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

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý****        QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For thequarterly period ended**

 

**November 30,2005**

 

**o****        TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For thetransition period from N/A to N/A**

 

**Commissionfile no. 1-7755**

 

**Summa Industries**

(Name of registrant as specified in itscharter)

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

 

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

(Address of principle executiveoffices, including zip code)

 

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the ExchangeAct during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

Yes  ý    No  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  ý

 

Indicate by check mark whether the registrant is as shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes  o    No  ý

 

The number of shares of common stock outstanding as of December 30,2005 was 3,895,128.

 

 

----

 

**Summa Industries**

 

**INDEX**

 
| PART I - FINANCIAL INFORMATION                                                                  |                                                                                                                                |
|------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                 |                                                                                                                                |
| Item 1. Financial Statements:                                                                        |                                                                                                                                |
|                                                                                                 |                                                                                                                                |
|                                                                                                 | Condensed Consolidated Balance Sheets (unaudited) -  November 30, 2004, August 31, 2005 and November 30, 2005        |   |
|                                                                                                 |                                                                                                                                |
|                                                                                                 | Condensed Consolidated Income Statements (unaudited) -  three months ended November 30, 2004 and November 30, 2005        |   |
|                                                                                                 |                                                                                                                                |
|                                                                                                 | Consolidated Statement of Stockholders’ Equity (unaudited) -  three months ended November 30, 2005                        |   |
|                                                                                                 |                                                                                                                                |
|                                                                                                 | Condensed Consolidated Statements of Cash Flows (unaudited) -  three months ended November 30, 2004 and November 30, 2005 |   |
|                                                                                                 |                                                                                                                                |
|                                                                                                 | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                    |   |
|                                                                                                 |                                                                                                                                |
| Item 2. Management’s Discussion and  Analysis of  Financial Condition and Results of Operations |                                                                                                                                |
|                                                                                                 |                                                                                                                                |
| Item 3. Quantitative and Qualitative Disclosure about Market Risk                                    |                                                                                                                                |
|                                                                                                 |                                                                                                                                |
| Item 4. Controls and Procedures                                                                      |                                                                                                                                |
|                                                                                                 |                                                                                                                                |
| PART II  - OTHER INFORMATION                                                                    |                                                                                                                                |
|                                                                                                 |                                                                                                                                |
| Item  1.                                                                                             | Legal  Proceedings                                                                                                                  |   |
| Item  1A.                                                                                            | Risk  Factors                                                                                                                       |   |
| Item 2.                                                                                              | Unregistered Sales of Equity Securities and Use of Proceeds                                                                         |   |
| Item 3.                                                                                              | Defaults upon Senior Securities                                                                                                     |   |
| Item 4.                                                                                              | Submission of Matters to a Vote of Security Holders                                                                                 |   |
| Item  5.                                                                                             | Other  Information                                                                                                                  |   |
| Item 6.                                                                                              | Exhibits                                                                                                                            |   |
|                                                                                                 |                                                                                                                                |
| Signature  Page                                                                                      |                                                                                                                                |

 

2

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**SummaIndustries**

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 
| ** **                                                                                                                                                                                             | ** ** | **November 30, 2004** | ** ** | **August 31, 2005** | ** ** | **November 30, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                                                                                                                             |       |                       |       |                     |       |                       |       |
| Current  assets:                                                                                                                                                                                       |       |                       |       |                     |       |                       |       |
| Cash and  cash equivalents                                                                                                                                                                             |       | $                          | 832,000    |                     | $          | 1,233,000                  |       | $ | 712,000 |   |
| Accounts  receivable                                                                                                                                                                                   |       | 16,371,000                 |       | 16,919,000               |       | 17,566,000                 |       |
| Inventories                                                                                                                                                                                            |       | 15,118,000                 |       | 12,665,000               |       | 15,210,000                 |       |
| Prepaid  expenses and other                                                                                                                                                                            |       | 4,512,000                  |       | 3,471,000                |       | 3,582,000                  |       |
| Assets held  for sale                                                                                                                                                                                  |       | —                     |       | 3,641,000                |       | —                     |       |
| Note  receivable                                                                                                                                                                                       |       | —                     |       | —                   |       | 2,280,000                  |       |
| Total  current assets                                                                                                                                                                                  |       | 36,833,000                 |       | 37,929,000               |       | 39,350,000                 |       |
| Property,  plant and equipment                                                                                                                                                                         |       | 67,152,000                 |       | 62,629,000               |       | 62,630,000                 |       |
| Less  accumulated depreciation                                                                                                                                                                         |       | (34,066,000                | )          | (33,416,000              | )          | (33,569,000                | )          |
| Net  property, plant and equipment                                                                                                                                                                     |       | 33,086,000                 |       | 29,213,000               |       | 29,061,000                 |       |
| Other assets                                                                                                                                                                                           |       | 1,840,000                  |       | 1,454,000                |       | 1,448,000                  |       |
| Goodwill and  other intangibles, net                                                                                                                                                                   |       | 9,186,000                  |       | 8,981,000                |       | 8,932,000                  |       |
| Assets held  for sale                                                                                                                                                                                  |       | —                     |       | 2,458,000                |       | 1,994,000                  |       |
| Total assets                                                                                                                                                                                           |       | $                          | 80,945,000 |                     | $          | 80,035,000                 |       | $ | 80,785,000 |   |
|                                                                                                                                                                                                   |       |                       |       |                     |       |                       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                         |       |                       |       |                     |       |                       |       |
| Current  liabilities:                                                                                                                                                                                  |       |                       |       |                     |       |                       |       |
| Accounts  payable                                                                                                                                                                                      |       | $                          | 6,543,000  |                     | $          | 8,731,000                  |       | $ | 10,873,000 |   |
| Accrued  liabilities                                                                                                                                                                                   |       | 6,744,000                  |       | 5,774,000                |       | 6,050,000                  |       |
| Current  maturities of long-term debt                                                                                                                                                                  |       | 2,702,000                  |       | 3,069,000                |       | 2,504,000                  |       |
| Liabilities  held for sale                                                                                                                                                                             |       | —                     |       | 1,280,000                |       | —                     |       |
| Total  current liabilities                                                                                                                                                                             |       | 15,989,000                 |       | 18,854,000               |       | 19,427,000                 |       |
| Long-term  debt, net of current maturities                                                                                                                                                             |       | 31,591,000                 |       | 27,520,000               |       | 27,088,000                 |       |
| Other  long-term liabilities                                                                                                                                                                           |       | 2,500,000                  |       | 2,441,000                |       | 3,035,000                  |       |
| Total  long-term liabilities                                                                                                                                                                           |       | 34,091,000                 |       | 29,961,000               |       | 30,123,000                 |       |
| Minority  interest in subsidiary                                                                                                                                                                       |       | 205,000                    |       | 132,000                  |       | 101,000                    |       |
| Stockholders’  equity:                                                                                                                                                                            |       |                       |       |                     |       |                       |       |
| Common  stock, par value $.001; 10,000,000 shares authorized; issued and outstanding:  4,002,527 at November 30, 2004, 3,940,041 at August 31, 2005 and  3,920,226 at November 30, 2005 |       | 15,566,000                 |       | 15,046,000               |       | 14,912,000                 |       |
| Retained  earnings                                                                                                                                                                                     |       | 15,094,000                 |       | 16,042,000               |       | 16,222,000                 |       |
| Total  stockholders’ equity                                                                                                                                                                       |       | 30,660,000                 |       | 31,088,000               |       | 31,134,000                 |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                       |       | $                          | 80,945,000 |                     | $          | 80,035,000                 |       | $ | 80,785,000 |   |

