**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**Annual Report Pursuant to Section13 or 15(d) of the Securities Exchange Act of 1934**

 

**For thefiscal year ended June 30, 2003**

 

**Commissionfile number 1-9429**

 

**ROTONICSMANUFACTURING INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                                 |   | **36-2467474**                              |
|------------------------------------------------------------------------------|--------|---------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)             |   | (I.R.S. Employer  Identification No.)       |
|                                                                         |   |                                        |
| **17022  South Figueroa Street  Gardena, California**                        |   | **90248**                                   |
| (Address of principal  offices)                                              |   | (Zip Code)                                  |
|                                                                         |   |                                        |
| Registrant’s telephone  number, including area code: **(310) 538-4932** |
|                                                                         |   |                                        |
| Securities registered  pursuant to Section 12(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 registeredpursuant to Section 12(g) of the Act:  **None**

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) for the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and has been subject to such filingrequirements for the past 90 days. Yes   ý    No   o

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  ý

 

The aggregate marketvalue of the voting stock held by non-affiliates of the registrant, as ofSeptember 1, 2003, was $8,045,400 (1).

 

The number of shares ofcommon stock outstanding at September 1, 2003 was 12,328,891.

 

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(1) Excludes 7,070,430shares held by directors, officers, and stockholders, whose ownership exceeded5% of the outstanding shares at September 1, 2003.  Exclusion of such shares should not be construed to indicate thatthe holders thereof possess the power, direct or indirect, to direct themanagement or policies of registrant, or that such persons are controlled by orunder 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 8, 2003 |       | III                 |       |

 

2

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TABLE OF 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 |
| Item 9a    | Controls and  Procedures |
|       |   |
| 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 |
| Item  14   | Principal  Accounting Fees and Services |
|       |   |
| PART IV    |
|       |   |
| Item  15   | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K |
|       |   |
| SIGNATURES |

 

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PART I

 

Forward-LookingStatements

 

To the extent that this10-K Annual Report discusses matters which are not historical, includingstatements regarding future financial results, information, or expectationabout products or markets, or otherwise makes statements about future events,such statements are forward-looking and are subject to a number of risks anduncertainties that could cause actual results to differ materially from thestatements made.  These include, amongothers, fluctuations in costs of raw materials and other expenses, costsassociated with plant closures, downturns in the markets served by the Company,the costs associated with new product introductions, as well as other factorsdescribed under the heading: Item 1, “Business”, Item 3, “Legal Proceedings”,under Item 7, “Management’s Discussion and Analysis of Financial Condition andResults of Operations”, and Footnote 1 to Financial Statements.  When used in this report, the words“expects,”  “anticipates,” “intends,”“plans,” “ believes,” “seeks,” “estimates” and similar expressions aregenerally intended to identify forward-looking statements.  You should not place undue reliance on theseforward-looking statements, which reflect our opinion only as of the date ofthe Annual Report. We undertake no obligation to publicly release any revisionsto the forward-looking statements after the date of this document.  You should carefully review the risk factorsdescribed in other documents we file from time to time with the Securities andExchange Commission, including the Quarterly Reports on Form 10-Q to be filedby us in fiscal year 2004.

 

Item 1.  Business

 

Introduction

 

Rotonics ManufacturingInc. (the “Company”) was founded as an Illinois Corporation, and wasreincorporated in Delaware in December 1986. Effective July 1, 1991, the Company merged with Rotonics Molding,Inc.-Chicago (“Rotonics”), with the Company being the surviving entity.  In accordance with the 1991 mergeragreement, the Company issued 2,666,666 (after giving effect to a 1-for-3 reversestock split) shares of its common stock and 4,999,997 shares of a newly issuednon-voting preferred stock in exchange for all the outstanding voting stock ofRotonics.  The preferred stock wascompletely redeemed prior to the end of fiscal 1996, and the Company’s Articlesof Incorporation were subsequently amended to eliminate the authorization ofSeries A preferred stock.

 

Rotonics had operationsin Itasca, Illinois; Deerfield, Wisconsin; Denver, Colorado; and Bartow,Florida. Three of these operations currently conduct business as divisions ofthe Company using the trade names RMI-C, RMI-D, and RMI-F, respectively.  Rotonics was a privately held CaliforniaCorporation, which was 52% owned by Mr. Sherman McKinniss.  Mr. McKinniss became president and chiefexecutive officer of the Company on August 12, 1991, and currently presides asthe Company’s president, CEO and chairman of the board.

 

In September 1991, theCompany’s wholly owned subsidiary, Rotational Molding, Inc. (“RMI”), was mergedinto the Company and now operates as two divisions using the trade names RMI-Gand RMI-I with manufacturing operations in Gardena, California and Caldwell,Idaho, respectively.

 

Effective January 1,1992, the Company acquired Plastech Holdings, Inc. (“Plastech”), and its whollyowned subsidiary, Plastech International, Inc., for $1,777,070 in cash.  Plastech was headquartered in Warminster,Pennsylvania, with an additional operation in Gainesville, Texas.  In July 1992, Plastech was merged with theCompany and now operates as a division of the Company using the trade nameRMI-T.

 

Effective April 1, 1995,the Company purchased certain assets and assumed certain liabilities of CustomRotational Molding, Inc. (“CRM”) for 300,000 shares of the Company’s commonstock.  The Company assumed CRM’soperations in Arleta, California.

 

In September 1994, theCompany purchased a larger manufacturing facility in Bensenville, Illinois andsubsequently relocated its Itasca, Illinois operations into this newfacility.  In December 1995, the Companydiscontinued its operations at its Deerfield, Wisconsin location and combinedthese operations into its newly purchased Bensenville, Illinois operation. TheWisconsin facility is currently being leased to two tenants on a month-to-monthterm basis at $2,500 per month.

 

In February 1997, theCompany purchased a 9.73-acre facility consisting of 63,000 square feet ofmanufacturing and office building space in Commerce City, Colorado.  The Company has since expended significantresources to

 

4

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refurbish the facility tohouse its Colorado operations.  Thefacility is also 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 $4,100 per month.

 

Effective April 1, 1998,the Company merged with Rotocast International, Inc. and its wholly ownedsubsidiaries (“Rotocast”), with the Company being the surviving entity.  In accordance with the Merger Agreement, theCompany issued 2,072,539 shares of its common stock and a $2,000,000 notepayable secured by a stand-by letter of credit, in exchange for all theoutstanding voting stock of Rotocast. In January 2000, the Company repurchased these shares for $2.8million.  Upon consummation of therepurchase, the shares were retired.

 

Rotocast had operationsin Miami, Florida; Knoxville, Tennessee; Brownwood, Texas; Las Vegas, Nevada;and Bossier City, Louisiana.  Theseoperations currently conduct business as divisions of the Company using thetrade names Nutron, Rotocast of Tennessee, RMI-B and RMI-Nevada.  Prior to the merger, the operations inBossier City, Louisiana were substantially discontinued.  Rotocast was a privately held Floridacorporation, owned by GSC Industries, Inc. (“GSC”).  The Company leases the remaining Rotocast facilities from GSC,and other affiliated parties, under long-term lease arrangements.  A portion of the Nutron office building isbeing sub-leased on a long-term basis at $2,300 per month.

 

In conjunction with theRotocast merger, the Company initiated the consolidation of its Warminster,Pennsylvania and Arleta, California facilities into its remainingoperations.  The consolidation of thesefacilities was completed in fiscal 1999 and enhanced the operations of theCompany’s remaining facilities, reduced its overall manufacturing overheadcosts, and allowed the Company to take greater advantage of its marketing anddistribution channels.  Also, in fiscal1999, the Company consolidated its Miami operations into the remainingoperating facilities.

 

The Corporate office ofthe Company is located at the same site as the RMI-G (Gardena, California)facility.

 

Description of Business

 

The Company currently hasten manufacturing locations and was again listed by a plastics industryperiodical as one of the top ten rotational molders in North America.  These operating divisions manufacture avariety of plastic products for commercial, agricultural, pharmaceutical,governmental, building, 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 rotonically molding processand, on a smaller scale; injection molding and dip molding processes. In April1998, 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.  Rotonically molding is a processfor molding plastic resin by rotating a mold in a heated environment, while theplastic resin powder placed inside the mold melts and evenly coats the inner wallof 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 rotonically molding process has been used for many years andcontinues to be recognized as a growth industry in recent years, as a result ofnumerous ongoing business consolidations and the development of newresins.  These new resins allowrotonically molded items to compete with more traditional materials such ascarbon, fiberglass, and stainless steel, especially in the fabrication oflarge, lightweight, one-piece molded items, such as storage tanks and polysteellight poles.  Rotonically molding is aparticularly advantageous process for users of molded plastic products who maywant to test different prototypes, or who do not require sufficient numbers ofsuch products to justify a more expensive manufacturing process.  The Company’s products include various typesof storage tanks, bin lids, refuse containers for automated removal, medical wastecontainers, agricultural/livestock products, kayaks, outdoor polysteel lampposts, furniture, planters, and other rotonically molded items.

 

The Company purchasesresin from five major suppliers in the U.S. and Canada.  There are fourteen additional suppliers oflesser significance.  Since the majorityof the resin used in the manufacturing process is a polyethylene derived fromnatural gas, resin price is not directly related to the price forpetrochemicals, and until recent years, has not generally been subject tovolatile fluctuations that are often experienced by the petroleumindustry.  The Company also incorporatesthe use of recycled plastic materials, blended with virgin materials in themanufacturing of products, whenever appropriate.

 

The Company holds severalpatents on storage containers used for pharmaceutical, commercial andresidential applications that expire through the year 2010.  Although the Company has been able tocapture its share of these niche markets and expects to see continued growth,no one patent or groups of patents is considered material to the business as awhole.

 

5

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Competition for theCompany’s products is governed by geography and region, since large capacitytanks and bulky hollow products are expensive to ship long distances and, assuch, any prospective competitor is constrained by shipping costs.  There are numerous single-location, as wellas a growing trend to structure multi-location, rotonically molding businesses throughoutthe United States.  However, each ofthese businesses still competes in a geographic region, which is determined bycustomer demand 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 $5,201,600 and$2,511,100 as of June 30, 2003 and 2002, respectively.  All of the backlog orders as of June 30,2003 are expected to be filled during fiscal 2004.

 

The Company’s productsare marketed through the in-house sales and engineering staff, variousdistributors and outside commission-based sales representatives.  The Company continues to build a strong, broadand diverse customer 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 developmentexpenditures for the Company were insignificant for the last three fiscalyears.

 

Regulation

 

The Company believes itis in compliance with all applicable federal, state and local laws relating tothe protection of the environment, and does not anticipate any such laws willhave material effect on its financial position, capital expenditures, orcompetitive position.

 

Employees

 

As of June 30, 2003, theCompany employed a total of 390 individuals. The Company maintains, for its respective employees who are eligible, amedical insurance plan (some of which is contributory), a group life insuranceplan, an annual bonus plan and a semi-annual attendance bonus plan.

 

Item 2. Properties

 

The Company’s corporateoffice occupies a separate building that uses approximately 3,600 square feetof the facilities of RMI-G in Gardena, California.

 

6

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The operating divisionslease warehouse, production and office space as follows:

 
| **Property  Location**   |   | **Building  Square  Footage** |   | **Total  Facility  Square  Footage** |   | **Annual  Base  Rent** |    | **Expiration  Date (2)** |           |
|--------------------------|--------|-------------------------------|--------|--------------------------------------|--------|------------------------|---------|--------------------------|----------------|
|                     |   |                          |   |                                 |   |                   |    |                     |           |
| Gardena,  California (1) |   | 42,800                        |   | 183,300                              |   | $                      | 307,000 |                     | October 2011   |   |
|                     |   |                          |   |                                 |   |                   |    |                     |           |   |
| Caldwell,  Idaho         |   | 21,250                        |   | 71,200                               |   | $                      | 105,600 |                     | September 2005 |   |
|                     |   |                          |   |                                 |   |                   |    |                     |           |   |
| Bartow,  Florida         |   | 46,200                        |   | 174,600                              |   | $                      | 129,400 |                     | September 2004 |   |
|                     |   |                          |   |                                 |   |                   |    |                     |           |   |
| Miami,  Florida (3)      |   | 50,000                        |   | 86,000                               |   | $                      | 168,000 |                     | March 2013     |   |
|                     |   |                          |   |                                 |   |                   |    |                     |           |   |
| Gainesville,  Texas (4)  |   | —                        |   | 108,900                              |   | $                      | 1,000   |                     | April 2006     |   |
|                     |   |                          |   |                                 |   |                   |    |                     |           |   |
| Brownwood,  Texas        |   | 42,800                        |   | 136,120                              |   | $                      | 74,700  |                     | March 2013     |   |
|                     |   |                          |   |                                 |   |                   |    |                     |           |   |
| Las  Vegas, Nevada       |   | 30,000                        |   | 90,000                               |   | $                      | 139,700 |                     | March 2013     |   |
|                     |   |                          |   |                                 |   |                   |    |                     |           |   |
| Knoxville,  Tennessee    |   | 44,000                        |   | 174,240                              |   | $                      | 151,500 |                     | March 2013     |   |
|                          |        |                               |        |                                      |        |                        |         |                          |                |  |  |  |

 

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(1)   The Company has a first rightto purchase option on this facility.

(2)   Does not give effect to anyrenewal options.

(3)   The Company recently negotiateda sub-lease on one of the Miami buildings (18,000 sq. ft.) for $4,000 per monthand is currently sub-leasing a portion of the other building’s office space for$2,300 per month.

(4)   Represents a 2.5 acre groundlease adjacent to owned, Gainsville, Texas facility.

