<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from ______________ to _______________
Commission file number 1-9087.
SUMMA RX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1535372
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2940 FM 3028, Mineral Wells, Texas 76067
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (940) 325-0771
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.01 par value Over the Counter
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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.
(1) Yes [X] No [ ] (2) Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and 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-KSB or any
amendment to this Form 10-KSB. [X]
As of July 17, 1998, the estimated aggregate market price of the
Registrant's voting stock held by non-affiliates was $590,000.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of July 17, 1998, the Registrant had 3,145,838 shares of its common
stock issued and outstanding.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits from (i) Registration Statement No. 33-00297-FW on
Form S-18 as filed with the Commission on December 9, 1985, (ii) Registration
Statement No. 33-9475 on Form S-8 as filed with the Commission on October 9,
1986, (iii) Annual Report on Form 10-K for the year ended April 30, 1989 and
(iv) Quarterly Report on Form 10-Q dated September 15, 1988 are incorporated by
reference into Part IV of this Report.
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PART I
ITEM 1. BUSINESS
CORPORATE IDENTITY STATEMENT
Summa Rx Laboratories, Inc. ("Summa") was formed as a Texas sole
proprietorship in 1972 and was incorporated in the State of Texas in October
1976, as Dews Laboratories, Inc. In November 1987, Dews was merged into a
Delaware corporation and was renamed Summa Rx Laboratories, Inc.
On December 20, 1991, Summa entered into an Agreement and Plan of
Reorganization whereby Summa acquired eighty percent (80%) of the outstanding
shares of Mountain Brook Spring Water Co., Inc., a Louisiana corporation
("Mountain Brook"), from its sole stockholder, Mr. G. Russell Chambers ("Mr.
Chambers"), in exchange for 908,295 shares of Summa Common Stock after giving
effect to the reverse split referred to below. Mountain Brook was organized as a
Louisiana corporation in 1987 to wholesale bottled drinking water. As of March
15, 1996, Summa exchanged all of its Mountain Brook shares for 855,379 shares of
Summa's Common Stock held by Mr. Chambers' estate. See Item 7 - "Management's
Discussion and Analysis of Financial Condition and Statement of Operation" and
Item 13 -"Certain Relationships and Related Transactions."
After Divesting itself of Mountain Brook Summa no longer has industry
segments for reporting purposes, and makes no disclosure regarding that former
industry segment except for financial reporting purposes.
Summa is engaged in the business of manufacturing and marketing of
pharmaceuticals, dietary supplements and nutritional products for sale under its
own label and under contract for others. Its executive offices and manufacturing
facilities are located at 2940 FM 3028, Mineral Wells, Texas 76067,
approximately 45 miles west of the Dallas/Fort Worth metropolitan area.
DESCRIPTION OF PHARMACEUTICAL PRODUCTS AND SERVICES
Summa's manufacturing facility is registered with the Food and Drug
Administration (the "FDA") to manufacture drugs and medical devices. Present
operations consist primarily of the manufacturing and marketing of products that
fall into three categories - dietary supplements, prescription and over the
counter ("OTC") pharmaceuticals. Almost all of its manufacturing and sales are
now done on a contract basis according to the customer's specifications,
including content and labeling design; however, some food supplements are
produced for sale under the Summa "house" label. Summa's own proprietary
products are sold to hospitals, clinics and wholesale and retail customers.
A major portion of Summa's sales consists of dietary supplements.
Pursuant to the new Dietary Supplement Health and Educational Act of 1994, the
term dietary supplements includes vitamins, minerals, amino acids, and herbs or
other botanicals. Summa manufactures dietary supplements for a variety of
customers including multi-level marketers, direct sales companies, and
pharmacies.
Summa also produces protein modified diet supplements, designed to be
used in conjunction with behavior modification and under medical supervision to
help significantly obese patents lose weight. These products are marketed to
hospitals and medical clinics.
In addition, Summa, manufactures prescription and nonprescription
pharmaceuticals such as analgesics, decongestants, and mucolytic expectorants.
On March 31, 1997, Summa entered into a license agreement to
manufacture zinc acetate lozenges under several U. S. Patents. The license
allows Summa to sell the products worldwide and was entered into with the
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patent holder in return for his use of Summa's manufacturing facilities, and for
consultation and assistance provided by Summa over the past ten years that
resulted in the development of the patents.
Effective on May 16, 1997, Summa entered into a contract to manufacture
and sell zinc acetate lozenges to a distribution firm under the brand name
ColdCure(TM). On July 10, 1997, Summa entered into a contract to manufacture and
sell zinc acetate lozenges under the Cepacol(TM) brand.
In June 1997 the distribution company introduced Summa to the JB
Williams Company, Inc., the seller of the Cepacol brand product. As a result of
that introduction, on July 10, 1997 Summa entered into a multi-year
manufacturing and sales agreement with JB Williams Company to supply it with
zinc lozenge tablets. That agreement provides that JB Williams will purchase an
annual minimum during the first two years with an increase of 64% during the
remainder of the agreement. The JB Williams agreement is for a five year primary
term with automatic five year extensions thereafter. Sales by JB Williams under
its agreement are limited to the United States of America, its territories and
possessions, the other nations of North America, the nations islands of Central
America and the Caribbean Sea, less Cuba and Greenland.
Summa's production and billing procedures are based on an order,
production and shipment/payment premise so as to minimize finished goods
inventory, order backlog and delays in payment of receivables. As of July 17,
1998, Summa had pending orders that totaled $ 364,086. These orders are
scheduled for delivery during the next six weeks.
Distribution of products from Summa's manufacturing facility is by
commercial freight carriers.
PRODUCT ANNOUNCEMENTS
On June 26, 1997 Summa issued a press release to the Mineral Wells
Index and the Weatherford Democrat to announce the signing of a contract for the
manufacture and sale of zinc acetate lozenges to a distribution firm under the
brand name ColdCure.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The sources of the raw materials for Summa's operations are from
independent commercial suppliers through-out the United States, and are
available from many other suppliers, other than those utilized by Summa. There
is adequate availability of the raw materials required for Summa's manufacturing
operations.
PATENTS AND TRADEMARKS
Although most of Summa's formulas are not subject to patent protection,
Summa has in the past, and will in the future attempt to retain those formulas
in the form of trade secrets. Summa believes that improvement of existing
products, reliance upon trade secrets, and unpatented proprietary know-how and
development of new products are generally as important as patent protection in
establishing and maintaining a competitive market position.
