**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

 

**For the fiscal year ended June 30, 2004**

 

**Commission file number 1-9429**

 

**ROTONICSMANUFACTURING INC.**

(Exact name of registrant as specified in itscharter)

 

| **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 registered pursuant to Section 12(g) of the Act:          **None**

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) for the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements 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.  o

 

The aggregate market value of the voting stock held by non-affiliatesof the registrant, as of December 31, 2003, was $6,964,100 (1).

 

The number of shares of common stock outstanding at September 3,2004 was 11,978,258.

 

----

(1)   Excludes 7,038,208 shares held by directors,officers, and stockholders, whose ownership exceeded 5% of the outstandingshares at December 31, 2003. Exclusion of such shares should not be construed to indicate that theholders thereof possess the power, direct or indirect, to direct the managementor policies of registrant, or that such persons are controlled by or undercommon control with the registrant.

 

 

----

 

DOCUMENTS INCORPORATED 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 6, 2004 |   | III                  |   |

 

2

----

 

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, Related Stockholder Matters and Issuer  Purchases of Common Stock |   |
| Item 6     | Selected  Financial Data                                                                                      |   |
| Item 7     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                   |   |
| Item 7a    | Quantitative  and Qualitative 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 |                                                                                                          |

 

3

----

 

PART I

 

Forward-Looking Statements

 

To the extent that this 10-K Annual Report discusses matters which arenot historical, including statements regarding future financial results,information, or expectation about products or markets, or otherwise makesstatements about future events, such statements are forward-looking and aresubject to a number of risks and uncertainties that could cause actual resultsto differ materially from the statements made. These include, among others, fluctuations in costs of raw materials andother expenses, costs associated with plant closures, downturns in the marketsserved by the Company, the costs associated with new product introductions, aswell as other factors described under the heading: Item 1, “Business”, Item 3,“Legal Proceedings”, under Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”, and Footnote 1 to FinancialStatements.  When used in this report,the words “expects,”  “anticipates,”“intends,” “plans,” “ believes,” “seeks,” “estimates” and similar expressionsare generally 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 2005.

 

Item 1.   Business

 

Introduction

 

Rotonics Manufacturing Inc. (the “Company”) was founded as an IllinoisCorporation, and was reincorporated in Delaware in December 1986.  Effective July 1, 1991, the Companymerged with Rotonics Molding, Inc.-Chicago (“Rotonics”), with the Company beingthe surviving entity.  In accordance withthe 1991 merger agreement, the Company issued 2,666,666 (after giving effect toa 1-for-3 reverse stock split) shares of its common stock and 4,999,997 sharesof a newly issued non-voting preferred stock in exchange for all theoutstanding voting stock of Rotonics. The preferred stock was completely redeemed prior to the end of fiscal1996, and the Company’s Articles of Incorporation were subsequently amended toeliminate the authorization of Series A preferred stock.

 

Rotonics had operations in Itasca, Illinois; Deerfield, Wisconsin;Denver, Colorado; and Bartow, Florida. Three of these operations currentlyconduct business as divisions of the Company using the trade names RMI-C,RMI-D, and RMI-F, respectively. Rotonics was a privately held California Corporation, which was 52%owned by Mr. Sherman McKinniss.  Mr.McKinniss became president and chief executive officer of the Company onAugust 12, 1991, and currently presides as the Company’s president, CEOand chairman of the board.

 

In September 1991, the Company’s wholly owned subsidiary,Rotational Molding, Inc. (“RMI”), was merged into the Company and now operatesas two divisions using the trade names RMI-G and RMI-I with manufacturingoperations in Gardena, California and Caldwell, Idaho, respectively.

 

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

 

Effective April 1, 1995, the Company purchased certain assets andassumed certain liabilities of Custom Rotational Molding, Inc. (“CRM”) for300,000 shares of the Company’s common stock. The Company assumed CRM’s operations in Arleta, California.

 

In September 1994, the Company purchased a larger manufacturingfacility in Bensenville, Illinois and subsequently relocated its Itasca,Illinois operations into this new facility. In December 1995, the Company discontinued its operations at itsDeerfield, Wisconsin location and combined these operations into its newlypurchased Bensenville, Illinois operation. The Wisconsin facility is currentlybeing leased to one tenant on a month-to-month term basis at $2,500 per month.

 

In February 1997, the Company purchased a 9.73-acre facilityconsisting of 63,000 square feet of manufacturing and office building space inCommerce City, Colorado.  The Companyhas since expended significant resources to 

 

4

----

 

refurbish the facility to house its Colorado operations.  The facility is also located within anenterprise zone, which continues to provide additional benefits.  The Company leases a portion of this facility’sexcess office and yard space on a long-term basis at $4,100 per month.

 

Effective April 1, 1998, the Company merged with RotocastInternational, Inc. and its wholly owned subsidiaries (“Rotocast”), with theCompany being the surviving entity.  Inaccordance with the Merger Agreement, the Company issued 2,072,539 shares ofits common stock and a $2,000,000 note payable secured by a stand-by letter ofcredit, in exchange for all the outstanding voting stock of Rotocast.  In January 2000, the Company repurchasedthese shares for $2.8 million.  Uponconsummation of the repurchase, the shares were retired.

 

Rotocast had operations in Miami, Florida; Knoxville, Tennessee;Brownwood, Texas; Las Vegas, Nevada; and Bossier City, Louisiana.  These operations currently conduct businessas divisions of the Company using the trade names Nutron, Rotocast ofTennessee, RMI-B and RMI-Nevada.  Priorto the merger, the operations in Bossier City, Louisiana were substantiallydiscontinued.  Rotocast was a privatelyheld Florida corporation, owned by GSC Industries, Inc. (“GSC”).  The Company leases the remaining Rotocastfacilities from GSC, and other affiliated parties, under long-term leasearrangements.  A portion of the Nutronoffice building is being sub-leased on a long-term basis at $2,500 per month.

 

In conjunction with the Rotocast merger, the Company initiated theconsolidation of its Warminster, Pennsylvania and Arleta, California facilitiesinto its remaining operations.  Theconsolidation of these facilities was completed in fiscal 1999 and enhanced theoperations of the Company’s remaining facilities, reduced its overallmanufacturing overhead costs, and allowed the Company to take greater advantageof its marketing and distribution channels. Also, in fiscal 1999, the Company consolidated its Miami operations intothe remaining operating facilities.

 

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

 

Description of Business

 

The Company currently has ten manufacturing locations and was againlisted by a plastics industry periodical as one of the top ten rotationalmolders in North America.  Theseoperating divisions manufacture a variety of plastic products for commercial,agricultural, pharmaceutical, governmental, building, medical waste, refuse,retail, recreation, marine, healthcare and residential use, as well as a vastnumber of custom plastic products for a variety of industries, utilizing therotonically molding process and, on a smaller scale; injection molding and dipmolding processes. In April 1998, the injection molding process was addedto the Company’s manufacturing operations as part of the Rotocast merger.  Utilizing this process, the Company marketsa variety of parts for commercial, promotional, and residential uses, under thetrade names Nutron and AMP.  Rotonicallymolding is a process for molding plastic resin by rotating a mold in a heatedenvironment, while the plastic resin powder placed inside the mold melts andevenly coats the inner wall of the mold. The injection molding process varies in that the plastic resin is firstheated to a molten state and then injected under pressure into a mold.  The rotonically molding process has beenused for many years and continues to be recognized as a growth industry inrecent years, as a result of numerous ongoing business consolidations and thedevelopment of new resins.  These newresins allow rotonically molded items to compete with more traditional materialssuch as carbon, fiberglass, and stainless steel, especially in the fabricationof large, lightweight, one-piece molded items, such as storage tanks andpolysteel light poles.  Rotonicallymolding is a particularly advantageous process for users of molded plasticproducts who may want to test different prototypes, or who do not requiresufficient numbers of such products to justify a more expensive manufacturingprocess.  The Company’s products includevarious types of storage tanks, bin lids, refuse containers for automatedremoval, medical waste containers, agricultural/livestock products, kayaks,outdoor polysteel lamp posts, furniture, planters, and other rotonically moldeditems.

 

The Company purchases resin from six major suppliers in the U.S. andCanada.  There are fifteen additionalsuppliers of lesser significance.  Sincethe majority of the resin used in the manufacturing process is a polyethylenederived from natural 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 several patents on storage containers used forpharmaceutical, commercial and residential applications that expire through theyear 2010.  Although the Company hasbeen able to capture its share of these niche markets and expects to see continuedgrowth, no one patent or groups of patents is considered material to thebusiness as a whole.

 

5

----

 

Competition for the Company’s products is governed by geography andregion, since large capacity tanks and bulky hollow products are expensive toship long distances and, as such, any prospective competitor is constrained byshipping costs.  There are numeroussingle-location, as well as a growing trend to structure multi-location,rotonically molding businesses throughout the United States.  However, each of these businesses stillcompetes in a geographic region, which is determined by customer demand withinthat region, a constraint inherent to the industry.  Due to its nationwide presence, the Company has substantiallyalleviated this constraint.  TheCompany’s sales are usually not subject to large seasonal fluctuations as thebusiness typically operates on significant backlogs with a diverse product mix.  Peak season is usually experienced in theperiod from April through June. Historically, the quarter from January through March is theslowest production period of the year. The Company’s backlog was $3,001,200 and $5,201,600 as of June 30,2004 and 2003, respectively.  All of thebacklog orders as of June 30, 2004 are expected to be filled during fiscal2005.

 

The Company’s products are marketed through the in-house sales andengineering staff, various distributors and outside commission-based salesrepresentatives.  The Company continuesto build a strong, broad and diverse customer base, which covers a multitude ofindustries.  Since fiscal 1991, no salesto any one single customer represented a material part of the Company’sbusiness.

 

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

 

Regulation

 

The Company believes it is in compliance with all applicable federal,state and local laws relating to the protection of the environment, and doesnot anticipate any such laws will have material effect on its financialposition, capital expenditures, or competitive position.

 

Employees

 

As of June 30, 2004, the Company employed a total of 425individuals.  The Company maintains, forits respective employees who are eligible, a medical insurance plan (some ofwhich is contributory), a group life insurance plan, an annual bonus plan and asemi-annual attendance bonus plan.

 

Item 2.Properties

 

The Company’s corporate office occupies a separate building that usesapproximately 3,600 square feet of the facilities of RMI-G in Gardena,California.

 

6

----

 

The operating divisions lease warehouse, production and office space asfollows:

 
| **Property  Location**  |   | **Building  Square  Footage** |   | **Total  Facility  Square  Footage** |   | **Annual  Base  Rent** |    | **Expiration  Date (2)** |                |
|-------------------------|--------|-------------------------------|--------|--------------------------------------|--------|------------------------|---------|--------------------------|---------------------|
|                    |   |                          |   |                                 |   |                   |    |                     |                |
| Gardena, California (1) |   | 42,800                        |   | 183,300                              |   | $                      | 313,100 |                     | October 2011   |   |
|                    |   |                          |   |                                 |   |                   |    |                     |                |
| Caldwell, Idaho         |   | 21,250                        |   | 71,200                               |   | $                      | 105,600 |                     | September 2005 |   |
|                    |   |                          |   |                                 |   |                   |    |                     |                |
| Bartow, Florida         |   | 46,200                        |   | 174,600                              |   | $                      | 129,400 |                     | September 2009 |   |
|                    |   |                          |   |                                 |   |                   |    |                     |                |
| Miami, Florida (3)      |   | 50,000                        |   | 86,000                               |   | $                      | 168,700 |                     | March 2013     |   |
|                    |   |                          |   |                                 |   |                   |    |                     |                |
| Gainesville, Texas (4)  |   | —                        |   | 108,900                              |   | $                      | 1,000   |                     | April 2006     |   |
|                    |   |                          |   |                                 |   |                   |    |                     |                |
| Brownwood, Texas        |   | 42,800                        |   | 136,120                              |   | $                      | 75,000  |                     | March 2013     |   |
|                    |   |                          |   |                                 |   |                   |    |                     |                |
| Las Vegas, Nevada       |   | 30,000                        |   | 90,000                               |   | $                      | 140,200 |                     | March 2013     |   |
|                    |   |                          |   |                                 |   |                   |    |                     |                |
| Knoxville, Tennessee    |   | 44,000                        |   | 174,240                              |   | $                      | 152,100 |                     | March 2013     |   |

 

----

(1)   The Company has a first right to purchase option onthis facility.

