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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1997
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Transition Period from N/A to N/A
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Commission File No. 1-7755
SUMMA INDUSTRIES
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-1240978
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
21250 HAWTHORNE BOULEVARD, SUITE 500, TORRANCE, CALIFORNIA 90503
(Address of principal executive offices, including Zip Code)
Registrant's Telephone Number: (310) 792-7024
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Indicate by checkmark whether the registrant (1) filed all reports required
to be filed by Section 12 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
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Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this form, and disclosure will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]
The aggregate market value of registrant's Common Stock held by non-
affiliates as of November 5, 1997, based upon the closing price of a share of
the Common Stock on The Nasdaq National Market on that date, was $27,897,712.
The number of shares of registrant's Common Stock outstanding as of November 5,
1997 was 4,099,004.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's Proxy Statement
for the Annual Meeting of Shareholders to be held on January 26, 1998 to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K are incorporated by reference in
Part III hereof.
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PART I
ITEM 1. BUSINESS.
General
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Summa Industries ("Summa") was incorporated in the State of California in
1942, and is a publicly-owned corporation whose Common Stock is registered under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and traded on The Nasdaq National Market under the symbol "SUMX". Through
1990, the principal business of Summa was limited to the design, manufacture and
sale of chemical process equipment. In 1991, Summa adopted a strategy of growth
through acquisitions and has completed four major acquisitions, including the
recent purchase of Calnetics Corporation on October 28, 1997. See "Growth
Through Acquisitions Strategy" and "Acquisition of Calnetics" below.
Consequently, as of October 28, 1997, the primary business and operations of
Summa are conducted through six operating subsidiaries that are wholly-owned,
directly or indirectly, by Summa. Through these subsidiaries, Summa designs and
manufactures injection-molded plastic optical components for OEM customers in
the lighting industry, molded plastic bobbins, components, filters, fittings,
sheet and tubing primarily for the industrial plastics, building materials and
agricultural irrigation industries, material handling components, some of which
Summa initially developed in plastic, including plastic chains, belts and
customized components, water cannons for fire fighting in harsh environments,
and proprietary pneumatic/hydraulic actuators and other components for defense
aircraft.
The principal executive offices of Summa are located at 21250 Hawthorne
Boulevard, Suite 500, Torrance, California 90503, its telephone number is (310)
792-7024, and its facsimile number is (310) 792-7079.
GROWTH THROUGH ACQUISITIONS STRATEGY
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Through 1990, the principal business of Summa was limited to the design,
manufacture and sale of chemical process equipment, which was unprofitable from
1983 to 1990, in which year it had revenues of only $3,257,000. In 1991, Summa
adopted a strategy of growth through acquisitions of profitable manufacturing
companies with proprietary products or protected market niches, with the intent
of expanding its operations by acquiring additional product offerings, enhancing
gross profit margins, increasing combined sales so that general and
administrative costs 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 shareholders by increasing
the number of outstanding shares in the public float and the trading activity in
the stock. Typically, it is expected that Summa's corporate staff will not
direct operations of the acquired subsidiaries on an ongoing basis, but, in
addition to planning and financial oversight, will provide financing, conduct
the acquisition program and business development activities, and handle investor
relations matters. From time to time, the corporate staff also will be active in
non-operational business activities such as risk management and employee benefit
program management. Corporate charges are assessed on a basis established
annually, related to asset utilization by each operating subsidiary.
The first acquisition consummated by Summa following the adoption of this
strategy occurred in October 1991, when Summa purchased all of the outstanding
capital stock of GST Industries, Inc., a California corporation ("GST"). GST has
two divisions, the Stang Industrial Products Division ("Stang") which
manufactures and sells water cannons for firefighting, and the GST Industries
Division which manufactures and sells proprietary sub-systems and components for
the defense aircraft industry, primarily for the F-16 and derivative aircraft.
Summa paid the GST shareholders an aggregate of $2.3 million in cash and gave
them subordinated promissory notes in an aggregate principal amount of $200,000,
with interest only payable thereon at the rate of 10% per annum at the end of
the first and second years, and all principal payable at the end of the second
year following the closing. In addition, the former shareholders of GST earned
contingent performance payments totaling $2,111,000. The acquisition was
partially funded by borrowings under Summa's then existing credit facility with
Community Bank, which were subsequently repaid.
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In July 1993, Summa acquired all of the outstanding capital stock of KVP
Systems, Inc., a California corporation ("KVP"), which designs, manufactures and
markets material handling components, including injection-molded plastic
conveyor belting. Belts which can operate on a curve were pioneered by KVP. In
connection with this acquisition, which was accomplished through the merger of
KVP with and into a newly formed and wholly-owned subsidiary of Summa, an
aggregate of 555,275 shares of Summa's Common Stock was issued to the
shareholders of KVP in a transaction registered under the Securities Act of
1933, as amended (the "Securities Act"). In addition, Karl V. Palmaer, the
founder of KVP, joined the Board of Directors of Summa.
On November 22, 1996, Summa acquired all of the outstanding capital stock
of LexaLite International Corporation, a Delaware corporation ("LexaLite"),
through the merger of a newly formed and wholly-owned subsidiary of Summa with
and into LexaLite in which 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.
Because LexaLite operates as a wholly-owned operating subsidiary of Summa,
headquartered in Charlevoix, Michigan, the achievement of most of the perceived
advantages of this acquisition will not be measured by the ability of the
combined companies to eliminate overlapping facilities or personnel or achieve
other efficiencies or economies of scale. Rather, the success of the acquisition
will depend more on the continuing compatibility of the management of both Summa
and LexaLite. It is anticipated, however, that a number of administrative issues
such as tax and legal, personnel policies and shareholder relations will be
handled primarily at the Summa level, thereby permitting the management of
LexaLite to devote more time and attention to sales and marketing, product
development and customer service. There can be no assurance that there will be
future changes in LexaLite's operations, marketing or sales, or that the other
perceived benefits of the acquisition will be realized.
On October 28, 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
in which the former shareholders of Calnetics received an aggregate of
approximately $22,335,000 in cash and Summa assumed approximately $1.8 million
in indebtedness. In this acquisition, Summa also acquired the following
operating subsidiaries of Calnetics: Manchester Plastics Co., Inc. ("Manchester
Plastics"), a California corporation that manufactures proprietary items and
custom products of acrylic, polycarbonate and polystyrene plastic sheet,
principally for the building materials and industrial plastics industries; Ny-
Glass Plastics, Inc. ("Ny-Glass"), a California corporation that 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 Agricultural Products, Inc. ("API"), a California
corporation that manufactures fittings, filters, plastic tubing and accessories,
principally for irrigation use in the agricultural industry. For additional
information concerning this acquisition and the business and operations of
Calnetics, see Item 1, "Business - Acquisition of Calnetics" and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Acquisition of Calnetics," below.
In evaluating future acquisitions, Summa will endeavor to identify target
companies that manufacture engineered plastic components or other industrial
products which have a proprietary advantage because of patent protection, brand
recognition, unique manufacturing requirements or other comparable
characteristics. It is anticipated that target companies typically will have
been profitable in recent periods, particularly if the acquisition is to be made
through the issuance of Summa Common Stock, so that the acquisition will not
have an immediate dilutive effect on post-acquisition, consolidated earnings per
share. Since it is intended that each acquired company will be maintained as a
separate operating unit in most instances, existing management of each target
company will be extensively evaluated in an attempt to ascertain whether such
management possesses the capability and compatibility to continue to manage the
continuing day to day operations following the acquisition. Perhaps most
importantly, Summa will seek to determine that there is a significant likelihood
that a sustainable increase in earnings per share within 12 months of the
closing can reasonably be expected.
Continued implementation of Summa's strategy for growth through
acquisitions will depend to a significant extent upon the ability of Summa's top
management in identifying appropriate candidates for
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acquisition, negotiating deals acceptable to the Board of Directors of Summa and
the shareholders of Summa, and supervising the management of a variety of
operating subsidiaries. Furthermore, with a developing focus on businesses which
manufacture engineered plastic components, the number of opportunities which
meet this acquisition criteria will be smaller. In addition, with the increased
size of Summa, larger acquisition candidates will have to be sought in the
future to sustain the growth rate of Summa and the number of such candidates
will be smaller. Competition for such acquisitions may be greater and there is
no assurance Summa will be able to successfully compete with larger companies
and buyer groups. There can be no assurance that the terms upon which a
prospective company can be acquired will be favorable to Summa, or that Summa
will not encounter unforeseen difficulties and liabilities in connection with
any such acquisition.
PRODUCTS
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The principal products offered by Summa through the three operating
subsidiaries owned prior to the acquisition of Calnetics include engineered
injection-molded plastic optical components for OEM customers in the lighting
industry produced by LexaLite, plastic conveyor components manufactured by KVP,
industrial firefighting equipment produced by Stang, and aerospace assemblies
fabricated by GST. For related information regarding Calnetics, see "Acquisition
of Calnetics" below.
PLASTIC OPTICAL COMPONENTS. Summa's optical components business is
conducted by LexaLite, which is headquartered in Charlevoix, Michigan.
LexaLite's original products were plastic lamp covers for street lights, used to
replace glass covers which were subject to vandalism. Subsequently, LexaLite
developed prismatic lenses, refractors and reflectors molded from clear plastic,
which are used in commercial and industrial lighting fixtures and in similar
applications such as lighted navigational aids, traffic signals and vehicles. On
a selective basis, LexaLite also makes non-optical molded plastic products. Most
of the products are injection molded from optical grade polycarbonate or
acrylic. The principal advantages of LexaLite's injection molded plastic
components over more traditional glass or metal components are lighter weight,
superior optical performance and in certain instances, lower cost.
PLASTIC CONVEYOR COMPONENTS. Summa's material handling components business
is conducted by KVP, located in Rancho Cordova, California, whose products are
engineered plastic components which form conveyer belts and chains. The
components in KVP's product line, several of which are patented, are constructed
of non-toxic, non-corrosive plastic materials and are designed to be easily
cleaned, meeting FDA-USDA requirements and specifications. The components are
available in materials which can withstand temperatures ranging from 150 degrees
Fahrenheit below zero to 350 degrees Fahrenheit, a temperature typically
required for sterilization. The components do not require lubrication and thus
offer the advantage of operation free from contaminants such as grease, oil and
metal particles. Because KVP's components are lightweight, they require less
energy to operate than steel belts, and are quieter in operation and easier to
service in place than metal belts.
INDUSTRIAL FIREFIGHTING EQUIPMENT. Summa's industrial firefighting business
is conducted by Stang, located in Santa Ana, California, whose products have
been sold in the market for over 20 years. Stang designs, manufactures and sells
monitors, also known as water cannons, that are used for firefighting and to
disperse toxic gas clouds, as well as in hydraulic mining and digester cleaning.
These monitors are designed to equalize reactive forces so that the monitors can
be aimed with minimal force. Summa believes that Stang has proprietary designs
which provide superior performance to products offered by competitive
manufacturers. Stang monitors can be mounted on vehicles, standpipes, hydrants
or vessels, including fireboats, and can be controlled manually or hydraulically
via remote actuators provided by Stang as options.
AEROSPACE ASSEMBLIES. Summa's aerospace business is conducted by GST,
located in Santa Ana, California. GST has been in the business of designing,
manufacturing and selling hydraulic actuators and other parts and sub-assemblies
for use in aircraft such as the F-16 and similar activities for more than 20
years.
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RESEARCH AND DEVELOPMENT
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Through its subsidiaries, Summa invests significantly in the development of
products for new applications. Only direct costs associated with tooling for new
products are capitalized. All other costs, including salaries and wages of
employees included in research and development, are expensed as incurred. Most
of Summa's research and development efforts are for engineered plastic
components. For related information regarding Calnetics, see "Acquisition of
Calnetics" below.
Summa's LexaLite subsidiary consistently invests heavily in research and
development of products and manufacturing methods. LexaLite independently
develops many products for sale to multiple customers, and also develops
products to specifications with customers on a confidential basis, which may
provide for sales by the customer on an exclusive basis or for a license to
LexaLite to make sales to third parties. For the years ended June 30, 1995, 1996
and 1997, LexaLite spent $671,000, $885,000 and $525,000, respectively, on
research and development. At its state-of-the-art Lighting Research Center,
which was recently consolidated into the LexaLite Scientific Center building,
optical surfaces are designed using computer-aided design techniques, prototypes
of products are fabricated, and photometric performance testing is conducted.
The LexaLite Scientific Center was created in 1994 to develop confidential
products and methods. LexaLite is also developing an automated thin film coating
process, which has the potential to materially reduce the cost and increase the
photometric performance of plastic "canister" components to be used in recessed
lighting fixtures. If successful, this product could result in a significant
increase in LexaLite's sales because these components are generally made of
metal by others.
PRODUCTION; ENVIRONMENTAL MATTERS
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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 machining and welding of both metal
and plastic parts, coating, assembly and testing. Most of Summa's production
takes place in company-owned LexaLite plants in the states of Michigan and
Tennessee.
Certain injection molds and tools are made by a division of LexaLite at the
main plant, where the staff has developed the injection molding capability to
produce specialized optical components using the complex tooling required for
the manufacture of injection molding to close tolerances. Products are made on
modern molding machines which range from 28 to 1500 tons clamping force.
Ancillary equipment and special operations include automatic resin feed systems,
two color molding, insert molding, robotics, painting, vacuum deposition coating
with reflective metallic films, assembly, packaging and warehousing. LexaLite
operates on a just-in-time system with many of its customers, and inventories
are managed to minimal levels. Inventory turns approximately 17 times a year.
All of LexaLite's manufacturing plants are ISO 9002 registered. LexaLite
monitors environmental compliance via a full-time environmental engineer,
reporting directly to a vice-president.
Summa management believes that Summa is in compliance with all requirements
set forth by the E.P.A. and the states of California, Michigan and Tennessee
relating to air quality, water quality and hazardous waste management and
disposal. For related information regarding Calnetics, see "Acquisition of
Calnetics" below.
MARKETING
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Summa's plastic lighting components manufactured by its LexaLite subsidiary
are installed in high-bay manufacturing plants, warehouses, retail stores,
gasoline stations, other types of buildings, parking lots, traffic signals,
marine navigation aids and in vehicles. Because the products are components,
they are virtually always sold to OEM manufacturers such as Hubbell, Lithonia
division of National Service Industries, Inc., Cooper, Thomas Industries and GE,
as well as many less recognized companies, many of whom have been active
accounts for more than 10 years. At August 31, 1997, LexaLite had 375 active
accounts. Sales to the largest five customers represented 12.2%, 11.1%, 7.5%,
6.1% and 2.8% of product and tooling sales, respectively, for the nine months
ended August 31, 1997. Product sales comprised 95% and tooling sales accounted
for 5% of LexaLite's net sales during the nine months ended August 31, 1997.
LexaLite seeks to maintain a "strategic partnership" relationship
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with its customers and has a direct sales force of seven persons who operate out
of two manufacturing plants in Michigan and Tennessee. Sales of all optical
components are considered strategic, while non-optical products are manufactured
to expand the relationships with customers or to balance utilization of
manufacturing capacity. LexaLite also sells its products through commissioned
sales representatives in selected domestic and international geographic areas
and for specialized business situations. For the nine months ended August 31,
1997, approximately 83% of LexaLite's sales were made directly and approximately
17% of its sales were made through commercial manufacturers' representatives. Of
LexaLite's product sales during the nine months ended August 31, 1997,
approximately 54% of sales were of products made from LexaLite proprietary
tooling, approximately 31% were of optical components manufactured for a single
customer using tooling owned by others, and approximately 15% of product sales
were of non-optical components.
Ultimate users of material handling components in the food processing
industry manufactured by Summa's KVP subsidiary include companies such as
Beatrice/Hunt Wesson, Campbell Soup, Comstock Food, Kellogg's and Jeno's. In
bakery applications, the ultimate users include Sara Lee, Pepperidge Farms and
Lenders. In poultry applications, ultimate users include Foster Farms, Tyson
Foods, Pilgrims Pride and Con Agra. In freezing applications, ultimate users
include Baskin Robbins, Tombstone Pizza, Stouffer's and Swanson's. The
components also have applications in the pharmaceutical, industrial and
electronics industries. Summa's GST subsidiary sells aerospace assemblies,
primarily for the F-16 and derivative aircraft, to a foreign government engaged
in a U.S. sanctioned cooperative aircraft manufacturing program, Lockheed
Aircraft, and the U.S. Department of Defense. The primary markets for Summa's
Stang subsidiary products are the oil, gas and petrochemical industry,
municipalities which use fireboats, the mining industry and the municipal waste
water treatment industry. Products are sold directly and through independent
representatives and distributors, world-wide. Summa does not believe that
revenues attributable to sales of any of the products manufactured by its
industrial firefighting equipment or material handling components subsidiaries
are dependent upon sales to one or a small number of customers, although in a
given year one or a small number of customers may account for a significant
portion of sales. In the fiscal year ended August 31, 1997, the largest customer
in either segment accounted for 2% of consolidated net sales, while in fiscal
years 1996 and 1995 sales to a single customer accounted for 5% and 7% of total
consolidated net sales, respectively. Because the F-16 is a mature program which
is being phased out, GST faces a possible loss of most of its defense related
business over the next several years. Sales of aerospace assemblies represented
15%, 15% and 4% of Summa's consolidated net sales for 1995, 1996 and 1997,
respectively, with sales of aerospace assemblies to GST's largest customer
constituting 7%, 6% and 2% of consolidated net sales for the three most recently
completed fiscal years.
RAW MATERIALS
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Summa's KVP and Stang subsidiaries purchase materials and parts, including
pelletized plastic resins, castings, forgings, steel, valves and controls from
various suppliers. Summa does not believe that either of these subsidiaries is
dependent upon any single supplier or manufacturer for any of its present
principal requirements for materials or parts, and neither experienced
significant difficulty in obtaining such parts and materials during the fiscal
year ended August 31, 1997. Lead times for special components, such as custom
hydraulic power units, can be as long as four months. Summa's LexaLite
subsidiary purchases pelletized resins from major suppliers such as Bayer, GE
Plastics, ICI and others. Certain of these resins may be in short supply from
time to time, but LexaLite has been able to obtain an adequate supply of resin
during such periods to meet its manufacturing commitments, because it is a
significant consumer of the materials. LexaLite believes it is one of the
largest users of optical grade polycarbonate and acrylic in the world.
Occasionally, LexaLite uses smaller quantities of other resins such as ABS,
polypropylene and nylon. For related information regarding Calnetics, see
"Acquisition of Calnetics" below.
BACKLOG
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On August 31, 1997, Summa's continuing businesses had a backlog of orders,
believed to be firm, in the amount of $6,323,000, as compared to a backlog of
$2,475,000 as of August 31, 1996. Of the backlog at August 31, 1997, $3,524,000
was attributable to orders for plastic optical components manufactured by
LexaLite, $418,000 was attributable to orders for KVP's material handling
components, $358,000 was attributable to orders for Stang
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firefighting equipment, and $1,343,000 was attributable to orders for aerospace
assemblies produced by GST. A portion of Summa's August 31, 1997 backlog
consisted of products to be manufactured to custom designs suited for a
particular customer's application or physical requirements. Because the length
of time between entering an order, shipping the product and recording a sale can
vary significantly from product to product, Summa believes that its backlog
levels should not necessarily be relied upon as an indicator of sales volume for
a specific future period. The aerospace assembly backlog is comprised of some
long-term contracts, which are scheduled to ship through 1999. Since LexaLite's
lead time for producing components is only two to four weeks, backlog
historically has been minimal and typically represents approximately one and
one-half months of product sales. The backlog of orders for tooling, as opposed
to products, varies widely with the lead time ranging from four to ten months.
At August 31, 1997, the backlog of firm orders for new tooling was $680,000,
approximately 6 months of fiscal 1997 tooling sales. For related information
regarding Calnetics, see "Acquisition of Calnetics" below.
COMPETITIVE CONDITIONS
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The markets for the products currently manufactured and sold by each of
Summa's operating subsidiaries are characterized by extensive competition. There
are a number of companies that currently offer competing products nationally and
internationally, and in certain geographic areas from local manufacturers. It
can be expected that additional competing products will be introduced by other
companies in the future. Many existing and potential competitors have greater
financial, marketing and research capabilities than Summa. A significant number
of custom injection molders, some of which are larger than Summa's LexaLite
subsidiary, make optical components. Management believes that none of these
companies regards optical components as a strategic business focus and none has
developed optical design expertise to a significant extent. On the other hand,
virtually all of LexaLite's customers have both optical design capability and
injection molding machines and also conduct operations for themselves which
LexaLite regards as within its strategic activity.
Summa believes that its trade names and reputation are significant to its
competitive position in all segments. In addition, Summa believes that price is
a significant element of competition in all segments. However, factors such as
engineering, performance, availability and reliability are considered in the
purchasing process. The performance of Summa in the future will depend on the
ability of its operating subsidiaries to develop and market new products that
will gain customer acceptance and loyalty, as well as its ability to adapt its
product offerings to meet changing pricing considerations and other market
factors. Summa's operating performance would be adversely affected if its
operating subsidiaries were to incur delays in developing new products or if
such products did not gain market acceptance. There can be no assurance that
existing or future products will be sufficiently successful to enable Summa's
operating subsidiaries to effectively compete in their respective markets or,
should new product offerings meet with significant customer acceptance, that one
or more current or future competitors will not introduce products that render
Summa's products noncompetitive. For related information regarding Calnetics,
see "Acquisition of Calnetics" below.
PATENTS, TRADEMARKS AND LICENSES
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Summa holds several domestic and foreign patents on products which it has
developed or acquired that expire on dates ranging from the near term to 2010.
In addition, several active patent applications are being processed. The extent
to which patents provide a commercial advantage or inhibit the development of
competing products varies. To a large extent, however, Summa is required to rely
upon common law concepts of confidentiality and trade secrets, as well as
economic barriers created by the required investments in tooling and technical
personnel and the development of customer relationships, to protect its
proprietary products. Summa also has foreign and domestic trade name and
trademark registrations covering the names and logos which appear on its product
which, in the opinion of management, are helpful in enabling Summa to maintain
its present competitive position. For related information regarding Calnetics,
see "Acquisition of Calnetics" below.
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EMPLOYEES
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At August 31, 1997, Summa had 357 employees, including three employees who
comprise Summa's corporate staff, 85 salaried and 169 hourly employees at
LexaLite, including 11 involved in sales and marketing, 205 in manufacturing and
38 in general administration, 70 employees at KVP, of whom 16 were involved in
sales and marketing, 44 in manufacturing and 10 in general administration, and
30 employees at GST, of whom 4 were involved in sales and marketing, 22 in
manufacturing and 4 in general administration. LexaLite's headquarters is
located in a small town in Northwest Michigan that has a limited labor pool, and
LexaLite is one of the largest employers in the area. Occasionally, LexaLite has
had to recruit individuals for key positions from outside the area and has
incurred some delays in filling these positions. In 1985, LexaLite opened a
branch plant near Nashville, Tennessee, in an area which, at the time, had a
labor surplus. Subsequently, a number of other employers have opened plants in
that area and management currently does not consider a labor surplus to exist
there. No employees of any of Summa's operating subsidiaries are covered by a
collective bargaining agreement. Summa considers its relationship with its
employees to be good. For related information regarding Calnetics, see
"Acquisition of Calnetics" below.
BUSINESS SEGMENT INFORMATION; EXPORT SALES
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For information regarding the net sales, operating income and identifiable
assets of Summa's business segments for the past three fiscal years, see Note 13
in the "Notes to Consolidated Financial Statements" of Summa in this Annual
Report on Form 10-K.
For information regarding the dollar amount of Summa's export sales by
geographic area for the past three fiscal years, see Note 12 in the "Notes to
Consolidated Financial Statements" of Summa in this Annual Report on Form 10-K.
ACQUISITION OF CALNETICS
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On October 28, 1997, Summa acquired all of the outstanding capital stock of
Calnetics through a merger of a newly formed and wholly-owned subsidiary of
Summa with and into Calnetics in which the former shareholders of Calnetics
received an aggregate of approximately $22,335,000 in cash and Summa assumed
approximately $1.8 million in indebtedness.
Accordingly, as of October 28, 1997, Calnetics, a California corporation
founded in 1960, whose headquarters are located at 20401 Prairie Street,
Chatsworth, California 91311, became a wholly-owned subsidiary of Summa. All of
the manufacturing operations of Calnetics are conducted through its three
wholly-owned subsidiaries: Manchester Plastics located in Chatsworth,
California, that manufactures proprietary items and custom products of acrylic,
polycarbonate and polystyrene plastic sheet, principally for the building
materials and industrial plastics industries; Ny-Glass located in Corona,
California, that 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 API, with locations in
Ontario, California and Winter Haven, Florida, that manufactures fittings,
filters, plastic tubing and accessories, principally for irrigation use in the
agricultural industry.
Prior to the acquisition by Summa, the outstanding common stock of
Calnetics was registered under Section 12(g) of the Exchange Act and traded on
The Nasdaq National Market under the symbol, "CALN." Set forth below is
additional information concerning the business and operations of Calnetics which
has been derived from the Annual Report on Form 10-K for the year ended June 30,
1997 filed by Calnetics under the Exchange Act:
PRODUCTION. Through its three operating subsidiaries, the principal
manufacturing operations of Calnetics are the extrusion of plastic sheet and
tubing and injection and structural foam molding of numerous plastic parts using
various types of resins. Through API, Calnetics also assembles certain parts
using sonic welding techniques. Although substantially all extrusions are
performed in-house by Calnetics, a material amount of injection molding of
plastic parts is performed by third parties, principally for API. Although
Calnetics designs, repairs, services and
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maintains molds for its own products and those of its customers, it does not
perform mold-making services. In addition to the extrusion of sheet and tubing
and the injection molding of clear and colored plastic parts, Calnetics performs
a variety of value-added services, such as pin-insertion, heat stamping, silk
screening, assembly, packaging and short-term warehousing.
For its fiscal year ended June 30, 1997, approximately 70% of Calnetics'
net sales of approximately $36.6 million were of proprietary products. The
remaining portion of net sales for such fiscal year were of custom fabrication
and production parts manufactured to each individual customer's specifications.
Such custom parts are produced for a wide variety of industries, including the
electronics industry.
All production occurs at plants located in Chatsworth, Corona and Ontario,
California and in Winter Haven, Florida. Sheet products are made on extrusion
lines located at the Manchester Plastics plant. Tubing is made on extrusion
lines located at API's two plants, while the sonic welding of fittings and other
agricultural products occurs principally at API's Ontario plant. All injection
molding and structural foam molding occurs at the Ny-Glass plant, which is ISO
9002 and UL certified, on molding machines ranging from 75 to 800 tons clamping
force.
RAW MATERIALS; INVENTORIES. Calnetics maintains an inventory of raw
materials and finished goods for sale at levels determined to be desirable to
enable each operating subsidiary to quickly respond to customer demand. Although
such raw materials and finished goods on hand represent a substantial commitment
of working capital, Calnetics believes that a rapid response to customer catalog
orders is essential and that its inventory practices are not unusual in the
industries in which it competes.
The principal raw materials used by Calnetics with respect to the
manufacture of its products are resins for producing plastic parts. Each
operating subsidiary maintains what it considers to be a reasonable supply of
raw material resins, typically ranging from 30 to 60 days' supply. These amounts
are not increased except in times of expected shortages. Such resins are
purchased in pelletized form from several different suppliers, such as Dow
Chemical, Muehlstein, Cyro, Union Carbide, DuPont and GE Plastics. Calnetics is
not currently a party to any long-term agreements for the purchase of resins.
None of the operating subsidiaries is dependent upon any one supplier for its
present requirements of such resins nor are any such subsidiaries experiencing
any shortages in supply, although Manchester Plastics experienced nominal
shortages of polycarbonate resin in the 1996 fiscal year. However, there can be
no assurance that shortages in one or more types of resin will not occur from
time to time.
CUSTOMERS AND MARKETING. Calnetics' largest customer, which is a customer
of Ny-Glass, represented less than five percent of its combined net sales for
the last fiscal year. Although export sales of certain products are increasing,
such sales represented less than five percent of combined net sales for the last
fiscal year. API sells a large percentage of its products to customers in the
Central Valley of California. Although Calnetics previously believed that the
floods in such area earlier this calendar year would have an adverse impact on
sales of agricultural irrigation products, a reduction in sales did not
materialize. Calnetics does not have any government contracts or any other
contracts which are subject to the renegotiation of profits or termination at
the election of the government.
Calnetics markets its products at all four facilities by use of in-house
sales personnel and a limited number of outside sales representatives and
independent manufacturers representatives.
BACKLOG; SEASONALITY. Backlog orders consist of written purchase orders
and telephone orders generally confirmed in writing or by substantially
concurrent delivery and acceptance of product. Calnetics estimates that
approximately 90% of its sales orders are written. Calnetics normally does not
offer cancellation rights and considers its backlog of orders to be firm. As of
June 30, 1997 and 1996, backlog for all products was approximately $2,497,000
and $2,508,000, respectively. The backlog as of the end of the fiscal year on
June 30, 1995 was $2,290,000. Typically, Calnetics anticipates that
approximately 95% of its backlog at any given time will be filled during the
subsequent 12 months.
Prior to the 1995 fiscal year, Calnetic's business was not of a seasonal
nature, as neither the Manchester Plastics nor Ny-Glass subsidiaries experienced
seasonality in the sale of their products. However, the business of
9
<PAGE>
the API subsidiary, which was purchased effective two months prior to the 1995
fiscal year, has historically been seasonal in nature, with demand for its
irrigation products highest during the spring and early summer. In fiscal 1997,
the business of Calnetics reflected this trend, with approximately $17,032,000
of revenue in the first half of the fiscal year (July through December) and
approximately $19,584,000 during the remainder of the fiscal year (January
through June).
COMPETITION. Calnetics encounters extensive competition from many
competitors, a substantial number of which are larger and have greater financial
and marketing resources. In addition, Calnetics believes that the number of
international entities attempting to compete in its markets is increasing.
Although it is difficult to estimate the number of businesses in the plastic
manufacturing industry with which Calnetics competes, the injection molding
business operated by Ny-Glass appears to have the most competitors, ranging from
numerous small proprietorships to large corporations, while Manchester Plastics
competes principally with a lesser number of large corporations and API competes
principally with a lesser number of corporations of similar and larger size.
Competition is based principally on price, product quality, customer
service and the ability to timely deliver products. Calnetics believes that each
operating subsidiary has good relationships with its customers, and that such
subsidiaries have developed a good following in the respective markets they
serve, including a favorable reputation for prompt and reliable customer service
and quality of products.
PATENTS AND TRADEMARKS. Although Calnetics has a limited number of
domestic patents and trademarks held by API as well as several trademark
applications currently in process, Calnetics does not believe that any such
patents or trademarks are material to its businesses or operations.
RESEARCH AND DEVELOPMENT. Calnetics has not expended a material amount on
research and development of proprietary products in the past several years and
currently does not anticipate any material expenditures in this area. However,
Calnetics does conduct routine product line analysis to develop additional
catalog and custom products as part of its normal operations, particularly at
API and, to a lesser extent, at Ny-Glass.
LEGAL PROCEEDINGS. In the ordinary course of its business, Calnetics and/or
one or more of the operating subsidiaries may become involved in legal
proceedings from time to time. As of June 30, 1997, neither Calnetics nor any of
the operating subsidiaries is a party to any material pending legal proceedings.
TAX EXAMINATION. API is in the process of an Internal Revenue Service
("IRS") examination regarding the tax-exempt status of its industrial revenue
bond. The IRS has informed Calnetics that preliminary findings indicate that the
bond may not be tax exempt and thus API may be required to pay additional
interest. Calnetics believes it has recorded adequate reserves to cover any
potential liability that may result from the final resolution of this matter.
ENVIRONMENTAL MATTERS. Calnetics believes that its policy in controlling
the use and discharge of hazardous materials is in compliance with applicable
federal, state and local regulations. As of June 30, 1997, Calnetics had not
received notice from any governmental authority of any assertion of material
non-compliance with any such laws.
Calnetics formerly operated a facility on property within an area
subsequently designated as a federal Superfund site located in Southern
California. Calnetics operated at this facility prior to October 1986. Calnetics
has 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. Calnetics 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.
Calnetics, as one of several prior operators of the property, may be held
responsible for the contamination at the site to the extent Calnetics caused the
contamination. Calnetics does not believe it is responsible for any material
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 Calnetics were held liable under federal Superfund
law, or other environmental law, the consequences
10
<PAGE>
could be material to the results of operations of Calnetics.
EMPLOYEES. At June 30, 1997, Calnetics employed approximately 262
employees, consisting of three employees at corporate headquarters,
approximately 12 salaried and 39 hourly employees at Manchester Plastics,
approximately nine salaried and 48 hourly employees at Ny-Glass and
approximately 25 salaried, 91 hourly and 35 temporary employees at API. None of
the foregoing employees is subject to a collective bargaining agreement.
Calnetics considers the relationship with its employees to be good, and has not
experienced any work stoppage from any labor dispute.
11
<PAGE>
ITEM 2. PROPERTIES
Summa's principal executive offices are located in approximately 300
square feet of leased office space in Torrance, California. Summa anticipates
continuing to lease comparable space with no difficulty.
LexaLite's original plant, which has been expanded several times,
comprises 94,000 square feet of manufacturing and office space on 14 acres of
land on the shore of Lake Michigan in Charlevoix, Michigan. The Lighting
Scientific Center ("LSC") comprises 27,500 square feet of office and
manufacturing area on 11 acres of land in a business park in Charlevoix. This
facility was constructed with utilities in place so that it can be modularly
expanded as required. Recently, the Lighting Research Center ("LRC") was
combined with the LSC, and the former LRC facilities, comprising 14,700 square
feet of office, testing and light manufacturing area on three-quarters of an
acre of land in Charlevoix, Michigan, were leased to a third party. The
Tennessee plant comprises 55,000 square feet of office and manufacturing area on
24 acres of land in Dickson, Tennessee. All four facilities are owned by
LexaLite, all of which are pledged to secure debt. The LSC was built with the
proceeds of a Michigan Industrial Revenue Bond.
In January 1996, KVP relocated to a larger leased facility in an
industrial park in Rancho Cordova, California, which contains 48,000 square foot
office and manufacturing space, to provide for expanding operations of its
material handling component business. The lease expires in February 2001.
GST leases 28,000 square feet of office and manufacturing space in an
industrial park in Santa Ana, California. The lease expires in October 1998.
Summa believes that in general all of the facilities currently used by
each operating subsidiary are adequate for present and foreseeable needs, and
that expiring leases can be renegotiated or alternate facilities can be leased
on favorable terms, as necessary.
Summa also owns approximately 63,000 square feet of factory and office
space on approximately 3.4 acres in Fullerton, California, which it leases to
Morehouse-COWLES, Inc., a former subsidiary of Summa. The lease expires in July
2006. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Sale of Discontinued Operations."
Set forth below is additional information concerning the properties of
Calnetics which has been derived from the Annual Report on Form 10-K for the
year ended June 30, 1997 filed by Calnetics under the Exchange Act:
The Manchester Plastics plant is located in Chatsworth, California,
consisting of approximately 60,000 square feet of office and manufacturing space
under a lease that is scheduled to expire in December 1999.
The Ny-Glass plant is located in Corona, California, in a building
consisting of approximately 30,000 square feet of office and manufacturing space
under a lease that is scheduled to expire in May 2002.
The API California plant is located in Ontario, California, in a building
consisting of approximately 50,000 square feet of office and manufacturing space
owned by API, subject to repayment of industrial revenue bonds. API's Florida
plant is located in Winter Haven, Florida, in two buildings consisting of
approximately 28,000 square feet of office and manufacturing space owned by API,
subject to payment of existing mortgages.
In addition to the foregoing properties, additional space has been leased
by Calnetics at three locations and is being used principally for the
warehousing and storage of inventory. The largest location consists of
approximately 15,000 square feet of space leased by API in Ontario, California.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Summa encounters lawsuits from time to time in the ordinary course of
its business, and at August 31, 1997, Summa's wholly-owned subsidiaries KVP and
the Stang division of GST were each a party to the civil lawsuits described
below. Although Summa has been able to obtain liability insurance coverage for
each of the past five years, such insurance may not be available in the future
at economically feasible premium rates. Additionally, some lawsuits filed
against Summa in the past have contained claims not covered by insurance, or
sought damages in excess of policy limits, and such claims could be filed in the
future. Any losses that Summa may suffer from current or future lawsuits, and
the effect such litigation may have upon the reputation and marketability of
Summa's products, could have a material adverse impact on the financial
condition and prospects of Summa.
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 claim KVP
has infringed upon two patents. The venue was changed to the Federal District
Court in Sacramento, California. KVP contended the claims were invalid and filed
certain counterclaims. On April 24, 1997, the District Court ruled that KVP's
products do not infringe plaintiff's patents and also dismissed the
counterclaims. On May 28, 1997, the plaintiff filed a notice of appeal of the
summary judgment decision with the United States Court of Appeals, and KVP filed
a notice of appeal on June 5, 1997. Both parties have submitted appeal briefs to
the Court of Appeals. Although Summa believes it has a reasonable expectation of
prevailing on appeal and, therefore, has not established a reserve, in the
absence of applicable insurance, the consequences of an adverse determination
would be borne by Summa.
In Wright v. Stang, et al., a piece of pipe, to which a water cannon
--------------------------
manufactured by Stang was attached, broke, knocking a fireman down. Since Stang
did not make or supply the pipe which failed, the case was dismissed.
Subsequently, the dismissal was reversed on appeal. Summa has $2,000,000 in
product liability insurance applicable in this case.
For a discussion of certain proceedings relating to Calnetics, see
"Business - Acquisition of Calnetics -Tax Examination;" and "- Environmental
Matters" in Item 1 above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year
ended August 31, 1997 to a vote of Summa's shareholders, through solicitation of
proxies or otherwise.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.
