**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, 2003**                                                                                   |
|                                                                                               |                                                                                         |
| **o**                                                                                              | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**      |
|                                                                                               |                                                                                         |
| **For  the transition period  from   N/A   to   N/A** |
|                                                                                               |                                                                                         |
| **Commission  file no. 1-7755**                                                                    |

 

| **Summa  Industries**                                                 |
|-----------------------------------------------------------------------|
| (Name of registrant as specified in its charter)                      |
|                                                                  |   |   |
| **Delaware**                                                          |   | **95-1240978** |
| (State or other  jurisdiction of  incorporation or organization)      |   | (I.R.S. employer  identification number) |
|                                                                  |   |   |
| **21250 Hawthorne Boulevard, Suite  500, Torrance, California 90503** |
| (Address of  principle executive offices, including zip code)         |
|                                                                  |
| Registrant’s  telephone number:  **(310)  792-7024**        |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes   ý**      **No    o

 

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

Yes   o**      **No    ý

 

The number of shares ofcommon stock outstanding as of June 27, 2003 was 4,244,742.

 

 

----

**Summa Industries**

 

**INDEX**

 
| PART I - FINANCIAL  INFORMATION |
|---------------------------------|
|                            |   |
| Item 1.                         | Financial Statements: |
|                            |   |
|                            |  Condensed  Consolidated Balance Sheets -   May 31, 2002, August 31, 2002 and May 31, 2003 |
|                            |   |
|                            |  Condensed  Consolidated Statements of Operations -   three months and nine months ended May 31, 2002 and 2003 |
|                            |   |
|                            |  Condensed  Consolidated Statements of Cash Flows -   nine months ended May 31, 2002 and 2003 |
|                            |   |
|                            |  Notes  to Condensed Consolidated Financial Statements |
|                            |   |
| 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.                        | Changes  in 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 and  Reports on Form 8-K |
|                            |   |
| Signature Page                  |

 

2

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**Summa Industries**CONDENSED CONSOLIDATEDBALANCE SHEETS

 
|                                                                                                                                                                          |   | **May 31, 2002** |        | **August 31, 2002** |   | **May 31, 2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|-------------|---------------------|--------|------------------|--------|
| **ASSETS**                                                                                                                                                                    |   |             |        |                |   |             |   |
| Current assets:                                                                                                                                                               |   |             |        |                |   |             |   |
| Cash  and cash equivalents                                                                                                                                                    |   | $                | 49,000      |                | $      | 690,000          |   | $ | 52,000 |   |
| Accounts  receivable                                                                                                                                                          |   | 19,227,000       |        | 17,594,000          |   | 17,222,000       |   |
| Inventories                                                                                                                                                                   |   | 13,243,000       |        | 12,313,000          |   | 12,572,000       |   |
| Prepaid  expenses and other                                                                                                                                                   |   | 3,468,000        |        | 3,181,000           |   | 2,825,000        |   |
| Total  current assets                                                                                                                                                         |   | 35,987,000       |        | 33,778,000          |   | 32,671,000       |   |
| Property,  plant and equipment                                                                                                                                                |   | 52,849,000       |        | 51,845,000          |   | 55,199,000       |   |
| Less  accumulated depreciation                                                                                                                                                |   | (24,230,000      | )           | (25,025,000         | )      | (28,552,000      | )      |
| Net  property, plant and equipment                                                                                                                                            |   | 28,619,000       |        | 26,820,000          |   | 26,647,000       |   |
| Other  assets                                                                                                                                                                 |   | 135,000          |        | 124,000             |   | 2,957,000        |   |
| Goodwill,  net                                                                                                                                                                |   | 35,398,000       |        | 35,190,000          |   | 8,035,000        |   |
| Other  intangibles, net                                                                                                                                                       |   | 1,739,000        |        | 1,653,000           |   | 1,471,000        |   |
| Total  assets                                                                                                                                                                 |   | $                | 101,878,000 |                | $      | 97,565,000       |   | $ | 71,781,000 |   |
| Current  liabilities:                                                                                                                                                         |   |             |        |                |   |             |   |
| Accounts  payable                                                                                                                                                             |   | $                | 6,159,000   |                | $      | 6,410,000        |   | $ | 6,491,000 |   |
| Accrued  liabilities                                                                                                                                                          |   | 6,172,000        |        | 6,001,000           |   | 5,680,000        |   |
| Current  maturities of long-term debt                                                                                                                                         |   | 5,930,000        |        | 5,066,000           |   | 4,133,000        |   |
| Total  current liabilities                                                                                                                                                    |   | 18,261,000       |        | 17,477,000          |   | 16,304,000       |   |
| Long-term  debt, net of current maturities                                                                                                                                    |   | 25,398,000       |        | 19,845,000          |   | 18,284,000       |   |
| Other  long-term liabilities                                                                                                                                                  |   | 3,967,000        |        | 4,658,000           |   | 2,635,000        |   |
| Total  long-term liabilities                                                                                                                                                  |   | 29,365,000       |        | 24,503,000          |   | 20,919,000       |   |
| Mandatorily  redeemable convertible preferred stock, par value $.001, 5,000 shares  authorized, issued and outstanding                                                        |   | 5,289,000        |        | 5,366,000           |   | 5,919,000        |   |
| Mandatorily  redeemable common stock                                                                                                                                          |   | 530,000          |        | —              |   | —           |   |
| Stockholders’  equity:                                                                                                                                                   |   |             |        |                |   |             |   |
| Common  stock, par value $.001; 10,000,000 shares authorized; issued and outstanding:  4,428,211 at May 31, 2002, 4,401,769 at August 31, 2002 and 4,249,117 at May  31, 2003 |   | 18,330,000       |        | 18,894,000          |   | 17,600,000       |   |
| Retained  earnings                                                                                                                                                            |   | 30,111,000       |        | 31,325,000          |   | 11,039,000       |   |
| Accumulated  other comprehensive (loss)                                                                                                                                       |   | (8,000)          |        | —              |   | —           |   |
| Total  stockholders’ equity                                                                                                                                              |   | 48,433,000       |        | 50,219,000          |   | 28,639,000       |   |
| Total  liabilities and stockholders’ equity                                                                                                                              |   | $                | 101,878,000 |                | $      | 97,565,000       |   | $ | 71,781,000 |   |

 

See accompanying notes to condensed consolidated financial statements*.*

 