(2)   Does not give effect to any renewal options.

(3)   The Company is actively pursuing a sub-lease on oneof the Miami buildings (18,000 sq. ft.) and is currently sub-leasing a portionof the other building’s office space for $2,500 per month.

(4)   Represents a 2.5 acre ground lease adjacent toowned, Gainsville, Texas facility.

 

The Company owns 2.1 acres (including 38,000 square feet of warehouse,production and office space) in Gainesville, Texas.  In September 1994, the Company purchased 3.1 acres(including 63,300 square feet of warehouse, production and office space) inBensenville, Illinois, for the Company’s Illinois manufacturingoperations.  The Texas and Illinoisfacilities were encumbered by a combined $1.77 million mortgage, which was paidin full on August 15, 2002.  InFebruary 1997, the Company purchased for cash 9.73 acres (including 63,000square feet of warehouse, production and office space) in Commerce City,Colorado, for the Company’s Colorado manufacturing operations. The Companycurrently leases a portion of this facility for $4,100 per month. The Companyalso owns approximately 1.59 unencumbered acres (including 35,100 square feetof warehouse, production, and office space) in Deerfield, Wisconsin, which wasvacated in December 1995 by the Company, and its operations wereincorporated into the Illinois facility. The Wisconsin facility is currently leased to an unrelated lessee for$2,500 per month, and as of September 22, 2004 we are in negotiations forthe sale of the property.

 

Item 3. LegalProceedings

 

In the normal course of business, the Company encounters certainlitigation matters, which in the opinion of management will not have asignificant adverse effect on the financial position or the results ofoperations of the Company.

 

Item 4.  Submission of Matters to a Vote of SecurityHolders

 

None.

 

7

----

 

PART II

 

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

 

The Company’s Common Stock ($.01 stated value) is traded on theAmerican Stock Exchange (“AMEX”) under the symbol “RMI”.  The number of stockholders of record of theCompany’s Common Stock was approximately 3,400 at September 3, 2004.

 

Price Range of Common Stock

 

The following table sets forth the quarterly price ranges of theCompany’s Common Stock in Fiscal 2004 and 2003, as reported on the compositetransactions reporting system for AMEX listed stocks.

 
| **Fiscal Period**                           |   | **High** |   | **Low** |   |
|---------------------------------------------|--------|----------|--------|---------|--------|
| 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    |   |
|                                        |   |     |   |    |   |
| Fiscal 2004:                                |   |     |   |    |   |
| First Quarter Ended September 30, 2003 |   | $        | 1.71   |    | $      | 1.25 |   |
| Second Quarter Ended December 31, 2003 |   | 1.70     |   | 1.32    |   |
| Third Quarter Ended March 31, 2004     |   | 1.60     |   | 1.27    |   |
| Fourth Quarter Ended June 30, 2004     |   | 1.90     |   | 1.38    |   |

 

Since fiscal 1996 the Company has paid seven regular cash dividends onits Common Stock and in fiscal 2004, the Company declared a regular cashdividend of $.05 per common share on its Common Stock that was paid inJuly 2004.  Any future cashdividends or other distributions of stock will be determined solely by theBoard of Directors (“the Board”) and will be based on the Company’s futurefinancial ability to declare and pay such dividends.  Additionally, certain lending agreements restrict the Companyfrom declaring or paying dividends beyond set limits on its Common Stock (seeItem 7, “Management’s Discussion and Analysis of Financial Condition andResults 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 acquireshares of any class of the Company’s stock in a maximum aggregate or $1,000,000in any fiscal year.  Transactions thatwould exceed these limits would require prior bank authorization and theappropriate waivers.

 

The table below discloses the following information with respect to theCompany’s equity compensation plans that have been approved by stockholders andplans that have not been approved by stockholders as of June 30, 2004.

 

Equity Compensation Plan Information

 
| **Plan category**                                       |   | **(a) Number  of securities to   be issued upon exercise of   outstanding options,   warrants and rights** |   | **(b)  Weighted-average exercise   price of outstanding options,   warrants and rights** |   | **(c) Number  of securities remaining   available for future issuance under   equity compensation plans   (excluding securities reflected in   column (a))** |    |
|---------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| Equity compensation plans approved by  stockholders     |   | —                                                                                                     |   | $                                                                                        | — |                                                                                                                                                         | 850,000 |   |
| Equity compensation plans not approved by  stockholders |   | —                                                                                                     |   | $                                                                                        | — |                                                                                                                                                         | —  |   |
| Total                                                   |   | —                                                                                                     |   | $                                                                                        | — |                                                                                                                                                         | 850,000 |   |

 

The table below discloses the following information with respect topurchases of the Company’s common stock during the fourth quarter of fiscal2004.

 

8

----

 

Issuer Purchases of Common Stock

 
| **Period**                                         |   | **(a) Total   number of   shares (or   units)   purchased (1)** |   | **(b)  Average   price paid per   share (or unit)** |   | **(c) Total  number of shares   (or units) purchased as part of   publicly announced plans or   programs** |   | **(d)  Maximum number (or   approximate dollar value) of   shares (or units) that may yet  be purchased under the plans   or programs (2)** |   |
|----------------------------------------------------|--------|-----------------------------------------------------------------|--------|-----------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Month #1 April 1, 2004 -  April 30, 2004 |   | 5,500                                                           |   | $                                                   | 1.52   |                                                                                                       | 5,500  |                                                                                                                                        | $      | 95,100 |   |
| Month #2 May 1, 2004 - May 31, 2004                |   | 33                                                              |   | $                                                   | 1.62   |                                                                                                       | — |                                                                                                                                        | $      | 95,100 |   |
| Month #3 June 1, 2004 - June 30,  2004   |   | —                                                          |   | $                                                   | — |                                                                                                       | — |                                                                                                                                        | $      | 95,100 |   |
| Total                                              |   | 5,533                                                           |   | $                                                   | 1.53   |                                                                                                       | 5,500  |                                                                                                                                        | $      | 95,100 |   |

 

----

(1)   33 shares were purchased in an open markettransaction.

(2)   In fiscal 2001, the Board of Directors approved acommon stock buyback program to purchase up to $1,000,000 of the Company’scommon stock.  At June 30, 2004,the Company had approximately $95,100 available for additional purchases underthe program.  The buyback program doesnot have an expiration date.

 

Item 6. Selected Financial Data

 
|                                                   |   | **Year ended  June 30,** |       |
|--------------------------------------------------------|--------|-------------------------------|------------|
|                                                   |   | **2004**                      |       | **2003** |   | **2002** |   | **2001** |   | **2000** |   |
| Income Statement Data                                  |   |                          |       |   |   |   |   |   |   |   |   |
| Net sales                                              |   | $                             | 40,332,900 |   | $ | 35,972,100 |   | $ | 37,973,300 |   | $ | 40,520,100 |   | $ | 46,647,700 |   |
|                                                   |   |                          |       |   |   |   |   |   |   |   |   |
| Cost of goods sold                                     |   | 31,140,600                    |       | 26,927,300 |   | 27,765,900 |   | 31,158,700 |   | 34,645,000 |   |
|                                                   |   |                          |       |   |   |   |   |   |   |   |   |
| Gross margin                                           |   | 9,192,300                     |       | 9,044,800 |   | 10,207,400 |   | 9,361,400 |   | 12,002,700 |   |
|                                                   |   |                          |       |   |   |   |   |   |   |   |   |
| Selling, general, and administrative  expenses         |   | 6,888,600                     |       | 7,068,700 |   | 7,540,900 |   | 7,635,400 |   | 7,888,900 |   |
|                                                   |   |                          |       |   |   |   |   |   |   |   |   |
| Interest expense                                       |   | 211,800                       |       | 266,000 |   | 464,100 |   | 743,100 |   | 955,000 |   |
|                                                   |   |                          |       |   |   |   |   |   |   |   |   |
| Net income from operations                             |   | $                             | 1,304,200  |   | $ | 1,156,600 |   | $ | 1,408,700 |   | $ | 473,700 |   | $ | 2,030,500 |   |
|                                                   |   |                          |       |   |   |   |   |   |   |   |   |
| Basic/diluted income per common share from  operations |   | $                             | 0.11       |   | $ | 0.09 |   | $ | 0.11 |   | $ | 0.04 |   | $ | 0.14 |   |
|                                                   |   |                          |       |   |   |   |   |   |   |   |   |
| Avg. common shares outstanding (A)                     |   | 12,155,500                    |       | 12,486,000 |   | 12,758,800 |   | 12,835,200 |   | 13,981,800 |   |
|                                                   |   |                          |       |   |   |   |   |   |   |   |   |
| Other Financial Data                                   |   |                          |       |   |   |   |   |   |   |   |   |
| Net income from operations as a percent of  sales      |   | 3.2                           | %          | 3.2 | % | 3.7 | % | 1.2 | % | 4.4 | % |

 

----

(A)  Computed on the basis ofthe weighted average number of common shares outstanding during each year.

 

9

----

 
|                                |   | **At  June 30,** |       |
|-------------------------------------|--------|-----------------------|------------|
|                                |   | **2004**              |       | **2003** |   | **2002** |   | **2001** |   | **2000** |   |
| Balance Sheet Data                  |   |                  |       |   |   |   |   |   |   |   |   |
| Current assets                      |   | $                     | 12,980,600 |   | $ | 11,440,200 |   | $ | 12,043,100 |   | $ | 13,379,700 |   | $ | 14,866,100 |   |
|                                |   |                  |       |   |   |   |   |   |   |   |   |
| Current liabilities                 |   | 5,224,300             |       | 4,710,700 |   | 4,559,400 |   | 4,185,600 |   | 5,408,300 |   |
|                                |   |                  |       |   |   |   |   |   |   |   |   |
| Working capital surplus             |   | 7,756,300             |       | 6,729,500 |   | 7,483,700 |   | 9,194,100 |   | 9,457,800 |   |
|                                |   |                  |       |   |   |   |   |   |   |   |   |
| Total assets                        |   | 27,351,800            |       | 26,450,200 |   | 27,841,800 |   | 34,500,800 |   | 37,193,200 |   |
|                                |   |                  |       |   |   |   |   |   |   |   |   |
| Long-term debt                      |   | 2,474,000             |       | 2,362,100 |   | 3,937,200 |   | 7,396,200 |   | 8,569,800 |   |
|                                |   |                  |       |   |   |   |   |   |   |   |   |
| Total liabilities                   |   | 10,174,600            |       | 9,500,200 |   | 11,061,700 |   | 14,193,700 |   | 16,629,400 |   |
|                                |   |                  |       |   |   |   |   |   |   |   |   |
| Current ratio                       |   | 2.5 to 1              |       | 2.4 to 1 |   | 2.6 to 1 |   | 3.2 to 1 |   | 2.7 to 1 |   |
|                                |   |                  |       |   |   |   |   |   |   |   |   |
| Net book value per common share (A) |   | $                     | 1.43       |   | $ | 1.37 |   | $ | 1.33 |   | $ | 1.59 |   | $ | 1.59 |   |
|                                |   |                  |       |   |   |   |   |   |   |   |   |
| Dividends (B)                       |   | $                     | 0.05       |   | $ | 0.05 |   | $ | 0.05 |   | $ | 0.04 |   | $ | — |   |

 

----

(A)  Computed on the basis of the actual number of commonshares outstanding at the end of the fiscal year.  Fiscal 2002 net book value includes the write-down of goodwillamounting to $4.1 million in connection with the adoption of SFAS No. 142.

