**U.S. Securities and ExchangeCommission**

**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**            |
| **February 29, 2004**                         |
|                                          |
| **o**                                         | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**      |
|                                          |
| **For the transition period from N/A to N/A** |
|                                          |
| **Commission file no. 1-7755**                |

 

**Summa Industries**

(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 mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

Yes  o**       **No  **ý**

 

The number of shares of commonstock outstanding as of March 26, 2004 was 4,379,530.

 

** **

----

 

**Summa Industries**

 

**INDEX**

 
| PART I -  FINANCIAL INFORMATION                                                                                                           |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                      |   |
| Item 1.  Financial Statements:                                                                                                       |   |
|                                                                                                                                      |   |
| Condensed Consolidated Balance Sheets -  February 28, 2003 (unaudited), August 31, 2003 and February 29, 2004  (unaudited)                |   |
|                                                                                                                                      |   |
| Condensed Consolidated Statements of  Operations (unaudited) -  three months and six months ended February 28, 2003 and February 29, 2004 |   |
|                                                                                                                                      |   |
| Condensed Consolidated Statements of Cash  Flows (unaudited) -  six months ended February 28, 2003 and February 29, 2004                  |   |
|                                                                                                                                      |   |
| 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.   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

----

 

**Summa Industries**

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 
|                                                                                                                        |   | **February 28, 2003** |       | **August 31, 2003** |   | **February 29, 2004** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|------------|---------------------|--------|-----------------------|--------|
| **ASSETS**                                                                                                                  |   |                  |       |                |   |                  |   |
| Current assets:                                                                                                             |   |                  |       |                |   |                  |   |
| Cash and cash equivalents                                                                                                   |   | $                     | 462,000    |                | $      | 380,000               |   | $ | 147,000 |   |
| Accounts receivable                                                                                                         |   | 17,285,000            |       | 15,729,000          |   | 17,669,000            |   |
| Inventories                                                                                                                 |   | 11,928,000            |       | 11,645,000          |   | 13,828,000            |   |
| Prepaid expenses and other                                                                                                  |   | 3,246,000             |       | 2,710,000           |   | 3,108,000             |   |
| Total current assets                                                                                                        |   | 32,921,000            |       | 30,464,000          |   | 34,752,000            |   |
| Property, plant and equipment                                                                                               |   | 54,151,000            |       | 55,731,000          |   | 59,351,000            |   |
| Less accumulated depreciation                                                                                               |   | (27,382,000           | )          | (29,619,000         | )      | (31,384,000           | )      |
| Net property, plant and equipment                                                                                           |   | 26,769,000            |       | 26,112,000          |   | 27,967,000            |   |
| Other assets                                                                                                                |   | 2,917,000             |       | 2,518,000           |   | 2,518,000             |   |
| Goodwill and other intangibles, net                                                                                         |   | 9,566,000             |       | 9,422,000           |   | 9,378,000             |   |
| Total assets                                                                                                                |   | $                     | 72,173,000 |                | $      | 68,516,000            |   | $ | 74,615,000 |   |
| Current liabilities:                                                                                                        |   |                  |       |                |   |                  |   |
| Accounts payable                                                                                                            |   | $                     | 5,440,000  |                | $      | 5,302,000             |   | $ | 5,871,000 |   |
| Accrued liabilities                                                                                                         |   | 5,011,000             |       | 5,015,000           |   | 4,211,000             |   |
| Current maturities of long-term debt                                                                                        |   | 4,597,000             |       | 3,896,000           |   | 2,110,000             |   |
| Total current liabilities                                                                                                   |   | 15,048,000            |       | 14,213,000          |   | 12,192,000            |   |
| Long-term debt, net of current maturities                                                                                   |   | 19,187,000            |       | 16,219,000          |   | 21,818,000            |   |
| Other long-term liabilities                                                                                                 |   | 2,637,000             |       | 2,601,000           |   | 2,585,000             |   |
| Total long-term liabilities                                                                                                 |   | 21,824,000            |       | 18,820,000          |   | 24,403,000            |   |
| Mandatorily redeemable convertible preferred stock,  par value $.001, 5,000 shares authorized,  issued and outstanding |   | 5,735,000             |       | 6,103,000           |   | 6,472,000             |   |
| Minority interest in subsidiary                                                                                             |   | —                |       | —              |   | 205,000               |   |
| Stockholders’ equity:                                                                                                  |   |                  |       |                |   |                  |   |
| Common stock,  par  value $.001; 10,000,000  shares authorized;  issued and outstanding:                          |   |                  |       |                |   |                  |   |
| 4,429,217 at February 28, 2003, 4,246,103 at August 31,  2003 and 4,378,030 at February 29, 2004                            |   | 19,111,000            |       | 17,577,000          |   | 18,626,000            |   |
| Retained earnings                                                                                                           |   | 10,455,000            |       | 11,803,000          |   | 12,717,000            |   |
| Total stockholders’ equity                                                                                             |   | 29,566,000            |       | 29,380,000          |   | 31,343,000            |   |
| Total liabilities, mandatorily redeemable preferred stock  And stockholders’ equity                                    |   | $                     | 72,173,000 |                | $      | 68,516,000            |   | $ | 74,615,000 |   |

 

See accompanying notes to condensed consolidated financial statements*.*

 

3

----

 