 

The Company owns 2.1acres (including 38,000 square feet of warehouse, production and office space)in Gainesville, Texas.  In September1994, the Company purchased 3.1 acres (including 63,300 square feet of warehouse,production and office space) in Bensenville, Illinois, for the Company’sIllinois manufacturing operations.  TheTexas and Illinois facilities were encumbered by a combined $1.77 millionmortgage, which was paid in full on August 15, 2002.  In February 1997, the Company purchased for cash 9.73 acres(including 63,000 square feet of warehouse, production and office space) inCommerce City, Colorado, for the Company’s Colorado manufacturing operations.The Company currently leases a portion of this facility for $4,100 per month.The Company also owns approximately 1.59 unencumbered acres (including 35,100square feet of warehouse, production, and office space) in Deerfield,Wisconsin, which was vacated in December 1995 by the Company, and itsoperations were incorporated into the Illinois facility.  The Wisconsin facility is currently leasedto two unrelated lessees for $2,500 per month, and is currently listed forsale.

 

Item 3. Legal Proceedings

 

In the normal course ofbusiness, the Company encounters certain litigation matters, which in theopinion of management will not have a significant adverse effect on thefinancial position or the results of operations of the Company.

 

Item 4.  Submission of Matters to a Vote of SecurityHolders

 

None.

 

7

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PART II

 

Item 5.  Market for Registrant’s Common Stock andRelated Stockholder Matters

 

The Company’s CommonStock ($.01 stated value) is traded on the American Stock Exchange (“AMEX”)under the symbol “RMI”.  The number ofstockholders of record of the Company’s Common Stock was approximately 3,750 atSeptember 1, 2003.

 

Price Range of Common Stock

 

The following table setsforth the quarterly price ranges of the Company’s Common Stock in Fiscal 2003and 2002, as reported on the composite transactions reporting system for AMEXlisted stocks.

 
| **Fiscal Period**                       |   | **High** |   | **Low** |   |
|-----------------------------------------|--------|----------|--------|---------|--------|
|                                    |   |     |   |    |   |
| Fiscal  2002.                           |   |     |   |    |   |
| First  Quarter Ended September 30, 2001 |   | $        | 1.12   |    | $      | 0.57 |   |
| Second  Quarter Ended December 31, 2001 |   | 0.82     |   | 0.57    |   |
| Third  Quarter Ended March 31, 2002     |   | 1.00     |   | 0.66    |   |
| Fourth  Quarter Ended June 30, 2002     |   | 1.19     |   | 0.81    |   |
|                                    |   |     |   |    |   |
| Fiscal  2003.                           |   |     |   |    |   |
| First  Quarter Ended September 30, 2002 |   | $        | 1.42   |    | $      | 0.95 |   |
| Second  Quarter Ended December 31, 2002 |   | 1.17     |   | 0.90    |   |
| Third  Quarter Ended March 31, 2003     |   | 1.44     |   | 0.97    |   |
| Fourth  Quarter Ended June 30, 2003     |   | 1.68     |   | 1.20    |   |

 

Since fiscal 1996 theCompany has paid six regular cash dividends on its Common Stock and in fiscal2003, the Company declared a regular cash dividend of $.05 per common share onits Common Stock that was paid in July 2003. Any future cash dividends or other distributions of stock will bedetermined solely by the Board of Directors (“the Board”) and will be based onthe Company’s future financial ability to declare and pay such dividends.  Additionally, certain lending agreementsrestrict the Company from declaring or paying dividends beyond set limits onits Common Stock (see Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations: Liquidity and Capital Resources”).  According to the lending agreement with itsbank, the Company may declare or pay any dividend or distribution in a maximumaggregate of $700,000 and may redeem, retire, repurchase or otherwise acquire sharesof any class of the Company’s stock in a maximum aggregate or $1,000,000 in anyfiscal year.  Transactions that wouldexceed these limits would require prior bank authorization and the appropriatewaivers.

 

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Item 6. Selected FinancialData

 
|                                                    |   | **Year ended June 30,** |       |
|---------------------------------------------------------|--------|-------------------------|------------|
|                                                    |   | **2003**                |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| Income  Statement Data                                  |   |                    |       |   |   |   |   |   |   |   |   |
| Net  sales                                              |   | $                       | 35,972,100 |   | $ | 37,973,300 |   | $ | 40,520,100 |   | $ | 46,647,700 |   | $ | 46,730,900 |   |
|                                                    |   |                    |       |   |   |   |   |   |   |   |   |
| Cost  of goods sold                                     |   | 26,927,300              |       | 27,765,900 |   | 31,158,700 |   | 34,645,000 |   | 34,566,500 |   |
|                                                    |   |                    |       |   |   |   |   |   |   |   |   |
| Gross  margin                                           |   | 9,044,800               |       | 10,207,400 |   | 9,361,400 |   | 12,002,700 |   | 12,164,400 |   |
|                                                    |   |                    |       |   |   |   |   |   |   |   |   |
| Selling,  general, and administrative expenses (B) |   | 7,068,700               |       | 7,540,900 |   | 7,635,400 |   | 7,888,900 |   | 8,841,600 |   |
|                                                    |   |                    |       |   |   |   |   |   |   |   |   |
| Interest  expense                                       |   | 266,000                 |       | 464,100 |   | 743,100 |   | 955,000 |   | 987,700 |   |
|                                                    |   |                    |       |   |   |   |   |   |   |   |   |
| Net  income from operations                             |   | $                       | 1,156,600  |   | $ | 1,408,700 |   | $ | 473,700 |   | $ | 2,030,500 |   | $ | 1,326,000 |   |
|                                                    |   |                    |       |   |   |   |   |   |   |   |   |
| Basic/diluted  income per common share from operations  |   | $                       | 0.09       |   | $ | 0.11 |   | $ | 0.04 |   | $ | 0.14 |   | $ | 0.09 |   |
|                                                    |   |                    |       |   |   |   |   |   |   |   |   |
| Avg.  common shares outstanding (A)                     |   | 12,486,000              |       | 12,758,800 |   | 12,835,200 |   | 13,981,800 |   | 15,379,400 |   |
|                                                    |   |                    |       |   |   |   |   |   |   |   |   |
| Other  Financial Data                                   |   |                    |       |   |   |   |   |   |   |   |   |
|                                                    |   |                    |       |   |   |   |   |   |   |   |   |
| Net  income from operations as a percent of sales       |   | 3.2                     | %          | 3.7 | % | 1.2 | % | 4.4 | % | 2.9 | % |

 

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

 

(B)    Fiscal1999 includes $394,400 in plant consolidation expenses.

 

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|                                 |   | **At June 30,** |       |
|--------------------------------------|--------|-----------------|------------|
|                                 |   | **2003**        |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| Balance  Sheet Data                  |   |            |       |   |   |   |   |   |   |   |   |
|                                 |   |            |       |   |   |   |   |   |   |   |   |
| Current  assets                      |   | $               | 11,440,200 |   | $ | 12,043,100 |   | $ | 13,379,700 |   | $ | 14,866,100 |   | $ | 15,701,500 |   |
|                                 |   |            |       |   |   |   |   |   |   |   |   |
| Current  liabilities                 |   | 4,710,700       |       | 4,559,400 |   | 4,185,600 |   | 5,408,300 |   | 5,965,900 |   |
|                                 |   |            |       |   |   |   |   |   |   |   |   |
| Working  capital surplus             |   | 6,729,500       |       | 7,483,700 |   | 9,194,100 |   | 9,457,800 |   | 9,735,600 |   |
|                                 |   |            |       |   |   |   |   |   |   |   |   |
| Total  assets                        |   | 26,450,200      |       | 27,841,800 |   | 34,500,800 |   | 37,193,200 |   | 39,300,300 |   |
|                                 |   |            |       |   |   |   |   |   |   |   |   |
| Long-term  debt                      |   | 2,362,100       |       | 3,937,200 |   | 7,396,200 |   | 8,569,800 |   | 9,470,600 |   |
|                                 |   |            |       |   |   |   |   |   |   |   |   |
| Total  liabilities                   |   | 9,500,200       |       | 11,061,700 |   | 14,193,700 |   | 16,629,400 |   | 17,866,000 |   |
|                                 |   |            |       |   |   |   |   |   |   |   |   |
| Current  ratio                       |   | 2.4  to 1       |       | 2.6  to 1 |   | 3.2  to 1 |   | 2.7  to 1 |   | 2.6  to 1 |   |
|                                 |   |            |       |   |   |   |   |   |   |   |   |
| Net  book value per common share (A) |   | $               | 1.37       |   | $ | 1.33 |   | $ | 1.59 |   | $ | 1.59 |   | $ | 1.42 |   |
|                                 |   |            |       |   |   |   |   |   |   |   |   |
| Dividends  (B)                       |   | $               | 0.05       |   | $ | 0.05 |   | $ | 0.04 |   | $ | — |   | $ | 0.04 |   |

 

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(A)    Computed on the basis of theactual number of common shares outstanding at the end of the fiscal year.  Fiscal 2002 net book value includes thewrite-down of goodwill amounting to $4.1 million in connection with theadoption of SFAS No. 142.

 

(B)    Based on cash dividendsdeclared per common share during the respective periods.

 

10

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Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

**Introduction**

 

To the extent that this10-K Annual Report discusses matters which are not historical, includingstatements regarding future financial results, information, or expectationabout products or markets, or otherwise makes statements about future events,such statements are forward-looking and are subject to a number of risks and uncertaintiesthat could cause actual results to differ materially from the statementsmade.  These include, among others,fluctuations in costs of raw materials and other expenses, costs associatedwith plant closures, downturns in the markets served by the Company, the costsassociated with new product introductions, as well as other factors describedunder the heading: Item 1, “Business”, Item 3, “Legal Proceedings”, under thisItem 7, “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations”, and Footnote 1 to Financial Statements.  When used in this report, the words“expects,”  “anticipates,” “intends,”“plans,” “ believes,” “seeks,” “estimates” and similar expressions aregenerally intended to identify forward-looking statements.  You should not place undue reliance on theseforward-looking statements, which reflect our opinion only as of the date ofthe Annual Report. We undertake no obligation to publicly release any revisionsto the forward-looking statements after the date of this document.  You should carefully review the risk factorsdescribed in other documents we file from time to time with the Securities andExchange Commission, including the Quarterly Reports on Form 10-Q to be filedby us in fiscal 2004.

 

**Operations**

 

Net sales fell 5.3% to$35,972,100 in fiscal 2003 compared to $37,973,300 in fiscal 2002.  Fiscal 2003 sales volumes continue to mirrorour nation’s lackluster economy.  Our industrialproduct group reflected the most resilience during these tough conditions,reporting a modest 2.4% increase in sales. Of the hardest hit sectors, our contract manufacturing group was down6.8% in fiscal 2003.  However, fiscal2003 was also a strong period for contract tooling projects that are expectedto help boost future contract manufacturing sales.  We also continue to receive positive feedback that the U.S.economy is slowly moving forward.  Ifthis trend sustains itself, we anticipate it will further support positivesales volume growth for our product lines. We are also in the final stages of placing our new roto-molding machineinto service, which will improve our competitive edge in the marketplace.

 

Net sales dropped 6.3% to$37,973,300 in fiscal 2002, compared to $40,520,100 in fiscal 2001.  Even though our diverse product offeringshelped minimize sales volume deterioration, the country’s general economicconditions continued to weigh heavily on the manufacturing sector.  Our marine and consumer product groupsreported the largest downturn with decreases of 26.5% and 17.8%, respectively,compared to fiscal 2001 volumes. Despite the overall drop in sales, industrial products posted arespectable 6.0% increase over fiscal 2001 sales volumes.  Industrial products continue to be a growthsector for us as we continue to broaden our product offerings and targetspecific niche markets.

 

Cost of goods sold was$26,927,300, or 74.9% of net sales, in fiscal 2003 compared to $27,765,900 or73.1% and $31,158,700 or 76.9% of net sales in fiscal 2002 and 2001,respectively.  We were pleased thattargeted gross margin objectives were sustained as we continued to battlerising raw material, insurance and utility costs.  Workers compensation costs continue to escalate in many areas inwhich we operate reflecting a 33.6% rise over prior years costs.  To date, we have contained most of thesecosts through systematic product price increases, sustaining workforcereductions and ongoing efficiency and cost containment efforts.  Fiscal 2002 was also pressured by alackluster economy.  To maintainacceptable margins, we again improved our manufacturing efficiencies andreduced our workforce by 15% during the year. This, coupled with favorable resin prices and a $600,000 reduction innatural gas costs that had previously spiked in fiscal 2001, helped counter the36% increase in workers compensation costs in fiscal 2002.  As depicted, the cost of plastic resin,utility costs and labor related costs represent the major portion of theCompany’s manufacturing costs.  Weanticipate that we will continually be challenged to mitigate future costincreases related to these expenses, which in turn could hamper the Company’sgoal to maintain future gross margin objectives.

 

Selling, general andadministrative (“SG&A”) expenses were $7,068,700, or 19.7% of net sales, infiscal 2003 compared to $7,540,900, or 19.9% of net sales, in fiscal 2002.  Overall SG&A costs have decreased$472,200, which is primarily attributed to our cost containment efforts.  These efforts were reflected in reducedmarketing costs of $87,600, travel costs of $43,800 and wage/benefit costs of$280,200.  Additional cost savings werealso reflected in commission/royalty expenses of $172,600 due to royaltyagreements completed last fiscal year and a dip in commission-based productsales, and finally, a reduction in bad debt expense of $47,400.  These costs savings were partially offset bya $190,000 one-time administrative contractual charge during fiscal 2003.

 

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SG&A expenses were$7,540,900, or 19.9% of net sales, in fiscal 2002 compared to $7,635,400, or18.8% of net sales, in fiscal 2001.  Thecomparative percentage increase is attributed to the lower sales volumes.  However, overall SG&A costs decreased by$94,500, which is primarily related to the elimination of goodwill amortizationin the amount of $324,900, net of planned increases in marketing, wage andwage-related costs of approximately $121,900, and an increase in bad debtexpense of $140,800.

