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**SECURITIES AND EXCHANGECOMMISSION****Washington,D.C. 20549**

**FORM10-K**

**Annual Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934**

**For thefiscal year ended June 30, 2001**

**Commissionfile number 1-9429**

| **ROTONICS MANUFACTURING INC.**                         |
|---------------------------------------------------------|
| ****                                                    |
| (Exact name of  registrant as specified in its charter) |
|                                                    |   |   |
|                                                    |   |   |
| **Delaware**                                            |   | **36-2467474** |
|                                                         |   |  |
| (State or other  jurisdiction of                        |   | (I.R.S. Employer |
| incorporation or  organization)                         |   | Identification No.) |
|                                                    |   |   |
| **17022  South Figueroa Street**                        |   |   |
| **Gardena,  California**                                |   | **90248** |
|                                                         |   |  |
| (Address of principal  offices)                         |   | (Zip Code) |

 

Registrant’s telephone number, includingarea code: (310) 538-4932

Securities registered pursuant to Section12(b) of the Act:

 

| **Common  Stock ($.01 stated par value)** |   | **American  Stock Exchange** |
|-------------------------------------------|--------|------------------------------|
|                                           |   |                              |
| Titles of each class                      |   | Name of each Exchange        |
|                                      |   | on which registered          |

 

Securities registered pursuant to Section12(g) of the Act:     None

Indicate by check mark whether theRegistrant (1) has filed all reports required to be filed by Section 13 or15(d) for the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and has been subject to such filing requirements for the past 90days. Yes ý   No o

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K. ý

The aggregate market value of the votingstock held by non-affiliates of the registrant, as of September 6, 2001, was$4,330,400 (1).

The number of shares of common stockoutstanding at September 6, 2001 was 12,812,262.

(1)         Excludes7,038,430 shares held by directors, officers and stockholders whose ownershipexceeded 5% of the outstanding shares at September 6, 2001.  Exclusion of such shares should not beconstrued to indicate that the holders thereof possess the power, direct orindirect, to direct the management or policies of registrant, or that suchpersons are controlled by or under common control with the registrant.

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DOCUMENTSINCORPORATED BY REFERENCE

| Document                                                                                                                     |   | Form  10-K Part |
|------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|
|                                                                                                                              |   |                 |
| Definitive Proxy  Statement to be used in connection with the Annual Meeting of Stockholders to  be held on December 3, 2001 |   | III             |

 

TABLEOF CONTENTS

| PART I     |   |                                                                                        |   |
|------------|--------|---------------------------------------------------------------------------------------------|--------|
|       |   |                                                                                        |   |
| Item 1     |   | Business                                                                                    |   |
| Item 2     |   | Properties                                                                                  |   |
| Item  3    |   | Legal  Proceedings                                                                          |   |
| Item  4    |   | Submission  of Matters to a Vote of Security Holders                                        |   |
|       |   |                                                                                        |   |
| PART II    |   |                                                                                        |   |
|       |   |                                                                                        |   |
| Item  5    |   | Market  for Registrant’s Common Stock and Related Stockholder Matters                  |   |
| Item 6     |   | Selected Financial  Data                                                                    |   |
| Item  7    |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item 7a    |   | Disclosures  About Market Risks                                                             |   |
| Item  8    |   | Financial  Statements and Supplementary Data                                                |   |
| Item  9    |   | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure       |   |
|       |   |                                                                                        |   |
| PART III   |   |                                                                                        |   |
|       |   |                                                                                        |   |
| Item  10   |   | Directors  and Executive Officers of the Registrant                                         |   |
| Item 11    |   | Executive  Compensation                                                                     |   |
| Item  12   |   | Security  Ownership of Certain Beneficial Owners and Management                             |   |
|       |   |                                                                                        |   |
| Item  13   |   | Certain  Relationships and Related Transactions                                             |   |
|       |   |                                                                                        |   |
| PART IV    |   |                                                                                        |   |
|       |   |                                                                                        |   |
| Item 14    |   | Exhibits, Financial Statement Schedules, and  Reports on Form 8-K                           |   |
|       |   |                                                                                        |   |
| SIGNATURES |   |

 

PART I

Item1.   Business

Introduction

Rotonics Manufacturing Inc. (the“Company”) was founded as an Illinois Corporation, and was reincorporated inDelaware in December 1986.  EffectiveJuly 1, 1991, the Company merged with Rotonics Molding, Inc.-Chicago  (“Rotonics”), with the Company being thesurviving entity.  In accordance withthe 1991 merger agreement, the Company issued 2,666,666 (after giving effect toa 1-for-3 reverse stock split) shares of its common stock and 4,999,997 sharesof a newly issued non-voting preferred stock in exchange for all theoutstanding voting stock of Rotonics. The preferred stock, which has subsequently been redeemed, was entitledto cumulative dividends of $.09 per share per annum and had a liquidation valueof $1.00 per share, plus accrued unpaid dividends in preference to any paymenton the common stock.

Rotonicshad operations in Itasca, Illinois; Deerfield, Wisconsin; Denver, Colorado; andBartow, Florida. Three of these operations currently conduct business asdivisions of the Company using the trade names RMI-C, RMI-D, and RMI-F,respectively.  Rotonics was a privatelyheld California Corporation, which was 52% owned by Mr. Sherman McKinniss.  Mr. McKinniss became president and chiefexecutive officer of the Company on August 12, 1991.

In September 1991, the Company’s whollyowned subsidiary, Rotational Molding, Inc. (“RMI”), was merged into the Companyand now operates as two divisions using the trade names RMI-G and RMI-I withmanufacturing operations in Gardena, California and Caldwell, Idaho,respectively.

Effective January 1, 1992, the Companyacquired Plastech Holdings, Inc. (“Plastech”), and its wholly owned subsidiary,Plastech International, Inc., for $1,777,070 in cash.  Plastech was headquartered in Warminster, Pennsylvania with anadditional operation in Gainesville, Texas. In July 1992, Plastech was merged with the Company and now operates as adivision of the Company using the trade name RMI-T.

Effective April 1, 1995, the Companypurchased certain assets and assumed certain liabilities of Custom RotationalMolding, Inc. (“CRM”) for 300,000 shares of the Company’s common stock.  The Company assumed CRM’s operations inArleta, California.

In September 1994, the Company purchaseda larger manufacturing facility in Bensenville, Illinois and subsequentlyrelocated its Itasca, Illinois operations into this new facility.  In December 1995, the Company discontinuedits operations at its Deerfield, Wisconsin location and combined theseoperations into its newly purchased Bensenville, Illinois operation. TheWisconsin facility is currently being leased to two tenants on a month-to-monthterm basis at $1,300 per month.

In February 1997, the Company purchased a9.73-acre facility consisting of 63,000 square feet of manufacturing and officebuilding space in Commerce City, Colorado. The Company has since expended significant resources to refurbish thefacility to house its Colorado operations. In addition to the new facility the Company added two state of the artroto-molding machines and a CNC router to increase and enhance existingmanufacturing capacity.  Also, thefacility is located within an enterprise zone, which continues to provideadditional benefits.  The Company leasesa portion of this facility’s excess office and yard space on a long term basisat $4,000 per month.

Effective April 1, 1998, the Company mergedwith Rotocast International, Inc. and its wholly owned subsidiaries(“Rotocast”), with the Company being the surviving entity.  In accordance with the Merger Agreement, theCompany issued 2,072,539 shared of its common stock and a $2,000,000 note payablesecured by a stand-by letter of credit in exchange for all the outstandingvoting stock of Rotocast.  In January2000, the Company repurchased these shares for $2.8 million.  Upon consummation of the repurchase, theshares were retired.

Rotocast had operations in Miami,Florida; Knoxville, Tennessee; Brownwood, Texas; Las Vegas, Nevada; and BossierCity, Louisiana.  These operationscurrently conduct business as divisions of the Company using the trade namesNutron, Rotocast of Tennessee, RMI-B and RMI-Nevada.  Prior to the merger the operations in Bossier City, Louisianawere substantially discontinued. Rotocast was a privately held Florida corporation owned by GSC Industries,Inc. (“GSC”).  The Company leases theremaining Rotocast facilities from GSC, and other affiliated parties, underlong-term lease arrangements.  A portionof the Nutron office building is being sub-leased on a long-term basis at$2,100 per month.  Effective April 1998,and pursuant to the Merger Agreement, Mr. Robert Grossman, a shareholder of GSCand former President of Rotocast, was named to the Company’s Board ofDirectors.  Following the January 2000repurchase of the shares issued to GSC, Mr. Grossman resigned from the Board ofDirectors.
In conjunction with the Rotocast mergerthe Company initiated the consolidation of its Warminster, Pennsylvania andArleta, California facilities into its remaining operations.  The consolidation of these facilities hasenhanced the operations of the Company’s remaining facilities, reduced itsoverall manufacturing overhead costs, and has allowed the Company to takegreater advantage of its marketing and distribution channels since thecompletion of the Rotocast merger.  Theconsolidation of the facilities was completed in fiscal 1999. Also in fiscal1999, the Company consolidated its Miami operations into the remainingoperating facilities.

The Corporate office of the Company islocated at the same site as the RMI-G (Gardena, California) facility.

Description of Business

The Company currently has tenmanufacturing locations and was again listed by a plastics industry periodicalas one of the top ten Rotational Molders in North America.  These operating divisions manufacture avariety of plastic products for commercial, agricultural, pharmaceutical, pointof purchase display, medical waste, refuse, retail, recreation, marine,healthcare and residential use, as well as a vast number of custom plasticproducts for a variety of industries, utilizing the roto-molding process and,on a smaller scale; injection molding and dip molding processes. In April 1998,the injection molding process was added to the Company’s manufacturingoperations as part of the Rotocast merger. Utilizing this process the Company markets a variety of parts forcommercial, promotional and residential uses under the trade names Nutron andAMP.  Roto-molding is a process formolding plastic resin by rotating a mold in a heated environment while theplastic resin powder placed inside the mold melts and evenly coats the innerwall of the mold.  The injection moldingprocess varies in that the plastic resin is first heated to a molten state andthen injected under pressure into a mold. The roto-molding process has been used for many years and continues tobe recognized as a growth industry in recent years as a result of numerousongoing business consolidations and the development of new resins.  These new resins allow roto-molded items tocompete with more traditional materials such as carbon and stainless steel,especially in the fabrication of large, lightweight; one-piece molded itemssuch as storage tanks.  Roto-molding isa particularly advantageous process for users of molded plastic products whomay want to test different prototypes, or who do not require sufficient numbersof such products to justify a more expensive manufacturing process.  The Company’s products include various typesof storage tanks, bin lids, refuse containers for automated removal, medicalwaste containers, point-of-purchase displays, agricultural/livestock products,kayaks, outdoor lamp posts, furniture, planters, and other molded items.

