-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UltKAUe3B8Zq7zH5G08stYxRAHtBjuDaWTjbkQJSqQF04llaif3Krqiz+SH/P2xT y1QOJe4YhUjKcwbp6FweEA== 0000892569-98-002881.txt : 19981103 0000892569-98-002881.hdr.sgml : 19981103 ACCESSION NUMBER: 0000892569-98-002881 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMA INDUSTRIES CENTRAL INDEX KEY: 0000062262 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 951240978 STATE OF INCORPORATION: CA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07755 FILM NUMBER: 98736214 BUSINESS ADDRESS: STREET 1: 21250 HAWTHORNE BLVD., SUITE 500 CITY: TORRANCE STATE: CA ZIP: 90503 BUSINESS PHONE: 3107927024 MAIL ADDRESS: STREET 1: 1101 CALIFORNIA AVE STE 200 CITY: CORONA STATE: CA ZIP: 91719 FORMER COMPANY: FORMER CONFORMED NAME: SUMMA INDUSTRIES INC DATE OF NAME CHANGE: 19951212 FORMER COMPANY: FORMER CONFORMED NAME: MOREHOUSE INDUSTRIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MAXAD INC DATE OF NAME CHANGE: 19740304 10-K 1 FORM 10-K FOR THE FISCAL YEAR ENDED 08/31/1998 1 U.S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended AUGUST 31, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A --- --- Commission file no. 1-7755 SUMMA INDUSTRIES (Exact name of registrant as specified in its charter) DELAWARE 95-1240978 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 21250 HAWTHORNE BOULEVARD, SUITE 500, TORRANCE, CALIFORNIA 90503 (Address of principal executive offices, including zip code) Registrant's telephone number: (310) 792-7024 Securities registered pursuant to Section 12(b) of the Exchange Act: NONE Securities registered pursuant to Section 12(g) of the Exchange Act: COMMON STOCK, $.001 PAR VALUE (Title of class) Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and disclosure will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of registrant's Common Stock held by non-affiliates as of October 15, 1998, based upon the closing price of a share of the Common Stock on The Nasdaq National Market on that date, was $27,891,154. The number of shares of registrant's Common Stock outstanding as of October 15, 1998 was 4,264,807. DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on December 10, 1998 to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K are incorporated by reference in Part III hereof. 2 PART I ITEM 1. BUSINESS. GENERAL Summa Industries ("Summa" or the "Company") was incorporated as Southern California Plastics Co. in the State of California in 1942 and subsequently reincorporated in the State of Delaware in April 1998. Since before 1970, Summa has been a publicly-owned corporation whose Common Stock is registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is currently traded on The Nasdaq National Market under the symbol "SUMX". Growth has been achieved by acquisition, development of new products and expansion of the Company's sales organization. Summa designs and manufactures injection-molded plastic optical components for original equipment manufacturer ("OEM") customers in the lighting industry; molded plastic modular conveyor belt and chain for the food processing industry; plastic fittings, valves, filters and tubing for the agricultural irrigation industry; and other molded and extruded plastic components for diverse industries. The principal executive offices of the Company are located at 21250 Hawthorne Boulevard, Suite 500, Torrance, California 90503; its telephone number is (310) 792-7024; its facsimile number is (310) 792-7079; and its website is www.SummaIndustries.com. STRATEGY Summa has a strategy of growth through acquisitions of profitable manufacturing companies with proprietary products or protected market niches, with the intent of expanding its operations by acquiring additional product offerings, enhancing gross profit margins, increasing combined sales so that general and administrative costs would constitute a smaller percentage of total revenues, enhancing overall profitability, and increasing the market value of Summa's Common Stock to provide liquidity and value for its stockholders by increasing the number of outstanding shares in the public float and the trading activity in the stock. In 1995, the Company refined the strategy to focus on manufacturers of plastic components for industrial and commercial markets. Typically, it is expected that Summa's corporate staff will not direct operations of acquired subsidiaries on an ongoing basis, but, in addition to planning, financial and legal oversight, will provide financing, conduct the acquisition program and business development activities, implement purchasing programs utilizing economies of scale, and handle investor relations matters. From time to time, the corporate staff also will be active in non-operational business activities such as risk management and employee benefit program management. Corporate charges are assessed on a basis established annually, related to asset utilization by each operating subsidiary. Although the existing management of an acquired company typically would be retained to manage day to day operations, it is anticipated that the business of the acquired company could be expanded through the support of Summa's corporate staff described above. Any such expansion could place a significant strain on Summa's management and resources, require Summa to implement additional operating, marketing and financial controls, and necessitate that Summa hire additional personnel, which could have a significant adverse effect on Summa's operating results. It is also likely that any such acquisition would require Summa to raise additional capital to finance the acquisition or provide working capital to the acquired company. If this additional capital were raised through debt financings, Summa would incur substantial additional interest expense; sales of additional equity to raise the needed capital would dilute, on a pro-rata basis, the percentage ownership of all holders of Summa Common Stock. There can, however, be no assurance that sufficient financing will be available to Summa to implement its acquisition strategy on terms and conditions that are acceptable to Summa. Continued implementation of the Company's strategy will depend to a significant extent upon the ability of Summa's top management in identifying appropriate candidates for acquisition, negotiating deals acceptable to the Board of Directors and stockholders of the Company, including obtaining acceptable acquisition prices in the current environment of dramatically higher asking prices, and supervising the management of operating subsidiaries. Furthermore, with a focus on businesses which manufacture plastic components, the number of opportunities which meet this acquisition criteria is smaller. In addition, with the increased size of the Company, larger acquisition candidates would have to be sought in the 2 3 future to sustain the growth rate of Summa and the number of such candidates is smaller. Competition for such acquisitions may be greater and there is no assurance Summa will be able to successfully compete with larger companies and buyer groups to consummate additional acquisitions. There can be no assurance that the terms upon which a prospective company can be acquired will be favorable to Summa, or that Summa will not encounter unforeseen difficulties and liabilities in connection with any such acquisition. HISTORY OF RECENT ACQUISITIONS AND DIVESTITURES KVP FALCON PLASTIC BELTING, INC. In July 1993, Summa acquired all of the outstanding capital stock of KVP Systems, Inc., a California corporation renamed KVP Falcon Plastic Belting, Inc. in May 1998 after its acquisition of Falcon Belting, Inc. described below ("KVP"), which designs, manufactures and markets injection-molded plastic conveyor belting. Belts which can operate on a curve were pioneered by KVP. In connection with this acquisition, which was accomplished through the merger of KVP with and into a newly formed and wholly-owned subsidiary of Summa, an aggregate of 555,275 shares of Summa's Common Stock were issued to the shareholders of KVP in a transaction registered under the Securities Act of 1933, as amended (the "Securities Act"). The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to identifiable tangible and intangible assets purchased and liabilities assumed or incurred based upon their fair value at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired amounted to $302,000 and was recorded as goodwill which is being amortized on a straight-line basis over 25 years. ARMENCO ENGINEERING. In May 1994, Summa acquired substantially all of the assets of A&D Armendariz Corp., a California corporation doing business as Armenco Engineering ("Armenco"). The operations of Armenco were promptly consolidated with Morehouse-COWLES, Inc. (see below). The total acquisition cost was approximately $500,000, consisting of $400,000 in cash and obligations to make future payments to the former owners of Armenco and liabilities assumed or incurred of $100,000. MOREHOUSE-COWLES, INC. In June 1996, Summa sold all of the outstanding capital stock of Morehouse-COWLES, Inc., a California corporation ("Morehouse"), which manufactures industrial process machinery produced from non-plastic materials, to a private investment group based in Michigan. The total purchase price paid by the buyers was $2,521,000, consisting of $750,000 in cash and a ten-year $1,771,000 subordinated, secured promissory note bearing interest at 7% per annum. The subordinated note was subsequently prepaid in full in August 1998 in connection with the merger of Morehouse and certain other entities. LEXALITE INTERNATIONAL CORPORATION. In November 1996, Summa acquired all of the outstanding capital stock of LexaLite International Corporation, a Delaware corporation ("LexaLite"), which manufactures injection molded plastic prismatic components for lighting fixtures, through the merger of a newly formed and wholly-owned subsidiary of Summa with and into LexaLite. In connection with the transaction, the former stockholders of LexaLite received shares of Summa's Common Stock which in the aggregate constituted approximately 58% of the shares of Summa's Common Stock outstanding immediately after the merger in a transaction registered under the Securities Act. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to identifiable tangible and intangible assets purchased and liabilities assumed or incurred based upon their fair value at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired amounted to $905,000 and was recorded as goodwill which is being amortized on a straight-line basis over 25 years. CALNETICS CORPORATION. In October 1997, Summa acquired all of the outstanding capital stock of Calnetics Corporation, a California corporation ("Calnetics"), through a merger of a newly formed and wholly-owned subsidiary of Summa with and into Calnetics. As a result, Summa acquired the following operating subsidiaries of Calnetics: Agricultural Products, Inc., a California corporation ("API"), which manufactures plastic fittings, filters, tubing and accessories, principally for agricultural irrigation; Ny-Glass Plastics, Inc., a California corporation ("Ny-Glass"), which manufactures plastic parts, principally by use of injection molding and structural foam molding techniques, and performs certain value-added services for customers in a variety of industries; and Manchester Plastics Co., Inc., a California corporation ("Manchester Plastics"), which manufactures proprietary and custom acrylic, polycarbonate and polystyrene plastic sheet products, principally for the building materials and industrial plastics industries. The total acquisition cost was $31,792,000, 3 4 consisting of cash due to former Calnetics shareholders of $22,335,000, acquisition costs of $50,000, liabilities assumed or incurred of $8,062,000 and an estimated fair value of $1,345,000 for options issued in conjunction with the transaction, primarily replacement options issued to Calnetics employees who continued with the Company. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to identifiable tangible and intangible assets purchased and liabilities assumed or incurred based upon their fair value at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired amounted to $13,974,000 and was recorded as goodwill which is being amortized on a straight-line basis over 40 years. FALCON BELTING, INC. In May 1998, Summa acquired all of the outstanding capital stock of Falcon Belting, Inc., an Oklahoma corporation ("Falcon"), which manufactures modular plastic conveyor belting used in food processing industries. The operations of Falcon were promptly consolidated with KVP. The total acquisition cost was $5,125,000, consisting of $2,636,000 in cash and the present value of obligations to make future payments to the former owner of Falcon and liabilities assumed or incurred of $2,489,000. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to identifiable tangible and intangible assets purchased and liabilities assumed or incurred based upon their fair value at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired amounted to $1,995,000 and was recorded as goodwill which is being amortized on a straight-line basis over 30 years. GST INDUSTRIES, INC. In June 1998, Summa sold all of the outstanding capital stock of GST Industries, Inc., a California corporation, ("GST"), which manufactures industrial firefighting and defense aerospace equipment produced from non-plastic materials, to a private investment group based in California. While GST had been profitable, it was not expected to grow significantly in the near term. The total purchase price paid by the buyers was $2,700,000, consisting of $1,200,000 in cash and a $1,500,000 seven-year subordinated, convertible, secured promissory note bearing interest at 10% per annum. In addition, the Company may receive a maximum of $2,000,000 in royalty payments over the next five years based upon a percentage of future sales in excess of a base amount. It is expected that the royalties actually received, if any, will be substantially less than $2,000,000, and the value of the conversion rights of the note is highly speculative. CANYON MOLD. In September 1998, Summa acquired substantially all of the assets of Canyon Mold, Inc., a California corporation. The operations of Canyon Mold were promptly relocated to and integrated into the Company's molding facility in Corona, California. Canyon Mold had provided tool design and manufacturing services almost exclusively for the Company. The total acquisition cost was approximately $200,000 in cash and assumed liabilities. In evaluating future acquisitions, Summa will endeavor to identify target companies that manufacture plastic components which have a proprietary advantage because of patent protection, brand recognition, unique manufacturing processes or other comparable characteristics. It is anticipated that target companies typically will have been profitable in recent periods, particularly if the acquisition is to be made through the issuance of Summa Common Stock, so that the acquisition will not have an immediate dilutive effect on post-acquisition, consolidated earnings per share. Since it is usually intended that each acquired company will be maintained as a separate operating unit, existing management of each target company will be extensively evaluated in an attempt to ascertain whether such management possesses the capability and compatibility to continue to manage the day to day operations following the acquisition. Perhaps most importantly, Summa will seek to determine that there is a significant likelihood that a sustainable increase in earnings per share within 12 months of the closing can reasonably be expected. PRODUCTS Summa manufactures diverse plastic products. Key product categories include: OPTICAL COMPONENTS. Summa's optical components include prismatic lenses, refractors and reflectors molded from clear plastic, which are used in commercial and industrial lighting fixtures and in similar applications such as lighted navigational aids, traffic signals and vehicles. Most of the products are injection molded from optical grade polycarbonate or acrylic. The principal advantages of Summa's injection molded plastic components over more traditional glass or metal components are superior optical performance, lighter weight, and in certain instances, lower cost. 4 5 IRRIGATION COMPONENTS. Summa's irrigation components include engineered fittings, valves, filters and accessories, including tubing for drip irrigation systems. The use of drip irrigation systems conserves water and allows more precise control of delivery of water and soluble nutrients to plants than is possible with spray, sprinkler or flood irrigation techniques. CONVEYOR COMPONENTS. Summa's conveyor components include engineered plastic components which form conveyer belts and chains. The components in Summa's product line, many of which are patented, are constructed of non-toxic, non-corrosive plastic materials and are designed to be easily cleaned, meeting FDA-USDA requirements and specifications. The components do not require lubrication and thus offer the advantage of operation free from contaminants such as grease, oil and metal particles. Because these components are