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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, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from N/A to N/A
Commission file no. 1-7755
SUMMA INDUSTRIES
(Exact name of registrant as specified in its charter)
DELAWARE 95-1240978
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
21250 HAWTHORNE BOULEVARD, SUITE 500, TORRANCE, CALIFORNIA 90503
www.SummaIndustries.com
(Address of principal executive offices, including zip code)
Registrant's telephone number: (310) 792-7024
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and disclosure will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of registrant's Common Stock held by non-affiliates
as of October 18, 2000, based upon the closing price of a share of the Common
Stock on The Nasdaq National Market on that date, was $33,932,745. The number of
shares of registrant's Common Stock outstanding as of October 18, 2000 was
4,229,365.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's Proxy Statement
for the Annual Meeting of Stockholders to be held on December 15, 2000 to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K are incorporated by reference in
Part III hereof.
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PART I
ITEM 1. BUSINESS.
GENERAL
Summa Industries ("Summa" or the "Company") was incorporated as Southern
California Plastics Co. in the State of California in 1942 and subsequently
reincorporated in the State of Delaware in 1998. Since 1946, Summa has been a
publicly-owned corporation whose Common Stock is registered under Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is
currently traded on The Nasdaq National Market under the symbol "SUMX". Growth
has been achieved by acquisition, development of new products and expansion of
the Company's sales organization. Summa designs and manufactures
injection-molded and formed plastic optical components for original equipment
manufacturer ("OEM") customers in the lighting industry; molded plastic modular
conveyor belt and chain for the food processing industry; plastic fittings,
valves, filters and tubing for the agricultural irrigation industry; molded
plastic coil forms ("bobbins") for use in transformers, motors, relays and
switches; extruded plastic sheet with smooth or textured surfaces in various
colors and sizes for diverse industrial applications; and other molded and
extruded plastic components for diverse industries.
The principal executive offices of the Company are located at 21250 Hawthorne
Boulevard, Suite 500, Torrance, California 90503; its telephone number is (310)
792-7024; its facsimile number is (310) 792-7079; and its website is
www.summaindustries.com.
STRATEGY
Summa has a strategy of growth through acquisitions of profitable manufacturing
companies with proprietary products or protected market niches, with the intent
of expanding its operations by acquiring additional product offerings, enhancing
gross profit margins, increasing combined sales so that general and
administrative costs would constitute a smaller percentage of total revenues,
enhancing overall profitability, and increasing the market value of Summa's
Common Stock to provide liquidity and value for its stockholders by increasing
the number of outstanding shares in the public float and the trading activity in
the stock. In 1995, the Company refined the strategy to focus on manufacturers
of plastic components for industrial and commercial markets. In general, Summa's
corporate staff does not manage operations of acquired subsidiaries on an
ongoing basis, but provides planning, financial and legal oversight, and
financing; conducts the acquisition program and business development activities;
and manages the investor relations, risk management and employee benefit
programs. Corporate charges are assessed on a basis established annually,
related to asset utilization by each operating subsidiary.
HISTORY OF RECENT ACQUISITIONS -- CONTINUING OPERATIONS
KVP FALCON PLASTIC BELTING, INC. In July 1993, Summa acquired all of the
outstanding capital stock of KVP Systems, Inc., a California corporation,
renamed KVP Falcon Plastic Belting, Inc. in May 1998 after its acquisition of
Falcon Belting, Inc. described below ("KVP"), which designs, manufactures and
markets injection-molded plastic conveyor belting. Belts which can operate on a
curve were pioneered by KVP. In connection with this acquisition, which was
accomplished through the merger of KVP with and into a newly formed and
wholly-owned subsidiary of Summa, an aggregate of 555,275 shares of Summa's
Common Stock were issued to the shareholders of KVP in a transaction registered
under the Securities Act of 1933, as amended (the "Securities Act"). The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to identifiable tangible and
intangible assets purchased and liabilities assumed or incurred based upon their
fair value at the date of acquisition. The excess of the purchase price over the
fair value of the net assets acquired amounted to $302,000 and was recorded as
goodwill which is being amortized on a straight-line basis over 25 years.
LEXALITE INTERNATIONAL CORPORATION. In November 1996, Summa acquired all of the
outstanding capital stock of LexaLite International Corporation, a Delaware
corporation ("LexaLite"), which manufactures injection-molded plastic prismatic
components for lighting fixtures, through the merger of a newly formed and
wholly-owned subsidiary of Summa with and into LexaLite. In connection with the
transaction, the former stockholders of LexaLite received shares of Summa's
Common Stock which in the aggregate constituted approximately 58% of the shares
of Summa's Common Stock outstanding immediately after the merger in a
transaction registered under the Securities Act. The acquisition was accounted
for using the purchase method of accounting and, accordingly, the purchase price
was allocated to identifiable tangible and intangible assets purchased and
liabilities assumed or incurred based upon their fair value at the date of
acquisition. During fiscal year 2000, a contingent liability in connection with
an Employee Stock Ownership Plan repurchase obligation was resolved which
resulted in a reduction of goodwill of $257,000. The excess of the purchase
price over the fair value of the net assets acquired amounted to $648,000 and
was recorded as goodwill which is being amortized on a straight-line basis over
25 years.
CALNETICS CORPORATION. In October 1997, Summa acquired all of the outstanding
capital stock of Calnetics Corporation, a California corporation ("Calnetics"),
through a merger of a newly formed and wholly-owned subsidiary of Summa with and
into Calnetics. As a result, Summa acquired the following operating subsidiaries
of Calnetics: Agricultural Products, Inc., a
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California corporation ("API"), which manufactures plastic fittings, filters,
tubing and accessories, principally for agricultural irrigation; Ny-Glass
Plastics, Inc., a California corporation ("Ny-Glass"), which manufactures
plastic parts, principally by use of injection molding and structural foam
molding techniques, and performs certain value-added services for customers
in a variety of industries; and Manchester Plastics Co., Inc., a California
corporation ("Manchester Plastics"), which manufactures proprietary and
custom acrylic, polycarbonate and polystyrene plastic sheet products,
principally for the building materials and industrial plastics industries.
The total acquisition cost was $31,792,000, consisting of cash due to former
Calnetics shareholders of $22,335,000, acquisition costs of $50,000,
liabilities assumed or incurred of $8,062,000 and an estimated fair value of
$1,345,000 for options issued in conjunction with the transaction, primarily
replacement options issued to Calnetics employees who continued with the
Company. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to identifiable
tangible and intangible assets purchased and liabilities assumed or incurred
based upon their fair value at the date of acquisition. During fiscal year
2000, an insurance claim settlement was received which resulted in a
reduction of the acquisition cost and of goodwill in the amount of $350,000.
The excess of the purchase price over the fair value of the net assets
acquired amounted to $13,624,000 and was recorded as goodwill which is being
amortized on a straight-line basis over 40 years.
FALCON BELTING, INC. In May 1998, Summa acquired all of the outstanding capital
stock of Falcon Belting, Inc., an Oklahoma corporation ("Falcon"), which
manufactures modular plastic conveyor belting used in food processing
industries. The operations of Falcon were promptly consolidated with KVP. The
total acquisition cost was $5,125,000, consisting of $2,636,000 in cash and the
present value of obligations to make future payments to the former owner of
Falcon and liabilities assumed or incurred of $2,489,000. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
purchase price was allocated to identifiable tangible and intangible assets
purchased and liabilities assumed or incurred based upon their fair value at the
date of acquisition. During fiscal year 1999, a contingency was resolved which
resulted as a reduction of the total acquisition cost and of goodwill in the
amount of $125,000. The excess of the purchase price over the fair value of the
net assets acquired amounted to $1,870,000 and was recorded as goodwill which is
being amortized on a straight-line basis over 30 years.
CANYON MOLD. In September 1998, Summa acquired substantially all of the assets
of Canyon Mold, Inc., a California corporation. The operations of Canyon Mold
were promptly relocated to and integrated into the Company's molding facility in
Corona, California. Canyon Mold had provided tool design and manufacturing
services almost exclusively for the Company. The total acquisition cost was
approximately $200,000 in cash and assumed liabilities. No goodwill was recorded
in this transaction.
PLASTRON INDUSTRIES, INC. In March 1999, Summa acquired substantially all of the
assets of Plastron Industries, L.P. ("Plastron") which manufactures molded
plastic coil forms ("bobbins") for use in transformers, motors, relays and
switches. The aggregate purchase price paid for Plastron consisted of
$19,525,000 in cash; a four-year warrant exercisable to purchase up to 200,000
shares of the Company's common stock at $11.75 per share valued at $278,000;
investment banking fees consisting of a $125,000 cash payment and stock options,
valued at $32,000; and the assumption of certain liabilities, principally trade
payables and accrued obligations of $2,220,000. The transaction has been
accounted for using the purchase method of accounting, and accordingly, the
purchase price has been allocated to identifiable tangible and intangible assets
purchased and liabilities assumed or incurred based upon their fair value at the
date of acquisition. The excess of the purchase price over fair value of the net
assets acquired amounted to $13,781,000 and has been recorded as goodwill which
is being amortized on a straight-line basis over 35 years. In April 2000, Summa
repurchased the warrant for $500,000.
BROADVIEW INJECTION MOLDING, INC. In September 1999, Summa acquired
substantially all of the assets of Broadview Injection Molding Co., Inc.
("Broadview"), which manufacturers molded plastic coil forms ("bobbins") for use
in transformers, motors, relays and switches. The aggregate purchase price paid
for Broadview consisted of $2,143,000 in cash, liabilities assumed or incurred
of $364,000 and acquisition costs of $26,000. The transaction has been accounted
for using the purchase method of accounting, and accordingly, the purchase price
has been allocated to identifiable tangible and intangible assets purchased and
liabilities assumed or incurred based upon their fair value at the date of
acquisition. The excess of the purchase price over the fair value of the net
assets acquired amounted to $237,000 and has been recorded as goodwill, which is
being amortized on a straight-line basis over 15 years.
YARBROUGH-TIMCO. In May 2000, Summa acquired substantially all of the assets of
Yarbrough-Timco ("Yarbrough"), which is a distributor and manufacturer of molded
plastic coil forms ("bobbins") for use in transformers, motors, relays and
switches. The total acquisition cost was $349,000, consisting of $150,000 in
cash, a note payable to the seller in the amount of $50,000, liabilities assumed
or incurred of $124,000, and acquisition costs of $25,000. The transaction has
been accounted for using the purchase method of accounting, and accordingly, the
purchase price has been allocated to identifiable tangible and intangible assets
purchased and liabilities assumed or incurred based upon their fair value at the
date of acquisition. The excess of the purchase price over the fair value of the
net assets acquired amounted to $100,000 and has been recorded as goodwill which
is being amortized on a straight-line basis over 15 years.
RECENT EVENTS
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PLASTIC SPECIALTIES, INC. In October 2000, Summa acquired all of the outstanding
capital stock of Plastic Specialties, Inc., a California corporation ("PSI"),
which is a manufacturer of thermoformed, extruded and injection-molded plastic
prismatic components for lighting fixtures. The acquisition cost consisted of
$6,287,000 in cash, $4,873,000 in assumed indebtedness, subsequently paid, and
liabilities assumed or incurred to be determined. The Company used its existing
acquisition facility to finance the transaction.
In evaluating future acquisitions, Summa will endeavor to identify target
companies that manufacture plastic components which have a proprietary advantage
because of patent protection, brand recognition, unique manufacturing processes
or other comparable characteristics. It is anticipated that target companies
typically will have been profitable in recent periods, particularly if the
acquisition is to be made through the issuance of Summa Common Stock, so that
the acquisition will not have an immediate dilutive effect on post-acquisition,
consolidated earnings per share. Since it is usually intended that each acquired
company will be maintained as a separate operating unit, existing management of
each target company will be extensively evaluated in an attempt to ascertain
whether such management possesses the capability and compatibility to continue
to manage the operations following the acquisition. Perhaps most importantly,
Summa will seek to determine that there is a significant likelihood that a
sustainable increase in earnings per share within twelve months of the closing
can reasonably be expected. For a history of recent divestitures, see Note 16 in
the "Notes to Consolidated Financial Statements" of the Company in this Annual
Report on Form 10-K.
Although the existing management of an acquired company typically would be
retained to manage day to day operations, it is anticipated that the business of
the acquired company could be expanded through the support of Summa's corporate
staff. Any such expansion could place a significant strain on Summa's management
and resources, require Summa to implement additional operating, marketing and
financial controls, and necessitate that Summa hire additional personnel, which
could have a significant adverse effect on Summa's operating results. It is also
likely that any such acquisition would require Summa to raise additional capital
to finance the acquisition or provide working capital to the acquired company.
