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

**Washington,D.C. 20549**

 

**FORM 10-Q**

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

 

**For thequarterly period ended**

 

**February 28,2005**

 
| **o** | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|-------|------------|----------------------------------------------------------------------------------------------------|

 

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

 

**Commissionfile no. 1-7755**

 

**Summa Industries**

(Name ofregistrant as specified in its charter)

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

 

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

(Address ofprinciple executive offices, including zip code)

 

Registrant’stelephone number:  **(310) 792-7024**

 

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

Yes  **ý **  No  o

 

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

Yes  **o **  No  ý

 

The number of shares ofcommon stock outstanding as of March 22, 2005 was 4,002,022.

 

** **

----

 

**SummaIndustries**

 

**INDEX**

 

 
| PART I - FINANCIAL  INFORMATION |                                                                                                                                         |
|--------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------|
|                                 |                                                                                                                                         |   |
| Item 1.                              | Financial Statements:                                                                                                                        |   |
|                                 |                                                                                                                                         |   |
|                                 | Condensed  Consolidated Balance Sheets (unaudited) - February 29, 2004,  August 31, 2004 and February 28, 2005                |   |
|                                 |                                                                                                                                         |   |
|                                 | Condensed  Consolidated Income Statements (unaudited) - three months and six months  ended February 29, 2004 and February 28, 2005 |   |
|                                 |                                                                                                                                         |   |
|                                 | Condensed  Consolidated Statements of Cash Flows (unaudited) - six months ended  February 29, 2004 and February 28, 2005           |   |
|                                 |                                                                                                                                         |   |
|                                 | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                            |   |
|                                 |                                                                                                                                         |   |
| Item  2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                  |   |
|                                 |                                                                                                                                         |   |
| Item  3.                             | Quantitative  and Qualitative Disclosure about Market Risk                                                                                   |   |
|                                 |                                                                                                                                         |   |
| Item  4.                             | Controls  and Procedures                                                                                                                     |   |
|                                 |                                                                                                                                         |   |
| PART II - OTHER  INFORMATION    |                                                                                                                                         |
|                                 |                                                                                                                                         |   |
| Item 1.                              | Legal Proceedings                                                                                                                            |   |
| Item  2.                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                 |   |
| Item 3.                              | Defaults upon  Senior Securities                                                                                                             |   |
| Item  4.                             | Submission  of Matters to a Vote of Security Holders                                                                                         |   |
| Item 5.                              | Other Information                                                                                                                            |   |
| Item  6.                             | Exhibits                                                                                                                                     |   |
|                                 |                                                                                                                                         |   |
| Signature Page                       |                                                                                                                                         |

 

2

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**SummaIndustries**

CONDENSEDCONSOLIDATED BALANCE SHEETS

(unaudited)

 
| **ASSETS**                                                                                                                                                                                             | ** ** | **February 29, 2004** | ** ** | **August 31, 2004** | ** ** | **February 28, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
| Current assets:                                                                                                                                                                                        |       |                       |       |                     |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                                             |       | $                          | 147,000    |                     | $          | 1,248,000                  |       | $ | 930,000 |   |
| Accounts  receivable                                                                                                                                                                                   |       | 17,669,000                 |       | 18,227,000               |       | 19,251,000                 |       |
| Inventories                                                                                                                                                                                            |       | 13,828,000                 |       | 14,749,000               |       | 15,213,000                 |       |
| Prepaid expenses  and other                                                                                                                                                                            |       | 3,108,000                  |       | 3,782,000                |       | 4,188,000                  |       |
| Total current  assets                                                                                                                                                                                  |       | 34,752,000                 |       | 38,006,000               |       | 39,582,000                 |       |
| Property, plant  and equipment                                                                                                                                                                         |       | 59,351,000                 |       | 63,842,000               |       | 67,483,000                 |       |
| Less accumulated  depreciation                                                                                                                                                                         |       | (31,384,000                | )          | (32,789,000              | )          | (34,638,000                | )          |
| Net property,  plant and equipment                                                                                                                                                                     |       | 27,967,000                 |       | 31,053,000               |       | 32,845,000                 |       |
| Other assets                                                                                                                                                                                           |       | 2,518,000                  |       | 1,804,000                |       | 1,852,000                  |       |
| Goodwill and  other intangibles, net                                                                                                                                                                   |       | 9,378,000                  |       | 9,254,000                |       | 9,117,000                  |       |
| Total assets                                                                                                                                                                                           |       | $                          | 74,615,000 |                     | $          | 80,117,000                 |       | $ | 83,396,000 |   |
| Current  liabilities:                                                                                                                                                                                  |       |                       |       |                     |       |                       |       |
| Accounts payable                                                                                                                                                                                       |       | $                          | 5,871,000  |                     | $          | 9,088,000                  |       | $ | 8,793,000 |   |
| Accrued  liabilities                                                                                                                                                                                   |       | 4,211,000                  |       | 7,429,000                |       | 5,450,000                  |       |
| Current  maturities of long-term debt                                                                                                                                                                  |       | 2,110,000                  |       | 2,195,000                |       | 4,955,000                  |       |
| Total current  liabilities                                                                                                                                                                             |       | 12,192,000                 |       | 18,712,000               |       | 19,198,000                 |       |
| Long-term debt,  net of current maturities                                                                                                                                                             |       | 21,818,000                 |       | 28,663,000               |       | 30,603,000                 |       |
| Other long-term  liabilities                                                                                                                                                                           |       | 2,585,000                  |       | 2,508,000                |       | 2,492,000                  |       |
| Total long-term  liabilities                                                                                                                                                                           |       | 24,403,000                 |       | 31,171,000               |       | 33,095,000                 |       |
| Mandatorily  redeemable convertible preferred stock, par value $.001, 5,000 shares  authorized, issued and outstanding                                                                                 |       | 6,472,000                  |       | —                   |       | —                     |       |
| Minority  interest in subsidiary                                                                                                                                                                       |       | 205,000                    |       | 205,000                  |       | 172,000                    |       |
| Stockholders’  equity:                                                                                                                                                                            |       |                       |       |                     |       |                       |       |
| Common stock,  par value $.001; 10,000,000 shares authorized; issued and outstanding:  4,378,030 at February 29, 2004, 3,974,187 at August 31, 2004 and  4,002,022 at February 28, 2005 |       | 18,626,000                 |       | 15,305,000               |       | 15,561,000                 |       |
| Retained  earnings                                                                                                                                                                                     |       | 12,717,000                 |       | 14,724,000               |       | 15,370,000                 |       |
| Total  stockholders’ equity                                                                                                                                                                       |       | 31,343,000                 |       | 30,029,000               |       | 30,931,000                 |       |
| Total  liabilities, mandatorily redeemable preferred stock and stockholders’ equity                                                                                                               |       | $                          | 74,615,000 |                     | $          | 80,117,000                 |       | $ | 83,396,000 |   |

