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

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                          | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------|--------------------------------------------------------------------------------------------------------|
|                                |                                                                                                   |
| **For the  quarterly period ended** |
|                                |                                                                                                   |
| **May 31,  2005**              |
|                                |                                                                                                   |
| **o**                               | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**      |

 

**For the transition period from    N/A   to    N/A  **

 

**Commission file****no. 1-7755**

 

**SummaIndustries**

(Name of registrant as specified in its charter)

 
| **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 executive offices,including zip code)

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes   ý**    **No   o

 

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

Yes   o**    **No   ý

 

The number of shares of common stock outstanding as of July 5,2005 was 3,955,542.

 

 

----

 

**Summa Industries**

 

**INDEX**

 
| PART I - FINANCIAL INFORMATION |                                                                                                                                |
|-------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                                |   |
| Item 1.                             | Financial Statements:                                                                                                               |   |
|                                |                                                                                                                                |   |
|                                | Condensed  Consolidated Balance Sheets (unaudited) -  May 31, 2004, August 31, 2004 and May 31, 2005                 |   |
|                                |                                                                                                                                |   |
|                                | Condensed  Consolidated Income Statements (unaudited) -  three months and nine months ended May 31, 2004 and May 31, 2005 |   |
|                                |                                                                                                                                |   |
|                                | Condensed  Consolidated Statements of Cash Flows (unaudited) -  nine months ended May 31, 2004 and May 31, 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  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**

CONDENSEDCONSOLIDATED BALANCE SHEETS

(unaudited)

 
| ** **                                                                                            | ** ** | **May 31, 2004** | ** ** | **August 31, 2004** | ** ** | **May 31, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|------------------|------------|
| **ASSETS**                                                                                            |       |                  |       |                |       |             |       |
| Current  assets:                                                                                      |       |                  |       |                |       |             |       |
| Cash and  cash equivalents                                                                            |       | $                     | 680,000    |                | $          | 1,248,000        |       | $ | 1,027,000 |   |
| Accounts  receivable                                                                                  |       | 19,895,000            |       | 18,227,000          |       | 18,761,000       |       |
| Inventories                                                                                           |       | 13,306,000            |       | 14,749,000          |       | 15,638,000       |       |
| Prepaid  expenses and other                                                                           |       | 3,098,000             |       | 3,782,000           |       | 3,895,000        |       |
| Total  current assets                                                                                 |       | 36,979,000            |       | 38,006,000          |       | 39,321,000       |       |
| Property,  plant and equipment                                                                        |       | 60,859,000            |       | 63,842,000          |       | 67,450,000       |       |
| Less  accumulated depreciation                                                                        |       | (32,385,000           | )          | (32,789,000         | )          | (35,223,000      | )          |
| Net  property, plant and equipment                                                                    |       | 28,474,000            |       | 31,053,000          |       | 32,227,000       |       |
| Other assets                                                                                          |       | 2,497,000             |       | 1,804,000           |       | 1,844,000        |       |
| Goodwill and  other intangibles, net                                                                  |       | 9,321,000             |       | 9,254,000           |       | 9,050,000        |       |
| Total assets                                                                                          |       | $                     | 77,271,000 |                | $          | 80,117,000       |       | $ | 82,442,000 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                        | ** ** | ** **            | ** ** | ** **          | ** ** | ** **       | ** ** |
| Current  liabilities:                                                                                 |       |                  |       |                |       |             |       |
| Accounts  payable                                                                                     |       | $                     | 7,365,000  |                | $          | 9,088,000        |       | $ | 9,909,000 |   |
| Accrued  liabilities                                                                                  |       | 5,769,000             |       | 7,429,000           |       | 5,429,000        |       |
| Current  maturities of long-term debt                                                                 |       | 1,957,000             |       | 2,195,000           |       | 4,178,000        |       |
| Total  current liabilities                                                                            |       | 15,091,000            |       | 18,712,000          |       | 19,516,000       |       |
| Long-term  debt, net of current maturities                                                            |       | 30,337,000            |       | 28,663,000          |       | 29,157,000       |       |
| Other  long-term liabilities                                                                          |       | 2,577,000             |       | 2,508,000           |       | 2,448,000        |       |
| Total  long-term liabilities                                                                          |       | 32,914,000            |       | 31,171,000          |       | 31,605,000       |       |
| Minority  interest in subsidiary                                                                      |       | 205,000               |       | 205,000             |       | 155,000          |       |
| Stockholders’  equity:                                                                           |       |                  |       |                |       |             |       |
| Common  stock, par value $.001; 10,000,000 shares authorized; issued and outstanding:                 |       |                  |       |                |       |             |       |
| 3,934,702 at May 31, 2004, 3,974,187  at August 31, 2004 and 3,970,757 at May 31, 2005 |       | 15,035,000            |       | 15,305,000          |       | 15,288,000       |       |
| Retained  earnings                                                                                    |       | 14,026,000            |       | 14,724,000          |       | 15,878,000       |       |
| Total  stockholders’ equity                                                                      |       | 29,061,000            |       | 30,029,000          |       | 31,166,000       |       |
| Total  liabilities and stockholders’ equity                                                      |       | $                     | 77,271,000 |                | $          | 80,117,000       |       | $ | 82,442,000 |   |

 

See accompanying notes to condensed consolidatedfinancial statements*.*

 

