,833,190
Research and development 884,706 671,350 554,074
----------- ----------- -----------
5,886,485 5,189,272 4,387,264
----------- ----------- -----------
Income from operations 3,238,925 2,724,973 2,283,878
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (721,276) (562,711) (482,579)
Other, net 32,899 62,018 12,849
----------- ----------- -----------
(688,377) (500,693) (469,730)
----------- ----------- -----------
Income before provision
for income taxes 2,550,548 2,224,280 1,814,148
PROVISION FOR INCOME TAXES 962,400 802,500 630,700
----------- ----------- -----------
Net income $ 1,588,148 $ 1,421,780 $ 1,183,448
=========== =========== ===========
Earnings per share $ 1.08 $ 1.00 $ 0.85
=========== =========== ===========
The accompanying notes to financial statements are
an integral part of these statements.
F-17
LEXALITE INTERNATIONAL CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1996, 1995, AND
1994
TOTAL
COMMON TREASURY ADDITIONAL RETAINED SHAREHOLDERS'
STOCK STOCK PAID-IN CAPITAL EARNINGS EQUITY
------ -------- --------------- -------- -------------
BALANCES July 4, 1993,
as restated (Note 9) $1,400,000 $(141,752) $362,694 $3,153,159 $4,774,101
Treasury shares reissued, net - 25,736 - - 25,736
Net income, as restated
(Note 9) - - - 1,183,448 1,183,448
---------- ------------ -------- ---------- ----------
BALANCES, June 30, 1994 1,400,000 (116,016) 362,694 4,336,607 5,983,285
Issuance of common stock and
tax benefit of stock plan transactions 26,160 - 166,285 - 192,445
Treasury shares reissued, net - 116,016 - - 116,016
Net income, as restated (Note 9) - - - 1,421,780 1,421,780
---------- ------------ -------- ---------- ----------
BALANCES, June 30, 1995 1,426,160 - 528,979 5,758,387 7,713,526
Issuance of common stock and
tax benefit of stock plan
transactions 33,318 - 170,273 - 203,591
Net income - - - 1,588,148 1,588,148
---------- ------------ -------- ---------- ----------
BALANCES, June 30, 1996 $1,459,478 $ - $699,252 $7,346,535 $9,505,265
========== ============ ======== ========== ==========
The accompanying notes to financial statements are
an integral part of these statements.
F-18
LEXALITE INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30,
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,588,148 $ 1,421,780 $ 1,183,448
Adjustments to reconcile net income
to net cash provided by operating
activities-
Depreciation and amortization 1,773,094 1,632,023 1,167,562
Gain on sale of assets (6,500) (85,506) (109,675)
Deferred income taxes 173,100 (74,000) 32,200
Decrease (increase) in current
assets:
Accounts receivable (978,999) (700,030) (1,683,793)
Inventories 75,833 152,720 (348,578)
Prepaid expenses and other (95,170) 158,464 41,739
Increase (decrease) in current
liabilities:
Accounts payable 459,865 (3,057) 635,344
Billings on uncompleted tooling
projects in excess of costs 204,100 49,000 86,000
Accrued expenses 133,142 202,445 257,445
----------- ----------- ----------
Net cash provided by operating
activities 3,326,613 2,753,839 1,261,692
----------- ----------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (3,199,322) (3,813,536) (3,188,423)
Net decrease (increase) in
unexpended industrial revenue
bond proceeds 2,204,279 (3,275,928) -
Decrease (increase) in other
assets 102,100 (310,197) 14,847
Proceeds from sale of assets 6,500 141,863 52,465
Increase in cash surrender value
of life insurance (67,500) (67,000) (74,764)
----------- ----------- ----------
Net cash used for investing
activities (953,943) (7,324,798) (3,195,875)
----------- ----------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings of long-term debt 365,000 6,448,604 2,000,000
Payments on long-term debt (2,394,122) (2,225,367) (1,027,483)
Issuance of common stock and tax
benefit of stock plan
transactions 203,591 192,445 -
----------- ----------- ----------
Net cash (used for) provided by
financing activities (1,825,531) 4,415,682 972,517
----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 547,139 (155,277) (961,666)
CASH AND CASH EQUIVALENTS, beginning
of year 72,884 228,161 1,189,827
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of
year $ 620,023 $ 72,884 $ 228,161
=========== =========== ==========
The accompanying notes to financial statements are
an integral part of these statements.