RECENT MARKET PRICES
- --------------------
Summa's Common Stock is traded on The Nasdaq National Market under the
symbol "SUMX." Historically, there has been a limited public market for Summa's
Common Stock. During the year ended August 31, 1997, the average weekly trading
volume increased to approximately 26,000 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 closing prices for
a share of Summa's Common Stock on The Nasdaq National Market for the periods
indicated.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
---- ---
<S> <C> <C>
November 30, 1995........................... $5.25 $3.75
February 29, 1996........................... 5.50 3.88
May 31, 1996................................ 6.25 4.81
August 31, 1996............................. 6.50 5.25
QUARTER ENDED
November 30, 1996........................... 6.50 5.50
February 28, 1997........................... 6.25 5.25
May 31, 1997................................ 6.00 4.75
August 31, 1997............................. 6.63 5.88
</TABLE>
On November 5, 1997, the closing price on The Nasdaq National Market
for a share of Summa Common Stock was $10.25.
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, 1997, 4,099,004 shares of Summa's Common Stock were
issued and outstanding, including a total of 2,721,728 shares held by non-
affiliates of Summa, and no shares of Preferred Stock had been issued or were
outstanding. The approximate number of holders of record of Summa's Common Stock
as of November 1, 1997, was 488. In addition, Summa estimates that there are
approximately 600 additional shareholders whose shares are held in "street
name."
COMMON STOCK. Holders of the Common Stock are entitled to one vote per
share on each matter submitted to a vote of the shareholders 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, the holders
of Common Stock are entitled to share ratably in all assets of Summa which are
legally available for distribution, after payment of all debts and other
liabilities and the liquidation preference of any outstanding Preferred Stock.
Holders of 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: (818) 502-1404.
14
<PAGE>
PREFERRED STOCK. The Board of Directors is authorized, subject to any
limitations prescribed by the laws of the State of California, but without
further action by Summa's shareholders, to provide for the issuance of Preferred
Stock in one or more series, to establish from time to time the number of shares
to be included in each such series, to fix the designations, powers, preferences
and rights of the shares of each such series and any qualifications, limitations
or restrictions thereof, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then outstanding)
without any further vote or action by the shareholders. Although Summa has no
present plans to issue any additional shares of Preferred Stock, the issuance of
Preferred Stock in the future could provide voting or conversion rights that
would adversely affect the voting power or other rights of the holders of Common
Stock and thereby reduce the value of the Common Stock. In addition, the
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of Summa. In particular, specific rights granted
to future holders of Preferred Stock could be used to restrict Summa's ability
to merge with or sell its assets to a third party, or otherwise delay,
discourage or prevent a change in control of Summa.
ANTI-TAKEOVER DEVICES. In addition to the ability to issue Preferred
Stock, Summa's Articles of Incorporation and Bylaws provide for elimination of
cumulative voting and the classification of the Board of Directors, provisions
which are also likely to delay, discourage or prevent a change in control of
Summa.
SHARES ISSUABLE UPON EXERCISE OF OPTIONS
- ----------------------------------------
Summa has registered 837,517 shares issuable upon exercise of options
granted and available to be granted under its stock option plans and in
connection with acquisitions. 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 and
currently does not intend to pay cash dividends on its Common Stock in the
foreseeable future.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below for the three years ended
August 31, 1995, 1996 and 1997 has 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, 1993 and 1994 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.
<TABLE>
<CAPTION>
STATEMENT OF INCOME DATA: FISCAL YEARS ENDED AUGUST 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales................................ $5,284 $10,279 $10,247 $12,742 $43,237
Cost and expenses:
Cost of sales............................ 3,016 5,510 5,609 6,847 29,315
Selling, general and administrative,
other................................... 1,700 3,623 3,480 4,566 9,881
Interest-net............................. --- --- --- (15) 275
------ ------- ------- ------- -------
Total costs and expenses from
continuing operations.................... 4,716 9,133 9,089 11,398 39,471
------ ------- ------- ------- -------
Income from continuing operations
before provision for taxes,
extraordinary item and cumulative
effect of accounting change.............. 568 1,146 1,158 1,344 3,766
Provision for income taxes................ 355 645 482 541 1,514
------ ------- ------- ------- -------
Income from continuing operations
before extraordinary item and
cumulative effect of accounting
change.................................. 213 501 676 803 2,252
Income (loss) from discontinued
operations, net of income tax effect..... 179 118 (28) (235) ---
Extraordinary item, tax benefit of
net operating loss carryforward.......... 321 --- --- --- ---
Cumulative effect of accounting change.... --- 100 --- --- ---
------ ------- ------- ------- -------
Net income................................ $ 713 $ 719 $ 648 $ 568 $ 2,252
====== ======= ======= ======= =======
Weighted average number of shares......... 1,020 1,548 1,553 1,603 3,521
====== ======= ======= ======= =======
Income per common and equivalent share:
Income from continuing operations
before extraordinary item and
cumulative effect of accounting
change................................. $ .21 $ .32 $ .44 .50 $.64
Income (loss) from discontinued operations,
net of income tax effect................ .18 .08 (.02) (.15) ---
Extraordinary item........................ .31 --- --- - ---
Cumulative effect of accounting change.... --- .06 --- --- ---
------ ------- ------- ------- -------
Net income per common and equivalent
share................................... $ .70 $ .46 $ .42 $ .35 $.64
====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: AUGUST 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Assets.................................... $8,758 $10,009 $11,278 $11,825 $36,015
Working capital........................... 2,203 2,086 1,882 2,975 8,104
Long-term debt............................ 415 305 400 300 5,571
Shareholders' equity...................... 6,505 7,224 7,930 8,644 20,965
</TABLE>
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
-------
Statements contained in this Annual Report on Form 10-K that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including but not limited to statements regarding Summa's expectations,
hopes, beliefs, intentions or strategies regarding the future. Actual results
could differ materially from those projected in any forward-looking statements
as a result of a number of factors, including those detailed in this
"Management's Discussion and Analysis" section and elsewhere in this Annual
Report on Form 10-K. The forward-looking statements are made as of the date
hereof, and Summa assumes no obligation to update the forward-looking
statements, or to update the reasons why actual results could differ materially
from those projected in the forward-looking statements.
As discussed in more detail under Item 1 above, Summa has adopted a
strategy of growth by acquisitions. Although GST and KVP had each been
established for over 15 years prior to their acquisition by Summa, such have
been operating under their current ownership structure for only six years and
four years, respectively. LexaLite, in turn, has operated as a wholly-owned
subsidiary of Summa only since November 22, 1996. There can be no assurance that
Summa will be able to sustain rates of revenue growth and profitability in
future periods which are comparable to those experienced in the past several
years.
Although the existing management of an acquired company typically
would be retained to manage day to day operations, it is anticipated that the
business of the acquired company could be expanded through enhanced financial,
marketing and administrative support to be furnished by the executive officers
of Summa. Any such expansion could place a significant strain on Summa's
management and resources, require Summa to implement additional operating,
marketing and financial controls, and necessitate that Summa hire additional
personnel, which could have a significant adverse effect on Summa's operating
results. It is also likely that any such acquisition would require Summa to
raise additional capital to finance the acquisition or provide working capital
to the acquired company. If this additional capital were raised through debt
financings, Summa would incur substantial additional interest expense; sales of
additional equity to raise the needed capital would dilute, on a pro-rata basis,
the percentage ownership of all holders of Summa Common 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, if at all. See "- Acquisition of Calnetics" below in this Item 7.
Summa's LexaLite subsidiary sells its products and services primarily
to manufacturers of lighting fixtures, of which there are a limited number. As a
consequence, a significant portion of LexaLite sales are to relatively few
customers. Most of the sales of aerospace assemblies by Summa's GST subsidiary
are for the F-16 and derivative aircraft, and are made to a foreign government
engaged in a U.S. sanctioned cooperative aircraft manufacturing program, to
Lockheed Aircraft, and to the Department of Defense. Because the F-16 is a
mature program which is being phased out, GST faces a possible loss of most of
its defense related business over the next several years. The sales of the
aerospace assemblies segment represented 15%, 15% and 4% of Summa's consolidated
net sales for fiscal years 1995, 1996 and 1997, respectively, with sales to the
largest aerospace customer for the fiscal years ended August 31, 1995, 1996 and
1997 constituting 7%, 6% and 2% of consolidated net sales, respectively. The
largest customer of any operating subsidiary during the fiscal years ended
August 31, 1995, 1996 and 1997 represented approximately 7%, 6% and 8% of
consolidated net sales, respectively. There can be no assurance that the loss of
more than one of these significant customers would not occur simultaneously.
As of August 31, 1997, Summa's consolidated backlog had increased to
$6,323,000, as compared to consolidated backlog of $2,475,000 and $2,924,000 as
of August 31, 1996 and 1995, respectively. Summa's consolidated backlog for the
current fiscal year increased over last fiscal year's backlog primarily due to
the addition of backlog resulting
17
<PAGE>
from the acquisition of LexaLite during fiscal 1997, partially offset by a
decrease in the backlog of the defense business. Fiscal 1996 backlog decreased
to $2,475,000 as compared to fiscal 1995 backlog of $2,924,000, primarily as a
result of decreased backlog in the defense business at such time. The open order
backlog, believed to be firm, is comprised of orders for components and spare
parts, with scheduled deliveries from September 1997 through fiscal 1999.
However, Summa faces a probable loss of most of its defense related business
over the next several years, as mature programs are wound down. Because Summa
has historically booked some disproportionately large orders during its fiscal
years, and because backlog is usually not material except in the defense
business, the amount of firm order backlog at year-end cannot necessarily be
used as an indicator of future sales volume.
Although none of the businesses conducted by Summa's operating
subsidiaries as of August 31, 1997 is considered to be seasonal, each involves
the sale of components to be incorporated into capital equipment provided by its
customers, the demand for which depends upon a number of factors beyond the
control of Summa. Among other factors which would affect the demand for the
products offered by Summa, it can be expected that economic conditions
generally, the availability of credit, as well as industry conditions in the
markets for Summa's products, could have a significant impact upon the decisions
of prospective customers as to the timing of purchases of additional or
replacement products. For these and other reasons, it is possible that Summa's
quarterly revenues and profitability on a consolidated basis may fluctuate from
time to time, although the likelihood of extreme changes may be mitigated by the
fact that the operating subsidiaries sell components into several different
markets. Moreover, there can be no assurance that a major economic downturn or
severe tightening of credit would not adversely affect the demand for all of
Summa's products concurrently. For a discussion regarding the seasonal nature of
the business of Calnetics' API subsidiary, see Item 1 "Business - Acquisition of
Calnetics - Backlog; Seasonality" above.
Any future success that Summa might enjoy will depend upon many
factors including factors which may be beyond the control of Summa or which
cannot be predicted at this time. These factors may include changes in the
markets for the products offered by Summa through its operating subsidiaries,
increased levels of competition including the entry of additional competitors
and increased success by existing competitors, reduced margins caused by
competitive pressures and other factors, increases in operating costs including
costs of production, supplies, personnel, equipment, import duties and
transportation, increases in governmental regulation imposed under federal,
state or local laws, including regulations applicable to environmental, labor
and trade matters, changing customer profiles and general economic and industry
conditions that affect customer demand, the introduction of new products by the
Summa or its competitors, the timing of the Summa's advertising and promotional
campaigns, and other factors.
For information regarding the net sales, operating income and
identifiable assets of Summa's business segments for the past three fiscal
years, see Note 13 in the "Notes to Consolidated Financial Statements" of Summa
in this Annual Report on Form 10-K. For information regarding the dollar amount
of Summa's export sales by geographic area for the past three fiscal years, see
Note 12 in the "Notes to Consolidated Financial Statements" of Summa in this
Annual Report on Form 10-K.
18
<PAGE>
RESULTS OF 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, 1995, 1996 and 1997, as
well as Summa's effective income tax rate for each period presented. As
discussed in more detail below, Summa's statements of income have been restated
to reflect the discontinuance of operations and subsequent sale in 1996 of the
Morehouse-COWLES industrial process equipment business.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED AUGUST 31,
--------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Gross profit 45.3 46.3 32.2
S,G & A expense 34.0 35.6 22.3
Income from continuing operations before tax 11.3 10.5 8.7
Income from continuing operations 6.6 6.3 5.2
Effective tax rate 41.6 40.3 40.2
</TABLE>
NET SALES. For the year ended August 31, 1996, net sales increased by
$2,495,000, or 24%, over the prior fiscal year, primarily due to continued
growth in sales in the material handling components business and increased sales
by Stang as a result of participation in increased building and expansion
activity in the petrochemical industry.
For the year ended August 31, 1997, net sales increased by
$30,495,000, or 239%, over the prior fiscal year, primarily due to the inclusion
of nine months of sales for the newly acquired plastic optical components
business of LexaLite and strong continued growth in the sales of the material
handling components business. KVP's sales growth is attributable to growing
acceptance of its products, the market for its products and use of an expanded
sales force.
GROSS PROFIT. Gross profit for the year ended August 31, 1996 was
$5,895,000, an increase of $1,257,000, or 27%, over the level of gross profit
generated during the year ended August 31, 1995. The increase in gross profit is
primarily due to the growth in the material handling components business and
increased sales by Stang. As a percentage of sales, the gross profit margin
increased from 45.3% for the year ended August 31, 1995 to 46.3% for the year
ended August 31, 1996, primarily due to improved margins at Stang related to
higher volume.
Gross profit for the year ended August 31, 1997 increased by
$8,027,000 to $13,922,000, an increase of 136% over the level of gross profit
generated during the prior fiscal year. The increase in gross profit is
primarily due to the inclusion of nine months of operations of the newly
acquired plastic optical components business of LexaLite and growth in the
material handling components business. As a percentage of sales, the gross
profit margin decreased from 46.3% for the year ended August 31, 1996 to 32.2%
for the year ended August 31, 1997, primarily due to the inclusion of sales of
the plastic optical components business at typically lower margins than those of
Summa's other businesses. Gross margin percentages of Summa's other businesses
increased slightly, due primarily to price increases and increased volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses for the year ended August 31, 1996 increased by
$1,051,000, or 30%, when compared to total operating expenses for fiscal year
1995, and as a percentage of sales, increased from 34.0% to 35.6%, largely
reflecting increases in sales and marketing expenses at KVP associated with
expanding the sales organization and due to increased contingent performance
payments related to increased sales and profitability at GST and Stang.
19
<PAGE>
For the year ended August 31, 1997, selling, general and
administrative expenses increased by $5,090,000, or 112%, when compared to total
operating expenses for the prior fiscal year, primarily due to the inclusion of
nine months of expenses of the newly acquired plastic optical components
business of LexaLite and growth in the material handling components business. As
a percentage of sales, selling, general and administrative expenses decreased
from 35.6% to 22.3%, due mostly to the inclusion of the plastic optical
components business which operates with lower operating expenses as a percentage
of sales.
OTHER EXPENSE. Other expense increased from minor amounts for the
fiscal years ended August 31, 1995 and 1996 to $254,000 in the fiscal year ended
August 31, 1997, due primarily to costs incurred in the first attempted
acquisition of Calnetics which was aborted on May 7, 1997. See Note 17 in the
"Notes to Consolidated Financial Statements" of Summa in this Annual Report on
Form 10-K for a description of the subsequent successful acquisition of
Calnetics.
INTEREST. Interest income increased from minor amounts for the fiscal
years ended August 31, 1995 and 1996 to $200,000 in the fiscal year ended August
31, 1997, due primarily to interest earned on the note receivable which was
received as partial consideration for the sale of Morehouse-COWLES, Inc. in May
1996, interest earned on funds held in trust which were acquired with the
acquisition of LexaLite, and interest earned on funds set aside for the payment
of industrial revenue bonds. Interest expense increased from minor amounts for
the fiscal years ended August 31, 1995 and 1996 to $475,000 in the fiscal year
ended August 31, 1997, due primarily to interest on debt acquired in the
acquisition of LexaLite.
EFFECTIVE TAX RATE. The effective income tax rate, which is a
composite of federal and state taxes, decreased from 41.6% for fiscal 1995 to
40.3% in fiscal 1996, primarily because there were no non-deductible contingent
performance accruals due the former shareholders of GST in fiscal 1996 as were
due in fiscal 1995. In fiscal 1997, the effective tax rate decreased slightly to
40.2% from 40.3% in fiscal 1996.
BACKLOG. Backlog increased slightly during fiscal 1995 to $2,924,000
at August 31, 1995. By August 31, 1996, backlog had decreased to $2,475,000, as
a result of decreased backlog in the defense business. At August 31, 1997,
backlog increased to $6,323,000, primarily due to the addition of backlog for
tooling and products relating to the plastic optical components business of
LexaLite, amounts not included in the fiscal 1996 consolidated backlog total as
LexaLite was acquired after the fiscal 1996 year end, partially offset by a
continued decrease in the backlog of the defense business. The open order
backlog, believed to be firm, is comprised of orders for components and spare
parts, with scheduled deliveries from September 1997 through fiscal 1999.
However, Summa faces a probable loss of most of its defense related business
over the next several years, as mature programs are wound down. Because Summa
has historically booked some disproportionately large orders during its fiscal
years, and because backlog is usually not material except in the defense
business, the amount of firm order backlog at year-end cannot necessarily be
used as an indicator of future sales volume.
INFLATION. Although the impact of inflation is difficult to accurately
assess, management of Summa does not believe that inflation has had a
significant impact on Summa's net sales and revenues, or on income from
continuing operations in the current fiscal year or in the two preceding fiscal
years.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash provided by operating activities is Summa's most important source
of liquidity. During the fiscal year ended August 31, 1995, Summa used $235,000
of cash, primarily because cash used by discontinued operations of $894,000
related to inventory growth more than offset cash provided by continuing
operations of $659,000. Net cash provided by operating activities for the fiscal
year ended August 31, 1996 was $1,577,000, substantially from continuing
operations. Net cash provided by operating activities for the fiscal year ended
August 31, 1997 was $3,597,000, primarily due to the inclusion of LexaLite
offset by cash used in payment of the final contingent performance accruals. The
improved cash flows for the two most recent fiscal years are primarily
attributable to the inclusion of LexaLite, lower payments of accrued
20
<PAGE>
contingent performance payments and lower required tax payments.
During the fiscal year ended August 31, 1996, working capital of
Summa's continuing operations increased by $1,093,000, or 58%, from $1,882,000
at August 31, 1995 to $2,975,000 at August 31, 1996, reflecting decreased
utilization of the line of credit. As of August 31, 1997, Summa's working
capital had increased to $8,104,000, due primarily to the inclusion of LexaLite
and to decreased accrued contingent performance payments.
Asset utilization for the fiscal years ended August 31, 1995, 1996 and
1997 is illustrated in the following table:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Average working capital turnover...... 5.2 times 5.2 times 7.8 times
Average accounts receivable turnover.. 7.8 times 8.4 times 10.0 times
Average inventory turnover............ 3.7 times 3.5 times 9.6 times
</TABLE>
The investment in property, plant and equipment in the years ended
August 31, 1995 and 1996 relates primarily to the acquisition of molds for new
products in the material handling components business. For the year ended August
31, 1997, such investment relates primarily to purchases of injection molding
equipment and completion of the LexaLite Scientific Center for the optical
components business as well as the acquisition of molds for new products. Summa
expects to continue to invest heavily in tooling for new products .
At August 31, 1997, Summa was not committed to any outside supplier
for major capital expenditures, and it believes its present capacity, augmented
by anticipated continued investment in new product tooling for the materials
handling components business and the plastic optical components business and in
injection molding equipment for the optical components business, will be
sufficient to meet demand for its products with a competitive lead time and to
produce quality products in a cost-effective manner. Summa believes that cash
flows from operations will be sufficient to fund working capital and planned
capital expenditure requirements for the next twelve months.
At August 31, 1997, Summa had various working capital and equipment
acquisition credit facilities with two banks, aggregating $7,000,000, of which
none was in use. Both of the working capital lines of credit bore interest at
their respective banks' prime rate (8.5% at August 31, 1997). Subsequent to
fiscal year end, these credit facilities were terminated and replaced by the
financing discussed below.
In connection with the financing of the Calnetics acquisition, Summa
entered into new credit facilities consisting of $13,500,000 in term debt, a
three year revolving line of credit of up to $15,000,000 depending upon the
amount of eligible accounts receivable and inventory, and a $5,000,000 facility
available for three years to acquire equipment which would be repayable in
monthly installments over seven years. The Company anticipates that the entire
$13,500,000 term debt and approximately $9,500,000 of the revolving line of
credit will be used in connection with the Calnetics acquisition. The term debt
requires monthly principal payments of $83,333 in the first year, $166,667 in
years two through six and $208,333 in year seven. Interest is due monthly on
both facilities at a base rate plus an applicable margin. At October 31, 1997,
based upon the base rate optionally selected, most of Summa's debt incurred in
connection with the acquisition of Calnetics bears interest at below the prime
rate.
Substantially all of Summa's assets, and the assets of newly acquired
Calnetics, not pledged to secure other financing, are pledged to secure the term
debt and revolving bank line of credit described above. The term debt and
revolving line of credit require compliance with various bank convenants.
Summa believes that cash flows from operations and existing credit
facilities will be sufficient to fund planned capital expenditure and working
capital requirements for the next twelve months.
21
<PAGE>
ACQUISITION OF CALNETICS
- ------------------------
On October 28, 1997, Summa acquired all of the outstanding capital
stock of Calnetics through a merger of a newly formed and wholly-owned
subsidiary of Summa with and into Calnetics in which the former shareholders of
Calnetics received an aggregate of approximately $22,335,000 in cash and Summa
assumed approximately $1.8 million in indebtedness.
It is anticipated that each of the three operating subsidiaries of
Calnetics will continue to operate on a semi-autonomous basis in much the same
way as the three operating subsidiaries of Summa currently function. The
management of each operating subsidiary has independent profit and loss
responsibility, subject to the achievement of specified objectives and
compliance with budgetary goals set forth in an operating plan developed each
year in consultation with Mr. Swartwout, the Chief Executive Officer of Summa,
and presented to the Summa Board of Directors for approval on an annual basis.
Summa has no employees other than Mr. Swartwout, Paul A. Walbrun, its
Controller, and an administrative assistant. Trygve M. Thoresen, formerly a Vice
President and the General Counsel of Calnetics, joined Summa in a comparable
capacity at the time of the Calnetics acquisition. The corporate staff does not
direct operations of subsidiaries on an ongoing basis but, in addition to
planning and financial oversight, provides financing, conducts Summa's
acquisition program and business development activities, and handles legal and
investor relations matters. In addition, from time to time the corporate staff
is active in non-operational business activities, such as risk management and
employee benefit program management. Summa assesses corporate charges on a basis
established annually, related to asset utilization by subsidiaries.
The Calnetics acquisition will be accounted for as a purchase by Summa
of the net assets of Calnetics. The following table summarizes (in thousands)
information set forth in the audited financial statements of Calnetics and the
notes thereto which are included under Item 14(a) of this Annual Report on Form
10-K, and should be read in conjunction with those financial statements and the
related notes.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
INCOME STATEMENT DATA: 1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net Sales.................................... $29,172 $35,194 $36,616
Gross profit................................. 7,433 8,942 10,023
Selling, general and administrative expense.. 5,188 5,627 6,400
Income before provision for income taxes..... 1,745 2,934 3,349
------- ------- -------
Net income................................... $ 1,006 $ 1,672 $ 2,031
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
-----------------------------
BALANCE SHEET DATA: 1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Total assets................................. $17,123 $18,686 $19,262
Working capital.............................. 7,234 7,927 9,341
Long-term debt............................... 5,551 4,741 3,746
Shareholders' equity......................... 7,136 8,873 11,187
</TABLE>
The following information (in thousands, except per share data) has
been derived from and should be read in conjunction with the separate audited
historical financial statements of Summa and Calnetics, and the unaudited Summa
and Calnetics Pro Forma Financial Information, and the respective notes thereto,
which are included under Item 14(a) of this
22
<PAGE>
Annual Report on Form 10-K. The pro forma combined income statement data gives
effect to the acquisition of Calnetics by Summa as if it had occurred on
September 1, 1996. The pro forma combined balance sheet gives effect to the
acquisition of Calnetics by Summa as if it had occurred on August 31, 1997. The
pro forma financial information should not be construed to be indicative of the
actual financial condition or results of operations of Summa on a consolidated
basis after consummation of the Calnetics acquisition.
<TABLE>
<CAPTION>
YEAR ENDED
PRO FORMA STATEMENT OF INCOME DATA: AUGUST 31, 1997
---------------
<S> <C>
Net sales........................................ $79,853
Income from continuing operations before
provision for taxes............................ 4,784
Net income from continuing operations............ 2,723
Net income per share from continuing operations.. $0.75
Weighted average number of shares................ 3,619
AS OF
PRO FORMA BALANCE SHEET DATA: AUGUST 31, 1997
---------------
Total assets..................................... $64,487
Working capital.................................. 13,864
Long-term debt, net.............................. 27,938
Shareholders' equity............................. 22,310
</TABLE>
SALE OF DISCONTINUED OPERATIONS
- -------------------------------
On June 17, 1996, Summa completed the sale of all of the issued and
outstanding capital stock of Morehouse-COWLES, Inc. to a private investment
group based in Michigan. In exchange for all of the capital stock of Morehouse-
COWLES, Inc., Summa was paid $750,000 in cash and will be paid an additional
$1,771,000 on the terms and conditions set forth in a subordinated promissory
note. The subordinated note provides for the payment of interest monthly at the
rate of 7% per annum through June 2001, and at the rate of 9% per annum through
June 2006, and provides for monthly principal payments commencing July 2001
utilizing a 10-year amortization schedule with all unpaid interest and principal
due and payable by June 30, 2006. The note is subordinated to the investor's
bank credit agreement, permits optional prepayments, contains certain covenants
and default provisions and remedies, and is secured by a pledge of all of the
outstanding capital stock of Morehouse-COWLES, Inc. Additionally, the investment
group entered into a new lease with the wholly-owned subsidiary of Summa that
holds title to Summa's Fullerton facilities, in which the operations of
Morehouse-COWLES also have been conducted. The lease is for a period of ten
years, with an option to extend the term of the lease for an additional five
years. The monthly rent, on a "triple-net basis," is $4,000 during the first
five years of the lease, increasing to $5,500 per month during the second five
years of the original lease term.
On January 30, 1996, Summa had previously announced that it had
entered into a letter of intent to sell Morehouse-COWLES to another prospective
purchaser. Accordingly, Morehouse-COWLES, Inc. has been treated for accounting
purposes as a discontinued operation in the interim financial statements of
Summa published since that date. For the nine months ended May 31, 1996,
Morehouse-COWLES, Inc. lost $421,000 before income taxes, on sales of
$5,638,000, compared to net income of $7,000 before taxes on sales of $6,048,000
for the nine months ended May 31, 1995.
23
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
Summa has elected to continue to report stock based compensation in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock issued to Employees." Summa has adopted the appropriate disclosure
requirements of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation."
In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128 ,"Earnings Per Share," which establishes new standards for
computing and presenting earnings per share. This statement will be adopted by
Summa for the 1998 fiscal year. Summa does not believe that adoption of the
pronouncement will have a material effect on reported earnings per share.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which establishes standards for disclosing
information about an entity's capital structure. This statement will be adopted
by Summa for the 1998 fiscal year. Based on the capital structure disclosures
presented in the accompanying consolidated financial statements and notes
thereto, the Company does not believe that any additional disclosures will be
required as a result of adopting this pronouncement.
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 will be adopted by Summa 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 Summa for the 1999 fiscal year. The effect of adoption of
this pronouncement has not yet been determined.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS.
None.
24
<PAGE>
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.
25
<PAGE>
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, 1996 and 1997 and for each of the three
years ended August 31, 1997, (including the notes thereto which contain
unaudited quarterly financial data for the two-year period ended August 31,
1997), the audited financial statements of Calnetics as of June 30, 1996 and
1997 and for each of the three years ended June 30, 1997 (including the notes
thereto), the respective reports of independent public accountants thereon, and
certain unaudited pro forma financial information which reflects the acquisition
by Summa of Calnetics, are included herein as set forth in the "Index to
Financial Statements" set forth on the following page.
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 filed herewith:
Exhibit
Number
------
10.1 Loan Agreement between Summa and Comerica Bank-
California dated October 21, 1997
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
In addition, each of the exhibits previously filed with the
Commission in connection with (i) the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1995 (File No. 1-7755), (ii) the Company's
Registration Statement on Form S-4 (File No. 333-11571), and (iii) the
Calnetics' Annual Report on Form 10-K for the fiscal year ended June 30, 1997
(File No. 0-08767), as well as Appendix I to the Calnetics' definitive Proxy
Statement on Schedule 14A (File No. 0-08767) for the Special Meeting of
Shareholders held October 28, 1997 are by this reference incorporated herein.
(b) Reports on Form 8-K filed during the last quarter of the fiscal
---------------------------------------------------------------
year ended August 31, 1997:
--------------------------
None.
26
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
SUMMA INDUSTRIES
Report of Independent Public Accountants............................. F-1
Consolidated Balance Sheets as of August 31, 1996 and 1997........... F-2
Consolidated Statements of Income for each of the three years
ended August 31, 1995, 1996 and 1997............................. F-3
Consolidated Statements of Shareholders' Equity for each of the
three years ended August 31, 1995, 1996 and 1997....... ......... F-4
Consolidated Statements of Cash Flows for each of the three years
ended August 31, 1995, 1996 and 1997............................. F-5
Notes to Consolidated Financial Statements........................... F-7
CALNETICS CORPORATION
Report of Independent Public Accountants............................. F-17
Consolidated Balance Sheets as of June 30, 1997 and 1996............. F-18
Consolidated Statements of Income for each of the three years
ended June 30, 1995, 1996 and 1997............................... F-20
Consolidated Statements of Shareholders' Equity for each of the
three years ended June 30, 1995, 1996 and 1997................... F-21
Consolidated Statements of Cash Flows for each of the three years
ended June 30, 1995, 1996 and 1997............................... F-22
Notes to Consolidated Financial Statements........................... F-24
SUMMA AND CALNETICS PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Consolidated Financial Statements................ F-34
Pro Forma Condensed Consolidated Balance Sheet....................... F-35
Pro Forma Condensed Consolidated Statement of Income................. F-36
Report of Independent Public Accountants............................. F-37
Schedule II - Valuation and Qualifying Accounts...................... F-38
</TABLE>
27
<PAGE>
Report of Independent Public Accountants
TO: THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SUMMA INDUSTRIES
We have audited the accompanying consolidated balance sheets of SUMMA INDUSTRIES
(a California corporation) and subsidiaries as of August 31, 1996 and 1997 and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended August 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SUMMA INDUSTRIES and
subsidiaries as of August 31, 1996 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
October 6, 1997
F-1
<PAGE>
SUMMA INDUSTRIES
CONSOLIDATED BALANCE SHEETS AT AUGUST 31
<TABLE>
<CAPTION>
ASSETS 1996 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 567,000 $ 2,883,000
Accounts receivable, net of allowance for doubtful accounts
of $51,000 in 1996 and $224,000 in 1997 1,627,000 7,023,000
Inventories 2,186,000 3,903,000
Prepaid expenses and other 212,000 656,000
Deferred tax asset 444,000 991,000
- ---------------------------------------------------------------------------------------------
Total current assets 5,036,000 15,456,000
- ---------------------------------------------------------------------------------------------
Property, plant and equipment, at cost:
Land 550,000 1,380,000
Building and leasehold improvements 1,278,000 7,306,000
Machinery and equipment 3,911,000 10,879,000
Office furniture and equipment 321,000 683,000
- ---------------------------------------------------------------------------------------------
6,060,000 20,248,000
Less: Accumulated depreciation and amortization 2,082,000 3,888,000
- ---------------------------------------------------------------------------------------------
Net property, plant and equipment 3,978,000 16,360,000
- ---------------------------------------------------------------------------------------------
Other assets 1,865,000 2,331,000
- ---------------------------------------------------------------------------------------------
Goodwill and other intangibles, net 946,000 1,868,000
- ---------------------------------------------------------------------------------------------
$11,825,000 $36,015,000
=============================================================================================
- ---------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long term debt $ --- $ 2,673,000
Accounts payable 812,000 2,006,000
Accrued salaries, wages and benefits 465,000 1,831,000
Accrued performance payments 478,000 ---
Other accrued liabilities 119,000 535,000
Income tax payable 187,000 307,000
- ---------------------------------------------------------------------------------------------
Total current liabilities 2,061,000 7,352,000
Long-term debt, net of current maturities 300,000 5,571,000
Deferred income taxes 763,000 1,351,000
Other long-term liabilities 57,000 776,000
- ---------------------------------------------------------------------------------------------
Total liabilities 3,181,000 15,050,000
- ---------------------------------------------------------------------------------------------
Commitments and contingencies
- ---------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, par value $.001; 5,000,000 shares authorized,
none outstanding --- ---
Common stock, par value $.001; 10,000,000 shares authorized,
1,603,483 and 4,099,004 shares issued and outstanding
at August 31, 1996 and 1997, respectively. 6,157,000 16,226,000
Retained earnings 2,487,000 4,739,000
- ---------------------------------------------------------------------------------------------
Total shareholders' equity 8,644,000 20,965,000
- ---------------------------------------------------------------------------------------------
$11,825,000 $36,015,000
=============================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED AUGUST 31,
<TABLE>
<CAPTION>
1995 1996 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $10,247,000 $12,742,000 $43,237,000
Cost of sales 5,609,000 6,847,000 29,315,000
- --------------------------------------------------------------------------------------------
Gross profit 4,638,000 5,895,000 13,922,000
Selling, general and administrative expenses 3,486,000 4,537,000 9,627,000
- --------------------------------------------------------------------------------------------
Income from operations 1,152,000 1,358,000 4,295,000
Interest (income) --- (27,000) (200,000)
Interest expense --- 12,000 475,000
Other (income) expense (6,000) 29,000 254,000
- --------------------------------------------------------------------------------------------
Income from continuing operations before
provision for taxes 1,158,000 1,344,000 3,766,000
Provision for income taxes 482,000 541,000 1,514,000
- --------------------------------------------------------------------------------------------
Income from continuing operations 676,000 803,000 2,252,000
Loss from discontinued operations, net of the
effect of income tax of ($12,000) in 1995 and
($186,000) in 1996 (28,000) (235,000) ---
- --------------------------------------------------------------------------------------------
Net income $ 648,000 $ 568,000 $ 2,252,000
============================================================================================
Income per common and equivalent share:
Income from continuing operations $ .44 $ .50 $ .64
Loss from discontinued operations, net of the
effect of income tax (.02) (.15) ---
- --------------------------------------------------------------------------------------------
Net income per common and equivalent share $ .42 $ .35 $ .64
============================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
COMMON COMMON RETAINED TOTAL
SHARES STOCK EARNINGS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at August 31, 1994 1,529,957 $ 5,953,000 $1,271,000 $ 7,224,000
Cashout of odd lots (27) --- --- ---
Exercise of options 7,000 34,000 --- 34,000
Management bonus 5,000 24,000 --- 24,000
Net Income --- --- 648,000 648,000
- ------------------------------------------------------------------------------------------------
Balance at August 31, 1995 1,541,930 6,011,000 1,919,000 7,930,000
Cashout of odd lots (2) --- --- ---
Stock redeemed in exercise of stock options (5,200) (33,000) --- (33,000)
Exercise of options 35,923 179,000 --- 179,000
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
================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31
<TABLE>
<CAPTION>
1995 1996 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 648,000 $ 568,000 $ 2,252,000
- -----------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 727,000 744,000 2,125,000
Change in net deferred income taxes 327,000 (94,000) 138,000
Gain on disposition of property and equipment (10,000) (59,000) ---
Net change in assets and liabilities, net of effects from
purchase of LexaLite in fiscal 1997:
Accounts receivable (21,000) 87,000 258,000
Inventories (1,617,000) (73,000) 101,000
Prepaid expenses and other assets (203,000) 99,000 (275,000)
Accounts payable 759,000 (114,000) (385,000)
Accrued liabilities (845,000) 419,000 (617,000)
- -----------------------------------------------------------------------------------------------------------------------------
Total adjustments (883,000) 1,009,000 1,345,000
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (235,000) 1,577,000 3,597,000
- -----------------------------------------------------------------------------------------------------------------------------
Investing activities:
Capital expenditures:
Purchases of property and equipment (836,000) (983,000) (1,626,000)
Cash paid for patents (16,000) (21,000) (13,000)
Sale of Morehouse-COWLES, Inc. in fiscal 1996, --- 608,000 ---
net of fees and of cash held by Morehouse-COWLES, Inc.
Net proceeds from the sale of equipment 53,000 96,000 16,000
Net decrease in unexpended revenue bond proceeds --- --- 438,000
Proceeds from cash surrender value of life insurance --- --- 646,000
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (799,000) (300,000) (539,000)
- -----------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net proceeds from (payments on) line of credit 938,000 (938,000) (275,000)
Payments on long term debt --- (100,000) (1,012,000)
Principal payments under capital lease (14,000) --- ---
Proceeds from the exercise of stock options 34,000 146,000 227,000
Proceeds from the issuance of common stock 24,000 --- ---
Cash received in the acquisition of LexaLite, net of cash paid --- --- 318,000
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 982,000 (892,000) (742,000)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (52,000) 385,000 2,316,000
Cash and cash equivalents, beginning of year 234,000 182,000 567,000
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the year $ 182,000 $ 567,000 $ 2,883,000
=============================================================================================================================
</TABLE>
F-5
<PAGE>
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31 (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the period for interest $ 88,000 $ 107,000 $ 395,000
- -----------------------------------------------------------------------------------------------------------------------------
Cash paid during the period for income taxes $ 427,000 $ 301,000 $ 1,414,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Supplemental disclosure of noncash investing activities:
The Company received a note receivable of $1,771,000 in 1996 as partial
consideration for the sale of Morehouse-COWLES, Inc.