3

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**SummaIndustries**

CONDENSEDCONSOLIDATED INCOME STATEMENTS

(unaudited)

 
| ** **                                           | ** ** | **Three months ended May 31** | ** ** | **Nine months ended May 31** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2004**                           | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                 |       |                               |       |                              |       |   |   |   |   |
| Net sales                                            |       | $                                  | 33,160,000 |                              | $          | 31,541,000 |   | $ | 85,631,000 |   | $ | 88,976,000 |   |
| Cost of  sales                                       |       | 25,096,000                         |       | 24,980,000                        |       | 64,907,000 |   | 70,183,000 |   |
| Gross profit                                         |       | 8,064,000                          |       | 6,561,000                         |       | 20,724,000 |   | 18,793,000 |   |
| Selling,  general, administrative and other expenses |       | 5,609,000                          |       | 5,316,000                         |       | 15,467,000 |   | 15,363,000 |   |
| Operating  income                                    |       | 2,455,000                          |       | 1,245,000                         |       | 5,257,000 |   | 3,430,000 |   |
| Interest  expense                                    |       | 321,000                            |       | 476,000                           |       | 1,210,000 |   | 1,314,000 |   |
| Income  before income taxes and minority interest    |       | 2,134,000                          |       | 769,000                           |       | 4,047,000 |   | 2,116,000 |   |
| Provision  for income taxes                          |       | 744,000                            |       | 278,000                           |       | 1,374,000 |   | 772,000 |   |
| Income  before minority interest                     |       | 1,390,000                          |       | 491,000                           |       | 2,673,000 |   | 1,344,000 |   |
| Minority  interest in net (loss) of subsidiary       |       | —                             |       | (17,000                           | )          | — |   | (50,000 | ) |
| Net income                                           |       | $                                  | 1,390,000  |                              | $          | 508,000 |   | $ | 2,673,000 |   | $ | 1,394,000 |   |
| Preferred  stock accretion                           |       | $                                  | 81,000     |                              | —     |   | $ | 450,000 |   | — |   |
| Net income  available to common stockholders         |       | $                                  | 1,309,000  |                              | $          | 508,000 |   | $ | 2,223,000 |   | $ | 1,394,000 |   |
| Earnings per  common share                           |       |                               |       |                              |       |   |   |   |   |
| Basic                                                |       | $                                  | 0.31       |                              | $          | 0.13 |   | $ | 0.52 |   | $ | 0.35 |   |
| Diluted                                              |       | $                                  | 0.30       |                              | $          | 0.13 |   | $ | 0.51 |   | $ | 0.34 |   |
| Weighted  average common shares outstanding:         |       |                               |       |                              |       |   |   |   |   |
| Basic                                                |       | 4,234,000                          |       | 3,984,000                         |       | 4,297,000 |   | 3,990,000 |   |
| Diluted                                              |       | 4,310,000                          |       | 4,038,000                         |       | 4,372,000 |   | 4,060,000 |   |

 

Seeaccompanying notes to condensed consolidated financial statements*.*

 

4

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**Summa Industries**

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 
| ** **                                                                         | ** ** | **Nine months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **May 31, 2004** | ** ** | **May 31, 2005** | ** ** |
| Operating activities:                                                              |       |                  |       |                  |       |
| Net income                                                                         |       | $                     | 2,673,000  |                  | $          | 1,394,000 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                  |       |                  |       |
| Depreciation                                                                       |       | 3,574,000             |       | 3,887,000             |       |
| Amortization                                                                       |       | 181,000               |       | 204,000               |       |
| (Gain) on  disposition of property, plant and equipment                            |       | (7,000                | )          | (33,000               | )          |
| Minority  interest in net loss of subsidiary                                       |       | —                |       | (50,000               | )          |
| Net changes  in assets and liabilities, net of effects of acquisitions:            |       |                  |       |                  |       |
| Accounts  receivable                                                               |       | (4,166,000            | )          | (534,000              | )          |
| Inventories                                                                        |       | (796,000              | )          | (889,000              | )          |
| Prepaid  expenses and other assets                                                 |       | (323,000              | )          | (153,000              | )          |
| Accounts  payable                                                                  |       | 2,063,000             |       | 821,000               |       |
| Accrued  liabilities                                                               |       | 953,000               |       | (1,799,000            | )          |
| Total  adjustments                                                                 |       | 1,479,000             |       | 1,454,000             |       |
| Net cash  provided by operating activities                                         |       | 4,152,000             |       | 2,848,000             |       |
| Investing  activities:                                                             |       |                  |       |                  |       |
| Acquisition  of business                                                           |       | (1,903,000            | )          | —                |       |
| Purchases of  property and equipment                                               |       | (4,510,000            | )          | (6,166,000            | )          |
| Proceeds  from sale of property and equipment                                      |       | 17,000                |       | 1,138,000             |       |
| Net cash  (used in) investing activities                                           |       | (6,396,000            | )          | (5,028,000            | )          |
| Financing  activities:                                                             |       |                  |       |                  |       |
| Net proceeds  from line of credit                                                  |       | 9,818,000             |       | 481,000               |       |
| Proceeds  from issuance of long-term debt                                          |       | 5,561,000             |       | 6,231,000             |       |
| Payments on  long-term debt                                                        |       | (13,386,000           | )          | (4,235,000            | )          |
| Proceeds  from the exercise of stock options                                       |       | 586,000               |       | —                |       |
| Purchase of  common stock                                                          |       | (35,000               | )          | (278,000              | )          |
| Payment of  cash dividends                                                         |       | —                |       | (240,000              | )          |
| Net cash  provided by financing activities                                         |       | 2,544,000             |       | 1,959,000             |       |
| Net increase  (decrease) in cash and cash equivalents                              |       | 300,000               |       | (221,000              | )          |
| Cash and  cash equivalents, beginning of period                                    |       | 380,000               |       | 1,248,000             |       |
| Cash and  cash equivalents, end of period                                          |       | $                     | 680,000    |                  | $          | 1,027,000 |   |

 

See accompanying notes to condensed consolidated financial statements*.*

 

5

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**Summa Industries**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(unaudited)

May 31,2005

 

**1.****                                     ****Basis of presentation**

 

The accompanying unauditedcondensed 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, 2004.  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 and nine months ended May 31,2005 are not necessarily indicative of the results to be expected for the fullyear ending August 31, 2005.

 

**Recentaccounting pronouncements**

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 123R (“SFAS No. 123R”),“Share-Based Payments,” which requires companies to recognize in the incomestatement the grant-date fair value of stock options and equity-basedcompensation issued to employees. The Company reports equity based compensationin accordance with Accounting Principles Board Opinion No. 25 andFinancial Interpretation No. 44, and accordingly, no compensation expenseis recognized in the financial statements. The pro forma effect of equity-basedcompensation under SFAS No. 123, “Accounting for Stock-Based Compensation,”is disclosed in Note 4 below.  TheCompany will adopt this statement, effective with its fiscal year beginning September 1,2006.  The Company is currentlyevaluating the impact of adopting this standard.