F-19
LEXALITE INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
DESCRIPTION OF BUSINESS
LexaLite International Corporation (the "Company") is engaged in the manufacture
and sale of plastic molded injection parts and providing design and development
services. The majority of LexaLite's net sales and accounts receivable are with
customers in the lighting industry.
CASH AND CASH EQUIVALENTS
LexaLite considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents are
recorded at cost, which approximates current market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed over
the estimated useful lives of the assets using the straight-line method for
financial reporting purposes and primarily accelerated methods for income tax
purposes.
Estimated lives used to depreciate fixed assets for book purposes are as
follows:
Years
-----
Building and improvements 10-40
Machinery and equipment 3-7
Office furniture and fixtures 5-10
During fiscal year 1995, LexaLite constructed a 27,500 square foot industrial
facility ("the Facility") to be used for the research, development and
manufacture of plastic injection molded products.
BOND PROCEEDS HELD IN TRUST
Unexpended bond proceeds are restricted for use to finance the construction of
the Facility and related equipment. The unexpended proceeds are invested in
short-term marketable securities, and are stated at cost which approximates
market, together with accrued interest. Investments must be rated at least A-1
by Standard and Poor's or an equivalent rating by a similarly recognized rating
service.
LONG-TERM ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" (SFAS 121). LexaLite is required to adopt the
provisions of SFAS 121 beginning in fiscal 1997. Based on the information
currently available, LexaLite does not expect the adoption to have a material
effect on its financial condition or results of operations.
RESEARCH AND DEVELOPMENT
Research and development costs related to the planning and development of new
and existing products are charged to operations as incurred.
F-20
EARNINGS PER SHARE
The earnings per share are computed based on the weighted average number of
common shares outstanding and, to the extent dilutive, common share equivalents.
The weighted average number of shares outstanding were approximately 1,477,000,
1,427,000, and 1,385,000 in 1996, 1995, and 1994, respectively.
USE OF ESTIMATES
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 disclosures 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.
2. INVENTORIES
Inventories are stated at the lower of cost or market and include materials,
labor and manufacturing overhead. Cost is determined using the first, first-out
(FIFO) method. Inventories consisted of the following as of June 30,:
1996 1995
---- ----
Raw materials $ 938,638 $1,229,985
Finished goods and
work-in-process 571,915 356,401
---------- ----------
$1,510,553 $1,586,386
========== ==========
3. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
During fiscal 1995, LexaLite issued $5,000,000 of Michigan Strategic Fund
Limited Obligation Revenue Bonds Series 1994 to finance the construction of the
Facility and certain related equipment. The bonds mature at various dates from
November 1997 through November 2001 at an average effective interest rate of
6.09% and are secured by substantially all assets of LexaLite and an irrevocable
letter of credit.
LexaLite has available a secured line of credit with a bank which provides for
$3,000,000 in maximum borrowings and matures on October 1, 1996. No borrowings
were outstanding under this agreement at June 30, 1996. Interest is payable at
the bank's prime rate (8.25% at June 30, 1996). The weighted average interest
rate on borrowings was 6.8% and 8.4% in 1996 and 1995, respectively.
LexaLite also has a credit agreement with a bank to borrow up to $1,250,000 for
the purchase of equipment. The agreement expires December 1, 1996. No
borrowings have been made against this arrangement. Interest is payable at the
bank's prime rate.
F-21
Long-term debt consisted of the following as of June 30,:
1996 1995
---- ----
Michigan Strategic Fund Limited
Obligation Revenue Bonds Series 1994 $5,000,000 $5,000,000
Note payable to bank, due in monthly
installments of $29,334 including
interest at 7.9%, through October
2000, secured by related equipment 1,525,328 1,395,000
Notes payable to bank, secured by
substantially all assets of the
Company, due in monthly installments
totaling $72,902, with interest
rates ranging between 6.75% and
9.75%, maturing between 1998
and 2001 2,879,149 3,617,126
Revolving credit note - 1,400,000
Other 59,307 80,780
----------- -----------
9,463,784 11,492,906
Less: - current portion (1,200,000) (1,003,000)
----------- -----------
$ 8,263,784 $10,489,906
=========== ===========
Future maturities of long-term debt are as follows:
1997 $1,200,000
1998 2,218,000
1999 2,088,000
2000 1,529,000
2001 1,307,000
Under the terms of certain of its loan agreements, LexaLite must maintain
specified levels of net worth and certain other performance ratios. LexaLite
was in compliance with all covenants throughout the year.
