**U.S.Securities and Exchange Commission**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

| **ý**                                                                                       | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|
|                                                                                             |       |                                                                                                |
| **For the fiscal year ended**                                                                    |
|                                                                                             |       |                                                                                                |
| **August 31, 2005**                                                                         |
|                                                                                             |       |                                                                                                |
| **o**                                                                                            | ** ** | **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**                                                                   |

 

**SummaIndustries**

(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 telephonenumber:  **(310) 792-7024**

 

Securities registered pursuant to Section 12(b) of theExchange Act:  **None**

Securities registered pursuant to Section 12(g) of theExchange Act:

 

**Common Stock, $.001 par value**

(Titleof class)

 

Indicateby checkmark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  ý   No  o

 

Indicateby checkmark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and disclosure will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.  o

 

Indicateby checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes  o   No  ý

 

Indicateby checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes  o   No  ý

 

Theaggregate market value of registrant’s Common Stock held by non-affiliates,computed by reference to the closing price of a share of the Common Stock onThe Nasdaq National Market on the last business day of registrant’s mostrecently completed second quarter, was $36,699,000.  The number of shares of registrant’s CommonStock outstanding as of October 27, 2005 was 3,926,984.

 

DOCUMENTS INCORPORATED BY REFERENCE: Portionsof registrant’s Proxy Statement for the Annual Meeting of Stockholders to beheld on January 26, 2006 to be filed with the Commission not later than120 days after the end of the fiscal year covered by this Annual Report on Form 10-Kare 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 asSouthern California Plastics Co. in the State of California in 1942 andsubsequently reincorporated in the State of Delaware in 1998. Since 1946, Summahas been a publicly-owned corporation whose Common Stock is registered under Section 12(g) ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”), and iscurrently traded on The Nasdaq National Market under the symbol “SUMX”.  Through its three reportable segmentsdescribed below, Summa designs and manufactures injection-molded and formedplastic optical components for original equipment manufacturer (“OEM”)customers in the lighting industry; molded plastic modular conveyor belt andchain for the food processing industry; plastic fittings, valves, filters andtubing for agricultural and landscape irrigation;****andother molded and extruded plastic components for diverse industries.

 

The principal executive offices of the Company are located at 21250Hawthorne Boulevard, Suite 500, Torrance, California 90503; its telephonenumber is (310) 792-7024; its facsimile number is (310) 792-7079; and itswebsite is www.summaindustries.com.

 

**Strategy**

 

Summa has a strategy to maximize stockholder value by substantiallyincreasing the size of the enterprise, maintaining a consistent dividend policyand opportunistically buying back stock in the public market, without undulyleveraging the Company with debt.  Growthof the business under this strategy may be accomplished both organically and byacquisition.

 

 Operations. Through its operating companies, Summa strives to achieve long-termgrowth in sales and earnings by establishing and exceeding aggressive customerservice metrics, from continuous improvement in cost structure and workingcapital utilization via lean enterprise and other management initiatives and bycontinuously introducing new products and product enhancements.

 

Organization.  Summa operateswith a business portfolio concept whereby subsidiaries functionsemi-autonomously to achieve focused business objectives.  In general, these businesses have valuablebrands, unique patented products, commanding target market share, eliteprocessing capabilities and/or other attributes which allow them to succeed inniche industrial and commercial markets. Summa has a lean corporate staff, which provides planning, financial andlegal oversight, and financing; conducts the acquisition program and businessdevelopment activities; and manages the Company’s investor relations, riskmanagement and employee benefit programs.

 

 Acquisitions. Summa is comprised entirely of acquired businesses.  The Company will continue to seekacquisitions which are compatible with its ethical culture, are reasonablyexpected to be accretive to earnings per share within an acceptable time frame,and have a proprietary advantage because of patent protection, brandrecognition, unique manufacturing processes or other comparablecharacteristics.  Acquisitions may benew, semi-autonomously managed additions to the business portfolio or may besmaller organizations or product lines to be merged into existing portfoliobusinesses.

 

The Company monitors the financial performance of its portfoliocompanies and trends in the environments in which they operate to determinewhether they continue to fit with its evolving strategic vision.  Based upon this assessment, the Company mayconsider divestitures as part of its strategy of maximizing stockholder value.

 

**History of Acquisitions**

 

The Company is comprised entirely of businesses acquired since1993.  Certain acquisitions, which relateto its continuing operations, are described below:

 

***KVP Systems, Inc. ***In July 1993,Summa acquired all of the outstanding capital stock of KVP Systems, Inc.,a California corporation (“KVP”).  KVPdesigns, manufactures and markets injection-molded plastic conveyor belting forthe food processing industry.  KVP is nowpart of the Material Handling Components segment.

 

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***LexaLite International Corporation. ***In November 1996,Summa acquired all of the outstanding capital stock of LexaLite InternationalCorporation, a Delaware corporation (“LexaLite”), which manufacturesinjection-molded plastic prismatic components for lighting fixtures.  LexaLite is now part of the OpticalComponents segment.

 

***Calnetics Corporation. ***In October 1997,Summa acquired all of the outstanding capital stock of Calnetics Corporation, aCalifornia corporation (“Calnetics”). The principal operating subsidiary of Calnetics was AgriculturalProducts, Inc., which manufactures plastic fittings, filters, tubing andaccessories, primarily for irrigation. Substantially all of Calnetics is now part of the Irrigation Componentssegment.

 

***Falcon Belting, Inc. ***In May 1998,Summa acquired all of the outstanding capital stock of Falcon Belting, Inc.,an Oklahoma corporation (“Falcon”), which manufactured modular plastic conveyorbelting used in food processing industries.  Falcon is now part of the Material Handling Components segment.

 

***Canyon Mold. ***In September 1998, Summa acquiredsubstantially all of the assets of Canyon Mold, Inc., a Californiacorporation (“Canyon”). Canyon had provided tool design and manufacturingservices almost exclusively for the Company. Canyon is now part of the Irrigation Components segment.

 

***Plastic Specialties, Inc. ***In October 2000,Summa acquired all of the outstanding capital stock of Plastic Specialties, Inc.(“PSI”), which manufactures formed and extruded plastic components for lightingfixtures.  PSI is now part of the OpticalComponents segment.

 

***Ram Belts & Chains. ***In December 2000,Summa acquired substantially all of the assets of the Ram Belts &Chains division (“Ram”) of Rainbow Industrial Products Corp., whichmanufactured injection molded plastic chain and conveyor belting for the foodprocessing and beverage industries.  Ramis now part of the Material Handling Components segment.

 

***Genesta. ***In January 2002,Summa acquired substantially all of the assets of the Genesta Manufacturingdivision (“Genesta”) of Pavaco Plastics, Inc.  Genesta manufactures extruded sheet andprofiles and thermoformed components for the lighting and otherindustries.  Genesta is now part of theOptical Components segment.

 

***Pepco. ***In January 2004, Summa acquiredcertain assets from R.M. Wade & Company, including the product brand “Pepco”and product lines sold to commercial and agricultural irrigation markets.  Pepco is now part of the IrrigationComponents segment.

 

##### **Segmentsand Products**

 

The Company manufactures diverse plastic products in three reportablesegments as follows:

 

***Optical Components.***  In its Optical Components segment, Summadesigns and manufactures plastic prismatic lenses, reflectors and diffusers andother plastic products, which are used in commercial and industrial lightingfixtures and other applications. Products, many of which are patented, are injection-molded usingspecially compounded lighting grade polycarbonate or acrylic, extruded fromsimilar materials, or thermoformed from sheet extruded from similar materials.

 

***Material Handling Components.**** *In its MaterialHandling Components segment, Summa designs and manufactures engineered plasticcomponents which form conveyer belts and chains and other plasticproducts.  The material handlingcomponents, many of which are patented, are constructed of non-toxic,non-corrosive plastic materials and are designed to be easily cleaned, meetingFDA or similar requirements for food contact applications. The components donot require lubrication and thus offer the advantage of operation free fromcontaminants such as grease, oil and metal particles.

 

***Irrigation Components.***  In its Irrigation Components segment, Summadesigns and manufactures plastic injection-molded fittings, micro-sprinklers,emitters, valves, filters and accessories, extruded tubing and other plasticproducts for drip irrigation systems used in agriculture, commercial andresidential landscape and other applications.

 

Formerly, the Company also operated in a Miscellaneous PlasticComponents segment which was integrated with the Irrigation Components segmentin the fourth quarter of fiscal 2004, and in an Electrical Components segmentwhich was discontinued in September 2005.

 

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The following table sets forth external sales by segment as a percentof total Company sales:

 
| ** **                    | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |     |       |
| Optical Components            |       | 58       | %          | 53       | %          | 51       | %          |
| Material  Handling Components |       | 25       | %          | 25       | %          | 24       | %          |
| Irrigation  Components        |       | 17       | %          | 22       | %          | 25       | %          |

 

For financial information by reportable segment, including revenue,profit or loss and total asset information, see Note 20 in the “Notes toConsolidated Financial Statements” of the Company in this Annual Report on Form10-K.

 

**Research and Development **

 

Summa invests in the development of new products and manufacturingprocesses.  Only direct costs associatedwith new tooling for products are capitalized. All other costs, including salaries and wages of employees involved inresearch and development, are expensed as incurred.

 

**Production**

 

***Injection Molding.***  Summa’s principal manufacturing operation isinjection molding of plastic parts.  Someproducts are molded by third-party vendors. Injection molds and tools are made by Summa and outside vendors.  Products are made on molding machines, whichrange from 40 to 1500 tons clamping force, using a wide variety of plasticresins.

 

***Extrusion.***  Summa extrudes plastic sheet, profiles andtubing.  The Company’s sheet and profileproducts are primarily made of acrylic and polycarbonate, while the tubing isextruded from polyethylene and polyvinylchloride (PVC).

 

***Thermoforming. ***Summa vacuumforms and pressure forms products from sheet which it produces and buys fromthird parties.  Tooling for the formingprocess is produced by third-party vendors.

 

In addition to injection molding, extrusion and thermoforming, Summaperforms additional production operations including laser cutting, machiningand welding of plastic parts, vacuum deposition, coating, assembly and testing.Summa operates on a just-in-time basis with many of its customers, andinventories are managed to support competitive service levels. Four of Summa’smanufacturing plants are ISO registered.

 

**Marketing and Distribution**

 

Summa manufactures plastic products and components which are generallysold to original equipment manufacturers (“OEM’s”) who incorporate Summa’scomponents in their products, to businesses which incorporate the Company’sproducts in systems assembled for their own use or for their customers’ use andto distributors and resellers who provide them to users of the products.  Most sales are made directly by employees ofthe Company, although Summa utilizes several independent manufacturers’representatives.  Sales in the OpticalComponents segment are almost exclusively to OEM’s, while sales in the MaterialHandling Components and Irrigation Components segments are primarily to distributors.   The Company delivers its productsprincipally by truck through the use of independent freight carriers and, to alesser extent, by air and sea transport.

 

Summa’s largest three customers, all of whom are customers of theOptical Components segment, accounted for 10%, 5% and 4% of sales in fiscal2005.  Summa’s largest customer in fiscal2005 was Acuity Brands, Inc.  TheCompany has several thousand active accounts including Fortune 1,000 and largeprivately held businesses.

 

**Raw Materials**

 

Summa’s principal raw material is pelletized plastic resin which isdelivered in bulk, or in large boxes, typically weighing 1,000 pounds (“Gaylords”).  The Company is a large user of resin and doesnot rely on any single vendor for more than 20% of its raw material. Everymaterial used is available from several vendors.  Primary resins used include acrylic,polycarbonate, polyethylene, polyvinylchloride, polypropylene, acetal andnylon.  Principal vendors include Arkema,Bayer, Cyro, Dow, GE Plastics and Lucite, among others.  The resins used by the Company are crude oilor natural gas derivatives and are affected by the supply, demand and pricetrends in the petroleum and natural gas industries.

 

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**Backlog and Seasonality**

 

On August 31, 2005, Summa had a backlog of orders, believed to befirm, in the amount of $5,592,000, compared to a backlog of $6,682,000 on August 31,2004.  The open order backlog iscomprised of orders for components and tooling. Because the time between entering an order, shipping the product andrecording a sale is typically shorter than one month, backlog levels are not areliable indicator of future sales volume.

 

Summa’s sales exhibit modest seasonality, except in its IrrigationComponents segment which sells to the extremely seasonal agriculturalmarket.  Excluding the effects ofeconomic cycles, growth and acquisitions, the Company expects approximately 54%of annual sales to occur in the second half of the fiscal year.  Because a portion of overhead and operatingexpense is fixed and, therefore, does not vary with sales volume, operatingprofit may vary from quarter to quarter with more volatility than sales volume.

 

**Competitive Conditions**

 

The markets for the products currently manufactured and sold by Summaare characterized by extensive competition. Numerous companies currently offer competing products nationally andinternationally, and in certain geographic areas the Company has competitionfrom local manufacturers.  It can beexpected that other companies will introduce additional competing products inthe future.  Many existing and potentialcompetitors have greater financial, marketing and research resources thanSumma.  All of Summa’s segments includeone or more dominant competitors, such as Filtrona and Lucite in the OpticalComponents segment; Intralox and Rexnord in the Material Handling Componentssegment; and Toro and Netafim in the Irrigation Components segment.  In addition, some of Summa’s largestcustomers have the resources to manufacture products comparable to thosecurrently purchased from Summa, and some of Summa’s customers also compete withthe Company in certain areas.

 

Summa believes that its trade names and reputation are significant toits 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 purchasingprocess.  The performance of Summa in thefuture will depend on its ability to develop and market new products that willgain customer acceptance and loyalty, as well as its ability to adapt itsproduct offerings and control its costs to meet changing pricing considerationsand other market factors.  The Company’soperating performance would be adversely affected if it were to incur delays indeveloping new products or if such products did not gain marketacceptance.  There can be no assurancethat existing or future products will be sufficiently successful to enable Summato effectively compete in its markets or, should new product offerings meetwith significant customer acceptance, that one or more current or futurecompetitors will not introduce products that render the Company’s productsuncompetitive.

 

**Patents, Trademarks and Licenses**

 

The Company owns and licenses domestic and foreign patents, whichexpire on dates ranging to 2022.  In addition, several patent applicationsare currently in process.  The extent to which patents provide acommercial advantage or inhibit the development of competing products varieswidely.  The expiration of certain economically significant patents,particularly patents covering the highly successful Reflexor® line of productsin the Optical Components segment, the first of which expires in 2008, willlikely result in increased competition, lower prices and decreasedprofitability.  In 2004, Summa settled patent infringement lawsuits withtwo customers regarding one of the Reflexor® patents and resumed manufacturingand selling reflectors to those customers.  Even so, Summa believesincidents of infringement of the Reflexor®-related patents and other patentsmay increase as they near their respective expiration dates.

 

Summa also relies upon common law concepts of confidentiality and tradesecrets, as well as economic barriers created by its technical personnel,including the development of proprietary manufacturing processes, investmentsin tooling and the development of customer relationships, to protect itsproprietary products.  Summa also has domestic and foreign trade name andtrademark registrations covering many of the names and logos which appear onits products which are helpful in enabling the Company to maintain its presentcompetitive position.

 

5

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**Environmental Matters**

 

The Company is subject to the environmental laws, rules andregulations of the jurisdictions in which it operates and has operatedfacilities, including those governing air quality, water quality, soil qualityand hazardous waste management and disposal. The Company does not anticipate that future expenditures for thecompliance with such laws, rules and regulations will have a materialeffect on its capital expenditures or its financial condition or results of operations.

 

**Employees**

 

At October 27, 2005, Summa had 528 employees, including sixemployees who comprise the Company’s corporate staff.  Approximately 25 of Summa’s employees arecovered 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 forthe past three fiscal years, see Note 20 in the “Notes to ConsolidatedFinancial Statements” of the Company in this Annual Report on Form 10-K.

 

**Code of Conduct**

 

The Company has a long-standing Ethics Policy, and a Code of Conductwhich applies to all of the Company’s employees and non-employee directors,other than Article III (Financial Management) thereof, which applies tothe Company’s principal executive officer, principal financial officer,principal accounting officer or controller, persons performing similarfunctions for the Company, and persons performing similar functions at eachsubsidiary of the Company.  The EthicsPolicy and the Code of Conduct are posted on the Company’s website, and theCompany intends to post information regarding any amendment to or waiver of theCode of Conduct on its website within five business days of the date of anysuch amendment or waiver.

 

**ITEM 2.****          PROPERTIES.**

 

The Company currently operates primarily at the following facilities:

 
| **Location**               | ** ** | **Sq. Ft.** | ** ** | **Principal Activity**    | ** ** | **Segment**        | ** ** | **Lease Expires** | ** ** |
|----------------------------|------------|-------------|------------|---------------------------|------------|--------------------|------------|-------------------|------------|
| Torrance,  California      |       | 280         |       | Corporate  office         |       |               |       | Month-to-Month    |       |
| Charlevoix,  Michigan      |       | 130,000     |       | Manufacturing,  warehouse |       | Optical            |       | Owned             |       |
| Dickson,  Tennessee        |       | 55,000      |       | Manufacturing,  warehouse |       | Optical            |       | Owned             |       |
| Olive  Branch, Mississippi |       | 128,000     |       | Manufacturing,  warehouse |       | Optical            |       | Owned             |       |
| Guelph,  Ontario           |       | 41,000      |       | Manufacturing,  warehouse |       | Optical            |       | January 2007      |       |
| Reading,  Pennsylvania     |       | 80,000      |       | Manufacturing,  warehouse |       | Material  Handling |       | Owned             |       |
| Ontario,  California       |       | 72,000      |       | Manufacturing,  warehouse |       | Irrigation         |       | August 2009       |       |
| Winter  Haven, Florida     |       | 28,000      |       | Manufacturing,  warehouse |       | Irrigation         |       | Owned             |       |
| Fresno,  California        |       | 122,000     |       | Manufacturing,  warehouse |       | Irrigation         |       | January 2009      |       |

 

The Company’s facilities are well maintained, and well suited for itsoperations. The Company believes it has adequate capacity to meet foreseeabledemand.

 

The Company owns several parcels of real property held for sale,including 63,000 square feet of factory and office space in Fullerton,California, which is under contract for sale to a third party; and 43,000square feet of factory and office space in Bensenville, Illinois.  In addition, the Company is attempting tosublease a vacant 48,000 square foot facility in Rancho Cordova, Californiaunder a lease which expires in April 2006.

 

**ITEM 3.****          LEGALPROCEEDINGS.**

 

The Company encounters lawsuits from time to time in the ordinarycourse of business and, at August 31, 2005, the Company and/or itsaffiliates were parties to several civil lawsuits. Summa does not expect thatthe resolution of these lawsuits will have a material adverse impact on futureresults of operations or financial position.  Certain lawsuits filed against the Company from time to time containclaims not covered by insurance, or seek damages in excess of policy limits,and such claims could be filed in the future.

 

6

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**ITEM 4.****          SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

No matters were submitted to a vote of Summa’s stockholders, throughsolicitation of proxies or otherwise, during the fourth quarter of the fiscalyear ended August 31, 2005.

 

**PART II**

 
| **ITEM 5.** | **MARKET  FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES.** |
|-------------|--------------------------------------------------------------------------------------------------------------------------|

 

**Recent Market Prices **

 

Summa’s Common Stock is traded on The Nasdaq National Market under thesymbol “SUMX.”  During the year ended August 31,2005, the average weekly trading volume was approximately 27,000 shares.  The stock markets have experienced extremeprice and volume fluctuations during certain periods.  These broad market fluctuations and otherfactors may adversely affect the market price of Summa’s Common Stock forreasons unrelated to Summa’s operating performance.  The following table sets forth the high andlow prices for a share of Summa’s Common Stock on The Nasdaq National Marketfor the periods indicated.

 
| **Quarter  Ended** | ** ** | **11/30/03** | ** ** | **2/29/04** | ** ** | **5/31/04** | ** ** | **8/31/04** | ** ** | **11/30/04** | ** ** | **2/28/05** | ** ** | **5/31/05** | ** ** | **8/31/05** | ** ** |
|--------------------|------------|--------------|------------|-------------|------------|-------------|------------|-------------|------------|--------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **High**           |       | $            | 8.81       |        | $          | 9.55        |       | $           | 9.65       |         | $          | 14.34       |       | $           | 11.20      |        | $          | 11.00 |   | $ | 9.36 |   | $ | 8.97 |   |
| **Low**            |       | $            | 7.00       |        | $          | 8.55        |       | $           | 8.55       |         | $          | 9.35        |       | $           | 8.56       |        | $          | 8.45 |   | $ | 7.10 |   | $ | 7.17 |   |
|                    |            |              |            |             |            |             |            |             |            |              |            |             |            |             |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

On October 27, 2005, the closing price on The Nasdaq NationalMarket for a share of Summa Common Stock was $7.82.