<TABLE>
<CAPTION>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Non-cash investing and financing activities
Common stock issued for acquisition (Note 16) $ 9,842,000
- -----------------------------------------------------------------------------------------------------------------------------
Details of acquisition (Note 16):
Fair value of assets acquired $23,943,000
Liabilities assumed or incurred 13,906,000
Common stock issued 9,842,000
- -----------------------------------------------------------------------------------------------------------------------------
Cash paid 195,000
Less cash acquired (513,000)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash acquired in acquisition $ (318,000)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
F-6
<PAGE>
SUMMA INDUSTRIES
Notes to Consolidated Financial Statements
For the years ended August 31, 1995, 1996 and 1997.
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
SUMMA INDUSTRIES ("SUMMA"), which was incorporated in California in 1942,
currently serves as a holding company whose businesses are conducted
primarily through its three wholly-owned subsidiaries, LexaLite
International Corporation, KVP Systems, Inc. and GST Industries, Inc.
SUMMA's subsidiaries manufacture proprietary industrial components.
Products include engineered injection-molded plastic optical components for
OEM customers in the lighting industry, conveyor components for food
manufacturing industries, aerospace actuators and firefighting components
for petrochemical plants. Sales are domestic and worldwide (see Note 12).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of SUMMA
INDUSTRIES and its wholly-owned subsidiaries. The results of operations of
LexaLite have been included in the consolidated results of operations and
the consolidated statement of cash flows of the Company and the shares
issued to complete the acquisition have been included in the earnings per
share calculation since November 22, 1996. The acquisition of LexaLite is
more fully described in Note 16. The consolidated financial statements
also include the discontinued operations of Morehouse-COWLES, Inc.
("Morehouse-COWLES"), in 1995 and 1996. All intercompany account balances
and transactions have been eliminated in consolidation. Certain
reclassifications of 1995 and 1996 amounts have been made to conform to
1997 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 on 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 10-20 years
Machinery and equipment 3-15 years
Office furniture and equipment 3-10 years
Leasehold improvements Lesser of remaining term of lease or
estimated useful life
Maintenance, repairs and minor renewals are charged directly to expense as
incurred. Additions and betterments to property, plant and equipment are
capitalized. When assets are disposed of, the related cost and accumulated
depreciation thereon are removed from the accounts, and any gain or loss is
included in operations.
F-7
<PAGE>
INTANGIBLE ASSETS
Intangible assets primarily include goodwill and other intangibles such as trade
names, patents and customer relationships capitalized in connection with
business acquisitions. Other intangibles are being amortized over their
estimated useful lives of 10-17 years. Goodwill is amortized over 25 years (see
Note 6).
NET INCOME PER COMMON AND EQUIVALENT SHARE
Per share amounts are based on the weighted average number of common and
equivalent shares outstanding during each year. Common equivalent shares relate
to shares issuable upon the exercise of stock options (Note 11). Income per
common and equivalent share is the same as fully diluted earnings per share for
all years presented. Weighted average common and equivalent shares outstanding
were 1,553,000 for 1995, 1,603,000 for 1996 and 3,521,000 for 1997.
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).
PENDING ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share,"
which establishes new standards for computing and presenting earnings per share.
This statement will be adopted by the Company for the 1998 fiscal year. The
Company does not believe that the adoption of this pronouncement will have a
material effect on reported earnings per share.
In February 1997, the FASB issued SFAS No. 129 "Disclosure of Information about
Capital Structure," which establishes standards for disclosing information about
an entity's capital structure. This statement will be adopted by the Company for
the 1998 fiscal year. Based on the capital structure disclosures presented in
the accompanying consolidated financial statements and notes thereto, the
Company does not believe that any additional disclosures will be required as a
result of adopting this pronouncement.
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 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 effect of adoption of this
pronouncement has not yet been determined.
F-8
<PAGE>
2. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate:
CASH AND CASH EQUIVALENTS - The carrying amount is a reasonable estimate of
fair value. These assets consist of short term certificates of deposit and
demand deposits.
NOTE RECEIVABLE - The note receivable was received as partial consideration
for the sale of all of the stock of Morehouse-COWLES. The carrying value is
not materially different than the fair value. (See Note 5.)
LONG-TERM DEBT - The carrying value approximates fair value since the
interest rate on the long-term loan approximates the rate which is
currently available to the Company for the issuance of debt with similar
terms and maturities.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31,
1996 1997
- ---------------------------------------------------------------
<S> <C> <C>
Finished goods $ 713,000 $1,557,000
Work in process 81,000 108,000
Materials and parts 1,392,000 2,238,000
- ---------------------------------------------------------------
$2,186,000 $3,903,000
==============================================================-
</TABLE>
4. PROPERTY AND EQUIPMENT LEASED TO OTHERS AND RENTAL INCOME
Included in property, plant and equipment are certain land and buildings which
are being leased to Morehouse-COWLES. The cost of the land is $550,000 and the
cost of the building is $1,208,000 less accumulated depreciation of $973,000 at
August 31, 1997. The lease expires in 2006 with an option for an additional five
years. The monthly rent, on a "triple-net basis" is $4,000 through June 2001,
increasing to $5,500 per month from June 2001 through June 2006. For the years
ended August 31, 1996 and August 31, 1997, depreciation expense was $17,000 and
$57,000, respectively and rental income was $8,000 and $48,000, respectively.
5. OTHER ASSETS
Other assets consist primarily of a note receivable for $1,771,000 received as
partial consideration for the sale of all of the stock of Morehouse-COWLES. The
note is subordinated to the buyers' bank credit agreement and is secured by a
pledge of all of the outstanding capital stock of Morehouse-COWLES as well as by
the assets of Morehouse-COWLES. Under the terms of the note, interest is due
monthly at an annual rate of 7 percent until June 2001. Interest at 9 percent
and amortizing principal payments will be due monthly from June 2001 through
June 2006. At August 31, 1997, other assets also include bond proceeds held in
trust of $371,000.
6. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consist of the following:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31,
1996 1997
- --------------------------------------------------------------
<S> <C> <C>
Goodwill $ 615,000 $1,520,000
Other intangibles 527,000 642,000
- --------------------------------------------------------------
1,142,000 2,162,000
Less: accumulated amortization (196,000) (294,000)
- --------------------------------------------------------------
Goodwill and other intangibles, net $ 946,000 $1,868,000
==============================================================
</TABLE>
F-9
<PAGE>
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:
<TABLE>
<CAPTION>
1995 1996 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for taxes at statutory rates $394,000 $457,000 $1,280,000
State tax, net of federal benefit 70,000 82,000 231,000
Effect of performance payments 26,000 --- ---
Other-net (8,000) 2,000 3,000
- --------------------------------------------------------------------------
Provision for income taxes $482,000 $541,000 $1,514,000
==========================================================================
</TABLE>
The provision for income taxes consists of the
following for the years ended August 31:
<TABLE>
<CAPTION>
1995 1996 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $244,000 $493,000 $1,164,000
State 81,000 142,000 309,000
- --------------------------------------------------------------------------
325,000 635,000 1,473,000
- --------------------------------------------------------------------------
Deferred:
Federal 133,000 (80,000) 35,000
State 24,000 (14,000) 6,000
- --------------------------------------------------------------------------
157,000 (94,000) 41,000
- --------------------------------------------------------------------------
Provision for income taxes $482,000 $541,000 $1,514,000
==========================================================================
</TABLE>
The components of the Company's deferred tax asset (liability)
at August 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Effect of performance payments $ 141,000 $ ---
State taxes 72,000 157,000
Reserves 231,000 834,000
- --------------------------------------------------------------------------
Total deferred tax assets 444,000 991,000
- --------------------------------------------------------------------------
Depreciation (636,000) (1,063,000)
Amortization (127,000) (148,000)
Write up land to fair value --- (140,000)
- --------------------------------------------------------------------------
Total deferred tax liabilities (763,000) (1,351,000)
- --------------------------------------------------------------------------
Net deferred tax liability $ (319,000) $ (360,000)
- --------------------------------------------------------------------------
Changes in components of the Company's deferred
tax provision (benefit) are as follows:
- --------------------------------------------------------------------------
Effect of performance payments $ 101,000 $ (141,000)
State taxes 39,000 85,000
Reserves (77,000) 603,000
Depreciation (10,000) (427,000)
Amortization 20,000 (21,000)
Other 21,000 ---
Write up land to fair value --- $ 40,000)
- --------------------------------------------------------------------------
$ 94,000 $ (41,000)
==========================================================================
</TABLE>
F-10
<PAGE>
8. NOTES PAYABLE AND LONG-TERM DEBT
Long term debt consists of following:
<TABLE>
<CAPTION>
August 31, August 31,
1996 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Michigan Strategic Fund Limited Obligation Revenue Bonds Series 1994
of which $1,000,000 is due November 1, 1997, 1998, 1999, 2000 and
2001 with an average effective interest rate of 6.09%. $ --- $5,000,000
- ------------------------------------------------------------------------------------------------------------
Note payable to bank, due in monthly installments of $29,334 including
interest at 7.9%, through October 2000, secured by related equipment. --- 1,114,000
- ------------------------------------------------------------------------------------------------------------
Notes payable to bank, secured by substantially all assets of LexaLite,
due in monthly installments currently totaling $72,902, with interest
with rates ranging between 6.75 and 9.75%, maturing between 1998
and 2001. --- 1,928,000
Other 300,000 202,000
- ------------------------------------------------------------------------------------------------------------
Total 300,000 8,244,000
Less: current maturities --- 2,673,000
- ------------------------------------------------------------------------------------------------------------
Long-term $300,000 $5,571,000
============================================================================================================
</TABLE>
Included in long term debt is $200,000 borrowed from an officer of a subsidiary.
Interest paid to the officer, at a market rate was $32,000 in 1995, $33,000 in
1996 and $26,000 in 1997.
Future maturities long term at August 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $2,673,000
1999 1,619,000
2000 1,630,000
2001 1,250,000
2002 1,072,000
</TABLE>
At August 31, 1997, the Company had various working capital and equipment
acquisition credit facilities, with two banks, aggregating $7,000,000, of which
none was in use. Both of the working capital lines of credit bear interest at
their respective banks' prime rate (8.5 percent at August 31, 1997).
Substantially all of the Company's assets are pledged to secure the outstanding
debt and credit facilities. The working capital lines of credit require
compliance with various bank covenants. The credit facilities in place at August
31, 1997 have been replaced by new facilities in connection with the financing
for the acquisition of Calnetics Corporation, ("Calnetics") which is more fully
described in Note 17.
9. COMMITMENTS AND CONTINGENCIES
The Company is a party to a civil lawsuit in which the plaintiffs have alleged
patent infringement. The Company contends the claims are invalid, and the court
dismissed the claims. Plaintiff has appealed the dismissal. Since the case
involves a number of complex factual and legal issues, it is impossible to
predict the outcome or estimate the loss, if any. The Company believes it has a
reasonable expectation of prevailing and therefore has not recorded any reserve
in connection with this matter. Consequently any adverse determination could
have a material effect on the Company's financial statements.
The Company is involved in a product liability case which was dismissed. The
dismissal was appealed by the plaintiff. The Company believes it has adequate
product liability insurance in the event of an adverse outcome.
F-11
<PAGE>
The Company leases office and manufacturing facilities and certain equipment
under noncancelable operating leases which expire at various dates through June
2001. Rental expense charged to operations was approximately $266,000, $308,000
and $508,000 for the years ended August 31, 1995, 1996 and 1997, respectively.
The aggregate minimum future lease payments under these leases at August 31,
1996 are approximately as follows:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
1998 $ 380,000
1999 319,000
2000 248,000
2001 156,000
2002 ---
----------
Total $1,103,000
==========
</TABLE>
401(K) PLAN
The Company has employee savings and investment plans covering substantially all
of its employees. The plans, which qualify under Section 401(k) of the Internal
Revenue Code, allow employees to defer specified percentages of their
compensation, as defined, in a tax-exempt trust. The Company is required to make
matching contributions at the discretion of the Board of Directors. The cost of
the Company matching contribution is partially offset by a reduction in payroll
taxes. Company contributions to the plan totaled $81,000 in 1995, $83,000 in
1996 and $357,000 in 1997.
10. RELATED PARTY TRANSACTION
The Company paid commissions in the amount of $120,000 and consulting fees of
$28,000 to a company controlled by a director of the Company in accordance with
a design and consulting agreement entered into in 1993 by LexaLite, which was
acquired by the Company in fiscal 1997. In addition, the Company paid a one time
payment of $365,000 in consideration of amending the terms of the earlier
agreement by which LexaLite will continue to receive consulting services for
$30,000 per year and pay commissions of 0.75% (a reduction from the previously
existing rate) of sales of certain products up to the earlier to occur of the
cumulative commission payment of $650,000 or expiration of 12 years.
The Company paid $101,000 during 1997 for cleaning services to a company which
had a relationship by marriage to a former officer of one of the Company's
subsidiaries. The agreement which was competitively bid annually was not re-
awarded to the related party upon termination of the existing agreement.
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 under which the
Company is obligated to pay approximately $2,000 per month through June 2001.
Additionally, the Company paid that party $379,000 for trucking services under
an agreement which is renewable annually.
11. STOCK-BASED COMPENSATION PLANS
The Company has three stock option plans, all of which have been approved by the
shareholders 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 granted 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 250,000 shares of Common Stock,
which may be granted to key employees, directors, consultants, vendors,
customers and others. In connection with the acquisition of LexaLite in November
1996, the existing outstanding LexaLite options acquired were reissued into
stock options of the Company.
The Company accounts for stock options under APB Opinion No. 25. Under these
plans no compensation cost was recognized in fiscal 1995, 1996 and 1997,
respectfully. FASB Statement 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 proforma
F-12
<PAGE>
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:
<TABLE>
<CAPTION>
August 31, 1996 August 31, 1997
<S> <C> <C> <C>
Net Income: As Reported $568,000 $2,252,000
Proforma $473,000 $2,174,000
Earnings per Share: As Reported $.35 $.64
Proforma $.28 $.61
</TABLE>
The Company has granted options of 433,123 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 five or 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 option plans at August 31, 1995,
August 31, 1996 and August 31, 1997 and changes during the years then ended is
presented in the table and narrative below:
<TABLE>
<CAPTION>
August 31, 1995 August 31, 1996 August 31, 1997
Shares Wtd Avg Shares Wtd Avg. Shares Wtd Avg.
------ ------- ------ -------- ------ --------
Ex Price (000) Ex Price Price
-------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beg. of year 162,750 $3.42 191,250 $4.72 237,473 $4.21
Granted 42,500 5.22 121,223 $4.03 327,562* $5.50
Exercised (7,000) 4.80 (35,923) $4.96 (50,441) $3.72
Forfeited/Expired (7,000) 6.25 (39,077) $5.55 (68,721) $5.42
Outstanding at end of year 191,250 $4.72 237,473 $4.21 445,873 $4.81
Exercisable at end of year 151,582 $4.61 206,579 $4.13 236,249 $4.28
Weighted average fair value of
options granted $1.54 $2.25
</TABLE>
* During fiscal 1997 the Company granted 157,650 options under shareholder
approved Plans and issued 169,912 options in conjunction with the acquisition of
LexaLite.
Of the total options outstanding at August 31, 1997, 210,455 have exercises
prices of $2.72 to $4.99 with a weighted average exercise price of $3.998 and a
weighted average remaining contractual life of 6.75 years; 182,717 of these
options are exercisable at year end. The remaining 235,418 options outstanding
at August 31, 1997 have exercise prices of $5.00 to $6.00 with a weighted
average exercise price of $5.527 and a weighted average remaining contractual
life of 7.59 years; 53,532 of these options are exercisable at year end.
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 and 1997; weighted average risk-free interest rate of 5.74
percent and 6.24 percent, respectively; volatility of 30 percent and 35 percent,
respectively; expected dividend yields of 0.00 percent; and a weighted average
contractual life of 7.74 and 8.87 years, respectively.
F-13
<PAGE>
12. SALES
Sales to the largest single customer represented 6.9 percent, 5.9 percent and
8.4 percent of total sales during 1995, 1996 and 1997, respectively.
Export sales by geographic area were as follows for the years ended August 31:
(in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Canada $ 341 $ 724 $1,333
Latin America --- 72 1,576
Asia 800 938 1,132
Europe 769 909 2,019
Other 131 125 500
- --------------------------------------------------------------------------------
$2,041 $2,768 $6,560
================================================================================
</TABLE>
13. BUSINESS SEGMENT INFORMATION
The following table sets forth certain information with respect to the
contribution to consolidated net sales and operating income generated by the
continuing businesses of the Company during each of the three years in the
period ended August 31, 1997, as well as the dollar value of the assets
identified to each subsidiary:
BUSINESS SEGMENT SUMMARY
<TABLE>
<CAPTION>
Engineered Mechanical
Plastic Assemblies and Corporate
Components Equipment and Other Total
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED AUGUST 31, 1997
<S> <C> <C> <C> <C>
Net sales $39,093,000 $4,144,000 $ --- $43,237,000
Operating income 4,228,000 1,066,000 (999,000) 4,295,000
Identifiable assets 30,001,000 1,397,000 4,617,000 36,015,000
FISCAL YEAR ENDED AUGUST 31, 1996
Net sales $ 8,124,000 $4,618,000 $ --- $12,742,000
Operating income 880,000 719,000 (241,000) 1,358,000
Identifiable assets 5,696,000 1,462,000 4,667,000 11,825,000
FISCAL YEAR ENDED AUGUST 31, 1995
Net sales $ 6,567,000 $3,680,000 $ --- $10,247,000
Operating income 903,000 546,000 (297,000) 1,152,000
Identifiable assets 4,554,000 1,352,000 5,372,000 11,278,000
</TABLE>
F-14
<PAGE>
14. UNAUDITED QUARTERLY RESULTS
<TABLE>
<CAPTION>
Quarters ended
- --------------------------------------------------------------------------------
November February May August
- --------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Fiscal 1996:
Net sales $2,839 $ 2,928 $ 3,136 $ 3,839
Gross profit 1,279 1,339 1,357 1,920
Income from continuing operations 177 157 207 262
Net income 91 22 193 262
Per Share:
Income from continuing operations $ .11 $ .10 $ .13 $ .16
Net income $ .06 $ .01 $ .12 $ .16
================================================================================
Fiscal 1997:
Net sales $3,139 $13,512 $13,075 $13,511
Gross profit 1,483 4,002 4,171 4,266
Net income 213 629 620 790
Per Share:
Net income $ .13 $ .16 $ .15 $ .20
================================================================================
</TABLE>
15. DISCONTINUED OPERATIONS
On June 17, 1996, the Company completed the divestiture of its industrial
process equipment subsidiary, Morehouse-COWLES, Inc. Accordingly, this business
unit has been accounted for as a discontinued operation and results of its
operations are segregated in the accompanying consolidated statements of income.
There was no gain or loss on the disposition of Morehouse-COWLES. Interest
expense of $87,000 and $93,000 was related to discontinued operations and
accordingly was allocated to discontinued operations for fiscal years 1995 and
1996, respectively. Discontinued operations have not been segregated in the
consolidated statements of cash flows. The preceding notes to consolidated
financial statements have been revised, as necessary, to reflect the change in
reporting due to discontinued operations.
The sales from these discontinued operations were $8,097,000 and $5,638,000 for
the years ended August 31, 1995 and 1996, respectively.
16. ACQUISITION
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.
The following information is presented as if the acquisition of LexaLite had
been made as of September 1, 1996 and September 1, 1995, respectively, with pro-
forma adjustments to give effect to the amortization of goodwill and other
intangibles, adjustments in depreciation and inventory value, the related income
tax effects, and the effect upon earnings per share of the additional shares of
stock given in exchange for LexaLite stock.
F-15
<PAGE>
<TABLE>
<CAPTION>
For the years ended August 31, 1996 1997
(unaudited) (unaudited)
- ----------------------------------------------------------------------------
<S> <C> <C>
Net sales $48,831,000 $51,844,000
Income from continuing operations 2,300,000 2,715,000
Net income 2,065,000 2,715,000
============================================================================
Income per common and equivalent share
Income from continuing operations $ .57 $ .66
Net income per common and equivalent share $ .51 $ .66
============================================================================
</TABLE>
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 the results which may be
achieved in the future.
17. SUBSEQUENT ACQUISITION (UNAUDITED)
On October 28, 1997, the Company completed the acquisition of Calnetics
Corporation ("Calnetics"). The total acquisition cost was $33,235,000,
consisting of cash of $22,335,000, acquisition costs estimated to be $80,000,
liabilities assumed or incurred of $9,425,000 and an assigned value of
$1,345,000 for options issued in conjunction with the transaction, primarily
replacement options issued to Calnetics employees who will continue with the
Company. The Company entered into a new banking facility to provide most of the
cash used to acquire the Calnetics stock. (See unaudited proforma financial
information included in the Company's 1997 Form 10K).
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
To the Directors and Shareholders of Calnetics Corporation:
We have audited the accompanying consolidated balance sheets of CALNETICS
CORPORATION (a California Corporation) and subsidiaries as of June 30, 1997 and
1996, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended June 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Calnetics Corporation and
subsidiaries as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
July 25, 1997
F-17
<PAGE>
CALNETICS CORPORATION
---------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1997 AND 1996
----------------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,422,119 $ 1,877,633
Accounts receivable, net of allowances of
$316,000 in 1997 and 1996 5,220,127 4,997,471
Inventories 5,391,659 5,470,710
Prepaid expenses 105,487 254,608
Deferred income taxes 451,000 342,000
----------- -----------
Total current assets 13,590,392 12,942,422
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 466,288 466,288
Buildings and leasehold improvements 2,277,763 2,269,525
Machinery and equipment 5,292,340 4,587,322
Furniture and fixtures 278,193 248,220
----------- -----------
8,314,584 7,571,355
Less--Accumulated depreciation and
amortization 4,143,601 3,399,998
----------- -----------
4,170,983 4,171,357
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$403,938 and $331,638 in 1997 and 1996,
respectively 1,328,968 1,401,268
Deposits and other assets 171,822 171,245
----------- -----------
1,500,790 1,572,513
----------- -----------
$19,262,165 $18,686,292
=========== ===========
</TABLE>
F-18
<PAGE>
CALNETICS CORPORATION
---------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1997 AND 1996
----------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 150,846 $ 247,187
Accounts payable 2,413,551 3,214,786
Accrued liabilities 900,041 756,050
Accrued compensation and benefits 542,612 411,657
Income taxes payable 242,023 386,021
----------- -----------
Total current liabilities 4,249,073 5,015,701
----------- -----------
LONG-TERM DEBT, net of current portion 3,745,697 4,740,820
----------- -----------
DEFERRED INCOME TAXES 80,000 57,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 9)
SHAREHOLDERS' EQUITY:
Preferred stock:
Authorized--2,000,000 shares
Issued and outstanding--0 shares - -
Common stock, no par value:
Authorized--20,000,000 shares
Issued and outstanding--3,038,799
and 2,959,799 shares in 1997
and 1996, respectively 2,745,947 2,462,345
Retained earnings 8,441,448 6,410,426
----------- -----------
Total shareholders' equity 11,187,395 8,872,771
----------- -----------
$19,262,165 $18,686,292
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-19
<PAGE>
CALNETICS CORPORATION
---------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
-------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $36,616,238 $35,193,973 $29,172,106
COST OF SALES 26,592,981 26,252,121 21,739,246
----------- ----------- -----------
Gross profit 10,023,257 8,941,852 7,432,860
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,400,237 5,627,299 5,187,534
----------- ----------- -----------
Income from operations 3,623,020 3,314,553 2,245,326
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of property
and equipment - 5,950 6,500
Interest and other income 49,086 29,803 27,345
Interest expense (323,084) (416,391) (534,105)
----------- ----------- -----------
(273,998) (380,638) (500,260)
----------- ----------- -----------
Income before provision
for income taxes 3,349,022 2,933,915 1,745,066
PROVISION FOR INCOME TAXES 1,318,000 1,262,000 739,000
----------- ----------- -----------
Net income $ 2,031,022 $ 1,671,915 $ 1,006,066
=========== =========== ===========
Earnings per common share and
common share equivalent $.66 $.55 $.33
=========== =========== ===========
Weighted average number of shares
outstanding 3,095,219 3,057,984 3,030,283
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-20
<PAGE>
CALNETICS CORPORATION
---------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
-------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
-----------------------
Total
Shares Retained Shareholders'
Outstanding Amount Earnings Equity
----------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1994 2,893,799 $2,367,437 $3,732,445 $ 6,099,882
Net income - - 1,006,066 1,006,066
Exercise of stock options 21,000 30,198 - 30,198
--------- ---------- ---------- -----------
BALANCE, June 30, 1995 2,914,799 2,397,635 4,738,511 7,136,146
Net income - - 1,671,915 1,671,915
Exercise of stock options 45,000 64,710 - 64,710
--------- ---------- ---------- -----------
BALANCE, June 30, 1996 2,959,799 2,462,345 6,410,426 8,872,771
Net income - - 2,031,022 2,031,022
Exercise of stock options,
including related income
tax benefit 79,000 283,602 - 283,602
--------- ---------- ---------- -----------
BALANCE, June 30, 1997 3,038,799 $2,745,947 $8,441,448 $11,187,395
========= ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-21
<PAGE>
CALNETICS CORPORATION
---------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
-------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,031,022 $1,671,915 $1,006,066
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 743,603 758,591 704,497
Provision for doubtful accounts 26,821 98,338 93,531
Gain on sale of property,
plant and equipment - (5,950) (6,500)
Benefit for deferred income taxes (86,000) (106,000) (64,000)
Change in operating assets and
Liabilities:
Decrease (increase) in:
Accounts receivable (249,477) (647,283) (287,260)
Inventories 79,051 (508,673) (785,506)
Prepaid expenses 149,121 58,388 (164,599)
Deposits and other assets (577) 29,960 (26,429)
Increase (decrease) in:
Accounts payable (801,235) 414,131 839,630
Accrued liabilities and
compensation and benefits 274,946 22,407 (84,661)
Income taxes payable (143,998) 327,828 (137,773)
---------- ---------- ----------
Net cash provided by
operating activities 2,023,277 2,113,652 1,086,996
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property,
plant and equipment - 14,600 6,500
Purchases of property, plant and
equipment (670,929) (995,026) (512,153)
---------- ---------- ----------
Net cash used in investing
activities (670,929) (980,426) (505,653)
---------- ---------- ----------
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt $(1,091,464) $ (901,277) $ (883,658)
Net proceeds from issuance of
common stock, including related
income tax benefit 283,602 64,710 30,198
----------- ---------- ----------
Net cash used in financing
activities (807,862) (836,567) (853,460)
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 544,486 296,659 (272,117)
CASH AND CASH EQUIVALENTS,
beginning of year 1,877,633 1,580,974 1,853,091
----------- ---------- ----------
CASH AND CASH EQUIVALENTS,
end of year $ 2,422,119 $1,877,633 $1,580,974
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-23
<PAGE>
CALNETICS CORPORATION
---------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 1997
-------------
1. Basis of Presentation
---------------------
Calnetics Corporation (the Company) is engaged in manufacturing operations
through three wholly owned subsidiaries:
Manchester Plastics, Co., Inc. (Manchester), located in Chatsworth, California,
primarily manufactures proprietary products consisting of acrylic, polycarbonate
and polystyrene plastic sheets for the building material and industrial plastics
industries.
Ny-Glass Plastics, Inc. (Ny-Glass), located in Corona, California, manufactures
custom plastic injection molding components for original equipment manufacturers
and high-quality, close-tolerance molded plastic components for a wide variety
of industries. Approximately one-fifth of its production is proprietary,
consisting of products for the electronic, computer, automotive and other high-
tech industries.
Agricultural Products, Inc. (API), located in Ontario, California and Winter
Haven, Florida, manufactures and distributes various irrigation hoses, fittings
and other products primarily for the agriculture industry.
2. Summary of Significant Accounting Policies
------------------------------------------
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its three wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
Credit Risk
-----------
The Company's accounts receivable are unsecured and the Company is at risk
to the extent such amounts become uncollectible. Customers are located
primarily throughout the United States.
Revenue Recognition
-------------------
Revenue on product sales is recognized at the time of shipment.
F-24
<PAGE>
Inventories
-----------
Inventories include costs of materials, labor and manufacturing overhead,
and are stated at the lower of cost or market using the first-in, first-out
(FIFO) and the last-in, first-out (LIFO) methods. The LIFO method is used
for the finished goods inventory at Manchester and totals approximately
$1,165,000. Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $2,688,014 $2,661,261
Finished goods 2,703,645 2,809,449
---------- ----------
$5,391,659 $5,470,710
========== ==========
</TABLE>
At June 30, 1997 and 1996, if the FIFO method had been used to value
Manchester finished goods inventories, the stated value of inventories
would have been higher by approximately $129,000 and $421,000,
respectively. Income before provision for income taxes would have decreased
by $292,000, increased by $13,000 and increased by $408,000 for 1997, 1996
and 1995, respectively. Net income would have decreased by $175,000,
increased by $7,000 and increased by $230,000 for 1997, 1996 and 1995,
respectively.
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost. The Company follows the
policy of capitalizing expenditures that materially increase asset lives
and charging ordinary maintenance and repairs to operations as incurred.
Amounts expensed as maintenance and repairs were approximately $423,000,
$336,000 and $370,000 in 1997, 1996 and 1995, respectively.
When assets are sold or disposed of, the cost and related depreciation are
removed from the accounts and any resulting gain or loss is included in
income.
Property, plant and equipment are depreciated and amortized using the
straight-line and accelerated methods over the following useful lives:
Buildings and improvements 7 - 31.5 years
Leasehold improvements term of lease
Machinery and equipment 3 - 7 years
Furniture and fixtures 5 - 7 years
Goodwill
--------
Goodwill resulted from the purchase of Manchester during 1989 and the
purchase of API in 1994. It is being amortized on a straight-line basis
over 30 years and 20 years, respectively.
F-25
<PAGE>
Statements of Cash Flows
------------------------
For the purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity date of 90 days or less
to be cash and cash equivalents.
Cash paid for income taxes was approximately $1,378,000, $1,041,000 and
$932,000 in 1997, 1996 and 1995, respectively. Cash paid for interest was
approximately $340,000, $445,000 and $511,000 in 1997, 1996 and 1995,
respectively.
Earnings Per Common Share
-------------------------
Earnings per common share and common share equivalent are based on the
weighted average number of shares of common stock and common stock
equivalents (dilutive stock options) outstanding during the related
periods. The weighted average number of common stock equivalent shares
includes shares issuable upon the assumed exercise of stock options, less
the number of shares assumed purchased with the proceeds available from
such exercise. Fully diluted net income per share does not differ
materially from net income per common share and common share equivalent.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts of cash, accounts receivable, and accounts payable
approximate fair value because of the short maturity of these financial
instruments. The carrying amounts of long-term debt approximate fair value
because either interest rates fluctuate based on market rates or interest
rates appear to approximate market rates for similar instruments.
New Authoritative Pronouncements
--------------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," which establishes new standards for computing and presenting
earnings per share. This statement will be adopted by the Company for the
1998 fiscal year.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure," which establishes standards for disclosing
information about an entity's capital structure. This statement will be
adopted by the Company for the 1998 fiscal year.
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 will be adopted by
the Company for the 1999 fiscal year.
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.
3. Line of Credit
--------------
The Company has a $2,500,000 unsecured line of credit with a bank. At June 30,
1997, the entire amount was available under this credit arrangement, which
expires on June 20, 1999. Borrowings under this facility bear interest at the
bank's reference rate (8.5 percent at June 30, 1997). The line of credit
agreement includes certain restrictive covenants which are discussed in Note 4
below.
F-26
<PAGE>
4. Long-Term Debt
--------------
At June 30, 1997 and 1996, long-term debt consists of the
following:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Term loans payable to banks, unsecured, interest
at the banks' reference rate (8.5 percent at June
30, 1997) plus .25 or .75 percent, due in various
monthly installments of principal and interest
through July 1, 1999, with balloon payments
totaling $1,458,462 due on August 1, 1999 $2,008,329 $2,949,948
Industrial revenue bond payable, principal due in
annual sinking fund installments ranging from
$15,000 to $130,000 through December 2021, plus
interest due monthly based on the Issuer's Weekly
Adjustable Interest Rates for Revenue Bonds (4.15
percent at June 30, 1997), secured by a standby
letter of credit issued by a bank with an annual
fee of 1.25 percent 1,420,000 1,440,000
Loans payable to former API shareholders,
unsecured, interest payable semi-annually at 7.50
percent, principal payable in four equal annual
installments of $100,510 through June 1999 201,022 301,532
Mortgage payable to bank, secured by the related
building and land, principal payable in monthly
installments of $1,665 plus interest at the
bank's prime rate (8.5 percent at June 30, 1997)
plus .75 percent, with a balloon payment of
$201,415 due on March 5, 2000 254,712 274,687
Other 12,480 21,840
------ ------
3,896,543 4,988,007
Less--Current portion of long-term debt 150,846 247,187
------ ------
$3,745,697 $4,740,820
=========== ===========
</TABLE>
F-27
<PAGE>
The following is a schedule of future principal payments of long-term debt as
of June 30, 1997:
<TABLE>
<S> <C>
1998 $ 150,846
1999 614,700
2000 1,770,997
2001 25,000
2002 1,335,000
----------
$3,896,543
==========
</TABLE>
The line of credit agreement (see Note 3), term loans and notes payable include
certain restrictive financial and non-financial covenants, including certain
cash restrictions and limitations on payment of cash dividends and redemption of
stock. At June 30, 1997, the Company was in compliance with all bank covenants.
5. Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No. 109.
Under SFAS No. 109, deferred income tax assets or liabilities are computed based
on the temporary difference between the financial statement and income tax bases
of assets and liabilities using the enacted marginal income tax rate in effect
for the year in which the differences are expected to reverse. Deferred income
tax expenses or credits are based on the changes in the deferred income tax
assets or liabilities from period to period.
The exercise of stock options which have been granted under the Company's
various stock option plans give rise to compensation which is includable in the
taxable income of the applicable employees and deductible by the Company for
federal and state tax purposes. Such compensation results from increases in the
fair market value of the Company's common stock subsequent to the date of grant
of the applicable exercised stock options. Accordingly, in accordance with
Accounting Principles Board Opinion No. 25 (APB 25), such compensation is not
recognized as an expense for financial accounting purposes and the related tax
benefits are taken directly to shareholders' equity. The tax benefits arising
from the exercise of stock options were approximately $170,000 in 1997 and not
material in 1996 and 1995.
The components of the deferred income tax asset at June 30, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Allowance for bad debts $127,000 $127,000
Vacation accrual 60,000 56,000
State taxes 95,000 103,000
Inventory reserve 30,000 30,000
Warranty reserve 24,000 26,000
Legal reserve 80,000 -
Other 35,000 -
-------- --------
$451,000 $342,000
======== ========
</TABLE>
The primary component of the deferred income tax liability at June 30, 1997 and
1996 is accelerated tax depreciation.
F-28
<PAGE>
The components of the provision (benefit) for income taxes for the years ended
June 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Current
- Federal $ 973,000 $1,048,000 $621,833
- State 261,000 320,000 181,167
---------- ---------- --------
1,234,000 1,368,000 803,000
---------- ---------- --------
Benefit of stock options
exercised
- Federal 143,000 - -
- State 27,000 - -
---------- ---------- --------
170,000 - -
---------- ---------- --------
Deferred
- Federal (71,000) (90,000) (49,000)
- State (15,000) (16,000) (15,000)
---------- ---------- --------
(86,000) (106,000) (64,000)
---------- ---------- --------
Provision for income taxes $1,318,000 $1,262,000 $739,000
========== ========== ========
</TABLE>
The components of the provision (benefit) for deferred income taxes for the
years ended June 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Allowance for doubtful accounts $ - $ (21,000) $(23,000)
Depreciation 23,000 (40,000) (4,000)
Accrued expenses and reserves (37,000) - (27,000)
Legal reserve (80,000) - -
State taxes 8,000 (52,000) (12,000)
Other - 7,000 2,000
-------- --------- --------
$(86,000) $(106,000) $(64,000)
======== ========= ========
</TABLE>
F-29
<PAGE>
A reconciliation of income taxes at the statutory federal income tax rate and
the provisions for income taxes for the years ended June 30, 1997, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ----------------- --------------
Amount % Amount % Amount %
---------- ----- ---------- ----- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory
federal rate $1,138,667 34.0% $ 997,531 34.0% $593,322 34.0%
State and local income
taxes, net of federal
income tax effect 204,290 6.1 180,084 6.1 106,449 6.1
State manufacturing
credits (105,000) (3.0) - - - -
Amortization of goodwill 35,033 1.0 35,033 1.2 35,033 2.0
Other items, net 45,010 1.3 49,352 1.7 4,196 0.2
---------- ---- ---------- ---- -------- ----
$1,318,000 39.4% $1,262,000 43.0% $739,000 42.3%
========== ==== ========== ==== ======== ====
</TABLE>
6. Commitments
-----------
Purchase Agreement
------------------
API has a purchase agreement with one of its vendors through June 1998.
The minimum purchase quantities are based on historical purchase trends
as defined in the agreement and the purchase price of the parts is the
list price as set forth in the agreement and as adjusted in the future
based on the mutual agreement of the parties.
Lease Commitments
-----------------
The Company leases certain office and manufacturing facilities and
equipment under noncancellable operating leases which expire at various
dates through May 2002. The aggregate minimum future lease payments
under these leases at June 30, 1997 are approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 756,000
1999 740,000
2000 394,000
2001 158,000
2002 152,000
----------
$2,200,000
</TABLE> ==========
Rental expense charged to operations was approximately $717,000, $700,000
and $641,000 for the years ended June 30, 1997, 1996 and 1995,
respectively.
F-30
<PAGE>
7. Employee Stock Options
----------------------
In 1988, the Company established an Employee Stock Option Plan under which
options to purchase a total of 275,000 shares of common stock may be granted to
certain employees as determined by the Company's Board of Directors. Options
granted under this plan vest in equal amounts on the first and second
anniversary dates of the granting of the options. At June 30, 1997, there were
no options outstanding under this plan.