The Company purchases resin from fivemajor suppliers in the U.S. and Canada. There are five additional suppliers of minor significance.  As the majority of the resin used in themanufacturing process is a polyethylene derived from natural gas, resin priceis not directly related to the price for petrochemicals and until recent yearshas not generally been subject to volatile fluctuations which are oftenexperienced by the petroleum industry. The Company also incorporates the use of recycled plastic materialsblended with virgin materials in the manufacturing of products wheneverappropriate.

The Company holds several patents onstorage containers used for pharmaceutical, commercial and residentialapplications.  The patents expirethrough the year 2010.  Although theCompany has been able to capture its share of these niche markets and expects tosee continued growth, no one patent or groups of patents is considered materialto the business as a whole.

Competition for the Company’s products isgoverned by geography and region since large capacity tanks and bulky hollowproducts are expensive to ship long distances and, as such, any prospectivecompetitor is constrained by shipping costs. There are numerous single-location as well as a growing trend tostructure multi-location roto-molding businesses throughout the UnitedStates.  However, each of thesebusinesses still compete in a geographic region which is determined by customerdemand within that region, a constraint inherent to the industry.  Due to its nationwide presence, the Companyhas substantially alleviated this constraint. The Company’s sales are usually not subject to large seasonalfluctuations as the business typically operates on significant backlogs with adiverse product mix.  Peak season isusually experienced in the period from April through June.  Historically the quarter from Januarythrough March is the slowest production period of the year.  The Company’s backlog was $3,987,300 and$3,683,900 as of June 30, 2001 and 2000, respectively.  All of the backlog orders as of June 30,2001 are expected to be filled during fiscal 2002.
The Company’s products are marketedthrough the in-house sales and engineering staff, various distributors andoutside commission-based sales representatives.  The Company continues to build a strong, broad and diversecustomer base, which covers a multitude of industries.  Since fiscal 1991, no sales to any onesingle customer represented a material part of the Company’s business.

Research and development expenditures forthe Company were insignificant for the last three fiscal years.

Regulation

The Company believes that it is incompliance with all applicable federal, state and local laws relating to theprotection of the environment and does not anticipate that any such laws willhave any material effect on its financial position, capital expenditures, orcompetitive position.

Employees

As of June 30, 2001, the Company employeda total of 475 individuals.  The Companymaintains, for its respective employees who are eligible, a medical insuranceplan (some of which is contributory), a group life insurance plan, an annualbonus plan and a semi-annual attendance bonus plan.

Item2. Properties

The Company’s corporate office occupies aseparate building comprising approximately 3,600 square feet of the facilitiesof RMI-G in Gardena, California.

The operating divisions lease warehouse,production and office space as follows:
Property  Location Building SquareFootage Total Facility SquareFootage Annual Base Rent ExpirationDate   (2)      Gardena,  California (1) 42,800 183,300 $300,000 October 2001 Caldwell,  Idaho 21,250 71,200 $105,600 September 2005 Bartow,  Florida 46,200 174,600 $125,600 September 2004 Miami,  Florida (3) 50,000 86,000 $160,200 March 2013 Gainesville,  Texas (4) - 108,900 $1,000 April 2006 Brownwood,  Texas 42,800 136,120 $73,000 March 2013 Las Vegas,  Nevada 30,000 90,000 $133,100 March 2013 Knoxville,  Tennessee 44,000 174,240 $146,200 March 2013 
 
(1) The  Company has an option to purchase this facility.  The Company has negotiated a 10 year  lease  renewal which was executed September 4, 2001.(2) Does not  give effect to any renewal options.(3) The  Company is currently considering listing the Rotocast-Miami building (20,000  sq ft) for lease.  The  Company is currently sub-leasing a portion of Nutron's office space for  $2,100 per month.(4) Represents  a 2.5 acre ground lease adjacent to owned, Gainsville, Texas facility.
 

The Company owns 2.1 acres (including38,000 square feet of warehouse, production and office space) in Gainesville,Texas.  In September 1994 the Companypurchased 3.1 acres (including 63,300 square feet of warehouse, production andoffice space) in Bensenville, Illinois for the Company’s Illinois manufacturingoperations.  The Texas and Illinoisfacilities are currently encumbered by a combined $1.77 million mortgage.  In February 1997 the Company purchased forcash 9.73 acres (including 63,000 square feet of warehouse, production andoffice space) in Commerce City, Colorado for the Company’s Coloradomanufacturing operations. The Company currently leases a portion of thisfacility for $4,000 per month. The Company also owns approximately 1.59unencumbered acres (including 35,100 square feet of warehouse, production andoffice space) in Deerfield, Wisconsin which was vacated in December 1995 by theCompany and its operations incorporated into the Illinois facility.  The Wisconsin facility is currently leasedto two unrelated lessees for $1,300 per month. In January 2000, the Company leased merchandise space in a showroomlocated in Atlanta, Georgia at an annual lease rate of $31,300.

Item3. Legal Proceedings

In the normal course of business, theCompany encounters certain litigation matters, which in the opinion ofmanagement will not have a significant adverse effect on the financial positionor the results of operations of the Company.

Item4.  Submission of Matters to a Vote ofSecurity Holders

None.

 

PART II

Item5.  Market for Registrant’s Common Stockand Related Stockholder Matters

The Company’s Common Stock  ($.01 stated value) is traded on theAmerican Stock Exchange  (“AMEX”) underthe symbol “RMI”.  The number ofstockholders of record of the Company’s Common Stock was approximately 5,100 atSeptember 6, 2001.

PriceRange of Common Stock

The following table sets forth the quarterlyprice ranges of the Company’s Common Stock in Fiscal 2001 and 2000, as reportedon the composite transactions reporting system for AMEX listed stocks.
Fiscal Period High Low    Fiscal 2000:      First Quarter Ended  September 30, 1999 $1.3125 $0.9375  Second Quarter Ended  December 31, 1999 1.6875 1.2500  Third Quarter Ended  March 31, 2000 1.9375 1.1875  Fourth Quarter Ended  June 30, 2000 2.5000 1.3750       Fiscal 2001:      First Quarter Ended  September 30, 2000 $1.5625 $1.0000  Second Quarter Ended  December 31, 2000 1.1250 0.6250  Third Quarter Ended  March 31, 2001 1.1250 0.6500  Fourth Quarter Ended  June 30, 2001 1.1500 0.6500 
In fiscal years 1996-1999, the Companypaid a regular cash dividend of $.04 per share on its Common Stock and infiscal 2001 the Company declared a regular cash dividend of $.04 per commonshare on its Common Stock which was paid in July 2001.  Any future cash dividends or otherdistributions of stock will be determined solely by the Board of Directors andwill be based on the Company’s future financial ability to declare and pay suchdividends.  Additionally, certainlending agreements restrict the Company from declaring or paying dividendsbeyond set limits on its Common Stock (see Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations: Liquidity andCapital Resources”).  According to thelending agreement with its bank, the Company may declare or pay any dividend ordistribution in a maximum aggregate of $700,000 and may redeem, retire,repurchase or otherwise acquire shares of any class of the Company’s stock in amaximum aggregate or $1,000,000 in any fiscal year.  Transactions that would exceed these limits would require priorbank authorization and the appropriate waivers.
Item 6.  Selected FinancialData
  Year ended June 30,      2001 2000 1999 1998(B) 1997    Income  Statement Data           Net sales $40,520,100 $46,647,700 $46,730,900 $38,774,900 $39,814,500 Cost of  goods sold 31,158,700 34,645,000 34,566,500 29,984,400 29,721,500 Gross  margin 9,361,400 12,002,700 12,164,400 8,790,500 10,093,000 Selling,  general and administrative expenses (C) 7,507,400 8,016,900 8,841,600 7,327,300 6,239,600       Interest  expense 743,100 955,000 987,700 793,700 556,500 Net income  (D) $550,500 $1,953,700 $1,326,000 $417,200 $1,441,800 Basic/diluted  income per common share $0.04 $0.14 $0.09 $0.03 $0.10       Average  common shares outstanding (A) 12,835,200 13,981,800 15,379,400 14,445,200 14,134,600                   Other  Financial Data           Net income  as a percent of sales 1.4%4.3%2.9%1.1%3.7%
 

(A)       Computedon the basis of the weighted average number of common shares outstanding duringeach year.             

(B)        Includesthe results of operations of Rotocast since the effective date of merger.

(C)        Infiscal 1999 and 1998, includes $394,400 and $280,300 respectively, in plantconsolidation expenses.

(D)        Fiscalyear 1997 includes $1,010,800 in costs relating to a lawsuit settlement.

 
 At June 30,    2001 2000 1999 1998(B) 1997   Balance  Sheet Data                     Current  assets$13,379,700 $14,866,100 $15,701,500 $16,463,600 $12,814,000            Current  liabilities4,185,600 5,408,300 5,965,900 6,452,800 5,099,700            Working  capital surplus9,194,100 9,457,800 9,735,600 10,010,800 7,714,300            Total  assets34,500,800 37,065,200 39,300,300 40,563,800 30,634,400            Long-term  debt7,396,200 8,569,800 9,470,600 10,976,500 6,486,100            Total  liabilities14,193,700 16,578,200 17,866,000 19,155,900 11,589,800                       Current  ratio3.2 to 1 2.7 to 1 2.6 to 1 2.6 to 1 2.5 to 1            Net book  value per common share (A)$1.59    $1.59    $1.42    $1.35    $1.35               Dividends  (C)$0.04 $- $0.04 $0.04 $0.04 
 

(A)       Computedon the basis of the actual number of common shares outstanding at the end ofthe fiscal year.