(B)   Based on cash dividends declared per common shareduring the respective periods.

 

10

----

 

Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations

 

**Introduction**

 

To the extent that this 10-K Annual Report discusses matters which arenot historical, including statements regarding future financial results,information, or expectation about products or markets, or otherwise makesstatements about future events, such statements are forward-looking and aresubject to a number of risks and uncertainties that could cause actual resultsto differ materially from the statements made. These include, among others, fluctuations in costs of raw materials andother expenses, costs associated with plant closures, downturns in the marketsserved by the Company, the costs associated with new product introductions, aswell as other factors described under the heading: Item 1, “Business”, Item 3,“Legal Proceedings”, under this Item 7, “Management’s Discussion and Analysisof Financial Condition and Results of Operations”, and Footnote 1 to FinancialStatements.  When used in this report,the words “expects,”  “anticipates,”“intends,” “plans,” “ believes,” “seeks,” “estimates” and similar expressionsare generally 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 2005.

 

**Operations**

 

Net sales improved by 12.1% to $40,332,900 in fiscal 2004 compared to$35,972,100 in fiscal 2003.  Themajority of our product groups reflected improvements with the most notablebeing a 20.6% increase in refuse products, a 16.5% increase in contractmanufacturing products and a 8.7% increase in industrial products.  We were pleased to realize such a notableupturn in sales volumes. During fiscal 2004, we spent $1,525,000 on newequipment, tooling and improvements to further our commitment to increase oursales, improve productivity and continue to improve the quality of our productofferings.  We have met this goal thisyear and will continue to benefit from these improvements and new productofferings for the foreseeable future. In addition, we have similar capital expenditure plans slated for fiscal2005 that should further our drive to improve future sales.  We also remain optimistic that ourmarketplace will continue to strengthen and in turn will provide additionalopportunities for growth.

 

Net sales fell 5.3% to $35,972,100 in fiscal 2003 compared to$37,973,300 in fiscal 2002.  Fiscal 2003sales volumes continued to mirror our nation’s lackluster economy.  Our industrial product group reflected themost resilience during these tough conditions, reporting a modest 2.4% increasein sales.  Of the hardest hit sectors,our contract manufacturing group was down 6.8% in fiscal 2003.  However, fiscal 2003 was also a strongperiod for contract tooling projects that are expected to help boost futurecontract manufacturing sales.  We werealso in the final stages of placing our state of the art new roto-moldingmachine into service, which will improve our competitive edge in themarketplace.

 

Cost of goods sold was $31,140,600, or 77.2% of net sales, in fiscal2004 compared to $26,927,300 and $27,765,900, or 74.9% and 73.1% of net sales,in fiscal 2003 and 2002, respectively. The increase in our sales volumes along with our manufacturingefficiencies and systematic price increases helped mitigate the overall 4.1%increase material costs along with rising natural gas and workers compensationinsurance costs that amounted to approximately $337,000.  These costs coupled with a $200,000inventory write-down in fiscal 2004, ultimately reduced our gross margins by2.3%.  We do not foresee any significantrelief from these costs, but will remain vigilant in our efforts to offsetthese rising costs in future periods.

 

Selling general and administrative (“SG&A”) expenses were$6,888,600, or 17.1% of net sales, in fiscal 2004 compared to $7,068,700, or19.7% of net sales, in fiscal 2003. Overall SG&A costs decreased $180,100, which is primarily attributedto the $190,000 one-time administrative contractual charge incurred in fiscal2003.  We are pleased that we have beenable to maintain overall SG&A costs in line with current sales volumelevels and anticipate holding this trend in the ensuing year.

 

SG&A expenses were $7,068,700, or 19.7% of net sales, in fiscal2003 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 royalty agreementscompleted in fiscal 2002 and a dip in commission-based product sales, andfinally, a reduction in bad debt expense of $47,400.  These costs savings were reduced by a $190,000 one-timeadministrative contractual charge during fiscal 2003.

 

11

----

 

Income from operations was $2,303,700, or 5.7% of net sales, in fiscalyear 2004 compared to $1,976,100 and $2,666,500, or 5.5% and 7.0% of net sales,in fiscal 2003 and 2002, respectively. We are pleased that our commitment to improving year-on-year operatingresults is starting to pay-off in spite of ongoing increases in insurance,utility and raw material costs as previously mentioned and we anticipate futureimprovements.  In addition, fiscal 2004income from operations also benefited from the overall reduction in SG&Acosts as also outlined above.  The 25.9%reduction in operating income in fiscal 2003 was attributed to the 5.3%reduction in sales volumes coupled with the 1.8% increase in cost of goods soldagain attributed to unmitigated increases in workers compensation insurance,utilities and raw materials incurred during the period.

 

Total interest expense decreased $54,200 to $211,800 in fiscal 2004,compared to $266,000 and $464,100 in fiscal 2003 and 2002 respectively.  The decrease is due to the historically lowinterest rates that we continued to benefit from during the current year alongwith a more favorable debt structure. Although we anticipate our debt structure to remain fairly consistent inthe ensuing months, recent increases in the bank’s prime and LIBOR rates mayincrease future interest costs.  Thenotable decrease in interest costs during fiscal 2003 was attributed to the$2,068,400 reduction in our debt structure during fiscal 2003 coupled with morefavorable bank interest rates.

 

Income taxes were $898,500, $677,400 and $947,200 in fiscal 2004, 2003and 2002, respectively.  Current federaltaxes amounted to $811,500 in fiscal 2004 compared to $667,100 and $476,300 infiscal 2003 and 2002, respectively.  Infiscal 2002, a notable portion of our tax provision was the deferred taxcomponent, which amounted to $307,100. During fiscal 2002 this amount was primarily related to the federalalternative minimum tax (“AMT”) credit carryforward and state net operatingloss carryforwards.  In fiscal 2002, wefully utilized our $412,600 federal AMT credit carry-forward.  Following the utilization of our AMT creditcarryforward, we have incurred an increase in our current federal taxes.  Fiscal 2004 increase income tax expense isalso related to the 20% increase in income before taxes compared to fiscal2003.

 

Net income before cumulative effect of change in accounting principlefor goodwill increased $147,600 to $1,304,200, or $.11 per common share, forfiscal 2004 compared to $1,156,600, or $.09 per common share, in fiscal2003.  The second half of fiscal 2004offered a renewed vigor in the marketplace, that coupled with our efforts toimprove sales volumes through enhanced product offerings and productivityresulted in our 12.1% increase in fiscal 2004 sales volumes.  The significant increase in sales volumesprovided the needed base to mitigate the rising raw material, utility andinsurance costs that continue to challenge our operations, along with the$200,000 fiscal 2004 inventory write down. We successfully recouped a portion of these costs, which coupled withthe reduction in SG&A and interest costs provided the 12.8% increase incurrent years net income.  Even thoughit seems evident that raw materials, natural gas and insurance costs willcontinue to challenge future periods, we remain optimistic that our strongfinancial condition and business strategies will help us to respond to currentmarket conditions and allow us to take advantage of growth opportunities asthey arise.

 

Net income before cumulative effect of change in accounting principlefor goodwill decreased $252,100 to $1,156,600, or $.09 per common share, forfiscal 2003 compared to $1,408,700, or $.11 per common share, in fiscal 2002.  Although we believe that future marketconditions are slowly improving, fiscal 2003 was hampered by a sluggisheconomy, especially in the fourth quarter, which contributed to the 5.3% dropin sales volumes.  While our costcontainment efforts, as reflected in the $472,200 reduction in SG&A costs,along with lower interest costs, helped to preserve income levels, we stillwere unable to fully compensate for rising raw material, insurance and utilitycosts.

 

**Cumulative Effect of Change in AccountingPrinciple for Goodwill**

 

We recorded an adjustment effective July 1, 2001 to reflect theimpact of adopting SFAS No.142, amounting to a reduction of intangible assetsof $4,105,900.  This amount is reflectedin net loss for the fiscal year ended June 30, 2002 as a cumulative effectof change in accounting principle for goodwill.  The adjustment represents a write down of our net goodwill basedon a review of the goodwill for impairment. Under the assessment guidelines of SFAS No. 142 and the SEC’s guidancethat our quoted market price is the most efficient mechanism for estimatingfair value, it was determined the fair value of our reporting unit was lessthan its carrying value.  Although theassumptions used to estimate fair value may not be indicative of futureresults, our goodwill has been reduced to zero and will not require futureimpairment analysis.

 

**Liquidity and Capital Resources**

 

Working capital increased $1,026,800 to $7,756,300 at June 30,2004, compared to $6,729,500 at June 30, 2003.  The increase is related to the $1,623,800 increase in accountsreceivable and inventories consistent with the 12.1% increase in sales volumesduring the current year net of the related increase in accounts payable of$659,300 

 

12

----

 

primarily related to the purchase of raw materials again associatedwith the higher sales volumes and to take advantage of favorable resinpricing.  Cash flows from operationsdecreased $1,910,700 to $2,515,600 in fiscal 2004, compared to $4,426,300 forthe same period last year.  The decreaseis once again attributed to the significant build up in our accounts receivablebalance due to the $2,466,500 increase in sales volumes in the fourth quarterof fiscal 2004 when compared to the same period last year.

 

We expended $1,525,000 for property, plant and equipment (“PP&E”)in fiscal 2004, compared to $1,532,600 in fiscal 2003.  Costs incurred during the current period arerelated to the completion of our new state of the art roto-molding machine thatwas placed in service at our Commerce City, Colorado facility and the costsassociated with a new roto-molding machine installed at our Gainesville, Texasfacility.  The remaining costs incurredare related to new tooling and tooling modifications that we believe enhancedour competitive edge in the market place and in turn helped spur the improvedsales volumes in fiscal 2004.  Weanticipate capital expenditures to total approximately $1.9 million in fiscal2005 that will include the instillation of three new roto-molding machines.

 

Net borrowings under the line of credit increased $976,100 to$1,357,300 between June 30, 2003 and June 30, 2004. The increase isdue to the timing of payments for capital expenditures, raw materials, federalincome taxes and common stock repurchases during the year.  Due to the timing of such payments, as wellas the current build up in accounts receivable, it is not unusual to incurfluctuations in our line of credit borrowings throughout the year.  However, since June 30, 2003, our totaldebt borrowings have only risen $111,900 as a result of these cash outlays. Weanticipate that this trend will continue through fiscal 2005 as we balance thetiming of cash flows from operations and the funding of these type or cash outlays.

 

Effective October 1, 2003, the bank extended the maturity date onthe line of credit to October 1, 2005. In addition, we did not advance on the $2,000,000 term loan commitmentthat subsequently expired on October 1, 2003 and was not renewed.  All other terms and conditions surroundingour credit facility with the bank remained the same, except that the agreementwas also modified to expand our ability to issue letters of credit.