 

See accompanying notes tocondensed consolidated financial statements*.*

 

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**SummaIndustries**

CONDENSEDCONSOLIDATED INCOME STATEMENTS

(unaudited)

 
| ** **                                           | ** ** | **Three months ended**     | ** ** | **Six months ended**       | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                           | ** ** | **February 29  2004** | ** ** | **February 28  2005** | ** ** | **February 29  2004** | ** ** | **February 28  2005** | ** ** |
| Net sales                                            |       | $                          | 26,545,000 |                       | $          | 29,197,000 |   | $ | 52,471,000 |   | $ | 57,435,000 |   |
| Cost of sales                                        |       | 20,256,000                 |       | 23,410,000                 |       | 39,811,000 |   | 45,203,000 |   |
| Gross profit                                         |       | 6,289,000                  |       | 5,787,000                  |       | 12,660,000 |   | 12,232,000 |   |
| Selling,  general, administrative and other expenses |       | 5,038,000                  |       | 4,929,000                  |       | 9,858,000 |   | 10,047,000 |   |
| Operating income                                     |       | 1,251,000                  |       | 858,000                    |       | 2,802,000 |   | 2,185,000 |   |
| Interest expense                                     |       | 584,000                    |       | 471,000                    |       | 889,000 |   | 838,000 |   |
| Income before  income taxes and minority interest    |       | 667,000                    |       | 387,000                    |       | 1,913,000 |   | 1,347,000 |   |
| Provision for  income taxes                          |       | (214,000                   | )          | (144,000                   | )          | (630,000 | ) | (494,000 | ) |
| Minority  interest in net loss of subsidiary         |       | —                     |       | 33,000                     |       | — |   | 33,000 |   |
| Net income                                           |       | $                          | 453,000    |                       | $          | 276,000 |   | $ | 1,283,000 |   | $ | 886,000 |   |
| Preferred stock  accretion                           |       | $                          | 185,000    |                       | —     |   | $ | 369,000 |   | — |   |
| Net income  available to common stockholders         |       | $                          | 268,000    |                       | $          | 276,000 |   | $ | 914,000 |   | $ | 886,000 |   |
| Earnings per  common share                           |       |                       |       |                       |       |   |   |   |   |
| Basic                                                |       | $                          | .06        |                       | $          | .07 |   | $ | .21 |   | $ | .22 |   |
| Diluted                                              |       | $                          | .06        |                       | $          | .07 |   | $ | .21 |   | $ | .22 |   |
| Weighted average  common shares outstanding:         |       |                       |       |                       |       |   |   |   |   |
| Basic                                                |       | 4,370,000                  |       | 4,002,000                  |       | 4,328,000 |   | 3,993,000 |   |
| Diluted                                              |       | 4,450,000                  |       | 4,079,000                  |       | 4,403,000 |   | 4,071,000 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

4

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** **

**SummaIndustries**

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 
|                                                                               |   | **Six months ended  February  29, 2004** |      | **Six months ended  February 28, 2005** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------------------|-----------|----------------------------------------------|--------|
| Operating  activities:                                                             |   |                                          |      |                                         |   |
| Net income                                                                         |   | $                                             | 1,283,000 |                                         | $      | 886,000 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                                          |      |                                         |   |
| Depreciation                                                                       |   | 2,288,000                                     |      | 2,566,000                                    |   |
| Amortization                                                                       |   | 124,000                                       |      | 137,000                                      |   |
| (Gain) on  disposition of property, plant and equipment                            |   | (2,000                                        | )         | (114,000                                     | )      |
| Minority  interest in net loss of subsidiary                                       |   | —                                        |      | 33,000                                       |   |
| Net change in  assets and liabilities, net of effects of acquisitions:             |   |                                          |      |                                         |   |
| Accounts  receivable                                                               |   | (1,940,000                                    | )         | (1,024,000                                   | )      |
| Inventories                                                                        |   | (1,318,000                                    | )         | (464,000                                     | )      |
| Prepaid expenses  and other assets                                                 |   | (354,000                                      | )         | (454,000                                     | )      |
| Accounts payable                                                                   |   | 569,000                                       |      | (295,000                                     | )      |
| Accrued  liabilities                                                               |   | (597,000                                      | )         | (1,800,000                                   | )      |
| Total  adjustments                                                                 |   | (1,230,000                                    | )         | (1,415,000                                   | )      |
| Net cash  provided by (used in) operating activities                               |   | 53,000                                        |      | (529,000                                     | )      |
| Investing  activities:                                                             |   |                                          |      |                                         |   |
| Acquisition of  business                                                           |   | (1,903,000                                    | )         | —                                       |   |
| Purchases of  property and equipment                                               |   | (2,707,000                                    | )         | (5,223,000                                   | )      |
| Proceeds from  sale of property and equipment                                      |   | 2,000                                         |      | 979,000                                      |   |
| Net cash (used  in) investing activities                                           |   | (4,608,000                                    | )         | (4,244,000                                   | )      |
| Financing  activities:                                                             |   |                                          |      |                                         |   |
| Net proceeds  from line of credit                                                  |   | 4,943,000                                     |      | 2,152,000                                    |   |
| Proceeds from  issuance of long-term debt                                          |   | 5,000,000                                     |      | 3,789,000                                    |   |
| Payments on long-term  debt                                                        |   | (6,130,000                                    | )         | (1,241,000                                   | )      |
| Proceeds from  the exercise of stock options                                       |   | 526,000                                       |      | —                                       |   |
| Purchase of  common stock                                                          |   | (17,000                                       | )         | (5,000                                       | )      |
| Payment of cash  dividends                                                         |   | —                                        |      | (240,000                                     | )      |
| Net cash  provided by financing activities                                         |   | 4,322,000                                     |      | 4,455,000                                    |   |
| Net (decrease)  in cash and cash equivalents                                       |   | (233,000                                      | )         | (318,000                                     | )      |
| Cash and cash  equivalents, beginning of period                                    |   | 380,000                                       |      | 1,248,000                                    |   |
| Cash and cash  equivalents, end of period                                          |   | $                                             | 147,000   |                                         | $      | 930,000 |   |

 

See accompanying notes tocondensed consolidated financial statements*.*

 

5

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**SummaIndustries**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(unaudited)

February 28,2005

 

**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 31,2004. Certain prior year amounts have been reclassified in the accompanyingfinancial statements 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 28, 2005 are not necessarilyindicative of the results to be expected for the full year ending August 31,2005.