**Summa Industries**

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 
|                                                                                           |   | **Three months ended** |       | **Six months ended**   |       |
|------------------------------------------------------------------------------------------------|--------|------------------------|------------|------------------------|------------|
|                                                                                           |   | **February  28  2003** |       | **February  29  2004** | ** ** | **February  28  2003** | ** ** | **February  29  2004** |   |
|                                                                                           |   |                   |       |                   |       |   | ** ** |   | ** ** |
| Net sales                                                                                      |   | $                      | 27,562,000 |                   | $          | 26,545,000 |   | $ | 56,110,000 |   | $ | 52,471,000 |   |
| Cost of sales                                                                                  |   | 20,833,000             |       | 20,256,000             |       | 41,957,000 |   | 39,811,000 |   |
| Gross profit                                                                                   |   | 6,729,000              |       | 6,289,000              |       | 14,153,000 |   | 12,660,000 |   |
| Selling, general, administrative and other expenses                                            |   | 5,348,000              |       | 5,038,000              |       | 10,613,000 |   | 9,858,000 |   |
| Operating income                                                                               |   | 1,381,000              |       | 1,251,000              |       | 3,540,000 |   | 2,802,000 |   |
| Interest expense                                                                               |   | 373,000                |       | 584,000                |       | 778,000 |   | 889,000 |   |
| Income before income taxes and cumulative effect of a  change in accounting principle          |   | 1,008,000              |       | 667,000                |       | 2,762,000 |   | 1,913,000 |   |
| Provision for income taxes                                                                     |   | 321,000                |       | 214,000                |       | 920,000 |   | 630,000 |   |
| Income before cumulative effect of a change in accounting  principle                           |   | 687,000                |       | 453,000                |       | 1,842,000 |   | 1,283,000 |   |
| Cumulative effect of a change in accounting principle,  net of tax                             |   | —                 |       | —                 |       | (22,343,000 | ) | — |   |
| Net income (loss)                                                                              |   | $                      | 687,000    |                   | $          | 453,000 |   | $ | (20,501,000 | ) | $ | 1,283,000 |   |
| Preferred stock accretion                                                                      |   | $                      | 185,000    |                   | $          | 185,000 |   | $ | 369,000 |   | $ | 369,000 |   |
| Net income (loss) available to common stockholders:                                            |   |                   |       |                   |       |   |   |   |   |
| Before cumulative effect of a change in accounting  principle                                  |   | $                      | 502,000    |                   | $          | 268,000 |   | $ | 1,473,000 |   | $ | 914,000 |   |
| After cumulative effect of a change in accounting  principle                                   |   | $                      | 502,000    |                   | $          | 268,000 |   | $ | (20,870,000 | ) | $ | 914,000 |   |
| Earnings per common share before cumulative effect of a  change in accounting principle:       |   |                   |       |                   |       |   |   |   |   |
| Basic                                                                                          |   | $                      | .11        |                   | $          | .06 |   | $ | .33 |   | $ | .21 |   |
| Diluted                                                                                        |   | $                      | .11        |                   | $          | .06 |   | $ | .32 |   | $ | .21 |   |
| Earnings (loss) per common share after cumulative effect  of a change in accounting principle: |   |                   |       |                   |       |   |   |   |   |
| Basic                                                                                          |   | $                      | .11        |                   | $          | .06 |   | $ | (4.70 | ) | $ | .21 |   |
| Diluted                                                                                        |   | $                      | .11        |                   | $          | .06 |   | $ | (4.70 | ) | $ | .21 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

4

----

 

**Summa Industries**

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 
|                                                                                      |   | **Six months ended****February  28, 2003** |        | **Six months ended****February  29, 2004** |   |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------------|-------------|--------------------------------------------|--------|
| Operating activities:                                                                     |   |                                       |        |                                       |   |
| Net income (loss)                                                                         |   | $                                          | (20,501,000 | )                                          | $      | 1,283,000 |   |
| Adjustments to reconcile net income (loss) to net cash  provided by operating activities: |   |                                       |        |                                       |   |
| Depreciation                                                                              |   | 2,385,000                                  |        | 2,288,000                                  |   |
| Amortization                                                                              |   | 122,000                                    |        | 124,000                                    |   |
| Cumulative effect of a change in accounting principle,  net of tax                        |   | 22,343,000                                 |        | —                                     |   |
| (Gain) on disposition of property, plant and equipment                                    |   | (15,000                                    | )           | (2,000                                     | )      |
| Net change in assets and liabilities, net of effects of  acquisitions:                    |   |                                       |        |                                       |   |
| Accounts receivable                                                                       |   | 309,000                                    |        | (1,940,000                                 | )      |
| Inventories                                                                               |   | 385,000                                    |        | (1,318,000                                 | )      |
| Prepaid expenses and other assets                                                         |   | (59,000                                    | )           | (354,000                                   | )      |
| Accounts payable                                                                          |   | (970,000                                   | )           | 569,000                                    |   |
| Accrued liabilities                                                                       |   | (569,000                                   | )           | (597,000                                   | )      |
| Total adjustments                                                                         |   | 23,931,000                                 |        | (1,230,000                                 | )      |
| Net cash provided by operating activities                                                 |   | 3,430,000                                  |        | 53,000                                     |   |
| Investing activities:                                                                     |   |                                       |        |                                       |   |
| Acquisition of business                                                                   |   | —                                     |        | (1,903,000                                 | )      |
| Purchases of property and equipment                                                       |   | (2,335,000                                 | )           | (2,707,000                                 | )      |
| Proceeds from sale of property and equipment                                              |   | 16,000                                     |        | 2,000                                      |   |
| Net cash (used in) investing activities                                                   |   | (2,319,000                                 | )           | (4,608,000                                 | )      |
| Financing activities:                                                                     |   |                                       |        |                                       |   |
| Net proceeds from line of credit                                                          |   | 1,490,000                                  |        | 4,943,000                                  |   |
| Proceeds from issuance of long-term debt                                                  |   | —                                     |        | 5,000,000                                  |   |
| Payments on long-term debt                                                                |   | (2,617,000                                 | )           | (6,130,000                                 | )      |
| Proceeds from the exercise of stock options                                               |   | 263,000                                    |        | 526,000                                    |   |
| Purchase of common stock                                                                  |   | (475,000                                   | )           | (17,000                                    | )      |
| Net cash provided by (used in) financing activities                                       |   | (1,339,000                                 | )           | 4,322,000                                  |   |
| Net (decrease) in cash and cash equivalents                                               |   | (228,000                                   | )           | (233,000                                   | )      |
| Cash and cash equivalents, beginning of period                                            |   | 690,000                                    |        | 380,000                                    |   |
| Cash and cash equivalents, end of period                                                  |   | $                                          | 462,000     |                                       | $      | 147,000 |   |

 

See accompanying notes tocondensed consolidated financial statements*.*

 

5

----

 

**Summa Industries**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

February 29, 2004

 

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

 

The accompanying unaudited condensed consolidatedfinancial statements of Summa Industries (the “Company”) have been condensed incertain respects and should, therefor, be read in conjunction with the auditedconsolidated financial statements and notes related thereto contained in theCompany’s Annual Report on Form 10-K for the year ended August 31, 2003.Certain prior year amounts have been reclassified in the accompanying financialstatements to conform with current year presentations.  In the opinion of the Company, thesefinancial statements contain all adjustments necessary for a fair presentationfor the interim period, all of which were normal recurring adjustments.  The results of operations for the threemonths and six months ended February 29, 2004 are not necessarily indicative ofthe results to be expected for the full year ending August 31, 2004.

 

**Recent accounting pronouncements**

 

The Company adopted FinancialAccounting Standards Board (“FASB”) Statement of Financial Accounting StandardsNo. 150, “Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity” (“SFAS 150”), as of September 1, 2003.  This Statement establishes standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument thatis within its scope as a liability (or an asset in some circumstances).  The provisions of SFAS 150 are effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise are effective at the beginning of the first interim period beginningafter June 15, 2003.  The adoption ofSFAS 150 did not have any effect on the Company’s financial position or resultsof operations.