3

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**SummaIndustries**

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

 
|                                                                                           |   | **Three months ended May 31** |       | **Nine months ended May 31** |   |
|------------------------------------------------------------------------------------------------|--------|-------------------------------|------------|------------------------------|--------|
|                                                                                           |   | **2002**                      |       | **2003**                     |   | **2002** |   | **2003** |   |
| Net  sales                                                                                     |   | $                             | 32,861,000 |                         | $      | 28,342,000 |   | $ | 85,135,000 |   | $ | 84,452,000 |   |
| Cost  of sales                                                                                 |   | 24,152,000                    |       | 21,296,000                   |   | 62,985,000 |   | 63,039,000 |   |
| Gross  profit                                                                                  |   | 8,709,000                     |       | 7,046,000                    |   | 22,150,000 |   | 21,413,000 |   |
| Selling,  general, administrative and other expenses                                           |   | 6,104,000                     |       | 5,524,000                    |   | 16,756,000 |   | 16,351,000 |   |
| Operating  income                                                                              |   | 2,605,000                     |       | 1,522,000                    |   | 5,394,000 |   | 5,062,000 |   |
| Interest  expense                                                                              |   | 584,000                       |       | 389,000                      |   | 1,980,000 |   | 1,167,000 |   |
| Income  before income taxes and cumulative effect of a change in accounting principle          |   | 2,021,000                     |       | 1,133,000                    |   | 3,414,000 |   | 3,895,000 |   |
| Provision  for income taxes                                                                    |   | 695,000                       |       | 365,000                      |   | 1,190,000 |   | 1,285,000 |   |
| Income  before cumulative effect of a change in accounting principle                           |   | 1,326,000                     |       | 768,000                      |   | 2,224,000 |   | 2,610,000 |   |
| Cumulative  effect of a change in accounting principle, net of tax                             |   | —                        |       | —                       |   | — |   | (22,343,000 | ) |
| Net  income (loss)                                                                             |   | $                             | 1,326,000  |                         | $      | 768,000 |   | $ | 2,224,000 |   | ($19,733,000 | ) |
| Preferred  stock accretion                                                                     |   | $                             | 173,000    |                         | $      | 184,000 |   | $ | 289,000 |   | $ | 553,000 |   |
| Net  income (loss) available to common stockholders:                                           |   |                          |       |                         |   |   |   |   |   |
| Before  cumulative effect of a change in accounting principle                                  |   | $                             | 1,153,000  |                         | $      | 584,000 |   | $ | 1,935,000 |   | $ | 2,057,000 |   |
| After  cumulative effect of a change in accounting principle                                   |   | $                             | 1,153,000  |                         | $      | 584,000 |   | $ | 1,935,000 |   | $ | (20,286,000 | ) |
| Earnings  per common share before cumulative effect of a change in accounting principle        |   |                          |       |                         |   |   |   |   |   |
| Basic                                                                                          |   | $                             | .26        |                         | $      | .14 |   | $ | .44 |   | $ | .47 |   |
| Diluted                                                                                        |   | $                             | .25        |                         | $      | .13 |   | $ | .43 |   | $ | .46 |   |
| Earnings  (loss) per common share after cumulative effect of a change in accounting  principle |   |                          |       |                         |   |   |   |   |   |
| Basic                                                                                          |   | $                             | .26        |                         | $      | .14 |   | $ | .44 |   | $ | (4.61 | ) |
| Diluted                                                                                        |   | $                             | .25        |                         | $      | .13 |   | $ | .43 |   | $ | (4.61 | ) |

 

See accompanying notes tocondensed consolidated financial statements.

 

4

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**Summa Industries**

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
|                                                                                      |   | **Nine months ended May 31** |      |
|-------------------------------------------------------------------------------------------|--------|------------------------------|-----------|
|                                                                                      |   | **2002**                     |      | **2003** |   |
| Operating  activities:                                                                    |   |                         |      |   |   |
| Net  income (loss)                                                                        |   | $                            | 2,224,000 |   | $ | (19,733,000 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |   |                         |      |   |   |
| Depreciation                                                                              |   | 3,808,000                    |      | 3,611,000 |   |
| Amortization                                                                              |   | 952,000                      |      | 182,000 |   |
| Cumulative  effect of a change in accounting principle, net of tax                        |   | —                       |      | 22,343,000 |   |
| Loss  on disposition of property, plant and equipment                                     |   | 1,000                        |      | 3,000 |   |
| Net  change in assets and liabilities, net of effects of acquisitions:                    |   |                         |      |   |   |
| Accounts  receivable                                                                      |   | (1,465,000                   | )         | 372,000 |   |
| Inventories                                                                               |   | 665,000                      |      | (259,000 | ) |
| Prepaid  expenses and other assets                                                        |   | (127,000                     | )         | 322,000 |   |
| Accounts  payable                                                                         |   | (498,000                     | )         | 81,000 |   |
| Accrued  liabilities                                                                      |   | 230,000                      |      | 97,000 |   |
| Total  adjustments                                                                        |   | 3,566,000                    |      | 26,752,000 |   |
| Net  cash provided by operating activities                                                |   | 5,790,000                    |      | 7,019,000 |   |
| Investing  activities:                                                                    |   |                         |      |   |   |
| Acquisition  of business, net of cash acquired                                            |   | (2,685,000                   | )         | — |   |
| Purchases  of property and equipment                                                      |   | (2,384,000                   | )         | (3,462,000 | ) |
| Proceeds  from sale of property and equipment                                             |   | 37,000                       |      | 21,000 |   |
| Net  cash (used in) investing activities                                                  |   | (5,032,000                   | )         | (3,441,000 | ) |
| Financing  activities:                                                                    |   |                         |      |   |   |
| Net  proceeds from line of credit                                                         |   | 83,000                       |      | 1,387,000 |   |
| Proceeds  from issuance of long-term debt                                                 |   | 4,007,000                    |      | — |   |
| Payments  on long-term debt                                                               |   | (10,377,000                  | )         | (3,881,000 | ) |
| Proceeds  from the exercise of stock options                                              |   | 332,000                      |      | 278,000 |   |
| Proceeds  from sale of redeemable convertible preferred stock                             |   | 5,000,000                    |      | — |   |
| Purchase  of common stock                                                                 |   | —                       |      | (2,000,000 | ) |
| Net  cash (used in) financing activities                                                  |   | (955,000                     | )         | (4,216,000 | ) |
| Net  (decrease) in cash and cash equivalents                                              |   | (197,000                     | )         | (638,000 | ) |
| Cash  and cash equivalents, beginning of period                                           |   | 246,000                      |      | 690,000 |   |
| Cash  and cash equivalents, end of period                                                 |   | $                            | 49,000    |   | $ | 52,000 |   |

 

See accompanying notes tocondensed consolidated financial statements*.*

 

5

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**Summa Industries**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

May 31, 2003

 

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

 

The accompanyingunaudited condensed consolidated financial statements of Summa Industries (the“Company”) have been condensed in certain respects and should, therefor, beread in conjunction with the audited consolidated financial statements andnotes related thereto contained in the Company’s Annual Report on Form 10-K forthe year ended August 31, 2002.  In theopinion 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 nine months ended May 31, 2003 are notnecessarily indicative of the results to be expected for the full year endingAugust 31, 2003.

 

**Recent accounting pronouncements**

 

The Company adoptedFinancial Accounting Standards Board (“FASB”) Statement of Financial AccountingStandards No. 142 (“SFAS 142”) “Goodwill and Other Intangible Assets” as ofSeptember 1, 2002, the beginning of its current fiscal year.  The effect of the adoption of SFAS 142 isdescribed in Note 3, below.

 

The Company adopted FASBStatement of Accounting Standards No. 143 (“SFAS 143”) “Accounting for AssetRetirement Obligations” as of September 1, 2002, the beginning of its currentfiscal year.  SFAS 143 addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts. The adoption of SFAS 143 had no effect on the Company’s financialposition or results of operations.

 

The Company adopted FASBStatement of Accounting Standards No. 144 (“SFAS 144”) “Accounting for the Impairment or Disposal of Long-LivedAssets” as of September 1, 2002, the beginning of its current fiscal year.  The adoption of SFAS 144 had no effect onthe Company’s financial position or results of operations.

 

The Company adopted FASBStatement of Accounting Standards No. 145 (“SFAS 145”) “Rescission of FASBStatements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections” as of September 1, 2002, the beginning of its current fiscalyear.  The adoption of SFAS 145 had noeffect on the Company’s financial position or results of operations.

