**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**AMENDMENTNO. 1**

**FORM 10-K/A**

 

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

 

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

** **

**Commissionfile number 1-9429**

 

**ROTONICS MANUFACTURING INC.**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                                     |   | **36-2467474**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **17022  South Figueroa Street  Gardena, California**            |   | **90248**                             |
| (Address of principal  offices)                                  |   | (Zip Code)                            |
|                                                             |   |                                  |
| Registrant’s telephone  number, including area code:        |   | **(310)  538-4932**                   |

 

Securities registered pursuant to Section 12(b) of the Act:

 

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

 

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

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) for the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and has been subject to suchfiling requirements for the past 90 days. Yes  ý  No   o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  ý

 

The aggregate market value of the voting stock held by non-affiliatesof the registrant, as of March 21, 2002, was $4,722,900 (1).

 

The number of shares of common stock outstanding at March 21, 2002 was12,767,683.

 

(1) Excludes 7,077,430 shares held by directors, officers andstockholders whose ownership exceeded 5% of the outstanding shares at March 21,2002.  Exclusion of such shares shouldnot be construed to indicate that the holders thereof possess the power, director indirect, to direct the management or policies of registrant, or that suchpersons are controlled by or under common control with the registrant.

 

 

 

TABLE OF CONTENTS

 
| PART II    |
|------------|
|       |
| Item 6     | Selected Financial  Data |
| Item  7    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item 7a    | Disclosures  About Market Risks |
| Item  8    | Financial  Statements and Supplementary Data |
| Item  9    | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure |
|       |
| PART  IV   |
|       |
| Item 14    | Exhibits, Financial Statement  Schedules, and Reports on Form 8-K |
|       |
| SIGNATURES |

 

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PART II

 

**The following selected financial datahas been restated for fiscal years 2001 and 2000 to correctly present a portionof patent defense costs previously capitalized in the fourth quarter of fiscal2001 to the period they were incurred in fiscal 2000.  Appropriate corrections were made to both balance sheet andincome statement accounts to reflect the $76,800 net of tax adjustment.  As a result of the adjustment net income forfiscal 2001 was restated from $550,500 to $473,700 and net income for fiscal2000 was resated from $1,953,700 to $2,030,500.**

 

Item 6.  Selected Financial Data

 
|                                              |   | **Year ended  June 30,** |        |
|---------------------------------------------------|--------|--------------------------|-------------|
|                                              |   | **2001(E)**              |        | **2000(E)** |   | **1999** |   | **1998(B)** |   | **1997** |   |
| Income Statement  Data                            |   |                     |        |   |   |   |   |   |   |   |   |
| Net sales                                         |   | $                        | 40,520,100  |   | $ | 46,647,700 |   | $ | 46,730,900 |   | $ | 38,774,900 |   | $ | 39,814,500 |   |
|                                              |   |                     |        |   |   |   |   |   |   |   |   |
| Cost of goods  sold                               |   | 31,158,700               |        | 34,645,000 |   | 34,566,500 |   | 29,984,400 |   | 29,721,500 |   |
|                                              |   |                     |        |   |   |   |   |   |   |   |   |
| Gross margin                                      |   | 9,361,400                |        | 12,002,700 |   | 12,164,400 |   | 8,790,500 |   | 10,093,000 |   |
|                                              |   |                     |        |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses (C) |   | **7,635,400**            | ** **  | **7,888,900** |   | 8,841,600 |   | 7,327,300 |   | 6,239,600 |   |
|                                              |   |                     |        |   |   |   |   |   |   |   |   |
| Interest expense                                  |   | 743,100                  |        | 955,000 |   | 987,700 |   | 793,700 |   | 556,500 |   |
|                                              |   |                     |        |   |   |   |   |   |   |   |   |
| Net income (D)                                    |   | **$**                    | **473,700** | ** ** | **$** | **2,030,500** |   | $ | 1,326,000 |   | $ | 417,200 |   | $ | 1,441,800 |   |
|                                              |   |                     |        |   |   |   |   |   |   |   |   |
| Basic/diluted  income per common share            |   | $                        | 0.04        |   | $ | 0.14 |   | $ | 0.09 |   | $ | 0.03 |   | $ | 0.10 |   |
|                                              |   |                     |        |   |   |   |   |   |   |   |   |
| Average common  shares outstanding (A)            |   | 12,835,200               |        | 13,981,800 |   | 15,379,400 |   | 14,445,200 |   | 14,134,600 |   |
|                                              |   |                     |        |   |   |   |   |   |   |   |   |
| Other Financial  Data                             |   |                     |        |   |   |   |   |   |   |   |   |
|                                              |   |                     |        |   |   |   |   |   |   |   |   |
| Net income as a  percent of sales                 |   | **1.2**                  | **%**       | **4.4** | **%** | 2.9 | % | 1.1 | % | 3.7 | % |

 

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

 

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

 

(C)     In fiscal1999 and 1998, includes $394,400 and $280,300 respectively, in plantconsolidation expenses.

 

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

 

(E)     Asrestated – see Note 18 of the Company’s Notes to Consolidated FinancialStatements.

 

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|                                 |   | **At June  30,** |       |
|--------------------------------------|--------|------------------|------------|
|                                 |   | **2001**         |       | **2000(D)** |   | **1999** |   | **1998(B)** |   | **1997** |   |
| Balance Sheet  Data                  |   |             |       |   |   |   |   |   |   |   |   |
|                                 |   |             |       |   |   |   |   |   |   |   |   |
| Current assets                       |   | $                | 13,379,700 |   | $ | 14,866,100 |   | $ | 15,701,500 |   | $ | 16,463,600 |   | $ | 12,814,000 |   |
|                                 |   |             |       |   |   |   |   |   |   |   |   |
| Current  liabilities                 |   | 4,185,600        |       | 5,408,300 |   | 5,965,900 |   | 6,452,800 |   | 5,099,700 |   |
|                                 |   |             |       |   |   |   |   |   |   |   |   |
| Working capital  surplus             |   | 9,194,100        |       | 9,457,800 |   | 9,735,600 |   | 10,010,800 |   | 7,714,300 |   |
|                                 |   |             |       |   |   |   |   |   |   |   |   |
| Total assets                         |   | 34,500,800       | ** ** | **37,193,200** |   | 39,300,300 |   | 40,563,800 |   | 30,634,400 |   |
|                                 |   |             |       |   |   |   |   |   |   |   |   |
| Long-term debt                       |   | 7,396,200        |       | 8,569,800 |   | 9,470,600 |   | 10,976,500 |   | 6,486,100 |   |
|                                 |   |             |       |   |   |   |   |   |   |   |   |
| Total  liabilities                   |   | 14,193,700       | ** ** | **16,629,400** |   | 17,866,000 |   | 19,155,900 |   | 11,589,800 |   |
|                                 |   |             |       |   |   |   |   |   |   |   |   |
| Current ratio                        |   | 3.2 to 1         |       | 2.7 to 1 |   | 2.6 to 1 |   | 2.6 to 1 |   | 2.5 to 1 |   |
|                                 |   |             |       |   |   |   |   |   |   |   |   |
| Net book value  per common share (A) |   | $                | 1.59       |   | $ | 1.59 |   | $ | 1.42 |   | $ | 1.35 |   | $ | 1.35 |   |
|                                 |   |             |       |   |   |   |   |   |   |   |   |
| Dividends (C)                        |   | $                | 0.04       |   | $ | — |   | $ | 0.04 |   | $ | 0.04 |   | $ | 0.04 |   |

 

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

 

(B)     Includesthe effect of the Rotocast merger.

 

(C)     Based oncash dividends declared per common share during the respective periods.

 

(D)     Asrestated – see Note 18 of the Company’s Notes to Consolidated FinancialStatements.

 

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

 

Introduction

 

**Management’s discussion and analysisof financial condition and results of operations has been updated to reflectrestatements to fiscal 2001 and 2000 to correctly present patent defense costscapitalized in fiscal 2001 which were incurred in fiscal 2000.  The correction resulted in adjustments toselling, general and administrative expenses, income tax provision, otherassets and deferred income taxes to reflect the net of tax adjustment of$76,800 between the two periods.  Thecorrection did not result in an additional cash outlay nor did it change theCompany’s stockholders’ equity value as of June 30, 2001.  The impact of the restatements on theaccompanying financial statements is as follows:**

 
| **Year Ended  June 30, 2001**      |   | **As  Previously  Reported** |          | **Adjustments** |       | **As  Restated** |       |
|------------------------------------|--------|------------------------------|---------------|-----------------|------------|------------------|------------|
| **Income  before income taxes**    |   | **$**                        | **1,216,500** | ** **      | **$**      | **(128,000**     | **)**      | **$** | **1,088,500** | ** ** |
| **Income  tax provision**          |   | **(666,000**                 | **)**         | **51,200**      | ** ** | **(614,800**     | **)**      |
| **Net  income**                    |   | **$**                        | **550,500**   | ** **      | **$**      | **(76,800**      | **)**      | **$** | **473,700** | ** ** |
|                               |   |                         | ** **    |            | ** ** |             | ** ** |
| **Year Ended June 30, 2000**       |   | **As Previously  Reported**  |          | **Adjustments** |       | **As Restated**  | ** ** |
| **Other  assets**                  |   | **$**                        | **222,300**   | ** **      | **$**      | **128,000**      | ** ** | **$** | **350,300** | ** ** |
| **Deferred  income tax liability** |   | **$**                        | **2,600,100** | ** **      | **$**      | **51,200**       | ** ** | **2,651,300** | ** ** |
| **Income  before income taxes**    |   | **$**                        | **3,172,200** | ** **      | **$**      | **128,000**      | ** ** | **$** | **3,300,200** | ** ** |
| **Income  tax provision**          |   | **(1,218,500**               | **)**         | **(51,200**     | **)**      | **(1,269,700**   | **)**      |
| **Net  income**                    |   | **$**                        | **1,953,700** | ** **      | **$**      | **76,800**       | ** ** | **$** | **2,030,500** | ** ** |

 

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

 

Operations

 

Net sales dipped 13.1% to $40,520,100 in fiscal 2001 compared to$46,647,700 in fiscal 2000.  The $6.1million reduction in sales volumes in fiscal 2001 is attributed to the economicdownturn in our country’s manufacturing sector which has affected all of theCompany’s product lines.  The Companyalso realized heightened competition in reaction to these economic pressureswhich further diminished sales volumes within the Company’s tank, bin lid andcustom product lines.  In line withthis, the Company also lost market share due to an unsuccessful refusecontainer bid, accounting for approximately $1 million in sales reductionduring the comparative period.  Althoughthese trends are not expected to improve quickly, management foresees currentback logs and projected business to improve sales volumes in fiscal 2002.  Also, on a positive note, the Company wasrecently awarded the refuse container business it had lost during fiscal 2001.