In 1993, the Company established the 1993 Stock Option Plan, which provides for
granting options to purchase up to 250,000 shares of the Company's common stock
to employees, officers, directors and consultants of the Company. Options to
purchase 160,000 shares have been granted and are outstanding under this plan at
June 30, 1997, of which 133,334 are exercisable, expiring at various dates
through November 11, 2006. These options generally vest over a three-year period
from the date of the grant.
In 1995, the Company established the 1995 Stock Option Plan, which provides for
granting options to purchase up to 250,000 shares of the Company's common stock.
Options to purchase 65,000 shares have been granted and are outstanding under
this plan at June 30, 1997, of which none are exercisable, expiring at various
dates through January 28, 2007. These options generally vest over a three-year
period from the date of the grant.
All options have been granted at prices equal to the fair market value of the
common stock at the grant date. A summary of option activities for all plans is
as follows:
<TABLE>
<CAPTION>
Weighted Average
Number Option Exercise
of Shares Prices
--------- ----------
<S> <C> <C>
Balance, June 30, 1994 245,000 $1.67
Granted 50,000 3.00
Exercised (21,000) 1.44
------- -----
Balance, June 30, 1995 274,000 $1.93
Exercised (45,000) 1.44
------- -----
Balance, June 30, 1996 229,000 2.02
Granted 75,000 6.05
Exercised (79,000) 1.44
------- -----
Balance, June 30, 1997 225,000 $3.57
======= =====
Exercisable, June 30, 1997 133,334 $2.25
======= =====
</TABLE>
F-31
<PAGE>
Information about stock options outstanding at June 30, 1997 is summarized as
follows:
<TABLE>
<CAPTION>
Options Outstanding Exercisable
----------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Exercise Price Number Contract Life Price Number Price
- -------------- -------- ------------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
$2.00 - $3.00 150,000 6.8 years $2.33 133,334 $2.25
5.88 - 6.13 75,000 9.6 years $6.05 - -
</TABLE>
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which applies the fair value-based method of accounting for
options granted under stock-based compensation plans beginning fiscal 1997. In
accordance with the issued standard, the Company has elected to continue to
account for stock-based compensation in accordance with APB 25.
The weighted average fair value of options granted during 1997 was $2.76. The
fair value of each option granted is estimated by using the Black-Scholes
pricing model on the date of grant. The following assumptions were used in the
calculation of present value: risk-free interest rate of 5.4 to 5.8 percent,
expected lives of five to six years, expected volatility of 37 percent and no
expected dividends.
Had compensation cost for the Company's stock option plans been determined
consistent with SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C> <C>
Net income As reported $2,031,022 $1,671,915
Pro forma $1,980,022 $1,671,915
Earnings per share As reported $ .66 $ .55
Pro forma $ .65 $ .55
</TABLE>
8. Employee Benefit Plans
----------------------
API provides a profit-sharing plan and 401(k) plan for its employees. The Board
of Directors can authorize discretionary contributions with no required minimum
contribution. API's contribution to the profit-sharing plan for the periods
ended June 30, 1997, 1996 and 1995 was $120,000 for each period. There were no
API contributions to the 401(k) plan for the periods ended June 30, 1997, 1996
and 1995.
9. Contingencies
-------------
Environmental Matters
---------------------
The Company formerly operated a facility on property within the boundaries
of a federal Superfund site located in Southern California. The Company
operated at this site prior to October 1986. The Company has 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. The
Company may be held responsible for the contamination at the site to the
extent the Company caused the contamination. The Company does not believe
that it is responsible for any material contamination and has not been
notified or contacted by the government or named in any proceeding relating
to the property. The potential liability associated with this property
cannot be reasonably determined at this time.
Tax Examination
---------------
F-32
<PAGE>
API is in the process of an Internal Revenue Service (IRS) examination
regarding the tax-exempt status of its industrial revenue bond. The IRS
has informed the Company that preliminary findings indicate that the bond
may not be tax exempt and thus API may be required to pay additional
interest. The Company believes it has recorded adequate reserves to cover
any potential liability that may result from the final resolution of this
matter.
10. Subsequent Event
----------------
On July 2, 1997, Summa Industries (Summa) signed a definitive agreement to
purchase all outstanding stock of the Company for $7.35 per share in cash. This
agreement is subject to shareholder approval and Summa's ability to obtain
financing for the transaction.
11. Unaudited Quarterly Results
---------------------------
Unaudited quarterly results of operations for each of the quarters in the three
years ended June 30, 1997 are presented below:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended June 30,
1997
Net sales $8,446,000 $8,586,000 $9,261,000 $10,323,000
Gross profit 2,118,000 2,125,000 2,679,000 3,101,000
Net income 404,000 359,000 542,000 727,000
Earnings per share .13 .11 .17 .23
1996
Net sales $8,772,000 $7,627,000 $9,090,000 $ 9,705,000
Gross profit 1,965,000 1,797,000 2,345,000 2,835,000
Net income 296,000 271,000 444,000 661,000
Earnings per share .10 .09 .14 .22
1995
Net sales $6,647,000 $6,275,000 $7,705,000 $ 8,545,000
Gross profit 1,590,000 1,579,000 1,992,000 2,272,000
Net income 170,000 179,000 280,000 377,000
Earnings per share .06 .06 .09 .12
</TABLE>
F-33
<PAGE>
SUMMA AND CALNETICS PROFORMA FINANCIAL INFORMATION
SUMMA INDUSTRIES
UNAUDITED PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited proforma condensed consolidated financial statements
reflect the acquisition by SUMMA of all the issued and outstanding capital stock
of Calnetics as a consequence of the merger of a wholly-owned subsidiary of
SUMMA with and into Calnetics. The transaction will be accounted as a purchase
by SUMMA of the net assets of Calnetics.
The unaudited proforma condensed consolidated balance sheet is based upon
SUMMA's historical audited consolidated balance sheet at August 31, 1997 and
Calnetic's historical audited balance sheet as of June 30, 1997, and is
presented as if the transaction had been consummated on August 31, 1997.
The unaudited proforma condensed consolidated statement of income for the year
ended August 31, 1997 gives effect to the merger of the subsidiary and Calnetics
as if the transaction had occurred at September 1, 1996, the beginning of
SUMMA's fiscal year ended August 31, 1997. The unaudited proforma condensed
consolidated income statement combines the audited historical consolidated
results of operations of SUMMA for the year ended August 31, 1997 and the
audited historical results of the operations of Calnetics for the year ended
June 30, 1997.
The proforma adjustments are based upon available information and upon certain
assumptions which the management of SUMMA believes are reasonable. However, the
unaudited proforma condensed consolidated financial statements do not purport to
be indicative of the results which would have been achieved if the transaction
had been completed on the respective dates above or the results which may be
achieved in the future.
F-34
<PAGE>
SUMMA INDUSTRIES
Proforma Condensed Consolidated Balance Sheet (Unaudited)
August 31, 1997
<TABLE>
<CAPTION>
Proforma
--------
SUMMA Calnetics Adjustments Combined
----- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 2,883,000 $ 2,422,000 $(4,387,000) (1) $ 918,000
Accounts receivable 7,023,000 5,220,000 --- 12,243,000
Inventories 3,903,000 5,392,000 386,000 (2) 9,681,000
Prepaid expenses and other 1,647,000 556,000 (123,000) (3) 2,080,000
------------ ----------- ----------- -----------
Total current assets 15,456,000 13,590,000 (4,124,000) 24,922,000
------------ ----------- ----------- -----------
Property, plant and equipment 20,248,000 8,315,000 (3,732,000) (4) 24,831,000
Less accumulated depreciation (3,888,000) (4,144,000) 4,144,000 (5) (3,888,000)
------------ ----------- ----------- -----------
Net property, plant and
equipment 16,360,000 4,171,000 412,000 20,943,000
Other assets 2,331,000 172,000 --- 2,503,000
Goodwill and other intangibles 1,868,000 1,329,000 12,922,000 (6) 16,119,000
------------ ----------- ----------- -----------
Total assets $36,015,000 $19,262,000 $ 9,210,000 $64,487,000
============ =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,006,000 $ 2,413,000 $ --- $ 4,419,000
Accrued liabilities 2,673,000 1,685,000 130,000 (7) $ 4,488,000
Current maturities of long-term
debt 2,673,000 151,000 (673,000) (1) 2,151,000
------------ ---------- ----------- -----------
Total current liabilities 7,352,000 4,249,000 (543,000) 11,058,000
Long-term debt, net of current
maturities 5,571,000 3,746,000 18,621,000 (1) 27,938,000
Deferred credits and other long 1,350,000 (8)
term liabilities 2,127,000 80,000 (376,000) (3) 3,181,000
------------ ---------- ----------- -----------
Total liabilities 15,050,000 8,075,000 19,052,000 42,177,000
------------ ---------- ----------- -----------
Shareholders' equity
1,345,000 (10)
Common stock 16,226,000 2,746,000 (2,746,000) (9) 17,571,000
Retained earnings 4,739,000 8,441,000 (8,441,000) (9) 4,739,000
------------ ----------- ----------- -----------
Total shareholders' equity 20,965,000 11,187,000 (9,842,000) 22,310,000
------------ ----------- ----------- -----------
Total liabilities and
shareholders' equity $36,015,000 $19,262,000 $ 9,210,000 $64,487,000
============ =========== =========== ===========
</TABLE>
F-35
<PAGE>
SUMMA INDUSTRIES
Proforma Condensed Consolidated Statement of Income (Unaudited)
For the Year Ended August 31, 1997
<TABLE>
<CAPTION>
ProForma
--------
SUMMA Calnetics Adjustments Combined
----- --------- ----------- --------
<S> <C> <C> <C> <C>
Net sales $43,237,000 $36,616,000 $ --- $79,853,000
Cost and expenses:
Cost of sales 29,315,000 26,593,000 450,000 (11) 56,358,000
Selling and administrative and other 403,000 (12)
operating expense 9,627,000 6,400,000 (200,000) (13) 16,230,000
Interest and other expense 529,000 274,000 1,678,000 (14) 2,481,000
-------------- -------------- ------------- -------------
Total cost and expenses 39,471,000 33,267,000 2,331,000 75,069,000
-------------- -------------- ------------- -------------
Income from continuing operations
before provision for taxes 3,766,000 3,349,000 (2,331,000) 4,784,000
Provision for income taxes 1,514,000 1,318,000 (771,000) (15) 2,061,000
-------------- -------------- ------------- -------------
Income from continuing operations $ 2,252,000 $ 2,031,000 $ (1,560,000) $ 2,723,000
============== ============== ============= =============
Income per common and equivalent
share from continuing operations $ .64 $ .66 $ .75
============== ============== ============= =============
Weighted average shares outstanding 3,521,000 3,095,000 (3,095,000) (9) 3,619,000
98,000 (10)
============== ============== ============= =============
</TABLE>
The proforma condensed consolidated financial statements give effect to certain
proforma adjustments, as follows:
(1) To reflect new debt, partial payoff of existing debt and cash used in
acquisition.
(2) Adjustment of work in process and finished goods inventory to eliminate
manufacturing profit.
(3) To record deferred taxes.
(4) Adjustment of property, plant and equipment to estimated fair value
including deferred tax effect.
(5) Reset of accumulated depreciation of acquired assets to zero.
(6) Record goodwill for the excess of purchase price over the fair value of net
assets acquired.
(7) Accrual of transaction fees and other costs.
(8) Accrual of contingent liability.
(9) Adjustment to reflect the acquisition of Calnetics.
(10) To reflect stock options granted in connection with the acquisition.
(11) Charge cost of sales with write-up of inventory to fair value and
amortization of the write-up of property, plant and equipment.
(12) To reflect amortization of goodwill created in purchase accounting.
(13) To reflect reduction in administrative expenses.
(14) To reflect interest expense on net debt incurred.
(15) To reflect tax effect of (11) - (14).
F-36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders 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, 1997. 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, 1997
F-37
<PAGE>
SUMMA INDUSTRIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the years ended August 31, 1997, 1996, 1995
<TABLE>
<CAPTION>
Balance at Amounts
beginning of charged Amounts Balance at
period (credited) to Acquired written end of
expense Reserves off period
_____________________________________________________________________________________________________________
<C> <S> <C> <C> <C> <C> <C>
1997 Allowance for doubtful accounts $51,000 $ 48,000 $157,000 $(32,000) $224,000
1996 Allowance for doubtful accounts 59,000 48,000 --- (56,000) 51,000
1995 Allowance for doubtful accounts 75,000 (15,000) --- (1,000) 59,000
</TABLE>
F-38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, Summa has duly caused this Annual Report on Form 10-K for the fiscal
year ended August 31, 1997 to be signed on its behalf by the undersigned,
thereunto duly authorized, on November 6, 1997.
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, 1997 has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James R. Swartwout Chairman of the Board, President November 6, 1997
--------------------------- and Chief Financial Officer
JAMES R.Swartwout (Principal Executive and Financial Officer)
/s/ Coalson C. Morris Director November 6, 1997
---------------------------
Coalson C. Morris
___________________________ Director November __, 1997
Michael L. Horst
/s/ William R. Zimmerman Director November 6, 1997
---------------------------
William R. Zimmerman
/s/ David McCoaughy Director November 6, 1997
---------------------------
David McConaughy
___________________________ Director November __, 1997
Byron C. Roth
/S/ Josh T. Barnes Director November 6, 1997
---------------------------
Josh T. Barnes
/s/ Paul A. Walbrun Vice President and Controller November 6, 1997
---------------------------
Paul A. Walbrun (Principal Accounting Officer)
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
Number
------
10.1 Loan Agreement between Summa and Comerica Bank-California
dated October 21, 1997
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
In addition, each of the exhibits previously filed with the Commission in
connection with (i) the Company's Annual Report on Form 10-K for the fiscal
year ended August 31, 1995 (File No. 1-7755), (ii) the Company's Registration
Statement on Form S-4 (File No. 333-11571), and (iii) the Calnetics' Annual
Report on Form 10-K for the fiscal year ended June 30, 1997 (File No. 0-
08767), as well as Appendix I to the Calnetics' definitive Proxy Statement
(File No. 0-08767) for the Special Meeting of Shareholders held October 28,
1997 are by this reference incorporated herein.
<PAGE>
EXHIBIT 10.1
LOAN AGREEMENT
--------------
This LOAN AGREEMENT (this "Agreement") is entered into as of October 21,
---------
1997 by and among SUMMA INDUSTRIES, a California corporation ("Borrower"),
--------
COMERICA BANK-CALIFORNIA, a California banking corporation, not in its
individual capacity, but solely as agent for the Lenders from time to time
("Agent"), and the various financial institutions that are (or may hereafter
- -------
become) parties hereto as lenders (each a "Lender" and collectively the
------
"Lenders").
-------
RECITALS
--------
A. Borrower has requested that Lenders provide it with certain credit
facilities as more particularly set forth in this Agreement.
B. Lenders have agreed to provide Borrower with the requested credit
facilities on the terms and conditions set forth herein.
C. The proceeds of credit facilities herein provided shall be used for
Borrower's working capital and general business purposes, and to finance
Borrower's acquisition (the "Acquisition") of all of the issued and outstanding
-----------
capital stock of Calnetics Corporation, a California corporation ("Target"),
------
pursuant to that certain Agreement and Plan of Acquisition dated as of July 2,
1997, as amended, between Borrower and Target (the "Acquisition Agreement").
---------------------
D. The Obligations under this Agreement shall be secured by a first-
priority lien and security interest in and to all of the assets of Borrower and
its Subsidiaries (other than Excluded Subsidiaries), subject to Permitted Liens
and Exclusive Liens, as more fully set forth herein.
NOW, THEREFORE, Agent, the Lenders and Borrower hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms shall have
-----------
the respective meanings provided below in this Section 1:
---------
"Accountants" is defined in Section 7.1(B)(1).
----------- -----------------
"Account Debtor" means the party who is obligated on or under an Account.
--------------
"Accounts" of any Person means all of such Person's presently existing and
--------
hereafter arising or acquired accounts, accounts receivable, margin accounts,
futures positions, book debts, notes, drafts, acceptances, chattel paper, and
other forms of obligations now or hereafter owned or held by or payable to such
Person relating in any way to Inventory or arising from the sale of Inventory or
the rendering of services by such Person or howsoever otherwise arising,
including the right to payment of any interest or finance charges with respect
thereto, together with all merchandise represented by any of the accounts; all
such merchandise that may be reclaimed or repossessed or returned to such
Person; all of such Person's rights as an unpaid vendor, including
1
<PAGE>
stoppage in transit, reclamation, replevin, and sequestration; all pledged
assets and all letters of credit, guaranty claims, liens, and security interests
held by or granted to such Person to secure payment of any of the foregoing; all
proceeds and products of all of the foregoing; and all proceeds of insurance
with respect thereto, including the proceeds of any applicable credit insurance
or fidelity bond, whether payable in cash or in kind; and all customer lists,
ledgers, books of account, records, computer programs, computer disks or tape
files, computer printouts, computer runs, and other computer prepared
information relating to any of the foregoing.
"Accounts Trial Balance" is defined in Section 7.1(E).
---------------------- --------------
"Acquisition" is defined in the Recitals.
----------- --------
"Acquisition Agreement" is defined in the Recitals.
--------------------- --------
"Advance" is defined in Section 2.1.
------- -----------
"Affiliate" means as to any Person (a) any Person which, directly or
---------
indirectly, is in control of, is controlled by, or is under common control with
such Person, (b) any Person who is a director, officer, partner or principal (i)
of such Person, (ii) of any Subsidiary of such Person or (iii) of any Person
described in clause (a) above, or (c) any individual who is a relative of any
Person described in clause (a) or clause (b) above. For purposes of this
definition, "control" of a Person shall mean the power, direct or indirect, (i)
to vote or direct the voting of 10% or more of the securities having ordinary
voting power for the election of directors of such Person, or (ii) to direct or
cause the direction of the management and policies of such Person whether by
contract or otherwise. For the purposes of this Agreement, neither Agent nor
any Lender shall be deemed to be an Affiliate of Borrower or any of its
Subsidiaries.
"Agent" is defined in the preamble.
----- --------
"Applicable Base Rate Margin" means (a) for all periods to and including
---------------------------
August 31, 1998, 0.375% for the Revolving Loan and 0.625% for each of the Term
Loan and the Purpose Line, and (b) commencing September 1, 1998 and at all times
thereafter, the applicable percentage set forth below beneath such Loan based
upon Borrower's ratio of Senior Debt to EBITDA for the most recently ended
period of four consecutive fiscal quarters:
<TABLE>
<CAPTION>
Senior Debt/EBITDA Ratio Applicable Base Rate Margin
------------------------ ---------------------------
Revolving Loan Term Loan & Purpose Line
-------------- ------------------------
<S> <C> <C>
Less than 1.5 0 .125%
More than 1.5 and
less than 2.0 0 .25%
More than 2.0 and
less than 2.5 .125% .375%
More than 2.5 and
less than 3.0 .25% .5%
More than 3.0 and
less than 3.75 .375% .625%
</TABLE>
2
<PAGE>
"Applicable LIBOR Margin" means (a) for all periods to and including August
-----------------------
31, 1998, 2.0% for the Revolving Loan and 2.25% for each of the Term Loan and
the Purpose Line, and (b) commencing September 1, 1998 and at all times
thereafter, with respect to any Loan, the applicable percentage set forth below
beneath such Loan based upon Borrower's ratio of Senior Debt to EBITDA for the
most recently ended period of four consecutive fiscal quarters:
<TABLE>
<CAPTION>
Senior Debt/EBITDA Ratio Applicable LIBOR Margin
------------------------ -----------------------
Revolving Loan Term Loan & Purpose Line
-------------- ------------------------
<S> <C> <C>
Less than 1.5 1.5% 1.75%
More than 1.5 and
less than 2.0 1.625% 1.875%
More than 2.0 and
less than 2.5 1.75% 2.0%
More than 2.5 and
less than 3.0 1.875% 2.125%
More than 3.0 and
less than 3.75 2.0% 2.25%
</TABLE>
"Available Amount" means, at any time, an aggregate outstanding principal
----------------
amount of Revolving Loans not in excess of the lesser of (i) the Borrowing Base
and (ii) the Revolving Commitment Limit.
"Base Rate" means a variable rate of interest per annum which is announced
---------
from time to time by Agent as the "prime rate," "reference rate," "base rate,"
or other similar rate. The Base Rate is a reference rate and does not
necessarily represent the lowest or best rate actually charged to any customer
by Agent.
"Borrowing Base" means an amount as of any time of determination equal to
--------------
the sum of:
(x) 85% of the aggregate face amount (less maximum discounts, credits
and allowances granted to Account Debtors in connection therewith) then
outstanding under existing Eligible Accounts, plus
----
(y) 50% (reducing to 45% at September 1, 1998 and for all times
thereafter) of the aggregate value of Borrower's then existing Eligible
Inventory valued at the lower of cost (determined on a first-in-first-out
basis) or Fair Market Value, but in no event not to exceed $5,000,000,
provided, that the foregoing percentages may be reduced in Agent's sole
--------
discretion if upon audit and examination of the Accounts and Inventory of
Borrower and its Subsidiaries, Agent determines that the quality and/or
character of the collateral has deteriorated.
"Borrowing Base Certificate" has the meaning specified in Section 7.1(E).
-------------------------- --------------
"Borrowing Request" is defined in Section 2.4.
----------------- -----------
3
<PAGE>
"Business Day" means any day on which commercial banks are not authorized
------------
or required to close in Los Angeles, California and, if such day relates to a
borrowing of, a payment or prepayment of principal of or interest on, or a
Conversion of or into, or an Interest Period for, a Loan bearing interest with
reference to LIBOR or a notice by Borrower with respect to any such Loan, a day
which is also a day on which dealings in Dollar deposits are carried out on the
London interbank market.
"Capital Expenditures" means the expenditures of any Person which should be
--------------------
capitalized on the balance sheet of such Person in accordance with GAAP (but
only that portion of Capitalized Lease Obligations paid in cash during the
relevant period) and which are made in connection with the purchase,
construction or improvement of items properly classified on such balance sheet
as Property, plant, equipment or other fixed assets or intangibles, provided
--------
that Capital Expenditures shall not include the portion of any such expenditures
paid for with (a) the Net Cash Proceeds of any property insurance or
condemnation award, (b) the Net Cash Proceeds of a sale of Property permitted
hereunder to the extent used within 30 days after such sale to purchase like or
similar Property, or (c) the Net Cash Proceeds of any purchase money
Indebtedness or Capitalized Leases permitted hereunder for the purpose of
financing such expenditures (provided that payments of principal amounts in
--------
respect of such purchase money Indebtedness or Capitalized Leases shall
nevertheless constitute Capital Expenditures hereunder).
"Capitalized Lease" means any lease of Property which in accordance with
-----------------
GAAP should be capitalized on the balance sheet of any Person or for which the
amount of the asset and liability thereunder as if so capitalized should be
disclosed in a note to such balance sheet.
"Capitalized Lease Obligation" means the amount of the liability of any
----------------------------
Person which in accordance with GAAP should be capitalized or disclosed on the
balance sheet of such Person in respect of a Capitalized Lease.
"Chattel Paper" shall have the meaning provided in the Security Agreement.
-------------
"Closing Date" means the date of the initial disbursement of Loans
------------
hereunder, which (subject to satisfaction of the applicable conditions set forth
herein) shall occur at 10:00 A.M. (Pacific time) on October 31, 1997, or such
other time and date as shall be mutually acceptable to Borrower and Agent and at
the offices of Manatt, Phelps & Phillips, LLP, 11355 West Olympic Blvd., Los
Angeles, CA 90064, or at such other place as the parties may agree.
"Code" means the Internal Revenue Code of 1986, as from time to time
----
amended.
"Collateral" means any and all collateral from time to time securing the
----------
Obligations, including without limitation all "Collateral" under and as defined
in the Security Agreement, any Trademark Security Agreement, the Pledge
Agreement and any Mortgage.
"Commitment" means each commitment of a Lender under this Agreement to
----------
advance Loan funds to Borrower.
"Consolidated Current Assets" means all assets of Borrower and its
---------------------------
Subsidiaries on a consolidated basis which, in accordance with GAAP, are
properly classified as current assets, including of cash and cash equivalents.
4
<PAGE>
"Consolidated Current Liabilities" means all liabilities of Borrower and
--------------------------------
its Subsidiaries on a consolidated basis maturing on demand or within one year
from the date as of which such liabilities are to be determined, and such other
liabilities (including, without limitation, accrued taxes) as may properly be
classified as current liabilities in accordance with GAAP, and including, in any
event, the outstanding principal balance of the Revolving Loan.
"Consolidated Interest Expense" means, for any period, total interest
-----------------------------
expense (including, without limitation, that portion of any Capitalized Lease
Obligations attributable to interest expense in conformity with GAAP and
amortization of capitalized interest) paid or accrued with respect to all
outstanding Indebtedness of Borrower and its Subsidiaries, excluding all
---------
commissions, discounts and other fees and charges owed with respect to letter of
credit and bankers acceptance financing, prepayment charges, agency fees,
administrative fees, commitment fees, capitalized transaction costs allocated to
interest expense, payments received under such interest rate hedging, cap or
similar agreement or arrangement, all as determined for Borrower and its
Subsidiaries on a consolidated basis for such period in accordance with GAAP.
"Consolidated Net Income (Loss)" means, for any period, the net income (or
------------------------------
loss) of Borrower and its Subsidiaries on a consolidated basis for such period
taken as a single accounting period, determined in accordance with GAAP (but in
any event without deduction of dividends paid or payable in respect of any
equity interest of Borrower); provided that in determining Consolidated Net
--------
Income (Loss) there shall be excluded (i) the income (or loss) of any Person
(other than a Subsidiary of Borrower) in which any Person other than Borrower or
any of its Subsidiaries has a joint interest or partnership interest, except to
the extent of the amount of dividends or other distributions actually paid to
Borrower or any of its Subsidiaries by such Person during such period, (ii) the
income (or loss) of any Person accrued prior to the date it becomes a Subsidiary
of Borrower or is merged into or consolidated with Borrower or any of its
Subsidiaries or that Person's assets are acquired by Borrower or any of its
Subsidiaries, (iii) the proceeds of any life insurance policy, (iv) gains and
losses from the sale, exchange, transfer or other disposition of Property or
assets not in the ordinary course of business of Borrower and its Subsidiaries,
and related tax effects in accordance with GAAP, (v) any other extraordinary or
non-recurring gains and losses of Borrower or its Subsidiaries, and related tax
effects in accordance with GAAP, and (vi) the income of any Subsidiary of
Borrower to the extent that the declaration or payment of dividends or similar
distributions by that Subsidiary of that income is not at the time permitted by
operation of the terms of its charter or of any agreement, instrument, judgment,
decree, Order, statute, rule or governmental regulation applicable to that
Subsidiary.
"Continue", "Continuation" and "Continued" shall refer to the continuation
-------- ------------ ---------
pursuant to Section 3.1 hereof of a LIBOR Loan from one Interest Period to the
-----------
next Interest Period.
"Contracts" of any Person means all contracts, undertakings, or other
---------
agreements (other than rights evidenced by Chattel Paper, Documents or
Instruments) in or under which such Person may now or hereafter have any right,
title or interest, including, without limitation, with respect to an Account,
any agreement relating to the terms of payment or the terms of performance
thereof.
"Convert", "Conversion" and "Converted" shall refer to a conversion
------- ---------- ---------
pursuant to Section 3.1 hereof of (a) a LIBOR Loan into a Base Rate Loan, or (b)
-----------
a Base Rate Loan into a LIBOR Loan.
"Default" means any event or condition which, with due notice or lapse of
-------
time or both, would become an Event of Default.
5
<PAGE>
"Deposit Account" of Borrower or any of its Subsidiaries means a controlled
---------------
cash collateral account of such Person maintained at Comerica Bank-California.
"Document" shall have the meaning provided in the Security Agreement.
--------
"EBITDA" means, for any period, Consolidated Net Income (Loss) for such
------
period plus all amounts deducted in determining such Consolidated Net Income
----
(Loss) on account of Consolidated Interest Expense, taxes based on or measured
by income, depreciation expense, amortization expense and other non-cash items
(including, without limitation, adjustments related to the write-up in the book
value of any assets arising out of the Transactions, to the extent such
adjustments are made pursuant to APB Nos. 16 and 17 and are deducted in
determining Consolidated Net Income (Loss) for such period, but exclusive of
extraordinary and non-recurring items), all as determined for Borrower and its
Subsidiaries on a consolidated basis in accordance with GAAP.
"Eligible Account" means each account receivable of Borrower or any of its
----------------
Subsidiaries:
(a) that arises out of the sale by Borrower or such Subsidiary of
Inventory in the ordinary course of its business to an Account Debtor
located within the United States of America (provided that in any
event accounts receivable of up to $500,000 at any one time
outstanding owed by Ammeraal Conveyor Belting, B.V. shall be permitted
to be Eligible Accounts to the extent that such accounts receivable
would otherwise qualify as Eligible Accounts pursuant to the other
requirements of this definition);
(b) that is the valid, binding and legally enforceable obligation of the
Account Debtor obligated thereon and such Account Debtor is not (i) an
Affiliate of Borrower or of any Subsidiary of Borrower, (ii) a
director, officer or employee of Borrower or of any Subsidiary or
Affiliate of Borrower, (iii) the United States of America or any
department, agency or instrumentality thereof (or any state or
municipality), (iv) a debtor under any proceeding under the United
States Bankruptcy Code or any other comparable bankruptcy or
insolvency law applicable under the law of any other country or
political subdivision thereof, or (v) an assignor for the benefit of
creditors;
(c) that is assignable and not evidenced by an instrument or chattel paper
unless the same has been endorsed and delivered to Agent;
(d) that is subject to a perfected, first priority Lien in favor of Agent,
and is free and clear of any other Lien other than Permitted Liens;
(e) that is net of any credit or allowance given by Borrower or such
Subsidiary to such Account Debtor;
(f) for which Borrower or such Subsidiary is not and will not become
liable to the Account Debtor for goods sold or services rendered by
such Account Debtor to Borrower or such Subsidiary;
(g) that is not subject to any asserted offset, counterclaim or other
defense with respect thereto, provided, however, that this clause (f)
-------- -------
shall not cause an account to fail to
6
<PAGE>
be an Eligible Account to the extent of the portion thereof, if any,
that is not subject to any asserted offset, counterclaim or other
defense;
(h) that is not unpaid more than 90 days after earlier of (x) the date of
the applicable invoice and (y) the date of shipment;
(i) that is not owed by an Account Debtor who is obligated on accounts
owed to Borrower and its Subsidiaries more than 25% of the aggregate
unpaid balance of which have been past due for longer than either of
the relevant periods specified in clause (h) above unless Agent has
approved expressly in writing the continued eligibility thereof;
(j) to the extent that it would not cause the total Eligible Accounts
owing from any one Account Debtor or its Affiliates to exceed 20% of
all Eligible Accounts owed to Borrower or any of its Subsidiaries; and
(k) that does not arise from a sale to an Account Debtor on a bill-and-
hold, guaranteed sale, sale-or-return, sale-on-approval, consignment
or any other repurchase or return basis.
"Eligible Inventory" means all finished goods and raw materials inventory
------------------
produced or procured pursuant to valid, binding and existing purchase orders
therefor and as to which Borrower or any of its Subsidiaries has title, provided
--------
that such inventory:
(a) is subject to a perfected, first priority Lien in favor of Agent, and
is free and clear of any other Lien other than Permitted Liens;
(b) is located at (1) the locations set forth on Schedule 6.10 or (2) such
-------------
other locations within the United States of America as are permitted
pursuant to this Agreement;
(c) is not so identified to a contract to sell that it constitutes an
Account;
(d) has not been acquired by Borrower or such Subsidiary on consignment
and has not been placed out on consignment by Borrower or such
Subsidiary; and
(e) is not obsolete or slow moving Inventory (including, without
limitation, Inventory of a type which has not had substantial sales
during the past twelve months or, in the case of any product
introduced within the past twelve months, since its date of
introduction), and is of good and merchantable quality free from any
defects which might adversely affect the market value thereof.
"Environmental Laws" means the Comprehensive Environmental Response,
------------------
Compensation and Liability Act, the Resource Conservation and Recovery Act, the
Emergency Planning and Community Right to Know Act, the Safe Drinking Water Act,
the Hazardous Materials Transportation Act, the Clean Air Act, the Clean Water
Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Noise Control
Act, Occupational Safety and Health Act, the Toxic Substances Control Act, any
so-called "Superfund" or "Superlien" law, any regulation promulgated under any
of the foregoing or any other Federal, state, or local statute, law, ordinance,
code, rule, regulation, order, decree, common law or other requirement of any
Governmental Body regulating, relating
7
<PAGE>
to or imposing liability or standards of conduct concerning the environment,
health and safety, siting, wetlands, coastal zone management, air emissions,
discharges to surface or ground water, discharges to any sewer or septic system,
noise emissions, solid waste disposal or any Hazardous Material, or the
generation, use, transportation or other management of Hazardous Materials, all
as now or at any time hereafter may be in effect.
"Environmental Matter" means any claim, investigation, notice letter,
--------------------
information request, litigation, administrative proceeding, cleanup or
remediation order, whether pending or, to the knowledge of Borrower, threatened,
or judgment or Order, relating to any Hazardous Materials, the release thereof,
or any Environmental Law.
"Equipment" shall have the meaning provided in the Security Agreement.
---------
"ERISA" means the Employee Retirement Income Security Act of 1974, as from
-----
time to time amended.
"ERISA Affiliate" means any corporation or other Person which is a member
---------------
of the same controlled group (within the meaning of Section 414(b) of the Code)
of corporations or other Persons as Borrower or any of its Subsidiaries, or
which is under common control (within the meaning of Section 414(c) of the Code)
with Borrower or any of its Subsidiaries, or any corporation or other Person
which is a member of an affiliated service group (within the meaning of Section
414(m) of the Code) with Borrower or any of its Subsidiaries, or any corporation
or other Person which is required to be aggregated with Borrower or any of its
Subsidiaries pursuant to Section 414(o) of the Code or the regulations
promulgated thereunder, to the extent effective.
"Event of Default" is defined in Section 8.1.
---------------- -----------
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
------------
any similar Federal statute then in effect, and a reference to a particular
section thereof shall include a reference to the comparable section, if any, of
any such similar Federal statute.
"Excluded Subsidiary" means (a) Summa International, Inc., a U.S. Virgin
-------------------
Islands corporation (the "FISC"), (b) Fullerton Holdings, Inc., a California
----
corporation, (c) Merger Sub, and (d) any other Person that may from time to
time be designated as an Excluded Subsidiary with the consent of Agent; provided
--------
any Excluded Subsidiary (other than the FISC, so long as the FISC owns no
material Property and conducts no material business operations) shall cease to
be an Excluded Subsidiary upon generating gross revenues of $250,000 or more in
any fiscal year, whereupon Borrower shall pledge its interest in such Subsidiary
to Agent pursuant to the Pledge Agreement and shall cause such Subsidiary to
execute and deliver the Security Agreement and the Subsidiary Guarantee.
"Exclusive Liens" means Liens encumbering Property of Borrower or any of
---------------
its Subsidiaries pursuant to documentation that prohibits the incurrence of any
other Liens on such Property, so identified on Schedule 6.8A and acceptable to
-------------
Agent and the Lenders.
"Fair Market Value" means the amount a willing buyer would pay to a willing
-----------------
seller for the assets in question, neither party being under compulsion to act
and both having reasonable knowledge of all relevant facts.
8
<PAGE>
"Funded Debt" of any Person means all items described in clauses (i),
-----------
(iii), (iv) and (vi) of the definition of "Indebtedness" set forth herein, and
all Guarantees of such Person in respect of any of such items.
"GAAP" means generally accepted accounting principles in the United States
----
of America in effect from time to time, applied on a consistent basis both as to
classification of items and amounts.
"General Intangibles" shall have the meaning provided in the Security
-------------------
Agreement.
"Governmental Body" means any Federal, state, county, city, town, village,
-----------------
municipal or other governmental department, commission, board, bureau, agency,
authority or instrumentality, domestic or foreign.
"Guarantee" means any guarantee or other contingent liability (other than
---------
any endorsement for collection or deposit in the ordinary course of business),
direct or indirect, with respect to any obligations of another Person, through
an agreement or otherwise, including, without limitation, (a) any other
endorsement or discount with recourse or undertaking substantially equivalent to
or having economic effect similar to a guarantee in respect of any such
obligations and (b) any agreement (i) to purchase, or to advance or supply funds
for the payment or purchase of, any such obligations, (ii) to purchase, sell or
lease Property, products, materials or supplies, or transportation or services,
in respect of enabling such other Person to pay any such obligation or to assure
the owner thereof against loss regardless of the delivery or nondelivery of the
Property, products, materials or supplies or transportation or services or (iii)
to make any loan, advance or capital contribution to or other investment in, or
to otherwise provide funds to or for, such other Person in respect of enabling
such Person to satisfy any obligation (including any liability for a dividend,
stock liquidation payment or expense) or to assure a minimum equity, working
capital or other balance sheet condition in respect of any such obligation. The
amount of any Guarantee shall be equal to the outstanding amount of the
obligations directly or indirectly guaranteed.
"Hazardous Material" and "Hazardous Materials" mean, and shall be deemed to
------------------ -------------------
refer to:
(1) any "hazardous substance" as defined in, or for purposes of, the
Comprehensive Environmental Response, Compensation and Liability Act,
42 U.S.C.A. (S)(S) 9601 & 9602, or any other so-called "superfund" or
"superlien" law and any judicial interpretation of any of the
foregoing;
(2) any "regulated substance" as defined pursuant to 40 C.F.R. Part 280;
(3) any "pollutant or contaminant" as defined in 42 U.S.C.A. (S) 9601(33);
(4) any "hazardous waste" as defined in, or for purposes of, the Resource
Conservation and Recovery Act;
(5) any "hazardous chemical" as defined in 29 C.F.R. Part 1910;
(6) any "hazardous material" as defined in, or for purposes of, the
Hazardous Materials Transportation Act; and
9
<PAGE>
(7) any other substance, regardless of physical form, or form of energy or
pathogenic agent that is subject to any other past, present or future
law or requirement of any Governmental Body regulating, relating to,
or imposing obligations, liability, or standards of conduct concerning
the protection of human health, plant life, animal life, natural
resources, Property or the reasonable enjoyment of life or Property
from the presence in the environment of any solid, liquid, gas, odor,
pathogen or form of energy, from whatever source.