 

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

 

**2.****                                     ****Inventories**

 

Inventories were as follows:

 
| ** **           | ** ** | **May 31, 2004** | ** ** | **August 31, 2004** | ** ** | **May 31, 2005** | ** ** |
|----------------------|------------|-----------------------|------------|--------------------------|------------|-----------------------|------------|
| Finished  goods      |       | $                     | 5,613,000  |                     | $          | 6,407,000             |       | $ | 7,600,000 |   |
| Work in process      |       | 587,000               |       | 296,000                  |       | 207,000               |       |
| Materials  and parts |       | 7,106,000             |       | 8,046,000                |       | 7,831,000             |       |
|                 |       |                  |       |                     |       |                  |       |
|                 |       | $                     | 13,306,000 |                     | $          | 14,749,000            |       | $ | 15,638,000 |   |

 

**3.****                                     ****Earnings per share**

 

Basic earnings per share (“EPS”) was computed by dividing net incomeavailable to common stockholders by the weighted average number of commonshares outstanding during each period. The Company had 5,000 shares ofredeemable convertible preferred stock outstanding until its repurchase on May 3,2004, which provided for an accretion in its redemption price.  This accretion reduced the net incomeavailable to common stockholders used in the EPS calculation prior to thatdate.

 

Diluted EPS reflects the potential dilution that could occur ifsecurities or other contracts to issue common stock were exercised or convertedinto common stock.  Diluted EPS wascalculated using the “treasury stock” method as if dilutive options had beenexercised and the funds were used to purchase common shares at the averagemarket price during the period.  Optionsto purchase 518,000 common shares as of May 31, 2004 and 773,000 commonshares as of May 31, 2005 

 

6

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were excluded from the calculation of equivalent shares, as they would havebeen anti-dilutive.  The 5,000 shares ofoutstanding preferred stock, convertible into 625,000 shares of common stock,were excluded from the calculation of equivalent shares for the three month andnine month periods ended May 31, 2004, as they would have beenanti-dilutive.

 

The following is a reconciliation of the numerators and denominators ofthe basic and diluted EPS computations for “income available to commonstockholders” and other disclosures required by FASB Statement of AccountingStandards No. 128, “Earnings per Share”:

 
| ** **                                                             | ** ** | **Three months ended May 31** | ** ** | **Nine months ended May 31** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                                                             | ** ** | **2004**                           | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2005** | ** ** |
| Numerators:                                                            |       |                               |       |                              |       |   |   |   |   |
|                                                                   |       |                               |       |                              |       |   |   |   |   |
| Net Income                                                             |       | $                                  | 1,390,000  |                              | $          | 508,000 |   | $ | 2,673,000 |   | $ | 1,394,000 |   |
| Preferred  stock accretion                                             |       | (81,000                            | )          | —                            |       | (450,000 | ) | — |   |
| Income  available to common stockholders                               |       | $                                  | 1,309,000  |                              | $          | 508,000 |   | $ | 2,223,000 |   | $ | 1,394,000 |   |
|                                                                   |       |                               |       |                              |       |   |   |   |   |
| Denominators:                                                          |       |                               |       |                              |       |   |   |   |   |
|                                                                   |       |                               |       |                              |       |   |   |   |   |
| Weighted  average shares outstanding – basic                      |       | 4,234,000                          |       | 3,984,000                         |       | 4,297,000 |   | 3,990,000 |   |
| Impact of common  shares assumed to be issued under stock option plans |       | 76,000                             |       | 54,000                            |       | 75,000 |   | 70,000 |   |
| Weighted  average shares outstanding – diluted                    |       | 4,310,000                          |       | 4,038,000                         |       | 4,372,000 |   | 4,060,000 |   |

 

**4.****                                     ****Stock-based compensationplans**

 

The Company accounts for stock options issued to employees anddirectors in accordance with the recognition and measurement principles ofAccounting Principles Board Opinion No. 25 and Financial Interpretation No. 44.Consequently, no compensation expense was recognized for the Company’s stockoption plans. The following table illustrates the effect on net earnings andnet earnings per share if the Company had applied the fair value recognitionprovisions of Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation”. The fair value estimate was computed using theBlack-Scholes option pricing model.

 
| ** **                                                             | ** ** | **Three months ended May 31** | ** ** | **Nine months ended May 31** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                                                             | ** ** | **2004**                           | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2005** | ** ** |
| Income  available to stockholders                                      |       | $                                  | 1,309,000  |                              | $          | 508,000 |   | $ | 2,223,000 |   | $ | 1,394,000 |   |
| Share-based  compensation included in income available to stockholders |       | —                             |       | —                            |       | — |   | — |   |
| Pro forma  impact of expensing stock options                           |       | (57,000                            | )          | (41,000                           | )          | (78,000 | ) | (35,000 | ) |
| Pro forma  income available to common stockholders                     |       | $                                  | 1,252,000  |                              | $          | 467,000 |   | $ | 2,145,000 |   | $ | 1,359,000 |   |
|                                                                   |       |                               |       |                              |       |   |   |   |   |
| Earnings per  share:                                                   |       |                               |       |                              |       |   |   |   |   |
|                                                                   |       |                               |       |                              |       |   |   |   |   |
| As reported:                                                           |       |                               |       |                              |       |   |   |   |   |
| Basic                                                                  |       | $                                  | 0.31       |                              | $          | 0.13 |   | $ | 0.52 |   | $ | 0.35 |   |
| Diluted                                                                |       | $                                  | 0.30       |                              | $          | 0.13 |   | $ | 0.51 |   | $ | 0.34 |   |
|                                                                   |       |                               |       |                              |       |   |   |   |   |
| Pro forma:                                                             |       |                               |       |                              |       |   |   |   |   |
| Basic                                                                  |       | $                                  | 0.30       |                              | $          | 0.12 |   | $ | 0.50 |   | $ | 0.34 |   |
| Diluted                                                                |       | $                                  | 0.29       |                              | $          | 0.12 |   | $ | 0.49 |   | $ | 0.33 |   |

 