 

The Company adopted FASBStatement of Financial Accounting Standards No. 146 (“SFAS 146”) “Accountingfor Costs Associated with Exit or Disposal Activities” as of January 1, 2003.SFAS 146 requires that costs associated with an exit or disposal activity berecognized only when the liability is incurred (that is, when it meets thedefinition of a liability in the FASB’s conceptual framework). SFAS 146 alsoestablishes fair value as the objective for initial measurement of liabilitiesrelated to exit or disposal activities. SFAS 146 is effective for exit or disposal activities that are initiatedafter December 31, 2002. The adoption of SFAS 146 did not have a materialimpact on the Company’s financial position or results of operations.

 

The Company adopted FASBInterpretation No. 45 (“FIN 45”) “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness toOthers” as of January 1, 2003. This Interpretation elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it has issued.It also clarifies that a guarantor is required to recognize, at the inception ofa guarantee, a liability for the fair value of the obligation undertaken inissuing the guarantee. This interpretation is effective for guarantees issuedor modified after December 31, 2002 for initial recognition and initialmeasurement provisions, and for interim financial statements of annual periodsending after December 15, 2002 for disclosure requirements. The adoption of FIN45 did not have any effect on the Company’s financial position or results ofoperations. The Company warrants with respect to certain of its products thatthey will be delivered free of the rightful claim of any person by way oftrademark, patent or other property rights in such products, and indemnifiescustomers who purchase those products from liability arising out of any suchclaims.  The Company cannot reasonablydevelop an estimate of the maximum potential amount of payments that might bemade under such guarantees because it cannot determine the probability of sucha claim being asserted nor estimate the cost of such a claim.

 

6

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In December 2002, theFASB issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”)“Accounting for Stock-Based Compensation-Transition and Disclosure”, whichprovides alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based compensation. SFAS 148 alsorequires certain disclosures about the method of accounting for stock-basedemployee compensation and the effect of the method used on reported results.SFAS 148 is effective for fiscal years ending after December 15, 2002 fortransition guidance and annual disclosure provisions and for interim periodsbeginning after December 15, 2002 for financial reports containing financial statementsfor interim periods.

 

In January 2003, theFASB issued FASB Interpretation No. 46 (“FIN 46”) “Consolidation ofVariable Interest Entities”. This Interpretation clarifies the application ofAccounting Research Bulletin No. 51, “Consolidated Financial Statements”,and requires companies to evaluate variable interest entities for specificcharacteristics to determine whether additional consolidation and disclosurerequirements apply. This Interpretation is immediately applicable for variableinterest entities created after January 31, 2003, and applies to fiscalperiods beginning after June 15, 2003 for variable interest entitiesacquired prior to February 1, 2003. The Company does not expect that theadoption of this Interpretation will have any impact on the Company’s financialposition or results of operations. The Company does not have any variableinterest entities.

 

**2.****                                      Inventories**

 

Inventories were as follows:

 
|                 |   | **May 31, 2002** |       | **August 31, 2002** |   | **May 31, 2003** |   |
|----------------------|--------|------------------|------------|---------------------|--------|------------------|--------|
|                 |   |             |       |                |   |             |   |
| Finished goods       |   | $                | 5,637,000  |                | $      | 5,457,000        |   | $ | 4,944,000 |   |
| Work in process      |   | 516,000          |       | 290,000             |   | 386,000          |   |
| Materials and  parts |   | 7,090,000        |       | 6,566,000           |   | 7,242,000        |   |
|                 |   | $                | 13,243,000 |                | $      | 12,313,000       |   | $ | 12,572,000 |   |

 

 

**------ the balance of this page leftblank intentionally -----**

 

7

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

 

The Company adopted FASBStatement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets” (“SFAS 142”), effective September 1, 2002.  As a result, the Company discontinued theamortization of goodwill arising from business combinations consummated priorto June 30, 2001 that were accounted for using the purchase method ofaccounting.  Goodwill aggregated to anet amount of $35,190,000 at August 31, 2002 and goodwill amortization was$277,000 for the three months ended May 31, 2002 and $833,000 for the ninemonths ended May 31, 2002.

 

SFAS 142 also requiresthe Company to assess the recoverability of recorded goodwill at the adoptiondate.  Impairments of goodwill that areidentified as a result of the assessment, if any, are to be reported as acumulative change in accounting principle as of the adoption date.  SFAS 142 requires that the initialassessment be completed within six months of the date of adoption and theimpairment, if any, be reported retroactively to the beginning of the year ofadoption.

 

The Company performed atransitional fair value based impairment test on its goodwill as of September1, 2002.  As a result, an impairmentcharge of $22,343,000 was recorded as of September 1, 2002.  The charge is presented as the cumulativeeffect of a change in accounting principle in the accompanying condensedconsolidated statements of operations. The charge is net of an income tax benefit of $4,812,000.

 

The carrying amount ofgoodwill and the impairment charge with respect to the Company’s reportablesegments is as follows:

 
| **Segment**                   |   | **Balance at  August 31, 2002** |       | **Impairment  Charges (Pre-tax)** |   | **Balance at  May 31, 2003** |   |
|-------------------------------|--------|---------------------------------|------------|-----------------------------------|--------|------------------------------|--------|
|                          |   |                            |       |                              |   |                         |   |
| Optical components            |   | $                               | 8,867,000  |                              | $      | 5,953,000                    |   | $ | 2,914,000 |   |
| Material handling  components |   | 5,095,000                       |       | —                            |   | 5,095,000                    |   |
| Electrical components         |   | 12,689,000                      |       | 12,663,000                        |   | 26,000                       |   |
| Irrigation components         |   | 6,831,000                       |       | 6,831,000                         |   | —                       |   |
| Misc. plastic components      |   | 1,708,000                       |       | 1,708,000                         |   | —                       |   |
| Consolidated                  |   | $                               | 35,190,000 |                              | $      | 27,155,000                   |   | $ | 8,035,000 |   |

 

A reconciliation ofpreviously reported net income and earnings per share, before cumulative effectof a change in accounting principle, to the amounts adjusted for the exclusionof goodwill amortization follows:

 
|                                           |   | **Three months ended  May 31** |      | **Nine months ended  May 31** |   |
|------------------------------------------------|--------|--------------------------------|-----------|-------------------------------|--------|
|                                           |   | **2002**                       |      | **2003**                      |   | **2002** |   | **2003** |   |
|                                           |   |                           |      |                          |   |   |   |   |   |
| Reported net income                            |   | $                              | 1,326,000 |                          | $      | 768,000 |   | $ | 2,224,000 |   | $ | 2,610,000 |   |
| Add back: Goodwill  amortization, net of taxes |   | 220,000                        |      | —                        |   | 660,000 |   | — |   |
| Adjusted net income                            |   | $                              | 1,546,000 |                          | $      | 768,000 |   | $ | 2,884,000 |   | $ | 2,610,000 |   |
|                                           |   |                           |      |                          |   |   |   |   |   |
| Basic earnings per share:                      |   |                           |      |                          |   |   |   |   |   |
|                                           |   |                           |      |                          |   |   |   |   |   |
| Reported net income                            |   | $                              | .26       |                          | $      | .14 |   | $ | .44 |   | $ | .47 |   |
| Goodwill amortization                          |   | .05                            |      | —                        |   | .15 |   | — |   |
| Adjusted net income                            |   | $                              | .31       |                          | $      | .14 |   | $ | .59 |   | $ | .47 |   |
|                                           |   |                           |      |                          |   |   |   |   |   |
| Diluted earnings per  share:                   |   |                           |      |                          |   |   |   |   |   |
|                                           |   |                           |      |                          |   |   |   |   |   |
| Reported net income                            |   | $                              | .25       |                          | $      | .13 |   | $ | .43 |   | $ | .46 |   |
| Goodwill amortization                          |   | .05                            |      | —                        |   | .15 |   | — |   |
| Adjusted net income                            |   | $                              | .30       |                          | $      | .13 |   | $ | .58 |   | $ | .46 |   |

