**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

 

**For the fiscal year ended June 30, 2005**

 

**Commission file number 1-9429**

 

**ROTONICS MANUFACTURINGINC.**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**                                                                 | ** ** | **36-2467474**      |
|------------------------------------------------------------------------------|------------|---------------------|
| (State or other jurisdiction of                                              |       | (I.R.S. Employer    |
| incorporation or organization)                                               |       | Identification No.) |
|                                                                         |
| **17022 South Figueroa Street**                                              | ** ** | ** **          |
| **Gardena, California**                                                      | ** ** | **90248**           |
| (Address of principal offices)                                               |       | (Zip Code)          |
|                                                                         |
| Registrant’s  telephone number, 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) ofthe Act:    **None**

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) for theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes    ý     No  o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. ý

 

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

Yes    o     No   ý

 

Indicate by check mark whether the registrantis as shell company (as defined in Rule 12b-2 of the Act).

Yes    o     No   ý

 

The aggregate market value of the votingstock held by non-affiliates of the registrant, as of December 31, 2004,was $14,747,300 (1).

 

The number of shares of common stockoutstanding at September 6, 2005 was 11,940,598.

 

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(1)         Excludes7,049,108 shares held by directors, officers, and stockholders, whose ownershipexceeded 5% of the outstanding shares at December 31, 2004.  Exclusion of such shares should not beconstrued to indicate that the holders thereof possess the power, direct orindirect, to direct the management or policies of registrant, or that suchpersons are controlled by or under common control with the registrant.

 

 

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DOCUMENTSINCORPORATED BY REFERENCE

 
| ** **                                                                                                                        | ** ** | **Form 10-K** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|
| **Document**                                                                                                                      | ** ** | **Part**           |
|                                                                                                                              |       |               |
| Definitive Proxy Statement to be used in  connection with the Annual Meeting of Stockholders to be held on  December 5, 2005 |       | III                |

 

2

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TABLE OFCONTENTS

 
| 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    |                                                                                                         |

 

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PART I

 

Forward-Looking Statements

 

To the extent that this 10-K Annual Report discussesmatters which are not historical, including statements regarding futurefinancial results, information, or expectation about products or markets, orotherwise makes statements about future events, such statements areforward-looking and are subject to a number of risks and uncertainties thatcould cause actual results to differ materially from the statements made.  These include, among others, fluctuations incosts of raw materials and other expenses, costs associated with plantclosures, downturns in the markets served by the Company, the costs associatedwith new product introductions, as well as other factors described under theheading: Item 1, “Business”, Item 3, “Legal Proceedings”, under Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”, andFootnote 1 to Financial Statements.  Whenused in this report, the words “expects,” “anticipates,” “intends,” “plans,” “ believes,” “seeks,” “estimates” andsimilar expressions are generally intended to identify forward-lookingstatements.  You should not place unduereliance on these forward-looking statements, which reflect our opinion only asof the date of the Annual Report. We undertake no obligation to publicly releaseany revisions to the forward-looking statements after the date of thisdocument.  You should carefully reviewthe risk factors described in other documents we file from time to time withthe Securities and Exchange Commission, including the Quarterly Reports on Form 10-Qto be filed by us in fiscal year 2006.

 

Item1.   Business

 

Introduction

 

Rotonics Manufacturing Inc. (the “Company”)was founded as an Illinois Corporation, and was reincorporated in Delaware in December 1986.  Effective July 1, 1991, the Companymerged with Rotonics Molding, Inc.-Chicago (“Rotonics”), with the Company being the surviving entity.  Rotonics had operations in Itasca, Illinois;Deerfield, Wisconsin; Denver, Colorado; and Bartow, Florida. Three of theseoperations currently conduct business as divisions of the Company using thetrade names RMI-C, RMI-D, and RMI-F, respectively.  Rotonics was a privately held CaliforniaCorporation, which was 52% owned by Mr. Sherman McKinniss.  Mr. McKinniss became president and chiefexecutive officer of the Company on August 12, 1991, and currentlypresides as the Company’s president, CEO and chairman of the board.

 

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

 

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

 

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

 

In September 1994, the Company purchaseda larger manufacturing facility in Bensenville, Illinois and subsequentlyrelocated its Itasca, Illinois operations into this new facility.  In December 1995, the Companydiscontinued its operations at its Deerfield, Wisconsin location and combinedthese operations into its newly purchased Bensenville, Illinois operation.

 

In February 1997, the Company purchaseda 9.73-acre facility consisting of 63,000 square feet of manufacturing andoffice building space in Commerce City, Colorado.  The Company has since expended significantresources to refurbish the facility to house its Colorado operations.  The facility is also located within an enterprisezone, which continues to provide additional benefits.  The Company leases a portion of this facility’sexcess office and yard space on a long-term and short-term basis at $7,800 permonth.

 

Effective April 1, 1998, the Companymerged with Rotocast International, Inc. and its wholly owned subsidiaries(“Rotocast”), with the Company being the surviving entity.  In accordance with the Merger Agreement, theCompany issued 2,072,539 shares of its common stock and a $2,000,000 notepayable secured by a stand-by letter

 

4

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of credit, in exchange for all theoutstanding voting stock of Rotocast.  InJanuary 2000, the Company repurchased these shares for $2.8 million.  Upon consummation of the repurchase, theshares were retired.

 

Rotocast had operations in Miami, Florida;Knoxville, Tennessee; Brownwood, Texas; Las Vegas, Nevada; and Bossier City,Louisiana.  These operations currentlyconduct business as divisions of the Company using the trade names Nutron,Rotocast of Tennessee, RMI-B and RMI-Nevada. Prior to the merger, the operations in Bossier City, Louisiana weresubstantially discontinued.  Rotocast wasa privately held 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, theCompany initiated the consolidation of its Warminster, Pennsylvania and Arleta,California facilities into its remaining operations.  The consolidation of these facilities wascompleted in fiscal 1999 and enhanced the operations of the Company’s remainingfacilities, reduced its overall manufacturing overhead costs, and allowed theCompany to take greater advantage of its marketing and distributionchannels.  Also, in fiscal 1999, theCompany consolidated its Miami operations into the remaining operatingfacilities.  The Miami facility buildingis being sub-leased on a long-term basis at $4,500 per month.

 

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

 

Description of Business

 

The Company currently has ten manufacturinglocations and was again listed by a plastics industry periodical as one of thetop ten rotational molders in North America. These operating divisions manufacture a variety of plastic products forcommercial, agricultural, pharmaceutical, governmental, building, medicalwaste, refuse, retail, recreation, marine, healthcare and residential use, aswell as a vast number of custom plastic products for a variety of industries,utilizing the rotonically molding process and, on a smaller scale; injectionmolding and dip molding processes. In April 1998, the injection moldingprocess was added to the Company’s manufacturing operations as part of theRotocast merger.  Utilizing this process,the Company markets a variety of parts for commercial, promotional, andresidential uses, under the trade names Nutron and AMP.  Rotonically molding is a process for moldingplastic resin by rotating a mold in a heated environment, while the plasticresin powder placed inside the mold melts and evenly coats the inner wall ofthe mold.  The injection molding processvaries in that the plastic resin is first heated to a molten state and theninjected under pressure into a mold.  Therotonically molding process has been used for many years and continues to berecognized as a growth industry in recent years, as a result of numerous ongoingbusiness consolidations and the development of new resins.  These new resins allow rotonically moldeditems to compete with more traditional materials such as carbon, fiberglass,and stainless steel, especially in the fabrication of large, lightweight,one-piece molded items, such as storage tanks and polysteel light poles.  Rotonically molding is a particularlyadvantageous process for users of molded plastic products who may want to testdifferent prototypes, or who do not require sufficient numbers of such productsto justify a more expensive manufacturing process.  The Company’s products include various typesof storage tanks, bin lids, refuse containers for automated removal, medicalwaste containers, agricultural/livestock products, kayaks, outdoor polysteellamp posts, furniture, planters, and other rotonically molded items.

 

The Company purchases resin from eight majorsuppliers in the U.S. and Canada.  Thereare seventeen additional suppliers of lesser significance.  Since the majority of the resin used in themanufacturing process is a polyethylene derived from natural gas, resin priceis not directly related to the price for petrochemicals, and until recentyears, has not generally been subject to volatile fluctuations that are oftenexperienced by the petroleum industry. The Company also incorporates the use of recycled plastic materials,blended with virgin materials in the manufacturing of products, wheneverappropriate.

 

The Company holds several patents on storagecontainers used for pharmaceutical, commercial and residential applicationsthat expire through the year 2010. Although the Company has been able to capture its share of these nichemarkets and expects to see continued growth, no one patent or groups of patentsis considered material to the business as a whole.

 

Competition for the Company’s products isgoverned by geography and region, since large capacity tanks and bulky hollowproducts are expensive to ship long distances and, as such, any prospectivecompetitor is constrained by shipping costs. There are numerous single-location, as well as a growing trend tostructure multi-location, rotonically molding businesses throughout the UnitedStates.  However, each of thesebusinesses still competes in a geographic region, which is determined bycustomer demand within that region, a constraint inherent to the industry.  Due to its nationwide presence, the Companyhas substantially alleviated this constraint. The Company’s sales are

 

5

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usually not subject to large seasonalfluctuations as the business typically operates on significant backlogs with adiverse product mix.  Peak season isusually experienced in the period from April through June.  Historically, the quarter from January throughMarch is the slowest production period of the year.  The Company’s backlog was $4,421,100 and$3,001,200 as of June 30, 2005 and 2004, respectively.  All of the backlog orders as of June 30,2005 are expected to be filled during fiscal 2006.

 

The Company’s products are marketed throughthe in-house sales and engineering staff, various distributors and outsidecommission-based sales representatives. The Company continues to build a strong, broad and diverse customer base,which covers a multitude of industries. Since fiscal 1991, no sales to any one single customer represented amaterial part of the Company’s business.

 

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

 

Regulation

 

The Company believes it is in compliance withall applicable federal, state and local laws relating to the protection of theenvironment, and does not anticipate any such laws will have material effect onits financial position, capital expenditures, or competitive position.

 

Employees

 

As of June 30, 2005, the Companyemployed a total of 428 individuals.  TheCompany maintains, for its respective employees who are eligible, a medicalinsurance plan (some of which is contributory), a group life insurance plan, anannual bonus plan and a semi-annual attendance bonus plan.

 

Item 2. Properties

 

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

 

The operating divisions lease warehouse,production and office space as follows:

 
| ** **               | ** ** | **Building** | ** ** | **Total Facility** | ** ** | **Annual** | ** ** | ** **     | ** **          |
|--------------------------|------------|--------------|------------|--------------------|------------|------------|------------|----------------|---------------------|
| **Property**             | ** ** | **Square**   | ** ** | **Square**         | ** ** | **Base**   | ** ** | **Expiration** | ** **          |
| **Location**             | ** ** | **Footage**  | ** ** | **Footage**        | ** ** | **Rent**   | ** ** | **Date (2)**   | ** **          |
|                     |       |         |       |               |       |       |       |           |                |
| Gardena,  California (1) |       | 42,800       |       | 183,300            |       | $          | 324,600    |           | October 2011   |   |
|                     |       |         |       |               |       |       |       |           |                |
| Caldwell,  Idaho         |       | 21,250       |       | 71,200             |       | $          | 105,600    |           | September 2005 |   |
|                     |       |         |       |               |       |       |       |           |                |
| Bartow,  Florida         |       | 46,200       |       | 174,600            |       | $          | 131,400    |           | September 2009 |   |
|                     |       |         |       |               |       |       |       |           |                |
| Miami,  Florida (3)      |       | 50,000       |       | 86,000             |       | $          | 172,600    |           | March 2013     |   |
|                     |       |         |       |               |       |       |       |           |                |
| Gainesville,  Texas (4)  |       | —       |       | 108,900            |       | $          | 1,000      |           | April 2006     |   |
|                     |       |         |       |               |       |       |       |           |                |
| Brownwood,  Texas        |       | 42,800       |       | 136,120            |       | $          | 76,300     |           | March 2013     |   |
|                     |       |         |       |               |       |       |       |           |                |
| Las Vegas,  Nevada       |       | 30,000       |       | 90,000             |       | $          | 142,600    |           | March 2013     |   |
|                     |       |         |       |               |       |       |       |           |                |
| Knoxville, Tennessee     |       | 44,000       |       | 174,240            |       | $          | 155,000    |           | March 2013     |   |

 

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(1)         The Company has a first right to purchaseoption on this facility.