 

**2.****                                      Inventories**

 

Inventorieswere as follows:

 
|                |   | **February  28, 2003** |       | **August 31,  2003** |   | **February  29, 2004** |   |
|---------------------|--------|------------------------|------------|----------------------|--------|------------------------|--------|
| Finished goods      |   | $                      | 4,942,000  |                 | $      | 4,266,000              |   | $ | 5,658,000 |   |
| Work in process     |   | 369,000                |       | 515,000              |   | 380,000                |   |
| Materials and parts |   | 6,617,000              |       | 6,864,000            |   | 7,790,000              |   |
|                |   |                   |       |                 |   |                   |   |
|                |   | $                      | 11,928,000 |                 | $      | 11,645,000             |   | $ | 13,828,000 |   |

 

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

 

The Company adopted FASBStatement of Financial Accounting Standards No. 142, “Goodwill and Other IntangibleAssets” (“SFAS 142”), effective September 1, 2002.  As a result, the Company discontinued the amortization ofgoodwill.  SFAS 142 also requires theCompany 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.

 

**4.             Earningsper share**

 

Basic earnings per share (“EPS”) was computed bydividing net income available to common stockholders by the weighted averagenumber of common shares outstanding during each period. The Company has 5,000shares of redeemable convertible preferred stock outstanding with an originalissue price of $5,000,000.  No dividendsare required to be paid on the stock, but the preferred stockholders have theright, provided the preferred stock has not been converted to common shares, torequire the Company to repurchase the stock during a one year period beginningDecember 14, 2004 at an

 

6

----

 

aggregate price which increases daily from $7,025,000on December 14, 2004 to $7,868,000 on December 13, 2005.  The net income available to commonstockholders used in the EPS calculations is the net income less the reportedaccretion in the value of the preferred stock for that period.

 

Diluted EPS reflects the potential dilution that couldoccur if securities or other contracts to issue common stock were exercised orconverted into common stock.  DilutedEPS, before cumulative effect of a change 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 600,837 common shares as of February 28, 2003 and 489,481 commonshares as of February 29, 2004 were excluded from the calculation of equivalentshares, as they would have been anti-dilutive. The 5,000 shares of outstanding preferred stock, convertible into625,000 shares of common stock, were excluded from the calculation ofequivalent shares for the three month and six month periods ended February 28,2003 and February 29, 2004, as they would have been anti-dilutive.  Diluted EPS after cumulative effect of achange in accounting principle, for the six month period ended February 28,2003, excludes common stock equivalents, as they would have been anti-dilutive.

 

The following is a reconciliation of the numeratorsand denominators of the basic and diluted EPS computations for “incomeavailable to common stockholders” and other disclosures required by FASBStatement of Accounting Standards No. 128, “Earnings per Share”:

 
|                                                                   |   | **Three months ended** |    | **Six months ended** |   |
|------------------------------------------------------------------------|--------|------------------------|---------|----------------------|--------|
|                                                                   |   | **Feb 28, 2003**       |    | **Feb 29, 2004**     |   | **Feb 28, 2003** |   | **Feb 29, 2004** |   |
| Numerators:                                                            |   |                   |    |                 |   |   |   |   |   |
|                                                                   |   |                   |    |                 |   |   |   |   |   |
| Before cumulative effect of a change in accounting  principle:         |   |                   |    |                 |   |   |   |   |   |
| Income                                                                 |   | $                      | 687,000 |                 | $      | 453,000 |   | $ | 1,842,000 |   | $ | 1,283,000 |   |
| Preferred stock accretion                                              |   | (185,000               | )       | (185,000             | )      | (369,000 | ) | (369,000 | ) |
| Income available to common stockholders                                |   | $                      | 502,000 |                 | $      | 268,000 |   | $ | 1,473,000 |   | $ | 914,000 |   |
|                                                                   |   |                   |    |                 |   |   |   |   |   |
| After cumulative effect of a change in accounting  principle:          |   |                   |    |                 |   |   |   |   |   |
| Net income (loss)                                                      |   | $                      | 687,000 |                 | $      | 453,000 |   | $ | (20,501,000 | ) | $ | 1,283,000 |   |
| Preferred stock accretion                                              |   | (185,000               | )       | (185,000             | )      | (369,000 | ) | (369,000 | ) |
| Income (loss) available to common stockholders                         |   | $                      | 502,000 |                 | $      | 268,000 |   | $ | (20,870,000 | ) | $ | 914,000 |   |
|                                                                   |   |                   |    |                 |   |   |   |   |   |
| Denominators:                                                          |   |                   |    |                 |   |   |   |   |   |
| Weighted average shares outstanding – basic                       |   | 4,450,000              |    | 4,370,000            |   | 4,444,000 |   | 4,328,000 |   |
| Impact of common shares assumed to be issued under stock  option plans |   | 106,000                |    | 80,000               |   | 110,000 |   | 75,000 |   |
| Weighted average shares outstanding – diluted                     |   | 4,556,000              |    | 4,450,000            |   | 4,554,000 |   | 4,403,000 |   |

 

**5. Stock-based compensation plans**

 

The Company accounts for stockoptions issued to employees and directors in accordance with the recognitionand measurement principles of Accounting Principles Board Opinion No. 25 andFinancial Interpretation No. 44. Consequently, no compensation expense wasrecognized for the Company’s stock option plans. The following tableillustrates 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.

 

7

----

 
|                                                          |   | **Three months ended** |    | **Six months ended** |   |
|---------------------------------------------------------------|--------|------------------------|---------|----------------------|--------|
|                                                          |   | **Feb 28,  2003**      |    | **Feb 29,  2004**    |   | **Feb 28,  2003** |   | **Feb 29,  2004** |   |
| Before cumulative effect of a change in accounting  principle |   |                   |    |                 |   |   |   |   |   |
| Income available to stockholders                              |   | $                      | 502,000 |                 | $      | 268,000 |   | $ | 1,473,000 |   | $ | 914,000 |   |
| Pro forma impact of expensing stock options                   |   | (77,000                | )       | 10,000               |   | (99,000 | ) | (20,000 | ) |
| Pro forma income available to common stockholders             |   | $                      | 425,000 |                 | $      | 278,000 |   | $ | 1,374,000 |   | $ | 894,000 |   |
|                                                          |   |                   |    |                 |   |   |   |   |   |
| Earnings per share:                                           |   |                   |    |                 |   |   |   |   |   |
| As reported:                                                  |   |                   |    |                 |   |   |   |   |   |
| Basic                                                         |   | $                      | .11     |                 | $      | .06 |   | $ | .33 |   | $ | .21 |   |
| Diluted                                                       |   | $                      | .11     |                 | $      | .06 |   | $ | .32 |   | $ | .21 |   |
|                                                          |   |                   |    |                 |   |   |   |   |   |
| Pro forma:                                                    |   |                   |    |                 |   |   |   |   |   |
| Basic                                                         |   | $                      | .10     |                 | $      | .06 |   | $ | .31 |   | $ | .21 |   |
| Diluted                                                       |   | $                      | .09     |                 | $      | .06 |   | $ | .30 |   | $ | .20 |   |