 

The following is a summary of the Company’s contractual commitmentsassociated with its debt and lease obligations as of June 30, 2004:

 
|                         |   | **For the  year ended June 30,** |      |      |      |      |   |
|------------------------------|--------|---------------------------------------|-----------|-----------|-----------|-----------|--------|
|                         |   | **2005**                              |      | **2006**  |      | **2007**  |   | **2008** |   | **2009** |   | **Thereafter** |   | **Total** |   |
| Principal payments-term debt |   | $                                     | 864,300   |      | $         | 864,300   |   | $ | 252,400 |   | $ | — |   | $ | — |   | $ | — |   | $ | 1,981,000 |   |
|                         |   |                                  |      |      |      |      |   |   |   |   |   |   |   |   |   |
| Line of credit               |   | —                                |      | $         | 1,357,300 |      | $      | — |   | — |   | — |   | — |   | 1,357,300 |   |
|                         |   |                                  |      |      |      |      |   |   |   |   |   |   |   |   |   |
| Operating leases             |   | 1,124,200                             |      | 1,036,900 |      | 994,700   |   | 992,800 |   | 989,800 |   | 2,774,700 |   | 7,913,100 |   |
|                         |   |                                  |      |      |      |      |   |   |   |   |   |   |   |   |   |
| Total commitments            |   | $                                     | 1,988,500 |      | $         | 3,258,500 |   | $ | 1,247,100 |   | $ | 992,800 |   | $ | 989,800 |   | $ | 2,774,700 |   | $ | 11,251,400 |   |

 

During fiscal 2001, we reinstated our common stock buybackprogram.  In fiscal 2004, we acquired459,633 shares of common stock at a total cost of $679,700.  As of June 30, 2004, we had 11,981,158shares of common stock outstanding.

 

On June 16, 2004, the Board declared a dividend of $.05 per shareof common stock payable on July 23, 2004 to stockholders of record onJuly 9, 2004.  This marks theeighth payment of dividends since 1996 on our common stock.  The Board is committed to annually review adividend program for our common stock.

 

Cash flows from operations in conjunction with our revolving line ofcredit are expected to meet our needs for working capital, capitalexpenditures, common stock repurchases and repayment of long term debt for theforeseeable future.

 

**Recent Accounting Pronouncements**

 

InJanuary 2003, the Financial Accounting Standards Board (“FASB”) issuedFASB Interpretation No. 46, “Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51” (“FIN 46”). In December 2003, the FASB issued a revision to FIN 46 to makecertain technical corrections and address certain implementation issues thathad arisen.  FIN 46, as revised,clarifies existing accounting literature regarding the consolidation ofentities in which a company holds a controlling financial interest.  A majority voting interest in an entity hasgenerally been considered indicative of a controlling financial interest.  FIN 46 specifies other factors (variableinterest) which must 

 

13

----

 

be considered whendetermining whether a company holds controlling financial interest in, andtherefore must consolidate, an entity (variable interest entities).  The adoption of FIN 46 had no impact on theCompany’s overall financial position and results of operations as the Companyhas no variable interest entities.

 

InApril 2003, the FASB issued Statement of Financial Accounting Standards(“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities.”  SFAS No. 149 isintended to result in more consistent reporting of contracts as eitherfreestanding derivative instruments subject to SFAS No. 133 in its entirety, oras hybrid instrument with debt host contracts and embedded derivativefeatures.  In addition, SFAS No. 149clarifies the definition of a derivative by providing guidance on the meaningof initial net investments related to derivatives.  This statement was effective for contracts entered into ormodified after June 30, 2003.  Theadoption of SFAS No. 149 did not have a material effect on our consolidatedfinancial position, results of operation or cash flows.

 

In May 2003, The FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities andEquity.”  SFAS No. 150 establishesstandards for how an issuer classifies and measures certain financialinstruments with characteristics of both liabilities and equity.  SFAS No. 150 was adopted by the Company onJuly 1, 2003 and did not have an impact on the Company’s financialstatements.

 

**Off-Balance Sheet Arrangements andContractual 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.

 

**Critical Accounting 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 governaccounts receivable, inventory valuation and income taxes.

 

Accountsreceivable

 

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 doubtful accounts does not reflect the future ability tocollect outstanding receivables, additional provisions for doubtful accountsmay be needed and the results of operations 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 costs 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.  Due to the high volume of transactions andthe way raw materials are used in product manufacturing, inventory quantitiescan change rapidly and are impacted by a variety of factors including,production efficiency, obsolescence, scrap, design changes, customerpreferences, etc.  As such, the Companymust regularly count inventories to ensure they are up to date.  The Company takes a physical count monthlyand reconciles the count to the inventory. However, given the number of transactions, the number of locations andthe large number of inventory items, adjustments to the counts do occur on a regularbasis.  Although we believe that ourinventory counts and values are reasonable the inventory does have some inheritestimates that could impact our balance sheet and results of operations.

 

14

----

 

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 future outcomes.  Our accounting for deferred tax consequencesrepresents management’s best estimate of future events that can beappropriately reflected in accounting estimates.  Our net operating loss carryforwards, which are available tooffset taxable income, are also subject to limitations should a “change inownership” as defined in the Internal Revenue Code occur.  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 ourhistorical 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.

 

# **FactorsThat May Affect Our Future Results or the Market Price of Our Stock**

 

We operate in a rapidlychanging economic environment that presents numerous risks.  Many of these risks are beyond our controland are driven by factors that we cannot predict.  The following discussion highlights some of these risks.

 

Economic, political and market conditions can adversely affect ourrevenue growth**.**

 

Our revenue growth and profitability depends on the overall demand forplastic products for commercial, recreational and residential uses.  Because our sales are primarily to corporateand government customers, our business depends on general economic and businessconditions.  The general weakening ofthe global economy, the weakening of business conditions in the manufacturingindustry, and governmental budgetary constraints have resulted in a decreaseddemand for our products as we realized during the first half of fiscal2004.  If demand for our productsweakens again, 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 revenue growthand results of operations.  If economicand market conditions do not remain healthy, our business will be adverselyaffected.

 

Management has nocomparative advantage in forecasting macroeconomic trends and developmentsrelating to general business conditions. Our management is, however, required to make such forecasts in order todevelop budgets, plan research and development strategies and perform a widevariety of general management functions. To the extent that our forecasts are in error, because we are eitheroverly optimistic or overly pessimistic about the performance of an economy orof a sector, our performance can suffer because of a failure properly to matchcorporate strategy with economic conditions.

 

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

 

Our future operating results will depend on our ability to forecastrevenues accurately and control expenses. While we can control certain internal factors, our future operatingresults can be adversely impacted by external factors, such as a slowing indemand for certain of our products.  Ifthere is an unexpected decline in revenues, which is not offset by a decreasein expenses, our business and operating results will be adversely affected.

 

We may be required to change our business practices if there arechanges in accounting regulations and related interpretations and policies.

 

Policies, guidelines and interpretations related to revenuerecognition, income taxes, facilities consolidation, accounting foracquisitions, allowances for doubtful accounts and other financial reportingmatters require difficult judgments as to complex matters that are oftensubject to multiple sources of authoritative guidance.  Some of these matters are also among topicscurrently under re-examination by accounting standards groups andregulators.  These standard groups andregulators could promulgate interpretations and guidance that could result inmaterial and potentially adverse, changes to our accounting policies.

 

15

----

 

Business disruptions could affect our future operating results.

 

Our operating results and financial condition could be materially andadversely affected in the event of a major earthquake, fire or othercatastrophic event, such as terrorist attacks upon the United States.  Our corporate headquarters, a significantportion of our research and development activities and certain other criticalbusiness operations are located in California, near major earthquakefaults.  A catastrophic event thatresults in the destruction of any of our critical business or informationtechnology systems could severely affect our ability to conduct normal businessoperations and as a result our future operating results could be adverselyaffected.  In 2001, Californiaexperienced ongoing power shortages, which resulted in “rollingblackouts.”  These blackouts, blackoutsin other regions or procedures implemented to avert blackouts could causedisruptions 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 has fluctuated widely in the past and could continue todo so in the future. Your investment in our stock could lose value. Some of thefactors that could significantly affect the market price of our stock include:

 

•      quarterly variations in ourresults of operations or those of our competitors;

•      changes in our or ourcompetitors’ prices;

•      changes in our revenue andrevenue growth rates as a whole or for specific geographic areas, businessunits, products or product categories;

•      announcements of newproducts or product enhancements by us or our competitors;

•      changes in management;

•      changes in our accountingpolicies;

•      changes in recommendationsor earnings estimates by financial analysts;

•      speculation in the press oranalyst community;

•      changes in economic andmarket conditions either generally or specifically to particular industries;

•      changes in interest rates;and

•      changes in investors beliefsas to the appropriate price-earnings ratios for us and our competitors.

 

A significant drop in our stock price could expose us to the risk ofsecurities class action lawsuits. Defending against such lawsuits could result in substantial costs anddivert management’s attention and resources. Furthermore, any settlement or adverse determination of these lawsuitscould adversely affect us.

 

Item 7a.Quantitative and Qualitative Disclosures About Market Risk

 

**InterestRate 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 $3.3 million of variable rate debt as ofJune 30, 2004.  In efforts toreduce interest rate volatility and mitigate exposure on variable rate debt, weentered into an interest rate swap effective July 15, 1998, as amended onAugust 15, 2002.  The swap, whichhas a notional amount of $3 million as of June 30, 2004, will step down to$2 million on August 15, 2005 and will remain at this amount until itsexpiration on August 15, 2006.  Theswap fixes the bank’s LIBOR option rate at 4.83% over the term of thecontract.  The fair value of the swap,net of tax, amounted to ($64,400) as of June 30, 2004.  If interest rates increased by 1% duringfiscal 2005 as compared to fiscal 2004, and additional borrowings are notincurred, we would not expect a significant increase in projected fiscal 2005interest expense.

 

Item 8.  Financial Statements and Supplementary Data

 

See Financial Statements and Financial Statement Schedules listed inItem 14(a)(1) and (2).

 

Item 9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure

 

None.

 

16

----

 

Item9a. Controls and Procedures

 

We maintain disclosure controls and procedures designed to ensure thatinformation required to be disclosed in reports filed under the Securities andExchange Act of 1934, as amended (the “Exchange Act”), is recorded, summarizedand processed within time periods specified in the SEC’s rules and forms.  As of the end of the period covered by thisreport (the “Evaluation Date”), we carried out an evaluation, under thesupervision and with the participation of our management, including ourpresident and chief executive officer and our chief financial officer, of theeffectiveness of the design and operation of our disclosure controls procedurespursuant to Rule 13a-14 under the Exchange Act.  Based upon this evaluation, our president and chief executiveofficer and our chief financial officer concluded that, as of the EvaluationDate, our disclosure controls and procedures were effective under Rules 13a-14.

 

There has been no change in our internal controls over financialreporting during our most recent fiscal quarter that has materially affected,or is reasonably likely to materially affect, our internal controls overfinancial reporting.

 

17

----

 

PART III

 

Item 10.  Directors and Executive Officers of theRegistrant

 

Directors

 

The Company incorporates by reference the information set forth underthe caption “Election of Directors” in the Proxy Statement to be filed with theSecurities and Exchange Commission, and mailed to stockholders in connectionwith the Company’s Annual Meeting of the Stockholders to be held onDecember 6, 2004 (“the Proxy Statement”)

 

Executive Officers

 

As of September 3, 2004, the executive officers of the Companywere as follows:

 
| **Name**           |   | **Age** |   | **Position**                                              |
|--------------------|--------|---------|--------|-----------------------------------------------------------|
| Sherman McKinniss  |   | 68      |   | Chairman of the Board, President, Chief Executive Officer |
| E. Paul Tonkovich  |   | 66      |   | Secretary, Director                                       |
| Douglas W. Russell |   | 43      |   | Chief Financial Officer, Assistant Secretary/Treasurer    |

 

Sherman McKinniss.  Mr. McKinniss served as President and Chief Executive Officerfrom August 1991 to December 2001 and again was appointed Presidentand 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.  Mr.McKinniss is also a 50% owner of Atlantic Meeco, Inc., a marina dock buildingcompany, and has served as a board member of that company since 1993.