If this additional capital were raised through debt financings, Summa would
incur substantial additional interest expense; sales of additional equity to
raise the needed capital would dilute, on a pro-rata basis, the percentage
ownership of all holders of Summa Common Stock. There can, however, be no
assurance that sufficient financing will be available to Summa to continue its
acquisition strategy on terms and conditions that are acceptable to Summa.
Continued implementation of the Company's strategy will depend to a significant
extent upon the ability of Summa's top management in identifying appropriate
candidates for acquisition, negotiating deals acceptable to the Board of
Directors and stockholders of the Company, including obtaining acceptable
acquisition prices in the current environment of dramatically higher asking
prices, and supervising the management of operating subsidiaries. Furthermore,
with a focus on businesses which manufacture plastic components, the number of
opportunities which meet this acquisition criteria is smaller. In addition, with
the increased size of the Company, larger acquisition candidates would have to
be sought in the future to sustain the growth rate of Summa, and the number of
such candidates is smaller. Competition for such acquisitions may be greater and
there is no assurance Summa will be able to successfully compete with larger
companies and buyer groups to consummate additional acquisitions. There can be
no assurance that the terms upon which a prospective company can be acquired
will be favorable to Summa, or that Summa will not encounter unforeseen
difficulties and liabilities in connection with any such acquisition.
SEGMENTS; PRODUCTS
Summa manufactures diverse plastic products in two segments:
ENGINEERED POLYMER COMPONENTS
OPTICAL COMPONENTS. Summa's optical components include prismatic lenses,
refractors and reflectors molded and formed from clear plastic, which are used
in commercial and industrial lighting fixtures and in similar applications such
as lighted navigational aids, traffic signals and vehicles. Most of the products
are injection-molded from specially compounded lighting grade polycarbonate or
acrylic. The principal advantages of Summa's injection-molded plastic components
over more traditional glass or metal components are superior optical
performance, lighter weight, and in certain instances, lower cost.
IRRIGATION COMPONENTS. Summa's irrigation components include injection-molded
fittings, valves, filters and accessories for drip irrigation systems. The use
of drip irrigation systems conserves water and allows more precise control of
delivery of water and soluble nutrients to plants than is possible with spray,
sprinkler or flood irrigation techniques.
CONVEYOR COMPONENTS. Summa's conveyor components include engineered plastic
components which form conveyer belts and chains. The components in Summa's
product line, many of which are patented, are constructed of non-toxic,
non-corrosive plastic materials and are designed to be easily cleaned,
meeting FDA-USDA requirements and specifications. The components do not
require lubrication and thus offer the advantage of operation free from
contaminants such as grease, oil and metal particles. Because these
components are lightweight, they require less energy to operate than steel
belts, and are quieter in operation and easier to service in place than metal
belts.
WINDING CORES. Summa's winding cores are thermoplastic and thermoset coil forms
or "bobbins" used in the manufacture of
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magnetic devices including transformers, relays, switches, power supplies and
small electro motors. These devices are utilized in controls, appliances,
vehicles, telecommunications equipment and many other applications.
In addition, the Company molds components for electronic products and
manufactures miscellaneous parts for diverse industrial and commercial markets.
EXTRUDED PLASTIC PRODUCTS
SHEET. Summa extrudes plastic sheet with smooth or textured surfaces in various
colors and sizes for diverse industrial applications.
TUBING. Summa extrudes plastic tubing for use in irrigation and industrial
applications.
For financial information by segment, see Note 14 in the "Notes to Consolidated
Financial Statements" of the Company in this Annual Report on Form 10-K.
RESEARCH AND DEVELOPMENT
Summa invests significantly in the development of new products and manufacturing
processes. Only direct costs associated with tooling for new products are
capitalized. All other costs, including salaries and wages of employees involved
in research and development, are expensed as incurred.
PRODUCTION
INJECTION MOLDING. Summa's principal manufacturing operation is injection
molding of plastic parts. Some products are molded by third-party vendors.
Injection molds and tools are made by Summa and outside vendors. Products are
made on modern molding machines, which range from 28 to 1500 tons clamping
force, using a wide variety of plastic resins. Ancillary equipment and special
operations include automatic resin feed systems, insert molding, robotics,
painting, vacuum deposition coating with reflective metallic films, assembly,
packaging and warehousing.
THERMOFORMING. Summa vacuum forms and pressure forms products from sheet which
it produces. Tooling for the forming process is produced by third-party vendors.
EXTRUSION. Summa extrudes plastic sheet and tubing products. The Company's sheet
products are made of polycarbonate, acrylic and polystyrene, while the tubing is
extruded from polyethylene and polyvinylchloride (PVC).
In addition to injection molding, thermoforming and extrusion, Summa performs
additional production operations including machining and welding of plastic
parts, coating, assembly and testing. Summa operates on a just-in-time basis
with many of its customers, and inventories are managed to minimal levels. Three
of Summa's manufacturing plants are ISO 9002 registered.
MARKETING AND DISTRIBUTION
Summa manufactures plastic products and components which are generally sold to
other manufacturers who incorporate Summa's materials and components in their
products, and to businesses which incorporate the Company's products in systems
assembled for their own use or for their customers' use. The Company generally
considers its customers to be OEM's, "end users" and distributors. Most sales
are made directly by employees of the Company, although Summa utilizes several
independent manufacturers' representatives and certain sales are made through
distribution channels. In recent years, the Company has expanded the size of its
direct sales staff substantially and has also increased its export sales. The
Company distributes its products principally by truck through the use of
independent freight entities and, to a lesser extent, by air and sea transport.
Summa's largest three customers accounted for 8.6%, 5.0% and 4.4% of sales in
fiscal 2000. The Company has thousands of active accounts including many Fortune
1,000 and large privately held businesses.
RAW MATERIALS
Summa's principal raw material is pelletized plastic resin which is delivered in
bulk by truck or in large boxes, typically weighing 1,000 pounds ("Gaylords").
The Company is a large user of resin and does not rely on any single vendor for
more than 15% of its raw material. Every material used is available from several
vendors. Primary resins used include polycarbonate, acrylic, polystyrene,
polyethelyne, polyvinylchloride, polypropylene, acetal and nylon. Principal
vendors include AtoFina, Bayer, Cyro, Dow, Dupont, GE Plastics and Ineos among
others. The resins used by the Company are
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crude oil or natural gas derivatives and may be affected to some extent by
the supply, demand and price trends in the petroleum industry. Despite
supplier plant disruptions at several facilities due to fire and other
causes, the Company did not incur any material shortages or unavailability
during fiscal 2000. Although prices were relatively stable during fiscal
1998, during fiscal 1999 and fiscal 2000 there have been several increases in
prices for certain types of resin.
BACKLOG AND SEASONALITY
On August 31, 2000, Summa's continuing businesses had a backlog of orders,
believed to be firm, in the amount of $9,886,000, as compared to a backlog of
$9,338,000 from continuing businesses as of August 31, 1999. The open order
backlog is comprised of orders for components, spare parts and tooling, with
scheduled deliveries from September 2000 through fiscal 2002. Because the length
of time between entering an order, shipping the product and recording a sale are
typically shorter than 90 days, backlog levels are not a reliable indicator of
future sales volume.
Summa's sales exhibit modest seasonality, principally for its irrigation
components. Excluding the effects of growth and acquisitions, the Company would
expect sales, as a percentage of fiscal year's sales, to occur approximately as
follows:
<TABLE>
<CAPTION>
Quarter Percent of Sales
------- ----------------
<S> <C>
1st quarter............................................ 24%
2nd quarter............................................ 24%
3rd quarter............................................ 26%
4th quarter............................................ 26%
----
100%
----
</TABLE>
Because a portion of overhead is fixed and, therefore, does not vary with sales
volume, profit may vary from quarter to quarter with more volatility than sales
volume.
COMPETITIVE CONDITIONS
The markets for the products currently manufactured and sold by Summa are
characterized by extensive competition. There are a number of companies that
currently offer competing products nationally and internationally, and in
certain geographic areas the Company has competition from local manufacturers as
well. It can be expected that additional competing products will be introduced
by other companies in the future. Many existing and potential competitors have
greater financial, marketing and research capabilities than Summa. Some of
Summa's largest customers have the resources to internally manufacture products
comparable to those currently purchased from Summa, and some of Summa's
customers also compete with the Company in certain areas.
Summa believes that its trade names and reputation are significant to its
competitive position. In addition, Summa believes that price is a significant
element of competition. However, factors such as engineering, performance,
availability and reliability are considered in the purchasing process. The
performance of Summa in the future will depend on the ability of its operating
subsidiaries to develop and market new products that will gain customer
acceptance and loyalty, as well as its ability to adapt its product offerings to
meet changing pricing considerations and other market factors. The Company's
operating performance would be adversely affected if its operating subsidiaries
were to incur delays in developing new products or if such products did not gain
market acceptance. There can be no assurance that existing or future products
will be sufficiently successful to enable Summa's operating subsidiaries to
effectively compete in their respective markets or, should new product offerings
meet with significant customer acceptance, that one or more current or future
competitors will not introduce products that render the Company's products
noncompetitive.
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PATENTS, TRADEMARKS AND LICENSES
The Company owns and licenses many domestic and foreign patents on products
which it has developed or acquired that expire on dates ranging to 2017. In
addition, several patent applications are currently in process. The extent to
which patents provide a commercial advantage or inhibit the development of
competing products varies. The Company does not capitalize expenses related to
product development and patent applications. Summa also relies upon common law
concepts of confidentiality and trade secrets, as well as economic barriers
created by the required investments in tooling and technical personnel and the
development of customer relationships, to protect its proprietary products.
Summa also has domestic and foreign trade name and trademark registrations
covering many of the names and logos which appear on its products which are
helpful in enabling the Company to maintain its present competitive position.
ENVIRONMENTAL MATTERS
The Company is subject to various environmental laws and regulations governing
air quality, water quality and hazardous waste management and disposal,
including such laws and regulations of the federal government and the states of
California, Michigan, Oklahoma, Illinois, Florida, Mississippi and Tennessee.
The Company does not anticipate that future expenditures for the compliance with
such laws and regulations will have a material effect on its capital
expenditures or except as set forth below, financial condition or, its results
of operations.
Prior to October 1986, a previously owned business unit of one of the Company's
subsidiaries operated a facility on property within an area subsequently
designated as a federal Superfund site. In 1997, the Company learned that
hazardous substances had been detected in the soil at the property and that the
current owner had been requested by a state agency to undertake additional
investigation at the property. The Company also became aware that the property
has been subject to a general notice letter issued by the United States
Environmental Protection Agency under the federal Superfund law. The Company, as
the successor to one of several prior tenants of the property, may be held
responsible for the contamination at the site regardless of whether its
subsidiary caused the contamination. The Company does not believe it is
responsible for any contamination at the property, and has not been notified or
contacted by any governmental authority in that regard, nor named in any
proceeding relating to the property. However, if the Company were held liable
under federal Superfund law, or other environmental law, or had to defend itself
against such a claim, the consequences could be material to the Company's
results of operations and financial position.
EMPLOYEES
At October 18, 2000, Summa had 927 employees, including five employees who
comprise the Company's corporate staff. None of Summa's employees is covered by
a collective bargaining agreement. The Company considers its relationship with
its employees to be good.
EXPORT SALES
For information regarding Summa's export sales by geographic area for the past
three fiscal years, see Note 13 in the "Notes to Consolidated Financial
Statements" of the Company in this Annual Report on Form 10-K.
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ITEM 2. PROPERTIES.