(B)        Includesthe effect of the Rotocast merger.

(C)        Basedon cash dividends declared per common share during the respective periods.
Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations

Introduction

To the extent that this 10-K AnnualReport discusses matters which are not historical, including statementsregarding future financial results, information or expectation about productsor markets, or otherwise makes statements about future events, such statementsare forward-looking and are subject to a number of risks and uncertainties thatcould cause actual results to differ materially from the statements made.  These include, among others, fluctuations incosts of raw materials and other expenses, costs associated with plantclosures, downturns in the markets served by the Company, the costs associatedwith new product introductions, as well as other factors described under theheading Item 3, “Legal Proceedings”, under this Item 7, “Management’s Discussionand Analysis of Financial Condition and Results of Operations”, and Footnote 1to Financial Statements.

Operations

Net sales dipped 13.1% to $40,520,100 infiscal 2001 compared to $46,647,700 in fiscal 2000.  The $6.1 million reduction in sales volumes in fiscal 2001 isattributed to the economic downturn in our country’s manufacturing sector whichhas affected all of the Company’s product lines.  The Company also realized heightened competition in reaction tothese economic pressures which further diminished sales volumes within theCompany’s tank, bin lid and custom product lines.  In line with this, the Company also lost market share due to anunsuccessful refuse container bid, accounting for approximately $1 million insales reduction during the comparative period. Although these trends are not expected to improve quickly, managementforesees current back logs and projected business to improve sales volumes infiscal 2002.  Also, on a positive note,the Company was recently awarded the refuse container business it had lostduring fiscal 2001.

Net sales were $46,647,700 in fiscal 2000which was comparable to net sales of $46,730,900 in fiscal 1999.  Although sales volumes were static betweenfiscal 2000 and 1999 due primarily to lower refuse sales volumes, the Companycontinues to see growth in its specialty product, marine and material handlingproduct lines.  Management believesthese product groups have tremendous future growth potential.  Management will continue to devisestrategies to expand its various niche markets including new and enhancedproduct designs to meet target market requirements.  Although current market conditions show continued signs ofsoftening as a result of ongoing economic conditions, management looks forwardto hone its marketing strategies to optimize future results.

Cost of goods sold was $31,158,700 or76.9% of net sales in fiscal 2001 compared to $34,645,000 or 74.3% and$34,566,500 or 74.0% of net sales in fiscal 2000 and 1999, respectively.  The increase is related both to the 13.1%decline in sales volumes in fiscal 2001 as well as escalating raw materialproduction costs, natural gas, labor and labor related insurance and fringecosts.  A significant portion of theseescalating costs was related to natural gas costs which amounted to a $625,000increase over prior year costs.  Inaddition, escalating resin prices continue to hamper the preservation of targetgross margins.  Over the last severalyears the roto-molding industry continues to experience extreme volatileplastic resin costs.  The cost ofplastic resin represents a significant portion of the Company’s manufacturingcosts and has continually challenged the Company to effectively mitigate theseprice increases.  During the yearspresented, the Company has been relatively successful in mitigating theserising costs with ongoing sales price increases, improved manufacturingefficiencies which have reduced scrap output as well as general costcontainment efforts.  Management willcontinue to institute similar practices in fiscal 2002.  Currently raw material and natural gas costshave declined.  However, the Companycontinues to realize substantial increases in wage related insurance and fringecosts.  This coupled with a furtherdiminishing in market conditions and/or future hikes in resin and utility costscould hamper the Company’s goal to maintain consistent future operatingresults.

Selling, general and administrative(“SG&A”) expenses were $7,507,400 or 18.5% of net sales in fiscal 2001compared to $8,016,.900 or 17.2% of net sales in fiscal 2000.  Again, the comparative percentage increaseis attributed to lower sales volumes. However, overall SG&A costs have decreased by $509,500.  The reduction is two-fold.  First, in the fourth quarter of fiscal 2001,the Company capitalized $323,500 of patent defense costs, a portion of which isrelated to prior year costs, relating to a favorable judgment in a patentlawsuit.  The second, and more importanton a go-forward basis, is a significant reduction in selling costs as a resultof lower commission, advertising and tradeshow costs.  Management continue to assess its marketing strategies to focusits resources and efforts in a manner which will optimize exposure for its variousproduct groups.

Selling, general and administrativeexpenses were $8,016,900 or 17.2% of net sales in fiscal 2000 compared to$8,447,200 or 18.1% of net sales in fiscal 1999.  Again, the reduction is the result of management cost containmentefforts which have effectively reduced overall SG&A costs by $430,300between the two periods.  Reductionswere primarily realized in advertising and marketing costs and significantreductions in employment wage costs. This is consistent with management’s goal to maintain SG&A levels inline with target sales volumes.
The Company incurred $394,400 in fiscalyear 1999 in costs related to the consolidation of three of its plants.  The Company began and substantiallycompleted the consolidation of its Arleta, California and Warrminster,Pennsylvania plants in the fourth quarter of fiscal 1998 and then completed theprocess during the first quarter of fiscal 1999.  Shortly after the completion of these consolidations, it launchedthe consolidation of the Miami, Florida Rotocast operation.  This consolidation was completed during thethird quarter of fiscal 1999.

These consolidations have had a definitepositive impact on future operating results of the Company.  Although the Company had to incur theinitial costs associated with the consolidation process, the future benefitsobtainable are unsurpassed.  Throughthese consolidations, the Company has improved manufacturing utilization at itsremaining sites and reduced manufacturing overhead.

Income from operations was $1,854,000 or4.6% of net sales in fiscal 2001 compared to $3,985,800 or 8.5% and $3,322,800or 7.1% of net sales in fiscal 2000 and 1999, respectively.  The 53.5% decrease in operating income infiscal 2001 is primarily due to the reduction in sales volumes caused by theeconomic downturn coupled with the increased raw material, natural gas andlabor related costs as outlines above. The 20% improvement in fiscal 2000 operating income is attributed to thepreservation of a favorable gross margin coupled with the reduction in SG&Acosts and from plant consolidations completed in fiscal 1999.  Although the Company continues to benefitfrom its plant consolidations and ongoing cost containment efforts, futureoperating results will be challenged, as we saw in fiscal 2001, by thecountry’s current economic conditions and escalating cost trends.

Total interest expense decreased $211,900to $743,100 in fiscal 2001 compared to $955,000 in fiscal 2000.  Although operating results have beenlackluster, the Company continues to generate sufficient cash flows which hasdecreased the Company’s total debt structure by approximately $2.2 million incomparison to amounts outstanding as of June 30, 2000.  This factor, along with negotiated ratereductions related to the Company’s bank debt and the 2.75% drop in the federaldiscount rate in fiscal 2001, will continue to have a positive effect onreducing future interest costs.

Interest expense decreased $32,700 to$955,000 in fiscal 2000 compared to $987,700 in fiscal 1999.  The Company’s cash flows during fiscal 2000were very strong allowing the Company to reduce its overall debt structureduring the year by approximately $1 million. Even though the bank’s interest rate has increased 1.75% during fiscal2000, the overall reduction in debt coupled with our existing interest rateSwap Agreement with the bank has kept interest costs in line with priorresults.

Income taxes were $666,000, $1,218,500and $1,147,500 in fiscal 2001, 2000 and 1999 respectively.  A major portion of the Company’s taxprovision is the deferred tax component which amounted to $562,700, $964,300and $923,400 in fiscal 2001, 2000 and 1999 respectively.  During the last three years these amountsprimarily relate to the utilization of the Company’s federal and state netoperating loss (“NOL”) carryforwards and thus do not diminish current cashflow.  In fiscal 2001, the Company fullyutilized its remaining Federal NOL carryforward.  At June 30, 2001 the Company had approximately $425,400 infederal alternative minimum tax (“AMT”) credit carryforwards to offset futuretaxable income.  Management anticipatesfully utilizing this AMT credit in fiscal 2002.  Following the utilization of this AMT credit, the Company willincur increased cashflow requirements for the payment of current federal taxes.

Net income decreased $1,403,200 to$550,500 or $.04 per common share for fiscal 2001 compared to net income of$1,953,700 or $.14 per common share in fiscal 2000.  The decrease is related to the 13.1% reduction in sales volumesdue to the tightening in the manufacturing sector coupled with the 2.6%increase in cost of sales, as a percentage of net sales, related to theescalating raw material, utility and labor related costs incurred during theperiod.  Management sees positive trendsin current backlogs, but realizes the manufacturing sector will continue toface ongoing challenges in its efforts to improve sales volumes, optimizeoperating results and absorb inflationary industry costs.  As such, management remains focused torebuild on its strengths and minimize these adverse conditions as much aspossible.

Net income increased 47% to $1,953,700 infiscal 2000 compared to $1,326,000 in fiscal 1999.  Earnings per share also increased 56% to $0.14 per common sharein fiscal 2000 compared to $0.09 per common share in fiscal 1999.  Management attributes the enhanced earningsto the current cost savings obtained from its SG&A cost containment effortsand the one-time plant consolidation costs realized in fiscal 1999 that did notdilute future earnings.  The increase infiscal 2000 earnings per share also benefited from the 2,169,099 common sharesrepurchased and retired in fiscal 2000.

Liquidity and CapitalResources

Working capital decreased $263,700 to$9,194,100 at June 30, 2001 compared to $9,457,800 at June 30, 2000.  The reduction is attributed to fluctuationsin accounts receivable, inventories and deferred income taxes consistent withthe Company’s current operations offset by the $1,000,000 reduction in thecurrent portion of long-term debt due to the restructuring of the Company’sdebt with the bank.  Cash flow fromoperations remained fairly strong but decreased by $1,646,000 to $3,547,200 forfiscal 2001 compared to $5,193,200 for the same period last year.  The decrease is primarily related to the$1,403,200 reduction in net income.