Summa has filed an application for a patent entitled "Dietary
Supplement for the Promotion of Healthy Hair and Pigment Restoration" with the
U. S. Patent Office.
In addition Summa has filed applications for trademarks for Gray Away,
Zinc Care, Zinc Plus, Cold Clear, and Cold Care.
As part of the license agreement to manufacture zinc acetate lozenges,
Summa acquired the exclusive right to the use of ColdCure.
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SEASONALITY
Dietary supplements and nutritional products traditionally experience
declines in sales during the summer months; however, Summa has attempted to
restructure its marketing efforts and product line to minimize the impact of
seasonality on its sales.
DEPENDENCE ON CUSTOMERS' BUSINESS
For the year ended April 30, 1998, three customers accounted for 37%,
20% and 12% of Summa's sales, respectively. The loss of any of these customers
could have an adverse effect on the company. During the fiscal year ended April
30, 1997, four customers accounted for 18%, 16%, 13% and 11% of sales, , and in
fiscal year April 30, 1996, three customers accounted for 18%, 11% and 11% of
sales.
COMPETITION
The manufacture and sale of dietary supplements, prescription and OTC
pharmaceuticals is highly competitive with respect to price and products offered
and is influenced by consumer preference. Summa does not attempt to compete with
large pharmaceutical and nutritional companies, except in its dietary supplement
programs, but attempts to supplement the products offered by such companies by
offering similar products in market areas not penetrated by the larger
companies. There are numerous smaller companies whose products overlap many of
the products produced by Summa. Many of those companies are of comparable size
or larger and provide the majority of the competition in Summa's market.
PRODUCT RESEARCH AND DEVELOPMENT
Summa intends to direct its research and development activities toward
(1) additional dietary supplement products and (2) product lines to be
manufactured under contract for customers, particularly pharmaceuticals.
GOVERNMENTAL REGULATION
Summa's products and production and manufacturing facility are subject
to governmental regulation by the FDA. The FDA establishes standards relative to
product safety, efficacy, and labeling, which apply to the manufacture, clinical
testing, and marketing of pharmaceuticals and medical devices in the United
States. FDA regulations prohibit the general sale of such products until they
have been determined to be safe and effective. Summa's manufacturing facility is
registered with the FDA to manufacture drugs and medical devices. However,
Summa's products do not require FDA pre-approval.
The procedure for seeking and obtaining FDA approval for a new
pharmaceutical or medical device can involve many steps including animal testing
to determine the safety, efficacy, and potential toxicity prior to testing on
humans, and clinical testing on humans prior to marketing. The process of
obtaining FDA new drug approval generally takes a substantial period of time and
involves the expenditure of a large amount of resources. Investigational drugs
used in domestic clinical trials are subject to regulation relating to
production methods, advertising, price, and profit.
Summa is not subject to any environmental regulations involving the
discharge of any matter into the environment at either of its facilities.
Consequently, the costs and effects of compliance with governmental
environmental laws are non-existent.
Summa has no contracts or subcontracts being done for the federal
government.
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EMPLOYEES
At April 30, 1998, Summa had 30 full-time employees.
Production/manufacturing accounted for 25 of such employees. The balance of
Summa's employees are engaged in finance, sales and administration.
ITEM 2. PROPERTIES
Summa owns its executive offices and its storage and manufacturing
facilities which consist of a single building containing 28,000 square feet
located on approximately six acres, five miles southeast of Mineral Wells,
Texas, and an 11,000 square foot warehouse located in the Wolters Industrial
Park in Mineral Wells, Texas. In the opinion of management the properties are
adequately covered by insurance.
Summa expanded its manufacturing, operating and storage facilities in
August 1997, Summa believes the expansion created sufficient manufacturing and
storage facilities for its present needs. Additional acreage at its facility
will provide sufficient area for expansion for long term goals.
Summa does not invest any of its assets in real estate, real estate
mortgages or other securities.
ITEM 3. LEGAL PROCEEDINGS
Summa is not a party to any claim for damages whose amounts exceeds ten
percent of its assets.
In early July 1998, the licensor of the license that allows Summa to
manufacture patented zinc acetate products filed a demand for mediation citing
"disputes" between himself and Summa. Prior to receipt of the demand for
arbitration Summa was completely unaware of any disputes between itself and the
licensor, and is not aware of any basis that would support the disputes cited in
the demand.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Summa's Common Stock was not publicly traded prior to February 27,
1986. Following that date, the Common Stock has been traded in the
over-the-counter market under the symbol DEWS until January 1988 when the symbol
was changed to SMRX. Summa's Common Stock does not have an established public
trading market.
The following table sets forth the high and low sales price (bid,
quote) for the Common Stock for the period shown during the last two years ended
April 30, 1997 and 1998.
<TABLE>
<CAPTION>
Quotations(1)
-------------
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
July 31, 1996 1/2 1/4
October 31, 1996 1/2 1/4
January 31, 1997 1/2 1/4
April 30, 1997 1/2 1/4
July 31, 1997 1/2 1/4
October 31, 1997 1/2 1/4
January 31, 1998 1/2 1/4
April 30, 1998 3/4 3/4
</TABLE>
----------
(1) Actual high and low bid quotations.
At April 30, 1998, Summa had approximately 150 listed stockholders,
excluding stockholders whose shares are held in a fiduciary capacity by banks,
brokerage houses and nominees. Based on information received from such banks,
brokers, and nominees, Summa believes that it has approximately 575
stockholders.
Summa has neither declared nor paid dividends on its Common Stock in
the two most recent fiscal years. Although there are no restrictions to the
payment of dividends, except as limited by Delaware general corporate laws,
Summa intends to retain earnings for the foreseeable future for use in the
expansion of its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On December 20, 1991, Summa acquired eighty percent (80%) of the
outstanding shares of Mountain Brook, a bottled drinking water supplier located
in Kentwood, Louisiana, from Mr. Chambers in exchange for 908,295 shares of
Summa Common Stock. During the fiscal year ended April 30, 1995, Summa and Mr.