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

(3)         The Company is currently sub-leasing one ofthe Miami buildings (18,000 sq. ft.) for $4,500 per month and is alsosub-leasing a portion of the other building’s office space for $2,500 per month.

(4)         Represents a 2.5 acre ground lease adjacentto owned, Gainsville, Texas facility.

 

6

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The Company owns 2.1 acres (including 38,000square feet of warehouse, production and office space) in Gainesville,Texas.  In September 1994, theCompany purchased 3.1 acres (including 63,300 square feet of warehouse,production and office space) in Bensenville, Illinois, for the Company’sIllinois manufacturing operations.  TheTexas and Illinois facilities were encumbered by a combined $1.77 millionmortgage, which was paid in full on August 15, 2002.  In February 1997, the Company purchasedfor cash 9.73 acres (including 63,000 square feet of warehouse, production andoffice space) in Commerce City, Colorado, for the Company’s Coloradomanufacturing operations. The Company currently leases a portion of thisfacility for $7,800 per month. The Company also owned approximately 1.59unencumbered acres (including 35,100 square feet of warehouse, production, andoffice space) in Deerfield, Wisconsin, which was vacated in December 1995by the Company, and its operations were incorporated into the Illinois facility.  The Wisconsin facility was sold in November 2004for $425,000.

 

Item 3. Legal Proceedings

 

In the normal course of business, the Companyencounters certain litigation matters, which in the opinion of management willnot have a significant adverse effect on the financial position or the resultsof operations of the Company.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

None.

 

7

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PART II

 

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

 

The Company’s Common Stock  ($.01 stated value) is traded on the AmericanStock Exchange  (“AMEX”) under the symbol“RMI”.  The number of stockholders ofrecord of the Company’s Common Stock was approximately 3,650 at September 6,2005.

 

Price Range ofCommon Stock

 

The following table sets forth the quarterlyprice ranges of the Company’s Common Stock in Fiscal 2005 and 2004, as reportedon the composite transactions reporting system for AMEX listed stocks.

 
| **Fiscal Period**                           | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------------------|------------|----------|------------|---------|------------|
| 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    |       |
|                                        |       |     |       |    |       |
| Fiscal 2005:                                |       |     |       |    |       |
| First Quarter Ended September 30, 2004 |       | $        | 2.62       |    | $          | 1.60 |   |
| Second Quarter Ended December 31, 2004 |       | 3.50     |       | 1.85    |       |
| Third Quarter Ended March 31, 2005     |       | 5.49     |       | 2.99    |       |
| Fourth Quarter Ended June 30, 2005     |       | 5.30     |       | 2.41    |       |

 

Since fiscal 1996 the Company has paid eightregular cash dividends on its Common Stock and in fiscal 2005, the Companydeclared a regular cash dividend of $.05 per common share on its Common Stockthat was paid in July 2005.  Anyfuture cash dividends or other distributions of stock will be determined solelyby the Board of Directors (“the Board”) and will be based on the Company’sfuture financial ability to declare and pay such dividends.  Additionally, certain lending agreementsrestrict the Company from declaring or paying dividends beyond set limits onits Common Stock (see Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations: Liquidity and Capital Resources”).  According to the lending agreement with itsbank, the Company may declare or pay any dividend or distribution in a maximumaggregate of $700,000 and may redeem, retire, repurchase or otherwise 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 followinginformation with respect to the Company’s equity compensation plans that havebeen approved by stockholders and plans that have not been approved bystockholders as of June 30, 2005.

 

EquityCompensation 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 followinginformation with respect to purchases of the Company’s common stock during thefourth quarter of fiscal 2005.

 

8

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IssuerPurchases of Common Stock

 
| **Period**                                         | ** ** | **(a) Total  number of  shares (or  units)  purchased** | ** ** | **(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 (1)** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Month #1  April 1, 2005 - April 30, 2005 |       | —                                                       |       | $                                                     | —     |                                                                                                         | —     |                                                                                                                                          | $          | 65,300 |   |
| Month #2  May 1, 2005 - May 31, 2005     |       | 24,094                                                       |       | $                                                     | 2.71       |                                                                                                         | 24,094     |                                                                                                                                          | $          | — |   |
| Month #3  June 1, 2005 - June 30, 2005   |       | —                                                       |       | $                                                     | —     |                                                                                                         | —     |                                                                                                                                          | $          | 1,000,000 |   |
| Total                                              |       | 24,094                                                       |       | $                                                     | 2.71       |                                                                                                         | 24,094     |                                                                                                                                          | $          | 1,000,000 |   |

 

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(1)         Infiscal 2001, the Board of Directors approved a common stock buyback program topurchase up to $1,000,000 of the Company’s common stock.  This program was completed in May 2005.  In June 2005, the Board of Directorsapproved a new common stock buyback program to purchase up to $1,000,000 of theCompany’s common stock.  At June 30,2005, the Company had $1,000,000 available for additional purchases under theprogram.  The buyback program does nothave an expiration date.

 

Item 6. Selected Financial Data

 
| ** **                                            | ** ** | **Year ended June 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Income Statement Data                                 |       |                         |       |   |   |   |   |   |   |   |   |
| Net sales                                             |       | $                            | 45,131,600 |   | $ | 40,332,900 |   | $ | 35,972,100 |   | $ | 37,973,300 |   | $ | 40,520,100 |   |
|                                                  |       |                         |       |   |   |   |   |   |   |   |   |
| Cost of goods sold                                    |       | 35,190,100                   |       | 31,140,600 |   | 26,927,300 |   | 27,765,900 |   | 31,158,700 |   |
|                                                  |       |                         |       |   |   |   |   |   |   |   |   |
| Gross margin                                          |       | 9,941,500                    |       | 9,192,300 |   | 9,044,800 |   | 10,207,400 |   | 9,361,400 |   |
|                                                  |       |                         |       |   |   |   |   |   |   |   |   |
| Selling, general, and administrative  expenses        |       | 7,088,500                    |       | 6,888,600 |   | 7,068,700 |   | 7,540,900 |   | 7,635,400 |   |
|                                                  |       |                         |       |   |   |   |   |   |   |   |   |
| Interest expense                                      |       | 196,900                      |       | 211,800 |   | 266,000 |   | 464,100 |   | 743,100 |   |
|                                                  |       |                         |       |   |   |   |   |   |   |   |   |
| Net income from operations                            |       | $                            | 1,769,900  |   | $ | 1,304,200 |   | $ | 1,156,600 |   | $ | 1,408,700 |   | $ | 473,700 |   |
|                                                  |       |                         |       |   |   |   |   |   |   |   |   |
| Basic/diluted income per common share from operations |       | $                            | 0.15       |   | $ | 0.11 |   | $ | 0.09 |   | $ | 0.11 |   | $ | 0.04 |   |
|                                                  |       |                         |       |   |   |   |   |   |   |   |   |
| Avg. common shares outstanding (A)                    |       | 11,965,200                   |       | 12,155,500 |   | 12,486,000 |   | 12,758,800 |   | 12,835,200 |   |
|                                                  |       |                         |       |   |   |   |   |   |   |   |   |
| Other Financial Data                                  |       |                         |       |   |   |   |   |   |   |   |   |
| Net income from operations as a percent of  sales     |       | 3.9                          | %          | 3.2 | % | 3.2 | % | 3.7 | % | 1.2 | % |

 

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

 

9

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| ** **                           | ** ** | **At June 30,** | ** ** |
|--------------------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **2005**             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Balance  Sheet Data                  |       |                 |       |   |   |   |   |   |   |   |   |
| Current  assets                      |       | $                    | 13,157,900 |   | $ | 12,980,600 |   | $ | 11,440,200 |   | $ | 12,043,100 |   | $ | 13,379,700 |   |
|                                 |       |                 |       |   |   |   |   |   |   |   |   |
| Current  liabilities                 |       | 4,584,900            |       | 5,224,300 |   | 4,710,700 |   | 4,559,400 |   | 4,185,600 |   |
|                                 |       |                 |       |   |   |   |   |   |   |   |   |
| Working  capital surplus             |       | 8,573,000            |       | 7,756,300 |   | 6,729,500 |   | 7,483,700 |   | 9,194,100 |   |
|                                 |       |                 |       |   |   |   |   |   |   |   |   |
| Total assets                         |       | 26,590,200           |       | 27,351,800 |   | 26,450,200 |   | 27,841,800 |   | 34,500,800 |   |
|                                 |       |                 |       |   |   |   |   |   |   |   |   |
| Long-term  debt                      |       | 1,281,800            |       | 2,474,000 |   | 2,362,100 |   | 3,937,200 |   | 7,396,200 |   |
|                                 |       |                 |       |   |   |   |   |   |   |   |   |
| Total  liabilities                   |       | 8,289,900            |       | 10,174,600 |   | 9,500,200 |   | 11,061,700 |   | 14,193,700 |   |
|                                 |       |                 |       |   |   |   |   |   |   |   |   |
| Current  ratio                       |       | 2.9 to 1             |       | 2.5 to 1 |   | 2.4 to 1 |   | 2.6 to 1 |   | 3.2 to 1 |   |
|                                 |       |                 |       |   |   |   |   |   |   |   |   |
| Net book  value per common share (A) |       | $                    | 1.53       |   | $ | 1.43 |   | $ | 1.37 |   | $ | 1.33 |   | $ | 1.59 |   |
|                                 |       |                 |       |   |   |   |   |   |   |   |   |
| Dividends  (B)                       |       | $                    | 0.05       |   | $ | 0.05 |   | $ | 0.05 |   | $ | 0.05 |   | $ | 0.04 |   |

 

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(A)          Computed on the basis of theactual number of common shares outstanding at the end of the fiscal year. Fiscal2002 net book value includes the write-down of goodwill amounting to $4.1million in connection with the adoption of SFAS No. 142.

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

 

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Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations

 

**Introduction**

 

To the extent that this 10-K Annual Reportdiscusses matters which are not historical, including statements regardingfuture financial results, information, or expectation about products ormarkets, or otherwise makes statements about future events, such statements areforward-looking and are subject to a number of risks and uncertainties thatcould cause actual results to differ materially from the statements made.  These include, among others, fluctuations incosts of raw materials and other expenses, costs associated with plantclosures, downturns in the markets served by the Company, the costs associatedwith new product introductions, as well as other factors described under theheading: Item 1, “Business”, Item 3, “Legal Proceedings”, under this Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”, andFootnote 1 to Financial Statements.  Whenused in this report, the words “expects,” “anticipates,” “intends,” “plans,” “ believes,” “seeks,” “estimates” andsimilar expressions are generally intended to identify forward-lookingstatements.  You should not place unduereliance on these forward-looking statements, which reflect our opinion only asof the date of the Annual Report. We undertake no obligation to publiclyrelease any revisions to the forward-looking statements after the date of thisdocument.  You should carefully reviewthe risk factors described in other documents we file from time to time withthe Securities and Exchange Commission, including the Quarterly Reports on Form 10-Qto be filed by us in fiscal 2006.