7

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**5.****                                     ****Supplemental cash flowinformation**

 
| ** **                                        | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2004**              | ** ** | **2005** | ** ** |
| Cash paid  during the period:                     |       |                  |       |   |   |
| Interest                                          |       | $                     | 1,254,000  |   | $ | 1,312,000 |   |
| Income taxes                                      |       | $                     | 820,000    |   | $ | 1,559,000 |   |
|                                              |       |                  |       |   |   |
| Non-cash  financing activity:                     |       |                  |       |   |   |
| Common stock  issued to 401(k) Plan               |       | $                     | 345,000    |   | $ | 261,000 |   |
| Accretion of  redeemable preferred stock          |       | $                     | 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    |   | — |   |

 

**6*.******                                     *****Segment information**

 

The Company has four reportable segments identifiedby differences in products and distribution channels.  The accounting policies of the segments arethe same as those described in the summary of significant accounting policesdescribed in the Company’s Annual Report on Form 10-K for the year ended August 31,2004.  The Company’s operations arereported in the following business segments:

 

***OpticalComponents.***  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 Handling Components segment,Summa designs and manufactures engineered plastic components, which formconveyer belts and chains and other plastic products for use in foodprocessing.

 

***Irrigation Components.*********  Inits Irrigation Components segment, Summa designs and manufactures plasticinjection-molded fittings, valves, filters and accessories, extruded tubing andother plastic products for drip irrigation systems used in agriculture,commercial landscape and other applications.

 

***ElectricalComponents.***  In its Electrical Components segment, Summa designsand 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.

 

8

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Financial information by reportable business segment is reported in thefollowing tables:

 
| ** **                    | ** ** | **Three months ended May 31** | ** ** | **Nine months ended May 31** | ** ** |
|-------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | **2004**                           | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2005** | ** ** |
| External  sales               |       |                               |       |                              |       |   |   |   |   |
| Optical  components           |       | $                                  | 14,694,000 |                              | $          | 13,151,000 |   | $ | 41,000,000 |   | $ | 41,019,000 |   |
| Material  handling components |       | 7,120,000                          |       | 7,259,000                         |       | 19,524,000 |   | 19,874,000 |   |
| Irrigation  components        |       | 8,005,000                          |       | 8,398,000                         |       | 16,046,000 |   | 20,089,000 |   |
| Electrical  components        |       | 3,341,000                          |       | 2,733,000                         |       | 9,061,000 |   | 7,994,000 |   |
| Other                         |       | —                             |       | —                            |       | — |   | — |   |
| Consolidated                  |       | $                                  | 33,160,000 |                              | $          | 31,541,000 |   | $ | 85,631,000 |   | $ | 88,976,000 |   |
|                          |       |                               |       |                              |       |   |   |   |   |
| Inter-segment  sales          |       |                               |       |                              |       |   |   |   |   |
| Optical  components           |       | $                                  | 935,000    |                              | $          | 32,000 |   | $ | 2,059,000 |   | $ | 341,000 |   |
| Material  handling components |       | —                             |       | —                            |       | — |   | — |   |
| Irrigation  components        |       | 26,000                             |       | —                            |       | 673,000 |   | — |   |
| Electrical  components        |       | —                             |       | —                            |       | — |   | — |   |
| Other                         |       | (961,000                           | )          | (32,000                           | )          | (2,732,000 | ) | (341,000 | ) |
| Consolidated                  |       | $                                  | —     |                              | $          | — |   | $ | — |   | $ | — |   |
|                          |       |                               |       |                              |       |   |   |   |   |
| Total sales                   |       |                               |       |                              |       |   |   |   |   |
| Optical components            |       | $                                  | 15,629,000 |                              | $          | 13,183,000 |   | $ | 43,059,000 |   | $ | 41,360,000 |   |
| Material  handling components |       | 7,120,000                          |       | 7,259,000                         |       | 19,524,000 |   | 19,874,000 |   |
| Irrigation  components        |       | 8,031,000                          |       | 8,398,000                         |       | 16,719,000 |   | 20,089,000 |   |
| Electrical  components        |       | 3,341,000                          |       | 2,733,000                         |       | 9,061,000 |   | 7,994,000 |   |
| Other                         |       | (961,000                           | )          | (32,000                           | )          | (2,732,000 | ) | (341,000 | ) |
| Consolidated                  |       | $                                  | 33,160,000 |                              | $          | 31,541,000 |   | $ | 85,631,000 |   | $ | 88,976,000 |   |
|                          |       |                               |       |                              |       |   |   |   |   |
| Operating  income (loss)      |       |                               |       |                              |       |   |   |   |   |
| Optical  components           |       | $                                  | 2,382,000  |                              | $          | 808,000 |   | $ | 5,652,000 |   | $ | 3,318,000 |   |
| Material  handling components |       | 398,000                            |       | 976,000                           |       | 909,000 |   | 2,056,000 |   |
| Irrigation  components        |       | 394,000                            |       | 579,000                           |       | 174,000 |   | 997,000 |   |
| Electrical  components        |       | (29,000                            | )          | (497,000                          | )          | 95,000 |   | (1,384,000 | ) |
| Other                         |       | (690,000                           | )          | (621,000                          | )          | (1,573,000 | ) | (1,557,000 | ) |
| Consolidated                  |       | $                                  | 2,455,000  |                              | $          | 1,245,000 |   | $ | 5,257,000 |   | $ | 3,430,000 |   |

 
| ** **                    | ** ** | **May 31, 2004** | ** ** | **Aug 31, 2004** | ** ** | **May 31, 2005** |   |   |       |
|-------------------------------|------------|-----------------------|------------|------------------|------------|-----------------------|--------|--------|------------|
| Assets                        |       |                  |       |             |       |                  |   |   |       |
| Optical  components           |       | $                     | 29,472,000 |             | $          | 30,183,000            |   | $      | 28,844,000 |   |   |   |
| Material  handling components |       | 18,447,000            |       | 20,069,000       |       | 22,394,000            |   |   |       |
| Irrigation  components        |       | 14,040,000            |       | 13,622,000       |       | 15,473,000            |   |   |       |
| Electrical  components        |       | 9,655,000             |       | 10,453,000       |       | 9,839,000             |   |   |       |
| Other                         |       | 5,657,000             |       | 5,790,000        |       | 5,892,000             |   |   |       |
|                          |       |                  |       |             |       |                  |   |   |       |
| Consolidated                  |       | $                     | 77,271,000 |             | $          | 80,117,000            |   | $      | 82,442,000 |   |   |   |