Chambers negotiated to rescind the transaction, which was approved but not
completed at the death of Mr. Chambers in 1995. As of March 15, 1996, Summa
exchanged all of its Mountain Brook shares for 855,379 shares of Summa's Common
Stock held by Mr. Chambers' estate. The operations of Mountain Brook are
reflected as discontinued.
LIQUIDITY
During the years ended April 30, 1996, 1995 and 1994 Mountain Brook
incurred losses of $155,883, $163,877 and $150,336, respectively, as well as
continual negative cash flows that restricted Summa's liquidity. As anticipated
Summa's liquidity increased during fiscal year 1997 as a direct result of the
disposition of Mountain Brook.
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During the year ended April 30, 1996 management negotiated with all of
the holders of its Non-voting Convertible 12% Preferred Stock, $0.10 par value
(the "Preferred Holders"), to convert all their preferred shares and unpaid
dividends into shares of Summa's Common Stock. As of October 1997, the last
Preferred Shareholder had converted his preferred shares to common.
During the year ended April 30, 1996 management also negotiated with
all of the holders of its 12% Convertible Subordinated Debentures Due October
31, 1995 (the "Debenture Holders") to convert all of their debentures and unpaid
interest into shares of Summa's Common Stock. In May 1996, the holders of
$185,000 in principle amount of Debentures and $98,405 of accrued interest
converted their Debentures and accrued interest into 566,810 shares of Common
Stock. In May 1997, Summa completed payment of $16,437 in principle amount of
the Debentures and $16,389 of accrued interest.
In fiscal 1992 Summa restructured and paid its mortgage on its
manufacturing facility. On January 15, 1996, Summa renegotiated and combined its
other debt, represented by two secured promissory notes, into a single
promissory note to a stockholder. See "Item 13 - Certain Relationships and
Related Transactions."
At April 30, 1998 Summa was generating sufficient cash flow to meet
daily operating requirements.
CAPITAL RESOURCES
At April 30, 1996 Summa had certain products manufactured by
sub-manufacturers. In July 1996 Summa's issued $190,000 in principal amount of
"12% Callable Notes" Due July 10, 1999. The funds were used to purchase
additional equipment and warehouse racking to eliminate the need for
manufacturing by sub-manufacturers and allow Summa to do all manufacturing "in
house."
In May 1998 Summa's issued $380,000 in principal amount of "10%
Callable Notes Series B" Due May 15, 2003. The funds are to be used for capital
improvements including the purchase of additional equipment to upgrade its
production capacity.
RESULTS OF OPERATIONS
Sales for fiscal 1998 increased 33% when compared to fiscal 1997, and
sales for fiscal 1997 increased 145% when compared to fiscal 1996. Sales
increased during fiscal 1998 primarily due to the acquisition of J.B. Williams
contract. Sales increased during fiscal 1997 due to the acquisition of two major
customers. Summa obtained the new customers as a direct result from increased
activity by its sales and marketing staff attending diversified trade shows
encompassing a larger exposure to new customers. The acquisition of these
customers decreased previously existing downtime caused by product seasonality.
Summa changed its manufacturing philosophy in 1991 to actively seek to do
contract manufacturing for others. Since that change in philosophy, Summa has
actively sought customers for whom it is able to manufacture powders, tablets or
capsules and whose needs and volumes are not sufficient to interest large
manufacturers.
Cost of goods sold, as a percent of sales, were approximately 51%, 70%
and 90% for fiscal years 1998, 1997 and 1996, respectively. The major components
of cost of goods sold for the respective fiscal years were as follows:
<TABLE>
<CAPTION>
Year Ended April 30,
---------------------------------------------------------------------
1998 1997 1996
-------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Material $ 842,468 25.4 $1,051,883 42.2 $ 906,817 52.8
Labor 484,472 14.6 410,423 16.5 386,799 22.6
Overhead 376,783 11.4 273,054 11.0 255,070 14.9
---------- ---- ---------- ---- ---------- ----
$1,703,723 51.4 $1,735,360 69.7 $1,548,686 90.3
========== ==== ========== ==== ========== ====
</TABLE>
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Material costs, as a percent of sales, decreased 16% in fiscal 1998.
The decrease was a direct result from lower cost of goods associated with
contracts that had higher royalty and commission expenses. Management was able
to decrease material costs in fiscal 1997 by actively seeking better pricing and
purchasing in larger quantities, due to the ability of two new customers to
forecast and place blanket purchase orders for several months production.
Selling and marketing expenses, as a percent of sales, increased 17%
due to contracts, which required royalty payments and allowed increased
commissions. Selling and marketing expenses, as a percent of sales, for fiscal
years 1997, 1996 and 1995 were approximately 24%, 7% and 7%, respectively. The
sales and marketing staff increased activity by attending trade shows during
fiscal 1997 and fiscal 1996 in order to expand sales into new markets. The major
components of selling and marketing expense for the respective fiscal years were
as follows:
<TABLE>
<CAPTION>
Year Ended April 30,
-----------------------------------------------------------------
1998 1997 1996
---------------------- ----------------- ------------------
Amount Percent Amount Percent Amount Percent
------------ ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Salaries
and commissions $ 590,895 17.8 $136,650 5.5 $ 84,362 5.0
Royalties 157,987 4.8 0 0.0 0 0.0
Travel 8,468 0.3 4,250 0.2 5,836 0.3
Advertising 4,850 0.1 5,630 0.2 5,799 0.3
Other 21,991 0.7 22,684 0.9 23,304 1.4
-------- ---- -------- --- -------- ---
$784,191 23.7 $169,214 6.8 $119,301 7.0
======== ==== ======== === ======== ===
</TABLE>
General and administrative expenses, as a percent of sales, for fiscal
1998, 1997, and 1996 were approximately 16%, 15% and 24%. The components remain
constant due primarily to management's ability to stabilize the costs of the
components that make up general and administrative expenses. The major
components of general and administrative expenses for the respective fiscal
years were as follows:
<TABLE>
<CAPTION>
Year Ended April 30,
---------------------------------------------------------------
1998 1997 1996
------------------ ------------------- -------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Salaries $160,768 4.8 $163,707 6.6 $127,295 7.4
Legal and Professional 77,405 2.3 48,473 1.9 47,528 2.8
Insurance 85,022 2.6 51,987 2.1 102,673 6.0
Other 198,591 6.0 109,457 4.4 139,326 8.1
-------- ---- -------- ---- -------- ----
$521,786 15.7 $373,624 15.0 $416,822 24.3
======== ==== ======== ==== ======== ====
</TABLE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is contained in a separate
section of this report. See Index of Financial Statements on Page F-1 of this
report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
BOARD OF DIRECTORS
The following table sets forth the names and ages of all of the
Directors of Summa as of July 17, 1998. Members of the Board of Directors are
elected to serve a term of one year or until their successors are elected and
qualified. No arrangement or understanding exists between any of the Directors
and any other persons pursuant to which the Directors were selected.