The Company operates primarily at the following facilities:
<TABLE>
<CAPTION>
LOCATION SQ. FT. PRINCIPAL ACTIVITY LEASE EXPIRES
=============================================================================================================
<S> <C> <C> <C>
Torrance, California 280 Corporate Office Month to Month
ENGINEERED POLYMER COMPONENTS:
Charlevoix, Michigan 94,000 Injection Molding Owned
Charlevoix, Michigan 27,500 R&D Owned
Dickson, Tennessee 55,000 Injection Molding Owned
Ontario, California 30,000 Warehouse, Assembly Owned
Ontario, California 25,000 Warehouse November 2000
Rancho Cordova, California 48,000 Warehouse, Assembly February 2001
Corona, California 53,000 Injection Molding May 2004
Visalia, California 4,500 Warehouse, Assembly December 2000
Oklahoma City, Oklahoma 22,000 Warehouse, Assembly May 2003
Bensenville, Illinois 76,500 Injection Molding, Assembly Owned
Broadview, Illinois 24,000 Injection Molding Owned
Olive Branch, Mississippi 90,000 Forming, Warehouse Owned
City of Industry, California 35,000 Forming, Warehouse August 2003
EXTRUDED PLASTIC PRODUCTS:
Ontario, California 72,000 Extrusion, Warehouse August 2009
Ontario, California 20,000 Extrusion, Assembly Owned
Winter Haven, Florida 28,000 Extrusion, Assembly Owned
Olive Branch, Mississippi 38,000 Extrusion, Warehouse Owned
City of Industry, California 15,000 Extrusion, Warehouse August 2003
</TABLE>
In addition, the Company owns 63,000 square feet of factory and office space in
Fullerton, California, and 15,000 square feet of office and warehouse space in
Charlevoix, Michigan, which are leased to unrelated parties. The Fullerton lease
expires in July 2006 and the Charlevoix leases expire in November 2001.
ITEM 3. LEGAL PROCEEDINGS.
The Company encounters lawsuits from time to time in the ordinary course of
business and, at August 31, 2000, the Company and/or its affiliates were parties
to several civil lawsuits. Summa does not expect that the resolution of these
lawsuits will have a material adverse impact on future results of operations or
financial position. Certain lawsuits filed against the Company in the past have
contained claims not covered by insurance, or sought damages in excess of policy
limits, and such claims could be filed in the future. Any losses that Summa may
suffer from such lawsuits, and the effect such litigation may have upon the
reputation and marketability of Summa's products, could have a material adverse
impact on the future results of operations, financial condition and/or prospects
of the Company. See also "Business--Environmental Matters" above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year ended
August 31, 2000 to a vote of Summa's stockholders, through solicitation of
proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
RECENT MARKET PRICES
Summa's Common Stock is traded on The Nasdaq National Market under the symbol
"SUMX." During the year ended August 31, 2000, the average weekly trading volume
was approximately 67,000 shares. The stock markets have experienced extreme
price and volume fluctuations during certain periods. These broad market
fluctuations and other factors may adversely affect the market price of Summa's
Common Stock for reasons unrelated to Summa's operating performance. The
following table sets forth the high and low prices for a share of Summa's Common
Stock on The Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
QUARTER
ENDED 11/30/98 2/28/99 5/31/99 8/31/99 11/30/99 2/29/00 5/31/00 8/31/00
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HIGH $11.50 $10.50 $12.25 $16.63 $16.00 $13.13 $12.25 $13.31
LOW $7.00 $8.25 $8.75 $10.94 $10.00 $9.50 $8.50 $10.44
</TABLE>
On October 18, 2000, the closing price on The Nasdaq National Market for a share
of Summa Common Stock was $11.00.
DESCRIPTION OF SECURITIES
The authorized capital stock of Summa consists of 10,000,000 shares of Common
Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001 par
value. As of August 31, 2000, 4,224,715 shares of the Company's Common Stock
were issued and outstanding and no shares of Preferred Stock had been issued or
were outstanding. The number of holders of record of Summa's Common Stock as of
August 31, 2000 was 328. In addition, Summa estimates that there are 2,500
additional stockholders whose shares are held in "street name", including
approximately 700 stockholders who own shares through the Employee Stock
Ownership Plan.
COMMON STOCK. Holders of Common Stock are entitled to one vote per share on each
matter submitted to a vote of the stockholders of Summa, and there is no
cumulative voting for the election of directors. Subject to preferences that may
be applicable to the holders of any outstanding Preferred Stock, each holder of
Common Stock is entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefor. Upon
the liquidation, dissolution or winding up of Summa, holders of Common Stock are
entitled to share ratably in all assets of Summa which are legally available for
distribution, after payment of all debts and other liabilities and the
liquidation preference of any outstanding Preferred Stock. Holders of Common
Stock have no preemptive, subscription, redemption or conversion rights. The
transfer agent and registrar for the Common Stock is U. S. Stock Transfer
Corporation, 1745 Gardena Avenue, Glendale, California 91204, www.usst.com, and
its telephone number is: (800) 835-8778.
PREFERRED STOCK. The Board of Directors is authorized, subject to any
limitations prescribed by the laws of the State of Delaware, but without further
action by Summa's stockholders, to provide for the issuance of Preferred Stock
in one or more series, to establish from time to time the number of shares to be
included in each such series, to fix the designations, powers, preferences and
rights of the shares of each such series and any qualifications, limitations or
restrictions thereof, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then outstanding)
without any further vote or action by the stockholders. Although Summa has no
present plans to issue any additional shares of Preferred Stock, the issuance of
Preferred Stock in the future could provide voting or conversion rights that
would adversely affect the voting power or other rights of the holders of Common
Stock and thereby reduce the value of the Common Stock. In addition, the
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of Summa. In particular, specific rights granted
to future holders of Preferred Stock could be used to restrict Summa's ability
to merge with or sell its assets to a third party, or otherwise delay,
discourage or prevent a change in control of Summa.
ANTI-TAKEOVER DEVICES. In addition to the ability to issue Preferred Stock,
Summa's Certificate of Incorporation and Bylaws specifically prohibit cumulative
voting and the right of stockholders to call a special stockholders meeting,
provide for the classification of the Board of Directors into three classes with
one class elected annually, require a two-thirds supermajority stockholder vote
to amend certain provisions of the Certificate of Incorporation and Bylaws, and
include other provisions which are also likely to delay, discourage or prevent a
change in control of Summa not approved by the Board of Directors and the
Company's stockholders. Further, neither the Company's Certificate of
Incorporation and Bylaws nor Delaware law prohibit the Company from adopting a
stockholders' rights plan, or poison pill.
9
<PAGE>
SHARES ISSUABLE UPON EXERCISE OF OPTIONS
As of August 31, 2000, 1,270,485 shares of Summa common stock are issuable upon
exercise of options granted and/or available to be granted under its stock
option plans and in connection with acquisitions, most of which are registered
under the Securities Act. The existence of these stock options may adversely
affect the terms on which Summa can obtain additional financing, and the holders
of the options can be expected to exercise or convert them 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. All options vest in full immediately
prior to a change of control of the Company, as defined in the stock option
plans.
DIVIDEND POLICY
Summa has not paid a cash dividend since the fiscal year ended August 31, 1983.
Summa does not currently intend to pay cash dividends on its Common Stock in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below for the three years ended August 31,
1998, 1999 and 2000 have been derived from the audited consolidated financial
statements of Summa included elsewhere herein. The selected financial data set
forth below for the years ended August 31, 1996 and 1997 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>
AT AND FOR THE FISCAL YEARS ENDED AUGUST 31,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales .................................................... $ 8,124 $ 39,093 $ 85,704 $106,723 $123,572
Costs and expenses:
Cost of sales .............................................. 4,339 27,097 59,197 73,947 88,296
Selling, general, administrative, other .................... 3,174 9,021 17,127 19,898 21,286
Interest, net .............................................. (15) 275 1,607 2,280 2,984
-------- -------- -------- -------- --------
Total costs and expenses of continuing operations ............ 7,498 36,393 77,931 96,125 112,566
-------- -------- -------- -------- --------
Income from continuing operations before provision for taxes.. 626 2,700 7,773 10,598 11,006
Provision for income taxes ................................... 253 1,088 3,215 4,043 3,700
-------- -------- -------- -------- --------
Income from continuing operations ............................ 373 1,612 4,558 6,555 7,306
Income from discontinued operations, net of income tax effect. 195 640 316 -- --
-------- -------- -------- -------- --------
Net income ................................................... $ 568 $ 2,252 $ 4,874 $ 6,555 $ 7,306
======== ======== ======== ======== ========
Earnings per common share:
Basic:
Continuing operations .................................. $ 0.24 $ 0.47 $ 1.09 $ 1.53 $ 1.71
Discontinued operations ................................ $ 0.12 $ 0.18 $ 0.07 -- --
Net income ............................................. $ 0.36 $ 0.65 $ 1.16 $ 1.53 $ 1.71
======== ======== ======== ======== ========
Diluted:
Continuing operations .................................. $ 0.23 $ 0.46 $ 1.03 $ 1.46 $ 1.62
Discontinued operations ................................ $ 0.12 $ 0.18 $ 0.07 -- --
Net income ............................................. $ 0.35 $ 0.64 $ 1.10 $ 1.46 $ 1.62
======== ======== ======== ======== ========
Weighted average number of shares:
Basic .................................................. 1,565 3,450 4,199 4,278 4,284
Diluted ................................................ 1,603 3,521 4,420 4,488 4,506
BALANCE SHEET DATA:
Assets ....................................................... $ 10,963 $ 35,651 $ 63,983 $ 87,654 $ 89,940
Working capital .............................................. $ 2,423 $ 7,209 $ 10,854 $ 10,326 $ 12,761
Long-term debt, net of current maturities .................... $ 300 $ 5,571 $ 18,675 $ 27,987 $ 25,777
Stockholders' equity ......................................... $ 8,644 $ 20,965 $ 28,118 $ 35,373 $ 41,060
Common shares outstanding .................................... 1,603 4,099 4,257 4,313 4,225
</TABLE>
10
<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, which are not purely
historical, are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including but not limited to statements regarding Summa's expectations,
hopes, beliefs, intentions or strategies regarding the future, such as those set
forth in "Business--Legal Proceedings" above. Actual results could differ
materially from those projected in any forward-looking statements as a result of
a number of factors, including those detailed in the "Risk Factors" section of
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 the Company assumes no obligation to update the forward-looking
statements, or to update the reasons why actual results could differ materially
from those projected in the forward-looking statements.
Summa manufactures diverse plastic products in two segments: Engineered Polymer
Components and Extruded Plastic Products. See "Business -- Segments; Products"
above. Summa designs and manufactures injection-molded and formed plastic
optical components for OEM customers in the lighting industry; modular plastic
conveyor belt and chain for the food processing industry; engineered plastic
fittings, valves, filters and tubing for the agricultural irrigation industry;
molded plastic coil forms ("bobbins") for use in transformers, motors, relays
and switches; extruded plastic sheet with smooth or textured surfaces in various
colors and sizes for diverse industrial applications, and other molded and
extruded plastic components for diverse industries. See "Business -- Segments;
Products" above, "Results of Continuing Operations -- Segment Information"
below, and Note 14 in the "Notes to Consolidated Financial Statements" of the
Company in this Annual Report on Form 10-K.
RISK FACTORS
Growth has been achieved by acquisition, development of new products and
expansion of the Company's sales organization. There can be no assurance that
Summa will be able to continue to consummate acquisitions, develop new products
or expand sales to sustain rates of revenue growth and profitability in future
periods comparable to those experienced in the past several years. See "Business
-- History of Recent Acquisitions -- Continuing Operations" and "-- Recent
Developments" above. Any future success that the Company may achieve will depend
upon many factors including factors which may be beyond the control of Summa or
which cannot be predicted at this time. Uncertainties and factors which could
cause actual results or events to differ materially from those set forth or
implied include:
- changes in the markets for the products offered by the Company through its
operating subsidiaries
- increased levels of competition, including the entry of additional foreign
and domestic competitors and increased success by existing competitors
- reduced margins caused by competitive pressures and other factors
- increases in operating costs including costs of production, energy,
materials, supplies, personnel, equipment, import duties and transportation
- increases in borrowing costs and the availability of funds
- increases in governmental regulation imposed under federal, state or local
laws, including regulations applicable to environmental, labor and trade
matters
- changes in governmental regulation, including changes affecting the
favorable tax benefits for export sales made by domestic entities through
foreign sales corporations (Summa obtained a $230,000 tax benefit in fiscal
2000)
- changing customer profiles and general economic and industry conditions
that affect customer demand and sales volume, both domestically and
internationally
- the introduction of new products by Summa or its competitors
- the need to make material capital expenditures
- the timing of the Summa's advertising and promotional campaigns
11
<PAGE>
RESULTS OF CONTINUING OPERATIONS
The following table sets forth certain information derived from Summa's
consolidated statements of income from continuing operations as a percentage of
sales for the three years ended August 31, 2000, as well as the Company's
effective income tax rate for each period presented. For a description of
acquisitions during the periods presented, see "Business--History of Recent
Acquisitions -- Continuing Operations" above.