 

9

----

 

In the fourth quarter of fiscal 2004, all of theassets and operations of the former Miscellaneous Plastic Components segmentwere integrated with the Irrigation Components segment.  Prior period segment information has beenrestated to conform to the consolidation. Segment information as reported prior to the consolidation is as followsfor the periods ended May 31, 2004:

 
| ** **                        | ** ** | **Three months** | ** ** | **Nine months** | ** ** |
|-----------------------------------|------------|------------------|------------|-----------------|------------|
| External  sales:                  |       |             |       |            |       |
| Irrigation  Components            |       | $                | 7,916,000  |            | $          | 15,432,000 |   |
| Miscellaneous  Plastic Components |       | 89,000           |       | 614,000         |       |
| Total                             |       | $                | 8,005,000  |            | $          | 16,046,000 |   |
|                              |       |             |       |            |       |
| Inter-segment  sales:             |       |             |       |            |       |
| Irrigation  Components            |       | $                | —     |            | $          | — |   |
| Miscellaneous  Plastic Components |       | 233,000          |       | 1,482,000       |       |
| Total                             |       | $                | 233,000    |            | $          | 1,482,000 |   |
|                              |       |             |       |            |       |
| Total sales:                      |       |             |       |            |       |
| Irrigation  Components            |       | $                | 7,916,000  |            | $          | 15,432,000 |   |
| Miscellaneous  Plastic Components |       | 322,000          |       | 2,096,000       |       |
| Total                             |       | $                | 8,238,000  |            | $          | 17,528,000 |   |
|                              |       |             |       |            |       |
| Operating  income (loss):         |       |             |       |            |       |
| Irrigation  Components            |       | $                | 665,000    |            | $          | 999,000 |   |
| Miscellaneous  Plastic Components |       | (271,000         | )          | (825,000        | )          |
| Total                             |       | $                | 394,000    |            | $          | 174,000 |   |
|                              |       |             |       |            |       |
| Assets at May 31,  2004:     |       |             |       |            |       |   |
| Irrigation  Components            |       |             | $          | 13,995,000      |       |   |   |
| Miscellaneous  Plastic Components |       |             | 45,000     |            |       |   |
| Total                             |       |             | $          | 14,040,000      |       |   |   |
|                                   |            |                  |            |                 |            |  |  |  |  |  |  |

 

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

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

Statements contained in thisQuarterly Report on Form 10-Q, which are not purely historical, areforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934, including but not limited to statements regarding Summa’s expectations,hopes, beliefs, intentions or strategies regarding the future, such as thoseset 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, 2004. 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 uncertainties that should be consideredand which could materially adversely affect the Company, please see “RiskFactors” in the “Management Discussion and Analysis” section of theCompany’s Annual Report on Form 10-K for the fiscal year ended August 31,2004.

 

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 andtubing for irrigation systems used in agriculture, commercial landscape andother applications; molded plastic coil forms (“bobbins”) for use intransformers, motors, relays and switches; and other molded and extrudedplastic components for diverse industries.

 

10

----

 

***Results of Operations***

 

Duringthe nine month period ended May 31, 2005, the Company experiencedunusually high expenses directly related to two major relocation initiatives:the consolidation of three plants in the Material Handling Components segmentto a new facility in Reading, PA, which was substantially completed during thesecond quarter, and an ongoing relocation in the Electrical Components segmentfrom Bensenville, Illinois to Pharr, Texas. The Pharr relocation is expected to be completed in the fourth quarterof fiscal 2005.  The relocation costs,which are shown in the following table, are expected to decline sharply in thefourth quarter fiscal 2005.  The expensesconsisted primarily of duplicate personnel and facility costs, costs to developand implement a new manufacturing process and costs to move inventory andequipment.  In connection with therelocation in the Electrical Components segment, excess real estate andequipment was sold for a net gain of $118,000, and the segment’s remainingfacilities in Bensenville have been listed for sale. The effects of therelocation expenses and the pro forma earnings, calculated as though therelocation expenses had not been incurred, are as follows:

 
| ** **                                      | ** ** | **Three months ended May 31** | ** ** | **Nine months ended May 31** | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                                      | ** ** | **2004**                           | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2005** | ** ** |
| Operating  income                               |       | $                                  | 2,455,000  |                              | $          | 1,245,000 |   | $ | 5,257,000 |   | $ | 3,430,000 |   |
| Relocation  expenses                            |       | 187,000                            |       | 497,000                           |       | 316,000 |   | 1,511,000 |   |
| Gain on sale  of real estate and equipment      |       | —                             |       | —                            |       | — |   | (118,000 | ) |
|                                            |       |                               |       |                              |       |   |   |   |   |
| Pro forma  operating income                     |       | $                                  | 2,642,000  |                              | $          | 1,742,000 |   | $ | 5,573,000 |   | $ | 4,823,000 |   |
|                                            |       |                               |       |                              |       |   |   |   |   |   |   |   |   |
| Net income                                      |       | $                                  | 1,390,000  |                              | $          | 508,000 |   | $ | 2,673,000 |   | $ | 1,394,000 |   |
| Tax-effected  relocation expenses               |       | 120,000                            |       | 318,000                           |       | 202,000 |   | 967,000 |   |
| Tax-effected  gain on real estate and equipment |       | —                             |       | —                            |       | — |   | (76,000 | ) |
|                                            |       |                               |       |                              |       |   |   |   |   |
| Pro forma  net income                           |       | $                                  | 1,510,000  |                              | $          | 826,000 |   | $ | 2,875,000 |   | $ | 2,285,000 |   |

 

Notethat “pro forma” has no defined meaning under Generally Accepted AccountingPrinciples.  The information presentedabove is for the purpose of drawing attention to a critical component ofcurrent performance.  There are othercomponents of current performance that are not highlighted in the foregoingpresentation.