<TABLE>
<CAPTION>
Name Since Age Position
-------------------- ----- --- --------------------------------
<S> <C> <C> <C>
Jerry A. Nelson 1987 62 Chairman of the Board, President
and Chief Executive Officer
Stanley K. Slutzky 1995 60 Chairman of the Compensation
Committee, Member of Audit
Committee and Director,
E. P. (Lou) Marinos 1996 55 Chairman of the Audit Committee,
Member of Compensation
Committee and Director
</TABLE>
The following sets forth pertinent information regarding each of the Directors.
Jerry A. Nelson - Elected as a Director of the Company in April, 1987,
and as Chairman of the Board, President and Chief Executive Officer in July,
1987. He previously had served as a consultant to the company from July 1985.
From June 1982 until June 1987, Mr. Nelson was President of Nelson & Associates,
a consulting firm providing manufacturing and product development services to
various companies. From 1972 until 1982, Mr. Nelson was employed by Alcon
Laboratories, serving in various management positions at different divisions of
Alcon.
Stanley K. Slutzky - Elected as a Director of the Company in October
1995, Mr. Slutzky is the senior partner of the law firm of Slutzky, Wolfe and
Bailey of Atlanta, Georgia. Mr. Slutzky has been in the practice of law in
Georgia since 1962 and specializes in the practice of business law, commercial
real estate and estate planning.
E. P. (Lou) Marinos - Mr. Marinos was appointed as a member of the
Board of Directors in August, 1996. Beginning in June 1997, Mr. Marinos is
serving as President and CEO of Midcoast Interstate Transmissions, Inc. Since
March 1995, and through May 1997 Mr. Marinos served as the President and Chief
Executive Officer of Arrhythmia Research and Technology, Inc. ("ART"), a
corporation that manufactures and sells medical devices. Mr. Marinos continues
as a member of ART's Board of Directors and is Chairman of the Audit Committee.
In June 1994, Mr. Marinos was appointed as the interim Vice President, Chief
Operating Officer and Chief Financial Officer of ART. From March 1991 until
March 1995, Mr. Marinos served as President and Chief Executive Officer of
AMT/EMP Associates, a consulting company providing services in the areas of
strategic and financial planning, mergers and acquisitions, and organizational
restructuring.
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EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of
the executive officers of Summa as of July 17, 1998. Such persons administer the
day-to-day operations of Summa and are appointed by Summa's Board of Directors
to serve until the subsequent annual meeting of the Board of Directors or until
they resign or are replaced. No arrangement or understanding exists between any
of the executive officers and any other persons pursuant to which the executive
officers were selected.
<TABLE>
<CAPTION>
Name Age Position
--------------- --- ----------------------------------
<S> <C> <C>
Jerry A. Nelson 62 President and Chief Executive
Officer
Pauline G. Lee 38 Principal Financial and Accounting
Officer and Corporate Secretary
</TABLE>
Pauline G. Lee - Mrs. Lee joined Summa in May 1989 as an in-house
accountant. She was elected by the Board as the Corporate Secretary and Chief
Accounting Officer on July 8, 1993. Prior to May 1989 she was employed as an
accountant for a group of automobile dealerships for two years, and was in
public accounting for the six years prior.
A description of Mr. Nelson's background is set forth above under
"Board of Directors."
ITEM 10. EXECUTIVE COMPENSATION
During the fiscal year ended April 30, 1998, Mr. Nelson, Summa's
President and CEO, received cash compensation of $ 107,985, which amount
includes $16,428 of non-reimbursed business expense. No other Summa executive
officer received cash compensation in excess of $100,000. All of Summa's
executive officers (two persons) received a total aggregate compensation of
approximately $ 151,082 during such period.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) CERTAIN BENEFICIAL OWNERS
The following table set forth information regarding certain beneficial
owners of Summa's Common Stock at July 17, 1998 who own more than five percent
(5%) of the Common Stock. Each stockholder has sole voting and investment power
with respect to the shares set forth opposite their name, unless otherwise
indicated.
<TABLE>
<CAPTION>
Number of Shares
Owned as of
Name and Address of Beneficial Owners July 17, 1998 Percent
------------------------------------- ---------------- -------
<S> <C> <C>
Carol M. Petrie
772 Potato Patch
Vail, Colorado 81657 233,356 7.42
Lawrence L. Black, Black & Co.
1 SW Columbia Street
Portland, Oregon 97258 223,695 7.11
</TABLE>
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<TABLE>
<S> <C> <C>
Jerome Klawitter
3 Humbolt Lane
Austin, Texas 78746 306,442 9.74
Shirley K. Hunter Trustee,
Le Damier Trust
1000 Bayou Oaks Lane
Lake Charles, Louisiana 70605 434,055 13.80
Edwin K. Hunter Trustee, Chambers
Medical Foundation and Tellurogenic
1807 Lake Street
Lake Charles, Louisiana 70601 374,064 9.03
--------- -----
TOTAL OWNERSHIP 1,571,612 47.10
========= =====
</TABLE>
(B) MANAGEMENT OWNERSHIP
The following table set forth information regarding management
ownership of Summa's Common Stock at July 17, 1998. Mr. Nelson has sole voting
and investment power with respect to his shares.
<TABLE>
<CAPTION>
Number of Shares
Owned as of
Name of Management Owners July 17, 1997 Percent
-------------------------- ---------------- ---------
<S> <C> <C>
Jerry A. Nelson 180,371 5.73
Stanley K. Slutzky Trustee
Gabriel Trust 331,914 10.55
------- -----
All Officers and Directors
as a Group (5 persons) 512,285 16.28
======= =====
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 15, 1996 Summa executed a single promissory note in the
principal amount of $104,390 to Carol Petrie, the holder of 195,772 shares of
the Common Stock. The principal amount includes all past due principal and
interest under two pre-existing notes. The note is due on December 15, 1998,
bears interest at 12% per annum and is secured by all of Summa's executive
offices and manufacturing facilities. It is management's opinion that the terms
of the note are equal to or better than those which could be obtained from an
independent financial institution.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements:
See Index to Financial Statements on page F-1 for a list of all
financial statements and schedules filed as part of this report.