lightweight, they require less energy to operate than steel belts, and are quieter in operation and easier to service in place than metal belts. In addition, the Company molds bobbins and circuit board components for electronic products and miscellaneous industrial and consumer components and other parts for OEM's, and extrudes plastic sheet for industrial, commercial and do-it-yourself markets. RESEARCH AND DEVELOPMENT Summa invests significantly in the development of new products and manufacturing processes. Only direct costs associated with tooling for new products are capitalized. All other costs, including salaries and wages of employees involved in research and development, are expensed as incurred. PRODUCTION Summa's principal manufacturing operation is injection molding of plastic parts. Some products are molded by third-party vendors. Summa performs additional production operations including extrusion, machining and welding of plastic parts, coating, assembly and testing. Injection molds and tools are made by Summa and outside vendors. Products are made on modern molding machines which range from 28 to 1500 tons clamping force. Ancillary equipment and special operations include automatic resin feed systems, two color molding, insert molding, robotics, painting, vacuum deposition coating with reflective metallic films, assembly, packaging and warehousing. The Company also operates sheet extrusion and tube extrusion lines. Summa operates on a just-in-time basis with many of its customers, and inventories are managed to minimal levels. Inventory turns approximately 10 times a year. Three of Summa's manufacturing plants are ISO 9002 registered. MARKETING AND DISTRIBUTION Summa manufactures plastic materials and components which are generally sold to other manufacturers who incorporate Summa's materials and components in their products, and to businesses which incorporate the Company's products in systems assembled for their own use or for their customers' use. The Company generally considers its customers to be OEM's, "end users" and distributors. Most sales are made directly by employees of the Company, although Summa utilizes several independent manufacturers' representatives and certain sales are made through distribution channels. In recent years, the Company has expanded the size of its direct sales staff substantially and has also increased its export sales, primarily to Europe. The Company distributes its products principally by truck through the use of independent freight entities and, to a lesser extent, by air and sea transport. Summa's largest three customers accounted for 7.1%, 5.5% and 5.0% of sales in fiscal 1998. The Company has thousands of active accounts including many Fortune 1,000 and large privately held businesses. RAW MATERIALS Summa's principal raw material is pelletized plastic resin which is delivered in bulk by truck or in large boxes, typically weighing 1,000 pounds ("Gaylords"). The Company is a large user of resin and does not rely on any single vendor 5 6 for more than 15% of its raw material. Every material used is available from several vendors. Primary resins used include polycarbonate, acrylic, polystyrene, polyethelyne, polyvinylchloride, polypropylene, acetal and nylon. Principal vendors include Atohaus, Bayer, Continental Polymers, Cyro, Dow, GE Plastics, ICI and Union Carbide, among others. The resins used by the Company are crude oil or natural gas derivatives and may be affected to some extent by the supply, demand and price trends in the petroleum industry. The Company did not incur any material shortages or unavailability during fiscal 1998. Prices have been relatively stable, some rising modestly and some falling modestly. Some vendors unsuccessfully attempted to raise industry prices during 1998. The Company does not have any fixed price supply contracts with its vendors but has two such contracts with customers which do not represent a significant portion of the Company's sales. BACKLOG AND SEASONALITY On August 31, 1998, Summa's continuing businesses had a backlog of orders, believed to be firm, in the amount of $7,198,000, as compared to a backlog of $4,622,000 from continuing businesses as of August 31, 1997. The increase is primarily attributable to acquisitions. See "Business--History of Recent Acquisitions and Divestitures" above. The open order backlog is comprised of orders for components, spare parts and tooling, with scheduled deliveries from September 1998 through fiscal 2000. Because the length of time between entering an order, shipping the product and recording a sale can vary significantly from order to order, backlog levels should not be relied upon as an indicator of future sales volume. Summa's sales exhibit modest seasonality, principally for its irrigation components. Excluding the effects of growth and new businesses, the Company would expect sales, as a percentage of fiscal year's sales, to occur approximately as follows: Quarter Percentage of Sales ------- ------------------- 1st quarter................................. 24% 2nd quarter................................. 23% 3rd quarter................................. 27% 4th quarter................................. 26% --- 100% === Because a portion of overhead is fixed and, therefore, does not vary with sales volume, profit may vary from quarter to quarter with more volatility than sales volume. COMPETITIVE CONDITIONS The markets for the products currently manufactured and sold by Summa are characterized by extensive competition. There are a number of companies that currently offer competing products nationally and internationally, and in certain geographic areas the Company has competition from local manufacturers as well. It can be expected that additional competing products will be introduced by other companies in the future. Many existing and potential competitors have greater financial, marketing and research capabilities than Summa. Some of Summa's largest customers have the resources to internally manufacture products comparable to those currently purchased from Summa, and some of Summa's customers also compete with the Company in certain areas. Summa believes that its trade names and reputation are significant to its competitive position. In addition, Summa believes that price is a significant element of competition. However, factors such as engineering, performance, availability and reliability are considered in the purchasing process. The performance of Summa in the future will depend on the ability of its operating subsidiaries to develop and market new products that will gain customer acceptance and loyalty, as well as its ability to adapt its product offerings to meet changing pricing considerations and other market factors. The Company's operating performance would be adversely affected if its operating subsidiaries were to incur delays in developing new products or if such products did not gain market acceptance. There can be no assurance that existing or future products will be sufficiently successful to enable Summa's operating subsidiaries to effectively compete in their respective markets or, 6 7 should new product offerings meet with significant customer acceptance, that one or more current or future competitors will not introduce products that render the Company's products noncompetitive. PATENTS, TRADEMARKS AND LICENSES The Company owns and licenses many domestic and foreign patents on products which it has developed or acquired that expire on dates ranging to 2015. In addition, several patent applications are currently in process. The extent to which patents provide a commercial advantage or inhibit the development of competing products varies. To a large extent, however, Summa relies upon common law concepts of confidentiality and trade secrets, as well as economic barriers created by the required investments in tooling and technical personnel and the development of customer relationships, to protect its proprietary products. Summa also has foreign and domestic trade name and trademark registrations covering many of the names and logos which appear on its products which are helpful in enabling the Company to maintain its present competitive position. ENVIRONMENTAL MATTERS The Company is subject to various environmental laws and regulations governing air quality, water quality and hazardous waste management and disposal, including such laws and regulations of the federal government and the states of California, Michigan, Oklahoma, Florida and Tennessee. The Company does not anticipate that future expenditures for the compliance with such laws and regulations will have a material effect on its capital expenditures or financial condition or, except as set forth below, its results of operations. Prior to October 1986, a previously owned business unit of one of the Company's subsidiaries operated a facility on property within an area subsequently designated as a federal Superfund site. The Company learned that hazardous substances have been identified in the subsurface of the property and that the current owner has been requested by a state agency to undertake additional investigation at the property. The Company is also aware that the property has been subject to a general notice letter issued by the United States Environmental Protection Agency under the federal Superfund law. Summa, as the successor to one of several prior operators of the property, may be held responsible for the contamination at the site regardless of whether its subsidiary caused the contamination. The Company does not believe it is responsible for any contamination at the property, and has not been notified or contacted by any governmental authority in that regard, nor named in any proceeding relating to the property. However, if Summa were held liable under federal Superfund law, or other environmental law, or had to defend itself against such a claim, the consequences could be material to the Company's financial statements. EMPLOYEES At August 31, 1998, Summa had 675 employees, including four employees who comprise the Company's corporate staff. None of Summa's employees are covered by a collective bargaining agreement. The Company considers its relationship with its employees to be good. EXPORT SALES For information regarding Summa's export sales by geographic area for the past three fiscal years, see Note 12 in the "Notes to Consolidated Financial Statements" of the Company in this Annual Report on Form 10-K. 7 8 ITEM 2. PROPERTIES. The Company operates primarily at the following facilities:
LOCATION SQ. FT. PRINCIPAL ACTIVITY LEASE EXPIRES -------- ------- ------------------ ------------- Torrance, California 280 Corporate Office Month to Month Charlevoix, Michigan 94,000 Injection Molding Owned Charlevoix, Michigan 27,500 R&D Owned Dickson, Tennessee 55,000 Injection Molding Owned Chatsworth, California 62,000 Extrusion December 1999 Ontario, California 50,000 Extrusion, Assembly Owned Ontario, California 25,000 Warehouse December 1999 Rancho Cordova, California 48,000 Warehouse, Assembly February 2001 Corona, California 30,000 Injection Molding May 2004 Corona, California 10,000 Warehouse December 1998 Visalia, California 4,500 Warehouse, Assembly December 1998 Oklahoma City, Oklahoma 22,000 Warehouse, Assembly May 2003 Winter Haven, Florida 28,000 Extrusion, Assembly Owned
In addition, the Company owns approximately 63,000 square feet of factory and office space in Fullerton, California, and approximately 15,000 square feet of office and warehouse space in Charlevoix, Michigan, which it leases to unrelated parties. The leases expire in July 2006 and November 1999, respectively. ITEM 3. LEGAL PROCEEDINGS. The Company encounters lawsuits from time to time in the ordinary course of business and, at August 31, 1998, the Company and/or its affiliates were parties to several civil lawsuits. Summa does not expect that the resolution of these lawsuits will have a material adverse impact on future results of operations. Certain lawsuits filed against the Company in the past have contained claims not covered by insurance, or sought damages in excess of policy limits, and such claims could be filed in the future. Any losses that Summa may suffer from such lawsuits, and the effect such litigation may have upon the reputation and marketability of Summa's products, could have a material adverse impact on the future results of operations, financial condition and/or prospects of the Company. See also "Business--Environmental Matters" above. Laitram, et. al. v. KVP Systems, Inc., et. al. was filed in the U.S. District Court in Eastern Louisiana in September 1993. The plaintiffs unsuccessfully claimed KVP infringed upon two patents. The venue was changed to the Federal District Court in Sacramento, California. On April 24, 1997, the District Court ruled that KVP's products do not infringe plaintiff's patents and also dismissed KVP's counterclaims. The parties appealed, and on May 5, 1998, the Court of Appeals affirmed the District Court's ruling in its entirety. The time for any further appeals or rehearings on this matter expired in August 1998 and this lawsuit is finally resolved. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted during the fourth quarter of the fiscal year ended August 31, 1998 to a vote of Summa's stockholders, through solicitation of proxies or otherwise. 8 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. RECENT MARKET PRICES Summa's Common Stock is traded on The Nasdaq National Market under the symbol "SUMX." Historically, there had been a limited public market for Summa's Common Stock. During the year ended August 31, 1998, the average weekly trading volume increased to approximately 112,000 shares. The stock markets have experienced extreme price and volume fluctuations during certain periods. These broad market fluctuations and other factors may adversely affect the market price of Summa's Common Stock for reasons unrelated to Summa's operating performance. The following table sets forth the high and low prices for a share of Summa's Common Stock on The Nasdaq National Market and the trading volume for the periods indicated.
QUARTER ENDED 11/30/96 2/28/97 5/31/97 8/31/97 11/30/97 2/28/98 5/31/98 8/31/98 ------- -------- -------- ------- ------- ---------- --------- --------- -------- HIGH $6.50 $6.25 $6.00 $6.63 $10.50 $13.13 $15.00 $12.50 LOW $5.50 $5.25 $4.75 $4.88 $6.13 $9.00 $11.25 $7.00 VOLUME 125,000 257,159 297,257 661,413 1,040,983 1,301,111 2,450,327 1,085,519
On October 20, 1998, the closing price on The Nasdaq National Market for a share of Summa Common Stock was $9.00. DESCRIPTION OF SECURITIES The authorized capital stock of Summa consists of 10,000,000 shares of Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001 par value. As of August 31, 1998, 4,257,307 shares of the Company's Common Stock were issued and outstanding and no shares of Preferred Stock had been issued or were outstanding. The number of holders of record of Summa's Common Stock as of August 31, 1998 was 562. In addition, Summa estimates that there are 1,700 additional stockholders whose shares are held in "street name." COMMON STOCK. Holders of Common Stock are entitled to one vote per share on each matter submitted to a vote of the stockholders of Summa, and there is no cumulative voting for the election of directors. Subject to preferences that may be applicable to the holders of any outstanding Preferred Stock, each holder of Common Stock is entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor. Upon the liquidation, dissolution or winding up of Summa, holders of Common Stock are entitled to share ratably in all assets of Summa which are legally available for distribution, after payment of all debts and other liabilities and the liquidation preference of any outstanding Preferred Stock. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The transfer agent and registrar for the Common Stock is U. S. Stock Transfer Corporation, 1745 Gardena Avenue, Glendale, California 91204, and its telephone number is: (800) 835-8778. PREFERRED STOCK. The Board of Directors is authorized, subject to any limitations prescribed by the laws of the State of Delaware, but without further action by Summa's stockholders, to provide for the issuance of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the designations, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding) without any further vote or action by the stockholders. Although Summa has no present plans to issue any additional shares of Preferred Stock, the issuance of Preferred Stock in the future could provide voting or conversion rights that would adversely affect the voting power or other rights of the holders of Common Stock and thereby reduce the value of the Common Stock. In addition, the issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of Summa. In particular, specific rights granted to future holders of Preferred Stock could be used to restrict Summa's ability to merge with or sell its assets to a third party, or otherwise delay, discourage or prevent a change in control of Summa. 9 10 ANTI-TAKEOVER DEVICES. In addition to the ability to issue Preferred Stock, Summa's Certificate of Incorporation and Bylaws (i) specifically prohibit cumulative voting and the right of stockholders to call a special stockholders meeting, and (ii) provide for the classification of the Board of Directors into three classes with one class elected annually, a requirement of a two-thirds supermajority stockholder vote to amend certain provisions of the Certificate of Incorporation and Bylaws, and other provisions which are also likely to delay, discourage or prevent a change in control of Summa not approved by the Board of Directors and the Company's stockholders. SHARES ISSUABLE UPON EXERCISE OF OPTIONS Summa has 847,633 shares issuable upon exercise of options granted and/or available to be granted under its stock option plans and in connection with acquisitions, most of which are registered under the Securities Act, and the Board of Directors has approved, subject to stockholder approval at the Annual Meeting of Stockholders to be held on December 10, 1998, the Summa 1999 Stock Option Plan which authorizes the issuance of options exercisable for an additional 500,000 shares. The existence of such stock options may adversely affect the terms on which Summa can obtain additional financing, and the holders of such options can be expected to exercise or convert such options at a time when Summa, in all likelihood, would be able to obtain additional capital by offering shares of its Common Stock on terms more favorable to Summa than those provided by the exercise or conversion of such options. DIVIDEND POLICY Summa has not paid a cash dividend since the fiscal year ended August 31, 1983. Summa intends to retain earnings, if any, for use in its business, currently does not intend to pay cash dividends on its Common Stock in the foreseeable future, and is prohibited from doing so by the loan agreement with its primary bank. ITEM 6. SELECTED FINANCIAL DATA. The selected financial data set forth below for the three years ended August 31, 1996, 1997 and 1998 have been derived from the audited consolidated financial statements of Summa included elsewhere herein. The selected financial data set forth below for the years ended August 31, 1994 and 1995 have been derived from audited consolidated financial statements of Summa that are not included herein. The selected financial data set forth below should be read in conjunction with those financial statements (including the notes thereto) and with the "Management's Discussion and Analysis of Financial Condition and Results of Operation" in Item 7 below. 10 11