 

### **Recent Issuances and Repurchases**

 

During the fiscal year ended August 31, 2005, no equity securitiesof the Company were sold by the Company that were not registered under theSecurities Act of 1933, as amended (“Securities Act”).

 

In June 2003, the Company announced a plan to repurchase up to$2,000,000 of its Common Stock with no time limit (the “2003 Buy Back”),pursuant to which the Company purchased 9,169 shares at an average cost of$7.96 per share.  In May 2004, theCompany repurchased all of its outstanding Series A Preferred Stock forits book value of $6,553,000, and 452,856 shares of its Common Stock for$3,633,000, or $8.02 per share, in a private transaction (the “Block Repurchase”).  The Company paid for the Block Repurchasewith $10,186,000 of subordinated debt. Subsequently, a substantial portion of the subordinated debt was prepaidusing the Company’s line of credit.  Inconjunction with the Block Repurchase, the 2003 Buy Back was cancelled.

 

In October 2004, the Company announced a plan to repurchase up to$2,000,000 of its Common Stock with no time limit (the “2005 Buy Back”).   As of August 31, 2005, the status ofthe 2005 Buy Back was as follows:

 
| ** **                       | ** ** | **Shares repurchased** | ** ** | **Average cost per share** | ** ** | **Repurchase cost** | ** ** |
|----------------------------------|------------|------------------------|------------|----------------------------|------------|---------------------|------------|
| Quarter  ended February 28, 2005 |       | 500                    |       | $                          | 9.76       |                | $          | 5,000 |   |
| Quarter  ended May 31, 2005      |       | 31,265                 |       | $                          | 8.73       |                | 273,000    |   |
| June 2005                        |       | 14,215                 |       | $                          | 8.02       |                | 114,000    |   |
| July 2005                        |       | 12,701                 |       | $                          | 7.87       |                | 100,000    |   |
| August 2005                      |       | 3,800                  |       | $                          | 7.37       |                | 28,000     |   |
| Total                            |       | 62,481                 |       | $                          | 8.32       |                | $          | 520,000 |   |

 

The cost per share includes commissions where applicable.

 

**Description of Securities **

 

The authorized capital stock of Summa consists of 10,000,000 shares ofCommon Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001par value.  As of August 31, 2005,3,940,041 shares of the Company’s Common Stock were issued and outstanding andno shares of Preferred Stock were issued and outstanding.  The number of holders of record of Summa’sCommon Stock as of August 31, 2005 was 204.  In addition, based upon the number of copiesof this Annual Report requested by intermediaries on behalf of their clients,Summa estimates that there are approximately 1,400 additional stockholderswhose shares are held in “street name”, including approximately 435stockholders who own shares through the Summa Industries 401(k) Savings andRetirement Plan.

 

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***Common Stock***.  Holders of Common Stock are entitled to onevote 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 applicable to theholders of outstanding Preferred Stock, each holder of Common Stock is entitledto receive ratably such dividends, if any, as may be declared by the Board ofDirectors out of funds legally available therefor.  Upon the liquidation, dissolution or windingup of Summa, holders of Common Stock are entitled to share ratably in allassets of Summa which are legally available for distribution, after payment ofall debts and other liabilities and the liquidation preference of anyoutstanding Preferred Stock.  Holders ofCommon Stock have no preemptive, subscription, redemption or conversionrights.  The transfer agent and registrarfor the Common Stock is U. S. Stock Transfer Corporation, 1745 Gardena Avenue,Glendale, California 91204, www.usst.com. Its telephone number is:  (800) 835-8778.

 

***Preferred Stock***.  The Board of Directors is authorized, subjectto any limitations prescribed by applicable laws, rules and regulations,to provide for the issuance of Preferred Stock in one or more series, toestablish from time to time the number of shares to be included in each suchseries, to fix the designations, powers, preferences and rights of the sharesof each such series and any qualifications, limitations or restrictionsthereof, 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) withoutany further vote or action by the stockholders. Although Summa has no present plan to issue Preferred Stock, the issuanceof Preferred Stock in the future could provide voting or conversion rights thatwould adversely affect the voting power or other rights of the holders ofCommon Stock and thereby reduce the value of the Common Stock.  In addition, the issuance of Preferred Stockmay have the effect of delaying, deferring or preventing a change in control ofSumma.  In particular, specific rightsgranted to future holders of Preferred Stock could be used to restrict Summa’sability 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 PreferredStock, Summa’s Certificate of Incorporation and Bylaws specifically prohibitcumulative voting and the right of stockholders to call a special meeting ofstockholders, provide for the classification of the Board of Directors intothree classes with one class elected annually, require a two-thirdssupermajority stockholder vote to amend certain provisions of the Certificateof Incorporation and Bylaws, and include other provisions which are also likelyto delay, discourage or prevent a change in control of Summa not approved bythe Board of Directors and the Company’s stockholders.  Further, neither the Company’s Certificate ofIncorporation and Bylaws, nor Delaware law, prohibit the Company from adoptinga stockholders’ rights plan, or poison pill.

 

**Shares Issuable Upon Exercise ofOptions **

 

As of August 31, 2005, 1,575,325 shares of Summa Common Stock wereissuable upon exercise of options granted and/or available to be granted underits stock option plans and in connection with acquisitions, all of which areregistered under the Securities Act. During 2005, the Board of Directors acted to accelerate the vesting ofmost of the then outstanding stock options, all of which contained exerciseprices greater than the market trading price at that time.  All options vest in full immediately prior toa change of control of the Company, as defined in the stock option plans.

 

**Dividend Policy**

 

Following the 2004fiscal year end, the Company declared an annual dividend of $.06 per share ofcommon stock, its first cash dividend since 1983.  The Board of Directors recently adopted apolicy of quarterly cash dividends, with the first such quarterly dividend of $0.06per share of common stock paid in October 2005.  Any future cash dividends or otherdistributions will be determined solely by the Board of Directors and will bebased on the Company’s future financial ability to declare and pay suchdividends.  Additionally, certain lending agreements restrict the Companyfrom declaring or paying dividends beyond set limits.  In any fiscal year,the Company may declare or pay any dividend or distribution and may redeem,retire, repurchase or otherwise acquire shares of Common Stock in a maximumaggregate of the lesser of $2,000,000 or the consolidated net profit aftertaxes of Summa for such fiscal year.  Transactions that would exceed theselimits would require prior bank authorization and the appropriate waivers.

 

Additional information required by this item is incorporated byreference from Part III, Item 12 of this Annual Report on Form 10-K.

 

8

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**ITEM 6.****          SELECTEDFINANCIAL DATA.**

 

The selected financial data set forth below for the years ended August 31,2003, 2004 and 2005 have been derived from the audited consolidated financialstatements of Summa included elsewhere herein. The selected financial data set forth below for the years ended August 31,2001 and 2002 (and balance sheet data for 2003) have been derived from auditedconsolidated financial statements of Summa that are not included herein.  The selected financial data set forth belowshould be read in conjunction with those financial statements (including the notesthereto) and with “Management’s Discussion and Analysis of Financial Conditionand Results of Operation” in Item 7 below.

 
| ** **                                                                                    | ** ** | **At and for the Fiscal Years Ended August 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2001**                                         | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                                    | ** ** | **(in thousands, except per share amounts)**     | ** ** |
| **Statements  of Operations Data:**                                                           |       |                                             |       |   |   |   |   |   |   |   |   |
| Net sales                                                                                     |       |                                             |       |   |   |   |   |   |   |   |   |
| Optical components                                                                            |       | $                                                | 66,324     |   | $ | 60,908 |   | $ | 57,425 |   | $ | 55,830 |   | $ | 54,963 |   |
| Material handling components                                                                  |       | 23,085                                           |       | 25,468 |   | 25,332 |   | 26,207 |   | 26,678 |   |
| Irrigation components                                                                         |       | 19,670                                           |       | 16,827 |   | 16,454 |   | 22,416 |   | 27,342 |   |
| Total                                                                                         |       | 109,079                                          |       | 103,203 |   | 99,211 |   | 104,453 |   | 108,983 |   |
| Gross profit                                                                                  |       | 30,389                                           |       | 28,362 |   | 26,256 |   | 26,612 |   | 24,931 |   |
|                                                                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Operating  income                                                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Optical components                                                                            |       | 7,904                                            |       | 7,832 |   | 7,139 |   | 7,720 |   | 3,902 |   |
| Material handling components                                                                  |       | 2,102                                            |       | 2,708 |   | 1,686 |   | 940 |   | 3,093 |   |
| Irrigation components                                                                         |       | 790                                              |       | (1,113 | ) | (721 | ) | 390 |   | 1,216 |   |
| Other                                                                                         |       | (1,664                                           | )          | (1,516 | ) | (1,671 | ) | (2,098 | ) | (2,199 | ) |
| Total                                                                                         |       | 9,132                                            |       | 7,911 |   | 6,433 |   | 6,952 |   | 6,012 |   |
| Interest  expense                                                                             |       | (3,808                                           | )          | (2,414 | ) | (1,400 | ) | (1,477 | ) | (1,548 | ) |
| Provision  for income taxes                                                                   |       | (1,593                                           | )          | (2,001 | ) | (1,664 | ) | (1,980 | ) | (1,577 | ) |
| Minority  interest in net loss of subsidiary                                                  |       | —                                           |       | — |   | — |   | — |   | 73 |   |
| Income from continuing operations before  cumulative effect of change in accounting principle |       | 3,731                                            |       | 3,496 |   | 3,369 |   | 3,495 |   | 2,960 |   |
| Income  (loss) from discontinued operations                                                   |       | 682                                              |       | 433 |   | 189 |   | (124 | ) | (1,402 | ) |
| Cumulative  effect of change in accounting principle                                          |       | —                                           |       | — |   | (22,343 | ) | — |   | — |   |
| Net income  (loss)                                                                            |       | $                                                | 4,413      |   | $ | 3,929 |   | $ | (18,785 | ) | $ | 3,371 |   | $ | 1,558 |   |
| Preferred  stock accretion                                                                    |       | —                                           |       | 491 |   | 737 |   | 450 |   | — |   |
| Net income  (loss) available to common stockholders                                           |       | $                                                | 4,413      |   | $ | 3,438 |   | $ | (19,522 | ) | $ | 2,921 |   | $ | 1,558 |   |
|                                                                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| **Per  Share Data:**                                                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Basic  earnings per share                                                                     |       |                                             |       |   |   |   |   |   |   |   |   |
| Income from continuing operations before  accounting change                                   |       | $                                                | 0.88       |   | $ | 0.68 |   | $ | 0.60 |   | $ | 0.72 |   | $ | 0.74 |   |
| Income (loss) from discontinued operations                                                    |       | 0.16                                             |       | 0.10 |   | 0.04 |   | (0.03 | ) | (0.35 | ) |
| Cumulative effect of change in accounting  principle                                          |       | —                                           |       | — |   | (5.12 | ) | — |   | — |   |
| Total                                                                                         |       | $                                                | 1.04       |   | $ | 0.78 |   | $ | (4.48 | ) | $ | 0.69 |   | $ | 0.39 |   |
| Diluted  earnings per share                                                                   |       |                                             |       |   |   |   |   |   |   |   |   |
| Income from continuing operations before  accounting change                                   |       | $                                                | 0.84       |   | $ | 0.66 |   | $ | 0.59 |   | $ | 0.71 |   | $ | 0.73 |   |
| Income (loss) from discontinued operations                                                    |       | 0.16                                             |       | 0.10 |   | 0.04 |   | (0.03 | ) | (0.34 | ) |
| Cumulative effect of change in accounting  principle                                          |       | —                                           |       | — |   | (5.02 | ) | — |   | — |   |
| Total                                                                                         |       | $                                                | 1.00       |   | $ | 0.76 |   | $ | (4.39 | ) | $ | 0.68 |   | $ | 0.39 |   |
|                                                                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Dividends  declared                                                                           |       | —                                           |       | — |   | — |   | — |   | $ | 0.06 |   |
|                                                                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data:**                                                                      |       |                                             |       |   |   |   |   |   |   |   |   |
| Total assets                                                                                  |       | $                                                | 98,279     |   | $ | 97,565 |   | $ | 68,719 |   | $ | 80,117 |   | $ | 80,035 |   |
| Working  capital                                                                              |       | $                                                | 14,539     |   | $ | 16,301 |   | $ | 16,251 |   | $ | 19,294 |   | $ | 19,075 |   |
| Total debt                                                                                    |       | $                                                | 36,860     |   | $ | 24,911 |   | $ | 20,115 |   | $ | 30,858 |   | $ | 30,589 |   |
| Mandatorily  redeemable preferred stock                                                       |       | —                                           |       | $ | 5,366 |   | $ | 6,103 |   | — |   | — |   |
| Common  stockholders’ equity                                                             |       | $                                                | 45,807     |   | $ | 50,219 |   | $ | 29,380 |   | $ | 30,029 |   | $ | 31,088 |   |
|                                                                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Common  shares outstanding                                                                    |       | 4,297                                            |       | 4,402 |   | 4,246 |   | 3,974 |   | 3,940 |   |
| Preferred  shares outstanding                                                                 |       | —                                           |       | 5 |   | 5 |   | — |   | — |   |

 

9

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| **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 arenot purely historical, are forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934, including but not limited to statements regarding Summa’sexpectations, hopes, beliefs, intentions or strategies regarding the future,such as those set forth in “Legal Proceedings” above.  Actual results could differ materially fromthose projected in any forward-looking statements as a result of a number offactors, including those detailed in “Risk Factors” below and elsewhere in thisAnnual Report on Form 10-K.  Theforward-looking statements are made as of the date hereof, and the Companyassumes no obligation to update the forward-looking statements, or to updatethe reasons why actual results could differ materially from those projected inthe forward-looking statements.

 

Summa manufactures plastic products for diverse commercial andindustrial markets. Through its three reportable segments, Summa designs andmanufactures injection-molded and formed plastic optical components for OEMcustomers in the lighting industry; modular plastic conveyor belt and chain forthe food processing industry; engineered plastic fittings, valves, filters andtubing for agricultural and landscape irrigation; and other molded and extrudedplastic components for diverse industries.

 

Significant events and developments in fiscal 2005 included:

 

•              Duringfiscal 2005, plastic resin, the principal raw material of the Company,experienced extreme price inflation and volatility, and the Company has so farbeen unable to increase the prices of its products to fully offset the costincreases, especially in the Optical Components segment.  The resin price volatility was exacerbatedafter the end of fiscal 2005 as a result of hurricane-related interruptions atoil processing and petrochemical facilities in the Gulf of Mexico region.  Further resin price increases have beenannounced and are anticipated in the near future, and passing these on willrepresent a continuing challenge.

 

•              Earnings forfiscal 2005 were substantially lower than in fiscal 2004. Improvement infinancial performance of the Material Handling Components and IrrigationComponents segments was eclipsed by deterioration in the Optical Components segment.  The Optical Components segment has initiateda three-point program of structural cost reduction, renewed customer focus, andan increased investment in product development activity.  The Company currently expects that the firsthalf of fiscal 2006 will compare unfavorably to prior year results for thissegment, but year over year improvement in the second half of fiscal year 2006is expected.

 

•              Aspreviously announced, the former Electrical Components segment was discontinuedin September 2005 when Summa sold certain current assets of itssubsidiary, Plastron Industries, Inc., at their book value and agreed tolease certain retained fixed assets of Plastron to the buyer.  Summa does not expect to report a materialgain or loss as a result of the transaction.***  ***Additional assets ofPlastron, principally real estate located in Illinois, will be liquidated assoon as practical.  In the past year,significant losses were incurred by this former segment. This transaction isexpected to eliminate negative operating cash flow and permit reinvestment ofproceeds of the sale and cash flow from leases in businesses with bettermargins and growth prospects.

 

•              Certainrelocation and consolidation programs in the Material Handling Components andIrrigation Components segments were successfully completed during fiscal 2005,and the expected operating cost benefits began to be realized in the secondhalf of the year.

 

•              InSeptember 2005, the Company announced a plan to pay quarterly cashdividends.  The first such dividend of$.06 per share of common stock was paid in October 2005.  Assuming the quarterly dividends continue tobe paid at the same rate, the program will use approximately $1 million peryear.

 

•              Duringfiscal 2005, the Company repurchased 62,481 shares of its common stock, at anaverage cost of $8.32 per share, in open market transactions, pursuant to aplan to acquire up to $2,000,000 of common stock with no time limit.

 

10

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**Results of Operations**

 

The following table sets forth certain information, derived from Summa’sconsolidated statements of operations, as a percentage of sales, for each ofthe years in the three year period ended August 31, 2005, as well as theCompany’s effective income tax rate for each period presented.

 
| ** **                                                                                                                           | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                                 |       |     |       |     |       |     |       |
| Net sales                                                                                                                            |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Cost of  sales                                                                                                                       |       | 73.5     |       | 74.5     |       | 77.1     |       |
| Gross profit                                                                                                                         |       | 26.5     |       | 25.5     |       | 22.9     |       |
| S,G, & A  and other expense, net                                                                                                 |       | 20.0     |       | 18.8     |       | 17.4     |       |
| Operating  income                                                                                                                    |       | 6.5      |       | 6.7      |       | 5.5      |       |
| Interest  expense, net                                                                                                               |       | 1.4      |       | 1.4      |       | 1.4      |       |
| Income from continuing operations before  income taxes, minority interest and cumulative effect of a change in  accounting principle |       | 5.1      | %          | 5.2      | %     | 4.1      | %          |
|                                                                                                                                 |       |     |       |     |       |     |       |
| Effective  tax rate                                                                                                                  |       | 33.1     | %          | 36.2     | %     | 35.3     | %          |

 

***Fiscal 2005 versus Fiscal 2004***

 

Sales for the fiscal year ended August 31, 2005 increased$4,530,000, or 4%, primarily due to the effects of price increases(approximately $4,200,000) and the contribution of sales from recently acquiredoperations in the Irrigation Components segment (about $1,900,000), partiallyoffset by the loss of business to China (about $850,000). Sales decreased$867,000, or 2%, in the Optical Components segment, primarily due to softnessin demand for high-bay, high intensity lighting products, and loss of businessto China, partially offset by price increases; increased $471,000, or 2%, inthe Material Handling Components segment, primarily due to price increases;increased $4,926,000, or 22%, in the Irrigation Components segment, primarilydue to the inclusion of sales from recently acquired operations (approximately$1,900,000), the effects of price increases (approximately $2,200,000),recaptured market share from certain major customers and improved marketconditions.

 

Gross profit for fiscal2005 decreased $1,681,000, or 6%, from the comparable prior year period,primarily due to increased material costs, partially offset by the effects ofhigher prices.  Gross margin decreasedfrom 25.5% to 22.9%, primarily due to increased material costs.

 

Operating expenses forfiscal 2005 decreased $741,000, or 4%, from the comparable prior period,primarily due to management cost reduction initiatives and the benefit of$186,000 from partial collection of a fully reserved note receivable, partiallyoffset by the inclusion of operating expenses of newly acquired operations andincreased costs related to compliance with Sarbanes-Oxley rules andregulations.  As a percent of sales,operating expenses decreased from 18.8% to 17.4%.

 

Operating income forfiscal 2005 was $6,012,000, which was $940,000 or 14%, lower than in thecomparable prior year period.  Operatingincome decreased $3,818,000 in the Optical Components segment, due primarily todifficulty and delays in fully passing through resin price increases andunfavorable product mix; increased $2,153,000 in the Material HandlingComponents segment, primarily due to inefficiencies related to a plantconsolidation in the prior year period, partially offset by expenses related toa plant relocation during fiscal 2005; and increased $826,000 in the IrrigationComponents segment, primarily due to the effects of higher sales volume andefficiencies gained from plant consolidation. Operating margin decreased from 6.7% in fiscal 2004 to 5.5% in fiscal2005, due to the factors discussed above.

 

Net interest in fiscal2005 was $71,000 higher than in fiscal 2004, due to the effects of higheraverage debt levels and higher average interest rates in the most recent periodpartially offset by the absence of term loan break-up fees and the write-off ofunamortized bank fees of $266,000 incurred in the prior year period.

 

The provision for incometaxes in fiscal 2005 was $403,000 lower than in the comparable prior yearperiod, primarily due to lower income before taxes.

 

The Company’s backlog ofunfilled orders, believed to be firm, was $6,682,000 at August 31, 2004and $5,592,000 at August 31, 2005. Because the time between entering an order and shipping the product andrecording a sale is typically shorter than one month, backlog levels are not areliable indicator of future sales volume.

