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

**Washington,D.C. 20549**

** **

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** **

**FORM 10-Q**

 

ý                                    **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended**

 

**May 31, 2004**

 

o                                    **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition period from    N/A    to    N/A  **

 

**Commission file no. 1-7755**

 

**Summa Industries**

(Name ofregistrant as specified in its charter)

 

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

Yes  **ý**     No o

 

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

Yes o    No **ý**

 

The number of shares ofcommon stock outstanding as of June 25, 2004 was 3,965,687.

 

 

 

1

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**SummaIndustries**

 

**INDEX**

 

 

 
|                            |                                                                              |
|---------------------------------|-----------------------------------------------------------------------------------|
| PART I -  FINANCIAL INFORMATION |
|                            |                                                                              |
| Item 1.                         | Financial  Statements:                                                            |
|                            |                                                                              |
|                            | Condensed  Consolidated Balance Sheets   (unaudited) -                       |
|                            | May 31, 2003,  August 31, 2003 and May 31, 2004                                   |
|                            |                                                                              |
|                            | Condensed  Consolidated Statements of Operations (unaudited) -                    |
|                            | three  months and nine months ended May 31, 2003 and 2004                         |
|                            |                                                                              |
|                            | Consolidated  Statement of Stockholders’ Equity (unaudited) —           |
|                            | nine  months ended May 31, 2004                                                   |
|                            |                                                                              |
|                            | Condensed  Consolidated Statements of Cash Flows (unaudited) -                    |
|                            | nine  months ended May 31, 2003 and 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, Use of Proceeds and Issuer Purchases of Equity Securities |
| 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

(unaudited)

 
| ASSETS                                                      |   | **May 31,  2003** |       | **August 31,  2003** |   | **May 31,  2004** |   |
|-------------------------------------------------------------|--------|-------------------|------------|----------------------|--------|-------------------|--------|
| Current assets:                                        |   |              |       |                 |   |              |   |
| Cash and cash equivalents                                   |   | $                 | 52,000     |                 | $      | 380,000           |   | $ | 680,000 |   |
| Accounts receivable                                         |   | 17,222,000        |       | 15,729,000           |   | 19,895,000        |   |
| Inventories                                                 |   | 12,572,000        |       | 11,645,000           |   | 13,306,000        |   |
| Prepaid expenses and other                                  |   | 2,825,000         |       | 2,710,000            |   | 3,098,000         |   |
| Total current assets                                        |   | 32,671,000        |       | 30,464,000           |   | 36,979,000        |   |
| Property, plant and equipment                               |   | 55,199,000        |       | 55,731,000           |   | 60,859,000        |   |
| Less accumulated depreciation                               |   | (28,552,000       | )          | (29,619,000          | )      | (32,385,000       | )      |
| Net property, plant and equipment                           |   | 26,647,000        |       | 26,112,000           |   | 28,474,000        |   |
| Other assets                                                |   | 2,957,000         |       | 2,518,000            |   | 2,497,000         |   |
| Goodwill and other intangibles, net                         |   | 9,506,000         |       | 9,422,000            |   | 9,321,000         |   |
| Total assets                                                |   | $                 | 71,781,000 |                 | $      | 68,516,000        |   | $ | 77,271,000 |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                  |   |              |       |                 |   |              |   |
| Current liabilities:                                        |   |              |       |                 |   |              |   |
| Accounts payable                                            |   | $                 | 6,491,000  |                 | $      | 5,302,000         |   | $ | 7,365,000 |   |
| Accrued liabilities                                         |   | 5,680,000         |       | 5,015,000            |   | 5,769,000         |   |
| Current maturities of long-term debt                        |   | 4,133,000         |       | 3,896,000            |   | 1,957,000         |   |
| Total current liabilities                                   |   | 16,304,000        |       | 14,213,000           |   | 15,091,000        |   |
| Long-term debt, net of current maturities                   |   | 18,284,000        |       | 16,219,000           |   | 30,337,000        |   |
| Other long-term liabilities                                 |   | 2,635,000         |       | 2,601,000            |   | 2,577,000         |   |
| Total long-term liabilities                                 |   | 20,919,000        |       | 18,820,000           |   | 32,914,000        |   |
| Preferred stock,  par value  $.001, 5,000,000 shares   |   |              |       |                 |   |              |   |
| authorized; issued and outstanding:   5,000 at May 31, |   |              |       |                 |   |              |   |
| 2003 and August 31, 2003; none at May 31, 2004              |   | 5,919,000         |       | 6,103,000            |   | —            |   |
| Minority interest in subsidiary                             |   | —            |       | —               |   | 205,000           |   |
| Stockholders’ equity:                                  |   |              |       |                 |   |              |   |
| Common stock,  par value $.001;  10,000,000 shares     |   |              |       |                 |   |              |   |
| authorized; issued and outstanding:                         |   |              |       |                 |   |              |   |
| 4,249,117 at May 31, 2003, 4,246,103 at August 31,          |   |              |       |                 |   |              |   |
| 2003 and 3,934,702 at May 31, 2004                          |   | 17,600,000        |       | 17,577,000           |   | 15,035,000        |   |
| Retained earnings                                           |   | 11,039,000        |       | 11,803,000           |   | 14,026,000        |   |
| Total stockholders’ equity                             |   | 28,639,000        |       | 29,380,000           |   | 29,061,000        |   |
| Total liabilities and stockholders’ equity             |   | $                 | 71,781,000 |                 | $      | 68,516,000        |   | $ | 77,271,000 |   |

 

Seeaccompanying notes to condensed consolidated financial statements*.*

 

3

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**Summa Industries**

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

(unaudited)