 

See accompanying notes to condensed consolidated financial statements*.*

 

3

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**SummaIndustries**

CONDENSED CONSOLIDATED INCOME STATEMENTS

(unaudited)

 
| ** **                                                                        | ** ** | **Three months ended November 30** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                                | ** ** | **2005** | ** ** |
| Net sales                                                                         |       | $                                       | 25,488,000 |   | $ | 27,740,000 |   |
| Cost of  sales                                                                    |       | 19,044,000                              |       | 20,956,000 |   |
| Gross profit                                                                      |       | 6,444,000                               |       | 6,784,000 |   |
| Selling,  general, administrative and other expenses                              |       | 4,781,000                               |       | 4,973,000 |   |
| (Gain) on  sale of real estate                                                    |       | (43,000                                 | )          | (205,000 | ) |
| Operating  income                                                                 |       | 1,706,000                               |       | 2,016,000 |   |
| Interest  expense                                                                 |       | 309,000                                 |       | 448,000 |   |
| Income from  continuing operations before income taxes and minority interest      |       | 1,397,000                               |       | 1,568,000 |   |
| Provision  for income taxes                                                       |       | 495,000                                 |       | 561,000 |   |
| Income from  continuing operations before minority interest                       |       | 902,000                                 |       | 1,007,000 |   |
| Minority  interest in net loss of subsidiary                                      |       | —                                  |       | 31,000 |   |
| Income from  continuing operations                                                |       | 902,000                                 |       | 1,038,000 |   |
| (Loss) from  discontinued operations, net of tax benefit of $145,000 and $199,000 |       | (292,000                                | )          | (387,000 | ) |
| Net income                                                                        |       | $                                       | 610,000    |   | $ | 651,000 |   |
| Earnings  (loss) per common share                                                 |       |                                    |       |   |   |
| Basic                                                                             |       |                                    |       |   |   |
| Continuing  operations                                                            |       | $                                       | .22        |   | $ | .26 |   |
| Discontinued  operations                                                          |       | $                                       | (.07       | ) | $ | (.10 | ) |
| Net income                                                                        |       | $                                       | .15        |   | $ | .16 |   |
| Diluted                                                                           |       | $                                       | .22        |   | $ | .26 |   |
| Continuing  operations                                                            |       | $                                       | (.07       | ) | $ | (.10 | ) |
| Discontinued  operations                                                          |       | $                                       | .15        |   | $ | .16 |   |
| Net income                                                                        |       |                                    |       |   |   |
| Weighted average  common shares outstanding:                                      |       |                                    |       |   |   |
| Basic                                                                             |       | 3,984,000                               |       | 3,927,000 |   |
| Diluted                                                                           |       | 4,064,000                               |       | 3,961,000 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

4

----

 

**Summa Industries**

CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY

for the three months ended November 30,2005

(unaudited)

 
| ** **                                                  | ** ** | **Common** | ** ** | **Common** | ** ** | **Retained** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|------------|------------|
| ** **                                                  | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
| Balance at August 31,  2005                            |       | 3,940,041  |       | $          | 15,046,000 |         | $          | 16,042,000 |       | $ | 31,088,000 |   |
| Exercise of  stock options, including tax benefit of $3,000 |       | 2,500      |       | 15,000     |       | —       |       | 15,000     |       |
| Repurchase  of common stock                                 |       | (22,315    | )          | (173,000   | )          | —       |       | (173,000   | )          |
| Net income                                                  |       | —     |       | —     |       | 651,000      |       | 651,000    |       |
| Stock-based  compensation                                   |       | —     |       | 24,000     |       | —       |       | 24,000     |       |
| Payment of  dividends                                       |       | —     |       | —     |       | (236,000     | )          | (236,000   | )          |
| Dividends  declared                                         |       | —     |       | —     |       | (235,000     | )          | (235,000   | )          |
| Balance at November 30,  2005                          |       | 3,920,226  |       | $          | 14,912,000 |         | $          | 16,222,000 |       | $ | 31,134,000 |   |

 

See accompanying notes to condensedconsolidated financial statements*.*

 