 

The following table setsforth certain information, derived from Summa’s unaudited condensedconsolidated statements of income, as a percent of sales for the three monthand nine month periods ended May 31, 2004 and May 31, 2005, and theCompany’s effective income tax rate during those periods:

 
| ** ** | ** **                               | ** ** | **Three months ended May 31** | ** ** | **Nine months ended May 31** | ** ** |
|------------|------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** ** | ** **                               | ** ** | **2004**                           | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2005** | ** ** |
|       | Net sales                                |       | 100.0                              | %          | 100.0                             | %          | 100.0 | % | 100.0 | % |
|       | Cost of  sales                           |       | 75.7                               | %          | 79.2                              | %          | 75.8 | % | 78.9 | % |
|       | Gross profit                             |       | 24.3                               | %          | 20.8                              | %          | 24.2 | % | 21.1 | % |
|       | S,G &  A and other expenses     |       | 16.9                               | %          | 16.9                              | %          | 18.1 | % | 17.2 | % |
|       | Operating  income                        |       | 7.4                                | %          | 3.9                               | %          | 6.1 | % | 3.9 | % |
|       | Interest  expense, net                   |       | 1.0                                | %          | 1.5                               | %          | 1.4 | % | 1.5 | % |
|       | Income  before tax and minority interest |       | 6.4                                | %          | 2.4                               | %          | 4.7 | % | 2.4 | % |
|       |                                     |       |                               |       |                              |       |   |   |   |   |
|       | Effective  tax rate                      |       | 34.9                               | %          | 35.4                              | %          | 34.0 | % | 35.6 | % |

 

11

----

 

**Quarterended May 31, 2005 compared to the quarter ended May 31, 2004**

 

Sales for the third quarterended May 31, 2005 decreased $1,619,000, or 5%, primarily due to weaknessin sales in the Optical Components segment and the transfer of business toChina (approximately $500,000) partially offset by the effects of priceincreases (approximately $1,200,000). Sales decreased 11% in the Optical Components segment, primarily due tosoftness in demand for high-bay, high intensity lighting products, and transferof business to China, partially offset by price increases; increased 2% in theMaterial Handling Components segment, due to price increases; increased 5% inthe Irrigation Components segment, primarily due to price increases, anddecreased 18% in the Electrical Components segment, despite price increases,primarily due to transfer of business to China and disruptions related to aplant relocation.

 

Gross profit for the third quarter decreased $1,503,000, or 19%, fromthe comparable prior year period, primarily due to increased material costs,increased business relocation expense and the effects of lower sales volume,partially offset by the effects of higher prices.  Gross margin decreased from 24.3% to 20.8%,primarily due to increased relocation expenses.

 

Operating expenses for the third quarter decreased $293,000, or 5%,from the comparable prior year period, primarily due to lower variable expenserelated to lower sales volume and management cost reduction initiatives,partially offset by increased charges related to plant relocations, andincreased costs related to compliance with Sarbanes-Oxley rules andregulations.  As a percent of sales,operating expenses were unchanged at 16.9%.

 

Operating income for the third quarter was $1,245,000, which was$1,210,000, or 49%, lower than in the comparable prior year period.  By segment, operating income decreased$1,574,000 in the Optical Components segment, due primarily to lower salesvolume, difficulty and delays in fully passing through resin price increasesand unfavorable product mix; increased $578,000 in the Material HandlingComponents segment, due to the benefits of previous plant consolidations;increased $185,000 in the Irrigation Components segment, primarily due to theeffects of higher sales volume and the benefits of previous plantconsolidations; and the operating loss increased $468,000 in the ElectricalComponents segment, primarily due to costs and inefficiencies of the businessrelocation which is underway and the effects of reduced sales volume. Operatingmargin for the quarter decreased from 7.4% in the third quarter of fiscal 2004to 3.9% in the third quarter of fiscal 2005, due to the factors discussedabove.

 

Net interest expense for the quarter ended May 31, 2005 increased$155,000 from the prior year second quarter, due to the effects of higheraverage debt levels and higher average interest rates in the most recentperiod.

 

The provision for income taxes in the third quarter was $278,000,$466,000 lower than in the prior year third quarter, due to lower income beforetaxes.

 

**Nine monthsended May 31, 2005 compared to the nine months ended May 31, 2004**

 

Sales for the nine monthsended May 31, 2005 increased $3,345,000, or 4%, primarily due to theeffects of price increases (approximately $3,700,000) and the contribution ofsales from recently acquired operations in the Irrigation Components segment(approximately $1,900,000), partially offset by the transfer of business toChina (approximately $1,300,000). Sales were unchanged in the OpticalComponents segment, as price increases were offset by lower volume; increased2% in the Material Handling Components segment, primarily due to priceincreases, partially offset by inefficiencies associated with a plantrelocation; increased $4,043,000, or 25%, in the Irrigation Components segment,primarily due to the inclusion of sales from recently acquired operations (approximately$1,900,000), the effects of price increases (approximately $1,500,000),recaptured market share from certain major customers and improved marketconditions; and decreased 12% in the Electrical Components segment, primarilydue to the transfer of business to China and disruptions related to a plantrelocation, partially offset by the effects of price increases.

 

Gross profit for the nine months ended May 31, 2005 decreased$1,931,000, or 9%, from the comparable prior year period, primarily due tobusiness relocation expenses of $1,393,000 versus $316,000 in the same prioryear period and increased material costs, partially offset by the effects ofhigher sales and higher prices.  Grossmargin decreased from 24.2% to 21.1%, primarily due to increased relocationexpenses.

 

Operating expenses for the nine months ended May 31, 2005decreased $104,000, or 1%, from the comparable prior period, primarily due tothe benefit of $186,000 from partial collection of a note receivable and a gainon the sale of excess real estate, partially offset by the inclusion ofoperating expenses of newly acquired operations and increased costs related tocompliance with Sarbanes-Oxley rules and regulations.  As a percent of sales, operating expensesdecreased from 18.1% to 17.2%.