Cash expended for interest on debt was approximately $704,000, $719,000, and
$496,000 in 1996, 1995, and 1994, respectively. Capitalization of interest
related to the project discussed in Note 1 reduced interest expense by
approximately $185,000 in 1995. No interest was capitalized in 1996 or 1994.
F-22
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of LexaLite's financial instruments included in assets and
current liabilities approximates the fair value due to their short-term nature.
As of June 30, 1996 and 1995, carrying value approximated the fair value of
LexaLite's long-term debt.
5. LEASE COMMITMENTS
LexaLite has various operating leases for certain equipment. Future minimum
rental payments at June 30, 1996 under noncancellable operating leases with
initial terms of one year or more are approximately as follows:
1997 $168,300
1998 81,500
1999 54,400
2000 44,700
2001 4,100
Rental expense under all operating leases was approximately $244,000, $182,000
and $179,000 in 1996, 1995, and 1994, respectively.
6. INCOME TAXES
LexaLite applies the "liability" method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which differences
are expected to be reversed.
The components of the provision for income taxes consisted of the following for
the years ended June 30,:
1996 1995 1994
-------- -------- --------
Current $789,300 $876,500 $598,500
Deferred 173,100 (74,000) 32,200
-------- -------- --------
Provision for income taxes $962,400 $802,500 $630,700
======== ======== ========
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
1996 1995 1994
-------- -------- --------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State taxes 2.6 1.5 .8
Other 1.1 0.6 -
---- ---- ----
Effective income tax rate 37.7% 36.1% 34.8%
==== ==== ====
F-23
The major components of deferred income taxes at June 30, 1996 and 1995 are as
follows:
1996 1995
---- ----
Deferred tax assets:
Financial accruals and reserves
not currently deductible:
Compensation $274,800 $258,000
Inventory 64,800 50,300
Other 37,900 16,500
Valuation allowance - -
-------- --------
$377,500 $324,800
======== ========
Deferred tax liability:
Book basis of property in excess
of tax basis $755,000 $594,200
Book basis of inventory in excess
of tax basis 124,200 59,800
Other 10,300 9,700
-------- --------
$889,500 $663,700
======== ========
Cash expended for income taxes totaled approximately $909,000, $860,000, and
$641,000 for the years ended June 30, 1996, 1995, and 1994, respectively.
7. EMPLOYEE BENEFIT PLANS
STOCK OWNERSHIP PLAN
LexaLite has an Employee Stock Ownership Plan ("ESOP")which provides retirement,
death and disability benefits to substantially all of its employees. Benefits
are payable in the form of LexaLite's common stock. A trustee has been
designated to administer the Employee Stock Ownership Trust established under
the Plan. LexaLite provides a discretionary contribution to the ESOP as
determined by the Board of Directors. Contributions are allocated to
participants based on their proportionate share of compensation, within certain
limitations. Contributions, for the years ended June 30, 1996, 1995 and 1994 are
charged to operations and approximate $143,000, $278,000, and $269,000,
respectively. The ESOP owned 501,998 and 503,298 shares of LexaLite's stock as
of June 30, 1996 and 1995, respectively. For earnings per share purposes, all
shares are considered outstanding.
F-24
NONQUALIFIED STOCK OPTION PLAN
LexaLite has a nonqualified stock option plan for certain salaried employees.
Options are granted at a price not less than the market price on the date of
grant, and are exercisable beginning three years from the effective date of
grant, for a period of six months to one year. No charges to operations are
made under this plan. A summary of stock option activity is as follows:
OPTIONS PRICE RANGE
------- -----------
Outstanding at July 4, 1993 94,500 $3.75 - $4.50
Options granted 29,000 $5.89
Options exercised (24,529) $3.75 - $4.50
Options canceled (5,271) $4.30 - $5.89
-------
Outstanding at June 30, 1994 93,700 $4.07 - $4.30
Options granted - -
Options exercised (34,000) $4.07 - $4.30
Options canceled (10,400) $4.30 - $5.89
-------
Outstanding at June 30, 1995 49,300 $4.50 - $5.89
Options granted - -
Options exercised (22,760) $4.50
Options canceled (2,040) $4.50 - $5.89
-------
Outstanding at June 30, 1996 24,500 $5.89
=======
QUALIFIED STOCK OPTION PLAN
In 1996, LexaLite adopted a qualified stock option plan for certain salaried
employees. Options are granted at a price not less than the market price on the
date of grant, and are exercisable beginning three years from the effective date
of grant, for a period of six months. During 1996, 26,050 shares were granted
and are outstanding under the plan at options prices between $7.85 and $9.33.