 

Net sales were $46,647,700 in fiscal 2000 which was comparable to netsales of $46,730,900 in fiscal 1999. Although sales volumes were static between fiscal 2000 and 1999 dueprimarily to lower refuse sales volumes, the Company continues to see growth inits specialty product, marine and material handling product lines.  Management believes these product groupshave tremendous future growth potential. Management will continue to devise strategies to expand its variousniche markets including new and enhanced product designs to meet target marketrequirements.  Although current marketconditions show continued signs of softening as a result of ongoing economicconditions, management looks forward to hone its marketing strategies tooptimize future results.

 

Cost of goods sold was $31,158,700 or 76.9% of net sales in fiscal 2001compared to $34,645,000 or 74.3% and $34,566,500 or 74.0% of net sales infiscal 2000 and 1999, respectively.  Theincrease is related both to the 13.1% decline in sales volumes in fiscal 2001as well as escalating raw material production costs, natural gas, labor andlabor related insurance and fringe costs. A significant portion of these escalating costs was related to naturalgas costs which amounted to a $625,000 

 

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increase over prior year costs. In addition, escalating resin prices continue to hamper the preservationof target gross margins.  Over the lastseveral years the roto-molding industry continues to experience extremevolatile plastic resin costs.  The costof plastic resin represents a significant portion of the Company’smanufacturing costs and has continually challenged the Company to effectivelymitigate these price increases.  Duringthe years presented, the Company has been relatively successful in mitigatingthese rising costs with ongoing sales price increases, improved manufacturingefficiencies which have reduced scrap output as well as general costcontainment efforts.  Management willcontinue to institute similar practices in fiscal 2002.  Currently raw material and natural gas costshave declined.  However, the Companycontinues to realize substantial increases in wage related insurance and fringecosts.  This coupled with a furtherdiminishing in market conditions and/or future hikes in resin and utility costscould hamper the Company’s goal to maintain consistent future operatingresults.

 

Selling, general and administrative (“SG&A”) expenses were **$7,635,400** or **18.8%**of net sales in fiscal 2001 compared to **$7,888,900** or **16.9%** of net sales in fiscal 2000.  Again, the comparative percentage increase is attributed to lowersales volumes.  However, overallSG&A costs have decreased by **$253,500**.  The reduction is related to a significantreduction in selling costs as a result of lower commission, advertising andtradeshow costs.  Management continue toassess its marketing strategies to focus its resources and efforts in a mannerwhich will optimize exposure for its various product groups.

 

Selling, general and administrative expenses were **$7,888,900** or **16.9%** of net sales in fiscal 2000 compared to $8,447,200 or18.1% of net sales in fiscal 1999. Again, the reduction is the result of management cost containmentefforts which have effectively reduced overall SG&A costs by **$558,300** between the two periods.  Reductions were primarily realized inadvertising and marketing costs and significant reductions in employment wagecosts.  This is consistent with management’sgoal to maintain SG&A levels in line with target sales volumes.

 

The Company incurred $394,400 in fiscal year 1999 in costs related tothe consolidation of three of its plants. The Company began and substantially completed the consolidation of itsArleta, California and Warrminster, Pennsylvania plants in the fourth quarterof fiscal 1998 and then completed the process during the first quarter offiscal 1999.  Shortly after thecompletion of these consolidations, it launched the consolidation of the Miami,Florida Rotocast operation.  Thisconsolidation was completed during the third quarter of fiscal 1999.

 

These consolidations have had a definite positive impact on futureoperating results of the Company. Although the Company had to incur the initial costs associated with theconsolidation process, the future benefits obtainable are unsurpassed.  Through these consolidations, the Companyhas improved manufacturing utilization at its remaining sites and reducedmanufacturing overhead.

 

Income from operations was **$1,726,000**or **4.3%** of net sales in fiscal2001 compared to **$4,113,800** or **8.8%** and $3,322,800 or 7.1% of net sales infiscal 2000 and 1999, respectively.  The**58%** decrease in operating incomein fiscal 2001 is primarily due to the reduction in sales volumes caused by theeconomic downturn coupled with the increased raw material, natural gas andlabor related costs as outlines above. The **23.8%** improvement infiscal 2000 operating income is attributed to the preservation of a favorablegross margin coupled with the reduction in SG&A costs and from plantconsolidations completed in fiscal 1999. Although the Company continues to benefit from its plant consolidationsand ongoing cost containment efforts, future operating results will bechallenged, as we saw in fiscal 2001, by the country’s current economicconditions and escalating cost trends.

 

Total interest expense decreased $211,900 to $743,100 in fiscal 2001compared to $955,000 in fiscal 2000. Although operating results have been lackluster, the Company continuesto generate sufficient cash flows which has decreased the Company’s total debtstructure by approximately $2.2 million in comparison to amounts outstanding asof June 30, 2000.  This factor, alongwith negotiated rate reductions related to the Company’s bank debt and the2.75% drop in the federal discount rate in fiscal 2001, will continue to have apositive effect on reducing future interest costs.

 

Interest expense decreased $32,700 to $955,000 in fiscal 2000 comparedto $987,700 in fiscal 1999.  TheCompany’s cash flows during fiscal 2000 were very strong allowing the Companyto reduce its overall debt structure during the year by approximately $1million.  Even though the bank’sinterest rate has increased 1.75% during fiscal 2000, the overall reduction indebt coupled with our existing interest rate Swap Agreement with the bank haskept interest costs in line with prior results.

 

Income taxes were **$614,800,$1,269,700** and $1,147,500 in fiscal 2001, 2000 and 1999respectively.  A major portion of theCompany’s tax provision is the deferred tax component which amounted to **$511,500, $1,015,500** and $923,400 in fiscal2001, 2000 and 1999 respectively. During the last three years these amounts primarily relate to theutilization of the Company’s federal and state net operating loss (“NOL”)carryforwards and thus do not diminish current cash flow.  In fiscal 2001, the Company fully utilizedits remaining Federal NOL carryforward. At June 30, 2001 the Company had approximately $425,400 in federalalternative minimum tax (“AMT”) credit carryforwards to offset future taxableincome.

 

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Management anticipates fully utilizing this AMT credit in fiscal2002.  Following the utilization of thisAMT credit, the Company will incur increased cashflow requirements for the paymentof current federal taxes.

 

Net income decreased **$1,556,800**to **$473,700** or $.04 per commonshare for fiscal 2001 compared to net income of **$2,030,500** or $.14 per common share in fiscal 2000.  The decrease is related to the 13.1%reduction in sales volumes due to the tightening in the manufacturing sectorcoupled with the 2.6% increase in cost of sales, as a percentage of net sales,related to the escalating raw material, utility and labor related costsincurred during the period.  Managementsees positive trends in current backlogs, but realizes the manufacturing sectorwill continue to face ongoing challenges in its efforts to improve salesvolumes, optimize operating results and absorb inflationary industrycosts.  As such, management remainsfocused to rebuild on its strengths and minimize these adverse conditions asmuch as possible.

 

Net income increased **53%**to **$2,030,500** in fiscal 2000compared to $1,326,000 in fiscal 1999. Earnings per share also increased 56% to $0.14 per common share in fiscal2000 compared to $0.09 per common share in fiscal 1999.  Management attributes the enhanced earningsto the current cost savings obtained from its SG&A cost containment effortsand the one-time plant consolidation costs realized in fiscal 1999 that did notdilute future earnings.  The increase infiscal 2000 earnings per share also benefited from the 2,169,099 common sharesrepurchased and retired in fiscal 2000.

 

Liquidity and Capital Resources

 

Working capital decreased **$391,700**to $9,194,100 at June 30, 2001 compared to **$9,585,800**at June 30, 2000.  The reduction isattributed to fluctuations in accounts receivable, inventories and deferredincome taxes consistent with the Company’s current operations offset by the$1,000,000 reduction in the current portion of long-term debt due to therestructuring of the Company’s debt with the bank.  Cash flow from operations remained fairly strong but decreased by$1,646,000 to $3,547,200 for fiscal 2001 compared to $5,193,200 for the sameperiod last year.  The decrease isprimarily related to the **$1,556,800**reduction in net income.

 

Earnings before interest, taxes, depreciation and amortization(“EBITDA”) were **$4,503,900** infiscal 2001 compared to **$6,959,900**in fiscal 2000.  Although EBIDTA is nota substitute for measures of performance prepared in accordance with accountingprinciples generally accepted in the United States, it is a relevant internalmeasurement of the Company’s operations and cash flows.  As such, in spite of the numerous challengesfaced in fiscal 2001 which caused diminished operating results, the Companycontinues to generate sufficient cash flows from operations enabling theCompany to easily meet its working capital needs, service and reduce its debt,pay the common stock dividend declared in June 2001 and continue the commonstock buyback program.

 

The Company expended a total of $1,348,100 for property, plant, andequipment during fiscal 2001 compared to $1,415,100 for the same period lastyear.  The primary emphasis in fiscal2001 was on new tooling and tooling modifications as well as the additional CNCrouter for the Gardena facility.  TheCompany currently anticipates total capital expenditures to be approximately$1.2 million in fiscal 2002.

 

Net borrowings under the line of credit decreased $1,215,100 to$1,100,000 between June 30, 2000 and June 30, 2001.  The decrease is attributed to excess cash flows generated fromoperations and the cash flow savings related to the Company’s restructuredCredit Agreement with the bank.  At June30, 2001, the Company had $5,900,000 available for future borrowing under theline of credit.

 

On September 1, 2000, the bank reduced its LIBOR interest rate optionon all of the Company’s outstanding debt from LIBOR plus 2% to LIBOR plus1.5%.  Then, effective October 1, 2000,the Company renegotiated its interest rate options in unison with the revolvingline of credit renewal.  As such, thematurity date for the line of credit was extended to October 1, 2002 and the Company’sinterest rates now reflect reductions from their prior levels to the bank’sprime rate minus .25%, LIBOR plus 1% for borrowings under the line of creditand LIBOR plus 1.25% for all other term debt. In addition, the Company consolidated all of its outstanding term debt,except the real estate loan, with the bank into a new $6,050,000 seven-yearterm loan.  The note will be due inmonthly principal installments of approximately $72,000 plus interest at thebank’s prime or LIBOR interest rate options. The restructuring of the Company’s bank debt will result in cash flowsavings of approximately $1.1 million (principal and interest) during theperiod October 2000 to September 2001.