 

Income from operationswas $1,976,100, or 5.5% of net sales, in fiscal 2003 compared to $2,666,500 or7.0% and $1,726,000 or 4.3% of net sales in fiscal 2002 and 2001,respectively.  The 25.9% reduction inoperating income in fiscal 2003 is attributed to the 5.3% reduction in salesvolumes coupled with 1.8% increase in cost of goods sold attributed tounmitigated increases in workers compensation insurance, utilities and rawmaterial costs.  The 54.5% increase infiscal 2002 operating income was attributed to the elimination of goodwillamortization ($324,900) due to the adoption of Statement of FinancialAccounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”as well as lower raw material and utility costs.

 

Total interest expensedecreased $198,100 to $266,000 in fiscal 2003, compared to $464,100 and$743,100 in fiscal 2002 and 2001, respectively.  The decrease is due to the significant reduction in our debtstructure, which amounted to $2,068,400 and $3,045,700 in fiscal 2003 and 2002,respectively.  The overall debtreduction coupled with the low interest rate environment during the last twoyears and the renegotiation of our bank interest rate swap agreementcontributed to further reductions in interest costs in fiscal 2003 and willcontinue to have a positive effect on reducing future interest costs.

 

Income taxes were$677,400, $947,200 and $614,800 in fiscal years 2003, 2002 and 2001,respectively.  Prior to fiscal 2003, asignificant portion of our tax provision was the deferred tax component, whichamounted to $307,100 and $511,500 in fiscal years 2002 and 2001,respectively.  During fiscal 2002 and2001, these amounts primarily related to the utilization of our federal andstate net operating loss (“NOL”) carryforwards and federal alternative minimumtax (“AMT”) credit carryforward, and thus did not diminish cash flows.  In fiscal 2001, we fully utilized ourremaining federal NOL carryforward, and in fiscal 2002 we fully utilized the$412,600 federal AMT credit carryforward. Following the utilization of these carryforwards, we have incurred anincrease in our current federal taxes. Current federal taxes amounted to $667,100 in fiscal 2003 compared to$476,300 and $26,000 in fiscal 2002 and 2001, respectively.  As such, our cash flow requirements havesignificantly increased for the payment of current federal taxes.

 

Net income beforecumulative effect of change in accounting principle for goodwill decreased$252,100 to $1,156,600, or $.09 per common share, for fiscal 2003 compared to$1,408,700, or $.11 per common share, in fiscal 2002.  Although we believe that future market conditions are slowlyimproving, fiscal 2003 was hampered by a sluggish economy, especially in thefourth quarter, which contributed to the 5.3% drop in sales volumes.  While our cost containment efforts, asreflected in the $472,200 reduction in SG&A costs, along with lowerinterest costs, helped to preserve income levels, we still were unable to fullycompensate for rising raw material, insurance and utility costs.  Even though these trends will continue tochallenge future periods, we remain optimistic that our strong financialcondition and business strategies will help us to continue to respond tocurrent market conditions and allow us to take advantage of growthopportunities as they become available.

 

Net income beforecumulative effect of change in accounting principle for goodwill increased$935,000 to $1,408,700, or $0.11 per common share, for fiscal 2002 compared tonet income of $473,700, or $0.04 per common share, in fiscal 2001.  Even though market conditions werechallenging in fiscal 2002, we were pleased that we were able to minimize thedeterioration of sales volumes in comparison to the prior year results.  These efforts, coupled with improvedefficiencies, cost containment efforts, workforce reductions and the reductionsrelating to interest expense and goodwill previously mentioned, helped tosuccessfully minimize the impact of these adverse market conditions, andultimately resulted in the 197% improvement in net income for fiscal 2002before the effect of the accounting change.

 

**CumulativeEffect of Change in Accounting Principle for Goodwill**

 

We recorded an adjustmenteffective July 1, 2001 to reflect the impact of adopting SFAS No.142, amountingto a reduction of intangible assets of $4,105,900.  This amount is reflected in net loss for the fiscal year endedJune 30, 2002 as a cumulative effect of change in accounting principle forgoodwill.  The adjustment represents awrite down of our net goodwill based on a review of the goodwill forimpairment.  Under the assessmentguidelines of SFAS No. 142 and the SEC’s guidance that our quoted market priceis the most efficient mechanism for estimating fair value, it was determinedthe fair value of our reporting unit was less than its carrying value.  Although the assumptions used to estimatefair value may not be indicative of future results, our goodwill has beenreduced to zero and will not require future impairment analysis.

 

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**Liquidityand Capital Resources**

 

Working capital decreased$754,200 to $6,729,500 at June 30, 2003 compared to $7,483,700 at June 30,2002.  The reduction is related to adecrease in accounts receivable, which is in-line with current sales volumes,plus a decrease in our current portion of long-term debt due to the payoff ofour real estate note and a decrease in income taxes payable net of an increasein accounts payable at year end that included amounts due for the newroto-molding machine and additional resin shipments to take advantage offavorable pricing.  Cash flows fromoperations decreased $173,900 to $4,426,300 for fiscal 2003, compared to$4,600,200 for the same period last year. This reduction is primarily related to the $252,100 drop in incomebefore cumulative effect of change in accounting principle for goodwill betweenthe two periods.

 

Earnings before interest,taxes, depreciation and amortization (“EBITDA”) were $4,220,400 in fiscal 2003compared to $5,014,000 in fiscal 2002. Although EBIDTA is not a substitute for measures of performance preparedin accordance with accounting principles generally accepted in the UnitedStates, (“GAAP”), it is a relevant internal measurement of our operations andcash flows.  As such, in spite of the ongoing challenges faced in fiscal 2003, we continue to generate sufficient cashflows from operations enabling us to meet our working capital needs, serviceand reduce our debt ($2,068,400 in fiscal 2003), pay the $.05 per share commonstock dividend declared in June 2003 and continue the common stock buybackprogram.

 

We expended $1,532,600for property, plant and equipment (“PP&E”) in fiscal 2002, compared to$1,028,800 in fiscal 2002.  The increaseof $503,800, in comparison to the amount expended in fiscal 2002, is due to thepurchase of new technology-based molding equipment that will be completed infiscal 2004.  We currently anticipatecapital expenditures to total approximately $1.2 - $1.5 million in fiscal 2004.

 

Net borrowings under theline of credit increased $189,200 to $381,200 between June 30, 2002 and June30, 2003.  The increase is due to thetiming of funding capital expenditure projects and the payment of federalincome taxes in June 2003.  Due to thetiming of these types of payments, we can anticipate the line of credit toreflect temporary fluctuations throughout the year.

 

Effective October1, 2001, the bank extended the maturity date on the line of credit to October1, 2004.  In addition, management didnot advance on the $2,000,000 term loan commitment and instead requested thebank to issue a new term loan commitment in the same amount that will expire onOctober 31, 2003.  Effective August 15,2002, we also amended our interest rate swap agreement with the bank, byreducing the notional amount down to $4 million, reducing the fixed LIBOR rateand extending the maturity date to August 15, 2006.

 

The following is asummary of the Company’s contractual commitments associated with its debt andlease obligations as of June 30, 2003:

 
|                           |   | **For the  year ended June 30,** |      |      |   |      |
|--------------------------------|--------|----------------------------------|-----------|-----------|--------|-----------|
|                           |   | **2004**                         |      | **2005**  |   | **2006**  |   | **2007** |   | **2008** |   | **Thereafter** |   | **Total** |   |
|                           |   |                             |      |      |   |      |   |   |   |   |   |   |   |   |   |
| Principal  payments- term debt |   | $                                | 864,300   |      | $      | 864,300   |   | $ | 864,300 |   | $ | 252,300 |   | $ | — |   | $ | — |   | $ | 2,845,200 |   |
|                           |   |                             |      |      |   |      |   |   |   |   |   |   |   |   |   |
| Operating  leases              |   | 1,110,000                        |      | 1,006,100 |   | 883,400   |   | 841,600 |   | 841,000 |   | 3,534,200 |   | 8,216,300 |   |
|                           |   |                             |      |      |   |      |   |   |   |   |   |   |   |   |   |
| Total  commitments             |   | $                                | 1,974,300 |      | $      | 1,870,400 |   | $ | 1,747,700 |   | $ | 1,093,900 |   | $ | 841,000 |   | $ | 3,534,200 |   | $ | 11,061,500 |   |

 

During fiscal 2001, wereinstated our common stock buyback program. In fiscal 2003, we acquired 270,151 shares of common stock at a totalcost of $340,500.  We plan to continueto actively acquire our common shares. As of June 30, 2003, we had approximately 12,344,800 shares of commonstock outstanding.

 

On June 24, 2003 theBoard declared a dividend of $.05 per share of common stock payable on July 25,2003 to stockholders of record on July 14, 2003.  This marks the seventh payment of dividends since 1996 on our commonstock.  The Board is committed toannually review a dividend program for our common stock.

 

Cash flows fromoperations in conjunction with our revolving line of credit are expected tomeet our needs for working capital, capital expenditures, common stockrepurchases and repayment of long term debt for the foreseeable future.

 

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**RecentAccounting Pronouncements**

 

In September 2001, theFinancial Accounting Standards Board (“FASB”) approved SFAS No. 144 “Accountingfor the Impairment or Disposal of Long-Lived Assets.”  SFAS No. 144 supersedes SFAS No. 121 “Accounting for Impairmentof Long-Lived Assets and for Long-Lived Assets to be Disposed of,” as well asAccounting Principle Board Opinion No. 30 “Reporting the Resultsof Operations – Reporting the Effects of Disposal of a Segmentof Business, and Extraordinary, Unusual, and Infrequently Occurring Events andTransactions.”  SFAS No. 144 not onlyretains the requirements of SFAS No. 121 to recognize an impairment loss if thecarrying amount of a long-lived asset is not recoverable from its undiscountedcash flows, but also establishes a single accounting method for assets to bedisposed of and broadens the presentation of discounted operations to includemore disposal transactions.  SFAS No.144 was effective for fiscal years beginning after December 15, 2001.  The adoption of this pronouncement did nothave a significant impact on the Company’s financial statements.

 

In June 2002, theFASB issued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities.”  Thispronouncement was effective for exit or disposal activities initiated afterDecember 31, 2002, and requires these costs to be recognized when the liabilityis incurred and not at project initiation. This statement did not have a material impact on the Company’s financialstatements.

 

In December 2002,the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation –Transition and Disclosure.”  SFAS No.148 amends the disclosure requirements in SFAS No. 123, “Accounting forStock-Based Compensation,” for annual periods ending after December 15, 2002and for interim periods beginning after December 15, 2002.  Effective for financial statements forfiscal years ending after December 15, 2002, SFAS No. 148 also provides threealternative transition methods for companies that choose to adopt the fairvalue measurement provisions of SFAS No. 123. The Company accounts for stock options under the intrinsic method pursuantto Accounting Principles Board (“APB”) Opinion 25,  “Accounting for Stock Issued to Employees,” which is permittedunder SFAS No. 123.  Had compensationcost for the plan been determined in accordance with the fair value method asset forth in SFAS No. 123, as amended by SFAS No. 148, the Company’s net incomeand income per common share data would not have been significantly different.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement133 on Derivative Instruments and Hedging Activities.”  SFAS No. 149 is intended to result in moreconsistent reporting of contracts as either freestanding derivative instrumentssubject to SFAS No. 133 in its entirety, or as hybrid instruments with debthost contracts and embedded derivative features.  In addition, SFAS No. 149 clarifies the definition of aderivative by providing guidance on the meaning of initial net investmentsrelated to derivatives.  This statementis effective for contracts entered into or modified after June 30, 2003.  The Company does not believe the adoption ofSFAS No. 149 will have a material effect on its consolidated financialposition, results of operations or cash flows.

 

**Off-BalanceSheet Arrangements and Contractual Obligations**

 

The Company has nooff-balance sheet arrangements or significant guarantees to third parties notfully recorded in our balance sheets or fully disclosed in our notes toconsolidated financial statements.  TheCompany’s significant contractual obligations include our debt agreements.  Certain financial and operating restrictionsunder these agreements are fully disclosed in notes 7 and 8 of the consolidatedfinancial statements.

 

**CriticalAccounting Policies**

 

We make variousestimates when applying accounting policies in accordance with GAAP that affectour consolidated financial statements. Due to the nature of our business, these estimates generally are notconsidered highly uncertain at the time of estimation and therefore are notexpected to result in a period-to-period change that would materially affectour results of operations or financial condition.

 

We do apply keyaccounting principles as required by GAAP. These key accounting policies governallowance for doubtful accounts, inventory valuation and income taxes.

 

Allowance fordoubtful accounts

 

We make judgmentsas to its ability to collect outstanding receivables and provide allowances forthe portion of receivables when collection becomes doubtful.  Provisions are based on a percentage of netsales and a specific review of all significant outstanding receivablebalances.  Percentages applied may varybased on analysis of historical collection experience or current economictrends.  If the data we use to calculatethe allowance for

 

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doubtful accountsdoes not reflect the future ability to collect outstanding receivables,additional provisions for doubtful accounts may be needed and the results ofoperations could be affected.

 

Inventoryvaluation

 

Finished goodsinventory is valued at cost and management uses historical gross margin trendsand other estimates to continually update labor and overhead allocations.  The gross margin percentage reflects ourestimate of the cost of, among other things, material, labor and overheadexpenditures during the production process. Such cost are capitalized to inventory as products aremanufactured.  Although it is believedthat the estimates are reasonable, it is possible that the actual labor andoverhead costs will differ over time from the estimated amounts.  Such differences could have a materialimpact on the Company’s results of operations and financial position.

 

Income taxes

 

Under SFAS No.109, “Accounting for Income Taxes,” income taxes are recorded based on thecurrent amounts payable or refundable, as well as the consequences of eventsthat give rise to deferred tax assets and liabilities based on differences inhow those events are treated for tax purposes. We base our estimates of deferred tax assets and liabilities on currenttax laws and rates and in certain cases expectations about futureoutcomes.  Our accounting for deferredtax consequences represents management’s best estimate of future events thatcan be appropriately reflected in accounting estimates.  Although management believes that itsestimates are reasonable, no assurance can be given that the final tax outcomeof these matters will not be different than that which is reflected in tourhistorical income tax provisions and accruals. Such differences could have a material impact on our results ofoperations and financial position.