 
|                                                 |   | **Three  months ended May 31** |       | **Nine  months ended May 31** |   |
|------------------------------------------------------|--------|--------------------------------|------------|-------------------------------|--------|
|                                                 |   | **2003**                       |       | **2004**                      |   | **2003** |   | **2004** |   |
| Net sales                                            |   | $                              | 28,342,000 |                          | $      | 33,160,000 |   | $ | 84,452,000 |   | $ | 85,631,000 |   |
| Cost of sales                                        |   | 21,339,000                     |       | 25,096,000                    |   | 63,296,000 |   | 64,907,000 |   |
| Gross profit                                         |   | 7,003,000                      |       | 8,064,000                     |   | 21,156,000 |   | 20,724,000 |   |
| Selling,  general, administrative and other expenses |   | 5,481,000                      |       | 5,609,000                     |   | 16,094,000 |   | 15,467,000 |   |
| Operating income                                     |   | 1,522,000                      |       | 2,455,000                     |   | 5,062,000 |   | 5,257,000 |   |
| Interest expense                                     |   | 389,000                        |       | 321,000                       |   | 1,167,000 |   | 1,210,000 |   |
| Income before  income taxes and cumulative effect    |   |                           |       |                          |   |   |   |   |   |
| of a change in  accounting principle                 |   | 1,133,000                      |       | 2,134,000                     |   | 3,895,000 |   | 4,047,000 |   |
| Provision for  income taxes                          |   | 365,000                        |       | 744,000                       |   | 1,285,000 |   | 1,374,000 |   |
| Income before  cumulative effect of a change         |   |                           |       |                          |   |   |   |   |   |
| in accounting  principle                             |   | 768,000                        |       | 1,390,000                     |   | 2,610,000 |   | 2,673,000 |   |
| Cumulative  effect of a change in accounting         |   |                           |       |                          |   |   |   |   |   |
| principle,  net  of tax                         |   | —                         |       | —                        |   | (22,343,000 | ) | — |   |
| Net income  (loss)                                   |   | $                              | 768,000    |                          | $      | 1,390,000 |   | $ | (19,733,000 | ) | $ | 2,673,000 |   |
| Preferred stock  accretion                           |   | $                              | 184,000    |                          | $      | 81,000 |   | $ | 553,000 |   | $ | 450,000 |   |
| Net income  (loss) available to common               |   |                           |       |                          |   |   |   |   |   |
| stockholders:                                        |   |                           |       |                          |   |   |   |   |   |
| Before  cumulative effect of a change                |   |                           |       |                          |   |   |   |   |   |
| in accounting  principle                             |   | $                              | 584,000    |                          | $      | 1,309,000 |   | $ | 2,057,000 |   | $ | 2,223,000  |   |
| After cumulative  effect of a change                 |   |                           |       |                          |   |   |   |   |   |
| in accounting  principle                             |   | $                              | 584,000    |                          | $      | 1,309,000 |   | $ | (20,286,000 | ) | $ | 2,223,000 |   |
| Earnings per  common share before cumulative         |   |                           |       |                          |   |   |   |   |   |
| effect of a  change in accounting principle:         |   |                           |       |                          |   |   |   |   |   |
| Basic                                                |   | $                              | .14        |                          | $      | .31 |   | $ | .47 |   | $ | .52 |   |
| Diluted                                              |   | $                              | .13        |                          | $      | .30 |   | $ | .46 |   | $ | .51 |   |
| Earnings (loss)  per common share after cumulative   |   |                           |       |                          |   |   |   |   |   |
| effect of a  change in accounting principle:         |   |                           |       |                          |   |   |   |   |   |
| Basic                                                |   | $                              | .14        |                          | $      | .31 |   | $ | (4.61 | ) | $ | .52 |   |
| Diluted                                              |   | $                              | .13        |                          | $      | .30 |   | $ | (4.61 | ) | $ | .51 |   |

See accompanying notes tocondensed consolidated financial statements.

4

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**SummaIndustries**

CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY

for the nine months ended May 31, 2004

(unaudited)

 
|                                    |   | **Common** |   | **Common**  |       | **Retained** |   |        |   |
|-----------------------------------------|--------|------------|--------|-------------|------------|--------------|--------|-------------|--------|
|                                    |   | **Shares** |   | **Stock**   |       | **Earnings** |   | **Total**   |   |
| Balance at August 31, 2003              |   | 4,246,103  |   | $           | 17,577,000 |         | $      | 11,803,000  |   | $ | 29,380,000 |   |
| Contribution to 401(k) plan             |   | 45,536     |   | 345,000     |       | —       |   | 345,000     |   |
| Exercise of stock options,              |   |       |   |        |       |         |   |        |   |
| including tax benefit of $179,000       |   | 99,788     |   | 586,000     |       | —       |   | 586,000     |   |
| Repurchase of common stock              |   | (456,725)  |   | (3,668,000) |       | —       |   | (3,668,000) |   |
| Net income                         |   | —     |   | —      |       | 2,673,000    |   | 2,673,000   |   |
| Preferred stock accretion               |   | —     |   | —      |       | (450,000)    |   | (450,000)   |   |
| Benefit related to issuance of minority |   |       |   |        |       |         |   |        |   |
| interest                                |   | —     |   | 195,000     |       | —       |   | 195,000     |   |
| Balance at May  31, 2004                |   | 3,934,702  |   | $           | 15,035,000 |         | $      | 14,026,000  |   | $ | 29,061,000 |   |

See accompanyingnotes to condensed consolidated financial statements

 

5

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**SummaIndustries**

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(unaudited)

 
|                                                                                      |   | **Nine  months ended**

**May 31  2003** |        | **Nine  months ended**

**May 31  2004** |   |
|-------------------------------------------------------------------------------------------|--------|------------------------------------------|-------------|------------------------------------------|--------|
| Operating  activities:                                                                    |   |                                     |        |                                     |   |
| Net income  (loss)                                                                        |   | $                                        | (19,733,000 | )                                        | $      | 2,673,000 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |   |                                     |        |                                     |   |
| Depreciation                                                                              |   | 3,611,000                                |        | 3,574,000                                |   |
| Amortization                                                                              |   | 182,000                                  |        | 181,000                                  |   |
| Cumulative  effect of a change in accounting principle, net of tax                        |   | 22,343,000                               |        | —                                   |   |
| (Gain) loss on  disposition of property, plant and equipment                              |   | 3,000                                    |        | (7,000                                   | )      |
| Net change in  assets and liabilities, net of effects of acquisitions:                    |   |                                     |        |                                     |   |
| Accounts  receivable                                                                      |   | 372,000                                  |        |  (4,166,000                         | )      |
| Inventories                                                                               |   |  (259,000                           | )           | (796,000                                 | )      |
| Prepaid expenses  and other assets                                                        |   | 322,000                                  |        | (323,000                                 | )      |
| Accounts payable                                                                          |   |  81,000                             |        | 2,063,000                                |   |
| Accrued  liabilities                                                                      |   | 97,000                                   |        | 953,000                                  |   |
| Total  adjustments                                                                        |   | 26,752,000                               |        | 1,479,000                                |   |
| Net cash  provided by operating activities                                                |   | 7,019,000                                |        | 4,152,000                                |   |
| Investing  activities:                                                                    |   |                                     |        |                                     |   |
| Acquisition of  business                                                             |   | —                                   |        | (1,903,000                               | )      |
| Purchases of  property and equipment                                                      |   | (3,462,000                               | )           | (4,510,000                               | )      |
| Proceeds from  sale of property and equipment                                             |   | 21,000                                   |        | 17,000                                   |   |
| Net cash (used  in) investing activities                                                  |   | (3,441,000                               | )           | (6,396,000                               | )      |
| Financing  activities:                                                |   |                                     |        |                                     |   |
| Net proceeds  from line of credit                                                         |   | 1,387,000                                |        | 9,818,000                                |   |
| Proceeds from  issuance of long-term debt                                                 |   | —                                   |        | 5,561,000                                |   |
| Payments on  long-term debt                                                               |   | (3,881,000                               | )           | (13,386,000                              | )      |
| Proceeds from  the exercise of stock options                                              |   | 278,000                                  |        | 586,000                                  |   |
| Purchase of  common stock                                                                 |   | (2,000,000                               | )           | (35,000                                  | )      |
| Net cash  provided by (used in) financing activities                                      |   | (4,216,000                               | )           | 2,544,000                                |   |
| Net increase  (decrease) in cash and cash equivalents                                     |   | (638,000                                 | )           | 300,000                                  |   |
| Cash and cash  equivalents, beginning of period                                           |   |  690,000                            |        | 380,000                                  |   |
| Cash and cash  equivalents, end of period                                                 |   | $                                        | 52,000      |                                     | $      | 680,000 |   |
|                                                                                           |        |                                          |             |                                          |        |  |  |  |