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Net sales .................................. 100.0% 100.0% 100.0%
Cost of sales .............................. 69.1 69.3 71.5
----- ----- -----
Gross profit ............................... 30.9 30.7 28.5
S,G, & A and other expense ................. 20.0 18.6 17.2
----- ----- -----
Operating income from continuing operations 10.9 12.1 11.3
Interest expense, net ...................... 1.8 2.2 2.4
----- ----- -----
Income from continuing operations before tax 9.1 9.9 8.9
Provision for income taxes ................. 3.8 3.8 3.0
----- ----- -----
Income from continuing operations .......... 5.3% 6.1% 5.9%
===== ===== ======
Effective tax rate ......................... 41.4% 38.1% 33.6%
</TABLE>
NET SALES. For the year ended August 31, 1999, net sales from continuing
operations increased by $21,019,000, or 25%, over the prior fiscal year, due
primarily to the inclusion of sales of newly acquired operations. See "Business
-- History of Recent Acquisitions -- Continuing Operations" above. Comparative
trailing twelve months' sales from continuing businesses grew at 5% in the
Engineered Polymer Components segment, declined 5% in the Extruded Plastic
Products segment, and grew at 3% on a consolidated basis in fiscal 1999. The
decline in sales in the Extruded Plastic Products segment is not apparent from
footnote 14 in the "Notes to Consolidated Financial Statements", as the
extrusion operations were acquired during fiscal 1998 and results were included
for ten months thereof. The decline was attributable to management turnover at a
sheet extrusion plant and preparations for the relocation of that plant, which
was completed in the first quarter of fiscal 2000.
For the year ended August 31, 2000, net sales increased $16,849,000, or 16%,
over the prior fiscal year, due primarily to the inclusion of sales of newly
acquired operations. See "Business -- History of Recent Acquisitions --
Continuing Operations" above. Comparative same business unit sales grew 8% in
the Engineered Polymer Components segment due to expanded sales programs, new
product introductions and market growth, declined 4% in the Extruded Plastic
Products segment due to industry consolidation and competitive conditions, and
grew 6% on a consolidated basis in fiscal 2000.
COST OF SALES. For the year ended August 31, 1999, cost of sales from continuing
operations increased by $14,750,000, or 25%, over the prior fiscal year, due
primarily to the inclusion of expenses of newly acquired operations, and
increased sales volume and related expenses. See "Business -- History of Recent
Acquisitions -- Continuing Operations" above.
For the year ended August 31, 2000, the cost of sales increased by $14,349,000,
or 19%, over the prior fiscal year, due primarily to the inclusion of the costs
of newly acquired operations and increased sales. As a percent of sales, costs
of goods sold increased from 69.3% to 71.5%, due to increased costs of raw
materials and energy, particularly in the fourth quarter, and an unfavorable mix
of business. See "Business -- History of Recent Acquisitions -- Continuing
Operations" above.
GROSS PROFIT. For the year ended August 31, 1999, gross profit from continuing
businesses increased by $6,269,000 to $32,776,000, an increase of 24% over the
gross profit generated during the prior fiscal year. The increase in gross
profit is due primarily to the inclusion of newly acquired operations. As a
percent of sales, the gross profit margin decreased from 30.9% for the year
ended August 31, 1998 to 30.7% for the year ended August 31, 1999, due primarily
to the inclusion of newly acquired operations, which had historically lower
gross margins. See "Business -- History of Recent Acquisitions -- Continuing
Operations" above.
For the year ended August 31, 2000, gross profit increased $2,500,000, or 8%,
over the prior fiscal year, primarily due to the inclusion of results of newly
acquired operations. See "Business -- History of Recent Acquisitions --
Continuing Operations" above. As a percent of sales, the gross profit decreased
from 30.7% to 28.5% due primarily to the inclusion to newly acquired operations,
with historically lower margins, for the complete fiscal year 2000 compared to a
partial fiscal year 1999. Other factors included several low margin OEM
arrangements, since terminated, and inflation in resin and manufacturing costs.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the year ended August 31, 1999,
selling, general and administrative expenses from continuing businesses
increased by $2,771,000, or 16%, compared to the prior fiscal year, due
primarily to the inclusion of several newly acquired operations, and continued
growth in sales and expenses. As a percent of sales, selling, general and
administrative expenses decreased from 20.0% to 18.6%, due mostly to the
inclusion of several newly acquired operations, which historically had lower
operating expenses as a percentage of sales. See "Business --History of Recent
Acquisitions -- Continuing Operations" above.
For the year ended August 31, 2000, selling, general and administrative expenses
("operating expenses") increased by $1,388,000, or 7%, primarily due to the
inclusion of newly acquired operations. See "Business -- History of Recent
Acquisitions -- Continuing Operations" above. As a percent of sales, operating
expenses decreased from 18.6% to 17.2%, as a result of the inclusion of newly
acquired operations, with historically lower operating expenses as a percentage
of sales, for the entire fiscal year 2000 compared to a partial fiscal year
1999, and as a result of more rapid sales growth than expense growth.
INTEREST EXPENSE, NET. Interest expense increased from $1,607,000 for fiscal
1998 and $2,280,000 for fiscal 1999 to $2,984,000 for fiscal 2000, due to
increased interest rates and higher average levels of debt during the year
although debt at August 31, 2000 was $1,303,000 less than at August 31, 1999.
Interest expense relates primarily to interest on debt owed to the Company's
primary lenders, pursuant to the borrowing arrangement described in the
"Liquidity and Capital Resources" section below. Most of the outstanding
borrowings under this arrangement were for acquisitions.
INCOME FROM CONTINUING OPERATIONS. As a result of the above described changes,
income from continuing operations increased by $1,997,000 in fiscal 1999 to
$6,555,000, an increase of 44% over fiscal 1998. Net income for fiscal 2000
increased by $751,000, or 11%.
EFFECTIVE TAX RATE. For the fiscal year ended August 31, 1999, the effective tax
rate, which is a composite of federal and state income taxes, decreased from
41.4% to 38.1%, due primarily to a lower effective combined state income tax
rate and increased foreign sales corporation tax benefit. For fiscal 2000 the
effective tax rate decreased to 33.6% primarily due to lower average state tax
rates and increased foreign sales corporation tax benefit. During the year, a
non-recurring tax benefit of $190,000 was recognized, reflecting the benefit of
state tax adjustments from prior periods. Without this non-recurring benefit,
the effective tax rate in fiscal 2000 would have been 35.3%. The foreign sales
corporation tax benefit provision of the U.S. Tax Code has been challenged by
the World Trade Organization and may be revised in the future. If the code were
changed to eliminate this benefit, the effective tax rate of the Company would
be approximately 2% higher.
INFLATION. Inflation did not have a significant impact on Summa's operations
during the past three fiscal years until fiscal 2000, particularly in the fourth
quarter. During that period, oil price increases resulted in increasing and
increasingly volatile costs of plastic resin, energy and transportation. These
factors did not have a material impact on the Company's financial results until
the fourth quarter, in which they contributed significantly to reduced gross
margins. To mitigate the future impact of inflation, the Company has recently
implemented selected price increases on certain of its products, and intends to
attempt to implement additional selected increases, although the ability to do
so is not certain. No significant amount of sales or purchases are made pursuant
to fixed price, long-term agreements.
13
<PAGE>
SEGMENT INFORMATION. The following tables set forth the relative contribution of
each segment to the sales and operating income of the entire Company and the
operating margins of each segment. This data was derived from Summa's
consolidated statements of income for the three years ended August 31, 2000.
RELATIVE CONTRIBUTION BY SEGMENT
<TABLE>
<CAPTION>
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
Net sales
Engineered polymer components.......................... 79.5% 81.3% 84.5%
Extruded plastic products.............................. 20.5 18.7 15.5
------ ----- ----
Consolidated........................................... 100.0% 100.0% 100.0%
Operating profit
Engineered polymer components.......................... 103.8% 101.1% 107.0%
Extruded plastic products.............................. 11.2 9.2 1.7
All other.............................................. (15.0) (10.3) (8.7)
------ ------ -----
Consolidated........................................... 100.0% 100.0% 100.0%
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Operating margin
Engineered polymer components.......................... 14.3% 15.0% 14.3%
Extruded plastic products.............................. 6.0% 5.9% 1.3%
Consolidated........................................... 10.9% 12.1% 11.3%
</TABLE>
From the foregoing discussion and above tables, it is apparent that the
Engineered Polymer Components segment comprises approximately 85% of the
Company's sales and virtually all of the Company's operating profit, and is
growing faster than the Extruded Plastic Products segment, a trend which is
expected to continue for the operations which currently comprise the Company.
See also, Note 14 in the "Notes to Consolidated Financial Statements" of the
Company in this Annual Report on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
SOURCE AND USE OF FUNDS. The Company's primary source of liquidity has been cash
generated from operating activities and borrowings from third parties. See
"Financing Arrangements" below. During the three fiscal years ended August 31,
2000, net cash provided by operating activities was $8,441,000 in 1998,
$11,681,000 in 1999 and $8,368,000 in 2000. Cash flows from operations improved
in 1999 vs. 1998 primarily to the inclusion of newly acquired businesses. Cash
flows from operations declined in 2000 vs. 1999 due to increases in working
capital. Accounts receivable increased by $1.4 million and inventories increased
by $1.0 million, as accrued liabilities were reduced by $1.6 million.
Summa's principal uses of cash have been the (i) support of operating
activities, (ii) acquisitions of businesses, (iii) investment in capital
improvements, (iv) reduction of debt and (v) repurchase of common stock. Cash
used for certain investing activities for the three fiscal years ended August
31, 2000 is summarized in the following table:
<TABLE>
<CAPTION>
Fiscal Years Ended August 31,
-----------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Acquisitions of businesses....................... $23,322,000 $19,650,000 $2,174,000
Investment in capital improvements............... $3,033,000 $4,153,000 $4,333,000
Capital investment as a % of depreciation....... 94.2% 104.1% 91.8%
</TABLE>
Increased levels of investment are a result of higher new product tooling
activity, manufacturing equipment upgrades and new computer systems. Although
Summa expects to continue making substantial investments in tooling for new
products, at August 31, 2000, Summa was not committed to any outside supplier
for major capital expenditures, and believes its present capacity, augmented by
anticipated continued investment in new product tooling and equipment, will be
sufficient to meet demand for its products. For information relating to
acquisitions, see "Business -- History of Certain Acquisitions -- Continuing
Operations" and "--- Recent Events " above.
WORKING CAPITAL; ASSET UTILIZATION. At fiscal year end August 31, working
capital was $10,854,000 in 1998, $10,326,000 in 1999, and $12,761,000 in 2000
representing a decrease of 5% from 1998 to 1999 and an increase of 24% from 1999
to 2000. Working capital decreased in 1999 in spite of increases in accounts
receivable and inventory associated with acquisitions, due to the increase in
the current portion of long-term debt of $3.1 million. The increase in working
capital in 2000 was primarily attributable to increased accounts receivable and
inventory due to sales growth and acquisitions.
14
<PAGE>
Asset utilization for the three fiscal years ended August 31, 2000 is
illustrated in the following table:
<TABLE>
<CAPTION>
Fiscal Years Ended August 31,
-----------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Average working capital turnover............ 9.5 times 10.0 times 10.7 times
Average accounts receivable turnover........ 8.8 times 7.4 times 7.3 times
Average inventory turnover.................. 9.6 times 7.0 times 7.2 times
</TABLE>
The downward change in turnover of accounts receivable and inventory from 1998
to 1999 was not a result of changes in operations. It was a result of the
blending of newly acquired operations and the timing of acquisitions during
1999.
FINANCING ARRANGEMENTS. Summa has several debt relationships in place as
described below. Substantially all of the Company's assets are pledged to secure
debt. The term debt and revolving line of credit require compliance with various
bank covenants.
Summary of the Company's debt at August 31, 2000:
<TABLE>
<CAPTION>
Weighed
Average Additional
Description of Debt Balance Interest Rate Availability Due
------------------- ------- ------------- ------------ ---
<S> <C> <C> <C> <C>
Revolving line of credit................ $9,276,000 8.7% $15,724,000 2002
Bank term loans......................... 16,634,000 9.2% -- 2001-2005
Acquisition facility.................... --- --- 12,800,000 ---
Industrial revenue bonds and other...... 6,568,000 6.8% -- 2001-2021
----------- ---- ----------- ---------
Total debt.............................. $32,478,000 8.6% $28,524,000
=========== ==== ===========
</TABLE>
Subsequent to the end of fiscal 2000, in October, Summa acquired the stock of
PSI. See "Business -- Recent Events", above. The acquisition facility was used
to finance the transaction.