 

**Recent accounting pronouncements**

 

In December 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 123R (“SFAS No. 123R”), “Share-BasedPayments,” which requires companies to recognize in the income statement thegrant-date fair value of stock options and equity-based compensation issued toemployees. The Company reports equity based compensation in accordance withAccounting Principles Board Opinion No. 25 and Financial Interpretation No. 44,and accordingly, no compensation expense is recognized in the financialstatements. The pro forma effect of equity-based compensation under SFAS No. 123,“Accounting for Stock-Based Compensation,” is disclosed in Note 4 below. Thestandard is effective for interim or annual reporting periods beginning after June 15,2005. The Company is currently evaluating the impact of adopting this standard.

 

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

 

**2.****                                      Inventories**

 

Inventories were asfollows:

 
| ** **           | ** ** | **February 29, 2004** | ** ** | **August 31, 2004** | ** ** | **February 28, 2005** | ** ** |
|----------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
| Finished goods       |       | $                          | 5,658,000  |                     | $          | 6,407,000                  |       | $ | 7,135,000 |   |
| Work in process      |       | 380,000                    |       | 296,000                  |       | 234,000                    |       |
| Materials and  parts |       | 7,790,000                  |       | 8,046,000                |       | 7,844,000                  |       |
|                 |       | $                          | 13,828,000 |                     | $          | 14,749,000                 |       | $ | 15,213,000 |   |

 

**3.             Earnings per 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 5,000shares of redeemable convertible preferred stock outstanding until itsrepurchase on May 3, 2004, which provided for an accretion in itsredemption price.  This accretion reducedthe net income available to common stockholders used in the EPS calculationprior to that date.

 

Diluted EPS reflects the potential dilution that couldoccur if securities or other contracts to issue common stock were exercised orconverted into common stock.  Diluted EPSwas calculated using the “treasury stock” method as if dilutive options hadbeen exercised and the funds were used to purchase common shares at the averagemarket price during the

 

6

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period.  Optionsto purchase 489,000 common shares as of February 29, 2004 and 314,000common shares as of February 28, 2005 were excluded from the calculationof equivalent shares, as they would have been anti-dilutive.  The 5,000 shares of outstanding preferredstock, convertible into 625,000 shares of common stock, were excluded from thecalculation of equivalent shares for the three month and six month periodsended February 29, 2004, 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 29, 2004**       | ** ** | **Feb 28, 2005**     | ** ** | **Feb 29, 2004** | ** ** | **Feb 28, 2005** | ** ** |
| Numerators:                                                            |       |                   |       |                 |       |   |   |   |   |
|                                                                   |       |                   |       |                 |       |   |   |   |   |
| Net Income                                                             |       | $                      | 453,000    |                 | $          | 276,000 |   | $ | 1,283,000 |   | $ | 886,000 |   |
| Preferred stock  accretion                                             |       | (185,000               | )          | —               |       | (369,000 | ) | — |   |
| Income available  to common stockholders                               |       | $                      | 268,000    |                 | $          | 276,000 |   | $ | 914,000 |   | $ | 886,000 |   |
|                                                                   |       |                   |       |                 |       |   |   |   |   |
| Denominators:                                                          |       |                   |       |                 |       |   |   |   |   |
|                                                                   |       |                   |       |                 |       |   |   |   |   |
| Weighted average  shares outstanding – basic                      |       | 4,370,000              |       | 4,002,000            |       | 4,328,000 |   | 3,993,000 |   |
| Impact of common  shares assumed to be issued under stock option plans |       | 80,000                 |       | 77,000               |       | 75,000 |   | 78,000 |   |
| Weighted average  shares outstanding – diluted                    |       | 4,450,000              |       | 4,079,000            |       | 4,403,000 |   | 4,071,000 |   |

** **

**4. Stock-based compensation plans**

 

The Company accounts forstock options issued to employees and directors in accordance with therecognition and measurement principles of Accounting Principles Board Opinion No. 25and Financial Interpretation No. 44. Consequently, no compensation expensewas recognized 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.

 
| ** **                                                             | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                             | ** ** | **Feb 29, 2004**       | ** ** | **Feb 28, 2005**     | ** ** | **Feb 29, 2004** | ** ** | **Feb 28, 2005** | ** ** |
| Income available  to stockholders                                      |       | $                      | 268,000    |                 | $          | 276,000 |   | $ | 914,000 |   | $ | 886,000 |   |
| Share-based  compensation included in income available to stockholders |       | —                 |       | —               |       | — |   | — |   |
| Pro forma impact  of expensing stock options                           |       | 10,000                 |       | 68,000               |       | (20,000 | ) | 37,000 |   |
| Pro forma income  available to common stockholders                     |       | $                      | 278,000    |                 | $          | 344,000 |   | $ | 894,000 |   | $ | 923,000 |   |
|                                                                   |       |                   |       |                 |       |   |   |   |   |
| Earnings per  share:                                                   |       |                   |       |                 |       |   |   |   |   |
| As reported:                                                           |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                  |       | $                      | .06        |                 | $          | .07 |   | $ | .21 |   | $ | .22 |   |
| Diluted                                                                |       | $                      | .06        |                 | $          | .07 |   | $ | .21 |   | $ | .22 |   |
|                                                                   |       |                   |       |                 |       |   |   |   |   |
| Pro forma:                                                             |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                  |       | $                      | .06        |                 | $          | .09 |   | $ | .21 |   | $ | .23 |   |
| Diluted                                                                |       | $                      | .06        |                 | $          | .08 |   | $ | .20 |   | $ | .23 |   |