5

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**Summa Industries**

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 
| ** **                                                                                    | ** ** | **Three months ended**     | ** ** | **Three months ended**     | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                    | ** ** | **November 30, 2004** | ** ** | **November 30, 2005** | ** ** |
| Operating activities:                                                                         |       |                       |       |                       |       |
| Net income                                                                                    |       | $                          | 610,000    |                       | $          | 651,000 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |       |                       |       |                       |       |
| Depreciation                                                                                  |       | 1,277,000                  |       | 1,202,000                  |       |
| Amortization                                                                                  |       | 68,000                     |       | 49,000                     |       |
| (Gain) on  disposition of property, plant and equipment                                       |       | (43,000                    | )          | (272,000                   | )          |
| Minority  interest in net loss of subsidiary                                                  |       | —                     |       | (31,000                    | )          |
| Stock based  compensation                                                                     |       | —                     |       | 24,000                     |       |
| Net changes  in assets and liabilities:                                                       |       |                       |       |                       |       |
| Accounts  receivable                                                                          |       | 1,856,000                  |       | (647,000                   | )          |
| Inventories                                                                                   |       | (369,000                   | )     | (2,545,000                 | )          |
| Prepaid  expenses and other assets                                                            |       | (766,000                   | )     | (324,000                   | )          |
| Accounts  payable                                                                             |       | (2,545,000                 | )     | 2,142,000                  |       |
| Accrued  liabilities                                                                          |       | (672,000                   | )     | 635,000                    |       |
| Total  adjustments                                                                            |       | (1,194,000                 | )     | 233,000                    |       |
| Net cash  provided by (used in) operating activities                                          |       | (584,000                   | )     | 884,000                    |       |
| Investing activities:                                                                         |       |                       |       |                       |       |
| Purchases of property and equipment                                                           |       | (3,310,000                 | )     | (1,086,000                 | )          |
| Proceeds from sale of property and  equipment                                                 |       | 43,000                     |       | 772,000                    |       |
| Proceeds from sale of discontinued  operations                                                |       | —                     |       | 300,000                    |       |
| Net cash  (used in) investing activities                                                      |       | (3,267,000                 | )     | (14,000                    | )          |
| Financing activities:                                                                         |       |                       |       |                       |       |
| Net proceeds from (payments on) line of  credit                                               |       | 1,743,000                  |       | (1,046,000                 | )          |
| Proceeds from issuance of long-term debt                                                      |       | 2,229,000                  |       | 2,952,000                  |       |
| Payments on long-term debt                                                                    |       | (537,000                   | )     | (2,903,000                 | )          |
| Proceeds from the exercise of stock options                                                   |       | —                     |       | 15,000                     |       |
| Purchase of common stock                                                                      |       | —                     |       | (173,000                   | )          |
| Payment of cash dividends                                                                     |       | —                     |       | (236,000                   | )          |
| Net cash  provided by (used in) financing activities                                          |       | 3,435,000                  |       | (1,391,000                 | )          |
| Net (decrease) in cash and cash equivalents                                                   |       | (416,000                   | )     | (521,000                   | )          |
| Cash and cash equivalents, beginning of  period                                               |       | 1,248,000                  |       | 1,233,000                  |       |
| Cash and cash equivalents, end of period                                                      |       | $                          | 832,000    |                       | $          | 712,000 |   |

 

See accompanying notes to condensedconsolidated financial statements*.*

 

6

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**Summa Industries**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(unaudited)

November 30, 2005

 

**1.****                                      Basisof presentation**

 

The accompanyingunaudited condensed consolidated financial statements of Summa Industries (the “Company”)have been condensed in certain respects and should, therefore, be read inconjunction with the audited consolidated financial statements and notesrelated thereto contained in the Company’s Annual Report on Form 10-K forthe year ended August 31, 2005.  Inthe opinion of the Company, these financial statements contain all adjustmentsnecessary for a fair presentation for the interim period, all of which werenormal recurring adjustments.  Theresults of operations for the three months ended November 30, 2005 are notnecessarily indicative of the results to be expected for the full year ending August 31,2006.

 

**Recentaccounting pronouncements**

 

In December 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 123R, “Share-Based Payments,” whichrequires companies to recognize in the income statement the grant-date fairvalue of stock options and equity-based compensation issued to employees. Priorto its adoption, the Company reported equity based compensation in accordancewith Accounting Principles Board (“APB”) Opinion No. 25 and FinancialInterpretation No. 44, and accordingly, no compensation expense wasrecognized in the financial statements prior to September 1, 2005. The proforma effect of equity-based compensation under SFAS No. 123, “Accountingfor Stock-Based Compensation,” for the period prior to the adoption of SFAS No,123R and the expense charged to earnings since its adoption are disclosed inNote 5, below.

 

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs-an amendment of AccountingResearch Bulletin (“ARB”) 43, Chapter 4.”  This statement amends the guidancein ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accountingfor abnormal amounts of idle facility expense, freight, handling costs andwasted material.  This statement requires that those items be recognizedas current period charges.  In addition, this statement requires thatallocation of fixed production overhead to the costs of conversion be based onthe normal capacity of the production facilities.  The adoption of SFAS No. 151effective September 1, 2005, did not have an impact on the Company’sfinancial position, results of operations or cash flow.

 

In October 2005,the FASB issued Staff Position Financial Accounting Standard (“FAS”)13-1, “Accountingfor Rental Costs Incurred during a Construction Period,” which requires rentalcosts associated with ground or building operating leases that are incurredduring a construction period to be recognized as rental expense.  ThisStaff Position is effective for reporting periods beginning after December 15,2005, and retrospective application is permitted but not required.  Theadoption of this statement is not expected to have any significant effect onthe Company’s results of operations or financial position.

 

In June 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections, areplacement of APB No. 20 and FAS No.3”. . SFAS No. 154 providesguidance on the accounting for and reporting of accounting changes and errorcalculations. It establishes, unless impracticable, retrospectiveapplication as the required method forreporting a change in accounting principle in the absence of explicittransition requirements specific to the newly adopted accounting principle.SFAS No. 154 also provides guidance for determining whether retrospective application is impracticable. The correction ofan error in previously issued financial statements is not an accounting change.However, the reporting of an error correction involves adjustments topreviously issued financial statements similar to those generally applicable toreporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restatingpreviously issued financial statements is also addressed by SFAS No. 154.SFAS No. 154 is required to be adopted for reporting periods beginningafter December 15, 2005. The Company does not believe its adoption willhave a material impact on its consolidated results of operations or financialposition.