 

During fiscal 2001, the Company reinstated its common stock buybackprogram.  In fiscal 2001, the Companyhas acquired and retired 146,823 shares of common stock at a total cost of$130,400.  The Company plans to continueto actively acquire its common shares as long as the market value per sharecontinues to be under recognized by the stock market.  As of June 30, 2001 the Company has approximately 12,761,400shares of common stock outstanding.

 

On June 12, 2001, the Board of Directors declared a common stockdividend of $.04 per common share payable on July 13, 2001 to stockholders ofrecord on June 27, 2001.  This marks thefifth payment of dividends since 1996 on the Company’s 

 

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stock.  This dividend, the firstsince the $2.8 million GSC common stock repurchase in January 2000 is atestament to the Board of Directors’ commitment to reward shareholder loyaltyand continue to build shareholder value. The Board of Directors has committed themselves to review annually adividend program for the Company’s common stock.

 

Cash flows from operations in conjunction with the Company’s revolvingline of credit and machinery and equipment loan commitment are expected to meetthe Company’s needs for working capital, capital expenditures, common stockrepurchases and repayment of long term debt for the foreseeable future.

 

In June 1998, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting forDerivative Instruments and Hedging Activities” as amended in June 1999 by SFAS137, “Accounting for Derivative Instruments and Hedging Activities - Deferralof the Effective Date of FASB Statement No. 133,” and in June 2000 by SFAS 138,“Accounting for Certain Derivative Instruments and Certain Hedging Activities,”(collectively SFAS 133).  SFAS 133requires that entities recognize all derivatives as either assets orliabilities in the statement of financial condition and measure thoseinstruments at fair value.  Under SFAS133 an entity may designate a derivative as a hedge of exposure to eitherchanges in: (a) fair value of a recognized asset or liability or firmcommitment, (b) cash flows of a recognized or forecasted transaction, or (c)foreign currencies of a net investment in foreign operations, firm commitments,available-for-sale securities or a forecasted transaction.  Depending upon the effectiveness of thehedge and/or the transaction being hedged, any changes in the fair value of thederivative instrument is either recognized in earnings in the current year,deferred to future periods, or recognized in other comprehensive income.  Changes in the fair value of all derivativeinstruments not recognized as hedge accounting are recognized in current yearearnings.  SFAS 133 is required for allfiscal years beginning after June 15, 2000. On July 1, 2000 the Company adopted SFAS 133.  In connection with the adoption of SFAS 133, the Company’sinterest rate swap was designated as a hedge. On the initial adoption date of SFAS 133, the Company recorded the fairvalue of its derivative on the balance sheet as an asset valued at $109,400with an offsetting entry to accumulated other comprehensive income.  The related unrealized loss of $270,000during the year ended June 30, 2001 has been recognized in the comprehensiveincome component of stockholders’ equity.

 

On December 3, 1999, the Securities and Exchange Commission staffreleased Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition, toprovide guidance on the recognition, presentation and disclosure of revenue infinancial statements.  While SAB No. 101provides a framework by which to recognize revenue in the financial statements,adherence to this SAB did not have a material impact on the Company’s financialstatements.  The Company adopted thisrequirement during the fourth quarter of Fiscal 2001.

 

The Emerging Issues Task Force (EITF) of the Financial AccountingStandard Board issued a new release (EITF 00-10) at the end of July 2000regarding the classification of freight and handling costs billed tocustomers.  EITF 00-10 requires freightand handling costs billed separately on an invoice to be included as part ofSales on the Statement of Income.  Inaddition, the preferred classification of freight and handling costs expensedon the Statement of Income is to include them in Cost of Sales.  The Company adopted this requirement duringthe fourth quarter of Fiscal 2001. There was no impact on net income as a result of the adoption of EITF00-10.

 

In March 2000, the FASB issued FASB Interpretation No. 44, “Accountingfor Certain Transactions involving Stock Compensation” (“FIN 44”).  FIN 44 provides guidance for issues arisingin applying APB Opinion No. 25 “Accounting for Stock Issued to Employees.”  FIN 44 applies specifically to new awards,exchanges of awards in a business combination, modification to outstandingawards and changes in grantee status that occur on or after July 1, 2000,except for the provisions related to repricings and the definition of anemployee which apply to awards issued after December 15, 1998.  The requirements of FIN 44 are consistentwith the Company’s existing accounting policies.

 

In June 2001, the FASB approved two new pronouncements: SFAS No. 141,“Business Combinations,” and SFAS No. 142, “Goodwill and Other IntangibleAssets.”  SFAS No. 141 applies to allbusiness combinations with a closing date after June 30, 2001.  This Statement eliminates thepooling-of-interests method of accounting and further clarifies the criteriafor recognition of intangible assets separately from goodwill.

 

SFAS No. 142 eliminates the amortization of goodwill andindefinite-lived intangible assets and initiates an annual review forimpairment.  Identifiable intangibleassets with a determinable useful life will continue to be amortized.  The Company will adopt SFAS No. 142effective July 1, 2001, which will require the Company to cease amortization ofits remaining net goodwill balance and to perform an impairment test of itsexisting goodwill based on a fair value concept.  Although the Company is still reviewing the provisions of theseStatements, it is management’s preliminary assessment that goodwill impairmentwill not result upon adoption.  As ofJune 30, 2001, the Company has net unamortized goodwill of $4,105,900 andannual goodwill amortization expense of $324,900.

 

8

----

 

Item 7a. Disclosures About Market Risk

 

Interest Rate Risk

 

The Company is exposed to certain market risks relating to interestrate volatility on its existing and future issuances of variable rate debt withthe bank.  Primary exposures includemovements in U.S. Treasury rates and LIBOR rates which in turn affect thebank’s prime and LIBOR option rates.

 

The Company had approximately $8.3 million of variable rate debt as ofJune 30, 2001.  In efforts to reduceinterest rate volatility and mitigate exposure on variable rate debt, theCompany entered into an interest rate swap effective July 15, 1998.  The swap has a notional amount of $5 millionas of July 15, 2000, and will remain at this amount until its expiration on July15, 2003.  The swap fixes the bank’sLIBOR option rate at 6.2% over the term of the contract.  The fair value of the swap amounted to($91,400) as of June 30, 2001.  Ifaverage interest rates increased by 1% during fiscal 2002 as compared to fiscal2001, and additional borrowings are not incurred, the Company would not expecta significant increase in projected fiscal 2002 interest expense.

 

Item 8. Financial Statements and Supplementary Data

 

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

 

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

 

None.

 

9

----

 

PART IV

 

Item 14.        Exhibits,Financial Statements Schedules, and Reports on form 8-K

 

(a)       The following documents are filed as partof this report:

 
|   | (1)    | Financial Statements:                                                                                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                   |   |
|   |   | Report of  Independent Public Accountants                                                                                              |
|   |   | Consolidated Balance  Sheets, June 30, 2001 and 2000                                                                                   |
|   |   | Consolidated  Statements of Income and Comprehensive Income, Years Ended June 30, 2001,  2000, and 1999                                |
|   |   | Consolidated  Statements of Changes in Stockholders’ Equity, Years Ended June 30, 2001,  2000, and 1999                           |
|   |   | Consolidated  Statements of Cash Flows, Years Ended June 30, 2001, 2000, and 1999                                                      |
|   |   | Notes to  Consolidated Financial Statements                                                                                            |
|   |   |                                                                                                                                   |
|   | (2)    | Financial Statement Schedules:                                                                                                         |
|   |   |                                                                                                                                   |
|   |   | II          Valuation and  Qualifying Accounts, Years Ended June 30, 2001, 2000, and 1999 |

 

All other schedules areomitted because they are not applicable or the required information is shown inthe financial statements or notes thereto.

 

(b)       Reports on Form 8-K - None.

 

(c)       The following exhibits are filed as partof this report:

 
| Exhibit  Number |   | Exhibit Title                                                    |
|-----------------|--------|------------------------------------------------------------------|
|            |   |                                                             |
| 23(a)           |   | Consent of Independent Public Accountants - Arthur  Andersen LLP |
|            |   |                                                             |
| 99              |   | Arthur Andersen Special Exhibit                                  |

 

 

10

----

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|   | ROTONICS MANUFACTURING INC. |
|--------|-----------------------------|
|   |                        |   |
|   | By                          | /s/ ROBERT E.  GAWLIK |
|   |                        |   |
|   |                        | Robert E. Gawlik |
|   |                        | President, Chief  Executive Officer |
|   |                        |   |
|   |                        | Date 03/25/2002 |
|   |                        |   |
|   | By                          | /s/ DOUGLAS W.  RUSSELL |
|   |                        |   |
|   |                        | Douglas W. Russell |
|   |                        | Chief Financial Officer |
|   |                        | Assistant Secretary/Treasurer |
|   |                        |   |
|   |                        | Date 03/25/2002 |
|        |                             |  |  |

 

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

 
| Signature                   |   | Title                 |   | Date       |
|-----------------------------|--------|-----------------------|--------|------------|
|                        |   |                  |   |       |
| /s/  SHERMAN MCKINNISS |   | Chairman of the Board |   | 03/25/2002 |
| Sherman McKinniss           |   |                  |   |       |
|                        |   |                  |   |       |
| /s/  E. PAUL TONKOVICH |   | Secretary, Director   |   | 03/25/2002 |
| E. Paul Tonkovich           |   |                  |   |       |
|                        |   |                  |   |       |
| /s/ DAVID C. POLITE         |   | Director              |   | 03/25/2002 |
| David C. Polite             |   |                  |   |       |
|                        |   |                  |   |       |
| /s/ LARRY M.  DEDONATO      |   | Director              |   | 03/25/2002 |
| Larry M. DeDonato           |   |                  |   |       |
|                        |   |                  |   |       |
| /s/ LARRY L.  SNYDER        |   | Director              |   | 03/25/2002 |
| Larry L. Snyder             |   |                  |   |       |
|                        |   |                  |   |       |
| /s/ MARC L.  BERMAN         |   | Director              |   | 03/25/2002 |
| Marc L. Berman              |   |                  |   |       |
|                        |   |                  |   |       |
| /s/ JULES  SANDFORD         |   | Director              |   | 03/25/2002 |
| Jules Sandford              |   |                  |   |       |

 

11

----

 

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

 

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

 

We have audited the accompanying consolidated balance sheets ofROTONICS MANUFACTURING INC. (a Delaware corporation) as of June 30, 2001 and2000 (as restated, see Note 18), and the related consolidated statements ofincome and comprehensive income, changes in stockholders’ equity and cash flows(as restated, see Note 18) for each of the three years in the period ended June30, 2001.  These consolidated financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of RotonicsManufacturing Inc. as of June 30, 2001 and 2000, and the results of theiroperations and their cash flows for each of the three years in the period endedJune 30, 2001 in conformity with accounting principles generally accepted inthe United States.