 

Earnings before interest, taxes,depreciation and amortization (“EBITDA”) were $4,631,900 in fiscal 2001compared to $6,831,900 in fiscal 2000. Although EBIDTA is not a substitute for measures of performance preparedin accordance with accounting principles generally accepted in the UnitedStates, it is a relevant internal measurement of the Company’s operations andcash flows.  As such, in spite of thenumerous challenges faced in fiscal 2001 which caused diminished operating results,the Company continues to generate sufficient cash flows from operationsenabling the Company to easily meet its working capital needs, service andreduce its debt, pay the common stock dividend declared in June 2001 andcontinue the common stock buyback program.

The Company expended a total of$1,348,100 for property, plant, and equipment during fiscal 2001 compared to$1,415,100 for the same period last year. The primary emphasis in fiscal 2001 was on new tooling and toolingmodifications as well as the additional CNC router for the Gardenafacility.  The Company currentlyanticipates total capital expenditures to be approximately $1.2 million infiscal 2002.

Net borrowings under the line of creditdecreased $1,215,100 to $1,100,000 between June 30, 2000 and June 30,2001.  The decrease is attributed toexcess cash flows generated from operations and the cash flow savings relatedto the Company’s restructured Credit Agreement with the bank.  At June 30, 2001, the Company had $5,900,000available for future borrowing under the line of credit.

On September 1, 2000, the bank reducedits LIBOR interest rate option on all of the Company’s outstanding debt fromLIBOR plus 2% to LIBOR plus 1.5%.  Then,effective October 1, 2000, the Company renegotiated its interest rate optionsin unison with the revolving line of credit renewal.  As such, the maturity date for the line of credit was extended toOctober 1, 2002 and the Company’s interest rates now reflect reductions fromtheir prior levels to the bank’s prime rate minus .25%, LIBOR plus 1% forborrowings under the line of credit and LIBOR plus 1.25% for all other termdebt.  In addition, the Companyconsolidated all of its outstanding term debt, except the real estate loan,with the bank into a new $6,050,000 seven-year term loan.  The note will be due in monthly principalinstallments of approximately $72,000 plus interest at the bank’s prime orLIBOR interest rate options.  The restructuringof the Company’s bank debt will result in cash flow savings of approximately$1.1 million (principal and interest) during the period October 2000 toSeptember 2001.

During fiscal 2001, the Companyreinstated its common stock buyback program. In fiscal 2001, the Company has acquired and retired 146,823 shares ofcommon stock at a total cost of $130,400. The Company plans to continue to actively acquire its common shares aslong as the market value per share continues to be under recognized by thestock market.  As of June 30, 2001 theCompany has approximately 12,761,400 shares of common stock outstanding.

On June 12, 2001, the Board of Directorsdeclared a common stock dividend of $.04 per common share payable on July 13,2001 to stockholders of record on June 27, 2001.  This marks the fifth payment of dividends since 1996 on theCompany’s stock.  This dividend, thefirst since the $2.8 million GSC common stock repurchase in January 2000 is atestament to the Board of Directors’ commitment to reward shareholder loyaltyand continue to build shareholder value. The Board of Directors has committed themselves to review annually adividend program for the Company’s common stock.

Cash flows from operations in conjunctionwith the Company’s revolving line of credit and machinery and equipment loancommitment are expected to meet the Company’s needs for working capital,capital expenditures, common stock repurchases and repayment of long term debtfor the foreseeable future.

In June 1998, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards(“SFAS”) No. 133, “Accounting for Derivative Instruments and HedgingActivities” as amended in June 1999 by SFAS 137, “Accounting for DerivativeInstruments and Hedging Activities – Deferral of the Effective Date of FASBStatement No. 133,” and in June 2000 by SFAS 138, “Accounting for CertainDerivative Instruments and Certain Hedging Activities,” (collectively SFAS133).  SFAS 133 requires that entitiesrecognize all derivatives as either assets or liabilities in the statement offinancial condition and measure those instruments at fair value.  Under SFAS 133 an entity may designate aderivative as a hedge of exposure to either changes in: (a) fair value of arecognized asset or liability or firm commitment, (b) cash flows of arecognized or forecasted transaction, or (c) foreign currencies of a netinvestment in foreign operations, firm commitments, available-for-salesecurities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transactionbeing hedged, any changes in the fair value of the derivative instrument iseither recognized in earnings in the current year, deferred to future periods,or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognizedas hedge accounting are recognized in current year earnings.  SFAS 133 is required for all fiscal yearsbeginning after June 15, 2000.  On July1, 2000 the Company adopted SFAS 133. In connection with the adoption of SFAS 133, the Company’s interest rateswap was designated as a hedge.  On theinitial adoption date of SFAS 133, the Company recorded the fair value of itsderivative on the balance sheet as an asset valued at $109,400 with anoffsetting entry to accumulated other comprehensive income.  The related unrealized loss of $270,000during the year ended June 30, 2001 has been recognized in the comprehensiveincome component of stockholders’ equity.

 

On December 3, 1999, the Securities andExchange Commission staff released Staff Accounting Bulletin (“SAB”) No. 101,Revenue Recognition, to provide guidance on the recognition, presentation anddisclosure of revenue in financial statements. While SAB No. 101 provides a framework by which to recognize revenue inthe financial statements, adherence to this SAB did not have a material impacton the Company’s financial statements. The Company adopted this requirement during the fourth quarter of Fiscal2001.

The Emerging Issues Task Force (EITF) ofthe Financial Accounting Standard Board issued a new release (EITF 00-10) atthe end of July 2000 regarding the classification of freight and handling costsbilled to customers.  EITF 00-10requires freight and handling costs billed separately on an invoice to beincluded as part of Sales on the Statement of Income.  In addition, the preferred classification of freight and handlingcosts expensed on the Statement of Income is to include them in Cost ofSales.  The Company adopted thisrequirement during the fourth quarter of Fiscal 2001.  There was no impact on net income as a result of the adoption ofEITF 00-10.

In March 2000, the FASB issued FASBInterpretation No. 44, “Accounting for Certain Transactions involving StockCompensation” (“FIN 44”).  FIN 44provides guidance for issues arising in applying APB Opinion No. 25 “Accountingfor Stock Issued to Employees.”  FIN 44applies specifically to new awards, exchanges of awards in a businesscombination, modification to outstanding awards and changes in grantee statusthat occur on or after July 1, 2000, except for the provisions related torepricings and the definition of an employee which apply to awards issued afterDecember 15, 1998.  The requirements ofFIN 44 are consistent with the Company’s existing accounting policies.

In June 2001, the FASB approved two newpronouncements: SFAS No. 141, “Business Combinations,” and SFAS No. 142,“Goodwill and Other Intangible Assets.” SFAS No. 141 applies to all business combinations with a closing dateafter June 30, 2001.  This Statementeliminates the pooling-of-interests method of accounting and further clarifiesthe criteria for recognition of intangible assets separately from goodwill.

SFAS No. 142 eliminates the amortizationof goodwill and indefinite-lived intangible assets and initiates an annualreview for impairment.  Identifiableintangible assets with a determinable useful life will continue to beamortized.  The Company will adopt SFASNo. 142 effective July 1, 2001, which will require the Company to ceaseamortization of its remaining net goodwill balance and to perform an impairmenttest of its existing goodwill based on a fair value concept.  Although the Company is still reviewing theprovisions of these Statements, it is management’s preliminary assessment thatgoodwill impairment will not result upon adoption.  As of June 30, 2001, the Company has net unamortized goodwill of$4,105,900 and annual goodwill amortization expense of $324,900.

Item 7a. DisclosuresAbout Market Risk

Interest Rate Risk

The Company is exposed to certain marketrisks relating to interest rate volatility on its existing and future issuancesof variable rate debt with the bank. Primary exposures include movements in U.S. Treasury rates and LIBORrates which in turn affect the bank’s prime and LIBOR option rates.

The Company had approximately $8.3million of variable rate debt as of June 30, 2001.  In efforts to reduce interest rate volatility and mitigateexposure on variable rate debt, the Company entered into an interest rate swapeffective July 15, 1998.  The swap has anotional amount of $5 million as of July 15, 2000, and will remain at thisamount until its expiration on July 15, 2003. The swap fixes the bank’s LIBOR option rate at 6.2% over the term of thecontract.  The fair value of the swapamounted to ($91,400) as of June 30, 2001. If average interest rates increased by 1% during fiscal 2002 as comparedto fiscal 2001, and additional borrowings are not incurred, the Company wouldnot expect a significant increase in projected fiscal 2002 interest expense.

Item8.  Financial Statements andSupplementary Data

See Financial Statements and FinancialStatement Schedules listed in Item 14(a)(1) and (2).

Item9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure

None.

 

PART III

Item10.  Directors and Executive Officers ofthe Registrant

Directors

The Company incorporates by reference theinformation set forth under the caption “Election of Directors” in theCompany’s Proxy Statement to be filed with the Securities and ExchangeCommission, and mailed to stockholders in connection with the Company’s AnnualMeeting of the Stockholders to be held on December 3, 2001 (“the ProxyStatement”)

Executive Officers

As of September 6, 2001, the executiveofficers of the Company were as follows:
NameAgePositionSherman  McKinniss65President,  Chief Executive Officer, Chairman of the BoardRobert  E. Gawlik53Executive  Vice-President, Chief Operating OfficerE.  Paul Tonkovich63Secretary,  DirectorDouglas  W. Russell40Chief  Financial Officer, Assistant Secretary/Treasurer
 

Sherman McKinniss.  Mr. McKinniss has served as President, ChiefExecutive Officer and a Director of the Company since August 1991 and wasappointed as Chairman of the Board in December 1994.  He was President and a Director of Rotonics from 1987-1991.  Previously, he owned and operated RMI, whichhe sold to the Company in 1986 and was a partial owner of Rotational Molding,Inc.-Florida which was merged into Rotonics in 1988.