** **

**6.****                                      Supplementalcash flow information**

 
|                                                                                  |   | **Six months ended** |      |
|---------------------------------------------------------------------------------------|--------|----------------------|-----------|
|                                                                                  |   | **Feb 28,  2003**    |      | **Feb 29,  2004** |   |
| Cash paid during the period:                                                          |   |                 |      |   |   |
| Interest                                                                              |   | $                    | 765,000   |   | $ | 923,000 |   |
| Income taxes                                                                          |   | $                    | 1,652,000 |   | $ | 664,000 |   |
| Non-cash financing activity:                                                          |   |                 |      |   |   |
| Common stock issued to 401(k) Plan                                                    |   | $                    | 429,000   |   | $ | 345,000 |   |
| Minority interest in subsidiary given as partial  consideration for land and building |   | —               |      | $ | 205,000 |   |

** **

**7.  Refinancing of indebtedness**

 

During the quarter, the Companyrefinanced its bank revolving line of credit and bank term loan with a newbank. The former revolving line of credit and bank term loan were paid andreplaced with a new line of credit of up to $25,000,000 and a five-year termloan with a fixed interest rate of 4.7%.

 

**8.  Segment Information**

 

Summa manufactures diverseplastic products in five reportable segments as described below:

 

***OpticalComponents.*** In its Optical Components segment, Summa designs and manufacturesplastic prismatic lenses, refractors and reflectors and other plastic products,which are used in commercial and industrial lighting fixtures, display,signage, architectural and other applications.

 

***MaterialHandling Components.**** *In its Material Handling Components segment, Summa designsand manufactures engineered plastic components, which form conveyer belts andchains and other plastic products for use in food processing.

 

***ElectricalComponents.*** In its Electrical Components segment, Summa designs and manufacturesthermoplastic coil forms or “bobbins” and other plastic products usedprincipally in the manufacture of magnetic devices such as transformers,relays, switches, power supplies and small electric motors.

 

***IrrigationComponents.***  In its Irrigation Components segment, Summa designs andmanufactures plastic injection-molded fittings, valves, filters andaccessories, extruded tubing and other plastic products for drip irrigationsystems used in agriculture, commercial landscape and other applications.

 

8

----

 

***MiscellaneousPlastic Components.***  In its Miscellaneous Plastic Components segment, Summa designsand manufactures plastic injection-molded products for diverse industrial andcommercial applications.  This segmentalso manufactures products for other Summa segments.

 

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

 
|                             |   | **Three months ended** |       | **Six months ended** |   |
|----------------------------------|--------|------------------------|------------|----------------------|--------|
|                             |   | **Feb 28,  2003**      |       | **Feb 29,  2004**    |   | **Feb 28,  2003** |   | **Feb 29,  2004** |   |
| External sales                   |   |                   |       |                 |   |   |   |   |   |
| Optical components               |   | $                      | 14,297,000 |                 | $      | 12,714,000 |   | $ | 30,412,000 |   | $ | 26,306,000 |   |
| Material handling components     |   | 6,613,000              |       | 6,511,000            |   | 12,474,000 |   | 12,404,000 |   |
| Electrical components            |   | 2,973,000              |       | 2,859,000            |   | 6,247,000 |   | 5,720,000 |   |
| Irrigation components            |   | 3,348,000              |       | 4,245,000            |   | 6,108,000 |   | 7,516,000 |   |
| Miscellaneous plastic components |   | 331,000                |       | 216,000              |   | 869,000 |   | 525,000 |   |
| Other                            |   | —                 |       | —               |   | — |   | — |   |
| Consolidated                     |   | $                      | 27,562,000 |                 | $      | 26,545,000 |   | $ | 56,110,000 |   | $ | 52,471,000 |   |
|                             |   |                   |       |                 |   |   |   |   |   |
| Inter-segment sales              |   |                   |       |                 |   |   |   |   |   |
| Optical components               |   | $                      | —     |                 | $      | 678,000 |   | $ | — |   | $ | 1,124,000 |   |
| Material handling components     |   | —                 |       | —               |   | — |   | — |   |
| Electrical components            |   | —                 |       | —               |   | — |   | — |   |
| Irrigation components            |   | —                 |       | —               |   | — |   | — |   |
| Miscellaneous plastic components |   | 873,000                |       | 451,000              |   | 1,525,000 |   | 1,249,000 |   |
| Other                            |   | (873,000               | )          | (1,129,000           | )      | (1,525,000 | ) | (2,373,000 | ) |
| Consolidated                     |   | $                      | —     |                 | $      | — |   | $ | — |   | $ | — |   |
|                             |   |                   |       |                 |   |   |   |   |   |
| Total sales                      |   |                   |       |                 |   |   |   |   |   |
| Optical components               |   | $                      | 14,297,000 |                 | $      | 13,392,000 |   | $ | 30,412,000 |   | $ | 27,430,000 |   |
| Material handling components     |   | 6,613,000              |       | 6,511,000            |   | 12,474,000 |   | 12,404,000 |   |
| Electrical components            |   | 2,973,000              |       | 2,859,000            |   | 6,247,000 |   | 5,720,000 |   |
| Irrigation components            |   | 3,348,000              |       | 4,245,000            |   | 6,108,000 |   | 7,516,000 |   |
| Miscellaneous plastic components |   | 1,204,000              |       | 667,000              |   | 2,394,000 |   | 1,774,000 |   |
| Other                            |   | (873,000               | )          | (1,129,000           | )      | (1,525,000 | ) | (2,373,000 | ) |
| Consolidated                     |   | $                      | 27,562,000 |                 | $      | 26,545,000 |   | $ | 56,110,000 |   | $ | 52,471,000 |   |
|                             |   |                   |       |                 |   |   |   |   |   |
| Operating income (loss)          |   |                   |       |                 |   |   |   |   |   |
| Optical components               |   | $                      | 1,427,000  |                 | $      | 1,462,000 |   | $ | 3,798,000 |   | $ | 3,270,000 |   |
| Material handling components     |   | 538,000                |       | 354,000              |   | 1,046,000 |   | 511,000 |   |
| Electrical components            |   | 43,000                 |       | (16,000              | )      | 193,000 |   | 124,000 |   |
| Irrigation components            |   | 151,000                |       | 278,000              |   | 82,000 |   | 334,000 |   |
| Miscellaneous plastic components |   | (385,000               | )          | (344,000             | )      | (786,000 | ) | (554,000 | ) |
| Other                            |   | (393,000               | )          | (483,000             | )      | (793,000 | ) | (883,000 | ) |
| Consolidated                     |   | $                      | 1,381,000  |                 | $      | 1,251,000 |   | $ | 3,540,000 |   | $ | 2,802,000 |   |