STATEMENT OF INCOME DATA: FISCAL YEARS ENDED AUGUST 31, -------------------------------------------------------------- 1994 1995 1996 1997 1998 --------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales ................................................ $ 5,061 $ 6,567 $ 8,124 $ 39,093 $ 85,704 Cost and expenses: Cost of sales ......................................... 2,685 3,474 4,339 27,097 59,197 Selling, general, administrative, other ............... 1,925 2,487 3,174 9,021 17,127 Interest, net ......................................... -- -- (15) 275 1,607 -------- -------- -------- -------- -------- Total costs and expenses of continuing operations ........ 4,610 5,961 7,498 36,393 77,931 -------- -------- -------- -------- -------- Income from continuing operations before provisions for taxes and cumulative effect of accounting change ...... 451 606 626 2,700 7,773 Provision for income taxes ............................... 218 217 253 1,088 3,215 -------- -------- -------- -------- -------- Income from continuing operations before cumulative effect of accounting change .................................. 233 389 373 1,612 4,558 Income (loss) from discontinued operations, net of income tax effect ............................................ 386 259 195 640 316 Cumulative effect of accounting change ................... 100 -- -- -- -- -------- -------- -------- -------- -------- Net income ............................................... $ 719 $ 648 $ 568 $ 2,252 $ 4,874 ======== ======== ======== ======== ======== Earnings per common share: Basic Continuing operations before cumulative effect of accounting change ................ $ 0.15 $ 0.25 $ 0.24 $ 0.47 $ 1.09 Discontinued operations ...................... 0.25 0.17 0.12 0.18 0.07 Cumulative effect of accounting change ....... 0.07 -- -- -- -- -------- -------- -------- -------- -------- Net income ................................... $ 0.47 $ 0.42 $ 0.36 $ 0.65 $ 1.16 ======== ======== ======== ======== ======== Diluted Continuing operations before cumulative effect of accounting change ...................... $ 0.15 $ 0.25 $ 0.23 $ 0.46 $ 1.03 Discontinued operations ...................... 0.25 0.17 0.12 0.18 0.07 Cumulative effect of accounting change ....... 0.06 -- -- -- -- -------- -------- -------- -------- -------- Net income ................................... $ 0.46 $ 0.42 $ 0.35 $ 0.64 $ 1.10 ======== ======== ======== ======== ======== Weighted average number of shares: Basic ............................................ 1,530 1,538 1,565 3,450 4,199 Diluted .......................................... 1,548 1,553 1,603 3,521 4,420 BALANCE SHEET DATA: Assets ................................................... $ 9,171 $ 10,756 $ 10,963 $ 35,651 $ 63,983 Working capital .......................................... 1,484 1,090 2,423 7,209 10,854 Long-term debt ........................................... 305 400 300 5,571 18,675 Stockholders' equity ..................................... 7,224 7,930 8,644 20,965 28,118
11 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Statements contained in this Annual Report on Form 10-K, which are not purely historical, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including but not limited to statements regarding Summa's expectations, hopes, beliefs, intentions or strategies regarding the future, such as those set forth in "Business--Legal Proceedings" above. Actual results could differ materially from those projected in any forward-looking statements as a result of a number of factors, including those detailed in this "Management's Discussion and Analysis" section (including, without limitation, the potential material adverse consequences to the Company of the Year 2000 issue) and elsewhere in this Annual Report on Form 10-K. The forward-looking statements are made as of the date hereof, and the Company assumes no obligation to update the forward-looking statements, or to update the reasons why actual results could differ materially from those projected in the forward-looking statements. Summa designs and manufactures injection-molded plastic optical components for OEM customers in the lighting industry; molded plastic modular conveyor belt and chain for the food processing industry; engineered plastic fittings, valves, filters and tubing for the agricultural irrigation industry; and other molded and extruded plastic components for diverse industries. See "Business" above. Growth has been achieved by acquisition, development of new products and expansion of the Company's sales organization. There can be no assurance that Summa will be able to continue to consummate acquisitions, develop new products or expand sales to sustain rates of revenue growth and profitability in future periods comparable to those experienced in the past several years. See "Business--History of Recent Acquisitions and Divestitures" above. Any future success that the Company may achieve will depend upon many factors including factors which may be beyond the control of Summa or which cannot be predicted at this time. These factors may include changes in the markets for the products offered by the Company through its operating subsidiaries, increased levels of competition including the entry of additional competitors and increased success by existing competitors, reduced margins caused by competitive pressures and other factors, increases in operating costs including costs of production, supplies, personnel, equipment, import duties and transportation, increases in governmental regulation imposed under federal, state or local laws, including regulations applicable to environmental, labor and trade matters, changing customer profiles and general economic and industry conditions that affect customer demand and sales volume, both domestically and in international markets such as the current crises in Asia, Russia and elsewhere, the introduction of new products by the Summa or its competitors, the need to make material capital expenditures, the timing of the Summa's advertising and promotional campaigns, and other factors. RECENT EVENTS ACQUISITION OF SECOND CONVEYOR COMPONENTS MANUFACTURER. In May 1998, the Company acquired all of the outstanding capital stock of Falcon Belting, Inc., an Oklahoma corporation ("Falcon"), which manufactures modular plastic conveyor belting used in food processing industries. The operations of Falcon were promptly consolidated with KVP. See "Business--History of Recent Acquisitions and Divestitures" above. ACQUISITION OF ASSETS OF MOLD MAKER. In September 1998, the Company acquired substantially all of the assets of mold maker, Canyon Mold, Inc. See "Business--History of Recent Acquisition and Divestitures" above. DIVESTITURE OF LAST NON-PLASTIC SUBSIDIARY. In June 1998, the Company sold all of the outstanding capital stock of GST Industries, Inc., a California corporation ("GST"), which manufactures industrial firefighting and defense aerospace equipment made of non-plastic materials, to a private investment group based in California. See "Business--History of Recent Acquisitions and Divestitures" above. SUCCESSFUL DEFENSE OF INTELLECTUAL PROPERTY LAWSUIT. In August 1998, the time for any appeals or petitions for rehearing relating to the previously reported Laitram, et. al. v. KVP Systems, Inc., et. al. lawsuit expired, leaving intact the Court of Appeals ruling that certain of the Company's conveyor components products do not infringe plaintiff's patents. See Item 3 "Legal Proceedings" above. 12 13 PREPAYMENT IN FULL OF SUBORDINATED PROMISSORY NOTE. In August 1998, the purchasers of Morehouse-COWLES, Inc., a former Summa subsidiary, prepaid in full their ten-year $1,771,000 subordinated, secured promissory note due June 2006 bearing interest at 7% per annum. The cash received in the prepayment was used to reduce Summa's outstanding indebtedness to its primary bank. See "Business--History of Recent Acquisitions and Divestitures" above. SETTLEMENT OF BOND TAXABILITY ISSUE WITH THE INTERNAL REVENUE SERVICE. In August 1998, the Company and the Internal Revenue Service entered into a settlement of their previously reported dispute regarding the tax exempt status of one of the Company's industrial revenue bonds. Under the terms of the settlement, the bond remains outstanding and tax exempt. The settlement did not materially affect the Company's results of operations or financial position. INJUNCTION AGAINST FORMER OFFICER OF SUBSIDIARY AND COMPETING BUSINESS. In July 1998, the Company filed a civil lawsuit in the Los Angeles Superior Court against Steven L. Strawn, former president of Manchester Plastics Co., Inc., a Summa subsidiary, his recently formed company, Waypoint LLC, and several other individuals. In late August 1998, the Los Angeles Superior Court issued a temporary injunction against Strawn and Waypoint LLC. The defendants agreed to the injunction. Among other restrictions, the injunction bars the defendants from soliciting and selling to Manchester's customers, contacting or hiring Manchester employees and using or disclosing Manchester trade secrets. REINCORPORATION IN DELAWARE. Effective in April 1998, the Company was reincorporated from the State of California to the State of Delaware (the "Reincorporation"). The Reincorporation was previously approved by the requisite vote of the Company's shareholders at the Annual Meeting of Shareholders held in Torrance, California on January 26, 1998. The definitive proxy statement describing the Reincorporation was filed with the Securities and Exchange Commission on December 10, 1997. ADOPTION OF STOCK REPURCHASE PLAN. In September 1998, the Company announced that it had adopted a plan to repurchase up to $2 million of its stock on The Nasdaq National Market. There is no deadline and no specified minimum amount of stock to be repurchased. PREPAYMENT OF TWO ABOVE MARKET RATE NOTES. In August 1998, the Company prepaid, without penalty, two real estate loans in an aggregate principal amount of approximately $450,000 bearing interest at above market rates. QUALIFICATION FOR REDUCED INTEREST RATE WITH PRIMARY LENDER. The Company recently achieved certain financial criteria set forth in the loan agreement with its primary lender which qualified the Company for a .4% reduction in the interest rate currently charged on borrowings with such lender. CONSOLIDATION OF RISK INSURANCE. In June 1998, the Company consolidated the various risk insurance policies then held by its subsidiaries into one overall policy, providing for significant improvements in coverage at reduced expense. 13 14 RESULTS OF CONTINUING OPERATIONS The following table sets forth certain information derived from Summa's consolidated statements of income for continuing operations as a percentage of sales for the three years ended August 31, 1996, 1997 and 1998, as well as the Company's effective income tax rate for each period presented. For a description of acquisitions and dispositions during the periods presented, see "Business--History of Recent Acquisitions and Divestitures" above.
Fiscal Years Ended August 31 ---------------------------- 1996 1997 1998 ----- ----- ----- Net sales ............................................. 100.0% 100.0% 100.0% Cost of sales ......................................... 53.4 69.3 69.1 ----- ----- ----- Gross profit .......................................... 46.6 30.7 30.9 S, G, & A expense ..................................... 38.7 22.4 19.6 ----- ----- ----- Operating income from continuing operations ........... 7.9 8.3 11.3 Interest expense, net ................................. (0.2) 0.7 1.9 Other expense ......................................... 0.4 0.7 .3 ----- ----- ----- Income from continuing operations before tax .......... 7.7 6.9 9.1 Provision for income taxes ............................ 3.1 2.8 3.8 ----- ----- ----- Income from continuing operations ..................... 4.6% 4.1% 5.3% ===== ===== ===== Effective tax rate .................................... 40.4 40.3 41.4
NET SALES. For the year ended August 31, 1997, net sales from continuing operations increased by $30,969,000 or 381%, over the prior fiscal year, due primarily to the inclusion of sales of newly acquired operations and strong continued growth in sales of certain of the Company's products, attributable to growing acceptance of such products, the market for the products and use of an expanded sales force. See "Business--History of Recent Acquisitions and Divestitures" and "Business--Products" above. Net sales from continuing operations for the year ended August 31, 1998 increased by $46,611,000 or 119%, over the prior fiscal year, due primarily to the inclusion of sales of several newly acquired operations. See "Business--History of Recent Acquisitions and Divestitures" and "Business--Products" above. Comparative trailing twelve months' sales from continuing businesses grew at 6%. COST OF SALES. For the year ended August 31, 1997, cost of sales from continuing operations increased by $22,758,000 or 524%, over the prior fiscal year, due primarily to the inclusion of expenses for newly acquired operations and increased sales volume and related expenses for certain of the Company's products due to growth. See "Business--History of Recent Acquisitions and Divestitures" and "Business--Products" above. Cost of sales from continuing operations for the year ended August 31, 1998 increased by $32,100,000 or 118%, over the prior fiscal year, due primarily to the inclusion of a full twelve months of expenses (segments) of several newly acquired operations, and increased sales volume and related expenses for certain of the Company's products due to growth. See "Business--History of Recent Acquisitions and Divestitures" and Business--Products" above. GROSS PROFIT. For the year ended August 31, 1997, gross profit from continuing businesses increased by $8,211,000 to $11,996,000, an increase of 217% over the level of gross profit generated during the prior fiscal year. The increase in gross profit is due primarily to the inclusion of operations of newly acquired operations and growth in the sales of certain of the Company's products. As a percentage of sales, the gross profit margin decreased from 46.6% for the year ended 14 15 August 31, 1996 to 30.7% for the year ended August 31, 1997, due primarily to the inclusion of sales of newly acquired operations at typically lower margins than those of Summa's other operations at such time. Gross margin percentages of Summa's other operations increased slightly, due primarily to price increases and increased volume. See "Business--History of Recent Acquisitions and Divestitures" and "Business--Products" above. Gross profit from continuing businesses for the year ended August 31, 1998 increased by $14,511,000 to $26,507,000, an increase of 121% over the level of gross profit generated during the prior fiscal year. The increase in gross profit is due primarily to the inclusion of newly acquired operations, and strong continued growth in the sales of certain of the Company's products. As a percentage of sales, the gross profit margin increased from 30.7% for the year ended August 31, 1997 to 30.9% for the year ended August 31, 1998, due to volume benefits, productivity increases and cost reductions which more than offset the inclusion of sales of several newly acquired operations at typically lower margins than those of Summa's other operations. See "Business--History of Recent Acquisitions and Divestitures" and "Business--Products" above. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the year ended August 31, 1997, selling, general and administrative expenses from continuing businesses increased by $5,623,000, or 179%, when compared to such expenses for the prior fiscal year, due primarily to the inclusion of expenses of newly acquired operations and growth in certain of the Company's products. As a percentage of sales, selling, general and administrative expenses decreased from 38.7% to 22.4%, due mostly to the inclusion of newly acquired operations with lower operating expenses as a percentage of sales. See "Business--History of Recent Acquisitions and Divestitures" and "Business--Products" above. Selling, general and administrative expenses from continuing businesses for the year ended August 31, 1998 increased by $8,052,000, or 92%, when compared to such expenses for the prior fiscal year, due primarily to the inclusion of several newly acquired operations, and continued growth in the sales and expenses relating to certain of the Company's products. As a percentage of sales, selling, general and administrative expenses decreased from 22.4% to 19.6%, due mostly to the inclusion of several newly acquired operations at typically lower operating expenses as a percentage of sales. See "Business--History of Recent Acquisitions and Divestitures" and "Business--Products" above. INTEREST EXPENSE, NET. Interest expense increased from a minor amount for the fiscal year ended August 31, 1996 to $275,000 for the fiscal year ended August 31, 1997 to $1,607,000 for the fiscal year ended 1998. Interest expense in the 1997 fiscal year relates primarily to interest on debt assumed in the acquisition of new operations. Interest expense in the 1998 fiscal year relates primarily to interest on debt assumed in acquisitions and interest paid on debt owed to the Company's primary bank pursuant to the borrowing arrangement described in the "Liquidity and Capital Resources" section below. The majority of the outstanding borrowings under such arrangement were incurred in connection with recent acquisitions of several operations. EFFECTIVE TAX RATE. The effective income tax rate, which is a composite of federal and state income taxes, decreased from 40.4% for the fiscal year ended August 31, 1996 to 40.3% in the fiscal year ended August 31, 1997. For the fiscal year ended August 31, 1998, the effective tax rate increased to 41.4%, due primarily to non-deductible amortization of goodwill related to recent acquisitions offset by a lower effective combined state income tax rate. INCOME FROM CONTINUING OPERATIONS. As a result of the above described changes, income from continuing operations for fiscal 1997 grew by $1,239,000 to $1,612,000, an increase of 332%, over fiscal 1996 and increased by $2,946,000 in fiscal year 1998 to $4,558,000, an increase of 183% over fiscal 1997. INFLATION. Management of the Company does not believe that inflation has had a significant impact on Summa's operations during the past three fiscal years. No significant amount of sales or purchases are made pursuant to fixed price, long-term agreements. LIQUIDITY AND CAPITAL RESOURCES SOURCE AND USE OF FUNDS. The Company's primary source of liquidity has been cash generated from operating activities and borrowings from third parties. See "-- Financing Arrangements" below. During the three fiscal years ended August 31, 1998, net cash provided by operating activities was $1,577,000 in 1996, $3,597,000 in 1997, and $8,441,000 in 1998. The improved cash flows for the last three fiscal years are primarily due to inclusion of newly acquired operations and increasing profitability. 15 16 Summa's principal uses of cash have been the (i) support of operating activities, (ii) financing of acquisitions of businesses, (iii) investment in capital improvements, and (iv) reduction of debt. For information relating to cash used in acquisitions and generated from dispositions, see "Business--History of Certain Acquisitions and Divestitures" above. Investment in capital improvements for the three years ended August 31, 1998 amounted to $983,000 in 1996, $1,626,000 in 1997 and $3,033,000 in 1998, and was primarily for tooling for new products and for molding equipment. Although Summa expects to continue making substantial investments in tooling for new products, at August 31, 1998, Summa was not committed to any outside supplier for major capital expenditures, and believes its present capacity, augmented by anticipated continued investment in new product tooling and equipment, will be sufficient to meet demand for its products. For the three years ended August 31, 1998, the Company applied $1,038,000 in 1996, $1,287,000 in 1997 and $5,751,000 in 1998 to then-existing, interest bearing debt, even though overall indebtedness may have increased due to acquisitions. WORKING CAPITAL; ASSET UTILIZATION. At fiscal year end August 31, working capital was $2,423,000 in 1996, $7,209,000 in 1997 and $10,854,000 in 1998, representing increases in working capital of 198% from the 1996 to 1997 fiscal year end, and 51% from the 1997 to 1998 fiscal year end. The increase in working capital in the 1997 fiscal year was due primarily to the inclusion of newly acquired operations, and the increase in working capital in the 1998 fiscal year was due primarily to the inclusion of several additional newly acquired operations. Asset utilization for the fiscal years ended August 31, 1996, 1997 and 1998 is illustrated in the following table:
Fiscal Years Ended August 31, ----------------------------------- 1996 1997 1998 --------- ---------- --------- Average working capital turnover....... 4.6 times 8.1 times 9.5 times Average accounts receivable turnover... 8.6 times 10.2 times 8.8 times Average inventory turnover............. 3.7 times 12.4 times 9.6 times
FINANCING ARRANGEMENTS. Summa entered into a $34 million credit agreement with a bank in the first quarter of the 1998 fiscal year, comprised of a $13,500,000 term loan, a three year revolving line of credit of up to $15,000,000 depending upon eligible accounts receivable and inventory, and a $5,000,000 acquisition facility available for three years, repayable in monthly installments over seven years. At August 31, 1998, total borrowings under the credit agreement were $15,401,000, and the Company had additional debt of $5,941,000. The weighted average interest rate for all of the Company's debt at August 31, 1998 was 7.5%, and unused bank credit totaled $16,417,000. All of the Company's assets which are not security for industrial revenue bonds or specific equipment loans are pledged to secure the debt described above The term debt and revolving line of credit require compliance with various bank covenants. Loan balances and weighted average interest rates of the Company's debt at August 31, 1998 were:
Description of Debt Balance Interest Rate ------------------- ----------- ------------- Bank term loan................................ $12,667,000 7.9% Line of credit................................ $ 2,734,000 8.2% Acquisition line.............................. $ -- -- Industrial revenue bonds and other............ $ 5,941,000 6.3% ----------- --- Total debt.................................... $21,342,000 7.5% =========== ===
16 17 Summa believes that cash flows from operations and existing credit facilities will be sufficient to fund working capital requirements, planned capital expenditures and debt service for the next twelve months. As discussed in "Business--Strategy" above, the Company has a strategy of growth by acquisition. In the event an acquisition plan is adopted which requires funds exceeding the availability described above, an alternate source of funds to accomplish the acquisition would have to be developed. The Company has 10,000,000 shares of common stock authorized, of which 4,257,307 shares were outstanding at August 31, 1998 and 5,000,000 shares of "blank check" preferred stock authorized of which none is outstanding. The Company could issue additional shares of common or preferred stock to raise funds. RECENT ACCOUNTING PRONOUNCEMENTS See Note 1 in the "Notes to Consolidated Financial Statements" in Part IV of this Annual Report on Form 10-K. YEAR 2000 COMPLIANCE The Company is continuing to analyze operations to determine and implement the procedures necessary to ensure timely Year 2000 compliance. The Company is also in the process of identifying and contacting key customers, vendors and suppliers to request confirmation of timely external Year 2000 compliance. Each of the Company's facilities utilizes and is dependent upon data processing systems and software to conduct business. The Company has received confirmation from vendors of most of the business software used by the Company that such software is designed to be Year 2000 compliant. Further, for reasons generally unrelated to the Year 2000 issue, the Company is in the process of purchasing and installing new systems for certain operations at a cost of several hundred thousand dollars. The Company currently anticipates that all internally used software will be Year 2000 compliant in a timely manner. Additionally, various machines and other types of personal property at each facility have computer controls and/or contain integrated circuits that may be affected, and the Company is in the process of identifying and analyzing such property to determine Year 2000 compliance. Although, the Company currently believes that it will be internally Year 2000 compliant in all material respects prior to January 1, 2000 and that the effort to achieve Year 2000 compliance has not and will not have a significant impact on the financial condition or results of future operations of the Company, the Company remains concerned that the failure to comply by a relatively small number of large customers and/or vendors, including banking institutions, utilities, telecommunications and transportation companies, could significantly disrupt operations at one or more of the Company's facilities. Summa does not have a formalized Company-wide contingency plan covering worst case scenarios in the event of Year 2000 non-compliance, but any such plan, if and when formalized, would likely include technical contacts, access to backup systems and alternative vendor sources, among other things. See " - - General" above for forward looking statements disclaimer. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. None. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and related notes thereto of the Company filed herewith are set forth in Item 14 and included in Part IV of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 17 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT. Incorporated by reference from Summa's definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. Incorporated by reference from Summa's definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated by reference from Summa's definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated by reference from Summa's definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. 18 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements, Financial Statement Schedules and Exhibits: The following documents are either filed herewith or incorporated herein by reference: 1. Financial Statements. The audited consolidated financial statements of Summa as of August 31, 1997 and 1998 and for each of the three years ended August 31, 1998 (including the notes thereto which contain unaudited quarterly financial data for the two-year period ended August 31, 1998), and the report of independent public accountants thereon, are included herein as set forth in the "Index to Financial Statements" set forth below. 2. Financial Statement Schedules. The following financial statement schedules: Schedule II - Valuation and qualifying accounts. 3. Exhibits. The following exhibits to this Annual Report on Form 10-K are either filed herewith or incorporated herein by reference as indicated: Exhibit Number Document ------- -------- 2.1 Agreement and Plan of Reorganization dated March 19, 1993 by and between the Company and KVP Systems, Inc. relating to the acquisition by the Company of KVP(1) 2.2 Agreement and Plan of Merger dated November 22, 1996 by and among the Company, LexaLite International Corporation and Charlevoix The Beautiful, Inc. relating to the acquisition by the Company of LexaLite(2) 2.3 Agreement and Plan of Acquisition dated July 2, 1997 by and between the Company and Calnetics Corporation relating to the acquisition by the Company of Calnetics and its subsidiaries(3) 2.4 Stock Purchase Agreement and Amendment No. 1 thereto dated April 8, 1998 and April 24, 1998, respectively, by and among Mr. William G. Faulkner, KVP Systems, Inc. and the Company relating to the acquisition by the Company of Falcon Belting, Inc.(4) 2.5 Stock Purchase Agreement dated June 12, 1998 by and between P&L Growth Industries, Inc., a California corporation, and the Company relating to the divestiture by the Company of GST Industries, Inc.(4) 3.1 Certificate of Incorporation of the Company(5) 3.2 Bylaws of the Company(5) 10.1 Loan Agreement dated October 21, 1997 between Summa and Comerica Bank-California providing for $34 million credit facility(6) 10.2 Subordinated Convertible Promissory Note, Security Agreement and Guaranty dated June 26, 1998 by and among P&L Growth Industries, Inc., GST Industries, Inc. and the Company relating to the divestiture by the Company of GST Industries, Inc.(4) 10.3 Lease dated November 22, 1989 by and between Manchester Plastics Co., Inc. and Tom and Arlene Schneider and Amendment thereto dated December 5, 1989 for premises located in Chatsworth, California(7) 10.4 1991 Stock Option Plan of the Company(8) 10.5 1995 Stock Option Plan of the Company(9) 10.6 Employment Agreement dated March 1994 between the Company and James R. Swartwout(*) 10.7 Amendment No. 1 to Employment Agreement between the Company and James R. Swartwout dated January 1, 1998(*) 19 20 10.8 Change in Control Agreement dated January 26, 1997 between Calnetics Corporation and Trygve M. Thoresen (10) 21 Subsidiaries of the Registrant(*) 23 Consent of Arthur Andersen LLP(*) 27 Financial Data Schedule(*) - ----------------------- (1) Incorporated by reference from the exhibits to the Company's Registration Statement on Form S-4 filed with the Commission on May 24, 1993. (2) Incorporated by reference from the appendices to the Company's definitive Proxy Statement on Schedule 14A for the Annual Meeting of Shareholders held November 21, 1996. (3) Incorporated by reference from the appendices to the Calnetics' definitive Proxy Statement on Schedule 14A for the Special Meeting of Shareholders held October 28, 1997. (4) Incorporated by reference from exhibits to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1998. (5) Incorporated by reference from the appendices to the Company's definitive Proxy Statement on Schedule 14A for the Annual Meeting of Shareholders held January 26, 1998. (6) Incorporated by reference from exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997. (7) Incorporated by reference from exhibits to the Calnetics' Annual Report on Form 10-K for the fiscal year ended June 30, 1991. (8) Incorporated by reference from exhibits to the Company's Registration Statement on Form S-8 filed with the Commission on April 15, 1993. (9) Incorporated by reference from exhibits to the Company's Registration Statement on Form S-8 filed with the Commission on January 30, 1997. (10) Incorporated by reference from exhibits to the Calnetics' Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. - ------------- * Filed herewith. (b) Reports on Form 8-K filed during the last quarter of the fiscal year ended August 31, 1998: None. 20 21 INDEX TO FINANCIAL STATEMENTS Report of Independent Public Accountants.................................. F-1 Consolidated Balance Sheets as of August 31, 1997 and 1998................ F-2 Consolidated Statements of Income for each of the three years ended August 31, 1996, 1997 and 1998.................................... F-3 Consolidated Statements of Stockholders' Equity for each of the three years ended August 31, 1996, 1997 and 1998...................... F-4 Consolidated Statements of Cash Flows for each of the three years ended August 31, 1996, 1997 and 1998........................... F-5 Notes to Consolidated Financial Statements................................ F-6 Report of Independent Public Accountants................................. F-19 Schedule II - Valuation and Qualifying Accounts........................... F-20 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO: The Board of Directors and Stockholders of Summa Industries We have audited the accompanying consolidated balance sheets of Summa Industries (a Delaware corporation) and subsidiaries as of August 31, 1997 and 1998 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended August 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Summa Industries and subsidiaries as of August 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1998, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP ---------------------------- ARTHUR ANDERSEN LLP Los Angeles, California October 6, 1998 F-1 23 SUMMA INDUSTRIES CONSOLIDATED BALANCE SHEETS AT AUGUST 31