 

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

 

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

 

Item 11.   Executive Compensation

 

The Company incorporates by reference the information set forth underthe captions “Compensation of Executive Officers”, the “Summary CompensationTable” and related disclosure information, “Certain Transactions”, and“Compensation of Directors” in the Proxy Statement.

 

Item 12.   Security Ownership of Certain BeneficialOwners and Management

 

The Company incorporates by reference the information set forth underthe caption “Security Ownership by Certain Beneficial Holders” in the ProxyStatement.

 

Item 13.   Certain Relationships and RelatedTransactions

 

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

 

Item14.   PrincipalAccounting Fees and Services

 

The information required by this item is incorporated herein byreference to the caption “Ratification of Appointment of Independent Auditors”in the definitive Proxy Statement for our 2004 Annual Meeting of Stockholdersthat will be filed with the SEC within 120 days after the end of the fiscalyear covered by this report.

 

18

----

 

PART IV

 

Item 15.   Exhibits, Financial Statements, Schedules,and Reports on form 8-K

 

(a)           The following documents are filed as part ofthis report:

 
| (1)    Financial Statements:                                                                            |                                                                               |
|------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------|
|                                                                                                                   |                                                                               |
| Report of Independent Registered Public  Accounting Firm                                                               |                                                                               |
| Consolidated Balance Sheets, June 30, 2004 and 2003                                                               |                                                                               |
| Consolidated Statements of Operations and  Comprehensive Income/(Loss), Years Ended June 30, 2004, 2003, and 2002 |                                                                               |
| Consolidated Statements of Changes in  Stockholders’ Equity, Years Ended June 30, 2004, 2003, and 2002       |                                                                               |
| Consolidated Statements of Cash Flows,  Years Ended June 30, 2004, 2003, and 2002                                 |                                                                               |
| Notes to Consolidated Financial Statements                                                                             |                                                                               |
|                                                                                                                   |                                                                               |
| (2)    Financial Statement  Schedules:                                                                  |                                                                               |
|                                                                                                                   |                                                                               |
| II                                                                                                                     | Valuation and Qualifying Accounts, Years  Ended June 30, 2004, 2003, and 2002 |   |
|                                                                                                                        |                                                                                    |  |

 

All other schedules are omitted because they are not applicable, or therequired information is shown in the financial statements or notes thereto.

 

(b)           Reports on Form 8-K

 

On April 13, 2004, we filed a currentreport of Form 8-K reporting under item 12, Results of Operations and FinancialCondition, announcing our press release dated April 13, 2004 outlining ourunaudited financial results for the nine months and three months endedMarch 31, 2004.

 

 

(c)           The following exhibits are filed orfurnished as part of this report:

 
| **Exhibit  Number** |   | **Exhibit Title**                                                                                                |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                             |
| 23.1                |   | Consent of Independent Registered Public Accounting Firm – Windes  & McClaughry Accountancy Corporation |
|                |   |                                                                                                             |
| 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 the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | ROTONICS MANUFACTURING INC. |
|--------|-----------------------------|
|   |                        |
|   |                        |
|   |                        | By | /s/              SHERMAN  McKINNISS |
|   |                        |   |   | Sherman McKinniss |
|   |                        |   |   | President, Chief Executive Officer |
|   |                        |   |   | Chairman of the Board |
|   |                        |   |   | Date 09/23/2004 |
|   |                        |
|   |                        |
|   |                        | By | /s/            DOUGLAS W.  RUSSELL |
|   |                        |   |   | Douglas W. Russell |
|   |                        |   |   | Chief Financial Officer |
|   |                        |   |   | Assistant Secretary/Treasurer |
|   |                        |   |   | Date 09/23/2004 |
|        |                             |  |  |  |  |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.

 
| **Signature**               |   | **Title** |                | **Date** |
|-----------------------------|--------|-----------|---------------------|----------|
|                        |   |      |                |     |
|                        |   |      |                |     |
| /s/  E. PAUL TONKOVICH |   |      | Secretary, Director |     | 09/23/2004 |
| E. Paul Tonkovich           |   |      |                |     |
|                        |   |      |                |     |
|                        |   |      |                |     |
| /s/  BRENT A. BROWN    |   |      | Director            |     | 09/23/2004 |
| Brent A. Brown              |   |      |                |     |
|                        |   |      |                |     |
|                        |   |      |                |     |
| /s/  LARRY M. DEDONATO |   |      | Director            |     | 09/23/2004 |
| Larry M. DeDonato           |   |      |                |     |
|                        |   |      |                |     |
|                        |   |      |                |     |
| /s/  LARRY L. SNYDER   |   |      | Director            |     | 09/23/2004 |
| Larry L. Snyder             |   |      |                |     |
|                        |   |      |                |     |
|                        |   |      |                |     |
| /s/  MARC L. BERMAN    |   |      | Director            |     | 09/23/2004 |
| Marc L. Berman              |   |      |                |     |
|                        |   |      |                |     |
|                        |   |      |                |     |
| /s/  JULES SANDFORD    |   |      | Director            |     | 09/23/2004 |
| Jules Sandford              |   |      |                |     |
|                        |   |      |                |     |
|                        |   |      |                |     |
| /s/  BILL ALLEN        |   |      | Director            |     | 09/23/2004 |
| Bill Allen                  |   |      |                |     |

 

20

----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

 

To the Board of Directorsand Stockholders of Rotonics Manufacturing Inc.:

 

We have audited the accompanying consolidated balance sheets ofROTONICS MANUFACTURING INC. (a Delaware corporation) as of June 30, 2004and 2003 and the related consolidated statements of operations andcomprehensive income/(loss), changes in stockholders’ equity and cash flows foreach of the three years in the period ended June 30, 2004.  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 audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Rotonics Manufacturing Inc. as of June 30, 2004 and 2003, and theresults of its operations and its cash flows for each of the three years in theperiod ended June 30, 2004 in conformity with accounting principlesgenerally accepted in the United States.

 

Our audits were made for the purpose of forming an opinion on the basicfinancial statements taken as a whole. The schedule listed in the index appearing under Item 14(a)(2) ispresented for purposes of complying with the Securities and Exchange Commission’srules and is not a required part of the basic financial statements.  This schedule has been subjected to theauditing procedures applied in our audits of the basic financial statementsand, in our opinion, is fairly stated in all material respects in relation tothe basic financial statements taken as a whole.

 

 
| /s/ WINDES & McCLAUGHRY ACCOUNTANCY CORPORATION |   |
|-----------------------------------------------------|--------|
|                                                |
|                                                |
| Long Beach, California                              |
| August 12, 2004                                |

 

F - 1

----

 

ROTONICS MANUFACTURING INC.

 

CONSOLIDATEDBALANCE SHEETS

 
|                                                                                                                                       |   | **June 30,** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|
|                                                                                                                                       |   | **2004**          |       | **2003** |   |
| **ASSETS**                                                                                                                                 |   |              |       |   |   |
| Current assets:                                                                                                                            |   |              |       |   |   |
| Cash                                                                                                                                       |   | $                 | 56,500     |   | $ | 44,700 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $256,100 and $231,100, respectively                                        |   | 5,784,900         |       | 4,419,700 |   |
| Current portion of notes receivable                                                                                                        |   | —            |       | 92,100 |   |
| Inventories                                                                                                                                |   | 6,629,000         |       | 6,370,400 |   |
| Deferred income taxes, net                                                                                                                 |   | 243,700           |       | 256,900 |   |
| Prepaid expenses and other current assets                                                                                                  |   | 266,500           |       | 256,400 |   |
|                                                                                                                                       |   |              |       |   |   |
| Total current assets                                                                                                                       |   | 12,980,600        |       | 11,440,200 |   |
|                                                                                                                                       |   |              |       |   |   |
| Notes receivable, less current portion                                                                                                     |   | 138,600           |       | 138,600 |   |
| Investment in partnership                                                                                                                  |   | 100,900           |       | 104,300 |   |
| Property, plant and equipment, net                                                                                                         |   | 13,849,700        |       | 14,462,000 |   |
| Intangible assets, net                                                                                                                     |   | 216,700           |       | 262,600 |   |
| Other assets                                                                                                                               |   | 65,300            |       | 42,500 |   |
|                                                                                                                                       |   |              |       |   |   |
|                                                                                                                                       |   | $                 | 27,351,800 |   | $ | 26,450,200 |   |
|                                                                                                                                       |   |              |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                              |   |              |       |   |   |
|                                                                                                                                       |   |              |       |   |   |
| Current liabilities:                                                                                                                       |   |              |       |   |   |
| Current portion of long-term debt                                                                                                          |   | $                 | 864,300    |   | $ | 864,300 |   |
| Accounts payable                                                                                                                           |   | 3,450,900         |       | 2,791,600 |   |
| Accrued liabilities                                                                                                                        |   | 909,100           |       | 1,054,800 |   |
|                                                                                                                                       |   |              |       |   |   |
| Total current liabilities                                                                                                                  |   | 5,224,300         |       | 4,710,700 |   |
|                                                                                                                                       |   |              |       |   |   |
| Bank line of credit                                                                                                                        |   | 1,357,300         |       | 381,200 |   |
| Long-term debt, less current portion                                                                                                       |   | 1,116,700         |       | 1,980,900 |   |
| Deferred income taxes, net                                                                                                                 |   | 2,393,300         |       | 2,427,400 |   |
| Other liabilites                                                                                                                           |   | 83,000            |       | — |   |
|                                                                                                                                       |   |              |       |   |   |
| Total liabilities                                                                                                                          |   | 10,174,600        |       | 9,500,200 |   |
|                                                                                                                                       |   |              |       |   |   |
| Commitments and contingencies (Note 14)                                                                                                    |   |              |       |   |   |
|                                                                                                                                       |   |              |       |   |   |
| Stockholders’ equity:                                                                                                                 |   |              |       |   |   |
| Common stock, stated par value $.01:  authorized 20,000,000 shares; issued and outstanding 11,981,158 and  12,344,791 shares, respectively |   | 22,127,900        |       | 22,699,600 |   |
| Accumulated other comprehensive loss                                                                                                       |   | (64,400           | )          | (158,200 | ) |
| Accumulated deficit                                                                                                                        |   | (4,886,300        | )          | (5,591,400 | ) |
|                                                                                                                                       |   |              |       |   |   |
| Total stockholders’ equity                                                                                                            |   | 17,177,200        |       | 16,950,000 |   |
|                                                                                                                                       |   |              |       |   |   |
|                                                                                                                                       |   | $                 | 27,351,800 |   | $ | 26,450,200 |   |
|                                                                                                                                       |   |              |       |   |   |

 

The accompanying notes are an integral partof these financial statements.