 

7

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**5. Supplemental cash flowinformation**

** **

| ** **                                                                            | ** ** | **Six months ended**       | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                            | ** ** | **February 29, 2004** | ** ** | **February 28, 2005** | ** ** |
| Cash paid during  the period:                                                         |       |                       |       |   |   |
| Interest                                                                              |       | $                          | 923,000    |   | $ | 1,111,000 |   |
| Income taxes                                                                          |       | $                          | 664,000    |   | $ | 1,488,000 |   |
|                                                                                  |       |                       |       |   |   |
| Non-cash  financing activity:                                                         |       |                       |       |   |   |
| Common stock  issued to 401(k) Plan                                                   |       | $                          | 345,000    |   | $ | 261,000 |   |
| Minority  interest in subsidiary given as partial consideration for land and building |       | $                          | 205,000    |   | — |   |

** **

**6*.*Segmentinformation**

 

The Company has fourreportable segments identified by differences in products and distributionchannels.  The accounting policies of thesegments are the same as those described in the summary of significant accountingpolices described in the Company’s Annual Report on Form 10-K for the yearended August 31, 2004.  The Company’soperations are reported in the following business segments:

 

***OpticalComponents.***  In itsOptical Components segment, Summa designs and manufactures plastic prismaticlenses, reflectors and diffusers and other plastic products, which are used incommercial and industrial lighting fixtures, display, signage, architecturaland other applications.

 

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

 

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

 

***ElectricalComponents.***  In 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.

 

8

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

 
|                          |   | **Three months ended** |       | **Six months ended** |   |
|-------------------------------|--------|------------------------|------------|----------------------|--------|
|                          |   | **Feb 29, 2004**       |       | **Feb 28, 2005**     |   | **Feb 29, 2004** |   | **Feb 28, 2005** |   |
| External sales                |   |                   |       |                 |   |   |   |   |   |
| Optical components            |   | $                      | 12,714,000 |                 | $      | 13,718,000 |   | $ | 26,306,000 |   | $ | 27,868,000 |   |
| Material  handling components |   | 6,511,000              |       | 6,206,000            |   | 12,404,000 |   | 12,615,000 |   |
| Irrigation  components        |   | 4,461,000              |       | 6,762,000            |   | 8,041,000 |   | 11,691,000 |   |
| Electrical  components        |   | 2,859,000              |       | 2,511,000            |   | 5,720,000 |   | 5,261,000 |   |
| Other                         |   | —                 |       | —               |   | — |   | — |   |
| Consolidated                  |   | $                      | 26,545,000 |                 | $      | 29,197,000 |   | $ | 52,471,000 |   | $ | 57,435,000 |   |
|                          |   |                   |       |                 |   |   |   |   |   |
| Inter-segment  sales          |   |                   |       |                 |   |   |   |   |   |
| Optical  components           |   | $                      | 678,000    |                 | $      | 18,000 |   | $ | 1,124,000 |   | $ | 309,000 |   |
| Material  handling components |   | —                 |       | —               |   | — |   | — |   |
| Irrigation  components        |   | 451,000                |       | —               |   | 1,249,000 |   | — |   |
| Electrical  components        |   | —                 |       | —               |   | — |   | — |   |
| Other                         |   | (1,129,000             | )          | (18,000              | )      | (2,373,000 | ) | (309,000 | ) |
| Consolidated                  |   | $                      | —     |                 | $      | — |   | $ | — |   | $ | — |   |
|                          |   |                   |       |                 |   |   |   |   |   |
| Total sales                   |   |                   |       |                 |   |   |   |   |   |
| Optical  components           |   | $                      | 13,392,000 |                 | $      | 13,736,000 |   | $ | 27,430,000 |   | $ | 28,177,000 |   |
| Material  handling components |   | 6,511,000              |       | 6,206,000            |   | 12,404,000 |   | 12,615,000 |   |
| Irrigation  components        |   | 4,912,000              |       | 6,762,000            |   | 9,290,000 |   | 11,691,000 |   |
| Electrical  components        |   | 2,859,000              |       | 2,511,000            |   | 5,720,000 |   | 5,261,000 |   |
| Other                         |   | (1,129,000             | )          | (18,000              | )      | (2,373,000 | ) | (309,000 | ) |
| Consolidated                  |   | $                      | 26,545,000 |                 | $      | 29,197,000 |   | $ | 52,471,000 |   | $ | 57,435,000 |   |
|                          |   |                   |       |                 |   |   |   |   |   |
| Operating income  (loss)      |   |                   |       |                 |   |   |   |   |   |
| Optical components            |   | $                      | 1,462,000  |                 | $      | 1,228,000 |   | $ | 3,270,000 |   | $ | 2,510,000 |   |
| Material  handling components |   | 354,000                |       | 370,000              |   | 511,000 |   | 1,080,000 |   |
| Irrigation  components        |   | (66,000                | )          | 260,000              |   | (220,000 | ) | 418,000 |   |
| Electrical  components        |   | (16,000                | )          | (508,000             | )      | 124,000 |   | (887,000 | ) |
| Other                         |   | (483,000               | )          | (492,000             | )      | (883,000 | ) | (936,000 | ) |
| Consolidated                  |   | $                      | 1,251,000  |                 | $      | 858,000 |   | $ | 2,802,000 |   | $ | 2,185,000 |   |

 
|                          |   | **Feb 29,  2004** | ** ** | **Aug 31,  2004** | ** ** | **Feb 28,  2005** | ** ** |
|-------------------------------|--------|-------------------|------------|-------------------|------------|-------------------|------------|
| Assets                        |   |              |       |              |       |              |       |
| Optical  components           |   | $                 | 28,018,000 |              | $          | 30,183,000        |       | $ | 29,818,000 |   |
| Material  handling components |   | 20,037,000        |       | 20,069,000        |       | 22,543,000        |       |
| Irrigation  components        |   | 12,943,000        |       | 13,622,000        |       | 15,230,000        |       |
| Electrical  components        |   | 8,625,000         |       | 10,453,000        |       | 10,039,000        |       |
| Other                         |   | 4,992,000         |       | 5,790,000         |       | 5,766,000         |       |
|                          |   |              |       |              |       |              |       |
| Consolidated                  |   | $                 | 74,615,000 |              | $          | 80,117,000        |       | $ | 83,396,000 |   |