 

8

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

 

Basic earnings per share(“EPS”) was computed by dividing net income available to common stockholders bythe weighted average number of common shares outstanding during each period.The Company has 5,000 shares of redeemable convertible preferred stockoutstanding with an original issue price of $5,000,000.  No dividends are required to be paid on thestock, but the preferred stockholders have the right, provided the preferredstock has not been converted to common shares, to require the Company torepurchase the stock during a one year period beginning December 14, 2004 at anaggregate price which increases daily from $7,025,000 on December 14, 2004 to$7,868,000 on December 13, 2005.  Thenet income available to common stockholders used in the EPS calculations is thenet income less the reported accretion in the value of the preferred stock forthat period.

 

Diluted EPS reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock.  Diluted EPS, before cumulative effect of achange in accounting principle,  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 428,000 common shares as of May 31, 2002 and 745,000 common sharesas of May 31, 2003 were excluded from the calculation of equivalent shares, asthey would have been anti-dilutive.  The5,000 shares of outstanding preferred stock, convertible into 625,000 shares ofcommon stock, were excluded from the calculation of equivalent shares for thethree and nine month periods ended May 31, 2002 and May 31, 2003, as they wouldhave been anti-dilutive.  Diluted EPSafter cumulative effect of a change in accounting principle, for the nine monthperiod ended May 31, 2003, excludes common stock equivalents, 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,“Earnings per Share”:

 
|                                                                   |   | **Three months ended  May 31** |      | **Nine months ended  May 31** |   |
|------------------------------------------------------------------------|--------|--------------------------------|-----------|-------------------------------|--------|
|                                                                   |   | **2002**                       |      | **2003**                      |   | **2002** |   | **2003** |   |
| Numerators:                                                            |   |                           |      |                          |   |   |   |   |   |
|                                                                   |   |                           |      |                          |   |   |   |   |   |
| Before cumulative effect  of a change in accounting principle:         |   |                           |      |                          |   |   |   |   |   |
| Net income                                                             |   | $                              | 1,326,000 |                          | $      | 768,000 |   | $ | 2,224,000 |   | $ | 2,610,000 |   |
| Preferred stock accretion                                              |   | (173,000                       | )         | (184,000                      | )      | (289,000 | ) | (553,000 | ) |
| Income available to  common stockholders                               |   | $                              | 1,153,000 |                          | $      | 584,000 |   | $ | 1,935,000 |   | $ | 2,057,000 |   |
|                                                                   |   |                           |      |                          |   |   |   |   |   |
| After cumulative effect  of a change in accounting principle:          |   |                           |      |                          |   |   |   |   |   |
| Net income (loss)                                                      |   | $                              | 1,326,000 |                          | $      | 768,000 |   | $ | 2,224,000 |   | $ | (19,733,000 | ) |
| Preferred stock accretion                                              |   | (173,000                       | )         | —                        |   | (289,000 | ) | (553,000 | ) |
| Income (loss) available  to common stockholders                        |   | $                              | 1,153,000 |                          | $      | 768,000 |   | $ | 1,935,000 |   | $ | (20,286,000 | ) |
|                                                                   |   |                           |      |                          |   |   |   |   |   |
| Denominators:                                                          |   |                           |      |                          |   |   |   |   |   |
|                                                                   |   |                           |      |                          |   |   |   |   |   |
| Weighted average shares  outstanding – basic                      |   | 4,425,000                      |      | 4,304,000                     |   | 4,389,000 |   | 4,397,000 |   |
| Impact of common shares  assumed to be issued under stock option plans |   | 115,000                        |      | 75,000                        |   | 112,000 |   | 98,000 |   |
| Weighted average shares  outstanding – diluted                    |   | 4,540,000                      |      | 4,379,000                     |   | 4,501,000 |   | 4,495,000 |   |

 

9

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

 

The Company accounts forstock options issued to employees and directors in accordance with therecognition and measurement principles of Accounting Principles Board OpinionNo. 25 and Financial Interpretation No. 44. Consequently, no compensationexpense was recognized for the Company’s stock option plans. The followingtable illustrates the effect on net earnings and net earnings per share if theCompany had applied the fair value recognition provisions of Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation”. The fair value estimate was computed using the Black-Scholesoption pricing model.

** **
|                                                          |   | **Three  months endedMay 31** |      | **Nine  months endedMay 31** |   |
|---------------------------------------------------------------|--------|-------------------------------|-----------|------------------------------|--------|
|                                                          |   | **2002**                      |      | **2003**                     |   | **2002** |   | **2003** |   |
| Before  cumulative effect of a change in accounting principle |   |                          |      |                         |   |   |   |   |   |
| Income  available to stockholders                             |   | $                             | 1,153,000 |                         | $      | 584,000 |   | $ | 1,935,000 |   | $ | 2,057,000 |   |
| Pro  forma impact of expensing stock options                  |   | (68,000                       | )         | 20,000                       |   | (251,000 | ) | (46,000 | ) |
| Pro  forma income available to common stockholders            |   | $                             | 1,085,000 |                         | $      | 604,000 |   | $ | 1,684,000 |   | $ | 2,011,000 |   |
|                                                          |   |                          |      |                         |   |   |   |   |   |
| Earnings  per share:                                          |   |                          |      |                         |   |   |   |   |   |
| As  reported:                                                 |   |                          |      |                         |   |   |   |   |   |
| Basic                                                         |   | $                             | .26       |                         | $      | .14 |   | $ | .44 |   | $ | .47 |   |
| Diluted                                                       |   | .25                           |      | .13                          |   | .43 |   | .46 |   |
|                                                          |   |                          |      |                         |   |   |   |   |   |
| Pro  forma:                                                   |   |                          |      |                         |   |   |   |   |   |
| Basic                                                         |   | $                             | .25       |                         | $      | .14 |   | $ | .38 |   | $ | .46 |   |
| Diluted                                                       |   | .24                           |      | .14                          |   | .37 |   | .45 |   |

 

**6.             Supplementalcash flow information**

 
|                                         |   | **Nine  months ended  May 31** |      |
|----------------------------------------------|--------|--------------------------------|-----------|
|                                         |   | **2002**                       |      | **2003** |   |
| Cash  paid during the period:                |   |                           |      |   |   |
| Interest                                     |   | $                              | 1,954,000 |   | $ | 1,100,000 |   |
| Income  taxes                                |   | $                              | 398,000   |   | $ | 1,812,000 |   |
|                                         |   |                           |      |   |   |
| Non-cash  financing activity:                |   |                           |      |   |   |
| Details  of acquisition                      |   |                           |      |   |   |
| Fair  value of assets acquired               |   | $                              | 5,283,000 |   | $ | — |   |
| Liabilities  assumed or incurred             |   | (2,598,000                     | )         | — |   |
| Cash  paid                                   |   | 2,685,000                      |      | — |   |
| Less  cash acquired                          |   | —                         |      | — |   |
| Net  cash used in acquisition                |   | $                              | 2,685,000 |   | $ | — |   |
|                                         |   |                           |      |   |   |
| Common  stock issued to ESOP and 401(k) Plan |   | $                              | 240,000   |   | $ | 429,000 |   |

 

10

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**7.             Comprehensiveincome (loss)**

 

As part of its interestrate management program, the Company periodically enters into interest rateswap agreements with respect to portions of its outstanding debt.  The purpose of these swaps is to mitigatethe adverse effect on cash flows of an increase in interest rates.  There was no swap agreement in place as ofMay 31, 2003.