Without limiting the generality of the foregoing, the term "Hazardous
Material" thus includes, but is not limited to, any material, waste or substance
that contains petroleum or any fraction thereof, asbestos, or polychlorinated
biphenyls, or that is flammable, explosive or radioactive.
"Indebtedness" means with respect to any Person, without duplication, (i)
------------
all indebtedness of such Person for borrowed money, (ii) any obligation incurred
for all or any part of the purchase price of Property or services, other than
accounts payable and accrued expenses included in current liabilities and
incurred in respect of Property or services purchased in the ordinary course of
business, (iii) indebtedness or obligations evidenced by bonds, debentures,
notes or similar written instruments, (iv) the face amount of all letters of
credit issued for the account of such Person and all drafts drawn thereunder,
(v) any obligation (whether or not such Person has assumed or become liable for
the payment of such obligation) secured by a Lien on any Property of such
Person, (vi) Capitalized Lease Obligations of such Person, (vii) all
indebtedness, contingent or otherwise, with respect to any interest rate
agreement, including without limitation any interest rate swap agreement,
interest rate cap agreement, interest rate collar agreement or other similar
agreement or arrangement designed to protect Borrower or its Subsidiaries
against fluctuations in interest rates, (viii) any indebtedness, contingent or
otherwise, under any foreign exchange contract, currency swap agreement or other
similar agreement or arrangement designed to protect Borrower or any of its
Subsidiaries against fluctuations in currency values, and (ix) all Guarantees of
such Person.
"Instrument" of any Person means any "instrument" of such Person, as such
----------
term is defined in Section 9105(1) (i) of the UCC, and shall include, without
limitation, any draft, check, certificate of deposit, note, bill of exchange,
security (including equity securities) or any other writing owned or held by
such person which evidences a right to the payment of money and is not itself a
security agreement or lease and is of a type which is transferred in the
ordinary course of business by delivery with any necessary endorsement or
assignment.
"Interest Period" means, with respect to any portion of the outstanding
---------------
principal of the Loans bearing interest from time to time with reference to
LIBOR, the period commencing on and including the date such principal is
advanced or is Converted from the Floating Rate to LIBOR, or the last day of
the immediately preceding Interest Period for such principal (if previously
bearing interest with reference to LIBOR), and ending on but excluding the 30th,
60th, 90th or 120th day thereafter; provided that if any Interest Period would
--------
end on a day that is not a Business Day, such Interest Period shall be extended
to the next day that is a Business Day (unless extending such Interest Period to
the next Business Day would cause the Interest Period to end in a different
calendar month, in which case the last day of such Interest Period shall be the
immediately preceding Business Day). In no event shall an Interest Period
extend beyond the Revolving Maturity Date; and if any Interest Period would
otherwise commence before and end after the Revolving Maturity Date, then the
LIBOR shall not be available hereunder for such period.
10
<PAGE>
"Inventory" of any Person means any "inventory" of such Person, as such
---------
term is defined in Section 9109 (4) of the UCC, and shall include, without
limitation, any and all goods owned or held by or for the account of such
Person, for sale or lease, or for furnishing under a contract of service, or as
raw materials, work in process, materials incorporated in or consumed in the
production, packaging, delivery or shipping of any of the foregoing, supplies,
and all property the sale, lease or other disposition of which has given rise to
Accounts and which has been returned to such Person or repossessed by such
Person or stopped in transit, all substitutions and replacements therefor and
all additions and accessions thereto; and all customer lists, ledgers, books of
account, records, computer programs, computer disks or tape files, computer
printouts, computer runs, and other computer prepared information relating to
any of the foregoing.
"Investment" means with respect to any Person, any investment of such
----------
Person so classified under GAAP, and, whether or not so classified, includes (a)
any loan or advance made by such Person to any other Person, (b) any Guarantee,
and (c) any ownership or similar interest in any other Person; and the amount of
any Investment shall be the original principal or capital amount thereof less
all cash returns of principal or equity thereof (and without adjustment by
reason of the financial condition of such other Person).
"LIBOR" means, with respect to any portion of the outstanding Loans for any
-----
Interest Period therefor, the offered rate per annum for deposits of Dollars for
a period equal to such Interest Period that appears on Telerate Page 3750 as of
11:00 A.M. (London, England time) two Business Days prior to the commencement of
such Interest Period. If no such offered rate exists, the rate in respect of
such Interest Period will be the rate of interest per annum, as determined by
Agent (rounded upwards, if necessary, to the nearest 1/16 of 1%) at which
deposits of Dollars in immediately available and freely transferable funds are
offered at 11:00 A.M. (London, England time) two Business Days prior to the
commencement of such Interest Period by major financial institutions reasonably
satisfactory to Agent in the London interbank market for a period equal to such
Interest Period and for an amount equal or comparable to such portion of the
principal amount of the Loans.
"LIBOR Rate" is defined in Section 3.1.
---------- -----------
"LIBOR Loan" is defined in Section 3.1.
---------- -----------
"Lien" means any security interest, mortgage, pledge, lien, claim, charge,
----
encumbrance, title retention agreement or lessor's interest under a Capitalized
Lease or analogous instrument.
"Loan" means each of the Revolving Loan, the Term Loan and the Purpose
----
Line, or any portion thereof, and "Loans" means all of such loans collectively.
-----
"Loan Documents" means this Agreement, the Notes, the Subsidiary
--------------
Guarantees, the Security Agreement, the Trademark Security Agreement, the Pledge
Agreement, the Mortgages and all other documents, instruments and agreements
(including financing statements and certificates executed and delivered from
time to time in connection with or pursuant to this Agreement).
"Material Adverse Effect" means any change or changes or effect or effects
-----------------------
that individually or in the aggregate are or are likely to be materially adverse
to (i) the assets, business, operations, income, prospects or condition
(financial or otherwise) of Borrower and its Subsidiaries taken as
11
<PAGE>
a whole, (ii) the Transactions, (iii) the ability of Borrower and its
Subsidiaries to perform its respective obligations under this Agreement, the
Notes, and the other Loan Documents to which they may be parties or (iv) the
validity or enforceability of any of the Loan Documents in any manner that would
impair the practical realization by Agent or the Lenders of their respective
rights, benefits or remedies under any thereof.
"Merger Sub" means Calnetics Acquisition Corp., a Delaware corporation
----------
newly formed by Borrower for the purpose of consummating the Acquisition.
"Mortgage" means a Mortgage substantially in the form of Exhibit F-1 or a
-------- -----------
Deed of Trust substantially in the form of Exhibit F-2 pursuant to which a Site
-----------
shall be pledged to Agent, for the benefit of the Lenders, as collateral for the
Obligations.
"Multiemployer Plan" means a multiemployer plan as defined in Section 3(37)
------------------
or Section 4001(a)(3) of ERISA or Section 414(f) of the Code contributed to by
Borrower or any of its ERISA Affiliates and which is subject to Title IV of
ERISA.
"Net Cash Proceeds" means, with respect to (a) an incurrence by Borrower or
-----------------
any of its Subsidiaries of any Indebtedness, (b) the issuance and sale by
Borrower or any of its Subsidiaries of any of its equity interests or (c) any
sale, lease, transfer or other voluntary or involuntary disposition of any
Property of Borrower or any of its Subsidiaries (other than sales of Inventory
in the ordinary course of business, but including, without limitation, a sale or
disposition of any capital stock of any Subsidiary, and any receipt of fire,
property, casualty or similar insurance proceeds or condemnation awards in
respect of such Property), the aggregate amount of cash consideration received
by Borrower or any of its Subsidiaries in connection with such transaction after
deduction of (a) all fees, costs and expenses directly incurred by Borrower or
such Subsidiary in connection therewith, including, without limitation,
underwriting discount, brokerage or selling commissions, if any, (b) taxes paid
or payable in connection with such transaction, (c) in the case of any sale,
lease, transfer or disposition of Property, the amount of Indebtedness secured
by such Property required to be repaid in connection with such transaction, (d)
in the case of any incurrence of Indebtedness for the purpose of refinancing any
existing Indebtedness, the amount of the existing Indebtedness being so
refinanced, and (e) the reasonable fees and disbursements of counsel paid by
Borrower or any of its Subsidiaries in connection therewith.
"Note" is defined in Section 2.2.
---- -----------
"Obligations" means all obligations (monetary or otherwise) of Borrower and
-----------
its Subsidiaries to Agent and the Lenders arising under or in connection with
this Agreement, the Notes and each other Loan Document; provided that the
--------
Obligations of any Subsidiary of Borrower shall be limited to the maximum amount
of such Subsidiary's liability under the Subsidiary Guarantee.
"Order" means any order, writ, injunction, decree, judgment, award,
-----
determination or written direction or demand of any court, arbitrator or
Governmental Body.
"Patent Security Agreement" means a Patent Security Agreement substantially
-------------------------
in the form of Exhibit J-1, made by Borrower or a Subsidiary of Borrower in
-----------
favor of Agent, for the benefit of the Lenders.
12
<PAGE>
"PBGC" means the Pension Benefit Guaranty Corporation, and any successor
----
agency or Governmental Body performing similar functions.
"Pension Plan" means an employee pension benefit plan, as defined in
------------
Section 3(2) of ERISA which is subject to Section 412 of the Code, Section 302
of ERISA or Title IV of ERISA, excluding a Multiemployer Plan, maintained by or
contributed to by Borrower or any of its ERISA Affiliates.
"Percentage" means, with respect to any Lender, the percentage of the
----------
aggregate Commitments of all Lenders represented by the Commitment of such
Lender.
"Permitted Investments" means, (i) marketable obligations issued or fully
---------------------
guaranteed by the United States of America or an instrumentality or agency
thereof maturing within 180 days after acquisition thereof, (ii) open market
commercial paper, maturing within 180 days after acquisition thereof, which has
the highest credit rating of either Standard & Poor's Corporation or Moody's
Investors Service, Inc., issued by a Person (other than Borrower or any of its
Subsidiaries or Affiliates) organized under the laws of any State of the United
States of America or of the District of Columbia, and (iii) certificates of
deposit or bankers acceptances or other obligations maturing within 180 days
after acquisition thereof issued by a domestic commercial bank which is a member
of the Federal Reserve System and has capital and surplus and undivided profits
in excess of $500,000,000.
"Permitted Liens" is defined in Section 7.8.
--------------- -----------
"Person" means any natural person, corporation, partnership, firm,
------
association, trust, government, governmental agency or any other entity, whether
acting in an individual, fiduciary or other capacity.
"Pledge Agreement" means a pledge agreement substantially in the form of
----------------
Exhibit G, pursuant to which Borrower or a Subsidiary pledges to Agent, for the
- ---------
benefit of the Lenders, all of such Person's ownership interests in each of its
Subsidiaries (other than Excluded Subsidiaries).
"Property" means, with respect to any Person, any interest of such Person
--------
in any kind of property or asset, whether real, personal, or mixed, tangible or
intangible.
"Purpose Line" is defined in Section 2.3.
------------ -----------
"Purpose Note(s)" is defined in Section 2.3.
--------------- -----------
"Required Lenders" means, as of any date of determination, Lenders holding
----------------
Commitments comprising 66 2/3% or more of the aggregate Commitments of all of
the Lenders.
"Restricted Payment" means, with respect to any Person,
------------------
(a) the declaration or payment of any dividend or other distribution on,
or the incurrence of any liability to make any other payment in respect of,
capital stock or other equity interest of such Person (other than one payable
solely in the same class of capital stock of such Person),
13
<PAGE>
(b) any payment or distribution on account of the purchase, redemption,
defeasance (including in-substance or legal defeasance) or other retirement of
any capital stock of such Person, or of any warrant, option or other right to
acquire such capital stock, or any other payment or distribution made in respect
thereof, and
(c) any payment or distribution by such Person on account of the principal
of or prepayment charge, if any, or interest or other amounts, with respect to
any Indebtedness of Borrower or any of its Subsidiaries which is subordinated
and subject in right of payment to the prior payment of the Obligations.
The amount of any Restricted Payment made in the form of Property shall be
deemed to be the Fair Market Value of such Property as of the date of such
payment.
"Revolving Commitment Limit" is defined in Section 2.1.
-------------------------- -----------
"Revolving Loan" is defined in Section 2.1.
-------------- -----------
"Revolving Maturity Date" is defined in Section 2.1.
----------------------- -----------
"Revolving Note" is defined in Section 2.1.
-------------- -----------
"SEC" means the United States Securities and Exchange Commission and any
---
other agency or Governmental Body that may hereafter succeed to the functions
thereof.
"Securities Act" means as of any date the Securities Act of 1933, as
--------------
amended, or any similar Federal statute then in effect, and a reference to a
particular section thereof shall include a reference to the comparable section,
if any, of any such similar Federal statute.
"Security Agreement" means the Security Agreement executed and delivered by
------------------
Borrower and each of its Subsidiaries (other than Excluded Subsidiaries) in
favor of Agent, for the benefit of the Lenders, substantially in the form of
Exhibit I.
- ---------
"Senior Debt" means all outstanding Funded Debt of Borrower and its
-----------
Subsidiaries, less the principal amount of any such Funded Debt which is
----
expressly subordinated to the payment of the Obligations.
"Site" means (a) 10163 U.S. 31 North, Charlevoix, Michigan, (b) One Gum
----
Branch Road, Dickson, Tennessee, and (c) each other parcel of real property
hereafter required to be made subject to a Mortgage pursuant to Section 7.21.
------------
"Solvent" means, when used with respect to any Person, that (A) the fair
-------
value of the property of such Person is greater than the total amount of
liabilities (including, without limitation, contingent liabilities) of such
Person, (B) the present fair salable value of the assets of such Person is not
less than the amount that will be required to pay the probable liabilities of
such Person on its debts as they become absolute and matured, (C) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature, and (D) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person's
property would constitute unreasonably small capital. For such purposes, any
contingent liability (including, without limitation,
14
<PAGE>
pending litigation, Guarantees, pension plan liabilities and claims for federal,
state, local and foreign taxes, if any) is valued at the amount that, in light
of all the facts and circumstances existing at such time, represents the amount
that can reasonably be expected to become an actual or matured liability.
"Subsidiary" means as to any Person (a) a corporation of which outstanding
----------
shares of stock having ordinary voting power (other than stock having such power
only by reason of the happening of a contingency) to elect a majority of the
Board of Directors of such corporation are at the time owned, directly or
indirectly through one or more intermediaries, or both, by such Person and (b)
any partnership, association, joint venture or other business entity the
controlling interest of which is at the time owned, directly or indirectly
through one or more intermediaries, or both, by such Person.
"Subsidiary Guarantee" means the guaranty executed and delivered by the
--------------------
Subsidiaries of Borrower (other than Excluded Subsidiaries) in favor of Agent,
for the benefit of the Lenders, substantially in the form of Exhibit H.
---------
"Tangible Net Worth" means the consolidated net worth of Borrower and its
------------------
Subsidiaries after subtracting therefrom the aggregate amount of any intangible
assets of Borrower and its Subsidiaries, including goodwill, franchises,
licenses, patents, trademarks, trade names, copyrights, service marks and brand
names.
"Term Loan" is defined in Section 2.2.
--------- -----------
"Term Note" is defined in Section 2.2.
--------- -----------
"Trademark Security Agreement" means a Trademark Security Agreement
----------------------------
substantially in the form of Exhibit J-2, made by Borrower or a Subsidiary of
-----------
Borrower in favor of Agent, for the benefit of the Lenders.
"Transactions" means the Acquisition, the Loans to be made on the Closing
------------
Date, and the other actions to be taken and documents to be delivered on or
prior to the Closing Date as contemplated by this Agreement and the other Loan
Documents.
"UCC" means the Uniform Commercial Code as the same may, from time to time,
---
be in effect in the State of California; provided, however, in the event that,
by reason of mandatory provisions of law, any or all of the attachment,
perfection or priority of Agent's security interest in any Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of California, the term "UCC" means the Uniform Commercial Code
as in effect in such other jurisdiction for purposes of the provisions hereof
relating to such attachment, perfection or priority and for purposes of
definitions related to such provisions.
2. CREDIT FACILITIES. Lenders shall provide the following credit facilities
-----------------
to Borrower (the Revolving Loan and the Term Loan defined below are sometimes
referred to collectively as the "Facilities" and individually as a "Facility"):
---------- --------
2.1 Revolving Loan. Lenders agree to make available to Borrower a
--------------
revolving line of credit (the "Revolving Loan") in the maximum principal amount
--------------
outstanding at any one time of
15
<PAGE>
FIFTEEN MILLION Dollars ($15,000,000) (the "Revolving Commitment Limit"), which
--------------------------
Revolving Loan shall be evidenced by one or more Revolving Notes, each
substantially in the form of Exhibit A hereto (each, a "Revolving Note" and
--------- --------------
collectively the "Revolving Notes"). Each Revolving Note shall be registered in
---------------
the name of a Lender and shall have a maximum principal amount equal to such
Lender's Commitment. The Revolving Loan shall mature and be payable in full on
the third anniversary of the Closing Date (the "Revolving Maturity Date").
-----------------------
Borrower may from time to time repay all or a portion of the amounts outstanding
under the Revolving Loan (together with accrued interest to the date of
repayment on the principal amount so repaid), which amounts may be re-borrowed
(subject to the Revolving Commitment Limit and the Available Amount) so long as
the Commitment of the Lenders to make Advances under the Revolving Loan has not
been terminated. With respect to each disbursement of funds under the Revolving
Loan (an "Advance"), each Lender is hereby authorized to record, on its books
-------
and records, the date and amount of such Advance, the duration of each Interest
Period therefor and the interest rate applicable to such Interest Period. The
information so recorded by each Lender shall be conclusive in the absence of
manifest error. Notwithstanding the foregoing, the failure by any Lender to
record any such information shall not impair the liability of Borrower to make
any payment of the Obligations when due.
2.2 Term Loan. Lenders agree to provide Borrower with a term loan (the
---------
"Term Loan") in the principal amount of up to THIRTEEN MILLION FIVE HUNDRED
- ----------
THOUSAND Dollars ($13,500,000) (the "Term Commitment Limit"), which Term Loan
---------------------
shall be evidenced by one or more Term Notes, each substantially in the form of
Exhibit B hereto (each a "Term Note" and collectively the "Term Notes").
- --------- --------- ----------
Subject to the terms and conditions of this Agreement, the Term Loan shall be
disbursed at the closing of the Acquisition. In no event may Borrower re-borrow
any principal portion of the Term Loan that has been repaid. The Term Loan
proceeds shall be applied to pay the purchase price under the Acquisition
Agreement. Principal shall be payable as provided in Section 3.3, and interest
-----------
shall be payable concurrently with principal. At its option, Borrower may from
time to time prepay all or any portion of the outstanding principal of the Term
Loan, together with accrued interest on the principal being so prepaid and any
amount payable pursuant to Section 3.7. Borrower shall be entitled to designate
-----------
the scheduled principal payments to which any partial voluntary prepayment under
the Term Loan is to be applied; in such event Borrower shall pay accrued
interest on the outstanding principal of the Term Loan on the payment dates when
such prepaid principal payments would otherwise have been due.
2.3 Purpose Line. Lenders agree to provide Borrower with a non-revolving
------------
specific advance facility (the "Purpose Line") in a principal amount of FIVE
------------
MILLION DOLLARS ($5,000,000) (the "Purpose Line Commitment"). No loan funds
-----------------------
shall be available for disbursement pursuant to the Purpose Line following the
third (3rd) anniversary of the Closing Date, at which time the Purpose Line
Commitment shall terminate as to any future Loans thereunder. Each loan
advanced under the Purpose Line shall be evidenced by one or more Purpose Notes,
each substantially in the form of Exhibit C hereto (each a "Purpose Note" and
--------- ------------
collectively the "Purpose Notes"). In no event may Borrower re-borrow any
-------------
principal portion of the Purpose Line that has been repaid. Borrower may
request a loan of up to $1,000,000 under the Purpose Line on the Closing Date to
provide funds to close the Acquisition, and the balance of funds available under
the Purpose Line may be used to finance up to 90% of the purchase price of new
equipment, up to 80% of the purchase price of used equipment and up to 90% for
the acquisition of other businesses, each of which shall be subject to the prior
approval of Agent. Principal of each loan made pursuant to the Purpose Line
shall be repaid as provided in Section 3.3. In addition, at its option,
-----------
Borrower may from time to time prepay all or any portion of the outstanding
principal under
16
<PAGE>
the Purpose Line, together with accrued interest on the principal being so
prepaid and any amount payable pursuant to Section 3.7.
-----------
2.4 Borrowing Procedure. Borrower may request an Advance pursuant to
-------------------
written notice or pursuant to telephonic notice confirmed in writing or by
facsimile (each a "Borrowing Request"). Each Borrowing Request shall be made not
-----------------
later than the last Business Day immediately preceding the date of the requested
Advance, and shall specify the date and amount of the requested Advance, the
Interest Period therefor, and whether such Advance is to bear interest with
reference to LIBOR or the Floating Rate for such Interest Period. All Borrowing
Requests and confirmations thereof in writing or by facsimile must be signed by
an officer of Borrower who has been identified in writing to Agent as an officer
authorized to make Borrowing Requests on behalf of Borrower. Notwithstanding the
foregoing, in the case of the Purpose Line, Borrowing Requests shall be
accompanied by sufficient documentation for Agent and the Lenders to evaluate
the assets or business the Borrower proposes to acquire with the proceeds of the
requested loan, including any applicable purchase orders, equipment
specifications and acquisition agreements, and such Borrowing Requests and
documentation shall be delivered sufficiently in advance of the proposed date of
disbursement to permit Agent and the Lenders to evaluate the acquisition to be
financed by the requested loan.
2.5 Lenders' Records. With respect to each Loan, each Lender is hereby
----------------
authorized to note the date, principal amount, interest rate and Interest Period
(if any) applicable thereto and any payments made thereon on its books and
records (either manually or by electronic entry) and/or on any schedule attached
to the applicable Note, which notations shall be conclusive evidence of the
information noted, in the absence of manifest error.
2.6 Commitment Fee. As a commitment fee for underwriting the Facilities
--------------
provided hereunder, Borrower shall pay to Agent, for the benefit of Comerica
Bank-California, the sum of $90,000 at or prior to Closing.
2.7 Voluntary Commitment Reductions. Upon three (3) Business Days' prior
-------------------------------
written notice to Agent, Borrower may from time to time, on any Business Day,
effect a permanent reduction of the Revolving Commitment Limit; provided,
--------
however, that
- -------
(i) to the extent that the outstanding Revolving Loan would exceed
the Available Amount after giving effect to the requested reduction,
Borrower shall, concurrently with the reduction of the Revolving Commitment
Limit, make a prepayment of the Revolving Loan in an amount sufficient to
cause Borrower to be in compliance with the Available Amount after giving
effect to such reduction; and
(ii) each such reduction in the Total Commitment shall be in an
aggregate minimum amount of $500,000 and an integral multiple of $25,000.
Each reduction of the Revolving Commitment Limit shall reduce, pro-rata, the
Lenders' respective portions of the Revolving Commitment Limit.
17
<PAGE>
3. PAYMENTS OF PRINCIPAL, INTEREST AND OTHER AMOUNTS.
-------------------------------------------------
3.1 Interest. Amounts outstanding under the Loans shall bear interest
--------
based at the rate per annum equal to the sum of the Base Rate from time to time
plus the Applicable Base Rate Margin (the "Floating Rate") or, at Borrower's
-------------
election subject to the following provisions of this Section 3.1, at the rate
-----------
per annum equal to the sum of LIBOR plus the Applicable LIBOR Margin (the "LIBOR
-----
Rate"); provided, that following the occurrence of an Event of Default, all
- ---- --------
amounts outstanding under each Facility shall, at the option of Agent, bear
interest at the rate per annum equal to the sum of the Floating Rate then
applicable to such Facility plus 3%. A portion of principal outstanding
hereunder bearing interest at the Floating Rate shall be referred to as a
"Floating Rate Loan"; and a portion of principal outstanding hereunder bearing
------------------
interest at the LIBOR Rate shall be referred to as a "LIBOR Loan". With respect
----------
to any LIBOR Loan, Borrower may, at the end of the applicable Interest Period
(or, subject to Section 3.7, on any other Business Day), convert such loan to a
-----------
Floating Rate Loan. Borrower may at any time convert a Floating Rate Loan into
a LIBOR Loan. At the time any advance is requested under a Facility, and/or
Borrower wishes to have the LIBOR Rate apply to all or a portion of the
outstanding principal of the Loans, and at the end of each Interest Period,
Borrower shall give Agent notice specifying (i) the interest rate option
selected by Borrower, (ii) the principal amount to be subject to such interest
rate, and (iii) if the LIBOR Rate is selected, the length of the applicable
Interest Period. Any such notice may be given by telephone so long as, in the
case of LIBOR Loans, (x) Agent received written confirmation of such telephonic
notice not later than three (3) Business Days after such telephonic notice is
given, and (y) such notice is given to Agent prior to 10:00 a.m., California
time, on the first day of the requested Interest Period. Notwithstanding the
foregoing, Borrower may only request the LIBOR Rate with respect to the
Revolving Loan, and only for amounts of principal that are at least $500,000 in
the aggregate and integral multiples of $100,000. If, upon any request to have
the LIBOR Rate apply to any portion of the Loans, Borrower does not immediately
accept the LIBOR Rate quoted by Agent, any subsequent acceptance by Borrower
shall be subject to a redetermination of the LIBOR Rate by Agent; provided that
--------
if Borrower fails to accept any such quotation as given, then the quoted rate
shall expire and Agent shall be under no obligation to permit Borrower to select
the LIBOR Rate on such day. With respect to any portion of the Loans for which
the LIBOR Rate has not been duly selected in accordance with the foregoing
provisions of this Section 3.1, Borrower will be deemed to have selected the
-----------
Floating Rate. Each portion of the Loans bearing interest at the LIBOR Rate
must remain outstanding for the Interest Period selected for such portion of the
Loans by Borrower.
3.2 Interest Payments and Computations. Accrued interest on all
----------------------------------
outstanding Loans shall be due and payable on the last Business Day of each
month. Interest on LIBOR Loans shall be computed on the basis of a 360-day year
and shall be assessed for the actual number of days elapsed from the first day
of the applicable Interest Period, but excluding the last day of such period.
Interest on each Floating Rate Loan shall be computed on the basis of a 360-day
year and shall be assessed for the actual number of days elapsed.
3.3 Principal Payments. The outstanding principal of the Loans shall be
------------------
payable as follows:
(a) The principal of the Term Loan shall be payable in monthly
installments as follows:
Closing through October 31, 1998,
18
<PAGE>
commencing November 30, 1997: 12 installments of $83,333.33
through October 31, 2003: 60 installments of $166,666.66
through October 31, 2004: 12 installments of $208,333.33
The Term Loan shall mature and be payable in full on October 31, 2004.
(b) The outstanding principal of the Revolving Loan shall be payable
in full on the Revolving Maturity Date.
(c) The outstanding principal of each loan under the Purpose Line
will be amortized and repayable over a period of seven (7) years from the date
of disbursement thereof in substantially equal monthly installments plus
interest; provided, that the loan of up to $1,000,000 disbursed on the Closing
--------
Date to finance Acquisition closing costs (as contemplated by Section 2.3) shall
-----------
mature one year from the Closing Date and shall provide for monthly payments
consisting solely of accrued interest until full repayment.
(d) Not later than 30 days prior to each date on which Borrower or
any of its Subsidiaries is to receive any Net Cash Proceeds (or promptly upon
becoming aware that any Net Cash Proceeds are to be received, if less than 30
days prior to the anticipated date of receipt), Borrower shall deliver to Agent
an officer's certificate setting forth in reasonable detail a description of the
transaction or event generating such Net Cash Proceeds, and stating the date
such transaction or event is expected to occur and the amount of the Net Cash
Proceeds expected to be received by Borrower or any of its Subsidiaries in
connection therewith. All Net Cash Proceeds received by Borrower and its
Subsidiaries in excess of $250,000 in the aggregate in any fiscal year (or, in
the case of Net Cash Proceeds derived from the issuance or sale by Borrower of
any of its equity interests or any issuance of indebtedness which is subordinate
to the Obligations on terms and conditions satisfactory to Agent, 50% of such
excess Net Cash Proceeds) shall be paid, immediately upon receipt thereof, to
Agent (for the benefit of the Lenders as hereinafter provided) in immediately
available funds, together with unpaid interest accrued on such amount to the
date of such payment but without prepayment charge or premium, unless prior to
------
the actual receipt by Borrower or the applicable Subsidiary of such Net Cash
Proceeds, Agent (at the direction of Lenders holding at least 66 2/3% of the
Term Commitment Limit and the Purpose Line Commitment) delivers a written notice
to Borrower declining to accept such Net Cash Proceeds. Notwithstanding the
foregoing, in the case of any Net Cash Proceeds consisting of insurance proceeds
or condemnation awards, Borrower and its Subsidiaries shall have the option
(exercisable by written notice to Agent delivered concurrently with the notice
required by the first sentence of this subsection (d) (A) to replace the
--------------
Property in respect of which such Net Cash Proceeds were received or to purchase
other Property to be used in the ordinary course of Borrower's or such
Subsidiary's business or (B) to repair or restore such Property or other
Property used in the ordinary course of Borrower's business; provided, that (1)
--------
to the extent that Borrower so elects to restore or repair Property, it shall
commence such repairs or restoration promptly upon the receipt of Net Cash
Proceeds and shall diligently pursue at all times thereafter such repair or
restoration, which shall be completed not more than 180 days following the date
of receipt thereof, (2) pending the application of any such Net Cash Proceeds
pursuant to clause (A) or (B) of this sentence, any amounts to be so applied
shall be retained in the Deposit Account and invested solely in Permitted
Investments, and (3) any portion of such Net Cash Proceeds that is not to be so
applied shall be paid to Agent in accordance with the second sentence of this
subsection (d). All Net Cash Proceeds paid to Agent as herein provided shall be
- --------------
applied first to repay the outstanding Term Loan, ratably among the Lenders in
-----
accordance with their respective portions of the Term
19
<PAGE>
Commitment Limit and second to repay the outstanding loans under the Purpose
------
Line, ratably among the Lenders in accordance with their respective portions of
the Purpose Line Commitment.
(e) Not later than 30 days following the first to occur of (i) the
delivery of Borrower's audited financial statements pursuant to Section
-------
7.1(B)(1), and (ii) the date by which such audited financial statements were
- ---------
required to be delivered pursuant to Section 7.1(B)(1), Borrower shall tender to
-----------------
Agent, for the ratable benefit of the Lenders in accordance with their
respective portions of the Term Commitment Limit, prepayment of the Term Loan in
an amount equal to 50% of the sum of Borrower's annual Consolidated Net Income
plus depreciation and amortization less the current portion of long term debt
- ---- ----
(which for these purposes will include all scheduled installments of long term
debt that would otherwise be treated as "current portions" under GAAP as of the
date of determination, regardless of whether any such installments have been
prepaid) and Capital Expenditures incurred but not financed during the
applicable period, all calculated excluding any accounting items in respect of
Net Cash Proceeds received during the most recently ended fiscal year that were
applied in accordance with Section 3.3(d). Such prepayment shall be applied
--------------
against the remaining installments of the Term Loan on a pro-rata basis based
upon the number and amounts of such installments.
(f) Anything herein to the contrary notwithstanding, the aggregate
outstanding principal amount of the Revolving Loan shall not at any time exceed
the Available Amount as from time to time determined (in accordance with the
most recently delivered Borrowing Base Certificate), and no Advance may be
requested unless after giving effect thereto Borrower is in compliance with
foregoing requirement. In the event that the aggregate outstanding principal
amount of the Revolving Loan shall at any time and for any reason (including,
without limitation, a decrease in the amount of the Borrowing Base) exceed the
Available Amount then in effect, Borrower shall, without notice or demand, pay
not later than the Business Day after the date such excess is determined the
amount of such excess to Agent as a prepayment of the principal amount of the
Revolving Loan, together with all unpaid interest accrued on the amount of such
excess to such date but without prepayment charge or premium. Upon any
determination by Borrower that a prepayment of the Revolving Loan is required
pursuant to this Section 3.3(f), Borrower shall immediately notify Agent in
--------------
writing of such determination, specifying the amounts of principal and interest
required to be prepaid hereunder and the date on which such prepayment will
occur.
3.4 LIBOR Lending Unlawful. If any Lender shall determine (which
----------------------
determination shall, upon notice thereof to Borrower and Agent, be conclusive
and binding on Borrower) that the introduction of or any change in or in the
interpretation of any law makes it unlawful, or any central bank or other
Governmental Body asserts that it is unlawful, for such Lender to make, continue
or maintain any loan as, or to convert any loan into, a LIBOR Loan, the
obligations of such Lender to make, continue, maintain or convert any such loans
shall, upon such determination, forthwith be suspended until Lender shall notify
Borrower and Agent that the circumstances causing such suspension no longer
exist, and all LIBOR Loans shall automatically convert into Floating Rate Loans
at the end of the then current Interest Periods with respect thereto or sooner,
if required by such law or assertion.
3.5 Deposits Unavailable. If any Lender shall have determined that by
--------------------
reason of circumstances affecting such Lender's relevant market, adequate means
do not exist for ascertaining the interest rate applicable hereunder to LIBOR
Loans, then, upon notice from such Lender to Borrower, the obligations of such
Lender to make or continue any loans as, or to convert
20
<PAGE>
any loans into, LIBOR Loans shall forthwith be suspended until such Lender shall
notify Borrower and Agent that the circumstances causing such suspension no
longer exist.
3.6 Increased LIBOR Loan Costs, etc. Borrower agrees to reimburse each
-------------------------------
Lender for any increase in the cost to such Lender (by reason of the
introduction of or any change in or in the interpretation of any law) of, or any
reduction in the amount of any sum receivable by such Lender in respect of,
making, continuing or maintaining (or of its obligation to make, continue or
maintain) any loans as, or of converting (or of its obligation to convert) any
loans into, LIBOR Loans. Each Lender shall promptly notify Borrower and Agent
in writing of the occurrence of any such event, such notice to state, in
reasonable detail, the reasons therefor and the additional amount required fully
to compensate such Lender for such increased cost or reduced amount. Such
additional amounts shall be payable by Borrower directly to such Lender within
five days of its receipt of such notice, and such notice shall, in the absence
of manifest error, be conclusive and binding on Borrower.
3.7 Funding Losses. In the event that any Lender shall incur any loss or
--------------
expense (including any loss or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by such Lender to make,
continue or maintain any portion of the principal amount of any loan as, or to
convert any portion of the principal amount of any loan into, a LIBOR Loan) as a
result of (a) any conversion or repayment or prepayment of the principal amount
of any LIBOR Loan on a date other than the scheduled last day of the Interest
Period applicable thereto, for any reason, or (b) any loans not being made as
LIBOR Loans in accordance with Borrower's request therefor; then, upon the
written notice of such Lender to Borrower and Agent, Borrower shall, within five
days of its receipt thereof, pay directly to such Lender such amount as will (in
such Lender's reasonable determination) reimburse such Lender for such loss or
expense. Such written notice (which shall include calculations in reasonable
detail) shall, in the absence of manifest error, be conclusive and binding on
Borrower.
4. SECURITY FOR OBLIGATIONS.
------------------------
4.1 Security Interest. As collateral security for the prompt and complete
-----------------
payment and performance when due (whether at stated maturity, by acceleration or
otherwise) of all the Obligations, Borrower and each of its Subsidiaries shall
assign, convey, mortgage, pledge, hypothecate and transfer to Agent, for the
benefit of the Lenders, a security interest in all of the Collateral (and all of
each such Person's interest in any Site), all as more specifically provided in
the Security Agreement, the Pledge Agreement, the Trademark Security Agreements
and the Mortgages.
4.2 Agent as Attorney-in-Fact.
-------------------------
(a) Borrower hereby irrevocably constitutes and appoints Agent and
any officer or agent thereof, with full power of substitution, as its true and
lawful attorney-in-fact with full irrevocable power and authority in the place
and stead of Borrower and in the name of Borrower or in its own name, from time
to time in Agent's discretion, for the purpose of carrying out the terms of this
Agreement, without notice to or assent by Borrower, upon the occurrence and
during the continuance of an Event of Default:
21
<PAGE>
(i) to ask, demand, collect, receive and give acquittances and
receipts for any and all moneys due and to become due under any Collateral
and, in the name of Borrower or its own name or otherwise, to take
possession of and endorse and collect any checks, drafts, notes,
acceptances or other Instruments for the payment of moneys due under any
Collateral and to file any claim or to take any other action or proceeding
in any court of law or equity or otherwise deemed appropriate by Borrower
for the purpose of collecting any and all such moneys due under any
Collateral whenever payable;
(ii) to pay or discharge taxes or Liens levied or placed on or
threatened against the Collateral, to effect any repairs or any insurance
called for by the terms of this Agreement and to pay all or any part of the
premiums therefor and the costs thereof;
(iii) (A) to direct any party liable for any payment under any of the
Collateral to make payment of any and all moneys due, and to become due
thereunder, directly to Agent or as Agent shall direct; (B) to receive
payment of and receipt for any and all moneys, claims and other amounts
due, and to become due at any time, in respect of or arising out of any
Collateral; (C) to sign and endorse any invoices, freight or express bills,
bills of lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications and notices in connection with Accounts and
other Documents constituting or relating to the Collateral; (D) to settle
and adjust any claims under all policies of insurance covering the
Collateral; (E) to commence and prosecute any suits, actions or proceedings
at law or in equity in any court of competent jurisdiction to collect the
Collateral or any part thereof and to enforce any other right in respect of
any Collateral; (F) to defend any suit, action or proceeding brought
against Borrower with respect to any Collateral; (G) to settle, compromise
or adjust any suit, action or proceeding described above and, in connection
therewith, to give such discharges or releases as Agent may deem
appropriate; (H) to license or, to the extent permitted by an applicable
license, sublicense, whether general, special or otherwise, and whether on
an exclusive or non-exclusive basis, any patent, copyright or trademark,
throughout the world for such term or terms, on such conditions, and in
such manner, as Agent shall in its sole discretion determine; (I) to
receive and open Borrower's mail, and to appropriate therefrom any payment
in respect of Accounts or otherwise constituting Collateral and apply the
same to the Obligations (in furtherance of which Agent shall be entitled to
direct any party, including the U.S. Postal Service, to send Borrower's
mail to Agent) and (K) generally to sell, transfer, pledge, make any
agreement with respect or otherwise deal with any of the Collateral as
fully and completely as though Agent were the absolute owner thereof for
all purposes, and to do, at Agent's option, at any time, or from time to
time, all acts and things which Agent reasonably deems necessary to
protect, preserve or realize upon the Collateral and Agent's Lien therein,
in order to effect the intent of this Agreement, all as fully and
effectively as Borrower might do; and
(iv) to take any and all other appropriate action and to execute and
deliver any and all documents and instruments which may be necessary or
desirable to accomplish the purposes of this Agreement.