 

F - 2

----

 

ROTONICS MANUFACTURING INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)

 
|                                                                                             |   | **For the  year ended June 30,** |       |
|--------------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                                             |   | **2004**                              |       | **2003** |   | **2002** |   |
|                                                                                             |   |                                  |       |   |   |   |   |
| Net sales                                                                                        |   | $                                     | 40,332,900 |   | $ | 35,972,100 |   | $ | 37,973,300 |   |
| Costs and expenses:                                                                              |   |                                  |       |   |   |   |   |
| Cost of goods sold                                                                               |   | 31,140,600                            |       | 26,927,300 |   | 27,765,900 |   |
| Gross profit                                                                                     |   | 9,192,300                             |       | 9,044,800 |   | 10,207,400 |   |
| Selling, general, and administrative  expenses                                                   |   | 6,888,600                             |       | 7,068,700 |   | 7,540,900 |   |
| Income from operations                                                                           |   | 2,303,700                             |       | 1,976,100 |   | 2,666,500 |   |
|                                                                                             |   |                                  |       |   |   |   |   |
| Other (expense)/income:                                                                          |   |                                  |       |   |   |   |   |
| Interest expense                                                                                 |   | (211,800                              | )          | (266,000 | ) | (464,100 | ) |
| Other income, net                                                                                |   | 110,800                               |       | 123,900 |   | 153,500 |   |
| Total other expense, net                                                                         |   | (101,000                              | )          | (142,100 | ) | (310,600 | ) |
| Income before income taxes and cumulative  effect of change in accounting principle for goodwill |   | 2,202,700                             |       | 1,834,000 |   | 2,355,900 |   |
| Income tax provision                                                                             |   | (898,500                              | )          | (677,400 | ) | (947,200 | ) |
| Income before cumulative effect of change  in accounting principle for goodwill                  |   | 1,304,200                             |       | 1,156,600 |   | 1,408,700 |   |
| Cumulative effect of change in accounting  principle for goodwill                                |   | —                                |       | — |   | (4,105,900 | ) |
| Net income/(loss)                                                                                |   | 1,304,200                             |       | 1,156,600 |   | (2,697,200 | ) |
|                                                                                             |   |                                  |       |   |   |   |   |
| Other comprehensive income/(loss), before  tax:                                                  |   |                                  |       |   |   |   |   |
| Unrealized holding gain/(loss) arising  during the period                                        |   | 36,800                                |       | (199,200 | ) | (247,500 | ) |
| Less: Reclassification adjustments for  losses included in net income                            |   | 119,400                               |       | 149,000 |   | 186,400 |   |
| Total other comprehensive income/(loss)  before tax                                              |   | 156,200                               |       | (50,200 | ) | (61,100 | ) |
| Income tax (provision)/benefit related to  items of other comprehensive income/(loss)            |   | (62,400                               | )          | 20,000 |   | 24,500 |   |
| Total other comprehensive income/(loss),  net of tax                                             |   | 93,800                                |       | (30,200 | ) | (36,600 | ) |
| Comprehensive income/(loss)                                                                      |   | $                                     | 1,398,000  |   | $ | 1,126,400 |   | $ | (2,733,800 | ) |
|                                                                                             |   |                                  |       |   |   |   |   |
| Net income/(loss) per common share:                                                              |   |                                  |       |   |   |   |   |
| Basic and diluted                                                                                |   |                                  |       |   |   |   |   |
| Income before accounting change                                                                  |   | $                                     | 0.11       |   | $ | 0.09 |   | $ | 0.11 |   |
| Cumulative effect of change in accounting  principle for goodwill                                |   | —                                |       | — |   | (0.32 | ) |
| Net income/(loss)                                                                                |   | $                                     | 0.11       |   | $ | 0.09 |   | $ | (0.21 | ) |

 

The accompanying notes are an integral partof these financial statements.

 

F - 3

----

 

ROTONICSMANUFACTURING INC.

 

CONSOLIDATED STATEMENTS OFCHANGES IN STOCKHOLDERS’ EQUITY

 
|                                   |   |              |   |              |       | **Accumulated**   |   |        |   |       |       |
|----------------------------------------|--------|-------------------|--------|-------------------|------------|-------------------|--------|-------------|--------|------------|------------|
|                                   |   |              |   |              |       | **Other**         |   |        |   |       |       |
|                                   |   | **Common  Stock** |   | **Comprehensive** |       | **Accumulated**   |   |        |   |
|                                   |   | **Shares**        |   | **Amount**        |       | **Income/(Loss)** |   | **Deficit** |   | **Total**  |       |
|                                   |   |              |   |              |       |              |   |        |   |       |       |
| 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 |       |
|                                   |   |              |   |              |       |              |   |        |   |       |       |
| Exercise of stock options              |   | 96,000            |   | 108,000           |       | —            |   | —      |   | 108,000    |       |
| Repurchase of common stock             |   | (459,633          | )      | (679,700          | )          | —            |   | —      |   | (679,700   | )          |
| Common stock dividends                 |   | —            |   | —            |       | —            |   | (599,100    | )      | (599,100   | )          |
| Other comprehensive income, net of tax |   | —            |   | —            |       | 93,800            |   | —      |   | 93,800     |       |
|                                   |   |              |   |              |       |              |   |        |   |       |       |
| Net income                             |   | —            |   | —            |       | —            |   | 1,304,200   |   | 1,304,200  |       |
|                                   |   |              |   |              |       |              |   |        |   |       |       |
| Balances, June 30, 2004           |   | 11,981,158        |   | $                 | 22,127,900 |              | $      | (64,400     | )      | $          | (4,886,300 | ) | $ | 17,177,200 |   |

 

The accompanying notes are an integral partof these financial statements.

 

F - 4

----

 

ROTONICS MANUFACTURING INC.

 

CONSOLIDATEDSTATEMENT OF CASH FLOWS

 
|                                                                                      |   | **For the  year ended June 30,** |      |
|-------------------------------------------------------------------------------------------|--------|---------------------------------------|-----------|
|                                                                                      |   | **2004**                              |      | **2003** |   | **2002** |   |
| Cash flows from operating activities:                                                     |   |                                  |      |   |   |   |   |
| Net income/(loss)                                                                         |   | $                                     | 1,304,200 |   | $ | 1,156,600 |   | $ | (2,697,200 | ) |
| 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                                                             |   | 2,182,700                             |      | 2,120,400 |   | 2,194,000 |   |
| Gain on sales of equipment                                                                |   | (1,000                                | )         | (2,100 | ) | (8,600 | ) |
| Deferred income tax (benefit)/expense                                                     |   | (83,300                               | )         | (101,800 | ) | 307,100 |   |
| Provision for doubtful accounts                                                           |   | 100,400                               |      | 125,000 |   | 170,700 |   |
| Changes in assets and liabilities:                                                        |   |                                  |      |   |   |   |   |
| (Increase)/decrease in accounts receivable                                                |   | (1,465,600                            | )         | 577,300 |   | (182,000 | ) |
| (Increase)/decrease in inventories                                                        |   | (258,600                              | )         | (61,900 | ) | 829,800 |   |
| (Increase)/decrease in prepaid expenses and  other current assets                         |   | (10,100                               | )         | 6,200 |   | 86,500 |   |
| (Increase)/decrease in other assets                                                       |   | (22,800                               | )         | (2,000 | ) | 64,800 |   |
| Increase/(decrease) in accounts payable                                                   |   | 676,200                               |      | 715,100 |   | (448,500 | ) |
| Increase in accrued liabilities                                                           |   | 10,500                                |      | 22,300 |   | 48,900 |   |
| (Decrease)/increase in income taxes payable                                               |   | —                                |      | (128,800 | ) | 128,800 |   |
| Increase in other liabilities                                                             |   | 83,000                                |      | — |   | — |   |
| Net cash provided by operating activities                                                 |   | 2,515,600                             |      | 4,426,300 |   | 4,600,200 |   |
|                                                                                      |   |                                  |      |   |   |   |   |
| Cash flows from investing activities:                                                     |   |                                  |      |   |   |   |   |
| Repayments on notes receivable                                                            |   | 92,100                                |      | 116,400 |   | 177,000 |   |
| Capital expenditures                                                                      |   | (1,525,000                            | )         | (1,532,600 | ) | (1,028,800 | ) |
| Proceeds from sales of equipment                                                          |   | 1,500                                 |      | 2,400 |   | 15,000 |   |
| Distribution from investment in partnership                                               |   | 3,400                                 |      | 4,400 |   | 5,100 |   |
| Net cash used in investing activities                                                     |   | (1,428,000                            | )         | (1,409,400 | ) | (831,700 | ) |
|                                                                                      |   |                                  |      |   |   |   |   |
| Cash flows from financing activities:                                                     |   |                                  |      |   |   |   |   |
| Borrowings under line of credit                                                           |   | 10,502,100                            |      | 7,253,900 |   | 5,579,800 |   |
| Repayments under line of credit                                                           |   | (9,526,000                            | )         | (7,064,700 | ) | (6,487,800 | ) |
| Repayments of long-term debt                                                              |   | (864,200                              | )         | (2,257,600 | ) | (2,137,700 | ) |
| Payment of common stock dividends                                                         |   | (616,000                              | )         | (630,200 | ) | (520,900 | ) |
| Proceeds from exercise of stock options                                                   |   | 108,000                               |      | — |   | 49,800 |   |
| Repurchases of common stock                                                               |   | (679,700                              | )         | (340,500 | ) | (212,800 | ) |
| Net cash used in financing activities                                                     |   | (1,075,800                            | )         | (3,039,100 | ) | (3,729,600 | ) |
|                                                                                      |   |                                  |      |   |   |   |   |
| Net increase/(decrease) in cash                                                           |   | 11,800                                |      | (22,200 | ) | 38,900 |   |
| Cash at beginning of year                                                                 |   | 44,700                                |      | 66,900 |   | 28,000 |   |
|                                                                                      |   |                                  |      |   |   |   |   |
| Cash at end of year                                                                       |   | $                                     | 56,500    |   | $ | 44,700 |   | $ | 66,900 |   |

 

The accompanying notes are an integral partof these financial statements

 

F - 5

----

 

ROTONICS MANUFACTURING INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1- ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:

 

Organization and operations

 

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 2004, 2003, or 2002.  In fiscal 2004, the Company purchased inaggregate approximately 98% of its plastic resin from six 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 significant accounting policies are as follows:

 

Principles ofconsolidation

 

The consolidated financial statements include the accounts of theCompany and its wholly owned subsidiary, Rotocast Plastic Products ofTennessee, Inc.  All intercompanyaccounts and transactions have been eliminated in consolidation.

 

Revenue recognition

 

Revenues are recognized upon shipment to the customer and are recordednet of sales discounts, returns and allowances.

 

Use of estimates

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates.

 

Fair Value of Financial Instruments

 

The carrying value of accounts receivable and trade payablesapproximates the fair value due to their short-term maturities. The carryingvalue of the Company’s line of credit and notes payable is considered toapproximate fair market value, because the interest rates of these instrumentsare based predominately on variable reference rates.

 

Inventories

 

Inventories are stated at the lower of cost or market.  Cost is determined on the first-in,first-out method.

 

Property, plant and equipment

 

Depreciation is computed using the straight-line method and theestimated useful lives of the assets range from three to thirty-nineyears.  When assets are retired orotherwise disposed of, the cost and related accumulated depreciation areremoved from the accounts, and any resulting gain or loss is included in incomefor the period.  The cost of maintenanceand repairs is charged to income as incurred; costs relating to significantrenewals 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 - 6

----

 

### Impairment of long-livedassets

###  

The Company evaluates the recoverability of long-lived assets and therelated estimated remaining lives at each balance sheet date.  Should events or changes in circumstancesindicate that the carrying amount may not be recoverable or the useful life haschanged, the Company records an impairment charge or changes the useful life.

 

#### Stock-based compensation

 

Stock-basedcompensation is accounted for using the intrinsic value method under which nocompensation expense is recognized when the exercise price of the employee’sstock option equals or exceeds the market price of the underlying stock on thedate of grant.  Required pro formainformation has been presented under the fair value method using aBlack-Scholes option-pricing model.

