**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, 2004**                                                        |
|                                                                            |                                                                                           |
| **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**                                                  |

 

**Summa Industries**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                                    | ** ** | **95-1240978**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. employer  identification number) |

 

**21250 Hawthorne Boulevard, Suite 500,Torrance, California 90503**

**www.summaindustries.com**

(Address of principal executive offices,including zip code)

 

Registrant’s telephone number:  **(310) 792-7024**

 

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

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

 

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

(Title of class)

 

Indicate by checkmark whether the registrant (1) has filed all reportsrequired to be 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 filing requirementsfor the past 90 days. Yes   ý  No   o

 

Indicate by checkmark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and disclosure will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  ý

 

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

 

The aggregate market value of registrant’sCommon Stock held by non-affiliates, computed by reference to the closing priceof a share of the Common Stock on The Nasdaq National Market on the lastbusiness day of registrant’s most recently completed second quarter, was$33,783,000.  The number of shares ofregistrant’s Common Stock outstanding as of October 29, 2004 was3,974,187.

 

DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant’s ProxyStatement for the Annual Meeting of Stockholders to be held on January 24,2005 to be filed with the Commission not later than 120 days after the end ofthe fiscal year covered by this Annual Report on Form 10-K are incorporated byreference in Part III hereof.

 

 

----

 

**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)of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and iscurrently traded on The Nasdaq National Market under the symbol “SUMX”. Growthhas been achieved by acquisition, development of new products and expansion ofthe Company’s sales organization. Through its four reportable segments described below, Summa designs andmanufactures injection-molded and formed plastic optical components fororiginal equipment manufacturer (“OEM”) customers in the lighting industry;molded plastic modular conveyor belt and chain for the food processingindustry; plastic fittings, valves, filters and tubing for the agriculturalirrigation industry;****molded plasticcoil forms (“bobbins”) for use in transformers, motors, relays and switches;and other molded and extruded plastic components for diverse industries.

 

The Company has a long-standing Ethics Policy.  In addition, the Company recently adopted aCode of Conduct which applies to all of the Company’s employees andnon-employee directors, other than Article III (Financial Management)thereof, which applies to the Company’s principal executive officer, principalfinancial officer, principal accounting officer or controller, personsperforming similar functions for the Company, and persons performing similarfunctions at each subsidiary of the Company. The Ethics Policy and the Code of Conduct are posted on the Company’swebsite, and the Company intends to post information regarding any amendment toor waiver of the Code of Conduct on its website within five business days ofthe date of any such amendment or waiver.

 

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 of growth through acquisitions of profitablemanufacturing companies with proprietary products or protected market niches,with the intent of expanding its operations by acquiring additional productofferings, enhancing gross profit margins, increasing combined sales so thatgeneral and administrative costs would constitute a smaller percentage of totalrevenues, enhancing overall profitability, and increasing the market value ofSumma’s Common Stock to provide liquidity and value for its stockholders.  In 1995, the Company refined the strategy tofocus on manufacturers of plastic components for industrial and commercialmarkets.  In general, Summa’s corporatestaff does not manage operations of acquired subsidiaries on an ongoing basis,but provides planning, financial and legal oversight, and financing; conductsthe acquisition program and business development activities; and manages theinvestor relations, risk management and employee benefit programs.

 

**History of Acquisitions**

 

***KVP Falcon Plastic Belting, Inc. ***In July 1993,Summa acquired all of the outstanding capital stock of KVP Systems, Inc., aCalifornia corporation (“KVP”).  KVP wasrenamed KVP Falcon Plastic Belting, Inc. in May 1998, after the acquisition ofFalcon Belting, Inc., which is described below. KVP designs, manufactures and markets injection-molded plastic conveyorbelting for the food processing industry. Belts which can operate on a curvewere pioneered by KVP.

 

***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.

 

2

----

 

***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.

 

***Falcon Belting, Inc. ***In May 1998,Summa acquired all of the outstanding capital stock of Falcon Belting, Inc., anOklahoma corporation (“Falcon”), which manufactured modular plastic conveyorbelting used in food processing industries.

 

***Canyon Mold. ***In September 1998, Summa acquiredsubstantially all of the assets of Canyon Mold, Inc., a California corporation(“Canyon”). Canyon had provided tool design and manufacturing services almostexclusively for the Company.

 

***Plastron Industries, Inc.***  In March 1999, Summa acquiredsubstantially all of the assets of Plastron Industries, L.P. (“Plastron”),which manufactures molded plastic coil forms (“bobbins”) for use intransformers, motors, relays and switches.

 

***Broadview Injection Molding, Inc.***  In September 1999, Summa acquiredsubstantially all of the assets of Broadview Injection Molding Co., Inc. (“Broadview”),which manufactured molded plastic coil forms (“bobbins”) for use intransformers, motors, relays and switches.

 

***Yarbrough-Timco. *** In May 2000, Summa acquired substantially allof the assets of Yarbrough-Timco (“Yarbrough”), which was a distributor andmanufacturer of molded plastic coil forms (“bobbins”) for use in transformers,motors, relays and switches.

 

***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 forlighting fixtures.

 

***Ram Belts & Chains. ***In December 2000,Summa acquired substantially all of the assets of the Ram Belts & Chainsdivision (“Ram”) of Rainbow Industrial Products Corp., which manufacturedinjection molded plastic chain and conveyor belting for the food processing andbeverage industries.

 

***Genesta. ***In January 2002,Summa acquired substantially all of the assets of the Genesta Manufacturingdivision (“Genesta”) of Pavaco Plastics, Inc. Genesta manufactures extruded sheet and profiles and thermoformedcomponents for the lighting and other industries.

 

***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.  The primary reasons for the acquisition werethe brand value in the commercial market, the strategic location in theagricultural market and prospective economies of scale.

 

In evaluating future acquisitions, Summa will endeavor to identifytarget companies that manufacture plastic components which have a proprietaryadvantage because of patent protection, brand recognition, unique manufacturingprocesses or other comparable characteristics.

 

Although the existing management of an acquired company typically wouldbe retained to manage day to day operations, it is anticipated that thebusiness of the acquired company could be expanded with the support of Summa’scorporate staff.  Any such expansioncould place a significant strain on Summa’s management and resources, requireSumma to implement additional operating, marketing and financial controls, andnecessitate that Summa hire additional personnel, which could have asignificant adverse effect on Summa’s operating results.  It is also likely that any such acquisitionwould require Summa to raise additional capital to finance the acquisition orprovide 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 can, however, be noassurance that sufficient financing will be available to Summa to continue itsacquisition strategy on terms and conditions that are acceptable to Summa.

 

Continued implementation of the Company’s strategy will depend to asignificant extent upon the ability of

 

3

----

 

Summa’s management to identify appropriate candidates for acquisition,negotiate deals acceptable to the Board of Directors and stockholders of theCompany, obtain acceptable acquisition prices, and supervise the management ofoperating subsidiaries.  There can be noassurance that the terms upon which a prospective company can be acquired willbe favorable to Summa, or that Summa will not encounter unforeseen difficultiesand liabilities in connection with any such acquisition.

 

##### **Segments and Products**

 

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

 

***Optical Components.***  In its Optical Components segment, Summa designsand manufactures plastic prismatic lenses, reflectors and diffusers and otherplastic products, which are used in commercial and industrial lightingfixtures, and in display, signage, architectural and other applications.  Products, many of which are patented, areinjection-molded using specially compounded lighting grade polycarbonate oracrylic, extruded from similar materials, or thermoformed from sheet extrudedby the Optical Components segment.

 

***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, valves, filters andaccessories, extruded tubing and other plastic products for drip irrigationsystems used in agriculture, commercial landscape and other applications.

 

***Electrical Components.***  In its Electrical Components segment, Summadesigns and manufactures thermoplastic coil forms or “bobbins” and otherplastic products used principally in the manufacture of magnetic devices suchas transformers, relays, switches, power supplies and small electromotors.  These devices are utilized inlighting controls, process controls, HVAC equipment, appliances, vehicles,telecommunications equipment and other applications.

 

Formerly, theCompany also operated in a Miscellaneous Plastic Components segment which wasintegrated with the Irrigation Components segment in the fourth quarter offiscal 2004.

 

The following table sets forth external sales by segment as a percent oftotal Company sales:

 
| ** **                   | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Optical Components           |       | 52       | %          | 52  | %          | 48  | %          |
| Material Handling Components |       | 22       | %          | 23  | %          | 23  | %          |
| Irrigation Components        |       | 15       | %          | 15  | %          | 19  | %          |
| Electrical Components        |       | 11       | %          | 11       | %          | 10       | %          |

 

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.

 

4

----

 

**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 modern molding machines,which range from 40 to 1500 tons clamping force, using a wide variety ofplastic resins.

 

***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.

 

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

 

In addition to injection molding, thermoforming and extrusion, 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 minimal levels. Three of Summa’s manufacturingplants 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, and to businesses which incorporate the Company’sproducts in systems assembled for their own use or for their customers’use.  The Company generally considers itscustomers to be OEM’s, distributors and, to a limited extent, end users.  Most sales are made directly by employees ofthe Company, although Summa utilizes several independent manufacturers’representatives.  Sales in the OpticalComponents and Electrical Components segments are almost exclusively to OEM’s,while sales in the Material Handling Components and Irrigation Componentssegments are primarily to distributors. The Company delivers its products principally by truck through the useof independent freight carriers and, to a lesser extent, by air and seatransport.

 

Summa’s largest three customers, all of whom are customers of theOptical Components segment, accounted for 10%, 5% and 3% of sales in fiscal2004.  Summa’s largest customer in fiscal2004 was Acuity Brands, Inc.  The Companyhas 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 15% of its raw material. Everymaterial used is available from several vendors.  Primary resins used include polycarbonate,acrylic, polyethylene, polyvinylchloride, polypropylene, acetal and nylon.  Principal vendors include AtoFina, Bayer,Cyro, Dow, Dupont, GE Plastics and Lucite, among others.  The resins used by the Company are crude oilor natural gas derivatives and may be affected to some extent by the supply,demand and price trends in the petroleum and natural gas industries.

 

**Backlog and Seasonality**

 

On August 31, 2004, Summa had a backlog of orders, believed to befirm, in the amount of $7,696,000, compared to a backlog of $7,892,000 on August 31,2003.  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.

 

5

----

 

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 sales, as apercentage of fiscal year’s sales, to occur approximately as follows:

 

 
| **Quarter** | ** ** | **Percent of Sales** | ** ** |
|-------------|------------|----------------------|------------|
| 1st quarter |       | 23                   | %          |
| 2nd quarter |       | 24                   | %          |
| 3rd quarter |       | 27                   | %          |
| 4th quarter |       | 26                   | %          |
|        |       | 100                  | %          |

 

Because a portion of overhead and sales and administrative expense isfixed and, therefor, does not vary with sales volume, operating profit may varyfrom 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.  Several of Summa’s segmentsinclude one or more dominant competitors, such as Intralox and Rexnord in theMaterial Handling Components segment, Cosmo in the Electrical 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 market acceptance.  There can be no assurance that existing orfuture products will be sufficiently successful to enable Summa to effectivelycompete in its markets or, should new product offerings meet with significantcustomer acceptance, that one or more current or future competitors will notintroduce products that render the Company’s products noncompetitive.

 

**Patents, Trademarks and Licenses**

 

The Company owns and licenses domestic and foreign patents, whichexpire on dates ranging to 2021.  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 has resumedmanufacturing and selling reflectors to those customers.  Even so, Summabelieves incidents of infringement of the Reflexor®-related patents and otherpatents may 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.

 

6

----

 

**Environmental Matters**

 

The Company is subject to the environmental laws, rules and regulationsof the jurisdictions in which it operates and has operated facilities,including those governing air quality, water quality, soil quality andhazardous waste management and disposal. The Company does not anticipate that future expenditures for thecompliance with such laws, rules and regulations will have a material effect onits capital expenditures or its financial condition or results of operations.

 

**Employees**

 

At October 29, 2004, Summa had 715 employees, including sixemployees who comprise the Company’s corporate staff.  Approximately 40 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.

 

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

 

The Company operates primarily at the following facilities:

 
| **Location**               | ** ** | **Sq. Ft.** | ** ** | **Principal Activity**   | ** ** | **Segment**       | ** ** | **Lease Expires** | ** ** |
|----------------------------|------------|-------------|------------|--------------------------|------------|-------------------|------------|-------------------|------------|
| Torrance, California       |       | 280         |       | Corporate office         |       |              |       | Month-to-Month    |       |
| Charlevoix, Michigan       |       | 137,000     |       | 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      |       | 38,000      |       | Manufacturing, warehouse |       | Material Handling |       | March 2005   |       |
| Rancho Cordova, California |       | 48,000      |       | Manufacturing, warehouse |       | Material Handling |       | April 2006   |       |
| 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 |       |
| Bensenville, Illinois      |       | 76,500      |       | Manufacturing, warehouse |       | Electrical        |       | Owned             |       |
| Pharr, Texas               |       | 30,000      |       | Manufacturing, warehouse |       | Electrical        |       | Owned             |       |

 

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

 

In addition, the Company owns 63,000 square feet of factory and officespace in Fullerton, California which is leased to an unrelated party under alease expiring in July 2006.  TheCompany is currently building an 80,000 square foot facility in Reading,Pennsylvania for the Material Handling Components segment, which is intended toreplace the leased facilities in Reading, Pennsylvania and Rancho Cordova,California.

 

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

 

The Company encounters lawsuits from time to time in the ordinarycourse of business and, at August 31, 2004, 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. The Company may file patent infringement and/or other types of lawsuitsin the future which may result in materially increased costs and other adverseconsequences.  Any costs and/or lossesthat Summa may suffer from such lawsuits, and the effect such litigation mayhave upon the reputation and marketability of Summa’s products, could have amaterial adverse impact on the future results of operations, financialcondition and/or prospects of the Company.

 

7

----

 

**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, 2004.

 

**PART II**

 

**ITEM 5.****                             MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES 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 31,2004, the average weekly trading volume was approximately 34,000 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** | ** ** | **11/30/02** | ** ** | **2/28/03** | ** ** | **5/31/03** | ** ** | **8/31/03** | ** ** | **11/30/03** | ** ** | **2/29/04** | ** ** | **5/31/04** | ** ** | **8/31/04** | ** ** |
|--------------------|------------|--------------|------------|-------------|------------|-------------|------------|-------------|------------|--------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **High**           |       | $            | 10.05      |        | $          | 10.25       |       | $           | 9.00       |         | $          | 7.90        |       | $           | 8.81       |        | $          | 9.55 |   | $ | 9.65 |   | $ | 14.34 |   |
| **Low**            |       | $            | 8.55       |        | $          | 7.51        |       | $           | 6.03       |         | $          | 6.80        |       | $           | 7.00       |        | $          | 8.55 |   | $ | 8.55 |   | $ | 9.35 |   |

 

On October 29, 2004, the closing price on The Nasdaq NationalMarket for a share of Summa Common Stock was $9.17.

 

### **RecentIssuances and Repurchases**

### ** **

During the fiscal year ended August 31, 2004, no equity securitiesof the Company were sold by the Company that were not registered under theSecurities Act of 1933, as amended (“Securities Act”).