2. Financial Statement Schedules required to be filed by Item 8 of this
Form 10-K, and by paragraph (d) below:
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required or are inapplicable and, therefore, have been omitted.
3. Exhibits filed herewith as required by Item 601 of Regulation S-K:
Item (10) - Material Contracts.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the last quarter of the
period covered by this Report.
(c) Exhibits required by Item 601 of Regulation S-K:
Item (2) - Plan of acquisition, reorganization, arrangement,
liquidation. or succession:
(A) Articles of Merger of Dews Laboratories, Inc., a Texas
corporation, and Summa Rx Laboratories, Inc., a Delaware corporation,
filed with the Commission as Exhibit 3.3 to Annual Report on Form 10-K
for the year ended April 30, 1988 are incorporated herein by reference.
(B) Certificate of Agreement of Merger of Dews Laboratories,
Inc., a Texas corporation, and Summa Rx Laboratories, Inc., a Delaware
corporation, filed with the Commission as Exhibit 3.2 to Annual Report
on Form 10-K for the year ended April 30, 1988 are incorporated herein
by reference.
Item (3) (i) - Articles of Incorporation:
Certificate of Incorporation of Summa Rx Laboratories, Inc., a
Delaware corporation, filed with the Commission as Exhibit 3.1 to
Annual Report on Form 10-K for the year ended April 30, 1988 are
incorporated herein by reference.
Item (3) (ii) - By-Laws:
By-Laws of Summa Rx Laboratories, Inc., a Delaware
corporation, filed with the Commission as Exhibit 3.4 to Annual Report
on Form 10-K for the year ended April 30, 1989 are incorporated herein
by reference.
Item (4) - Instruments defining the rights of security holders,
including indentures:
Proxy Statement for Special Meeting of Stockholders held on
July 15, 1988 at which Summa stockholders approved and adopted a
proposal to authorize 2,000,000 shares of Preferred Stock, $0.10 par
Page 13
<PAGE> 14
value, and reported under Item 2 of Quarterly Report on Form 10-Q as
filed with the Commission and dated September 15, 1988 is incorporated
herein by reference.
Item (10) - Material Contracts - See Item (a)(3), above.
Item (23) - Consents of Experts and Counsel - Consents of Counsel are
incorporated herein by reference filed as part of Registration Statement No.
33-00297-FW on Form S-18 as filed with the Commission on December 9, 1985, and
Registration Statement No. 33-9475 on Form S-8 as filed with the Commission on
October 9, 1986.
Page 14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Summa Rx Laboratories, Inc.
By: /s/ Jerry A. Nelson Date: July 27, 1998
---------------------------------------------
JERRY A. NELSON, President and
Chief Executive Officer
By: /s/ Pauline G. Lee Date: July 27, 1998
---------------------------------------------
PAULINE G. LEE, Principal Financial
Officer and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Jerry A. Nelson Date: July 27, 1998
-------------------------------------------
JERRY A. NELSON, Chairman of
the Board of Directors
By: /s/ Stanley K. Slutzky Date: July 27, 1998
-------------------------------------------
STANLEY K. SLUTZKY, Director
By: /s/ E. P. (Lou) Marinos Date: July 27, 1998
-------------------------------------------
E. P. (LOU) MARINOS, Director
<PAGE> 16
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
NOT APPLICABLE.
<PAGE> 17
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
SUMMA RX LABORATORIES, INC.
APRIL 30, 1998 AND 1997
<PAGE> 18
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
Balance Sheets - April 30, 1998 and 1997 F-3
Statements of Operations - Years ended April 30, 1998, 1997 and 1996 F-5
Statement of Changes in Stockholders' Equity - Years ended
April 30, 1998, 1997 and 1996 F-6
Statements of Cash Flows - Years ended April 30, 1998, 1997 and 1996 F-7
NOTES TO FINANCIAL STATEMENTS F-9
</TABLE>
F-1
<PAGE> 19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Summa Rx Laboratories, Inc.
We have audited the accompanying balance sheets of Summa Rx Laboratories, Inc.
as of April 30, 1998 and 1997, and the related statements of operations, changes
in stockholders' equity, and cash flows for each of the three years in the
period ended April 30, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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 Rx Laboratories, Inc. as
of April 30, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended April 30, 1998, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
June 12, 1998, except for Note H, as to which the date is July 6, 1998
F-2
<PAGE> 20
SUMMA RX LABORATORIES, INC.
BALANCE SHEETS
April 30,
<TABLE>
<CAPTION>
ASSETS 1998 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 415,227 $ 236,915
Trade accounts receivable, less allowance for doubtful
accounts of $73,161 in 1998 and $10,000 in 1997 158,440 85,492
Inventories
Raw materials 123,239 146,646
Work-in-progress 7,000 2,082
Finished goods 2,393 4,300
---------- ----------
132,632 153,028
Other current assets 84,465 11,006
---------- ----------
TOTAL CURRENT ASSETS 790,764 486,441
PROPERTY, PLANT AND EQUIPMENT
Furniture, fixtures and equipment 1,172,310 764,246
Buildings and improvements 343,156 327,358
---------- ----------
1,515,466 1,091,604
Less accumulated depreciation 487,339 412,767
---------- ----------
1,028,127 678,837
Land 5,798 5,798
---------- ----------
1,033,925 684,635
OTHER ASSETS 4,576 6,508
---------- ----------
$1,829,265 $1,177,584
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 21
SUMMA RX LABORATORIES, INC.