 

9

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In the fourth quarter offiscal 2004, all of the assets and operations of the former MiscellaneousPlastic Components segment were integrated with the Irrigation Componentssegment.  Prior period segmentinformation has been restated to conform to the consolidation.  Segment information as reported prior to theconsolidation is as follows for the periods ended February 29, 2004:

 
| ** **                         | ** ** | **Three months** | ** ** | **Six months** | ** ** |
|------------------------------------|------------|------------------|------------|----------------|------------|
| External sales:                    |       |             |       |           |       |
| Irrigation  Components             |       | $                | 4,245,000  |           | $          | 7,516,000 |   |
| Miscellaneous  Plastic Components  |       | 216,000          |       | 525,000        |       |
| Total                              |       | $                | 4,461,000  |           | $          | 8,041,000 |   |
| Inter-segment  sales:              |       |             |       |           |       |
| Irrigation  Components             |       | $                | —     |           | $          | — |   |
| Miscellaneous Plastic  Components  |       | 451,000          |       | 1,249,000      |       |
| Total                              |       | $                | 451,000    |           | $          | 1,249,000 |   |
| Total sales:                       |       |             |       |           |       |
| Irrigation  Components             |       | $                | 4,245,000  |           | $          | 7,516,000 |   |
| Miscellaneous  Plastic Components  |       | 667,000          |       | 1,774,000      |       |
| Total                              |       | $                | 4,912,000  |           | $          | 9,290,000 |   |
| Operating income  (loss):          |       |             |       |           |       |
| Irrigation  Components             |       | $                | 278,000    |           | $          | 334,000 |   |
| Miscellaneous  Plastic Components  |       | (344,000         | )          | (554,000       | )          |
| Total                              |       | $                | (66,000    | )              | $          | (220,000 | ) |
|                               |       |             |       |           |       |
| Assets at  February 29, 2004: |       |             |       |           |       |
| Irrigation  Components             |       | $                | 11,316,000 |           |       |   |
| Miscellaneous  Plastic Components  |       | 1,627,000        |       |           |       |
| Total                              |       | $                | 12,943,000 |           |       |   |

 

Interest expense andincome taxes are not shown in the preceding tables, as they are not fullyallocated by segment.  “Other” includesinter-company eliminations and corporate and other expenses not allocated by segment.

 

**MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Statements contained in this Quarterly Report on Form 10-Q,which are not purely historical, are forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities 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 “LegalProceedings” below.  Actual results coulddiffer materially from those projected in any forward-looking statements as aresult of 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 31,2004.  The forward-looking statements aremade as of 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 ofthe Company’s Annual Report on Form 10-K for the fiscal year ended August 31,2004.

 

Summa manufacturesplastic products for diverse commercial and industrial markets. Through itsfour 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.

 

10

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*** ***

***Resultsof Operations***

 

During the six monthperiod ended February 28, 2005, the Company experienced unusually highexpenses directly related to two major relocation initiatives: theconsolidation of three plants in the Material Handling Components segment to anew facility in Reading, PA, which was substantially completed during thesecond quarter, and an ongoing relocation in the Electrical Components segmentfrom Bensenville, Illinois to Pharr, Texas. The Pharr relocation is expected to be completed in the fourth quarterof fiscal 2005.  The relocation costs,which are shown in the following table, are expected to continue through thethird quarter and decline sharply thereafter. The expenses consisted primarily of duplicate personnel and facilitycosts, costs to develop and implement a new manufacturing process and costs tomove inventory and equipment.  Inconnection with the relocation in the Electrical Components segment, excessreal estate and equipment was sold for a net gain of $118,000. For comparison,it is noted that earnings in the second quarter of fiscal 2004 were adverselyimpacted by a non-recurring charge to interest expense of $266,000 for termloan breakup fees and the write-off of unamortized bank fees in connection witha change in banks.  The effects of therelocation expenses and financing expenses and the pro forma earnings,calculated as though the relocation expenses and financing expenses had notbeen incurred, are as follows:

 
| ** **                                      | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **Feb 29, 2004**       | ** ** | **Feb 28,2005**      | ** ** | **Feb 29, 2004** | ** ** | **Feb 28,2005** | ** ** |
| Operating income                                |       | $                      | 1,251,000  |                 | $          | 858,000 |   | $ | 2,802,000 |   | $ | 2,185,000 |   |
| Relocation  expenses                            |       | 77,000                 |       | 615,000              |       | 129,000 |   | 1,014,000 |   |
| Gain on sale of  real estate and equipment      |       | —                 |       | (118,000             | )          | — |   | (118,000 | ) |
| Pro forma  operating income                     |       | $                      | 1,328,000  |                 | $          | 1,355,000 |   | $ | 2,931,000 |   | $ | 3,081,000 |   |
|                                            |       |                   |       |                 |       |   |   |   |   |
| Net income                                      |       | $                      | 453,000    |                 | $          | 276,000 |   | $ | 1,283,000 |   | $ | 886,000 |   |
| Tax-effected  financing expenses                |       | 170,000                |       | —               |       | 170,000 |   | — |   |
| Tax-effected  relocation expenses               |       | 49,000                 |       | 394,000              |       | 83,000 |   | 649,000 |   |
| Tax-effected  gain on real estate and equipment |       | —                 |       | (76,000              | )          | — |   | (76,000 | ) |
| Pro forma net  income                           |       | $                      | 672,000    |                 | $          | 594,000 |   | $ | 1,536,000 |   | $ | 1,459,000 |   |

 

Note that “pro forma” hasno defined meaning under Generally Accepted Accounting Principles.  The information presented above is for thepurpose of drawing attention to two critical components of current performance.  There are other components of currentperformance that are not highlighted in the foregoing presentation.