 

11

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***Fiscal 2004 versus Fiscal 2003.***

 

For the year ended August 31, 2004, net sales increased by$5,242,000, or 5%, from the prior fiscal year, primarily as a result of theinclusion of $4,194,000 of sales from newly acquired operations.  See “Business – History of Acquisitions”,above.  Same business sales in fiscalyear 2004 increased approximately 1% from the prior year.  Optical Components segment sales declined$1,595,000, or 3%, primarily due to the loss of some contract manufacturingwork to competitors.  Material HandlingComponent sales increased $875,000, or 3%, primarily due to strong export sales,sales of new products and selected price increases, partially offset byincreased competition in the domestic market. Irrigation Components segment sales increased $5,962,000, or 36%, due tothe inclusion of $4,194,000 of sales from newly acquired operations, strengthof agricultural markets and aggressive selling efforts.

 

For the year ended August 31, 2004, cost of sales increased by$4,886,000, or 7%, from the prior fiscal year, due to the increase in sales andincreases in the cost of plastic resin. As a percent of sales, cost of goodssold increased from 73.5% to 74.5%, primarily due to increased cost of resinnot fully passed on to customers.

 

For the year ended August 31, 2004, gross profit increased$356,000, or 1%, from the prior fiscal year. Gross margin declined from 26.5% to 25.5%, primarily due to higher resincosts not fully passed on to customers.

 

For the year ended August 31, 2004, operating expenses were$19,660,000, or 1% lower than in the prior year.  As a percent of sales, operating expensesdecreased from 20.0% to 18.8% due to the benefit of increased sales and costreduction initiatives.

 

For the year ended August 31, 2004, operating income increased$519,000, or 8%, due to the changes discussed above.  By segment, operating income increased$581,000 in the Optical Components segment, primarily due to favorable productmix; decreased $746,000 in the Material Handling Components segment, primarilydue to increased expenses related to a facility consolidation and increased$1,111,000 in the Irrigation Components segment, primarily due to the effectsof higher sales volume.  Operating marginfor the year increased from 6.5% in fiscal 2003 to 6.7% due to the changes ingross margin and operating expenses discussed above.

 

For fiscal 2004, interest expense increased to $1,477,000 from$1,400,000, due to increased debt levels as a result of the Block Repurchasedescribed below, and a non-recurring charge of $266,000 related to refinancingof bank debt, substantially offset by lower average interest rates.  The Company’s debt and interest rates aredescribed more fully in “Liquidity and Capital Resources – FinancialArrangements” below.

 

For fiscal 2004, the effective tax rate increased to 36.2% from 33.1%in fiscal 2003, primarily due to a change in the distribution of earnings amongvarious tax jurisdictions.

 

***Inflation.***

 

In fiscal 2003, resin prices were relatively stable.  During fiscal 2004, especially in the fourthquarter, prices increased so rapidly that the increases were not fully passedon to customers.  Volatility in resinpricing resulted from high prices for oil and gas derivative feedstocks, strongdemand, especially in Asia, and reduced supply caused by several resin plantclosings.  In fiscal 2005, resin priceswere less volatile after the first quarter but generally continued toincrease.  This was especially true ofcommodity resins, including polyethylene and polyvinyl chloride, as oil pricesincreased dramatically.  The Company haddifficulty passing on the full impact of resin cost increases to its customersthroughout the year.  Following the endof the fiscal year, numerous facilities which produce component materials usedin the manufacture of plastic resins were damaged or temporarily shut down as aresult of hurricanes in the Gulf of Mexico. Prices paid by the Company for virtually all resins it uses haveincreased since August 31, 2005.

 

**Liquidityand Capital Resources **

 

***Sources and Uses of Funds.***  The Company’s primary sources of funds havebeen cash generated from operating activities and borrowings from thirdparties.  See “Financing Arrangements”below.   During the three fiscal yearsended August 31, 2005, net cash provided by operating activities was$10,248,000 in 2003, $9,711,000 in 2004 and $6,796,000 in 2005.  Cash flows from operations decreased in 2004compared to 2003, primarily due to changes in the components of workingcapital.  From August 31, 2003 to August 31,2004, net of the effect of acquisitions, accounts receivable increased$2,498,000; inventory increased $2,239,000; accounts payable increased$3,786,000; and accrued liabilities increased $2,341,000.  Cash flow from operations decreased in 2005compared

 

12

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to 2004, primarily due to the loss from discontinued operations of$1,402,000 and changes in the components of working capital.  Accounts receivable increased $370,000;inventories decreased $183,000; prepaid expenses and other assets increased$487,000; accounts payable increased $923,000 and accrued liabilities decreased$427,000.

 

Summa’s principal uses of cash have been the (i) support ofoperating activities, (ii) acquisitions of businesses, (iii) investmentsin capital improvements, (iv) reduction of debt and (v) repurchasesof Company equity.  Cash used for certaininvesting activities for the three fiscal years ended August 31, 2005 issummarized in the following table:

 
| ** **                                       | ** ** | **Fiscal Years Ended August 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                       | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2005** | ** ** |
| Acquisitions  of businesses                      |       | $                                 | —     |   | $ | 1,903,000 |   | $ | — |   |
| Investment  in capital improvements              |       | $                                 | 4,055,000  |   | $ | 8,334,000 |   | $ | 7,053,000 |   |
| Capital  investment as a percent of depreciation |       | 86                                | %          | 177 | % | 136 | % |

 

Generally, investment in capital improvements is primarily for newproduct tooling, manufacturing equipment upgrades and new computersystems.  At August 31, 2005, Summawas not materially committed to any outside supplier for any such capitalexpenditure and believes its present capacity, augmented by anticipatedcontinued investment in new product tooling and equipment, will be sufficientto meet demand for its products.  Duringfiscal 2004 and the first half of fiscal 2005, the Company invested in newfacilities, process improvement and automation systems, which resulted in totalcapital expenditures in fiscal 2004 and fiscal 2005 which were higher than intypical years.  The Company financedthese improvements with borrowings from commercial lenders.  For the three year period ended August 31,2005, total capital expenditures were 133% of total depreciation.

 

In fiscal 2005 the Company incurred long-term debt of $4,875,000related to the new facility in the Material Handling Components segment anddebt of $1,356,000 related to manufacturing tooling and equipment.  The Company paid debt of $6,340,000 includingsubordinated debt of $2,309,000 and used funds of $520,000 to purchase commonstock and $240,000 for payment of cash dividends.

 

In June 2003, the Company announced a plan to repurchase up to$2,000,000 of its Common Stock with no time limit (the “2003 Buy Back”).  Prior to May 2004, the Company hadpurchased 9,169 shares at an average cost of $7.96 per share.  In May 2004, the Company repurchased allof its outstanding Preferred Stock for its book value of $6,553,000, and452,856 shares of its Common Stock for $3,633,000, or $8.02 per share, in aprivate transaction (the “Block Repurchase”). The Company paid for the Block Repurchase with $10,185,000 ofsubordinated debt.  Subsequently, asubstantial portion of the subordinated debt was prepaid using the Company’sline of credit.  In conjunction with theBlock Repurchase, the 2003 Buy Back was cancelled.  In October 2004, the Company announced aplan to repurchase up to $2,000,000 of its Common Stock with no time limit (the“2005 Buy Back”).  As of August 31,2005, the status of the 2005 Buy Back was as follows:

 
| ** **                       | ** ** | **Shares repurchased** | ** ** | **Average cost per share** | ** ** | **Repurchase cost** | ** ** |
|----------------------------------|------------|------------------------|------------|----------------------------|------------|---------------------|------------|
| Quarter  ended February 28, 2005 |       | 500                    |       | $                          | 9.76       |                | $          | 5,000 |   |
| Quarter  ended May 31, 2005      |       | 31,265                 |       | $                          | 8.73       |                | 273,000    |   |
| June 2005                        |       | 14,215                 |       | $                          | 8.02       |                | 114,000    |   |
| July 2005                        |       | 12,701                 |       | $                          | 7.87       |                | 100,000    |   |
| August 2005                      |       | 3,800                  |       | $                          | 7.37       |                | 28,000     |   |
| Total                            |       | 62,481                 |       | $                          | 8.32       |                | $          | 520,000 |   |

 

The cost per share includes commissions where applicable.

 

In December 2004, the Company paid a dividend of $.06 per share tocommon stockholders, or $240,000  in theaggregate.  In September 2005, theCompany announced its intention to pay quarterly cash dividends, and in October 2005,the Company paid a dividend of $.06 per share to common stockholders, or$236,000 in the aggregate.  In November 2005,the Company announced a dividend of $.06 per share, or approximately $236,000in the aggregate, to be paid on approximately December 20, 2005 to commonstockholders of record as of December 9, 2005.

 

***Working Capital; Asset Utilization. ***At fiscal yearend, working capital was $16,251,000 in 2003, $19,294,000 in 2004 and$19,075,000 in 2005.  The increase inworking capital from 2003 to 2004 was due primarily to increases in accountsreceivable and inventory related to increased sales and reduced currentmaturities of long-term debt as a result of financial restructuring, partiallyoffset by an increase in accounts payable. Working capital at August 31, 2005 was approximately the same as atAugust 31, 2004.

 

13

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Asset utilization of continuing operations for the three fiscal yearsended August 31, 2005 is presented in the following table:

 
| ** **                            | ** ** | **Fiscal Years Ended August 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2005** | ** ** |
| Average  working capital turnover     |       | 7.0 times                         |       | 6.4 times |   | 6.2 times |   |
| Average  accounts receivable turnover |       | 6.7 times                         |       | 6.7 times |   | 6.8 times |   |
| Average  inventory turnover           |       | 7.0 times                         |       | 6.7 times |   | 7.1 times |   |

 

***Financing Arrangements.***  Summa has several debt relationships asdescribed below.   Substantially all ofthe Company’s assets are pledged to secure debt, which requires compliance withvarious covenants.

 

Summary of the Company’sdebt at August 31, 2005:

 
| ** **                  | ** ** | ** **  | ** ** | **Weighted** | ** ** | ** **       | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **               | ** ** |
|-----------------------------|------------|-------------|------------|--------------|------------|------------------|------------|----------------------|------------|------------|------------|------------|------------|------------|------------|--------------------------|------------|
| ** **                  | ** ** | ** **  | ** ** | **Average**  | ** ** | ** **       | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **               | ** ** |
| ** **                  | ** ** | ** **  | ** ** | **Interest** | ** ** | **Additional**   | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **               | ** ** |
| **Description of Debt**     | ** ** | **Balance** | ** ** | **Rate**     | ** ** | **Availability** | ** ** | **Fiscal  Year Due** | ** ** |
| ** **                  | ** ** | ** **  | ** ** | ** **   | ** ** | ** **       | ** ** | **2006**             | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010 and  thereafter** | ** ** |
| Revolving line of credit    |       | $           | 12,183,000 |         | 5.2        | %                | $          | 7,622,000            |       | —     |       | $          | 12,183,000 |       | $          | —                   |       | $ | — |   | $ | — |   |
| Bank term loan              |       | 3,546,000   |       | 4.7          | %          | —           |       | 974,000              |       | 1,021,000  |       | 1,072,000  |       | 479,000    |       | —                   |       |
| Real estate and other loans |       | 14,174,000  |       | 5.8          | %          | —           |       | 1,595,000            |       | 5,765,000  |       | 1,281,000  |       | 927,000    |       | 4,606,000                |       |
| Subordinated debt           |       | 686,000     |       | 6.5          | %          | —           |       | 500,000              |       | 186,000    |       | —     |       | —     |       | —                   |       |
|                        |       |        |       |         |       |             |       |                 |       |       |       |       |       |       |       |                     |       |   |   |   |   |   |   |   |
| Total debt                  |       | $           | 30,589,000 |         | 5.4        | %                | $          | 7,622,000            |       | $          | 3,069,000  |       | $          | 19,155,000 |       | $                        | 2,353,000  |   | $ | 1,406,000 |   | $ | 4,606,000 |   |

 

Interest rates on therevolving line of credit and certain real estate loans are subject to marketfluctuation, and the rates on the revolving line of credit are subject toreduction as the Company achieves certain financial milestones. See also Note10 in the “Notes to Consolidated Financial Statements” of the Company in thisAnnual Report on Form 10-K.

 

Summa believes that cash flows from operations and existing credit facilitieswill be sufficient to fund working capital requirements, planned capitalexpenditures and debt service for the next twelve months.  The Company has a strategy which includesgrowth by acquisition.  In the event anacquisition plan is adopted which requires funds exceeding the availabilitydescribed above, an alternate source of funds to accomplish the acquisitionwould have to be developed. The Company has 10,000,000 shares of Common Stockauthorized, of which 3,940,041 shares were outstanding at August 31, 2005,and 5,000,000 shares of “blank check” preferred stock authorized, of which nonewas outstanding at August 31, 2005. The Company could issue additional shares of common or preferred stockor enter into new or revised borrowing arrangements to raise funds.

 

**Off-Balance Sheet Arrangements**

 

At August 31, 2005, the Company had no material off-balance sheetarrangements other than the non-debt obligations described in “ContractualObligations,” below.

 

**Contractual Obligations**

 

Summaryof the Company’s contractual obligations at August 31, 2005:

 
| ** **                  | ** ** | **Fiscal  Year Obligations Due** | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| **Contractual Obligations** | ** ** | **Balance**                      | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011 and  thereafter** | ** ** |
|                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt              |       | $                                | 30,589,000 |   | $ | 3,069,000 |   | $ | 19,155,000 |   | $ | 2,353,000 |   | $ | 1,406,000 |   | $ | 485,000 |   | $ | 4,121,000 |   |
| Operating leases            |       | 3,279,000                        |       | 1,157,000 |   | 857,000 |   | 738,000 |   | 517,000 |   | 10,000 |   | — |   |
| Purchase obligations        |       | 5,873,000                        |       | 5,873,000 |   | — |   | — |   | — |   | — |   | — |   |
| Other                       |       | 3,142,000                        |       | 148,000 |   | 603,000 |   | 163,000 |   | 170,000 |   | 1,495,000 |   | 563,000 |   |
| Total                       |       | $                                | 42,883,000 |   | $ | 10,247,000 |   | $ | 20,615,000 |   | $ | 3,254,000 |   | $ | 2,093,000 |   | $ | 1,990,000 |   | $ | 4,684,000 |   |
|                             |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Operating Leases.*  Operating leases are primarily formanufacturing plants not owned by the Company. In recent years the Company has consolidated and/or abandoned severalfacilities in an effort to improve efficiencies and operating results, andplans further consolidations.  In theevent the Company were to abandon a facility prior to its being leased to a newtenant, the Company could become obligated for accelerated lease payments orother expenses.

 

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**Risk Factors**

 

The following risks and uncertainties, as well as others describedelsewhere in this Annual Report on Form 10-K, could materially adverselyaffect the Company’s business, results of operations and financial condition:

 

***Competition.***  The markets for the Company’s products areall characterized by extensive competition. Numerous companies currently offer competing products and servicesnationally and internationally (particularly in China), and in certaingeographic areas the Company has competition from local manufacturers.  It can be expected that other companies willintroduce additional competing products in the future.  Many existing and potential competitors havegreater financial, marketing and research resources than Summa.  In addition, some of Summa’s largestcustomers have the resources to manufacture products comparable to thosecurrently purchased from Summa, and some of Summa’s customers also compete withthe Company in certain areas.

 

***MarketDemand.***  Operating results are affected by the generalcyclical pattern of the markets in which our major customer groups operate andthe overall economic conditions in which the Company and its customersoperate.  A weak capital expenditureenvironment in one or more of the markets we serve from time to time has hadand can be expected in the future to have a material adverse effect on ourresults of operations.

 

***Inflation &Inability to Increase Prices.***  During periods of inflation, including thecurrent inflationary period, the Company has had limited success in itsattempts to pass on cost increases to its customers in the form of priceincreases, resulting in decreased margins and lower profitability, and theCompany expects its ability to increase prices to offset its own increasedcosts will continue to be limited in the future.  Although the Company attempts to reduce itsown cost structure to lessen the negative impact of inflation, there can be noassurance that cost reductions will be successful in restoring previous levelsof profitability.  The Company employssignificant amounts of plastic resins in its manufacturing processes, and theprices of such resins have been increasing. The costs of these raw materials are sometimes volatile and are beyondthe Company’s control.  Volatile rawmaterial costs can significantly affect operating results and makeperiod-to-period comparisons difficult. The Company does not attempt to hedge the costs of raw materials, otherthan to occasionally purchase larger than normal quantities in advance ofannounced price increases.  The Companyhas also experienced increases in other costs such as insurance, wages,employee benefits and electricity.

 

***Patent Expirations & RelatedLitigation.*** The expiration of certain economically significant patents, particularlypatents covering the highly successful Reflexor® line of products in theOptical Components segment, the first of which expires in 2008, will likelyresult in increased competition, lower prices and decreasedprofitability.  In 2004, Summa settled patent infringement lawsuits withtwo customers regarding one of the Reflexor® patents and resumed manufacturingand selling reflectors to those customers.  Even so, Summa believesincidents of infringement of the Reflexor®-related patents and other patentswill increase as they near their respective expiration dates.  The Company may file patent infringementand/or other types of lawsuits in the future which may result in materiallyincreased costs and other adverse consequences. Any costs and/or losses that Summa may suffer from such lawsuits, andthe effect such litigation may have upon the reputation and marketability ofSumma’s products, could have a material adverse impact on the future results ofoperations, financial condition and/or prospects of the Company.

 

***Discontinued Operations.***  In September 2005, the Company soldcertain current assets and current liabilities of its former ElectricalComponents segment at their book value and agreed to lease certain retainedfixed assets of that Segment, which is now reported as a discontinuedoperation.  Summa does not expect toreport a material gain or loss as a result of the transaction.  However, a substantial portion of theconsideration for the assets sold was in the form of a promissory note due August 30,2006 and various leases of equipment and real property.  In the event the buyer fails to fulfill itsobligations under the note and/or the asset leases, the Company will incursignificant legal expenses and a substantial loss in reclaiming and liquidatingthe assets.

 

***Customer Concentration.***  Summa’s largest three customers, all of whomare customers of the Optical Components segment, accounted for 10%, 5% and 4%of Company sales in fiscal 2005. Although the Company has several thousand active accounts, the loss ofone or more large customers or the business failure of one of these largecustomers and the resulting inability to pay its unsecured account with theCompany could have a materially adverse impact on the Company.

 

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***Product Development. ***The performanceof Summa in the future will depend in part on its ability to develop and marketnew products that will gain customer acceptance and loyalty, as well as itsability to adapt its product offerings and control its costs to meet changingpricing considerations and other market factors.  The Company’s operating performance would beadversely affected if it were to incur delays in developing new products or ifsuch products did not gain market acceptance. There can be no assurance that existing or future products will besufficiently successful to enable Summa to effectively compete in its marketsor, should new product offerings meet with significant customer acceptance,that one or more current or future competitors will not introduce products thatrender the Company’s products noncompetitive.

 

***Indebtedness.***  The Company’s financial leverage and theoperating and financial restrictions imposed by the instruments governing itsindebtedness may limit or prohibit its ability to incur additionalindebtedness, create liens, sell assets, engage in mergers, acquisitions orjoint ventures, pay cash dividends, repurchase shares or make certain otherpayments.  The Company’s leverage andsuch restrictions could limit its ability to respond to changing business oreconomic conditions.  The Company’sinability to meet debt obligations when due could impair the ability to financeoperations and could result in default and bankruptcy.  The Company has a significant amount ofindebtedness, and increases in borrowing costs, rising interest rates, or theinability to refinance indebtedness when due could result in default.

 

***RawMaterials.***  From time to time, the Company may experiencelimited availability of the raw material needed to manufacture its products,principally certain types of plastic resin. This supply failure may be due to increased worldwide demand in excessof supply or, more typically, as a result of a natural disaster or fire orsimilar event at a resin supplier’s facilities. The inability to obtain an adequate supply of one or more resins mayresult in the loss of sales and customers, and decreased profitability.

 

***Insurance.***  From time to time,the number of insurance carriers interested in underwriting businesses thatmanufacture products from plastics, including the Company, has beenlimited.  In addition, the Company’sclaims history may worsen, resulting in the Company being less attractive forinsurance purposes.  Although the Companyhas successfully obtained the desired levels of insurance coverage in the past,there can be no assurance such coverage will continue to be available to theCompany.  Even if available, the cost ofsuch coverage may become excessive, or the insurance coverage obtained may notadequately cover the Company’s risks.

 

***Acquisition Program. ***The expansion ofthe Company through acquisitions, in which Summa looks for candidates that cancomplement its existing product lines, expand geographic coverage, and providesuperior stockholder returns, is not assured. Acquiring businesses that meet these criteria continues to be animportant element of the Company’s business strategy. Some of the Company’smajor competitors have similar growth strategies. As a result, competition forqualifying acquisition candidates is increasing and there can be no assurancethat the Company will be able to identify and acquire such candidates onfavorable terms in the future.   If theCompany is unable to achieve expected financial results from futureacquisitions, the interest and other acquisition related expenses incurredcould exceed the net income derived from the acquired operations, which couldreduce or eliminate net income.