As of June 30, 1996, no options were exercisable and 100,000 shares were
authorized to be granted under either the stock ownership plan or the qualified
stock option plan.
F-25
STOCK BONUS PLAN
LexaLite has a stock bonus plan, the purpose of which is to permit grants of
shares to key employees of LexaLite, as a means of retaining and rewarding them
for long-term performance and to increase their ownership in LexaLite. Shares
awarded under the plan are based on discretionary percentage of aggregate stock
growth, as defined by the Plan. The awards vest in three annual installments
and are paid in the form of stock and cash. Awards are charged to operations in
the year granted and totaled approximately $267,000, $286,000, and $330,000 in
1996, 1995, and 1994, respectively.
PROFIT SHARING PLAN
LexaLite maintains a profit sharing plan which covers substantially all of its
employees. The discretionary payment, charged to operations, as determined by
the board of directors, was approximately $820,000, $543,000, and $457,000 in
1996, 1995, and 1994, respectively.
INCENTIVE BONUS PLAN
LexaLite also maintains an incentive bonus plan paid to certain key employees.
The discretionary bonus, charged to operations, as determined by the board of
directors, was approximately $758,000, $636,000, and $573,000 in 1996, 1995, and
1994, respectively.
8. SIGNIFICANT CUSTOMERS
During the years ended June 30, 1996, 1995, and 1994, LexaLite had four
customers which individually accounted for 10% or more of net sales.
CUSTOMER 1996 1995 1994
-------- ---- ---- ----
#1 15.4% 14.1% 12.4%
#2 12.8% 14.3% 10.7%
#3 9.6% 11.7% 16.9%
#4 8.5% 10.8% 8.9%
9. CHANGES IN PRIOR PERIOD FINANCIAL STATEMENTS
During 1996, LexaLite changed its method of accounting for inventory from the
last-in, first-out (LIFO) method to the FIFO method. Under the current economic
environment, LexaLite believes that the FIFO method will result in a better
measurement of operating results. During 1996, LexaLite also corrected the
amount charged to operations for the stock bonus in 1995 as well as the
accounting for deferred taxes in 1994. As a result, LexaLite has retroactively
restated the accompanying financial statements.
F-26
The following effects of the change in accounting principle and the corrections
discussed above have been reflected in the accompanying financial statements as
follows:
NET INCOME RETAINED
---------- EARNINGS
1996 1995 1994 JULY 4, 1993
---- ---- ---- ------------
Inventory methodology $111,500 $(23,100) $(13,200) $ 152,500
Stock bonus - 139,000 - -
Deferred taxes - - 138,000 (138,000)
-------- -------- -------- ---------
$111,500 $115,900 $124,800 $ 14,500
======== ======== ======== =========
Effect on earnings
per share $ 0.08 $ 0.08 $ 0.09
======== ======== ========
10. RELATED PARTY TRANSACTIONS
LexaLite pays commissions on certain proprietary products to a company owned by
an officer of LexaLite. The commissions are based upon a design and consulting
agreement which became effective in January, 1993. Commissions paid were
approximately $131,000, $107,000 and $85,000 in 1996, 1995 and 1994,
respectively. In management's opinion, the fees paid are comparable to those
that could be arranged with an unrelated party.
11. SUBSEQUENT EVENT
On July 18, 1996, LexaLite entered into a definitive agreement pursuant to which
Summa Industries (Summa) will acquire all of the outstanding common stock of
LexaLite. Under the terms of the agreement, Summa, through a wholly-owned
subsidiary, will convert each LexaLite share to 1.5 Summa shares, subject to
adjustment as provided in the agreement. The transaction remains subject to
shareholder approval of each Company and to certain other conditions.