 

**Operations**

 

Net sales improved by 11.9% to $45,131,600 infiscal 2005 compared to $40,332,900 in fiscal 2004.  All of our major product groups contributedto the notable $4.8 million increase in our net sales during fiscal 2005.  As we look back at fiscal 2005, we would liketo acknowledge that a significant contribution to this growth was attributed toour efforts to bring new product offerings to the marketplace as well as modifyexisting product line offerings to better serve our customers.  As a result, our industrial product group,led by tank, material handling and linen & laundry products increasedby 16.4%; marine, which includes our rivers & waterways line,increased by 15.2%; and refuse, led by medical waste products, increased by7.6%.  Our net sales also benefited froman 11.3% increase in contract manufacturing sales.  We continue to realize a consistent flow ofproducts in this group, which included an impressive array of outdoor spas infiscal 2005.  We remain optimistic aboutthe outlook for fiscal 2006 and believe that the recent tragic events that haveoccurred in our Gulf Coast also bring hope of more jobs, business opportunitiesand a stronger nation.  To date, ourbacklog levels are higher than they were this time last year, which combinedwith our investments in new energy efficient machinery and tooling and ourefforts to expand our marketing channels will continue to benefit futureperiods.

 

In fiscal 2004, net sales improved by 12.1%to $40,332,900 compared to $35,972,100 in fiscal 2003.  During fiscal 2004, the majority of ourproduct groups reflected improvements with the most notable being a 20.6%increase in refuse products, a 16.5% increase in contract manufacturing productsand a 8.7% increase in industrial products. We believe a key component to our 2004 sales growth was the $1,525,000spent on new equipment, tooling and improvements that fulfilled our commitmentto increase our sales, improve productivity and continue to improve the qualityof our product offerings.

 

Cost of goods sold was $35,190,100, or 78% ofnet sales, in fiscal 2005 compared to $31,140,600 and $26,927,300, or 77.2% and74.9% of net sales, in fiscal 2004 and 2003, respectively.  The increase in our net sales along with ourmanufacturing efficiencies and systematic price increases have beeninstrumental in mitigating the overall increase in our cost of goods sold.  Our largest hurdle in fiscal 2005 wascombating rising raw material and natural gas costs.  Since the material we use in ourmanufacturing process is derived from natural gas, the correlation between thetwo continues to impact our operations. To put this in perspective, resin prices increased a minimum of 20% infiscal 2005, or roughly 2.8% as a percentage of net sales, so in retrospect weare extremely pleased with our efforts to minimize the impact to our operatingresults.  With the recent disaster in ourGulf Coast region coupled with sales of resin to foreign countries, weanticipate these costs to continue to escalate in the ensuing months.  As such, we will continue to implementstrategies to minimize their potential impact to future operating results.

 

Selling general and administrative (“SG&A”)expenses were $7,088,500, or 15.7% of net sales, in fiscal 2005 compared to$6,888,600 and $7,068,700, or 17.1% and 19.7% of net sales, in fiscal 2004 and2003, respectively.  Although overallcosts increased $199,900 in fiscal 2005, we noted a 1.4% drop in SG&A costsas a percentage of net sales.  We werepleased with this correlation as it again confirms our efforts to maintainSG&A levels in line with our revenue growth.  The fiscal 2005 increase in SG&A costs of$199,900 is primarily linked to increased wage

 

11

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costs associated with our sales/marketing andcost efficiency efforts.  We believe thebenefits obtained as seen in the increase in our net sales and operatingefficiencies has more than justified any minimal increase in our overallSG&A costs.  The $180,100 decrease inSG&A costs between fiscal 2004 and 2003 is primarily attributed to the$190,000 one-time administrative contractual charge that was incurred in fiscal2003.

 

Income from operations was $2,853,000, or6.3% of net sales, in fiscal year 2005 compared to $2,303,700 and $1,976,100,or 5.7% and 5.5% of net sales, in fiscal 2004 and 2003, respectively.  We are pleased that we continue to postyear-on-year improvements to our operating results in spite of the challengesto offset rising raw material and utility costs as previously mentioned.  Fiscal 2005 operating results also benefitedfrom overall reductions in our insurance costs, which had previously impactedprior year results, as well as our efforts to keep SG&A costs in check withthe 11.9% increase in our net sales. Because of the uncertainties surrounding our nation’s recent disaster,we fully anticipate raw material and natural gas costs will continue to rise inthe near term.  If the general health ofthe economy remains positive, it is our hope that we can keep pace with thesecost escalations by continuing to institute price increases and from thesavings obtained from our recently installed energy efficient equipment.

 

Total interest expense decreased $14,900 to$196,900 in fiscal 2005, compared to $211,800 and $266,000 in fiscal 2004 and2003, respectively.  Although our debtlevel is down $1.2 million in comparison to amounts outstanding at the end offiscal 2004, any potential savings in interest costs for borrowings not coveredunder our interest rate swap agreement have been diminished by an increase inthe bank’s prime interest rate of 2% over the last twelve months.  The converse was true in fiscal 2004, whichbenefited from historically lower interest rates coupled with a more favorabledebt structure as compared to fiscal 2003. Because of our interest rate swap agreement, which matures in August 2006,we do not foresee any significant increases in future interest costs even ifadditional rate hikes are instituted.

 

Income taxes were $1,119,300, $898,500 and$677,400 in fiscal 2005, 2004 and 2003, respectively.  The majority of our income tax provisionrelates to current taxes due and is consistent with the respective level of taxableincome between the periods.

 

Net income increased $465,700 to $1,769,900,or $.15 per common share, for fiscal 2005 compared to $1,304,200, or $.11 percommon share, in fiscal 2004.  The 11.9%increase in our net sales in fiscal 2005 continued to play a pivotal role inboosting our net income by 35.7%.  Theincreased revenues provided a stronger base to cover our fixed operating andSG&A costs and helped mitigate the ongoing volatility we have experiencedin raw material and utility costs. Secondarily, we will continue to benefit from our existing as well asfuture installations of energy efficient equipment that continue to improve ouroperating efficiencies.  Although therecent events that have stricken our great nation have temporarily cloudedfuture market conditions, as a leader in our industry we will strive to takeadvantage of all opportunities as they present themselves.

 

Net income increased $147,600 to $1,304,200,or $.11 per common share, for fiscal 2004 compared to $1,156,600, or $.09 percommon share, in fiscal 2003.  The secondhalf of fiscal 2004 offered a renewed vigor in the marketplace, that coupledwith our efforts to improve sales volumes through enhanced product offeringsand productivity resulted 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 challenged our operations, along with the $200,000 fiscal2004 inventory write down.  We successfullyrecouped a portion of these costs, which coupled with the reduction in SG&Aand interest costs provided the 12.8% increase in current years net income.

 

**Liquidity and CapitalResources**

 

Working capital increased $816,700 to$8,573,000 at June 30, 2005, compared to $7,756,300 at June 30, 2004.  Working capital benefited from the $465,700increase in our net income, the $388,000 in proceeds received from the sale ofour Wisconsin property, collection of note receivable payments anddistributions from our partnership investment. These influxes of capital were used to purchase resin, pay our $.05common stock dividend and pay down our bank line of credit.  Cash flows from operations increased $811,000to $3,326,600 in fiscal 2005 compared to $2,515,600 for the same period lastyear.  The increase again is primarilyrelated to the $465,700 increase in our net income and cash flows obtained fromaccounts receivable reductions that were offset by a decrease in accountspayable and an increase in inventories that is consistent with current productionrequirements and to take advantage of preferred resin pricing.

 

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We expended $1,801,000 for property, plantand equipment (“PP&E”) in fiscal 2005, compared to $1,525,000 in fiscal2004.  During fiscal 2005, we placed intoservice three new energy efficient rotational molding machines at a combinedcost of $817,300 with the balance of our expenditures primarily going to newtooling and various tooling and machinery enhancement projects.  These expenditures continue to mirror ourcommitment to allocate funding for capital expenditure projects that haveprovided us with the foundation to improve our operating efficiencies andpromote increased sales revenues.  Weanticipate capital expenditures to total between $1.2-$1.5 million in fiscal2006, which currently includes the installation of one new energy efficientrotational molding machine.

 

Net borrowings under the line of creditdecreased $327,900 to $1,029,400 between June 30, 2004 and June 30,2005. The decrease is due to cash flows obtained from the increase in our netincome and overall reductions in outstanding accounts receivable balances.  In addition, since June 30, 2004, ourtotal debt borrowings have also declined by $1,192,200.  We anticipate that this trend will continuethrough fiscal 2006.  At June 30,2005, we had $3,970,600 available for future borrowings under the line ofcredit.

 

Effective October 1, 2004, the bankextended the maturity date on the line of credit to October 1, 2006.  In addition, the maturity date for the letterof credit subfeature of our credit facility was extended to February 1,2007.  All other terms and conditionssurrounding our credit facility with the bank remained the same.

 

The following is a summary of the Company’scontractual commitments associated with its debt and lease obligations as of June 30,2005:

 
| ** **                   | ** ** | **For the year ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | **2006**                             | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Principal payments-term debt |       | $                                    | 864,300    |       | $          | 252,400    |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 1,116,700 |   |
|                         |       |                                 |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Line of credit               |       | —                               |       | 1,029,400  |       | —     |       | — |   | — |   | — |   | 1,029,400 |   |
|                         |       |                                 |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Operating leases             |       | 1,071,200                            |       | 1,029,900  |       | 1,027,300  |       | 1,024,000 |   | 921,400 |   | 1,948,900 |   | 7,022,700 |   |
|                         |       |                                 |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Total commitments            |       | $                                    | 1,935,500  |       | $          | 2,311,700  |       | $ | 1,027,300 |   | $ | 1,024,000 |   | $ | 921,400 |   | $ | 1,948,900 |   | $ | 9,168,800 |   |

 

In fiscal 2005, we acquired 40,560 shares ofcommon stock at a total cost of $98,400, which completed our 2001 buybackprogram.  In June 2005, the Board ofDirectors approved a new buyback program to acquire up to $1,000,000 of theCompany’s common stock.  This buybackprogram does not have an expiration date. At June 30, 2005, we had 11,940,598 shares of common stockoutstanding.

 

On June 28, 2005, the Board declared adividend of $.05 per share of common stock payable on July 29, 2005 tostockholders of record on July 18, 2005. This marks the ninth payment of dividends since 1996 on our commonstock.  The Board is committed toannually review a dividend program for our common stock.

 

Cash flows from operations in conjunctionwith our revolving line of credit are expected to meet our needs for workingcapital, capital expenditures, common stock repurchases and repayment of longterm debt for the foreseeable future.

 

**Recent AccountingPronouncements**

 

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”)No. 123R (“Share-Based Payment”).  SFAS 123R requires the Company to recognizecompensation expense for equity instruments awarded to employees.  SFAS123R is effective for the Company as of the beginning of the first interimperiod that begins after June 15, 2005.  The Company does not expectthe adoption of this standard to have a significant impact on its consolidatedfinancial statements.

 

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs” (“SFAS 151”), an amendment of ARB No. 43, Chapter4.  SFAS 151 clarifies the accounting forabnormal amounts of idle facility expense, freight, handling costs and wastedmaterial.  SFAS 151 is effective forinventory costs incurred during fiscal years beginning after June 15,2005.  The Company does not believeadoption of SFAS 151 will have a material effect on its consolidated financialposition, results of operations or cash flows.