Robert E. Gawlik.  Mr. Gawlik was appointed as Chief OperatingOfficer of the Company in August 1998. Prior to this, he served as General Manager for Bonar Plastic’s Oregonfacility from 1991-1998, and as Executive Vice-President of Encore Industriesfrom 1986-1989, and later as President of Encore Group from 1989-1991.

E. Paul Tonkovich.  Mr. Tonkovich has served as Secretary and aDirector of the Company since August 1991. He has been a practicing attorney since January 1966.  He was legal counsel to Rotonics and to Mr.McKinniss and is now legal counsel for the Company.

Douglas W. Russell.  Mr. Russell has served as Chief FinancialOfficer and Assistant Secretary/Treasurer of the Company since 1991.  Prior to that he was a Senior Auditor forthe accounting firm Hallstein & Warner from 1988 until 1991, and wasAssistant Controller of RMI from September 1985 to September 1987.

Item 11.   Executive Compensation

The Company incorporates by reference theinformation set forth under the captions “Compensation of Executive Officers”,the “Summary Compensation Table” and related disclosure information, “CertainTransactions”, and “Compensation of Directors” in the Proxy Statement.

Item12.   Security Ownership of CertainBeneficial Owners and Management

The Company incorporates by reference theinformation set forth under the caption “Security Ownership by CertainBeneficial Holders” in the Proxy Statement.

Item13.   Certain Relationships and RelatedTransactions

The Company incorporates by reference theinformation set forth under the headings “Information Concerning the Board ofDirectors” under the caption “Election of Directors”, “Executive Officers”, and“Certain Transactions” in the Proxy Statement.

PART IV

Item14.   Exhibits, Financial Statements Schedules,and Reports on form 8-K
 (a)The  following documents are filed as part of this report:     (1)Financial  Statements:       Report  of Independent Public Accountants   Consolidated  Balance Sheets, June 30, 2001 and 2000   Consolidated  Statements of Income and Comprehensive Income, Years Ended June 30, 2001,  2000, and 1999   Consolidated  Statements of Changes in Stockholders’ Equity, Years Ended June 30, 2001,  2000, and 1999   Consolidated  Statements of Cash Flows, Years Ended June 30, 2001, 2000, and 1999   Notes  to Consolidated Financial Statements      (2)Financial  Statement Schedules:       IIValuation  and Qualifying Accounts,      Years Ended June 30, 2001, 2000, and 1999  All  other schedules are omitted because they are not applicable or the required  information is shown in the financial statements or notes thereto.    (b)Reports  on Form 8-K - None.    (c)The  following exhibits are filed as part of this report:
ExhibitNumber                                                                  ExhibitTitle

10.1                                                            CreditAgreement between registrant and Wells Fargo Bank dated October 1, 2000.

23(a)                                                          Consentof Independent Public Accountants - Arthur Andersen LLP
SIGNATURES

Pursuant to the requirements of Section13 or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
 ROTONICS  MANUFACTURING INC.    By    /s/   SHERMAN MCKINNISS     Sherman McKinniss  President, Chief Executive Officer     Date 09/ 21/2001  By    /s/   DOUGLAS W. RUSSELL     Douglas W. Russell  Chief Financial Officer  Assistant Secretary/Treasurer     Date 09/21/2001
Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on thedates indicated.

 
SignatureTitleDate   /s/  E. PAUL TONKOVICHSecretary,  Director09/21/2001E.  Paul Tonkovich  /s/  DAVID C. POLITEDirector09/21/2001David  C. Polite  /s/  LARRY M. DEDONATODirector09/21/2001Larry  M. DeDonato  /s/  LARRY L. SNYDERDirector09/21/2001Larry  L. Snyder     /s/  MARC L. BERMANDirector09/21/2001Marc  L. Berman  
 

 

REPORT OF INDEPENDENTPUBLIC ACCOUNTANTS

To the Board ofDirectorsand Stockholders of Rotonics Manufacturing Inc.:

We have audited theaccompanying consolidated balance sheets of ROTONICS MANUFACTURING INC. (aDelaware corporation) as of June 30, 2001 and 2000, and the relatedconsolidated statements of income and comprehensive income, changes instockholders’ equity and cash flows for each of the three years in the periodended June 30, 2001.  These consolidatedfinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

We conducted our auditsin accordance with auditing standards generally accepted in the UnitedStates.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Rotonics Manufacturing Inc. as ofJune 30, 2001 and 2000, and the results of their operations and their cashflows for each of the three years in the period ended June 30, 2001 inconformity with accounting principles generally accepted in the United States.

Our audits were made forthe purpose of forming an opinion on the basic financial statements taken as awhole.  The schedule listed in the indexappearing under Item 14(a)(2) is presented for purposes of complying with the Securitiesand Exchange Commission’s rules and is not a required part of the basicfinancial statements.  This schedule hasbeen subjected to the auditing procedures applied in our audits of the basicfinancial statements and, in our opinion, is fairly stated in all materialrespects in relation to the basic financial statements taken as a whole.

As explained in Note 1to the Financial Statements, effective July 1, 2000, the Company changed itsmethod of accounting for derivatives.

/s/ARTHUR ANDERSEN LLP

OrangeCounty, CaliforniaAugust 22, 2001

 

ROTONICSMANUFACTURING INC.

CONSOLIDATEDBALANCE SHEETS

 
 June 30,  2001 2000      ASSETS Current  assets:     Cash$28,000 $20,800  Accounts receivable, net of allowance for doubtful accounts  of $99,200 and $142,000, respectively (Notes 8 and 9)5,260,700 6,151,500  Current  portion of notes receivable (Note 3)62,300 17,700  Inventories  (Notes 4, 8 and 9)7,138,300 7,361,600  Deferred  income taxes, net (Note 14)541,300 1,092,200  Prepaid  expenses and other current assets349,100 222,300          Total  current assets13,379,700 14,866,100      Notes  receivable, less current portion (Note 3)311,800 418,000 Investment  in partnership (Note 5)113,800 120,300 Property,  plant and equipment, net (Notes 6, 8 and 9)16,129,600 17,132,100 Intangible  assets, net (Note 7)4,460,600 4,470,400 Other  assets105,300 58,300          $34,500,800 $37,065,200         LIABILITIES AND STOCKHOLDERS' EQUITY      Current  liabilities:     Current  portion of long-term debt (Note 9)$944,300 $1,961,700  Accounts  payable2,429,900 2,497,600  Accrued  liabilities (Note 11)811,400 949,000     Total  current liabilities4,185,600 5,408,300      Bank line  of credit (Note 8)1,100,000 2,315,100 Long-term  debt, less current portion (Note 9)6,296,200 6,254,700 Deferred  income taxes, net (Note 14)2,611,900 2,600,100          Total  liabilities14,193,700 16,578,200         Commitments  and contingencies (Note 15)         Stockholders'  equity:    Common  stock, stated par value $.01: authorized 20,000,000 shares; issued and outstanding 12,761,398  and 12,905,721 shares, respectively, net of treasury shares (Note 13)23,203,100 23,331,500 Accumulated  other comprehensive loss(91,400)- Accumulated  deficit(2,804,600)(2,844,500)         Total  stockholders' equity20,307,100 20,487,000          $34,500,800 $37,065,200    
 

The accompanying notes are an integral part ofthese financial statements.
ROTONICSMANUFACTURING INC.

CONSOLIDATEDSTATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 
 For the year ended June 30,    2001 2000 1999        Net sales$40,520,100 $46,647,700 $46,730,900            Costs and  expenses:       Cost of  goods sold31,158,700 34,645,000 34,566,500  Selling,  general and administrative expenses7,507,400 8,016,900 8,447,200  Plant  consolidation expenses (Note 2)- - 394,400             Total  costs and expenses38,666,100 42,661,900 43,408,100            Income  from operations1,854,000 3,985,800 3,322,800            Other  (expense)/income:       Interest  expense(743,100)(955,000)(987,700) Other  income, net105,600 141,400 138,400      Total  other expense, net(637,500)(813,600)(849,300)    Income  before income taxes1,216,500 3,172,200 2,473,500        Income tax  provision (Note 14)(666,000)(1,218,500)(1,147,500)    Net income550,500 1,953,700 1,326,000     Other  comprehensive income, before tax:       Cumulative  effect of adoption of SFAS 133109,400 - -  Unrealized  holding loss arising during the period(270,000)- -  Less:  Reclassification adjustments for losses included in net income8,300 - -      Total  other comprehensive loss before tax(152,300)- -  Income tax  benefit related to items of other comprehensive loss60,900 - -      Total  other comprehensive loss, net of tax(91,400)- -     Comprehensive  income$459,100 $1,953,700 $1,326,000            Basic and  diluted income per share (Note 1)$.04 $.14 $.09     
 

The accompanying notes are an integral part of these financialstatements.
ROTONICS MANUFACTURING INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

 
 Common Stock         Accumulated        Other  Comprehensive Accumulated    Shares Amount Loss Deficit Total            Balances,  June 30, 199815,806,361 $26,921,400 $- $(5,513,500)$21,407,900            Repurchase  of common stock(734,041)(688,900)- - (688,900)Common  stock dividends- - - (610,700)(610,700)           Net income- - - 1,326,000 1,326,000                  Balances,  June 30, 199915,072,320 26,232,500 - (4,798,200)21,434,300            Exercise  of stock options2,500 2,000 - - 2,000 Repurchase  of common stock(2,169,099)(2,903,000)- - (2,903,000)           Net income- - - 1,953,700 1,953,700                  Balances,  June 30, 200012,905,721 23,331,500 - (2,844,500)20,487,000            Exercise  of stock options2,500 2,000 - - 2,000 Repurchase  of common stock(146,823)(130,400)- - (130,400)Common  stock dividends- - - (510,600)(510,600)Other  comprehensive loss, net of tax- - (91,400)- (91,400)           Net income- - - 550,500 550,500                  Balances,  June 30, 200112,761,398 $23,203,100 $(91,400)$(2,804,600)$20,307,100       
 

The accompanying notes are an integral part ofthese financial statements.
ROTONICS MANUFACTURING INC.