 

The following table sets forth certain information,derived from Summa’s unaudited condensed consolidated statements of income, asa percent of sales for the three month and six month periods ended February 29,2004 and February 28, 2005, and the Company’s effective income tax rateduring those periods:

 
| ** **                                   | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                   | ** ** | **Feb 29, 2004**       | ** ** | **Feb 28, 2005**     | ** ** | **Feb 29, 2004** | ** ** | **Feb 28, 2005** | ** ** |
| Net sales                                    |       | 100.0                  | %          | 100.0                | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                |       | 76.3                   | %          | 80.2                 | %          | 75.9 | % | 78.7 | % |
| Gross profit                                 |       | 23.7                   | %          | 19.8                 | %          | 24.1 | % | 21.3 | % |
| S,G & A and  other expenses              |       | 19.0                   | %          | 16.9                 | %          | 18.8 | % | 17.5 | % |
| Operating income                             |       | 4.7                    | %          | 2.9                  | %          | 5.3 | % | 3.8 | % |
| Interest  expense, net                       |       | 2.2                    | %          | 1.6                  | %          | 1.7 | % | 1.5 | % |
| Income before  tax                           |       | 2.5                    | %          | 1.3                  | %          | 3.6 | % | 2.3 | % |
| Provision for  income taxes                  |       | (0.8                   | )%         | (0.5                 | )%         | (1.2 | )% | (0.9 | )% |
| Minority  interest in net loss of subsidiary |       | —                 |       | 0.1                  | %          | — |   | 0.1 | % |
| Net, income                                  |       | 1.7                    | %          | 0.9                  | %          | 2.4 | % | 1.5 | % |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Effective tax  rate                          |       | 32.1                   | %          | 34.3                 | %          | 32.9 | % | 35.8 | % |

 

11

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**Quarter ended February 28,2005 compared to the quarter ended February 29, 2004**

 

Sales for the second quarter ended February 28,2005 increased $2,652,000, or 10%, primarily due to the effects of price increases(about $1,940,000) and the contribution of sales from recently acquiredoperations in the Irrigation Components segment acquired during the secondquarter of fiscal 2004 (about $990,000), partially offset by the loss ofbusiness to China (about $650,000). Sales increased 8% in the OpticalComponents segment, primarily due to price increases; decreased 5% in theMaterial Handling Components segment, primarily due to inefficiencies relatedto relocation to the new facility in Reading, Pennsylvania, partially offset byprice increases; increased $2,301,000, or 52%, in the Irrigation Componentssegment, primarily due to the inclusion of approximately $990,000 more in salesfrom recently acquired operations than in the prior year second quarter,approximately $700,000 from price increases, recaptured market share fromcertain major customers and improved market conditions; and decreased 12% inthe Electrical Components segment, despite price increases, primarily due toloss of business to China.

 

Gross profit forthe second quarter decreased $502,000, or 8%, from the comparable prior yearperiod, primarily due to business relocation expense of $615,000 versus $77,000in the prior year second quarter and increased material costs, partially offsetby the effects of higher sales.  Grossmargin decreased from 23.7% to 19.8%, primarily due to increased relocationexpenses.

 

Operating expensesfor the second quarter decreased $109,000, or 2%, from the comparable prioryear period, primarily due to the benefit of $186,000 from partial collectionof a note receivable and a net gain of $118,000 on the sale of excess realestate and equipment, partially offset by the inclusion of operating expensesof newly acquired operations and increased costs related to compliance withSarbanes-Oxley rules and regulations. As a percent of sales, operating expenses decreased from 19.0% to 16.9%.

 

Operating incomefor the second quarter was $858,000, which was $393,000, or 31%, lower than inthe comparable prior year period.  Bysegment, operating income decreased $234,000 in the Optical Components segment,due primarily to difficulty and delays in fully passing through resin priceincreases and unfavorable product mix; increased $16,000 in the MaterialHandling Components segment, despite slightly lower sales, due to decreasedoperating expense; increased $326,000 in the Irrigation Components segment,primarily due to the effects of higher sales volume and the benefits ofprevious plant consolidations; and the operating loss increased $492,000 in theElectrical Components segment, primarily due to costs and inefficiencies of thebusiness relocation which is underway and the effects of reduced sales volume.Operating margin for the quarter decreased from 4.7% in the second quarter offiscal 2004 to 2.9% in the second quarter of fiscal 2005, due to the factorsdiscussed above.

 

Net interestexpense for the quarter ended February 28, 2005 decreased $113,000 fromthe prior year second quarter, due to term loan break-up fees and the write-offof unamortized bank fees of $266,000 in the prior year second quarter,partially offset by the effects of higher average debt levels and higheraverage interest rates in the most recent period.  

 

The provision forincome taxes in the second quarter was $70,000 lower than in the prior yearsecond quarter, despite a higher effective tax rate of 34.3% versus 32.1% inthe prior year second quarter, due to lower income before taxes. 

 

During the secondquarter ended February 28, 2005, the Company recognized a benefit of$33,000 for the minority interest in the net loss of the Electrical Componentssegment.

 

**Six months ended February 28,2005 compared to the six months ended February 29, 2004**

 

Sales for the six months ended February 28, 2005increased $4,964,000, or 9%, primarily due to the effects of price increases(about $3,240,000) and the contribution of sales from recently acquiredoperations in the Irrigation Components segment (about $1,650,000), partiallyoffset by the loss of business to China (about $1,240,000). Sales increased 6%in the Optical Components segment, primarily due to price increases; increased2% in the Material Handling Components segment, primarily due to priceincreases, substantially offset by inefficiencies associated with the consolidationand relocation in Reading, Pennsylvania; increased $3,650,000, or 45%, in theIrrigation Components segment, primarily due to the inclusion of sales fromrecently acquired operations, the effects of price increases, recaptured marketshare from certain major customers and improved market conditions; anddecreased 8% in the Electrical Components segment, despite price increases,primarily due to the loss of business to China, partially offset by the effectsof price increases.   

 

Gross profit forthe six months ended February 28, 2005 decreased $428,000, or 3%, from thecomparable prior year period, primarily due to business relocation expenses of$1,014,000 versus $129,000 in the same prior year period and

 

12

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increased material costs, partially offset by theeffects of higher sales.  Gross margindecreased from 24.1% to 21.3%, primarily due to increased relocation expenses.

 

Operating expenses for the six months ended February28, 2005 increased $189,000, or 2%, from the comparable prior year period,primarily due to the inclusion of operating expenses of newly acquiredoperations, and increased costs related to compliance with Sarbanes-Oxley rulesand regulations, partially offset by the benefit of $186,000 from partialcollection of a note receivable and a net gain of $118,000 on the sale ofexcess real estate and equipment.  As apercent of sales, operating expenses decreased from 18.8% to 17.5%.