BALANCE SHEETS - CONTINUED
April 30,
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of notes payable to related parties $ 104,390 $ 120,827
Accounts payable - trade 253,134 216,176
Accrued expenses 106,254 106,502
Customer deposits 83,722 85,361
----------- -----------
TOTAL CURRENT LIABILITIES 547,500 528,866
LONG-TERM NOTES PAYABLE TO RELATED PARTIES 570,000 190,000
STOCKHOLDERS' EQUITY
12% cumulative convertible preferred stock - authorized,
2,000,000 shares of $.10 par value; issued and outstanding,
50,000 shares in 1997 -- 5,000
Common stock - authorized, 10,000,000 shares of $.01
par value; issued and outstanding, 3,145,838 shares
in 1998 and 3,597,401 shares in 1997 31,458 35,974
Additional paid-in capital 3,219,379 3,295,747
Accumulated deficit (2,539,072) (2,878,003)
----------- -----------
711,765 458,718
----------- -----------
$ 1,829,265 $ 1,177,584
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 22
SUMMA RX LABORATORIES, INC.
STATEMENTS OF OPERATIONS
Years ended April 30,
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 3,314,877 $ 2,490,851 $ 1,714,516
Cost of goods sold 1,703,723 1,735,360 1,548,686
----------- ----------- -----------
GROSS PROFIT 1,611,154 755,491 165,830
Selling, general and administrative expenses 1,305,977 542,840 536,123
----------- ----------- -----------
OPERATING INCOME (LOSS) 305,177 212,651 (370,293)
Other income (expense)
Interest income 4,280 -- --
Interest expense - related parties (38,526) (37,369) (38,939)
----------- ----------- -----------
(34,246) (37,369) (38,939)
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 270,931 175,282 (409,232)
Deferred income tax benefit 68,000 -- --
----------- ----------- -----------
Net earnings (loss) from continuing operations 338,931 175,282 (409,232)
Loss from discontinued operations -- -- (155,883)
----------- ----------- -----------
NET EARNINGS (LOSS) 338,931 175,282 (565,115)
Less dividend requirement on preferred stock 2,750 6,000 6,000
----------- ----------- -----------
EARNINGS (LOSS) ALLOCABLE TO COMMON
STOCKHOLDERS $ 336,181 $ 169,282 $ (571,115)
=========== =========== ===========
Earnings (loss) per common share - basic and diluted
Continuing operations $ .10 $ .05 $ (.12)
Discontinued operations -- -- (.04)
----------- ----------- -----------
Net earnings (loss) $ .10 $ .05 $ (.16)
=========== =========== ===========
Weighted average common shares outstanding 3,472,301 3,498,384 3,577,879
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 23
SUMMA RX LABORATORIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
12% cumulative
convertible
preferred stock Common stock
-------------------------- --------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at May 1, 1995 75,000 $ 7,500 3,463,932 $ 34,639
Conversion of preferred stock to common stock (25,000) (2,500) 25,986 260
Compensation paid in common stock -- -- 265,000 2,650
Stock issued for satisfaction of debt -- -- 18,469 184
Retirement of common stock -- -- (855,379) (8,553)
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balances at April 30, 1996 50,000 5,000 2,918,008 29,180
Sale of stock -- -- 75,000 750
Stock issued for satisfaction of debt -- -- 604,393 6,044
Net earnings -- -- -- --
----------- ----------- ----------- -----------
Balances at April 30, 1997 50,000 5,000 3,597,401 35,974
Conversion of preferred stock to common stock (50,000) (5,000) 51,973 520
Stock issued for satisfaction of debt -- -- 56,464 564
Purchase and retirement of common stock -- -- (560,000) (5,600)
Net earnings -- -- -- --
----------- ----------- ----------- -----------
Balances at April 30, 1998 -- $ -- 3,145,838 $ 31,458
=========== =========== =========== ===========
<CAPTION>
Additional Total
paid-in Accumulated stockholders'
capital deficit equity (deficit)
----------- ----------- ----------------
<S> <C> <C> <C>
Balances at May 1, 1995 $ 2,962,239 $(2,488,170) $ 516,208
Conversion of preferred stock to common stock 2,240 -- --
Compensation paid in common stock 23,850 -- 26,500
Stock issued for satisfaction of debt 6,191 -- 6,375
Retirement of common stock (22,279) -- (30,832)
Net loss -- (565,115) (565,115)
----------- ----------- ----------------
Balances at April 30, 1996 2,972,241 (3,053,285) (46,864)
Sale of stock 36,750 -- 37,500
Stock issued for satisfaction of debt 286,756 -- 292,800
Net earnings -- 175,282 175,282
----------- ----------- ----------------
Balances at April 30, 1997 3,295,747 (2,878,003) 458,718
Conversion of preferred stock to common stock 4,480 -- --
Stock issued for satisfaction of debt 13,552 -- 14,116
Purchase and retirement of common stock (94,400) -- (100,000)
Net earnings -- 338,931 338,931
----------- ----------- ----------------
Balances at April 30, 1998 $ 3,219,379 $(2,539,072) $ 711,765
=========== =========== ================
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 24
SUMMA RX LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
Years ended April 30,
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 338,931 $ 175,282 $ (565,115)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities
Discontinued operations -- -- 155,883
Depreciation 76,504 56,267 42,884
Deferred income taxes (68,000) -- --
Compensation paid in common stock -- -- 26,500
Changes in operating assets and liabilities
Accounts receivable - trade (72,948) 25,891 138,214
Inventories 20,396 54,460 87,476
Other current assets (5,459) (5,299) 57,016
Accounts payable - trade 36,958 (135,688) (109,553)
Other accrued liabilities 13,868 42,561 27,211
Customer deposits (1,639) (39,608) 125,868
----------- ----------- -----------
Net cash provided by (used in) continuing
operations 338,611 173,866 (13,616)
Net cash used in discontinued operations -- -- (49,817)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 338,611 173,866 (63,433)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (423,862) (172,596) (160,061)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 380,000 190,000 --
Payments of long-term debt (16,437) (8,563) --
Proceeds from sale of common stock -- 37,500 --
Purchase of common stock (100,000) -- --
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 263,563 218,937 --
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 178,312 220,207 (223,494)
Cash and cash equivalents at beginning of year 236,915 16,708 240,202
----------- ----------- -----------
Cash and cash equivalents at end of year $ 415,227 $ 236,915 $ 16,708
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 25
SUMMA RX LABORATORIES, INC.
STATEMENTS OF CASH FLOWS - CONTINUED
Years ended April 30,
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 23,544 $ 32,831 $ --
Supplemental schedule of noncash investing
and financing activities
Compensation paid in common stock $ -- $ -- $ 26,500
Common stock of the Company received in exchange
for stock of subsidiary -- -- 30,832
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE> 26
SUMMA RX LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows.