 
|                             |   | **February  28  2003** |       | **August 31  2003** |   | **February  29  2004** |   |
|----------------------------------|--------|------------------------|------------|---------------------|--------|------------------------|--------|
|                             |   |                   |       |                |   |                   |   |
| Assets                           |   |                   |       |                |   |                   |   |
| Optical components               |   | $                      | 30,238,000 |                | $      | 28,228,000             |   | $ | 28,018,000 |   |
| Material handling components     |   | 16,968,000             |       | 18,335,000          |   | 20,037,000             |   |
| Electrical components            |   | 8,085,000              |       | 6,999,000           |   | 8,625,000              |   |
| Irrigation components            |   | 7,967,000              |       | 7,556,000           |   | 11,316,000             |   |
| Miscellaneous plastic components |   | 3,362,000              |       | 2,941,000           |   | 1,627,000              |   |
| Other                            |   | 5,553,000              |       | 4,457,000           |   | 4,992,000              |   |
|                             |   |                   |       |                |   |                   |   |
| Consolidated                     |   | $                      | 72,173,000 |                | $      | 68,516,000             |   | $ | 74,615,000 |   |

 

9

----

 

Operating income is the measureof profit or loss reported by segment as interest expense and income taxes arenot fully allocated by segment.  “Other”includes inter-company eliminations and corporate and other expenses notallocated by segment.  The impairmentcharge described in Note 3 to these interim financial statements was comprisedof the following charges by segment: $5,953,000 in Optical Components,$7,851,000 in Electrical Components, $6,831,000 in Irrigation Components and$1,708,000 in Miscellaneous Plastic Components.

 

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

 

Statements contained in this Quarterly Report on Form10-Q, which are not purely historical, are forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934, including but not limited to statementsregarding Summa’s expectations, hopes, beliefs, intentions or strategiesregarding the future, such as those set forth in Part II, Item 1 “Legal Proceedings”below.  Actual results could differmaterially from those projected in any forward-looking statements as a resultof a number of factors, including those detailed in this “Management’sDiscussion and Analysis” section and elsewhere herein and in the Company’sAnnual Report on Form 10-K for the fiscal year ended August 31, 2003.  The forward-looking statements are made asof the date hereof, and the Company assumes no obligation to update theforward-looking statements, or to update the reasons why actual results coulddiffer materially from those projected in the forward-looking statements.  For a discussion of risks and uncertaintiesthat should be considered and which could materially adversely affect theCompany, please see “Risk Factors” in the “Management Discussion and Analysis”section of the Company’s Annual Report on Form 10-K for the fiscal year endedAugust 31, 2003.

 

Summa manufactures plasticproducts for diverse commercial and industrial markets. Through its fivereportable segments, Summa designs and manufactures injection-molded and formedplastic optical components for OEM customers in the lighting industry; modularplastic conveyor belt and chain for the food processing industry; engineeredplastic fittings, valves, filters and tubing for irrigation systems used inagriculture, commercial landscape and other applications; molded plastic coilforms (“bobbins”) for use in transformers, motors, relays and switches; andother molded and extruded plastic components for diverse industries.

 

***RecentEvents***

 

*Asset Acquisition.*  During the quarter, Summa acquired certainassets from the Micro-irrigation division of R.M. Wade & Co. (“Wade”),including the product brand “Pepco” and transitional rights to the productbrand “Wade Rain”.  Pepco is a brand ofproducts for commercial landscape irrigation and Wade Rain is a brand ofproducts used in agricultural irrigation. The acquisition is expected to addabout $5 million in sales to the Irrigation Components segment.  Pursuant to the agreement, Summa will supplyproducts to Wade for use in leach mining applications.  Summa has assumed operation of the Wadeinjection molding and extrusion facility in Fresno, California, which is in thecenter of the California agriculture market. Consideration for the assets was approximately $2 million.  The purchase price was allocated primarilyto inventory and to machinery and equipment based upon their fair values at thedate of acquisition. The pro forma results of operations for the prior yearwould not have been materially different, if the acquisition had been made asof the beginning of the prior year. Summa expects the acquisition to beaccretive to earnings per share by the third quarter of the current fiscalyear.

 

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

 

*Settlement of Infringement Litigations.*  During the quarter, Summa entered intoconfidential agreements with Cooper Industries (NYSE:CBE) and GrandliteInternational Corporation to settle two patent infringement lawsuits filed bythe Optical Components segment.  Underthe agreements, the parties acknowledged the validity of certain of Summa’sintellectual property and agreed to certain on-going business relationships.

 

*Refinancing of Indebtedness.*  During the quarter, Summa entered into a newcomprehensive banking relationship with

 

10

----

 

Wells Fargo Bank, NationalAssociation, to replace the previously existing relationship with Comerica Bank– California.  For further information,see “Liquidity and Capital Resources – Financing Arrangements” below.

 

***Resultsof Operations***

 

The following table sets forth certain information,derived from Summa’s unaudited condensed consolidated statements of operations,as a percent of sales for the three month and six month periods ended February28, 2003 and February 29, 2004, and the Company’s effective income tax rateduring those periods:

 
|                                                                         |   | **Three months ended** |   | **Six months ended** |   |
|------------------------------------------------------------------------------|--------|------------------------|--------|----------------------|--------|
|                                                                         |   | **Feb 28,  2003**      |   | **Feb 29,  2004**    |   | **Feb 28,  2003** |   | **Feb 29,  2004** |   |
| Net sales                                                                    |   | 100.0                  | %      | 100.0                | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                                                |   | 75.6                   | %      | 76.3                 | %      | 74.8 | % | 75.9 | % |
|                                                                         |   |                   |   |                 |   |   |   |   |   |
| Gross profit                                                                 |   | 24.4                   | %      | 23.7                 | %      | 25.2 | % | 24.1 | % |
| S,G & A and other expenses, net                                          |   | 19.4                   | %      | 19.0                 | %      | 18.9 | % | 18.8 | % |
|                                                                         |   |                   |   |                 |   |   |   |   |   |
| Operating income                                                             |   | 5.0                    | %      | 4.7                  | %      | 6.3 | % | 5.3 | % |
| Interest expense, net                                                        |   | 1.3                    | %      | 2.2                  | %      | 1.4 | % | 1.7 | % |
|                                                                         |   |                   |   |                 |   |   |   |   |   |
| Income before tax and cumulative effect of a change in  accounting principle |   | 3.7                    | %      | 2.5                  | %      | 4.9 | % | 3.6 | % |
| Provision for income taxes                                                   |   | 1.2                    | %      | 0.8                  | %      | 1.6 | % | 1.2 | % |
| Income before cumulative effect of a change in accounting  principle         |   | 2.5                    | %      | 1.7                  | %      | 3.3 | % | 2.4 | % |
|                                                                         |   |                   |   |                 |   |   |   |   |   |
| Effective tax rate                                                           |   | 31.8                   | %      | 32.1                 | %      | 33.3 | % | 32.9 | % |