 

In particular, werecorded a valuation allowance to reduce its deferred tax assets to the amountof future tax benefit that is more likely than not to be realized.  While management has considered futuretaxable income and ongoing prudent and feasible tax planning strategies inassessing the need for the valuation allowance, there is no assurance that thevaluation allowance would not need to be increased to cover additional deferredtax assets that may not be realized. Any increase in the valuation allowance could have a material adverseimpact on our income tax provision and net income for the period in which suchdetermination is made.

 

# **Factors That May Affect Our Future Results or the MarketPrice of Our Stock**

 

We operate in a rapidly changing economic environment that presentsnumerous risks.  Many of these risks arebeyond our control and are driven by factors that we cannot predict.  The following discussion highlights some ofthese risks.

 

Economic, political andmarket conditions can adversely affect our revenue growth.

 

Our revenue growth andprofitability depends on the overall demand for plastic products forcommercial, recreational and residential uses. Because our sales are primarily to corporate and government customers,our business depends on general economic and business conditions.  The general weakening of the global economy,the weakening of business conditions in the manufacturing industry, andgovernmental budgetary constraints have resulted in a decreased demand for ourproducts.  If demand for our productscontinues to be weak, our revenue growth rates will be adversely affected.  In addition, our country’s war on terrorism,as well as federal and state budgetary concerns, have contributed to economic,political and other uncertainties that could adversely affect our revenuegrowth and results of operations.  Ifeconomic and market conditions do not improve as anticipated, our business willcontinue to be adversely affected.

 

Management has no comparative advantage in forecasting macroeconomictrends and developments relating to general business conditions.  Our management is, however, required to makesuch forecasts in order to develop budgets, plan research and developmentstrategies and perform a wide variety of general management functions.  To the extent that our forecasts are inerror, because we are either overly optimistic or overly pessimistic about theperformance of an economy or of a sector, our performance can suffer because ofa failure properly to match corporate strategy with economic conditions.

 

If we do not successfullymanage our operating margins, our business can be negatively impacted.

 

Our future operatingresults will depend on our ability to forecast revenues accurately and controlexpenses.  While we can control certaininternal factors, our future operating results can be adversely impacted byexternal factors,

 

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such as a slowing indemand for certain of our products. If there is an unexpected decline inrevenues, which is not offset by a decrease in expenses, our business andoperating results will be adversely affected.

 

We may be required tochange our business practices if there are changes in accounting regulationsand related interpretations and policies.

 

Policies, guidelines andinterpretations related to revenue recognition, income taxes, facilitiesconsolidation, accounting for acquisitions, allowances for doubtful accountsand other financial reporting matters require difficult judgments as to complexmatters that are often subject to multiple sources of authoritativeguidance.  Some of these matters arealso among topics currently under re-examination by accounting standards groupsand regulators.  These standard groupsand regulators could promulgate interpretations and guidance that could resultin material and potentially adverse, changes to our accounting policies.

 

Business disruptionscould affect our future operating results.

 

Our operating results andfinancial condition could be materially and adversely affected in the event ofa major earthquake, fire or other catastrophic event, such as terrorist attacksupon the United States.  Our corporateheadquarters, a significant portion of our research and development activitiesand certain other critical business operations are located in California, nearmajor earthquake faults. A catastrophic event that results in the destructionof any of our critical business or information technology systems couldseverely affect our ability to conduct normal business operations and as aresult our future operating results could be adversely affected.  In 2001, California experienced ongoingpower shortages, which resulted in “rolling blackouts.” These blackouts,blackouts in other regions or procedures implemented to avert blackouts couldcause disruptions to our operations and the operations of our customers.  Such disruptions, particularly at the end ofa quarter, could adversely affect quarterly revenues and net income.

 

*Our stock price could remainvolatile and your investment could lose value.*

 

Our stock price hasfluctuated widely in the past and could continue to do so in the future. Yourinvestment in our stock could lose value. Some of the factors that couldsignificantly affect the market price of our stock include:

 

•      quarterlyvariations in our results of operations or those of our competitors;

•      changesin our or our competitors’ prices;

•      changesin our revenue and revenue growth rates as a whole or for specific geographicareas, business units, products or product categories;

•      announcementsof new products or product enhancements by us or our competitors;

•      changesin management;

•      changesin our accounting policies;

•      changesin recommendations or earnings estimates by financial analysts;

•      speculationin the press or analyst community;

•      changesin economic and market conditions either generally or specifically toparticular industries;

•      changesin interest rates; and

•      changesin investors beliefs as to the appropriate price-earnings ratios for us and ourcompetitors.

 

A significant drop in ourstock price could expose us to the risk of securities class action lawsuits.Defending against such lawsuits could result in substantial costs and divertmanagement’s attention and resources. Furthermore, any settlement or adversedetermination of these lawsuits could adversely affect us.

 

Item 7a. Disclosures About Market Risk

 

**Interest Rate Risk**

 

We are exposed tocertain market risks relating to interest rate volatility on its existing andfuture issuances of variable rate debt with the bank.  Primary exposures include movements in U.S. Treasury rates andLIBOR rates, which in turn affect the bank’s prime and LIBOR option rates.

 

We had approximately $3.2million of variable rate debt as of June 30, 2003.  In efforts to reduce interest rate volatility and mitigateexposure on variable rate debt, we entered into an interest rate swap effectiveJuly 15, 1998, as amended on August 15, 2002. The swap had a notional amount of $4 million as of June 30, 2003, andwill step down to $3 million on August 15, 2004 and then $2 million on August15, 2005, and will remain at this amount until its expiration on August 15,2006.  The swap fixes the bank’s LIBORoption rate at 4.83% over the term of the

 

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contract.  The fair value of the swap, net of tax,amounted to ($158,200) as of June 30, 2003. If interest rates increased by 1% during fiscal 2004 as compared tofiscal 2003, and additional borrowings are not incurred, we would not expect asignificant increase in projected fiscal 2004 interest expense.

 

Item 8. Financial Statements and Supplementary Data

 

See Financial Statementsand Financial Statement Schedules listed in Item 14(a)(1) and (2).

 

Item 9.  Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9a. Controls andProcedures

 

We maintain disclosurecontrols and procedures designed to ensure that information required to bedisclosed in reports filed under the Securities and Exchange Act of 1934, asamended (the “Exchange Act”), is recorded, summarized and processed within timeperiods specified in the SEC’s rules and forms.  As of the end of the period covered by this report (the“Evaluation Date”), we carried out an evaluation, under the supervision andwith the participation of our management, including our president and chiefexecutive officer and our chief financial officer, of the effectiveness of thedesign and operation of our disclosure controls procedures pursuant toRule 13a-14 under the Exchange Act. Based upon this evaluation, our president and chief executive officerand our chief financial officer concluded that, as of the Evaluation Date, ourdisclosure controls and procedures were effective under Rules 13a-14.

 

There has been no changein our internal controls over financial reporting during our most recent fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

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PART III

 

Item 10. Directors and Executive Officers of the Registrant

 

Directors

 

The Company incorporatesby reference the information set forth under the caption “Election ofDirectors” in the 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 8, 2003 (“the ProxyStatement”)

 

Executive Officers

 

As of September 1, 2003,the executive officers of the Company were as follows:

 
| **Name**           |   | **Age** |   | **Position**                                               |
|--------------------|--------|---------|--------|------------------------------------------------------------|
| Sherman McKinniss  |   | 67      |   | Chairman of the Board,  President, Chief Executive Officer |
| E. Paul Tonkovich  |   | 65      |   | Secretary, Director                                        |
| Douglas W. Russell |   | 42      |   | Chief Financial Officer,  Assistant Secretary/Treasurer    |

 

Sherman McKinniss.  Mr. McKinniss served as President and ChiefExecutive Officer from August 1991 to December 2001 and again was appointedPresident and Chief Executive Officer in June 2003 following the resignation ofRobert E. Gawlik.  Mr. McKinniss hasalso served as Director of the Company since 1991, and was appointed asChairman 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.  Mr. McKinniss is also a 50% owner of Atlantic Meeco, Inc., amarina dock building company, and has served as a board member of that companysince 1993.

 

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 Mr. McKinniss andpredecessors of the Company 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 incorporatesby reference the information set forth under the captions “Compensation ofExecutive Officers”, the “Summary Compensation Table” and related disclosureinformation, “Certain Transactions”, and “Compensation of Directors” in theProxy Statement.

 

Item 12.  Security Ownership of Certain Beneficial Owners and Management

 

The Company incorporatesby reference the information set forth under the caption “Security Ownership byCertain Beneficial Holders” in the Proxy Statement.

 

Item 13.  Certain Relationships and Related Transactions

 

The Company incorporatesby reference the information set forth under the headings “InformationConcerning the Board of Directors” under the caption “Election of Directors”,“Executive Officers”, and “Certain Transactions” in the Proxy Statement.

 

Item 14.   Principal Accounting Fees and Services

 

The information requiredby this item is incorporated herein by reference to the caption “Ratificationof Appointment of Independent Auditors” in the definitive Proxy Statement forour 2003 Annual Meeting of Stockholders that will be filed with the SEC within120 days after the end of the fiscal year covered by this report.

 

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PART IV

 

Item15.   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, 2003 and 2002 |
|   |                                                                                                                                                  | Consolidated  Statements of Operations and Comprehensive Income/(Loss),  Years Ended June 30, 2003, 2002, and 2001 |
|   |                                                                                                                                                  | Consolidated  Statements of Changes in Stockholders’ Equity,  Years Ended June 30, 2003, 2002, and 2001 |
|   |                                                                                                                                                  | Consolidated  Statements of Cash Flows,  Years Ended June 30, 2003, 2002, and 2001 |
|   |                                                                                                                                                  | Notes to  Consolidated Financial Statements |
|   |                                                                                                                                                  |   |
|   | (2)                                                                                                                                                   | Financial Statement  Schedules: |
|   |                                                                                                                                                  |   |
|   |                                                                                                                                                  | II | Valuation and  Qualifying Accounts,  Years Ended June 30, 2003, 2002, and 2001 |
|   |                                                                                                                                                  |   |   |
|   | 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 or furnished as part of this report: |

 
| **Exhibit  Number** |   | **Exhibit  Title**                                                                                |
|---------------------|--------|---------------------------------------------------------------------------------------------------|
|                |   |                                                                                              |
| 23.1                |   | Consent of Independent  Public Accountants – Windes & McClaughry Accountancy Corporation |
|                |   |                                                                                              |
| 23.2                |   | Statement Regarding  Consent of Arthur Andersen LLP                                               |
|                |   |                                                                                              |
| 31.1                |   | Certification Pursuant  to Rule 13a-14 Under the Securities Exchange Act of 1934                  |
|                |   |                                                                                              |
| 31.2                |   | Certification Pursuant  to Rule 13a-14 Under the Securities Exchange Act of 1934                  |
|                |   |                                                                                              |
| 32.1                |   | Certification Pursuant  to Section 906 of the Sarbanes-Oxley Act                                  |

 

19

----

 

SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   | ROTONICS MANUFACTURING  INC. |
|--------|------------------------------|
|   |                         |
|   |
|   | By                           | /s/ | SHERMAN  McKINNISS |   |
|   |                         |   | Sherman  McKinniss |   |
|   |                         |   | President, Chief  Executive Officer |   |
|   |                         |   | Chairman of the  Board |   |
|   |                         |   | Date 09/24/2003 |   |
|   |                         |   |   |   |
|   |                         |   |   |   |
|   | By                           | /s/ | DOUGLAS W.  RUSSELL |   |
|   |                         |   | Douglas W.  Russell |   |
|   |                         |   | Chief Financial  Officer |   |
|   |                         |   | Assistant  Secretary/Treasurer |   |
|   |                         |   | Date 09/24/2003 |   |
|        |                              |  |  |  |  |

 

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the Registrant and in the capacities and onthe dates indicated.

 
| **Signature**                    |   | **Title** |                | **Date** |       |
|----------------------------------|--------|-----------|---------------------|----------|------------|
|                             |   |      |                |     |       |
| /s/  E. PAUL TONKOVICH      |   |      | Secretary, Director |     | 09/24/2003 |   |
| E. Paul Tonkovich                |   |      |                |     |       |   |
|                             |   |      |                |     |       |   |
|                             |   |      |                |     |       |   |
| /s/  DAVID C. POLITE        |   |      | Director            |     | 09/24/2003 |   |
| David C. Polite                  |   |      |                |     |       |   |
|                             |   |      |                |     |       |   |
|                             |   |      |                |     |       |   |
| /s/  LARRY M. DEDONATO      |   |      | Director            |     | 09/24/2003 |   |
| Larry M. DeDonato                |   |      |                |     |       |   |
|                             |   |      |                |     |       |   |
|                             |   |      |                |     |       |   |
|  /s/   LARRY L. SNYDER |   |      | Director            |     | 09/24/2003 |   |
| Larry L. Snyder                  |   |      |                |     |       |   |
|                             |   |      |                |     |       |   |
|                             |   |      |                |     |       |   |
|  /s/   MARC L. BERMAN  |   |      | Director            |     | 09/24/2003 |   |
| Marc L. Berman                   |   |      |                |     |       |   |
|                             |   |      |                |     |       |   |
|                             |   |      |                |     |       |   |
| /s/  JULES SANDFORD         |   |      | Director            |     | 09/24/2003 |   |
| Jules Sandford                   |   |      |                |     |       |   |

 

20

----

 

REPORT OFINDEPENDENT PUBLIC ACCOUNTANTS

 

 

To theBoard of Directorsand Stockholders of Rotonics Manufacturing Inc.:

 

We have audited theaccompanying consolidated balance sheets of ROTONICS MANUFACTURING INC. (aDelaware corporation) as of June 30, 2003 and 2002 and the relatedconsolidated statements of operations and comprehensive income/(loss), changesin stockholders’ equity and cash flows for the years then ended.  These consolidated financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidatedfinancial 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 thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of RotonicsManufacturing Inc. as of June 30, 2003 and 2002, and the results of itsoperations and its cash flows for the years then ended in conformity withaccounting 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 theindex appearing under Item 14(a)(2) is presented for purposes of complying withthe Securities and Exchange Commission’s rules and is not a required part ofthe basic financial statements.  Thisschedule has been subjected to the auditing procedures applied in ouraudits of the basic financial statements and, in our opinion, is fairly statedin all material respects in relation to the basic financial statements taken asa whole.