 

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

 

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

 
| /s/ Arthur Andersen LLP |   |
|-------------------------|--------|

 

Orange County, California

August 22, 2001 (except with respect to the matter discussed in Note18, as to which the date is March 21, 2002)

 

F-1

----

 

ROTONICS MANUFACTURINGINC.

CONSOLIDATED BALANCE SHEETS

 
|                                                                                                                                                                          |   | **June 30,** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|------------|
|                                                                                                                                                                          |   | **2001**     |       | **2000** |   |
| ASSETS                                                                                                                                                                        |   |         |       | **(As restated,  see Note 18)** |   |
| Current assets:                                                                                                                                                               |   |         |       |   |   |
| Cash                                                                                                                                                                          |   | $            | 28,000     |   | $ | 20,800 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $99,200 and $142,000,  respectively (Notes 8 and 9)                                                           |   | 5,260,700    |       | 6,151,500 |   |
| Current portion  of notes receivable (Note 3)                                                                                                                                 |   | 62,300       |       | 17,700 |   |
| Inventories  (Notes 4, 8 and 9)                                                                                                                                               |   | 7,138,300    |       | 7,361,600 |   |
| Deferred income  taxes, net (Note 14)                                                                                                                                         |   | 541,300      |       | 1,092,200 |   |
| Prepaid expenses  and other current assets                                                                                                                                    |   | 349,100      |       | 222,300 |   |
|                                                                                                                                                                          |   |         |       |   |   |
| Total current  assets                                                                                                                                                         |   | 13,379,700   |       | 14,866,100 |   |
|                                                                                                                                                                          |   |         |       |   |   |
| Notes  receivable, less current portion (Note 3)                                                                                                                              |   | 311,800      |       | 418,000 |   |
| Investment in  partnership (Note 5)                                                                                                                                           |   | 113,800      |       | 120,300 |   |
| Property, plant  and equipment, net (Notes 6, 8 and 9)                                                                                                                        |   | 16,129,600   |       | 17,132,100 |   |
| Intangible assets,  net (Note 7)                                                                                                                                              |   | 4,460,600    |       | 4,470,400 |   |
| Other assets                                                                                                                                                                  |   | 105,300      | ** ** | **186,300** | ** ** |
|                                                                                                                                                                          |   |         |       |   |   |
|                                                                                                                                                                          |   | $            | 34,500,800 | ** ** | **$** | **37,193,200** | ** ** |
|                                                                                                                                                                          |   |         |       |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                     |   |         |       |   |   |
|                                                                                                                                                                          |   |         |       |   |   |
| Current  liabilities:                                                                                                                                                         |   |         |       |   |   |
| Current portion  of long-term debt (Note 9)                                                                                                                                   |   | $            | 944,300    |   | $ | 1,961,700 |   |
| Accounts payable                                                                                                                                                              |   | 2,429,900    |       | 2,497,600 |   |
| Accrued  liabilities (Note 11)                                                                                                                                                |   | 811,400      |       | 949,000 |   |
|                                                                                                                                                                          |   |         |       |   |   |
| Total current  liabilities                                                                                                                                                    |   | 4,185,600    |       | 5,408,300 |   |
|                                                                                                                                                                          |   |         |       |   |   |
| Bank line of  credit (Note 8)                                                                                                                                                 |   | 1,100,000    |       | 2,315,100 |   |
| Long-term debt,  less current portion (Note 9)                                                                                                                                |   | 6,296,200    |       | 6,254,700 |   |
| Deferred income  taxes, net (Note 14)                                                                                                                                         |   | 2,611,900    | ** ** | **2,651,300** | ** ** |
|                                                                                                                                                                          |   |         |       |   |   |
| Total  liabilities                                                                                                                                                            |   | 14,193,700   | ** ** | **16,629,400** | ** ** |
|                                                                                                                                                                          |   |         |       |   |   |
| Commitments and  contingencies (Note 15)                                                                                                                                      |   |         |       |   |   |
|                                                                                                                                                                          |   |         |       |   |   |
| Stockholders’  equity:                                                                                                                                                   |   |         |       |   |   |
| Common stock,  stated par value $.01: authorized 20,000,000 shares; issued and outstanding  12,761,398 and 12,905,721 shares, respectively, net of treasury shares (Note  13) |   | 23,203,100   |       | 23,331,500 |   |
| Accumulated  other comprehensive loss                                                                                                                                         |   | (91,400      | )          | — |   |
| Accumulated  deficit                                                                                                                                                          |   | (2,804,600   | )          | **(2,767,700** | **)** |
|                                                                                                                                                                          |   |         |       |   |   |
| Total  stockholders’ equity                                                                                                                                              |   | 20,307,100   | ** ** | **20,563,800** | ** ** |
|                                                                                                                                                                          |   |         |       |   |   |
|                                                                                                                                                                          |   | $            | 34,500,800 | ** ** | **$** | **37,193,200** | ** ** |

 

The accompanying notesare an integral part of these financial statements.

 

F-2

----

 

ROTONICS MANUFACTURINGINC.

CONSOLIDATED STATEMENTSOF INCOME AND COMPREHENSIVE INCOME

 
|                                                                  |   | **For the  year ended June 30,** |        |
|-----------------------------------------------------------------------|--------|----------------------------------|-------------|
|                                                                  |   | **2001**                         |        | **2000** |   | **1999** |   |
|                                                                  |   | **(As  restated,  see Note 18)** |        | **(As  restated,  see Note 18)** |   |   |   |
| Net sales                                                             |   | $                                | 40,520,100  |   | $ | 46,647,700 |   | $ | 46,730,900 |   |
|                                                                  |   |                             |        |   |   |   |   |
| Costs and  expenses:                                                  |   |                             |        |   |   |   |   |
| Cost of goods  sold                                                   |   | 31,158,700                       |        | 34,645,000 |   | 34,566,500 |   |
| Selling, general  and administrative expenses                         |   | **7,635,400**                    | ** **  | **7,888,900** |   | 8,447,200 |   |
| Plant  consolidation expenses (Note 2)                                |   | —                           |        | — |   | 394,400 |   |
|                                                                  |   |                             |        |   |   |   |   |
| Total costs and  expenses                                             |   | **38,794,100**                   | ** **  | **42,533,900** |   | 43,408,100 |   |
|                                                                  |   |                             |        |   |   |   |   |
| Income from  operations                                               |   | **1,726,000**                    | ** **  | **4,113,800** |   | 3,322,800 |   |
|                                                                  |   |                             |        |   |   |   |   |
| Other  (expense)/income:                                              |   |                             |        |   |   |   |   |
| Interest expense                                                      |   | (743,100                         | )           | (955,000 | ) | (987,700 | ) |
| Other income,  net                                                    |   | 105,600                          |        | 141,400 |   | 138,400 |   |
| Total other  expense, net                                             |   | (637,500                         | )           | (813,600 | ) | (849,300 | ) |
|                                                                  |   |                             |        |   |   |   |   |
| Income before  income taxes                                           |   | **1,088,500**                    | ** **  | **3,300,200** |   | 2,473,500 |   |
|                                                                  |   |                             |        |   |   |   |   |
| Income tax  provision (Note 14)                                       |   | **(614,800**                     | **)**       | **(1,269,700** | **)** | (1,147,500 | ) |
|                                                                  |   |                             |        |   |   |   |   |
| Net income                                                            |   | **473,700**                      | ** **  | **2,030,500** |   | 1,326,000 |   |
|                                                                  |   |                             |        |   |   |   |   |
| Other  comprehensive income, before tax:                              |   |                             |        |   |   |   |   |
| Cumulative  effect of adoption of SFAS 133                            |   | 109,400                          |        | — |   | — |   |
| Unrealized  holding loss arising during the period                    |   | (270,000                         | )           | — |   | — |   |
| Less:  Reclassification adjustments for losses included in net income |   | 8,300                            |        | — |   | — |   |
| Total other  comprehensive loss before tax                            |   | (152,300                         | )           | — |   | — |   |
| Income tax  benefit related to items of other comprehensive loss      |   | 60,900                           |        | — |   | — |   |
| Total other  comprehensive loss, net of tax                           |   | (91,400                          | )           | — |   | — |   |
|                                                                  |   |                             |        |   |   |   |   |
| Comprehensive  income                                                 |   | **$**                            | **382,300** | ** ** | **$** | **2,030,500** |   | $ | 1,326,000 |   |
|                                                                  |   |                             |        |   |   |   |   |
| Basic and  diluted income per share (Note 1)                          |   | $                                | .04         |   | $ | .14 |   | $ | .09 |   |

 

The accompanying notesare an integral part of these financial statements.

 

F-3

----

 

ROTONICS MANUFACTURINGINC. 

 CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY 

 

 
|                                                |   |             |   | **Accumulated**   |       |            |       |           |   |
|-----------------------------------------------------|--------|------------------|--------|-------------------|------------|-----------------|------------|----------------|--------|
|                                                |   |             |   | **Other**         |       |            |       |           |   |
|                                                |   | **Common Stock** |   | **Comprehensive** |       | **Accumulated** |       |           |   |
|                                                |   | **Shares**       |   | **Amount**        |       | **Loss**        |       | **Deficit**    |   | **Total** |   |
| Balances, June  30, 1998                            |   | 15,806,361       |   | $                 | 26,921,400 |            | $          | —         |   | $ | (5,513,500 | ) | $ | 21,407,900 |   |
|                                                |   |             |   |              |       |            |       |           |   |   |   |
| Repurchase of  common stock                         |   | (734,041         | )      | (688,900          | )          | —          |       | —         |   | (688,900 | ) |
| Common stock  dividends                             |   | —           |   | —            |       | —          |       | (610,700       | )      | (610,700 | ) |
|                                                |   |             |   |              |       |            |       |           |   |   |   |
| Net income                                          |   | —           |   | —            |       | —          |       | 1,326,000      |   | 1,326,000 |   |
|                                                |   |             |   |              |       |            |       |           |   |   |   |
| Balances, June  30, 1999                            |   | 15,072,320       |   | 26,232,500        |       | —          |       | (4,798,200     | )      | 21,434,300 |   |
|                                                |   |             |   |              |       |            |       |           |   |   |   |
| Exercise of  stock options                          |   | 2,500            |   | 2,000             |       | —          |       | —         |   | 2,000 |   |
| Repurchase of  common stock                         |   | (2,169,099       | )      | (2,903,000        | )          | —          |       | —         |   | (2,903,000 | ) |
|                                                |   |             |   |              |       |            |       |           |   |   |   |
| Net income - (As  restated, see Note 18)            |   | —           |   | —            |       | —          | ** ** | **2,030,500**  |   | **2,030,500** | ** ** |
|                                                |   |             |   |              |       |            |       |           |   |   |   |
| Balances, June  30, 2000 (As restated, see Note 18) |   | 12,905,721       |   | 23,331,500        |       | —          | ** ** | **(2,767,700** | **)**  | **20,563,800** | ** ** |
|                                                |   |             |   |              |       |            |       |           |   |   |   |
| Exercise of  stock options                          |   | 2,500            |   | 2,000             |       | —          |       | —         |   | 2,000 |   |
| Repurchase of  common stock                         |   | (146,823         | )      | (130,400          | )          | —          |       | —         |   | (130,400 | ) |
| Common stock  dividends                             |   | —           |   | —            |       | —          |       | (510,600       | )      | (510,600 | ) |
| Other  comprehensive loss, net of tax               |   | —           |   | —            |       | (91,400         | )          | —         |   | (91,400 | ) |
|                                                |   |             |   |              |       |            |       |           |   |   |   |
| Net income - (As  restated, see Note 18)            |   | —           |   | —            |       | —          | ** ** | **473,700**    |   | **473,700** | ** ** |
|                                                |   |             |   |              |       |            |       |           |   |   |   |
| Balances, June  30, 2001                            |   | 12,761,398       |   | $                 | 23,203,100 |            | $          | (91,400        | )      | $ | (2,804,600 | ) | $ | 20,307,100 |   |

 

The accompanying notesare an integral part of these financial statements.

 

F-4

----

 

ROTONICS MANUFACTURINGINC.

CONSOLIDATED STATEMENTSOF CASH FLOWS

 
|                                                                               |   | **For the  year ended June 30,** |        |
|------------------------------------------------------------------------------------|--------|----------------------------------|-------------|
|                                                                               |   | **2001**                         |        | **2000** |   | **1999** |   |
| Cash flows from  operating activities:                                             |   | **(As restated,   see Note 18)** |        | **(As restated,   see Note 18)** |   |   |   |
| Net income                                                                         |   | **$**                            | **473,700** | ** ** | **$** | **2,030,500** |   | $ | 1,326,000 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                             |        |   |   |   |   |
| Depreciation and  amortization                                                     |   | 2,672,300                        |        | 2,704,600 |   | 2,635,300 |   |
| Gain on sales of  equipment                                                        |   | (48,000                          | )           | (24,000 | ) | (1,500 | ) |
| Deferred income  tax expense                                                       |   | **511,500**                      | ** **  | **1,015,500** |   | 923,400 |   |
| Provision for  doubtful accounts                                                   |   | 31,000                           |        | 22,800 |   | 179,300 |   |
| Changes in  assets and liabilities:                                                |   |                             |        |   |   |   |   |
| Decrease in  accounts receivable                                                   |   | 859,800                          |        | 395,900 |   | 160,400 |   |
| Decrease/(increase)  in inventories                                                |   | 223,300                          |        | (387,900 | ) | 108,200 |   |
| Increase in  prepaid expenses and other current assets                             |   | (126,800                         | )           | (5,600 | ) | (8,500 | ) |
| Increase in  other assets                                                          |   | **(242,500**                     | **)**       | **(109,100** | ) | 42,100 |   |
| Decrease in  accounts payable                                                      |   | (578,100                         | )           | (318,400 | ) | (879,900 | ) |
| (Decrease)/increase  in accrued liabilities                                        |   | (229,000                         | )           | (88,100 | ) | 87,900 |   |
| (Decrease)/increase  in income taxes payable                                       |   | —                           |        | (43,000 | ) | 43,000 |   |
|                                                                               |   |                             |        |   |   |   |   |
| Net cash  provided by operating activities                                         |   | 3,547,200                        |        | 5,193,200 |   | 4,615,700 |   |
|                                                                               |   |                             |        |   |   |   |   |
| Cash flows from  investing activities:                                             |   |                             |        |   |   |   |   |
| Repayments on  notes receivable                                                    |   | 61,600                           |        | 118,800 |   | 27,000 |   |
| Capital  expenditures                                                              |   | (1,348,100                       | )           | (1,415,100 | ) | (2,141,400 | ) |
| Proceeds from  sales of equipment                                                  |   | 59,600                           |        | 26,600 |   | 5,700 |   |
| Distribution  from investment in partnership                                       |   | 6,500                            |        | 3,900 |   | 9,000 |   |
|                                                                               |   |                             |        |   |   |   |   |
| Net cash used in  investing activities                                             |   | (1,220,400                       | )           | (1,265,800 | ) | (2,099,700 | ) |
|                                                                               |   |                             |        |   |   |   |   |
| Cash flows from  financing activities:                                             |   |                             |        |   |   |   |   |
| Borrowings under  line of credit                                                   |   | 9,336,300                        |        | 14,055,200 |   | 11,670,500 |   |
| Repayments under  line of credit                                                   |   | (10,551,400                      | )           | (14,027,500 | ) | (13,309,300 | ) |
| Proceeds from  issuance of long-term debt                                          |   | 6,050,000                        |        | 3,200,000 |   | 3,505,900 |   |
| Repayments of  long-term debt                                                      |   | (7,025,900                       | )           | (4,233,800 | ) | (3,090,000 | ) |
| Payment of  common stock dividends                                                 |   | (200                             | )           | (2,800 | ) | (631,600 | ) |
| Proceeds from  exercise of stock options                                           |   | 2,000                            |        | 2,000 |   | — |   |
| Repurchases of  common stock                                                       |   | (130,400                         | )           | (2,903,000 | ) | (688,900 | ) |
|                                                                               |   |                             |        |   |   |   |   |
| Net cash used in  financing activities                                             |   | (2,319,600                       | )           | (3,909,900 | ) | (2,543,400 | ) |
|                                                                               |   |                             |        |   |   |   |   |
| Net  increase/(decrease) in cash                                                   |   | 7,200                            |        | 17,500 |   | (27,400 | ) |
| Cash at  beginning of year                                                         |   | 20,800                           |        | 3,300 |   | 30,700 |   |
|                                                                               |   |                             |        |   |   |   |   |
| Cash at end of  year                                                               |   | $                                | 28,000      |   | $ | 20,800 |   | $ | 3,300 |   |

 

The accompanying notesare an integral part of these financial statements.

 

F-5

----

 

ROTONICS MANUFACTURINGINC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

 

NOTE 1- ORGANIZATION, OPERATIONS AND SIGNIFICANTACCOUNTING POLICIES:

 

**The Company’s consolidated financialstatements and related notes have been corrected to reflect restatements tofiscal 2001 and 2000 to correctly present patent defense costs capitalized infiscal 2001 which were incurred in fiscal 2000.  The correction resulted in adjustments to selling, general andadministrative expenses, income tax provision, other assets and deferred incometaxes (see Note 18).  In addition,corrections have been made to Note 17 “Unaudited Quarterly Results” to reflectcorrections to the quarters in which the legal costs were originallyincurred.  The correction did not resultin any additional cash outlay nor did it change the Company’s stockholders’equity value as of June 30, 2001.**

 

Organization and operations

 

Rotonics Manufacturing Inc. (the “Company”), a Delaware corporation manufactures and markets plasticproducts for commercial, agricultural, refuse, pharmaceutical, marine,recreation,  medical waste, healthcare,retail, recreation and residential use, as well as an array of custom moldedplastic products to customers in a variety of industries located in diversegeographic markets.  The Company’soperations are conducted under one operating segment.  No single customer accounted for more than 10% of the Company’snet sales in fiscal 2001, 2000, or 1999. In fiscal 2001, the Company purchased in aggregate approximately 97% ofits plastic resin from five vendors. Plastic resin represents a significant portion of the Company’smanufacturing costs.  As such, economicfactors that affect the Company’s plastic resin vendors will have a potentialimpact on the Company’s future operations.

 

The Company’s significant accounting policies are as follows:

 

Principles of consolidation

 

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

 

Revenue recognition

 

Revenues are recognized upon shipment to the customer or when titlepasses to the customer based on the terms of the sales, and are recorded net ofsales discounts, returns and allowances.

 

Use of estimates

 

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

 

Fair Value of Financial Instruments

 

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

 

Inventories

 

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

 

Property, plant and equipment

 

Depreciation is computed using the straight-line method and theestimated useful lives of the assets range from three to thirty-nineyears.  When assets are retired orotherwise disposed of, the cost and related accumulated depreciation are removedfrom the accounts, and any resulting gain or loss is included in income for theperiod.  The cost of maintenance andrepairs is charged to income as incurred; costs relating to significantrenewals and betterments are capitalized.

 

F-6

----

 

Intangible assets

 

The excess of the aggregate purchase price over the fair value of thenet assets of businesses acquired is amortized on the straight-line basis overperiods ranging from fifteen to forty years. Patents are amortized on the straight-line basis over their useful livesof seventeen years, or at their remaining useful life from date ofacquisition.  Legal costs associatedwith defending existing patents are capitalized as additional costs of thepatent when successful defense is probable.

 

Income taxes

 

The Company accounts for income taxes pursuant to an asset andliability approach that requires the recognition of deferred tax assets andliabilities for the expected future tax consequences of events that have beenrecognized in the Company’s financial statements or tax returns.  In estimating future tax consequencesexpected future events other than enactments of changes in tax laws or ratesare considered.