 

In December 2001, the Company issued and sold 5,000 shares ofnewly-authorized Series A Preferred Stock in a private sale made in reliance onthe exemption from registration contained in Rule 506 promulgated under theSecurities Act (“Rule 506”) to an investment group for an aggregate purchaseprice of $5,000,000. The purpose of the issuance was to fund the acquisition ofthe Genesta Manufacturing division (“Genesta”) of Pavaco Plastics Inc., anOntario corporation (“Pavaco”), from Pavaco and to reduce outstanding debt andstrengthen the Company’s financial position.

 

In June 2003, the Company announced a plan to repurchase up to anadditional $2,000,000 of its Common Stock with no time limit (the “2003 BuyBack”), pursuant to which the Company purchased 9,169 shares at an average costof $7.96 per share.

 

In May 2004, the Company repurchased all of its outstanding Series APreferred Stock for its book value of $6,553,000, and 452,856 shares of itsCommon Stock for $3,633,000, or $8.02 per share, in a private transaction (the “BlockRepurchase”).  The Company paid for theBlock Repurchase with $10,186,000 of subordinated debt.  Subsequently, a substantial portion of thesubordinated debt was prepaid using the Company’s line of credit.  In conjunction with the Block Repurchase, the2003 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”).

 

8

----

 

**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, 2004,3,974,187 shares of the Company’s Common Stock were issued and no shares ofPreferred Stock were issued and outstanding. The number of holders of record of Summa’s Common Stock as of August 31,2004 was 239.  In addition, based uponthe number of copies of this Annual Report requested by intermediaries onbehalf of their clients, Summa estimates that there are approximately 1,600additional stockholders whose shares are held in “street name”, includingapproximately 600 stockholders who own shares through the Summa Industries401(k) Savings and Retirement Plan.

 

***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, toprovide for the issuance of Preferred Stock in one or more series, to establishfrom time to time the number of shares to be included in each such series, tofix the designations, powers, preferences and rights of the shares of each suchseries and any qualifications, limitations or restrictions thereof, and toincrease or decrease the number of shares of any such series (but not below thenumber of shares of such series then outstanding) without any further vote oraction by the stockholders.  Although Summahas no present plan to issue Preferred Stock, the issuance of Preferred Stockin the future could provide voting or conversion rights that would adverselyaffect the voting power or other rights of the holders of Common Stock andthereby reduce the value of the Common Stock. In addition, the issuance of Preferred Stock may have the effect ofdelaying, deferring or preventing a change in control of Summa.  In particular, specific rights granted tofuture holders of Preferred Stock could be used to restrict Summa’s ability tomerge with or sell its assets to a third party, or otherwise delay, discourageor 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 of Options **

 

As of August 31, 2004, 1,095,075 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.  Alloptions vest in full immediately prior to a change of control of the Company,as defined in the stock option plans.

 

**Dividend Policy**

 

Following the fiscal year end, the Companydeclared a cash dividend of $.06 per share on its Common Stock to be paid on orabout December 10, 2004 to holders of record as of November 29,2004.  Prior to this declaration, the Company had not paid a cash dividendsince 1983.  Any future cash dividends orother distributions will be determined solely by the Board of Directors andwill be based on the Company’s future financial ability to declare

 

9

----

 

and pay such dividends.  Additionally,certain lending agreements restrict the Company from declaring or payingdividends beyond set limits.  In any fiscal year, the Company may declareor pay any dividend or distribution and may redeem, retire, repurchase orotherwise acquire shares of Common Stock in a maximum aggregate of the lesserof $2,000,000 or the consolidated net profit after taxes of Summa for suchfiscal year.  Transactions that would exceed these limits would requireprior bank authorization and the appropriate waivers.

 

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

 

The selected financial data set forth below for the years ended August 31,2002, 2003 and 2004 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 31,2000 and 2001 have been derived from audited consolidated financial statementsof Summa that are not included herein. The August 31, 2003 total assets has been adjusted to conform tocurrent year presentations.  The selectedfinancial data set forth below should be read in conjunction with thosefinancial statements (including the notes thereto) and with “Management’sDiscussion and Analysis of Financial Condition and Results of Operation” inItem 7 below.

 
| ** **                                                                                   | ** ** | **At and for the Fiscal Years Ended August 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2000**                                              | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                                                   | ** ** | **(in thousands, except per share amounts)**          | ** ** |
| **Statement  of Operations Data:**                                                           |       |                                                  |       |   |   |   |   |   |   |   |   |
| Net sales                                                                                    |       | $                                                     | 125,746    |   | $ | 127,002 |   | $ | 116,241 |   | $ | 111,140 |   | $ | 116,404 |   |
| Costs and expenses:                                                                          |       |                                                  |       |   |   |   |   |   |   |   |   |
| Cost of sales                                                                                |       | 90,833                                                |       | 93,650 |   | 85,765 |   | 83,336 |   | 88,522 |   |
| Selling, general and administrative and  other expenses                                      |       | 20,923                                                |       | 23,118 |   | 21,911 |   | 21,005 |   | 21,027 |   |
| Interest expense, net                                                                        |       | 2,984                                                 |       | 3,851 |   | 2,500 |   | 1,481 |   | 1,585 |   |
| Costs and expenses of continuing operations                                                  |       | 114,740                                               |       | 120,619 |   | 110,176 |   | 105,822 |   | 111,134 |   |
| Income before provision for taxes and  cumulative effect of a change in accounting principle |       | 11,006                                                |       | 6,383 |   | 6,065 |   | 5,318 |   | 5,270 |   |
| Provision for income taxes                                                                   |       | 3,700                                                 |       | 1,970 |   | 2,136 |   | 1,760 |   | 1,899 |   |
| Income before cumulative effect of a change  in accounting principle                         |       | 7,306                                                 |       | 4,413 |   | 3,929 |   | 3,558 |   | 3,371 |   |
| Cumulative effect of a change in accounting  principle                                       |       | —                                                |       | — |   | — |   | (22,343 | ) | — |   |
| Net income (loss)                                                                            |       | $                                                     | 7,306      |   | $ | 4,413 |   | $ | 3,929 |   | $ | (18,785 | ) | $ | 3,371 |   |
| Preferred stock accretion                                                                    |       | $                                                     | —     |   | $ | — |   | $ | 491 |   | $ | 737 |   | $ | 450 |   |
| Net income (loss) available to common  stockholders                                          |       | $                                                     | 7,306      |   | $ | 4,413 |   | $ | 3,438 |   | $ | (19,522 | ) | $ | 2,921 |   |
|                                                                                         |       |                                                  |       |   |   |   |   |   |   |   |   |
| Earnings (loss) per common share:                                                            |       |                                                  |       |   |   |   |   |   |   |   |   |
| Basic:                                                                                       |       |                                                  |       |   |   |   |   |   |   |   |   |
| Before cumulative effect of a change in  accounting principle                                |       | $                                                     | 1.71       |   | $ | 1.04 |   | $ | 0.78 |   | $ | 0.65 |   | $ | 0.69 |   |
| After cumulative effect of a change in  accounting principle                                 |       | $                                                     | 1.71       |   | $ | 1.04 |   | $ | 0.78 |   | $ | (4.48 | ) | $ | 0.69 |   |
| Diluted:                                                                                     |       |                                                  |       |   |   |   |   |   |   |   |   |
| Before cumulative effect of a change in  accounting principle                                |       | $                                                     | 1.62       |   | $ | 1.00 |   | $ | 0.76 |   | $ | 0.63 |   | $ | 0.68 |   |
| After cumulative effect of a change in  accounting principle                                 |       | $                                                     | 1.62       |   | $ | 1.00 |   | $ | 0.76 |   | $ | (4.48 | ) | $ | 0.68 |   |
|                                                                                         |       |                                                  |       |   |   |   |   |   |   |   |   |
| Weighted average number of shares:                                                           |       |                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                                                                        |       | 4,284                                                 |       | 4,255 |   | 4,398 |   | 4,359 |   | 4,215 |   |
| Diluted                                                                                      |       | 4,506                                                 |       | 4,424 |   | 4,512 |   | 4,449 |   | 4,297 |   |
|                                                                                         |       |                                                  |       |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data:**                                                                     |       |                                                  |       |   |   |   |   |   |   |   |   |
| Assets                                                                                       |       | $                                                     | 89,940     |   | $ | 98,279 |   | $ | 97,565 |   | $ | 68,719 |   | $ | 80,117 |   |
| Working capital                                                                              |       | $                                                     | 12,761     |   | $ | 14,539 |   | $ | 16,301 |   | $ | 16,251 |   | $ | 19,294 |   |
| Long-term debt, net of current maturities                                                    |       | $                                                     | 25,777     |   | $ | 29,178 |   | $ | 19,845 |   | $ | 16,219 |   | $ | 28,663 |   |
| Mandatorily redeemable preferred stock                                                       |       | —                                                |       | — |   | $ | 5,366 |   | $ | 6,103 |   | — |   |
| Stockholders’ equity                                                                    |       | $                                                     | 41,060     |   | $ | 45,807 |   | $ | 50,219 |   | $ | 29,380 |   | $ | 30,029 |   |
|                                                                                         |       |                                                  |       |   |   |   |   |   |   |   |   |
| Common shares outstanding                                                                    |       | 4,225                                                 |       | 4,297 |   | 4,402 |   | 4,246 |   | 3,974 |   |
| Preferred shares outstanding                                                                 |       | —                                                |       | — |   | 5 |   | 5 |   | — |   |
|                                                                                              |            |                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

10

----

 

**ITEM 7.****          MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**General**

 

Statements contained in this Annual Report on Form 10-K, which are notpurely 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 four 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 and tubingfor the agricultural irrigation industry; molded plastic coil forms (“bobbins”)for use in transformers, motors, relays and switches; and other molded andextruded plastic components for diverse industries.

 

**Risk Factors**

 

Historically, growth has been achieved by acquisition, development ofnew products and expansion of the Company’s sales organization. There can be noassurance that Summa will be able to continue to consummate acquisitions,develop new products or expand sales to sustain rates of revenue growth andprofitability in future periods comparable to those experienced in the pastseveral years.  See “Business — Historyof Acquisitions” above. Any future success that the Company may achieve willdepend upon many factors including factors which may be beyond the control ofSumma or which cannot be predicted at this time.  Uncertainties and factors which could causeactual results or events to differ materially from those set forth or impliedinclude:

 

•                  changes in themarkets for the products offered by the Company through its operatingsubsidiaries

•                  increased levelsof competition, including the entry of additional foreign and domesticcompetitors and increased success by existing competitors

•                  reduced marginscaused by competitive pressures, expiration of Company patents and otherfactors

•                  increases inoperating costs including costs of production, energy, materials, supplies,personnel, equipment, import duties and transportation

•                  increases inborrowing costs and/or the availability of funds

•                  increases ininsurance costs, or the failure or inability to obtain adequate levels ofinsurance

•                  increases ingovernmental regulation imposed under federal, state or local laws, includingregulations applicable to environmental, labor and trade matters

•                  changes ingovernmental regulation, including changes affecting the favorable tax benefitsfor export sales made by domestic entities

•                  changingcustomer profiles

•                  generalpolitical, economic and industry conditions that affect customer demand and salesvolume, both domestically and internationally

•                  the introductionof new products by competitors or the failure to gain acceptance of new Companyproducts

•                  the timing ofSumma’s advertising and promotional campaigns

•                  effects on theCompany of its cost reduction initiatives

•                  the loss of keypersonnel

 

11

----

 

**Recent Events**

 

***Asset Acquisition.***  In January 2004, the Company acquiredcertain assets from the micro-irrigation division of R.M. Wade & Co. (“Wade”),including the product brand “Pepco” and transitional rights to the productbrand “Wade Rain”.  Pepco is a brand ofproducts for commercial landscape irrigation and Wade Rain is a brand ofproducts used in agricultural irrigation. The acquisition is expected to addabout $5 million in annual sales to the Irrigation Components segment.  Pursuant to the agreement, the Company issupplying products to Wade for use in non-irrigation applications.  The Company assumed operation of the Wadeinjection molding and extrusion facility in Fresno, California, which is thecenter of the California agricultural market. Consideration for the assets was approximately $2 million.

 

***Texas-Mexico Development.***  In January 2004, the Company enteredinto a comprehensive relationship with Mr. David Frye of Longview, Texas tocollaborate on the implementation of a new proprietary injection moldingprocess at a facility in Pharr, Texas, in the greater McAllen/Reynosacross-border metropolitan area.  Thisprocess was developed to enable the Electrical Components segment to reducelead-times to most of its North American customers and provide more flexibilityin selection of materials and lot sizes, while improving quality.  The location will also enable the Company tomore easily serve its customers with operations in Northeast Mexico andSoutheast Texas.  As part of thistransaction, the Electrical Components segment purchased the Pharr plasticmolding plant from Mr. Frye, and he purchased approximately five percent ofthat segment.  Mr. Frye agreed to providetechnical services to the Company under a long-term agreement.  The Company is investing about $4 million instate-of-the-art automated systems for the plant.

 

***Settlement of Infringement Litigations.***  In the fiscal second quarter, the Companyentered into confidential agreements with Cooper Industries (NYSE:CBE) andGrandlite International Corporation to settle two patent infringement lawsuitsfiled by the Optical Components segment. Under the agreements, the parties acknowledged the validity of certainof the Company’s intellectual property and agreed to certain on-going businessrelationships.

 

***Refinancing of Indebtedness.***  In February 2004, the Company enteredinto a new comprehensive banking relationship with Wells Fargo Bank to replaceits former banking arrangement.  As aresult, the Company reduced its core borrowing interest rate and obtained moreborrowing flexibility.

 

***Block Repurchase. ***In May 2004, theCompany repurchased all of its outstanding Preferred Stock, at its book value,and 452,856 shares of its Common Stock at $8.02 per share, in a privatetransaction.  Consideration for the repurchased stock was in the form ofsubordinated debt, a substantial portion of which was promptly prepaid usingfunds from the Company’s line of credit.  This transaction is having afavorable impact on earnings per share for several reasons.  The preferredstock accretion charge, which was $185,000 per quarter prior to the repurchase,has been eliminated.  The number of outstanding common shares has beenreduced by approximately 10%.  Theoffsetting after-tax cost of the debt at August 31, 2004 is approximately$90,000 per quarter.

 

***Pennsylvania Facility Construction.***  In June 2004, after several delays, theCity of Reading, Pennsylvania contributed ownership of approximately 6.7 acresof partially improved land (the “Site”) to the Company’s Material HandlingComponents segment.  Additionalrelocation benefits are expected to include low-cost, long-term loans, trainingcost subsidies and long-term tax abatement. Construction of a new 80,000 square foot facility on the Site is inprocess, with expected completion in the Company’s fiscal 2005 secondquarter.  The Company expects to achieveoperating efficiency improvements after consolidating operations in the newfacility.