 

7

----

 

**2.****             Inventories**

 

Inventorieswere as follows:

 
| ** **          | ** ** | **November 30, 2004** | ** ** | **August 31, 2005** | ** ** | **November 30, 2005** | ** ** |
|---------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
|                |       |                       |       |                     |       |                       |       |
| Finished goods      |       | $                          | 6,771,000  |                     | $          | 6,097,000                  |       | $ | 7,394,000 |   |
| Work in process     |       | 292,000                    |       | 199,000                  |       | 262,000                    |       |
| Materials and parts |       | 8,055,000                  |       | 6,369,000                |       | 7,554,000                  |       |
|                |       |                       |       |                     |       |                       |       |
|                |       | $                          | 15,118,000 |                     | $          | 12,665,000                 |       | $ | 15,210,000 |   |

 

**3.****             Assetsheld for sale**

 

The book values of assets held for sale were:

 
| ** **                                  | ** ** | ** ** | ** ** | **August 31, 2005** | ** ** | **November 30, 2005** | ** ** |
|---------------------------------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|
|                                        |       |       |       |                     |       |                       |       |
| Vacant real  estate                         |       |       |       | $                        | 2,373,000  |                       | $          | 1,961,000 |   |
| Machinery &  equipment             |       |       |       | 85,000                   |       | 33,000                     |       |
| Working capital  of discontinued operations |       | 2,361,000  |       | —                   |       |
|                                        |       |       |       |                     |       |                       |       |
| Total assets  held for sale                 |       |       |       | $                        | 4,819,000  |                       | $          | 1,994,000 |   |

 

The working capital of discontinuedoperations at August 31, 2005 was net of liabilities held for sale of$1,280,000.  See Note 6 below.

 

**4.****             Earningsper share**

 

Basic earnings pershare (“EPS”) was computed by dividing net income by the weighted averagenumber of common shares outstanding during each period.

 

Diluted EPSreflects the potential dilution that could occur if securities or other contractsto issue common 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 590,000 common shares asof November 30, 2004 and 796,000 common shares as of November 30,2005 were excluded from the calculation of equivalent shares, as they wouldhave been anti-dilutive.

 

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

 
| ** **                                                             | ** ** | **Three months ended November 30** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                             | ** ** | **2004**                                | ** ** | **2005** | ** ** |
|                                                                   |       |                                    |       |   |   |
| Numerators:                                                            |       |                                    |       |   |   |
|                                                                   |       |                                    |       |   |   |
| Net Income                                                             |       | $                                       | 610,000    |   | $ | 651,000 |   |
|                                                                   |       |                                    |       |   |   |
| Denominators:                                                          |       |                                    |       |   |   |
|                                                                   |       |                                    |       |   |   |
| Weighted  average shares outstanding – basic                      |       | 3,984,000                               |       | 3,927,000 |   |
| Impact of  common shares assumed to be issued under stock option plans |       | 80,000                                  |       | 34,000 |   |
| Weighted  average shares outstanding – diluted                    |       | 4,064,000                               |       | 3,961,000 |   |
|                                                                        |            |                                         |            |  |  |  |  |

 

**5.****            ****Stock-based compensation**

 

Effective September 1, 2005, the Company adopted SFAS No. 123R,“Share-Based Payment,” which revisedSFAS No. 123, “Accounting for Stock-Based Compensation”, and supersededAccounting Principals Board Opinion (“APB”) No. 25

 

8

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“Accounting for Stock Issued to Employees”,and its related interpretations.  SFAS123R requires that new, modified and unvested share-based payment transactionswith employees, such as stock options, be recognized in the financialstatements based on their fair value and recognized as compensation expenseover the vesting period.  TheCompany has elected to use the modified prospective method, under whichpreviously reported financial results are not restated to reflect thestock-based compensation formerly recognized in the required pro forma footnotedisclosures.

 

The Company deemed it to be in the best interests of the Company andits stockholders to minimize the compensation expense that would be required tobe recognized under SFAS No. 123R for “out-of -the-money” or “underwater”stock options. Consequently, in the fiscal year ended August 31, 2005, theCompany accelerated the vesting of most of the then outstanding stock optionsthat contained exercise prices greater than the market trading price at thattime. As a result of this early vesting, employee compensation expense of $380,000,net of tax, was recognized in the pro forma footnote disclosure for the yearended August 31, 2005 and will not be recognized in the reported resultsof operations in the periods following the adoption of SFAS No. 123R.

 

As a result of adopting SFAS123R, the Company recognized compensation expense for stock options in thethree-month period ended November 30, 2005 of $15,000, net of taxbenefit.  Prior to the adoption of SFAS123R, the Company applied the provisions of APB No. 25 and Financial InterpretationNo. 44. Consequently, no compensation expense was recognized for stockoptions in the three-month period ended November 30, 2004.

 

The following table illustrates the effect onnet earnings and net earnings per share if the Company had applied the fairvalue recognition provisions of SFAS No. 123 as of September 1,2004.  The fair value estimate wascomputed using the Black-Scholes option pricing model.

 
| ** **                                       | ** ** | **Three months ended November 30,  2004** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------|------------|
|                                             |       |                                           |       |
| Net income                                       |       | $                                              | 610,000    |   |
| Share-based  compensation included in net income |       | —                                         |       |
| Pro forma  impact of expensing stock options     |       | (32,000                                        | )          |
| Pro forma  net income                            |       | $                                              | 578,000    |   |
|                                             |       |                                           |       |
| Earnings per share:                              |       |                                           |       |
|                                             |       |                                           |       |
| As reported:                                     |       |                                           |       |
| Basic                                            |       | $                                              | 0.15       |   |
| Diluted                                          |       | $                                              | 0.15       |   |
|                                             |       |                                           |       |
| Pro forma:                                       |       |                                           |       |
| Basic                                            |       | $                                              | 0.15       |   |
| Diluted                                          |       | $                                              | 0.14       |   |

 

**6.****             Discontinuedoperations**

 

As previously disclosed, in September 2005, the Company soldcertain assets and liabilities of its former Electrical Components segment attheir book value to an investor group for $300,000 cash and a $2,280,000 notedue in August 2006, and leased related equipment and facilities to theinvestor group for five years. Additional assets, principally real estate located in Illinois, arereported in assets held for sale. The financial results of Plastron, which wereformerly reported as the Electrical Components segment, have been excluded fromresults of operations for the periods presented herein and have been presentedas a discontinued operation.