F-27
LEXALITE INTERNATIONAL CORPORATION
Condensed Balance Sheets (Note 1)
JUNE 30,1996 SEPTEMBER 30,
1996
(unaudited)
--------------- --------------
ASSETS
Current assets:
Cash $ 620,000 $ 914,000
Accounts receivable 6,364,000 5,010,000
Inventories 1,511,000 1,888,000
Prepaid expenses and other 679,000 465,000
--------------- --------------
Total current assets 9,174,000 8,277,000
Property, plant and equipment 24,453,000 24,939,000
Less accumulated depreciation (11,427,000) (11,426,000)
--------------- --------------
Net property, plant and equipment 13,026,000 13,513,000
Other assets 1,909,000 1,645,000
--------------- --------------
$ 24,109,000 $ 23,435,000
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,027,000 $ 1,773,000
Accrued liabilities 2,348,000 1,567,000
Current maturities of long-term debt 1,200,000 1,200,000
--------------- --------------
Total current liabilities 5,575,000 4,540,000
Bonds payable 5,000,000 5,000,000
Other long-term debt and deferred credits 4,029,000 3,733,000
--------------- --------------
Total liabilities 14,604,000 13,273,000
Shareholders' equity:
Common stock 2,158,000 2,324,000
Retained earnings 7,347,000 7,838,000
--------------- --------------
Total shareholders' equity 9,505,000 10,162,000
--------------- --------------
$ 24,109,000 $ 23,435,000
=============== ==============
SEE ACCOMPANYING NOTES.
F-28
LEXALITE INTERNATIONAL CORPORATION
Condensed Statements of Income (unaudited)
THREE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
------------------ ------------------
Net sales $7,003,000 $8,607,000
Cost of sales 5,344,000 6,324,000
------------------ ------------------
Gross profit 1,659,000 2,283,000
Selling, general and administrative and 1,195,000 1,357,000
other expenses
------------------ ------------------
Income from operations 464,000 926,000
Interest expense 138,000 135,000
------------------ ------------------
Income before provision for taxes 326,000 791,000
Provision for income taxes 134,000 300,000
------------------ ------------------
Net income $ 192,000 $ 491,000
================== ==================
Net income per common and equivalent
share $ .13 $ .33
================== ==================
Weighted average shares outstanding 1,436,000 1,485,000
================== ==================
See accompanying notes.
F-29
LEXALITE INTERNATIONAL CORPORATION
Condensed Statements of Cash Flows (unaudited)
THREE MONTHS ENDED
-------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
------------------ ------------------
Operating activities:
Net income $ 192,000 $ 491,000
------------------ ------------------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 459,000 474,000
Gain on disposition of property,
plant and equipment (15,000) (70,000)
Net change in assets and liabilities
Accounts receivable 295,000 1,273,000
Inventories (176,000) (377,000)
Prepaid expenses and other 185,000 148,000
Accounts payable 515,000 (455,000)
Accrued liabilities (466,000) (505,000)
------------------ ------------------
Total adjustments 797,000 488,000
------------------ ------------------
Net cash provided by operating
activities 989,000 979,000
------------------ ------------------
Investing activities:
Purchase of property, plant &
equipment (799,000) (879,000)
Net decrease in unexpended
industrial revenue bond proceeds 449,000 271,000
Other 3,000 54,000
------------------ ------------------
Net cash (used) by investing
activities (347,000) (554,000)
------------------ ------------------
Financing activities:
Proceeds from issuance of long term
debt 2,240,000 400,000
Payment on long term debt (2,819,000) (696,000)
Proceeds from issuance of common
stock and tax benefits of
stock plan transactions 59,000 165,000
------------------ ------------------
Net cash (used) by financing
activities (520,000) (131,000)
------------------ ------------------
Net increase in cash 122,000 294,000
Cash at beginning of period 73,000 620,000
------------------ ------------------
Cash at end of period $ 195,000 $ 914,000
================== ==================
Supplemental cash flow information:
Cash paid during the period for:
Interest payments $ 118,000 $ 84,000
================== ==================
Income tax payments $ 149,000 $ 69,000
================== ==================
See accompanying notes.