See accompanying notes tocondensed consolidated financial statements*.*

 

6

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**SummaIndustries**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

May 31, 2004

 

**1.****                                     ****Basis of 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 nine months ended May 31, 2004 are not necessarily indicative of theresults to be expected for the full year ending August 31, 2004.

 

**Recent accounting pronouncements**

 

The Company adopted Financial Accounting Standards Board (“FASB”)Statement of Financial Accounting Standards No. 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity”(“SFAS 150”), as of September 1, 2003. This Statement establishes standards for how an issuer classifies andmeasures certain financial instruments with characteristics of both liabilitiesand equity.  It requires that an issuerclassify a financial instrument that is within its scope as aliability (or an asset in some circumstances). In November 2003, FASB issued FASB Staff Position No. 150-3 whichdeferred the effective dates for applying certain provisions of SFAS 150related to mandatorily redeemable financial instruments of certain non-publicentities and certain mandatorily redeemable non-controlling interests forpublic and non-public companies. For public entities, SFAS 150 is effective formandatorily redeemable financial instruments entered into or modified after May31, 2003 and is effective for all other financial instruments as of the firstinterim period beginning after June 15, 2003. For mandatorily redeemablenon-controlling interests that would not have to be classified as liabilitiesby a subsidiary under the exception in paragraph 9 of SFAS 150, but would beclassified as liabilities by the parent, the classification and measurementprovisions of SFAS 150 are deferred indefinitely. The measurement provisions ofSFAS 150 are also deferred indefinitely for other mandatorily redeemablenon-controlling interests that were issued before November 4, 2003. For thoseinstruments, the measurement guidance for redeemable shares and non-controllinginterests in other literature shall apply during the deferral period.  The Company adopted the provisions of SFAS150 and such adoption did not have an impact on the Company’s financialposition, results of operations or cash flow.

 

In January 2003, FASB issued InterpretationNo. 46, Consolidation of Variable Interest Entities (“FIN 46”). In general, avariable interest entity is a corporation, partnership, trust or any otherlegal structure used for business purposes that either (a) does not have equityinvestors with voting rights, or (b) has equity investors that do not providesufficient financial resources for the entity to support its activities. FIN 46requires certain variable interest entities to be consolidated by the primarybeneficiary of the entity if the investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. The consolidation requirements of FIN 46 applyimmediately to variable interest entities created after January 31, 2003. TheCompany adopted the provisions of FIN 46 effective February 1, 2003 and suchadoption did not have an impact on its consolidated financial statements sinceit currently has no variable interest entities. In December 2003, the FASBissued FIN 46R with respect to variable interest entities created beforeJanuary 31, 2003, which among other things, revised the implementation date tothe first year or interim period ending after March 15, 2004, with theexception of Special Purpose Entities (“SPE”). The consolidation requirementsapply to all SPE s in the first year or interim period beginning after December15, 2003. The Company’s adoption of the provisions of FIN 46R did not have animpact on the Company’s financial position or results of operations.

 

7

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

 

                Inventories were as follows:

*                               *

|                 |   | **May 31,  2003** |       | **August 31,  2003** |   | **May 31,  2004** |   |
|----------------------|--------|-------------------|------------|----------------------|--------|-------------------|--------|
| Finished goods       |   | $                 | 4,944,000  |                 | $      | 4,266,000         |   | $ | 5,613,000 |   |
| Work in process      |   | 386,000           |       | 515,000              |   | 587,000           |   |
| Materials and  parts |   | 7,242,000         |       | 6,864,000            |   | 7,106,000         |   |
|                 |   | $                 | 12,572,000 |                 | $      | 11,645,000        |   | $ | 13,306,000 |   |

 

**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.  SFAS 142 alsorequires the Company to assess the recoverability of recorded goodwill at theadoption date.  Impairments of goodwillthat are identified as a result of the assessment, if any, are to be reportedas a cumulative 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 had 5,000 sharesof redeemable convertible preferred stock outstanding until its repurchase onMay 3, 2004, which provided for an accretion in its redemption price.  This accretion reduced the net incomeavailable to common stockholders used in the EPS calculation prior to thatdate.

 

Diluted EPS reflects the potential dilution that 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 745,000 common shares as of May 31, 2003 and 518,000 common sharesas of May 31, 2004 were excluded from the calculation of equivalent shares, asthey would have been anti-dilutive.  The5,000 shares of previously outstanding preferred stock, convertible into 625,000shares of common stock, were excluded from the calculation of equivalent sharesfor the three month and nine month periods ended 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.

 

8

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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 May 31** |    | **Nine  months ended May 31** |   |
|------------------------------------------------------------------------|--------|--------------------------------|---------|-------------------------------|--------|
|                                                                   |   | **2003**                       |    | **2004**                      |   | **2003** |   | **2004** |   |
| Numerators:                                                            |   |                           |    |                          |   |   |   |   |   |
|                                                                   |   |                           |    |                          |   |   |   |   |   |
| Before  cumulative effect of a change in accounting principle:         |   |                           |    |                          |   |   |   |   |   |
| Income                                                                 |   | $                              | 768,000 |                          | $      | 1,390,000 |   | $ | 2,610,000 |   | $ | 2,673,000 |   |
| Preferred stock  accretion                                             |   | (184,000                       | )       |  (81,000                 | )      |  (553,000 | ) |  (450,000 | ) |
| Income available  to common stockholders                               |   | $                              | 584,000 |                          | $      | 1,309,000 |   | $ | 2,057,000 |   | $ | 2,223,000 |   |
|                                                                   |   |                           |    |                          |   |   |   |   |   |
| After cumulative  effect of a change in accounting principle:          |   |                           |    |                          |   |   |   |   |   |
| Net income  (loss)                                                     |   | $                              | 768,000 |                          | $      | 1,390,000 |   | $ | (19,733,000 | ) | $ | 2,673,000 |   |
| Preferred stock  accretion                                             |   |  (184,000                 | )       |  (81,000                 | )      |  (553,000 | ) |  (450,000 | ) |
| Income (loss)  available to common stockholders                        |   | $                              | 584,000 |                          | $      | 1,309,000 |   | $ | (20,286,000 | ) | $ | 2,223,000 |   |
|                                                                   |   |                           |    |                          |   |   |   |   |   |
| Denominators:                                                          |   |                           |    |                          |   |   |   |   |   |
|                                                                   |   |                           |    |                          |   |   |   |   |   |
| Weighted average  shares outstanding —basic                       |   |  4,304,000                |    |  4,234,000               |   |  4,397,000 |   |  4,297,000 |   |
| Impact of common  shares assumed to be issued under stock option plans |   |  75,000                   |    |  76,000                  |   |  98,000 |   |  75,000 |   |
| Weighted average  shares outstanding — diluted                    |   |  4,379,000                |    |  4,310,000               |   |  4,495,000 |   |  4,372,000 |   |
|                                                                        |        |                                |         |                               |        |  |  |  |  |  |  |  |  |  |  |