 

As has been previouslydiscussed in press releases and in the Company’s Annual Report on Form 10-K forthe period ended August 31, 2003 and it’s Quarterly Report on Form 10-Q for theperiod ended November 30, 2003, sales in the Company’s Optical Componentssegment were lower over the past 12 months, in part due to the manufacture ofproducts by certain customers which Summa deemed to infringe on itsintellectual property related to its Reflexor® brand prismatic reflectorproducts.  During the quarter ended February 29, 2004, the Company settledit lawsuits with the two customers and has resumed manufacturing and sellingreflectors to those customers.  While the Company expects an increase ofsales in future quarters as a result, the sales will be at lower price levelsand, as part of a previously announced strategy, the Company is offering lowerpriced substitute products and lowering its prices on certain patented productsto discourage similar future competition.  While it is not possible toquantify the sales previously lost, nor to accurately predict the effects oflower prices in the future, the resolution of these lawsuits was considered bymanagement to be a favorable and significant development.  Litigationexpense related to this matter was approximately $260,000, incurred evenly overthe last four quarters.

 

Sales for the second quarterended February 29, 2004 decreased $1,017,000, or 4%, compared to the sameperiod in the prior year, despite the inclusion of sales of $573,000 fromrecently acquired operations in the Irrigation Components Segment for one and ahalf months, primarily due to general economic conditions.  Same business sales in the second quarterwere about 6% lower than in the second quarter of the prior fiscal year.  Sales decreased 11% in the OpticalComponents segment, primarily due to weakness in the commercial/industriallighting sector, loss of some contract manufacturing work to competitors due toprice, lower sales of certain patented products due to increased sales ofproducts deemed by the Company to be infringing on its intellectual property,reduced prices on continuing business and the transfer of production to Asia bycertain customers, partially offset by sales of new products; decreased 4% inthe Electrical Components segment, primarily due to the loss of business from amajor customer which transferred its operations to China and competitive pricepressure; increased 27% in the Irrigation Components segment, primarily due tothe inclusion of sales of recently acquired operations, recaptured market sharefrom certain major customers and improved market conditions; and decreased 35%in the Miscellaneous Plastic Components segment, primarily due to the loss of acustomer which is now procuring its molded products from China and the shifttoward inter-segment sales.   TheCompany has adopted a plan to phase out the Miscellaneous Plastics Componentssegment, the assets and operations of which will be absorbed by the IrrigationComponents segment.

 

Sales for the six months endedFebruary 29, 2004 decreased $3,639,000, or 6%, compared to the same period inthe prior year, primarily due to the general market conditions.  Same business unit sales in the perioddecreased 8%, compared to

 

11

----

 

the first six months of fiscal2003.  Sales decreased 14% in theOptical Components segment, primarily due to weakness in thecommercial/industrial lighting sector, loss of some contract manufacturing workto competitors due to price, lower sales of certain patented products due toincreased sales of products deemed by the Company to be infringing on itsintellectual property, reduced prices on continuing business and the transferof production to Asia by certain customers, partially offset by sales of newproducts; decreased 8% in the Electrical Components segment, primarily due tothe loss of business from a major customer which transferred its operations toChina and competitive price pressure; increased 23% in the IrrigationComponents segment, primarily due to recaptured market share from certain majorcustomers, the inclusion of sales of recently acquired operations and improvedmarket conditions; and decreased 40% in the Miscellaneous Plastic Componentssegment, primarily due to the loss of a customer which is now procuring itsmolded products from China and the shift toward inter-segment sales.

 

Gross profit for the second quarter decreased$440,000, or 7%, from the comparable prior year period, primarily due to lowersales and inefficiencies related to a plant consolidation.  Gross margin decreased from 24.4% to 23.7%primarily due to the effects of lower sales volume, inefficiencies related to aplant consolidation and generally lower selling prices due to competitive pricepressure.

 

Gross profit for the six months ended February 29,2004 decreased $1,493,000, or 11%, from the comparable prior year period,primarily due to lower sales and inefficiencies related to a plantconsolidation.  Gross margin decreasedfrom 25.2% to 24.1%, primarily due to the effects of lower sales volume,inefficiencies related to a plant consolidation and generally lower sellingprices due to competitive price pressure.

 

Operating expenses for the second quarter decreased$310,000, or 6%, from the comparable prior year period, despite the inclusionof operating expenses of newly acquired operations, primarily due tonon-recurring facility consolidation expenses included in the second quarter offiscal 2003, management cost reduction initiatives and lower variable sellingexpenses resulting from lower sales.  Asa percent of sales, operating expenses decreased from 19.4% to 19.0%.

 

Operating expenses for the six months ended February29, 2004 decreased $755,000, or 7%, from the comparable prior year period,despite the inclusion of operating expenses of newly acquired operations,primarily due to non-recurring facility consolidation expenses included in theprior year period, management cost reduction initiatives and lower variableselling expenses resulting from lower sales. As a percent of sales, operating expenses decreased slightly from 18.9%to 18.8%.

 

Operating income for the second quarter was$1,251,000, which was $130,000, or 9%, lower than in the comparable prior yearperiod.  By segment, operating incomeincreased $35,000 in the Optical Components segment, due primarily to favorableproduct mix on lower sales; decreased $184,000 in the Material HandlingComponents segment, primarily due to inefficiencies related to a plantconsolidation; decreased $59,000 to a loss of ($16,000) in the ElectricalComponents segment, primarily due to decreased sales and continuing pricingpressures; increased $127,000 in the Irrigation Components segment, primarilydue to the effects of higher sales volume; and the operating loss was $41,000less in the Miscellaneous Plastic Components segment, primarily due to costreductions initiatives. Operating margin for the quarter decreased to 4.7% from5.0% in the second quarter of fiscal 2003, due to the factors discussed above.