 

As discussed in Notes 1and 6 to the consolidated financial statements, effective July 1, 2001,the Company changed its method of accounting for goodwill and other intangibleassets to conform with the provisions of Statement of Financial AccountingStandards No. 142, “Goodwill and other Intangible Assets.”

 

 
| /s/ WINDES & McCLAUGHRY  ACCOUNTANCY CORPORATION |   |
|------------------------------------------------------|--------|
|                                                 |
|                                                 |
| Long Beach, California                               |
| August 14, 2003                                 |

 

F-1

----

 

**This isa copy of the audit report previously issued by Arthur Andersen LLP inconnection with Rotonics Manufacturing Inc.’s filing on Form 10-K for the yearended June 30, 2001.  ArthurAndersen LLP has not reissued this audit report in connection with this filingon Form 10-K.  See exhibit 23.2 forfurther discussion.  The consolidatedbalance sheets as of June 30, 2001 and 2000, the consolidated statementsof operations and comprehensive income, changes in stockholders’ equity andcash flows for the years ended June 30, 2000 and 1999 and the informationin the schedule for 2000 and 1999 referred to in this report are not requiredto be and have not been included in the accompanying financial statements orschedules.**

 

 

REPORT OFINDEPENDENT PUBLIC ACCOUNTANTS

 

 

To theBoard of Directorsand 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.  Theseconsolidated financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

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 thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits 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 theindex appearing under Item 14(a)(2) is presented for purposes of complying withthe Securities and Exchange Commission’s rules and is not a required part ofthe basic financial statements.  Thisschedule has been subjected to the auditing procedures applied in ouraudits of the basic financial statements and, in our opinion, is fairly statedin all material respects in relation to the basic financial statements taken asa whole.

 

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

 

 
| /s/ ARTHUR ANDERSEN LLP   |   |
|---------------------------|--------|
|                      |
|                      |
| Orange County, California |
| August 22, 2001      |

 

F-2

----

 

ROTONICSMANUFACTURING INC.

 

CONSOLIDATED BALANCESHEETS

 
|                                                                                                                                                                |   | **June 30,** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|
|                                                                                                                                                                |   | **2003**          |       | **2002** |   |
| ASSETS                                                                                                                                                              |   |              |       |   |   |
| Current  assets:                                                                                                                                                    |   |              |       |   |   |
| Cash                                                                                                                                                                |   | $                 | 44,700     |   | $ | 66,900 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $231,100 and $175,000,  respectively                                                                |   | 4,419,700         |       | 5,122,000 |   |
| Current  portion of notes receivable                                                                                                                                |   | 92,100            |       | 10,300 |   |
| Inventories                                                                                                                                                         |   | 6,370,400         |       | 6,308,500 |   |
| Deferred  income taxes, net                                                                                                                                         |   | 256,900           |       | 272,800 |   |
| Prepaid  expenses and other current assets                                                                                                                          |   | 256,400           |       | 262,600 |   |
|                                                                                                                                                                |   |              |       |   |   |
| Total  current assets                                                                                                                                               |   | 11,440,200        |       | 12,043,100 |   |
|                                                                                                                                                                |   |              |       |   |   |
| Notes  receivable, less current portion                                                                                                                             |   | 138,600           |       | 336,800 |   |
| Investment  in partnership                                                                                                                                          |   | 104,300           |       | 108,700 |   |
| Property,  plant and equipment, net                                                                                                                                 |   | 14,462,000        |       | 15,004,000 |   |
| Intangible  assets, net                                                                                                                                             |   | 262,600           |       | 308,700 |   |
| Other  assets                                                                                                                                                       |   | 42,500            |       | 40,500 |   |
|                                                                                                                                                                |   |              |       |   |   |
|                                                                                                                                                                |   | $                 | 26,450,200 |   | $ | 27,841,800 |   |
|                                                                                                                                                                |   |              |       |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                          |   |              |       |   |   |
|                                                                                                                                                                |   |              |       |   |   |
| Current  liabilities:                                                                                                                                               |   |              |       |   |   |
| Current  portion of long-term debt                                                                                                                                  |   | $                 | 864,300    |   | $ | 1,357,600 |   |
| Accounts  payable                                                                                                                                                   |   | 2,791,600         |       | 2,090,700 |   |
| Accrued  liabilities                                                                                                                                                |   | 1,054,800         |       | 982,300 |   |
| Income  taxes payable                                                                                                                                               |   | —            |       | 128,800 |   |
|                                                                                                                                                                |   |              |       |   |   |
| Total  current liabilities                                                                                                                                          |   | 4,710,700         |       | 4,559,400 |   |
|                                                                                                                                                                |   |              |       |   |   |
| Bank  line of credit                                                                                                                                                |   | 381,200           |       | 192,000 |   |
| Long-term  debt, less current portion                                                                                                                               |   | 1,980,900         |       | 3,745,200 |   |
| Deferred  income taxes, net                                                                                                                                         |   | 2,427,400         |       | 2,565,100 |   |
|                                                                                                                                                                |   |              |       |   |   |
| Total  liabilities                                                                                                                                                  |   | 9,500,200         |       | 11,061,700 |   |
|                                                                                                                                                                |   |              |       |   |   |
| Commitments  and contingencies (Note 14)                                                                                                                            |   |              |       |   |   |
|                                                                                                                                                                |   |              |       |   |   |
| Stockholders’  equity:                                                                                                                                         |   |              |       |   |   |
| Common  stock, stated par value $.01: authorized 20,000,000 shares;  issued and outstanding 12,344,791 and 12,614,942 shares, respectively,  net of treasury shares |   | 22,699,600        |       | 23,040,100 |   |
| Accumulated  other comprehensive loss                                                                                                                               |   | (158,200          | )          | (128,000 | ) |
| Accumulated  deficit                                                                                                                                                |   | (5,591,400        | )          | (6,132,000 | ) |
|                                                                                                                                                                |   |              |       |   |   |
| Total  stockholders’ equity                                                                                                                                    |   | 16,950,000        |       | 16,780,100 |   |
|                                                                                                                                                                |   |              |       |   |   |
|                                                                                                                                                                |   | $                 | 26,450,200 |   | $ | 27,841,800 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

F-3

----

 

ROTONICSMANUFACTURING INC.

 

CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)

 
|                                                                                              |   | **For the  year ended June 30,** |       |
|---------------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                                              |   | **2003**                              |       | **2002** |   | **2001** |   |
|                                                                                              |   |                                  |       |   |   |   |   |
| Net  sales                                                                                        |   | $                                     | 35,972,100 |   | $ | 37,973,300 |   | $ | 40,520,100 |   |
| Costs  and expenses:                                                                              |   |                                  |       |   |   |   |   |
| Cost  of goods sold                                                                               |   | 26,927,300                            |       | 27,765,900 |   | 31,158,700 |   |
| Gross  profit                                                                                     |   | 9,044,800                             |       | 10,207,400 |   | 9,361,400 |   |
| Selling,  general, and administrative expenses                                                    |   | 7,068,700                             |       | 7,540,900 |   | 7,635,400 |   |
| Income  from operations                                                                           |   | 1,976,100                             |       | 2,666,500 |   | 1,726,000 |   |
|                                                                                              |   |                                  |       |   |   |   |   |
| Other  (expense)/income:                                                                          |   |                                  |       |   |   |   |   |
| Interest  expense                                                                                 |   | (266,000                              | )          | (464,100 | ) | (743,100 | ) |
| Other  income, net                                                                                |   | 123,900                               |       | 153,500 |   | 105,600 |   |
| Total  other expense, net                                                                         |   | (142,100                              | )          | (310,600 | ) | (637,500 | ) |
| Income  before income taxes and cumulative effect of change in accounting principle  for goodwill |   | 1,834,000                             |       | 2,355,900 |   | 1,088,500 |   |
| Income  tax provision                                                                             |   | (677,400                              | )          | (947,200 | ) | (614,800 | ) |
| Income  before cumulative effect of change in accounting principle for goodwill                   |   | 1,156,600                             |       | 1,408,700 |   | 473,700 |   |
| Cumulative  effect of change in accounting principle for goodwill                                 |   | —                                |       | (4,105,900 | ) | — |   |
| Net  income/(loss)                                                                                |   | 1,156,600                             |       | (2,697,200 | ) | 473,700 |   |
|                                                                                              |   |                                  |       |   |   |   |   |
| Other  comprehensive loss, before tax:                                                            |   |                                  |       |   |   |   |   |
| Cumulative  effect of adoption of SFAS 133                                                        |   | —                                |       | — |   | 109,400 |   |
| Unrealized  holding loss arising during the period                                                |   | (199,200                              | )          | (247,500 | ) | (270,000 | ) |
| Less:  Reclassification adjustments for losses included in net income                             |   | 149,000                               |       | 186,400 |   | 8,300 |   |
| Total  other comprehensive loss before tax                                                        |   | (50,200                               | )          | (61,100 | ) | (152,300 | ) |
| Income  tax benefit related to items of other comprehensive loss                                  |   | 20,000                                |       | 24,500 |   | 60,900 |   |
| Total  other comprehensive loss, net of tax                                                       |   | (30,200                               | )          | (36,600 | ) | (91,400 | ) |
| Comprehensive  income/(loss)                                                                      |   | $                                     | 1,126,400  |   | $ | (2,733,800 | ) | $ | 382,300 |   |
|                                                                                              |   |                                  |       |   |   |   |   |
| Net  income/(loss) per common share:                                                              |   |                                  |       |   |   |   |   |
| Basic  and diluted                                                                                |   |                                  |       |   |   |   |   |
| Income  before accounting change                                                                  |   | $                                     | 0.09       |   | $ | 0.11 |   | $ | 0.04 |   |
| Cumulative  effect of change in accounting principle for goodwill                                 |   | —                                |       | (0.32 | ) | — |   |
| Net  income/(loss)                                                                                |   | $                                     | 0.09       |   | $ | (0.21 | ) | $ | 0.04 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

F-4

----

 

ROTONICSMANUFACTURING INC.

 

CONSOLIDATED STATEMENTSOF CHANGES IN STOCKHOLDERS’ EQUITY

 
|                                  |   | **Common  Stock** |   | **Accumulated  Other  Comprehensive  Loss** |       | **Accumulated  Deficit** |   | **Total**  |   |
|---------------------------------------|--------|-------------------|--------|---------------------------------------------|------------|--------------------------|--------|------------|--------|
|                                  |   | **Shares**        |   | **Amount**                                  |       |
|                                  |   |              |   |                                        |       |                     |   |       |   |   |   |
| Balances,  June 30, 2000              |   | 12,905,721        |   | $                                           | 23,331,500 |                     | $      | —     |   | $ | (2,767,700 | ) | $ | 20,563,800 |   |
|                                  |   |              |   |                                        |       |                     |   |       |   |   |   |
| Exercise  of stock options            |   | 2,500             |   | 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                           |   | —            |   | —                                      |       | —                   |   | 473,700    |   | 473,700 |   |
|                                  |   |              |   |                                        |       |                     |   |       |   |   |   |
| Balances,  June 30, 2001              |   | 12,761,398        |   | 23,203,100                                  |       | (91,400                  | )      | (2,804,600 | )      | 20,307,100 |   |
|                                  |   |              |   |                                        |       |                     |   |       |   |   |   |
| Exercise  of stock options            |   | 57,500            |   | 49,800                                      |       | —                   |   | —     |   | 49,800 |   |
| Repurchase  of common stock           |   | (203,956          | )      | (212,800                                    | )          | —                   |   | —     |   | (212,800 | ) |
| Common  stock dividends               |   | —            |   | —                                      |       | —                   |   | (630,200   | )      | (630,200 | ) |
| Other  comprehensive loss, net of tax |   | —            |   | —                                      |       | (36,600                  | )      | —     |   | (36,600 | ) |
|                                  |   |              |   |                                        |       |                     |   |       |   |   |   |
| Net  loss                             |   | —            |   | —                                      |       | —                   |   | (2,697,200 | )      | (2,697,200 | ) |
|                                  |   |              |   |                                        |       |                     |   |       |   |   |   |
| Balances,  June 30, 2002              |   | 12,614,942        |   | 23,040,100                                  |       | (128,000                 | )      | (6,132,000 | )      | 16,780,100 |   |
|                                  |   |              |   |                                        |       |                     |   |       |   |   |   |
| Repurchase  of common stock           |   | (270,151          | )      | (340,500                                    | )          | —                   |   | —     |   | (340,500 | ) |
| Common  stock dividends               |   | —            |   | —                                      |       | —                   |   | (616,000   | )      | (616,000 | ) |
| Other  comprehensive loss, net of tax |   | —            |   | —                                      |       | (30,200                  | )      | —     |   | (30,200 | ) |
|                                  |   |              |   |                                        |       |                     |   |       |   |   |   |
| Net  income                           |   | —            |   | —                                      |       | —                   |   | 1,156,600  |   | 1,156,600 |   |
|                                  |   |              |   |                                        |       |                     |   |       |   |   |   |
| Balances,  June 30, 2003              |   | 12,344,791        |   | $                                           | 22,699,600 |                     | $      | (158,200   | )      | $ | (5,591,400 | ) | $ | 16,950,000 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

F-5

----

 

ROTONICS MANUFACTURING INC.