 

12

----

 

**Results of Operations**

 

The following table sets forth certain information, derived from Summa’sconsolidated statements of operations, as a percentage of sales for each of theyears in the three year period ended August 31, 2004, as well as theCompany’s effective income tax rate for each period presented.

 
| ** **                                                           | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                                            |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Cost of sales                                                        |       | 73.8     |       | 75.0     |       | 76.0     |       |
| Gross profit                                                         |       | 26.2     |       | 25.0     |       | 24.0     |       |
| S,G, & A and other expense, net                                  |       | 18.8     |       | 18.9     |       | 18.1     |       |
| Operating income                                                     |       | 7.4      |       | 6.1      |       | 5.9      |       |
| Interest expense, net                                                |       | 2.2      |       | 1.3      |       | 1.4      |       |
| Income before income taxes                                           |       | 5.2      |       | 4.8      |       | 4.5      |       |
| Provision for income taxes                                           |       | 1.8      |       | 1.6      |       | 1.6      |       |
| Income before cumulative effect of a change  in accounting principle |       | 3.4      | %          | 3.2      | %          | 2.9      | %          |
|                                                                 |       |     |       |     |       |     |       |
| Effective tax rate                                                   |       | 35.2     | %          | 33.1     | %          | 36.0     | %          |

 

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

 

During fiscal 2004, the Company concluded two financial transactionswhich significantly changed its capital structure.  The Company changed its principal bankingrelationship, which increased the availability of debt; and, in a privatetransaction, repurchased all of its outstanding Preferred Stock, at its bookvalue, and 452,856 shares of its Common Stock, at $8.02 per share, an 8%discount to the market price on the repurchase date.  Consideration forthe repurchased stock was in the form of subordinated debt, a substantialportion of which was promptly prepaid using funds from the Company’s new lineof credit.  These transactions have had a favorable impact on earnings pershare for several reasons.  The resulting increase in interest expense hasbeen more than offset by the elimination of the preferred stock accretioncharge.  Further, the number of outstandingcommon shares was reduced by approximately 10%. The net effect of the transactions was to increase earnings per share inthe fourth quarter of fiscal 2004 by about $.04 per share.  The effect of the transactions will changeover time as earnings, interest rates and debt levels change.

 

For the year ended August 31, 2004, net sales increased by$5,264,000, 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 exportsales, 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$5,186,000, or 6%, 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 75.0% to 76.0%, primarily due to increased cost of resinnot fully passed on to customers.

 

For the year ended August 31, 2004, gross profit increased$78,000, virtually unchanged, from the prior fiscal year.  Gross margin declined from 25.0% to 24.0%,primarily due to higher resin costs not fully passed on to customers.

 

For the year ended August 31, 2004, operating expenses were$21,027,000, virtually unchanged from the prior year.  As a percent of sales, operating expensesdecreased from 18.9% to 18.1% due to the benefit of increased sales and costreduction initiatives.

 

13

----

 

For the year ended August 31, 2004, operating income increased$56,000, or 1%, 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; increased$1,111,000 in the Irrigation Components segment, primarily due to the effectsof higher sales volume; and decreased $463,000 in the Electrical Componentssegment, primarily due to expenses related to startup of a new facility.  Operating margin for the year decreased from6.1% in fiscal 2003 to 5.9% due to the changes in gross margin and operatingexpenses discussed above.

 

For fiscal 2004, interest expense increased to $1,585,000 from$1,481,000, due to increased debt levels as a result of the Block Repurchasedescribed above, 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 36.0%, primarilydue to a change in the distribution of earnings among various taxjurisdictions.

 

As a result of the changes described above, net income in fiscal 2004was $187,000 lower than income before the cumulative effect of a change inaccounting principle in fiscal 2003.

 

***Fiscal 2003 versus Fiscal 2002.***

 

For the year ended August 31, 2003, net sales deceased by$5,101,000, or 4%, from the prior fiscal year. Sales declined 7% compared to pro forma fiscal 2002 sales includingfull-year revenue from a business acquired in January 2002.  See “Business — History of Acquisitions”,above.  The sales decline was due to thegeneral business downturn, especially in non-residential construction, lowerprices and increased international competition, primarily from China.  Optical Components segment reported salesdeclined $3,483,000, or 6%, due to weakness in the non-residential constructionmarket, the loss of some contract manufacturing work to competitors and lowersales of certain patented products due to increased sales of products deemed bythe Company to be infringing on its intellectual property.  On a pro forma basis, considering anacquisition made mid-year in fiscal 2002, sales in the Optical Componentssegment declined 10% for the year. Electrical Components segment sales declined $1,109,000, or 9%, due thegeneral business downturn and the transfer of manufacturing by some customersfrom North America to China.  IrrigationComponents segment sales increased $734,000, or 5%, due to aggressive sellingefforts, despite lower prices. Miscellaneous Plastic Components segment sales declined $1,107,000, or35%, due to the general economy and the migration of its customers out ofCalifornia.

 

For the year ended August 31, 2003, cost of sales decreased by$2,429,000, or 3%, from the prior fiscal year, due to the decline in sales,partially offset by increased consolidation expense of approximately $300,000,increases in workers’ compensation costs, especially in California, and theinclusion of costs of sales of an acquired business for a full year versus onlypart of fiscal 2002. As a percent of sales, cost of goods sold increased from73.8% to 75.0%, due to the effects of reduced sales volume, increasedconsolidation expense, especially in the Material Handling Components segment,and increases in workers’ compensation costs.

 

For the year ended August 31, 2003, gross profit decreased$2,672,000, or 9%, from the prior fiscal year, primarily due to the salesdecline.  As a percent of sales, grossprofit declined from 26.2% to 25.0%, primarily due to the effects of salesvolume decline, lower prices, increased consolidation expense and increasedworkers’ compensation costs.

 

For the year ended August 31, 2003, operating expenses decreased$906,000, or 4%, due to the elimination of goodwill amortization of $1,096,000and cost reduction initiatives, partially offset by increased consolidationexpenses of approximately $400,000, the gain on the sale of a facility infiscal 2002 of $723,000, inclusion of costs of an acquired business for thefull year versus only part of fiscal 2002, and increased insurance costs.  Operating expenses in fiscal 2002 included$1,096,000 in goodwill amortization expense, compared to a goodwill impairmentcharge of $26,000 in fiscal 2003. Goodwill amortization expense was discontinued at the beginning offiscal 2003. In fiscal 2002, the Company recorded a $723,000 gain from the saleof a facility. As a percent of sales, operating expenses increased slightlyfrom 18.8% to 18.9%.

 

14

----

 

For the year ended August 31, 2003, operating income was$1,766,000 lower than in the prior fiscal year, due to the changes discussedabove.  By segment, operating incomedecreased $693,000 in the Optical Components segment; decreased $1,022,000 inthe Material Handling Components segment; decreased $288,000 in the ElectricalComponents segment; and increased $659,000 in the Irrigation Components segment(excluding a gain of $723,000 on the sale of a facility in fiscal 2002). The operatingloss in the Miscellaneous Plastic Components segment decreased by$456,000.  Operating margin for the yeardecreased from 7.4% in fiscal 2002 to 6.1% due to the changes in gross marginand operating expenses discussed above.

 

For fiscal 2003, interest expense decreased further to $1,481,000, dueto reduced levels of debt and lower interest rates.  Interest expense relates primarily tointerest on debt owed to banks, pursuant to the borrowing arrangement describedin “Liquidity and Capital Resources – Financial Arrangements” below.  Most of the outstanding borrowings underthese arrangements were for acquisitions.

 

For fiscal 2003, the effective tax rate decreased to 33.1% due to thedistribution of earnings in lower tax rate jurisdictions and the elimination ofthe amortization of goodwill, a substantial portion of which was not taxdeductible.

 

As a result of the changes described above, income before thecumulative effect of a change in accounting principle decreased by $371,000, or9%, in fiscal 2003.

 

Upon adoption of Statement of Financial Accounting Standards No. 142, “Goodwilland Other Intangible Assets”, effective as of September 1, 2002, theCompany performed a transitional fair value based impairment test, resulting inan impairment charge of $22,343,000, net of the effect of tax of $4,812,000.

 

***Inflation.***

 

In fiscal 2002 and 2003, resin prices were relatively stable.  During fiscal 2004, especially in the fourthquarter, prices increased so rapidly that the increases were not fully passed onto customers.  Volatility in resinpricing is expected to continue, as high prices for oil and gas derivativefeedstocks, strong demand, especially in Asia, and reduced supply resultingfrom several resin plant closings converge to drive prices upward.  The Company plans to raise prices on virtuallyall of its products in the first quarter of fiscal 2005.

 

**Liquidity and CapitalResources **

 

***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, 2004, net cash provided by operating activities was$11,865,000 in 2002, $10,248,000 in 2003 and $9,711,000 in 2004.  Cash flows from operations decreased in 2003compared to 2002, primarily due to lower income before the cumulative effect ofa change in accounting principle, and due to changes in the components ofworking capital. Cash flows from operations decreased in 2004 compared to 2003,primarily due to changes in the components of working capital.  From August 31, 2003 to August 31,2004, cash and cash equivalents increased $868,000; accounts receivableincreased $2,498,000; inventory increased $3,104,000; accounts payable increased$3,786,000; and accrued liabilities increased $2,556,000, excluding a non-cashcontribution of Common Stock to the Company’s 401(k) Plan of $345,000 in fiscal2004.

 

Summa’s principal uses of cash have been the (i) support of operatingactivities, (ii) acquisitions of businesses, (iii) investments in capital improvements, (iv) reduction of debt and(v) repurchases of Company equity.  Cashused for certain investing activities for the three fiscal years ended August 31,2004 is summarized in the following table:

 
| ** **                                       | ** ** | **Fiscal Years Ended August 31,** | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|
|                                             |       | **2002**                               | ** ** | **2003** | ** ** | **2004** |   |
| Acquisitions of businesses                       |       | $                                      | 2,685,000  |   | $ | — |   | $ | 1,903,000 |   |
| Investment in capital improvements               |       | $                                      | 3,380,000  |   | $ | 4,055,000 |   | $ | 8,334,000 |   |
| Capital investment as a percent of  depreciation |       | 69                                     | %          | 86 | % | 177 | % |

 

15

----

 

Investment in capital improvements is primarily for new producttooling, manufacturing equipment upgrades and new computer systems.  Summa expects to continue making substantialinvestments in tooling for new products, although at August 31, 2004,Summa was 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.  Inaddition, the Company is currently investing in several new facilities, processimprovement and automation systems, which resulted in total capitalexpenditures in fiscal 2004 about twice the total in fiscal 2003, and isexpected to result in continued greater than average capital expenditures infiscal 2005. The Company intends to finance these improvements with borrowingsfrom commercial lenders.  For the threeyear period ended August 31, 2004, total capital expenditures were 110% ofthe total depreciation.

 

In August 2002, the Company announced a plan to repurchase up to$2,000,000 of its Common Stock with no time limit (the “2002 Buy Back”).  As of August 31, 2003, the Company had purchased233,600 shares at an average cost of $8.56 per share, completing the 2002 BuyBack.  98,600 shares were purchased inopen market transactions and 135,000 shares were purchased in a privatetransaction at the market price on the day of the transaction.  In June 2003, the Company announced anew plan to repurchase up to an additional $2,000,000 of its Common Stock withno time limit (the “2003 Buy Back”). Prior to May 2004, the Company had purchased 9,169 shares at an averagecost of $7.96 per share.  In May 2004,the Company repurchased all of its outstanding Preferred Stock for its bookvalue 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 $10,185,000 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 aplan to repurchase up to $2,000,000 of its Common Stock with no time limit (the“2005 Buy Back”).

 

In October 2004, the Company declared a dividend of $.06 per shareto stockholders of record on November 29, 2004.  The aggregate dividend of approximately$240,000 is scheduled to be paid on or about December 10, 2004.

 

***Working Capital; Asset Utilization. ***At fiscal yearend, working capital was $16,301,000 in 2002, $16,251,000 in 2003 and$19,294,000 in 2004.  There was virtuallyno change from 2002 to 2003.  Theincrease in working capital from 2003 to 2004 was due primarily to increases inaccounts receivable and inventory related to increased sales and reducedcurrent maturities of long-term debt as a result of financial restructuring,partially offset by an increase in accounts payable.

 

Asset utilization for the three fiscal years ended August 31, 2004is presented in the following table:

 
| ** **                           | ** ** | **Fiscal Years Ended August 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2002**                               | ** ** | **2003** | ** ** | **2004** | ** ** |
| Average working capital turnover     |       | 7.5 times                              |       | 6.8 times |   | 6.5 times |   |
| Average accounts receivable turnover |       | 6.8 times                              |       | 6.7 times |   | 6.9 times |   |
| Average inventory turnover           |       | 6.7 times                              |       | 7.0 times |   | 6.7 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.

 

16

----

 

Summary of the Company’s debt at August 31,2004:

 
|                               |   |        |       | **Weighted  Average** |   |                         |   | **Fiscal  Year Due** |       |
|------------------------------------|--------|-------------|------------|-----------------------|--------|------------------------------|--------|----------------------|------------|
| **Description of Debt**            |   | **Balance** |       | **Interest  Rate**    |   | **Additional  Availability** |   | **2005**             | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009 and  thereafter** |   |
| Revolving  line of credit     |   | $           | 12,343,000 |                  | 3.1    | %                            | $      | 6,165,000            |       | $ | — |   | $ | — |   | $ | 12,343,000 |   | $ | — |   | $ | — |   |
| Bank  term loan               |   | 4,537,000   |       | 4.7                   | %      | —                       |   | 926,000              |       | 971,000 |   | 1,019,000 |   | 1,068,000 |   | 553,000 |   |
| Real  estate and other loans  |   | 10,983,000  |       | 4.2                   | %      | 2,145,000                    |   | 1,269,000            |       | 4,210,000 |   | 3,814,000 |   | 769,000 |   | 921,000 |   |
| Subordinated  debt                 |   | 2,995,000   |       | 7.5                   | %      | —                       |   | —               |       | 2,000,000 |   | 995,000 |   | — |   | — |   |
|                               |   |        |       |                  |   |                         |   |                 |       |   |   |   |   |   |   |   |   |
| Total  debt                        |   | $           | 30,858,000 |                  | 4.1    | %                            | $      | 8,310,000            |       | $ | 2,195,000 |   | $ | 7,181,000 |   | $ | 18,171,000 |   | $ | 1,837,000 |   | $ | 1,474,000 |   |

 

Interest rates on the revolving line ofcredit and certain real estate loans are subject to market fluctuation, and therates on the revolving line of credit are subject to reduction as the Companyachieves certain financial milestones. See also Note 10 in the “Notes toConsolidated Financial Statements” of the Company in this Annual Report on Form10-K.

 

Summa believes that cash flows from operations and existing creditfacilities will be sufficient to fund working capital requirements, plannedcapital expenditures and debt service for the next twelve months.  The Company has a strategy of growth byacquisition.  In the event an acquisitionplan is adopted which requires funds exceeding the availability describedabove, an alternate source of funds to accomplish the acquisition would have tobe developed. The Company has 10,000,000 shares of Common Stock authorized, ofwhich 3,974,187 shares were outstanding at August 31, 2004, and 5,000,000shares of “blank check” preferred stock authorized, of which none wasoutstanding at August 31, 2004.  TheCompany could issue additional shares of common or preferred stock or enterinto new or revised borrowing arrangements to raise funds.