 

**5.Stock-based compensation plans**

 

The Companyaccounts for stock options issued to employees and directors in accordance withthe recognition and measurement principles of Accounting Principles BoardOpinion No. 25 and Financial Interpretation No. 44. Consequently, nocompensation expense was recognized for the Company’s stock option plans. Thefollowing table illustrates the effect on net earnings and net earnings pershare if the Company had applied the fair value recognition provisions ofStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation”. The fair value estimate was computed using theBlack-Scholes option pricing model.

** **
|                                                           |   | **Three  months ended May 31** |      | **Nine  months ended May 31** |             |
|----------------------------------------------------------------|--------|--------------------------------|-----------|-------------------------------|------------------|
|                                                           |   | **2003**                       |      | **2004**                      |             | **2003** |   | **2004** |   |
| Before  cumulative effect of a change in accounting principle: |   |                           |      |                          |             |   |   |   |   |
| Income available  to stockholders                              |   | $                              | 584,000   |                          | $                | 1,309,000 |   | $ | 2,057,000 |   | $ | 2,223,000 |   |
| Pro forma impact  of expensing stock options                   |   |  20,000                   |      |  (57,000                 | )                |  (46,000 | ) |  (78,000 | ) |
| Pro forma income  available to common stockholders             |   | $                              | 604,000   |                          |  $1,252,000 |   |  $2,011,000 |   |  $2,145,000 |   |
|                                                           |   |                           |      |                          |             |   |   |   |   |
| Earnings per  share:                                           |   |                           |      |                          |             |   |   |   |   |
| As reported:                                                   |   |                           |      |                          |             |   |   |   |   |
| Basic                                                          |   | $                              |  .14 |                          | $                |  .31 |   | $ |  .47 |   | $ |  .52 |   |
| Diluted                                                        |   | $                              | .13       |                          | $                | .30 |   | $ | .46 |   | $ | .51 |   |
|                                                           |   |                           |      |                          |             |   |   |   |   |
| Pro forma:                                                     |   |                           |      |                          |             |   |   |   |   |
| Basic                                                          |   | $                              |  .14 |                          | $                |  .30 |   | $ |  .46 |   | $ |  .50 |   |
| Diluted                                                        |   | $                              | .14       |                          | $                | .29 |   | $ | .45 |   | $ | .49 |   |
|                                                                |        |                                |           |                               |                  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

9

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**6.             Supplementalcash flow information**

** **
|                                                                                  |   | **Nine  months ended May 31** |      |
|---------------------------------------------------------------------------------------|--------|-------------------------------|-----------|
|                                                                                  |   | **2003**                      |      | **2004** |   |
|                                                                                  |   |                          |      |   |   |
|                                                                                  |   |                          |      |   |   |
| Cash paid during  the period:                                                         |   |                          |      |   |   |
| Interest                                                                              |   | $                             | 1,100,000 |   | $ | 1,254,000 |   |
| Income taxes                                                                          |   | $                             | 1,812,000 |   | $ | 820,000 |   |
|                                                                                  |   |                          |      |   |   |
| 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 |   |
| Issuance of  subordinated debt for retirement of:                                     |   |                          |      |   |   |
| Preferred stock                                                                       |   | —                        |      | $ | 6,553,000 |   |
| Common stock                                                                          |   | —                        |      | $ | 3,633,000 |   |
|                                                                                       |        |                               |           |  |  |  |  |  |

 

**7.   Subordinated debt**

 

On May 3, 2004, the Company repurchased andretired all of its outstanding Preferred Stock, at its stated value, and452,856 shares of common stock, at an 8% discount from the stock price on theday of redemption, by issuance of new, unsecured, subordinated debt of$10,186,000 bearing interest at an initial rate of 12%. The first principalpayment on the subordinated debt was due in December of 2004. On May 4, 2004,the Company paid $6,191,000 of the subordinated debt using its bank line ofcredit and thereby reduced the interest rate on the subordinated debt to 8.0%.  Prior to May 31, 2004, the Company paid anadditional $1,000,000 of the subordinated debt further reducing the interestrate to 7.5%. The interest rate is reduced by one half of one percent for eachone million dollars in principal payments. Subsequent quarterly principal paymentsof $500,000 are due beginning September 5, 2005 and the final payment is dueSeptember 5, 2006.

 

**8.   Minority interest**

 

Inconnection with a recent plant acquisition, the Company sold approximately 5%of the stock of a subsidiary to the former owner of the plant.  The excessof the purchase price over the stock’s net book value has been recorded as again directly in the statement of stockholders’ equity due to the uncertaintyof its realization.  Under the terms of the stock sale agreement, thepurchaser has the right to acquire additional shares or put the shares back tothe Company at a price based upon a prescribed formula.

 

**9.   Segmentinformation**

 

Summa manufacturesdiverse plastic products in five reportable segments as described below:

 

***Optical Components.***  In itsOptical Components segment, Summa designs and manufactures plastic prismaticlenses, refractors and reflectors and other plastic products, which are used incommercial and industrial lighting fixtures, display, signage, architectural andother applications.

 

 ***Material Handling 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.

 

***Electrical Components.***  In itsElectrical Components segment, Summa designs and manufactures thermoplasticcoil forms or “bobbins” and other plastic products used principally in themanufacture of magnetic devices such as transformers, relays, switches, powersupplies and small electric motors.