 

***Management of Acquisitions. ***Although theexisting management of an acquired company typically would be retained tomanage day to day operations, it is anticipated that the business of theacquired company could be expanded with the support of Summa’s corporatestaff.  Any such expansion could place asignificant strain on Summa’s management and resources, require Summa toimplement additional operating, marketing and financial controls, andnecessitate that Summa hire additional personnel, which could have asignificant adverse effect on Summa’s operating results.

 

***Indebtedness from Acquisitions. ***It is likelythat any acquisition would require Summa to raise additional capital to financethe acquisition or provide working capital to the acquired company.  If this additional capital were raisedthrough debt financings, Summa would incur substantial additional interestexpense; sales of additional equity to raise the needed capital would dilute,on a pro-rata basis, the percentage ownership of all holders of Summa CommonStock.  There is no assurance thatsufficient financing will be available to Summa to continue its acquisitionstrategy on terms and conditions that are acceptable to Summa.

 

#### **Critical Accounting Policies and Estimates**

#### ** **

Theforegoing discussion and analysis of the Company’s financial condition andresults of operations are based upon the consolidated financial statements ofthe Company, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of suchfinancial statements requires management to make estimates and assumptions inapplying certain critical accounting policies. Certain accounting estimates areparticularly sensitive because of their significance to the Company’s

 

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consolidatedfinancial statements and because of the possibility that future eventsaffecting the estimates could differ markedly from current expectations. TheCompany believes that the following are some of the more critical judgmentareas in the application of its accounting policies that affect the Company’sfinancial statements:

 

***Impairmentof Long-Lived Assets and Long-Lived Assets to be Disposed of.*** TheCompany reviews its long-lived assets and certain identifiable intangibles forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto the undiscounted future operating cash flows expected to be generated by theasset. If such assets are considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying amount of the assetsexceeds the fair value of the assets. Assets to be disposed of by sale arereported at the lower of the carrying amount or fair value less costs to sell.

 

The Company has asignificant amount of property and equipment and intangible assets. Thedetermination as to whether events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable involves management’sjudgment. In addition, should the Company conclude that recoverability of anasset is in question, the estimate of undiscounted future operating cash flowsto determine whether an asset is recoverable and, if not, the finaldetermination of the fair value of the asset are also based on the judgment ofmanagement. These judgments can be impacted by a variety of underlyingassumptions, such as the general business climate, effectiveness of competitionand supply and cost of resources. Accordingly, actual results can differ significantly from the assumptionsmade by management in making its estimates. Future changes in management’sestimates could result in indicators of impairment and future impairmentcharges.

 

***Valuationof Inventory*. **The Company values its inventories at the lower of cost or market usingthe first-in, first-out (FIFO) method. The Company records adjustments to thevalue of inventory based upon obsolescence and changes in market value aspermanent changes in the carrying amount of such inventory until its ultimatesale or other disposition. The Company has evaluated the current level ofinventories considering historical sales and other factors and, based on thisevaluation, has recorded adjustments to cost of goods sold to adjust inventoryto net realizable value.  Theseadjustments are estimates, which could vary significantly, either favorably orunfavorably, from actual requirements if future economic conditions, customerdemand or competition differ from expectations.

 

***Accounts Receivable.* **The Company performs ongoing evaluationsof customers and adjusts credit limits based upon each customer’s paymenthistory and credit worthiness, as determined by credit information available atthat time.  The Company monitorscollections and payments from customers and maintains allowances for doubtfulaccounts for the inability of customers to make required payments.  If the financial condition of customers wereto deteriorate resulting in an impairment of their ability to make payments,additional allowances may be required.

 

***Goodwill. ***Goodwill represents the excess of purchaseprice over fair value of net assets acquired. Goodwill is tested for impairment annually in the fourth quarter, aftercompletion of an annual planning process, or earlier if events occur whichrequire an impairment analysis to be performed. With respect to each reporting unit which has any goodwill, the fairvalue is determined using traditional valuation methodology, and compared withits carrying value.  If the fair valueexceeds the unit’s carrying value, goodwill of the reporting unit is considerednot to be impaired.  If the unit’scarrying value exceeds its fair value, assets of the unit are individuallyvalued to determine the implied fair value of the reporting unit goodwill.  Impairment loss is recognized to the extentthat the carrying value of the goodwill exceeds its implied fair value.  Significantmanagement judgment is involved in determining the fair value of assets. Futurechanges in management’s estimates could result in additional impairment chargesto goodwill.

 

***Income Taxes.***  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to temporarydifferences between the financial statement carrying amounts of assets andliabilities and their respective tax bases. Deferred tax assets are also recognized for tax credit carryforwards andthen assessed (including the anticipation of future income) to determine thelikelihood of realization.  Deferred taxassets and liabilities are measured using the rates expected to apply totaxable income in the years in which the temporary differences are expected toreverse and the credits are expected to be used.  The effect of a change in tax rates ondeferred tax assets and liabilities is recognized in income in the period thatincludes the enactment date.

 

***Accounting for Stock Options.*** Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation (‘SFAS 123”), as amended by SFAS 148,allows entities to continue to apply the provisions of Accounting PrinciplesBoard (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees,and provide pro forma income and pro forma earnings per share disclosures forstock-based awards as if the fair-value based method defined in SFAS 123 hadbeen applied.  In accordance with APBOpinion No. 25, and related

 

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interpretations, compensation expense would generally be recorded forfixed option grants only if, on the date of the grant, the current price of theunderlying stock exceeded the exercise price. The Company elected to continue to apply the provisions of APB Opinion No. 25and provide the pro forma disclosure provisions of SFAS 123.  Accordingly, no compensation expense has beenrecognized for the Company’s stock option plans and award of options tonon-employee directors. 

 

**Recent Accounting Pronouncements**

 

See Note 1 in the “Notes to Consolidated Financial Statements” in Part IVof this Annual Report on Form 10-K.

 

**ITEM 7A.****       QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

The Company’s market risk relates to interest rate exposure onlong-term borrowings.  The Company doesnot use financial instruments for trading or other speculative purposes.  Excess cash is primarily used to pay down therevolving line of credit.  Borrowingsagainst the revolving line of credit and certain real estate loans are atvariable interest rates.  All otherborrowings are at fixed rates.

 

At August 31, 2004, the Company had $20,829,000 of outstandingvariable interest loans with interest rates varying from 3.0 percent to 4.5percent, in traunches.  A one percentincrease in interest rates charged on the Company’s outstanding variable rateborrowings would result in an increase in annual interest expense of approximately$208,000, assuming the total outstanding amount of variable interest debt wereto remain the same as on August 31, 2004.

 

At August 31, 2005, the Company had $19,651,000 of outstandingvariable interest loans with interest rates varying from 4.4 percent to 6.5percent, in traunches.  A one percentincrease in interest rates charged on the Company’s outstanding variable rateborrowings would result in an increase in annual interest expense ofapproximately $196,000, assuming the total outstanding amount of variableinterest debt were to remain the same as on August 31, 2005.

 

**ITEM 8.****          FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.**

 

The financial statements and related notes thereto of the Company filedherewith are set forth in Item 15 and included in Part IV of this AnnualReport on Form 10-K.

 
| **ITEM 9.** | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.** |
|-------------|--------------------------------------------------------------------------------------------|

 

None.

 

**ITEM 9A.****       CONTROLSAND PROCEDURES.**

 

As of the end of theperiod covered by this report, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective.  There was no significant change in the Company’sinternal controls during the fiscal fourth quarter that had or is reasonablylikely to have a material affect on internal control over financial reporting.

 

The Company iscurrently not an accelerated filer under applicable rules and regulationsof the Securities and Exchange Commission and, as such, has not been requiredto comply with all of the regulations recently adopted by the Commission,particularly the requirement that the Company include in its Annual Report on Form 10-Ka report of management and accompanying auditor’s report on the Company’sinternal control over financial reporting (“404 reporting”).  Compliance with the 404 reporting rules andregulations has been extended for non-accelerated filers to fiscal years endingon or after July 15, 2007.

 

**ITEM 9B.****      ****OTHER INFORMATION.**

 

No other information was required to be disclosed in a report on Form 8-Kduring the Company’s fiscal fourth quarter except the information contained inthe Company’s Form 8-K dated June 27, 2005 regarding the Company’sresults of operations and financial condition for the fiscal third quarter andthe entry into of an agreement to sell a

 

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certain manufacturing facility and related real estate located inFullerton, California, and the Company’s Form 8-K dated July 15, 2005regarding the acceleration of vesting of most unvested outstanding stockoptions previously granted to employees and officers of the Company which hadan exercise price greater than the market price at that time.

 

**PART III**

 

**ITEM 10.****       DIRECTORSAND EXECUTIVE OFFICERS OF REGISTRANT.**

 

Incorporated by reference from Summa’s definitive Proxy Statement to befiled with the Commission not later than 120 days after the end of the fiscalyear covered by this Annual Report on Form 10-K.   Specifically excludes from incorporationdisclosures in the Proxy Statement made under Item 7(d)(3) of Regulation14A.

 

**ITEM 11.****       EXECUTIVECOMPENSATION.**

 

Incorporated by reference from Summa’s definitive Proxy Statement to befiled with the Commission not later than 120 days after the end of the fiscalyear covered by this Annual Report on Form 10-K.   Specifically excludes from incorporationdisclosures in the Proxy Statement made under paragraphs (k) and (l) of Item402 of Regulation S-K.

 
| **ITEM 12.** | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS.** |
|--------------|-------------------------------------------------------------------------------------------------------|

 

**Securities Authorized for Issuance Under EquityCompensation Plans**

 

The following table sets forth information regarding compensation plans(including individual compensation arrangements) under which equity securitiesof the Company are authorized for issuance as of August 31, 2005.  The Company has no such compensation plansother than plans under which stock options have been granted.

 
| **Plan Category**                                           | ** ** | **Number of Securities to be  Issued Upon Exercise of  Outstanding Options (A)** | ** ** | **Weighed-Average  Exercise Price of  Outstanding Options (B)** | ** ** | **Number of Securities Remaining  Available for Future Issuance Under  Equity Compensation Plans (Excluding  Securities Reflected in Column (A)) (C)** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by  stockholders (1)     |       |                                                                             | 953,860    |                                                            |       | $                                                                                                                                                      | 9.10       |   |   | 502,767 |   |
| Equity compensation plans not approved by  stockholders (2) |       |                                                                             | 118,698    |                                                            |       | $                                                                                                                                                      | 7.15       |   |   | — |   |
| Total                                                       |       |                                                                             | 1,072,558  |                                                            |       | $                                                                                                                                                      | 8.89       |   |   | 502,767 |   |

 

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  (1)  *Equity Compensation PlansApproved by Stockholders*. The following existing equity compensationplans of the Company were individually approved by the stockholders: SummaIndustries 1991 Stock Option Plan, Summa Industries 1995 Stock Option Plan, asamended, Summa Industries 1999 Stock Option Plan, as amended, and the SummaIndustries 2005 Equity Incentive Plan (collectively, the “Stockholder ApprovedPlans”).  The terms of each StockholderApproved Plan and the individual option agreements granted thereunder aresimilar, except that, under the 2005 Equity Incentive Plan, the Company has thediscretion to issue various other types of equity in addition to stock options,although to date no such other types of equity have been issued.  Each Plan has a ten-year term, and options toacquire shares of the Company’s Common Stock are available for grant to keyemployees, directors, consultants, vendors and others, for individual terms ofup to ten years from date of grant. Although stock options may be granted under the Stockholder ApprovedPlans which are intended to qualify as incentive stock options (“ISO’s”) under Section 422Aof the Internal Revenue Code of 1986, as amended (the “Code”), or,alternatively, as stock options which will not so qualify (“Nonstatutory StockOptions”), currently all options outstanding under these Plans are NonstatutoryStock Options.  Options granted under theStockholder Approved Plans become exercisable (vest) in accordance with theterms of the grant made by the Board of Directors, each as set forth in awritten stock option agreement, but generally vest in twenty-five percentincrements annually over four years. In the event of a “change in control” ofthe Company (defined as a dissolution, a merger or consolidation with any othercorporation in which the Company is not the surviving corporation, a sale ofsubstantially all assets to another person or entity, the acquisition by aperson or group of 30% or more of the Company’s Common Stock, or a specifiedchange in the composition of the Board of Directors), the date ofexercisability of each option outstanding under the Stockholder Approved Planswill be accelerated to a date and time immediately prior to suchtransaction.  During 2005, the Board ofDirectors acted to accelerate the vesting of all of the then outstanding stockoptions under the 1991, 1995 and 1999 Plans, all of which contained exerciseprices greater than the market trading price at that time.

 

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(2)  *Equity Compensation Plans Not Approved byStockholders*. The following existing equity compensation plans ofthe Company were not individually approved by the stockholders: CalneticsAcquisition Stock Option Plan, Falcon Acquisition Stock Option Plan, PlastronAcquisition Stock Option Plan, and Plastic Specialties, Inc. AcquisitionStock Option Plan (collectively, the “Acquisition Plans”).  Each of the Acquisition Plans was adopted bythe Company in connection with an acquisition of a third party entity.  Most of the options under the AcquisitionPlans were granted to employees of the acquired company to motivate futureperformance for the Company.  Becauseeach Acquisition Plan was adopted to address a specific acquisition, all optiongrants under each Plan were made on or soon after the acquisition date at thethen current market price, and no additional grants under these Plans will bemade. The terms of each Acquisition Plan and the individual option agreementsgranted thereunder are similar.  Undereach Acquisition Plan, options to acquire shares of the Company’s Common Stockwere granted principally to employees, for individual terms of up to ten yearsfrom date of grant.  All optionsoutstanding under these Plans are Nonstatutory Stock Options.  Options granted under the Acquisition Plansbecome exercisable (vest) in accordance with the terms of the grant made by theBoard of Directors, each as set forth in a written stock option agreement, butgenerally vest in twenty-five percent increments annually over four years,although some vest over a period of nine years. In the event of a “change in control” of the Company (defined as adissolution, a merger or consolidation with any other corporation in which theCompany is not the surviving corporation, a sale of substantially all assets toanother person or entity, the acquisition by a person or group of 30% or moreof the Company’s Common Stock, or a specified change in the composition of theBoard of Directors), the date of exercisability of each option outstandingunder the Acquisition Plans will be accelerated to a date and time immediatelyprior to such transaction.  During 2005,the Board of Directors acted to accelerate the vesting of all of the thenoutstanding stock options under the Acquisition Plans, all of which containedexercise prices greater than the market trading price at that time.

 

Additional information required by this item is incorporated byreference from Summa’s definitive Proxy Statement to be filed with thecommission not later than 120 days after the end of the fiscal year covered bythis Annual Report on Form 10-K.

 

**ITEM 13.****       CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.**

 

Incorporated by reference from Summa’s definitive Proxy Statement to befiled with the Commission not later than 120 days after the end of the fiscalyear covered by this Annual Report on Form 10-K.

 

**ITEM 14.****       PRINCIPALACCOUNTANT FEES AND SERVICES.**

 

Incorporated by reference from Summa’s definitive Proxy Statement to befiled with the Commission not later than 120 days after the end of the fiscalyear covered by this Annual Report on Form 10-K.

 

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**PART IV**

 

**ITEM 15.****                      EXHIBITS ANDFINANCIAL STATEMENT SCHEDULES.**

 

(a)          Financial Statements,Financial Statement Schedules and Exhibits:

 

The following documents are either filedherewith or incorporated herein by reference:

 

1.  *Financial Statements. *Theaudited consolidated financial statements of Summa Industries and itssubsidiaries as of August 31, 2004 and 2005 and for each of the threeyears in the period ended August 31, 2005 (including the notes theretowhich contain unaudited quarterly financial data for each of the two yearsended August 31, 2005), and the Reports of Independent Registered PublicAccounting Firm thereon, are included herein as set forth in the “Index toConsolidated Financial Statements” set forth on page F-1.

 

2.  *Financial Statement Schedules.  *Thefollowing financial statement schedules:

 

Schedule II - Valuation and qualifyingaccounts.

 

3.  *Exhibits. *The following exhibits to thisAnnual Report on Form 10-K are either filed herewith or incorporatedherein by reference as indicated:

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                              |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.1         |       | Agreement and Plan of  Reorganization dated March 19, 1993 by and between the Company and KVP  Systems, Inc. relating to the acquisition by the Company of KVP (1)                                                                                                                                                                                                                                            |
| 2.2         |       | Agreement and Plan of  Merger dated November 22, 1996 by and among the Company, LexaLite  International Corporation and Charlevoix The Beautiful, Inc. relating to  the acquisition by the Company of LexaLite (2)                                                                                                                                                                                            |
| 2.3         |       | Agreement and Plan of  Acquisition dated July 2, 1997 by and between the Company and Calnetics  Corporation relating to the acquisition by the Company of Calnetics and its  subsidiaries (3)                                                                                                                                                                                                                      |
| 2.4         |       | Stock  Purchase Agreement and Amendment No. 1 thereto dated April 8, 1998  and April 24, 1998, respectively, by and among Mr. William G.  Faulkner, KVP Systems, Inc. and the Company relating to the acquisition  by the Company of Falcon Belting, Inc. (4)                                                                                                                             |
| 2.5         |       | Stock  Purchase Agreement dated June 12, 1998 by and between P&L Growth  Industries, Inc., a California corporation, and the Company relating to  the divestiture by the Company of GST Industries, Inc. (4)                                                                                                                                                                                         |
| 2.6         |       | 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. (5)                                                                                                                                                                                                 |
| 2.7         |       | Asset Purchase Agreement dated November 3,  2000 among the Company, Ram Belts & Chains, Inc., a newly-formed  Delaware corporation and wholly-owned subsidiary of the Company (“Buyer”),  Rainbow Industrial Products Corp. (“Rainbow”), and Howard and Lee Beth Miller  relating to the purchase of assets of the Ram Belts & Chains  division of Rainbow by Buyer (6) |
| 2.8         |       | Asset Purchase Agreement dated January 4,  2002 by and among the Company, Pavaco Plastics Inc., Genesta Inc. and 1238579  Ontario Inc relating to the purchase of assets of Genesta Manufacturing  division of Pavaco (7)                                                                                                                                                                                          |
| 2.9         |       | Asset Purchase Agreement dated January 15,  2004 between Central Valley Manufacturing, Inc., a newly-formed  California corporation and wholly-owned subsidiary of the Company, and R.M.  Wade & Co., an Oregon corporation, relating to the purchase of  certain assets of the micro irrigation division of R.M. Wade (8)                                                                           |
| 2.10        |       | Asset Purchase & Sale Agreement  dated September 29, 2005 between Plastron Industries, Inc. and  Plastron Manufacturing Co., LLC, regarding the divestiture of certain assets  of the Electrical Components segment (9)                                                                                                                                                                              |
| 3.1         |       | Certificate of Incorporation of the Company  (10)                                                                                                                                                                                                                                                                                                                                                                       |
| 3.2         |       | Bylaws  of the Company (10)                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1        |       | Credit  Agreement dated February 20, 2004 between the Company and Wells Fargo  Bank (8)                                                                                                                                                                                                                                                                                                                            |
| 10.2        |       | 1991  Stock Option Plan of the Company (11)                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3        |       | 1995  Stock Option Plan of the Company (12)                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4        |       | 1999  Stock Option Plan of the Company (13)                                                                                                                                                                                                                                                                                                                                                                             |
| 10.5        |       | 2005  Amended & Restated Equity Incentive Plan (14)                                                                                                                                                                                                                                                                                                                                                            |

 

21

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| 10.6  |   | Standard  Non-Qualified Stock Option Agreement (14)                                                                                                                                                                      |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.7  |   | Summary  Sheet for Named Executive Officers and Directors Compensation (14) (18)                                                                                                                                         |
| 10.8  |   | Form of  Amended and Restated Employment Agreement dated June 1, 2001 between the  Company and each of Messrs. Swartwout, Thoresen and Walbrun (15)                                                       |
| 10.9  |   | Series A Preferred Stock &  Common Stock Repurchase Agreement, including form of Subordinated Promissory  Note, dated May 3, 2004 by and among the Company and the Investors set  forth therein (16). |
| 10.10 |   | Amended and Restated Purchase and Sale  Agreement and Joint Escrow Instructions dated June 27, 2005 between  Fullerton Holdings, Inc. and Olson Urban Housing, LLC regarding sale of  real property (17)       |
| 21.1  |   | Subsidiaries of the Registrant(*)                                                                                                                                                                                        |
| 23.1  |   | Consent of PricewaterhouseCoopers LLP(*)                                                                                                                                                                                 |
| 31.1  |   | Section 302 Certification(*)                                                                                                                                                                                        |
| 32.1  |   | Section 906 Certification(*)                                                                                                                                                                                        |

 

----

(1)  Incorporated by reference from theexhibits to the Company’s Registration Statement on Form S-4 filed withthe Commission on May 24, 1993.