 

**Off-Balance Sheet Arrangements**

 

At August 31, 2004, 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, 2004:

 
|                        |   |        |       | **Fiscal  year obligations due** |       |
|-----------------------------|--------|-------------|------------|----------------------------------|------------|
| **Contractual Obligations** |   | **Balance** |       | **2005**                         | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  thereafter** |   |
| Long-term  debt             |   | $           | 30,858,000 |                             | $          | 2,195,000 |   | $ | 7,181,000 |   | $ | 18,171,000 |   | $ | 1,837,000 |   | $ | 946,000 |   | $ | 528,000 |   |
| Operating  leases           |   | 4,178,000   |       | 1,345,000                        |       | 990,000 |   | 716,000 |   | 651,000 |   | 476,000 |   | — |   |
| Purchase  obligations       |   | 3,858,000   |       | 3,858,000                        |       | — |   | — |   | — |   | — |   | — |   |
| Facility  construction      |   | 2,913,000   |       | 2,913,000                        |       | — |   | — |   | — |   | — |   | — |   |
| Other                       |   | 3,277,000   |       | 133,000                          |       | 598,000 |   | 154,000 |   | 163,000 |   | 1,519,000 |   | 710,000 |   |
| Total                       |   | $           | 45,084,000 |                             | $          | 10,444,000 |   | $ | 8,769,000 |   | $ | 19,041,000 |   | $ | 2,651,000 |   | $ | 2,941,000 |   | $ | 1,238,000 |   |

 

*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, and plansfurther consolidations.  In the event theCompany were to abandon a facility prior to its being leased to a new tenant,the Company could become obligated for accelerated lease payments or otherexpenses.

 

*Facility Construction Obligation.*  The Company is currently constructing a newfacility for the Material Handling Components segment which is expected to costapproximately $6 million.  In June 2004,after several delays, the City of Reading, Pennsylvania transferred ownershipof approximately 6.7 acres of partially improved land (the “Site”) to theCompany’s Material Handling Components segment for $1.00.  The transfer of the Site to the Company ispart of a relocation incentive package. The Company is obligated to use commercially reasonable efforts tocomplete construction of the facility as soon as practical, and to employapproximately two hundred employees by the end of October 2005 at theSite. The Company expects to occupy the facility in the second quarter offiscal 2005.

 

17

----

 

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

 

The foregoingdiscussion and analysis of the Company’s financial condition and results ofoperations are based upon the consolidated financial statements of the Company,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of such financialstatements requires management to make estimates and assumptions in applyingcertain critical accounting policies. Certain accounting estimates are particularlysensitive because of their significance to the Company’s consolidated financialstatements and because of the possibility that future events affecting theestimates could differ markedly from current expectations. The Company believesthat the following are some of the more critical judgment areas in theapplication of its accounting policies that affect the Company’s financialstatements:

 

***Impairment of Long-Lived Assets andLong-Lived Assets to be Disposed of.***  The Company reviews its long-lived assets andcertain identifiable intangibles for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to the undiscounted futureoperating cash flows expected to be generated by the asset. If such assets areconsidered to be impaired, the impairment to be recognized is measured by theamount by which the carrying amount of the assets exceeds the fair value of theassets. Assets to be disposed of by sale are reported at the lower of thecarrying amount or fair value less costs to sell.

 

The Company has a significant amount ofproperty and equipment and intangible assets. The determination as to whetherevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable involves management’s judgment. In addition,should the Company conclude that recoverability of an asset is in question, theestimate of undiscounted future operating cash flows to determine whether anasset is recoverable and, if not, the final determination of the fair value ofthe asset are also based on the judgment of management. These judgments can beimpacted by a variety of underlying assumptions, such as the general businessclimate, effectiveness of competition and supply and cost of resources.  Accordingly, actual results can differsignificantly from the assumptions made by management in making its estimates.Future changes in management’s estimates could result in indicators ofimpairment and future impairment charges.

 

***Valuation of Inventory.***  The Company values its inventories at thelower of cost or market using the first-in, first-out (FIFO) method. TheCompany records adjustments to the value of inventory based upon obsolescenceand changes in market value as permanent changes in the carrying amount of suchinventory until its ultimate sale or other disposition. The Company hasevaluated the current level of inventories considering historical sales andother factors and, based on this evaluation, has recorded adjustments to costof goods sold to adjust inventory to net realizable value.  These adjustments are estimates, which couldvary significantly, either favorably or unfavorably, from actual requirementsif future economic conditions, customer demand or competition differ fromexpectations.

 

***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.

 

18

----

 

***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 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 StandardsNo. 123, Accounting for Stock-Based Compensation (‘SFAS 123”), as amended bySFAS 148, allows entities to continue to apply the provisions of AccountingPrinciples Board (“APB”) Opinion No. 25, Accounting for Stock Issued toEmployees, and provide pro forma income and pro forma earnings per sharedisclosures for stock-based awards as if the fair-value based method defined inSFAS 123 had been applied.  In accordancewith APB Opinion No. 25, and related interpretations, compensation expensewould generally be recorded for fixed option grants only if, on the date of thegrant, the current price of the underlying stock exceeded the exercise price.  The Company has elected to continue to applythe provisions of APB Opinion No. 25 and provide the pro forma disclosureprovisions of SFAS 123.  Accordingly, nocompensation expense has been recognized for the Company’s stock option plansand award of options to non-employee directors.

 

**Recent Accounting Pronouncements**

 

See Note 1 in the “Notes to Consolidated Financial Statements” in PartIV of 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, 2003, the Company had $14,568,000 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 ofapproximately $146,000, assuming the total outstanding amount of variableinterest debt were to remain the same as on August 31, 2003.

 

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 ofapproximately $208,000, assuming the total outstanding amount of variableinterest debt were to remain the same as on August 31, 2004.

 

**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 Annual Reporton Form 10-K.

 

**ITEM 9.****          DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

None.

 

**ITEM 9A.****                    CONTROLS ANDPROCEDURES.**

 

As of the end of the period covered bythis report, the Company carried out an evaluation, under the supervision andwith the participation of the Company’s management, including the Company’sChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of the Company’s disclosure controls and

 

19

----

 

procedures pursuant to Exchange Act Rule13a-15.  Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective.  There was no significant change in theCompany’s internal controls during the fiscal fourth quarter that had or isreasonably likely to have a material affect on internal control over financialreporting.

 

**ITEM9B.****                   ****OTHER INFORMATION.**

 

No other information was required to be disclosed in a report on Form8-K during the Company’s fiscal fourth quarter except the information containedin the Company’s Form 8-K dated June 23, 2004 regarding the Company’sresults of operations and financial condition for the fiscal third quarter.

 

**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 incorporation disclosuresin the Proxy Statement made under Item 7(d)(3) of Regulation 14A.

 

**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.****       SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.**

 

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 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.

 

20

----

**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 and subsidiaries as of August 31,2003 and 2004 and for each of the three years in the period ended August 31,2004 (including the notes thereto which contain unaudited quarterly financialdata for each of the two years ended August 31, 2004), and the Reports ofIndependent Registered Public Accounting Firms thereon, are included herein asset forth in the “Index to Consolidated Financial Statements” set forth on pageF-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 incorporated herein byreference 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                 |       | Asset  Purchase Agreement dated February 17, 1999 among Plastron Industries,  Inc., Plastron Industries L.P., the Company and Plastron Management, Inc.  relating to the acquisition of Plastron by the Company (5)                                                                                                                                                                                 |
| 2.7                 |       | Asset  Purchase Agreement dated August 18, 1999 among Broadview Injection  Molding, Inc., Broadview Injection Molding Co., Inc., the Cervenka and Hetzel  Joint Venture, Marvin E. Hetzel and Joseph J. Cervenka relating to the  acquisition of Broadview by the Company (6)                                                                                                                       |
| 2.8                 |       | Stock  Purchase Agreement dated October 4, 2000 by and among the Company and  the shareholders of Plastic Specialties, Inc. relating to the acquisition by  the Company of Plastic Specialties, Inc. (7)                                                                                                                                                                                            |
| 2.9                 |       | 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 (8) |
| 2.10                |       | 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 (9).                                                                                                                                                                          |
| 2.11                |       | 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.                                                                                                                                                                                                            |

 

21

----

 
|   |   | Wade & Co., an Oregon corporation,  relating to the purchase of certain assets of the micro irrigation division  of R.M. Wade (10).                                                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1    |   | Certificate of Incorporation of the Company  (11)                                                                                                                                                         |
| 3.2    |   | Bylaws  of the Company (11)                                                                                                                                                                               |
| 10.1   |   | Credit  Agreement dated February 20, 2004 between the Company and Wells Fargo  Bank (10)                                                                                                             |
| 10.2   |   | 1991  Stock Option Plan of the Company (12)                                                                                                                                                               |
| 10.3   |   | 1995  Stock Option Plan of the Company (13)                                                                                                                                                               |
| 10.4   |   | 1999  Stock Option Plan of the Company (14)                                                                                                                                                               |
| 10.5   |   | Form  of Amended and Restated Employment Agreement dated June 1, 2001 between  the Company and each of Messrs. Swartwout, Thoresen and Walbrun (15)                                                  |
| 10.6   |   | 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). |
| 21.1   |   | Subsidiaries of the Registrant(*)                                                                                                                                                                         |
| 23.1   |   | Consent of PricewaterhouseCoopers LLP(*)                                                                                                                                                                  |
| 23.2   |   | Consent of KPMG LLP(*)                                                                                                                                                                                    |
| 31.1   |   | Section 302 Certification(*)                                                                                                                                                                         |
| 32.1   |   | Section 906 Certification(*)                                                                                                                                                                         |

 

----

(1) Incorporated by reference from the exhibits to the Company’sRegistration Statement on Form S-4 filed with the Commission on May 24, 1993.

(2) Incorporated by reference from the appendices to the Company’sdefinitive Proxy Statement on Schedule 14A for the Annual Meeting ofShareholders held November 21, 1996.

(3) Incorporated by reference from the appendices to the Calnetics’definitive Proxy Statement on Schedule 14A for the Special Meeting ofShareholders held October 28, 1997.

(4) Incorporated by reference from exhibits to the Company’s QuarterlyReport on Form 10-Q for the fiscal quarter ended May 31, 1998.

(5) Incorporated by reference from exhibits to the Company’s Current Reporton Form 8-K dated March 5, 1999.

(6) Incorporated by reference from exhibits to the Company’s Annual Reporton Form 10-K for the fiscal year ended August 31, 1999.

(7) Incorporated by reference from exhibits to the Company’s Current Reporton Form 8-K dated October 5, 2000.

(8) Incorporated by reference from exhibits to the Company’s Current Reporton Form 8-K dated December 1, 2000.

(9) Incorporated by reference from exhibits to the Company’s QuarterlyReport on Form 10-Q for the fiscal quarter ended November 30, 2001.

(10) Incorporated by reference from exhibits to the Company’s QuarterlyReport on Form 10-Q for the fiscal quarter ended February 29, 2004.

(11) Incorporated by reference from the appendices to the Company’sdefinitive Proxy Statement on Schedule 14A for the Annual Meeting ofShareholders held January 26, 1998.

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

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

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

(15) Incorporated by reference from exhibits to the Company’s Annual Reporton 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.

* Filed herewith.

 

22

----

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of Independent Registered Public  Accounting Firm                                                      |   |
|---------------------------------------------------------------------------------------------------------------|--------|
| Report of Former Independent Registered  Public Accounting Firm                                               |   |
| Consolidated Balance Sheets as of August 31, 2003 and 2004                                               |   |
| Consolidated Statements of Operations for  the years ended August 31, 2002, 2003 and 2004                |   |
| Consolidated Statements of Stockholders’  Equity for the years ended August 31, 2002, 2003 and 2004 |   |
| Consolidated Statements of Cash Flows for  the years ended August 31, 2002, 2003 and 2004                |   |
| Notes to Consolidated Financial Statements                                                                    |   |
| Report of Independent Registered Public  Accounting Firm                                                      |   |
| Schedule II - Valuation and Qualifying Accounts                                                          |   |

 

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, 2003 and 2004 and theresults of their operations and their cash flows for the years then ended inconformity with accounting principles generally accepted in the United Statesof America.  These financial statementsare the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.  We conducted our audits of these statementsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  These standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audits provide areasonable 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 Intangible Assets.”

 
| /s/ PricewaterhouseCoopers LLP |   |
|--------------------------------|--------|
|                           |
| Los Angeles, California        |
| October 25, 2004          |

 

F-2

----

 

Report of Former Independent Registered Public Accounting Firm

 

TO:                            The Board ofDirectors and Stockholders of Summa Industries

 

We have audited theaccompanying consolidated statements of operations, stockholders’ equity, andcash flows of Summa Industries and subsidiaries for the year ended August 31,2002.  In connection with our audit ofthe consolidated financial statements, we also have audited the financialstatement schedule for the year ending August 31, 2002. Theseconsolidated financial statements and the financial statement schedule arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements and the financial statement schedule based on ouraudit.