 

The reconciliation of netincome to total comprehensive income is as follows:

 
|                                      |   | **Three  months ended  May 31** |      | **Nine  months ended  May 31** |   |
|-------------------------------------------|--------|---------------------------------|-----------|--------------------------------|--------|
|                                      |   | **2002**                        |      | **2003**                       |   | **2002** |   | **2003** |   |
| Net  income (loss)                        |   | $                               | 1,326,000 |                           | $      | 768,000 |   | $ | 2,224,000 |   | $ | (19,733,000 | ) |
| Foreign  currency translation adjustments |   | 9,000                           |      | —                         |   | — |   | — |   |
| Changes  in value of interest rate swaps  |   | 30,000                          |      | —                         |   | 120,000 |   | — |   |
| Total  comprehensive income (loss)        |   | $                               | 1,365,000 |                           | $      | 768,000 |   | $ | 2,344,000 |   | $ | (19,733,000 | ) |

 

**8.             SegmentInformation**

 

Summa manufacturesdiverse plastic products in five reportable segments. In earlier filings, thebusiness was reported as a single segment. After further analysis, it has been determined that the Company has fivereportable segments as described below, and certain prior period disclosureswill be amended to conform to this presentation.

 

***Optical Components.***  In its Optical Components segment, Summadesigns and manufactures plastic prismatic lenses, refractors and reflectorsand other plastic products, which are used in commercial and industriallighting fixtures, and in display, signage, architectural and otherapplications.  Products, many of whichare patented, are injection-molded using specially compounded lighting gradepolycarbonate or acrylic, extruded from similar materials, or thermoformed fromsheet extruded by the Optical Components Segment.  The principal advantages of Summa’s injection-molded plasticcomponents over more traditional glass or metal components are superior opticalperformance, lighter weight, and in certain instances, lower cost.

 

***Material Handling Components.**** *In its Material HandlingComponents segment, Summa designs and manufactures  engineered plastic components which form conveyer belts andchains and other plastic products.  Thematerial handling components,  many ofwhich are patented, are constructed of non-toxic, non-corrosive plasticmaterials and are designed to be easily cleaned, meeting FDA or similarrequirements for food contact applications.  The components do not require lubrication and thus offer the advantageof operation free from contaminants such as grease, oil and metalparticles.  Because these components arelightweight, they require less energy to operate than steel belts, and arequieter in operation and easier to service in place than metal belts.

 

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

 

***Irrigation Components.***  In its Irrigation Components segment, Summadesigns and manufactures plastic injection-molded fittings, valves, filters andaccessories, extruded tubing and other plastic products for drip irrigationsystems and other applications.  The useof drip irrigation systems conserves water and allows more precise control ofdelivery of water and soluble nutrients to plants than is possible with spray,sprinkler or flood irrigation techniques.

 

***Miscellaneous Plastic Components.***  In its Miscellaneous Plastic Componentssegment, Summa designs and manufactures plastic injection-molded products fordiverse industrial and commercial applications.  This segment also manufactures products for other Summa segments.

 

11

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Financial information byreportable business segment is reported in the following tables:

 
|                              |   | **Three  months ended  May 31** |       | **Nine  months ended  May 31** |   |
|-----------------------------------|--------|---------------------------------|------------|--------------------------------|--------|
|                              |   | **2002**                        |       | **2003**                       |   | **2002** |   | **2003** |   |
| External  sales                   |   |                            |       |                           |   |   |   |   |   |
| Optical  components               |   | $                               | 17,391,000 |                           | $      | 13,949,000 |   | $ | 45,199,000 |   | $ | 44,361,000 |   |
| Material  handling components     |   | 6,701,000                       |       | 5,999,000                      |   | 18,282,000 |   | 18,473,000 |   |
| Electrical  components            |   | 3,361,000                       |       | 3,121,000                      |   | 9,545,000 |   | 9,368,000 |   |
| Irrigation  components            |   | 4,805,000                       |       | 4,667,000                      |   | 10,267,000 |   | 10,775,000 |   |
| Miscellaneous  plastic components |   | 603,000                         |       | 606,000                        |   | 1,842,000 |   | 1,475,000 |   |
| Other                             |   | —                          |       | —                         |   | — |   | — |   |
| Consolidated                      |   | $                               | 32,861,000 |                           | $      | 28,342,000 |   | $ | 85,135,000 |   | $ | 84,452,000 |   |
|                              |   |                            |       |                           |   |   |   |   |   |
| Inter-segment  sales              |   |                            |       |                           |   |   |   |   |   |
| Optical  components               |   | $                               | —     |                           | $      | — |   | $ | — |   | $ | — |   |
| Material  handling components     |   | —                          |       | —                         |   | — |   | — |   |
| Electrical  components            |   | —                          |       | —                         |   | — |   | — |   |
| Irrigation  components            |   | —                          |       | —                         |   | — |   | — |   |
| Miscellaneous  plastic components |   | 1,128,000                       |       | 1,045,000                      |   | 2,061,000 |   | 2,570,000 |   |
| Other                             |   | (1,128,000                      | )          | (1,045,000                     | )      | (2,061,000 | ) | (2,570,000 | ) |
| Consolidated                      |   | $                               | —     |                           | $      | — |   | $ | — |   | $ | — |   |
|                              |   |                            |       |                           |   |   |   |   |   |
| Total  sales                      |   |                            |       |                           |   |   |   |   |   |
| Optical  components               |   | $                               | 17,391,000 |                           | $      | 13,949,000 |   | $ | 45,199,000 |   | $ | 44,361,000 |   |
| Material  handling components     |   | 6,701,000                       |       | 5,999,000                      |   | 18,282,000 |   | 18,473,000 |   |
| Electrical  components            |   | 3,361,000                       |       | 3,121,000                      |   | 9,545,000 |   | 9,368,000 |   |
| Irrigation  components            |   | 4,805,000                       |       | 4,667,000                      |   | 10,267,000 |   | 10,775,000 |   |
| Miscellaneous  plastic components |   | 1,731,000                       |       | 1,651,000                      |   | 3,903,000 |   | 4,045,000 |   |
| Other                             |   | (1,128,000                      | )          | (1,045,000                     | )      | (2,061,000 | ) | (2,570,000 | ) |
| Consolidated                      |   | $                               | 32,861,000 |                           | $      | 28,342,000 |   | $ | 85,135,000 |   | $ | 84,452,000 |   |
|                              |   |                            |       |                           |   |   |   |   |   |
| Operating  income (loss)          |   |                            |       |                           |   |   |   |   |   |
| Optical  components               |   | $                               | 2,714,000  |                           | $      | 1,686,000 |   | $ | 5,797,000 |   | $ | 5,484,000 |   |
| Material  handling components     |   | 771,000                         |       | 1,000                          |   | 1,606,000 |   | 1,047,000 |   |
| Electrical  components            |   | 125,000                         |       | 124,000                        |   | 264,000 |   | 317,000 |   |
| Irrigation  components            |   | 351,000                         |       | 587,000                        |   | 352,000 |   | 669,000 |   |
| Miscellaneous  plastic components |   | (716,000                        | )          | (434,000                       | )      | (1,462,000 | ) | (1,220,000 | ) |
| Other                             |   | (640,000                        | )          | (442,000                       | )      | (1,163,000 | ) | (1,235,000 | ) |
| Consolidated                      |   | $                               | 2,605,000  |                           | $      | 1,522,000 |   | $ | 5,394,000 |   | $ | 5,062,000 |   |