Interest rates on bank debt, which are based on LIBOR and subject to market
fluctuation, are subject to reduction as the Company achieves certain financial
milestones or increase due to market conditions. See also Note 9 in the "Notes
to Consolidated Financial Statements" of the Company in this Annual Report on
Form 10-K.
The Company announced a stock buy-back program September 28, 1998, under which
it was authorized to purchase its common stock in an aggregate amount of up to
$2,000,000. During fiscal 1999, the Company repurchased and retired 18,000
shares of its common stock in block trades, at an average price of $8.48 per
share. Additionally, the Company acquired and retired 10,046 shares of its stock
at $12.57 per share and 2,084 shares at $14.06 directly from certain former
employees who received distributions from the Summa Industries Employee Stock
Ownership Plan upon their retirement. During fiscal 2000, the Company
repurchased and retired 124,944 shares of its common stock at an average price
of $10.96 per share and repurchased all of the outstanding warrants to acquire
its common stock for $500,000. In addition, the Company acquired and retired
9,104 shares of its stock at $11.25 per share from a former employee who retired
and received the distribution from the Summa Industries Employee Stock Ownership
Plan upon retirement. As of August 31, 2000, the authorized repurchase amount of
$2,000,000 had been fully utilized.
Summa believes that cash flows from operations and existing credit facilities
will be sufficient to fund working capital requirements, planned capital
expenditures and debt service for the next twelve months. The Company has a
strategy of growth by acquisition. In the event an acquisition plan is adopted
which requires funds exceeding the availability described above, an alternate
source of funds to accomplish the acquisition would have to be developed. The
Company has 10,000,000 shares of common stock authorized, of which 4,224,715
shares were outstanding at August 31, 2000 and 5,000,000 shares of "blank check"
preferred stock authorized of which none is outstanding. The Company could issue
additional shares of common or preferred stock or enter into new or revised
borrowing arrangements to raise funds.
15
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 in the "Notes to Consolidated Financial Statements" in Part IV of
this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk relates to interest rate exposure on long-term
borrowings. The Company does not use financial instruments for trading or other
speculative purposes. Excess cash is primarily used to pay down the revolving
line of credit and bank term loans. Borrowings against the revolving line of
credit and bank term loans are at variable interest rates. All other borrowings
are at fixed rates.
At August 31, 2000, the Company had $25,910,000 outstanding against the
revolving line of credit and bank term loans at variable rates ranging from 8.3
percent to 9.4 percent in traunches with variable interest rates or rates fixed
for periods of from 30 days to 25 months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and related notes thereto of the Company filed herewith
are set forth in Item 14 and included in Part IV of this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
16
<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.
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 and subsidiaries as of August 31, 1999 and 2000 and for
each of the three years ended August 31, 2000 (including the notes thereto
which contain unaudited quarterly financial data for each of the two years
ended August 31, 2000), and the report of independent public accountants
thereon, are included herein as set forth in the "Index to Financial
Consolidated Statements" set forth below.
2. FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedules:
Schedule II - Valuation and qualifying accounts.
3. EXHIBITS. The following exhibits to this Annual Report on Form
10-K are either filed herewith or incorporated herein by reference as
indicated:
17
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<S> <C>
2.1 Agreement and Plan of Reorganization dated March 19, 1993 by and
between the Company and KVP Systems, Inc. relating to the acquisition
by the Company of KVP(1)
2.2 Agreement and Plan of Merger dated November 22, 1996 by and among the
Company, LexaLite International Corporation and Charlevoix The
Beautiful, Inc. relating to the acquisition by the Company of
LexaLite(2)
2.3 Agreement and Plan of Acquisition dated July 2, 1997 by and between the
Company and Calnetics Corporation relating to the acquisition by the
Company of Calnetics and its subsidiaries(3)
2.4 Stock Purchase Agreement and Amendment No. 1 thereto dated April 8,
1998 and April 24, 1998, respectively, by and among Mr. William G.
Faulkner, KVP Systems, Inc. and the Company relating to the acquisition
by the Company of Falcon Belting, Inc.(4)
2.5 Stock Purchase Agreement dated June 12, 1998 by and between P&L Growth
Industries, Inc., a California corporation, and the Company relating to
the divestiture by the Company of GST Industries, Inc.(4)
2.6 Asset Purchase Agreement dated February 17, 1999 among Plastron
Industries, Inc., Plastron Industries L.P., the Company and Plastron
Management, Inc. relating to the acquisition of Plastron by the
Company(5)
2.7 Asset Purchase Agreement dated August 18, 1999 among Broadview
Injection Molding, Inc., Broadview Injection Molding Co., Inc., the
Cervenka and Hetzel Joint Venture, Marvin E. Hetzel and Joseph J.
Cervenka relating to the acquisition of Broadview by the Company (6)
2.8 Stock Purchase Agreement dated October 4, 2000 by and among the Company
and the shareholders of Plastic Specialties, Inc. relating to the
acquisition by the Company of Plastic Specialties, Inc. (7)
3.1 Certificate of Incorporation of the Company(8)
3.2 Bylaws of the Company(8)
10.1 Amended and Restated Loan Agreement dated March 5, 1999 between the
Company and a group of lenders(5)
10.2 1991 Stock Option Plan of the Company(9)
10.3 1995 Stock Option Plan of the Company(10)
10.4 1999 Stock Option Plan of the Company(11)
10.5 Employment Agreement dated March 1994 between the Company and James R.
Swartwout (12)
10.6 Amendment No. 1 to Employment Agreement between the Company and James
R. Swartwout dated January 1, 1998(12)
10.7 Employment Agreement dated December 1, 1999 between the Company and
Paul A. Walbrun (13)
10.8 Employment Agreement dated August 7, 2000 between the Company and
Trygve M. Thoresen (*)
21 Subsidiaries of the Registrant(*)
23 Consent of Arthur Andersen LLP(*)
27 Financial Data Schedule(*)
</TABLE>
---------------------------
(1) Incorporated by reference from the exhibits to the Company's Registration
Statement on Form S-4 filed with the Commission on May 24, 1993.
(2) Incorporated by reference from the appendices to the Company's definitive
Proxy Statement on Schedule 14A for the Annual Meeting of Shareholders held
November 21, 1996.
(3) Incorporated by reference from the appendices to the Calnetics' definitive
Proxy Statement on Schedule 14A for the Special Meeting of Shareholders held
October 28, 1997.
(4) Incorporated by reference from exhibits to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended May 31, 1998.
(5) Incorporated by reference from exhibits to the Company's Current Report on
Form 8-K dated March 5, 1999.
(6) Incorporated by reference from exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended August 31, 1999.
(7) Incorporated by reference from exhibits to the company's Current Report on
Form 8-K dated October 5, 2000.
(8) Incorporated by reference from the appendices to the Company's definitive
Proxy Statement on Schedule 14A for the Annual Meeting of Shareholders held
January 26, 1998.
(9) Incorporated by reference from exhibits to the Company's Registration
Statement on Form S-8 filed with the Commission on April 15, 1993.
(10) Incorporated by reference from exhibits to the Company's Registration
Statement on Form S-8 filed with the Commission on January 30, 1997.
(11) Incorporated by reference from exhibits to the Company's Registration
Statement on Form S-8 filed with the Commission on December 15, 1998.
(12) Incorporated by reference from exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended August 31, 1998.
(13) Incorporated by reference from exhibits to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended November 3, 1999.
* Filed herewith.
18
<PAGE>
(b) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF THE FISCAL YEAR ENDED
AUGUST 31, 2000:
None.
19
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants...............................................................F-2
Consolidated Balance Sheets as of August 31, 1999 and 2000.............................................F-3
Consolidated Statements of Income for the years ended August 31, 1998, 1999 and 2000...................F-4
Consolidated Statements of Stockholders' Equity for the years ended August 31, 1998, 1999 and 2000 ....F-5
Consolidated Statements of Cash Flows for the years ended August 31, 1998, 1999 and 2000...............F-6
Notes to Consolidated Financial Statements.............................................................F-7
Report of Independent Public Accountants..............................................................F-19
Schedule II - Valuation and Qualifying Accounts........................................................F-20
</TABLE>
F-1
<PAGE>
Report of Independent Public Accountants
TO: The Board of Directors and Stockholders of Summa Industries:
We have audited the accompanying consolidated balance sheets of Summa
Industries (a Delaware corporation) and subsidiaries as of August 31, 1999
and 2000 and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended August
31, 2000. 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 auditing standards generally
accepted in the United States. 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, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period
ended August 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
October 6, 2000
F-2
<PAGE>
SUMMA INDUSTRIES
CONSOLIDATED BALANCE SHEETS
as of August 31
<TABLE>
<CAPTION>
ASSETS 1999 2000
------------------------------------------------------------------------------------------ --------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,148,000 $343,000
Accounts receivable, net of allowances of $626,000 in 1999 and $636,000 in 2000 16,075,000 17,867,000
Inventories 11,714,000 12,921,000
Prepaid expenses and other 597,000 780,000
Prepaid income taxes 686,000 871,000
------------------------------------------------------------------------------------------ --------------- ----------------
Total current assets 30,220,000 32,782,000
Property, plant and equipment, net 25,721,000 26,956,000
Other assets 585,000 214,000
Goodwill and other intangibles, net 31,128,000 29,988,000
------------------------------------------------------------------------------------------ --------------- ----------------
Total assets $87,654,000 $89,940,000
========================================================================================== =============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------ --------------- ----------------
Current liabilities:
Current maturities of long-term debt $5,794,000 $6,701,000
Accounts payable 7,054,000 6,869,000
Accrued salaries, wages and benefits 3,359,000 3,432,000
Other accrued liabilities 3,687,000 2,809,000
Deferred tax liabilities --- 210,000
------------------------------------------------------------------------------------------ --------------- ----------------
Total current liabilities 19,894,000 20,021,000
Long-term debt, net of current maturities 27,987,000 25,777,000
Deferred tax liabilities 493,000 67,000
Other long-term liabilities 3,907,000 3,015,000
------------------------------------------------------------------------------------------ --------------- ----------------
Total liabilities 52,281,000 48,880,000
------------------------------------------------------------------------------------------ --------------- ----------------
Stockholders' equity:
Preferred stock, par value $.001; 5,000,000 shares authorized; none outstanding --- ---
Common stock, par value $.001; 10,000,000 shares authorized; issued and outstanding:
4,313,481 at August 31, 1999 and 4,224,715 at August 31, 2000 19,205,000 17,586,000
Retained earnings 16,168,000 23,474,000
------------------------------------------------------------------------------------------ --------------- ----------------
Total stockholders' equity 35,373,000 41,060,000
---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $87,654,000 $89,940,000
========================================================================================== =============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended August 31
<TABLE>
<CAPTION>
1998 1999 2000
------------------------------------------------------- ------------------- ---------------------- ----------------------
<S> <C> <C>
Net sales $85,704,000 $106,723,000 $123,572,000
Cost of sales 59,197,000 73,947,000 88,296,000
------------------------------------------------------- ------------------- ---------------------- ----------------------
Gross profit 26,507,000 32,776,000 35,276,000
Selling, general, administrative and other expenses 17,127,000 19,898,000 21,286,000
------------------------------------------------------- ------------------- ---------------------- ----------------------
Operating income from continuing operations 9,380,000 12,878,000 13,990,000
Interest expense, net 1,607,000 2,280,000 2,984,000
------------------------------------------------------- ------------------- ---------------------- ----------------------
Income from continuing operations before provision
for income taxes 7,773,000 10,598,000 11,006,000
Provision for income taxes 3,215,000 4,043,000 3,700,000
------------------------------------------------------- ------------------- ---------------------- ----------------------
Income from continuing operations 4,558,000 6,555,000 7,306,000
Income from discontinued operations, net of the
effect of income tax of $210,000 in 1998 316,000 --- ---
------------------------------------------------------- ------------------- ---------------------- ----------------------
Net income $4,874,000 $6,555,000 $7,306,000
======================================================= =================== ====================== ======================
Earnings per common share
------------------------------------------------------- ------------------- ---------------------- ----------------------
Basic:
Continuing operations $1.09 $1.53 $1.71
Discontinued operations $.07 $ ---- $ ----
Net income $1.16 $1.53 $1.71
------------------------------------------------------- ------------------- ---------------------- ----------------------
Diluted:
Continuing operations $1.03 $1.46 $1.62
Discontinued operations $.07 $ ---- $ ----
Net income $1.10 $1.46 $1.62
======================================================= =================== ======================= ====================
Weighted average common shares outstanding:
Basic 4,199,000 4,278,000 4,284,000
Diluted 4,420,000 4,488,000 4,506,000
------------------------------------------------------- ------------------- ---------------------- ----------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the three years ended August 31, 2000
<TABLE>
<CAPTION>
Common Common Retained
Shares Stock Earnings Total
-------------------------------------------------- ------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Balance at August 31, 1997 4,099,004 $16,226,000 $4,739,000 $20,965,000