 

CONSOLIDATEDSTATEMENT OF CASH FLOWS

 
|                                                                                      |   | **For the  year ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                                      |   | **2003**                              |       | **2002** | ** ** | **2001** | ** ** |
| Cash  flows from operating activities:                                                    |   |                                  |       |   |   |   |   |
| Net  income/(loss)                                                                        |   | $                                     | 1,156,600  |   | $ | (2,697,200 | ) | $ | 473,700 |   |
| Adjustments  to reconcile net income/(loss) to net cash provided by operating activities: |   |                                  |       |   |   |   |   |
| Cumulative  effect of change in accounting principle for goodwill                         |   | —                                |       | 4,105,900 |   | — |   |
| Depreciation  and amortization                                                            |   | 2,120,400                             |       | 2,194,000 |   | 2,672,300 |   |
| Gain  on sales of equipment                                                               |   | (2,100                                | )          | (8,600 | ) | (48,000 | ) |
| Deferred  income tax (benefit)/expense                                                    |   | (101,800                              | )          | 307,100 |   | 511,500 |   |
| Provision  for doubtful accounts                                                          |   | 125,000                               |       | 170,700 |   | 31,000 |   |
| Changes  in assets and liabilities:                                                       |   |                                  |       |   |   |   |   |
| Decrease/(increase)  in accounts receivable                                               |   | 577,300                               |       | (182,000 | ) | 859,800 |   |
| (Increase)/decrease  in inventories                                                       |   | (61,900                               | )          | 829,800 |   | 223,300 |   |
| Decrease/(increase)  in prepaid expenses and other current assets                         |   | 6,200                                 |       | 86,500 |   | (126,800 | ) |
| (Increase)/decrease  in other assets                                                      |   | (2,000                                | )          | 64,800 |   | (242,500 | ) |
| Increase/(decrease)  in accounts payable                                                  |   | 715,100                               |       | (448,500 | ) | (578,100 | ) |
| Increase/(decrease)  in accrued liabilities                                               |   | 22,300                                |       | 48,900 |   | (229,000 | ) |
| (Decrease)/increase  in income taxes payable                                              |   | (128,800                              | )          | 128,800 |   | — |   |
| Net  cash provided by operating activities                                                |   | 4,426,300                             |       | 4,600,200 |   | 3,547,200 |   |
|                                                                                      |   |                                  |       |   |   |   |   |
| Cash  flows from investing activities:                                                    |   |                                  |       |   |   |   |   |
| Repayments  on notes receivable                                                           |   | 116,400                               |       | 177,000 |   | 61,600 |   |
| Capital  expenditures                                                                     |   | (1,532,600                            | )          | (1,028,800 | ) | (1,348,100 | ) |
| Proceeds  from sales of equipment                                                         |   | 2,400                                 |       | 15,000 |   | 59,600 |   |
| Distribution  from investment in partnership                                              |   | 4,400                                 |       | 5,100 |   | 6,500 |   |
| Net  cash used in investing activities                                                    |   | (1,409,400                            | )          | (831,700 | ) | (1,220,400 | ) |
|                                                                                      |   |                                  |       |   |   |   |   |
| Cash  flows from financing activities:                                                    |   |                                  |       |   |   |   |   |
| Borrowings  under line of credit                                                          |   | 7,253,900                             |       | 5,579,800 |   | 9,336,300 |   |
| Repayments  under line of credit                                                          |   | (7,064,700                            | )          | (6,487,800 | ) | (10,551,400 | ) |
| Proceeds  from issuance of long-term debt                                                 |   | —                                |       | — |   | 6,050,000 |   |
| Repayments  of long-term debt                                                             |   | (2,257,600                            | )          | (2,137,700 | ) | (7,025,900 | ) |
| Payment  of common stock dividends                                                        |   | (630,200                              | )          | (520,900 | ) | (200 | ) |
| Proceeds  from exercise of stock options                                                  |   | —                                |       | 49,800 |   | 2,000 |   |
| Repurchases  of common stock                                                              |   | (340,500                              | )          | (212,800 | ) | (130,400 | ) |
| Net  cash used in financing activities                                                    |   | (3,039,100                            | )          | (3,729,600 | ) | (2,319,600 | ) |
|                                                                                      |   |                                  |       |   |   |   |   |
| Net  (decrease)/increase in cash                                                          |   | (22,200                               | )          | 38,900 |   | 7,200 |   |
| Cash  at beginning of year                                                                |   | 66,900                                |       | 28,000 |   | 20,800 |   |
|                                                                                      |   |                                  |       |   |   |   |   |
| Cash  at end of year                                                                      |   | $                                     | 44,700     |   | $ | 66,900 |   | $ | 28,000 |   |

 

The accompanying notes are an integral part of these financialstatements

 

F-6

----

 

ROTONICSMANUFACTURING INC.

 

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1- ORGANIZATION,OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:

 

Organization andoperations

 

RotonicsManufacturing Inc.  (the “Company”), aDelaware corporation, manufactures and markets plastic products for commercial,agricultural, refuse, pharmaceutical, marine, recreation, medical waste,healthcare, retail, recreation and residential use, as well as an array ofcustom molded plastic products to customers in a variety of industries, locatedin diverse geographic markets.  TheCompany’s operations are conducted under one operating segment.  No single customer accounted for more than10% of the Company’s net sales in fiscal 2003, 2002, or 2001.  In fiscal 2003, the Company purchased inaggregate approximately 97% of its plastic resin from five vendors.  Plastic resin represents a significantportion of the Company’s manufacturing costs. As such, economic factors that affect the Company’s plastic resinvendors will have a potential impact on the Company’s future operations.

 

The Company’s significantaccounting policies are as follows:

 

Principles ofconsolidation

 

The consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiary, Rotocast Plastic Products of Tennessee, Inc.  All intercompany accounts and transactionshave been eliminated in consolidation.

 

Revenue recognition

 

Revenues are recognizedupon shipment to the customer or when title passes to the customer based on theterms of the sales, and are recorded net of sales discounts, returns andallowances.

 

Use of estimates

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

Fair Value of FinancialInstruments

 

The carrying value ofaccounts receivable and trade payables approximates the fair value due to theirshort-term maturities. The carrying value of the Company’s line of credit andnotes payable is considered to approximate fair market value, because theinterest rates of these instruments are based predominately on variablereference rates.

 

Inventories

 

Inventories are stated atthe lower of cost or market.  Cost isdetermined on the first-in, first-out method.

 

Property, plant andequipment

 

Depreciation is computedusing the straight-line method and the estimated useful lives of the assetsrange from three to thirty-nine years. When assets are retired or otherwise disposed of, the cost and relatedaccumulated depreciation are removed from the accounts, and any resulting gainor loss is included in income for the period. The cost of maintenance and repairs is charged to income as incurred;costs relating to significant renewals and betterments are capitalized.

 

Intangible assets

 

Patents areamortized on the straight-line basis over their useful lives of seventeenyears, or at their remaining useful life from date of acquisition.  Legal costs associated with defendingexisting patents are capitalized as additional costs of the patent, whensuccessful defense is probable.

 

F-7

----

 

### Impairment oflong-lived assets

###  

The Company evaluates therecoverability of long-lived assets and the related estimated remaining livesat each balance sheet date.  Shouldevents or changes in circumstances indicate that the carrying amount may not berecoverable or the useful life has changed, the Company records an impairmentcharge or changes the useful life.

 

#### Stock-basedcompensation

 

Stock-based compensation is accounted for using theintrinsic value method under which no compensation expense is recognized whenthe exercise price of the employee’s stock option equals or exceeds the marketprice of the underlying stock on the date of grant.  Required pro forma information has been presented under the fairvalue method using a Black-Scholes option-pricing model.

 

Income taxes

 

The Companyaccounts for income taxes pursuant to an asset and liability approach that requiresthe recognition of deferred tax assets and liabilities for the expected futuretax consequences of events that have been recognized in the Company’s financialstatements or tax returns.  Inestimating future tax consequences, expected future events other thanenactments of changes in tax laws or rates, are considered.

 

### Derivative instruments

###  

The Company accounts for its derivative instrumentsand hedging activities in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 133, “Accountingfor Derivative Instruments and Hedging Activities*,*” as amended by SFAS No.138, “Accounting for Certain Derivative Instruments and Certain HedgingActivities,” which established methods of accounting and reporting forderivative instruments and hedging activities related to those instruments aswell as other hedging activities.

 

Earnings per share

 

Basic earnings per share(“EPS”) is computed by dividing reported earnings by weighted average sharesoutstanding.  Diluted EPS include theeffect of the potential shares outstanding, including dilutive securities usingthe treasury stock method.  Potentialdilutive securities for the Company include outstanding stock options.  The table below details the components ofthe basic and diluted EPS calculations:

 
|                                                              |   | **Net  Income/(Loss)** |       | **Weighted  Average Shares  Outstanding** |       | **EPS** |       |
|-------------------------------------------------------------------|--------|------------------------|------------|-------------------------------------------|------------|---------|------------|
| June 30,  2003                                               |   |                   | ** ** |                                      | ** ** |    | ** ** |
| Basic EPS                                                         |   |                   |       |                                      |       |    |       |
| Net income                                                        |   | $                      | 1,156,600  |                                      | 12,486,038 |    | $          | 0.09 |   |
| Effect of dilutive stock options                                  |   | —                 |       | 10,633                                    |       | —  |       |
| Diluted EPS                                                       |   | $                      | 1,156,600  |                                      | 12,496,671 |    | $          | 0.09 |   |
|                                                              |   |                   |       |                                      |       |    |       |
| June 30, 2002                                                |   |                   |       |                                      |       |    |       |
| Basic EPS                                                         |   |                   |       |                                      |       |    |       |
| Net income before accounting change                               |   | $                      | 1,408,700  |                                      | 12,758,828 |    | $          | 0.11 |   |
| Cumulative effect of change in accounting principle  for goodwill |   | (4,105,900             | )          | —                                    |       | (0.32   | )          |
| Net loss                                                          |   | (2,697,200             | )          | 12,758,828                                |       | (0.21   | )          |
| Effect of dilutive stock options (1)                              |   | —                 |       | —                                    |       | —  |       |
| Diluted EPS                                                       |   | $                      | (2,697,200 | )                                         | 12,758,828 |    | $          | (0.21 | ) |
|                                                              |   |                   |       |                                      |       |    |       |
| June 30, 2001                                                |   |                   |       |                                      |       |    |       |
| Basic EPS                                                         |   |                   |       |                                      |       |    |       |
| Net income                                                        |   | $                      | 473,700    |                                      | 12,835,200 |    | $          | 0.04 |   |
| Effect of dilutive stock options                                  |   | —                 |       | 10,800                                    |       | —  |       |
| Diluted EPS                                                       |   | $                      | 473,700    |                                      | 12,486,000 |    | $          | 0.04 |   |

 

----

(1) Common stockequivalents are omitted in the earnings per share calculations due to theiranti-dilutive effect.

 

F-8

----

 

Geographic and Product Information

 

All of the Company’smanufacturing operations are located within the United States.  The Company’s revenues were almostexclusively generated in North America for the years ended June 30, 2003,2002, and 2001.  The Company categorizesits products into five main groups.  Netsales for these products are summarized as follows:

 
|                    |   | **For Year Ended June 30,** |       |
|-------------------------|--------|----------------------------------|------------|
|                    |   | **2003**                         |       | **2002** |   | **2001** |   |
| Product Group:          |   |                             |       |   |   |   |   |
| Contract  Manufacturing |   | $                                | 14,915,100 |   | $ | 16,000,300 |   | $ | 17,177,900 |   |
| Industrial              |   | 11,058,500                       |       | 10,802,000 |   | 10,190,300 |   |
| Marine                  |   | 2,774,700                        |       | 2,796,100 |   | 3,806,000 |   |
| Refuse                  |   | 4,029,100                        |       | 4,876,700 |   | 5,091,300 |   |
| Consumer                |   | 3,194,700                        |       | 3,498,200 |   | 4,254,600 |   |
| Total  net sales        |   | $                                | 35,972,100 |   | $ | 37,973,300 |   | $ | 40,520,100 |   |

 

Impact of Recent AccountingPronouncements

 

InSeptember 2001, the Financial Accounting Standards Board (“FASB”) approvedSFAS No. 144 “Accounting for the Impairment or Disposal of Long-LivedAssets.”  SFAS No. 144 supersedes SFASNo. 121 “Accounting for Impairment of Long-Lived assets and for Long LivedAssets to be Disposed of” as well as Accounting Principle Board Opinion No. 30“Reporting the Results of Operations – Reporting the Effects of Disposal of aSegment of a Business, and Extraordinary, Unusual, and Infrequently OccurringEvents and Transactions.”  SFAS No. 144not only retains the requirements of SFAS No. 121 to recognize an impairmentloss if the carrying amount of a long-lived asset is not recoverable from itsundiscounted cash flows, but also establishes a single accounting method forassets to be disposed of and broadens the presentation of discounted operationsto include more disposal transactions. SFAS No. 144 was effective for fiscal years beginning after December 15,2001.  The adoption of this pronouncementdid not have an impact on the Company’s financial position or results ofoperations.

 

In June 2002,the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities.”  Thispronouncement was effective for exit or disposal activities initiated afterDecember 31, 2002, and requires these costs to be recognized when theliability is incurred and not at project initiation.  This statement did not have a material impact on the Company’sfinancial statements.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure”. SFAS No. 148 amends the disclosure requirements in SFAS No. 123,“Accounting for Stock-Based Compensation” for annual periods ending afterDecember 15, 2002 and for interim periods beginning afterDecember 15, 2002.  Effective forfinancial statements for fiscal years ending after December 15, 2002, SFASNo. 148 also provides three alternative transition methods for companies thatchoose to adopt the fair value measurement provisions of SFAS No. 123.  The Company accounts for stock options underthe intrinsic method pursuant to Accounting Principles Board (“APB”) Opinion25, “Accounting for Stock Issued to Employees”, which is permitted under SFASNo. 123.  Had compensation cost for theplan been determined in accordance with the fair value method as set out inSFAS No. 123, as amended by SFAS No. 148, the Company’s net income and incomeper common share data would not have been significantly different.