 

9

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**7.****             Supplementalcash flow information**

 
| ** **                                                                                                                                                              | ** ** | **Three months ended November 30** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                                              | ** ** | **2004**                                | ** ** | **2005** | ** ** |
|                                                                                                                                                                    |       |                                    |       |   |   |
| Cash paid  during the period:                                                                                                                                           |       |                                    |       |   |   |
| Interest                                                                                                                                                                |       | $                                       | 387,000    |   | $ | 509,000 |   |
| Income taxes                                                                                                                                                            |       | $                                       | 550,000    |   | $ | 99,000 |   |
|                                                                                                                                                                    |       |                                    |       |   |   |
| Non-cash financing activity:                                                                                                                                            |       |                                    |       |   |   |
| Common stock  issued to 401(k) Plan                                                                                                                                     |       | $                                       | 261,000    |   | $ | — |   |
| Dividend  declared                                                                                                                                                      |       | $                                       | (240,000   | ) | $ | (235,000 | ) |
|                                                                                                                                                                    |       |                                    |       |   |   |
| Non-cash investing activity:                                                                                                                                            |       |                                    |       |   |   |
| The Company  received a note receivable of $2,280,000 in September 2005 as partial  consideration for the sale of certain assets of Plastron Industries, Inc. |       |                                    |       |   |   |

 

**8*.*****             Segmentinformation**

 

The Companyhas three reportable segments identified by differences in products anddistribution channels.  The accountingpolicies of the segments are the same as those described in the summary ofsignificant accounting polices described in the Company’s Annual Report on Form 10-Kfor the year ended August 31, 2005. The Company’s operations are reported in the following businesssegments:

 

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

 

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

 

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

 

Formerly, the Company also operated in anElectrical Components segment which was discontinued in the first quarter offiscal 2006 and has been reported as discontinued operations at August 31,2005 and for the period ended November 30, 2005.

 

10

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Financial information by reportable businesssegment follows:

 
| ** **                    | ** ** | **Three months ended November 30** | ** ** |
|-------------------------------|------------|-----------------------------------------|------------|
| ** **                    | ** ** | **2004**                                | ** ** | **2005** | ** ** |
|                          |       |                                    |       |   |   |
| External  sales               |       |                                    |       |   |   |
| Optical  components           |       | $                                       | 14,150,000 |   | $ | 14,523,000 |   |
| Material  handling components |       | 6,409,000                               |       | 6,525,000 |   |
| Irrigation  components        |       | 4,929,000                               |       | 6,692,000 |   |
| Consolidated                  |       | $                                       | 25,488,000 |   | $ | 27,740,000 |   |
|                          |       |                                    |       |   |   |
| Inter-segment sales           |       |                                    |       |   |   |
| Optical  components           |       | $                                       | 291,000    |   | $ | — |   |
| Material  handling components |       | —                                  |       | — |   |
| Irrigation  components        |       | —                                  |       | — |   |
| Other                         |       | (291,000                                | )          | — |   |
| Consolidated                  |       | $                                       | —     |   | $ | — |   |
|                          |       |                                    |       |   |   |
| Total sales                   |       |                                    |       |   |   |
| Optical  components           |       | $                                       | 14,441,000 |   | $ | 14,523,000 |   |
| Material  handling components |       | 6,409,000                               |       | 6,525,000 |   |
| Irrigation  components        |       | 4,929,000                               |       | 6,692,000 |   |
| Other                         |       | (291,000                                | )          | — |   |
| Consolidated                  |       | $                                       | 25,488,000 |   | $ | 27,740,000 |   |
|                          |       |                                    |       |   |   |
| Operating income (loss)       |       |                                    |       |   |   |
| Optical  components           |       | $                                       | 1,282,000  |   | $ | 1,804,000 |   |
| Material  handling components |       | 710,000                                 |       | 723,000 |   |
| Irrigation  components        |       | 163,000                                 |       | 163,000 |   |
| Other                         |       | (449,000                                | )          | (674,000 | ) |
| Consolidated                  |       | $                                       | 1,706,000  |   | $ | 2,016,000 |   |

 
| ** **                    | ** ** | **November 30, 2004** | ** ** | **August 31, 2005** | ** ** | **November 30, 2005** | ** ** |
|-------------------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
| Assets                        |       |                       |       |                     |       |                       |       |
| Optical  components           |       | $                          | 28,995,000 |                     | $          | 28,668,000                 |       | $ | 30,127,000 |   |
| Material  handling components |       | 21,781,000                 |       | 23,270,000               |       | 23,587,000                 |       |
| Irrigation  components        |       | 13,709,000                 |       | 13,046,000               |       | 14,002,000                 |       |
| Assets held  for sale         |       | —                     |       | 6,099,000                |       | 1,994,000                  |       |
| Other                         |       | 16,460,000                 |       | 8,952,000                |       | 11,075,000                 |       |
|                          |       |                       |       |                     |       |                       |       |
| Consolidated                  |       | $                          | 80,945,000 |                     | $          | 80,035,000                 |       | $ | 80,785,000 |   |

 

Interestexpense and income taxes are not shown in the preceding table, as they are notfully allocated by segment.  “Other”includes inter-company eliminations, corporate and other expenses and assetsnot allocated by segment.

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Statementscontained in this Quarterly Report on Form 10-Q, which are not purelyhistorical, 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 Part II, Item 1 “Legal Proceedings” below.  Actual results could differ materially fromthose projected in any forward-looking statements as a result of a number offactors, including those detailed in this “Management’s Discussion and Analysis”section and elsewhere herein and in the Company’s Annual Report on Form 10-Kfor the fiscal year ended August 31, 2005. The forward-looking statements are made as of the date hereof, and theCompany assumes no obligation to update the forward-looking statements, or toupdate the reasons why actual results could differ materially from thoseprojected in the forward-looking statements. For a discussion of risks and

 

11

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uncertainties thatshould be considered and which could materially adversely affect the Company,please see “Risk Factors” in the “Management Discussion and Analysis” section ofthe Company’s Annual Report on Form 10-K for the fiscal year ended August 31,2005.

 

Summa manufactures plastic products fordiverse commercial and industrial markets. Through its three reportable segments,Summa designs and manufactures injection-molded and formed plastic opticalcomponents for OEM customers in the lighting industry; modular plastic conveyorbelt and chain for the food processing industry; engineered plastic fittings,micro-sprinklers, emitters, valves, filters and tubing for irrigation systemsused in agriculture, commercial landscape and other applications; and othermolded and extruded plastic components for diverse industries.

 

**Significant events and developments duringthe first quarter of fiscal 2006, ended November 30 2005**

 

During the quarter, plastic resin, theprincipal raw material used by the Company, experienced extreme price inflationand volatility, as a result of a number of factors including petrochemicalplant interruptions related to hurricanes in the Gulf of Mexico.  The price volatility was particularly evidentwith respect to polyethylene, a primary material used in the IrrigationComponents segment.  As a result, theCompany was not able to pass through all cost increases incurred and priceincreases passed through typically had little or no mark-up.  These factors had the effect of reducinggross margins.  In the IrrigationComponents segment, some customers placed speculative purchase orders againstthe risk of further price increases or material unavailability.  The Company did not experience any supplyinterruptions and prices have moderated somewhat since the end of the firstquarter.