 

We conducted our auditin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the results of operations and the cash flows of SummaIndustries and subsidiaries for the year ended August 31, 2002, inconformity with U.S. generally accepted accounting principles. Also in ouropinion, the related financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentfairly, in all material respects, the information set forth therein.

 
| /s/ KPMG LLP             |   |
|--------------------------|--------|
|                     |
| Los Angeles,  California |
| October 7, 2002     |

 

F-3

----

 

**SummaIndustries**

CONSOLIDATED BALANCE SHEETSas of August 31

 
| ** **                                                                                                                                                                              | ** ** | **2003**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **ASSETS**                                                                                                                                                                              |       |       |       |       |       |
| ** **                                                                                                                                                                              |       |       |       |       |       |
| Current  assets:                                                                                                                                                                        |       |       |       |       |       |
| Cash and  cash equivalents                                                                                                                                                              |       | $          | 380,000    |       | $          | 1,248,000 |   |
| Accounts  receivable, net of allowances of $605,000 in 2003 and $685,000 in 2004                                                                                                        |       | 15,729,000 |       | 18,227,000 |       |
| Inventories                                                                                                                                                                             |       | 11,645,000 |       | 14,749,000 |       |
| Prepaid  expenses and other                                                                                                                                                             |       | 905,000    |       | 1,429,000  |       |
| Deferred tax  assets                                                                                                                                                                    |       | 2,008,000  |       | 2,353,000  |       |
|                                                                                                                                                                                    |       |       |       |       |       |
| Total  current assets                                                                                                                                                                   |       | 30,667,000 |       | 38,006,000 |       |
| Property,  plant and equipment, net                                                                                                                                                     |       | 26,112,000 |       | 31,053,000 |       |
| Other assets                                                                                                                                                                            |       | 88,000     |       | 67,000     |       |
| Deferred tax  assets                                                                                                                                                                    |       | 2,430,000  |       | 1,737,000  |       |
| Goodwill,  net                                                                                                                                                                          |       | 8,009,000  |       | 8,009,000  |       |
| Other  intangibles, net                                                                                                                                                                 |       | 1,413,000  |       | 1,245,000  |       |
|                                                                                                                                                                                    |       |       |       |       |       |
| Total assets                                                                                                                                                                            |       | $          | 68,719,000 |       | $          | 80,117,000 |   |
| **LIABILITIES,  MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY**                                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current  liabilities:                                                                                                                                                                   |       |       |       |       |       |
| Current  maturities of long-term debt                                                                                                                                                   |       | $          | 3,896,000  |       | $          | 2,195,000 |   |
| Accounts  payable                                                                                                                                                                       |       | 5,302,000  |       | 9,088,000  |       |
| Accrued  salaries, wages and benefits                                                                                                                                                   |       | 2,629,000  |       | 3,180,000  |       |
| Other  accrued liabilities                                                                                                                                                              |       | 2,589,000  |       | 4,249,000  |       |
|                                                                                                                                                                                    |       |       |       |       |       |
| Total  current liabilities                                                                                                                                                              |       | 14,416,000 |       | 18,712,000 |       |
|                                                                                                                                                                                    |       |       |       |       |       |
| Long-term  debt, net of current maturities                                                                                                                                              |       | 16,219,000 |       | 28,663,000 |       |
| Other  long-term liabilities                                                                                                                                                            |       | 2,601,000  |       | 2,508,000  |       |
|                                                                                                                                                                                    |       |       |       |       |       |
| Total  long-term liabilities                                                                                                                                                            |       | 18,820,000 |       | 31,171,000 |       |
|                                                                                                                                                                                    |       |       |       |       |       |
| Manditorily  redeemable convertible preferred stock, par value $.001; 5,000 shares  authorized; issued and outstanding: 5,000 at August 31, 2003 and none at  August 31, 2004 |       | 6,103,000  |       | —     |       |
| Minority  interest in subsidiary                                                                                                                                                        |       | —     |       | 205,000    |       |
|                                                                                                                                                                                    |       |       |       |       |       |
| Stockholders’  equity:                                                                                                                                                             |       |       |       |       |       |
| Preferred  stock, par value $.001; 5,000,000 shares authorized; none outstanding                                                                                                        |       | —     |       | —     |       |
| Common  stock, par value $.001; 10,000,000 shares authorized; issued and outstanding:  4,246,103 at August 31, 2003 and 3,974,187 at August 31, 2004                          |       | 17,577,000 |       | 15,305,000 |       |
| Retained  earnings                                                                                                                                                                      |       | 11,803,000 |       | 14,724,000 |       |
|                                                                                                                                                                                    |       |       |       |       |       |
| Total  stockholders’ equity                                                                                                                                                        |       | 29,380,000 |       | 30,029,000 |       |
| Total  liabilities, manditorily redeemable preferred stock and stockholders’ equity                                                                                                |       | $          | 68,719,000 |       | $          | 80,117,000 |   |

 

See accompanying notes to consolidated financial statements.

 

F-4

----

 

**SummaIndustries**

 

CONSOLIDATEDSTATEMENTS OF OPERATIONS

for the years ended August 31

 
| ** **                                                                                      | ** ** | **2002**   | ** **  | **2003**    | ** ** | **2004**    | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------|-------------|-------------|------------|-------------|------------|
| Net sales                                                                                       |       | $          | 116,241,000 |        | $          | 111,140,000 |       | $ | 116,404,000 |   |
| Cost of  sales                                                                                  |       | 85,765,000 |        | 83,336,000  |       | 88,522,000  |       |
|                                                                                            |       |       |        |        |       |        |       |
| Gross profit                                                                                    |       | 30,476,000 |        | 27,804,000  |       | 27,882,000  |       |
| Selling,  general, and administrative and other expenses                                        |       | 21,911,000 |        | 21,005,000  |       | 21,027,000  |       |
|                                                                                            |       |       |        |        |       |        |       |
| Operating  income                                                                               |       | 8,565,000  |        | 6,799,000   |       | 6,855,000   |       |
| Interest  expense, net                                                                          |       | 2,500,000  |        | 1,481,000   |       | 1,585,000   |       |
|                                                                                            |       |       |        |        |       |        |       |
| Income  before income taxes and cumulative effect of a change in accounting principle           |       | 6,065,000  |        | 5,318,000   |       | 5,270,000   |       |
| Provision  for income taxes                                                                     |       | 2,136,000  |        | 1,760,000   |       | 1,899,000   |       |
|                                                                                            |       |       |        |        |       |        |       |
| Income  before cumulative effect of a change in accounting principle                            |       | 3,929,000  |        | 3,558,000   |       | 3,371,000   |       |
| Cumulative  effect of a change in accounting principle, net of tax                              |       | —     |        | (22,343,000 | )          | —      |       |
|                                                                                            |       |       |        |        |       |        |       |
| Net income  (loss)                                                                              |       | $          | 3,929,000   |        | $          | (18,785,000 | )          | $ | 3,371,000 |   |
|                                                                                            |       |       |        |        |       |        |       |
| Preferred  stock accretion                                                                      |       | $          | 491,000     |        | $          | 737,000     |       | $ | 450,000 |   |
|                                                                                            |       |       |        |        |       |        |       |
| Net income  available to common stockholders:                                                   |       |       |        |        |       |        |       |
| Before  cumulative effect of a change in accounting principle                                   |       | $          | 3,438,000   |        | $          | 2,821,000   |       | $ | 2,921,000 |   |
| After  cumulative effect of a change in accounting principle                                    |       | $          | 3,438,000   |        | $          | (19,522,000 | )          | $ | 2,921,000 |   |
|                                                                                            |       |       |        |        |       |        |       |
| Earnings per  common share before cumulative effect of a change in accounting principle:        |       |       |        |        |       |        |       |
| Basic                                                                                           |       | $          | 0.78        |        | $          | 0.65        |       | $ | 0.69 |   |
| Diluted                                                                                         |       | $          | 0.76        |        | $          | 0.63        |       | $ | 0.68 |   |
|                                                                                            |       |       |        |        |       |        |       |
| Earnings  (loss) per common share after cumulative effect of a change in accounting  principle: |       |       |        |        |       |        |       |
| Basic                                                                                           |       | $          | 0.78        |        | $          | (4.48       | )          | $ | 0.69 |   |
| Diluted                                                                                         |       | $          | 0.76        |        | $          | (4.48       | )          | $ | 0.68 |   |
|                                                                                            |       |       |        |        |       |        |       |
| Weighted  average common shares outstanding:                                                    |       |       |        |        |       |        |       |
| Basic                                                                                           |       | 4,398,000  |        | 4,359,000   |       | 4,215,000   |       |
| Diluted                                                                                         |       | 4,512,000  |        | 4,449,000   |       | 4,297,000   |       |

 

See accompanying notes to consolidated financial statements.

 

F-5

----

 

**SummaIndustries**

 

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

for the years ended August 31,2004

 
| ** **                                                    | ** ** | **Common  Shares** | ** ** | **Common  Stock** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total**   | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|------------------------------------------------------|------------|-------------|------------|
|                                                          |       |               |       |              |       |                   |       |                                                 |       |        |       |
| Balance at August 31,  2001                              |       | 4,297,313          |       | $                 | 18,048,000 |                   | $          | 27,887,000                                           |       | $           | (128,000   | ) | $ | 45,807,000 |   |
| Contribution  to ESOP                                         |       | 29,023             |       | 240,000           |       | —                 |       | —                                               |       | 240,000     |       |
| Common stock  issued for business acquisition                 |       | 40,000             |       | 530,000           |       | —                 |       | —                                               |       | 530,000     |       |
| Exercise of  stock options, including tax benefit of $176,000 |       | 80,433             |       | 441,000           |       | —                 |       | —                                               |       | 441,000     |       |
| Stock  redeemed in exercise of stock options                  |       | (5,000             | )          | (40,000           | )          | —                 |       | —                                               |       | (40,000     | )          |
| Repurchase  of common stock                                   |       | (40,000            | )          | (450,000          | )          | —                 |       | —                                               |       | (450,000    | )          |
| Net income                                                    |       | —             |       | —            |       | 3,929,000              |       |                                                 |       | 3,929,000   |       |
| Beneficial  conversion on issuance of preferred stock         |       | —             |       | 125,000           |       | —                 |       | —                                               |       | 125,000     |       |
| Preferred  stock accretion                                    |       | —             |       | —            |       | (491,000               | )          |                                                 |       | (491,000    | )          |
| Other  comprehensive income                                   |       | —             |       | —            |       | —                 |       | 128,000                                              |       | 128,000     |       |
|                                                          |       |               |       |              |       |                   |       |                                                 |       |        |       |
| 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 |   |
|                                                               |            |                    |            |                   |            |                        |            |                                                      |            |             |            |  |  |  |  |

 

See accompanying notes to consolidatedfinancial statements.

 

F-6

----

 

**SummaIndustries**

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

for the years ended August 31

 
| ** **                                                                                | ** ** | **2002**    | ** ** | **2003**   | ** ** | **2004**    | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|-------------|------------|
| Operating  activities:                                                                    |       |        |       |       |       |        |       |
| Net income  (loss)                                                                        |       | $           | 3,929,000  |       | $          | (18,785,000 | )          | $ | 3,371,000 |   |
|                                                                                      |       |        |       |       |       |        |       |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |        |       |       |       |        |       |
| Depreciation                                                                              |       | 4,927,000   |       | 4,730,000  |       | 4,720,000   |       |
| Amortization                                                                              |       | 1,286,000   |       | 240,000    |       | 248,000     |       |
| Cumulative  effect of change in accounting principle, net of tax                          |       | —      |       | 22,343,000 |       | —      |       |
| Write-down  of goodwill, net of tax                                                       |       | —      |       | 16,000     |       | —      |       |
| Change in  net deferred income taxes                                                      |       | (139,000    | )          | 363,000    |       | 348,000     |       |
| (Gain) loss  on disposition of property, plant and equipment                              |       | (742,000    | )          | (5,000     | )          | 93,000      |       |
| Net changes  in assets and liabilities, net of effects of acquisitions                    |       | 2,604,000   |       | 1,346,000  |       | 931,000     |       |
|                                                                                      |       |        |       |       |       |        |       |
| Total  adjustments                                                                        |       | 7,936,000   |       | 29,033,000 |       | 6,340,000   |       |
|                                                                                      |       |        |       |       |       |        |       |
| Net cash  provided by operating activities                                                |       | 11,865,000  |       | 10,248,000 |       | 9,711,000   |       |
|                                                                                      |       |        |       |       |       |        |       |
| Investing  activities:                                                                    |       |        |       |       |       |        |       |
| Acquisitions  of businesses, net of cash acquired                                         |       | (2,685,000  | )          | —     |       | (1,903,000  | )          |
| Purchases of  property and equipment                                                      |       | (3,380,000  | )          | (4,055,000 | )          | (8,334,000  | )          |
| Net proceeds  from the sale of property plant and equipment                               |       | 2,397,000   |       | 38,000     |       | 16,000      |       |
|                                                                                      |       |        |       |       |       |        |       |
| Net cash  (used in) investing activities                                                  |       | (3,668,000  | )          | (4,017,000 | )          | (10,221,000 | )          |
|                                                                                      |       |        |       |       |       |        |       |
| Financing  activities:                                                                    |       |        |       |       |       |        |       |
| Net proceeds  from (payments on) revolving line of credit                                 |       | (1,854,000  | )          | (753,000   | )          | 7,586,000   |       |
| Proceeds  from issuance of long-term debt                                                 |       | 4,007,000   |       | —     |       | 5,561,000   |       |
| Payments on  long-term debt                                                               |       | (14,857,000 | )          | (4,043,000 | )          | (12,590,000 | )          |
| Proceeds  from the exercise of stock options, net                                         |       | 401,000     |       | 293,000    |       | 856,000     |       |
| Proceeds  from sale of redeemable preferred stock                                         |       | 5,000,000   |       | —     |       | —      |       |
| Purchase of  common stock                                                                 |       | (450,000    | )          | (2,038,000 | )          | (35,000     | )          |
|                                                                                      |       |        |       |       |       |        |       |
| Net cash  provided by (used in) financing activities                                      |       | (7,753,000  | )          | (6,541,000 | )          | 1,378,000   |       |
|                                                                                      |       |        |       |       |       |        |       |
| Net increase  (decrease) in cash and cash equivalents                                     |       | 444,000     |       | (310,000   | )          | 868,000     |       |
| Cash and  cash equivalents, beginning of year                                             |       | 246,000     |       | 690,000    |       | 380,000     |       |
|                                                                                      |       |        |       |       |       |        |       |
| Cash and  cash equivalents, end of year                                                   |       | $           | 690,000    |       | $          | 380,000     |       | $ | 1,248,000 |   |

 

See accompanying notes to consolidated financial statements*.*

 

F-7

----

 

Summa Industries

 

*Notes to Consolidated Financial Statements*

 

For the year ended August 31, 2004

 

**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 ofconsolidation**

 

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 19.  All intercompany account balances andtransactions have been eliminated in consolidation.  Prior year amounts have been reclassified inthe accompanying financial statements to conform with current yearpresentations.

 

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

 

The preparation of financial statements in conformity with United Statesgenerally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer 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, thecustomer’s credit worthiness has been established, shipment of the product hasoccurred, and title has transferred.

 

**Inventories**

 

Inventories are stated at the lower of cost (determined on a first-in,first-out basis) or market.  Costincludes material, labor and manufacturing overhead.  Lower of cost or market adjustments arecharged to cost of sales as identified.

 

**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 relatedresults of cost and accumulated depreciation thereon are removed from theaccounts, and any gain or loss is included in results of operations.

 

F-8

----

 

**Goodwill**

 

Goodwill represents the excess of purchase price over fair value of netassets acquired.  Goodwill is tested forimpairment annually in the fourth quarter, after completion of an annualplanning process, or earlier if events occur which require an impairmentanalysis to be performed.  With respectto each reporting unit which has any goodwill, the fair value is determinedusing traditional valuation methodology, and compared with its carryingvalue.  If the fair value exceeds theunit’s carrying value, goodwill of the reporting unit is considered not to beimpaired.  If the unit’s carrying valueexceeds its fair value, assets of the unit are individually valued to determinethe 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.

 

**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.

 

**Long-lived assets**

 

The realizability of long-lived assets is evaluated periodically asevents or circumstances indicate a possible inability to recover the carryingamount.  Such evaluation is based onvarious analyses, including cash flow and profitability projections.  The analyses necessarily involve significantmanagement judgment.  In the event theprojected undiscounted cash flows are less than net book value of the assets,the carrying value of the assets will be written down to their estimated fairvalue.

 

**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 isantidilutive.  See Note 3 for details ofthe computation.

 

**Cash equivalents**

 

The Company considers all highly liquid debt instruments with anoriginal maturity of three months or less to be cash equivalents.