 

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

 

***Miscellaneous Plastic 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.

 

10

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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** |   |
|-----------------------------------|--------|--------------------------------|------------|-------------------------------|--------|
|                              |   | **2003**                       |       | **2004**                      |   | **2003** |   | **2004** |   |
| External sales                    |   |                           |       |                          |   |   |   |   |   |
| Optical  components               |   | $                              | 13,949,000 |                          | $      | 14,694,000 |   | $ | 44,361,000 |   | $ | 41,000,000 |   |
| Material  handling components     |   | 5,999,000                      |       | 7,120,000                     |   | 18,473,000 |   | 19,524,000 |   |
| Electrical  components            |   | 3,121,000                      |       | 3,341,000                     |   | 9,368,000 |   | 9,061,000 |   |
| Irrigation  components            |   | 4,667,000                      |       | 7,916,000                     |   | 10,775,000 |   | 15,432,000 |   |
| Miscellaneous  plastic components |   | 606,000                        |       | 89,000                        |   | 1,475,000 |   | 614,000 |   |
| Other                             |   | —                         |       | —                        |   | — |   | — |   |
| Consolidated                      |   | $                              | 28,342,000 |                          | $      | 33,160,000 |   | $ | 84,452,000 |   | $ | 85,631,000 |   |
|                              |   |                           |       |                          |   |   |   |   |   |
| Inter-segment  sales              |   |                           |       |                          |   |   |   |   |   |
| Optical  components               |   | $                              | —     |                          | $      | 935,000 |   | $ | — |   | $ | 2,059,000 |   |
| Material  handling components     |   | —                         |       | —                        |   | — |   | — |   |
| Electrical  components            |   | —                         |       | —                        |   | — |   | — |   |
| Irrigation  components            |   | —                         |       | —                        |   | — |   | — |   |
| Miscellaneous  plastic components |   | 1,045,000                      |       | 233,000                       |   | 2,570,000 |   | 1,482,000 |   |
| Other                             |   | (1,045,000                     | )          | (1,168,000                    | )      | (2,570,000 | ) | (3,541,000 | ) |
| Consolidated                      |   | $                              | —     |                          | $      | — |   | $ | — |   | $ | — |   |
|                              |   |                           |       |                          |   |   |   |   |   |
| Total sales                       |   |                           |       |                          |   |   |   |   |   |
| Optical  components               |   | $                              | 13,949,000 |                          | $      | 15,629,000 |   | $ | 44,361,000 |   | $ | 43,059,000 |   |
| Material  handling components     |   | 5,999,000                      |       | 7,120,000                     |   | 18,473,000 |   | 19,524,000 |   |
| Electrical  components            |   | 3,121,000                      |       | 3,341,000                     |   | 9,368,000 |   | 9,061,000 |   |
| Irrigation  components            |   | 4,667,000                      |       | 7,916,000                     |   | 10,775,000 |   | 15,432,000 |   |
| Miscellaneous  plastic components |   | 1,651,000                      |       | 322,000                       |   | 4,045,000 |   | 2,096,000 |   |
| Other                             |   | (1,045,000                     | )          | (1,168,000                    | )      | (2,570,000 | ) | (3,541,000 | ) |
| Consolidated                      |   | $                              | 28,342,000 |                          | $      | 33,160,000 |   | $ | 84,452,000 |   | $ | 85,631,000 |   |
|                              |   |                           |       |                          |   |   |   |   |   |
| Operating income  (loss)          |   |                           |       |                          |   |   |   |   |   |
| Optical  components               |   | $                              | 1,686,000  |                          | $      | 2,382,000 |   | $ | 5,484,000 |   | $ | 5,652,000 |   |
| Material  handling components     |   | 1,000                          |       | 398,000                       |   | 1,047,000 |   | 909,000 |   |
| Electrical  components            |   | 124,000                        |       | (29,000                       | )      | 317,000 |   | 95,000 |   |
| Irrigation  components            |   | 587,000                        |       | 665,000                       |   | 669,000 |   | 999,000 |   |
| Miscellaneous  plastic components |   | (434,000                       | )          | (271,000                      | )      | (1,220,000 | ) | (825,000 | ) |
| Other                             |   | (442,000                       | )          | (690,000                      | )      | (1,235,000 | ) | (1,573,000 | ) |
| Consolidated                      |   | $                              | 1,522,000  |                          | $      | 2,455,000 |   | $ | 5,062,000 |   | $ | 5,257,000 |   |
|                              |   |                           |       |                          |   |   |   |   |   |

 
|                              |   | **May 31  2003** |       | **August 31  2003** |   | **May 31  2004** |   |
|-----------------------------------|--------|------------------|------------|---------------------|--------|------------------|--------|
| Assets                            |   |             |       |                |   |             |   |
| Optical  components               |   | $                | 29,427,000 |                | $      | 28,228,000       |   | $ | 29,472,000 |   |
| Material  handling components     |   | 16,447,000       |       | 18,335,000          |   | 18,447,000       |   |
| Electrical  components            |   | 7,480,000        |       | 6,999,000           |   | 9,655,000        |   |
| Irrigation  components            |   | 8,772,000        |       | 7,556,000           |   | 13,995,000       |   |
| Miscellaneous  plastic components |   | 3,691,000        |       | 2,941,000           |   | 45,000           |   |
| Other                             |   | 5,964,000        |       | 4,457,000           |   | 5,657,000        |   |
| Consolidated                      |   | $                | 71,781,000 |                | $      | 68,516,000       |   | $ | 77,271,000 |   |
|                                   |        |                  |            |                     |        |                  |        |  |  |  |  |  |

 

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.  Theimpairment charge described in Note 3 to these interim financial statements wascomprised of the following charges by segment: $5,953,000 in OpticalComponents, $7,851,000 in Electrical Components, $6,831,000 in IrrigationComponents and $1,708,000 in Miscellaneous Plastic Components.

 

11

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**MANAGEMENT’SDISCUSSION****AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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 yearended August 31, 2003.  Theforward-looking statements are made as of the date hereof, and the Companyassumes no obligation to update the forward-looking statements, or to updatethe reasons why actual results could differ materially from those projected inthe forward-looking statements.  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, 2003.

 

Summa manufacturesplastic products for diverse commercial and industrial markets. Through itsfive reportable segments, Summa designs and manufactures injection-molded andformed plastic optical components for OEM customers in the lighting industry;modular plastic conveyor belt and chain for the food processing industry;engineered plastic fittings, valves, filters and tubing for irrigation systemsused in agriculture, commercial landscape and other applications; moldedplastic coil forms (“bobbins”) for use in transformers, motors, relays andswitches; and other molded and extruded plastic components for diverseindustries.

 

***Results of Operations***

 

As announced in a press release on May 4,2004 and reported in a Current Report on Form 8-K dated May 6, 2004, theCompany repurchased all of its outstanding preferred stock, at its statedvalue, and 452,856 shares of its common stock, at an 8% discount from the stockprice on the redemption date, in a private transaction.  Consideration forthe repurchased stock was in the form of subordinated debt, a substantialportion of which was promptly prepaid using funds from the Company’s line ofcredit.  This transaction will have a favorable impact on earnings pershare for several reasons.  The preferred stock accretion charge, whichwas $185,000 per quarter prior to the repurchase, has been eliminated. The number of outstanding common shares has been reduced by approximately10%.  The offsetting after-tax cost ofthe debt at May 31, 2004 is approximately $85,000, per quarter.  Management views this transaction as afavorable development.