 

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In December 2004,the FASB issued SFAS No. 153 “Exchanges of Nonmonetary Assets – anamendment of APB Opinion No. 29.” This standard amends APB Opinion No. 29, “Accounting forNonmonetary Transactions”, by eliminating the exception to fair valuemeasurement for exchanges of similar productive assets and replaces it with ageneral exception for exchange transactions that do not have commercialsubstance – that is, transactions that are not expected to result insignificant changes in the cash flows of the reporting entity.  SFAS No. 153 will become effective forthe Company as of the first interim period that begins after June 15,2005.  The Company does not expect theadoption of this standard to have a material effect on its consolidatedfinancial position, results of operation or cash flows.

 

**Off-Balance SheetArrangements and Contractual Obligations**

 

The Company has no off-balance sheet arrangements orsignificant guarantees to third parties not fully recorded in our balancesheets or fully disclosed in our notes to consolidated financialstatements.  The Company’s significantcontractual obligations include our debt agreements and lease commitments.  Certain financial and operating restrictionsunder these agreements are fully disclosed in notes 7 and 8 of the consolidatedfinancial statements.

 

**Critical AccountingPolicies**

 

Our consolidated financial statements are prepared inaccordance with accounting principles generally accepted in the United States (“GAAP”).  These accounting principles require us tomake certain estimates, judgments and assumptions.  We believe that the estimates, judgments andassumptions upon which we rely are reasonable based upon information availableto us at the time that these estimates, judgments and assumptions aremade.  These estimates, judgments andassumptions can affect the reported amounts of assets and liabilities as of thedate of the financial statements, as well as the reported amounts of revenuesand expenses during the periods presented. To the extent there are materialdifferences between these estimates, judgments or assumptions and actualresults, our financial statements will be affected.  In many cases, the accounting treatment of aparticular transaction is specifically dictated by GAAP and does not requiremanagement’s judgment in its application. There are also areas in which management’s judgment in selecting amongavailable alternatives would not produce a materially different result.  Our senior management has reviewed thesecritical accounting policies and related disclosures with our Audit Committee.

 

The significant accounting policies that we believeare the most critical to aid in fully understanding and evaluating our reportedfinancial results include the following:

 

Accounts receivable

 

We make judgments as to our ability to collectoutstanding receivables and provide allowances for the portion of receivableswhen collection becomes doubtful. Provisions are based on a percentage of net sales and a specific reviewof all significant outstanding receivable balances.  Percentages applied may vary based on analysisof historical collection experience or current economic trends.  If the data we use to calculate the allowancefor doubtful accounts does not reflect the future ability to collectoutstanding receivables, additional provisions for doubtful accounts may beneeded and the results of operations could be affected.

 

Inventory valuation

 

Finished goods inventory is valued at cost andmanagement uses historical gross margin trends and other estimates tocontinually 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, productionefficiency, obsolescence, scrap, design changes, customer preferences,etc.  As such, the Company must regularlycount 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, thenumber of locations and the large number of inventory items, adjustments to thecounts

 

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do occur on a regular basis.  Although we believe that our inventory countsand values are reasonable the inventory does have some inherit estimates thatcould impact our balance sheet and results of operations.

 

Impairments of Long-Lived Assets

 

In accordance with the methodology described in FASBStatement No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” we review long-lived assets for impairment whenever eventsor changes in circumstances indicate the carrying amount of such assets may notbe recoverable.  Impairment losses arerecorded on long-lived assets used in operations when indicators of impairmentare present and the undiscounted cash flows estimated to be generated by thoseassets are less than the assets’ carrying amounts.  The impairment loss is measured by comparingthe fair value of the asset to its carrying amount.  No impairments were recorded in the financialstatements included in this Form 10-K.

 

Revenue Recognition

 

Revenuesare recognized from the sale of our products upon shipment, provided thatpersuasive evidence of a sales arrangement exists, the price is fixed ordeterminable, title has transferred, and collectibility of the resultingreceivable is reasonably assured.  Titleand risk of loss transfer to the customer when the product leaves the Company’sfacility.

 

Income taxes

 

Under SFAS No. 109, “Accounting for Income Taxes,”income taxes are recorded based on the current amounts payable or refundable,as well as the consequences of events that give rise to deferred tax assets andliabilities based on differences in how those events are treated for taxpurposes.  We base our estimates ofdeferred tax assets and liabilities on current tax laws and rates and incertain 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, whichare available to offset taxable income, are also subject to limitations shoulda “change in ownership” 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, we recorded a valuation allowance toreduce its deferred tax assets to the amount of future tax benefit that is morelikely than not to be realized.  Whilemanagement has considered future taxable income and ongoing prudent andfeasible tax planning strategies in assessing the need for the valuationallowance, there is no assurance that the valuation allowance would not need tobe increased to cover additional deferred tax assets that may not berealized.  Any increase in the valuationallowance could have a material adverse impact on our income tax provision andnet income for the period in which such determination is made.

 

# **Factors That May AffectOur Future Results or the Market Price of Our Stock**

 

Weoperate in a rapidly changing economic environment that presents numerousrisks.  Many of these risks are beyondour control and are driven by factors that we cannot predict.  The following discussion highlights some ofthese risks.

 

Economic, political and market conditions canadversely affect our revenue growth**.**

 

Our revenue growth and profitability dependson the overall demand for plastic products for commercial, recreational andresidential uses.  Because our sales areprimarily to corporate and government customers, our business depends ongeneral economic and business conditions. In the past, the general weakening of the global economy, the weakeningof business conditions in the manufacturing industry, and governmentalbudgetary constraints have resulted in a decreased demand for ourproducts.  If demand for our productsweakens again, our revenue growth rates will be adversely affected.  In addition, our country’s war on terrorism,the recent natural disaster that hit our Gulf Coast, as well as federal andstate budgetary concerns, have contributed to economic, political and otheruncertainties that could adversely affect our revenue growth and results ofoperations.  If economic and marketconditions do not remain healthy, our business will be adversely affected.

 

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

 

If wedo not successfully manage our operating margins, our business can benegatively impacted.

 

Our future operating results will depend onour ability to forecast revenues accurately and control expenses.  While we can control certain internalfactors, our future operating results can be adversely impacted by externalfactors, such as a slowing in demand for certain of our products.  If there is an unexpected decline inrevenues, which is not offset by a decrease in expenses, our business andoperating results will be adversely affected.

 

We may be required to change our businesspractices if there are changes in accounting regulations and relatedinterpretations and policies.

 

Policies, guidelines and interpretationsrelated to revenue recognition, income taxes, facilities consolidation,accounting for acquisitions, allowances for doubtful accounts and otherfinancial reporting matters require difficult judgments as to complex mattersthat are often subject 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.

 

Business disruptions could affect our futureoperating results.

 

Our operating results and financial conditioncould be materially and adversely affected in the event of a major earthquake,fire or other catastrophic event, such as terrorist attacks upon the UnitedStates.  Our corporate headquarters, asignificant portion of our research and development activities and certainother critical business operations are located in California, near majorearthquake faults.  A catastrophic eventthat results 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 “rolling blackouts.”  These blackouts, blackouts in other regionsor procedures implemented to avert blackouts could cause disruptions to ouroperations and the operations of our customers. Such disruptions, particularly at the end of a quarter, could adverselyaffect quarterly revenues and net income.

 

*Our stock price could remain volatile and your investment could losevalue.*

* *

Our stock price has fluctuated widely in thepast and could continue to do so in the future. Your investment in our stockcould lose value. Some of the factors that could significantly affect themarket price of our stock include:

 

•                  quarterly variationsin our results of operations or those of our competitors;

•                  changes in our orour competitors’ prices;

•                  changes in ourrevenue and revenue growth rates as a whole or for specific geographic areas,business units, products or product categories;

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

•                  changes inmanagement;

•                  changes in ouraccounting policies;

•                  changes inrecommendations or earnings estimates by financial analysts;

•                  speculation in thepress or analyst community;

•                  changes in economicand market conditions either generally or specifically to particularindustries;

•                  changes in plasticresin and natural gas costs;

•                  changes in interestrates; and

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

 

A significant drop in our stock price couldexpose us to the risk of securities class action lawsuits.  Defending against such lawsuits could resultin substantial costs and divert management’s attention and resources.  Furthermore, any settlement or adversedetermination of these lawsuits could adversely affect us.

 

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Item 7a. Quantitative and QualitativeDisclosures About Market Risk

 

**Interest Rate Risk**

 

We are exposed to certain market risks relating tointerest rate volatility on its existing and future issuances of variable ratedebt with the bank.  Primary exposuresinclude movements in U.S. Treasury rates and LIBOR rates, which in turn affectthe bank’s prime and LIBOR option rates.

 

We had approximately $2.1 million of variablerate debt as of June 30, 2005.  Inefforts to reduce interest rate volatility and mitigate exposure on variablerate debt, we entered into an interest rate swap effective July 15, 1998,as amended on August 15, 2002.  Theswap, which has a notional amount of $3 million as of June 30, 2005,stepped down to $2 million on August 15, 2005 and will remain at thisamount until its expiration on August 15, 2006.  The swap fixes the bank’s LIBOR option rateat 4.83% over the term of the contract. The fair value of the swap, net of tax, amounted to ($15,800) as of June 30,2005.  If interest rates increased by 1%during fiscal 2006 as compared to fiscal 2005, and additional borrowings arenot incurred, we would not expect a significant increase in projected fiscal2006 interest expense.

 

Item 8. Financial Statements and Supplementary Data

 

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

 

Item 9. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure

 

None.

 

Item 9a.Controls and Procedures

 

We maintain disclosure controls andprocedures designed to ensure that information required to be disclosed inreports filed under the Securities and Exchange Act of 1934, as amended (the “ExchangeAct”), is recorded, summarized and processed within time periods specified inthe SEC’s rules and forms.  As ofthe end of the period covered by this report (the “Evaluation Date”), wecarried out an evaluation, under the supervision and with the participation ofour management, including our president and chief executive officer and ourchief financial officer, of the effectiveness of the design and operation ofour disclosure controls procedures pursuant to Rule 13a-14 under theExchange Act.  Based upon thisevaluation, our president and chief executive officer and our chief financialofficer concluded that, as of the Evaluation Date, our disclosure controls andprocedures were effective under Rules 13a-14.

 

There has been no change in our internalcontrols over financial reporting during our most recent fiscal quarter thathas materially affected, or is reasonably likely to materially affect, ourinternal controls over financial reporting.

 

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PART III

 

Item 10. Directors and Executive Officers of the Registrant

 

Directors

 

The Company incorporates by reference theinformation set forth under the caption “Election of Directors” in the ProxyStatement to be filed with the Securities and Exchange Commission, and mailedto stockholders in connection with the Company’s Annual Meeting of theStockholders to be held on December 5, 2005 (“the Proxy Statement”)

 

Executive Officers

 

As of September 6, 2005, the executiveofficers of the Company were as follows:

 
| **Name**           | ** ** | **Age** | ** ** | **Position**                                               |
|--------------------|------------|---------|------------|------------------------------------------------------------|
| Sherman McKinniss  |       | 69      |       | Chairman of the Board, President, Chief  Executive Officer |
| E. Paul Tonkovich  |       | 67      |       | Secretary, Director                                        |
| Douglas W. Russell |       | 44      |       | Chief Financial Officer, Assistant  Secretary/Treasurer    |

 

Sherman McKinniss.  Mr. McKinniss served asPresident and Chief Executive Officer from August 1991 to December 2001 andagain was appointed President and Chief Executive Officer in June 2003.  Mr. McKinniss has also served as Director ofthe Company since 1991, and was appointed as Chairman of the Board in December1994.  He was President and a Director ofRotonics from 1987-1991.  Previously, heowned and operated RMI, which he sold to the Company in 1986.  Mr. McKinniss is also a 50% owner of AtlanticMeeco, Inc., a marina dock building company, and has served as a board memberof that company since 1993.