 

F-9

----

 

**Income taxes**

 

The Company accounts for income taxes in accordance with the 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 compensation cost for stock options awarded been determinedconsistently with SFAS Statement No. 123, the Company’s net income and earningsper share would have reflected the following pro forma amounts at August 31:

 
| ** **                                                                                                  | ** ** | **2002** | ** ** | **2003** | ** ** | **2004**  | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Net income  available to common stockholders before cumulative effect of a change in  accounting principle: |       |     |       |     |       |      |       |
| As reported                                                                                                 |       | $        | 3,438,000  |     | $          | 2,821,000 |       | $ | 2,921,000 |   |
| Stock based  employee cost, net of tax                                                                      |       | 302,000  |       | 100,000  |       | 130,000   |       |
| Pro forma                                                                                                   |       | $        | 3,136,000  |     | $          | 2,721,000 |       | $ | 2,791,000 |   |
| Diluted earnings  per common share:                                                                         |       |     |       |     |       |      |       |
| As reported                                                                                                 |       | $        | 0.76       |     | $          | 0.63      |       | $ | 0.68 |   |
| Stock based  employee cost, net of tax                                                                      |       |     | 0.04       |     |       | 0.02      |       |   | 0.03 |   |
| Pro forma                                                                                                   |       | $        | 0.70       |     | $          | 0.61      |       | $ | 0.65 |   |

 

**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-10

----

 

The carrying amount of goodwill and the impairment charge with respectto the Company’s reportable segments is as follows:

 
| **Segment**                   | ** ** | **Balance at  August 31, 2002** | ** ** | **Impairment  Charges (Pre-tax)** | ** ** | **Balance at  August 31, 2003** | ** ** | **Balance at  August 31, 2004** | ** ** |
|-------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
|                          |       |                            |       |                              |       |                            |       |                            |       |
| Optical  components           |       | $                               | 8,867,000  |                              | $          | 5,953,000                       |       | $                               | 2,914,000  |   | $ | 2,914,000 |   |
| Material  handling components |       | 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 |   |

 

The following is a reconciliation of previously reported net incomeavailable to common stockholders and earnings per share, before cumulativeeffect of a change in accounting principle, to the amounts adjusted for theexclusion of goodwill amortization for the years ended August 31:

 
| ** **                                                     | ** ** | **2002** | ** ** | **2003** | ** ** | **2004**  | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
|                                                           |       |     |       |     |       |      |       |
| Reported  income before cumulative effect of accounting change |       | $        | 3,438,000  |     | $          | 2,821,000 |       | $ | 2,921,000 |   |
| Add back:  Goodwill amortization, net of taxes                 |       | 880,000  |       | —   |       | —    |       |
| Adjusted  income before cumulative effect of accounting change |       | $        | 4,318,000  |     | $          | 2,821,000 |       | $ | 2,921,000 |   |
|                                                           |       |     |       |     |       |      |       |
| Basic  earnings per share:                                     |       |     |       |     |       |      |       |
|                                                           |       |     |       |     |       |      |       |
| Reported  income before cumulative effect of accounting change |       | $        | .78        |     | $          | 0.65      |       | $ | 0.69 |   |
| Goodwill  amortization                                         |       | .20      |       | —   |       | —    |       |
| Adjusted  income before cumulative effect of accounting change |       | $        | .98        |     | $          | .65       |       | $ | .69 |   |
|                                                           |       |     |       |     |       |      |       |
| Diluted  earnings per share:                                   |       |     |       |     |       |      |       |
|                                                           |       |     |       |     |       |      |       |
| Reported  income before cumulative effect of accounting change |       | $        | .76        |     | $          | .63       |       | $ | .68 |   |
| Goodwill  amortization                                         |       | .20      |       | —   |       | —    |       |
| Adjusted  income before cumulative effect of accounting change |       | $        | .96        |     | $          | .63       |       | $ | .68 |   |

 

**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 412,940 common shares asof August 31, 2002, 736,597 common shares as of August 31, 2003 and171,296 shares as of August 31, 2004 were excluded from the calculation ofequivalent 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.

 

F-11

----

 

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: 

 
| ** **                                                     | ** ** | **2002**  | ** ** | **2003**  | ** ** | **2004**    | ** ** |
|----------------------------------------------------------------|------------|-----------|------------|-----------|------------|-------------|------------|
| Numerators:                                                    |       |      |       |      |       |        |       |
|                                                           |       |      |       |      |       |        |       |
| Before  cumulative effect of a change in accounting principle: |       |      |       |      |       |        |       |
|                                                           |       |      |       |      |       |        |       |
| Net income                                                     |       | $         | 3,929,000  |      | $          | 3,558,000   |       | $ | 3,371,000 |   |
| Preferred  stock accretion                                     |       | (491,000  | )          | (737,000  | )          | (450,000    | )          |
| Income  available to common stockholders                       |       | $         | 3,438,000  |      | $          | 2,821,000   |       | $ | 2,921,000 |   |
|                                                           |       |      |       |      |       |        |       |
| After  cumulative effect of a change in accounting principle:  |       |      |       |      |       |        |       |   |   |   |
|                                                           |       |      |       |      |       |        |       |
| Net income  (loss)                                             |       | $         | 3,929,000  |      | $          | (18,785,000 | )          | $ | 3,371,000 |   |
| Preferred  stock accretion                                     |       | (491,000  | )          | (737,000  | )          | (450,000    | )          |
| Income  available to common stockholders                       |       | $         | 3,438,000  |      | $          | (19,522,000 | )          | $ | 2,921,000 |   |
|                                                           |       |      |       |      |       |        |       |
| Denominators:                                                  |       |      |       |      |       |        |       |
|                                                           |       |      |       |      |       |        |       |
| Weighted  average shares outstanding – basic              |       | 4,398,000 |       | 4,359,000 |       | 4,215,000   |       |
| Impact of  common shares to be issued under stock option plans |       | 114,000   |       | 90,000    |       | 82,000      |       |
| Weighted  average shares outstanding – diluted            |       | 4,512,000 |       | 4,449,000 |       | 4,297,000   |       |
|                                                                |            |           |            |           |            |             |            |  |  |  |  |  |  |

 

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

 

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

 
| ** **                                                                                 | ** ** | **2002**  | ** ** | **2003**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|------------|------------|
| Accounts receivable, net                                                                   |       | $         | 168,000    |       | $          | 1,865,000  |       | $ | (2,498,000 | ) |
| Inventories                                                                                |       | 1,595,000 |       | 668,000    |       | (2,239,000 | )          |
| Prepaid expenses and other  assets                                                         |       | 1,103,000 |       | 320,000    |       | (459,000   | )          |
| Accounts payable                                                                           |       | (249,000  | )          | (1,108,000 | )          | 3,786,000  |       |
| Accrued liabilities                                                                        |       | (13,000   | )          | (399,000   | )          | 2,341,000  |       |
| Cash flows from net  changes in assets and liabilities, net of the effects of acquisitions |       | $         | 2,604,000  |       | $          | 1,346,000  |       | $ | 931,000 |   |

 

Cash paid during the years ended August 31:
| ** **   | ** ** | **2002** | ** ** | **2003** | ** ** | **2004**  | ** ** |
|--------------|------------|----------|------------|----------|------------|-----------|------------|
|         |       |     |       |     |       |      |       |   |   |   |
| Interest     |       | $        | 2,536,000  |     | $          | 1,250,000 |       | $ | 1,555,000 |   |
| Income taxes |       | $        | 470,000    |     | $          | 1,888,000 |       | $ | 834,000 |   |

 

F-12

----

 

Non-cash investing and financing activities:

 
| ** **                                                                             | ** ** | **2002**   | ** ** | **2003** | ** ** | **2004**  | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|-----------|------------|
| Common stock issued to  401K Plan                                                      |       | $          | 240,000    |     | $          | 428,000   |       | $ | 345,000 |   |
| Common stock issued in  business acquisition                                           |       | $          | 530,000    |     | —     |      | —     |   |
| Accretion of redeemable  preferred stock                                               |       | $          | 491,000    |     | $          | 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 19):                                                    |       |       |       |     |       |      |       |
| Fair value of assets  acquired                                                         |       | $          | 5,344,000  |     | $          | —    |       | $ | 2,025,000 |   |
| Liabilities assumed or  incurred                                                       |       | (2,659,000 | )          | —   |       | (122,000  | )          |
| Cash paid                                                                              |       | 2,685,000  |       | —   |       | 1,903,000 |       |
| Less cash acquired                                                                     |       | —     |       | —   |       | —    |       |
| Net cash used in  acquisitions                                                         |       | $          | 2,685,000  |     | $          | —    |       | $ | 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, 2003, theestimated fair value of total long-term debt was $20,501,000 compared to thecarrying value of $20,115,000.  At August 31,2004, the estimated fair value of debt was equal to the carrying value of$30,858,000 based on market rates.

 

**6.****                                      Inventories**

 

Inventories consisted of the following at August 31:

 
| ** **           | ** ** | **2003**  | ** ** | **2004**  | ** ** |
|----------------------|------------|-----------|------------|-----------|------------|
| Finished  goods      |       | $         | 4,266,000  |      | $          | 6,407,000 |   |
| Work in  process     |       | 515,000   |       | 296,000   |       |
| Materials  and parts |       | 6,864,000 |       | 8,046,000 |       |
|                 |       | $         | 11,645,000 |      | $          | 14,749,000 |   |

 

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

 

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

 
| ** **                                     | ** ** | **2003**    | ** ** | **2004**    | ** ** |
|------------------------------------------------|------------|-------------|------------|-------------|------------|
| Land, at cost                                  |       | $           | 2,636,000  |        | $          | 2,716,000 |   |
| Buildings and leasehold  improvements, at cost |       | 14,893,000  |       | 17,382,000  |       |
| Machinery and equipment,  at cost              |       | 34,602,000  |       | 40,124,000  |       |
| Office furniture and  equipment, at cost       |       | 3,600,000   |       | 3,620,000   |       |
|                                           |       | 55,731,000  |       | 63,842,000  |       |
| Accumulated depreciation                       |       | (29,619,000 | )          | (32,789,000 | )          |
| Net property, plant and  equipment             |       | $           | 26,112,000 |        | $          | 31,053,000 |   |

 

F-13

----

 

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

 

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

 
| ** **                      | ** ** | **2003** | ** ** | **2004**   | ** ** |
|---------------------------------|------------|----------|------------|------------|------------|
| Goodwill                        |       | $        | 8,902,000  |       | $          | 8,902,000 |   |
| Less: accumulated  amortization |       | (893,000 | )          | (893,000   | )          |
| Goodwill, net                   |       | $        | 8,009,000  |       | $          | 8,009,000 |   |
|                            |       |     |       |       |       |   |   |
| Other intangibles               |       | $        | 2,324,000  |       | $          | 2,404,000 |   |
| Less: accumulated  amortization |       | (911,000 | )          | (1,159,000 | )          |
| Other intangibles, net          |       | $        | 1,413,000  |       | $          | 1,245,000 |   |

 

Otherintangibles consisted of the following at August 31:

 
| ** **                        | ** ** | **2003** | ** ** | **2004**                      | ** ** |
|-----------------------------------|------------|----------|------------|-------------------------------|------------|
| ** **                        | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Non-compete  agreement            |       | $        | 695,000    |                          | $          | (200,000 | ) | $ | 495,000 |   | $ | 695,000 |   | $ | (268,000 | ) | $ | 427,000 |   |
| Royalty agreement                 |       | 599,000  |       | (118,000                      | )          | 481,000 |   | 599,000 |   | (136,000 | ) | 463,000 |   |
| Patents,  trademarks, trade names |       | 674,000  |       | (348,000                      | )          | 326,000 |   | 674,000 |   | (411,000 | ) | 263,000 |   |
| Other                             |       | 356,000  |       | (245,000                      | )          | 111,000 |   | 436,000 |   | (344,000 | ) | 92,000 |   |
| Total                             |       | $        | 2,324,000  |                          | $          | (911,000 | ) | $ | 1,413,000 |   | $ | 2,404,000 |   | $ | (1,159,000 | ) | $ | 1,245,000 |   |

 

Amortization of other intangibles for fiscal year 2004 was$248,000.  Future amortization of otherintangibles at August 31, 2004 is as follows:

 
| **Fiscal Year**      | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|
| 2005                 |       | $          | 269,000    |   |
| 2006                 |       | $          | 176,000    |   |
| 2007                 |       | $          | 131,000    |   |
| 2008                 |       | $          | 129,000    |   |
| 2009                 |       | $          | 110,000    |   |
| 2010 and  thereafter |       | $          | 430,000    |   |

 

F-14

----

 

**9.****                                      Incometaxes**

 

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

 
| ** **                 | ** ** | **2002**  | ** ** | **2003** | ** ** | **2004**  | ** ** |
|----------------------------|------------|-----------|------------|----------|------------|-----------|------------|
| Current:                   |       |      |       |     |       |      |       |
| Federal                    |       | $         | 1,977,000  |     | $          | 804,000   |       | $ | 1,065,000 |   |
| State                      |       | 85,000    |       | (99,000  | )          | 297,000   |       |
| Foreign                    |       | 213,000   |       | 116,000  |       | 189,000   |       |
|                       |       | 2,275,000 |       | 821,000  |       | 1,551,000 |       |
| Deferred:                  |       |      |       |     |       |      |       |
| Federal                    |       | (133,000  | )          | 842,000  |       | 304,000   |       |
| State                      |       | (6,000    | )          | 97,000   |       | 44,000    |       |
|                       |       | (139,000  | )          | 939,000  |       | 348,000   |       |
| Provision for income taxes |       | $         | 2,136,000  |     | $          | 1,760,000 |       | $ | 1,899,000 |   |

 

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:

 
| ** **                                      | ** ** | **2002** | ** ** | **2003** | ** ** | **2004**  | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Provision for federal taxes  at statutory rates |       | $        | 2,062,000  |     | $          | 1,808,000 |       | $ | 1,792,000 |   |
| State tax, net of federal  benefit              |       | 50,000   |       | 84,000   |       | 216,000   |       |
| Amortization of  nondeductible goodwill         |       | 192,000  |       | —   |       | —    |       |
| Extraterritorial income  exclusion benefit      |       | (147,000 | )          | (129,000 | )          | (182,000  | )          |
| Other, net                                      |       | (21,000  | )          | (3,000   | )          | 73,000    |       |
| Provision for income taxes                      |       | $        | 2,136,000  |     | $          | 1,760,000 |       | $ | 1,899,000 |   |

 

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

 
| ** **                                           | ** ** | **2003**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|
| State taxes                                          |       | $          | 157,000    |       | $          | 89,000 |   |
| Accrued expenses                                     |       | 1,049,000  |       | 1,224,000  |       |
| Reserves                                             |       | 802,000    |       | 1,040,000  |       |
| Total current deferred tax  assets                   |       | 2,008,000  |       | 2,353,000  |       |
| Other long-term deferred  tax assets                 |       | 53,000     |       | (11,000    | )          |
| Long-term reserves                                   |       | 773,000    |       | 725,000    |       |
| Depreciation                                         |       | (2,046,000 | )          | (1,918,000 | )          |
| Amortization                                         |       | 3,650,000  |       | 2,941,000  |       |
| Total non-current deferred  tax assets (liabilities) |       | 2,430,000  |       | 1,737,000  |       |
| Net deferred tax assets  (liabilities)               |       | $          | 4,438,000  |       | $          | 4,090,000 |   |

 

F-15

----

 

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

 

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

 
| ** **               | ** ** | **2003**   | ** ** | **2004**   | ** ** |
|--------------------------|------------|------------|------------|------------|------------|
| Revolving line of credit |       | $          | 4,757,000  |       | $          | 12,343,000 |   |
| Bank term loan           |       | 6,001,000  |       | 4,537,000  |       |
| Real estate and other    |       | 9,357,000  |       | 10,983,000 |       |
| Subordinated debt        |       | —     |       | 2,995,000  |       |
|                     |       |       |       |       |       |
| Total                    |       | 20,115,000 |       | 30,858,000 |       |
| Less: current maturities |       | 3,896,000  |       | 2,195,000  |       |
| Long-term portion        |       | $          | 16,219,00  |       | $          | 28,663,000 |   |

 

Future maturities of long-term debt at August 31, 2004 were asfollows:

 
| **Fiscal Year**     | ** ** | **Amount** | ** ** |
|---------------------|------------|------------|------------|
| 2005                |       | $          | 2,195,000  |   |
| 2006                |       | 7,181,000  |       |
| 2007                |       | 18,171,000 |       |
| 2008                |       | 1,837,000  |       |
| 2009                |       | 946,000    |       |
| 2010 and thereafter |       | 528,000    |       |
| Total               |       | $          | 30,858,000 |   |

 

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, 2004, the total capacityunder the revolving line of credit was $18,508,000, of which advances were$12,343,000, all classified as long-term. Depending on certain financial ratios, interest on the line of credit isat 0.075% to 1.0% below the applicable prime rate or 1.25% to 1.5% above LIBOR,at the Company’s option, in traunches. The average interest rate on the revolving line of credit was 3.1% at August 31,2003 and 2004.  There is a charge of0.25% 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.  The loan replaced a former bank term loanwith an interest rate of 8.4% at August 31, 2003.  The bank loans are subject to certaincovenants and restrictions and are secured by substantially all of the Company’sassets, excluding real estate and equipment related to certain other long-termdebt.