Cashout of odd lots (4) --- --- ---
Exercise of stock options 167,318 1,044,000 --- 1,044,000
Stock redeemed in exercise of stock options (9,011) (110,000) --- (110,000)
Value of stock options issued in connection
with acquisition of Calnetics --- 1,345,000 --- 1,345,000
Net Income --- --- 4,874,000 4,874,000
-------------------------------------------------- ------------- ------------------- ------------------- -------------------
Balance at August 31, 1998 4,257,307 18,505,000 9,613,000 28,118,000
Cashout of odd lots (4) --- --- ---
Exercise of stock options 62,041 465,000 --- 465,000
Repurchase of common stock (30,130) (306,000) --- (306,000)
Value of stock options and warrants issued in
connection with acquisition of Plastron --- 310,000 --- 310,000
Sale of common stock 24,267 231,000 --- 231,000
Net Income --- --- 6,555,000 6,555,000
-------------------------------------------------- ------------- ------------------- ------------------- -------------------
Balance at August 31, 1999 4,313,481 19,205,000 16,168,000 35,373,000
Cashout of odd lots (6) --- --- ---
Exercise of stock options 45,288 354,000 --- 354,000
Repurchase of common stock (134,048) (1,473,000) --- (1,473,000)
Repurchase of warrants issued in connection
with acquisition of Plastron --- (500,000) --- (500,000)
Net Income --- --- 7,306,000 7,306,000
-------------------------------------------------- ------------- ------------------- ------------------- -------------------
Balance at August 31, 2000 4,224,715 $17,586,000 $23,474,000 $41,060,000
================================================== ============= =================== =================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SUMMA INDUSTRIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended August 31
<TABLE>
<CAPTION>
1998 1999 2000
---------------------------------------------------------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C>
Operating activities:
Net income $4,874,000 $6,555,000 $7,306,000
----------------------------------------------------------------------------------------- ------------------- ------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 3,221,000 3,989,000 4,718,000
Amortization 452,000 742,000 965,000
Change in net deferred income taxes 26,000 1,574,000 (216,000)
(Gain) loss on disposition of equipment 30,000 (17,000) (24,000)
Net change in assets and liabilities, net of effects of
acquisitions (162,000) (1,162,000) (4,381,000)
---------------------------------------------------------------------- ------------------ ------------------- -------------------
Total adjustments 3,567,000 5,126,000 1,062,000
---------------------------------------------------------------------- ------------------ ------------------- -------------------
Net cash provided by operating activities 8,441,000 11,681,000 8,368,000
---------------------------------------------------------------------- ------------------ ------------------- -------------------
Investing activities:
Acquisitions of businesses (23,322,000) (19,650,000) (2,174,000)
Purchases of property and equipment (3,033,000) (4,153,000) (4,333,000)
Cash paid for patents --- --- (95,000)
Sales of subsidiaries, net of fees and of cash held 1,185,000 --- ---
Net proceeds from the sale of equipment 86,000 23,000 51,000
Net decrease in unexpended revenue bond proceeds 371,000 --- ---
Proceeds from insurance claim --- --- 350,000
Collection of note receivable 1,771,000 --- ---
---------------------------------------------------------------------- ------------------ ------------------- -------------------
Net cash (used in) investing activities (22,942,000) (23,780,000) (6,201,000)
---------------------------------------------------------------------- ------------------ ------------------- -------------------
Financing activities:
Net proceeds from revolving line of credit 2,734,000 5,282,000 1,260,000
Proceeds from issuance of long-term debt 13,994,000 13,997,000 3,258,000
Payments on long-term debt (5,751,000) (6,715,000) (5,871,000)
Proceeds from the exercise of stock options, net 934,000 465,000 354,000
Proceeds from sale of common stock --- 231,000 ---
Purchase of common stock --- (306,000) (1,473,000)
Purchase of warrants --- --- (500,000)
---------------------------------------------------------------------- ------------------ ------------------- -------------------
Net cash provided by (used in) financing activities 11,911,000 12,954,000 (2,972,000)
---------------------------------------------------------------------- ------------------ ------------------- -------------------
Net increase (decrease) in cash and cash equivalents (2,590,000) 855,000 (805,000)
Cash and cash equivalents, beginning of year 2,883,000 293,000 1,148,000
Cash and cash equivalents, end of year $293,000 $1,148,000 $343,000
====================================================================== ================== =================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Summa Industries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended August 31, 2000
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Summa Industries, a Delaware corporation ("Summa" or the "Company"), develops
and manufactures proprietary plastic products for diverse industrial and
commercial markets, primarily located in the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Summa and its
wholly-owned subsidiaries. The results of operations of acquired companies
have been included in the consolidated statements of income and cash flows of
the Company since the dates of acquisitions. See Note 17. All intercompany
account balances and transactions have been eliminated in consolidation.
Prior year amounts in the accompanying financial statements have been
reclassified to conform with current year presentations.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Cost includes material, labor and manufacturing
overhead.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is charged against earnings, principally using the straight-line
method, over the estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Building and improvements 10-40 years
Machinery and equipment 3-10 years
Office furniture and equipment 3-7 years
Leasehold improvements Lesser of remaining term
of lease or estimated
useful life
</TABLE>
Maintenance, repairs and minor renewals are charged directly to expense as
incurred. Additions and improvements to property, plant and equipment are
capitalized. When assets are disposed of, the related cost and accumulated
depreciation thereon are removed from the accounts, and any gain or loss is
included in operations.
INTANGIBLE ASSETS
Intangible assets include goodwill and other intangibles such as trade names,
patents and customer lists recognized in connection with business
acquisitions. Goodwill is amortized over 15-40 years. Other intangibles are
being amortized over their estimated useful lives of 10-17 years. See Note 7.
F-7
<PAGE>
LONG-LIVED ASSETS
The Company has adopted the Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of". This statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. Management monitors the
recoverability of existing assets and considers events or changes in
circumstances, such as loss of significant customers, which indicates that the
value of assets may not be recoverable. When circumstances indicate possible
impairment, management compares the carrying value of existing assets to
management's best estimate of undiscounted future cash flows expected to result
from the use of the assets and their eventual disposition. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying value of the assets exceeds the estimated fair
value of the assets. Estimated fair value will be based on either reliably
determined third-party valuations, if available, or discounted cash flows. When
using discounted cash flows, a discount rate will be selected which will be
commensurate with the risk involved. No impairment has occurred as of August 31,
2000.
EARNINGS PER COMMON SHARE
Basic earnings per common share (EPS) is based on income available to common
stockholders divided by the weighted average number of common shares outstanding
during the year. Diluted EPS is similar to the computation for Basic EPS except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential common shares
had been issued. See Note 2 for details of the computation.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
INCOME TAXES
The Company accounts for income taxes in accordance with the SFAS No. 109
"Accounting for Income Taxes". This statement requires that income taxes be
accounted for using the liability method.
STOCK-BASED COMPENSATION
The Company has elected to continue to report stock based compensation to
employees and directors in accordance with Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock issued to Employees." The Company has
adopted the appropriate disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation." See Note 12.
COMPREHENSIVE INCOME
There are no adjustments to net income required in order to derive comprehensive
income.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," which establishes standards for
reporting and disclosure of derivative and hedging instruments. SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133," requires SFAS No.
133 to be adopted for all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company has not yet adopted SFAS No. 133, but if it had been
adopted, there would not have been any effect on reported income because the
Company had not entered into any derivative or hedging financial contracts. The
Company plans to adopt SFAS No. 133 in fiscal year 2001.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 clarifies certain existing accounting principles for the recognition and
classification of revenues in financial statements. The Company will adopt SAB
101 during the first quarter of fiscal 2001. The Company does not believe that
the adoption of SAB 101 will have a material effect on operations or financial
position.
F-8
<PAGE>
2. DILUTED EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For the years ended August 31: 1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Income from continuing operations ................................ $4,558,000 $6,555,000 $7,306,000
Net income ....................................................... $4,874,000 $6,555,000 $7,306,000
Weighted average common shares outstanding during the period-basic 4,199,000 4,278,000 4,284,000
Effect of dilutive securities:
Impact of common shares to be issued under stock option
plans .................................................. 221,000 204,000 218,000
Impact of common shares to be issued with respect to
warrants ............................................... -- 6,000 4,000
---------- ---------- ----------
Weighted average shares outstanding-diluted (1) (2) ................... 4,420,000 4,488,000 4,506,000
========== ========== ==========
</TABLE>
-----------------
(1) Calculated using the "treasury stock" method as if diluted securities were
exercised and the funds were used to purchase common shares at the average
market price during the period.
(2) Options to purchase 166,328 common shares in 1998, 3,000 common shares in
1999 and 203,708 common shares in 2000 were not included in the computation of
diluted earnings per share because the exercise price was greater than the
average market value of the common shares.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash flows from net changes in assets and liabilities, net of effects of
acquisitions for the years ended August 31:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Accounts receivable, net ............................ $ (488,000) $(1,042,000) $(1,392,000)
Inventories ......................................... (389,000) (1,002,000) (1,003,000)
Prepaid expenses and other assets ................... 5,000 (325,000) (20,000)
Accounts payable .................................... 443,000 163,000 (363,000)
Accrued liabilities ................................. 197,000 1,044,000 (1,603,000)
----------- ----------- -----------
Cash flows from net change in assets and liabilities,
net of the effects of acquisitions ............. $ (162,000) $(1,162,000) $(4,381,000)
=========== =========== ===========
</TABLE>
Cash paid during the years ended August 31:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Interest......................................... $1,986,000 $1,892,000 $3,100,000
Income taxes..................................... $3,478,000 $3,064,000 $4,245,000
</TABLE>
Non-cash investing and financing activities:
<TABLE>
<CAPTION>
Details of acquisitions (Note 17): 1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Fair value of assets acquired .......... $ 36,917,000 $ 22,180,000 $ 2,882,000
Liabilities assumed or incurred ........ (10,844,000) (2,220,000) (589,000)
Value of options and warrants issued ... (1,345,000) (310,000) --
------------ ------------ ------------
Cash paid ................................ 24,728,000 19,650,000 2,293,000
Less cash acquired ....................... (1,406,000) -- (119,000)
------------ ------------ ------------
Net cash used in acquisitions ............ $ 23,322,000 $ 19,650,000 $ 2,174,000
============ ============ ============
</TABLE>
F-9
<PAGE>
4. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate:
Cash and cash equivalents, accounts receivable and accounts payable - the
carrying amount is a reasonable estimate of fair value.
Long-term debt - the carrying value approximates fair value since the
interest rate on the long-term debt approximates the rate which is
currently available to the Company for the issuance of debt with similar
terms and maturities.
5. INVENTORIES
Inventories consisted of the following at August 31:
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Finished goods......................................... $4,588,000 $5,292,000
Work in process........................................ 458,000 312,000
Materials and parts.................................... 6,668,000 7,317,000
----------- -----------
$11,714,000 $12,921,000
=========== ===========
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following, at August 31:
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Land, at cost.......................................... $2,870,000 $3,073,000
Buildings and leasehold improvements, at cost.......... 11,617,000 12,380,000
Machinery and equipment, at cost....................... 20,577,000 24,645,000
Office furniture and equipment, at cost................ 1,755,000 2,403,000
----------- -----------
36,819,000 42,501,000
Accumulated depreciation.............................. (11,098,000) (15,545,000)
----------- -----------
Net property, plant and equipment..................... $25,721,000 $26,956,000
=========== ===========
</TABLE>
7. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consisted of the following at August 31:
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Goodwill.............................................. $30,832,000 $30,562,000
Other intangibles..................................... 1,700,000 1,795,000
----------- -----------
32,532,000 32,357,000
Less: accumulated amortization........................ (1,404,000) (2,369,000)
----------- -----------
Goodwill and other intangibles, net................... $31,128,000 $29,988,000
=========== ===========
</TABLE>
During fiscal year 2000, a contingent liability incurred in connection with the
LexaLite Employee Stock Ownership Plan was resolved which resulted in a
reduction of goodwill of $257,000. For additional activity as it relates to
goodwill, see Note 17.