 

E. Paul Tonkovich.  Mr. Tonkovich has served asSecretary and a Director of the Company since August 1991.  He has been a practicing attorney sinceJanuary 1966.  He was legal counsel toMr. McKinniss and predecessors of the Company and is now legal counsel for theCompany.

 

Douglas W. Russell.  Mr. Russell has served asChief Financial Officer and Assistant Secretary/Treasurer of the Company since1991.  Prior to that, he was a SeniorAuditor for the accounting firm Hallstein & Warner from 1988 until 1991,and was Assistant Controller of RMI from September 1985 to September 1987.

 

Item 11.  Executive Compensation

 

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

 

Item 12.  Security Ownership of Certain Beneficial Owners and Management

 

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

 

Item 13.  Certain Relationships and Related Transactions

 

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

 

Item14.   Principal Accounting Fees andServices

 

The information required by this item isincorporated herein by reference to the caption “Ratification of Appointment ofIndependent Auditors” in the definitive Proxy Statement for our 2005 AnnualMeeting of Stockholders that will be filed with the SEC within 120 days afterthe end of the fiscal year 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 of this report:

 
| (1)    | Financial Statements:                                                                                        |                                                                          |
|--------|--------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------|
|   |                                                                                                         |                                                                          |
|   | Report of Independent Registered Public Accounting Firm                                                      |                                                                          |
|   | Consolidated Balance Sheets, June 30, 2005 and 2004                                                          |                                                                          |
|   | Consolidated Statements of Operations and  Comprehensive Income,   Years Ended June 30, 2005, 2004, and 2003 |                                                                          |
|   | Consolidated Statements of Changes in  Stockholders’ Equity,  Years Ended June 30, 2005, 2004, and 2003 |                                                                          |
|   | Consolidated Statements of Cash Flows,  Years Ended June 30, 2005, 2004, and 2003                            |                                                                          |
|   | Notes to Consolidated Financial Statements                                                                   |                                                                          |
|   |                                                                                                         |                                                                          |
| (2)    | Financial Statement Schedules:                                                                               |                                                                          |
|   |                                                                                                         |                                                                          |
|   | II                                                                                                           | Valuation and Qualifying Accounts,  Years Ended June 30, 2005, 2004, and 2003 |   |
|        |                                                                                                              |                                                                               |  |

 

All other schedules are omitted because theyare not applicable, or the required information is shown in the financial statementsor notes thereto.

 

(b)                                 Reports on Form 8-K

 

On April 18, 2005, we filed acurrent report of Form 8-K reporting under item 2.02, Results of Operations andFinancial Condition, announcing our press release dated April 18, 2005outlining our unaudited financial results for the nine months and three monthsended March 31, 2005.

 

(c)                                  The following exhibits are filed or furnished as part of thisreport:

 
| **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 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|   |   | ROTONICS MANUFACTURING INC. |
|--------|--------|-----------------------------|
|   |   |                        |   |
|   |   |                        |   |
|   |   | By                          |   | /s/        SHERMAN McKINNISS |
|   |   |                        |   | Sherman McKinniss |
|   |   |                        |   | President, Chief Executive Officer |
|   |   |                        |   | Chairman of the Board |
|   |   |                        |   | Date 09/22/2005 |
|   |   |                        |   |   |
|   |   |                        |   |   |
|   |   | By                          |   | /s/     DOUGLAS W. RUSSELL |
|   |   |                        | Douglas W. Russell |
|   |   |                        | Chief Financial Officer |
|   |   |                        | Assistant Secretary/Treasurer |
|   |   |                        | Date 09/22/2005 |

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

 
| **Signature**                    | ** ** | ** ** | **Title**           | ** ** | **Date**   |
|----------------------------------|------------|------------|---------------------|------------|------------|
|                             |       |       |                |       |       |
| /s/   E. PAUL TONKOVICH     |       |       | Secretary, Director |       | 09/22/2005 |
| E. Paul Tonkovich                |       |       |                |       |       |
|                             |       |       |                |       |       |
|                             |       |       |                |       |       |
| /s/   BRENT A. BROWN        |       |       | Director            |       | 09/22/2005 |
| Brent A. Brown                   |       |       |                |       |       |
|                             |       |       |                |       |       |
|                             |       |       |                |       |       |
| /s/   LARRY M. DEDONATO     |       |       | Director            |       | 09/22/2005 |
| Larry M. DeDonato                |       |       |                |       |       |
|                             |       |       |                |       |       |
|                             |       |       |                |       |       |
|  /s/   LARRY L. SNYDER |       |       | Director            |       | 09/22/2005 |
| Larry L. Snyder                  |       |       |                |       |       |
|                             |       |       |                |       |       |
|                             |       |       |                |       |       |
|  /s/   MARC L. BERMAN  |       |       | Director            |       | 09/22/2005 |
| Marc L. Berman                   |       |       |                |       |       |
|                             |       |       |                |       |       |
|                             |       |       |                |       |       |
| /s/   JULES SANDFORD        |       |       | Director            |       | 09/22/2005 |
| Jules Sandford                   |       |       |                |       |       |
|                             |       |       |                |       |       |
|                             |       |       |                |       |       |
| /s/   BILL ALLEN            |       |       | Director            |       | 09/22/2005 |
| Bill Allen                       |       |       |                |       |       |

 

20

----

 

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

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

 

We have audited the accompanying consolidatedbalance sheets of ROTONICS MANUFACTURING INC. (a Delaware corporation) as ofJune 30, 2005 and 2004 and the related consolidated statements of operationsand comprehensive income, changes in stockholders’ equity and cash flows foreach of the three years in the period ended June 30, 2005.  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 withthe standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonablebasis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of Rotonics Manufacturing Inc. as of June 30,2005 and 2004, and the results of its operations and its cash flows for each ofthe three years in the period ended June 30, 2005 in conformity with accountingprinciples generally accepted in the United States.

 

Our audits were made for the purpose offorming an opinion on the basic financial statements taken as a whole.  The schedule listed in the index appearingunder Item 15(a)(2) is presented for purposes of complying with the Securitiesand Exchange Commission’s rules and is not a required part of the basicfinancial statements.  This schedule hasbeen subjected to the auditing procedures applied in our audits of the basicfinancial statements and, in our opinion, is fairly stated in all materialrespects in relation to the basic financial statements taken as a whole.

 

 
| /s/ WINDES & McCLAUGHRY ACCOUNTANCY  CORPORATION |   |
|------------------------------------------------------|--------|
|                                                 |
|                                                 |
| Long Beach, California                               |
| August 12, 2005                                      |

 

F-1

----

 

ROTONICS MANUFACTURING INC.

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                                 | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|
| ** **                                                                                                                                 | ** ** | **2005**     | ** ** | **2004** | ** ** |
| ASSETS                                                                                                                                     |       |         |       |   |   |
| Current assets:                                                                                                                            |       |         |       |   |   |
| Cash                                                                                                                                       |       | $            | 310,500    |   | $ | 56,500 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $291,500 and $256,100, respectively                                        |       | 5,430,800    |       | 5,784,900 |   |
| Inventories                                                                                                                                |       | 6,974,000    |       | 6,629,000 |   |
| Deferred income taxes, net                                                                                                                 |       | 226,900      |       | 243,700 |   |
| Prepaid expenses and other current assets                                                                                                  |       | 215,700      |       | 266,500 |   |
|                                                                                                                                       |       |         |       |   |   |
| Total current assets                                                                                                                       |       | 13,157,900   |       | 12,980,600 |   |
|                                                                                                                                       |       |         |       |   |   |
| Notes receivable                                                                                                                           |       | —       |       | 138,600 |   |
| Investment in partnership                                                                                                                  |       | —       |       | 100,900 |   |
| Property, plant and equipment, net                                                                                                         |       | 13,196,700   |       | 13,849,700 |   |
| Intangible assets, net                                                                                                                     |       | 171,100      |       | 216,700 |   |
| Other assets                                                                                                                               |       | 64,500       |       | 65,300 |   |
|                                                                                                                                       |       |         |       |   |   |
|                                                                                                                                       |       | $            | 26,590,200 |   | $ | 27,351,800 |   |
|                                                                                                                                       |       |         |       |   |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                 |       |         |       |   |   |
|                                                                                                                                       |       |         |       |   |   |
| Current liabilities:                                                                                                                       |       |         |       |   |   |
| Current portion of long-term debt                                                                                                          |       | $            | 864,300    |   | $ | 864,300 |   |
| Accounts payable                                                                                                                           |       | 2,819,300    |       | 3,450,900 |   |
| Accrued liabilities                                                                                                                        |       | 901,300      |       | 909,100 |   |
|                                                                                                                                       |       |         |       |   |   |
| Total current liabilities                                                                                                                  |       | 4,584,900    |       | 5,224,300 |   |
|                                                                                                                                       |       |         |       |   |   |
| Bank line of credit                                                                                                                        |       | 1,029,400    |       | 1,357,300 |   |
| Long-term debt, less current portion                                                                                                       |       | 252,400      |       | 1,116,700 |   |
| Deferred income taxes, net                                                                                                                 |       | 2,304,200    |       | 2,393,300 |   |
| Other liabilites                                                                                                                           |       | 119,000      |       | 83,000 |   |
|                                                                                                                                       |       |         |       |   |   |
| Total liabilities                                                                                                                          |       | 8,289,900    |       | 10,174,600 |   |
|                                                                                                                                       |       |         |       |   |   |
| Commitments and contingencies (Note 14)                                                                                                    |       |         |       |   |   |
|                                                                                                                                       |       |         |       |   |   |
| Stockholders’ equity:                                                                                                                 |       |         |       |   |   |
| Common stock, stated par value $.01:  authorized 20,000,000 shares; issued and outstanding 11,940,598 and  11,981,158 shares, respectively |       | 22,029,500   |       | 22,127,900 |   |
| Accumulated other comprehensive loss                                                                                                       |       | (15,800      | )          | (64,400 | ) |
| Accumulated deficit                                                                                                                        |       | (3,713,400   | )          | (4,886,300 | ) |
|                                                                                                                                       |       |         |       |   |   |
| Total stockholders’ equity                                                                                                            |       | 18,300,300   |       | 17,177,200 |   |
|                                                                                                                                       |       |         |       |   |   |
|                                                                                                                                       |       | $            | 26,590,200 |   | $ | 27,351,800 |   |

 

The accompanying notes are an integral partof these financial statements.

 

F-2

----

 

ROTONICS MANUFACTURING INC.

CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME

 
| ** **                                                                            | ** ** | **For the year ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                  |       |                            |       |   |   |   |   |
| Net sales                                                                             |       | $                               | 45,131,600 |   | $ | 40,332,900 |   | $ | 35,972,100 |   |
| Costs and expenses:                                                                   |       |                            |       |   |   |   |   |
| Cost of goods sold                                                                    |       | 35,190,100                      |       | 31,140,600 |   | 26,927,300 |   |
| Gross profit                                                                          |       | 9,941,500                       |       | 9,192,300 |   | 9,044,800 |   |
| Selling, general, and administrative  expenses                                        |       | 7,088,500                       |       | 6,888,600 |   | 7,068,700 |   |
| Income from operations                                                                |       | 2,853,000                       |       | 2,303,700 |   | 1,976,100 |   |
|                                                                                  |       |                            |       |   |   |   |   |
| Other income/(expense):                                                               |       |                            |       |   |   |   |   |
| Interest expense                                                                      |       | (196,900                        | )          | (211,800 | ) | (266,000 | ) |
| Other income, net                                                                     |       | 233,100                         |       | 110,800 |   | 123,900 |   |
| Total other income/(expense), net                                                     |       | 36,200                          |       | (101,000 | ) | (142,100 | ) |
|                                                                                  |       |                            |       |   |   |   |   |
| Income before income taxes                                                            |       | 2,889,200                       |       | 2,202,700 |   | 1,834,000 |   |
| Income tax provision                                                                  |       | (1,119,300                      | )          | (898,500 | ) | (677,400 | ) |
|                                                                                  |       |                            |       |   |   |   |   |
| Net income                                                                            |       | 1,769,900                       |       | 1,304,200 |   | 1,156,600 |   |
|                                                                                  |       |                            |       |   |   |   |   |
| Other comprehensive income/(loss), before  tax:                                       |       |                            |       |   |   |   |   |
| Unrealized holding gain/(loss) arising  during the period                             |       | 1,100                           |       | 36,800 |   | (199,200 | ) |
| Less: Reclassification adjustments for  losses included in net income                 |       | 79,900                          |       | 119,400 |   | 149,000 |   |
| Total other comprehensive income/(loss)  before tax                                   |       | 81,000                          |       | 156,200 |   | (50,200 | ) |
| Income tax (provision)/benefit related to  items of other comprehensive income/(loss) |       | (32,400                         | )          | (62,400 | ) | 20,000 |   |
| Total other comprehensive income/(loss),  net of tax                                  |       | 48,600                          |       | 93,800 |   | (30,200 | ) |
| Comprehensive income                                                                  |       | $                               | 1,818,500  |   | $ | 1,398,000 |   | $ | 1,126,400 |   |
|                                                                                  |       |                            |       |   |   |   |   |
| Net income per common share:                                                          |       |                            |       |   |   |   |   |
| Basic and diluted                                                                     |       |                            |       |   |   |   |   |
| Net income                                                                            |       | $                               | 0.15       |   | $ | 0.11 |   | $ | 0.09 |   |

 

The accompanying notes are an integral partof these financial statements.

 

F-3

----

 

ROTONICS MANUFACTURING INC.

CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY

 
| ** **                             | ** ** | ** **       | ** ** | ** **        | ** ** | **Accumulated  Other** | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------------|------------|-------------------|------------|------------------------|------------|-------------|------------|------------|------------|
| ** **                             | ** ** | **Common Stock** | ** ** | **Comprehensive** | ** ** | **Accumulated**        | ** ** | ** **  | ** ** |
| ** **                             | ** ** | **Shares**       | ** ** | **Amount**        | ** ** | **Income/(Loss)**      | ** ** | **Deficit** | ** ** | **Total**  | ** ** |
|                                   |       |             |       |              |       |                   |       |        |       |       |       |
| 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 |       |
|                                   |       |             |       |              |       |                   |       |        |       |       |       |
| Repurchase of common stock             |       | (40,560          | )          | (98,400           | )          | —                 |       | —      |       | (98,400    | )          |
| Common stock dividends                 |       | —           |       | —            |       | —                 |       | (597,000    | )          | (597,000   | )          |
| Other comprehensive income, net of tax |       | —           |       | —            |       | 48,600                 |       | —      |       | 48,600     |       |
|                                   |       |             |       |              |       |                   |       |        |       |       |       |
| Net income                             |       | —           |       | —            |       | —                 |       | 1,769,900   |       | 1,769,900  |       |
|                                   |       |             |       |              |       |                   |       |        |       |       |       |
| Balances, June 30, 2005                |       | 11,940,598       |       | $                 | 22,029,500 |                   | $          | (15,800     | )          | $          | (3,713,400 | ) | $ | 18,300,300 |   |

 

The accompanying notes are an integral partof these financial statements.

 

F-4

----

 

ROTONICS MANUFACTURING INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 
| ** **                                                                         | ** ** | **For the year ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                              |       |                            |       |   |   |   |   |
| Net income                                                                         |       | $                               | 1,769,900  |   | $ | 1,304,200 |   | $ | 1,156,600 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                            |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 2,177,000                       |       | 2,182,700 |   | 2,120,400 |   |
| Gain on sales of plant and equipment                                               |       | (109,600                        | )          | (1,000 | ) | (2,100 | ) |
| Deferred income tax benefit                                                        |       | (104,800                        | )          | (83,300 | ) | (101,800 | ) |
| Provision for doubtful accounts                                                    |       | 146,100                         |       | 100,400 |   | 125,000 |   |
| Changes in assets and liabilities:                                                 |       |                            |       |   |   |   |   |
| Decrease/(increase) in accounts receivable                                         |       | 261,600                         |       | (1,465,600 | ) | 577,300 |   |
| Increase in inventories                                                            |       | (345,000                        | )          | (258,600 | ) | (61,900 | ) |
| Decrease/(increase) in prepaid expenses and  other current assets                  |       | 50,800                          |       | (10,100 | ) | 6,200 |   |
| Decrease/(increase) in other assets                                                |       | 800                             |       | (22,800 | ) | (2,000 | ) |
| (Decrease)/increase in accounts payable                                            |       | (629,500                        | )          | 676,200 |   | 715,100 |   |
| Increase in accrued liabilities                                                    |       | 73,300                          |       | 10,500 |   | 22,300 |   |
| Decrease in income taxes payable                                                   |       | —                          |       | — |   | (128,800 | ) |
| Increase in other liabilities                                                      |       | 36,000                          |       | 83,000 |   | — |   |
| Net cash provided by operating activities                                          |       | 3,326,600                       |       | 2,515,600 |   | 4,426,300 |   |
|                                                                               |       |                            |       |   |   |   |   |
| Cash flows from investing activities:                                              |       |                            |       |   |   |   |   |
| Repayments on notes receivable                                                     |       | 85,000                          |       | 92,100 |   | 116,400 |   |
| Capital expenditures                                                               |       | (1,801,100                      | )          | (1,525,000 | ) | (1,532,600 | ) |
| Proceeds from sales of plant and equipment                                         |       | 432,300                         |       | 1,500 |   | 2,400 |   |
| Distribution from investment in partnership                                        |       | 100,900                         |       | 3,400 |   | 4,400 |   |
| Net cash used in investing activities                                              |       | (1,182,900                      | )          | (1,428,000 | ) | (1,409,400 | ) |
|                                                                               |       |                            |       |   |   |   |   |
| Cash flows from financing activities:                                              |       |                            |       |   |   |   |   |
| Borrowings under line of credit                                                    |       | 11,847,300                      |       | 10,502,100 |   | 7,253,900 |   |
| Repayments under line of credit                                                    |       | (12,175,200                     | )          | (9,526,000 | ) | (7,064,700 | ) |
| Repayments of long-term debt                                                       |       | (864,300                        | )          | (864,200 | ) | (2,257,600 | ) |
| Payment of common stock dividends                                                  |       | (599,100                        | )          | (616,000 | ) | (630,200 | ) |
| Proceeds from exercise of stock options                                            |       | —                          |       | 108,000 |   | — |   |
| Repurchases of common stock                                                        |       | (98,400                         | )          | (679,700 | ) | (340,500 | ) |
| Net cash used in financing activities                                              |       | (1,889,700                      | )          | (1,075,800 | ) | (3,039,100 | ) |
|                                                                               |       |                            |       |   |   |   |   |
| Net increase/(decrease) in cash                                                    |       | 254,000                         |       | 11,800 |   | (22,200 | ) |
| Cash at beginning of year                                                          |       | 56,500                          |       | 44,700 |   | 66,900 |   |
|                                                                               |       |                            |       |   |   |   |   |
| Cash at end of year                                                                |       | $                               | 310,500    |   | $ | 56,500 |   | $ | 44,700 |   |

 

The accompanying notes are an integral partof these financial statements

 

F-5

----

 

ROTONICS MANUFACTURING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1- ORGANIZATION, OPERATIONS ANDSIGNIFICANT 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 2005, 2004, or 2003.  In fiscal 2005, the Company purchased inaggregate approximately 98% of its plastic resin from eight 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 policiesare as follows:

 

Principles of consolidation

 

The consolidated financial statements includethe accounts of the Company and its wholly owned subsidiary, Rotocast PlasticProducts of Tennessee, Inc.  Allintercompany accounts and transactions have been eliminated in consolidation.

 

Revenue recognition

 

Revenues arerecognized from the sale of our products upon shipment, provided thatpersuasive evidence of a sales arrangement exists, the price is fixed ordeterminable, title has transferred, and collectibility of the resultingreceivable is reasonably assured.  Titleand risk of loss transfer to the customer when the product leaves the Company’sfacility.

 

Use of estimates

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements, and the reported amountsof revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

Fair value of financial instruments

 

The carrying value of accounts receivable andtrade payables approximates the fair value due to their short-term maturities.The carrying value of the Company’s line of credit and notes payable isconsidered to approximate fair market value, because the interest rates ofthese instruments are based predominately on variable reference rates.

 

Account receivable and allowance for doubtful accounts

 

The Company records accounts receivable net of a reserve for doubtfulaccounts. The Company estimates its allowance for doubtful accounts based on anassessment of the collectibility of specific accounts and the overall aging ofthe accounts receivable. When evaluating the adequacy of the allowance fordoubtful accounts, the Company analyzes specific trade and other receivables,historical bad debts, customer credits, customer concentrations, customercredit-worthiness, current economic trends and changes in customers’ paymentterms and/or patterns. The Company reviews the allowance for doubtful accountson a quarterly basis and records adjustments as considered necessary. Customeraccounts are written-off against the allowance for doubtful accounts when anaccount is considered uncollectible.

 

F-6

----

 

Inventories

 

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

 

Property, plant and equipment

 

Depreciation is computed using thestraight-line method and the estimated useful lives of the assets range fromthree to thirty-nine years.  When assetsare retired or otherwise disposed of, the cost and related accumulated depreciationare removed from the accounts, and any resulting gain or loss is included inincome for the period.  The cost ofmaintenance and repairs is charged to income as incurred; costs relating tosignificant renewals and betterments are capitalized.

 

Intangible assets

 

Patentsare amortized 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.

 

### Impairmentof long-lived assets

###  

The Company evaluates the recoverability oflong-lived assets and the related estimated remaining lives at each balancesheet date.  Should events or changes incircumstances indicate that the carrying amount may not be recoverable or theuseful life has changed, the Company records an impairment charge or changesthe 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.  Had compensation cost forthe plan been determined in accordance with the fair value method as set out inSFAS No. 123, as amended by SFAS No. 148, the Company’s net income and incomeper common share data would not have been significantly different.

 

Income taxes

 

TheCompany accounts for income taxes pursuant to an asset and liability approachthat requires 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.

 

### Derivativeinstruments

###  

The Company accounts for its derivativeinstruments and hedging activities in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 133, “Accountingfor Derivative Instruments and Hedging Activities*,*”as amended by SFAS No. 149, “Amendment of Statement 133 on DerivativeInstrument and Hedging Activities,” which established methods of accounting andreporting for derivative instruments and hedging activities related to thoseinstruments as well as other hedging activities.