 

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 7 years.  Average interest rates on other long-termdebt were 3.5% at August 31, 2003 and 4.2% at August 31, 2004.  The Company has a subordinated note with abalance of $2,995,000 at August 31, 2004. The interest rate on the subordinated debt at August 31, 2004 was7.5%, which is scheduled to decline by 1⁄2 % for each one million dollars bywhich the note is retired.

 

**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$7,191,000 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 May 2009.  Rental expense chargedto operations was approximately $1,362,000 in 2002, $1,663,000 in 2003 and$1,739,000 in 2004.

 

The aggregate minimum future lease payments under these leases at August 31,2004 are approximately as follows:

 
| **Fiscal Year**      | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|
| 2005                 |       | $          | 1,345,000  |   |
| 2006                 |       | 990,000    |       |
| 2007                 |       | 716,000    |       |
| 2008                 |       | 651,000    |       |
| 2009                 |       | 476,000    |       |
| 2010 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$618,000 in 2002, $887,000 in 2003 and $846,000 in 2004.

 

The Company had an Employee Stock Ownership Plan (the “ESOP”).  Under the ESOP, the Company could make cashcontributions to the ESOP trust for purchases of shares of the Company’s CommonStock, or could contribute Common Stock directly to the ESOP trust. The totalcontributions by the Company to the ESOP were $290,000 in fiscal 2002.  In August 2002, the ESOP was merged withthe Savings and Retirement Plan.

 

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 productwarranty liability for the years ended August 31:

 
| ** **                             | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Beginning of  period                   |       | $        | 496,000    |     | $          | 550,000  |       | $ | 472,000 |   |
| Deductions                             |       | (565,000 | )          | (337,000 | )          | (419,000 | )          |
| Additions                              |       | 591,000  |       | 259,000  |       | 393,000  |       |
| Other –  acquired in acquisitions |       | 28,000   |       | —   |       | 25,000   |       |
| End of  period                         |       | $        | 550,000    |     | $          | 472,000  |       | $ | 471,000 |   |

 

F-17

----

 

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

 

The Company is obligated to pay fees and commissions on certainproducts to one of its directors, pursuant to pre-existing agreements with asubsidiary acquired in fiscal 1997. Total fees and commissions were $42,000 in 2002, $30,000 in 2003 and$30,000 in 2004.  The agreements continueuntil 2009.

 

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

 

The Company has three 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:

 
| **Plan**   | ** ** | **Total Shares Authorized** | ** ** | **Shares Remaining and  Available for Grant  at August 31, 2004** | ** ** |
|------------|------------|-----------------------------|------------|------------------------------------------------------------------------|------------|
| ** ** | ** ** | ** **                  | ** ** | ** **                                                             | ** ** |
| 1991 Plan  |       | 150,000                     |       | —                                                                 |       |
| 1995 Plan  |       | 350,000                     |       | 21,527                                                                 |       |
| 1999 Plan  |       | 750,000                     |       | 121,390                                                                |       |

 

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 2002, 2003 and 2004. 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 2002, 2003 and 2004:

 
| ** **                                | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average risk-free  interest rate |       | 4.2      | %          | 2.6      | %          | 3.5      | %          |
| Volatility                                |       | 35       | %          | 35       | %          | 34       | %          |
| Expected dividend yields                  |       | —   |       | —   |       | —   |       |
| Weighted average expected  life in years  |       | 4.8      |       | 4.9      |       | 5.0      |       |

 

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, 2004 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 31,2002, 2003 and 2004 and changes during the years then ended, is presented inthe following table:

 
| ** **                                      | ** ** | **2002**   | ** ** | **2003**                             | ** ** | **2004**   | ** ** |
|-------------------------------------------------|------------|------------|------------|--------------------------------------|------------|------------|------------|
| ** **                                      | ** ** | **Shares** | ** ** | **Weighted Average Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted Average Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted Average Exercise  Price** | ** ** |
| Outstanding at beginning of year                |       | 1,044,012  |       | $                                    | 8.33       |       | 1,082,153  |   | $ | 8.58 |   | 1,034,435 |   | $ | 8.48 |   |
| Granted                                         |       | 165,000    |       | $                                    | 8.41       |       | 84,000     |   | $ | 9.45 |   | 105,000 |   | $ | 7.57 |   |
| Exercised                                       |       | (80,433    | )          | $                                    | 3.30       |       | (37,925    | ) | $ | 6.71 |   | (136,835 | ) | $ | 4.33 |   |
| Forfeited/expired                               |       | (46,426    | )          | $                                    | 11.36      |       | (93,793    | ) | $ | 11.31 |   | (50,442 | ) | $ | 10.25 |   |
| Outstanding at end of year                      |       | 1,082,153  |       | $                                    | 8.58       |       | 1,034,435  |   | $ | 8.48 |   | 952,158 |   | $ | 8.88 |   |
|                                            |       |       |       |                                 |       |       |       |   |   |   |   |   |   |
| Exercisable at end of year                      |       | 744,161    |       | $                                    | 8.04       |       | 761,608    |   | $ | 8.10 |   | 667,177 |   | $ | 8.99 |   |
| Weighted average fair  value of options granted |       |       |       | $                                    | 3.26       |       |       |   | $ | 3.22 |   |   |   | $ | 2.72 |   |

 

The following table summarizes information about stock optionsoutstanding at August 31, 2004:

 
| ** **                 | ** ** | ** **                                     | ** ** | **Outstanding**                     | ** ** | **Exercisable**                        | ** ** |
|----------------------------|------------|------------------------------------------------|------------|-------------------------------------|------------|----------------------------------------|------------|
| **Exercise  Price  Range** | ** ** | **Weighted  Average  Remaining  Term (Years)** | ** ** | **Number of  Options  Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Options  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $4.55 - $5.75              |       | 2.7                                            |       | 162,115                             |       | $                                      | 5.20       |   | 162,115 |   | $ | 5.20 |   |
| $7.50 - $9.53              |       | 6.1                                            |       | 416,750                             |       | $                                      | 8.52       |   | 197,250 |   | $ | 8.84 |   |
| $9.55 - $12.16             |       | 4.7                                            |       | 329,357                             |       | $                                      | 10.61      |   | 264,126 |   | $ | 10.78 |   |
| $12.50 - $13.72            |       | 4.3                                            |       | 43,936                              |       | $                                      | 12.75      |   | 43,686 |   | $ | 12.82 |   |
|                       |       |                                           |       | 952,158                             |       | $                                      | 8.88       |   | 667,177 |   | $ | 8.99 |   |

 

F-19

----

 

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

 
| ** **                                                     | ** ** | **Quarters ended**                            | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                     | ** ** | **November**                                  | ** ** | **February** | ** ** | **May** | ** ** | **August** | ** ** | **Fiscal Year** | ** ** |
| ** **                                                     | ** ** | **(in thousands, except per share  amounts)** | ** ** |
| Fiscal 2003:                                                   | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                      |       | $                                             | 28,548     |   | $ | 27,562 |   | $ | 28,342 |   | $ | 26,688 |   | $ | 111,140 |   |
| Gross profit                                                   |       | $                                             | 7,658      |   | $ | 6,709 |   | $ | 7,046 |   | $ | 6,391 |   | $ | 27,804 |   |
| Income  before cumulative effect of accounting change          |       | $                                             | 1,155      |   | $ | 687 |   | $ | 768 |   | $ | 948 |   | $ | 3,558 |   |
| Preferred  stock accretion                                     |       | $                                             | 184        |   | $ | 185 |   | $ | 184 |   | $ | 184 |   | $ | 737 |   |
| Net income  (loss) available to common stockholders            |       | $                                             | (21,372    | ) | $ | 502 |   | $ | 584 |   | $ | 764 |   | $ | (19,522 | ) |
|                                                           |       |                                          |       |   |   |   |   |   |   |   |   |
| Earnings  (loss) per common share:                             |       |                                          |       |   |   |   |   |   |   |   |   |
| before  cumulative effect of a change in accounting principle: |       |                                          |       |   |   |   |   |   |   |   |   |
| Basic                                                          |       | $                                             | .22        |   | $ | .11 |   | $ | .14 |   | $ | .18 |   | $ | .65 |   |
| Diluted                                                        |       | $                                             | .21        |   | $ | .11 |   | $ | .13 |   | $ | .18 |   | $ | .63 |   |
| after  cumulative effect of a change in accounting principle:  |       |                                          |       |   |   |   |   |   |   |   |   |
| Basic                                                          |       | $                                             | (4.82      | ) | $ | .11 |   | $ | .14 |   | $ | .18 |   | $ | (4.48 | ) |
| Diluted                                                        |       | $                                             | (4.82      | ) | $ | .11 |   | $ | .13 |   | $ | .18 |   | $ | (4.48 | ) |
|                                                           |       |                                          |       |   |   |   |   |   |   |   |   |
| Fiscal 2004:                                                   |       |                                          |       |   |   |   |   |   |   |   |   |
| Net sales                                                      |       | $                                             | 25,926     |   | $ | 26,545 |   | $ | 33,160 |   | $ | 30,773 |   | $ | 116,404 |   |
| Gross profit                                                   |       | $                                             | 6,371      |   | $ | 6,289 |   | $ | 8,064 |   | $ | 7,158 |   | $ | 27,882 |   |
| 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                                                          |       | $                                             | .15        |   | $ | .06 |   | $ | .31 |   | $ | .18 |   | $ | .69 |   |
| Diluted                                                        |       | $                                             | .15        |   | $ | .06 |   | $ | .30 |   | $ | .17 |   | $ | .68 |   |
|                                                                |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**18.****                               ComprehensiveIncome**

 

As part of its interestrate management program, the Company periodically enters into interest rateswap agreements with respect to portions of its outstanding debt.  The purpose of these swaps is to mitigate theadverse effect on cash flows of an increase in interest rates.  There were no swap agreements in place as of August 31,2003 and 2004.  When used, these swapagreements qualified as derivative instruments under Statement of FinancialAccounting Standards No. 133, “Accounting for Derivative Instruments and forHedging Activities” and, accordingly, changes in their fair value resulted inthe recognition of other comprehensive income or loss pursuant to SFAS No. 133.

 

The reconciliation ofnet income to total comprehensive income for the years ended August 31 isas follows:

 
| ** **                               | ** ** | **2002** | ** ** | **2003** | ** ** | **2004**    | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|-------------|------------|
| Net income  (loss)                       |       | $        | 3,929,000  |     | $          | (18,785,000 | )          | $ | 3,371,000 |   |
| Changes in  value of interest rate swaps |       | 128,000  |       | —   |       | —      |       |
| Total  comprehensive income (loss)       |       | $        | 4,057,000  |     | $          | (18,785,000 | )          | $ | 3,371,000 |   |

 

F-20

----

 

**19.****                               Acquisitions**

 

OnJanuary 4, 2002, Summa acquired substantially all of the assets of theGenesta Manufacturing division (“Genesta”) of Pavaco Plastics, Inc.  Genesta manufactures extruded sheet and profilesand thermoformed components for the lighting and other industries.  The aggregate purchase price paid for theassets consisted of $2,685,000 in cash, an unsecured note for $627,000, 40,000shares of the Company’s unregistered common stock valued at $530,000(subsequently repurchased at a discounted price of $450,000 in August 2002),liabilities assumed or incurred of $1,433,000 and acquisition costs of $69,000.The transaction was accounted for using the purchase method of accounting, andaccordingly, the purchase price was allocated to identifiable tangible andintangible assets acquired and liabilities assumed or incurred based upon theirfair value at the date of acquisition. The excess of the purchase price over the fair value of net acquired assetswas $2,450,000, which was recorded as goodwill. Because the acquisition of Genesta was subsequent to the adoption ofSFAS 141, goodwill was not amortized.

 

Theresults of operations of the above described acquisition have been included inthe consolidated results of operations and statements of cash flows of theCompany since the date of acquisition. The following pro forma financial information presents the results ofoperations of the continuing businesses of the Company as though theacquisition of Genesta had been made as of September 1, 2001.  Pro forma adjustments have been made to givethe effect to the amortization of other intangibles, adjustments indepreciation and inventory value, interest expense related to acquisition debt,the related tax effects and the effect upon diluted earnings per share ofaccretion in the value of preferred stock issued in conjunction with theacquisition.

 
| Unaudited,  pro forma results of operations for the year ended August 31, 2002:   |   |   |        |
|----------------------------------------------------------------------------------------|--------|--------|-------------|
|                                                                                   |   |   |        |
| Net sales                                                                              |   | $      | 119,113,000 |   |
| Income  before cumulative effect of a change in accounting principle                   |   | $      | 4,087,000   |   |
| Income per  common share before cumulative effect of a change in accounting principle: |   |   |        |
| Basic                                                                                  |   | $      | 0.76        |   |
| Diluted                                                                                |   | $      | 0.74        |   |
|                                                                                        |        |        |             |  |  |

 

The above pro forma results are not necessarily indicative of what theactual consolidated results of operations might have been if the acquisitionhad been effective at the beginning of the periods presented or of the resultswhich may be achieved in the future.