 

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 nine month periods ended May 31,2003 and 2004, and the Company’s effective income tax rate during thoseperiods:

 
|                                                                         |   | **Three  months ended May 31** |   | **Nine  months ended May 31** |   |
|------------------------------------------------------------------------------|--------|--------------------------------|--------|-------------------------------|--------|
|                                                                         |   | **2003**                       |   | **2004**                      |   | **2003** |   | **2004** |   |
| Net sales                                                                    |   | 100.0                          | %      | 100.0                         | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                                                |   | 75.3                           | %      | 75.7                          | %      | 74.9 | % | 75.8 | % |
| Gross profit                                                                 |   | 24.7                           | %      | 24.3                          | %      | 25.1 | % | 24.2 | % |
| S,G & A and  other expenses, net                                         |   | 19.3                           | %      | 16.9                          | %      | 19.1 | % | 18.1 | % |
| Operating income                                                             |   | 5.4                            | %      | 7.4                           | %      | 6.0 | % | 6.1 | % |
| Interest  expense, net                                                       |   | 1.4                            | %      | 1.0                           | %      | 1.4 | % | 1.4 | % |
| Income before  tax and cumulative effect of a change in accounting principle |   | 4.0                            | %      | 6.4                           | %      | 4.6 | % | 4.7 | % |
| Provision for  income taxes                                                  |   | 1.3                            | %      | 2.2                           | %      | 1.5 | % | 1.6 | % |
| Income before  cumulative effect of a change in accounting principle         |   | 2.7                            | %      | 4.2                           | %      | 3.1 | % | 3.1 | % |
|                                                                         |   |                           |   |                          |   |   |   |   |   |
| Effective tax  rate                                                          |   | 32.2                           | %      | 34.9                          | %      | 33.0 | % | 34.0 | % |

 

 

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**Quarter ended May 31, 2004compared to the quarter ended May 31, 2003**

 

Salesfor the third quarter ended May 31, 2004 increased $4,818,000, or 17%, primarilydue to the contribution of sales of approximately $2 million  from recently acquired operations in theIrrigation Components segment, an apparent broad strengthening of the generaleconomy and price increases on selected products and services, partially offsetby generally lower selling prices due to competition.  Same business sales in the third quarter were about 10% higherthan in the third quarter of the prior fiscal year.  Sales increased 5% in the Optical Components segment, primarilydue to strengthening in the commercial/industrial lighting sector and therecovery of business as a result of the favorable settlement of patentlitigation, partially offset by the loss of some contract manufacturing work tocompetitors due to price; increased 19% in the Material Handling Componentssegment, primarily due to sales being lower in the prior year when a plantrelocation disrupted business, the success of new products and increasedpurchases prior to the effective date of announced price increases; increased7% in the Electrical Components segment, despite the loss of business from amajor customer which transferred its operations to China, due to increasedpurchases from a wide cross-section of customers; increased 70% in theIrrigation Components segment, primarily due to the inclusion of sales ofapproximately $2 million from recently acquired operations, recaptured marketshare from certain major customers and improved market conditions; anddecreased 85% in the Miscellaneous Plastic Components segment.   As of May 31, 2004, the sales of theMiscellaneous Plastic Components segment were consolidated with those of theIrrigation Components segment, and will not be separately reported in thefuture.  The Company has substantiallycompleted a plan to phase out the Miscellaneous Plastics Components segment,the assets and operations of which have been transferred to the IrrigationComponents segment.

 

Gross profit for the thirdquarter increased $1,061,000, or 15%, from the comparable prior year period,primarily due to higher sales.  Grossmargin decreased from 24.7% to 24.3%, primarily due to costs related to windingdown Miscellaneous Plastic Components operations, unfavorable business mix andgenerally lower selling prices due to competitive price pressure.

 

Operating expenses for thethird quarter increased $128,000, or 2%, from the comparable prior year period,due to higher variable selling expenses related to higher sales and theinclusion of operating expenses of newly acquired operations, substantiallyoffset by non-recurring facility consolidation expenses included in the thirdquarter of fiscal 2003 and management cost reduction initiatives.  As a percent of sales, operating expensesdecreased from 19.3% to 16.9%, due to the significant increase in sales.

 

Operating income for thethird quarter was $2,455,000, which was $933,000, or 61%, higher than in thecomparable prior year period.  Bysegment, operating income increased $696,000 in the Optical Components segment,due primarily to higher sales; increased $397,000 in the Material HandlingComponents segment, primarily due to inefficiencies related to a plantconsolidation in the prior year third quarter; decreased $153,000 in theElectrical Components segment, primarily due to expenses related to costs of anew facility expansion and relocation; increased $78,000 in the IrrigationComponents segment, primarily due to the effects of higher sales volumepartially offset by lower margins; and the operating loss was $163,000 less inthe Miscellaneous Plastic Components segment, primarily due to the wind down ofoperations. Operating margin for the quarter increased from 5.4% in the thirdquarter of fiscal 2003 to 7.4%, due to the factors discussed above.

 

Net interest expense forthe third quarter ended May 31, 2004 decreased $68,000 from the prior yearthird quarter, due to lower interest rates on lower average debt levels.  Debt was significantly increased near theend of the quarter as a result of the $10.2 million repurchase of preferred andcommon shares discussed above and interest expense is expected to beapproximately $300,000 for the fourth quarter which ends August 31, 2004.

 

**Nine months ended May 31, 2004compared to nine months ended May 31, 2003**

 

Salesfor the nine months ended May 31, 2004 increased $1,179,000, or 1%, compared tothe same period in the prior year, primarily due to the inclusion of sales ofapproximately $2.5 million from recently acquired operations, partially offsetby weak market conditions in the first and second quarters.  Same business unit sales in the perioddecreased approximately 1%, compared to the first nine months of fiscal2003.  Sales decreased 8% 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; increased  6% in the Material Handling Componentssegment, primarily due to strong export sales and sales of new products, partiallyoffset by increased competition in traditional domestic markets; decreased 3%in the Electrical Components segment, primarily due to the loss of businessfrom a major customer which transferred its operations to China and competitiveprice pressure; increased 43% in the Irrigation Components segment, primarilydue to the inclusion of sales of recently acquired operations, recapturedmarket share from certain major 

 

13

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customers,and improved market conditions; and decreased 58% in the Miscellaneous PlasticComponents segment.  As of May 31, 2004,the sales of the Miscellaneous Plastic Components segment were consolidatedwith those of the Irrigation Components segment, and will not be separately reportedin the future.  The Company has substantiallycompleted a plan to phase out the Miscellaneous Plastics Components segment,the assets and operations of which have been transferred to the IrrigationComponents segment.