 

Operating income for the six months ended February 29,2004 was $2,802,000, which was $738,000, or 21%, lower than in the comparableprior year period.  By segment,operating income decreased $528,000 in the Optical Components segment, dueprimarily to lower volumes and lower prices; decreased $535,000 in the MaterialHandling Components segment, primarily due to inefficiencies related to a plantconsolidation; decreased $69,000 in  theElectrical Components segment primarily due to lower volume; increased $252,000in the Irrigation Components segment, primarily due to the effects of highersales volume; and the operating loss was $232,000 lower in the MiscellaneousPlastic Components segment, primarily due to cost reduction initiatives.  Operating margin decreased from 6.3% in thesix months ended February 28, 2003 to 5.3% in the six months ended February 29,2004, due to the factors discussed above.

 

Net interest expense for the second quarter endedFebruary 29, 2004 increased $211,000 from the prior year second quarter, due toterm loan break-up fees and the write-off of unamortized bank fees resulting ina non-recurring charge of $266,000, related to refinancing of bank debt,partially offset by decreased interest rates. Net interest expense for the six months ended February 29, 2004increased $111,000 from the comparable prior year period due to term loanbreak-up fees and the write-off of unamortized bank fees resulting in anon-recurring charge of $266,000, related to refinancing of bank debt,partially offset by decreased interest rates.

 

The Company’s backlog of unfilled orders, believed tobe firm, was $9,058,000 at February 28, 2003, $7,892,000 at August 31, 2003 and$8,134,000 at February 29, 2004. Because the time between entering an order and shipping the product and

 

12

----

 

recording a sale is typically shorter than one month,backlog levels are not a reliable indicator of future sales volume.

 

***Liquidity and Capital Resources***

 

*Working Capital. *The Company’s workingcapital was $17,873,000 at February 28, 2003; $16,251,000 at August 31, 2003and $22,560,000 at February 29, 2004.  Working capital at February 29,2004 was $6,309,000 greater than at August 31, 2003, primarily due to aseasonal increase in accounts receivable, the refinancing of a term loan whichreduced the current portion of term debt, an increase in inventory inanticipation of increased sales, and a bulk purchase of inventory as part ofthe Fresno acquisition.  Working capital at February 29, 2004 was$4,687,000 greater than at February 28, 2003, primarily due to the refinancingof a term loan which reduced the current portion of term debt, an increase ininventory in anticipation of increased sales, and a bulk purchase of inventoryas part of the Fresno acquisition.

 

Summary of the Company’s debtat February 29, 2004:

 
|                        |   |        |       | **Weighted  Average** |   |                         |   | **Fiscal Year Due** |   |
|-----------------------------|--------|-------------|------------|-----------------------|--------|------------------------------|--------|---------------------|--------|
| **Description of Debt**     |   | **Balance** |       | **Interest  Rate**    |   | **Additional  Availability** |   | **2004**            |   | **2005** |   | **2006** |   | **2007** |   | **2008 and  thereafter** |   |
| Revolving line of credit    |   | $           | 9,700,000  |                  | 2.6    | %                            | $      | 12,344,000          |   | $ | — |   | $ | — |   | $ | — |   | $ | 9,700,000 |   | $ | — |   |
| Bank term loan              |   | 5,000,000   |       | 4.7                   | %      | —                       |   | 463,000             |   | 926,000 |   | 971,000 |   | 1,019,000 |   | 1,621,000 |   |
| Real estate and other loans |   | 9,228,000   |       | 3.5                   | %      | —                       |   | 757,000             |   | 911,000 |   | 3,808,000 |   | 3,411,000 |   | 341,000 |   |
|                        |   |        |       |                  |   |                         |   |                |   |   |   |   |   |   |   |   |   |
| Total debt                  |   | $           | 23,928,000 |                  | 3.4    | %                            | $      | 12,344,000          |   | $ | 1,220,000 |   | $ | 1,837,000 |   | $ | 4,779,000 |   | $ | 14,130,000 |   | $ | 1,962,000 |   |

 

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

 

In June 2003, the Companyannounced a plan to repurchase up to $2,000,000 of its common stock with notime limit (the “2003 Buy Back”).  As ofFebruary 29, 2004, the status of the 2003 Buy Back was as follows:

 
|                                          |   | **Shares  repurchased** |   | **Average  cost per share** |   | **Repurchase  cost** |      |
|-----------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|----------------------|-----------|
| Prior to December 2003                        |   | 5,347                   |   | $                           | 7.15   |                 | $         | 38,000 |   |
| December 2003                                 |   | 1,000                   |   | $                           | 8.95   |                 | 9,000     |   |
| January 2004                                  |   | —                  |   | —                      |   | —               |      |
| February 2004                                 |   | 850                     |   | $                           | 9.47   |                 | 8,000     |   |
| Total                                         |   | 7,197                   |   | $                           | 7.44   |                 | $         | 55,000 |   |
|                                          |   |                    |   |                        |   |                 |      |
| Remaining authorization   for repurchase |   |                    |   |                        |   | $                    | 1,945,000 |   |

 

The cost per shareincludes commissions where applicable. All share repurchases in the reported period were made pursuant to the2003 Buy Back.

 

*Sources and Uses of Funds. *Net cash provided by operating activities in the firstsix months of fiscal 2004 was $53,000, $3,377,000 less than in the first sixmonths of fiscal 2003, primarily due to increases in accounts receivables andinventory and lower income before a non-cash charge for a cumulative effect ofa change in accounting principle.  Netcash used in investing activities was $4,608,000 in the first six months offiscal 2004, $2,289,000 more than in the first quarter of fiscal 2003, primarilydue to a business acquisition.  Net cashof $4,322,000 was provided by financing activities in the quarter endedFebruary 29, 2004, primarily from additional borrowing, versus $1,339,000 usedin the comparable prior year period.

 

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 astrategy of growth

 

13

----

 

by acquisition.  In the event an acquisition plan is adoptedwhich requires funds exceeding the availability described above, an alternatesource of funds to accomplish the acquisition would have to be developed.  The Company has 10,000,000 shares of commonstock authorized, of which 4,378,030 shares were outstanding at February 29,2004 and 5,000,000 shares of “blank check” preferred stock authorized, of which5,000 shares were outstanding as mandatorily redeemable convertible preferredstock at February 29, 2004.  The Companycould issue additional shares of common or preferred stock or enter into new orrevised borrowing arrangements to raise funds.