CONSOLIDATED STATEMENTS OF CASHFLOWS

 
 For the year ended June 30,  200120001999 Cash flows  from operating activities:       Net income$550,500 $1,953,700 $1,326,000  Adjustments  to reconcile net income to net cash provided by operating activities:                Depreciation  and amortization2,672,300 2,704,600 2,635,300  Gain on  sales of equipment(48,000)(24,000)(1,500) Deferred  income tax expense562,700 964,300 923,400  Provision  for doubtful accounts31,000 22,800 179,300  Changes in  assets and liabilities:       Decrease  in accounts receivable859,800 395,900 160,400  Decrease/(increase)  in inventories223,300 (387,900)108,200  Increase  in prepaid expenses and other current assets(126,800)(5,600)(8,500) (Increase)/decrease  in other assets(370,500)18,900 42,100  Decrease  in accounts payable(578,100)(318,400)(879,900) (Decrease)/increase  in accrued liabilities(229,000)(88,100)87,900  (Decrease)/increase  in income taxes payable- (43,000)43,000             Net cash  provided by operating activities3,547,200 5,193,200 4,615,700            Cash flows  from investing activities:       Repayments  on notes receivable61,600 118,800 27,000  Capital  expenditures(1,348,100)(1,415,100)(2,141,400) Proceeds  from sales of equipment59,600 26,600 5,700  Distribution  from investment in partnership6,500 3,900 9,000             Net cash  used in investing activities(1,220,400)(1,265,800)(2,099,700)           Cash flows  from financing activities:       Borrowings  under line of credit9,336,300 14,055,200 11,670,500  Repayments  under line of credit(10,551,400)(14,027,500)(13,309,300) Proceeds  from issuance of long-term debt6,050,000 3,200,000 3,505,900  Repayments  of long-term debt(7,025,900)(4,233,800)(3,090,000) Payment of  common stock dividends(200)(2,800)(631,600) Proceeds  from exercise of stock options2,000 2,000 -  Repurchases  of common stock(130,400)(2,903,000)(688,900)            Net cash  used in financing activities(2,319,600)(3,909,900)(2,543,400)           Net  increase/(decrease) in cash7,200 17,500 (27,400)Cash at  beginning of year20,800 3,300 30,700            Cash at  end of year$28,000 $20,800 $3,300     
 

The accompanying notes are an integral part ofthese financial statements.

 

ROTONICSMANUFACTURING INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1- ORGANIZATION,OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:

Organization andoperations

Rotonics Manufacturing Inc.  (the “Company”), a Delaware corporationmanufactures and markets plastic products for commercial, agricultural, refuse,pharmaceutical, marine, recreation, medical waste, healthcare, retail, recreation and residential use, aswell as an array of custom molded plastic products to customers in a variety ofindustries located in diverse geographic markets.  The Company’s operations are conducted under one operatingsegment.  No single customer accountedfor more than 10% of the Company’s net sales in fiscal 2001, 2000, or1999.  In fiscal 2001, the Companypurchased in aggregate approximately 97% of its plastic resin from fivevendors.  Plastic resin represents asignificant portion of the Company’s manufacturing costs.  As such, economic factors that affect theCompany’s plastic resin vendors will have a potential impact on the Company’sfuture operations.

The Company’s significant accountingpolicies are as follows:

Principles ofconsolidation

The consolidated financial statementsinclude the accounts of the Company and its wholly-owned subsidiary, RotocastPlastic Products of Tennessee, Inc.  Allintercompany accounts and transactions have been eliminated in consolidation.

Revenue recognition

Revenues are recognized upon shipment tothe customer or when title passes to the customer based on the terms of thesales, and are recorded net of sales discounts, returns and allowances.

Use of estimates

The preparation of financial statementsin conformity with accounting principles generally accepted in the UnitedStates requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

Fair Value of FinancialInstruments

The carrying value of accounts receivableand trade payables approximates the fair value due to their short-termmaturities. The carrying value of the Company’s line of credit and notespayable is considered to approximate fair market value because the interestrates of these instruments are based predominately on variable reference rates.

Inventories

Inventories are stated at the lower ofcost or market.  Cost is determined onthe first-in, first-out method.

Property, plant and equipment

Depreciation is computed using thestraight-line method and the estimated useful lives of the assets range fromthree to thirty-nine years.  When assetsare retired or otherwise disposed of, the cost and related accumulateddepreciation are removed from the accounts, and any resulting gain or loss isincluded in income for the period.  Thecost of maintenance and repairs is charged to income as incurred; costsrelating to significant renewals and betterments are capitalized.

Intangible assets

The excess of the aggregate purchaseprice over the fair value of the net assets of businesses acquired is amortizedon the straight-line basis over periods ranging from fifteen to fortyyears.  Patents are amortized on thestraight-line basis over their useful lives of seventeen years, or at theirremaining useful life from date of acquisition.  Legal costs associated with defending existing patents arecapitalized as additional costs of the patent when successful defense isprobable.

 

Income taxes

The Company accounts for income taxespursuant to an asset and liability approach that requires the recognition ofdeferred tax assets and liabilities for the expected future tax consequences ofevents that have been recognized in the Company’s financial statements or taxreturns.  In estimating future taxconsequences expected future events other than enactments of changes in taxlaws or rates are considered.

Reclassifications

Certain reclassifications of prior years’amounts relating to sales and cost of sales have been made to conform tocurrent year presentation.

Earnings per share

Basic EPS is computed by dividingreported earnings by weighted average shares outstanding.  Diluted EPS include the effect of thepotential shares outstanding including dilutive securities using the treasurystock method.  Potential dilutivesecurities for the Company include outstanding stock options.

The table below details the components ofthe basic and diluted earnings per share (“EPS”) calculations:
   Weighted      Average    Income Shares EPS Amount June 30,  2001       Basic EPS       Net Income$550,500 12,835,200 $0.04         Effect of  dilutive stock options- 10,800 -             Diluted  EPS$550,500 12,846,000 $0.04            June 30,  2000       Basic EPS       Net Income$1,953,700 13,981,800 $0.14         Effect of  dilutive stock options- 58,000 -             Diluted  EPS$1,953,700 14,039,800 $0.14            June 30,  1999       Basic EPS       Net Income$1,326,000 15,379,400 $0.09         Effect of  dilutive stock options- 4,700 -             Diluted  EPS$1,326,000 15,384,100 $0.09     
 

Impact of RecentAccounting Pronouncements

In June 1998, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards(“SFAS”) No. 133, “Accounting for Derivative Instruments and HedgingActivities” as amended in June 1999 by SFAS 137, “Accounting for DerivativeInstruments and Hedging Activities – Deferral of the Effective Date of FASBStatement No. 133,” and in June, 2000, by SFAS 138, “Accounting for CertainDerivative Instruments and Certain Hedging Activities,” (collectively SFAS133).  SFAS 133 requires that entitiesrecognize all derivatives as either assets or liabilities in the statement offinancial condition and measure those instruments at fair value.  Under SFAS 133 an entity may designate aderivative as a hedge of exposure to either changes in: (a) fair value of arecognized asset or liability or firm commitment, (b) cash flows of arecognized or forecasted transaction, or (c) foreign currencies of a netinvestment in foreign operations, firm commitments, available-for-salesecurities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transactionbeing hedged, any changes in the fair value of the derivative instrument iseither recognized in earnings in the current year, deferred to future periods,or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognizedas hedge accounting are recognized in current year earnings.  SFAS 133 is required for all fiscal yearsbeginning after June 15, 2000.  On July1, 2000 the Company adopted SFAS 133. In connection with the adoption of SFAS 133, the Company’s interest rateswap was designated as a hedge.  On theinitial adoption date of SFAS 133, the Company recorded the fair value of itsderivative on the balance sheet as an asset valued at $109,400 with anoffsetting entry to accumulated other comprehensive income.  The related unrealized loss of $270,000during the year ended June 30, 2001 has been recognized in the other comprehensiveloss component of stockholders’ equity.

On December 3, 1999, the Securities andExchange Commission staff released Staff Accounting Bulletin (“SAB”) No. 101,Revenue Recognition, to provide guidance on the recognition, presentation anddisclosure of revenue in financial statements. While SAB No. 101 provides a framework by which to recognize revenue inthe financial statements, adherence to this SAB did not have a material impacton the Company’s financial statements. The Company adopted the new standard during fiscal 2001.

The Emerging Issues Task Force (EITF) ofthe Financial Accounting Standard Board issued a new release (EITF 00-10) atthe end of July 2000 regarding the classification of freight and handling costsbilled to customers.  EITF 00-10required freight and handling costs billed separately on an invoice to beincluded as part of Sales on the Statements of Income.  In addition, the preferred classification offreight and handling costs expensed on the Statements of Income is to includethem in Cost of Sales.  The Companyadopted this requirement during the fourth quarter of fiscal 2001 andreclassifications have been made for all periods presented.  There was no impact on net income as aresult of the adoption of EITF 00-10.

In March 2000, the FASB issued FASBInterpretation No. 44, “Accounting for Certain Transactions involving StockCompensation” (“FIN 44”).  FIN 44provides guidance for issues arising in applying APB Opinion No. 25 “Accountingfor Stock Issued to Employees.”  FIN 44applies specifically to new awards, exchanges of awards in a businesscombination, modification to outstanding awards and changes in grantee statusthat occur on or after July 1, 2000, except for the provisions related torepricings and the definition of an employee which apply to awards issued afterDecember 15, 1998.  The requirements ofFIN 44 are consistent with the Company’s existing accounting policies.

In June 2001, the FASB approved two newpronouncements: SFAS No. 141, “Business Combinations,” and SFAS No. 142,“Goodwill and Other Intangible Assets.” SFAS No. 141 applies to all business combinations with a closing dateafter June 30, 2001.  This Statementeliminates the pooling-of-interests method of accounting and further clarifiesthe criteria for recognition of intangible assets separately from goodwill.
SFAS No. 142 eliminates the amortizationof goodwill and indefinite-lived intangible assets and initiates an annualreview for impairment.  Identifiableintangible assets with a determinable useful life will continue to beamortized.  The Company will adopt SFASNo. 142 effective July 1, 2001, which will require the Company to ceaseamortization of its remaining net goodwill balance and to perform an impairmenttest of its existing goodwill based on a fair value concept.  Although the Company is still reviewing theprovisions of these Statements, it is management’s preliminary assessment thatgoodwill impairment will not result upon adoption.  As of June 30, 2001, the Company has net unamortized goodwillof  $4,105,900 and annual goodwillamortization expense of $324,900.