 

Reclassifications

 

Certain reclassifications of prior years’ amounts relating to sales andcost of sales have been made to conform to current year presentation.

 

Earnings per share

 

Basic EPS is computed by dividing reported earnings by weighted averageshares outstanding.  Diluted EPS includethe effect of the potential shares outstanding including dilutive securitiesusing the treasury stock method. Potential dilutive securities for the Company include outstanding stockoptions.

 

The table below details the components of the basic and dilutedearnings per share (“EPS”) calculations:

 
|                                                    |   | **Net Income** |          | **Weighted  Average  Shares  Outstanding** |       | **EPS** | ** ** |
|---------------------------------------------------------|--------|----------------|---------------|--------------------------------------------|------------|---------|------------|
| June 30, 2001                                           |   |           | ** **    |                                       | ** ** |    | ** ** |
| Basic EPS  Net Income – (As restated, see Note 18) |   | **$**          | **473,700**   |                                       | 12,835,200 |    | $          | 0.04 |   |
|                                                    |   |           |          |                                       |       |    |       |
| Effect of  dilutive stock options                       |   | **—**     |          | 10,800                                     |       | —  |       |
|                                                    |   |           |          |                                       |       |    |       |
| Diluted EPS                                             |   | **$**          | **473,700**   |                                       | 12,846,000 |    | $          | 0.04 |   |
|                                                    |   |           |          |                                       |       |    |       |
| June 30, 2000                                           |   |           |          |                                       |       |    |       |
| Basic EPS  Net Income – (As restated, see Note 18) |   | **$**          | **2,030,500** |                                       | 13,981,800 |    | $          | 0.14 |   |
|                                                    |   |           |          |                                       |       |    |       |
| Effect of  dilutive stock options                       |   | **—**     |          | 58,000                                     |       | —  |       |
|                                                    |   |           |          |                                       |       |    |       |
| Diluted EPS                                             |   | **$**          | **2,030,500** |                                       | 14,039,800 |    | $          | 0.14 |   |
|                                                    |   |           |          |                                       |       |    |       |
| June 30, 1999                                           |   |           |          |                                       |       |    |       |
| Basic EPS  Net Income                                   |   | $              | 1,326,000     |                                       | 15,379,400 |    | $          | 0.09 |   |
|                                                    |   |           |          |                                       |       |    |       |
| Effect of  dilutive stock options                       |   | —         |          | 4,700                                      |       | —  |       |
|                                                    |   |           |          |                                       |       |    |       |
| Diluted EPS                                             |   | $              | 1,326,000     |                                       | 15,384,000 |    | $          | 0.09 |   |

 

F-7

----

 

Impact of Recent Accounting Pronouncements

 

In June 1998, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting forDerivative Instruments and Hedging Activities” as amended in June 1999 by SFAS137, “Accounting for Derivative Instruments and Hedging Activities - Deferralof the Effective Date of FASB Statement No. 133,” and in June, 2000, by SFAS138, “Accounting for Certain Derivative Instruments and Certain HedgingActivities,” (collectively SFAS 133). SFAS 133 requires that entities recognize all derivatives as eitherassets or liabilities in the statement of financial condition and measure thoseinstruments at fair value.  Under SFAS133 an entity may designate a derivative as a hedge of exposure to eitherchanges in: (a) fair value of a recognized asset or liability or firmcommitment, (b) cash flows of a recognized or forecasted transaction, or (c)foreign currencies of a net investment in foreign operations, firm commitments,available-for-sale securities or a forecasted transaction.  Depending upon the effectiveness of thehedge and/or the transaction being hedged, any changes in the fair value of thederivative instrument is either recognized in earnings in the current year,deferred to future periods, or recognized in other comprehensive income.  Changes in the fair value of all derivativeinstruments not recognized as hedge accounting are recognized in current yearearnings.  SFAS 133 is required for allfiscal years beginning after June 15, 2000. On July 1, 2000 the Company adopted SFAS 133.  In connection with the adoption of SFAS 133, the Company’sinterest rate swap was designated as a hedge. On the initial adoption date of SFAS 133, the Company recorded the fairvalue of its derivative on the balance sheet as an asset valued at $109,400with an offsetting entry to accumulated other comprehensive income.  The related unrealized loss of $270,000during the year ended June 30, 2001 has been recognized in the othercomprehensive loss component of stockholders’ equity.

 

On December 3, 1999, the Securities and Exchange Commission staffreleased Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition, toprovide guidance on the recognition, presentation and disclosure of revenue infinancial statements.  While SAB No. 101provides a framework by which to recognize revenue in the financial statements,adherence to this SAB did not have a material impact on the Company’s financialstatements.  The Company adopted the newstandard during fiscal 2001.

 

The Emerging Issues Task Force (EITF) of the Financial AccountingStandard Board issued a new release (EITF 00-10) at the end of July 2000regarding the classification of freight and handling costs billed tocustomers.  EITF 00-10 required freightand handling costs billed separately on an invoice to be included as part ofSales on the Statements of Income.  Inaddition, the preferred classification of freight and handling costs expensedon the Statements of Income is to include them in Cost of Sales.  The Company adopted this requirement duringthe fourth quarter of fiscal 2001 and reclassifications have been made for allperiods presented.  There was no impacton net income as a result of the adoption of EITF 00-10.

 

In March 2000, the FASB issued FASB Interpretation No. 44, “Accountingfor Certain Transactions involving Stock Compensation” (“FIN 44”).  FIN 44 provides guidance for issues arisingin applying APB Opinion No. 25 “Accounting for Stock Issued to Employees.”  FIN 44 applies specifically to new awards,exchanges of awards in a business combination, modification to outstandingawards and changes in grantee status that occur on or after July 1, 2000,except for the provisions related to repricings and the definition of anemployee which apply to awards issued after December 15, 1998.  The requirements of FIN 44 are consistentwith the Company’s existing accounting policies.

 

In June 2001, the FASB approved two new pronouncements: SFAS No. 141,“Business Combinations,” and SFAS No. 142, “Goodwill and Other IntangibleAssets.”  SFAS No. 141 applies to allbusiness combinations with a closing date after June 30, 2001.  This Statement eliminates thepooling-of-interests method of accounting and further clarifies the criteriafor recognition of intangible assets separately from goodwill.

 

F-8

----

 

SFAS No. 142 eliminates the amortization of goodwill andindefinite-lived intangible assets and initiates an annual review forimpairment.  Identifiable intangibleassets with a determinable useful life will continue to be amortized.  The Company will adopt SFAS No. 142effective July 1, 2001, which will require the Company to cease amortization ofits remaining net goodwill balance and to perform an impairment test of itsexisting goodwill based on a fair value concept.  Although the Company is still reviewing the provisions of theseStatements, it is management’s preliminary assessment that goodwill impairmentwill not result upon adoption.  As ofJune 30, 2001, the Company has net unamortized goodwill of  $4,105,900 and annual goodwill amortizationexpense of $324,900.

 

NOTE 2 - ACQUISITIONS:

 

Pursuant to an Agreement and Plan of Merger and Reorganization datedMarch 24, 1998 between the Company and GSC Industries, Inc. (“GSC”), theCompany acquired all of GSC’s outstanding common stock holdings in RotocastInternational, Inc. (“Rotocast”) and Rotocast’s wholly owned subsidiaries.  In accordance with the merger andreorganization, Rotocast was merged into the Company and the Company issued toGSC 2,072,539 shares of its own common stock and a $2,000,000 eighteen-monthpromissory note bearing interest at 5.26% per annum.  The note was paid in full in September 1999.  In January 2000, the Company repurchased andretired the 2,072,539 common shares issued to GSC for $2.8 million.

 

As part of the reorganization of Rotonics and Rotocast, the Companyrelocated its operations in Warminster, Pennyslvania, Arleta, California andMiami, Florida into its other operating facilities.  The relocation of these plants resulted in non-recurring costs ofapproximately $394,400 in Fiscal 1999.

 

NOTE 3 - NOTES RECEIVABLE:

 

On March 31, 1995, the Company and a customer entered into an agreementunder which the Company acquired from this customer certain assets, includingmolds and trade accounts receivable, at their total estimated fair value of$357,800, which was applied against the principal of a 1993 Promissory Noteowed by this customer to the Company. The remaining unpaid principal, together with accrued interest and opentrade receivable from this customer as of March 31, 1995, were exchanged for anew note with a principal balance of $455,000, bearing interest at 8% per annumand maturing on March 31, 2005.

 

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

 

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

 

NOTE 4 - INVENTORIES:

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

 

F-9

----

 

NOTE 5 - INVESTMENT IN PARTNERSHIP:

 

The Company owns a 33-1/3% interest in a real estate venture that wasacquired in 1998 and is being accounted for using the equity method.  The investment consists principally of anote receivable which is payable in monthly installments, including interest at7%, to 2008, with annual principal reductions as provided.

 

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:

 
| Property, plant and equipment consist of:     |   | **June 30,** |   |
|-----------------------------------------------|--------|--------------|--------|
|                                          |   | **2001**     |   | **2000** |   |
| Land                                          |   | $ 1,039,500  |   | $ 1,039,500 |   |
| Buildings and  building improvements          |   | 5,009,900    |   | 4,725,200 |   |
| Machinery,  equipment, furniture and fixtures |   | 25,911,000   |   | 24,879,100 |   |
| Construction in  progress                     |   | 4,900        |   | 48,500 |   |
|                                          |   | 31,965,300   |   | 30,692,300 |   |
|                                          |   |         |   |   |   |
| Less -  accumulated depreciation              |   | (15,835,700  | )      | (13,560,200 | ) |
|                                          |   |         |   |   |   |
|                                          |   | $ 16,129,600 |   | $ 17,132,100 |   |

 

NOTE 7 - INTANGIBLE ASSETS:

 
| Intangible assets consist of:                                           |   | **June 30,** |   |
|-------------------------------------------------------------------------|--------|--------------|--------|
|                                                                    |   | **2001**     |   | **2000** |   |
| Patents, net of  accumulated amortization of $121,000 and $112,600      |   | $ 354,700    |   | $ 39,600 |   |
| Goodwill, net of  accumulated amortization of $3,351,500 and $3,026,600 |   | 4,105,900    |   | 4,430,800 |   |
|                                                                    |   |         |   |   |   |
|                                                                    |   | $ 4,460,600  |   | $ 4,470,400 |   |

 

The Company assesses the recoverability of its long-lived assets on anannual basis or whenever adverse events or changes in circumstances or businessclimate indicate that expected undiscounted future cash flows related to suchlong-lived assets may not be sufficient to support the net book value of suchassets.  If undiscounted cash flows arenot sufficient to support the recorded assets, impairment is recognized toreduce the carrying value of the long-lived assets to the estimated fairvalue.  Cash flow projections, althoughsubject to a degree of uncertainty, are based on trends of historicalperformance and management’s estimate of future performance, givingconsideration to existing and anticipated competitive and economic conditions.  Additionally, in conjunction with the reviewfor impairment, the remaining estimated lives of certain of the Company’slong-lived assets are assessed.