 
|                              |   | **May 31  2002** |        | **August 31  2002** |   | **May 31  2003** |   |
|-----------------------------------|--------|------------------|-------------|---------------------|--------|------------------|--------|
| Assets                            |   |             |        |                |   |             |   |
| Optical  components               |   | $                | 40,098,000  |                | $      | 38,643,000       |   | $ | 29,427,000 |   |
| Material  handling components     |   | 16,921,000       |        | 17,063,000          |   | 16,447,000       |   |
| Electrical  components            |   | 21,243,000       |        | 20,973,000          |   | 7,480,000        |   |
| Irrigation  components            |   | 16,104,000       |        | 13,679,000          |   | 8,772,000        |   |
| Miscellaneous  plastic components |   | 4,855,000        |        | 4,583,000           |   | 3,691,000        |   |
| Other                             |   | 2,657,000        |        | 2,624,000           |   | 5,964,000        |   |
| Consolidated                      |   | $                | 101,878,000 |                | $      | 97,565,000       |   | $ | 71,781,000 |   |

 

Operating income is themeasure of profit or loss reported by segment as interest expense and incometaxes are not fully allocated by segment. “Other” includes inter-company eliminations and corporate and otherexpenses not allocated by segment.

 

12

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**MANAGEMENT’SDISCUSSION A****ND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

Statements contained inthis Quarterly Report on Form 10-Q, which are not purely historical, areforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934, includingbut not limited to statements regarding Summa’s expectations, hopes, beliefs,intentions or strategies regarding the future, such as those set forth in PartII, Item 1 “Legal Proceedings” below. Actual results could differ materially from those projected in anyforward-looking statements as a result of a number of factors, including thosedetailed in this “Management’s Discussion and Analysis” section and elsewhereherein and in the Company’s Annual Report on Form 10-K for the fiscal year endedAugust 31, 2002.  The forward-lookingstatements are made as of the date hereof, and the Company assumes noobligation to update the forward-looking statements, or to update the reasonswhy actual results could differ materially from those projected in theforward-looking statements.  For adiscussion of risks and uncertainties that should be considered and which couldmaterially adversely affect the Company, please see “Risk Factors” in the“Management Discussion and Analysis” section of the Company’s Annual Report onForm 10-K for the fiscal year ended August 31, 2002.

 

Summa manufacturesplastic products for diverse commercial and industrial markets. Growth has beenachieved by acquisition, development of new products and expansion of theCompany’s sales organization. Through its five reportable segments, Summadesigns and manufactures injection-molded and thermo-formed plastic opticalcomponents for OEM customers in the lighting industry; modular plastic conveyorbelt and chain for the food processing industry; engineered plastic fittings,valves, filters and tubing for the agricultural irrigation industry; moldedplastic coil forms (“bobbins”) for use in transformers, motors, relays andswitches; and other molded and extruded plastic components for diverseindustries.

 

#### ***Critical AccountingPolicies and Estimates***

 

Thefollowing discussion and analysis of the Company’s financial condition andresults of operations are based upon the consolidated financial statements ofthe Company, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of suchfinancial statements requires management to make estimates and assumptions inapplying certain critical accounting policies. Certain accounting estimates areparticularly sensitive because of their significance to the Company’s condensedconsolidated financial statements and because of the possibility that futureevents affecting the estimates could differ markedly from current expectations.The Company believes that the following are some of the more critical judgmentareas in the application of its accounting policies that affect the Company’sfinancial statements.

 

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

 

The Company has asignificant amount of property and equipment and intangible assets. Thedetermination as to whether events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable involves management’sjudgment. In addition, should the Company conclude that recoverability of an assetis in question, the estimate of undiscounted future operating cash flows todetermine whether an asset is recoverable and, if not, the final determinationof the fair value of the asset are also based on the judgment of management.These judgments can be impacted by a variety of underlying assumptions, such asthe general business climate, effectiveness of competition and supply and costof resources.  Accordingly, actualresults can differ significantly from the assumptions made by management inmaking its estimates. Future changes in management’s estimates could result inindicators of impairment and future impairment charges.

 

Newaccounting standards adopted by the Company effective September 1, 2002eliminated the impairment recoverability tests for goodwill and certain otherintangible assets with indefinite lives and require that such assets be valuedat the lower of their carrying value or fair value.  For a summary of the impairment charge to goodwill taken by theCompany effective September 1, 2002, see Note 3 in the “Notes to CondensedConsolidated Financial Statements”, above. Significant management judgment is involved in determining the fairvalue of assets. Accordingly, future changes in management’s estimates couldresult in additional impairment charges of goodwill.

 

13

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###### ***Valuation of Inventory. ***The Companyvalues its inventories at the lower of cost or market using the first-in,first-out (FIFO) method. Accordingly, the Company records adjustments to thevalue of inventory based upon obsolescence and changes in market value aspermanent changes in the carrying amount of such inventory until its ultimatesale or other disposition. The Company has evaluated the current level ofinventories considering planned sales volume and other factors and, based onthis evaluation, has recorded adjustments to cost of goods sold to adjustinventory to lower of cost or market. These adjustments are estimates, which could vary significantly, eitherfavorably or unfavorably, from actual requirements if future economicconditions, customer demand or competition differ from expectations.

 

***Results of Operations***

 

The following table setsforth certain information, derived from Summa’s unaudited condensed consolidatedstatements of operations, as a percent of sales for the three month and ninemonth periods ended May 31, 2002 and 2003, and the Company’s effective incometax rate during those periods:

 

 
|                                                                         |   | **Three  months ended  May 31** |   | **Nine  months ended  May 31** |   |
|------------------------------------------------------------------------------|--------|---------------------------------|--------|--------------------------------|--------|
|                                                                         |   | **2002**                        |   | **2003**                       |   | **2002** |   | **2003** |   |
| Net  sales                                                                   |   | 100.0                           | %      | 100.0                          | %      | 100.0 | % | 100.0 | % |
| Cost  of sales                                                               |   | 73.5                            | %      | 75.1                           | %      | 74.0 | % | 74.6 | % |
| Gross  profit                                                                |   | 26.5                            | %      | 24.9                           | %      | 26.0 | % | 25.4 | % |
| S,G  & A and other expenses, net                                         |   | 18.6                            | %      | 19.5                           | %      | 19.7 | % | 19.4 | % |
| Operating  income                                                            |   | 7.9                             | %      | 5.4                            | %      | 6.3 | % | 6.0 | % |
| Interest  expense, net                                                       |   | 1.8                             | %      | 1.4                            | %      | 2.3 | % | 1.4 | % |
| Income  before tax and cumulative effect of a change in accounting principle |   | 6.1                             | %      | 4.0                            | %      | 4.0 | % | 4.6 | % |
| Provision  for income taxes                                                  |   | 2.1                             | %      | 1.3                            | %      | 1.4 | % | 1.5 | % |
| Income  before cumulative effect of a change in accounting principle         |   | 4.0                             | %      | 2.7                            | %      | 2.6 | % | 3.1 | % |
|                                                                         |   |                            |   |                           |   |   |   |   |   |
| Effective  tax rate                                                          |   | 34.4                            | %      | 32.2                           | %      | 34.9 | % | 33.0 | % |

 

Sales for the thirdquarter ended May 31, 2003 decreased $4,519,000, or 14%, compared to the sameperiod in the prior year, primarily due to the general economic downturn.  Sales were especially impacted in theOptical Components segment, due to weakness in industrial and commercialconstruction.  The sales decline of 20%in the Optical Components segment comprised 76% of the total salesdecline.  Sales in the Material HandlingComponents segment decreased 10%, primarily due to delayed deliveries relatedto a facilities consolidation project in that segment.  Electrical Components sales decreased 7% dueto demand weakness and the loss of a key customer which moved operations toChina.