(2)  Incorporated by reference fromthe appendices to the Company’s definitive Proxy Statement on Schedule 14Afor the Annual Meeting of Shareholders held November 21, 1996.

(3)  Incorporated by reference from theappendices to the Calnetics’ definitive Proxy Statement on Schedule 14Afor the Special Meeting of Shareholders held October 28, 1997.

(4)  Incorporated by reference fromexhibits to the Company’s Quarterly Report on Form 10-Q for the fiscalquarter ended May 31, 1998.

(5)  Incorporated by reference fromexhibits to the Company’s Current Report on Form 8-K dated October 5,2000.

(6)  Incorporated by reference fromexhibits to the Company’s Current Report on Form 8-K dated December 1,2000.

(7)  Incorporated by reference from exhibitsto the Company’s Quarterly Report on Form 10-Q for the fiscal quarterended November 30, 2001.

(8)  Incorporated by reference fromexhibits to the Company’s Quarterly Report on Form 10-Q for the fiscalquarter ended February 29, 2004.

(9)  Incorporated by reference fromexhibits to the Company’s Current Report on Form 8-K dated September 29,2005.

(10)  Incorporated by reference from theappendices to the Company’s definitive Proxy Statement on Schedule 14A forthe Annual Meeting of Shareholders held January 26, 1998.

(11) Incorporated by reference from exhibits to the Company’s RegistrationStatement on Form S-8 filed with the Commission on April 15, 1993.

(12) Incorporated by reference from exhibitsto the Company’s Registration Statement on Form S-8 filed with theCommission on January 30, 1997.

(13) Incorporated by reference from exhibitsto the Company’s Registration Statement on Form S-8 filed with theCommission on December 15, 1998.

(14) Incorporated by reference from exhibits to the Company’s QuarterlyReport on Form 10-Q for the fiscal quarter ended February 28, 2005.

 (15)  Incorporated by reference from exhibits tothe Company’s Annual Report on Form 10-K for the fiscal year ended August 31,2001.

(16) Incorporated by reference from exhibits to the Company’s Current Reporton Form 8-K dated May 3, 2004.

(17) Incorporated by reference from exhibits to the Company’s Current Reporton Form 8-K dated June 27, 2005.

(18) Incorporated by reference from exhibits to the Company’s Current Report onForm 8-K dated November 1, 2005.

 

* Filed herewith.

 

22

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**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of Independent Registered Public  Accounting Firm                                                      |   |
|---------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheets as of  August 31, 2004 and 2005                                              |   |
| Consolidated Statements of Operations for  the years ended August 31, 2003, 2004 and 2005                |   |
| Consolidated Statements of Stockholders’  Equity for the years ended August 31, 2003, 2004 and 2005 |   |
| Consolidated Statements of Cash Flows for  the years ended August 31, 2003, 2004 and 2005                |   |
| Notes to Consolidated Financial Statements                                                                    |   |
| Report of Independent Registered Public Accounting  Firm                                                      |   |
| Schedule II - Valuation and Qualifying Accounts                                                          |   |

 

All other schedules are omitted since the required information is notpresent or is not present in amounts sufficient to require submission of theschedule, or because the information required is included in the consolidatedfinancial statements and notes thereto.

 

F-1

----

 

Report of Independent Registered Public Accounting Firm

 

TO:                            TheBoard of Directors and Stockholders of Summa Industries:

 

In our opinion, the accompanying consolidated balance sheets and therelated consolidated statements of operations, stockholders’ equity and cashflows present fairly, in all material respects, the financial position of SummaIndustries and its subsidiaries at August 31, 2004 and 2005 and theresults of their operations and their cash flows for each of the three years inthe period ended August 31, 2005 in conformity with accounting principlesgenerally accepted in the United States of America.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.  Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States).  These standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 1 and Note 2 to the financial statements,effective September 1, 2002, the Company adopted Statement of FinancialAccounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets.”

 

 
| /s/ PricewaterhouseCoopers LLP |   |
|--------------------------------|--------|
|                           |
| Los Angeles, California        |
| October 19, 2005          |

 

F-2

----

 

Summa Industries

CONSOLIDATEDBALANCE SHEETS

as of August 31

 
| ** **                                                                                                                                                     | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **ASSETS**                                                                                                                                                     |       |       |       |       |       |
| Current  assets:                                                                                                                                               |       |       |       |       |       |
| Cash and cash equivalents                                                                                                                                      |       | $          | 1,248,000  |       | $          | 1,233,000 |   |
| Accounts receivable, net of allowances of  $685,000 in 2004 and $409,000 in 2005                                                                               |       | 18,227,000 |       | 16,919,000 |       |
| Inventories                                                                                                                                                    |       | 14,749,000 |       | 12,665,000 |       |
| Prepaid expenses and other                                                                                                                                     |       | 1,429,000  |       | 1,877,000  |       |
| Deferred tax assets                                                                                                                                            |       | 2,353,000  |       | 1,594,000  |       |
| Assets held for sale                                                                                                                                           |       | —     |       | 3,641,000  |       |
| Total current assets                                                                                                                                           |       | 38,006,000 |       | 37,929,000 |       |
| Property,  plant and equipment, net                                                                                                                            |       | 31,053,000 |       | 29,213,000 |       |
| Other assets                                                                                                                                                   |       | 67,000     |       | 44,000     |       |
| Deferred tax  assets                                                                                                                                           |       | 1,737,000  |       | 1,410,000  |       |
| Goodwill,  net                                                                                                                                                 |       | 8,009,000  |       | 8,009,000  |       |
| Other  intangibles, net                                                                                                                                        |       | 1,245,000  |       | 972,000    |       |
| Assets held  for sale                                                                                                                                          |       | —     |       | 2,458,000  |       |
| Total assets                                                                                                                                                   |       | $          | 80,117,000 |       | $          | 80,035,000 |   |
|                                                                                                                                                           |       |       |       |       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                 |       |       |       |       |       |
| Current  liabilities:                                                                                                                                          |       |       |       |       |       |
| Current maturities of long-term debt                                                                                                                           |       | $          | 2,195,000  |       | $          | 3,069,000 |   |
| Accounts payable                                                                                                                                               |       | 9,088,000  |       | 8,731,000  |       |
| Accrued salaries, wages and benefits                                                                                                                           |       | 3,180,000  |       | 2,503,000  |       |
| Other accrued liabilities                                                                                                                                      |       | 4,249,000  |       | 3,271,000  |       |
| Liabilities held for sale                                                                                                                                      |       | —     |       | 1,280,000  |       |
| Total current liabilities                                                                                                                                      |       | 18,712,000 |       | 18,854,000 |       |
| Long-term  debt, net of current maturities                                                                                                                     |       | 28,663,000 |       | 27,520,000 |       |
| Other  long-term liabilities                                                                                                                                   |       | 2,508,000  |       | 2,441,000  |       |
| Total long-term liabilities                                                                                                                                    |       | 31,171,000 |       | 29,961,000 |       |
| Minority  interest in subsidiary                                                                                                                               |       | 205,000    |       | 132,000    |       |
| 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: 3,974,187 at August 31, 2004  and 3,940,041 at August 31, 2005 |       | 15,305,000 |       | 15,046,000 |       |
| Retained earnings                                                                                                                                              |       | 14,724,000 |       | 16,042,000 |       |
| Total stockholders’ equity                                                                                                                                |       | 30,029,000 |       | 31,088,000 |       |
| Total liabilities and stockholders’ equity                                                                                                                |       | $          | 80,117,000 |       | $          | 80,035,000 |   |

 

See accompanying notes to consolidated financial statements.

 

F-3

----

** **

**SummaIndustries**

 

CONSOLIDATED STATEMENTS OF OPERATIONS

for the years ended August 31

 
| ** **                                                                                                                         | ** ** | **2003**    | ** **  | **2004**   | ** ** | **2005**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|-------------|------------|
| Net sales                                                                                                                          |       | $           | 99,211,000  |       | $          | 104,453,000 |       | $ | 108,983,000 |   |
| Cost of sales                                                                                                                      |       | 72,955,000  |        | 77,841,000 |       | 84,052,000  |       |
| Gross profit                                                                                                                       |       | 26,256,000  |        | 26,612,000 |       | 24,931,000  |       |
| Selling, general, and administrative and  other expenses                                                                           |       | 19,823,000  |        | 19,660,000 |       | 18,919,000  |       |
| Operating income                                                                                                                   |       | 6,433,000   |        | 6,952,000  |       | 6,012,000   |       |
| Interest expense, net                                                                                                              |       | 1,400,000   |        | 1,477,000  |       | 1,548,000   |       |
| Income from continuing operations before  income taxes, minority interest and cumulative effect of change in accounting  principle |       | 5,033,000   |        | 5,475,000  |       | 4,464,000   |       |
| Provision for income taxes                                                                                                         |       | 1,664,000   |        | 1,980,000  |       | 1,577,000   |       |
| Income from continuing operations before  minority interest and cumulative effect of change in accounting principle                |       | 3,369,000   |        | 3,495,000  |       | 2,887,000   |       |
| Minority interest in net loss of subsidiary                                                                                        |       | —      |        | —     |       | 73,000      |       |
| Income from continuing operations before  cumulative effect of change in accounting principle                                      |       | 3,369,000   |        | 3,495,000  |       | 2,960,000   |       |
| Income (loss) from discontinued operations,  net of tax expense (benefit) of $96,000, $(81,000) and $(716,000),  respectively      |       | 189,000     |        | (124,000   | )          | (1,402,000  | )          |
| Income before cumulative effect of change  in accounting principle                                                                 |       | 3,558,000   |        | 3,371,000  |       | 1,558,000   |       |
| Cumulative effect of change in accounting  principle, net of tax                                                                   |       | (22,343,000 | )           | —     |       | —      |       |
| Net income (loss)                                                                                                                  |       | $           | (18,785,000 | )          | $          | 3,371,000   |       | $ | 1,558,000 |   |
| Preferred stock accretion                                                                                                          |       | $           | 737,000     |       | $          | 450,000     |       | $ | — |   |
| Net income (loss) available to common  stockholders:                                                                               |       |        |        |       |       |        |       |
| Before cumulative effect of change in  accounting principle                                                                        |       | $           | 2,821,000   |       | $          | 2,921,000   |       | $ | 1,558,000 |   |
| After cumulative effect of change in  accounting principle                                                                         |       | $           | (19,522,000 | )          | $          | 2,921,000   |       | $ | 1,558,000 |   |
| Earnings (loss) per common share                                                                                                   |       |        |        |       |       |        |       |
| Basic                                                                                                                              |       |        |        |       |       |        |       |
| Income from continuing operations before  accounting change                                                                        |       | $           | 0.60        |       | $          | 0.72        |       | $ | .74 |   |
| Income (loss) from discontinued operations                                                                                         |       | 0.04        |        | (0.03      | )          | (0.35       | )          |
| Cumulative effect of change in accounting  principle                                                                               |       | (5.12       | )           | —     |       | —      |       |
| Net income                                                                                                                         |       | $           | (4.48       | )          | $          | 0.69        |       | $ | 0.39 |   |
| Diluted                                                                                                                            |       |        |        |       |       |        |       |
| Income from continuing operations before  accounting change                                                                        |       | $           | 0.59        |       | $          | 0.71        |       | $ | .73 |   |
| Income (loss) from discontinued operations                                                                                         |       | 0.04        |        | (0.03      | )          | (0.34       | )          |
| Cumulative effect of change in accounting  principle                                                                               |       | (5.02       | )           | —     |       | —      |       |
| Net income                                                                                                                         |       | $           | (4.39       | )          | $          | 0.68        |       | $ | 0.39 |   |
| Weighted average common shares outstanding:                                                                                        |       |        |        |       |       |        |       |
| Basic                                                                                                                              |       | 4,359,000   |        | 4,215,000  |       | 3,979,000   |       |
| Diluted                                                                                                                            |       | 4,449,000   |        | 4,297,000  |       | 4,041,000   |       |

 

Seeaccompanying notes to consolidated financial statements.

 

F-4

----

 

**SummaIndustries**

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

for the years ended August 31,2005

 
| ** **                                                    | ** ** | **Common  Shares** | ** ** | **Common  Stock** | ** ** | **Retained  Earnings** | ** ** | **Total**   | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|-------------|------------|
| Balance at August 31, 2002                               |       | 4,401,769          |       | $                 | 18,894,000 |                   | $          | 31,325,000  |       | $ | 50,219,000 |   |
| Cash out of odd lots and fractional shares                    |       | (39                | )          | —            |       | —                 |       | —      |       |
| Contribution to 401(k) plan                                   |       | 45,348             |       | 428,000           |       |                   |       | 428,000     |       |
| Exercise of stock options, including tax  benefit of $38,000  |       | 37,925             |       | 293,000           |       | —                 |       | 293,000     |       |
| Repurchase of common stock                                    |       | (238,900           | )          | (2,038,000        | )          | —                 |       | (2,038,000  | )          |
| Net (loss)                                                    |       | —             |       | —            |       | (18,785,000            | )          | (18,785,000 | )          |
| Preferred stock accretion                                     |       | —             |       | —            |       | (737,000               | )          | (737,000    | )          |
| Balance at August 31, 2003                               |       | 4,246,103          |       | 17,577,000        |       | 11,803,000             |       | 29,380,000  |       |
| Contribution to 401(k) plan                                   |       | 45,536             |       | 345,000           |       | —                 |       | 345,000     |       |
| Exercise of stock options, including tax  benefit of $252,000 |       | 139,273            |       | 856,000           |       | —                 |       | 856,000     |       |
| Repurchase of common stock                                    |       | (456,725           | )          | (3,668,000        | )          | —                 |       | (3,668,000  | )          |
| Net income                                                    |       | —             |       | —            |       | 3,371,000              |       | 3,371,000   |       |
| Preferred stock accretion                                     |       | —             |       | —            |       | (450,000               | )          | (450,000    | )          |
| Benefit related to issuance of minority  interest             |       | —             |       | 195,000           |       | —                 |       | 195,000     |       |
| Balance at August 31, 2004                               |       | 3,974,187          |       | 15,305,000        |       | 14,724,000             |       | 30,029,000  |       |
| Cash out of fractional shares                                 |       | (5                 | )          | —            |       | —                 |       | —      |       |
| Contribution to 401(k) plan                                   |       | 28,340             |       | 261,000           |       | —                 |       | 261,000     |       |
| Repurchase of common stock                                    |       | (62,481            | )          | (520,000          | )          | —                 |       | (520,000    | )          |
| Payment of dividends                                          |       | —             |       | —            |       | (240,000               | )          | (240,000    | )          |
| Net income                                                    |       | —             |       | —            |       | 1,558,000              |       | 1,558,000   |       |
| Balance at August 31, 2005                               |       | 3,940,041          |       | $                 | 15,046,000 |                   | $          | 16,042,000  |       | $ | 31,088,000 |   |

 

See accompanying notes to consolidated financial statements.

 

F-5

----

 

**SummaIndustries**

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

for the years ended August 31

 
| ** **                                                                                | ** ** | **2003**   | ** **  | **2004**    | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|-------------|-------------|------------|------------|------------|
|                                                                                      |       |       |        |        |       |       |       |
| Operating activities:                                                                     |       |       |        |        |       |       |       |
| Net income (loss)                                                                         |       | $          | (18,785,000 | )           | $          | 3,371,000  |       | $ | 1,558,000 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |       |        |        |       |       |       |
| Depreciation                                                                              |       | 4,730,000  |        | 4,720,000   |       | 5,170,000  |       |
| Amortization                                                                              |       | 240,000    |        | 248,000     |       | 273,000    |       |
| Cumulative effect of change in accounting  principle, net of tax                          |       | 22,343,000 |        | —      |       | —     |       |
| Write-down of goodwill, net of tax                                                        |       | 16,000     |        | —      |       | —     |       |
| Deferred tax provision                                                                    |       | 939,000    |        | 348,000     |       | 52,000     |       |
| (Gain) loss on disposition of property,  plant and equipment                              |       | (5,000     | )           | 93,000      |       | (6,000     | )          |
| Minority interest in loss of subsidiary                                                   |       | —     |        | —      |       | (73,000    | )          |
| Net changes in assets and liabilities, net  of effects of acquisitions                    |       | 770,000    |        | 931,000     |       | (178,000   | )          |
| Total adjustments                                                                         |       | 29,033,000 |        | 6,340,000   |       | 5,238,000  |       |
| Net cash provided by operating activities                                                 |       | 10,248,000 |        | 9,711,000   |       | 6,796,000  |       |
| Investing activities:                                                                     |       |       |        |        |       |       |       |
| Acquisitions of businesses, net of cash  acquired                                         |       | —     |        | (1,903,000  | )          | —     |       |
| Purchases of property and equipment                                                       |       | (4,055,000 | )           | (8,334,000  | )          | (7,053,000 | )          |
| Net proceeds from the sale of property  plant and equipment                               |       | 38,000     |        | 16,000      |       | 1,271,000  |       |
| Net cash (used in) investing activities                                                   |       | (4,017,000 | )           | (10,221,000 | )          | (5,782,000 | )          |
| Financing activities:                                                                     |       |       |        |        |       |       |       |
| Net proceeds from (payments on) revolving  line of credit                                 |       | (753,000   | )           | 7,586,000   |       | (160,000   | )          |
| Proceeds from issuance of long-term debt                                                  |       | —     |        | 5,561,000   |       | 6,231,000  |       |
| Payments on long-term debt                                                                |       | (4,043,000 | )           | (12,590,000 | )          | (6,340,000 | )          |
| Proceeds from the exercise of stock options                                               |       | 293,000    |        | 856,000     |       | —     |       |
| Purchase of common stock                                                                  |       | (2,038,000 | )           | (35,000     | )          | (520,000   | )          |
| Payment of cash dividends                                                                 |       | —     |        | —      |       | (240,000   | )          |
| Net cash provided by (used in) financing  activities                                      |       | (6,541,000 | )           | 1,378,000   |       | (1,029,000 | )          |
| Net increase (decrease) in cash and cash  equivalents                                     |       | (310,000   | )           | 868,000     |       | (15,000    | )          |
| Cash and cash equivalents, beginning of  year                                             |       | 690,000    |        | 380,000     |       | 1,248,000  |       |
| Cash and cash equivalents, end of year                                                    |       | $          | 380,000     |        | $          | 1,248,000  |       | $ | 1,233,000 |   |

 

See accompanying notes to consolidated financial statements*.*

 

F-6

----

 

Summa Industries

 

*Notes to Consolidated Financial Statements*

 

**1.****                                      Descriptionof 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 industrialand commercial markets, primarily located in the United States.

 

**Basis of presentation and principles of consolidation**

 

The accompanying consolidated financial statements include the accountsof Summa and its wholly-owned subsidiaries and are prepared in accordance withgenerally accepted accounting principles in the United States of America. Theresults of operations of acquired companies have been included in theconsolidated statements of operations and cash flows of the Company since thedates of acquisitions.  See Note 18.  All intercompany account balances andtransactions have been eliminated in consolidation.

 

In August 2005, the Company’s board of directors approved a planto divest the bobbin manufacturing business of Plastron Industries, Inc.,the Company’s Electrical Components segment. The Company completed the sale of certain assets of Plastron Industries, Inc.in September 2005.  As a result ofthe divestiture, the former Electrical Components segment is presented in theconsolidated statement of operations as a discontinued operation for allperiods presented.  The Company’sremaining reportable segments are Optical Components, Material HandlingComponents and Irrigation Components.

 

**Use of estimates in the preparation offinancial statements**

 

The preparation of financial statements in conformity with UnitedStates generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates.

 

**Revenue recognition**

 

Revenue from product sales is recognized when all of the followingconditions have been met: an authorized purchase order has been received, thesales price is fixed and determinable, collectibility is reasonably assured,shipment of the product has occurred, and title has transferred.  The Company records shipping costs billed tocustomers in a sales transaction as revenue. Costs incurred for shipping and handling are charged to cost of sales.

 

**Concentrationof credit risk**

 

Concentrations of credit risk with respect totrade receivables are limited due to a large, diverse customer base. TheCompany performs periodic credit evaluations of the financial condition of itscustomers, monitors collections and payments from customers, and generally doesnot require collateral. Receivables are generally due within 30 days. TheCompany provides for the possible inability to collect accounts receivable by recordingan allowance for doubtful accounts and writes off an account when it isconsidered to be uncollectible. The Company estimates its allowance fordoubtful accounts based on historical experience, aging of accounts receivable,and information regarding the creditworthiness of its customers. To date,losses have been within the range of management’s expectations.

 

F-7

----

 

**Inventories**

 

Inventories are valued at the lower of cost(determined on a first-in, first-out basis) or market.  On an ongoing basis, inventories are reviewedand written down for estimated obsolescence or lack of marketability equal tothe difference between the cost of inventories and the estimated net realizablevalue. Charges to increase inventory reserves are recorded as an increase incost of goods sold. Estimated inventory obsolescence has been provided for inthe financial statements and has been within the range of management’sexpectations.