(b) Borrower hereby ratifies, to the extent permitted by law, all
that said attorneys shall lawfully do or cause to be done by virtue hereof. The
power of attorney granted pursuant to this Section 4.3 is a power coupled with
-----------
an interest and shall be irrevocable until the Obligations are indefeasibly paid
in full.
22
<PAGE>
(c) The powers conferred on Agent hereunder are solely to protect
Agent's interests in the Collateral and shall not impose any duty upon Agent to
exercise any such powers. Agent shall be accountable only for amounts that it
actually receives as a result of the exercise of such powers and neither it nor
any of its officers, directors, employees or agents shall be responsible to
Borrower for any act or failure to act, except for its or their respective gross
negligence or willful misconduct and for failure to exercise reasonable care
with respect to any Collateral under its or their respective possession or
control.
(d) Borrower also authorizes Agent, at any time and from time to time
upon the occurrence and during the continuation of any Event of Default, (i) to
communicate in its own name with any party to any Contract with regard to the
assignment of the right, title and interest of Borrower in and under the
Contracts hereunder and other matters relating thereto and (ii) to execute, in
connection with the sale provided for in Section 8.3, any endorsements,
-----------
assignments or other instruments of conveyance or transfer with respect to the
Collateral.
4.3 Performance of Borrower's Obligations. If Borrower fails to perform
-------------------------------------
or comply with any of its agreements contained herein and Agent, as provided for
by the terms of this Agreement, shall itself perform or comply, or otherwise
cause performance or compliance, with such agreement, the reasonable expenses of
Agent incurred in connection with such performance or compliance, together with
interest thereon at the rate then in effect in respect of the Loans, shall be
payable by Borrower to Agent on demand and shall constitute Obligations secured
hereby.
5. CONDITIONS PRECEDENT.
--------------------
5.1 Initial Borrowing. The obligation of Lenders to disburse the Term
-----------------
Loan, to make the initial loan under the Purpose Line and to make the initial
Advance under the Revolving Loan is subject to the fulfillment, to the
satisfaction of Agent, Lenders and their counsel, of each of the following
conditions:
(a) Proceedings Satisfactory. All corporate and other proceedings
------------------------
taken or to be taken in connection with the transactions contemplated hereby and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Agent and its counsel, and Lenders and their counsel shall have
received all such counterpart originals or certified or other copies of such
documents as they may reasonably request.
(b) Delivery of Notes. There shall have been delivered to each Lender
-----------------
such Lender's respective Term Note, Purpose Note and Revolving Note, each duly
executed by Borrower and dated the Closing Date, in the respective principal
amounts, having the required maturity date and as otherwise provided herein.
(c) Opinion of Borrower's Counsel. Agent and the Lenders shall have
-----------------------------
received from Morrison & Foerster and Phillips & Haddan, LLP, counsel for
Borrower and its Subsidiaries, legal opinions addressed to Agent and the Lenders
and dated the Closing Date substantially to the effect of the matters set forth
in Exhibit D. Agent and the Lenders shall also have received such opinions of
---------
local or special counsel as they may reasonably request. In addition, Agent
shall have received a reliance letter from counsel to Target, authorizing Agent
and the Lenders to rely upon the opinion being rendered by such counsel in
connection with the Acquisition.
23
<PAGE>
(d) Initial Borrowing Base Certificate. At least two Business Days
----------------------------------
prior to the Closing Date, Borrower shall have delivered to Agent a duly
completed and executed Borrowing Base Certificate and Accounts Trial Balance as
at August 31, 1997, satisfactory in form and substance to Agent. In addition,
Borrower shall have delivered to Agent an opening balance sheet of Borrower,
prepared by the Accountants on a pro forma basis giving effect to the
Transactions.
(e) Representations and Warranties True, Etc.; Certificates. The
-------------------------------------------------------
representations and warranties contained in Section 6 and elsewhere in this
---------
Agreement and the representations and warranties contained in the other Loan
Documents shall be true in all material respects on and as of the Closing Date
with the same effect as if such representations and warranties had been made on
and as of the Closing Date, except that any such representation or warranty
which is expressly made only as of a specified date need be true only as of such
date. Borrower and its Subsidiaries shall have performed all material agreements
on their part required to be performed under this Agreement and the other Loan
Documents on or prior to the Closing Date; there shall exist on the Closing Date
no Default or Event of Default; Borrower shall have delivered to Agent an
officer's certificate, dated the Closing Date, to such effect and to the effects
specified in subsections (f), (h) and (i) below, inclusive; and Agent shall have
received such certificates or other evidence as Agent may request to establish
that the proceeds of the Loans made on the Closing Date will be applied as
contemplated by this Agreement.
(f) Acquisition Agreement. The Acquisition Agreement shall have been
---------------------
duly executed and delivered by the respective parties thereto and shall be in
full force and effect. All of the material terms, conditions and provisions
thereof shall be satisfactory to Agent, Lenders and their counsel in all
respects in form and substance and no material term, condition or provision
thereof shall have been supplemented, amended, modified or waived without
Agent's prior written consent. Agent shall have received a copy of the
Acquisition Agreement (including any and all amendments, modifications and
supplements thereto to and including the Closing Date), certified by a duly
authorized officer of Borrower as true, correct and complete.
(g) Acquisition and Other Transactions. Concurrently with the
----------------------------------
disbursement of the Term Loan and the initial disbursements under the Revolving
Loan and the Purpose Line, the Acquisition shall have been duly consummated in
accordance with the provisions of the Acquisition Agreement, and the Acquisition
shall become effective in accordance with the provisions of the Acquisition
Agreement, and Agent and the Lenders shall have received such certificates,
opinions and other evidence with respect to the foregoing as they shall request.
(h) Absence of Material Adverse Change, Etc.. Since May 31, 1997, no
----------------------------------------
change or changes or event or events shall have occurred which Agent reasonably
believes in good faith constitutes or is likely to have a Material Adverse
Effect.
(i) Consents and Approvals. All necessary consents, approvals and
----------------------
authorizations of, and declarations, registrations and filings with,
Governmental Bodies and nongovernmental Persons required in order to consummate
the Acquisition, the Loans and the other Transactions shall have been obtained
or made and shall be in full force and effect. Agent shall have received
satisfactory evidence that Borrower and Target are exempt from bulk transfer
laws in connection with the Acquisition.
(j) Absence of Litigation, Orders, Etc.. There shall not be pending
-----------------------------------
or, to the knowledge of Borrower and its Subsidiaries, threatened, any action,
suit, proceeding, governmental
24
<PAGE>
investigation or arbitration against or affecting Borrower or any of its
Subsidiaries or the respective assets or Property of any of such Persons which
seeks to enjoin or restrain any of the Transactions or which Agent reasonably
believes in good faith is likely to have a Material Adverse Effect. No Order of
any court, arbitrator or Governmental Body shall be in effect which purports to
enjoin or restrain any of the Transactions or which Agent reasonably believes in
good faith constitutes or is likely to have a Material Adverse Effect.
(k) Security Agreements and Subsidiary Guarantee. Borrower and each
--------------------------------------------
Subsidiary (other than the Excluded Subsidiaries) shall have executed and
delivered the Security Agreement and (in the case of such Subsidiaries) the
Subsidiary Guarantee, and each of Borrower and its Subsidiaries which owns any
material patent or trademark shall have executed and delivered a Patent Security
Agreement (in the case of patents) or a Trademark Security Agreement (in the
case of trademarks).
(l) Pledge Agreement. Borrower and each Subsidiary of Borrower that
----------------
has a Subsidiary shall have executed and delivered the Pledge Agreement provided
--------
that Borrower shall not be required to pledge the stock of Target or Merger Sub
except as provided in Section 7.9.
-----------
(m) Mortgages. The Mortgages relating to the Sites described in
---------
clause (a) and (b) of the definition of "Site" shall have been duly executed and
delivered by the respective owners of such Sites.
(n) Title Insurance. Agent, for the benefit of the Lenders, shall
---------------
have received from the Title Insurance Company its ALTA 1992 form of loan policy
of title insurance with respect to each Site, acceptable in form and substance
to Agent and the counsel for the Lenders, insuring the creation under the
Mortgage in favor of Agent with respect to such Site of a valid first priority
mortgage lien against such Site, subject to such exceptions to title as may be
acceptable to Agent and the counsel for the Lenders, together with complete,
legible copies of all encumbrances, maps and surveys of record (each a "Title
-----
Policy"). Each Title Policy shall be dated as of the Closing Date, shall be in
- ------
an amount equal to 110% of the appraised value of the applicable Site and, to
the extent permitted under applicable laws and to the extent applicable to each
type of policy, shall (x) contain affirmative endorsements as to mechanics'
liens, usury, doing business, zoning (with express parking coverage), easements
and rights-of-way, comprehensive coverage, encroachments, rights of access and
survey matters, (y) delete the creditors' rights exclusion and the general
exceptions to coverage, and (z) contain such other endorsements reasonably
requested by Agent.
(o) Environmental Audit. Not less than two (2) Business Days prior to
-------------------
the Closing Date, Agent and each Lender shall have received a phase 1
environmental report for each Site, which shall be approved by Agent and the
Lenders in their sole and absolute discretion.
(p) Survey. Not less than two (2) Business Days prior to the Closing
------
Date, Borrower shall have delivered, or shall have caused to be delivered, to
Agent, with sufficient counterpart originals for Agent to distribute to each
Lender, an ALTA survey of each Site in a form satisfactory to the Title
Insurance Company and showing no state of facts unsatisfactory to Agent and
counsel to the Lenders, which survey shall be certified to Agent, for the
benefit of the Lenders. Each such survey shall also certify that no portion of
the applicable Site lies within a flood hazard area or contains wetlands.
25
<PAGE>
(q) Deposit Account. Borrower and each of its Subsidiaries shall have
---------------
established its respective Deposit Account with Agent, and Borrower shall have
supplied Agent with evidence of the filing of the appropriate financing
statements and other documents under the provisions of the UCC or under
applicable foreign, domestic or local laws, rules or regulations in each of the
offices where such filing is necessary or appropriate, and shall have taken all
other action as may be necessary or appropriate to grant Agent valid,
enforceable, first priority perfected Liens in such Deposit Accounts. Amounts
held in the Deposit Accounts shall be invested solely in Permitted Investments.
(r) Financing Statements; Assignments. On or prior to the Closing
---------------------------------
Date, Agent shall have received from Borrower duly executed UCC financing
statements identifying Borrower as "debtor" and Agent, for the benefit of the
Lenders, as "secured party" and containing an adequate description of all
Collateral in which a security interest may be properly perfected under the UCC,
which financing statements shall have been filed in all places deemed necessary
or desirable by Agent in order to perfect the security interests granted
pursuant to the Loan Documents. In addition, Agent shall have received such
assignments, endorsements or other interests as may be necessary to perfect
Agent's security interest in any Collateral.
(s) Constituent Documents. Agent shall have received copies of (i)
---------------------
the Articles or Certificate of incorporation of Borrower and each Subsidiary
(other than Excluded Subsidiaries), certified as of a recent date by the
Secretary of State of the State of its incorporation, and (ii) Borrower's and
each such Subsidiary's By-Laws certified as of the Closing Date by the Secretary
of Borrower or such Subsidiary.
(t) Resolutions; Incumbency. Agent shall have received certified
-----------------------
resolutions of the Board of Directors and shareholders of Borrower and each
Subsidiary (other than Excluded Subsidiaries) with respect to this Agreement and
the other Loan Documents, together with a certificate identifying Borrower's and
each such Subsidiary's incumbent officers and setting for specimen signatures of
such officers.
(u) Borrowing Request. Agent shall have received a Borrowing Request
-----------------
conforming to the requirements of Section 2.4.
-----------
(v) Fees Payable at Closing. Borrower shall have paid Agent's counsel
-----------------------
for the legal fees and expenses incurred in their representation of Agent in
connection with the issuance and sale of the Notes and the other transactions
contemplated by this Agreement.
(w) Insurance. Agent shall have received policies or certificates of
---------
insurance satisfactory to Agent demonstrating that Borrower has obtained
insurance as required by this Agreement.
5.2 Subsequent Borrowings. The obligation of Lenders to make any Advance
---------------------
hereunder is further subject to the fulfillment, to the satisfaction of Agent,
the Lenders and their counsel, of each of the following conditions:
(a) Compliance with Warranties, No Default, etc. Both before and
-------------------------------------------
after giving effect to any Advance, (i) each of the representations and
warranties set forth in Section 6 shall be true and correct in all material
----------
respects, except to the extent that they expressly relate to an
26
<PAGE>
earlier date, (ii) there shall exist no Default or Event of Default, and (iii)
no condition shall exist and no event shall have occurred which has had or could
have a Material Adverse Effect.
(b) Borrowing Request. Agent shall have received a Borrowing Request
-----------------
conforming to the requirements of Section 2.4. The delivery of each Borrowing
-----------
Request shall constitute a representation and warranty by Borrower that on the
date of such Advance (both immediately before and after giving effect to such
Advance) the statements made in the foregoing subsection (a) are true and
correct. In addition, in the case of a request for a Loan under the Purpose
Line, Agent shall have received all other documents and information required
pursuant to Section 2.4 in connection with the acquisition to be financed by the
-----------
requested Loan, and Agent and the Lenders shall have approved of such
acquisition and the documentation thereof in their sole discretion.
(c) Commitment Amount and Expiration Not Exceeded. The aggregate
---------------------------------------------
outstanding principal amount of the Revolving Loan, after giving effect to such
Advance, shall not exceed the Available Amount. In the case of a Loan requested
under the Purpose Line, the principal amount of the Loan so requested, when
added to the original principal amount of all other Loans theretofore disbursed
pursuant to the Purpose Line, shall not exceed the Purpose Line Commitment. No
funds requested under the Revolving Loan or the Purpose Line shall be disbursed
following the third (3rd) anniversary of the Closing Date.
(d) Satisfactory Legal Form. All documents executed or submitted
-----------------------
pursuant hereto by or on behalf of Borrower shall be satisfactory in form and
substance to Agent, the Lenders and their counsel; Agent, the Lenders and their
counsel shall have received all information, approvals, opinions, documents or
instruments as they may reasonably request.
6. REPRESENTATIONS AND WARRANTIES. Borrower hereby makes the following
------------------------------
representations and warranties to Agent and each Lender. For purposes of these
representations and warranties, it is expressly understood that (i) except for
purposes of Section 6.5, Target and its Subsidiaries shall be considered
-----------
Subsidiaries of Borrower, regardless of whether or not Target and its
Subsidiaries were actually Subsidiaries of Borrower during the time periods
covered by any such representation and warranty, and (ii) for purposes of any
reference to Borrower's "knowledge" the knowledge of any Subsidiary shall be
attributed to Borrower.
6.1 Existence and Authority. Borrower and each of its Subsidiaries (a) is
-----------------------
a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization and is duly qualified to do
business in each additional jurisdiction where the failure to so qualify would
have a Material Adverse Effect and (b) has all requisite power to own its
Properties and to carry on its business as now being conducted and as proposed
to be conducted, and to execute, deliver and perform its obligations under this
Agreement and the other Loan Documents to which it is a party to execute,
issue, sell, deliver and perform its obligations under the Notes (in the case of
Borrower) and to engage in the respective transactions contemplated by this
Agreement and the Loan Documents to which it is a party.
6.2 Authorization. The execution, delivery and performance by Borrower
-------------
and each of its Subsidiaries of this Agreement, the Notes and the Loan Documents
to which it is a party, are
27
<PAGE>
within its powers and have been duly authorized by all necessary corporate
action by or on behalf of such Person.
6.3 Binding Effect. This Agreement and the Loan Documents to which
--------------
Borrower or any of its Subsidiaries is a party are the legal, valid and binding
obligations of Borrower or such Subsidiary (as the case may be), and the Notes
when issued and delivered against payment therefor as herein provided will be
the legal, valid and binding obligations of Borrower, enforceable in accordance
with their respective terms, except, in each case, as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
other laws relative to or affecting the enforcement of creditors' rights
generally in effect from time to time and by general principles of equity.
6.4 Ownership Interests. Except as set forth on Schedule 6.4A, Borrower
------------------- -------------
will not have outstanding any equity or ownership interests or other securities
convertible into or exchangeable for any of its equity or ownership interests,
nor will there be outstanding any rights to subscribe for or to purchase, or any
options or warrants for the purchase of, or any agreements (contingent or
otherwise) providing for the issuance of, or any calls, commitments or claims of
any character relating to, any of its equity or ownership interests or any
securities convertible into or exchangeable for any of its equity or ownership
interests. After giving effect to the Transactions, Borrower will not be
subject to any obligation (contingent or otherwise) to repurchase or otherwise
acquire or retire any of its equity interests.
6.5 Business Operations and Other Information; Financial Condition.
--------------------------------------------------------------
(a) Borrower has delivered to Agent and the Lenders true and complete
copies of (i) the audited consolidated balance sheets of Borrower as of August
31, 1994, 1995 and 1996, the audited consolidated balance sheets of Target as of
June 30, 1995, 1996 and 1997, and the respective related audited statements of
operations and earnings (or deficit) and cash flows for each of the fiscal years
then ended, together with the notes thereto and the reports thereon of Arthur
Andersen, LLP (the "Audited Financial Statements"), and (ii) the unaudited
----------------------------
balance sheet of Borrower as of July 31, 1997, the unaudited balance sheet of
Target as of July 31, 1997, and the respective related unaudited statements of
operations and earnings and cash flows for the portion of each such Person's
fiscal year then ended (the "Unaudited Financial Statements", which Audited
------------------------------
Financial Statements and Unaudited Financial Statements are true and correct;
the Audited Financial Statements and the Unaudited Financial Statements are
sometimes hereinafter collectively referred to as the "Financial Statements").
--------------------
True and complete copies of the Financial Statements have been delivered to
Agent. The Financial Statements have been prepared in accordance with GAAP
(except as noted thereon) consistently applied throughout the periods involved,
and present fairly, in all material respects, the respective financial positions
of Borrower and Target as at each of the dates of the balance sheets contained
therein and the respective results of operations and cash flows of Borrower and
Target for each of the respective periods then ended, subject, in the case of
the Unaudited Financial Statements, to non-material year-end audit adjustments
and absence of the notes required by GAAP. As of the date of each of the
balance sheets included in the Financial Statements neither Borrower nor Target
had any Indebtedness or liability, absolute or contingent, liquidated or
unliquidated, which, in accordance with GAAP, would be reflected on such
Financial Statements, except Indebtedness and liabilities reflected or reserved
against on such respective balance sheets or described in the notes thereto.
28
<PAGE>
(b) Except as contemplated herein or in the Loan Documents, or as
disclosed in Schedule 6.5B, since August 31, 1997, neither Borrower nor Target
-------------
has:
(1) written off or been required by GAAP to write off any
Accounts in excess of $25,000 in the aggregate;
(2) written down Inventory in excess of $25,000 in the
aggregate; or
(3) suffered any Material Adverse Effect or any event or
condition which could reasonably be expected to
result in a Material Adverse Effect.
(c) Borrower has delivered to Agent a true and complete copy of a
consolidated balance sheet for Borrower dated February 28, 1997, accompanied by
a Review Report of the Accountants dated September 24, 1997, along with a
condensed consolidated balance sheet of Borrower dated July 31, 1997 under cover
of a letter from James R. Swartwout dated September 30, 1997 (collectively, the
"Pro Forma Financials"). The Pro Forma Financials fairly present in all
--------------------
material respects the consolidated financial position of Borrower as of the
respective dates thereof, on a pro forma basis as if the Acquisition had been
completed, and contain all pro forma adjustments necessary in order to fairly
reflect the assumptions upon which they are based.
6.6 Subsidiaries. Except as set forth on Schedule 6.6, Borrower does not,
------------ ------------
and will not have on the Closing Date, after giving effect to the Transactions,
(a) any Subsidiaries or (b) except for Permitted Investments, any capital stock
or other equity interest in any other Person or any option, warrant or right to
purchase or acquire any such capital stock or other equity interest.
6.7 Litigation; No Violation of Governmental Orders or Laws.
-------------------------------------------------------
(a) Except as set forth in Schedule 6.7(a), there are no actions,
---------------
suits or proceedings pending, or, to the best knowledge of Borrower after due
inquiry, threatened against or affecting Borrower or any of its Subsidiaries,
any of their respective Properties or any officer or director of Borrower or
any such Subsidiary which is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect; or which seek to enjoin, or otherwise
prevent the consummation of, any of the Transactions in any court or before any
arbitrator of any kind or before or by any Governmental Body.
(b) Except as set forth in Schedule 6.7(b), neither Borrower nor any
---------------
of its Subsidiaries (nor any of their respective Properties) will be, after or
as a result of giving effect to the Transactions, in default under or in
violation of any Order of any court, arbitrator or Governmental Body or any
statute or law or any rule or regulation of any Governmental Body (including,
without limitation, any building, zoning or other ordinance, code or rule),
which default or violation has or could reasonably be expected to have a
Material Adverse Effect; and none of them is subject to or a party to any Order
of any court or Governmental Body arising out of any action, suit or proceeding
under any statute or other law respecting antitrust, monopoly, restraint of
trade, unfair competition or similar matters.
29
<PAGE>
6.8 Outstanding Indebtedness; Investments.
-------------------------------------
(a) Schedule 6.8A sets forth a correct and complete list and
-------------
description of each item of Funded Debt of Borrower and its Subsidiaries and all
Liens securing such Funded Debt, now outstanding or existing, or which will be
outstanding or existing on the Closing Date after giving effect to the
Transactions.
(b) Schedule 6.8B sets forth a correct and complete list of each
-------------
Investment of Borrower and its Subsidiaries which is now outstanding or
existing, or which will be outstanding or existing on the Closing Date after
giving effect to the Transactions.
6.9 Consents, etc.. No consent, approval or authorization of or
--------------
declaration, registration or filing with any Governmental Body or any
nongovernmental Person (including, without limitation, any creditor or
stockholder of Target or Borrower, and also including, without limitation, any
consent, approval, authorization, declaration or filing or the expiration of any
waiting period under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976)
is required in connection with the execution or delivery of this Agreement, the
Notes, the Subsidiary Guarantee, the Acquisition Agreement or the other Loan
Documents by the respective parties thereto or the performance by such parties
of their respective obligations thereunder, or in connection with the
consummation of the transactions contemplated hereby and thereby, or as a
condition to the legality, validity or enforceability of this Agreement, the
Notes, the Guarantees, the Acquisition Agreement or the other Loan Documents,
except for such consents, approvals, authorizations, declarations, registrations
or filings as are listed in Schedule 6.9, all of which have been or will on or
------------
prior to the Closing Date be obtained and are or will then be in full force and
effect. Target and Borrower are exempt from all applicable bulk sale and bulk
transfer laws in connection with the Acquisition.
6.10 Title to Properties. Borrower and each of its Subsidiaries has (i)
-------------------
good and marketable fee simple title to its respective real Properties (other
than real Properties which are leased from others), subject to no Lien of any
kind except for Liens described in Schedule 6.10 and Permitted Liens and (ii)
-------------
good title to all of its Equipment and other personal Property and assets (other
than Properties and assets leased from others), subject to no Lien of any kind
except Permitted Liens. Schedule 6.10 sets forth a true and complete list and
-------------
brief description of all real Property owned or leased by Borrower and its
Subsidiaries on the Closing Date (after giving effect to the Acquisition),
together with a true and complete list of all leases of real Property to which
Borrower or any of its Subsidiaries is a party, identifying the parties to each
such lease and the Property to which it relates. True and complete copies of all
such leases, together with all amendments, modifications and supplements thereto
to the date hereof, have been made available to Agent. As of the Closing Date,
Borrower and each of its Subsidiaries enjoys peaceful and undisturbed possession
under all such leases to which it is a party, none of which contains any unusual
or burdensome provisions which might have a Material Adverse Effect, and all
such leases are valid and subsisting and in full force and effect. As of the
Closing Date, Borrower and its Subsidiaries are not in breach or violation of
the terms of any of such leases (except for such breaches and violations as will
not have, individually or in the aggregate, a Material Adverse Effect), and
after due inquiry Borrower knows of no breach or violation of any of such leases
by any party other than Borrower and its Subsidiaries. None of the personal
Property owned or to be owned by Borrower or any such Subsidiary is located or
stored on sites other than those listed on Schedule .10. Except as set forth in
------------
Schedule 6.10, as of the Closing Date the tangible Properties of Borrower and
- -------------
its Subsidiaries are and will be reasonably fit for the use for which they are
being put
30
<PAGE>
by each of such Persons in the ordinary course of its business and are in
reasonably sufficient and satisfactory condition to operate the business of each
of such Persons as presently conducted except for such tangible Properties with
respect to which the failure to be so fit or to be in such condition shall not
give rise to a Material Adverse Effect. Schedule 6.10 also contains a true,
-------------
complete and correct list and brief descriptions of all Equipment having a Fair
Market Value of $5,000 or more owned or leased by each of such Persons on the
Closing Date.
6.11 Taxes. Except as disclosed on Schedule 6.11, as of the Closing Date
----- -------------
Borrower and each of its Subsidiaries, and each Person required to file any tax
or informational return in respect of any consolidated group of which any of
them is or has been a member, as the case may be, has prepared and timely filed
or on behalf of each of such Persons there have been filed or validly extended,
all required federal, state, local and foreign tax returns which are required to
have been filed by or on behalf of such Persons, which returns were prepared on
a basis consistent with its financial records and all taxes shown thereon to be
due have been timely paid in full or validly extended. As of the Closing Date no
tax liens have been filed and no claims are being asserted with respect to any
such taxes. Except as disclosed on Schedule 6.11, as of the Closing Date no tax
-------------
assessment against any such Person has been proposed and all of their respective
tax liabilities are adequately provided for on their respective books and
financial statements in accordance with GAAP.
6.12 No Conflicts with Agreements, Etc.. Neither the execution and
----------------------------------
delivery of this Agreement, the Notes or any other Loan Document nor the
fulfillment of or compliance with the terms and provisions hereof or thereof,
will conflict with, or result in a breach or violation of any of the terms,
conditions or provisions of, or constitute a default under, the charter or by-
laws of Borrower or any contract, agreement, mortgage, indenture, lease,
instrument, Order, statute, law, rule or regulation to which any of them or any
of their respective assets is subject, or (except pursuant to the Loan
Documents) result in the creation of any Lien on any Properties of the Borrower
or any of its Subsidiaries, which conflict, breach, violations, defaults or
Liens, could have a Material Adverse Effect.
6.13 Related Documents. Borrower has delivered to Agent and its counsel
-----------------
true and correct copies of the Acquisition Agreement and each of the other
documents executed and delivered in connection therewith (including all Exhibits
and Schedules thereto) as now in effect, including all amendments, modifications
and supplements thereto, and of each document, certificate or statement required
to be executed or delivered by any party thereunder (there being no amendments
or modifications to the Acquisition Agreement or any of such other documents,
and no waiver of any rights thereunder by Borrower, nor of any condition to the
obligations of Borrower under any thereof, except as heretofore disclosed to
Agent in writing).
6.14 Disclosure. Neither this Agreement nor any other document,
----------
certificate or statement furnished to Agent in writing by or on behalf of
Borrower and its Subsidiaries in connection herewith, including the Acquisition
Agreement (together with the schedules thereto as updated through the Closing
Date), contained, as of its respective date, or now contains, any untrue
statement of a material fact or as of any such date omitted, or now omits, to
state a material fact necessary in order to make the statements contained herein
and therein not misleading. Except as otherwise disclosed in this Agreement and
the Schedules hereto, there is no fact known to Borrower (other than matters of
a general economic or political nature) which now has or is likely to have a
Material Adverse Effect.
31
<PAGE>
6.15 Broker's or Finder's Commissions. No broker's or finder's fee or
--------------------------------
commission will be payable by Borrower with respect to any of the Transactions.
Borrower agrees to indemnify Agent and hold Agent harmless against any loss,
cost, claim or liability (including, without limitation, reasonable attorneys'
fees and disbursements for the investigation and defense of claims) arising out
of or relating to any such actual or alleged fee or commission.
6.16 Labor Matters.
-------------
(a) Borrower and each of its Subsidiaries is in compliance with all
applicable laws respecting employment and employment practices, terms and
conditions of employment and wages and hours, and none of such Persons is
engaged in any unlawful labor or employment practice nor has received any notice
of a complaint, charge or allegation to the contrary, except for such practices
and instances of non-compliance as could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect. There is no labor
strike, dispute, slowdown or work stoppage pending or, to Borrower's best
knowledge after due inquiry, threatened against or affecting Borrower or any of
its Subsidiaries. No material grievance or arbitration proceeding arising out of
or under any collective bargaining agreement to which Borrower or any Subsidiary
is a party or subject is pending. To Borrower's best knowledge after due
inquiry, no present or former employee of Borrower or any Subsidiary has any
rightful claim for wrongful discharge against any of such Persons.
(b) During the five year period ending on the Closing Date, no
present or (to the best knowledge of Borrower and its Subsidiaries after due
inquiry) former employee or independent contractor of Borrower or any Subsidiary
has any pending or threatened material claim against them for (A) overtime pay,
other than overtime pay for the current period; (B) wages, salaries or profit
sharing (excluding wages, salaries or profit sharing for the current payroll
period); (C) vacations, time off or pay in lieu of vacation or time off, other
than vacation or time off (or pay in lieu thereof) earned in respect of the
employer's current fiscal year; (D) any violation of any statute, ordinance,
contract or regulation relating to minimum wages or maximum hours of work; (E)
discrimination against employees on any basis; (F) unlawful or wrongful
employment or termination practices; (G) unlawful retirement, termination or
labor relations practices, breach of contract or other claim arising under a
collective bargaining agreement, individual, express or implied contract, or
policy, practice or procedure manual or statement; (H) any violation of
occupational safety or health standards, or any violation of the Worker
Adjustment Retraining and Notification Act ("WARN").
6.17 Environmental Matters. Except as set forth in Schedule 6.17, as of
--------------------- -------------
the Closing Date:
(a) there is no pending Environmental Matter relating to Borrower,
any of its Subsidiaries or any of their respective Properties, and after due
inquiry Borrower is aware of no facts that could result in any such
Environmental Matter. None of such Persons has agreed to assume by contract or
otherwise any liability of any other Person for cleanup, compliance, or required
capital expenditures in connection with any Environmental Matter arising prior
to the date hereof;
(b) the Properties used, owned, leased, operated, managed or
controlled at any time by Borrower or any of its Subsidiaries are free of
contamination from Hazardous Materials, including, without limitation, any
contamination of the associated air, soil, groundwater or surface
32
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waters, and are free of any other potentially injurious chemical or physical
conditions which could give rise to an Environmental Matter;
(c) Neither Borrower nor any of its Subsidiaries is in violation of
applicable Environmental Laws, nor has any of them failed to cure any past
violations or alleged violations of Environmental Laws to the satisfaction of
applicable Governmental Bodies. To the best knowledge of Borrower and its
Subsidiaries after due inquiry, none of such Persons has generated,
manufactured, refined, recycled, discharged, emitted, released, buried,
processed, produced, reclaimed, stored, treated, transported and disposed of
Hazardous Materials in a manner which is reasonably likely to give rise to an
Environmental Matter;
(d) no real Property of Borrower or any of its Subsidiaries is (i)
listed or proposed for listing on the National Priorities List under the
Comprehensive Environmental Response, Compensation and Liability Act or is (ii)
listed in the Comprehensive Environmental Response, Compensation, Liability
Information System List promulgated pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act, or on any comparable list maintained
by any Governmental Body;
(e) no Properties of Borrower or any of its Subsidiaries is subject
to any Lien or claim for Lien in favor of any Person as a result of any
Environmental Matter or response thereto;
(f) to the best knowledge of Borrower after due inquiry, no Hazardous
Materials, including leachate and effluents, generated, disposed of,
transported, managed or released by Borrower or any of its Subsidiaries have
caused or will cause in whole or in party any contamination or injury to the
environment, any person, any natural resource or any Property, including,
without limitation, Property through which or to which such materials were
shipped. To the best knowledge of Borrower after due inquiry, neither Borrower
nor any such Subsidiary has handled, transported, disposed of or managed any
Hazardous Material in any manner that is reasonably likely to form the basis for
any present or future Environmental Matter, and no such Person has any material
liabilities, absolute or contingent, on the date hereof with respect thereto;
and
(g) to the best knowledge of Borrower after due inquiry, all
facilities where any Person has treated, stored, disposed of, reclaimed, or
recycled any Hazardous Material on behalf of Borrower or any of its Subsidiaries
are in compliance with all applicable Environmental Laws to the extent
reasonably necessary to avoid giving rise to an Environmental Matter.
6.18 Possession of Franchises, Licenses, Etc.. As of the Closing Date,
----------------------------------------
each of Borrower and each of its Subsidiaries is in possession of all material
permits, licenses or other authorizations of Governmental Bodies required for
the conduct of its business and the ownership of its respective Properties
(including all licenses and certificates of occupancy which are material to the
ownership or operation of any real Property) have been obtained and are usable
by such respective Persons, and their respective businesses are being conducted
in accordance with the material requirements of such permits, licenses or other
authorizations of Governmental Bodies in effect on the date hereof, and after
due inquiry Borrower is not aware of any condition that would prevent the
renewal of such permits, licenses or other authorizations or cause it to incur
any material costs to renew such permits, licenses or other authorizations.
6.19 Trademarks, Etc.. Except as set forth on Schedule 6.19, Borrower is
---------------- -------------
the sole owner or has the right to use, free from any restrictions, claims,
rights, encumbrances or burdens , all of
33
<PAGE>
the patents, trademarks, service marks, trade names, copyrights, licenses,
processes, designs, formulas, computer programs, computer software packages,
trade secrets, inventions, product manufacturing instructions, technology,
research and development, know-how and all other intellectual property that are
necessary for the operation of its business as heretofore conducted and as
proposed to be conducted from and after the consummation of the Acquisition. To
the best knowledge of Borrower after due inquiry, as of the Closing Date (i)
none of the present or contemplated products or operations of Borrower or any of
its Subsidiaries infringes any patent, trademark, service mark, trade name,
copyright, license or other right owned by any other Person, and (ii) there is
no pending or threatened claims or litigation against or affecting Borrower or
any of its Subsidiaries contesting the right of any of them to sell or use any
such product or to engage in any such operation which, if adversely determined
could have, individually or in the aggregate, a Material Adverse Effect.
6.20 Margin Regulations; Use of Proceeds. Except as permitted by Section
-----------------------------------
7.17 and except for the acquisition of the stock of Calnetics Corporation (which
will cease to be "margin stock" within 30 days after the Closing Date), Borrower
neither owns nor now intends to acquire any "margin stock" as defined in
Regulation U of the Board of Governors of the Federal Reserve System (12 CAR
207). The proceeds of the Loans will be used to finance in part the Acquisition,
to pay transaction fees and expenses incurred in connection with the
Transactions and for working capital and other general business purposes of
Borrower and its Subsidiaries. No part of the proceeds of the Loans will be used
directly or indirectly, for the purpose of buying or carrying any margin stock
within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System (12 CAR 207), or for the purpose of buying or carrying or trading
in any securities under such circumstances as to involve Borrower in a violation
of Regulation X of said Board (12 CAR 224) or to involve any broker or dealer in
a violation of Regulation T of said Board (12 CAR 220). As used in this Section,
the term "purpose of buying or carrying" has the meaning assigned thereto in the
aforesaid Regulation U.