F-10
<PAGE>
8. 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>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Provision for taxes at statutory rates............... $2,643,000 $3,603,000 $3,742,000
State tax, net of federal benefit.................... 332,000 420,000 250,000
Amortization of nondeductible goodwill............... 147,000 189,000 185,000
Foreign sales corporation benefit.................... (71,000) (156,000) (230,000)
Other, net........................................... 164,000 (13,000) (247,000)
---------- ---------- ----------
Provision for income taxes........................... $3,215,000 $4,043,000 $3,700,000
========== ========== ==========
</TABLE>
The provision for income taxes consisted of the following for the years ended
August 31:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Current:
Federal........................................... $2,500,000 $2,055,000 $3,267,000
State............................................. 450,000 414,000 649,000
---------- ---------- ----------
2,950,000 2,469,000 3,916,000
---------- ---------- ----------
Deferred:
Federal........................................... 208,000 1,410,000 (193,000)
State............................................. 57,000 164,000 (23,000)
---------- ---------- ----------
265,000 1,574,000 (216,000)
---------- ---------- ----------
Provision for income taxes........................... $3,215,000 $4,043,000 $3,700,000
========== ========== ==========
</TABLE>
Changes in components of the Company's net deferred tax assets (liabilities)
were as follows:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
State taxes.......................................... $ (103,000) $65,000 $(76,000)
Reserves............................................. 238,000 1,422,000 (176,000)
Depreciation......................................... 107,000 109,000 (250,000)
Amortization......................................... (17,000) (22,000) 286,000
Other................................................ 40,000 --- ---
---------- ---------- ----------
$265,000 $1,574,000 $(216,000)
========== ========== ==========
</TABLE>
The components of the Company's net deferred tax liabilities at August 31,
1999 and 2000 were as follows:
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
State taxes......................................................... $152,000 $228,000
Reserves............................................................ 764,000 940,000
---------- ---------
Total deferred tax assets........................................... 916,000 1,168,000
---------- -----------
Depreciation........................................................ (1,306,000) (1,056,000)
Amortization........................................................ (103,000) (389,000)
---------- -----------
Total deferred tax liabilities...................................... (1,409,000) (1,445,000)
---------- -----------
Net deferred tax liabilities........................................ $(493,000) $(277,000)
---------- -----------
</TABLE>
9. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT
The Company had bank term loans in the aggregate amount of $16,634,000 at August
31, 2000. Monthly principal payments are due as follows: $414,000 through
October 2003, $322,000 through November 2003; and $37,000 through March 2005.
The average interest rate on the term loans was 7.7% at August 31, 1999 and 9.2%
at August 31, 2000.
The Company has a three year revolving line of credit, expiring in December
2002, in an amount of up to $25 million. Interest is due monthly on both the
term loans and the revolving line of credit and is based upon the banks' prime
rate or the LIBOR plus a margin, at the Company's option, and has provision for
increases or decreases in the applicable margins based upon the senior debt to
EBITDA ratio. The average interest rate on the revolver was 7.6% at August 31,
1999 and 8.7% at August 31, 2000. The bank loans, which require compliance with
various covenants, are secured by substantially all of the
F-11
<PAGE>
Company assets which are not security for other loans. At August 31, 2000,
the Company had available borrowings of $15,724,000 under its revolving line
of credit and $12,800,000 under its acquisition facility.
At August 31, 2000, the Company has industrial revenue bond ("IRB") financing in
the amount of $2,000,000 in connection with a facility in Michigan, secured by a
letter of credit. Principal payments of $1,000,000 are due on November 1, 2000
and 2001. Interest is payable semi-annually at an average effective interest
rate of 6.8% at August 31, 1999 and 2000.
The Company has IRB financing in connection with a California facility in the
amount of $1,360,000. Principal payments, secured by a letter of credit and the
related property, are due in annual installments ranging from $25,000 to
$130,000 through December 2021. Interest is due monthly at an average effective
interest rate of 4.1% at August 31, 1999 and 4.8% at August 31, 2000.
Other debt consists of equipment and property loans secured by the related
equipment or property. These loans mature between 2001 and 2005 and have fixed
interest rates ranging from 7.2% to 8.0% at August 31, 1999 and 2000.
Long-term debt consisted of the following at August 31:
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Revolving line of credit................ $8,016,000 $9,276,000
Bank term loans......................... 19,017,000 16,634,000
Industrial revenue bonds................ 4,380,000 3,360,000
Other................................... 2,368,000 3,208,000
----------- -----------
Total................................... 33,781,000 32,478,000
Less: current maturities................ 5,794,000 6,701,000
----------- -----------
Long-term portion....................... $27,987,000 $25,777,000
----------- -----------
</TABLE>
Future maturities of long-term debt at August 31, 2000 were as follows:
<TABLE>
<CAPTION>
Fiscal year Amount
----------- ------
<S> <C>
2002.................................................... $6,285,000
2003.................................................... 15,289,000
2004.................................................... 2,167,000
2005.................................................... 821,000
2006 and thereafter..................................... 1,215,000
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
The Company leases office and manufacturing facilities and certain equipment
under non-cancelable operating leases which expire at various dates through May
2009. Rental expense charged to operations was approximately $1,160,000 in 1998,
$1,430,000 in 1999 and $1,302,000 in 2000.
The aggregate minimum future lease payments under these leases at August 31,
2000 are approximately as follows:
<TABLE>
<CAPTION>
Fiscal year Amount
----------- ------
<S> <C>
2001.................................................... $1,129,000
2002.................................................... 888,000
2003.................................................... 768,000
2004.................................................... 525,000
2005.................................................... 343,000
2006 and thereafter..................................... 1,427,000
</TABLE>
The Company has adopted a retirement and savings plan. The plan, which qualifies
under Section 401(k) of the Internal Revenue Code, allows employees to defer
specified percentages of their compensation, in a tax-deferred trust. The
Company may elect to make matching contributions and discretionary
contributions. The cost of the Company matching contribution is partially offset
by a reduction in payroll taxes. Company contributions to the plan totaled
$529,000 in 1998, $699,000 in 1999 and $741,000 in 2000.
The Company has adopted an Employee Stock Ownership Plan (the "ESOP"). Under the
ESOP, the Company may make contributions to the ESOP trust for purchases of
shares of the Company's Common Stock, or may contribute Common Stock directly to
the ESOP trust. The total cash contributions by the Company to the ESOP were
$180,000 in 1998, $278,000 in 1999 and $325,000 in 2000.
F-12
<PAGE>
The Company has various employment agreements with officers, some of which
include bonuses, stock options, and/or change in control provisions.
Prior to October 1986, a previously owned business unit of one of the Company's
subsidiaries operated a facility on property within an area subsequently
designated as a federal Superfund site. In 1997, the Company learned that
hazardous substances had been detected in the soil at the property and that the
current owner had been requested by a state agency to undertake additional
investigation at the property. The Company also became aware that the property
has been subject to a general notice letter issued by the United States
Environmental Protection Agency under the federal Superfund law. The Company, as
the successor to one of several prior tenants of the property, may be held
responsible for the contamination at the site regardless of whether its
subsidiary caused the contamination. The Company does not believe it is
responsible for any contamination at the property, and has not been notified or
contacted by any governmental authority in that regard, nor named in any
proceeding relating to the property. However, if the Company were held liable
under federal Superfund law, or other environmental law, or had to defend itself
against such a claim, the consequences could be material to the Company's
results of operations and financial position.
11. RELATED PARTY TRANSACTIONS
The Company is obligated to pay fees and commissions on certain products to one
of its directors, pursuant to pre-existing agreements with a subsidiary acquired
in fiscal 1997. Total fees and commissions were $150,000 in 1998, $172,000 in
1999 and $204,000 in 2000. The agreements continue until 2009.
12. STOCK-BASED COMPENSATION PLANS
The Company has four stock option plans (the Plans) which have been approved by
the Stockholders and are administered by its Board of Directors. Under the
Plans, options to acquire shares of common stock may be granted to key
employees, directors, consultants, vendors and others in the following amounts:
<TABLE>
<CAPTION>
SHARES REMAINING AND AVAILABLE
PLAN TOTAL SHARES AUTHORIZED FOR GRANT AT AUGUST 31, 2000
---- ----------------------- ----------------------------
<S> <C> <C>
1984 Plan 25,000 --
1991 Plan 150,000 850
1995 Plan 350,000 2,277
1999 Plan 500,000 327,176
</TABLE>
In addition, options have been issued in conjunction with acquisitions. The fair
value of these options is included in the purchase prices.
The Company accounts for stock options issued to employees and directors under
APB Opinion No. 25. Under APB 25, if the exercise price of the stock option
equals the market price of the underlying stock on the issuance date, no
compensation expense is recognized. Consequently, no compensation expense was
recognized under these plans for fiscal years 1998, 1999 and 2000. The Company
is required by SFAS No. 123 "Accounting for Stock-Based Compensation" to provide
pro forma disclosures under an alternate fair value method of accounting.
Had compensation cost for stock options awarded under these plans been
determined consistent with SFAS Statement No. 123, the Company's net income and
earnings per share would have reflected the following pro forma amounts at
August 31:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Income from continuing operations
As reported...................................... $4,558,000 $6,555,000 $7,306,000
Pro forma........................................ $4,424,000 $6,383,000 $6,926,000
Diluted earnings per common share:
As reported....................................... $1.03 $1.46 $1.62
Pro forma......................................... $1.00 $1.42 $1.54
</TABLE>
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 1998, 1999 and 2000:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Weighted average risk-free interest rate....................... 5.7% 4.9% 6.1%
Volatility..................................................... 35% 35% 35%
Expected dividend yields....................................... -- -- --
Weighted average expected life in years........................ 3.2 4.3 4.7
</TABLE>
F-13
<PAGE>
Under these Plans, the options are generally issued with exercise prices
equal to the market price of the Company's stock on the grant date. Options
vest cumulatively over various periods, at the discretion of the Board of
Directors, up to five years from the grant date, are exercisable in whole or
in installments, and expire up to ten years from date of grant. Options that
are forfeited are again available for grant under the Plans. All options vest
in full immediately prior to a change in control of the Company, as defined
in the stock option plans.
A summary of the status of the Company's stock options at August 31, 1998, 1999
and 2000, and changes during the years then ended, is presented in the following
table:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........ 445,873 $4.81 790,506 $6.32 869,088 $6.81
Granted under Stockholder
approved plans........................ 180,328 $11.74 111,000 $9.37 132,824 $11.92
Granted in conjunction with
acquisitions.......................... 346,267 $3.77 55,500 $9.46 -- --
Exercised............................... (167,318) $2.68 (62,041) $5.58 (45,288) $5.02
Forfeited/expired....................... (14,644) $7.87 (25,877) $12.08 (16,442) $11.30
-------- ------- -------
Outstanding at end of year.............. 790,506 $6.32 869,088 $6.81 940,182 $7.54
======== ======= =======
Exercisable at end of year.............. 452,179 $4.31 518,592 $5.10 630,287 $6.22
Weighted average fair value of
options granted....................... $4.63 $3.23 $4.84
</TABLE>
The following table summarizes information about stock options outstanding at
August 31, 2000:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------- -----------
WEIGHTED WEIGHTED WEIGHTED
EXERCISE AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
PRICE REMAINING OPTIONS EXERCISE OPTIONS EXERCISE
RANGE TERM (YEARS) OUTSTANDING PRICE OUTSTANDING PRICE
----- ------------ ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$1.55 - 2.32 3.7 86,230 $2.04 86,230 $2.04
$2.72 - 3.61 2.8 88,425 3.34 88,425 3.34
$4.25 - 5.75 6.0 285,429 5.19 253,810 5.13
$7.75 - 12.50 7.1 406,714 10.22 165,879 9.94
$13.72 - 14.56 6.5 73,384 13.75 35,943 13.74
------- ----- ------- -----
940,182 $7.54 630,287 $6.22
======= ===== ======= =====
</TABLE>
F-14
<PAGE>
13. SALES
Sales to the Company's largest single customer represented 7.1% in 1998, 8.1% in
1999 and 8.6% in 2000 of total sales.