 

**Property, plant and equipment**

 

Property, plant and equipment are recorded at cost.  Depreciation is charged against earnings,principally using the straight-line method, over the estimated useful lives ofthe related assets as follows:

 
| Building and improvements      |   | 10-40 years                                                 |
|--------------------------------|--------|-------------------------------------------------------------|
| Machinery and equipment        |   | 3-10 years                                                  |
| Office furniture and equipment |   | 3-7 years                                                   |
| Leasehold improvements         |   | Lesser of remaining term of lease or  estimated useful life |

 

Maintenance, repairs and minor renewals are charged directly to expenseas incurred.  Additions and improvementsto property, plant and equipment are capitalized.  When assets are disposed of, the relatedcosts and accumulated depreciation thereon are removed from the accounts, andany gain or loss is included in results of operations.

 

**Goodwill**

 

Effective September 1, 2002, the Companyadopted Statement of Financial Accounting Standard (SFAS) No. 142, “Goodwilland Other Intangible Assets”, which requires, among other things, the use of anonamortization approach for purchased goodwill and certain intangibles. Undera nonamortization approach, goodwill and intangibles having an indefinite lifeare not amortized, but instead will be reviewed for impairment at leastannually or if an event occurs or circumstances indicate that the carryingamount may be impaired. Events or circumstances which could indicate animpairment include a significant change in the business climate, economic andindustry trends, legal factors, negative operating performance indicators,significant competition, changes in strategy or disposition of a reporting unitor a portion thereof. Goodwill impairment testing is performed at the reportingunit level.

 

SFAS 142 requires that goodwill betested for impairment using a two-step process. The first step of the goodwillimpairment test, used to identify potential impairment, compares the fair valueof a reporting unit with its carrying amount, including goodwill. If the fairvalue of a reporting unit exceeds its carrying amount, goodwill of thereporting unit is not considered to be impaired and the second step of theimpairment test is unnecessary. If the carrying amount of a reporting unitexceeds its fair value, the second step of the goodwill impairment test must beperformed to measure the amount of impairment loss, if any. The second step ofthe goodwill impairment test compares the implied fair value of reporting unitgoodwill with the carrying amount of that goodwill. The implied fair value ofgoodwill is determined in the same manner as the amount of goodwill recognizedin a business combination. If the carrying amount of the reporting unitgoodwill exceeds the implied fair value of that goodwill, an impairment loss isrecognized in an amount equal to that excess.

 

Application of the goodwill impairment testrequires judgment, including the identification of reporting units, assignmentof assets and liabilities to reporting units, assignment of goodwill toreporting units, and determination of the fair value of each reporting unit.The fair value of each reporting unit is estimated using several analyticaltechniques, including a discounted cash flow methodology. This requiressignificant judgments including estimation of future cash flows, which isdependent on internal forecasts, estimation of the long-term rate of growth ofthe Company’s business, determination of the useful life over which cash flowswill occur, and determination of the Company’s weighted average cost ofcapital. Changes in these estimates and assumptions could materially affect thedetermination of fair value and/or goodwill impairment for each reporting unit.

 

The Company has selected August 31 asthe date on which it will perform its annual goodwill impairment test. Based onthe Company’s valuation of goodwill, an impairment charge of $16,000, net ofthe effect of tax, was recognized in fiscal 2003. No impairment charges relatedto the write-down of goodwill were recognized for fiscal 2004 or fiscal 2005.

 

F-8

----

 

**Other intangible assets**

 

Other intangible assets include intangibles such as non-competeagreements, non-contractual customer relationships, trade names, patents andcustomer lists recognized in connection with business acquisitions.  Other intangibles are being amortized overtheir estimated useful lives of 3-17 years. See Note 8.

 

**Impairmentof long-lived assets**

 

The Company periodically assesses potential impairments of itslong-lived assets in accordance with the provisions of Statement of FinancialAccounting Standards No. 144, “Accounting for the Impairment or Disposalof Long-lived Assets”. An impairment review is performed whenever events orchanges in circumstances indicate that the carrying value of the assets may notbe recoverable. Factors considered by the Company include, but are not limitedto, significant underperformance relative to expected historical or projectedfuture operating results; significant changes in the manner of use of theacquired assets or the strategy for the overall business; and significantnegative industry or economic trends. When the carrying value of a long-livedasset may not be recoverable based upon the existence of one or more of theabove indicators of impairment, the Company estimates the future undiscountedcash flows expected to result from the use of the asset and its eventual disposition.If the sum of the expected future undiscounted cash flows and eventualdisposition is less than the carrying amount of the asset, the Companyrecognizes an impairment loss. An impairment loss is reflected as the amount bywhich the carrying amount of the asset exceeds the fair value of the asset,based on the fair market value if available, or discounted cash flows, if not.

 

**Warranties**

 

The Company warrants that certain of its products are free fromdefects.  The Company recognizes theestimated cost of warranty expense at the time of revenue recognition.  Warranty reserves are reviewed periodicallyand adjusted based on actual and anticipated experience.

 

**Guaranties**

 

The Company warrants with respect to certain of its products that theywill be delivered free of the rightful claim of any person by way of trademark,patent or other property rights in such products, and indemnifies customers whopurchase those products from liability arising out of any such claims.  The Company cannot reasonably develop anestimate of the maximum potential amount of payments that might be made undersuch guarantees because it cannot determine the probability of such a claimbeing asserted nor estimate the cost of such a claim.

 

**Earnings per common share**

 

Basic earnings per common share (“EPS”) is based on income available tocommon stockholders divided by the weighted average number of common sharesoutstanding during the year.  Diluted EPSis similar to the computation for basic EPS except that the denominator isincreased to include the number of additional common shares that would havebeen outstanding if the dilutive potential common shares had been issued.  Common stock equivalents are not included inthe calculation of diluted loss per share when their effect is antidilutive.  See Note 3 for details of the computation.

 

**Cash equivalents**

 

The Company considers all highly liquid debt instruments with anoriginal maturity of three months or less to be cash equivalents.  The Company maintains its cash deposits atnumerous banks located throughout the United States, which at times, may exceedfederally insured limits. The Company has not experienced any losses in suchaccounts and believes it is not exposed to any significant risk on cash andcash equivalents.

 

**Foreign currency**

 

The U.S. dollar is the functional currency of the Company’sinternational operation.  Bank accountswith balances in foreign currency are remeasured into U.S. dollars atend-of-period exchange rates.  Revenueand expenses are remeasured at average exchange rates in effect during eachperiod.  Gains or losses from foreigncurrency remeasurement are included in net earnings.

 

**Research and development**

 

Summa invests in the development of new products and manufacturingprocesses.  Only direct costs associatedwith new tooling for products are capitalized. All other costs, including salaries and wages of employees involved inresearch and development, are expensed as incurred.  Research and development expenses included inselling, general, administrative and other expenses in the ConsolidatedStatements of Operations were $1,173,000 in fiscal 2003, $1,041,000 in fiscal2004 and $1,222,000 in fiscal 2005.

 

F-9

----

 

**Income taxes**

 

The Company accounts for income taxes in accordance with SFAS No. 109“Accounting for Income Taxes”.  Thisstatement requires that income taxes be accounted for using the asset andliability method.  Under the asset andliability method, deferred tax assets and liabilities are recognized for theestimated future tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax bases.  This methodalso requires the recognition of future tax benefits such as net operating losscarryforwards, to the extent that realization of such benefits is more likelythan not.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled.  The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.

 

**Stock-based compensation**

 

The Company reports stock based compensation to employees and directorsin accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock issued to Employees” and Financial Interpretation No. 44, “Accountingfor Certain Transactions Regarding Stock Compensation.”  The Company has adopted the appropriatedisclosure requirements of SFAS No. 123, “Accounting for Stock-BasedCompensation.”

 

Had stock option compensation cost been recognized in accordance withSFAS Statement No. 123, the Company’s net income and earnings per sharewould have reflected the following pro forma amounts at August 31:

 

| ** **                                                                                                 | ** ** | **2003** | ** ** | **2004** | ** ** | **2005**  | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
|                                                                                                       |       |     |       |     |       |      |       |
| Net income available to common stockholders  before cumulative effect of a change in accounting principle: |       |     |       |     |       |      |       |
| As reported                                                                                                |       | $        | 2,821,000  |     | $          | 2,921,000 |       | $ | 1,558,000 |   |
| Stock based employee cost, net of tax                                                                      |       | 100,000  |       | 130,000  |       | 386,000   |       |
| Pro forma                                                                                                  |       | $        | 2,721,000  |     | $          | 2,791,000 |       | $ | 1,172,000 |   |
| Diluted earnings per common share:                                                                         |       |     |       |     |       |      |       |
| As reported                                                                                                |       | $        | .63        |     | $          | .68       |       | $ | .39 |   |
| Stock based employee cost, net of tax                                                                      |       | .02      |       | .03      |       | .10       |       |
| Pro forma                                                                                                  |       | $        | .61        |     | $          | .65       |       | $ | .29 |   |

 

During 2005, the Company accelerated the vesting of most of the thenoutstanding stock options which contained exercise prices greater than themarket trading price at that time.   Thestock based employee cost, net of tax of $386,000 for fiscal 2005, includes$380,000, net of tax, related to the accelerated vesting.

 

**Dividend policy**

 

Following the 2004fiscal year end, the Company declared an annual dividend of $.06 per share ofcommon stock, its first cash dividend since 1983.  The Board of Directors recently adopted apolicy of quarterly cash dividends, with the first such quarterly dividend of$0.06 per share of common stock paid in October 2005.  Any future cash dividends or otherdistributions will be determined solely by the Board of Directors and will bebased on the Company’s future financial ability to declare and pay suchdividends.  Additionally, certain lending agreements restrict the Companyfrom declaring or paying dividends beyond set limits.  In any fiscal year,the Company may declare or pay any dividend or distribution and may redeem,retire, repurchase or otherwise acquire shares of Common Stock in a maximumaggregate of the lesser of $2,000,000 or the consolidated net profit aftertaxes of Summa for such fiscal year.  Transactions that would exceed theselimits would require prior bank authorization and the appropriate waivers.

 

F-10

----

 

**Recent accounting pronouncements**

 

In December 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 123R (“SFAS No. 123R”), “Share-BasedPayments,” which requires companies to recognize in the income statement thegrant-date fair value of stock options and equity-based compensation issued toemployees. The Company reports equity based compensation in accordance withAccounting Principles Board Opinion No. 25 and Financial Interpretation No. 44,and accordingly, no compensation expense is recognized in the financialstatements. The pro forma effect of equity-based compensation under SFAS No. 123,“Accounting for Stock-Based Compensation,” is disclosed in Note 4 below. The Company will adopt this statement, effective with its fiscal year beginningSeptember 1, 2006.  The Company is currently evaluating the impact ofadopting this standard.

 

In November 2004,the FASB issued Statement of Financial Accounting Standards No. 151 (“SFASNo. 151”), “Inventory Costs-an amendment of ARB 43, Chapter 4.”  Thisstatement amends the guidance in ARB No. 43, Chapter 4, “InventoryPricing,” to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs and wasted material.  This statementrequires that those items be recognized as current period charges.  Inaddition, this statement requires that allocation of fixed production overheadto the costs of conversion be based on the normal capacity of the productionfacilities.  The Company will adopt this statement, effective with itsfiscal year beginning September 1, 2005.  The Company is currentlyevaluating the effect of the adoption of this statement on the Company’sresults of operations and financial position.

 

In October 2005,the FASB issued Staff Position FAS 13-1, “Accounting for Rental Costs Incurredduring a Construction Period,” which requires rental costs associated withground or building operating leases that are incurred during a constructionperiod to be recognized as rental expense.  This Staff Position iseffective for reporting periods beginning after December 15, 2005, andretrospective application is permitted but not required.  The adoption ofthis statement is not expected to have any significant effect on the Company’sresults of operations or financial position.

 

In June 2005, theFASB issued SFAS No. 154, Accounting Changes and Error Corrections, areplacement of APB No. 20 and FAS No.3 (“SFAS 154”). SFAS 154 providesguidance on the accounting for and reporting of accounting changes and errorcalculations. It establishes, unless impracticable, retrospective applicationas the required method for reporting a change in accounting principle in theabsence of explicit transition requirements specific to the newly adoptedaccounting principle. SFAS 154 also provides guidance for determining whetherretrospective application is impracticable. The correction of an error inpreviously issued financial statements is not an accounting change. However,the reporting of an error correction involves adjustments to previously issuedfinancial statements similar to those generally applicable to reporting anaccounting change retrospectively. Therefore, the reporting of a correction ofan error by restating previously issued financial statements is also addressedby SFAS 154. SFAS 154 is required to be adopted in fiscal years beginning afterDecember 15, 2005. The Company does not believe its adoption will have amaterial impact on its consolidated results of operations or financialposition.

 

**2.****                                      Cumulativeeffect of a change in accounting principle**

 

The Company adopted Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets” (“SFAS 142”), effective September 1,2002.  As a result, the Companydiscontinued the amortization of goodwill arising from business combinationsconsummated prior to June 30, 2001 that have been accounted for using thepurchase method of accounting.  Netgoodwill was $35,190,000 at August 31, 2002 and goodwill amortization forthe year ended August 31, 2002 was $1,096,000.

 

SFAS 142 also requires the Company to assess the recoverability ofrecorded goodwill at the adoption date. Impairments of goodwill that are identified as a result of theassessment, if any, are to be reported as a cumulative change in accountingprinciple as of the adoption date.  SFAS142 requires that assessment to be completed within six months of the date ofadoption and to be reported retroactively to the beginning of the year adopted.

 

The Company performed a transitional fair value based impairment teston its goodwill as of September 1, 2002. As a result, an impairment charge of $22,343,000 was recorded as of September 1,2002.  The charge is presented as thecumulative effect of a change in accounting principle in the accompanyingconsolidated statements of operations. The charge is net of an income tax benefit of $4,812,000.  An additional impairment charge of $26,000was recorded in the fourth quarter of fiscal 2003 as a result of the Company’sannual test for impairment.

 

F-11

----

 

The carrying amount of goodwill and the impairment charge with respectto the Company’s reportable segments and former reportable segment is asfollows:

 
| ** **                   | ** ** | **Balance at**           | ** ** | **Impairment**        | ** ** | **Balance at**           | ** ** | **Balance at**           | ** ** | **Balance at**           | ** ** |
|------------------------------|------------|--------------------------|------------|-----------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                   | ** ** | **August 31, 2002** | ** ** | **Charges (Pre-tax)** | ** ** | **August 31, 2003** | ** ** | **August 31, 2004** | ** ** | **August 31, 2005** | ** ** |
| Segment                      |       |                     |       |                  |       |                     |       |                     |       |                     |       |
|                         |       |                     |       |                  |       |                     |       |                     |       |                     |       |
| Optical components           |       | $                        | 8,867,000  |                  | $          | 5,953,000                |       | $                        | 2,914,000  |                     | $          | 2,914,000 |   | $ | 2,914,000 |   |
| Material handling components |       | 5,095,000                |       | —                |       | 5,095,000                |       | 5,095,000                |       | 5,095,000                |       |
| Irrigation components        |       | 8,539,000                |       | 8,539,000             |       | —                   |       | —                   |       | —                   |       |
| Electrical components        |       | 12,689,000               |       | 12,689,000            |       | —                   |       | —                   |       | —                   |       |
|                         |       |                     |       |                  |       |                     |       |                     |       |                     |       |
| Consolidated                 |       | $                        | 35,190,000 |                  | $          | 27,181,000               |       | $                        | 8,009,000  |                     | $          | 8,009,000 |   | $ | 8,009,000 |   |

 

**3.****                                      Earningsper share**

 

Basic earnings per share(“EPS”) was computed by dividing net income available to common stockholders bythe weighted average number of common shares outstanding during each period.The Company had 5,000 shares of redeemable convertible preferred stockoutstanding until its repurchase on May 3, 2004, which provided for anaccretion in its redemption price.  Thisaccretion reduced the net income available to common stockholders used in theEPS calculation prior to that date.

 

Diluted EPS reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock.  Diluted EPS was calculated using the “treasurystock” method as if dilutive options had been exercised and the funds were usedto purchase common shares at the average market price during the period.  Options to purchase 736,597 common shares asof August 31, 2003, 171,296 common shares as of August 31, 2004 and830,943 common shares as of August 31, 2005 were excluded from thecalculation of equivalent shares, as they would have been anti-dilutive.  The 5,000 shares of previously outstandingpreferred stock, convertible into 625,000 shares of common stock, were excludedfrom the calculation of equivalent shares, as they would have beenanti-dilutive.

 

The following is areconciliation of the numerators and denominators of the basic and diluted EPScomputations for “income available to common stockholders” and otherdisclosures required by Statement of Accounting Standards No. 128, “Earningsper Share”, for the years ended August 31:

 
| ** **                                                     | ** ** | **2003**  | ** **  | **2004**  | ** ** | **2005**  | ** ** |
|----------------------------------------------------------------|------------|-----------|-------------|-----------|------------|-----------|------------|
| Numerators:                                                    |       |      |        |      |       |      |       |
|                                                           |       |      |        |      |       |      |       |
| Before  cumulative effect of a change in accounting principle: |       |      |        |      |       |      |       |
|                                                           |       |      |        |      |       |      |       |
| Net income                                                     |       | $         | 3,558,000   |      | $          | 3,371,000 |       | $ | 1,558,000 |   |
| Preferred  stock accretion                                     |       | (737,000  | )           | (450,000  | )          | —    |       |
| Income  available to common stockholders                       |       | $         | 2,821,000   |      | $          | 2,921,000 |       | $ | 1,558,000 |   |
|                                                           |       |      |        |      |       |      |       |
| After  cumulative effect of a change in accounting principle:  |       |      |        |      |       |      |       |
|                                                           |       |      |        |      |       |      |       |
| Net income  (loss)                                             |       | $         | (18,785,000 | )         | $          | 3,371,000 |       | $ | 1,558,000 |   |
| Preferred  stock accretion                                     |       | (737,000  | )           | (450,000  | )          | —    |       |
| Income  available to common stockholders                       |       | $         | (19,522,000 | )         | $          | 2,921,000 |       | $ | 1,558,000 |   |
|                                                           |       |      |        |      |       |      |       |
| Denominators:                                                  |       |      |        |      |       |      |       |
|                                                           |       |      |        |      |       |      |       |
| Weighted  average shares outstanding – basic              |       | 4,359,000 |        | 4,215,000 |       | 3,979,000 |       |
| Impact of common shares to be issued under  stock option plans |       | 90,000    |        | 82,000    |       | 62,000    |       |
| Weighted  average shares outstanding – diluted            |       | 4,449,000 |        | 4,297,000 |       | 4,041,000 |       |

 

F-12

----

 

**4.****                                      Supplementalcash flow information**

 

Cash flows from net changes in assets and liabilities, net of effectsof acquisitions for the years ended August 31:

 
| ** **                                                                                 | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                                       |       |       |       |       |       |       |       |
| Accounts  receivable, net                                                                  |       | $          | 1,865,000  |       | $          | (2,498,000 | )          | $ | (370,000 | ) |
| Inventories                                                                                |       | 668,000    |       | (2,239,000 | )          | 183,000    |       |
| Prepaid  expenses and other assets                                                         |       | 320,000    |       | (459,000   | )          | (487,000   | )          |
| Accounts  payable                                                                          |       | (1,108,000 | )          | 3,786,000  |       | 923,000    |       |
| Accrued liabilities                                                                        |       | (975,000   | )          | 2,341,000  |       | (427,000   | )          |
| Cash flows from net changes in assets and  liabilities, net of the effects of acquisitions |       | $          | 770,000    |       | $          | 931,000    |       | $ | (178,000 | ) |

 

Cash paid during the yearsended August 31:

 
| ** **   | ** ** | **2003** | ** ** | **2004** | ** ** | **2005**  | ** ** |
|--------------|------------|----------|------------|----------|------------|-----------|------------|
|         |       |     |       |     |       |      |       |
| Interest     |       | $        | 1,250,000  |     | $          | 1,555,000 |       | $ | 1,742,000 |   |
| Income taxes |       | $        | 1,888,000  |     | $          | 834,000   |       | $ | 1,671,000 |   |

 

Non-cash investing and financing activities in the years ended August 31:

 
| ** **                                                                            | ** ** | **2003** | ** ** | **2004**  | ** ** | **2005**  | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|-----------|------------|-----------|------------|
| Common stock  issued to 401K Plan                                                     |       | $        | 428,000    |      | $          | 345,000   |       | $ | 261,000 |   |
| Accretion of  redeemable preferred stock                                              |       | $        | 737,000    |      | $          | 450,000   |       | — |   |
| Issuance of  subordinated debt for repurchase of:                                     |       |     |       |      |       |      |       |
| Preferred stock                                                                       |       | —   |       | $         | 6,553,000  |      | —     |   |
| Common stock                                                                          |       | —   |       | $         | 3,633,000  |      | —     |   |
| Minority interest in subsidiary given as  partial consideration for land and building |       | —   |       | $         | 205,000    |      | —     |   |
|                                                                                  |       |     |       |      |       |      |       |
| Details of  acquisitions (Note 18):                                                   |       |     |       |      |       |      |       |
| Fair value of assets acquired                                                         |       | $        | —     |      | $          | 2,025,000 |       | $ | — |   |
| Liabilities assumed or incurred                                                       |       | —   |       | (122,000  | )          | —    |       |
| Cash paid                                                                             |       | —   |       | 1,903,000 |       | —    |       |
| Less cash  acquired                                                                   |       | —   |       | —    |       | —    |       |
| Net cash  used in acquisitions                                                        |       | $        | —     |      | $          | 1,903,000 |       | $ | — |   |

 

**5.****                                      Disclosuresabout fair value of financial instruments**

 

The following methods and assumptions were used to estimate the fairvalue of each class of financial instrument for which it is practicable toestimate:

 

Cash and cash equivalents, accountsreceivable and accounts payable**-** the carryingamount is a reasonable estimate of fair value due to quick turnover.