--------------------------------------------------------------------------------------------------- ASSETS 1997 1998 --------------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 3,020,000 $ 293,000 Accounts receivable, net of allowances of $195,000 in 1997 and $620,000 in 1998 6,603,000 12,975,000 Inventories 2,976,000 9,392,000 Prepaid expenses and other 607,000 777,000 Deferred tax asset 991,000 662,000 --------------------------------------------------------------------------------------------------- Total current assets 14,197,000 24,099,000 --------------------------------------------------------------------------------------------------- Property, plant and equipment, at cost: Land 1,380,000 2,080,000 Building and leasehold improvements 7,275,000 9,371,000 Machinery and equipment 10,709,000 15,226,000 Office furniture and equipment 634,000 1,119,000 --------------------------------------------------------------------------------------------------- Total property, plant and equipment, at cost 19,998,000 27,796,000 Less: accumulated depreciation and amortization 3,776,000 7,132,000 --------------------------------------------------------------------------------------------------- Net property, plant and equipment 16,222,000 20,664,000 --------------------------------------------------------------------------------------------------- Other assets 2,331,000 1,006,000 Net assets of discontinued operations 1,273,000 -- Goodwill and other intangibles, net 1,628,000 18,214,000 --------------------------------------------------------------------------------------------------- Total assets $35,651,000 $63,983,000 =================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY --------------------------------------------------------------------------------------------------- Current liabilities: Current maturities of long term debt $ 2,673,000 $ 2,667,000 Accounts payable 1,819,000 5,299,000 Accrued salaries, wages and benefits 1,522,000 2,418,000 Other accrued liabilities 974,000 2,861,000 --------------------------------------------------------------------------------------------------- Total current liabilities 6,988,000 13,245,000 --------------------------------------------------------------------------------------------------- Long-term debt, net of current maturities 5,571,000 18,675,000 Deferred income taxes 1,351,000 -- Other long-term liabilities 776,000 3,945,000 --------------------------------------------------------------------------------------------------- Total liabilities 14,686,000 35,865,000 Stockholders' equity: Preferred stock, par value $.001; 5,000,000 shares authorized, none outstanding -- -- Common stock, par value $.001; 10,000,000 shares authorized; issued and outstanding: 4,099,004 at August 31, 1997 and 4,257,307 at August 31, 1998 16,226,000 18,505,000 Retained earnings 4,739,000 9,613,000 --------------------------------------------------------------------------------------------------- Total stockholders' equity 20,965,000 28,118,000 --------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $35,651,000 $63,983,000 ===================================================================================================
See accompanying notes to consolidated financial statements. F-2 24 SUMMA INDUSTRIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED AUGUST 31
1996 1997 1998 - -------------------------------------------------------------------------------------------------------- Net sales $8,124,000 $39,093,000 $85,704,000 Cost of sales 4,339,000 27,097,000 59,197,000 - ------------------------------------------------------------------------------------------------------- Gross profit 3,785,000 11,996,000 26,507,000 Selling, general and administrative expenses 3,144,000 8,767,000 16,819,000 - ------------------------------------------------------------------------------------------------------- Operating income from continuing operations 641,000 3,229,000 9,688,000 Interest (income) (27,000) (200,000) (198,000) Interest expense 12,000 475,000 1,805,000 Other (income) expense 30,000 254,000 308,000 - ------------------------------------------------------------------------------------------------------- Income from continuing operations before provision for taxes 626,000 2,700,000 7,773,000 Provision for income taxes 253,000 1,088,000 3,215,000 - ------------------------------------------------------------------------------------------------------- Income from continuing operations 373,000 1,612,000 4,558,000 Income from discontinued operations, net of the effect of income tax of $102,000 in 1996, $426,000 in 1997, and $210,000 in 1998 195,000 640,000 316,000 - ------------------------------------------------------------------------------------------------------- Net income $ 568,000 $ 2,252,000 $ 4,874,000 - ------------------------------------------------------------------------------------------------------- Earnings per common share - ------------------------------------------------------------------------------------------------------- Basic Continuing operations $.24 $.47 $1.09 Discontinued operations $.12 $.18 $.07 Net income $.36 $.65 $1.16 ======================================================================================================= Diluted Continuing operations $.23 $.46 $1.03 Discontinued operations $.12 $.18 $.07 Net income $.35 $.64 $1.10 ======================================================================================================= Weighted average common shares outstanding Basic 1,565,000 3,450,000 4,199,000 Diluted 1,603,000 3,521,000 4,420,000 - -------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-3 25 SUMMA INDUSTRIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------- Common Common Retained Shares Stock Earnings Total - -------------------------------------------------------------------------------------------------------- Balance at August 31, 1995 1,541,930 $ 6,011,000 $1,919,000 $ 7,930,000 Cashout of odd lots (2) -- -- -- Exercise of options 35,923 179,000 -- 179,000 Stock redeemed in exercise of stock options (5,200) (33,000) -- (33,000) Reserved shares, acquisition of KVP 30,832 -- -- -- Net Income -- -- 568,000 568,000 - -------------------------------------------------------------------------------------------------------- Balance at August 31, 1996 1,603,483 6,157,000 2,487,000 8,644,000 Cashout of odd lots (26) -- -- -- Exercise of options 50,441 227,000 -- 227,000 Acquisition of LexaLite 2,445,106 9,842,000 -- 9,842,000 Net Income -- -- 2,252,000 2,252,000 - -------------------------------------------------------------------------------------------------------- Balance at August 31, 1997 4,099,004 16,226,000 4,739,000 20,965,000 Cashout of odd lots (4) -- -- -- Exercise of options 167,318 1,044,000 -- 1,044,000 Stock redeemed in exercise of stock options (9,011) (110,000) -- (110,000) Value of options issued in connection with acquisition of Calnetics -- 1,345,000 -- 1,345,000 Net Income -- -- 4,874,000 4,874,000 - -------------------------------------------------------------------------------------------------------- Balance at August 31, 1998 4,257,307 $18,505,000 $9,613,000 $28,118,000 ========================================================================================================
See accompanying notes to consolidated financial statements. F-4 26 SUMMA INDUSTRIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31
1996 1997 1998 - ------------------------------------------------------------------------------------------------------------- Operating activities: Net income $ 568,000 $ 2,252,000 $ 4,874,000 - ------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 662,000 2,029,000 3,221,000 Amortization 82,000 96,000 452,000 Change in net deferred income taxes (94,000) 138,000 26,000 (Gain) loss on disposition of equipment (59,000) -- 30,000 Net change in assets and liabilities, net of effects from purchase of LexaLite in fiscal 1997 and Calnetics and Falcon in fiscal 1998: Accounts receivable 87,000 258,000 (488,000) Inventories (73,000) 101,000 (389,000) Prepaid expenses and other assets 99,000 (275,000) 75,000 Accounts payable (114,000) (385,000) 443,000 Accrued liability 419,000 (617,000) 197,000 - ------------------------------------------------------------------------------------------------------------- Total adjustments 1,009,000 1,345,000 3,567,000 - ------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,577,000 3,597,000 8,441,000 - ------------------------------------------------------------------------------------------------------------- Investing activities: Acquisitions of businesses -- -- (23,322,000) Capital expenditures: Purchases of property and equipment (983,000) (1,626,000) (3,033,000) Cash paid for patents (21,000) (13,000) -- Sales of subsidiaries, net of fees and of cash held 608,000 -- 1,185,000 Net proceeds from the sale of equipment 96,000 16,000 86,000 Net decrease in unexpended revenue bond proceeds -- 438,000 371,000 Proceeds from cash surrender value of life insurance -- 646,000 -- Collection of note receivable -- -- 1,771,000 - ------------------------------------------------------------------------------------------------------------- Net cash (used in) investing activities (300,000) (539,000) (22,942,000) - ------------------------------------------------------------------------------------------------------------- Financing activities: Net proceeds from (payments on) line of credit (938,000) (275,000) 2,734,000 Proceeds from issuance of long term debt -- -- 13,994,000 Payments on long term debt (100,000) (1,012,000) (5,751,000) Proceeds from the exercise of stock options 146,000 227,000 934,000 Cash received in the acquisition of business, net of cash paid -- 318,000 -- - ------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (892,000) (742,000) 11,911,000 - ------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 385,000 2,316,000 (2,590,000) Cash and cash equivalents, beginning of year 182,000 567,000 2,883,000 - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of the year $ 567,000 $ 2,883,000 $ 293,000 =============================================================================================================
See accompanying notes to consolidated financial statements. F-5 27 SUMMA INDUSTRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 1996, 1997 AND 1998 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Summa Industries ("Summa"), a Delaware corporation, develops and manufactures proprietary plastic products for diverse industrial and commercial markets. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Summa Industries and its wholly-owned subsidiaries. The results of operations of acquired companies have been included in the consolidated results of operations and the consolidated statements of cash flows of the Company since the dates of acquisitions. See Note 15. All intercompany account balances and transactions have been eliminated in consolidation. Certain reclassifications of 1996 and 1997 amounts have been made to conform to 1998 presentations. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION Revenue from product sales is recognized at the time of shipment. INVENTORIES Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Cost includes material, labor and manufacturing overhead. PROPERTY, PLANT AND EQUIPMENT Depreciation is charged against earnings, principally using the straight-line method, over the estimated useful lives of the related assets as follows: Building and improvements 10-40 years Machinery and equipment 3-10 years Office furniture and equipment 3-7 years Leasehold improvements Lesser of remaining term of lease or estimated useful life Maintenance, repairs and minor renewals are charged directly to expense as incurred. Additions and improvements to property, plant and equipment are capitalized. When assets are disposed of, the related cost and accumulated depreciation thereon are removed from the accounts, and any gain or loss is included in operations. INTANGIBLE ASSETS Intangible assets include goodwill and other intangibles such as trade names, patents and customer lists capitalized in connection with business acquisitions. Other intangibles are being amortized over their estimated useful lives of 10-17 years. Goodwill is amortized over 25-40 years (see Note 6). F-6 28 EARNINGS PER COMMON SHARE Basic earnings per common share (EPS) is based on income available to common stockholders divided by the weighted average number of common shares outstanding during the year. Diluted EPS is similar to the computation for Basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. See Note 2 for details of the computation. STATEMENTS OF CASH FLOWS For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents. INCOME TAXES The Company accounts for income taxes in accordance with the Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes". This statement requires that income taxes be accounted for using the liability method. STOCK BASED COMPENSATION The Company has elected to continue to report stock based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to Employees." The Company has adopted the appropriate disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (see Note 11). RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share," which requires the presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures and requires a reconciliation of both the numerator and denominator of the basic and dilutive earnings per share computations. SFAS No. 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. The Company adopted this standard in the second quarter of fiscal year 1998 with no material impact on earnings per share. All prior period earnings per share have been restated for the new disclosure. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components. This statement is effective for financial statements for annual periods beginning after December 15, 1997 and will be adopted by the Company for the 1999 fiscal year. The Company does not believe that the adoption of this pronouncement will have a material effect on reported income. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for reporting and disclosure of financial information by segment. This statement will be adopted by the Company for the 1999 fiscal year. The Company has not yet determined the impact of adopting this pronouncement on its financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and for Hedging Activities," which establishes standards for reporting and disclosure of derivative and hedging instruments. SFAS No. 133 is effective for annual reports beginning after June 15, 1999. The Company will not be affected by this new standard because the Company has no derivative or hedging financial instruments. F-7 29 2. DILUTED EARNINGS PER SHARE
For the year ended August 31, 1996 1997 1998 - ------------------------------------------------------------------------------------------------------ Income from continuing operations $373,000 $1,612,000 $4,558,000 Net income $568,000 $2,252,000 $4,874,000 Weighted average shares outstanding during the period -- basic 1,565,000 3,450,000 4,199,000 Effect of dilutive securities Impact of common shares to be issued under stock options plans 38,000 71,000 221,000 - ------------------------------------------------------------------------------------------------------ Weighted average shares outstanding-diluted (1) (2) 1,603,000 3,521,000 4,420,000 ======================================================================================================
(1) Calculated using the "treasury stock" method as if diluted securities were exercised and the funds were used to purchase Common shares at the average market price during the period. (2) Options to purchase 30,894 common shares in 1996, 209,624 common shares in 1997, and 338,327 common shares in 1998, were not included in the computation of diluted earnings per share because the exercise price was greater than the average fair market value of the common shares. 3. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the years ended August 31:
1996 1997 1998 ----------------------------------------------------------------- Interest $107,000 $ 395,000 $1,986,000 Income taxes $301,000 $1,414,000 $3,478,000 -----------------------------------------------------------------
Noncash investing activities: The Company received a note receivable of $1,771,000 in 1996 as partial consideration for the sale of Morehouse-COWLES, Inc. (collected in 1998) and received a note receivable of $1,500,000 in 1998 as partial consideration for the sale of GST Industries, Inc.