 

Earnings per share

 

Basic earnings per share (“EPS”) is computedby dividing reported earnings by weighted average shares outstanding.  Diluted EPS include the effect of thepotential shares outstanding, including dilutive securities using the treasurystock method.  Potential dilutivesecurities for the Company include outstanding stock options.  The table below details the components of thebasic and diluted EPS calculations:

 

F-7

----

 
| ** **                       | ** ** | **Net Income** | ** ** | **Weighted  Average Shares  Outstanding** | ** ** | **EPS** | ** ** |
|----------------------------------|------------|----------------|------------|-------------------------------------------|------------|---------|------------|
| June 30, 2005                    |       |           |       |                                      |       |    |       |
| Basic EPS                        |       |           |       |                                      |       |    |       |
| Net income                       |       | $              | 1,769,900  |                                      | 11,965,167 |    | $          | 0.15 |   |
| Effect of dilutive stock options |       | —         |       | —                                    |       | —  |       |
| Diluted EPS                      |       | $              | 1,769,900  |                                      | 11,965,167 |    | $          | 0.15 |   |
|                             |       |           |       |                                      |       |    |       |
| 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 |   |

 

Geographic and Product Information

 

All of theCompany’s manufacturing operations are located within the United States.  The Company’s revenues were almostexclusively generated in North America for the years ended June 30, 2005, 2004,and 2003.  The Company categorizes itsproducts into five main groups.  Netsales for these products are summarized as follows:

 
| ** **             | ** ** | **For Year Ended June 30,** | ** ** |
|------------------------|------------|-----------------------------|------------|
| **Product Group:**     | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Contract Manufacturing |       | $                           | 19,343,800 |   | $ | 17,379,600 |   | $ | 14,915,100 |   |
|                   |       |                        |       |   |   |   |   |   |   |   |
| Industrial             |       | 13,991,800                  |       | 12,017,600 |   | 11,058,500 |   |
|                   |       |                        |       |   |   |   |   |
| Marine                 |       | 3,428,600                   |       | 2,975,600 |   | 2,774,700 |   |
|                   |       |                        |       |   |   |   |   |
| Refuse                 |       | 5,226,400                   |       | 4,858,400 |   | 4,029,100 |   |
|                   |       |                        |       |   |   |   |   |
| Consumer               |       | 3,141,000                   |       | 3,101,700 |   | 3,194,700 |   |
|                   |       |                        |       |   |   |   |   |
| Total net sales        |       | $                           | 45,131,600 |   | $ | 40,332,900 |   | $ | 35,972,100 |   |

 

Impact of Recent Accounting Pronouncements

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standard (“SFAS”) No. 123R (“Share-BasedPayment”).  SFAS 123R requires the Company to recognize compensation expensefor equity instruments awarded to employees.  SFAS 123R is effective forthe Company as of the beginning of the first interim period that begins afterJune 15, 2005.  The Company does not expect the adoption of this standardto have a significant impact on its consolidated financial statements.

 

In November 2004, the FASB issued SFAS No.151, “Inventory Costs” (“SFAS 151”), an amendment of ARB No. 43, Chapter4.  SFAS 151 clarifies the accounting forabnormal amounts of idle facility expense, freight, handling costs and wastedmaterial.  SFAS 151 is effective forinventory costs incurred during fiscal years beginning after June 15,2005.  The Company does not believeadoption of SFAS 151 will have a material effect on its consolidated financialposition, results of operations or cash flows.

 

In December2004, the FASB issued SFAS No. 153 “Exchanges of Nonmonetary Assets – anamendment of APB Opinion No. 29.”  Thisstandard amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions”,by eliminating the exception to fair value measurement for exchanges of similarproductive assets and replaces it with a general exception for exchangetransactions that do not have commercial substance – that is, transactions thatare not expected to result in significant changes in the cash flows of thereporting entity.  SFAS No. 153 willbecome

 

F-8

----

 

effective forthe Company as of the first interim period that begins after June 15,2005.  The Company does not expect theadoption of this standard to have a material effect on its consolidatedfinancial position, results of operation or cash flows.

 

NOTE 2 – NOTES RECEIVABLE:

 

In July 2001, the Company and a formercustomer agreed to convert an open trade receivable balance due from thecustomer in the amount of $150,000 to a note receivable bearing interest at 8%per annum and maturing on June 15, 2004. In March 2005, the Company reached an out of court settlement with theformer customer that resulted in a write down of the remaining note balancefrom $138,600 to $85,000, a contingency that was accrued in a prior year byincreasing our allowance for doubtful accounts. The remaining balance of the note was paid in full in May 2005.

 

NOTE 3 – INVENTORIES:

 

Inventoriesconsist of:

 
| ** **     | ** ** | **June 30,** | ** ** |
|----------------|------------|--------------|------------|
| ** **     | ** ** | **2005**     | ** ** | **2004** | ** ** |
| Raw materials  |       | $            | 2,470,700  |   | $ | 2,525,900 |   |
| Finished goods |       | 4,503,300    |       | 4,103,100 |   |
|           |       | $            | 6,974,000  |   | $ | 6,629,000 |   |

 

NOTE 4 - INVESTMENT IN PARTNERSHIP:

 

TheCompany owned a 33-1/3% interest in a real estate venture that was acquired in1998 and was being accounted for using the equity method.  The investment consisted principally of anote receivable which was payable in monthly installments, including interestat 7%, to 2008.  The principal portion ofthe note receivable was paid in full in June 2005.  The Company anticipates the final dissolutionof the partnership in 2005.

 

NOTE 5 - PROPERTY,PLANT AND EQUIPMENT:

 

Property,plant and equipment consist of:

 
|                                              | ** ** | **For  Year Ended June 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| Land                                              |       | $                            | 1,027,300  |   | $ | 1,039,500 |   |
| Buildings and building improvements               |       | 4,941,500                    |       | 5,291,000 |   |
| Machinery, equipment, furniture and  fixtures     |       | 29,877,100                   |       | 28,938,400 |   |
| Construction in progress                          |       | 28,500                       |       | 164,200 |   |
|                                              |       | 35,874,400                   |       | 35,433,100 |   |
| Less - accumulated depreciation and  amortization |       | (22,677,700                  | )          | (21,583,400 | ) |
|                                              |       | $                            | 13,196,700 |   | $ | 13,849,700 |   |

 

NOTE 6 - INTANGIBLEASSETS:

 

Intangibleassets consist of:

 
| ** **                    | ** ** | **For Year Ended June 30,** | ** ** |
|-------------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| Patents                       |       | $                           | 475,700    |   | $ | 475,700 |   |
| Less accumulated amortization |       | (304,600                    | )          | (259,000 | ) |
| Net patents                   |       | $                           | 171,100    |   | $ | 216,700 |   |

 

Aggregateamortization expense for each of the fiscal years ended June 30, 2005, 2004,and 2003 was $45,600, $45,900 and $46,100, respectively.  Future estimated amortization expense will beapproximately $45,000 for each of the next three years and $34,000 in fiscal2009.

 

NOTE 7 - BANK LINE OF CREDIT:

 

The Company has a $5,000,000 revolving lineof credit with Wells Fargo Bank.  Theline matures on October 1, 2006 and is secured by the Company’s machinery andequipment, accounts receivable and inventories. Interest is payable monthly at the respective bank’s prime rate minus..25% (6.0% per annum at June 30, 2005). In addition, the loan agreement allows the Company to convert theoutstanding principal balance in amounts no less than $250,000 to a LIBOR-basedloan for up to 90-day periods.  At June30, 2005, total borrowings under the Company’s

 

F-9

----

 

line of credit were $1,029,400 of which$1,000,000 was borrowed under the LIBOR option bearing a LIBOR interest of4.24% per annum and maturing July 15, 2005. Proceeds from the loan were usedfor working capital purposes.  At June30, 2005, the Company had approximately $3,970,600 available for future borrowingsunder the revolving line of credit.  Theloan agreement contains various covenants pertaining to tangible net worth, netincome and liquidity ratios, capital expenditures, payments of dividends,payment of subordinated debt as well as various other restrictions.  The Company was in compliance with thesecovenants during fiscal 2005.

 

NOTE 8 - LONG-TERM DEBT:

 

Long-term debtconsists of:

 
| ** **              | ** ** | **For Year Ended June 30,** | ** ** |
|-------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| Note payable - Bank (A) |       | $                           | 1,116,700  |   | $ | 1,981,000 |   |
| Less current portion    |       | (864,300                    | )          | (864,300 | ) |
|                    |       | $                           | 252,400    |   | $ | 1,116,700 |   |

 

----

(A)      On October1, 2000, the bank issued a $6,050,000 seven year note due in monthly principalinstallments of $72,000 plus interest at the bank’s prime rate minus .25% (6.0%per annum at June 30, 2005). In addition, the loan agreement allows the Companyto convert all or a portion of the outstanding principal to a LIBOR-based loanfor periods up to one year.  At June 30,2005, the total outstanding principal balance was under the LIBOR option at4.49% per annum maturing July 15, 2005. The note is secured by the Company’s machinery and equipment, accountsreceivable and inventories and matures October 15, 2007.

 

TheCompany has an interest rate swap agreement with the bank.  The agreement allows the Company to fix aportion of its outstanding term and line of credit debt ($3 million as of June30, 2005) from a variable floating LIBOR rate to a fixed LIBOR rate in effortsto protect against future increases in the banks LIBOR rate.  The notional amount of the swap agreementwill remain at $3 million until August 15, 2005 at which time it will bereduced to $2 million and will remain at this amount through to the swap’smaturity on August 15, 2006.  At June 30,2005 the notional amount of our interest rate swap exceeded our total debtborrowings associated with the swap.  Infiscal 2005, the amount of hedge ineffectiveness for our swap was approximately$5,000.

 

Aggregate annual maturities of long-term debtare summarized as follows:

 
| **Year Ending June 30** | ** ** | ** ** | ** ** |
|-------------------------|------------|------------|------------|
| 2006                    |       | $          | 864,300    |   |
| 2007                    |       | 252,400    |       |
|                    |       | $          | 1,116,700  |   |

 

NOTE 9 – RELATED PARTY TRANSACTIONS:

 

The Company sold molded plastic products andmolds under arms–length terms to Atlantic Meeco, Inc. (“AMI”) a company inwhich the President/CEO/Chairman of the Board of the Company has a 50% equityinterest.  Sales to AMI amounted to$113,400, $75,000 and $101,600 in fiscal years 2005, 2004 and 2003,respectively.  Amounts due on sales to AMIwere $23,600 and $8,100 at June 30, 2005 and 2004, respectively, and are includedin accounts receivable in the accompanying consolidated balance sheet.  In fiscal 2005, the Company also purchased$11,200 of resin from AMI.  No amountswere due AMI as of June 30, 2005.

 

The Company purchased injection moldedproducts under arms-length terms from Custom Plastics (“Custom”) a company inwhich the owner has a 8.5% equity interest in the Company.  Purchases from Custom amounted to $168,100,$172,000 and $141,000 in fiscal 2005, 2004 and 2003 respectively.  Amounts due on purchases from Custom were$2,000 and $8,600 at June 30, 2005 and 2004, respectively, and are included inaccounts payable in the accompanying consolidated balance sheets.

 

In fiscal years 2005, 2004 and 2003, theCompany incurred legal fees and costs amounting to $22,000, $60,100 and$21,000, respectively, for services by E. Paul Tonkovich ProfessionalCorporation, of which an officer/director of the Company is an employee.