Nature of Operations
Summa Rx Laboratories, Inc. (the Company) is licensed by the Food and Drug
Administration to manufacture drugs and medical devices. Summa primarily
manufactures and markets products which fall into three categories: food
supplements, pharmaceuticals and vitamins. In addition, Summa manufactures
prescription and nonprescription pharmaceuticals such as antihistamines,
analgesics, and mucolytic expectorants.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided
by the straight-line method over the estimated useful lives of the assets,
which for buildings and improvements is 30 years, and furniture, fixtures
and equipment range from 5 to 10 years.
Customer Deposits
The Company requires cash deposits on certain customer orders. The deposits
are recorded as a current liability and recognized as revenue when the
product is shipped.
Revenue Recognition
Revenue is recognized from sales when a product is shipped.
Earnings Per Share
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 "Earnings per Share" (SFAS 128). In accordance
with SFAS 128, the Company computes basic earnings (loss) per common share
based on the weighted average number of common shares outstanding. Diluted
earnings per share is computed based on the weighted average number of
common shares outstanding plus the number of additional common shares that
would have been outstanding if dilutive potential common shares had been
issued. All potential common shares were anti-dilutive in 1996 and
insignificant in 1997 and 1998. Accordingly, singular earnings (loss) per
share amount share been presented in the accompanying financial statements.
In 1998 and 1997, options and warrants covering 506,664 and 400,000 shares
of common stock, respectively, were excluded from diluted earnings per
share because they were anti-dilutive.
F-9
<PAGE> 27
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
Financial Instruments
The carrying amounts for cash, accounts receivable, accounts payable and
notes payable approximate fair value because of the short term nature of
these items.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Stock Options
The Company measures stock-based compensation cost as the excess of the
quoted market price of the Company's common stock over the amount the
employee must pay for the stock. The Company's policy is to generally grant
stock options at fair market value at the date of grant.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board released Statement
No. 130 (SFAS 130) Reporting Comprehensive Income and Statement No. 131
(SFAS 131), Disclosures about Segments of an Enterprise and Related
Information. SFAS 130 addresses the manner in which certain adjustments to
shareholders' equity are displayed in the financial statements, with no
effect on reported assets or results of operations. SFAS 131 requires
disclosures of certain information about operating segments and geographic
areas of operation. The Company will adopt the statements in fiscal 1999.
NOTE B - DISCONTINUED OPERATIONS
On March 15, 1996, the Company entered into and consummated an agreement to
rescind the 1991 acquisition of Mountain Brook Spring Water Co., Inc.
(Mountain Brook). Pursuant to this agreement, Summa conveyed to the former
owner of Mountain Brook, all of the Mountain Brook common stock owned by
Summa, in exchange for 855,379 shares of Summa common stock. The recession
transaction has been valued at the carrying value of Summa's investment in
Mountain Brook, which was $30,832 at April 15, 1996.
Accordingly, the operations of Mountain Brook have been reflected as
discontinued operations in the accompanying financial statements.
F-10
<PAGE> 28
NOTE C - LONG-TERM NOTES PAYABLE TO RELATED PARTIES
Long-term notes payable to stockholders' consist of the following:
<TABLE>
<CAPTION>
April 30,
1998 1997
-------- --------
<S> <C> <C>
Convertible subordinated debentures, interest at 12% per annum,
payable quarterly $ -- $ 16,437
Unsecured note payable to a stockholder, interest at 12% per annum,
payable monthly, in either cash or shares of the Company's stock (at a
rate
of $.25 per share) at the Company's option, due December 1998 104,390 104,390
Unsecured notes payable to stockholders, interest at 12% per annum,
payable quarterly, due July 1999 and subordinate to the 12% note
payable to a stockholder 190,000 190,000
Unsecured notes payable to stockholders, interest at 10% per annum,
payable quarterly, due May 2003 and subordinate to the 12% unsecured
notes payable to stockholders 380,000 --
-------- --------
674,390 310,827
Less current maturities 104,390 120,827
-------- --------
$570,000 $190,000
======== ========
Aggregate annual principal maturities of long-term debt at April 30, 1998
are as follows:
1999 $104,390
2000 190,000
2003 380,000
--------
$674,390
========
</TABLE>
In 1996, the Company issued warrants to purchase 210,000 shares of its common
stock for $.50 per share, in connection with a modification of the terms of
the $104,390 note payable. In 1998, the Company issued warrants to purchase
100,000 shares of its common stock for $.50 per share, in connection with a
one-year extension on the aforementioned note payable.
In connection with the issuance of the $190,000 notes payable in 1997, the
Company issued warrants to purchase 190,000 shares of its common stock for
$.50 per share. The notes are callable, at the option of the Company, upon
thirty days notice.
F-11
<PAGE> 29
NOTE C - LONG-TERM NOTES PAYABLE TO RELATED PARTIES - CONTINUED
In connection with the issuance of the $380,000 notes payable in 1998, the
Company issued warrants to purchase 506,664 shares of its common stock for
$.75 per share. The notes are callable, at the option of the Company, upon
thirty days notice.
The value of the aforementioned warrants was not significant.
NOTE D - INCOME TAXES
The following reconciles the provision for income taxes in the statements
of operations to the expected provision at standard Federal rates:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Expected provision (benefit) at Federal rates $ 92,117 $ 60,000 $ (139,000)
Change in valuation allowance (158,000) (62,000) 154,000
Other (2,117) 2,000 (15,000)
---------- ---------- ----------
$ (68,000) $ -- $ --
========== ========== ==========
</TABLE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
Deferred tax assets 1998 1997
--------- ----------
<S> <C> <C>
Net operating loss carryforwards $ 388,000 $ 500,000
Other 25,000 3,000
--------- ----------
413,000 503,000
Less valuation allowance (345,000) (503,000)
--------- ---------
$ 68,000 $ --
========= ==========
</TABLE>
As a result of the purchase of Mountain Brook, utilization of certain of
the Company's net operating loss carryforwards (NOL's) were limited to
approximately $66,000 per year. At April 30, 1998, the amount of
aforementioned NOL's aggregated approximately $330,000. Additionally, the
Company has net operating loss carryforwards of approximately, $800,000,
which expire in 2007 through 2011.