 

Operating income for the six months ended February 28,2005 was $2,185,000, which was $617,000, or 22%, lower than in the comparableprior year period.  By segment, operatingincome decreased $760,000 in the Optical Components segment, due primarily todifficulty and delays in fully passing through resin price increases andunfavorable product mix; increased $569,000 in the Material Handling Componentssegment, primarily due to inefficiencies related to a plant consolidation inthe prior year period, partially offset by expenses related to a plantrelocation in the period ended February 28, 2005; increased $638,000 in theIrrigation Components segment, primarily due to the effects of higher salesvolume and efficiencies gained from facility consolidation; and decreased$1,011,000 in the Electrical Components segment, primarily due to costs of thebusiness relocation incurred in the six months ended February 28, 2005.Operating margin decreased from 5.3% in the first six months of fiscal 2004 to3.8% in the first six months of fiscal 2005, due to the factors discussedabove.

 

Net interest expense for the six months ended February28, 2005 was $51,000 lower than in the comparable prior year period, due toterm loan break-up fees and the write-off of unamortized bank fees of $266,000in the prior year period, partially offset by the effects of higher averagedebt levels and higher average interest rates in the most recent period.

 

The provision for income taxes in the six months endedFebruary 28, 2005 was $136,000 lower than in the comparable prior year period,despite a higher effective tax rate of 35.8% versus 32.9% in the prior yearperiod, due to lower income before taxes.

 

During the six months ended February 28, 2005, theCompany recognized a benefit of $33,000 for the minority interest in the netloss of the Electrical Components segment.

 

The Company’s backlog of unfilled orders, believed tobe firm, was $8,134,000 at February 29, 2004, $7,696,000 at August 31, 2004 and$8,058,000 at February 28, 2005.  Becausethe time between entering an order and shipping the product and recording asale is typically shorter than one month, backlog levels are not a reliableindicator of future sales volume.

 

***Liquidity and Capital Resources***

 

*WorkingCapital. *The Company’s working capital was $22,560,000at February 29, 2004; $19,294,000 at August 31, 2004 and $20,384,000 atFebruary 28, 2005.

 

Summary of the Company’s debt at February 28, 2005:

 
| ** **                   | ** ** | ** **  | ** ** | **Weighted  Average** | ** ** | ** **                   | ** ** | **Fiscal  Year Due** | ** ** |
|------------------------------|------------|-------------|------------|-----------------------|------------|------------------------------|------------|----------------------|------------|
| **Description  of Debt**     | ** ** | **Balance** | ** ** | **Interest  Rate**    | ** ** | **Additional  Availability** | ** ** | **2005**             | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009 and  thereafter** |   |
| ** **                   | ** ** | ** **  | ** ** | ** **            | ** ** | ** **                   | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Revolving line of  credit    | ** ** | $           | 14,495,000 |                  | 4.2        | %                            | $          | 5,945,000            |       | $ | — |   | $ | — |   | $ | 14,495,000 | ** ** | **$** | **—** | ** ** | **$** | **—** |   |
| Bank term loan               | ** ** | 4,081,000   | ** ** | 4.7                   | %          | **—**                   | ** ** | 470,000              | ** ** | 971,000 | ** ** | 1,019,000 | ** ** | 1,068,000 | ** ** | 553,000 |   |
| Real estate and  other loans | ** ** | 13,987,000  | ** ** | 5.4                   | %          | **—**                   | ** ** | 753,000              | ** ** | 4,256,000 | ** ** | 4,050,000 | ** ** | 1,011,000 | ** ** | 3,917,000 |   |
| Subordinated debt            | ** ** | 2,995,000   | ** ** | 7.5                   | %          | **—**                   | ** ** | —               | ** ** | 2,000,000 | ** ** | 995,000 | ** ** | — | ** ** | — |   |
| Total debt                   |       | $           | 35,558,000 |                  | 5.0        | %                            | $          | 5,945,000            |       | $ | 1,223,000 |   | $ | 7,227,000 |   | $ | 20,559,000 |   | $ | 2,079,000 |   | $ | 4,470,000 |   |

 

The interest rate on thebank term 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.  The interest rate on the subordinated debt isscheduled to decrease as the outstanding balance is reduced.

 

13

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In October 2004, the Companyannounced a plan to repurchase up to $2,000,000 of its Common Stock with notime limit (the “2005 Buy Back”).  Duringthe quarter ended February 28, 2005, 500 shares were repurchased under the 2005Buy Back at an average cost of $9.76 per share.

 

*Sources and Uses of Funds*.  Net cash used in operating activities for thefirst six months of fiscal 2005 was $529,000 compared to $53,000 provided byoperating activities for the first six months of fiscal 2004. The decrease wasprimarily due to lower net income.  Netcash used in investing activities was $4,244,000 in the first six months offiscal 2005, $364,000 less than in the first six months of fiscal 2004,primarily due to an acquisition made in the prior year period, partially offsetby the investment in a new facility in the Material Handling Components segmentin the current year.  Net cash of$4,455,000 was provided by financing activities for the first six months offiscal 2005, primarily by debt related to the new facility, compared to$4,322,000 in net cash provided in the prior year first six months from a newbank relationship.

 

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 which4,002,022 shares were outstanding at February 28, 2005 and 5,000,000 shares of “blankcheck” preferred stock authorized, of which none was outstanding at February28, 2005.  The Company could issueadditional shares of common or preferred stock or enter into new or revisedborrowing arrangements to raise funds.

 

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

### *** ***

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

 

*Future Lease Payments.*  The Company leases offices and manufacturingfacilities and certain equipment under non-cancelable operating leases.  Future payments under these leases atFebruary 28, 2005 are approximately as follows:

 

| **Fiscal Year**      | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|
| 2005                 |       | $          | 654,000    |   |
| 2006                 |       | $          | 1,097,000  |   |
| 2007                 |       | $          | 797,000    |   |
| 2008                 |       | $          | 701,000    |   |
| 2009                 |       | $          | 504,000    |   |
| 2010 and  thereafter |       | $          | 8,000      |   |

 

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

 

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

 

The foregoing discussion andanalysis of the Company’s financial condition and results of operations arebased upon the consolidated financial statements of the Company, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of such financial statementsrequires management to make estimates and assumptions in applying certaincritical accounting policies. Certain accounting estimates are particularlysensitive because of their significance to the Company’s consolidated financialstatements and because of the possibility that future events affecting theestimates could differ markedly from current expectations. The Company believesthat the following are some of the more critical judgment areas in theapplication of its accounting policies that affect the Company’s financialstatements:

 

###### *Impairment of Long-Lived Assets and Long-Lived Assets tobe 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.