 

As previously announced, during the quarter,the Company ceased operations in the Electrical Components segment, when itsold its bobbin manufacturing business. Prior to the cessation of operations, the Company experienced excessivecosts related to closing inventory activity, reduced sales and employeeseparation expenses.  As a result, a lossof $387,000, or $.10 per share, was incurred for the first quarter and reportedas a loss from discontinued operations.

 

***Results of Operations***

 

The followingtable sets forth certain information, derived from Summa’s unaudited condensedconsolidated statements of income, as a percent of sales for the three monthperiods ended November 30, 2004 and November 30, 2005, and theCompany’s effective income tax rate during those periods:

 
| ** **                              | ** ** | **Three months ended November 30** | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                              | ** ** | **2004**                                | ** ** | **2005** | ** ** |
| Net sales                               |       | 100.0                                   | %          | 100.0 | % |
| Cost of sales                           |       | 74.7                                    | %          | 75.5 | % |
| Gross profit                            |       | 25.3                                    | %          | 24.5 | % |
| S,G & A and other expenses     |       | 18.8                                    | %          | 17.9 | % |
| (Gain) on sale of real estate           |       | (0.2                                    | )%         | (0.7 | )% |
| Operating income                        |       | 6.7                                     | %          | 7.3 | % |
| Interest expense, net                   |       | 1.2                                     | %          | 1.6 | % |
| Income before tax and minority interest |       | 5.5                                     | %          | 5.7 | % |
|                                    |       |                                    |       |   |   |
| Effective tax rate                      |       | 35.4                                    | %          | 35.8 | % |

 

**Quarter ended November 30, 2005 compared to the quarter ended November 30,2004**

 

Sales for thefirst quarter ended November 30, 2005 increased $2,252,000, or 9%,primarily due to the effects of price increases (approximately $1,200,000) andsome speculative buying by Irrigation Components segment customers to hedgeagainst anticipated future higher prices for resin.  Sales increased $373,000, or 3%, in theOptical Components segment, primarily due to price increases (approximately$700,000) and opportunistic non-recurring business (approximately $600,000),substantially offset by business lost due to competitive pricing; increased$116,000, or 2%, in the Material Handling Components segment, primarily due tostrength in export sales; and increased $1,763,000, or 36%, in the IrrigationComponents segment, primarily due to speculative buying and price increases(approximately $470,000).

 

Gross profit forthe first quarter increased $340,000, or 5%, from the comparable prior yearperiod, primarily due to

 

12

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increased sales,partially offset by increased material costs. Gross margin decreased from 25.3% to 24.5%, primarily due to increasesin plastic resin costs passed through to customers without mark-up andunfavorable mix of business.

 

Operating expensesfor the first quarter, excluding a $205,000 gain from the sale of excess realestate, versus a $43,000 gain from a real estate sale in the prior year firstquarter, increased $192,000, or 4%, from the comparable prior year period,primarily due to increased variable sales expenses related to higher sales andexchange rate costs, partially offset by management cost reduction initiatives.  As a percent of sales, operating expenses,excluding the gain from real estate sales, decreased from 18.8% to 17.9%.

 

Operating incomefor the first quarter was $2,016,000, which was $310,000, or 18%, higher thanin the comparable prior year period.  By segment,operating income increased $522,000 in the Optical Components segment,primarily due to the gain of $205,000 on the sale of an excess building, thebenefit of non-recurring opportunistic business, management cost reductioninitiatives and favorable product mix; increased $13,000 in the MaterialHandling Components segment; and was unchanged in the Irrigation Componentssegment, despite substantially higher sales volume, primarily due tounfavorable product mix and higher resin costs passed on with little or nomark-up. Operating margin for the quarter increased from 6.7% in the firstquarter of fiscal 2005 to 7.3% in the first quarter of fiscal 2006, due to thefactors discussed above.

 

Net interestexpense for the quarter ended November 30, 2005 increased $139,000 fromthe prior year first quarter, due to the effects of higher average interestrates in the most recent period, despite lower average debt levels. Theweighted average interest rate was 5.8% on $29.6 million in debt at November 30,2005, versus 4.4% on $34.3 million in debt a year earlier.

 

The provision forincome taxes in the first quarter of fiscal 2006 was $561,000, $66,000 higherthan in the prior year first quarter, due to higher income before taxes. Theeffective income tax rate was slightly higher at 35.8% in the most recentquarter versus 35.4% a year earlier.

 

The Company’sbacklog of unfilled orders, believed to be firm, was $6,707,000 at November 30,2004, $5,592,000 at August 31, 2005 and $5,866,000 at November 30,2005.  Because the time between enteringan order and shipping the product and recording a sale is typically shorterthan one month, backlog levels are not a reliable indicator of future salesvolume.

 

***Liquidity andCapital Resources***

 

*Working Capital. *The Company’s workingcapital was $20,844,000 at November 30, 2004; $19,075,000 at August 31,2005 and $19,923,000 at November 30, 2005.

 

Summary of the Company’s debt at November 30,2005:

 
| ** **                  | ** ** | ** **  | ** ** | **Weighted** | ** ** | ** **       | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------------|------------|-------------|------------|--------------|------------|------------------|------------|---------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                  | ** ** | ** **  | ** ** | **Average**  | ** ** | ** **       | ** ** | **Fiscal Year Due** | ** ** |
| ** **                  | ** ** | ** **  | ** ** | **Interest** | ** ** | **Additional**   | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2010 and**   | ** ** |
| **Description  of Debt**    | ** ** | **Balance** | ** ** | **Rate**     | ** ** | **Availability** | ** ** | **2006**            | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **thereafter** | ** ** |
|                        |       |        |       |         |       |             |       |                |       |       |       |       |       |       |       |           |       |
| Revolving line of credit    |       | $           | 11,137,000 |         | 5.7        | %                | $          | 7,964,000           |       | $          | —     |       | $          | 11,137,000 |       | $              | —     |   | $ | — |   | $ | — |   |
| Bank term loan              |       | 3,308,000   |       | 4.7          | %          | —           |       | 736,000             |       | 1,022,000  |       | 1,071,000  |       | 479,000    |       | —         |       |
| Real estate and other loans |       | 15,147,000  |       | 6.1          | %          | —           |       | 1,145,000           |       | 4,430,000  |       | 1,412,000  |       | 1,058,000  |       | 7,102,000      |       |
| Total debt                  |       | $           | 29,592,000 |         | 5.8        | %                | $          | 7,964,000           |       | $          | 1,881,000  |       | $          | 16,589,000 |       | $              | 2,483,000  |   | $ | 1,537,000 |   | $ | 7,102,000 |   |

 

The interest rate on the bankterm loan is fixed for five years. Interest rates on the bank line of credit are subject to marketfluctuation and are subject to reduction as the Company achieves certainfinancial milestones.  Interest rates onmost of the real estate and other loans are subject to market fluctuation.