Due to net earnings in 1998 and 1997, the Company believes the realization
of a portion of its deferred tax asset is more likely than not and,
accordingly, a deferred tax asset of $68,000 was recorded at April 30,
1998. The total amount of future taxable income necessary to realize the
deferred tax asset is approximately $200,000. The remaining valuation
allowance is necessary due to the uncertainty of future taxable income
estimates. The Company continually reviews the adequacy of the valuation
allowance and is recognizing these benefits only as reassessment indicates
that it is more likely than not the benefits will be realized.
F-12
<PAGE> 30
NOTE E - STOCKHOLDERS' EQUITY
The Company has a nonqualified stock option plan under which directors may
be granted options to purchase the Company's common stock. The Company has
reserved 150,000 shares of stock for issuance under the plan. The exercise
price of options granted under the plan cannot be less than the fair market
value of the stock on the date of grant. The following summarizes option
activity under the nonqualified stock option plan for each of the two years
in the period ended April 30, 1998:
<TABLE>
<CAPTION>
Weighted
average
exercise
Shares price
------- -------
<S> <C> <C>
Options outstanding at May 1, 1996 -- $ --
Granted 100,000 .50
------- -------
Options outstanding and exercisable at April 30, 1997 100,000 .50
Granted 40,000 .50
------- -------
Options outstanding and exercisable at April 30, 1998 140,000 $ .50
======= =======
Weighted average fair value per share of
options granted during 1997 $ .23
=======
Weighted average fair value per share of
options granted during 1998 $ .13
=======
Weighted average remaining contractual life 7.4 years
</TABLE>
F-13
<PAGE> 31
NOTE E - STOCKHOLDERS' EQUITY - CONTINUED
In 1998, the Company adopted a qualified stock option plan under which key
employees may be granted options to purchase the Company's common stock.
The Company has reserved 300,000 shares of stock for issuance under the
plan. The exercise price of options granted under the plan cannot be less
then the fair market value of the stock on the date of grant. The following
summarizes option activity under the qualified stock option plan for the
year ended April 30, 1998:
<TABLE>
<CAPTION>
Weighted
average
exercise
Shares price
------- -------
<S> <C> <C>
Options outstanding at May 1, 1997 -- $ --
Granted 80,000 .50
------- -------
Options outstanding and exercisable at April 30, 1998 80,000 $ .50
======= =======
Weighted average fair value per share of
options granted during 1998 $ .13
=======
Weighted average remaining contractual life 4.5 years
</TABLE>
Effective in 1997, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation". As permitted under SFAS 123, the Company
will continue to measure stock-based compensation cost as the excess of the
quoted market price of the Company's common stock at the grant date over
the amount the employee must pay for the stock.
SFAS 123 requires disclosure of pro forma net earnings (loss) and pro forma
net income (loss) per share as if the fair value based method had been
applied in measuring compensation cost for stock-based awards granted after
1995. There were no stock-based awards prior to 1997.
F-14
<PAGE> 32
NOTE E - STOCKHOLDERS' EQUITY - CONTINUED
Reported and pro forma net earnings and net earnings per share amounts are
set forth below:
<TABLE>
<CAPTION>
Year ended April 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net earnings allocable to common stockholders
As reported $ 336,181 $ 169,282
Pro forma $ 320,581 $ 146,282
Net earnings per share
As reported $ .10 $ .05
Pro forma $ .09 $ .04
</TABLE>
The fair value of these options was estimated at the date of grant using
the minimum value option pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.5 percent; no dividend yield; and
expected lives ranging from 5 to 10 years. Due to the lack of an active
market in the Company's common stock, the volatility factor was excluded
from the model.
At various times, the Company has issued warrants to purchase common stock
to certain employees, directors, creditors and stockholders. The warrants
are exercisable within one year of the date of grant. The following
summarizes warrant activity for each of the three years ended April 30,
1998:
<TABLE>
<CAPTION>
Warrant
weighted
Fiscal average
Number year of price
of shares expiration per share
---------- ---------- ----------
<S> <C> <C> <C>
Warrants outstanding at May 1, 1995 2,500 1996 $ 10.00
Expired (2,000) 1996 10.00
Granted 210,000 2001 0.50
---------- ----------
Warrants outstanding at April 30, 1996 210,500 1996-2001 0.52
Expired (500) 1996 10.00
Granted 190,000 2001 0.50
---------- ----------
Warrants outstanding at April 30, 1997 400,000 2001 0.50
Granted 606,664 2000-2003 .71
---------- ----------
Warrants outstanding at April 30, 1998 1,006,664 2000-2003 $ .63
========== ==========
</TABLE>
F-15
<PAGE> 33
NOTE F - MAJOR CUSTOMERS
A significant portion of the Company's net sales have been derived from as
follows:
Three customers in 1998 accounted for 37%, 20% and 12% of the sales of
the Company, respectively.
Four customers in 1997 accounted for 18%, 16%, 13%, and 11% of the
sales of the Company, respectively.
Three customers in 1996 accounted for 18%, 11%, and 11% of sales of
the Company, respectively.
Although management believes its relations with these customers are
currently good, it is reasonably possible that the Company could lose one
of these customers which could result in a material adverse effect on the
Company.
NOTE G - EMPLOYEE BENEFIT PLAN
In 1998 the Company adopted an employee benefit plan which provides
for tax deferred contributions from employees, together with certain
matching contributions from the Company. The Plan qualifies under section
401 (k) of the Internal Revenue Code. Under the Plan, employees are
permitted to contribute up to 15% of their gross compensation into the
retirement plan and the Company will match 50% of each employee's
contribution to a maximum rate of 6%. Benefit plan expense was
approximately $3,000 in 1998.
NOTE H - SUBSEQUENT EVENT
In July 1998, the patent holder of the zinc acetate products filed a
demand under the terms of the Company's license agreement for mediation
claiming certain provisions of the license had not been complied with. In
1998 sales of these products comprised 49% of the Company's total sales.
Management believes the Company has complied with the terms of the license
and is not aware of any basis that would support the disputes in the claim.
F-16
<PAGE> 34
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
23 - Consent of Independent Certified Public Accountants
27 - Financial Data Schedule