 

TheCompany has a significant amount of property and equipment and intangibleassets. The determination as to whether

 

14

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eventsor changes in circumstances indicate that the carrying amount of an asset maynot be recoverable involves management’s judgment. In addition, should theCompany conclude that recoverability of an asset is in question, the estimateof undiscounted future operating cash flows to determine whether an asset isrecoverable and, if not, the final determination of the fair value of the assetare also based on the judgment of management. These judgments can be impactedby a variety of underlying assumptions, such as the general business climate,effectiveness of competition and supply and cost of resources.  Accordingly, actual results can differsignificantly from the assumptions made by management in making its estimates.Future changes in management’s estimates could result in indicators ofimpairment and future impairment charges.

 

###### *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 performsongoing evaluations of customers and adjusts credit limits based upon eachcustomer’s payment history and credit worthiness, as determined by creditinformation available at that time.  TheCompany monitors collections and payments from customers and maintainsallowances for doubtful accounts for the inability of customers to makerequired payments.  If the financialcondition of customers were to deteriorate resulting in an impairment of theirability to make payments, additional allowances may be required.

 

*Goodwill.** ***Goodwillrepresents the excess of purchase price over fair value of net assetsacquired.  Goodwill is tested forimpairment annually in the fourth quarter, after completion of an annualplanning process, or earlier if events occur which require an impairmentanalysis to be performed.  With respectto each reporting unit which has any goodwill, the fair value is determinedusing traditional valuation methodology, and compared with its carryingvalue.  If the fair value exceeds theunit’s carrying value, goodwill of the reporting unit is considered not to beimpaired.  If the unit’s carrying valueexceeds its fair value, assets of the unit are individually valued to determinethe implied fair value of the reporting unit goodwill.  Impairment loss is recognized to the extentthat the carrying value of the goodwill exceeds its implied fair value.  Significantmanagement judgment is involved in determining the fair value of assets. Futurechanges in management’s estimates could result in additional impairment chargesto goodwill.

 

*Income Taxes.*  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to temporarydifferences between the financial statement carrying amounts of assets andliabilities and their respective tax bases. Deferred tax assets are also recognized for credit carryforwards andthen assessed (including the anticipation of future income) to determine thelikelihood of realization.  Deferred taxassets and liabilities are measured using the rates expected to apply totaxable income in the years in which the temporary differences are expected toreverse and the credits are expected to be used.  The effect of a change in tax rates ondeferred tax assets and liabilities is recognized in income in the period thatincludes the enactment date.

 

*Accounting for 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.  In accordancewith APB Opinion No. 25, and related interpretations, compensation expensewould generally be recorded for fixed option grants only if, on the date of thegrant, the current price of the underlying stock exceeded the exerciseprice.  The Company has elected tocontinue to apply the provisions of APB Opinion No. 25 and provide the proforma disclosure provisions of SFAS 123. Accordingly, no compensation expense has been recognized for the Company’sstock option plans and award of options to non-employee directors.

 

**QUANTITATIVE AND QUALITATIVEDISCLOSURES 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 31,2004.  The Company has no market risksensitive instruments entered into for trading purposes.

 

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**EFFECTIVENESSOF 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.  LegalProceedings***

 

The Company encounterslawsuits from time to time in the ordinary course of business and, at February28, 2005, the Company and/or its affiliates were parties to several civillawsuits. Summa does not expect that the resolution of these lawsuits will havea material adverse impact on future results of operations or financialposition.   Certain lawsuits filed againstthe Company from time to time contain claims not covered by insurance, or seekdamages in excess of policy limits, and such claims could be filed in thefuture.  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 may sufferfrom such lawsuits, and the effect such litigation may have upon the reputationand marketability of Summa’s products, could have a material adverse impact onthe future results of operations, financial condition and/or prospects of theCompany.

 

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

 

In October 2004, theCompany announced a plan to repurchase up to $2,000,000 of its Common Stockwith no time limit (the “2005 Buy Back”).  During the quarter ended February 28, 2005, 500 shares were repurchasedunder the 2005 Buy Back at an average cost of $9.76 per share.

 

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

 

None.

 

***Item4.  Submission of Matters to a Vote ofSecurity Holders***

 

At the Company’s AnnualMeeting of Stockholders held on January 24, 2005, incumbent directors James R.Swartwout, Jack L. Watts and Charles A. Tourville were re-elected to the Boardof Directors of the Company to serve as one Class of the Board of Directors fora three year term and until their successors are elected and qualified.  Messr. Swartwout received 3,142,344 votes inhis favor, with 609,420 votes withheld, Messr. Watts received 3,458,568 votesin his favor, with 293,196 votes withheld, and Messr. Tourville received3,458,275 votes in his favor, with 293,489 votes withheld.  There were no broker non-votes.  Incumbent directors William R. Zimmerman, MichaelL. Horst, David McConaughy and Josh T. Barnes are members of two additionalClasses of the Board of Directors, and their terms of office continued afterthe Annual Meeting.

 

In addition, thestockholders voted to approve and adopt the Company’s 2005 Equity IncentivePlan under which investment interests relating to up to 500,000 additionalshares of the Company’s Common Stock (subject to anti-dilution adjustmentsspecified in the plan) may be granted to the Company’s directors, officers,employees, agents and others.  Thisproposal received 1,428,515 votes in favor, 1,204,548 votes against, 96,473abstentions and 1,022,228 broker non-votes.

 

***Item 5.   Other Information***

 

None.

 

***Item 6.  Exhibits***

10.1                           Amendedand Restated 2005 Equity Incentive Plan

10.2                           Form ofNonstatutory Stock Option Agreement

10.3                           SummarySheet for Named Executive Officers and Directors Compensation

31.1                           Section302 Certification

32.1                           Section906 Certification

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized on April 4, 2005.

 

**SummaIndustries**

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

 

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