 

In April 2003,the FASB issued SFAS No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities.” SFAS No. 149 is intended to result in more consistent reporting ofcontracts as either freestanding derivative instruments subject to SFAS No. 133in its entirety, or as hybrid instruments with debt host contracts and embeddedderivative features.  In addition, SFASNo. 149 clarifies the definition of a derivative by providing guidance on themeaning of initial net investments related to derivatives.  This statement is effective for contractsentered into or modified after June 30, 2003.  The Company does not believe the adoption of SFAS No. 149 willhave a material effect on its consolidated financial position, results ofoperations or cash flows.

 

NOTE 2 – NOTES RECEIVABLE:

 

On March 31, 1995,the Company and a customer entered into an agreement under which the Companyacquired from this customer certain assets, including molds and trade accountsreceivable, at their total estimated fair value of $357,800, which was appliedagainst the principal of a 1993 promissory note owed by this customer to the

 

F-9

----

 

Company.  The remaining unpaid principal, togetherwith accrued interest and open trade receivable from this customer as ofMarch 31, 1995, was 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 Company sold products manufactured using these molds directly toend-users.  The Company pays this formercustomer royalty 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, 2003 and 2002, the totalbalance of this note amounted to $86,100 and $186,100.  The Company intends to hold this note untilmaturity.

 

In July 2001, theCompany and a former customer agreed to convert an open trade receivablebalance due from the customer in the amount of $150,000 to a note receivablebearing interest at 8% per annum and maturing on June 15, 2004.  As of June 30, 2003, the total balanceof this note amounted to $138,600.  Thecustomer is currently disputing the balance of this note.  The Company expects a resolution prior tomaturity of the note.

 

At the end of fiscal2003, the Company was owed $6,000 on a note receivable for the sale of variousmolds.

 

NOTE3 - INVENTORIES:

 

Inventories consist of:

 
|            |   | **June 30,** |      |
|-----------------|--------|-------------------|-----------|
|            |   | **2003**          |      | **2002** |   |
| Raw  materials  |   | $                 | 2,279,800 |   | $ | 2,006,900 |   |
| Finished  goods |   | 4,090,600         |      | 4,301,600 |   |
|            |   | $                 | 6,370,400 |   | $ | 6,308,500 |   |

 

NOTE 4 - INVESTMENT INPARTNERSHIP:

 

The Company owns a 33-1/3% interest in a real estateventure that was acquired in 1998 and is being accounted for using the equitymethod.  The investment consistsprincipally of a note receivable which is payable in monthly installments,including interest at 7%, to 2008, with annual principal reductions asprovided.

 

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT:

 

Property, plantand equipment consist of:

 
|                                              |   | **For Year  Ended June 30,** |       |
|---------------------------------------------------|--------|-----------------------------------|------------|
|                                              |   | **2003**                          |       | **2002** |   |
| Land                                              |   | $                                 | 1,039,500  |   | $ | 1,039,500 |   |
| Buildings  and building improvements              |   | 5,114,500                         |       | 5,047,100 |   |
| Machinery,  equipment, furniture and fixtures     |   | 27,382,500                        |       | 26,797,100 |   |
| Construction  in progress                         |   | 548,200                           |       | 17,900 |   |
|                                              |   | 34,084,700                        |       | 32,901,600 |   |
| Less  - accumulated depreciation and amortization |   | (19,622,700                       | )          | (17,897,600 | ) |
|                                              |   | $                                 | 14,462,000 |   | $ | 15,004,000 |   |

 

NOTE 6 - INTANGIBLEASSETS:

 

Intangible assets consistof:

 
|                                    |   | **For Year  Ended June 30,** |    |
|-----------------------------------------|--------|-----------------------------------|---------|
|                                    |   | **2003**                          |    | **2002** |   |
| Patents                                 |   | $                                 | 475,700 |   | $ | 475,700 |   |
| Less  accumulated amortization, patents |   | (213,100                          | )       | (167,000 | ) |
| Net  patents                            |   | $                                 | 262,600 |   | $ | 308,700 |   |

 

F-10

----

 

The changes in thecarrying amount of goodwill is as follows:

 
|                                                              |   | **For Year  Ended June 30,** |   |
|-------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                              |   | **2003**                          |   | **2002** |   |
| Balance  at beginning of year                                     |   | $                                 | — |   | $ | 4,105,900 |   |
| Cumulative  effect of change in accounting principle for goodwill |   | —                            |   | (4,105,900 | ) |
| Balance  at end of each year                                      |   | $                                 | — |   | $ | — |   |

 

Aggregateamortization expense for the fiscal years ended June 30, 2003, 2002, and2001 was $46,000, $46,000 and 333,300, respectively.  Future estimated amortization expense will be $46,000 for each ofthe next five years and $32,600 thereafter through 2010.

 

In fiscal 2002, theCompany’s reporting unit was reviewed for goodwill impairment in conjunctionwith the adoption of SFAS No. 142 “Goodwill and Other Intangible Assets.”  Due to the disparity between the Company’sestimated fair value and its carrying value, a goodwill impairment loss of$4,105,900 was recognized as a cumulative effect of change in accountingprinciple as of July 1, 2001.  Thefair value of the reporting unit was estimated using conservative valuationmodels involving guideline public companies, acquisition analysis anddiscounted cash flows as well as the Company’s market capitalization.

 

Goodwillamortization expense was $324,900 for the year ended June 30, 2001.

 

For illustrative purposesthe following unaudited proforma information gives the effect of the adoptionof SFAS No. 142 on prior periods.

 
|                                                              |   | **For the  Year Ended June 30,** |       |
|-------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                              |   | **2002**                              |       | **2001** |   |
| Reported net income before accounting change                      |   | $                                     | 1,408,700  |   | $ | 473,700 |   |
| Cumulative  effect of change in accounting principle for goodwill |   | (4,105,900                            | )          | — |   |
| Net (loss)/income                                                 |   | (2,697,200                            | )          | $ | 473,700 |   |
| Add  back goodwill amortization                                   |   | —                                |       | 324,900 |   |
| Proforma net (loss)/income                                        |   | $                                     | (2,697,200 | ) | $ | 798,600 |   |
|                                                              |   |                                  |       |   |   |
| Basic  and diluted earning per share:                             |   |                                  |       |   |   |
| Reported  net income before accounting change                     |   | $                                     | .11        |   | $ | .04 |   |
| Cumulative  effect of change in accounting principle for goodwill |   | $                                     | (.32       | ) | — |   |
| Net  (loss)/income                                                |   | $                                     | (.21       | ) | $ | .04 |   |
| Goodwill  amortization                                            |   | —                                |       | $ | .02 |   |
| Proforma  net (loss)/income                                       |   | $                                     | (.21       | ) | $ | .06 |   |

 

NOTE 7 - BANK LINE OFCREDIT:

 

The Company has a$5,000,000 revolving line of credit with Wells Fargo Bank, which matures onOctober 1, 2004.  The line issecured by the Company’s machinery and equipment, accounts receivable andinventories.  Interest is payablemonthly at the respective bank’s prime rate minus .25% (3.75% per annum atJune 30, 2003).  In addition, theloan agreement allows the Company to convert the outstanding principal balancein amounts no less than $250,000 to a LIBOR-based loan for up to 90-dayperiods.  At June 30, 2003, totalborrowings under the Company’s line of credit were $381,200 of which none wasborrowed under the LIBOR option. Proceeds from the loan were used for workingcapital purposes.  At June 30,2003, the Company had approximately $4,618,800 available for future borrowingsunder the revolving line of credit.  Theloan agreement contains various covenants pertaining to tangible net worth, netincome and liquidity ratios, capital expenditures, payments of dividends,payment of subordinated debt as well as various other restrictions.  The Company was in compliance with thesecovenants during fiscal 2003.

 

F-11

----

 

NOTE 8 - LONG-TERM DEBT:

 

Long-termdebt consists of:

 
|                     |   | **For Year  Ended June 30,** |      |
|--------------------------|--------|-----------------------------------|-----------|
|                     |   | **2003**                          |      | **2002** |   |
| Note  payable - Bank (A) |   | $                                 | 2,845,200 |   | $ | 4,609,500 |   |
| Note  payable - Bank (B) |   | —                            |      | 493,300 |   |
|                     |   | 2,845,200                         |      | 5,102,800 |   |
| Less  current portion    |   | (864,300                          | )         | (1,357,600 | ) |
|                     |   | $                                 | 1,980,900 |   | $ | 3,745,200 |   |

 

----

(A)      OnOctober 1, 2000, the bank issued a $6,050,000 seven year note due inmonthly principal installments of $72,000 plus interest at the bank’s primerate minus .25% (3.75% per annum at June 30, 2003). In addition, the loanagreement allows the Company to convert all or a portion of the outstandingprincipal to a LIBOR-based loan for periods up to one year.  At June 30, 2003, the total outstandingprincipal balance was under the LIBOR option at 2.3575% per annum maturingJuly 15, 2003.  The note is securedby the Company’s machinery and equipment, accounts receivable and inventoriesand matures October 15, 2007.

 

At June 30, 2003 theCompany had available a term-loan commitment in the amount of $2,000,000 forfuture machinery and equipment purchases. Advances under the line will be subject to monthly interest onlypayments at the bank’s prime or LIBOR interest rate options untilOctober 1, 2003 at which time amounts borrowed will convert to asixty-month fully amortizable loan.

 

(B)        InJuly 1998, a $2,000,000 real estate loan secured by the Company’sBensenville, Illinois and Gainesville, Texas properties was issued to WellsFargo bank.  This note replaced a 1994real estate loan issued in connection with the purchase of the Bensenville,Illinois property.  The note was due inmonthly principal installments of approximately $6,700 plus interest at thebank’s prime rate minus .25% or LIBOR interest rate option on a twenty-fiveyear amortization with the outstanding principal due on July 1, 2008.   This note was repaid in full onAugust 15, 2002 and as a result, the Company’s Bensenville, Illinois andGainesville, Texas properties are currently unencumbered.

 

OnAugust 15, 2002, the Company amended its interest rate swap agreement withthe bank.  The agreement allows theCompany to fix a portion of its outstanding term and line of credit debt ($4million as of June 30, 2003) from a variable floating LIBOR rate to a fixedLIBOR rate in efforts to protect against future increases in the banks LIBORrate.  The amended agreement alsoreduced the fixed LIBOR rate and extended the maturity date to August 15,2006.

 

Aggregate annualmaturities of long-term debt are summarized as follows:

 

Year EndingJune 30

 
| 2004   |   | $       | 864,300   |   |
|--------|--------|---------|-----------|--------|
| 2005   |   | 864,300 |      |
| 2006   |   | 864,300 |      |
| 2007   |   | 252,300 |      |
|   |   | $       | 2,845,200 |   |

 

NOTE 9 – RELATED PARTYTRANSACTIONS:

 

The Company sold moldedplastic products and molds under arms—length terms to Atlantic Meeco, Inc.(“AMI”) a company in which the President/CEO/Chairman of the Board of theCompany has a 50% equity interest. Sales to AMI amounted to $101,600, $59,100 and $59,500 in fiscal years2003, 2002 and 2001, respectively.  Amountsdue on sales to AMI were $32,000 and $2,100 at June 30, 2003 and 2002, respectively,and are included in accounts receivable in the accompanying consolidatedbalance sheet.

 

In fiscal years 2003,2002 and 2001, the Company incurred legal fees and costs amounting to $21,000,$23,900 and $42,500, respectively, for services by E. Paul TonkovichProfessional Corporation, of which an officer/director of the Company is anemployee.

 

F-12

----

 

NOTE 10 - ACCRUEDLIABILITIES:

 

Accruedliabilities consist of:

 
|                                               |   | **June 30,** |      |
|----------------------------------------------------|--------|-------------------|-----------|
|                                               |   | **2003**          |      | **2002** |   |
| Salaries,  wages, commissions and related payables |   | $                 | 572,900   |   | $ | 554,200 |   |
| Other                                              |   | 481,900           |      | 428,100 |   |
|                                               |   | $                 | 1,054,800 |   | $ | 982,300 |   |

 

NOTE 11 - STOCK OPTIONPLAN:

 

In December 1994, atthe Annual Meeting of Stockholders of the Company, the stockholders voted by majoritydecision to ratify and approve a new stock option plan as adopted by the Boardof Directors (“the Board”) in June 1994. The plan allows, at the discretion of the Board, for the granting ofoptions to key employees, officers, directors, and consultants of the Companyto purchase 1,000,000 shares of the Company’s common stock.  Under the terms and conditions set forth inthe plan, the exercise price of the stock options will be a least 85% of thefair market value of the Company’s common stock on the grant date.  The plan expires June 12, 2004.

 

Stock Option Activity

 
|                                       |   | **Outstanding  Shares** |   | **Exercisable  Shares** |   | **Weighted  Average Price  Per Share** |   |
|--------------------------------------------|--------|-------------------------|--------|-------------------------|--------|----------------------------------------|--------|
| Balance outstanding at June 30, 2000  |   | 150,000                 |   | 145,000                 |   | $                                      | 0.8901 |   |
| Granted                                    |   | 193,000                 |   |                    |   | $                                      | 1.1146 |   |
| Exercised                                  |   | (2,500                  | )      |                    |   | $                                      | 0.8125 |   |
| Cancelled                                  |   | (33,000                 | )      |                    |   | $                                      | 0.9886 |   |
| Balance  outstanding at June 30, 2001 |   | 307,500                 |   | 277,500                 |   | $                                      | 1.0084 |   |
| Exercised                                  |   | (57,500                 | )      |                    |   | $                                      | 0.8668 |   |
| Cancelled                                  |   | (50,000                 | )      |                    |   | $                                      | 0.8750 |   |
| Balance  outstanding at June 30, 2002 |   | 200,000                 |   | 185,000                 |   | $                                      | 1.1000 |   |
| Cancelled                                  |   | (95,000                 | )      |                    |   | $                                      | 1.0724 |   |
| Balance  outstanding at June 30, 2003 |   | 105,000                 |   | 105,000                 |   | $                                      | 1.1250 |   |

 

The Company did not grantany options in fiscal 2003.  AtJune 30, 2003, the Company had 832,500 shares available for future grants.  The Company accounts for stock options underthe intrinsic value method.  Hadcompensation cost for the plan been determined in accordance with the fairvalue method as set out in SFAS No. 123, as amended by SFAS No. 148, theCompany’s net income and income per common share data would not have beensignificantly different.