 

*Sources andUses of Funds*. Net cash provided by operating activities for the first three months offiscal 2006 was $884,000 compared to $584,000 used in operating activities forthe first quarter of fiscal 2005.  Theincrease was primarily due to increases in accounts payable and accruedliabilities in the most recent quarter versus decreases in the prior year firstquarter, partially offset by a larger increase in inventory than in the prioryear comparable period and an increase in accounts receivable in the mostrecent quarter versus a decrease in the prior year comparable period.  The increase in inventory in the most recentperiod was primarily due to a level loaded manufacturing initiative in theseasonal irrigation business, higher than normal raw material purchases toavoid announced price increases and selected increases to

 

13

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improvecustomer service levels.  Increases inaccounts payable were primarily related to inventory increases.  Net cash used in investing activities was$14,000 in the first quarter, $3,253,000 less than in the first quarter offiscal 2005, primarily due to an unusually large investment in a new facilityin the Material Handling Components segment and investments in equipment in thefirst quarter of fiscal 2005 and proceeds from the sale of assets in the firstquarter of fiscal 2006.  Net cash of$1,391,000 was used in financing activities for the first three months offiscal 2006, compared to $3,435,000 in net cash provided in the prior yearfirst three months.  The change primarilyrepresents retirement of debt in the most recent period, versus increase indebt in the prior year, associated with the new facility investment.  Additionally, the Company used $409,000 forthe repurchase of stock in the open market and payment of dividends in thefirst quarter of fiscal 2006 versus no such transactions in the first quarterof fiscal 2005.

 

In October 2004,the Company announced a plan to repurchase up to $2,000,000 of its Common Stockwith no time limit (the “2005 Buy Back”). As of November 30, 2005, the status of the 2005 Buy Back was asfollows:

 
| ** **                   | ** ** | **Shares repurchased** | ** ** | **Average cost per share** | ** ** | **Repurchase cost** | ** ** |
|------------------------------|------------|------------------------|------------|----------------------------|------------|---------------------|------------|
|                         |       |                   |       |                       |       |                |       |
| Prior to September 2005 |       | 62,481                 |       | $                          | 8.32       |                | $          | 520,000 |   |
|                         |       |                   |       |                       |       |                |       |
| September 2005          |       | 5,900                  |       | $                          | 7.57       |                | $          | 45,000 |   |
| October 2005            |       | 7,157                  |       | $                          | 7.91       |                | $          | 56,000 |   |
| November 2005           |       | 9,258                  |       | $                          | 7.77       |                | $          | 72,000 |   |
| Total for the quarter        |       | 22,315                 |       | $                          | 7.76       |                | $          | 173,000 |   |
|                         |       |                   |       |                       |       |                |       |
| Total for the plan           |       | 84,796                 |       | $                          | 8.17       |                | $          | 693,000 |   |

 

The cost per shareincludes commissions where applicable.

 

Summa believesthat cash flows from operations and existing credit facilities will be sufficientto fund working capital requirements, planned investments and debt service forthe next twelve months.  In addition,funds may be generated from a limited number of sales of certain non-coreassets of the Company.  The Company has astrategy which includes growth by acquisition. In the event an acquisition plan is adopted which requires fundsexceeding the availability described above, an alternate source of funds toaccomplish the acquisition would have to be developed.  The Company has 10,000,000 shares of commonstock authorized, of which 3,920,226 shares were outstanding at November 30,2005 and 5,000,000 shares of «blank check» preferred stock authorized, of whichnone was outstanding at November 30, 2005. The Company could issue additional shares of common or preferred stockor enter into new or revised borrowing arrangements to raise funds.

 

### ***Off-Balance SheetArrangements***

 

The Company’smaterial off-balance sheet arrangements are as follows:

 

*Future Lease Payments.*  The Company leases offices and manufacturingfacilities and certain equipment under non-cancelable operating leases.  Future payments under these leases at November 30,2005 are approximately as follows:

 

| **Fiscal Year**     | ** ** | **Amount** | ** ** |
|---------------------|------------|------------|------------|
| 2006                |       | $          | 848,000    |   |
| 2007                |       | $          | 871,000    |   |
| 2008                |       | $          | 749,000    |   |
| 2009                |       | $          | 526,000    |   |
| 2010                |       | $          | 18,000     |   |
| 2011 and thereafter |       | $          | 1,000      |   |

 

In recentyears the Company has consolidated and/or abandoned several facilities in aneffort to improve efficiencies and operating results, and plans furtherconsolidations.  In the event the Companywas to abandon a facility prior to its being leased to a new tenant, theCompany could become obligated for accelerated lease payments or otherexpenses.

 

14

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***Critical Accounting Policies and Estimates***

 

The foregoing discussion and analysis of the Company’s financialcondition and results of operations are based upon the consolidated financialstatements of the Company, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of such financial statements requires management to make estimatesand assumptions in applying certain critical accounting policies. Certainaccounting estimates are particularly sensitive because of their significanceto the Company’s consolidated financial statements and because of thepossibility that future events affecting the estimates could differ markedlyfrom current expectations. The Company believes that the following are some ofthe more critical judgment areas in the application of its accounting policiesthat affect the Company’s financial statements:

 

###### *Impairment of Long-Lived Assetsand Long-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.

 

TheCompany has a significant amount of property and equipment and intangibleassets. The determination as to whether events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable involvesmanagement’s judgment. In addition, should the Company conclude thatrecoverability of an asset is in question, the estimate of undiscounted futureoperating cash flows to determine whether an asset is recoverable and, if not,the final determination of the fair value of the asset, is also based on thejudgment of management. These judgments can be impacted by a variety ofunderlying assumptions, such as the general business climate, effectiveness ofcompetition and supply and cost of resources. Accordingly, actual results can differ significantly from theassumptions made by management in making its estimates. Future changes inmanagement’s estimates could result in indicators of impairment and futureimpairment charges.