 

NOTE 8 - BANK LINE OF CREDIT:

 

The Company has a $7,000,000 revolving line of credit with Wells FargoBank, which matures on October 1, 2002. The line is secured by the Company’s machinery and equipment, accountsreceivable and inventories.  Interest ispayable monthly at the respective bank’s prime rate minus .25%.  The respective bank’s prime rate at June 30,2001 was 6.75% per annum.  In addition,the loan agreement allows the Company to convert the outstanding principalbalance in amounts no less than $250,000 to a LIBOR-based loan for up to 90-dayperiods.  At June 30, 2001, totalborrowings under the Company’s line of credit were $1,100,000 of which thetotal balance was borrowed under the LIBOR option bearing a LIBOR interest rateof 4.95% per annum and maturing on July 16, 2001.  Proceeds from the loan were used for working capital purposes.  At June 30, 2001, the Company hadapproximately $5,900,000 available for future borrowings under the revolvingline of credit.  The loan agreementcontains various covenants pertaining to tangible net worth, net income andliquidity ratios, capital expenditures, payments of dividends, payment ofsubordinated debt as well as various other restrictions.  The Company was in compliance with thesecovenants during fiscal 2001.

 

F-10

----

 

NOTE 9 - LONG-TERM DEBT:

 
| Long-term debt consists of:                                              |   | **June 30,** |      |
|--------------------------------------------------------------------------|--------|--------------|-----------|
|                                                                     |   | **2001**     |      | **2000** |   |
| Note  payable - Bank         (A) |   | $            | 5,473,800 |   | $ | — |   |
| Note  payable - Bank         (B) |   | 1,766,700    |      | 1,846,700 |   |
| Note payable -  Bank                                                     |   | —       |      | 186,400 |   |
| Note payable -  Bank                                                     |   | —       |      | 400,000 |   |
| Note payable -  Bank                                                     |   | —       |      | 800,000 |   |
| Note payable -  Bank                                                     |   | —       |      | 1,850,000 |   |
| Note payable -  Bank                                                     |   | —       |      | 91,600 |   |
| Note payable -  Bank                                                     |   | —       |      | 1,833,300 |   |
| Note payable -  Bank                                                     |   | —       |      | 1,200,000 |   |
| Other                                                                    |   | —       |      | 8,400 |   |
|                                                                     |   | 7,240,500    |      | 8,216,400 |   |
|                                                                     |   |         |      |   |   |
| Less-current  portion                                                    |   | (944,300     | )         | (1,961,700 | ) |
|                                                                     |   | $            | 6,296,200 |   | $ | 6,254,700 |   |

 

----

(A)      On October 1, 2000, theCompany restructured its Credit Agreement with Wells Fargo Bank resulting inthe consolidation of all its outstanding term debt, except for the real estateloan.  In replacement the bank issued a$6,050,000 seven year note due in monthly principal installments of $72,000plus interest at the bank’s prime rate minus .25% (6.75% per annum at June 30,2001).  In addition, the loan agreementallows the Company to convert all or a portion of the outstanding principal toa LIBOR-based loan for periods up to one year. In connection with the restructured Credit Agreement, the Company alsonegotiated with the bank to reduce its interest borrowing rates on all of its outstandingterm debt from the bank’s prime or LIBOR plus 2% rates to the bank’s primeminus .25% or LIBOR plus 1.25%.  At June30, 2001, the total outstanding principal balance was under the LIBOR option at5.2% per annum maturing July 16, 2001. The note is secured by the Company’s machinery and equipment, accountsreceivable and inventories and matures October 15, 2007.  This restructuring of the Company’s debtwill result in annual cash flow savings of approximately $1.1 million(principal and interest) for the period October 2000 through September 2001.

 

At June 30, 2001 theCompany had available a term-loan commitment in the amount of $1,200,000 forfuture machinery and equipment purchases. Advances under the line will be subject to monthly interest onlypayments at the bank’s prime or LIBOR interest rate options until October 1,2001 at which time amounts borrowed will convert to a sixty-month fullyamortizable loan.  The Company plans toadvance against the available borrowings under the term loan commitment priorto its expiration.

 

(B)        In July 1998, a $2,000,000real estate loan secured by the Company’s Bensenville, Illinois andGainesville, Texas properties was issued to Wells Fargo Bank.  This note replaced the 1994 real estate loanissued in connection with the purchase of the Bensenville, Illinoisproperty.  The note is due in monthlyprincipal installments of approximately $6,700 plus interest at the bank’sprime rate minus .25% (6.75% per annum at June 30, 2001), or LIBOR interestrate option on a twenty-five year amortization with the outstanding principaldue on July 1, 2008.  At June 30, 2001,the total outstanding principal was under the LIBOR option at 5.2% per annummaturing July 16, 2001.

 

Effective July 15, 1998,the Company initiated an interest rate swap agreement with the bank.  The agreement allows the Company to fix aportion of its outstanding term and line of credit debt ($5 million as of June30, 2001) from a variable floating LIBOR rate to a fixed LIBOR rate in effortsto protect against future increases in the bank’s LIBOR rate.  The agreement matures July 15, 2003.

 

F-11

----

 

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

 
| **Year Ending June 30,** |   |      |      |
|--------------------------|--------|-----------|-----------|
| 2002                     |   | $         | 944,300   |   |
| 2003                     |   | 944,300   |      |
| 2004                     |   | 944,300   |      |
| 2005                     |   | 944,300   |      |
| 2006                     |   | 944,300   |      |
| Thereafter               |   | 2,519,000 |      |
|                     |   |      |      |
|                     |   | $         | 7,240,500 |   |

 

NOTE 10 – RELATED PARTY TRANSACTIONS:

 

The Company sold plastic resin and molded plastic products to a companyin which an officer/director of the Company has an equity interest.  Sales to the Company amounted to $59,500,$157,000 and $461,000 in fiscal years 2001, 2000 and 1999, respectively.  Amounts due on sales to this company were$1,600 at June 30, 2001, and are included in accounts receivable in theaccompanying balance sheet.   No amountswere due at June 30, 2000.

 

In fiscal years 2001, 2000 and 1999, the Company incurred legal feesand costs amounting to $42,500, $138,600 and $44,500, respectively, forservices by E. Paul Tonkovich Professional Corporation, of which anofficer/director of the Company is an employee.

 

NOTE 11 - ACCRUED LIABILITIES:

 
| Accrued liabilities consist of:                    |   | **June 30,** |    |
|----------------------------------------------------|--------|--------------|---------|
|                                               |   | **2001**     |    | **2000** |   |
| Salaries, wages,  commissions and related payables |   | $            | 463,000 |   | $ | 620,000 |   |
| Other                                              |   | 348,400      |    | 329,000 |   |
|                                               |   |         |    |   |   |
|                                               |   | $            | 811,400 |   | $ | 949,000 |   |

 

NOTE 12 - STOCK OPTION PLAN:

 

In December 1994, at the Annual Meeting of Stockholders of the Company,the stockholders voted by majority decision to ratify and approve a new stockoption plan as adopted by the Board of Directors in June 1994.  The plan allows, at the discretion of theBoard of Directors, for the granting of options to key employees, officers,directors, and consultants of the Company to purchase 1,000,000 shares of theCompany’s common stock.  Under the termsand conditions set forth in the plan, the exercise price of the stock optionswill be a least 85% of the fair market value of the Company’s common stock onthe grant date.  The plan expires June12, 2004.

 

F-12

----

 
| Stock Option Activity                 |   |                    |   |                    |   |                                   |   |
|---------------------------------------|--------|-------------------------|--------|-------------------------|--------|----------------------------------------|--------|
|                                  |   | **Outstanding  Shares** |   | **Exercisable  Shares** |   | **Weighted  Average  Price Per Share** |   |
| Balance  outstanding at June 30, 1998 |   | —                  |   | —                  |   |                                   |   |
| Granted                               |   | 115,000                 |   |                    |   | $                                      | 0.8869 |   |
|                                  |   |                    |   |                    |   |                                   |   |
| Balance  outstanding at June 30, 1999 |   | 115,000                 |   | 100,000                 |   | $                                      | 0.8750 |   |
| Granted                               |   | 40,000                  |   |                    |   | $                                      | 0.9375 |   |
| Exercised                             |   | (2,500                  | )      |                    |   | $                                      | 0.8125 |   |
| Cancelled                             |   | (2,500                  | )      |                    |   | $                                      | 0.8125 |   |
|                                  |   |                    |   |                    |   |                                   |   |
| Balance  outstanding at June 30, 2000 |   | 150,000                 |   | 145,000                 |   | $                                      | 0.8901 |   |
| Granted                               |   | 193,000                 |   |                    |   | $                                      | 1.1146 |   |
| Exercised                             |   | (2,500                  | )      |                    |   | $                                      | 0.8125 |   |
| Cancelled                             |   | (33,000                 | )      |                    |   | $                                      | 0.9886 |   |
|                                  |   |                    |   |                    |   |                                   |   |
| Balance  outstanding at June 30, 2001 |   | 307,500                 |   | 277,500                 |   | $                                      | 1.0084 |   |

 

In fiscal 1998, there was no activity in the plan.  In fiscal 2001, the Company issued stockoptions to Directors and key employees to purchase 193,000 shares of commonstock at fair market value at the date of grant.  At June 30, 2001, the Company had 687,500 shares available forfuture grants.

 

The Company accounts for stock options under Accounting PrinciplesBoard Opinion 25 (“APB25”), “Accounting for Stock Issued to Employees”, whichis permitted under SFAS No. 123 “Accounting for Stock Based Compensation”, issued in 1995.  Had compensation cost for the plan beendetermined in accordance with rules set out in SFAS 123, the Company’s netincome and income per common share data would not be significantly different.