 

Long-term debt – At August 31, 2004, theestimated fair value of debt was equal to the carrying value of $30,858,000based on market rates.  At August 31,2005, the estimated fair value of debt was equal to the carrying value of$30,589,000 based on market rates.

 

F-13

----

 

**6.****                                      Inventories**

 

Inventories consisted of the following at August 31:

 

| ** **           | ** ** | **2004**  | ** ** | **2005**  | ** ** |
|----------------------|------------|-----------|------------|-----------|------------|
|                 |       |      |       |      |       |   |   |
| Finished  goods      |       | $         | 6,407,000  |      | $          | 6,097,000 |   |
| Work in  process     |       | 296,000   |       | 199,000   |       |
| Materials  and parts |       | 8,046,000 |       | 6,369,000 |       |
|                 |       |      |       |      |       |   |   |
|                 |       | $         | 14,749,000 |      | $          | 12,665,000 |   |

 

**7.****                                      Property,plant and equipment**

 

Property, plant and equipment consisted of the following at August 31:

 

| ** **                                      | ** ** | **2004**    | ** ** | **2005**    | ** ** |
|-------------------------------------------------|------------|-------------|------------|-------------|------------|
|                                            |       |        |       |        |       |   |   |
| Land, at  cost                                  |       | $           | 2,716,000  |        | $          | 1,287,000 |   |
| Buildings  and leasehold improvements, at cost. |       | 17,382,000  |       | 16,472,000  |       |
| Machinery  and equipment, at cost               |       | 40,124,000  |       | 40,708,000  |       |
| Office  furniture and equipment, at cost        |       | 3,620,000   |       | 4,162,000   |       |
|                                            |       | 63,842,000  |       | 62,629,000  |       |
| Accumulated  depreciation                       |       | (32,789,000 | )          | (33,416,000 | )          |
| Net property,  plant and equipment              |       | $           | 31,053,000 |        | $          | 29,213,000 |   |

 

**8.****                                      Goodwilland other intangibles**

 

Goodwill and other intangibles consisted of the following at August 31:

 
| ** **                      | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|
|                            |       |       |       |       |       |   |   |
| Goodwill                        |       | $          | 8,902,000  |       | $          | 8,902,000 |   |
| Less:  accumulated amortization |       | (893,000   | )          | (893,000   | )          |
|                            |       |       |       |       |       |   |   |
| Goodwill,  net                  |       | $          | 8,009,000  |       | $          | 8,009,000 |   |
|                            |       |       |       |       |       |
| Other  intangibles              |       | $          | 2,404,000  |       | $          | 2,404,000 |   |
| Less:  accumulated amortization |       | (1,159,000 | )          | (1,432,000 | )          |
|                            |       |       |       |       |       |   |   |
| Other  intangibles, net         |       | $          | 1,245,000  |       | $          | 972,000 |   |

 

Otherintangibles consisted of the following at August 31:

 
| ** **                        | ** ** | **2004**   | ** ** | **2005**         | ** ** |
|-----------------------------------|------------|------------|------------|------------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Net** | ** ** | **Cost** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Non-compete  agreement            |       | $          | 695,000    |             | $          | (268,000 | ) | $ | 427,000 |   | $ | 695,000 |   | $ | (395,000 | ) | $ | 300,000 |   |
| Royalty  agreement                |       | 599,000    |       | (136,000         | )          | 463,000 |   | 599,000 |   | (171,000 | ) | 428,000 |   |
| Patents,  trademarks, trade names |       | 674,000    |       | (411,000         | )          | 263,000 |   | 674,000 |   | (477,000 | ) | 197,000 |   |
| Other                             |       | 436,000    |       | (344,000         | )          | 92,000 |   | 436,000 |   | (389,000 | ) | 47,000 |   |
| Total                             |       | $          | 2,404,000  |             | $          | (1,159,000 | ) | $ | 1,245,000 |   | $ | 2,404,000 |   | $ | (1,432,000 | ) | $ | 972,000 |   |

 

F-14

----

 

Amortization of other intangibles was $240,000 in fiscal 2003, $248,000in fiscal 2004 and $273,000 in fiscal 2005.  Future amortization of other intangibles at August 31, 2005 is asfollows:

 

| **Fiscal Year**     | ** ** | **Amount** | ** ** |
|---------------------|------------|------------|------------|
|                |       |       |       |
| 2006                |       | $          | 178,000    |   |
| 2007                |       | $          | 129,000    |   |
| 2008                |       | $          | 128,000    |   |
| 2009                |       | $          | 107,000    |   |
| 2010                |       | $          | 112,000    |   |
| 2011and  thereafter |       | $          | 318,000    |   |

 

**9.****                                      Incometaxes**

 

The provision for income taxes consisted of the following for the yearsended August 31:

 
| ** **                  | ** ** | **2003** | ** ** | **2004**  | ** ** | **2005**  | ** ** |
|-----------------------------|------------|----------|------------|-----------|------------|-----------|------------|
|                        |       |     |       |      |       |      |       |
| Current:                    |       |     |       |      |       |      |       |
| Federal                     |       | $        | 717,000    |      | $          | 1,138,000 |       | $ | 1,449,000 |   |
| State                       |       | (108,000 | )          | 305,000   |       | 262,000   |       |
| Foreign                     |       | 116,000  |       | 189,000   |       | (186,000  | )          |
|                        |       | 725,000  |       | 1,632,000 |       | 1,525,000 |       |
| Deferred:                   |       |     |       |      |       |      |       |
| Federal                     |       | 842,000  |       | 304,000   |       | 47,000    |       |
| State                       |       | 97,000   |       | 44,000    |       | 5,000     |       |
|                        |       | 939,000  |       | 348,000   |       | 52,000    |       |
| Provision  for income taxes |       | $        | 1,664,000  |      | $          | 1,980,000 |       | $ | 1,577,000 |   |

 

Foreign earnings (loss) included in income from continuing operationswas $206,000 in fiscal 2003, $340,000 in fiscal 2004 and $(348,000) in fiscal2005.

 

The following table provides a reconciliation between the provision fortaxes based on income included in the accompanying consolidated statements ofoperations and the provision for taxes computed by applying the statutoryincome tax rate to income before taxes for the years ended August 31:

 
| ** **                                       | ** ** | **2003** | ** ** | **2004** | ** ** | **2005**  | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
|                                             |       |     |       |     |       |      |       |   |   |   |
| Provision  for federal taxes at statutory rates. |       | $        | 1,711,000  |     | $          | 1,861,000 |       | $ | 1,543,000 |   |
| State tax,  net of federal benefit               |       | 85,000   |       | 228,000  |       | 170,000   |       |
| Extraterritorial  income exclusion benefit       |       | (129,000 | )          | (182,000 | )          | (178,000  | )          |
| Other, net                                       |       | (3,000   | )          | 73,000   |       | 42,000    |       |
|                                             |       |     |       |     |       |      |       |   |   |   |
| Provision  for income taxes                      |       | $        | 1,664,000  |     | $          | 1,980,000 |       | $ | 1,577,000 |   |

 

The components of the Company’s net deferred tax assets (liabilities)at August 31 were as follows:

 
| ** **                             | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|
| State taxes                            |       | $          | 89,000     |       | $          | 87,000 |   |
| Accrued  expenses                      |       | 1,224,000  |       | 510,000    |       |
| Reserves                               |       | 1,040,000  |       | 997,000    |       |
| Total  current deferred tax assets     |       | 2,353,000  |       | 1,594,000  |       |
| Other  long-term deferred tax assets   |       | (11,000    | )          | 259,000    |       |
| Long-term  reserves                    |       | 725,000    |       | 663,000    |       |
| Depreciation                           |       | (1,918,000 | )          | (2,261,000 | )          |
| Amortization                           |       | 2,941,000  |       | 2,749,000  |       |
| Total  non-current deferred tax assets |       | 1,737,000  |       | 1,410,000  |       |
|                                   |       |       |       |       |       |   |   |
| Net deferred  tax assets               |       | $          | 4,090,000  |       | $          | 3,004,000 |   |

 

F-15

----

 

**10.****                               Revolvingline of credit and long-term debt**

 

Long-term debt consisted of the following at August 31:

 
| ** **                | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|---------------------------|------------|------------|------------|------------|------------|
| Revolving  line of credit |       | $          | 12,343,000 |       | $          | 12,183,000 |   |
| Bank term  loan           |       | 4,537,000  |       | 3,546,000  |       |
| Real estate  and other    |       | 10,983,000 |       | 14,174,000 |       |
| Subordinated  debt        |       | 2,995,000  |       | 686,000    |       |
|                      |       |       |       |       |       |
| Total                     |       | 30,858,000 |       | 30,589,000 |       |
| Less:  current maturities |       | 2,195,000  |       | 3,069,000  |       |
| Long-term  portion        |       | $          | 28,663,000 |       | $          | 27,520,000 |   |

 

Future maturities of long-term debt at August 31, 2005 were asfollows:

 
| **Fiscal Year**      | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|
| 2006                 |       | $          | 3,069,000  |   |
| 2007                 |       | 19,155,000 |       |
| 2008                 |       | 2,353,000  |       |
| 2009                 |       | 1,406,000  |       |
| 2010                 |       | 485,000    |       |
| 2011 and  thereafter |       | 4,121,000  |       |
| Total                |       | $          | 30,589,000 |   |

 

The Company has a revolving line of credit from its principal bank,which expires in February 2007, with availability of up to $25,000,000,depending on levels of accounts receivable and inventory.  At August 31, 2005, the total capacityunder the revolving line of credit was $19,885,000.  Advances on the revolving line of credit were$12,343,000 at August 31, 2004 and $12,183,000 at August 31, 2005,all classified as long-term.  Dependingon certain financial ratios, interest on the line of credit is at 0.075% to1.0% below the applicable prime rate or 1.25% to 1.5% above LIBOR, at theCompany’s option, in traunches.  The averageinterest rate on the revolving line of credit was 3.1% at August 31, 2004and 5.2% at August 31, 2005.  Thereis a charge of 0.25% on the unused portion of the line of credit.  The Company has an amortizing, 4.695%, 5-yearbank term loan with a balance of $4,537,000 at August 31, 2004 and$3,546,000 at August 31, 2005.  Thebank loans are secured by substantially all of the Company’s assets, excludingreal estate and equipment related to certain other long-term debt.

 

The Company’s line of credit facility contains certain restrictivecovenants including limitations on borrowing, mergers and acquisitions, payingdividends and acquiring shares of common stock. Additionally, the Company isrequired to meet debt covenants based on certain financial ratios, including anEBITDA coverage ratio, as defined, of not less than 2.0 to 1.0 at any fiscalquarter end on or after August 31, 2005. The Company was in compliancewith all such bank covenants as of August 31, 2005.

 

The Company’s other long-term debt is primarily comprised of fixed rateand variable rate loans, secured by related real estate and equipment, withtypical terms of 5 to 10 years.  Averageinterest rates on other long-term debt were 4.2% at August 31, 2004 and5.8% at August 31, 2005.  TheCompany has a subordinated note with a balance of $2,995,000 at August 31,2004 and $686,000 at August 31, 2005. The interest rate on the subordinated debt at August 31, 2005 was6.5%.

 

**11.****                               Preferredstock and subordinated debt**

 

The Company had 5,000 shares of mandatorily redeemable preferred stock,the holders of which had the right to demand redemption beginning December 14,2004 for $7,025,000, with daily scheduled increases of the redemptionvalue.  On May 3, 2004, the Companyrepurchased and retired all of its outstanding preferred stock for $6,553,000,and 452,852 shares of its common stock at $8.02 per share, by issuance of new,unsecured, subordinated debt of $10,186,000 with an initial interest rate of12%.  Subsequently, the Company retired$9,600,000 of the subordinated debt, with advances from its bank line ofcredit.  See Note 10 above.

 

F-16

----

 

**12.****                               Commitmentsand contingencies**

 

The Company leases office and manufacturing facilities and certainequipment under non-cancelable operating leases which expire at various datesthrough August 2009.  Rental expensecharged to operations was approximately $1,663,000 in 2003, $1,739,000 in 2004and $1,511,000 in 2005.

 

The aggregate minimum future lease payments under these leases at August 31,2005 are approximately as follows:

 

| **Fiscal Year**      | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|
| 2006                 |       | $          | 1,157,000  |   |
| 2007                 |       | 857,000    |       |
| 2008                 |       | 738,000    |       |
| 2009                 |       | 517,000    |       |
| 2010                 |       | 10,000     |       |
| 2011 and  thereafter |       | —     |       |
|                      |            |            |            |  |

 

The Company has adopted a Savings and Retirement Plan.  The plan, which qualifies under Section 401(k)of the Internal Revenue Code, allows employees to defer specified percentagesof their compensation in a tax-deferred trust. The Company may elect to make matching contributions and discretionarycontributions, which can be made in cash or the Company’s common stock.  The cost of the Company matching contributionis partially offset by a reduction in payroll taxes.  Company contributions to the plan totaled$887,000 in 2003, $846,000 in 2004 and $781,000 in 2005.

 

The Company is subject to legal proceedings and claims arising in theordinary course of business.  Althoughoccasional adverse decisions may occur, the Company believes that the finaldisposition of existing matters will not have a material adverse effect on itsfinancial condition or results of operation.

 

**13.****                               Minorityinterest**

 

In connection with a plant acquisition in January 2004, theCompany sold approximately 5% of the stock of a subsidiary to the former ownerof the plant.  The excess of the purchase price over the stock’s net bookvalue has been recorded as a gain directly in the statement of stockholders’equity due to the uncertainty of its realization. Under the terms of the stocksale agreement, the purchaser has the right to acquire additional shares or,commencing in January 2007, put the shares back to the Company at a pricebased upon a prescribed formula. Commencing in January 2008, the Company has the right to repurchasethe minority interest shares based on a prescribed formula.

 

**14.****                               Productwarranties**

 

The following table summarizes information about the Company’s accrualfor product warranty liability for the years endedAugust 31:

 
| ** **                             | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Beginning of  period                   |       | $        | 550,000    |     | $          | 472,000  |       | $ | 471,000 |   |
| Deductions                             |       | (337,000 | )          | (419,000 | )          | (255,000 | )          |
| Additions                              |       | 259,000  |       | 393,000  |       | 186,000  |       |
| Other –  acquired in acquisitions |       | —   |       | 25,000   |       | —   |       |
| End of  period                         |       | $        | 472,000    |     | $          | 471,000  |       | $ | 402,000 |   |

 

**15.****                               Relatedparty transactions**

 

The Company is obligated to pay consulting fees to one of itsdirectors, pursuant to pre-existing agreements with a subsidiary acquired infiscal 1997.  Total fees were $30,000 ineach of 2003, 2004 and 2005.  Theagreements continue until 2011.

 

F-17

----

 

**16.****                               Stock-basedcompensation plans**

 

The Company has four stock option plans (the “Plans”) which have beenapproved by the Stockholders and are administered by its Board ofDirectors.  Under the Plans, options toacquire shares of common stock may be granted to key employees, directors,consultants, vendors and others in the following amounts:

 
| ** ** | ** ** | ** **                  | ** ** | **Shares Remaining and**    | ** ** |
|------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** ** | ** ** | ** **                  | ** ** | **Available for Grant**     | ** ** |
| **Plan**   | ** ** | **Total Shares Authorized** | ** ** | **at August 31, 2005** | ** ** |
| 1991 Plan  |       | 150,000                     |       | —                      |       |
| 1995 Plan  |       | 350,000                     |       | 11,527                      |       |
| 1999 Plan  |       | 750,000                     |       | 91,240                      |       |
| 2005 Plan  |       | 500,000                     |       | 400,000                     |       |

 

In addition, options have been issued in conjunction with acquisitions,the fair value of which was included in the acquisition purchase prices.

 

The Company accounts for stock options issued to employees anddirectors under APB Opinion No. 25 and Financial Interpretation No. 44.  Under APB 25, if the exercise price of thestock option equals the market price of the underlying stock on the issuancedate, no compensation expense is recognized. Consequently, no compensation expense was recognized under these plansfor fiscal years 2003, 2004 and 2005. The Company is required by SFAS No. 123 “Accounting for Stock-BasedCompensation” to provide pro forma disclosures under an alternate fair valuemethod of accounting.

 

For pro forma disclosure purposes, the fair value of each option grantis estimated on the date of grant using the Black-Scholes pricing model withthe following assumptions used for grants in fiscal years 2003, 2004 and 2005:

 
| ** **                                | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted  average risk-free interest rate |       | 2.6      | %          | 3.5      | %          | 4.2      | %          |
| Volatility                                |       | 35       | %          | 34       | %          | 45       | %          |
| Expected  dividend yields                 |       | —   |       | —   |       | 0.6      | %          |
| Weighted  average expected life in years  |       | 4.9      |       | 5.0      |       | 4.7      |       |

 

Under these Plans, the options are generally issued with exerciseprices equal to the market price of the Company’s stock on the grant date.  Options vest cumulatively over variousperiods, at the discretion of the Board of Directors, up to five years from thegrant date, are exercisable in whole or in installments, and expire up to tenyears from the date of grant.  All optiongrants during the three year period ended August 31, 2005 were pursuant toStockholder approved plans.  Options thatare forfeited are again available for grant under the Plans.  All options fully vest immediately prior to achange in control of the Company, as defined in the stock option plans.