1997 1998 - ------------------------------------------------------------------------------------- Non-cash investing and financing activities: Common stock issued for acquisition (Note 15) $ 9,842,000 $ -- - ------------------------------------------------------------------------------------- Details of acquisitions (Note 15): Fair value of assets acquired 23,943,000 36,917,000 Liabilities assumed or incurred (13,906,000) (10,844,000) Common stock and value of options issued (9,842,000) (1,345,000) - ------------------------------------------------------------------------------------- Cash paid (195,000) (24,728,000) Less cash acquired 513,000 1,406,000 - ------------------------------------------------------------------------------------- Net cash acquired (used) in acquisition $ 318,000 $(23,322,000) =====================================================================================
F-8 30 4. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate: CASH AND CASH EQUIVALENTS - The carrying amount is a reasonable estimate of fair value. These assets consist of short term certificates of deposit and demand deposits. LONG-TERM DEBT - The carrying value approximates fair value since the interest rate on the long-term loan approximates the rate which is currently available to the Company for the issuance of debt with similar terms and maturities. 5. INVENTORIES Inventories consisted of the following at August 31:
1997 1998 --------------------------------------------------------------- Finished goods $ 885,000 $3,611,000 Work in process 13,000 111,000 Materials and parts 2,078,000 5,670,000 --------------------------------------------------------------- $2,976,000 $9,392,000 ===============================================================
6. GOODWILL AND OTHER INTANGIBLES Goodwill and other intangibles consisted of the following at August 31:
1997 1998 ---------------------------------------------------------------- Goodwill $1,207,000 $17,176,000 Other intangibles 642,000 1,700,000 ---------------------------------------------------------------- 1,849,000 18,876,000 Less: accumulated amortization (221,000) (662,000) ---------------------------------------------------------------- Goodwill and other intangibles, net $1,628,000 $18,214,000 ================================================================
7. INCOME TAXES The following table provides a reconciliation between the provision for taxes based on income included in the accompanying consolidated statements of income and the provision for taxes computed by applying the statutory income tax rate to income from continuing operations before taxes for the years ended August 31:
1996 1997 1998 --------------------------------------------------------------------- Provision for taxes at statutory rates $213,000 $ 918,000 $2,643,000 State tax, net of federal benefit 26,000 116,000 332,000 Goodwill amortization 15,000 24,000 147,000 Other-net (1,000) 30,000 93,000 --------------------------------------------------------------------- Provision for income taxes $253,000 $1,088,000 $3,215,000 =====================================================================
F-9 31 The provision for income taxes consisted of the following for the years ended August 31:
1996 1997 1998 -------------------------------------------------------------------- Current: Federal $225,000 $ 771,000 $1,994,000 State 94,000 240,000 360,000 -------------------------------------------------------------------- 319,000 1,011,000 2,354,000 -------------------------------------------------------------------- Benefit of stock options exercised: Federal 24,000 31,000 506,000 State 4,000 5,000 90,000 -------------------------------------------------------------------- 28,000 36,000 596,000 -------------------------------------------------------------------- Deferred: Federal (80,000) 35,000 208,000 State (14,000) 6,000 57,000 -------------------------------------------------------------------- (94,000) 41,000 265,000 -------------------------------------------------------------------- Provision for income taxes $253,000 $1,088,000 $3,215,000 ====================================================================
Changes in components of the Company's deferred tax provision (benefit) were as follows:
1996 1997 1998 ---------------------------------------------------------------------- Effect of performance payments $(101,000) $ 141,000 $ -- State taxes (39,000) (85,000) (103,000) Reserves 77,000 (603,000) 238,000 Depreciation 10,000 567,000 107,000 Amortization (20,000) 21,000 (17,000) Other (21,000) -- 40,000 ---------------------------------------------------------------------- $ (94,000) $ 41,000 $ 265,000 ======================================================================
F-10 32 The components of the Company's deferred tax asset (liability) at August 31, 1997 and 1998 were as follows:
1997 1998 ------------------------------------------------------------------- State taxes $ 157,000 $ 217,000 Reserves 834,000 2,186,000 ------------------------------------------------------------------- Total deferred tax assets 991,000 2,403,000 Depreciation (1,203,000) (1,197,000) Amortization (148,000) (125,000) ------------------------------------------------------------------- Total deferred tax liabilities (1,351,000) (1,322,000) ------------------------------------------------------------------- Net deferred tax asset (liability) $ (360,000) $ 1,081,000 ===================================================================
Included in other assets at August 31, 1998 is a $419,000 balance representing noncurrent deferred income taxes. 8. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT The Company has a seven-year bank term loan in the amount of $12,667,000. Monthly principal payments are due as follows: $83,000 through October 1998; $167,000 through October 2003; and $208,000 through October 2004. The Company has a three year revolving line of credit, expiring in October 2000, in an amount of up to $15 million, based on eligible receivables and inventory. At August 31, 1998, the balance outstanding was $2,734,000 with additional availability of $11,417,000. The Company has an acquisition facility available through October 2000 of $5,000,000, of which none is in use as of August 31, 1998. Interest is due monthly on both the term loan and the revolving line of credit and is based upon the banks prime rate plus a margin or the LIBOR plus a margin, at the Company's option, and has provision for decreases in the applicable margins based upon the senior debt to EBITDA ratio. At August 31, 1998, the average interest rate was 7.9% on the term loan and 8.2% on the revolver. Effective September 1, 1998, the interest rate was reduced by .4% on both facilities. The bank term loan and revolver, which require compliance with various bank covenants, are secured by all of the Company assets which are not security for other loans. The Company has industrial revenue bond ("IRB") financing in the amount of $3,677,000 in connection with a facility in Michigan. Principal payments, secured by a letter of credit and the related property, are due annually on November 1, 1998, 1999, 2000, 2001 in the amount of $677,000, $1,000,000, $1,000,000 and $1,000,000, respectively. Interest is payable semi-annually at an average effective interest rate of 6.7% at August 31, 1998. The Company has IRB financing in connection with a California facility in the amount of $1,400,000. Principal payments, secured by a letter of credit and the related property, are due in annual installments ranging from $20,000 to $130,000 through December 2021. Interest is due monthly at an average effective interest rate of 4.2% at August 31, 1998. The Company has equipment loans to a bank in the amount of $472,000 secured by its related equipment. Principal payments of $5,926 are due monthly with balloon payments due in January and March, 2003. Interest is due monthly at 7.7%. The Company has an unsecured loan payable in the amount of $100,000 due in June 1999. Interest is payable semi-annually at 7.5%. The Company has an unsecured loan in the amount of $292,000 due in October 1999. Interest is due quarterly at the prime rate less 1%. F-11 33 Long-term debt consisted of the following at August 31:
1997 1998 -------------------------------------------------------------- Term loan $ -- $12,667,000 Revolving line of credit -- 2,734,000 Industrial revenue bonds 5,000,000 5,077,000 Equipment loans 3,042,000 472,000 Other 202,000 392,000 -------------------------------------------------------------- Total 8,244,000 21,342,000 Less: current maturities 2,673,000 2,667,000 -------------------------------------------------------------- Long-term $5,571,000 $18,675,000 ==============================================================
Future maturities of long-term at August 31, 1998 were as follows: Years Amount -------------------------------------------- 1999 $2,667,000 2000 3,350,000 2001 5,800,000 2002 3,070,000 2003 2,337,000 2004 and thereafter 4,118,000 -------------------------------------------- 9. COMMITMENTS AND CONTINGENCIES The Company leases office and manufacturing facilities and certain equipment under non-cancelable operating leases which expire at various dates through May 2004. Rental expense charged to operations was approximately $159,000 in 1996, $367,000 in 1997 and $1,160,000 in 1998. The aggregate minimum future lease payments under these leases at August 31, 1998 are approximately as follows: Years Amount -------------------------------------------- 1999 $1,379,000 2000 833,000 2001 528,000 2002 316,000 2003 249,000 2004 and thereafter 187,000 -------------------------------------------- F-12 34 The Company has adopted a retirement and savings plan. The plan, which qualifies under Section 401(k) of the Internal Revenue Code, allow employees to defer specified percentages of their compensation, in a tax-deferred trust. The Company may elect to make matching contributions and discretionary contributions. The cost of the Company matching contribution is partially offset by a reduction in payroll taxes. Company contributions to the plan totaled $75,000 in 1996, $349,000 in 1997 and $529,000 in 1998. The Company has adopted and maintains an Employee Stock Ownership Plan (the "ESOP") Under the ESOP, the Company may make contributions to the ESOP trust for purchases of shares of the Company's Common Stock, or may contribute Common Stock directly to the ESOP trust. The total cash contributions by the Company to the ESOP were $135,000 in 1997 and $180,000 in 1998. Prior to October 1986, a previously owned business unit of one of the Company's subsidiaries operated a facility on property within an area subsequently designed as a federal Superfund site. The Company learned that hazardous substances have been identified in the subsurface of the property and that the current owner has been requested by a state agency to undertake additional investigation at the property. The Company is also aware that the property has been subject to a general notice letter issued by the United States Environmental Protection Agency under the federal Superfund law. Summa, as the successor to one of several prior operators of the property, may be held responsible for the contamination at the site regardless of whether its subsidiary caused the contamination. The Company does not believe it is responsible for any contamination at the property, and has not been notified or contacted by any governmental authority in that regard, nor named in any proceeding relating to the property. However, if Summa were held liable under federal Superfund law, or other environmental law, or had to defend itself against such a claim, the consequences could be material to the Company's financial statements. 10. RELATED PARTY TRANSACTIONS The Company is obligated to pay fees and commissions on certain products to one of its directors, pursuant to pre-existing agreements with a subsidiary acquired in 1997. The Company made a one-time payment of $365,000 in 1997 to modify the agreements. Total fees and commissions were $148,000 in 1997 and $150,000 in 1998. The agreements continue until 2009. In fiscal year 1998, the Company purchased $1,340,000 in injection molding services from a business in which an officer of one of the Company's recently acquired subsidiaries is a director and part owner. The amounts paid are considered to be commercially competitive. The Company leases truck trailers from a company owned by an employee of the Company under which the Company paid $25,000 in fiscal 1997 and $27,000 in fiscal 1998 and under which the Company is obligated to pay approximately $2,000 per month through June 2001. Additionally, the Company paid that party $379,000 in fiscal 1997 and $517,000 in fiscal 1998 for trucking services which the Company believes are commercially competitive under an agreement which is renewable annually. Both agreements are cancelable with sixty days notice. 11. STOCK-BASED COMPENSATION PLANS The Company has three stock option plans, all of which have been approved by the Stockholders and are administered by its Board of Directors. The 1984 Stock Option Plan (the "1984 Plan") provides for the grant of options to key employees to purchase an aggregate of 25,000 shares of Common Stock. Under the 1991 Stock Option Plan (the "1991 Plan"), options to purchase an aggregate of 150,000 shares of Common Stock may be grated to key employees, directors, consultants, vendors and others. The 1995 Stock Option Plan (the "1995 Plan") provides for the grant of options to purchase an aggregate of 350,000 shares of Common Stock, which may be granted to key employees, directors, consultants, vendors, customers and others. In addition, options have been issued in conjunction with acquisitions, primarily to replace options held by employees of acquired companies. The fair value of these options is included in the purchase price. F-13 35 The Company accounts for stock options issued to employees and directors under APB Opinion No. 25. Under these plans no compensation cost was recognized in fiscal years 1996, 1997 and 1998. SFAS No. 123 "Accounting for Stock-Based Compensation" was issued by the FASB in 1995 and, if fully adopted, changes the methods for recognition of cost on plans similar to those of the Company. Adoption of FASB Statement No. 123 is optional; however, pro-forma disclosures as if the Company had adopted the cost recognition method are required. Had compensation cost for stock options awarded under these plans been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have reflected the following pro-forma amounts: August 31, ---------------------------------------------------------------- 1996 1997 1998 ---------------------------------------------------------------- Income from continuing operations As Reported $373,000 $1,612,000 $4,558,000 Pro Forma $278,000 $1,534,000 $4,424,000 Diluted earnings per share: As Reported $.23 $.46 $1.03 Pro Forma $.17 $.44 $1.00 ---------------------------------------------------------------- The Company has granted options of 523,123 shares under the above plans. Under these plans, the options are generally issued at fair market value at the grant date. Options become vested cumulatively over various periods, at the discretion of the Board of Directors, up to five years from the grant date, are exercisable in whole or in installments, and expire up to ten years from date of grant. Options that are forfeited are again available for grant under the Plans. A summary of the status of the Company's stock options at August 31, 1996, August 31, 1997, August 31, 1998 and changes during the years then ended is presented in the table and narrative below:
August 31, 1996 August 31, 1997 August 31, 1998 -------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------------------------------------------------------------------------------------- Outstanding at beginning of year 191,250 $4.72 237,473 $4.21 445,873 $4.81 Granted (1)(2) 121,223 4.03 327,562 5.50 526,595 6.50 Exercised (35,923) 4.96 (50,441) 3.72 (167,318) 2.68 Forfeited/Expired (39,077) 5.55 (68,721) 5.42 (14,644) 7.87 -------------------------------------------------------------------------------------- Outstanding at end of year 237,473 $4.21 445,873 $4.81 790,506 $6.32 Exercisable at end of year 206,579 $4.13 236,249 $4.28 452,179 $4.31 Weighted average fair value of options granted $1.54 $2.25 $4.63 --------------------------------------------------------------------------------------
- ----------- (1) During fiscal 1997, the Company granted 157,650 options under shareholder approved Plans and issued 169,912 options in conjunction with an acquisition. (2) During fiscal 1998, the Company granted 346,267 options under shareholder approved Plans and issued 180,328 options in conjunction with acquisitions. F-14 36 The following table summarizes information about stock options outstanding at August 31, 1998:
Outstanding Exercisable -------------------- --------------------- Weighted Weighted Weighted Exercise average Number of average Number of average price remaining options exercise options exercise range term (years) outstanding price outstanding price --------------------------------------------------------------------------- $1.55 - 2.32 5.8 96,230 $2.07 91,012 $2.10 $2.72 - 3.61 5.4 89,425 3.35 89,425 3.35 $4.25 - 6.00 6.9 379,023 5.22 251,742 5.07 $9.00 - 13.12 8.5 144,500 9.76 20,000 9.01 $13.72 8.6 81,328 13.72 -- -- ------- ----- ------- ----- 790,506 $6.32 452,179 $4.31 ======= ===== ======= =====
The fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model with the following assumptions used for grants in fiscal years 1996, 1997 and 1998.
1996 1997 1998 ---------------------------------------------------------------------- Weighted average risk-free interest rate 5.7% 6.2% 5.7% Volatility 30% 35% 35% Expected dividend yields -- -- -- Weighted average expected life in years 3.3 4.4 3.2 ----------------------------------------------------------------------
12. SALES Sales to the Company's largest single customer represented 8.6% in 1996, 9.3% in 1997 and 7.1% in 1998, of total sales. Export sales by geographic area were as follows for the years ended August 31:
1996 1997 1998 ---------------------------------------------------------------------- Mexico and Canada $ 443,000 $1,928,000 $ 4,518,000 Europe 891,000 1,994,000 5,057,000 Latin America 19,000 472,000 1,083,000 Asia 43,000 675,000 665,000 Other 105,000 486,000 794,000 ---------------------------------------------------------------------- $1,501,000 $5,555,000 $12,117,000 ======================================================================
F-15 37 13. UNAUDITED QUARTERLY RESULTS
Quarters ended ---------------------------------------------------- Fiscal November February May August Year ---------------------------------------------------------------------------------- (in thousands, except per share amounts) Fiscal 1997: Net sales $2,026 $12,585 $12,023 $12,459 $39,093 Gross profit 933 3,569 3,694 3,800 11,996 Income from continuing operations 32 494 458 628 1,612 Net income $ 213 $ 629 $ 620 $ 790 $ 2,252 ---------------------------------------------------------------------------------- Per Share: Income from continuing operations Basic $.02 $.12 $.11 $.15 $.47(a) Diluted $.02 $.13 $.11 $.15 $.46(a) Net income Basic $.13 $.16 $.15 $.19 $.65(a) Diluted $.13 $.15 $.15 $.19 $.64(a) ---------------------------------------------------------------------------------- Fiscal 1998: Net sales $16,434 $20,410 $23,854 $25,006 $85,704 Gross profit 5,099 6,001 7,477 7,930 26,507 Income from continuing operations 866 880 1,334 1,478 4,558 Net income $ 1,020 $ 959 $ 1,400 $ 1,495 $ 4,874 ================================================================================== Per Share: Income from continuing operations Basic $.21 $.21 $.32 $.35 $1.09 Diluted $.20 $.20 $.30 $.33 $1.03 Net income Basic $.25 $.23 $.33 $.35 $1.16 Diluted $.24 $.22 $.31 $.33 $1.10 ===================================================================================
- ------------- (a) The total of the earnings per share for each of the four quarters does not equal the total earnings per share for the full year because the calculations are based on the average shares outstanding during each of the individual periods. F-16 38 14. DISCONTINUED OPERATIONS On June 17, 1996, the Company completed the divestiture of its subsidiary, Morehouse-COWLES, Inc. for $2,521,000 consisting of cash of $750,000 and a $1,771,000 subordinated secured promissory note which was paid in fiscal 1998. Accordingly, this business unit has been accounted for as a discontinued operation and results of its operations are segregated in the 1996 consolidated statement of income. There was no gain or loss on the disposition of Morehouse-COWLES. Interest expense of $93,000 was related to discontinued operations and accordingly was allocated to discontinued operations for fiscal year 1996. On June 26, 1998, the Company completed the divestiture of its subsidiary, GST Industries, Inc. for $2,700,000, consisting of $1,200,000 in cash and a $1,500,000 seven-year subordinated, convertible, secured promissory note bearing interest at 10% per annum. In addition, the Company may receive a maximum of $2,000,000 in royalty payments over the next five years based upon a percentage of future sales in excess of a base amount. It is expected that the royalties actually received, if any, will be substantially less than $2,000,000, and the value of the conversion rights of the note is highly speculative. Accordingly, this business unit has been accounted for as a discontinued operation and the results of its operation are segregated in the accompanying consolidated statements of income. There was no gain or loss on the disposition of GST and no interest expense was allocated to discontinued operations for fiscal years 1996, 1997 and 1998. Discontinued operations have not been segregated in the consolidated statements of cash flows. The preceding notes to consolidated financial statements have been revised, as necessary, to reflect the change in reporting due to discontinued operations. The following table presents the sales and results of operations of the discontinued operations.