F-30
LEXALITE INTERNATIONAL CORPORATION
Notes to Condensed Financial Statements
1. Basis of presentation
The accompanying financial statements, some of which are unaudited, have
been condensed in certain respects and should, therefor, be read in
conjunction with the audited financial statements and notes related thereto
of LexaLite International Corporation for the year ended June 30, 1996 which
are contained herein. In the opinion of the Company, the accompanying
unaudited interim financial statements contain all adjustments (all of which
are of a normal recurring nature) necessary for a fair presentation for the
interim period. The results of operations for the three months ended
September 30, 1996 are not necessarily indicative of the results to be
expected for the full year.
2. Inventories
Inventories at June 30, 1996 and September 30, 1996 were as follows:
JUNE 30, 1996 SEPTEMBER 30, 1996
(unaudited)
-------------- ------------------
Raw materials $ 939,000 $1,172,000
Finished goods and work in process 572,000 716,000
-------------- ------------------
$1,511,000 $1,888,000
============== ==================
F-31
SUMMA AND LEXALITE PRO FORMA FINANCIAL INFORMATION
SUMMA INDUSTRIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated financial statements
reflect the acquisition by Summa of all the issued and outstanding capital stock
of LexaLite as a consequence of the Merger of Subsidiary with and into LexaLite.
The transaction will be accounted as a purchase by Summa of the net assets of
LexaLite.
The unaudited pro forma condensed consolidated balance sheet is based upon
Summa's historical audited consolidated balance sheet at August 31, 1996 and
LexaLite's historical audited balance sheet as of June 30, 1996, and is
presented as if the transaction had been consummated on August 31, 1996.
The unaudited pro forma condensed consolidated statement of income for the year
ended August 31, 1996 gives effect to the merger of Subsidiary and LexaLite as
if the transaction had occurred at September 1, 1995, the beginning of Summa's
fiscal year ended August 31, 1996. The unaudited pro forma condensed
consolidated income statement combines the audited historical consolidated
results of operations of Summa for the year ended August 31, 1996 and the
audited historical results of the operations of LexaLite for the year ended June
30, 1996.
The pro forma adjustments are based upon available information and upon certain
assumptions which the respective management of Summa and LexaLite believes are
reasonable. However, the unaudited pro forma condensed consolidated financial
statements do not purport to be indicative of the results which would have been
achieved if the transaction had been completed on the respective dates above or
the results which may be achieved in the future.
F-32
SUMMA INDUSTRIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AUGUST 31, 1996
PRO FORMA
SUMMA LEXALITE ADJUSTMENTS CONTINUED
------------ ----------- ------------ ------------
ASSETS
Current assets:
Cash $ 567,000 $ 620,000 $ --- $ 1,187,000
Accounts receivable 1,627,000 6,364,000 --- 7,991,000
Inventories 2,186,000 1,511,000 50,000 (1) 3,747,000
Prepaid expenses and other 656,000 679,000 --- 1,335,000
------------ ----------- ------------ ------------
Total current assets 5,036,000 9,174,000 50,000 14,260,000
------------ ----------- ------------ ------------
Property, plant and equipment 6,060,000 24,453,000 (8,177,000) (2) 22,336,000
Less accumulated depreciation (2,082,000) (11,427,000) 11,427,000 (3) (2,082,000)
Net property, plant and ------------ ----------- ------------ ------------
equipment 3,978,000 13,026,000 3,250,000 20,254,000
Other assets 1,865,000 1,909,000 --- 3,774,000
Goodwill and other intangibles 946,000 --- --- 946,000
------------ ----------- ------------ ------------
Total assets $11,825,000 $24,109,000 $ 3,300,000 $39,234,000
============ =========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 812,000 $ 2,027,000 --- 2,839,000
Accrued liabilities 1,249,000 2,348,000 500,000 (4) 4,097,000
Current maturities of long-term debt --- 1,200,000 --- 1,200,000
------------ ------------ ------------ ------------
Total current liabilities 2,061,000 5,575,000 500,000 8,136,000
Bonds payable --- 5,000,000 --- 5,000,000
Other long-term debt and
deferred credits and other 1,300,000 (2)
long term liabilities 1,120,000 4,029,000 500,000 (5) 6,949,000
------------ ------------ ------------ ------------
Total liabilities 3,181,000 14,604,000 2,300,000 20,085,000
------------ ------------ ------------ ------------