 

Income taxes

 

The Companyaccounts for income taxes pursuant to an asset and liability approach thatrequires the recognition of deferred tax assets and liabilities for theexpected future tax consequences of events that have been recognized in theCompany’s financial statements or tax returns. In estimating 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 instruments and hedgingactivities in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 133, “Accounting forDerivative Instruments and Hedging Activities*,*” as amended by SFAS No.149, “Amendment of Statement 133 on Derivative Instrument and 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 reportedearnings by weighted average shares outstanding.  Diluted EPS include the effect of the potential sharesoutstanding, including dilutive securities using the treasury stockmethod.  Potential dilutive securitiesfor the Company include outstanding stock options.  The table below details the components of the basic and dilutedEPS calculations:

 
|                                                              |   | **Net  Income/(Loss)** |       | **Weighted  Average Shares  Outstanding** |       | **EPS** |   |
|-------------------------------------------------------------------|--------|------------------------|------------|-------------------------------------------|------------|---------|--------|
| June 30, 2004                                                |   |                   |       |                                      |       |    |   |
| Basic EPS                                                         |   |                   |       |                                      |       |    |   |
| Net income                                                        |   | $                      | 1,304,200  |                                      | 12,155,548 |    | $      | 0.11 |   |
| Effect of dilutive stock options                                  |   | —                 |       | 1,115                                     |       | —  |   |
| Diluted EPS                                                       |   | $                      | 1,304,200  |                                      | 12,156,663 |    | $      | 0.11 |   |
|                                                              |   |                   |       |                                      |       |    |   |
| 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 | ) |

 

----

(1) Common stock equivalents are omitted in the earnings per sharecalculations due to their anti-dilutive effect.

 

F - 7

----

 

Geographic andProduct 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, 2004,2003, and 2002.  The Company categorizesits products into five main groups.  Netsales for these products are summarized as follows:

 
|                   |   | **For Year  Ended June 30,** |       |
|------------------------|--------|-----------------------------------|------------|
|                   |   | **2004**                          |       | **2003** |   | **2002** |   |
| Product Group:         |   |                              |       |   |   |   |   |
| Contract Manufacturing |   | $                                 | 17,379,600 |   | $ | 14,915,100 |   | $ | 16,000,300 |   |
| Industrial             |   | 12,017,600                        |       | 11,058,500 |   | 10,802,000 |   |
| Marine                 |   | 2,975,600                         |       | 2,774,700 |   | 2,796,100 |   |
| Refuse                 |   | 4,858,400                         |       | 4,029,100 |   | 4,876,700 |   |
| Consumer               |   | 3,101,700                         |       | 3,194,700 |   | 3,498,200 |   |
| Total net sales        |   | $                                 | 40,332,900 |   | $ | 35,972,100 |   | $ | 37,973,300 |   |

 

Impact of RecentAccounting Pronouncements

 

InJanuary 2003, the Financial Accounting Standards Board (“FASB”) issuedFASB Interpretation No. 46, “Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51” (“FIN 46”). In December 2003, the FASB issued a revision to FIN 46 to makecertain technical corrections and address certain implementation issues thathad arisen.  FIN 46, as revised,clarifies existing accounting literature regarding the consolidation of entitiesin which a company holds a controlling financial interest.  A majority voting interest in an entity hasgenerally been considered indicative of a controlling financial interest.  FIN 46 specifies other factors (variableinterest) which must be considered when determining whether a company holdscontrolling financial interest in, and therefore must consolidate, an entity(variable interest entities).  Theadoption of FIN 46 had no impact on the Company’s overall financial positionand results of operations as the Company has no variable interest entities.

 

InApril 2003, the FASB issued Statement of Financial Accounting Standards(“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities.”  SFAS No. 149 isintended to result in more consistent reporting of contracts as eitherfreestanding derivative instruments subject to SFAS No. 133 in its entirety, oras hybrid instrument with debt host contracts and embedded derivativefeatures.  In addition, SFAS No. 149clarifies the definition of a derivative by providing guidance on the meaningof initial net investments related to derivatives.  This statement was effective for contracts entered into ormodified after June 30, 2003.  Theadoption of SFAS No. 149 did not have a material effect on our consolidatedfinancial position, results of operation or cash flows.

 

In May 2003, TheFASB issued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity.”  SFAS No. 150 establishes standards for how an issuer classifiesand measures certain financial instruments with characteristics of bothliabilities and equity.  SFAS No. 150was adopted by the Company on July 1, 2003 and did not have an impact onthe Company’s financial statements

 

NOTE 2 – NOTES RECEIVABLE:

 

In July 2001, the Company and a former customer agreed to convertan open trade receivable balance due from the customer in the amount of$150,000 to a note receivable bearing interest at 8% per annum and maturing onJune 15, 2004.  As of June 30,2004 and 2003, the total balance of this note amounted to $138,600.  The customer continues to dispute thebalance of this note.  At this juncture,we are proceeding through the discovery phase of the litigation process andanticipate a resolution during fiscal 2005. We have taken a conservation approach to the ultimate outcome and haveincreased our allowance for doubtful accounts accordingly.

 

At the end of fiscal 2003, the Company was owed $92,100 on notesreceivable for the sale of various molds and other assets.  These notes were repaid in full duringfiscal 2004.

 

F - 8

----

 

NOTE 3 - INVENTORIES:

 
|                    |   | **June 30,** |      |
|-------------------------|--------|-------------------|-----------|
|                    |   | **2004**          |      | **2003** | ** ** |
| Inventories consist of: |   |              |      |   |   |
| Raw materials           |   | $                 | 2,525,900 |   | $ | 2,279,800 |   |
| Finished goods          |   | 4,103,100         |      | 4,090,600 |   |
|                    |   | $                 | 6,629,000 |   | $ | 6,370,400 |   |

 

NOTE 4 - INVESTMENT IN PARTNERSHIP:

 

The Company owns a33-1/3% interest in a real estate venture that was acquired in 1998 and isbeing accounted for using the equity method. The investment consists principally of a note receivable which ispayable in monthly installments, including interest at 7%, to 2008, with annualprincipal reductions as provided.

 

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT:

 
|                                              |   | **For Year  Ended June 30,** |       |
|---------------------------------------------------|--------|-----------------------------------|------------|
|                                              |   | **2004**                          |       | **2003** |   |
| Property, plant and equipment consist of:         |   |                              |       |   |   |
| Land                                              |   | $                                 | 1,039,500  |   | $ | 1,039,500 |   |
| Buildings and building improvements               |   | 5,291,000                         |       | 5,114,500 |   |
| Machinery, equipment, furniture and  fixtures     |   | 28,938,400                        |       | 27,382,500 |   |
| Construction in progress                          |   | 164,200                           |       | 548,200 |   |
|                                              |   | 35,433,100                        |       | 34,084,700 |   |
| Less - accumulated depreciation and  amortization |   | (21,583,400                       | )          | (19,622,700 | ) |
|                                              |   | $                                 | 13,849,700 |   | $ | 14,462,000 |   |

 

NOTE 6 - INTANGIBLE ASSETS:

 
|                          |   | **For Year  Ended June 30,** | ** ** |
|-------------------------------|--------|-----------------------------------|------------|
|                          |   | **2004**                          |       | **2003** | ** ** |
| Intangible assets consist of: |   |                              |       |   |   |
| Patents                       |   | $                                 | 475,700    |   | $ | 475,700 |   |
| Less accumulated amortization |   | (259,000                          | )          | (213,100 | ) |
| Net patents                   |   | $                                 | 216,700    |   | $ | 262,600 |   |

 

Aggregateamortization expense for each of the fiscal years ended June 30, 2004,2003, and 2002 was $46,000.  Futureestimated amortization expense will be approximately $45,000 for each of thenext four years and $34,000 in fiscal 2009.

 

In fiscal 2002, the Company’s reporting unit was reviewed for goodwillimpairment in conjunction with the adoption of SFAS No. 142 “Goodwill and OtherIntangible Assets.”  Due to thedisparity between the Company’s estimated fair value and its carrying value, agoodwill impairment loss of $4,105,900 was recognized as a cumulative effect ofchange in accounting principle as of July 1, 2001.  The fair value of the reporting unit wasestimated using conservative valuation models involving guideline publiccompanies, acquisition analysis and discounted cash flows as well as the Company’smarket capitalization.

 

NOTE 7 - BANK LINE OF CREDIT:

 

The Company has a $5,000,000 revolving line of credit with Wells FargoBank, which matures on October 1, 2005. The line is secured by the Company’s machinery and equipment, accountsreceivable and inventories.  Interest ispayable monthly at the respective bank’s prime rate minus .25% (4.0% per annumat June 30, 2004).  In addition,the loan agreement allows the Company to convert the outstanding principalbalance in amounts no less than $250,000 to a LIBOR-based loan for up to 90-dayperiods.  At June 30, 2004, totalborrowings under the Company’s line of credit were $1,357,300 of which$1,000,000 was borrowed under the LIBOR option bearing a LIBOR interest of2.27875% per annum and maturing July 15, 2004. Proceeds from the loan wereused for working capital purposes.  AtJune 30, 2004, the Company had approximately $3,642,700 available forfuture borrowings under the revolving line of credit.  The loan agreement contains various covenants pertaining totangible net worth, net income and liquidity ratios, capital expenditures,payments of dividends, payment of subordinated debt as well as various otherrestrictions.  The Company was incompliance with these covenants during fiscal 2004.

 

F - 9

----

 

NOTE 8 - LONG-TERM DEBT:

 
|                        |   | **For Year  Ended June 30,** |      |
|-----------------------------|--------|-----------------------------------|-----------|
|                        |   | **2004**                          |      | **2003** |   |
| Long-term debt consists of: |   |                              |      |   |   |
| Note payable - Bank (A)     |   | $                                 | 1,981,000 |   | $ | 2,845,200 |   |
| Less current portion        |   | (864,300                          | )         | (864,300 | ) |
|                        |   | $                                 | 1,116,700 |   | $ | 1,980,900 |   |

 

----

(A)  On October 1, 2000, the bank issued a $6,050,000seven year note due in monthly principal installments of $72,000 plus interestat the bank’s prime rate minus .25% (4.0% per annum at June 30, 2004). Inaddition, the loan agreement allows the Company to convert all or a portion ofthe outstanding principal to a LIBOR-based loan for periods up to oneyear.  At June 30, 2004, the totaloutstanding principal balance was under the LIBOR option at 2.52875% per annummaturing July 15, 2004.  The noteis secured by the Company’s machinery and equipment, accounts receivable andinventories and matures October 15, 2007.

 

The Company has aninterest rate swap agreement with the bank. The agreement allows the Company to fix a portion of its outstandingterm and line of credit debt ($3 million as of June 30, 2004) from avariable floating LIBOR rate to a fixed LIBOR rate in efforts to protectagainst future increases in the banks LIBOR rate.  The notional amount of the swap agreement will remain at $3million until August 15, 2005 at which time it will be reduced to $2million and will remain at this amount through to the swap’s maturity onAugust 15, 2006.

 

Aggregate annual maturities of long-term debt are summarized asfollows:

 
| **Year Ending June 30** |   |    |      |
|------------------------------|--------|---------|-----------|
| 2005                         |   | $       | 864,300   |   |
| 2006                         |   | 864,300 |      |
| 2007                         |   | 252,400 |      |
|                         |   | $       | 1,981,000 |   |

 

NOTE 9 – RELATED PARTY TRANSACTIONS:

 

The Company sold molded plastic products and molds under arms–lengthterms to Atlantic Meeco, Inc. (“AMI”) a company in which thePresident/CEO/Chairman of the Board of the Company has a 50% equityinterest.  Sales to AMI amounted to$75,000, $101,600 and $59,100 in fiscal years 2004, 2003 and 2002,respectively.  Amounts due on sales toAMI were $8,100 and $32,000 at June 30, 2004 and 2003, respectively, andare included in accounts receivable in the accompanying consolidated balancesheet.  In fiscal 2004, the Company alsopurchased $16,700 of fabricated products and resin from AMI.  No amounts were due AMI as of June 30,2004.

 

The Company purchased injection molded products under arms-length termsfrom Custom Plastics (“Custom”) a company in which the owner has a 8.5% equityinterest in the Company.  Purchases fromCustom amounted to $172,000, $141,000 and $152,900 in fiscal 2004, 2003 and 2002,respectively.  Amounts due on purchasesfrom Custom were $8,600 and $5,200 at June 30, 2004 and 2003,respectively, and are included in accounts payable in the accompanyingconsolidated balance sheets.