 

Gross profit for the ninemonths ended May 31, 2004 decreased $432,000, or 2%, from the comparable prioryear period, primarily due to unfavorable business mix and generally lowerselling prices due to competition. Gross margin decreased from 25.1% to 24.2%, primarily due to inefficienciesrelated to a plant consolidation, generally lower selling prices due tocompetitive price pressure and costs related to winding down MiscellaneousPlastic Components operations.

 

Operatingexpenses for the nine months ended May 31, 2004 decreased $627,000, or 4%, fromthe comparable prior year period, despite the inclusion of operating expensesof newly acquired operations, primarily due to non-recurring facilityconsolidation expenses included in the prior year period and management costreduction initiatives.  As a percent ofsales, operating expenses decreased from 19.1% to 18.1%.

 

Operatingincome for the nine months ended May 31, 2004 was $5,257,000, which was$195,000, or 4%, higher than in the comparable prior year period.  By segment, operating income increased$168,000 in the Optical Components segment, due primarily to favorable salesmix and improved operating efficiencies, partially offset by lower volumes andlower prices on selected products; decreased $138,000 in the Material HandlingComponents segment, primarily due to inefficiencies related to a plantconsolidation; decreased $222,000 in the Electrical Components segment, primarily due to expenses related tostartup of a new facility and lower volume; increased $330,000 in the IrrigationComponents segment, primarily due to the effects of higher sales volume; andthe operating loss was $395,000 lower in the Miscellaneous Plastic Componentssegment, primarily due to the windup of the operation.  Operating margin increased from 6.0% in thenine months ended May 31, 2003 to 6.1% in the nine months ended May 31, 2004,due to the factors discussed above.

 

Net interest expense forthe nine months ended May 31, 2004 increased $43,000 from the comparable prioryear period due to term loan break-up fees and the write-off of unamortized bankfees resulting in a non-recurring charge of $266,000, related to refinancing ofbank debt, substantially offset by lower interest rates.

 

The Company’s backlog ofunfilled orders, believed to be firm, was $7,808,000 at May 31, 2003,$7,892,000 at August 31, 2003 and $8,039,000 at May 31, 2004.  Because the time between entering an orderand shipping the product and recording a sale is typically shorter than onemonth, backlog levels are not a reliable indicator of future sales volume.

 

***Liquidity and Capital Resources***

 

*WorkingCapital. *The Company’s working capital was $16,367,000 atMay 31, 2003; $16,251,000 at August 31, 2003 and $21,888,000 at May 31,2004.  Working capital at May 31, 2004 was $5,637,000 greater than atAugust 31, 2003, primarily due to a seasonal increase in accounts receivable,the refinancing of a term loan which reduced the current portion of term debt,an increase in inventory in anticipation of increased sales, and a bulkpurchase of inventory as part of an asset acquisition in the IrrigationComponents segment.  Working capital at May 31, 2004 was $5,521,000greater than at May 31, 2003, primarily due to higher accounts receivable, therefinancing of a term loan which reduced the current portion of term debt, anincrease in inventory in anticipation of increased sales, and a bulk purchaseof inventory as part of an asset acquisition, partially offset by an increasein accounts payable.

 

Summaryof the Company’s debt at May 31, 2004:

 
| **Description of Debt**      | ** ** | **Balance** | ** ** | **Weighted  Average**

**Interest**

**Rate** | ** ** | **Additional  Availability** | ** ** | **Fiscal  Year Due** |   |
|------------------------------|------------|-------------|------------|-----------------------------------------------|------------|------------------------------|------------|----------------------|--------|
|                         |
|                         |
|                         |
|                         |       |        |       |                                          |       |                         |       | **2004**             |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   |
| Revolving line  of credit    |       | $           | 14,575,000 |                                          | 2.80       | %                            | $          | 4,751,000            |   | $ | — |   | $ | — |   | $ | — |   | $ | 14,575,000 |   | $ | — |   |
| Bank term loan               |       | 4,762,000   |       | 4.70                                          | %          | —                       |       | 225,000              |   | 926,000 |   | 971,000 |   | 1,019,000 |   | 1,621,000 |   |
| Real estate and  other loans |       | 9,962,000   |       | 3.80                                          | %          | 3,438,000                    |       | 269,000              |   | 1,047,000 |   | 3,951,000 |   | 3,558,000 |   | 1,137,000 |   |
| Subordinated  debt           |       | 2,995,000   |       | 7.50                                          | %          | —                       |       | —               |   | — |   | 2,000,000 |   | 995,000 |   | — |   |
| Total debt                   |       | $           | 32,294,000 |                                          | 3.80       | %                            | $          | 8,189,000            |   | $ | 494,000 |   | $ | 1,973,000 |   | $ | 6,922,000 |   | $ | 20,147,000 |   | $ | 2,758,000 |   |

 

 

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Theinterest rate on the bank term loan is fixed for five 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.  The interest rateon the subordinated debt is scheduled to decrease as the outstanding balance isreduced.

 

InJune 2003, the Company announced a plan to repurchase up to $2,000,000 of itscommon stock with no time limit (the “2003 Buy Back”).  As of May 31, 2004, the status of the 2003Buy Back was as follows:

 

|                 |   | **Shares**      |   | **Average**         |   | **Repurchase** |   |
|----------------------|--------|-----------------|--------|---------------------|--------|----------------|--------|
|                 |   | **repurchased** |   | **cost per  share** |   | **cost**       |   |
| Prior to March  2004 |   | 7,197           |   | $                   | 7.44   |           | $      | 55,000 |   |
| March 2004           |   | 500             |   | $                   | 9.29   |           | 5,000  |   |
| April 2004           |   | 1,000           |   | $                   | 8.82   |           | 9,000  |   |
| May 2004             |   | 472             |   | $                   | 9.04   |           | 4,000  |   |
| Total                |   | 9,169           |   | $                   | 7.96   |           | $      | 73,000 |   |

 

                                The cost per share includescommissions where applicable.

 

In May 2004, the Company repurchased all ofits outstanding preferred stock for its book value of $6,553,000, and 452,856shares of its common stock for $3,633,000, or $8.02 per share, in a privatetransaction (the “Block Repurchase”).  The Company paid for the BlockRepurchase with $10,186,000 of subordinated debt.  Subsequently, asubstantial portion of the subordinated debt was prepaid using the Company’sline of credit.  In conjunction with the Block Repurchase, the 2003 BuyBack was cancelled.

 

*Sources and Uses of Funds. *Net cash provided by operating activities in the firstnine months of fiscal 2004 was $4,152,000, $2,867,000 less than in the firstnine months of fiscal 2003, primarily due to increases in accounts receivablesand inventory partially offset by increases in accounts payable and accruedliabilities.  Net cash used in investingactivities was $6,396,000 in the first nine months of fiscal 2004, $2,995,000more than in the first nine months of fiscal 2003, primarily due to a businessacquisition and increased purchases of property and equipment.  Net cash of $2,544,000 was used in financingactivities in the nine months ended May 31, 2004, primarily from additionalborrowing, versus $4,216,000 used in the comparable prior year period for debtpaydown and stock repurchase.