 

### ***Off-Balance Sheet Arrangements***

### *** ***

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 atFebruary 29, 2004 are approximately as follows:

 
| **Fiscal Year**     |   | **Amount** |      |
|---------------------|--------|------------|-----------|
| 2004                |   | $          | 845,000   |   |
| 2005                |   | $          | 1,202,000 |   |
| 2006                |   | $          | 932,000   |   |
| 2007                |   | $          | 502,000   |   |
| 2008                |   | $          | 451,000   |   |
| 2009 and thereafter |   | $          | 421,000   |   |

 

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

 

*Contingent preferred stock redemptionobligation.*  InDecember 2001, in order to finance an acquisition, reduce outstanding debt andstrengthen the Company’s financial position, the Company issued and sold 5,000shares of newly-authorized Series A Preferred Stock (the “Preferred Stock”) ina private sale for an aggregate purchase price of $5,000,000.  The terms of the Preferred Stock werenegotiated at arms length, including (i) non-voting, (ii) no dividend, (iii)liquidation preference, (iv) convertible into an aggregate of 625,000 shares ofcommon stock, (v) redeemable by the holder’s election commencing on the thirdanniversary of the date of issuance and ending immediately prior to the fourthanniversary at a price which equals a twelve percent annual increase over theoriginal issuance price in cash, subject to adjustment, (vi) redeemable at theCompany’s option commencing on the fourth anniversary of the date of issuanceand ending immediately prior to the fifth anniversary at a price which equals atwenty percent annual increase over the original issuance price in cash,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 regarding accretionof the preferred stock to its redemption value, see Note 4 in the “Notes toCondensed Consolidated Financial Statements” above.

 

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

### *** ***

The above 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:

 

###### *Impairmentof Long-Lived Assets and Long-Lived Assets to be Disposed of. *The Companyreviews 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

 

14

----

 

###### *carrying amount of the assets exceedsthe fair value of the assets. Assets to be disposed of by sale are reported atthe lower of the carrying amount or fair value less costs to sell.*

###### * *

###### *15*

###### **

######  

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

 

Accountingstandards adopted by the Company effective September 1, 2002 required that theCompany perform a transitional fair value based impairment test for goodwilland required that goodwill be valued at the lower of carrying value or fairvalue. For a summary of the impairment charge to goodwill taken by the Companyeffective September 1, 2002, see Note 3 in the “Notes to Condensed ConsolidatedFinancial Statements”.  The Companyreviews goodwill for impairment annually in the fourth quarter.  Significant management judgment is involvedin determining the fair value of assets. Future changes in management’sestimates could result in additional impairment charges to goodwill.

 

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

###### * *

*Accounts Receivable.*  The Company performs ongoing evaluations ofcustomers and adjusts credit limits based upon each customer’s payment historyand credit worthiness, as determined by credit information available at thattime.  The Company monitors collectionsand payments from customers and maintains allowances for doubtful accounts forthe inability of customers to make required payments.  If the financial condition of customers were to deteriorateresulting in an impairment of their ability to make payments, additionalallowances may be required.

 

*Accounting for Stock Options. *Statement ofFinancial Accounting Standards No. 123, Accounting for Stock-Based Compensation(“SFAS 123”), as amended by SFAS 148, allows entities to continue to apply theprovisions of Accounting Principles Board (“APB”) Opinion No. 25, Accountingfor Stock Issued to Employees, and provide pro forma income and pro formaearnings per share disclosures for stock-based awards as if the fair-valuebased method defined in SFAS 123 had been applied.  In accordance with APB Opinion No. 25, and relatedinterpretations, compensation expense would generally be recorded for fixed optiongrants only if, on the date of the grant, the current price of the underlyingstock exceeded the exercise price.  TheCompany has elected to continue to apply the provisions of APB Opinion No. 25and provide the pro forma disclosure provisions of SFAS 123.  Accordingly, no compensation expense hasbeen recorded for the issuance of options to employees or non-employeedirectors.

 

**QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Except for the outstanding debt and related variableinterest rates set forth in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Liquidity and Capital Resources” above,there are no material changes to the disclosure set forth in Item 7A of theCompany’s Annual Report on Form 10-K for the fiscal year ended August 31, 2003.  The Company has no market risk sensitiveinstruments entered into for trading purposes.

 

## **EFFECTIVENESS OF DISCLOSURE CONTROLSAND PROCEDURES**

##  

As of the end of the period covered by this report,the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedurespursuant to Exchange Act Rules 13a – 14 and 13a-15.  Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures are effective.  There were nosignificant changes in the Company’s internal controls that could significantlyaffect these controls subsequent to the date of their evaluation.

 

16

----

 

**PARTII****- OTHER INFORMATION**

 

### ***Item 1.  Legal Proceedings***

### *** ***

The Company encounters lawsuitsfrom time to time in the ordinary course of business and, at February 29, 2004,the Company and/or its affiliates were parties to several civil lawsuits. Summadoes not expect that the resolution of these lawsuits will have a materialadverse impact on future results of operations or financial position.   Certain lawsuits filed against the Companyfrom time to time contain claims not covered by insurance, or seek damages inexcess of policy limits, and such claims could be filed in the future.  The Company may file patent infringementand/or other types of lawsuits in the future which may result in materiallyincreased costs and other adverse consequences.  Any costs and/or losses that Summa may suffer from such lawsuits,and the effect such litigation may have upon the reputation and marketabilityof Summa’s products, could have a material adverse impact on the future resultsof operations, financial condition and/or prospects of the Company.

 

###### ***Item2.  Changes in Securities and Use ofProceeds***

###### * *

None.

 

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

#### *** ***

None.

 

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

 

At the Company’s Annual Meetingof Stockholders held on January 13, 2004, incumbent directors Michael L. Horstand William R. Zimmerman were re-elected to the Board of Directors of theCompany to serve as one Class of the Board of Directors for a three year termand until their successors are elected and qualified.  Messr. Horst received 3,954,284 votes in his favor, with 78,670votes withheld, and Messr. Zimmerman received 3,934,004 votes in his favor,with 98,950 votes withheld.  There wereno broker non-votes.  Incumbentdirectors David McConaughy, James R. Swartwout, Josh T. Barnes, Jack L. Wattsand Charles A. Tourville are members of two additional Classes of the Board ofDirectors, and their terms of office continued after the Annual Meeting.

 

***Item 5.   Other Information***

 

None.

 

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

 

**(a)    Exhibits**

 

2.1    Asset Purchase Agreement dated January 15,2004 between Central Valley Manufacturing, Inc., a newly-formed Californiacorporation and wholly-owned subsidiary of the Company (“Buyer”), and R.M. Wade& Co., an Oregon corporation (“Seller”), relating to the purchase ofcertain assets of the micro irrigation division of Seller by Buyer

10.1   Credit Agreement dated February 20, 2004between the Company and Wells Fargo Bank, National Association 

31.1  Section 302 Certification

32.1  Section 906 Certification

 

**(b)    Current Reports on Form 8-K**

 

Form 8-K dated December 23, 2003 regarding the Company’s results ofoperations and financial condition for the fiscal first quarter ended November30, 2003

 

17

----

 

**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized onApril 7, 2004.

 
| **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 |
|                                        |  |  |  |

 

18

----