6.21 Compliance with ERISA.
---------------------
(a) Neither Borrower nor any ERISA Affiliate has a Pension Plan
which is subject to Part 3 of Subtitle B of Title 1 of ERISA or Section 412 of
the Code;
(b) neither Borrower nor any ERISA Affiliate maintains or has
maintained, contributes to or has contributed to, or has any liability or
contingent liability with respect to a Pension Plan subject to Title IV of
ERISA;
(c) neither Borrower nor any ERISA Affiliate maintains or has
maintained, contributes to or has contributed to, or has any liability or
contingent liability with respect to a Multiemployer Plan;
(d) neither Borrower nor any ERISA Affiliate has any contingent
liability with respect to any post-retirement benefit under a welfare plan (as
such term is defined in Section 3(1) of ERISA) other than liability for
continuation coverage described in Part 6 of Title 1 of ERISA;
(e) to the best knowledge of Borrower and its Subsidiaries, Borrower
and all Plans contributed to or maintained by any of them are in compliance in
all material respects with all applicable provisions of ERISA and the Code and
with the applicable law and administrative requirements of any relevant
jurisdiction and the regulations and published interpretations
34
<PAGE>
thereunder, including, without limitation, the provisions of ERISA and the Code
requiring continuation coverage under Plans which are group health plans subject
to the Consolidated Omnibus Budget Reconciliation Act of 1985 or similar law;
(f) neither Borrower nor any of its ERISA Affiliates is a party in
interest with respect to any employee benefit plan (as defined in Section 3(3)
of ERISA) other than a Plan;
(g) neither Borrower nor any of its ERISA Affiliates has breached any
of the responsibilities, obligations or duties imposed upon any of such Persons
by the Code or ERISA which breach has given rise, or could give rise in the
future to any obligation to pay money that would have a Material Adverse Effect
on any of such Persons;
(h) there are no actions, suits or claims other than for routine
claims for benefits pending or threatened, involving the Plans that would have a
Material Adverse Effect ; and
(i) all required reports and descriptions of the Plans of Borrower or
its ERISA Affiliates (including but not limited to Form 5500 Annual Reports,
Summary Annual Reports and Summary Plan Descriptions) have been timely filed and
distributed, and any notices required by ERISA or the Code or the law of any
other applicable jurisdiction or any ruling or regulation of any administrative
agency of any applicable jurisdiction with respect to such Plans, including but
not limited to any notices required by Section 204(h) or Section 606 of ERISA or
Section 4980B of the Code have been appropriately given.
6.22 Material Contracts. Schedule 6.22 contains a list of all written
------------------ -------------
supply agreements, requirements contracts, customer agreements, franchise
agreements, license agreements, distribution agreements, joint venture
agreements, asset purchase agreements, stock purchase agreements, merger
agreements, agency or advertising agreements and other contracts, agreements and
commitments (other than purchase orders entered into in the ordinary course of
business, leases of real Property listed on Schedule 6.10, and other than this
-------------
Agreement, the Acquisition Agreement and the other Loan Documents, or any
agreement, instrument or document executed and delivered pursuant thereto) to
which Borrower or any of its Subsidiaries is now, or will be on the Closing Date
after giving effect to the Transactions, a party and which are now or will then
be material to the business, assets or operations of such Persons ("Material
--------
Contracts"). True and complete copies of each of the Material Contracts, with
- ---------
all material amendments, modifications and supplements thereto to the date
hereof, have previously been made available by Borrower to Agent or its
representatives. Each of the Material Contracts is, and on the Closing Date
after giving effect to the Transactions will be, valid, subsisting and in full
force and effect, neither Borrower nor any of its Subsidiaries is in default
under any of the Material Contracts, nor has any such default under any of the
Material Contracts been asserted by any other party thereto, and there has not
occurred any event which, with the giving of notice or the passage of time, or
both, would constitute such a default.
6.23 Insurance. As of the Closing Date, Schedule 6.23 sets forth a true
--------- -------------
and complete list, in all material respects, and brief descriptions of all
policies of workers compensation, general liability, fire, property, casualty,
marine, business interruption, errors and omissions, flood, earthquake and other
insurance carried by Borrower and its Subsidiaries, true and complete copies of
which policies (or certificates therefor) have been previously delivered to
Agent. Such policies are in full force and effect on the date hereof, and none
of such Persons has received notice of cancellation with respect to any such
policy. All premiums payable with respect to such policies
35
<PAGE>
have been paid through the Closing Date or otherwise will be paid in the
ordinary course of business.
6.24 Solvency. Borrower and each of its Subsidiaries will be Solvent on
--------
the Closing Date after giving effect to the Transactions and the application of
the net proceeds of the Loans.
6.25 Status under Certain Laws. Neither Borrower nor any of its
-------------------------
Subsidiaries is an "investment company" or a "person directly or indirectly
controlled by or acting on behalf of an investment company" within the meaning
of the Investment Company Act of 1940, as amended, or a "holding company", or a
"subsidiary company" of a "holding company", or an "affiliate" of a "holding
company" or of a "subsidiary company" of a "holding company", within the meaning
of the Public Utility Company Holding Act of 1935, as amended. Neither Borrower
nor any of its Subsidiaries is subject to regulation as a "common carrier" or
"contract carrier" or any similar classification by the Interstate Commerce
Commission or under the laws of any state.
6.26 Places of Business. The principal place of business and the chief
------------------
executive office of Borrower is, and on the Closing Date after giving effect to
the Transactions will be, located at 21250 Hawthorne Blvd., Suite 500, Torrance,
California 90503. The books and records (including, without limitation, all
records of Accounts) of Borrower are, and on the Closing Date after giving
effect to the Transactions all will be, located at the location set forth above.
6.27 Other Names. During the five-year period preceding the Closing
-----------
Date, the business conducted by Borrower and its Subsidiaries has not been
conducted under any corporate, trade or fictitious name other than those names
listed on Schedule 6.27.
-------------
6.28 Account Warranties. With respect to Eligible Accounts scheduled,
------------------
listed or referred to in any Accounts Trial Balance delivered to Agent pursuant
to the terms hereof, Borrower represents and warrants that, except as disclosed
in the applicable Accounts Trial Balance, as of the date of each such Accounts
Trial Balance: (a) the Accounts are genuine, are in all respects what they
purport to be, and are not evidenced by a judgment; (b) they represent
undisputed, bona fide transactions; (c) the amounts shown on the applicable
Accounts Trial Balance and on Borrower's books and records and all invoices and
statements which may be delivered to Agent with respect thereto are actually and
absolutely owing solely to Borrower or one of Borrower's Subsidiaries and are
not contingent; (d) no payments have been made thereon; (e) there are no
setoffs, counterclaims or disputes asserted or, to the best knowledge of
Borrower, existing with respect thereto and neither Borrower nor any of its
Subsidiaries has made any agreement with any Account Debtor for any deduction
therefrom except or discounts or allowances allowed by Borrower and its
Subsidiaries in the ordinary course of business for prompt payment; (f) to the
best of Borrower's knowledge, there are no facts, events or occurrences which in
any way impair the validity or enforcement thereof or tend to reduce the amount
payable thereunder as shown on the respective Borrowing Base Certificate,
Borrower's and its Subsidiaries' books and records and all invoices and
statements delivered to Agent with respect thereto; (g) to the best of
Borrower's knowledge, all Account Debtors have the capacity to contract and are
Solvent; except, as to Solvency, for such Eligible Accounts as will not, in the
aggregate, give rise to a Material Adverse Effect; and (h) the services
furnished and/or goods sold giving rise thereto are not subject to any Lien
except for the first and valid fully perfected security interest granted to
Agent hereunder, and except for Permitted Liens.
36
<PAGE>
6.29 Inventory Warranties. With respect to Eligible Inventory scheduled,
--------------------
listed or referred to in the Initial Borrowing Base Certificate and in each
subsequent Borrowing Base Certificate hereafter delivered to Agent pursuant to
the terms hereof, Borrower represents and warrants that, except as disclosed in
the applicable Borrowing Base Certificate, as of the date of each Borrowing
Base Certificate: (a) Borrower and its Subsidiaries have good, indefeasible and
merchantable title to such Eligible Inventory and such Inventory is not subject
to any Lien whatsoever, except for the prior, first and valid, fully perfected
security interest granted to Agent hereunder or Permitted Liens; (b) such
Eligible Inventory is located only in the United States of America at the
location set forth in Schedule 6.10 hereto or such other locations in the United
-------------
States of America as are permitted hereunder (or is in transit to such location
as set forth in such Borrowing Base Certificate); (c) such Inventory is of good
and merchantable quality, free from any defects and such Inventory is not
subject to any licensing, patent, royalty, trademark, trade name or copyright
agreement which would prohibit, or impose a material burden or expense upon, the
completion in manufacture and sale or other disposition of such Inventory by a
Person other than Borrower or one of its Subsidiaries; and (d) to the best
knowledge of Borrower and its Subsidiaries, the sale or other disposition of
such Inventory by a Person other than Borrower or one of its Subsidiaries would
not require the consent of any Person or constitute a breach of any contract to
which Borrower or any of its Subsidiaries is a party or to which the Inventory
is subject. No Inventory shall at any time be in the possession or control of
any warehouseman, bailee or any of Borrower's or its Subsidiaries' agents or
processors except in conformity with the applicable provisions hereof. Borrower
shall (or shall cause the applicable Subsidiary to) notify any such
warehouseman, bailee or processor holding Inventory having a Fair Market Value
in excess of $1,000,000 of the Liens created in favor of Agent and the Lenders
and shall instruct such Person to hold such Inventory for Agent's account
subject to Agent 's instructions. As of the date hereof, no Inventory is in the
possession or control of any warehouseman, bailee or any of Borrower's or its
Subsidiaries' agents or processors, except as disclosed on Schedule 6.29 and
-------------
Inventory in transit to or from any Person identified on Schedule 6.29.
-------------
6.30 Equipment. After giving effect to the Transactions, (a) Borrower
---------
and each of its Subsidiaries has good, indefeasible and merchantable title to
its respective Equipment; (b) except for items under repair and molds and tools
in the possession of third-party molders having an aggregate Fair Market Value
of not more than $1,000,000 at any one time, the Equipment is located only on
the premises set forth on Schedule 6.10 (and Borrower shall (or shall cause the
-------------
applicable Subsidiary to) notify any such third-party molder holding Equipment
having a Fair Market Value in excess of $1,000,000 of the Liens created in favor
of Agent and the Lenders and shall instruct such Person to hold such Equipment
for Agent's account subject to Agent 's instructions); (c) the Equipment is not
subject to any Lien whatsoever except for the first and valid fully perfected
security interest granted to Agent pursuant to the terms hereof, and except for
Permitted Liens; (d) the Equipment is in good condition and repair except for
such Equipment, the failure of which to be no good condition and repair, would
not cause a Material Adverse Effect, ordinary wear and tear excepted, and is
currently used or usable in Borrower's and its Subsidiaries' businesses.
6.31 Reliance by Agent and Lenders; Cumulative. Each warranty and
-----------------------------------------
representation contained in this Agreement (including without limitation the
Schedules hereto as modified from time to time) shall be automatically deemed
repeated with each Advance and shall be conclusively presumed to have been
relied on by Agent and the Lenders regardless of any investigation made or
information possessed by Agent and the Lenders. The warranties and
representations set forth herein shall be cumulative and in addition to any and
all other warranties and representations that Borrower shall now or hereinafter
give, or cause to be given, to Agent and the Lenders.
37
<PAGE>
7. COVENANTS. Borrower covenants and agrees that, so long as any credit
---------
hereunder shall be available and until payment in full of the Obligations, and
unless Agent shall otherwise consent in writing, Borrower shall, and shall cause
each of its Subsidiaries to, comply with the following provisions of this
Section 7.
- ---------
7.1 Financial Statements and Information. So long as any of the
------------------------------------
Obligations shall be outstanding, Borrower will furnish to Agent (with
sufficient copies for each Lender):
(A) as soon as available and in any event within 45 days after the
end of each fiscal quarter, copies of the consolidated and consolidating balance
sheets of Borrower and its Subsidiaries as of the end of such fiscal quarter,
and of the related consolidated and consolidating statements of operations,
earnings and cash flows for such fiscal quarter and for the portion of the
fiscal year of Borrower ended with the last day of such fiscal quarter, all in
reasonable detail and stating in comparative form (i) the consolidated and
consolidating figures as of the end of and for the corresponding date and period
in the previous fiscal year and (ii) the corresponding figures from the
consolidated budget of Borrower and its Subsidiaries for such period, all such
statements being Certified by the chief financial officer of Borrower;
(B) as soon as available and in any event within 90 days after the
end of each fiscal year of Borrower, copies of the audited consolidated and
consolidating balance sheets of Borrower and its Subsidiaries as of the end of
such fiscal year, and of the related audited consolidated and consolidating
statements of operations, earnings and cash flows for such fiscal year, together
with the notes thereto, all in reasonable detail and stating in comparative form
(i) the respective audited consolidated and consolidating figures as of the end
of and for the previous fiscal year and (ii) the corresponding figures from the
consolidated budget of Borrower and its Subsidiaries for such fiscal year, (x)
in the case of such audited consolidated financial statements, accompanied by a
report thereon of Arthur Andersen, LLP, or other independent public accountants
selected by Borrower and acceptable to Agent (the "Accountants"), which report
-----------
shall be accompanied by a loan compliance letter addressed to Agent and
unqualified as to going concern and scope of audit and shall state that such
consolidated financial statements present fairly the consolidated financial
position of Borrower and its Subsidiaries as at the end of such fiscal year and
the consolidated results of their operations and cash flows for such fiscal year
in conformity with GAAP applied on a basis consistent with prior years and that
the examination by the Accountants in connection with such consolidated
financial statements has been made in accordance with generally accepted
auditing standards, and (y) in the case of such consolidating financial
statements, Certified by the chief financial officer of Borrower;
(C) within 45 days after the end of each fiscal quarter of Borrower,
an Officer's Certificate of Borrower (1) setting forth calculations in
reasonable detail demonstrating whether or not as at the end of such fiscal
quarter Borrower was in compliance with Sections 7.7, 7.8 and 7.16 of this
--------------------------
Agreement and (2) stating that, based upon such examination or investigation and
review of this Agreement and other Loan Documents as in the opinion of the
signer is necessary to enable the signer to express an informed opinion with
respect thereto, no default by Borrower and its Subsidiaries in the fulfillment
of any of the terms, covenants, provisions or conditions of this Agreement or
any of the Loan Documents exists or has existed during such period or, if such a
default shall exist or have existed, the nature and period of existence thereof
and what action Borrower (or the applicable Subsidiary) has taken, is taking or
proposes to take with respect thereto;
38
<PAGE>
(D) promptly after the same are available and in any event within 10
days of filing, copies of all such proxy statements, financial statements,
notices and reports as Borrower or any Subsidiary shall send or make available
generally to any of its securityholders, and copies of all regular and periodic
reports (including without limitation annual reports on Form 10-K and quarterly
reports on Form 10-Q), all reports on Form 8-K and all registration statements
which Borrower or any Subsidiary may file with the SEC or with any securities
exchange;
(E) Within 20 days after the last Business Day of each calendar
month, Borrower shall deliver to Agent and each Lender (i) a certificate in the
form of Exhibit E hereto ("Borrowing Base Certificate") showing the Borrowing
--------- --------------------------
Base as of the close of business on the last Business Day of the immediately
preceding calendar month, (ii) an aged trial balance of all Accounts of Borrower
and its Subsidiaries as of such date ("Accounts Trial Balance"), indicating
----------------------
which Accounts are current, up to 90 days, and more than 90 days past the
invoice date, (iii) an Inventory analysis (including raw materials, work in
progress and finished Inventory), and (iv) an accounts payable aging, in each
case certified as complete and correct on behalf of Borrower by an authorized
officer of Borrower;
(F) at any time when an Event of Default shall have occurred and be
continuing, upon the request of Agent, Borrower shall provide Agent with a
Borrowing Base Certificate with such frequency as Agent shall specify. Upon
request by Agent, Borrower shall furnish copies of any other material reports,
documents or information, in a form and with such specificity as is reasonably
satisfactory to Agent (to the extent such reports, documents and information can
be produced or furnished without unreasonable cost), concerning Accounts and
Inventory included, described or referred to in such Borrowing Base
Certificates, including without limitation, copies of all invoices prepared in
connection with such Accounts;
(G) promptly after the receipt thereof by Borrower and in any event
within 3 Business Days thereof, copies of any reports as to material
inadequacies in accounting controls (including reports as to the absence of any
such inadequacies) submitted to Borrower by the Accountants in connection with
any audit of such corporation made by the Accountants;
(H) promptly (and in any event within 3 Business Days) after becoming
aware of (1) the existence of any Default or Event of Default on the part of
Borrower, an officer's certificate of Borrower specifying the nature and period
of existence thereof and what action Borrower is taking or proposes to take with
respect thereto; or (2) any Funded Debt of Borrower or any of its Subsidiaries
in excess of $100,000 in the aggregate being declared due and payable before its
expressed maturity, or any holder of such Indebtedness having the right to
declare such Indebtedness due and payable before its expressed maturity, because
of the occurrence of any default (or any event which, with notice and/or the
lapse of time, shall constitute any such default) under such Indebtedness, an
officer's certificate of Borrower describing the nature and status of such
matters and what action Borrower or any applicable Subsidiary is taking or
proposes to take with respect thereto;
(I) promptly and in any event within 3 Business Days after Borrower
knows or, in the case of a Pension Plan has reason to know, that a Reportable
Event with respect to any Pension Plan has occurred, that any Pension Plan or
Multi Employer Plan is or reasonably may be terminated, reorganized, partitioned
or declared insolvent under Title IV of ERISA, or Borrower or any of its ERISA
Affiliates will or reasonably may incur any material liability to or on account
of a Pension Plan or Multi Employer Plan under Title IV of ERISA or any other
liability under ERISA
39
<PAGE>
which could reasonably have a Material Adverse Effect has been asserted against
Borrower or any of its ERISA Affiliates, an officer's certificate of Borrower
setting forth information as to such occurrence and what action, if any,
Borrower or an ERISA Affiliate is required or proposes to take with respect
thereto, together with any notices concerning such occurrences which are (a)
required to be filed by Borrower or an ERISA Affiliate or the plan administrator
of any such Pension Plan controlled by Borrower or such ERISA Affiliate with the
Internal Revenue Service or the PBGC, or (b) received by Borrower or such ERISA
Affiliate from any plan administrator of a Pension Plan not under their control
or from a Multi Employer Plan;
(J) promptly after becoming aware of any Material Adverse Effect with
respect to which notice is not otherwise required to be given pursuant to this
Section 7.1, an officer's certificate of Borrower setting forth the details of
- -----------
such Material Adverse Effect and stating what action Borrower has taken or
proposes to take with respect thereto;
(K) promptly (and in any event within 3 Business Days) after Borrower
knows of (a) the institution of, or reasonably credible threat of, any action,
suit, proceeding, governmental investigation or arbitration against or affecting
Borrower or any of its Property, or (b) any material development in any such
action, suit, proceeding, governmental investigation or arbitration, which, in
either case, if adversely determined, is likely to have a Material Adverse
Effect, an officer's certificate of Borrower describing the nature and status of
such matter in reasonable detail;
(L) as soon as available but in no event later than the last day of
each fiscal year of Borrower, a copy of a consolidated business plan for
Borrower and its Subsidiaries for the 24-month period commencing on the first
day of the succeeding fiscal year, which business plan shall contain
consolidated balance sheets as well as consolidated projections of sales, cash
flow and borrowing needs for such 24-month period, on a month-by-month basis for
the first 12 months of such period and on an annual basis for the second 12
months of such period;
(M) at least once in each fiscal year of Borrower, (i) an Officer's
Certificate setting forth all material insurance coverage maintained by Borrower
as of the date of such certificate and of all insurance planned to be maintained
by such Persons in such fiscal year, and (ii) certificates evidencing renewals
of such insurance;
(N) not less than two times in each calendar year, Agent shall
conduct, on behalf of the Lenders and at Borrower's expense (not to exceed
$12,000 in the aggregate in any fiscal year unless an Event of Default has
occurred), an audit of the Accounts and Inventory of Borrower and its
Subsidiaries, the results of which audits shall be satisfactory to Agent and the
Lenders in form and substance and shall be performed by Persons acceptable to
Agent and the Lenders, provided that at any time when an Event of Default shall
have occurred and be continuing Agent shall be entitled to conduct such
additional audits as it may require, at Borrower's sole cost and expense; and
(O) any other information, including financial statements and
computations, relating to the performance of obligations arising under this
Agreement and/or the affairs of Borrower that Agent or any Lender may from time
to time reasonably request and which is capable of being obtained, produced or
generated without unreasonable cost by Borrower or of which Borrower has
knowledge.
40
<PAGE>
7.2 Payment of Principal, Interest and Fees; to Keep Books; Reserves; Etc.
---------------------------------------------------------------------
Borrower will duly and punctually pay the principal of and interest and fees on
the Loans in accordance with the terms of the Notes and this Agreement.
Borrower will, and will cause each of its Subsidiaries to, comply with all of
the covenants, agreements and conditions contained in this Agreement and the
other Loan Documents to which it is a party. Borrower's fiscal year end is
August 31. Borrower will maintain the same fiscal year during and after the
fiscal year ended August 31, 1997 and will keep proper books of record and
account and set aside appropriate reserves, all in accordance with GAAP.
7.3 Payment of Taxes and Claims. Borrower will, and will cause each of
---------------------------
its Subsidiaries to, pay before they become delinquent:
(A) all taxes (including excise taxes), assessments and governmental
charges or levies imposed upon it or its income or profits or upon its Property,
real, personal or mixed, or upon any part thereof;
(B) all claims for labor, materials and supplies which, if unpaid,
might result in the creation of a Lien upon its Property; and
(C) all claims, assessments, or levies required to be paid by any of
them pursuant to any agreement, contract, law, ordinance or governmental rule or
regulation governing any pension, retirement, profit-sharing or any similar
plan;
provided, that, with respect to Property, items of the foregoing description
- --------
need not be paid while being diligently contested in good faith and by
appropriate proceedings so long as (i) adequate book reserves have been
established with respect thereto and (ii) Borrower's title to and right to use
its Property is not materially adversely affected by such non-payment. Borrower
will timely file all Federal and state tax returns and informational returns
required to be filed in connection with the payment of taxes and claims required
by this Section 7.3.
-----------
7.4 Maintenance of Properties and Corporate Existence. Borrower will, and
-------------------------------------------------
will cause each of its Subsidiaries to:
(A) maintain its Property in good condition and make all necessary
renewals, repairs, replacements, additions, betterments, and improvements
thereto consistent with the historical practices of such Persons;
(B) keep true books of records and accounts in which full and correct
entries will be made of all its business transactions and will reflect in its
financial statements adequate accruals and appropriations to reserves;
(C) do or cause to be done all things necessary to preserve and keep
in full force and effect its corporate existence, rights and powers and
franchises including, without limitation thereof, any necessary qualification or
licensing in any foreign jurisdiction;
(D) comply with (i) all applicable statutes, regulations, franchises,
and Orders of, and all applicable restrictions imposed by, any Governmental
Body, in respect of the conduct of its business and the ownership of its
Properties (including, without limitation, all Environmental Laws and all
applicable statutes, rules, ordinances, regulations and Orders relating to fair
labor
41
<PAGE>
standards, equal employment opportunities and occupational health and safety)
and (ii) all terms of any material mortgage, indenture, contract, agreement or
instrument, applicable to Borrower or any of its Properties; and
(E) keep any Property it owns or operates free of contamination from
Hazardous Materials and any other potentially harmful chemical or physical
conditions. If Borrower or any Subsidiary receives notice of any Environmental
Matter or contamination with Hazardous Materials that relates to any of them or
their respective Properties, then Borrower agrees, upon request of Agent, to
provide Agent with such reports, certificates, engineering studies or other
written material or data as Agent may reasonably require so as to satisfy Agent
that Borrower or such Subsidiary is in compliance with its obligations under
this Agreement. Borrower covenants and agrees to, and to cause each of its
Subsidiaries to, cooperate fully with such consultant in any such audits,
including, without limitation, by providing such reasonable access to Borrower's
and its Subsidiaries' books, records, Properties, employees and agents and by
furnishing such written and oral information as such consultant may reasonably
request in connection with any such audits.
7.5 Insurance. Borrower will, and will cause its Subsidiaries to, carry
---------
and maintain in full force and effect at all times with financially sound and
reputable insurers, rated A or better by AM Best & Co., provided that if the
--------
rating of such insurer is lowered so that it no longer complies with this
provision, Borrower shall have 30 days to replace (or to cause the applicable
Subsidiary to replace) such insurance with other insurance satisfying the
requirements of this Section 7.5 (or, as to workers' compensation or similar
-----------
insurance, in an insurance fund or by self-insurance authorized by the
jurisdiction in which its operations are carried on): (i) all workers'
compensation or similar insurance as may be required under the laws of any
jurisdiction, (ii) business interruption insurance covering risk of loss as a
result of the cessation for all or any part of one year of all or any
substantial part of the business conducted by it, (iii) insurance against such
other risks as are usually insured against by corporations of established
reputation engaged in the same or similar businesses and similarly situated,
including, without limitation, fire, casualty, flood, public liability, products
liability insurance, and (iv) with respect to any Collateral consisting of
insurable Property, insurance against loss by fire, explosion, theft and such
other casualties as may be reasonably satisfactory to Agent and insurance
insuring Borrower and its Subsidiaries against liability for personal injury and
property damage relating to such Collateral, in the forms and amounts required
hereunder and under the Mortgages. Insurance specified in clauses (ii) and (iii)
shall be maintained in such amounts (and with co-insurance, deductibles and
self-insured retention, if any) as such insurance is usually carried by
corporations of established reputation engaged in the same or similar businesses
and similarly situated. Insurance specified in clause (iv) shall be maintained
in such form and amounts and having such coverage as may be reasonably
satisfactory to Agent. All insurance required hereunder shall (A) provide that
no cancellation, material reduction in amount or material change in coverage
thereof shall be effective until at least 30 days after receipt by Agent of
written notice thereof, (B) name Agent (for the benefit of the Lenders) as loss
payee or additional insured, as its interests may appear, and (C) be reasonably
satisfactory to Agent in all other respects.
7.6 Further Assurances. Promptly upon request by Agent, Borrower shall,
------------------
and shall cause its Subsidiaries to, (1) correct any material defect or error
that may be discovered in any Loan Document or in the execution, acknowledgment
or recordation thereof, and (2) do, execute, acknowledge, deliver, record, re-
record, file, re-file, register and re-register any and all such further acts,
deeds, conveyances, pledge agreements, mortgages, deeds of trust, trust deeds,
assignments, estoppel certificates, financing statements and continuations
thereof, termination
42
<PAGE>
statements, notices of assignment, transfers, certificates, assurances, powers,
proxies and other instruments as Agent may reasonably require from time to time
in order (A) to carry out more effectively the purposes of this Agreement or any
other Loan Document, (B) to subject to the Liens and security interests created
by any of the Loan Documents any of their respective Properties, rights or
interests covered or now or hereafter intended to be covered by any of the Loan
Documents, (C) to perfect and maintain the validity, effectiveness and priority
of any of the Security Documents and the Liens and security interests intended
to be created thereby and (D) better to assure, convey, grant, assign, transfer,
preserve, protect and confirm to Agent the rights granted or now or hereafter
intended to be granted to it under any Loan Document or under any other
instrument executed in connection with or pursuant to any Loan Document.
7.7 Restrictions on Indebtedness. Borrower will not, and will not permit
----------------------------
any of its Subsidiaries to, incur, create, assume or suffer to exist any
Indebtedness, other than the following:
(A) Indebtedness incurred pursuant to this Agreement and the other
Loan Documents;
(B) Accounts payable and other accrued liabilities in the ordinary
course of business;
(C) Senior Debt, in addition to the Obligations, in an aggregate
principal amount not to exceed $2,000,000 in any fiscal year;
(D) Indebtedness owed to Bob Green in an aggregate amount of not more
than $500,000 at any one time outstanding; and
(E) Indebtedness secured by Liens permitted under Section 7.8.
-----------
7.8 Restrictions on Liens. Borrower will not, and will not permit any of
---------------------
its Subsidiaries to, create, assume or suffer to exist any Lien upon any of
their respective Properties, whether now owned or hereafter acquired, except the
following (herein collectively referred to as "Permitted Liens"):
---------------
(A) Liens for taxes, assessments or governmental charges or claims
the payment of which is not at the time required by Section 7.3;
-----------
(B) Statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, materialmen and other Liens imposed by law incurred in the ordinary
course of business for sums not yet delinquent or being diligently contested in
good faith, if such reserve or other appropriate provision, if any, as shall be
required by GAAP shall have been made therefor;
(C) Liens (other than any Lien imposed by ERISA) incurred or deposits
made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security, or to
secure the performance of tenders, statutory obligations, surety and appeal
bonds, bids, government contracts, performance and return-of-money bonds and
other similar obligations (exclusive of obligations for the payment of borrowed
money), provided that the amount of Liens of Borrower referred to in this
--------
Subsection (C) outstanding at any time shall not exceed $125,000 in the
aggregate;
43
<PAGE>
(D) Any attachment or judgment Lien (including judgment or appeal
bonds) which shall, within 30 days after the entry thereof, have been
discharged, bonded or execution thereof stayed pending appeal, or which shall
have been discharged or bonded within 30 days after the expiration of any such
stay;
(E) Leases or subleases granted to others not interfering with the
ordinary conduct of business;
(F) Easements, rights-of-way, restrictions and other similar charges
or encumbrances which do not, individually or in the aggregate, materially
interfere with the ordinary conduct of business;
(G) Any interest, title or Lien of a lessor under any permitted
operating lease;
(H) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(I) Liens incurred pursuant to the Loan Documents;
(J) Liens listed on Schedule 6.8A or Schedule 6.10 in existence on
------------- -------------
the Date after giving effect to the Transactions;
(K) Commencing in fiscal year 1998, and for each fiscal year
thereafter, Liens (including Capitalized Leases) in respect of Property acquired
or constructed or improved by Borrower after the Closing Date, which Liens exist
or are created at the time of acquisition or completion of construction or
improvement of such Property or within 60 days thereafter, but any such Lien
shall cover only the Property so acquired or constructed and any improvements
thereto (and any real Property on which such Property is located, if such
Property is a building, improvement or fixture), provided that the aggregate
--------
principal amount of all Indebtedness secured by Liens incurred pursuant to this
Subsection (K) in any fiscal year, together with any Indebtedness incurred
pursuant to Section 7.7(C), shall not exceed $2,000,000; provided that this
-------------- --------
Section 7.8 shall not be construed to prohibit the incurrence of Liens against
- -----------
the capital stock of Target at any time prior to the Inclusion Date (as defined
in Section 7.9).
-----------
7.9 Target Stock. Commencing on the Closing Date, Borrower shall take
------------
such action as may be necessary to cause the capital stock of Target to cease
being "margin stock" as defined in Regulation U of the board of Governors of the
Federal Reserve System (12 CAR 207), which shall be accomplished not more than
30 days after the Closing Date. Upon the capital stock of Target ceasing to be
"margin stock" (the Inclusion Date"),Borrower shall cause such stock to be
--------------
pledged to Agent pursuant to the Pledge Agreement and such stock shall
thereafter be subject to Section 7.8 of this Agreement.
7.10 Sale-Leaseback Transactions. Borrower will not, and will not permit
---------------------------
any of its Subsidiaries to, enter into any arrangements with any lender or
investor or to which such lender or investor is a party providing for the
leasing by Borrower or any Subsidiary of real or personal Property which has
been or is to be sold or transferred by Borrower or such Subsidiary to such
lender or investor or to any Person to whom funds have been or are to be
advanced by such lender or investor on the security of such Property or rental
obligations of Borrower or such Subsidiary.
44
<PAGE>
7.11 Transactions with Affiliates. Borrower will not, and will not permit
----------------------------
any of its Subsidiaries to, directly or indirectly, enter into or permit to
exist any transaction (including, without limitation, the purchase, sale, lease
or exchange of any Property or the rendering of any service), with any Affiliate
except in the ordinary course of business and on terms that are not less
favorable to Borrower or such Subsidiary than those that would be obtainable at
the time in an arms' length transaction with any Person who is not such an
Affiliate.
7.12 Consolidation, Merger or Disposition of Assets; Acquisitions.
------------------------------------------------------------
Borrower will not, and will not permit any of its Subsidiaries to, enter into
any transaction of merger or consolidation, or liquidate, wind up or dissolve
itself (or suffer any liquidation or dissolution), or convey, sell, lease,
transfer or otherwise dispose of, in one transaction or a series of
transactions, all or any part of its business, Property or fixed assets, whether
now owned or hereafter acquired, or acquire by purchase or otherwise all or
substantially all of the business, Property or fixed assets of, or stock or
other evidence of beneficial interest in any Person, except:
(A) Borrower and its Subsidiaries may in the ordinary course of its
business sell or otherwise dispose of Inventory;
(B) Borrower and its Subsidiaries may sell or otherwise dispose of,
in the ordinary course of business, (i) Property that is worn out or obsolete or
no longer used in its business, and (ii) other Property in an amount not to
exceed an aggregate Fair Market Value of $500,000 on a consolidated basis per
fiscal year;
(C) any Subsidiary of Borrower may merge with Borrower or any other
Subsidiary of Borrower.
7.13 Sale or Discount of Receivables. Borrower will not, and will not
-------------------------------
permit any of its Subsidiaries to, directly or indirectly, sell with or without
recourse, or discount or otherwise sell any of its notes or accounts receivable.
7.14 Certain Contracts. Borrower will not, and will not permit any of its
-----------------
Subsidiaries to, enter into or be a party to, any Guarantee or contract which,
in economic effect, is substantially equivalent to a Guarantee, except to the
extent permitted by Section 7.7.
-----------
7.15 Restricted Payments and Investments. Borrower will not, and will not
-----------------------------------
permit any of its Subsidiaries to, directly or indirectly, make any Restricted
Payment (except to Borrower) or any Investment other than Permitted Investments.
This Section 7.15 shall not prohibit Borrower or any Subsidiary from owning the
------------
capital stock of their respective Subsidiaries; provided that no Investments may
--------
be made in Excluded Subsidiaries in excess of those Investments existing as of
the Closing Date.
7.16 Financial Covenants. All financial covenants are determined for
-------------------
Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP.
(A) Borrower will have, as at the last day of each fiscal quarter
prior to August 31, 1998, a Book Net Worth of not less than $20,500,000. "Book
----
Net Worth" means the aggregate book value of all assets of Borrower and its
- ---------
Subsidiaries on a consolidated basis, net of liabilities, determined in
accordance with GAAP.
45
<PAGE>
(B) Borrower will not permit, as at the last day of each fiscal
quarter prior to August 31, 1998, its ratio of Total Liabilities to Book Net
Worth to be greater than 3.0 : 1.0. "Total Liabilities" means the aggregate
-----------------
liabilities of Borrower and its Subsidiaries, determined on a consolidated basis
in accordance with GAAP.
(C) Borrower will not permit, (i) as at August 31, 1998 and at the
last day of each fiscal quarter thereafter prior to August 31, 1999, its ratio
of Total Liabilities to Tangible Net Worth to be greater than 5.5 : 1.0, and
(ii) as at August 31, 1999 and at the last day of each fiscal quarter
thereafter, its ratio of Total Liabilities to Tangible Net Worth to be greater
than 3.5 : 1.0.
(D) Borrower will have, (i) as at August 31, 1998 and at the last day
of each fiscal quarter thereafter prior to August 31, 1999, a Tangible Net Worth
of not less than $8,500,000, and (ii) as at August 31, 1999 and at the last day
of each fiscal quarter thereafter, a Tangible Net Worth of not less than
$13,000,000.
(E) Borrower shall at all times have a ratio of (x) Consolidated Net
Income plus depreciation and amortization to (y) the current portion of long-
term Indebtedness plus Capital Expenditures incurred but not financed during the
applicable period of measurement of not less than 1.4 : 1.0, as at the end of
each fiscal quarter for the period of four consecutive fiscal quarters then
ended.
(F) Borrower shall have a ratio of Consolidated Current Assets to
Consolidated Current Liabilities of not less than 1.0 : 1.0, as at the end of
each fiscal quarter.
7.17 Acquisition of Margin Securities. Borrower will not, and will not
--------------------------------
permit any Subsidiary to, own, purchase or acquire (or enter into any contract
to purchase or acquire) any "margin security" as defined by any regulation of
the Board of Governors of the Federal Reserve System as now in effect or as the
same may hereafter be in effect unless, prior to any such purchase or
acquisition or entering into any such contract, Agent shall have received an
opinion of counsel satisfactory to it to the effect that such purchase or
acquisition will not cause this Agreement or the Loans to be in violation of
Regulations G, U or X or any other regulation of such Board then in effect;
provided that Borrower and its Subsidiaries may from time to time acquire and
- --------
hold "margin securities" so long as the aggregate Fair Market Value of all such
margin securities held by Borrower and its Subsidiaries at any one time does not
exceed $25,000; and provided, further that this Section 7.17 shall not be deemed
-------- ------- ------------
to prohibit the consummation of the acquisition or (subject to Section 7.9)
-----------
Borrower's ownership of the capital stock of Target. Notwithstanding any other
provision of the Loan Documents to the contrary, securities purchased and held
in accordance with the proviso of the preceding sentence shall not be required
to be subject to the Liens created pursuant to the Loan Documents, and such
securities shall not be deemed to be subject to the provisions of the Loan
Documents prohibiting Liens in favor of Persons other than Agent and the Lenders
against Property of Borrower and its Subsidiaries.
7.18 Collateral Locations. Neither the location of the principal place of
--------------------
business and chief executive office of Borrower nor the location of any
Collateral (except Collateral being disposed of as permitted under this
Agreement) shall be changed nor shall there be established additional places of
business or additional locations at which Collateral is stored, kept or
processed except
46
<PAGE>
upon at least 30 days' prior written notice to Agent and in compliance with the
applicable provisions of this Agreement.
7.19 Negative Pledges, Restrictive Agreements, etc. Borrower will not, and
---------------------------------------------
will not permit any of its Subsidiaries to, enter into any agreement (excluding
the Loan Documents) prohibiting the creation or assumption of any lien upon any
of the Collateral, whether now owned or hereafter acquired, or the ability of
Borrower or any Subsidiary to amend or otherwise modify any Loan Document to
which it is a party.
7.20 Additional Collateral Matters. Schedule 7.20 sets forth a complete
-----------------------------
and accurate list of all banking and other depository accounts of Borrower and
its Subsidiaries existing on the Closing Date after giving effect to the
Acquisition. Borrower shall, and shall cause each of its Subsidiaries to,
within the applicable time period indicated for each such account on Schedule
7.20, either (i) cause such account to be maintained with Agent, (ii) close such
account or (iii) cause such account to become subject to an account take-over
letter substantially in the form of Exhibit L hereto executed and delivered by
---------
the institution at which such account is maintained (if other than Agent).