 

F-18

----

 

A summary of the status of the Company’s stock options at August 31,2003, 2004 and 2005 and changes during the years then ended, is presented inthe following table:

 
| ** **                                      | ** ** | **2003**   | ** ** | **2004**     | ** ** | **2005**   | ** ** |
|-------------------------------------------------|------------|------------|------------|--------------|------------|------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                      | ** ** | ** ** | ** ** | **Average**  | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                      | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                                      | ** ** | **Shares** | ** ** | **Price**    | ** ** | **Shares** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
| Outstanding  at beginning of year               |       | 1,082,153  |       | $            | 8.58       |       | 1,034,435  |   | $ | 8.48 |   | 952,158 |   | $ | 8.88 |   |
| Granted                                         |       | 84,000     |       | $            | 9.45       |       | 105,000    |   | $ | 7.57 |   | 236,500 |   | $ | 9.51 |   |
| Exercised                                       |       | (37,925    | )          | $            | 6.71       |       | (136,835   | ) | $ | 4.33 |   | — |   | — |   |
| Forfeited/expired                               |       | (93,793    | )          | $            | 11.31      |       | (50,442    | ) | $ | 10.25 |   | (116,100 | ) | $ | 10.07 |   |
| Outstanding  at end of year                     |       | 1,034,435  |       | $            | 8.48       |       | 952,158    |   | $ | 8.88 |   | 1,072,558 |   | $ | 8.89 |   |
|                                            |       |       |       |         |       |       |       |   |   |   |   |   |   |
| Exercisable  at end of year                     |       | 761,608    |       | $            | 8.10       |       | 667,177    |   | $ | 8.99 |   | 972,558 |   | $ | 8.87 |   |
| Weighted average fair value of options  granted |       |       |       | $            | 3.22       |       |       |   | $ | 2.72 |   |   |   | $ | 3.90 |   |

 

The following table summarizes information about stock optionsoutstanding at August 31, 2005:

 

| ** **      | ** ** | ** **       | ** ** | **Outstanding** | ** ** | **Exercisable** | ** ** |
|-----------------|------------|------------------|------------|-----------------|------------|-----------------|------------|
| ** **      | ** ** | **Weighted**     | ** ** | ** **      | ** ** | **Weighted**    | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| **Exercise**    | ** ** | **Average**      | ** ** | **Number of**   | ** ** | **Average**     | ** ** | **Number of** | ** ** | **Average** | ** ** |
| **Price**       | ** ** | **Remaining**    | ** ** | **Options**     | ** ** | **Exercise**    | ** ** | **Options** | ** ** | **Exercise** | ** ** |
| **Range**       | ** ** | **Term (Years)** | ** ** | **Outstanding** | ** ** | **Price**       | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| $4.55 - $5.75   |       | 1.6              |       | 161,615         |       | $               | 5.20       |   | 161,615 |   | $ | 5.20 |   |
| $7.50 - $9.53   |       | 5.1              |       | 523,000         |       | $               | 8.74       |   | 423,000 |   | $ | 8.66 |   |
| $9.55 - $11.28  |       | 5.1              |       | 304,897         |       | $               | 10.10      |   | 304,897 |   | $ | 10.10 |   |
| $12.16 - $13.72 |       | 3.7              |       | 83,046          |       | $               | 12.54      |   | 83,046 |   | $ | 12.54 |   |
|            |       |             |       | 1,072,558       |       | $               | 8.89       |   | 972,558 |   | $ | 8.87 |   |

 

F-19

----

 

**17.****                               Unauditedquarterly information**

 
| ** **                                  | ** ** | **Quarters ended**                           | ** ** |
|---------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Fiscal** | ** ** |
| ** **                                  | ** ** | **November**                                 | ** ** | **February** | ** ** | **May** | ** ** | **August** | ** ** | **Year** | ** ** |
| ** **                                  | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Fiscal 2004:                                |       |                                         |       |   |   |   |   |   |   |   |   |
| Net sales                                   |       | $                                            | 23,065     |   | $ | 23,686 |   | $ | 29,819 |   | $ | 27,883 |   | $ | 104,453 |   |
| Gross profit                                |       | 5,946                                        |       | 5,994 |   | 7,726 |   | 6,946 |   | 26,612 |   |
| Income from continuing operations           |       | 752                                          |       | 474 |   | 1,424 |   | 845 |   | 3,495 |   |
| Income (loss) from discontinued operations  |       | 78                                           |       | (21 | ) | (34 | ) | (147 | ) | (124 | ) |
| Net income                                  |       | 830                                          |       | 453 |   | 1,390 |   | 698 |   | 3,371 |   |
| Preferred stock accretion                   |       | 184                                          |       | 185 |   | 81 |   | — |   | 450 |   |
| Net income available to common stockholders |       | $                                            | 646        |   | $ | 268 |   | $ | 1,309 |   | $ | 698 |   | $ | 2,921 |   |
| Earnings per common share:                  |       |                                         |       |   |   |   |   |   |   |   |   |
| Basic                                       |       |                                         |       |   |   |   |   |   |   |   |   |
| Income from continuing operations           |       | $                                            | .13        |   | $ | .06 |   | $ | .32 |   | $ | .21 |   | $ | .72 |   |
| Income (loss) from discontinued operations  |       | .02                                          |       | — |   | (.01 | ) | (.03 | ) | (.03 | ) |
| Net income                                  |       | $                                            | .15        |   | $ | .06 |   | $ | .31 |   | $ | .18 |   | $ | .69 |   |
|                                        |       |                                         |       |   |   |   |   |   |   |   |   |
| Diluted                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Income from continuing operations           |       | $                                            | .13        |   | $ | .06 |   | $ | .31 |   | $ | .21 |   | $ | .71 |   |
| Income (loss) from discontinued operations  |       | .02                                          |       | — |   | (.01 | ) | (.04 | ) | (.03 | ) |
| Net income                                  |       | $                                            | .15        |   | $ | .06 |   | $ | .30 |   | $ | .17 |   | $ | .68 |   |
|                                        |       |                                         |       |   |   |   |   |   |   |   |   |
| Fiscal 2005:                                |       |                                         |       |   |   |   |   |   |   |   |   |
| Net sales                                   |       | $                                            | 25,488     |   | $ | 26,686 |   | $ | 28,808 |   | $ | 28,001 |   | $ | 108,983 |   |
| Gross profit                                |       | 6,444                                        |       | 5,940 |   | 6,630 |   | 5,917 |   | 24,931 |   |
| Income from continuing operations           |       | 902                                          |       | 650 |   | 883 |   | 525 |   | 2,960 |   |
| (Loss) from discontinued operations         |       | (292                                         | )          | (374 | ) | (375 | ) | (361 | ) | (1,402 | ) |
| Net income                                  |       | $                                            | 610        |   | $ | 276 |   | $ | 508 |   | $ | 164 |   | $ | 1,558 |   |
|                                        |       |                                         |       |   |   |   |   |   |   |   |   |
| Earnings per common share:                  |       |                                         |       |   |   |   |   |   |   |   |   |
| Basic                                       |       |                                         |       |   |   |   |   |   |   |   |   |
| Income from continuing operations           |       | $                                            | .22        |   | $ | .16 |   | $ | .23 |   | $ | .13 |   | $ | .74 |   |
| (Loss) from discontinued operations         |       | (.07                                         | )          | (.09 | ) | (.10 | ) | (.09 | ) | (.35 | ) |
| Net income                                  |       | $                                            | .15        |   | $ | .07 |   | $ | .13 |   | $ | .04 |   | $ | .39 |   |
|                                        |       |                                         |       |   |   |   |   |   |   |   |   |
| Diluted                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Net income from continuing operations       |       | $                                            | .22        |   | $ | .16 |   | $ | .22 |   | $ | .13 |   | $ | .73 |   |
| (Loss) from discontinued operations         |       | (.07                                         | )          | (.09 | ) | (.09 | ) | (.09 | ) | (.34 | ) |
| Net income                                  |       | $                                            | .15        |   | $ | .07 |   | $ | .13 |   | $ | .04 |   | $ | .39 |   |

 

**18.****                               Acquisitions**

 

OnJanuary 19, 2004, Summa acquired certain assets from the Micro-irrigationdivision of R.M. Wade & Co. (“Wade”), including the product brand “Pepco”and transitional rights to the product brand “Wade Rain”.  Pepco is a brand of products for commerciallandscape irrigation and Wade Rain is a brand of products used in agriculturalirrigation.  The aggregate purchase pricepaid for the assets consisted of $1,903,000 in cash, liabilities assumed orincurred of $97,000 and acquisition costs of $25,000.  The transaction was accounted for using thepurchase method of accounting, and accordingly, the purchase price wasallocated to identifiable tangible and intangible assets acquired and liabilitiesassumed or incurred based upon their fair value at the date ofacquisition.  No goodwill was recorded inthis transaction.  Results of operationsfor the period prior to the acquisition were not material and, accordingly, proforma results of operations have not been presented.

 

F-20

----

** **

**19.****                               Discontinuedoperations**

 

In August 2005, the Company’s board of directors approved a planto divest the bobbin manufacturing business of Plastron Industries, Inc. (“Plastron”).  The Company sold certain assets to aninvestor group at their book value in September 2005 for $300,000 cash anda $2,280,000 note due in August 2006, and leased related equipment andfacilities to the investor group for five years.  Additional assets of Plastron, principallyreal estate located in Illinois, will be liquidated as soon as practical.  The Company does not expect to report amaterial gain or loss as a result of the transaction.

 

Certain assets of Plastron have been reclassified as “assets held forsale” and certain liabilities of Plastron have been reclassified as “liabilitiesheld for sale”.  The retained equipmentand facilities remain classified as assets of other ongoing operations.

 

The financial results of Plastron, which were historically reported asthe Electrical Components operating segment, have been excluded from results ofcontinuing operations for all periods presented herein and have been presentedas a discontinued operation.

 

The results of discontinued operations are summarized as follows forthe years ended August 31:

 
| ** **                                              | ** ** | **2003** | ** ** | **2004** | ** ** | **2005**   | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net sales                                               |       | $        | 11,929,000 |     | $          | 11,951,000 |       | $ | 10,531,000 |   |
| Income  (loss) from discontinued operations             |       | 285,000  |       | (205,000 | )          | (2,118,000 | )          |
| Income tax  expense (benefit)                           |       | 96,000   |       | (81,000  | )          | (716,000   | )          |
| Income  (loss) from discontinued operations, net of tax |       | $        | 189,000    |     | $          | (124,000   | )          | $ | (1,402,000 | ) |

 

The carrying amounts of the major classes of Plastron’s assets andliabilities that have been included in assets held for sale and liabilitiesheld for sale at August 31, 2005, were as follows:

 

| Current assets held for sale:       |   |      |      |
|-------------------------------------|--------|-----------|-----------|
| Accounts  receivable                |   | $         | 1,678,000 |   |
| Inventory                           |   | 1,901,000 |      |
| Other                               |   | 62,000    |      |
| Total  current assets               |   | 3,641,000 |      |
| Non-current  assets held for sale:  |   |      |      |
| Property,  plant and equipment, net |   | 1,654,000 |      |
| Total                               |   | $         | 5,295,000 |   |
|                                |   |      |      |
| Current  liabilities held for sale: |   |      |      |
| Accounts  payable                   |   | $         | 1,280,000 |   |

 

The non-current total assets held for sale of $2,458,000 at August 31,2005, includes certain real estate held for sale with a carrying value of$804,000 which does not relate to the discontinued operations.

 

**20*.******                              *Salesdistribution and segment information**

 

Sales to the Company’s largest single customer, as a percent of totalsales, represented 11.2% in 2003, 10.9% in 2004 and 10.3% in 2005.

 

Sales by geographic area, based on customer location, were as followsfor the years ended August 31:

 
| ** **         | ** ** | **2003**  | ** ** | **2004**  | ** ** | **2005**    | ** ** |
|--------------------|------------|-----------|------------|-----------|------------|-------------|------------|
| United  States     |       | $         | 82,048,000 |      | $          | 85,365,000  |       | $ | 89,944,000 |   |
| Mexico and  Canada |       | 8,323,000 |       | 9,111,000 |       | 9,386,000   |       |
| Europe             |       | 6,153,000 |       | 6,998,000 |       | 7,102,000   |       |
| Latin  America     |       | 773,000   |       | 617,000   |       | 466,000     |       |
| Asia               |       | 628,000   |       | 842,000   |       | 608,000     |       |
| Other              |       | 1,286,000 |       | 1,520,000 |       | 1,477,000   |       |
|               |       | $         | 99,211,000 |      | $          | 104,453,000 |       | $ | 108,983,000 |   |

 

F-21

----

 

Long-lived assets, comprised of property, plant and equipment, net ofaccumulated depreciation, by geographic location, were as follows at August 31:

 
| ** **     | ** ** | **2004** | ** ** | **2005** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| United  States |       | $        | 30,479,000 |     | $          | 28,352,000 |   |
| Canada         |       | 574,000  |       | 390,000  |       |
| Europe         |       | —   |       | 409,000  |       |
| Other          |       | —   |       | 62,000   |       |
| Total          |       | $        | 31,053,000 |     | $          | 29,213,000 |   |

 

The Company has three reportable segments identified by differences inproducts and distribution channels.  Theaccounting policies of the segments are the same as those described in thesummary of significant accounting polices. The Company’s operations are reported in the following businesssegments:

 

***Optical Components.***  In its Optical Components segment, Summadesigns and manufactures plastic prismatic lenses, reflectors and diffusers andother plastic products, which are used in commercial and industrial lightingfixtures and other applications.

 

***Material Handling Components.**** *In its MaterialHandling Components segment, Summa designs and manufactures engineered plasticcomponents, which form conveyer belts and chains and other plastic products foruse in food processing.

 

***Irrigation Components.***  In its Irrigation Components segment, Summadesigns and manufactures plastic injection-molded fittings, micro-sprinklers,emitters, valves, filters and accessories, extruded tubing and other plasticproducts for drip irrigation systems used in agriculture, commercial landscapeand other applications.

 

Formerly, the Company also operated in an Electrical Components segmentwhich was discontinued in September 2005 and is reported as discontinuedoperations.

 

F-22

----

 

Financial information by reportable business segment is reported in thefollowing table.  Inter-segment saleshave been reclassified to conform to current presentations.  Inter-segment sales are transferred at cost.

 
| ** **                      | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**    | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|-------------|------------|
| External  sales:                |       |       |       |       |       |        |       |
| Optical Components              |       | $          | 57,425,000 |       | $          | 55,830,000  |       | $ | 54,963,000 |   |
| Material Handling Components    |       | 25,332,000 |       | 26,207,000 |       | 26,678,000  |       |
| Irrigation Components           |       | 16,454,000 |       | 22,416,000 |       | 27,342,000  |       |
| Consolidated                    |       | $          | 99,211,000 |       | $          | 104,453,000 |       | $ | 108,983,000 |   |
| Inter-segment  sales:           |       |       |       |       |       |        |       |
| Optical Components              |       | $          | 266,000    |       | $          | 2,606,000   |       | $ | 341,000 |   |
| Material Handling Components    |       | —     |       | —     |       | —      |       |
| Irrigation Components           |       | 2,399,000  |       | 673,000    |       | —      |       |
| Other                           |       | (2,665,000 | )          | (3,279,000 | )          | (341,000    | )          |
| Consolidated                    |       | $          | —     |       | $          | —      |       | $ | — |   |
|                            |       |       |       |       |       |        |       |
| Total sales:                    |       |       |       |       |       |        |       |
| Optical Components              |       | $          | 57,691,000 |       | $          | 58,436,000  |       | $ | 55,304,000 |   |
| Material Handling Components    |       | 25,332,000 |       | 26,207,000 |       | 26,678,000  |       |
| Irrigation Components           |       | 18,853,000 |       | 23,089,000 |       | 27,342,000  |       |
| Other                           |       | (2,665,000 | )          | (3,279,000 | )          | (341,000    | )          |
| Consolidated                    |       | $          | 99,211,000 |       | $          | 104,453,000 |       | $ | 108,983,000 |   |
|                            |       |       |       |       |       |        |       |
| Operating  income:              |       |       |       |       |       |        |       |
| Optical Components              |       | $          | 7,139,000  |       | $          | 7,720,000   |       | $ | 3,902,000 |   |
| Material Handling Components    |       | 1,686,000  |       | 940,000    |       | 3,093,000   |       |
| Irrigation Components           |       | (721,000   | )          | 390,000    |       | 1,216,000   |       |
| Other                           |       | (1,671,000 | )          | (2,098,000 | )          | (2,199,000  | )          |
| Consolidated                    |       | $          | 6,433,000  |       | $          | 6,952,000   |       | $ | 6,012,000 |   |
|                            |       |       |       |       |       |        |       |
| Assets:                         |       |       |       |       |       |        |       |
| Optical Components              |       | $          | 28,228,000 |       | $          | 30,183,000  |       | $ | 28,668,000 |   |
| Material Handling Components    |       | 18,335,000 |       | 20,069,000 |       | 23,270,000  |       |
| Irrigation Components           |       | 10,497,000 |       | 13,622,000 |       | 13,046,000  |       |
| Electrical Components           |       | 6,999,000  |       | 10,453,000 |       | —      |       |
| Assets held for sale            |       | —     |       | —     |       | 6,099,000   |       |
| Other                           |       | 4,457,000  |       | 5,790,000  |       | 8,952,000   |       |
| Consolidated                    |       | $          | 68,516,000 |       | $          | 80,117,000  |       | $ | 80,035,000 |   |
|                            |       |       |       |       |       |        |       |
| Capital  expenditures:          |       |       |       |       |       |        |       |
| Optical Components              |       | $          | 1,022,000  |       | $          | 1,113,000   |       | $ | 758,000 |   |
| Material Handling Components    |       | 1,694,000  |       | 2,943,000  |       | 4,803,000   |       |
| Irrigation Components           |       | 1,169,000  |       | 648,000    |       | 582,000     |       |
| Other                           |       | 170,000    |       | 3,630,000  |       | 910,000     |       |
| Consolidated                    |       | $          | 4,055,000  |       | $          | 8,334,000   |       | $ | 7,053,000 |   |
|                            |       |       |       |       |       |        |       |
| Depreciation  and amortization: |       |       |       |       |       |        |       |
| Optical Components              |       | $          | 2,169,000  |       | $          | 2,209,000   |       | $ | 2,288,000 |   |
| Material Handling Components    |       | 1,387,000  |       | 1,216,000  |       | 1,430,000   |       |
| Irrigation Components           |       | 682,000    |       | 862,000    |       | 952,000     |       |
| Other                           |       | 732,000    |       | 681,000    |       | 773,000     |       |
| Consolidated                    |       | $          | 4,970,000  |       | $          | 4,968,000   |       | $ | 5,443,000 |   |

 

**21.****                               Subsequentevents**

 

In September 2005, the Company declared a dividend of $.06 pershare to stockholders of record on October 10, 2005.  The aggregate dividend of $236,000 was paidon October 20, 2005.  In October 2005,the Company declared a dividend of $.06 per share to stockholders of record on December 9,2005.  The aggregate dividend ofapproximately $236,000 is scheduled to be paid on or about December 20,2005.

 

F-23

----

 

Report of Independent Registered Public Accounting Firm on FinancialStatement Schedule

 

TO:                            TheBoard of Directors and Stockholders of Summa Industries:

 

Our audits of the consolidated financial statements referred to in ourreport dated October 19, 2005 appearing in the 2005 Annual Report on Form 10-Kof Summa Industries also included an audit of the financial statement schedule listedin Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly,in all material respects, the information set forth therein when read inconjunction with the related consolidated financial statements.

 
| /s/ PricewaterhouseCoopers LLP |   |
|--------------------------------|--------|

 

Los Angeles, California

October 19, 2005

 

F-24

----

 

Summa Industries

Schedule II

 

Valuation and QualifyingAccounts

 

Allowance for Doubtful Accounts

 

For the three years ended August 31

 
| ** ** | ** ** | **Balance at**   | ** ** | **Amounts**    | ** ** | ** **      | ** ** | ** ** | ** ** | ** **        | ** ** |
|------------|------------|------------------|------------|----------------|------------|-----------------|------------|------------|------------|-------------------|------------|
| ** ** | ** ** | **beginning of** | ** ** | **charged to** | ** ** | **Amounts**     | ** ** | ** ** | ** ** | **Balance at**    | ** ** |
| ** ** | ** ** | **period**       | ** ** | **expense**    | ** ** | **written off** | ** ** | **Other*** | ** ** | **end of period** | ** ** |
| 2003       |       | $                | 633,000    |           | $          | 251,000         |       | $          | (279,000   | )                 | $          | — |   | $ | 605,000 |   |
| 2004       |       | $                | 605,000    |           | $          | 402,000         |       | $          | (322,000   | )                 | $          | — |   | $ | 685,000 |   |
| 2005       |       | $                | 685,000    |           | $          | 111,000         |       | $          | (366,000   | )                 | $          | (21,000 | ) | $ | 409,000 |   |

 

----

* Reclassified to assets heldfor sale at August 31, 2005

 

F-25

----

 

**Signatures**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Act of 1934, as amended, Summa has duly caused this Annual Report onForm 10-K for the fiscal year ended August 31, 2005 to be signed onits behalf by the undersigned, thereunto duly authorized, on November 4,2005.

 
|   | 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 31,2005 has been signed below by the following persons on behalf of the registrantand in the capacities and on the dates indicated.

 
| **Signature**            | ** ** | **Title** | ** **                                  | **Date** |
|--------------------------|------------|-----------|---------------------------------------------|----------|
|                     |       |      |                                        |     |
| /s/ James R. Swartwout   |       |      | Chairman of the Board, President            |     | November 4, 2005 |
| James R. Swartwout       |       |      | & Chief Financial Officer               |     |   |
|                     |       |      | (Principal Executive and Financial Officer) |     |   |
|                     |       |      |                                        |     |   |
| /s/ Michael L. Horst     |       |      | Director                                    |     | November 4, 2005 |
| Michael L. Horst         |       |      |                                        |     |   |
|                     |       |      |                                        |     |   |
| /s/ William R. Zimmerman |       |      | Director                                    |     | November 4, 2005 |
| William R. Zimmerman     |       |      |                                        |     |   |
|                     |       |      |                                        |     |   |
| /s/ David McConaughy     |       |      | Director                                    |     | November 4, 2005 |
| David McConaughy         |       |      |                                        |     |   |
|                     |       |      |                                        |     |   |
| /s/ Josh T. Barnes       |       |      | Director                                    |     | November 4, 2005 |
| Josh T. Barnes           |       |      |                                        |     |   |
|                     |       |      |                                        |     |   |
| /s/ Jack L. Watts        |       |      | Director                                    |     | November 4, 2005 |
| Jack L. Watts            |       |      |                                        |     |   |
|                     |       |      |                                        |     |   |
| /s/ Charles A. Tourville |       |      | Director                                    |     | November 4, 2005 |
| Charles A. Tourville     |       |      |                                        |     |   |
|                     |       |      |                                        |     |   |
| /s/ Paul A. Walbrun      |       |      | Vice President & Controller        |     | November 4, 2005 |
| Paul A. Walbrun          |       |      | (Principal Accounting Officer)              |     |   |

 

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