 

In fiscal years 2004, 2003 and 2002, the Company incurred legal feesand costs amounting to $60,100, $21,000 and $23,900, respectively, for servicesby E. Paul Tonkovich Professional Corporation, of which an officer/director ofthe Company is an employee.

 

NOTE 10 - ACCRUED LIABILITIES:

 
|                                               |   | **June 30,** |    |
|----------------------------------------------------|--------|-------------------|---------|
|                                               |   | **2004**          |    | **2003** |   |
| Accrued liabilities consist of:                    |   |              |    |   |   |
| Salaries, wages, commissions and related  payables |   | $                 | 572,500 |   | $ | 572,900 |   |
| Other                                              |   | 336,600           |    | 481,900 |   |
|                                               |   | $                 | 909,100 |   | $ | 1,054,800 |   |

 

F - 10

----

 

NOTE 11 - STOCK OPTION PLAN:

 

The Company has a new stock option plan that was adopted by the Boardof Directors on October 7, 2003 and approved by shareholder vote onDecember 8, 2003.  This planautomatically replaces the prior stock option plan and allows, at thediscretion of the Board of Directors, option grants to key employees, officers,directors and consultants of the Company to purchase 850,000 shares of theCompany’s common stock.  Under the termsand conditions set forth in the plan, the purchase price of the stock optionswill be at least 85% of the fair market value of the Company’s common stock ongrant date.  The Maximum term foroptions granted under the plan is ten years. The plan expires on October 6, 2013.

 

Stock OptionActivity

 
|                                      |   | **Outstanding  Shares** |   | **Exercisable  Shares** |   | **Weighted  Average Price  Per Share** |   |
|-------------------------------------------|--------|-------------------------|--------|-------------------------|--------|----------------------------------------|--------|
| 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 |   |
| Exercised                                 |   | (96,000                 | )      |                    |   | $                                      | 1.1250 |   |
| Cancelled                                 |   | (9,000                  | )      |                    |   | $                                      | 1.1250 |   |
| Balance outstanding at June 30, 2004 |   | —                  |   | —                  |   |                                   |   |

 

The Company did not grant any options in fiscal 2004.  At June 30, 2004, the Company had850,000 shares available for future grants. The Company accounts for stock options under the intrinsic valuemethod.  Had compensation cost for theplan been determined in accordance with the fair value method as set out in SFASNo. 123, as amended by SFAS No. 148, the Company’s net income and income percommon share data would not have been significantly different.

 

NOTE 12 - COMMON STOCK:

 

In fiscal 2004 and 2003, the Company acquired 459,633 and 270,151shares of its common stock at a total cost of $679,700 and $340,500,respectively.  All shares acquired weresubsequently cancelled.  AtJune 30, 2004 and 2003, there was no outstanding treasury stock.

 

On June 16, 2004 the Board declared a dividend of $.05 per shareof common stock payable on July 23, 2004 to stockholders of record onJuly 9, 2004.

 

NOTE 13 - INCOME TAXES:

 

The components of theincome tax provision were:

 
|      |   | **For Year  Ended June 30,** |     |
|-----------|--------|-----------------------------------|----------|
|      |   | **2004**                          |     | **2003** |   | **2002** |   |
| Current:  |   |                              |     |   |   |   |   |
| Federal   |   | $                                 | (811,500 | ) | $ | (667,100 | ) | $ | (476,300 | ) |
| State     |   | (170,300                          | )        | (112,100 | ) | (163,800 | ) |
|      |   | (981,800                          | )        | (779,200 | ) | (640,100 | ) |
| Deferred: |   |                              |     |   |   |   |   |
| Federal   |   | 74,700                            |     | 69,900 |   | (302,800 | ) |
| State     |   | 8,600                             |     | 31,900 |   | (4,300 | ) |
|      |   | 83,300                            |     | 101,800 |   | (307,100 | ) |
|      |   | $                                 | (898,500 | ) | $ | (677,400 | ) | $ | (947,200 | ) |

 

At June 30,2004, the Company has net operating loss (NOL) carry-forwards of approximately$7,112,600 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 2005 if not utilized.  The state NOLcarry-forwards expire as follows:

 

F - 11

----

 
|   |   | **Amount of  Unused State  Operating Loss  Carryforwards** |      | **Expiration  During Year  Ended June 30,** |   |
|--------|--------|------------------------------------------------------------|-----------|--------------------------------------------------|--------|
|   |   | $                                                          | 717,200   |                                             | 2005   |   |
|   |   | 89,000                                                     |      | 2006                                             |   |
|   |   | 582,600                                                    |      | 2007                                             |   |
|   |   | 603,100                                                    |      | 2008                                             |   |
|   |   | 840,200                                                    |      | 2009                                             |   |
|   |   | 242,300                                                    |      | 2010                                             |   |
|   |   | 471,100                                                    |      | 2011                                             |   |
|   |   | 476,700                                                    |      | 2012                                             |   |
|   |   | 395,300                                                    |      | 2013                                             |   |
|   |   | 850,400                                                    |      | 2014                                             |   |
|   |   | 262,500                                                    |      | 2015                                             |   |
|   |   | 482,800                                                    |      | 2016                                             |   |
|   |   | 179,800                                                    |      | 2017                                             |   |
|   |   | 235,200                                                    |      | 2018                                             |   |
|   |   | 684,400                                                    |      | 2019                                             |   |
|   |   | $                                                          | 7,112,600 |                                             |   |   |

 

In fiscal 2002,the Company utilized its remaining alternative minimum tax credit, whichreduced its current 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 $358,400, 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 taxasset.  Any future adjustments to thevaluation allowance will be reflected as a component of the current years taxprovision.

 

### The following reconcilesthe federal statutory income tax rate to the effective rate of the provisionfor income taxes:

###  

|                                        |   | **For Year  Ended June 30,** |   |
|---------------------------------------------|--------|-----------------------------------|--------|
|                                        |   | **2004**                          |   | **2003** |   | **2002** |   |
| Federal statutory rate                      |   | 34.0                              | %      | 34.0 | % | 34.0 | % |
| State income taxes (net of federal benefit) |   | 4.0                               |   | 3.8 |   | 3.8 |   |
| Other items, net                            |   | 2.8                               |   | (0.9 | ) | 2.4 |   |
| Effective income tax rate                   |   | 40.8                              | %      | 36.9 | % | 40.2 | % |

 

Deferred taxassets and liabilities are summarized as follows:

 
|                                                   |   | **June 30,** |       |
|--------------------------------------------------------|--------|-------------------|------------|
|                                                   |   | **2004**          |       | **2003** |   |
| Deferred tax assets:                                   |   |              |       |   |   |
| State NOL (net of federal benefit)                     |   | $                 | 408,300    |   | $ | 388,300 |   |
| Employment-related reserves                            |   | 102,400           |       | 55,200 |   |
| Allowance for doubtful accounts                        |   | 102,400           |       | 91,800 |   |
| Interest rate swap derivative                          |   | 43,000            |       | 105,400 |   |
| Other liabilities                                      |   | 33,200            |       | — |   |
|                                                   |   | 689,300           |       | 640,700 |   |
| Deferred tax liabilities:                              |   |              |       |   |   |
| Depreciation and amortization                          |   | (2,480,500        | )          | (2,504,000 | ) |
| Net deferred tax liability before valuation  allowance |   | (1,791,200        | )          | (1,863,300 | ) |
| Deferred tax assets valuation allowance                |   | (358,400          | )          | (307,200 | ) |
| Net deferred tax liability                             |   | $                 | (2,149,600 | ) | $ | (2,170,500 | ) |

 

F - 12

----

 

NOTE 14 - COMMITMENTS AND CONTINGENCIES:

 

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 2004, 2003, and 2002 amountedto $1,119,800, $1,122,400 and $1,114,200, respectively.

 

At June 30, 2004, the future minimum lease commitments, excludinginsurance and taxes, are as follows:

 
| **Year Ending June 30,** |   |      |      |
|-------------------------------|--------|-----------|-----------|
| 2005                          |   | $         | 1,124,200 |   |
| 2006                          |   | 1,036,900 |      |
| 2007                          |   | 994,700   |      |
| 2008                          |   | 992,800   |      |
| 2009                          |   | 989,800   |      |
| Thereafter                    |   | 2,774,700 |      |
|                          |   | $         | 7,913,100 |   |

 

Contingencies

 

In the normal course of business, the Company encounters certainlitigation matters, which in the opinion of management will not have asignificant adverse effect on the financial position or the results ofoperations of the Company.

 

NOTE 15 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

Supplemental disclosures of cash flow information are as follows:

 
|                                                   |   | **For the  Year Ended June 30,** |    |
|--------------------------------------------------------|--------|---------------------------------------|---------|
|                                                   |   | **2004**                              |    | **2003** |   | **2002** |   |
| Cash paid during the year for:                         |   |                                  |    |   |   |   |   |
| Interest                                               |   | $                                     | 213,300 |   | $ | 272,200 |   | $ | 477,300 |   |
| Income taxes                                           |   | $                                     | 943,500 |   | $ | 925,400 |   | $ | 424,600 |   |
| Non-cash investing activities:                         |   |                                  |    |   |   |   |   |
| Conversion of accounts receivable to notes  receivable |   | $                                     | —  |   | $ | — |   | $ | 150,000 |   |
| Non-cash financing activities:                         |   |                                  |    |   |   |   |   |
| Common dividends declared but not paid                 |   | $                                     | 599,100 |   | $ | 616,000 |   | $ | 630,200 |   |
| Change in fair value of interest rate swap             |   | $                                     | (93,800 | ) | $ | 30,200 |   | $ | 36,600 |   |

 

NOTE 16 - UNAUDITED QUARTERLY RESULTS:

 
|                                |   | **Quarter  Ended** |      |
|-------------------------------------|--------|--------------------|-----------|
|                                |   | **September**      |      | **December** |   | **March** |   | **June** |   |
| Fiscal Year 2004:                   |   |               |      |   |   |   |   |   |   |
| Net sales                           |   | $                  | 8,874,900 |   | $ | 9,129,400 |   | $ | 10,036,100 |   | $ | 12,292,500 |   |
| Gross profit                        |   | 2,081,700          |      | 1,673,400 |   | 2,382,000 |   | 3,055,200 |   |
| Net income/(loss)                   |   | 198,400            |      | (94,200 | ) | 375,700 |   | 824,300 |   |
| Per share:                          |   |               |      |   |   |   |   |   |   |
| Net income/(loss)-basic and diluted |   | $                  | .02       |   | $ | (.01 | ) | $ | .03 |   | $ | .07 |   |
|                                |   |               |      |   |   |   |   |   |   |   |   |   |   |
| 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 |   |

 

F - 13

----

 

ROTONICS MANUFACTURING INC.

SCHEDULE II

VALUATIONAND QUALIFYING ACCOUNTS

Years Ended June 30, 2004, 2003 and 2002

 
| **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, 2004:                    |   |                                 |    |                                |   |         |   |           |   |   |   |
| Allowance for doubtful accounts        |   | $                                    | 231,100 |                                | $      | 98,700       |   | $              | — |   | $ | (73,700 | )(1) | $ | 256,100 |   |
|                                   |   |                                 |    |                                |   |         |   |           |   |   |   |
| Deferred tax asset valuation allowance |   | $                                    | 307,200 |                                | $      | —       |   | $              | 51,200 | (2) | $ | — |   | $ | 358,400 |   |
|                                   |   |                                 |    |                                |   |         |   |           |   |   |   |
| 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 |   |

 

----

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

(2) Represents valuation allowance for potentialstate NOL’s, which may expire prior to utilization.

 

F - 14

----