Export sales by geographic area were as follows for the years ended August 31:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Europe............................................ $5,057,000 $6,362,000 $6,553,000
Mexico and Canada................................. 4,518,000 6,304,000 5,988,000
Latin America..................................... 1,083,000 1,229,000 2,144,000
Asia.............................................. 665,000 1,008,000 1,656,000
Other............................................. 794,000 1,060,000 774,000
----------- ----------- -----------
$12,117,000 $15,963,000 $17,115,000
=========== =========== ===========
</TABLE>
14. SEGMENT REPORTING
Effective September 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which establishes
revised standards for the manner in which public business enterprises report
information about operating segments.
The Company identifies its reportable segments based on similarities between
economic characteristics considering products, production processes, customers
and distribution. The Company's operations consist of two businesses segments -
Engineered Polymer Components and Extruded Plastic Products.
In the Engineered Polymer Components segment, the Company designs and
manufactures, primarily by injection molding, sophisticated components, most of
which are proprietary. Many of the components are patented and/or approved by
government agencies such as the USFDA, or independent laboratories such as
Underwriters' Laboratories. The materials used in the manufacture are generally
known as engineered or high performance plastics. Most of the sales of the
components are made directly by Company employees to original equipment
manufacturers who incorporate the components into their products.
In the Extruded Plastic Products segment, the Company continuously extrudes
plastic products, which are generally not differentiated from those of
competitors and are typically produced from materials known as commodity grade
plastic resins. Extruded Plastic Product sales are made primarily through
independent distribution channels.
F-15
<PAGE>
All figures below are in thousands.
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Net sales:
Engineered polymer components $68,131 $86,714 $104,453
Extruded plastic products 17,573 20,009 19,119
------- -------- --------
Consolidated $85,704 $106,723 $123,572
======= ======== ========
Operating income from continuing operations:
Engineered polymer components $9,739 $13,019 $14,972
Extruded plastic products 1,053 1,186 244
All other (1,412) (1,327) (1,226)
------- ------- -------
Consolidated $9,380 $12,878 $13,990
======= ======= =======
Identifiable assets:
Engineered polymer components $45,887 $68,903 $72,003
Extruded plastic products 15,806 16,490 16,457
All other 2,290 2,261 1,480
------- ------- -------
Consolidated $63,983 $87,654 $89,940
======= ======= =======
Capital expenditures:
Engineered polymer components $2,893 $3,231 $4,086
Extruded plastic products 121 922 316
All other 7 -- 26
Discontinued operations 12 -- --
------- ------- -------
Consolidated $3,033 $4,153 $4,428
======= ======= =======
Depreciation and amortization:
Engineered polymer components $3,119 $4,117 $5,010
Extruded plastic products 457 558 620
All other 60 56 53
Discontinued operations 37 -- --
------- ------- -------
Consolidated $3,673 $4,731 $5,683
======= ======= =======
</TABLE>
Interest expense and income taxes are not shown in the above table, as they are
not fully allocated by segment. "All other" includes corporate and other
non-operating items not allocated by segment.
15. UNAUDITED QUARTERLY RESULTS
<TABLE>
<CAPTION>
Quarters ended
November February May August Fiscal Year
-------- -------- --- ------ -----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Fiscal 1999:
Net sales.................................... $23,271 $22,987 $30,203 $30,262 $106,723
Gross profit................................. 7,266 7,260 9,229 9,021 32,776
Net income................................... $1,406 $1,353 $1,880 $1,916 $6,555
Earnings per common share:
Basic.................................... $.33 $.32 $.44 $.44 $1.53
Diluted ................................. $.32 $.30 $.42 $.42 $1.46
Fiscal 2000:
Net sales.................................... $28,569 $30,023 $33,302 $31,678 $123,572
Gross profit................................. $8,272 $8,860 $9,722 $8,422 $35,276
Net income................................... $1,603 $1,647 $2,099 $1,957 $7,306
Earnings per common share:
Basic.................................... $.37 $.38 $.49 $.47 $1.71
Diluted ................................. $.35 $.36 $.47 $.44 $1.62
</TABLE>
16. DISCONTINUED OPERATIONS
F-16
<PAGE>
On June 26, 1998, the Company completed the divestiture of its subsidiary,
GST Industries, Inc. Accordingly, this business unit has been accounted for
as a discontinued operation and the results of its operation are segregated
in the accompanying consolidated statements of income. There was no gain or
loss on the disposition of GST and no interest expense was allocated to
discontinued operations for fiscal year 1998. Discontinued operations have
not been segregated in the consolidated statements of cash flows. The
preceding notes to consolidated financial statements have been revised, as
necessary, to reflect the change in reporting due to discontinued operations.
Sales from discontinued operations were $2,818,000 and income from
discontinued operations, net of the effect of income tax was $316,000, in
fiscal year 1998.
17. ACQUISITIONS
On October 28, 1997, the Company completed the acquisition of Calnetics
Corporation ("Calnetics"). The total acquisition cost was $31,792,000,
consisting of cash due to former Calnetics shareholders of $22,335,000, (of
which $243,000 was due at August 31, 1998) acquisition costs of $50,000,
liabilities assumed or incurred of $8,062,000 and an estimated fair value of
$1,345,000 for options issued in conjunction with the transaction, primarily
replacement options issued to Calnetics employees who continued with the
Company. The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to
identifiable tangible and intangible assets purchased and liabilities assumed
or incurred based upon their fair value at the date of acquisition. During
fiscal year 2000, an insurance claim settlement was received which resulted
in a reduction of the acquisition cost and of goodwill in the amount of
$350,000. The excess of the adjusted purchase price over the fair value of
the net assets acquired amounted to $13,624,000 and has been recorded as
goodwill which is being amortized on a straight-line basis over 40 years.
On May 1, 1998, the Company completed the acquisition of Falcon Belting, Inc.
("Falcon"), a manufacturer of modular plastic conveyor belting used in food
processing industries. The total acquisition cost was $5,125,000, consisting
of $2,636,000 in cash and the present value of obligations to make future
payments to the former owner of Falcon and liabilities assumed or incurred of
$2,489,000. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to
identifiable tangible and intangible assets purchased and liabilities assumed
or incurred based upon their fair value at the date of acquisition. During
fiscal year 1999, a contingency was resolved which resulted in a reduction of
the total acquisition cost and of goodwill in the amount of $125,000. The
excess of the adjusted purchase price over the fair value of the net assets
acquired amounted to $1,870,000 and has been recorded as goodwill which is
being amortized on a straight-line basis over 30 years.
On March 5, 1999, the Company completed the acquisition of substantially all
of the assets of Plastron Industries, L.P. ("Plastron"). The aggregate
purchase price paid for Plastron consisted of (i) $19,525,000 in cash; (ii) a
four-year warrant exercisable to purchase up to 200,000 shares of the
Company's common stock at $11.75 per share valued at $278,000; (iii)
investment banking fees consisting of a $125,000 cash payment and stock
options, valued at $32,000; and (iv) the assumption of certain liabilities,
principally trade payables and accrued obligations of $2,220,000. The
transaction has been accounted for using the purchase method of accounting,
and accordingly, the purchase price has been allocated to identifiable
tangible and intangible assets purchased and liabilities assumed or incurred
based upon their fair value at the date of acquisition. The excess of the
purchase price over the fair values of the net assets acquired amounted to
$13,781,000 and has been recorded as goodwill which is being amortized on a
straight-line basis over 35 years.
On September 1, 1999, Summa acquired substantially all of the assets of
Broadview Injection Molding Co., Inc. ("Broadview"). The aggregate purchase
price paid for Broadview consisted of $2,143,000 in cash, liabilities assumed
or incurred of $364,000 and acquisition costs of $26,000. The transaction has
been accounted for using the purchase method of accounting, and accordingly,
the purchase price has been allocated to identifiable tangible and intangible
assets purchased and liabilities assumed or incurred based upon their fair
value at the date of acquisition. The excess of the purchase price over the
net fair market value of acquired assets was $237,000 and has been recorded
as goodwill, which is being amortized on a straight-line basis over 15 years.
On May 5, 2000, Summa acquired all of the assets of Yarbrough-Timco. The
aggregate purchase price paid for Yarbrough-Timco consisted of $150,000 in
cash, a note payable to the seller in the amount of $50,000, liabilities
assumed or incurred of $124,000 and acquisition costs of $25,000. The
transaction has been accounted for using the purchase method of accounting,
and accordingly, the purchase price has been allocated to identifiable
tangible assets purchased and liabilities assumed or incurred based upon
their fair value at the date of acquisition. The excess of the purchase price
over the net fair market value of acquired assets was $100,000 and has been
recorded as goodwill, which is being amortized on a straight-line basis over
15 years.
F-17
<PAGE>
The results of operations of each of the above described acquisitions have
been included in the consolidated results of operations and statements of
cash flows of the Company since the date of acquisition. The following pro
forma financial information presents the results of operations of the
continuing businesses of the Company with Calnetics and Plastron as though
the acquisitions had been made as of September 1, 1997. Pro forma adjustments
have been made to give the effect to the amortization of goodwill and other
intangibles, adjustments in depreciation and inventory value, interest
expense related to acquisition debt, the related tax effects and the effect
upon basic and diluted earnings per share of the additional shares of stock
given in exchange for LexaLite stock and of stock options and warrants issued
in conjunction with the acquisitions. The following pro forma financial
information does not include adjustments to give effect to the Falcon,
Broadview and Yarbrough-Timco acquisitions as such adjustments would not be
material.
<TABLE>
<CAPTION>
For the years ended August 31, 1998 1999 2000
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
Net sales......................................... $109,554,000 $115,789,000 $123,572,000
Income from continuing operations................. $5,185,000 $6,889,000 $7,306,000
Net income........................................ $5,501,000 $6,889,000 $7,306,000
Earnings per common share
Continuing operations
Basic...................................... $1.23 $1.61 $1.71
Diluted.................................... $1.17 $1.53 $1.62
Net income
Basic...................................... $1.31 $1.61 $1.71
Diluted.................................... $1.24 $1.53 $1.62
</TABLE>
The above pro forma results are not necessarily indicative of what the actual
consolidated results of operations might have been if the acquisition had
been effective at the beginning of the periods presented or of the results
which may be achieved in the future.
18. SUBSEQUENT EVENTS
On October 5, 2000, the Company acquired all of the outstanding stock of
Plastic Specialties, Inc., a manufacturer of thermoformed, extruded and
injection-molded plastic prismatic components for lighting fixtures for
$6,287,000 in cash, 4,873,000 in assumed indebtedness, subsequently paid, and
liabilities assumed or incurred to be determined. The acquisition facility
was used to finance the transaction.
F-18
<PAGE>
Report of Independent Public Accountants
TO: The Board of Directors and Stockholders of Summa Industries:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements included in Summa
Industries and subsidiaries' annual report to stockholders included in this
Form 10-K, and have issued our report thereon dated October 6, 2000. Our
audit was made for the purpose of forming an opinion on those statements
taken as a whole. The schedule listed in the index to consolidated financial
statements is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
October 6, 2000
F-19
<PAGE>
Summa Industries
Schedule II
Valuation and Qualifying Accounts
Allowance for Doubtful Accounts
For the years ended August 31
<TABLE>
<CAPTION>
Balance at Amounts
beginning of charged to Acquired Amounts Balance at
period expense reserves written off end of period
------------ ----------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
2000 $626,000 $114,000 $25,000 $(129,000) $636,000
1999 620,000 248,000 25,000 (267,000) 626,000
1998 195,000 79,000 385,000 (39,000) 620,000
</TABLE>
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, as amended, Summa has duly caused this Annual Report on Form 10-K for
the fiscal year ended August 31, 2000 to be signed on its behalf by the
undersigned, thereunto duly authorized, on October 25, 2000.
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, 2000 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 October 25, 2000
----------------------- & Chief Financial Officer
James R. Swartwout (Principal Executive and Financial Officer)
/s/ Michael L. Horst Director October 25, 2000
-----------------------
Michael L. Horst
/s/ William R. Zimmerman Director October 25, 2000
------------------------
William R. Zimmerman
/s/ David McConaughy Director October 25, 2000
------------------------
David McConaughy
/s/ Byron C. Roth Director October 25, 2000
------------------------
Byron C. Roth
/s/ Josh T. Barnes Director October 25, 2000
------------------------
Josh T. Barnes
/s/ Jack L. Watts Director October 25, 2000
------------------------
Jack L. Watts
/s/ Paul A. Walbrun Vice President & Controller October 25, 2000
---------------------- (Principal Accounting Officer)
Paul A. Walbrun
</TABLE>