 

###### *Valuation of Inventory.** ***TheCompany values its inventories at the lower of cost or market using thefirst-in, first-out (FIFO) method. The Company records adjustments to the valueof inventory based upon obsolescence and changes in market value as permanentchanges in the carrying amount of such inventory until its ultimate sale orother disposition. The Company has evaluated the current level of inventoriesconsidering historical sales and other factors and, based on this evaluation,has recorded adjustments to cost of goods sold to adjust inventory to netrealizable value.  These adjustments areestimates, which could vary significantly, either favorably or unfavorably,from actual requirements if future economic conditions, customer demand orcompetition differ from expectations.

 

*Accounts Receivable.******* **The Company performsongoing evaluations of customers and adjusts credit limits based upon eachcustomer’s payment history and credit worthiness, as determined by creditinformation available at that time.  TheCompany monitors collections and payments from customers and maintainsallowances for doubtful accounts for the inability of customers to make requiredpayments.  If the financial condition ofcustomers were to deteriorate resulting in an impairment of their ability tomake payments, additional allowances may be required.

 

*Goodwill.** ***Goodwillrepresents the excess of purchase price over fair value of net assetsacquired.  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.  Significantmanagement judgment is involved in determining the fair value of assets. Futurechanges in management’s estimates could result in additional impairment chargesto goodwill.

 

*IncomeTaxes.*  Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to temporary differences between the financial statement carryingamounts of assets and liabilities and their respective tax bases.  Deferred tax assets are also recognized fortax credit carryforwards and then assessed (including the anticipation offuture income) to determine the likelihood of realization.  Deferred tax assets and liabilities aremeasured using the rates expected to apply to taxable income in the years inwhich the temporary differences are expected to reverse and the credits are

 

15

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expected to beused.  The effect of a change in taxrates on deferred tax assets and liabilities is recognized in income in theperiod that includes the enactment date.

 

*Accounting for Stock Options.***** The Company accounts for stock-basedcompensation in accordance with SFAS No. 123(R), Share-Based Payment.  Under the fair value recognition provisionsof this statement, share-based compensation cost is measured at the grant datebased on the value of the award and is recognized as expense over the vestingperiod.  The Company uses theBlack-Scholes model to calculate the fair value and is required to exercisejudgment and make assumptions concerning the expected term, the expectedvolatility, and the expected dividends. If actual results differ significantlyfrom these estimates, stock-based compensation expense and results ofoperations could be impacted. The Company has elected to use the modifiedprospective method, under which previously reported financial results are notrestated to reflect the stock based compensation expense formerly recognized inpro forma footnote disclosures and could affect comparability of historicalresults to results reported subsequent to the adoption of SFAS No. 123R.

 

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Except for theoutstanding debt and related variable interest rates set forth in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Liquidity and Capital Resources” above, there are no material changes to thedisclosure set forth in Item 7A of the Company’s Annual Report on Form 10-Kfor the fiscal year ended August 31, 2005. The Company has no market risk sensitive instruments entered into fortrading purposes.

 

**EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES**

 

As of the end ofthe period covered by this report, the Company carried out an evaluation, underthe supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Exchange Act Rules 13a-14 and 13a-15.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective.  There were no significant changes in theCompany’s internal controls that could significantly affect these controlssubsequent to the date of their evaluation.

 

**PART II- OTHER INFORMATION**

 

### ***Item 1.  LegalProceedings***

 

The Company encounters lawsuits from time totime in the ordinary course of business and, at November 30, 2005, theCompany and/or its affiliates were parties to several civil lawsuits. Summadoes not expect that the resolution of these lawsuits will have a materialadverse impact on future results of operations or financial position.  Certain lawsuits filed against the Companyfrom time to time contain claims not covered by insurance, or seek damages inexcess of policy limits, and such claims could be filed in the future.

###### * *

###### ***Item1A.  Risk Factors***

###### * *

As of the date of this filing, there has been no material change to therisk factors previously disclosed in the Company’s Annual Report on Form 10-K.

###### * *

###### ***Item 2. Unregistered Sales of Equity Securities and Use of Proceeds***

 

In October 2004,the Company announced a plan to repurchase up to $2,000,000 of its Common Stockwith no time limit (the “2005 Buy Back”). As of November 30, 2005, the status of the 2005 Buy Back was asfollows:

 

| ** **                   | ** ** | **Shares repurchased** | ** ** | **Average cost per share** | ** ** | **Repurchase cost** | ** ** |
|------------------------------|------------|------------------------|------------|----------------------------|------------|---------------------|------------|
|                         |       |                   |       |                       |       |                |       |
| Prior to September 2005 |       | 62,481                 |       | $                          | 8.32       |                | $          | 520,000 |   |
|                         |       |                   |       |                       |       |                |       |
| September 2005          |       | 5,900                  |       | $                          | 7.57       |                | $          | 45,000 |   |
| October 2005            |       | 7,157                  |       | $                          | 7.91       |                | $          | 56,000 |   |
| November 2005           |       | 9,258                  |       | $                          | 7.77       |                | $          | 72,000 |   |
| Total for the quarter        |       | 22,315                 |       | $                          | 7.76       |                | $          | 173,000 |   |
|                         |       |                   |       |                       |       |                |       |
| Total for the plan           |       | 84,796                 |       | $                          | 8.17       |                | $          | 693,000 |   |

 

16

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#### ***Item 3.  Defaults upon Senior Securities***

 

None.

 

***Item 4. Submission of Matters to a Vote of Security Holders***

 

None.

 

***Item 5.  Other Information***

 

None.

 

***Item 6. Exhibits***

 

31.1         Section 302Certification

32.1         Section 906Certification

 

 

**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized on January 10,2006.

 
| **Summa  Industries**                 |
|---------------------------------------|
|                                  |   |
| /s/ James R. Swartwout                |   | /s/ Trygve M. Thoresen |   |
| James R. Swartwout                    | Trygve M. Thoresen |
| President and Chief Financial Officer | Vice President and Secretary |
|                                       |  |  |  |

 

17

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