NOTE 2 - ACQUISITIONS:

Pursuant to an Agreement and Plan ofMerger and Reorganization dated March 24, 1998 between the Company and GSCIndustries, Inc. (“GSC”), the Company acquired all of GSC’s outstanding commonstock holdings in Rotocast International, Inc. (“Rotocast”) and Rotocast’swholly owned subsidiaries.  Inaccordance with the merger and reorganization, Rotocast was merged into theCompany and the Company issued to GSC 2,072,539 shares of its own common stockand a $2,000,000 eighteen-month promissory note bearing interest at 5.26% perannum.  The note was paid in full inSeptember 1999.  In January 2000, theCompany repurchased and retired the 2,072,539 common shares issued to GSC for$2.8 million.

As part of the reorganization of Rotonicsand Rotocast, the Company relocated its operations in Warminster, Pennyslvania,Arleta, California and Miami, Florida into its other operating facilities.  The relocation of these plants resulted innon-recurring costs of approximately $394,400 in Fiscal 1999.

NOTE 3 - NOTESRECEIVABLE:

On March 31, 1995, the Company and acustomer entered into an agreement under which the Company acquired from thiscustomer certain assets, including molds and trade accounts receivable, attheir total estimated fair value of $357,800, which was applied against theprincipal of a 1993 Promissory Note owed by this customer to the Company.  The remaining unpaid principal, togetherwith accrued interest and open trade receivable from this customer as of March31, 1995, were exchanged for a new note with a principal balance of $455,000,bearing interest at 8% per annum and maturing on March 31, 2005.

Effective March 31, 1995, the Companysold products manufactured using these molds directly to end users.  The Company pays this former customerroyalties at the initial rate of 10% (increased to 20% beginning fiscal 2000) of the Company’s net sales ofthese products.  Half of the royaltypayments are being applied to reduce principal and interest until the formercustomer has received a total of $300,000 in royalty payments or March 31,1998, whichever is earlier. Subsequently, all royalty payments shall be applied to principal andinterest until such principal and interest are paid in full, at which time theroyalty rate will be reduced to 5% through March 31, 2005.  As of June 30, 2001 and 2000, the totalbalance of this note amounted to $292,100 and $387,900.  The Company intends to hold this note untilmaturity.

In the normal course of business theCompany issued in fiscal 2001 two notes receivable for the sale of molds.  At June 30, 2001 these notes amounted to$82,000.  In fiscal 2000, the Companywas owed $47,800 on a note receivable for the sale of a roto-moldingmachine.  This note was  paid in full in fiscal 2001.

NOTE 4 - INVENTORIES:
Inventories consist  of:June  30,  2001 2000 Raw materials$2,353,300 $2,194,400 Finished goods4,785,000 5,167,200     $7,138,300 $7,361,600 
 

NOTE 5 - INVESTMENT INPARTNERSHIP:

TheCompany owns a 33-1/3% interest in a real estate venture that was acquired in1998 and is being accounted for using the equity method.  The investment consists principally of anote receivable which is payable in monthly installments, including interest at7%, to 2008, with annual principal reductions as provided.

NOTE 6 - PROPERTY, PLANTAND EQUIPMENT:
Property, plant and  equipment consist of:June  30,  2001 2000 Land$1,039,500 $1,039,500 Buildings and building  improvements5,009,900 4,725,200 Machinery, equipment,  furniture and fixtures25,911,000 24,879,100 Construction in  progress4,900 48,500     31,965,300 30,692,300 Less - accumulated  depreciation(15,835,700)(13,560,200)    $16,129,600 $17,132,100    
NOTE 7 - INTANGIBLEASSETS:

 
Intangible assets  consist of:June  30,  2001 2000 Patents, net of  accumulated amortization of $121,000 and $112,600$354,700 $39,600 Goodwill, net of  accumulated amortization of $3,351,500 and $3,026,6004,105,900 4,430,800     $4,460,600 $4,470,400    
The Company assesses the recoverabilityof its long-lived assets on an annual basis or whenever adverse events orchanges in circumstances or business climate indicate that expectedundiscounted future cash flows related to such long-lived assets may not besufficient to support the net book value of such assets.  If undiscounted cash flows are not sufficientto support the recorded assets, impairment is recognized to reduce the carryingvalue of the long-lived assets to the estimated fair value.  Cash flow projections, although subject to adegree of uncertainty, are based on trends of historical performance andmanagement’s estimate of future performance, giving consideration to existingand anticipated competitive and economic conditions.  Additionally, in conjunction with the review for impairment, theremaining estimated lives of certain of the Company’s long-lived assets areassessed.

NOTE 8 - BANK LINE OFCREDIT:

The Company has a $7,000,000 revolvingline of credit with Wells Fargo Bank, which matures on October 1, 2002.  The line is secured by the Company’smachinery and equipment, accounts receivable and inventories.  Interest is payable monthly at therespective bank’s prime rate minus .25%. The respective bank’s prime rate at June 30, 2001 was 6.75% perannum.  In addition, the loan agreementallows the Company to convert the outstanding principal balance in amounts noless than $250,000 to a LIBOR-based loan for up to 90-day periods.  At June 30, 2001, total borrowings under theCompany’s line of credit were $1,100,000 of which the total balance wasborrowed under the LIBOR option bearing a LIBOR interest rate of 4.95% perannum and maturing on July 16, 2001. Proceeds from the loan were used for working capital purposes.  At June 30, 2001, the Company hadapproximately $5,900,000 available for future borrowings under the revolvingline of credit.  The loan agreementcontains various covenants pertaining to tangible net worth, net income andliquidity ratios, capital expenditures, payments of dividends, payment ofsubordinated debt as well as various other restrictions.  The Company was in compliance with thesecovenants during fiscal 2001.
NOTE 9 - LONG-TERM DEBT:
Long-term  debt consists of:June 30,  2001 2000 Note  payable - Bank       (A)$5,473,800 $- Note  payable - Bank       (B)1,766,700 1,846,700 Note  payable - Bank- 186,400 Note  payable - Bank- 400,000 Note  payable - Bank- 800,000 Note  payable - Bank- 1,850,000 Note  payable - Bank- 91,600 Note  payable - Bank- 1,833,300 Note  payable - Bank- 1,200,000 Other- 8,400          7,240,500 8,216,400 Less-current  portion(944,300)(1,961,700)         $6,296,200 $6,254,700    
 
(A)On  October 1, 2000, the Company restructured its Credit Agreement with Wells  Fargo Bank resulting in the consolidation of all its outstanding term debt,  except for the real estate loan.  In  replacement the bank issued a $6,050,000 seven year note due in monthly  principal installments of $72,000 plus interest at the bank’s prime rate  minus .25% (6.75% per annum at June 30, 2001).  In addition, the loan agreement allows the Company to convert  all or a portion of the outstanding principal to a LIBOR-based loan for  periods up to one year.  In connection  with the restructured Credit Agreement, the Company also negotiated with the  bank to reduce its interest borrowing rates on all of its outstanding term  debt from the bank’s prime or LIBOR plus 2% rates to the bank’s prime minus  .25% or LIBOR plus 1.25%.  At June 30,  2001, the total outstanding principal balance was under the LIBOR option at  5.2% per annum maturing July 16, 2001.   The note is secured by the Company’s machinery and equipment, accounts  receivable and inventories and matures October 15, 2007.  This restructuring of the Company’s debt  will result in annual cash flow savings of approximately $1.1 million (principal  and interest) for the period October 2000 through September 2001.   At  June 30, 2001 the Company had available a term-loan commitment in the amount  of $1,200,000 for future machinery and equipment purchases.  Advances under the line will be subject to  monthly interest only payments at the bank’s prime or LIBOR interest rate  options until October 1, 2001 at which time amounts borrowed will convert to  a sixty-month fully amortizable loan.   The Company plans to advance against the available borrowings under  the term loan commitment prior to its expiration.  (B)In  July 1998, a $2,000,000 real estate loan secured by the Company’s  Bensenville, Illinois and Gainesville, Texas properties was issued to Wells  Fargo Bank.  This note replaced the  1994 real estate loan issued in connection with the purchase of the  Bensenville, Illinois property.  The  note is due in monthly principal installments of approximately $6,700 plus  interest at the bank’s prime rate minus .25% (6.75% per annum at June 30,  2001), or LIBOR interest rate option on a twenty-five year amortization with  the outstanding principal due on July 1, 2008.  At June 30, 2001, the total outstanding principal was under the  LIBOR option at 5.2% per annum maturing July 16, 2001.   Effective  July 15, 1998, the Company initiated an interest rate swap agreement with the  bank.  The agreement allows the  Company to fix a portion of its outstanding term and line of credit debt ($5  million as of June 30, 2001) from a variable floating LIBOR rate to a fixed LIBOR  rate in efforts to protect against future increases in the bank’s LIBOR  rate.  The agreement matures July 15,  2003.
 

Aggregate annual maturities of long-termdebt are summarized as follows:
Year  Ending June 30,    2002 $944,300  2003 944,300  2004 944,300  2005 944,300  2006 944,300  Thereafter 2,519,000        $7,240,500    
NOTE 10 – RELATED PARTYTRANSACTIONS:

The Company sold plastic resin and moldedplastic products to a company in which an officer/director of the Company hasan equity interest.  Sales to theCompany amounted to $59,500, $157,000 and $461,000 in fiscal years 2001, 2000and 1999, respectively.  Amounts due onsales to this company were $1,600 at June 30, 2001, and are included inaccounts receivable in the accompanying balance sheet.   No amounts were due at June 30, 2000.

In fiscal years 2001, 2000 and 1999, theCompany incurred legal fees and costs amounting to $42,500, $138,600 and$44,500, respectively, for services by E. Paul Tonkovich ProfessionalCorporation, of which an officer/director of the Company is an employee.