 

Sales for the nine monthsended May 31, 2003 decreased $683,000, or 1%, compared to the same period inthe prior year, due to a decline of 4% in sales of previously owned businesses,partially offset by the inclusion of the sales of recently acquired operationsin the Optical Components segment, sales of which declined 8% excluding theacquisition effect.  IrrigationComponents segment sales increased 5%, due to sales promotions and aggressivepricing.  Sales of the MiscellaneousPlastic Components segment declined 20%, primarily due to market weakness andthe shift toward inter-company sales.

 

Gross profit for thethird quarter decreased $1,663,000, or 19%, from the comparable prior yearperiod, primarily due to lower sales volume and facility consolidation costs ofapproximately $300,000 in the Material Handling Components segment.  Gross margin decreased from 26.5% to 24.9%primarily due to the same factors.

 

Gross profit for the ninemonths ended May 31, 2003 decreased $737,000, or 3%, from the comparable prioryear period, primarily due to decreased sales and profits in the OpticalComponents segment resulting from softness in non-residentialconstruction.  Gross margin decreased from26.0% to 25.4%.

 

Operating expenses forthe three months ended May 31, 2003 decreased $580,000, or 10%, from thecomparable prior year period, primarily due to the elimination of goodwillamortization which was $277,000 in the prior year third quarter,  and expense reduction measures, partiallyoffset by facility consolidation expenses of approximately $200,000 in the

 

14

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Material HandlingComponents segment.  As a percent ofsales, operating expenses increased from 18.6% to 19.5%.

 

Operating expenses forthe nine months ended May 31, 2003 decreased $405,000, or 2%, from thecomparable prior year period, primarily due to the elimination of goodwillamortization, which was $833,000 in the comparable prior year period, partiallyoffset by the inclusion of operating expenses of recently acquired operationsfor nine months in the current period compared to five months in the prior yearperiod, and other operating expense increases including facility consolidationcosts of approximately $275,000.  As apercent of sales, operating expenses decreased from 19.7% to 19.4%.

 

Operating income for thethird quarter was $1,083,000, or 42%, lower than in the comparable prior yearperiod, due to the changes discussed above. Facility consolidation costs wereapproximately $500,000 for the quarter. By segment, operating income decreased $1,028,000 in the OpticalComponents segment; decreased $770,000 in the Material Handling Componentssegment; decreased $1,000 in the Electrical Components segment; increased$236,000 in the Irrigation Components segment and the operating loss in theMiscellaneous Plastic Components segment was $282,000 less than in thecomparable prior year quarter. Operating margin for the quarter decreased to5.4% from 7.9% in the third quarter of fiscal 2002.

 

Operating income for thenine months ended May 31, 2003 was $332,000, or 6%, lower than in thecomparable prior year period, despite the elimination of goodwill amortization,which was $833,000 in the comparable prior year period.  Facility consolidation costs wereapproximately $650,000 in the nine months ended May 31, 2003.  By segment, operating income decreased$313,000 in the Optical Components segment; decreased $559,000 in the MaterialHandling Components segment; increased $53,000 in the Electrical Componentssegment; increased $317,000 in the Irrigation Components segment and theoperating loss in the Miscellaneous Plastic Components segment was $242,000less than in the comparable prior year period. Operating margin declined from 6.3% in the nine months ended May 31,2002, to 6.0% in the nine months ended May 31, 2003, due to the factorsdiscussed above.

 

Net interest expense forthe third quarter ended May 31, 2003 decreased $195,000 from the prior yearthird quarter, due to decreased average debt levels and lower interestrates.  Net interest expense for thenine months ended May 31, 2003 decreased $813,000 from the comparable prioryear period, due to decreased average debt levels and lower interest rates.

 

The decrease in the effectivetax rate in the third quarter of fiscal 2003 versus fiscal 2002, from 34.4% to32.2%, and the decrease for the nine months ended May 31, 2003 versus May 31,2002, from 34.9% to 33.0% was primarily due to the elimination of theamortization of goodwill, a substantial portion of which was not taxdeductible.

 

The Company’s backlog ofunfilled orders, believed to be firm, was $10,607,000 at May 31, 2002,$9,225,000 at August 31, 2002 and $7,808,000 at May 31, 2003.  Because the time between entering an orderand shipping the product and recording a sale is typically shorter than onemonth, backlog levels are not normally a reliable indicator of future salesvolume.  However, the substantialdecline in backlog is primarily due to weak bookings in the Optical Componentssegment resulting from the weak non-residential construction market, and thereis no indication of improvement in that segment in the near-term.  Therefor, sales in that segment are expectedto continue to be weak through the balance of fiscal 2003.

 

***Liquidity and Capital Resources***

 

*Working Capital. *TheCompany’s working capital was $17,726,000 at May 31, 2002, $16,301,000 atAugust 31, 2002 and $16,367,000 at May 31, 2003.

 

*Financing Arrangements.*  The Company has several debt relationships asdescribed below.  Substantially all ofthe Company’s assets are pledged to secure debt.  The term debt and revolving line of credit require compliancewith financial and operating covenants.

 

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Summary of the Company’sdebt at May 31, 2003:

 
| **Description of Debt**     |   | **Balance** |       | **Weighted  Average********Interest********Rate** |   | **Additional********Availability** |   | **Fiscal  Year Due** |   |
|-----------------------------|--------|-------------|------------|---------------------------------------------------|--------|------------------------------------|--------|----------------------|--------|
|                        |   |        |       |                                              |
|                        |   |        |       | **2003**                                          |   | **2004**                           |   | **2005**             |   | **2006** |   | **2007 and  thereafter** |   |
| Revolving line of credit    |   | $           | 6,897,000  |                                              | 3.4    | %                                  | $      | 10,223,000           |   | $ | — |   | $ | — |   | $ | 6,897,000 |   | $ | — |   | $ | — |   |
| Bank term loans             |   | 7,095,000   |       | 8.2                                               | %      | —                             |   | 1,094,000            |   | 3,014,000 |   | 2,560,000 |   | 427,000 |   | — |   |
| Real estate and other loans |   | 8,425,000   |       | 3.6                                               | %      | 1,288,000                          |   | 166,000              |   | 671,000 |   | 700,000 |   | 3,583,000 |   | 3,305,000 |   |
|                        |   |        |       |                                              |   |                               |   |                 |   |   |   |   |   |   |   |   |   |
| Total debt                  |   | $           | 22,417,000 |                                              | 5.0    | %                                  | $      | 11,511,000           |   | $ | 1,260,000 |   | $ | 3,685,000 |   | $ | 10,157,000 |   | $ | 4,010,000 |   | $ | 3,305,000 |   |

 

Interest rates on thebank term loans are fixed for periods of one month to four years.  Interest rates on the bank line of creditare subject to market fluctuation and are subject to reduction as the Companyachieves certain financial milestones. Interest rates on most of the real estate and other loans are subject tomarket fluctuation.