Shareholders' equity
Common stock 6,157,000 2,158,000 8,347,000 (6) 16,662,000
Retained earnings 2,487,000 7,347,000 (7,347,000) (6) 2,487,000
------------ ------------ ------------ ------------
Total shareholders' equity 8,644,000 9,505,000 1,000,000 19,149,000
------------ ------------ ------------ ------------
Total liabilities and share-
holders' equity $11,825,000 $24,109,000 $ 3,300,000 $39,234,000
============ ============ ============ ============
F-33
SUMMA INDUSTRIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED AUGUST 31, 1996
Pro Forma
Summa LexaLite Adjustments Combined
------------ ------------ ------------- -----------
Net Sales $12,742,000 $36,089,000 $ --- $48,831,000
Cost and expenses:
Cost of sales 6,847,000 26,964,000 50,000 (7) 33,861,000
Selling and administrative
and other operating expense 4,551,000 5,886,000 87,000 (8) 10,524,000
Interest and other expense --- 688,000 --- 688,000
----------- ----------- ----------- -----------
Total cost and expenses 11,398,000 33,538,000 137,000 45,073,000
----------- ----------- ----------- -----------
Income from continuing operations
before provision for taxes 1,344,000 2,551,000 (137,000) 3,758,000
Provision for income taxes 541,000 963,000 (55,000) (9) 1,449,000
------------ ----------- ----------- -----------
Income from continuing operations $ 803,000 $ 1,588,000 $ (82,000) $ 2,309,000
============ =========== =========== ===========
Income per common and equivalent
share from continuing operations $ .50 $ 1.08 $ .57
============ =========== ===========
Weighted average shares 1,603,000 1,477,000 953,000 (6) 4,033,000
outstanding ============ =========== =========== ===========
The pro forma condensed consolidated financial statements give effect to certain
pro forma adjustments, as follows:
(1) Adjustment of work in process and finished goods inventory to eliminate
manufacturing profit.
(2) Adjustment of property, plant and equipment to estimated fair value
including deferred tax effect.
(3) Reset of accumulated depreciation of acquired assets to zero.
(4) Accrual of transaction fees and related costs.
(5) Accrual of contingent liability in connection with repurchase obligations
under the Employee Stock Ownership Plan..
(6) Adjustment to reflect the acquisition of LexaLite for 2,439,928 shares of
Summa at an assigned value of $6.15 per share, less a discount of 30%.
(7) Charge cost of sales with write-up of inventory to fair value.
(8) Record additional depreciation expense.
(9) Record tax effect of (7) and (8).
F-34
SUMMA INDUSTRIES
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
For the years ended August 31, 1996, 1995, 1994
Amounts
Balance at charged
beginning of (credited) Acquired Amounts Balance at
period to expense Reserves written off end of period
- ------------------------------------------------------------------------------------------------------------------------------
1996 Allowance for doubtful accounts $59,000 $ 48,000 $(56,000) $51,000
1995 Allowance for doubtful accounts 75,000 (15,000) $0 (1,000) 59,000
1994 Allowance for doubtful accounts 56,000 20,000 0 (1,000) 75,000
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, Summa has duly caused this Annual Report on Form 10-K for the fiscal
year ended August 31, 1996, to be signed on its behalf by the undersigned,
thereunto duly authorized, on November 21, 1996.
SUMMA INDUSTRIES
By: /s/ James R. Swartwout
----------------------
James R. Swartwout
President, Chief Executive
and Financial Officer
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, 1996 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 November 21, 1996
- ------------------------------
James R. Swartwout
/s/ COALSON C. MORRIS Director November 21, 1996
- ------------------------------
Coalson C. Morris
/s/ DALE H. MOREHOUSE Director November 21, 1996
- ------------------------------
Dale H. Morehouse
/s/ MICHAEL L. HORST Director November 21, 1996
- ------------------------------
Michael L. Horst
/s/ WILLIAM R. ZIMMERMAN Director November 21, 1996
- ------------------------------
William R. Zimmerman
/s/ DAVID MCCONAUGHY Director November 21, 1996
- ------------------------------
David McConaughy
/s/ KARL V. PALMAER Director November 21, 1996
- ------------------------------
Karl V. Palmaer
/s/ BYRON C. ROTH Director November 21, 1996
- ------------------------------
Byron C. Roth
/s/ JOSH T. BARNES Director November 21, 1996
- ------------------------------
Josh T. Barnes
/s/ PAUL A. WALBRUN Vice President, Controller November 21, 1996
- ------------------------------ and Secretary
Paul A. Walbrun