 

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 by acquisition.  Inthe event an acquisition plan is adopted which requires funds exceeding theavailability described above, an alternate source of funds to accomplish theacquisition would have to be developed. The Company has 10,000,000 shares of common stock authorized, of which3,934,702 shares were outstanding at May 31, 2004 and 5,000,000 shares of“blank check” preferred stock authorized, of which none was outstanding at May31, 2004.  The Company could issueadditional shares of common or preferred stock or enter into new or revisedborrowing arrangements to raise funds.

### *** ***

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

 

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

 

*Future lease payments.* The Company leases offices and manufacturing facilities and certainequipment under non-cancelable operating leases.  Future payments under these leases at May 31, 2004 areapproximately as follows:

 

| **Fiscal Year**      |   | **Amount** |      |
|----------------------|--------|------------|-----------|
| 2004                 |   | $          | 747,000   |   |
| 2005                 |   | $          | 1,213,000 |   |
| 2006                 |   | $          | 993,000   |   |
| 2007                 |   | $          | 723,000   |   |
| 2008                 |   | $          | 670,000   |   |
| 2009 and  thereafter |   | $          | 494,000   |   |
|                      |        |            |           |  |  |  |  |  |

 

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

 

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### *** ***

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

 

The above discussion and analysis of the Company’sfinancial condition and results of operations are based upon the consolidatedfinancial statements of the Company, which have been prepared in accordancewith accounting principles generally accepted in the United States of America.The preparation of such financial statements requires management to makeestimates and assumptions in applying certain critical accounting policies.Certain accounting estimates are particularly sensitive because of theirsignificance to the Company’s consolidated financial statements and because ofthe possibility that future events affecting the estimates could differmarkedly from current expectations. The Company believes that the following aresome of the more critical judgment areas in the application of its accountingpolicies that affect the Company’s financial statements:

 

###### *Impairment of Long-LivedAssets 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 carrying amount of the assetsexceeds the fair value of the assets. Assets to be disposed of by sale arereported at the lower of the carrying amount or fair value less costs to sell.

 

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

 

Accounting standardsadopted by the Company effective September 1, 2002 required that the Companyperform a transitional fair value based impairment test for goodwill andrequired that goodwill be valued at the lower of carrying value or fair value.For a summary of the impairment charge to goodwill taken by the Company effectiveSeptember 1, 2002, see Note 3 in the “Notes to Condensed Consolidated FinancialStatements”.  The Company reviewsgoodwill 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.

 

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

 

*Accounts Receivable.*  The Company performs ongoing evaluations of customers and adjustscredit limits based upon each customer’s payment history and credit worthiness,as determined by credit information available at that time.  The Company monitors collections andpayments from customers and maintains allowances for doubtful accounts for theinability 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.

 

*Accountingfor Stock Options. *Statement of Financial Accounting StandardsNo. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as amended bySFAS 148, allows entities to continue to apply the provisions of AccountingPrinciples Board (“APB”) Opinion No. 25, Accounting for Stock Issued toEmployees, and provide pro forma income and pro forma earnings per sharedisclosures for stock-based awards as if the fair-value based method defined inSFAS 123 had been applied.  Inaccordance with APB Opinion No. 25, and related interpretations, compensationexpense would generally be recorded for fixed option grants only if, on thedate of the grant, the current price of the underlying stock exceeded theexercise price.  The Company has electedto continue to apply the provisions of APB Opinion No. 25 and provide the proforma disclosure provisions of SFAS 123. Accordingly, no compensation expense has been recorded for the issuanceof options to employees or non-employee directors.

 

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**QUANTITATIVE****AND QUALITATIVE DISCLOSURES ABOUT 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 risksensitive instruments entered into for trading purposes.

 

**EFFECTIVENESS OF DISCLOSURE CONTROLS AND 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.

 

**PART II****- OTHER INFORMATION**

 

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

 

The Company encounterslawsuits from time to time in the ordinary course of business and, at May 31,2004, the Company and/or its affiliates were parties to several civil lawsuits.Summa does not expect that the resolution of these lawsuits will have amaterial adverse impact on future results of operations or financialposition.   Certain lawsuits filedagainst the Company from time to time contain claims not covered by insurance,or seek damages in excess of policy limits, and such claims could be filed inthe future.  The Company may file patentinfringement 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, Use ofProceeds and Issuer Purchases of Equity Securities***

 

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 ofMay 31, 2004, the status of the 2003 Buy Back was as follows:

 

 

|                 |   | **Shares**      |   | **Average**         |   | **Repurchase** |   |
|----------------------|--------|-----------------|--------|---------------------|--------|----------------|--------|
|                 |   | **repurchased** |   | **cost per  share** |   | **cost**       |   |
| Prior to March  2004 |   | 7,197           |   | $                   | 7.44   |           | $      | 55,000 |   |
| March 2004           |   | 500             |   | $                   | 9.29   |           | 5,000  |   |
| April 2004           |   | 1,000           |   | $                   | 8.82   |           | 9,000  |   |
| May 2004             |   | 472             |   | $                   | 9.04   |           | 4,000  |   |
| Total                |   | 9,169           |   | $                   | 7.96   |           | $      | 73,000 |   |

 

                                The cost per share includescommissions where applicable.

 

In May 2004, the Company repurchased all ofits outstanding preferred stock for its book value of $6,553,000, and 452,856shares of its common stock for $3,633,000, or $8.02 per share, in a privatetransaction (the “Block Repurchase”).  The Company paid for the BlockRepurchase with $10,185,000 of subordinated debt.  Subsequently, asubstantial portion of the subordinated debt was prepaid using the Company’s lineof credit.  In conjunction with the Block Repurchase, the 2003 Buy Backwas cancelled.

 

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#### ***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**

 
| 3.1  |   | Certificate of Amendment of Certificate of  Designations for Series A Preferred Stock* |
|------|--------|----------------------------------------------------------------------------------------|
| 10.1 |   | Preferred Stock and Common Stock Repurchase  Agreement*                                |
| 31.1 |   | Section 302 Certification                                                              |
| 32.1 |   | Section 906 Certification                                                              |

____________

*Incorporated by reference from the Company’s CurrentReport on Form 8-K dated May 6, 2004

 

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

 

Form 8-K dated March 23, 2004 regarding the Company’sresults of operations and financial condition for the second fiscal quarterended February 29, 2004

 

**               **Form 8-K dated May 6, 2004 regarding theCompany’s repurchase of its preferred stock and common stock.

 

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized on July 8, 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 |

 

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