 

NOTE 12 - COMMON STOCK:

 

Treasury stock isrecorded at cost.  At June 30,2002, treasury stock consisted of 316 shares of common stock at a cost of$900.  In fiscal 2003 and 2002, theCompany acquired 270,151 and 203,956 shares of its common stock at a total costof $340,500 and $212,800, respectively.

 

On June 24, 2003 theBoard declared a dividend of $.05 per share of common stock payable onJuly 25, 2003 to stockholders of record on July 14, 2003.

 

F-13

----

 

NOTE 13 - INCOME TAXES:

 

The components of theincome tax provision were:

 
|      |   | **For Year  Ended June 30,** |     |
|-----------|--------|-----------------------------------|----------|
|      |   | **2003**                          |     | **2002** |   | **2001** |   |
| Current:  |   |                              |     |   |   |   |   |
| Federal   |   | $                                 | (667,100 | ) | $ | (476,300 | ) | $ | (26,000 | ) |
| State     |   | (112,100                          | )        | (163,800 | ) | (77,300 | ) |
|      |   | (779,200                          | )        | (640,100 | ) | (103,300 | ) |
| Deferred: |   |                              |     |   |   |   |   |
| Federal   |   | 69,900                            |     | (302,800 | ) | (473,700 | ) |
| State     |   | 31,900                            |     | (4,300 | ) | (37,800 | ) |
|      |   | 101,800                           |     | (307,100 | ) | (511,500 | ) |
|      |   | $                                 | (677,400 | ) | $ | (947,200 | ) | $ | (614,800 | ) |

 

At June 30, 2003,the Company has net operating loss (NOL) carry-forwards of approximately$6,511,300 for state income tax purposes. The NOL carry-forwards, which are available to offset future taxableincome of the Company and are subject to limitations should a “change inownership” as defined in the Internal Revenue Code occur, will begin to expirein 2004 if not utilized.  The state NOLcarry-forwards expire as follows:

 
|   |   |   |   | **Amount of  Unused State  Operating Loss  Carryforwards** |      | **Expiration  During Year  Ended June 30,** |   |
|--------|--------|--------|--------|------------------------------------------------------------|-----------|--------------------------------------------------|--------|
|   |   |   |   | $                                                          | 272,800   |                                             | 2004   |   |
|   |   |   |   | 444,400                                                    |      | 2005                                             |   |
|   |   |   |   | 89,000                                                     |      | 2006                                             |   |
|   |   |   |   | 582,600                                                    |      | 2007                                             |   |
|   |   |   |   | 603,100                                                    |      | 2008                                             |   |
|   |   |   |   | 840,200                                                    |      | 2009                                             |   |
|   |   |   |   | 286,400                                                    |      | 2010                                             |   |
|   |   |   |   | 555,300                                                    |      | 2011                                             |   |
|   |   |   |   | 476,700                                                    |      | 2012                                             |   |
|   |   |   |   | 395,300                                                    |      | 2013                                             |   |
|   |   |   |   | 850,400                                                    |      | 2014                                             |   |
|   |   |   |   | 262,500                                                    |      | 2015                                             |   |
|   |   |   |   | 482,800                                                    |      | 2016                                             |   |
|   |   |   |   | 179,800                                                    |      | 2017                                             |   |
|   |   |   |   | 190,000                                                    |      | 2018                                             |   |
|   |   |   |   | $                                                          | 6,511,300 |                                             |   |   |

 

In fiscal 2001, the Company utilized the remainingbalance of its federal NOL carry-forwards, and then in fiscal 2002, the Companyutilized its remaining alternative minimum tax credit, which reduced itscurrent federal tax liability by $412,600 in fiscal 2002.  In connection with the Rotocast merger, theCompany recorded a deferred tax asset of $394,400, net of a valuation allowanceof $192,400 as of June 30, 1998, for the future benefit related to stateNOL carry-forwards.  The current statevaluation allowance, amounting to $307,200, represents the estimated amount ofstate NOL’s that will expire prior to their utilization.  Realization of the future tax benefits ofthe NOL carry-forwards is dependent on the Company’s ability to generatetaxable income within the carry-forward period.  Management will continue to assess the likelihood of utilizingits state NOL’s by taking into consideration historical results and currenteconomic conditions in which the Company operates.  Management does not consider any non-routine transactions inassessing the likelihood of realization of the recorded deferred tax asset.  Any future adjustments to the valuationallowance will be reflected as a component of the current years tax provision.

 

F-14

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The following reconciles the federal statutory income tax rate to theeffective rate of the provision for income taxes:

 
|                                         |   | **For Year  Ended June 30,** |   |
|----------------------------------------------|--------|-----------------------------------|--------|
|                                         |   | **2003**                          |   | **2002** |   | **2001** |   |
| Federal statutory rate                       |   | 34.0                              | %      | 34.0 | % | 34.0 | % |
| State  income taxes (net of federal benefit) |   | 3.8                               |   | 3.8 |   | 3.6 |   |
| Goodwill  amortization                       |   | —                            |   | — |   | 10.2 |   |
| Other  items, net                            |   | (0.9                              | )      | 2.4 |   | 8.7 |   |
| Effective  income tax rate                   |   | 36.9                              | %      | 40.2 | % | 56.5 | % |

 

Deferred taxassets and liabilities are summarized as follows:

 
|                                                   |   |   |   | **June 30,** |       |
|--------------------------------------------------------|--------|--------|--------|-------------------|------------|
|                                                   |   |   |   | **2003**          |       | **2002** |   |
| Deferred tax assets:                                   |   |   |   |              |       |   |   |
| State  NOL (net of federal benefit)                    |   |   |   | $                 | 388,300    |   | $ | 392,100 |   |
| Employment-related  reserves                           |   |   |   | 55,200            |       | 103,300 |   |
| Allowance  for doubtful accounts                       |   |   |   | 91,800            |       | 69,600 |   |
| Interest  rate swap derivative                         |   |   |   | 105,400           |       | 85,400 |   |
|                                                   |   |   |   | 640,700           |       | 650,400 |   |
| Deferred  tax liabilities:                             |   |   |   |              |       |   |   |
| Depreciation  and amortization                         |   |   |   | (2,504,000        | )          | (2,635,500 | ) |
| Net  deferred tax liability before valuation allowance |   |   |   | (1,863,300        | )          | (1,985,100 | ) |
| Deferred  tax assets valuation allowance               |   |   |   | (307,200          | )          | (307,200 | ) |
| Net  deferred tax liability                            |   |   |   | $                 | (2,170,500 | ) | $ | (2,292,300 | ) |

 

NOTE 14 - COMMITMENTS ANDCONTINGENCIES:

 

Commitments

 

The Company leasesvarious office and warehouse facilities, and equipment under long-termoperating leases expiring through March 2013.  Certain of the leases provide for five-year renewal options andrental increases based on the Consumer Price Index.  Operating lease expense for fiscal 2003, 2002, and 2001 amountedto $1,122,400, $1,114,200 and $1,055,100, respectively.

 

At June 30, 2003,the future minimum lease commitments, excluding insurance and taxes, are asfollows:

 

Year Ending June 30,

 
| 2004       |   |   |   | $         | 1,110,000 |   |
|------------|--------|--------|--------|-----------|-----------|--------|
| 2005       |   |   |   | 1,006,100 |      |
| 2006       |   |   |   | 883,400   |      |
| 2007       |   |   |   | 841,600   |      |
| 2008       |   |   |   | 841,000   |      |
| Thereafter |   |   |   | 3,534,200 |      |
|       |   |   |   | $         | 8,216,300 |   |

 

Contingencies

 

In the normal course ofbusiness, the Company encounters certain litigation matters, which in theopinion of management will not have a significant adverse effect on thefinancial position or the results of operations of the Company.

 

F-15

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NOTE 15 - SUPPLEMENTALDISCLOSURES OF CASH FLOW INFORMATION:

 

Supplemental disclosuresof cash flows information are as follows:

 
|                                                   |   | **For the  Year Ended June 30,** |    |
|--------------------------------------------------------|--------|---------------------------------------|---------|
|                                                   |   | **2003**                              |    | **2002** |   | **2001** |   |
| Cash  paid during the year for:                        |   |                                  |    |   |   |   |   |
| Interest                                               |   | $                                     | 272,200 |   | $ | 477,300 |   | $ | 770,100 |   |
| Income taxes                                           |   | $                                     | 925,400 |   | $ | 424,600 |   | $ | 180,200 |   |
| Non-cash investing activities:                         |   |                                  |    |   |   |   |   |
| Conversion of accounts receivable to notes  receivable |   | $                                     | —  |   | $ | 150,000 |   | $ | — |   |
| Non-cash financing activities:                         |   |                                  |    |   |   |   |   |
| Common dividends declared but not paid                 |   | $                                     | 616,000 |   | $ | 630,200 |   | $ | 510,600 |   |
| Change in fair value of interest rate swap             |   | $                                     | 30,200  |   | $ | 36,600 |   | $ | 91,400 |   |

 

NOTE 16 - UNAUDITEDQUARTERLY RESULTS:

 
|                                                                                 |   | **Quarter  Ended** |      |
|--------------------------------------------------------------------------------------|--------|--------------------|-----------|
|                                                                                 |   | **September**      |      | **December** | ** ** | **March** | ** ** | **June** | ** ** |
| Fiscal  Year 2003:                                                                   |   |               |      |   |   |   |   |   |   |
| Net  sales                                                                           |   | $                  | 8,894,800 |   | $ | 8,530,500 |   | $ | 8,720,800 |   | $ | 9,826,000 |   |
| Gross  profit                                                                        |   | 2,347,500          |      | 2,067,000 |   | 2,121,300 |   | 2,509,000 |   |
| Net  income                                                                          |   | 361,700            |      | 198,900 |   | 102,800 |   | 493,200 |   |
|                                                                                 |   |               |      |   |   |   |   |   |   |
| Per  share:                                                                          |   |               |      |   |   |   |   |   |   |
| Net  income-basic and diluted                                                        |   | $                  | .03       |   | $ | .01 |   | $ | .01 |   | $ | .04 |   |
|                                                                                 |   |               |      |   |   |   |   |   |   |
| Fiscal  Year 2002:                                                                   |   |               |      |   |   |   |   |   |   |
| Net  sales                                                                           |   | $                  | 9,588,300 |   | $ | 7,927,600 |   | $ | 9,368,100 |   | $ | 11,089,300 |   |
| Gross  profit                                                                        |   | 2,275,500          |      | 1,928,500 |   | 2,645,600 |   | 3,357,800 |   |
| Net  income before cumulative effect of change in accounting principle of goodwill   |   | 157,700            |      | 40,200 |   | 394,100 |   | 816,700 |   |
| Net  (loss)/income)                                                                  |   | (3,948,200         | )         | 40,200 |   | 394,100 |   | 816,700 |   |
|                                                                                 |   |               |      |   |   |   |   |   |   |
| Per  share:                                                                          |   |               |      |   |   |   |   |   |   |
| Net  income before cumulative effect of change in accounting principle for  goodwill |   | .01                |      | — |   | .03 |   | .07 |   |
| Net  (loss)/income                                                                   |   | $                  | (.31      | ) | $ | — |   | $ | .03 |   | $ | .07 |   |

 

F-16

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ROTONICS MANUFACTURING INC. 

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

Years Ended June 30, 2003, 2002 and 2001

 
| **Column A**                           |   | **Colum B**                          |    | **Column C**                        |   | **Column D** |   | **Column E**   |   |
|----------------------------------------|--------|--------------------------------------|---------|-------------------------------------|--------|--------------|--------|----------------|--------|
|                                   |   |                                 |    | **Additions**                       |   |         |   |           |   |
| **Description**                        |   | **Balance at  Beginning of  Period** |    | **Charged to  Costs and  Expenses** |   | **Other**    |   | **Deductions** |   | **Balance at End  of Period** |   |
| June 30, 2003:                    |   |                                 |    |                                |   |         |   |           |   |   |   |
| Allowance for doubtful accounts        |   | $                                    | 175,000 |                                | $      | 123,000      |   | $              | — |   | $ | (66,900 | )  (1) | $ | 231,100 |   |
|                                   |   |                                 |    |                                |   |         |   |           |   |   |   |
| Deferred tax asset valuation allowance |   | $                                    | 307,200 |                                | $      | —       |   | $              | — |   | $ | — |   | $ | 307,200 |   |
|                                   |   |                                 |    |                                |   |         |   |           |   |   |   |
| June 30, 2002:                    |   |                                 |    |                                |   |         |   |           |   |   |   |
| Allowance for doubtful accounts        |   | $                                    | 99,200  |                                | $      | 170,400      |   | $              | — |   | $ | (94,600 | )  (1) | $ | 175,000 |   |
|                                   |   |                                 |    |                                |   |         |   |           |   |   |   |
| Deferred tax asset valuation allowance |   | $                                    | 307,200 |                                | $      | —       |   | $              | — |   | $ | — |   | $ | 307,200 |   |
|                                   |   |                                 |    |                                |   |         |   |           |   |   |   |
| 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 |   |

 

----

(1)Doubtful accounts written off during the year, net of recoveries.

 

(2)Represents valuation allowance for potential state NOL’s, which may expireprior to utilization.

 

F-17

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