 

In August 2002, theCompany announced a plan to repurchase up to $2,000,000 of its common stockwith no time limit (the “2002 Buy Back”). As of May 31, 2003, the Company had purchased 233,600 shares at anaverage cost of $8.56 per share, completing the 2002 Buy Back.  98,600 shares were purchased in open markettransactions and 135,000 shares were purchased in a private transaction fromStadium Capital Management LLC and affiliates, the Company’s largeststockholder, at the market price on the day of the transaction.  In June 2003, the Company announced a newplan to repurchase up to an additional $2,000,000 of its common stock with notime limit (the “2003 Buy Back”).  Noshares had been purchased under the 2003 Buy Back at May 31, 2003.

 

Net cash provided byoperating activities in the first nine months of fiscal 2003 was $7,020,000,$1,230,000 more than in the first nine months of fiscal 2002, primarily due tochanges in components of working capital and higher income before a non-cashcharge for a cumulative effect of a change in accounting principle, partiallyoffset by the elimination of goodwill amortization.  Net cash used in investing activities was $3,441,000 in the firstnine months of fiscal 2003, $1,591,000 less than in the first nine months offiscal 2002, primarily due to an acquisition in the prior year period.  $4,217,000 in cash was used in financingactivities in the first nine months of fiscal 2003 versus $955,000 used in thefirst nine months of fiscal 2002, primarily due to the sale of preferred stockin the prior year period to fund an acquisition.

 

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.  The Company has a strategyof growth by acquisition.  In the eventan acquisition 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 4,249,117 shareswere outstanding at May 31, 2003 and 5,000,000 shares of “blank check”preferred stock authorized, of which 5,000 shares were outstanding asmandatorily redeemable convertible preferred stock at May 31, 2003.  The Company could issue additional shares ofcommon or preferred stock or enter into new or revised borrowing arrangementsto raise funds.

 

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

 

The Company’s materialoff-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 May31, 2003 are approximately as follows:

 

| **Fiscal Year**      |   | **Amount** |      |
|----------------------|--------|------------|-----------|
| 2003                 |   | $          | 385,000   |   |
| 2004                 |   | $          | 1,222,000 |   |
| 2005                 |   | $          | 901,000   |   |
| 2006                 |   | $          | 711,000   |   |
| 2007                 |   | $          | 475,000   |   |
| 2008  and thereafter |   | $          | 799,000   |   |

 

In recent years theCompany has consolidated and/or abandoned several facilities in an effort toimprove efficiencies and

 

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operating results, andplans further consolidations.  In theevent the Company were to abandon a facility prior to its being leased to a newtenant, the Company could become obligated for accelerated lease payments orother expenses.

 

*Contingent preferred stock redemption obligation.*  In December 2001, in order to finance anacquisition, reduce outstanding debt and strengthen the Company’s financialposition, the Company issued and sold 5,000 shares of newly-authorized Series APreferred Stock (the “Preferred Stock”) in a private sale for an aggregatepurchase price of $5,000,000.  The termsof the Preferred Stock were negotiated at arms length, including (i)non-voting, (ii) no dividend, (iii) liquidation preference, (iv) convertibleinto common stock, (v) redeemable by the holder’s election commencing on thethird anniversary of the date of issuance and ending immediately prior to thefourth anniversary at a price which equals a twelve percent annual increase overthe original issuance price in cash, subject to adjustment, (vi) redeemable atthe Company’s option commencing on the fourth anniversary of the date ofissuance and ending immediately prior to the fifth anniversary at a price whichequals a twenty percent annual increase over the original issuance price incash, subject to adjustment, and (vii) if outstanding, redeemable on the fifthanniversary of the date of issuance by the Company at the original issuanceprice, subject to adjustment.  Ifredemption is elected by the holder of the Preferred Stock during the one-yeartime period referenced above, the contingent preferred stock redemptionobligation would require the Company to pay an aggregate price which increasesdaily from $7,025,000 on December 14, 2004 to $7,868,000 on December 13,2005.  For related disclosure regardingaccretion of the preferred stock to its redemption value, see Note 4 in the“Notes to Condensed Consolidated Financial Statements” above.

 

**QUANTITATIVEAND 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-K forthe fiscal year ended August 31, 2002. The Company has no market risk sensitive instruments entered into fortrading purposes.

 

**EFFECTIVENESS OF DISCLOSURE CONTROLSAND PROCEDURES**

 

As of the end of theperiod covered by this report, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures pursuant to Exchange Act 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 the Company’s internalcontrols that could significantly affect these controls subsequent to the dateof their evaluation.

 

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**PARTII - OTHER INFORMATION**

 

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

 

The Company encounterslawsuits from time to time in the ordinary course of business and, at May 31,2003, the Company and/or its affiliates were parties to several civil lawsuits.  Summa does not expect that the resolution ofthese lawsuits will have a material adverse impact on future results ofoperations 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. In addition, the Company recently filed several lawsuits in U.S.District Court against unrelated third parties for infringement of a patent andtrade dress owned by a Company subsidiary, and the Company may file additionalinfringement and/or other types of lawsuits in the future which may result inmaterially increased costs and other adverse consequences.  Any costs and/or losses that Summa maysuffer from such lawsuits, and the effect such litigation may have upon thereputation and marketability of Summa’s products, could have a material adverseimpact on the future results of operations, financial condition and/orprospects of the Company.

 

###### ***Item 2.  Changes in Securities and Use of Proceeds***

 

None.

 

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

 

None.

 

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

 

None.

 

***Item 5.   Other Information***

 

None.

 

***Item 6.  Exhibits and Reports on Form 8-K***

 

**(a)           Exhibits**

 

99.1  Section 906 Certification

 

**(b)           CurrentReports on Form 8-K**

 

Form 8-K dated May 27,2003 regarding a change in the Company’s certifying accountant.

 

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized on July 11, 2003.

 

**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 |

 

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**SECTION 302 CERTIFICATION**

 

I, James R. Swartwout,certify that:

 

1.             I have reviewed this Quarterly Report on Form 10-Q ofSumma Industries;

 

2.             Based on my knowledge, this Quarterly Report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this Quarterly Report;

 

3.             Based on my knowledge, the financial statements, andother financial information included in this Report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this QuarterlyReport;

 

4.             The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrantand we have:

 

(a)           designed such disclosure controls andprocedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisQuarterly Report is being prepared;

 

(b)           evaluated the effectiveness of theregistrant’s disclosure controls and procedures and presented in this QuarterlyReport our conclusions about the effectiveness of the disclosure controls andprocedures as of the end of the period covered by this report based on suchevaluation; and

 

(c)           Disclosed in this Quarterly Reportany change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s most recent fiscal quarter (the registrant’sfourth fiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and

 

5.             The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

(a)           all significant deficiencies in thedesign or operation of internal controls over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record,process, summarize and report financial information; and

 

(b)           any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.

 

 
|   |    /s/  James R. Swartwout                                           |   |
|--------|-------------------------------------------------------------------------------------|--------|
|   | James R. Swartwout  Chief Executive Officer  Chief Financial Officer  July 11, 2003 |

 

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