Borrower will, and will cause each of its Subsidiaries to: (a) use best efforts
have the lessors of their respective real Properties execute and deliver to
Agent landlord waivers substantially in the form of Exhibit K hereto, and each
---------
of them shall require the execution and delivery of such a landlord waiver in
connection with any new lease of real Property; (b) not open or suffer to exist
any banking or depositary account unless such account is either (x) maintained
with Agent or (y) (if not maintained with Agent) made subject to an account
take-over letter substantially in the form of Exhibit L hereto executed by the
---------
institution at which such account is maintained or otherwise subject to a first
priority security interest in favor of Agent; (c) notify any warehouseman,
bailee or processor holding Inventory having a Fair Market Value in excess of
$1,000,000 of the Liens created in favor of Agent and the Lenders and instruct
such Person to hold such Inventory for Agent's account subject to Agent 's
instructions; and (d) notify any third-party molder holding Equipment having a
Fair Market Value in excess of $1,000,000 of the Liens created in favor of Agent
and the Lenders and instruct such Person to hold such Equipment for Agent's
account subject to Agent 's instructions.
7.21 Future Subsidiaries. Notwithstanding any other provision of this
-------------------
Agreement or the other Loan Documents, Borrower will not, and not permit any of
its Subsidiaries to, create or acquire any other Subsidiary (a "New Subsidiary")
--------------
unless (a) such New Subsidiary is a corporation organized under the laws of the
United States, (b) such New Subsidiary (i) executes and delivers a Trademark
Security Agreement with respect to any Property owned by such New Subsidiary
that constitutes collateral under the form of Trademark Security Agreement, (ii)
becomes a party to the Security Agreement and the Subsidiary Guaranty and (iii)
if requested by Agent, with respect to any real property owned by such
Subsidiary, a Mortgage, (c) the ownership interests in such New Subsidiary are
pledged to Agent pursuant to a Pledge Agreement, (d) Agent and the Lenders
receive an opinion of counsel to such Subsidiary addressing, with respect to
such New Subsidiary and its Loan Documents, the matters addressed with respect
to Borrower's Subsidiaries on the Closing Date in the opinion attached hereto as
Exhibit D, and (e) after giving effect to the creation or acquisition of such
- ---------
New Subsidiary, no Default or Event of Default shall have occurred and be
continuing (for purposes of determining compliance with this clause (e),
Borrower shall deliver an Officer's Certificate in the form required by Section
-------
7.1(C) which shall set forth calculations of the specified covenants on a pro-
- ------
forma basis at last day of Borrower's most recently ended fiscal quarter as if
the New Subsidiary had been a Subsidiary of Borrower during such fiscal
quarter).
47
<PAGE>
8. EVENTS OF DEFAULT; REMEDIES.
---------------------------
8.1 Events of Default. Any one or more of the following events shall
-----------------
constitute an Event of Default by Borrower under this Agreement.
(a) If Borrower fails to make any payment of all or any portion of
the Obligations when due and payable or when declared due and payable (whether
interest, fees or otherwise, including any interest which, but for the
provisions of the United States Bankruptcy Code, would have accrued on any of
the Obligations);
(b) If Borrower or any of its Subsidiaries defaults in the
performance or observance of any term, provision, condition, covenant, or
agreement contained in Section 7.7, 7.10, 7.11, 7.12, 7.13, 7.14, 7.15, 7.16,
----------- ----- ---- ---- ---- ---- ---- ----
7.17, 7.19 or 7.21;
- ---- ---- ----
(c) If Borrower or any of its Subsidiaries defaults in the
performance or observance of any term, provision, condition, covenant, or
agreement contained in Section 7.1, 7.5, 7.8, 7.9 or 7.20 and such default
----------- --- --- --- ----
continues unremedied for a period of 5 days;
(d) If Borrower of any of its Subsidiaries fails or neglects to
perform, keep, or observe any term, provision, condition, covenant, or agreement
contained in this Agreement or in any of the other Loan Documents other than as
specified in any other subsection of this Section 8.1, and such default
-----------
continues unremedied for a period of 30 days;
(e) If any material portion of the Properties of Borrower and its
Subsidiaries is attached, seized, subjected to a writ or distress warrant, or is
levied upon, or comes into the possession of any judicial officer or assignee;
(f) If any bankruptcy, reorganization, receivership, liquidation,
assignment for the benefit of creditors or other insolvency proceeding (each, an
"Insolvency Proceeding") is commenced by Borrower or any Subsidiary;
---------------------
(g) If an Insolvency Proceeding is commenced against Borrower or any
Subsidiary and not dismissed within 60 calendar days;
(h) If Borrower or any of its Subsidiaries is enjoined, restrained,
or in any way prevented by court order from continuing to conduct all or any
material part of its business affairs and such injunction or other order is not
released to the satisfaction of Agent within 10 calendar days of the entry of
such injunction, restraint or order;
(i) If a notice of lien, levy, or assessment is filed of record with
respect to any material portion of the Property of Borrower and its Subsidiaries
by any Governmental Body, or if any taxes or debts owing at any time hereafter
to any one or more of such entities becomes a Lien, whether choate or otherwise,
upon any material portion of Borrower's and its Subsidiaries' Property and the
same is not paid on the payment date thereof, unless the same is being contested
in good faith by appropriate proceedings and with appropriate reserves and no
Lien has attached in respect thereof;
48
<PAGE>
(j) If a judgment or other claim becomes a Lien upon any material
portion of Borrower's or any Subsidiary's Property and is not being contested in
good faith by Borrower or such Subsidiary, execution on which has been stayed
pending such contest;
(k) If Agent's Lien in any Collateral shall cease or fail to be a
valid, perfected first-priority Lien, subject to Permitted Liens and such other
exceptions as may be permitted under this Agreement;
(l) If any Loan Document shall cease to be valid and enforceable
against Borrower or any of its Subsidiaries, or Borrower or any Subsidiary shall
so assert;
(m) If any Person, or any group of Persons acting in concert, shall
have become the direct or indirect beneficial owner (within the meaning of Rule
13d under the Exchange Act) of more than 25% of the outstanding shares of
Borrower's capital stock having ordinary voting power;
(n) If there is a default in any agreement to which Borrower or any
Subsidiary is a party with third parties resulting in a right by such third
parties, whether or not exercised, to accelerate the maturity of Borrower's or
any such Subsidiary's Funded Debt in an aggregate principal amount in excess of
$100,000; and
(o) If any representation, warranty, certification or statement made
by or on behalf of Borrower, and of its Subsidiaries or any officer of any of
them in this Agreement, any other Loan Document or in any certificate,
instrument, financial statement or other document now or hereafter delivered
hereunder or pursuant to or in connection with any provision hereof shall prove
to be false or incorrect or breached in any material respect on the date as of
which made.
8.2 Remedies. If any Event of Default described in clause (f) or (g) of
-------- ---------- ---
Section 8.1 shall occur, the Commitment and the Loans (if not theretofore
- -----------
terminated) shall automatically terminate and the outstanding principal amount
of all outstanding Obligations shall automatically be and become immediately due
and payable, without notice or demand. If any other Event of Default shall
occur for any reason, whether voluntary or involuntary, and be continuing,
Agent may, by notice to Borrower, declare all or any portion of the outstanding
principal amount of the Obligations to be due and payable and/or the Loans and
the Commitment (if not theretofore terminated) to be terminated, whereupon the
full unpaid amount of such Obligations which shall be so declared due and
payable shall be and become immediately due and payable, without further notice,
demand or presentment, and/or, as the case may be, the Loans and the Commitment
shall terminate. In addition, upon any Event of Default Agent shall have the
right to exercise any and all remedies available to it at law or in equity as
well as any rights or remedies specified in any the Loan Documents.
8.3 Remedies with Respect to Collateral.
-----------------------------------
(a) Without limiting the foregoing, if any Event of Default shall
occur and be continuing, Agent may exercise, in addition to all other rights
and remedies granted to it in this Agreement, any other Loan Document or by law,
all rights and remedies of a secured party under the UCC. Without limiting the
generality of the foregoing, Borrower expressly agrees that in any such event
Agent may, without demand of performance or other demand, advertisement, legal
process or notice of any kind (except as may be required by law or provided
herein) to or upon
49
<PAGE>
Borrower or any other Person (all and each of which demands, advertisements
and/or notices are hereby expressly waived to the maximum extent permitted by
the UCC and other applicable law), (i) at any time or times enter Borrower's
premises and take physical possession of the Collateral and maintain such
possession on Borrower's premises, without any obligation to pay rent or other
compensation to Borrower, (ii) remove the Collateral or any part thereof, to
such other places as Agent may desire, (iii) forthwith collect, receive,
appropriate and realize upon the Collateral, or any part thereof, and/or (iv)
forthwith sell, lease, assign, give an option or options to purchase, or sell or
otherwise dispose of and deliver said Collateral (or contract to do so), or any
part thereof, in one or more parcels at public or private sale or sales, at any
exchange or broker's board or at any of Agent's offices or elsewhere at such
prices and on such terms as Agent may deem commercially reasonable (irrespective
of the impact of any such sales on the market price of the Collateral), for cash
or on credit or for future delivery. Any such purchaser (including, without
limitation, Agent and any other Lender) of Collateral sold pursuant to this
Section 8.3 shall purchase the same absolutely free from any claim or right on
- -----------
the part of Borrower and Borrower does hereby waive (to the maximum extent
permitted by the UCC and other applicable law) all rights of redemption, stay,
and appraisal which Borrower now has or may at any time in the future have under
any rule of law or statute now existing or hereafter enacted. Borrower further
agrees, at Agent's request to assemble the Collateral and make it available to
Agent at places which Agent shall reasonably select, whether at Borrower's
premises or elsewhere. To the maximum extent permitted by applicable law,
Borrower waives all claims, damages, and demands against Agent arising out of
the repossession, retention or sale of the Collateral except such as may arise
out of the gross negligence or willful misconduct of Agent or the failure of
Agent to exercise reasonable care in the custody and preservation of Collateral
in its possession or under its control as provided in Section 4.3. Borrower
-----------
agrees that, to the extent notice of sale shall be required by law, Agent need
not give more than ten (10) days' notice of the time and place of any public
sale or of the time after which a private sale may take place and that such
notice shall constitute reasonable notification within the meaning of Section
9504(3) of the UCC.
(b) Borrower also agrees to pay all reasonable costs of Agent and
Lenders, including, without limitation, reasonable attorneys' fees, incurred in
connection with the enforcement of any of its rights and remedies hereunder,
including, without limitation, reasonable fees for attorneys employed by Agent
or any Lenders to collect any deficiency existing after the application of
proceeds from any sale of Collateral pursuant to this Section 8.3.
-----------
(c) Borrower hereby waives presentment, demand, protest or any notice
(to the maximum extent permitted by applicable law) of any kind in connection
with this Agreement or any Collateral.
(d) The proceeds of any disposition of any Collateral obtained
pursuant to this Section 8.3 and\or the other Loan Documents shall be applied as
-----------
follows:
(i) first, to the payment of any and all expenses and fees
(including reasonable attorney's fees) incurred by Agent in foreclosing on
and disposing of the Collateral;
(ii) next, any surplus then remaining to the payment of the
Obligations (whether matured or unmatured) in such order as Agent may
determine in its sole discretion; and
50
<PAGE>
(iii) thereafter, if no other Obligations are outstanding, any
surplus then remaining shall be paid to Borrower or to such other Person
legally entitled to same; it being understood that Borrower will remain
liable to Agent and the Lenders to the extent of any deficiency between the
amount of the Obligations and the aggregate of all amount realized from
Collateral.
9. THE AGENT
---------
9.1 Actions. Each Lender hereby appoints COMERICA BANK-CALIFORNIA
-------
("Comerica") as its Agent under and for purposes of this Agreement and each
----------
other Loan Document. Each Lender authorizes Agent to act on behalf of such
Lender under this Agreement and each other Loan Document and, in the absence of
other written instructions from the Required Lenders received from time to time
by Agent (with respect to which Agent agrees that it will comply, except as
otherwise provided in this Section or as otherwise advised by counsel), to
exercise such powers hereunder and thereunder as are specifically delegated to
or required of Agent by the terms hereof and thereof, together with such powers
as may be reasonably incidental thereto. Each Lender hereby indemnifies (which
indemnity shall survive any termination of this Agreement) Agent, pro rata
--- ----
according to such Lender's Percentage, from and against any and all liabilities,
obligations, losses, damages, claims, costs or expenses of any kind or nature
whatsoever which may at any time be imposed on, incurred by, or asserted
against, Agent in any way relating to or arising out of this Agreement and any
other Loan Document, including reasonable attorneys' fees, and as to which Agent
is not reimbursed by Borrower; provided, however, that no Lender shall be liable
-------- -------
for the payment of any portion of such liabilities, obligations, losses,
damages, claims, costs or expenses which are determined by a court of competent
jurisdiction in a final proceeding to have resulted solely from Agent's gross
negligence or wilful misconduct. Agent shall not be required to take any action
hereunder, or under any other Loan Document, or to prosecute or defend any suit
in respect of this Agreement or any other Loan Document, unless it is
indemnified hereunder to its satisfaction. If any indemnity in favor of Agent
shall be or become, in Agent's determination, inadequate, Agent may call for
additional indemnification from the Lenders and cease to do the acts indemnified
against hereunder until such additional indemnity is given.
9.2 Funding Reliance, etc. Unless Agent shall have been notified by
---------------------
telephone, confirmed in writing, by any Lender by 5:00 p.m., Pacific time, on
the day prior to an Advance or Purpose Line disbursement that such Lender will
not make available the amount which would constitute its Percentage of such
Advance or disbursement on the date specified therefor, Agent may assume that
such Lender has made such amount available to Agent and, in reliance upon such
assumption, make available to Borrower a corresponding amount. If and to the
extent that such Lender shall not have made such amount available to Agent, such
Lender and Borrower severally agree to repay Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the date
Agent made such amount available to Borrower to the date such amount is repaid
to Agent, at the interest rate applicable at the time to the portion of the
Revolving Loan comprising such Advance or to such Purpose Line disbursement, as
the case may be.
9.3 Exculpation. Neither Agent nor any of its directors, officers,
-----------
employees or agents shall be liable to any Lender for any action taken or
omitted to be taken by it under this Agreement or any other Loan Document, or in
connection herewith or therewith, except for its own wilful misconduct or gross
negligence, nor responsible for any recitals or warranties herein or therein,
51
<PAGE>
nor for the effectiveness, enforceability, validity or due execution of this
Agreement or any other Loan Document, nor for the creation, perfection or
priority of any Liens purported to be created by any of the Loan Documents, or
the validity, genuineness, enforceability, existence, value or sufficiency of
any collateral security, nor to make any inquiry respecting the performance by
Borrower or any of its Subsidiaries of their respective obligations under the
Loan Documents. Any such inquiry which may be made by Agent shall not obligate
it to make any further inquiry or to take any action. Agent shall be entitled
to rely upon advice of counsel concerning legal matters and upon any notice,
consent, certificate, statement or writing which Agent believes to be genuine
and to have been presented by a proper Person.
9.4 Successor. Agent may resign as such at any time upon at least 30
---------
days' prior notice to Borrower and all Lenders. If Agent at any time shall
resign, the Required Lenders may appoint another Lender as a successor Agent
which shall thereupon become Agent hereunder. If no successor Agent shall have
been so appointed by the Required Lenders, and shall have accepted such
appointment, within 30 days after the retiring Agent's giving notice of
resignation, then the retiring Agent may, on behalf of the Lenders, appoint a
successor Agent, which shall be one of the Lenders or a commercial banking
institution organized under the laws of the U.S. (or any State thereof) or a
U.S. branch or agency of a commercial banking institution, and having a combined
capital and surplus of at least $50,000,000. Upon the acceptance of any
appointment as Agent hereunder by a successor Agent, such successor Agent shall
be entitled to receive from the retiring Agent such documents of transfer and
assignment as such successor Agent may reasonably request, and shall thereupon
succeed to and become vested with all rights, powers, privileges and duties of
the retiring Agent, and the retiring Agent shall be discharged from its duties
and obligations under this Agreement. After any retiring Agent's resignation
hereunder as Agent, the provisions of this Section 9 shall inure to its benefit
---------
as to any actions taken or omitted to be taken by it while it was Agent under
this Agreement; and Sections 10.8 and 10.9 shall continue to inure to its
------------- ----
benefit.
9.5 Loans and other Transactions by Comerica. Comerica shall have the
----------------------------------------
same rights and powers with respect to (x) the Revolving Loan made by it or any
of its Affiliates, and (y) the Notes held by it or any of its Affiliates as any
other Lender and may exercise the same as if it were not Agent. Comerica and
its Affiliates may accept deposits from, lend money to, and generally engage in
any kind of business with Borrower, any of its Subsidiaries or any of their
Affiliates as if Comerica were not Agent hereunder.
9.6 Credit Decisions. Each Lender acknowledges that it has, independently
----------------
of Agent and each other Lender, and based on such Lender's review of the
financial information of Borrower and its Subsidiaries, this Agreement, the
other Loan Documents (the terms and provisions of which being satisfactory to
such Lender) and such other documents, information and investigations as such
Lender has deemed appropriate, made its own credit decision to extend its
Commitment. Each Lender also acknowledges that it will, independently of Agent
and each other Lender, and based on such other documents, information and
investigations as it shall deem appropriate at any time, continue to make its
own credit decisions as to exercising or not exercising from time to time any
rights and privileges available to it under this Agreement or any other Loan
Document.
9.7 Copies, etc. Agent shall give prompt notice to each Lender of each
-----------
notice or request required or permitted to be given to Agent by Borrower
pursuant to the terms of this Agreement (unless concurrently delivered to the
Lenders by Borrower). Agent will distribute to each Lender each document or
instrument received for its account and copies of all other
52
<PAGE>
communications received by Agent from Borrower for distribution to the Lenders
by Agent in accordance with the terms of this Agreement.
10. GENERAL PROVISIONS
------------------
10.1 Notices. All communications provided for hereunder shall be in
-------
writing and delivered by hand or sent by first class mail or sent by telecopy
(with such telecopy to be confirmed promptly in writing sent by first class
mail), sent (i) if to any Lender or Agent, to:
Comerica Bank-California
301 East Ocean Boulevard
Long Beach, CA 90802
Attention: Scott Monson
Telecopy Number: 562-595-8251
with a copy to:
Manatt, Phelps & Phillips, LLP
11355 West Olympic Blvd.
Los Angeles, CA 90064
Attention: Monte M. Lemann, Esq.
Telecopy Number: 310-312-4224
or to such other address or telecopy number as Agent or such Lender may have
designated to Borrower in writing; and (ii) if to Borrower, to:
Summa Industries
21250 Hawthorne Blvd., Suite 500
Torrance, CA 90503
Attention: Mr. James R. Swartwout, Chairman
Telecopy Number:
with a copy to:
Morrison & Foerster LLP
555 West Fifth St.
Los Angeles, CA 90013-1024
Telecopy Number: 213-892-5454
or to such other address or addresses or telecopy number or numbers as Borrower
may most recently have designated in writing to Agent and the Lenders by such
notice. All such communications shall be deemed to have been given or made when
so delivered by hand or sent by or telecopy, or three Business Days after being
so mailed.
10.2 Successors and Assigns; Assignments and Participations. This
------------------------------------------------------
Agreement shall bind and inure to the benefit of the respective successors and
assigns of each of the parties; provided, however, that Borrower may not assign
-----------------
this Agreement or any rights or duties hereunder
53
<PAGE>
without Agent's prior written consent and any prohibited assignment shall be
absolutely void. No consent by Agent to an assignment by Borrower shall release
Borrower from its obligations. Each Lender may assign, or sell participations
in, its Commitment to one or more other Persons in accordance with the following
provisions of this Section 10.2; provided that no such assignment or
------------ --------
participation shall be permitted if after giving effect thereto, there would be,
in the aggregate, more than four (4) Lenders and Participants hereunder
(a) Assignments. Any Lender may at any time, with notice to Borrower
-----------
and Agent, assign and delegate to one or more commercial banks or other
financial institutions acceptable to Agent (each Person to whom such assignment
and delegation is to be made, being hereinafter referred to as an "Assignee
--------
Lender"), all or any fraction of such Lender's Commitment (which assignment and
- ------
delegation shall be of a constant, and not a varying, percentage of all the
assigning Lender's Commitment and shall be allocated ratably among the Revolving
Loan, the Term Loan and the Purpose Line); provided, however, that Borrower and
-------- -------
Agent shall be entitled to continue to deal solely and directly with such Lender
in connection with the interests so assigned and delegated to an Assignee Lender
until (i) written notice of such assignment and delegation, together with
payment instructions, addresses and related information with respect to such
Assignee Lender, shall have been given to Borrower and Agent by such Lender and
such Assignee Lender; and (ii) Agent shall have received its customary
processing fee from such Lender or Assignee Lender and an executed assignment
agreement in form and substance satisfactory to Agent. Notwithstanding the
foregoing, not less than 50% of the aggregate Commitments shall at all times be
held by Comerica Bank-California and/or one of more of its Affiliates.
From and after the date that an assignment becomes effective as
provided in the preceding paragraph, (x) the Assignee Lender thereunder shall be
deemed automatically to have become a party hereto and to the extent that rights
and obligations hereunder have been assigned and delegated to such Assignee
Lender in connection with such assignment, shall have the rights and obligations
of a Lender hereunder and under the other Loan Documents, and (y) the assignor
Lender, to the extent that rights and obligations hereunder have been assigned
and delegated by it in connection with such assignment, shall be released from
its obligations hereunder and under the other Loan Documents. Within 5 Business
Days after its receipt of notice of such assignment, Borrower shall execute and
deliver to Agent (for delivery to the relevant Assignee Lender) new Notes
evidencing such Assignee Lender's assigned Commitment and, if the assignor
Lender has retained a Commitment hereunder, replacement Notes each in the
principal amount of the applicable Loan retained by the assignor Lender
hereunder (each such Note to be in exchange for, but not in payment of, the Note
then held by such assignor Lender). Each such replacement Note shall be dated
the date of the predecessor Note. The assignor Lender shall mark the
predecessor Note "exchanged" and deliver it to Borrower. Accrued interest on
that part of the predecessor Note evidenced by the replacement Note, and accrued
fees, shall be paid as provided in the documentation effecting the Assignment.
Accrued interest on that part of the predecessor Note evidenced by the Revolving
Note shall be paid to the assignor Lender. Accrued interest and accrued fees
shall be paid at the same time or times provided in the predecessor Note and in
this Agreement. Any attempted assignment and delegation not made in accordance
with this Section 10.2(a) shall be null and void.
---------------
(b) Participations. Any Lender may at any time sell to one or more
--------------
commercial banks or other Persons (each of such commercial banks and other
Persons being herein called a "Participant") participating interests in any its
-----------
Commitment; provided, however, that
-------- -------
54
<PAGE>
(i) no participation contemplated in this Section 10.2(b) shall
---------------
relieve such Lender from its Commitment or its other obligations hereunder
or under any other Loan Document;
(ii) such Lender shall remain solely responsible for the performance
of its Commitment and such other obligations;
(iii) Borrower and Agent shall continue to deal solely and directly
with such Lender in connection with such Lender's rights and obligations
under this Agreement and each of the other Loan Documents;
(iv) no Participant, unless such Participant is an Affiliate of such
Lender, or is itself a Lender, shall be entitled to require such Lender to
take or refrain from taking any action hereunder or under any other Loan
Document, except that such Lender may agree with any Participant that such
Lender will not, without such Participant's consent, take any actions of
the type described in clause (b) or (c) of Section 10.6.
---------- --- ------------
Borrower acknowledges and agrees that each Participant, for purposes of Sections
--------
3.4, 3.5, 3.6, 3.7, 10.8 and 10.9, shall be considered a Lender.
- --- --- --- --- ---- ----
10.3 Section Headings. Headings and numbers have been set forth herein for
----------------
convenience only. Unless the contrary is compelled by the context, everything
contained in each paragraph applies equally to this entire Agreement.
10.4 Interpretation. Neither this Agreement nor any uncertainty or
--------------
ambiguity herein shall be construed or resolved against Agent, any Lender or
Borrower, whether under any rule of construction or otherwise. On the contrary,
this Agreement has been reviewed by all parties (each of which has had the
benefit of advice from legal counsel) and shall be construed and interpreted
according to the ordinary meaning of the words used so as to fairly accomplish
the purposes and intentions of all parties hereto.
10.5 Severability of Provisions. Each provision of this Agreement shall be
--------------------------
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
10.6 Amendments and Waivers. No amendment, modification, termination, or
----------------------
waiver of any provision of this Agreement, the other Loan Documents, or any
other document or instrument executed in connection herewith, or consent to any
departure by Borrower therefrom, shall in any event be effective without the
written concurrence of the Required Lender; provided, however, that no such
-------- -------
amendment, modification or waiver which would:
(a) modify any requirement hereunder that any particular action be
taken by all the Lenders or by the Required Lenders shall be effective
unless consented to by each Lender;
(b) modify this Section 10.6, change the definition of "Required
------------ --------
Lenders", increase the Commitment of any Lender, reduce any fees payable to
-------
Agent or the Lenders, release any collateral security, except as otherwise
specifically provided in any Loan Document or extend the Maturity Date
shall be effective without the consent of each Lender and each holder of a
Note;
55
<PAGE>
(c) extend the due date for, or reduce the amount of, any scheduled
repayment or prepayment of principal of or interest on any portion of any
Loan (or reduce the principal amount of or rate of interest on any Loan)
shall be effective without the consent of the holder of that Note
evidencing such portion of the applicable Loan; or
(d) affect adversely the interests, rights or obligations of Agent
qua Agent shall be effective without consent of Agent.
---
10.7 Set Offs. Upon the occurrence and during the continuance of any Event
--------
of Default, Agent and each Lender is hereby authorized at any time and from time
to time, without notice to Borrower (any such notice being expressly waived by
Borrower), to set off and apply to the payment of the Obligations (whether or
not then due and regardless of whether Agent shall have made any demand
therefor), and (as security for such Obligations) Borrower hereby grants to
Agent (for the benefit of the Lenders) a continuing security interest in, any
and all balances, credits, deposits, accounts or moneys of Borrower then or
thereafter maintained with Agent or any Lender (whether general or special,
time or demand, provisional or final). Agent and each Lender agrees promptly
to notify Borrower after set-off and application made by Agent or any Lender,
as the case may be, provided that the failure to give such notice shall not
--------
affect the validity of such set-off and application. The provisions of this
Section 10.7 are in addition to other rights and remedies (including, without
- ------------
limitation, other rights of set-off) which Agent may have.
10.8 Attorneys' Fees and Costs. Borrower agrees to pay on demand all
-------------------------
expenses of Agent (including the fees and out-of-pocket expenses of counsel to
Agent and of local counsel, if any, who may be retained by counsel to Agent) in
connection with the negotiation, preparation, execution and delivery of this
Agreement and of each other Loan Document, including schedules and exhibits, and
any amendments, waivers, consents, supplements or other modifications to this
Agreement or any other Loan Document as may from time to time hereafter be
required, whether or not the transactions contemplated hereby are consummated.
Borrower further agrees to pay, and to save Agent harmless from all liability
for, any stamp or other taxes which may be payable in connection with the
execution or delivery of this Agreement, the Borrowings hereunder, or the
issuance of the Notes or any other Loan Documents. Borrower also agrees to
reimburse Agent upon demand for all reasonable out-of-pocket expenses
(including attorneys' fees and legal expenses) incurred by Agent and the
Lenders in connection with (x) the negotiation of any restructuring or "work-
out", whether or not consummated, of any Obligations and (y) the enforcement of
any Obligations and any Lien in favor of Agent.
10.9 Indemnification. In consideration of the execution and delivery of
---------------
this Agreement by Agent and Lenders and Lenders' agreement to provide the Loans
hereunder, Borrower hereby indemnifies, exonerates and holds Agent, each Lender
and each of their respective and each of its parents, officers, directors,
employees and agents (collectively, the "Indemnified Parties") free and harmless
-------------------
from and against any and all actions, causes of action, suits, losses, costs,
liabilities and damages, and expenses incurred in connection therewith
(irrespective of whether any such Indemnified Party is a party to the action for
which indemnification hereunder is sought), including reasonable attorneys' fees
and disbursements (collectively, the "Indemnified Liabilities"), incurred by the
-----------------------
Indemnified Parties or any of them as a result of, or arising out of, or
relating to any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of the Loans; except for any such
Indemnified Liabilities arising for the account of a particular Indemnified
Party by reason of the relevant Indemnified Party's gross negligence or wilful
misconduct. If and to the extent that the foregoing undertaking may be
unenforceable for any
56
<PAGE>
reason, Borrower hereby agrees to make the maximum contribution to the payment
and satisfaction of each of the Indemnified Liabilities which is permissible
under applicable law.
10.10 Dissemination. Borrower acknowledges that Agent and the Lenders may
-------------
provide information regarding Borrower and the Loans to their respective
parents, subsidiaries, affiliates and service providers in each case in
accordance with their respective customary business practices.
10.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
10.12 Integration. This Agreement, together with the other Loan Documents,
-----------
reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted, modified, or
qualified by any other agreement, oral or written, whether before or after the
date hereof.
10.13 No Waiver; Remedies Cumulative. Agent and the Lenders shall not by
------------------------------
any act, delay, omission or otherwise be deemed to have waived any of its rights
or remedies hereunder, and no waiver shall be valid unless in writing, signed by
Agent and the Lenders and then only to the extent expressly provided therein. A
waiver by Agent and the Lenders of any right or remedy hereunder on any one
occasion shall not be construed as a bar to any right or remedy which Agent and
the Lenders would otherwise have had on any future occasion. No failure to
exercise nor any delay in exercising on the part of Agent and the Lenders, any
right, power or privilege hereunder, shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power or privilege hereunder
preclude any other or future exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies hereunder provided are
cumulative and may be exercised singly or concurrently, and are not exclusive of
any rights and remedies provided by law.
10.14 GOVERNING LAW. THIS AGREEMENT, THE NOTES AND ALL OTHER LOAN
-------------
DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND SHALL BE GOVERNED BY THE
LAWS OF THE STATE OF CALIFORNIA (WITHOUT GIVING EFFECT TO THE CHOICE OF LAW
PRINCIPLES OF SUCH STATE).
10.15 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO ACKNOWLEDGES THAT
--------------------
THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED.
EACH OF THE PARTIES HERETO HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY
WAIVES (AFTER CONSULTING OR HAVING THE OPPORTUNITY TO CONSULT WITH COUNSEL OF
THEIR CHOICE) ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY HERETO.
EACH OF THE PARTIES ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND
SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH
OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A
MATERIAL
57
<PAGE>
INDUCEMENT FOR AGENT AND EACH LENDER TO ENTER INTO THIS AGREEMENT AND EACH SUCH
OTHER LOAN DOCUMENT.
[remainder of page intentionally left blank; signatures follow]
58
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Loan Agreement as
of the date first set forth above.
SUMMA INDUSTRIES
By:/s/ James R. Swartwout
-----------------------
Title: President
----------
COMERICA BANK-CALIFORNIA
By:/s/ Scott T. Monson
-------------------------
Title: Senior Vice President
---------------------
<PAGE>
EXHIBIT A
---------
REVOLVING NOTE
$15,000,000.00 __________ ___, 1997
FOR VALUE RECEIVED, the undersigned, SUMMA INDUSTRIES, a California
corporation (the "Borrower"), promises to pay to the order of COMERICA BANK-
--------
CALIFORNIA (the "Bank") on demand, the principal sum of FIFTEEN MILLION DOLLARS
----
($15,000,000) or, if less, the aggregate unpaid principal amount of all advances
under the Revolving Loan shown on Bank's books and records made by Bank pursuant
to that certain Loan Agreement, dated as of October 21, 1997 (together will all
amendments and other modifications, if any, from time to time thereafter made
thereto, the "Loan Agreement"), among Borrower, Comerica Bank-California, as
--------------
Agent, and the several Lenders identified therein.
Borrower also promises to pay interest on the unpaid principal amount
hereof from time to time outstanding from the date hereof until maturity
(whether by acceleration or otherwise) and, after maturity, until paid, at the
rates per annum and on the dates specified in the Loan Agreement.
Payments of both principal and interest are to be made in lawful money of
the United States of America in same day or immediately available funds to the
account designated by Bank pursuant to the Loan Agreement.
This Note is the Revolving Note referred to in, and evidences indebtedness
incurred under, the Loan Agreement, to which reference is made for a description
of the security for this Note and for a statement of the terms and conditions on
which Borrower is permitted and required to make prepayments and repayments of
principal of the indebtedness evidenced by this Note and on which such
indebtedness may be declared to be immediately due and payable. Unless
otherwise defined, terms used herein have the meanings provided in the Loan
Agreement.
All parties hereto, whether as makers, endorsers, or otherwise, severally
waive presentment for payment, demand, protest and notice of dishonor.
THIS NOTE HAS BEEN DELIVERED IN LOS ANGELES, CALIFORNIA, AND SHALL BE
DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE
STATE OF CALIFORNIA.
SUMMA INDUSTRIES
By:______________________________________
Title:___________________________________
1
<PAGE>
EXHIBIT B
---------
TERM NOTE
$13,500,000.00 _________ ___, 1997
FOR VALUE RECEIVED, the undersigned, SUMMA INDUSTRIES, a California
corporation (the "Borrower"), promises to pay to the order of COMERICA BANK-
--------
CALIFORNIA (the "Bank") on October 21, 2004, the principal sum of THIRTEEN
----
MILLION FIVE HUNDRED THOUSAND DOLLARS ($13,500,000) or, if less, the aggregate
unpaid principal amount of the Term Loan made by Lender pursuant to that certain
Loan Agreement, dated as of October 21, 1997 (together will all amendments and
other modifications, if any, from time to time thereafter made thereto, the
"Loan Agreement"), among Borrower, Comerica Bank-California, as Agent, and the
- ---------------
several Lenders identified therein.
Borrower also promises to pay interest on the unpaid principal amount
hereof from time to time outstanding from the date hereof until maturity
(whether by acceleration or otherwise) and, after maturity, until paid, at the
rates per annum and on the dates specified in the Loan Agreement.
Principal is payable at the times and in the amounts set forth in the Loan
Agreement. Payments of both principal and interest are to be made in lawful
money of the United States of America in same day or immediately available funds
to the account designated by Lender pursuant to the Loan Agreement.
This Note is the Term Note referred to in, and evidences indebtedness
incurred under, the Loan Agreement, to which reference is made for a description
of the security for this Note and for a statement of the terms and conditions on
which Borrower is permitted and required to make prepayments and repayments of
principal of the indebtedness evidenced by this Note and on which such
indebtedness may be declared to be immediately due and payable. Unless otherwise
defined, terms used herein have the meanings provided in the Loan Agreement.
All parties hereto, whether as makers, endorsers, or otherwise, severally
waive presentment for payment, demand, protest and notice of dishonor.
THIS NOTE HAS BEEN DELIVERED IN LOS ANGELES, CALIFORNIA, AND SHALL BE
DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE
STATE OF CALIFORNIA.
SUMMA INDUSTRIES
By:_____________________
Title:__________________
2
<PAGE>
EXHIBIT C
---------
PURPOSE NOTE
$____________ _________ ___, 199_
FOR VALUE RECEIVED, the undersigned, SUMMA INDUSTRIES, a California
corporation (the "Borrower"), promises to pay to the order of COMERICA BANK-
--------
CALIFORNIA (the "Bank") on _________, ____, the principal sum of
----
______________________________________ DOLLARS ($__________) or, if less, the
aggregate unpaid principal amount of the Term Loan made by Lender pursuant to
that certain Loan Agreement, dated as of October 21, 1997 (together will all
amendments and other modifications, if any, from time to time thereafter made
thereto, the "Loan Agreement"), between among Borrower, Comerica Bank-
--------------
California, as Agent, and the several Lenders identified therein Borrower,
Comerica Bank-California, Agent, and the several Lenders. Borrower also
promises to pay interest on the unpaid principal amount hereof from time to time
outstanding from the date hereof until maturity (whether by acceleration or
otherwise) and, after maturity, until paid, at the rates per annum and on the
dates specified in the Loan Agreement.
Principal is payable at the times and in the amounts set forth in the Loan
Agreement. Payments of both principal and interest are to be made in lawful
money of the United States of America in same day or immediately available funds
to the account designated by Lender pursuant to the Loan Agreement.
This Note is the one of the Purpose Notes referred to in, and evidences
indebtedness incurred under, the Loan Agreement, to which reference is made for
a description of the security for this Note and for a statement of the terms and
conditions on which Borrower is permitted and required to make prepayments and
repayments of principal of the indebtedness evidenced by this Note and on which
such indebtedness may be declared to be immediately due and payable. Unless
otherwise defined, terms used herein have the meanings provided in the Loan
Agreement.
All parties hereto, whether as makers, endorsers, or otherwise, severally
waive presentment for payment, demand, protest and notice of dishonor.
THIS NOTE HAS BEEN DELIVERED IN LOS ANGELES, CALIFORNIA, AND SHALL BE
DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE
STATE OF CALIFORNIA.
SUMMA INDUSTRIES
By:__________________________
Title:_______________________
3
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
LexaLite International Corporation, a Delaware corporation
Calnetics Corporation, a California corporation
Agricultural Products, Inc., a California corporation
KVP Systems, Inc., a California corporation
Manchester Plastics Co., Inc., a California corporation
Ny-Glass Plastics, Inc., a California corporation
GST Industries, Inc., a California corporation
Fullerton Holdings, Inc., a California corporation
Summa International, Inc., a Virgin Islands corporation
<PAGE>
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 Summa 401(k) Stock Option Plan, filed
on September 8, 1997 and the Calnetics Acquisition Stock Option Plan, filed on
October 21, 1997 with the Securities and Exchange Commission under the
Securities Act of 1993.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
November 6, 1997
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