NOTE 11 - ACCRUEDLIABILITIES:
Accrued liabilities  consist of:June  30,  2001 2000 Salaries, wages,  commissions and related payables$463,000 $620,000 Other348,400 329,000     $811,400 $949,000    
NOTE 12 - STOCK OPTIONPLAN:

In December 1994, at the Annual Meetingof Stockholders of the Company, the stockholders voted by majority decision toratify and approve a new stock option plan as adopted by the Board of Directorsin June 1994.  The plan allows, at thediscretion of the Board of Directors, for the granting of options to keyemployees, officers, directors, and consultants of the Company to purchase1,000,000 shares of the Company’s common stock.  Under the terms and conditions set forth in the plan, theexercise price of the stock options will be a least 85% of the fair marketvalue of the Company’s common stock on the grant date.  The plan expires June 12, 2004.
Stock Option Activity
 Outstanding Exercisable Weighted  Average  Shares Shares Price  Per Share Balance outstanding at  June 30, 1998- -    Granted115,000   $0.8869        Balance outstanding at  June 30, 1999115,000 100,000 $0.8750         Granted40,000   $0.9375  Exercised(2,500)  $0.8125  Cancelled(2,500)  $0.8125        Balance outstanding at  June 30, 2000150,000 145,000 $0.8901        Granted193,000   $1.1146  Exercised(2,500)  $0.8125  Cancelled(33,000)  $0.9886        Balance outstanding at  June 30, 2001307,500 277,500 $1.0084      
 

In fiscal 1998, there was no activity inthe plan.  In fiscal 2001, the Companyissued stock options to Directors and key employees to purchase 193,000 sharesof common stock at fair market value at the date of grant.  At June 30, 2001, the Company had 687,500shares available for future grants.

The Company accounts for stock optionsunder Accounting Principles Board Opinion 25 (“APB25”), “Accounting for StockIssued to Employees”, which is permitted under SFAS No. 123  “Accounting for Stock Based Compensation”,issued in 1995.  Had compensation costfor the plan been determined in accordance with rules set out in SFAS 123, theCompany’s net income and income per common share data would not besignificantly different.

NOTE 13 - COMMON STOCK:

Treasury stock is recorded at cost.  At June 30, 2001 and 2000, treasury stockconsisted of 864 and 868 shares of common stock at a cost of $700,respectively.  In fiscal 2001 and 2000,the Company acquired 146,823 and 2,169,099 shares of its common stock at atotal cost of $130,400 and $2,903,000, respectively.  The fiscal 2000 amount includes 2,072,539 shares of common stockrepurchased from GSC for $2.8 million. These shares were acquired pursuant to a Stock Purchase Agreement datedDecember 2, 1999 between the Company and GSC and which was consummated onJanuary 6, 2000.  In addition, therepurchase of these shares in fiscal year 2000 precluded the payment of anannual cash dividend for fiscal year 2000.

On June 12, 2001, the Board of Directorsdeclared a common stock dividend of $.04 per common share payable on July 13,2001 to stockholders of record on June 27, 2001.  This marks the fifth payment of dividends since 1996 on theCompany’s common stock.
NOTE 14 - INCOME TAXES:
The components of the  income tax provision were:      For  the years ended June 30,  2001 2000 1999 Current:       Federal$(26,000)$(75,000)$(72,900) State(77,300)(179,200)(151,200)     (103,300)(254,200)(224,100)    Deferred:       Federal(517,200)(917,500)(939,700) State(45,500)(46,800)16,300      (562,700)(964,300)(923,400)            $(666,000)$(1,218,500)$(1,147,500)    
 

At June 30, 2001, the Company has netoperating loss (NOL) carryforwards of approximately $7,053,200 for state incometax purposes.  The NOL carryforwards,which are available to offset future taxable income of the Company and aresubject to limitations should a “change in ownership” as defined in theInternal Revenue code occur, will begin to expire in 2002 if not utilized.  The state NOL carryforwards expire asfollows:
Amount  of unused state operating loss carryforwards Expiration  during year ended June 30,$207,300 2002451,500 2003272,800 2004444,400 200589,000 2006582,600 2007603,100 2008987,900 2009395,400 2010555,300 2011476,700 2012395,300 2013850,400 2014262,500 2015479,000 2016  $7,053,200    
 

At June 30, 2001, the Company had afederal alternative minimum tax (“AMT”) credit of approximately $425,400 whichis available to offset future federal income taxes once the Company is nolonger subject to an alternative minimum tax for federal income tax purposes.
In fiscal 2001, the Company utilized theremaining balance of its federal NOL carryforwards.  In connection with the Rotocast merger, the Company recorded adeferred tax asset of $394,400, net of a valuation allowance of $192,400 as ofJune 30, 1998, for the future benefit related to state NOL carryforwards.  The current state valuation allowance,amounting to $307,200, represents the estimated amount of state NOL’s whichwill expire prior to their utilization. Again, realization of the future tax benefits of the NOL carryforwardsis dependent on the Company’s ability to generate taxable income within thecarryforward period.  Management willcontinue to assess the likelihood of utilizing its state NOL’s by taking intoconsideration historical results and current economic conditions in which theCompany operates.  Management does notconsider any non-routine transactions in assessing the likelihood ofrealization of the recorded deferred tax asset.  Any future adjustments to the valuation allowance will bereflected as a component of the current years tax provision.  Management also notes that the deferred taxprovision does not result in current outlays of cash flows due to theutilization of its NOL’s.  Thesecashflow savings are then available to supplement funding of the Company’sexpansion projects, pay common stock dividends, acquire treasury stock andreduce outstanding debt.  Under currentprojections, management anticipates it will fully utilize the federal AMTcredit in fiscal 2002.

The following reconciles the federalstatutory income tax rate to the effective rate of the provision for incometaxes:
 For  the year ended June 30,  2001 2000 1999        Federal statutory rate34.0%34.0%34.0%State income taxes  (net of federal benefit)3.6 3.6 3.5 Goodwill amortization9.1 3.5 4.5 Other items, net8.0 (2.7)4.4      Effective income tax  rate54.7%38.4%46.4%    
 

Deferred tax assets and liabilities aresummarized as follows:
 June  30,    2001  2000         Deferred tax assets:     Federal NOL$- $499,600  State NOL  (net of federal benefit)399,100 417,800  Tax credit carryforwards425,400 409,100  Employment-related  reserves70,800 120,300  Allowance for doubtful  accounts39,200 56,100      934,500 1,502,900 Deferred tax  liabilities:     Depreciation and  amortization(2,697,900)(2,709,100)     Net deferred tax  liability before valuation allowance(1,763,400)(1,206,200) Deferred tax assets  valuation allowance(307,200)(301,700)     Net deferred tax  liability$(2,070,600)$(1,507,900)    
 

NOTE 15 - COMMITMENTSAND CONTINGENCIES:

Commitments

The Company leases various office andwarehouse facilities, and equipment under long-term operating leases expiringthrough March 2013.  Certain of theleases provide for five-year renewal options and rental increases based on theConsumer Price Index.  Operating leaseexpense for fiscal 2001, 2000, and 1999 amounted to $1,055,100, $1,006,700 and$991,100, respectively.
At June 30, 2001, the future minimumlease commitments, excluding insurance and taxes, are as follows:
Year  Ending June 30,  2002$875,300 2003791,400 2004772,600 2005671,900 2006550,200 Thereafter3,459,800  $7,121,200 
 

Contingencies

In the normal course of business, theCompany encounters certain litigation matters, which in the opinion ofmanagement will not have a significant adverse effect on the financial positionor the results of operations of the Company.

NOTE 16 - SUPPLEMENTALDISCLOSURES OF CASH FLOW INFORMATION:

Supplemental disclosures of cash flowsinformation are as follows:
 For  the years ended June 30,  2001 2000 1999 Cash paid during the  year for:       Interest$770,100 $952,500 $1,002,400       Income taxes$180,200 $391,600 $103,800      Non-cash financing  activities:       Common dividends  declared but not paid$510,600 $   -    $3,300       Fair value of interest  rate swap$91,400 $   -    $-      
NOTE 17 - UNAUDITEDQUARTERLY RESULTS:
 Quarter  Ended  September December March June Fiscal Year 2001:         Net sales$10,374,700 $9,371,500 $9,904,500 $10,869,400  Gross profit2,370,000 1,947,600 2,472,000 2,571,800 Net income/(loss)67,000 (176,600)259,400 400,700 Per share:         Net income/(loss) –  basic and diluted$.01 $.(01)$.02 $.02      Fiscal Year 2000:         Net sales$12,370,700 $10,519,900 $11,521,400 $12,235,700  Gross profit3,616,600 2,885,100 2,684,900 2,816,100  Net income700,000 401,200 328,800 523,700 Per share:         Net income – basic and  diluted$.05 $.02 $.03 $.04      
 

ROTONICS MANUFACTURING INC.

SCHEDULE II

VALUATION AND QUALIFYINGACCOUNTS

Years Ended June 30, 2001, 2000and 1999

 
Column A Column B Column C  Column D   Column E     Additions        Description Balance at  beginning  of  period Charged to  Costs & Expenses Other  Deductions   Balance at  end of  period                June 30,  2001:               Allowance  for doubtful accounts $142,000 $29,600 $-  $(72,400)(1) $99,200                           Deferred  tax asset valuation allowance $301,700 $- $5,500 (2)$-   $307,200                          June 30,  2000:               Allowance  for doubtful accounts $321,400 $1,500 $-  $(180,900)(1) $142,000                           Deferred  tax asset valuation allowance $243,300 $- $58,400 (2)$-   $ 301,700                          June 30,  1999:               Allowance  for doubtful accounts $148,000 $179,300 $-  $(5,900)(1) $321,400                           Deferred  tax asset valuation allowance $192,400 $- $50,900 (2)$-   $243,300             
 

(1) Doubtfulaccounts written off during the year, net of recoveries.(2) Represents valuation allowance for potential state NOL's which will expireprior to utilization.