1996 1997 1998 - --------------------------------------------------------------------------------------------------- Sales from discontinued operations: Morehouse-COWLES, Inc. $ 5,630,000 $ -- $ -- GST Industries, Inc. 4,618,000 4,144,000 2,818,000 - --------------------------------------------------------------------------------------------------- $10,256,000 $4,144,000 $2,818,000 =================================================================================================== Income (loss) from discontinued operations: Morehouse-COWLES, Inc. $ (235,000) $ -- $ -- GST Industries, Inc. 430,000 640,000 316,000 - --------------------------------------------------------------------------------------------------- $ 195,000 $ 640,000 $ 316,000 ===================================================================================================
15. ACQUISITIONS On November 22, 1996, the Company completed the acquisition of LexaLite International Corporation. The total acquisition cost was $23,943,000, consisting of 2,415,106 shares of Summa Common Stock issued to LexaLite shareholders and 30,000 shares issued to a broker valued at an estimated market value of $9,842,000, acquisition costs of $315,000 and liabilities associated or incurred of $13,906,000. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to identifiable tangible and intangible assets purchased and the liabilities assumed or incurred based upon their fair values at the date of acquisition. The excess of purchase price over the fair values of the net assets acquired amounted to $905,000 and has been recorded as goodwill which is being amortized on a straight-line basis over 25 years. On October 28, 1997, the Company completed the acquisition of Calnetics Corporation ("Calnetics"). The total acquisition cost was $31,792,000, consisting of cash due to former Calnetics shareholders of $22,335,000, (of which $243,000 is due at August 31, 1998) acquisition costs of $50,000, liabilities assumed or incurred of $8,062,000 and an estimated fair value of $1,345,000 for options issued in conjunction with the transaction, primarily replacement options issued to Calnetics employees who continued with the Company. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to identifiable tangible and intangible assets purchased and liabilities assumed or incurred based upon their fair value at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired amounted to $13,974,000 and has been recorded as goodwill which is being amortized on a straight-line basis over 40 years. F-17 39 On May 1, 1998, the Company completed the acquisition of Falcon Belting, Inc. ("Falcon") of Oklahoma City, Oklahoma, a manufacturer of modular plastic conveyor belting used in food processing industries. The operations of Falcon have been consolidated with the Company's KVP Falcon Plastic Belting, Inc. subsidiary (formerly KVP Systems, Inc.). The total acquisition cost was $5,125,000, consisting of $2,636,000 in cash and the present value of obligations to make future payments to the former owner of Falcon and liabilities assumed or incurred of $2,489,000. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to identifiable tangible and intangible assets purchased and liabilities assumed or incurred based upon their fair value at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired amounted to $1,995,000 and has been recorded as goodwill which is being amortized on a straight-line basis over 30 years. The following proforma financial information presents the results of operations of the continuing businesses of the Company with LexaLite and Calnetics as though both acquisitions had been made as of September 1, 1996. Proforma adjustments have been made to give the effect to the amortization of goodwill and other intangibles, adjustments in depreciation and inventory value, a reduction in redundant operating expense, interest expense related to acquisition debt, the related tax effects and the effect upon basic and diluted earnings per share of the additional shares of stock given in exchange for LexaLite stock and of stock options issued in conjunction with the acquisitions. The following proforma financial information does not include adjustments to give effect to the Falcon acquisition as such adjustments would not be material.
1997 1998 For the years ended August 31, (unaudited) (unaudited) -------------------------------------------------------------------------- Net sales $84,316,000 $91,422,000 Income from continuing operations 2,522,000 4,726,000 Net income 3,162,000 5,042,000 ========================================================================== Income per common share Income from continuing operations Basic $ .62 $1.13 Diluted $ .60 $1.05 Net income Basic $ .78 $1.20 Diluted $ .75 $1.12 ==========================================================================
Such pro-forma results are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisition had been effective at the beginning of the periods presented or of the results which may be achieved in the future. F-18 40 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO: The Board of Directors and Stockholders of Summa Industries: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Summa Industries and subsidiaries' annual report to shareholders included in this Form 10-K, and have issued our report dated October 6, 1998. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index of consolidated financial statements is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP -------------------------------- ARTHUR ANDERSEN LLP Los Angeles, California October 6, 1998 F-19 41 SUMMA INDUSTRIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS For the years ended August 31, 1998, 1997, 1996
Amounts Balance at charged Balance beginning (credited) Acquired Amounts at end of of period to expense reserves written off period - ------------------------------------------------------------------------------------------------------- 1998 Allowance for doubtful accounts $195,000 $79,000 $385,000 $(39,000) $620,000 1997 Allowance for doubtful accounts 22,000 48,000 157,000 (32,000) 195,000 1996 Allowance for doubtful accounts 30,000 39,000 -- (47,000) 22,000 - -------------------------------------------------------------------------------------------------------
F-20 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, as amended, Summa has duly caused this Annual Report on Form 10-K for the fiscal year ended August 31, 1998 to be signed on its behalf by the undersigned, thereunto duly authorized, on October 23, 1998. Summa Industries By: /s/ James R. Swartwout -------------------------------- James R. Swartwout President Pursuant to the requirements of the Securities Act of 1934, as amended, this Annual Report on Form 10-K for the fiscal year ended August 31, 1998 has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ James R. Swartwout Chairman of the Board, President October 23, 1998 - ---------------------------- and Chief Financial Officer James R. Swartwout (Principal Executive and Financial Officer) /s/ Coalson C. Morris Director October 23, 1998 - ---------------------------- Coalson C. Morris /s/ Michael L. Horst Director October 23, 1998 - ---------------------------- Michael L. Horst /s/ William R. Zimmerman Director October 23, 1998 - ---------------------------- William R. Zimmerman /s/ David McConaughy Director October 23, 1998 - ---------------------------- David McConaughy /s/ Byron C. Roth Director October 23, 1998 - ---------------------------- Byron C. Roth /s/ Josh T. Barnes Director October 23, 1998 - ---------------------------- Josh T. Barnes /s/ Paul A. Walbrun Vice President & Controller October 23, 1998 - ---------------------------- (Principal Accounting Officer) Paul A. Walbrun
F-21 43 EXHIBIT INDEX
Exhibit Sequentially Number Document Numbered Page ------- -------- ------------- 2.1 Agreement and Plan of Reorganization dated March 19, 1993 by and between the Company and KVP Systems, Inc. relating to the acquisition by the Company of KVP(1) 2.2 Agreement and Plan of Merger dated November 22, 1996 by and among the Company, LexaLite International Corporation and Charlevoix The Beautiful, Inc. relating to the acquisition by the Company of LexaLite(2) 2.3 Agreement and Plan of Acquisition dated July 2, 1997 by and between the Company and Calnetics Corporation relating to the acquisition by the Company of Calnetics and its subsidiaries(3) 2.4 Stock Purchase Agreement and Amendment No. 1 thereto dated April 8, 1998 and April 24, 1998, respectively, by and among Mr. William G. Faulkner, KVP Systems, Inc. and the Company relating to the acquisition by the Company of Falcon Belting, Inc.(4) 2.5 Stock Purchase Agreement dated June 12, 1998 by and between P&L Growth Industries, Inc., a California corporation, and the Company relating to the divestiture by the Company of GST Industries, Inc.(4) 3.1 Certificate of Incorporation of the Company(5) 3.2 Bylaws of the Company(5) 10.1 Loan Agreement dated October 21, 1997 between Summa and Comerica Bank-California providing for $34 million credit facility(6) 10.2 Subordinated Convertible Promissory Note, Security Agreement and Guaranty dated June 26, 1998 by and among P&L Growth Industries, Inc., GST Industries, Inc. and the Company relating to the divestiture by the Company of GST Industries, Inc.(4) 10.3 Lease dated November 22, 1989 by and between Manchester Plastics Co., Inc. and Tom and Arlene Schneider and Amendment thereto dated December 5, 1989 for premises located in Chatsworth, California(7) 10.4 1991 Stock Option Plan of the Company(8) 10.5 1995 Stock Option Plan of the Company(9) 10.6 Employment Agreement dated March 1994 between the Company and James R. Swartwout(*) 10.7 Amendment No. 1 to Employment Agreement between the Company and James R. Swartwout dated January 1, 1998(*) 10.8 Change in Control Agreement dated January 26, 1997 between Calnetics Corporation and Trygve M. Thoresen (10) 21 Subsidiaries of the Registrant(*) 23 Consent of Arthur Andersen LLP(*) 27 Financial Data Schedule(*)
- ----------------------- (1) Incorporated by reference from the exhibits to the Company's Registration Statement on Form S-4 filed with the Commission on May 24, 1993. (2) Incorporated by reference from the appendices to the Company's definitive Proxy Statement on Schedule 14A for the Annual Meeting of Shareholders held November 21, 1996. (3) Incorporated by reference from the appendices to the Calnetics' definitive Proxy Statement on Schedule 14A for the Special Meeting of Shareholders held October 28, 1997. (4) Incorporated by reference from exhibits to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1998. (5) Incorporated by reference from the appendices to the Company's definitive Proxy Statement on Schedule 14A for the Annual Meeting of Shareholders held January 26, 1998. (6) Incorporated by reference from exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997. (7) Incorporated by reference from exhibits to the Calnetics' Annual Report on Form 10-K for the fiscal year ended June 30, 1991. (8) Incorporated by reference from exhibits to the Company's Registration Statement on Form S-8 filed with the Commission on April 15, 1993. (9) Incorporated by reference from exhibits to the Company's Registration Statement on Form S-8 filed with the Commission on January 30, 1997. (10) Incorporated by reference from exhibits to the Calnetics' Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. - ---------------- * Filed herewith. EX-10.6 2 EMPLOYMENT AGREEMENT DATED MARCH 1994 1 EXHIBIT 10.6 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of March 1994, by and between SUMMA INDUSTRIES, a California corporation (the "Company" or "Employer") and James R. Swartwout, an individual residing in the State of California ("Executive"). WHEREAS, the Company desires to retain the services of Executive as President and Chief Executive Officer of the Company on the terms and conditions herein provided, and Executive is willing to provide such services on such terms and conditions; WHEREAS, Company and Executive desire to set forth the terms and conditions upon which Executive is to be employed by the Company; and WHEREAS, Company and Executive intend to act in good faith and deal fairly with each other. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants of the parties contained herein, the parties agree as follows: 1. Term. This Agreement shall continue in full force and effect for a period which shall commence as of the date indicated above and shall continue until terminated or as hereinafter provided. 2. Employment. Executive shall serve as President, Chief Executive Officer, and Chairman of the Board subject to the direction of the Company's Board of Directors. Executive shall devote such of his working time and effort to the business and affairs of the Company as may reasonably be required of him in the discharge of the duties and responsibilities of such office, but no less than 40 hours per week on average. Executive shall at all times perform his duties and obligations faithfully and diligently and to the best of Executive's ability. 3. Compensation. During the term of this Agreement, and any continuance hereof, as compensation for the services to be rendered and the other obligations undertaken by Executive hereunder, Executive shall be entitled to the following compensation: a) Salary. The Company shall pay Executive a base salary of $125,000 per year. Executive's base salary shall be reviewed by the Company's Board of Directors from time to time at its discretion, and Executive shall receive such base salary increases as the Company's Board of Directors shall determine. All such salary shall be payable in equal installments in conformity with the Company's normal payroll period. b) Annual Bonuses. In addition to the base salary specified in (a) immediately above, the Company shall pay Executive such annual bonuses as may be earned in accordance with an annual Performance Incentive Plan as described in EXHIBIT A. 4. Expenses. During the Term hereof, Executive shall be entitled to receive prompt reimbursement of all reasonable expenses incurred by Executive (in accordance with the policies and procedures from time to time adopted by the Board of Directors of the Company for its senior executive officers) in performing the services contemplated hereunder, provided that Executive properly accounts therefor in accordance with the Company's policy. Executive will receive a car expense allowance of $600 per month. 2 5. Benefits and Vacations. (a) Executive shall be entitled to participate in or receive benefits under the life, health and disability insurance plans or arrangements of an operating subsidiary of the Company as in effect on the date hereof for such period of time as such plans and arrangements shall remain in effect. In addition, Executive shall be entitled to participate in or receive benefits under any pension plan, profit-sharing plan, life insurance, health-and-accident plan or arrangement made available in the future by the Company or its subsidiaries to its executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to Executive under any such plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of any compensation payable to Executive hereunder. (b) Executive shall be entitled to the number of paid vacation days in each calendar year, and to compensation for earned but unused vacation days, determined by the Company or its subsidiaries from time to time for its executives and key management employees. Executive shall also be entitled to all paid holidays given by the Company or its subsidiaries to its executives and key management employees. (c) A subsidiary of the company shall continue to pay disability insurance premiums for the benefit of the Executive. 6. Termination. (a) Executive's employment hereunder shall terminate immediately upon death or permanent disability, in which case his estate shall be entitled to receive all payments as though he were terminated without Cause. (b) In the event that Executive shall be unable to perform the services contemplated hereunder by reason of temporary disability, illness or other incapacity, such failure to so perform such duties shall not be grounds for terminating the employment of Executive by the Company; provided, however, that the Company may terminate Executive's employment hereunder should the period of such incapacity exceed six (6) consecutive months, at which time Executive's disability will be deemed to be permanent. Any such termination shall not be considered to be for "Cause" as defined in subparagraph (c) immediately below. (c) Executive's employment hereunder may be terminated by the Company prior to the expiration of the Term, with or without Cause, immediately upon delivery by the Company of a written notice of termination; provided, however, that if the Company shall not have Cause to terminate Executive's employment hereunder, then upon any such termination, and as a condition to the effectiveness thereof, the Company shall pay to Executive as severance pay, in one lump sum, an amount equal to six months' salary at the level then being paid to Executive in accordance with Paragraph 3 above, together with a pro-rated portion of earned bonus, after deducting any amounts lawfully owing from Executive to the Company, and shall thereafter have no further obligation to Executive. For these purposes, "Cause" means (i) the willful and continued failure, after written notice thereof, by Executive to substantially perform Executive's duties hereunder, other than any such failure resulting from Executive's temporary disability, or (ii) the willful engaging by Executive in gross misconduct materially injurious to the Company. For purposes of this subparagraph, no act, or failure to act, on Executive's part shall be considered "willful" unless done by Executive or omitted to be done, other than in good faith and with a reasonable belief that Executive's action or omission was in the best interests of the Company. In the event that Executive is terminated for Cause, the Company shall pay Executive's salary through the date of termination, after deducting any amounts lawfully owing from Executive to the Company, and shall thereafter have no further obligation to Executive. (d) Executive may terminate this Agreement upon written notice to the Company, in which case the Executive will be paid as though he had been terminated for Cause as described in Paragraph 3 6.