 

12

----

 

Operating income for the nine months ended May 31, 2005 was$3,430,000, which was $1,827,000, or 35%, lower than in the comparable prioryear period.  By segment, operatingincome decreased $2,334,000 in the Optical Components segment, due primarily todifficulty and delays in fully passing through resin price increases andunfavorable product mix; increased $1,147,000 in the Material HandlingComponents segment, primarily due to inefficiencies related to a plantconsolidation in the prior year period, partially offset by expenses related toa plant relocation in the period ended May 31, 2005; increased $823,000 inthe Irrigation Components segment, primarily due to the effects of higher salesvolume and efficiencies gained from facility consolidation; and decreased$1,479,000 in the Electrical Components segment, primarily due to costs of abusiness relocation incurred in the nine months ended May 31, 2005.  Operating margin decreased from 6.1% in thefirst nine months of fiscal 2004 to 3.9% in the first nine months of fiscal2005, due to the factors discussed above.

 

Net interest expense for the nine months ended May 31, 2005 was$104,000 higher than in the comparable prior year period, due to the effects ofhigher average debt levels and higher average interest rates in the most recentperiod partially offset by term loan break-up fees and the write-off ofunamortized bank fees of $266,000 in the prior year period.

 

The provision for income taxes in the nine months ended May 31,2005 was $602,000 lower than in the comparable prior year period, due to lowerincome before taxes.

 

The Company’s backlog of unfilled orders, believed to be firm, was$8,039,000 at May 31, 2004, $7,696,000 at August 31, 2004 and$8,041,000 at May 31, 2005.  Becausethe time between entering an order and shipping the product and recording asale is typically shorter than one month, backlog levels are not a reliableindicator of future sales volume.

 

***Liquidity and Capital Resources***

 

*Working Capital.** *The Company’s working capital was $21,888,000 at May 31, 2004;$19,294,000 at August 31, 2004 and $19,805,000 at May 31, 2005.

 

Summary of the Company’s debt at May 31, 2005:

 

 
| ** **                  | ** ** | ** **  | ** ** | **Weighted** | ** ** | ** **       | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------------|------------|-------------|------------|--------------|------------|------------------|------------|---------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                  | ** ** | ** **  | ** ** | **Average**  | ** ** | ** **       | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| ** **                  | ** ** | ** **  | ** ** | **Interest** | ** ** | **Additional**   | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| **Description  of Debt**    | ** ** | **Balance** | ** ** | **Rate**     | ** ** | **Availability** | ** ** | **Fiscal Year Due** | ** ** |
| ** **                  | ** ** | ** **  | ** ** | ** **   | ** ** | ** **       | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2009 and**   | ** ** |
| ** **                  | ** ** | ** **  | ** ** | ** **   | ** ** | ** **       | ** ** | **2005**            | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **thereafter** | ** ** |
| Revolving line of credit    |       | $           | 12,824,000 |         | 4.7        | %                | $          | 7,399,000           |       | $          | —     |       | $          | —     |       | $              | 12,824,000 |   | $ | — |   | $ | — |   |
| Bank term loan              |       | 3,782,000   |       | 4.7          | %          | —           |       | 235,000             |       | 971,000    |       | 1,019,000  |       | 1,068,000  |       | 489,000        |       |
| Real estate and other loans |       | 16,043,000  |       | 5.4          | %          | —           |       | 427,000             |       | 4,501,000  |       | 4,313,000  |       | 1,277,000  |       | 5,525,000      |       |
| Subordinated debt           |       | 686,000     |       | 6.5          | %          | —           |       | —              |       | 500,000    |       | 186,000    |       | —     |       | —         |       |
| Total debt                  |       | $           | 33,335,000 |         | 5.1        | %                | $          | 7,399,000           |       | $          | 662,000    |       | $          | 5,972,000  |       | $              | 18,342,000 |   | $ | 2,345,000 |   | $ | 6,014,000 |   |

 

The interest rate on the bank term loan is fixed forfive years.  Interest rates on the bankline of credit are subject to market fluctuation and are subject to reductionas the Company achieves certain financial milestones.  Interest rates on most of the real estate andother loans are subject to market fluctuation.

 

*Sources and Uses of Funds*.  Net cash provided by operatingactivities for the first nine months of fiscal 2005 was $2,848,000 compared to$4,152,000 provided by operating activities for the first nine months of fiscal2004. The decrease was primarily due to lower net income.  Net cash used in investing activities was$5,028,000 in the first nine months of fiscal 2005, $1,368,000 less than in thefirst nine months of fiscal 2004, primarily due to an acquisition made in theprior year period, partially offset by the investment in a new facility in theMaterial Handling Components segment and investments in equipment for a newmanufacturing plant and process in Pharr, Texas for the Electrical Componentssegment in the current year.  Net cash of$1,959,000 was provided by financing activities for the first nine months offiscal 2005, primarily by debt related to the new facility and equipmentfinancing, compared to $2,544,000 in net cash provided in the prior year firstnine months from a new bank relationship.

 

13

----

 

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

 
| ** **               | ** ** | **Shares repurchased** | ** ** | **Average cost per share** | ** ** | **Repurchase cost** | ** ** |
|--------------------------|------------|------------------------|------------|----------------------------|------------|---------------------|------------|
| Prior to March 2005 |       | 500                    |       | $                          | 9.76       |                | $          | 5,000 |   |
| March 2005               |       | 600                    |       | $                          | 8.81       |                | $          | 5,000 |   |
| April 2005               |       | 21,937                 |       | $                          | 9.07       |                | $          | 199,000 |   |
| May 2005                 |       | 8,728                  |       | $                          | 7.87       |                | $          | 69,000 |   |
| Total                    |       | 31,765                 |       | $                          | 8.75       |                | $          | 278,000 |   |

 

The cost per share includescommissions where applicable.

 

Summa believes that cashflows from operations and existing credit facilities will be sufficient to fundworking capital requirements, planned investments and debt service for the nexttwelve months.  In addition, funds may begenerated from a limited number of sales of certain non-core assets of theCompany.  The Company has a strategy ofgrowth by acquisition.  In the event anacquisition plan is adopted which requires funds exceeding the availabilitydescribed above, an alternate source of funds to accomplish the acquisitionwould have to be developed.  The Companyhas 10,000,000 shares of common stock authorized, of which 3,970,757 shareswere outstanding at May 31, 2005 and 5,000,000 shares of “blank check”preferred stock authorized, of which none was outstanding at May 31,2005.  The Company could issue additionalshares of common or preferred stock or enter into new or revised borrowingarrangements to raise funds.