 

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 andliabilities assumed 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-21

----

 

**20*.******                              *Segmentinformation**

 

The Company has four 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, display, signage, architectural and other applications.

 

 ***MaterialHandling Components.**** *In its Material HandlingComponents 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, valves, filters andaccessories, extruded tubing and other plastic products for drip irrigationsystems used in agriculture, commercial landscape and other applications.

 

***Electrical Components.***  In its Electrical Components segment, Summadesigns and manufactures thermoplastic coil forms or “bobbins” and other plasticproducts used principally in the manufacture of magnetic devices such astransformers, relays, switches, power supplies and small electric motors.

 

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.

 
| ** **                      | ** ** | **2002**   | ** **  | **2003**   | ** ** | **2004**    | ** ** |
|---------------------------------|------------|------------|-------------|------------|------------|-------------|------------|
| External  sales:                |       |       |        |       |       |        |       |
| Optical  Components             |       | $          | 60,908,000  |       | $          | 57,425,000  |       | $ | 55,830,000 |   |
| Material  Handling Components   |       | 25,468,000 |        | 25,332,000 |       | 26,207,000  |       |
| Irrigation  Components          |       | 16,827,000 |        | 16,454,000 |       | 22,416,000  |       |
| Electrical  Components          |       | 13,038,000 |        | 11,929,000 |       | 11,951,000  |       |
| Consolidated                    |       | $          | 116,241,000 |       | $          | 111,140,000 |       | $ | 116,404,000 |   |
| Inter-segment  sales:           |       |       |        |       |       |        |       |
| Optical  Components             |       | $          | —      |       | $          | 266,000     |       | $ | 2,606,000 |   |
| Material  Handling Components   |       | —     |        | —     |       | —      |       |
| Irrigation  Components          |       | 1,812,000  |        | 2,399,000  |       | 673,000     |       |
| Electrical  Components          |       | —     |        | —     |       | —      |       |
| Other                           |       | (1,812,000 | )      | (2,665,000 | )     | (3,279,000  | )          |
| Consolidated                    |       | $          | —      |       | $          | —      |       | $ | — |   |
| Total sales:                    |       |       |        |       |       |        |       |
| Optical  Components             |       | $          | 60,908,000  |       | $          | 57,691,000  |       | $ | 58,436,000 |   |
| Material  Handling Components   |       | 25,468,000 |        | 25,332,000 |       | 26,207,000  |       |
| Irrigation  Components          |       | 18,639,000 |        | 18,853,000 |       | 23,089,000  |       |
| Electrical  Components          |       | 13,038,000 |        | 11,929,000 |       | 11,951,000  |       |
| Other                           |       | (1,812,000 | )      | (2,665,000 | )     | (3,279,000  | )          |
| Consolidated                    |       | $          | 116,241,000 |       | $          | 111,140,000 |       | $ | 116,404,000 |   |
| Operating  income:              |       |       |        |       |       |        |       |
| Optical Components              |       | $          | 7,832,000   |       | $          | 7,139,000   |       | $ | 7,720,000 |   |
| Material  Handling Components   |       | 2,708,000  |        | 1,686,000  |       | 940,000     |       |
| Irrigation  Components          |       | (1,113,000 | )           | (721,000   | )          | 390,000     |       |
| Electrical  Components          |       | 654,000    |        | 366,000    |       | (97,000     | )          |
| Other                           |       | (1,516,000 | )      | (1,671,000 | )     | (2,098,000  | )          |
| Consolidated                    |       | $          | 8,565,000   |       | $          | 6,799,000   |       | $ | 6,855,000 |   |
| Assets:                         |       |       |        |       |       |        |       |
| Optical  Components             |       | $          | 38,643,000  |       | $          | 28,228,000  |       | $ | 30,183,000 |   |
| Material  Handling Components   |       | 17,063,000 |        | 18,335,000 |       | 20,069,000  |       |
| Irrigation  Components          |       | 18,262,000 |        | 10,497,000 |       | 13,622,000  |       |
| Electrical  Components          |       | 20,973,000 |        | 6,999,000  |       | 10,453,000  |       |
| Other                           |       | 2,624,000  |        | 4,457,000  |       | 5,790,000   |       |
| Consolidated                    |       | $          | 97,565,000  |       | $          | 68,516,000  |       | $ | 80,117,000 |   |
| Capital  expenditures:          |       |       |        |       |       |        |       |
| Optical  Components             |       | $          | 1,661,000   |       | $          | 1,022,000   |       | $ | 1,113,000 |   |
| Material  Handling Components   |       | 581,000    |        | 1,694,000  |       | 2,943,000   |       |
| Irrigation  Components          |       | 1,045,000  |        | 1,169,000  |       | 648,000     |       |
| Electrical  Components          |       | 93,000     |        | 170,000    |       | 3,550,000   |       |
| Other                           |       | —     |        | —     |       | 80,000      |       |
| Consolidated                    |       | $          | 3,380,000   |       | $          | 4,055,000   |       | $ | 8,334,000 |   |
| Depreciation  and amortization: |       |       |        |       |       |        |       |
| Optical  Components             |       | $          | 2,733,000   |       | $          | 2,169,000   |       | $ | 2,209,000 |   |
| Material  Handling Components   |       | 1,619,000  |        | 1,387,000  |       | 1,216,000   |       |
| Irrigation  Components          |       | 717,000    |        | 682,000    |       | 862,000     |       |
| Electrical  Components          |       | 1,104,000  |        | 695,000    |       | 656,000     |       |
| Other                           |       | 40,000     |        | 37,000     |       | 25,000      |       |
| Consolidated                    |       | $          | 6,213,000   |       | $          | 4,970,000   |       | $ | 4,968,000 |   |

 

F-23

----

 

In the fourth quarter of fiscal 2004, all of the assets and operationsof the former Miscellaneous Plastic Components segment were integrated with theIrrigation Components segment. Prior-period segment information has been restated to conform to theconsolidation.  Segment information asreported prior to the consolidation is as follows:

 
| ** **                        | ** ** | **2002**   | ** ** | **2003**   | ** ** | **2004**   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|
| External  sales:                  |       |       |       |       |       |       |       |
| Irrigation  Components            |       | $          | 13,660,000 |       | $          | 14,394,000 |       | $ | 21,800,000 |   |
| Miscellaneous  Plastic Components |       | 3,167,000  |       | 2,060,000  |       | 616,000    |       |
| Total                             |       | $          | 16,827,000 |       | $          | 16,454,000 |       | $ | 22,416,000 |   |
|                              |       |       |       |       |       |       |       |
| Inter-segment  sales:             |       |       |       |       |       |       |       |
| Irrigation  Components            |       | $          | —     |       | $          | —     |       | $ | — |   |
| Miscellaneous  Plastic Components |       | 2,903,000  |       | 3,331,000  |       | 1,481,000  |       |
| Total                             |       | $          | 2,903,000  |       | $          | 3,331,000  |       | $ | 1,481,000 |   |
|                              |       |       |       |       |       |       |       |
| Total sales:                      |       |       |       |       |       |       |       |
| Irrigation  Components            |       | $          | 13,660,000 |       | $          | 14,394,000 |       | $ | 21,800,000 |   |
| Miscellaneous  Plastic Components |       | 6,070,000  |       | 5,391,000  |       | 2,097,000  |       |
| Total                             |       | $          | 19,730,000 |       | $          | 19,785,000 |       | $ | 23,897,000 |   |
|                              |       |       |       |       |       |       |       |
| Operating  income:                |       |       |       |       |       |       |       |
| Irrigation  Components            |       | $          | 873,000    |       | $          | 809,000    |       | $ | 1,163,000 |   |
| Miscellaneous  Plastic Components |       | (1,986,000 | )     | (1,530,000 | )          | (773,000   | )          |
| Total                             |       | $          | (1,113,000 | )          | $          | (721,000   | )          | $ | 390,000 |   |
|                              |       |       |       |       |       |       |       |
| Assets:                           |       |       |       |       |       |       |       |
| Irrigation  Components            |       | $          | 13,679,000 |       | $          | 7,556,000  |       | $ | 13,622,000 |   |
| Miscellaneous  Plastic Components |       | 4,583,000  |       | 2,941,000  |       | —     |       |
| Total                             |       | $          | 18,262,000 |       | $          | 10,497,000 |       | $ | 13,622,000 |   |
|                              |       |       |       |       |       |       |       |
| Capital  Expeditures:             |       |       |       |       |       |       |       |
| Irrigation  Components            |       | $          | 848,000    |       | $          | 973,000    |       | $ | 3,540,000 |   |
| Miscellaneous  Plastic Components |       | 197,000    |       | 196,000    |       | 10,000     |       |
| Total                             |       | $          | 1,045,000  |       | $          | 1,169,000  |       | $ | 3,550,000 |   |
|                              |       |       |       |       |       |       |       |
| Depreciation  and amortization:   |       |       |       |       |       |       |       |
| Irrigation  Components            |       | $          | 430,000    |       | $          | 421,000    |       | $ | 699,000 |   |
| Miscellaneous  Plastic Components |       | 287,000    |       | 261,000    |       | 163,000    |       |
| Total                             |       | $          | 717,000    |       | $          | 682,000    |       | $ | 862,000 |   |

 

Interest expense and income taxes are not shown in the preceedingtables, as they are not fully allocated by segment.  “Other” includes inter-company eliminationsand corporate and other expenses not allocated by segment.

 

Sales to the Company’s largest single customer, as a percent of totalsales, represented 10.3% in 2002, 10.0% in 2003 and 9.7% in 2004.

 

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

 
| ** **         | ** ** | **2002**  | ** **  | **2003**  | ** ** | **2004**    | ** ** |
|--------------------|------------|-----------|-------------|-----------|------------|-------------|------------|
| United  States     |       | $         | 98,376,000  |      | $          | 93,273,000  |       | $ | 96,440,000 |   |
| Mexico and  Canada |       | 7,726,000 |        | 8,772,000 |       | 9,507,000   |       |
| Europe             |       | 6,551,000 |        | 6,167,000 |       | 7,019,000   |       |
| Latin  America     |       | 1,312,000 |        | 773,000   |       | 617,000     |       |
| Asia               |       | 974,000   |        | 856,000   |       | 1,297,000   |       |
| Other              |       | 1,302,000 |        | 1,299,000 |       | 1,524,000   |       |
|               |       | $         | 116,241,000 |      | $          | 111,140,000 |       | $ | 116,404,000 |   |
|                    |            |           |             |           |            |             |            |  |  |  |  |

 

F-24

----

 

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

 
| ** **     | ** ** | **2003** | ** ** | **2004** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| United  States |       | $        | 25,386,000 |     | $          | 30,479,000 |   |
| Canada         |       | 726,000  |       | 574,000  |       |
| Total          |       | $        | 26,112,000 |     | $          | 31,053,000 |   |

 

**21.****                               Subsequentevent**

 

In October 2004, the Company declared a dividend of $.06 per shareto stockholders of record on November 29, 2004.  The aggregate dividend of approximately$240,000 is scheduled to be paid on or about December 10, 2004.

 

F-25

----

 

Report ofIndependent Registered Public Accounting Firm on Financial Statement Schedule

 

TO:                            TheBoard of Directors and Stockholders of Summa Industries:

 

Our audits of the consolidated financial statements referred to in ourreport dated October 25, 2004 appearing in the 2004 Annual Report on Form10-K of Summa Industries also included an audit of the financial statement schedule listedin Item 15(a)(2) of this Form 10-K.  Inour opinion, this financial statement schedule presents fairly, in allmaterial respects, the information set forth therein when read in conjunctionwith the related consolidated financial statements.

 
| /s/ PricewaterhouseCoopers LLP |   |
|--------------------------------|--------|
|                           |
| Los Angeles, California        |
| October 25, 2004          |

 

F-26

----

 

Summa IndustriesSchedule II

Valuation and QualifyingAccounts

 

Allowance for Doubtful Accounts

 

For the three years ended August 31

 
| ** ** | ** ** | **Balance at  beginning of  period** | ** ** | **Amounts  charged to  expense** | ** ** | **Other  adjustments** | ** ** | **Amounts  written off** | ** ** | **Balance at  end of period** | ** ** |
|------------|------------|--------------------------------------|------------|----------------------------------|------------|------------------------|------------|--------------------------|------------|-------------------------------|------------|
| 2002       |       | $                                    | 514,000    |                             | $          | 221,000                |       | $                        | 16,000     |                          | $          | (118,000 | ) | $ | 633,000 |   |
| 2003       |       | $                                    | 633,000    |                             | $          | 251,000                |       | —                   |       | $                             | (279,000   | ) | $ | 605,000 |   |
| 2004       |       | $                                    | 605,000    |                             | $          | 402,000                |       | —                   |       | $                             | (322,000   | ) | $ | 685,000 |   |
|            |            |                                      |            |                                  |            |                        |            |                          |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |

 

F-27

----

 

**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, 2004 to be signed on itsbehalf by the undersigned, thereunto duly authorized, on November 4, 2004.

 
|   | 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, 2004has been signed below by the following persons on behalf of the registrant andin the capacities and on the dates indicated.

 
| ** ** | ** ** | ** ** |
|------------|------------|------------|

 
|   |   |   |
|--------|--------|--------|

 
| **Signature**            | ** ** | ** ** | **Title**                                   | ** ** | **Date**              |
|--------------------------|------------|------------|---------------------------------------------|------------|-----------------------|
|                     |       |       |                                        |       |                  |
| /s/ James R. Swartwout   |       |       | Chairman of the Board, President            |       | November 4, 2004 |
| James R. Swartwout       |       |       | & Chief Financial Officer               |       |                  |
|                     |       |       | (Principal Executive and Financial Officer) |       |                  |
|                     |       |       |                                        |       |                  |
| /s/ Michael L. Horst     |       |       | Director                                    |       | November 4, 2004 |
| Michael L. Horst         |       |       |                                        |       |                  |
|                     |       |       |                                        |       |                  |
| /s/ William R. Zimmerman |       |       | Director                                    |       | November 4, 2004 |
| William R. Zimmerman     |       |       |                                        |       |                  |
|                     |       |       |                                        |       |                  |
| /s/ David McConaughy     |       |       | Director                                    |       | November 4, 2004 |
| David McConaughy         |       |       |                                        |       |                  |
|                     |       |       |                                        |       |                  |
|                     |       |       | Director                                    |       | November 4, 2004 |
| Josh T. Barnes           |       |       |                                        |       |                  |
|                     |       |       |                                        |       |                  |
| /s/ Jack L. Watts        |       |       | Director                                    |       | November 4, 2004 |
| Jack L. Watts            |       |       |                                        |       |                  |
|                     |       |       |                                        |       |                  |
| /s/ Charles A. Tourville |       |       | Director                                    |       | November 4, 2004 |
| Charles A. Tourville     |       |       |                                        |       |                  |
|                     |       |       |                                        |       |                  |
| /s/ Paul A. Walbrun      |       |       | Vice President & Controller             |       | November 4, 2004 |
| Paul A. Walbrun          |       |       | (Principal Accounting Officer)              |       |                  |

 

F-28

----