 

F-10

----

 

NOTE 10 -ACCRUED LIABILITIES:

 

Accrued liabilitiesconsist of:

 
|                                               | ** ** | **June  30,** | ** ** |
|----------------------------------------------------|------------|---------------|------------|
| ** **                                         | ** ** | **2005**      | ** ** | **2004** | ** ** |
| Salaries, wages, commissions and related  payables |       | $             | 604,900    |   | $ | 572,500 |   |
| Other                                              |       | 296,400       |       | 336,600 |   |
|                                               |       | $             | 901,300    |   | $ | 909,100 |   |

 

NOTE 11 - STOCK OPTION PLAN:

 

The Company has a stock option plan that wasadopted by the Board of Directors on October 7, 2003 and approved byshareholder vote on December 8, 2003. This plan allows at the discretion of the Board of Directors, to grantstock options to key employees, officers, directors and consultants of theCompany to purchase 850,000 shares of the Company’s common stock.  Under the terms and conditions set forth inthe plan, the purchase price of the stock options will be at least 85% of thefair market value of the Company’s common stock on grant date.  The maximum term for options granted underthe plan is ten years and the plan expires on October 6, 2013.

 

Stock Option Activity

 
| ** **                                       | ** ** | **Outstanding  Shares** | ** ** | **Exercisable  Shares** | ** ** | **Weighted  Average Price  Per Share** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|----------------------------------------|------------|
| Balance outstanding at June 30, 2002             |       | 200,000                 |       | 185,000                 |       | $                                      | 1.1000     |   |
| Cancelled-prior plan                             |       | (95,000                 | )          |                    |       | $                                      | 1.0724     |   |
| Balance outstanding at June 30, 2003             |       | 105,000                 |       | 105,000                 |       | $                                      | 1.1250     |   |
| Exercised-prior plan                             |       | (96,000                 | )          |                    |       | $                                      | 1.1250     |   |
| Cancelled-prior plan                             |       | (9,000                  | )          |                    |       | $                                      | 1.1250     |   |
| Balance outstanding at June 30, 2004 &  2005 |       | —                  |       | —                  |       |                                   |       |

 

The Company did not grant any options infiscal 2004 or in fiscal 2005.  At June30, 2005, the Company had 850,000 shares available for future grants.

 

NOTE 12 - COMMON STOCK:

 

In fiscal 2005 and 2004, the Company acquired40,560 and 459,633 shares of its common stock at a total cost of $98,400 and$679,700, respectively.  All sharesacquired were subsequently cancelled.  AtJune 30, 2005 and 2004, there was no outstanding treasury stock.  On June 28, 2005 the Board declared adividend of $.05 per share of common stock payable on July 29, 2005 tostockholders of record on July 18, 2005.

 

NOTE 13 - INCOME TAXES:

 

The componentsof the income tax provision were:

 
| ** ** | ** ** | **For Year Ended June 30,** | ** ** |
|------------|------------|-----------------------------|------------|
| ** ** | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current:   |       |                        |       |   |   |   |   |
| Federal    |       | $                           | (1,031,800 | ) | $ | (811,500 | ) | $ | (667,100 | ) |
| State      |       | (192,300                    | )          | (170,300 | ) | (112,100 | ) |
|       |       | (1,224,100                  | )          | (981,800 | ) | (779,200 | ) |
| Deferred:  |       |                        |       |   |   |   |   |
| Federal    |       | 77,800                      |       | 74,700 |   | 69,900 |   |
| State      |       | 27,000                      |       | 8,600 |   | 31,900 |   |
|       |       | 104,800                     |       | 83,300 |   | 101,800 |   |
|       |       | $                           | (1,119,300 | ) | $ | (898,500 | ) | $ | (677,400 | ) |

 

At June30, 2005, the Company has net operating loss (NOL) carry-forwards ofapproximately $7,344,600 for state income tax purposes.  The NOL carry-forwards, which are availableto offset future taxable income of the Company and are subject to limitationsshould a “change in ownership” as defined in the Internal Revenue Code occur,will begin to expire in 2006 if not utilized. The state NOL carry-forwards expire as follows:

 

F-11

----

 

| **Amount of  Unused State  Operating Loss  Carryforwards** | ** ** | **Expiration  During Year  Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|
| $                                                          | 533,400    |                                        | 2006       |   |
| 582,600                                                    |       | 2007                                        |       |
| 603,100                                                    |       | 2008                                        |       |
| 840,200                                                    |       | 2009                                        |       |
| 242,300                                                    |       | 2010                                        |       |
| 342,700                                                    |       | 2011                                        |       |
| 476,700                                                    |       | 2012                                        |       |
| 395,300                                                    |       | 2013                                        |       |
| 850,400                                                    |       | 2014                                        |       |
| 262,500                                                    |       | 2015                                        |       |
| 482,800                                                    |       | 2016                                        |       |
| 179,800                                                    |       | 2017                                        |       |
| 235,200                                                    |       | 2018                                        |       |
| 716,700                                                    |       | 2019                                        |       |
| 600,900                                                    |       | 2020                                        |       |
| $                                                          | 7,344,600  |                                        |       |   |

 

Inconnection with the Rotocast merger, the Company recorded a deferred tax assetof $394,400, net of a valuation allowance of $192,400 as of June 30, 1998, forthe future benefit related to state NOL carry-forwards.  The current state valuation allowance,amounting to $381,300, represents the estimated amount of state NOL’s that willexpire prior to their utilization.  Thevaluation allowance increased by $22,900 in fiscal 2005 as a result ofadditional state NOL’s incurred that will not be utilized prior to theirexpiration.  Realization of the futuretax benefits of the NOL carry-forwards is dependent on the Company’s ability togenerate taxable income within the carry-forward period.  Management will continue to assess thelikelihood of utilizing its state NOL’s by taking into consideration historicalresults and current economic conditions in which the Company operates.  Management does not consider any non-routinetransactions in assessing the likelihood of realization of the recordeddeferred tax asset.  Any futureadjustments to the valuation allowance will be reflected as a component of thecurrent years tax provision.

 

### Thefollowing reconciles the federal statutory income tax rate to the effectiverate of the provision for income taxes:

 
| ** **                                  | ** ** | **For Year Ended June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Federal statutory rate                      |       | 34.0                        | %          | 34.0 | % | 34.0 | % |
| State income taxes (net of federal benefit) |       | 4.0                         |       | 4.0 |   | 3.8 |   |
| Other items, net                            |       | 0.7                         |       | 2.8 |   | (0.9 | ) |
| Effective income tax rate                   |       | 38.7                        | %          | 40.8 | % | 36.9 | % |

 

Deferredtax assets and liabilities are summarized as follows:

 
| ** **                                             | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------|------------|--------------|------------|
| ** **                                             | ** ** | **2005**     | ** ** | **2004** | ** ** |
| Deferred tax assets:                                   |       |         |       |   |   |
| State NOL (net of federal benefit)                     |       | $            | 406,800    |   | $ | 408,300 |   |
| Employment-related reserves                            |       | 93,200       |       | 102,400 |   |
| Allowance for doubtful accounts                        |       | 116,600      |       | 102,400 |   |
| Interest rate swap derivative                          |       | 10,500       |       | 43,000 |   |
| Other liabilities                                      |       | 44,600       |       | 33,200 |   |
|                                                   |       | 671,700      |       | 689,300 |   |
| Deferred tax liabilities:                              |       |         |       |   |   |
| Depreciation and amortization                          |       | (2,367,700   | )          | (2,480,500 | ) |
| Net deferred tax liability before valuation  allowance |       | (1,696,000   | )          | (1,791,200 | ) |
| Deferred tax assets valuation allowance                |       | (381,300     | )          | (358,400 | ) |
| Net deferred tax liability                             |       | $            | (2,077,300 | ) | $ | (2,149,600 | ) |

 

F-12

----

 

NOTE 14 - COMMITMENTS AND CONTINGENCIES:

 

Commitments

 

TheCompany leases various office and warehouse facilities, and equipment underlong-term operating leases expiring through March 2013.  Certain of the leases provide for five-yearrenewal options and rental increases based on the Consumer Price Index.  Operating lease expense for fiscal 2005,2004, and 2003 amounted to $1,143,400, $1,119,800 and $1,122,400, respectively.

 

At June 30, 2005, the future minimum leasecommitments, excluding insurance and taxes, are as follows:

 
| **Year Ending June 30,** |   |      |      |
|--------------------------|--------|-----------|-----------|
| 2006                     |   | $         | 1,071,200 |   |
| 2007                     |   | 1,029,900 |      |
| 2008                     |   | 1,027,300 |      |
| 2009                     |   | 1,024,000 |      |
| 2010                     |   | 921,400   |      |
| Thereafter               |   | 1,948,900 |      |
|                     |   | $         | 7,022,700 |   |

 

Contingencies

 

In the normal course of business, the Companyencounters certain litigation matters, which in the opinion of management willnot have a significant adverse effect on the financial position or the resultsof operations of the Company.

 

NOTE 15 - SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:

 

Supplemental disclosures of cash flowinformation are as follows:

 
| ** **                                 | ** ** | **For the Year Ended June 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash paid during the year for:             |       |                            |       |   |   |   |   |
| Interest                                   |       | $                               | 199,300    |   | $ | 213,300 |   | $ | 272,200 |   |
| Income taxes                               |       | $                               | 1,218,900  |   | $ | 943,500 |   | $ | 925,400 |   |
| Non-cash  financing activities:            |       |                            |       |   |   |   |   |
| Common dividends declared but not paid     |       | $                               | 597,000    |   | $ | 599,100 |   | $ | 616,000 |   |
| Change in fair value of interest rate swap |       | $                               | (48,600    | ) | $ | (93,800 | ) | $ | 30,200 |   |

 

NOTE 16 - UNAUDITED QUARTERLY RESULTS:

 
| ** **                          | ** ** | **Quarter Ended** | ** ** |
|-------------------------------------|------------|-------------------|------------|
| ** **                          | ** ** | **September**     | ** ** | **December** | ** ** | **March** | ** ** | **June** | ** ** |
| Fiscal Year 2005:                   |       |              |       |   |   |   |   |   |   |
| Net sales                           |       | $                 | 11,969,500 |   | $ | 9,935,400 |   | $ | 10,873,200 |   | $ | 12,353,500 |   |
| Gross profit                        |       | 3,024,000         |       | 1,986,800 |   | 2,422,600 |   | 2,508,100 |   |
| Net income                          |       | 657,800           |       | 181,400 |   | 339,800 |   | 590,900 |   |
| Per share:                          |       |              |       |   |   |   |   |   |   |
| Net income-basic and diluted        |       | $                 | .05        |   | $ | .02 |   | $ | .03 |   | $ | .05 |   |
|                                |       |              |       |   |   |   |   |   |   |
| 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 |   |

 

F-13

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ROTONICS MANUFACTURING INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

Years Ended June 30, 2005, 2004 and 2003

 
| ** **                             | ** ** | **Column B**     | ** ** | **Column C**         | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **Balance at**   | ** ** | **Additions**        | ** ** | ** ** | ** ** | **Column E**   | ** ** |
| **Column A**                           | ** ** | **Beginning of** | ** ** | **Charged to Costs** | ** ** | ** ** | ** ** | **Column D**   | ** ** | **Balance at End** | ** ** |
| **Description**                        | ** ** | **Period**       | ** ** | **and Expenses**     | ** ** | **Other**  | ** ** | **Deductions** | ** ** | **of Period** | ** ** |
| June 30, 2005:                         |       |             |       |                 |       |       |       |           |       |   |   |
| Allowance for doubtful accounts        |       | $                | 256,100    |                 | $          | 146,100    |       | $              | —     |   | $ | (110,700 | )(1) | $ | 291,500 |   |
|                                   |       |             |       |                 |       |       |       |           |       |   |   |
| Deferred tax asset valuation allowance |       | $                | 358,400    |                 | $          | —     |       | $              | 22,900     | (2) | $ | — |   | $ | 381,300 |   |
|                                   |       |             |       |                 |       |       |       |           |       |   |   |
| 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 |   |

 

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

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

 

F-14

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