 

### ***Off-BalanceSheet Arrangements***

 

The Company’s materialoff-balance sheet arrangements are as follows:

 

*Future Lease Payments.*  TheCompany leases offices and manufacturing facilities and certain equipment undernon-cancelable operating leases.  Futurepayments under these leases at May 31, 2005 are approximately as follows:

 

| **Fiscal Year**      | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|
| 2005                 |       | $          | 307,000    |   |
| 2006                 |       | $          | 1,135,000  |   |
| 2007                 |       | $          | 827,000    |   |
| 2008                 |       | $          | 713,000    |   |
| 2009                 |       | $          | 514,000    |   |
| 2010 and  thereafter |       | $          | 10,000     |   |

 

In recent years the Companyhas consolidated and/or abandoned several facilities in an effort to improveefficiencies and operating results, and plans further consolidations.  In the event the Company was to abandon afacility prior to its being leased to a new tenant, the Company could becomeobligated for accelerated lease payments or other expenses.

 

#### ***CriticalAccounting Policies and Estimates***

 

The foregoing discussion andanalysis of the Company’s financial condition and results of operations arebased upon the consolidated financial statements of the Company, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of such financial statementsrequires management to make estimates and assumptions in applying certaincritical 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 ofLong-Lived Assets and Long-Lived Assets to be Disposedof.****** *TheCompany reviews its long-lived assets and certain identifiable intangibles forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto the undiscounted future operating cash flows expected to be generated by theasset. If such assets are considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying amount of the assetsexceeds the fair value of the assets. Assets to be disposed of by sale arereported at the lower of the carrying amount or fair value less costs to sell.

 

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The Company has a significant amount of property andequipment and intangible assets. The determination as to whether events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable involves management’s judgment. In addition, should the Companyconclude that recoverability of an asset is in question, the estimate ofundiscounted future operating cash flows to determine whether an asset isrecoverable and, if not, the final determination of the fairvalue of the asset are also based on the judgment of management. Thesejudgments can be impacted by a variety of underlying assumptions, such as thegeneral business climate, effectiveness of competition and supply and cost ofresources.  Accordingly, actual resultscan differ significantly from the assumptions made by management in making itsestimates. Future changes in management’s estimates could result in indicatorsof impairment and future impairment charges.

 

###### *Valuationof 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 net realizablevalue.  These adjustments are estimates,which could vary significantly, either favorably or unfavorably, from actualrequirements if future economic conditions, customer demand or competitiondiffer from expectations.

 

*Accounts Receivable. *The Companyperforms ongoing evaluations of customers and adjusts credit limits based uponeach customer’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 makerequired payments.  If the financialcondition of customers were to deteriorate resulting in an impairment of theirability to make payments, additional allowances may be required.

 

*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.  Significant management judgment is involvedin determining the fair value of assets. Future changes in management’sestimates could result in additional impairment charges to goodwill.

 

*IncomeTaxes.*  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.

 

*Accountingfor Stock Options.*** Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation (‘SFAS 123”), as amended by SFAS 148,allows entities to continue to apply the provisions of Accounting PrinciplesBoard (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees,and provide pro forma income and pro forma earnings per share disclosures forstock-based awards as if the fair-value based method defined in SFAS 123 hadbeen applied.  In accordance with APBOpinion No. 25, and related interpretations, compensation expense wouldgenerally be recorded for fixed option grants only if, on the date of thegrant, the current price of the underlying stock exceeded the exerciseprice.  The Company has elected tocontinue to apply the provisions of APB Opinion No. 25 and provide the proforma disclosure provisions of SFAS 123. Accordingly, no compensation expense has been recognized for the Company’sstock option plans and award of options to non-employee directors.  

 

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Except for the outstandingdebt and related variable interest rates set forth in “Management’s Discussionand Analysis of Financial Condition and Results of Operations – Liquidity andCapital Resources” above, there are no material changes to the disclosure setforth in Item 7A of the Company’s Annual Report on Form 10-K for thefiscal year ended August 31, 2004. The Company has no market risk sensitive instruments entered into fortrading purposes.

 

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**EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES**

 

As of the end of the periodcovered by this report, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures pursuant to Exchange Act 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.****** Legal Proceedings***

 

The Company encounters lawsuits from time to time in the ordinarycourse of business and, at May 31, 2005, the Company and/or its affiliateswere parties to several civil lawsuits. Summa does not expect that theresolution 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.

 

###### ***Item2.****** Unregistered Sales of Equity Securities and Use of Proceeds***

 

In October 2004, theCompany announced a plan to repurchase up to $2,000,000 of its Common Stockwith no time limit (the “2005 Buy Back). As of May 31, 2005, the status of the 2005 Buy Back was as follows:

 
| ** **               | ** ** | **Shares repurchased** | ** ** | **Average cost per share** | ** ** | **Repurchase cost** | ** ** |
|--------------------------|------------|------------------------|------------|----------------------------|------------|---------------------|------------|
| Prior to March 2005 |       | 500                    |       | $                          | 9.76       |                | $          | 5,000 |   |
| March 2005               |       | 600                    |       | $                          | 8.81       |                | $          | 5,000 |   |
| April 2005               |       | 21,937                 |       | $                          | 9.07       |                | $          | 199,000 |   |
| May 2005                 |       | 8,728                  |       | $                          | 7.87       |                | $          | 69,000 |   |
| Total                    |       | 31,765                 |       | $                          | 8.75       |                | $          | 278,000 |   |

 

#### ***Item3.****** Defaults upon Senior Securities***

 

None.

 

***Item 4.******  Submission of Matters to a Vote of SecurityHolders***

 

None.

 

***Item 5.******   Other Information***

 

None.

 

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***Item 6.****** Exhibits***

 
|   | 31.1 | Section 302 Certification |
|--------|------|--------------------------------|
|   | 32.1 | Section 906 Certification |

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized on July 8,2005.

 

 

**SummaIndustries**

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

 

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