(c), unless termination by Executive is made for "Good Reason" as defined in paragraph 6.(e), in which case Executive will be paid as though he had been terminated without Cause. (e) Executive shall be entitled to terminate his employment with Employer hereunder for "Good Reason". For purposes of this Agreement, any termination of employment under any one or more of the following circumstances shall be for "Good Reason": (i) Without Executive's express written consent, the assignment to Executive of any duties inconsistent with Executive's positions, duties, responsibilities and status with Employer or a change in Executive's reporting responsibilities, titles or offices as in effect upon the execution hereof, or any removal of Executive from or any failure to re-elect Executive to any of such positions, except in connection with the termination of Executive's employment for Cause, Disability, Retirement or as a result of death; (ii) The reduction by Employer in Executive's base salary, as the same may thereafter be increased from time to time; (iii) The failure by Employer to continue Executive's participation in the bonus and other compensation plans and incentive plans specified in subparagraph 3.(b) hereof; (iv) The failure by Employer to continue Executive's participation in any benefit plan, pension plan, qualified retirement plan, life insurance plan, vacation plan, holiday plan, car lease plan, medical expense, health and accident plan or disability plan, or expense reimbursement arrangement specified in paragraphs 4 and 5 hereof, or the taking of any action by Employer (prompt notice of which shall be provided to Executive) which would adversely affect Executive's participation in (including increasing Executive's costs of such participation), or materially reduce Executive's benefits under, any of such plans, or which would deprive Executive of any other fringe or personal benefit under any of such plans; provided, however, that notwithstanding the provisions of this subparagraph 6.(e) (iv), Employer's providing benefits of a type or amount different than as provided for hereinabove shall not be deemed a violation of this subparagraph if required by law; (v) The relocation of Employer's principal executive offices to a location outside Orange County, California, or the requirement by Employer that Executive be based anywhere other than at Employer's principal executive offices or the location where Executive is based at the time of execution hereof, except for required travel on Employer's business to an extent substantially consistent with Executive's business travel obligations in effect immediately prior to the execution hereof; or, in the event Executive consents to any such relocation of Employer's principal executive offices or change in the location where Executive is based, the failure by Employer (A) to pay (or promptly reimburse Executive for) all reasonable moving expenses incurred by Executive relating to a change of Executive's principal residence in connection with such relocation, and (B) to indemnify Executive against any loss (defined as Executive's cost of terminating any lease for such residence, if it is leased, or if Executive owns such residence the difference between the actual sale price of such residence and the higher of Executive's aggregate investment in such residence or the fair market value of such residence as determined by any real estate appraiser designated by Executive and reasonably satisfactory to Employer) realized in the lease termination or sale of Executive's principal residence in connection with any such change of residence, and (C) to reimburse Executive for the amount of any federal, state and local income taxes for which Executive becomes liable by a reason of Executive's receipt of any amounts under this subparagraph; (vi) Any purported termination of Executive's employment by Employer which is not effected pursuant to a notice of Termination satisfying the requirements of subparagraph 6.(f) below. (f) Any termination of Executive's employment by Employer for Disability, Retirement or Cause, or by Executive for Good Reason, shall be communicated by Written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which 4 shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, and shall set forth the date upon which such termination is to become effective. 7. Change In Control. Notwithstanding any provision in paragraph 6 hereof to the contrary, the provisions of this paragraph 7 shall control, to the exclusion of any other provision of this Agreement, in the event that there has been a "Change in Control" of Employer, as defined hereafter. In such event, regardless of whether Executive's employment is terminated as a result of such event, Executive shall be entitled to receive and the Company will be obligated to pay to Executive as a special bonus, an amount equal to two years' salary at the level then being paid to Executive in paragraph 3 above. For the purposes of this agreement, "Change in Control" means: (i) the acquisition by a person or a group of related persons, other than the Company or a person controlling, controlled by or under common control with the Company, of beneficial ownership (as determined pursuant to the provisions of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of Securities possessing (whether immediately or upon subsequent conversion or exercise) thirty percent (30%) or more of the total voting power of the Company's outstanding securities, or (ii) the acquisition by a person or a group of related persons, other than the Company or a person controlling, controlled by or under common control with the Company, of beneficial ownership (as determined pursuant to the provisions of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of Securities possessing (whether immediately or upon subsequent conversion or exercise) the right to elect a majority of the Company's Board of Directors, or (iii) the sale, transfer or other disposition (other than in the ordinary course) of fifty percent (50%) or more of the total fair market value of the Company's assets, as measured by the Company's most current financial statements, or (iv) the first date within any period of thirty-six (36) consecutive months or less on which there is effected a change in the composition of the Company Board such that a majority of the Board (determined by rounding up the next whole number) ceases to be comprised of individuals who either (I) have been members of the Company Board continuously since the beginning of such period or (II) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (I) who were still in office at the time such election or nomination was approved by the Board. 8. Proprietary Information. Executive acknowledges that certain technological and other information may from time to time be disclosed to Executive by Company during the continuance hereof. Executive hereby acknowledges that all such information and technology, whether currently existing or hereafter developed by Company through or involving the services and efforts of Executive hereunder, shall at all times consist of and be preserved by Executive as valuable trade secrets and confidential information which is proprietary to and owned exclusively by Company, and that Executive does not have, and shall not have or hereafter acquire, any rights in or to any of such information and technology, including without limitation any patents, inventions, discoveries, know-how, trademarks or trade names used or adopted by Company in connection with the design, development, manufacture, marketing, sale or installation of any products which at any time during the continuation hereof may be offered and sold or licensed by Company. Executive further warrants and agrees that he shall not at any time, whether during the continuance of this Agreement or after its expiration or earlier termination, whether by Executive or by Company, in any manner or form, directly or indirectly, use, disclose, duplicate, license, sell, reveal, divulge, publish or communicate any portion of any such information or technology, nor use, disclose duplicate, license, sell, reveal, divulge, publish or communicate any other confidential information concerning Company, or any customers or other products of Company, to any person, firm or entity. 5 9. Competition. During the Term hereof, Executive shall not, without company's prior written consent, directly or indirectly engage in any business activity, or have any interest in any person, firm or other entity engaged in any business activity, in which Company at the time is engaged or to the knowledge of Executive, is planning to engage. During the Term hereof and for a period of 2-years thereafter, Executive shall not directly or indirectly: (a) divert or take away or solicit or attempt to divert or take away any of Company's customers, including without limitation those customers with whom Executive became acquainted while retained by Company; (b) employ, or knowingly permit any business entity controlled by Executive to employ, any person who during the period of twelve (12) months immediately preceding such time has been employed by Company; (c) solicit or otherwise seek to induce any employee of Company to leave his or her employment with company; or (d) undertake planning for or organization of any business activity that will injure Company's business, or conspire with employees of Company for the purpose of organizing any such injurious business activity. 10. General Provisions. (a) Any notice, request, demand or other communication required or permitted hereunder shall be deemed to be properly given when personally served in writing, when deposited in the United States mail, postage prepaid, or when communicated to a public telegraph company for transmittal, addressed to the Company or Executive at their respective last known address. Either party may change its address by written notice given in accordance with this subparagraph. (b) This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective executors, administrators, successors and assigns; provided, however, that Executive may not assign any or all of Executive's rights or duties hereunder without the prior written consent of the Company. (c) This Agreement is made and entered into, is to be performed primarily within, and shall be governed by and construed in all respects in accordance with the laws of the State of California. (d) Captions and paragraph headings used herein are for convenience only and are not a part of this Agreement and shall not be used in construing it. (e) Should any provision of this Agreement for any reason be declared invalid, void, or unenforceable by a court of competent jurisdiction, the validity and binding effect of any remaining portions shall not be affected, and the remaining portions of this Agreement shall remain in full force and effect as if this Agreement had been executed with said provision eliminated. (f) This Agreement contains the entire agreement of the parties, and supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the retention of Executive by Company. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement or promise not contained herein shall be relied upon or be valid or binding. This Agreement may not be modified or amended by oral agreements, but only by an agreement in writing signed by Company on the one hand, and by Executive on the other hand. (g) In the event of any litigation between Executive and Company concerning the rights or obligations of any party under this Agreement, the non-prevailing party shall pay the reasonable costs and expenses, including attorneys' fees, of the prevailing party in connection therewith. (h) The Company shall indemnify Executive to the fullest extent permitted by applicable law with respect to any claims arising from the performance by Executive of his duties hereunder during the Term of this Agreement. 6 (i) The obligations of Executive under paragraphs 8 and 9 hereof shall survive the termination of this Agreement to the extent specified in paragraphs 8 and 9, respectively; the obligations of the Company under paragraph 10(h) immediately above shall survive termination of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. "Company" "Executive" SUMMA INDUSTRIES /s/ James R. Swartwout a California Corporation -------------------------- James R. Swartwout By: /s/ James R. Swartwout ------------------------- 7 EXHIBIT A EXECUTIVE BONUS The Board of Directors shall, at its sole discretion, award an annual bonus of between zero and forty percent (0-40%) of Executive's base salary. In determining the level of the bonus, the Board will consider Executive's performance, responsibilities and contributions to the long-term growth and profitability of the Company. The Board will consider various quantitative factors, primarily the Company's financial performance, sales and earnings against the Company's operating plan, as well as various qualitative factors such as new product development, the Company's product and service quality, the extent to which Executive has contributed to forming a strong management team and other factors which the Board believes are indicative of the Company's ongoing ability to achieve its long-term growth and profit objectives. The Bonus will be based on performance during each Fiscal Year of the Company. The Board will determine the level of the Bonus at its first meeting after the completion of an independent audit of company's financial statements. Payment of the Bonus can be in the form of cash or securities of the Company, at the election of Executive, and will be made within 90 days after the completion of the audit. EX-10.7 3 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT 1 EXHIBIT 10.7 AMENDMENT NO. 1 EMPLOYMENT AGREEMENT THIS AMENDMENT NO. 1 (this "Amendment") to that certain existing EMPLOYMENT AGREEMENT dated March 1994 (the "Agreement"), a copy of which is attached hereto, by and between Summa Industries, a California corporation (the "Company"), and James R. Swartwout, an individual ("Executive"), is made and entered into as of January 1, 1998. WHEREAS, the Board of Directors has resolved to modify certain of the terms and conditions of Executive's employment; WHEREAS, Executive has agreed to accept such modifications; and WHEREAS, the Company has determined that such modifications require amendment of the Agreement. NOW, THEREFORE, in consideration of the foregoing premises, the parties hereto hereby agree as follows: 1. Section 3(a). Section 3(a) of the Agreement is hereby amended as follows: The amount of $125,000 set forth in the first sentence of Section 3(a) is deleted and replaced with the amount of $200,000. 2. Section 6(e)(v). Section 6(e)(v) of the Agreement is hereby amended as follows: The words "Orange County" set forth in the first sentence of Section 6(e)(v) are deleted and replaced with the words "Los Angeles County." 3. Exhibit A. Exhibit A to the Agreement is hereby amended as follows: The words "forty percent (0-40%)" set forth in the first sentence of Exhibit A are deleted and replaced with the words "sixty percent (0-60%)." 4. Existence. Except as set forth in this Amendment, all of the terms and conditions of the Agreement remain in full force and effect as of the date hereof, and the Company confirms the existence of such Agreement as amended hereby. 5. Governing Law. This Amendment has been made and entered into, is to be performed primarily within, and shall be governed by and construed in all respects in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered as of the date first above written. THE COMPANY: EXECUTIVE: SUMMA INDUSTRIES, /s/ James R. Swartwout a California corporation ----------------------------- James R. Swartwout By: /s/ Trygve M. Thoresen ----------------------------- Trygve M. Thoresen Vice President and Secretary EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT LexaLite International Corporation, a Delaware corporation Agricultural Products, Inc., a California corporation KVP Falcon Plastic Belting, Inc., a California corporation Manchester Plastics Co., Inc., a California corporation Ny-Glass Plastics, Inc., a California corporation Falcon Belting, Inc., an Oklahoma corporation Calnetics Corporation, a California corporation Summa Industries, Inc., a Burmada corporation Fullerton Holdings, Inc., a California corporation EX-23 5 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 pertaining to the Company's 1984 and 1991 Stock Option Plans, filed on April 15, 1993, the 1995 Stock Option Plan, filed on January 31, 1997, the Summa ESOP and 401(k) Stock Option Plan, filed on September 8, 1997, and the Calnetics Stock Option Plan, filed on October 21, 1997, and the previously filed Registration Statement on Form S-4 pertaining to the LexaLite Stock Option Plan, filed on September 9, 1996, with the Securities and Exchange Commission under the Securities Act of 1933. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Los Angeles, California October 30, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 YEAR AUG-31-1998 SEP-01-1997 AUG-31-1998 293,000 0 13,595,000 620,000 9,392,000 24,099,000 27,796,000 7,132,000 63,983,000 13,245,000 0 0 0 18,505,000 9,613,000 63,983,000 85,704,000 85,704,000 59,197,000 59,197,000 17,127,000 0 1,607,000 7,773,000 3,215,000 4,558,000 316,000 0 0 4,874,000 1.16 1.10
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