 

NOTE 13 - COMMON STOCK:

 

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

 

On June 12, 2001, the Board of Directors declared a common stockdividend of $.04 per common share payable on July 13, 2001 to stockholders ofrecord on June 27, 2001.  This marks thefifth payment of dividends since 1996 on the Company’s common stock.

 

F-13

----

 

NOTE 14 - INCOME TAXES:

 

The components of the income tax provision were:

 
|      |   | **For the  years ended June 30,** |         |
|-----------|--------|-----------------------------------|--------------|
|      |   | **2001**                          |         | **2000** |   | **1999** |   |
|      |   | **(As  restated,  see Note 18)**  |         | **(As  restated,  see Note 18)** |   |   |   |
| Current:  |   |                              |         |   |   |   |   |
| Federal   |   | $                                 | (26,000      | ) | $ | (75,000 | ) | $ | (72,900 | ) |
| State     |   | (77,300                           | )            | (179,200 | ) | (151,200 | ) |
|      |   | (103,300                          | )            | (254,200 | ) | (224,100 | ) |
|      |   |                              |         |   |   |   |   |
| Deferred: |   |                              |         |   |   |   |   |
| Federal   |   | **(473,700**                      | **)**        | **(961,000** | ) | (939,700 | ) |
| State     |   | **(37,800**                       | **)**        | **(54,500** | ) | 16,300 |   |
|      |   | **(511,500**                      | )            | **(1,015,500** | ) | (923,400 | ) |
|      |   |                              |         |   |   |   |   |
|      |   | **$**                             | **(614,800** | ) | **$** | **(1,269,700** | ) | $ | (1,147,500 | ) |

 

At June 30, 2001, the Company has net operating loss (NOL)carryforwards of approximately $7,053,200 for state income tax purposes.  The NOL carryforwards, 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 2002 if not utilized. The state NOL carryforwards expire as follows:

 
| **Amount of  unused state  operating loss carryforwards** |      | **Expiration  during year  ended June 30,** |   |
|-----------------------------------------------------------|-----------|---------------------------------------------|--------|
| $                                                         | 207,300   |                                        | 2002   |   |
| 451,500                                                   |      | 2003                                        |   |
| 272,800                                                   |      | 2004                                        |   |
| 444,400                                                   |      | 2005                                        |   |
| 89,000                                                    |      | 2006                                        |   |
| 582,600                                                   |      | 2007                                        |   |
| 603,100                                                   |      | 2008                                        |   |
| 987,900                                                   |      | 2009                                        |   |
| 395,400                                                   |      | 2010                                        |   |
| 555,300                                                   |      | 2011                                        |   |
| 476,700                                                   |      | 2012                                        |   |
| 395,300                                                   |      | 2013                                        |   |
| 850,400                                                   |      | 2014                                        |   |
| 262,500                                                   |      | 2015                                        |   |
| 479,000                                                   |      | 2016                                        |   |
| $                                                         | 7,053,200 |                                        |   |   |

 

At June 30, 2001, the Company had a federal alternative minimum tax(“AMT”) credit of approximately $425,400 which is available to offset futurefederal income taxes once the Company is no longer subject to an alternativeminimum tax for federal income tax purposes.

 

F-14

----

 

In fiscal 2001, the Company utilized the remaining balance of itsfederal NOL carryforwards.  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 carryforwards.  The current state valuation allowance,amounting to $307,200, represents the estimated amount of state NOL’s whichwill expire prior to their utilization. Again, realization of the future tax benefits of the NOL carryforwardsis dependent on the Company’s ability to generate taxable income within thecarryforward period.  Management willcontinue to assess the likelihood of utilizing its state NOL’s by taking intoconsideration historical results and current economic conditions in which theCompany operates.  Management does notconsider any non-routine transactions in assessing the likelihood ofrealization of the recorded deferred tax asset.  Any future adjustments to the valuation allowance will bereflected as a component of the current years tax provision.  Management also notes that the deferred taxprovision does not result in current outlays of cash flows due to theutilization of its NOL’s.  Thesecashflow savings are then available to supplement funding of the Company’sexpansion projects, pay common stock dividends, acquire treasury stock andreduce outstanding debt.  Under currentprojections, management anticipates it will fully utilize the federal AMTcredit in fiscal 2002.

 

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

 
|                                         |   | **For the  year ended June 30,** |       |
|----------------------------------------------|--------|----------------------------------|------------|
|                                         |   | **2001**                         |       | **2000** |   | **1999** |   |
|                                         |   | **(As restated,  see Note 18)**  |       | **(As restated,  see Note 18)** |   |   |   |
| Federal  statutory rate                      |   | 34.0                             | %          | 34.0 | % | 34.0 | % |
| State income  taxes (net of federal benefit) |   | 3.6                              |       | 3.6 |   | 3.5 |   |
| Goodwill  amortization                       |   | **10.2**                         | ** ** | **3.4** |   | 4.5 |   |
| Other items, net                             |   | **8.7**                          | ** ** | **(2.5** | ) | 4.4 |   |
|                                         |   |                             |       |   |   |   |   |
| Effective income  tax rate                   |   | **56.5**                         | **%**      | **38.5** | % | 46.4 | % |

 

Deferred tax assets and liabilities are summarized as follows:

 
|                                                   |   | **June 30,**                    |       |
|--------------------------------------------------------|--------|---------------------------------|------------|
|                                                   |   | **2001**                        |       | **2000** |   |
|                                                   |   | **(As restated,  see Note 18)** |       |   |   |
| Deferred tax  assets:                                  |   |                            |       |   |   |
| Federal NOL                                            |   | $                               | —     |   | $ | 499,600 |   |
| State NOL  (net of federal benefit)               |   | 399,100                         |       | 417,800 |   |
| Tax credit  carryforwards                              |   | 425,400                         |       | 409,100 |   |
| Employment-related  reserves                           |   | 70,800                          |       | 120,300 |   |
| Allowance for  doubtful accounts                       |   | 39,200                          |       | 56,100 |   |
|                                                   |   | 934,500                         |       | 1,502,900 |   |
| Deferred tax  liabilities:                             |   |                            |       |   |   |
| Depreciation and  amortization                         |   | (2,697,900                      | )          | **(2,760,300** | **)** |
| Net deferred tax  liability before valuation allowance |   | (1,763,400                      | )          | **(1,257,400** | **)** |
| Deferred tax  assets valuation allowance               |   | (307,200                        | )          | (301,700 | ) |
| Net deferred tax  liability                            |   | $                               | (2,070,600 | ) | **$** | **(1,559,100** | **)** |
|                                                        |        |                                 |            |  |  |  |  |  |

 

NOTE 15 - COMMITMENTS AND CONTINGENCIES:

 

Commitments

 

The Company leases various office and warehouse facilities, andequipment under long-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 2001,2000, and 1999 amounted to $1,055,100, $1,006,700 and $991,100, respectively.

 

F-15

----

 

At June 30, 2001, the future minimum lease commitments, excludinginsurance and taxes, are as follows:

 
| **Year Ending June 30,** |   |      |      |
|--------------------------|--------|-----------|-----------|
| 2002                     |   | $         | 875,300   |   |
| 2003                     |   | 791,400   |      |
| 2004                     |   | 772,600   |      |
| 2005                     |   | 671,900   |      |
| 2006                     |   | 550,200   |      |
| Thereafter               |   | 3,459,800 |      |
|                     |   | $         | 7,121,200 |   |

 

Contingencies

 

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

 

NOTE 16 - SUPPLEMENTAL DISCLOSURES OF CASH FLOWINFORMATION:

 

Supplemental disclosures of cash flows information are as follows:

 
|                                    |   | **For the  years ended June 30,** |    |
|-----------------------------------------|--------|-----------------------------------|---------|
|                                    |   | **2001**                          |    | **2000** |   | **1999** |   |
| Cash paid during  the year for:         |   |                              |    |   |   |   |   |
| Interest                                |   | $                                 | 770,100 |   | $ | 952,500 |   | $ | 1,002,400 |   |
| Income taxes                            |   | $                                 | 180,200 |   | $ | 391,600 |   | $ | 103,800 |   |
|                                    |   |                              |    |   |   |   |   |
| Non-cash financing  activities:         |   |                              |    |   |   |   |   |
| Common dividends  declared but not paid |   | $                                 | 510,600 |   | $ | — |   | $ | 3,300 |   |
| Fair value of  interest rate swap       |   | $                                 | 91,400  |   | $ | — |   | $ | — |   |

 

NOTE 17 - UNAUDITED QUARTERLY RESULTS:

 
|                                            |   | **Quarter  Ended** |        |
|-------------------------------------------------|--------|--------------------|-------------|
|                                            |   | **September**      |        | **December** |   | **March** |   | **June** |   |
| Fiscal Year 2001  - (As restated, see Note 18): |   |               |        |   |   |   |   |   |   |
| Net sales                                       |   | $                  | 10,374,700  |   | $ | 9,371,500 |   | $ | 9,904,500 |   | $ | 10,869,400 |   |
| Gross profit                                    |   | 2,370,000          |        | 1,947,600 |   | 2,472,000 |   | 2,571,800 |   |
|                                            |   |               |        |   |   |   |   |   |   |
| **Net  income/(loss) - as previously reported** |   | $                  | 67,000      |   | $ | (176,600 | ) | $ | 259,400 |   | $ | 400,700 |   |
| **Adjustment  (Note 18)**                       |   | **43,100**         | ** **  | **71,600** | ** ** | **1,400** | ** ** | **(192,900** | **)** |
| **Net  income - restated**                      |   | **$**              | **110,100** | ** ** | **$** | **(105,000** | **)** | **$** | **260,800** | ** ** | **$** | **207,800** | ** ** |
|                                            |   |               |        |   |   |   |   |   |   |
| Per share:                                      |   |               |        |   |   |   |   |   |   |
| Net  income/(loss) - basic and diluted          |   | $                  | .01         |   | $ | .(01 | ) | $ | .02 |   | $ | .02 |   |
|                                            |   |               |        |   |   |   |   |   |   |
| Fiscal Year 2000  - (As restated, see Note 18): |   |               |        |   |   |   |   |   |   |
| Net sales                                       |   | $                  | 12,370,700  |   | $ | 10,519,900 |   | $ | 11,521,400 |   | $ | 12,235,700 |   |
| Gross profit                                    |   | 3,616,600          |        | 2,885,100 |   | 2,684,900 |   | 2,816,100 |   |
|                                            |   |               |        |   |   |   |   |   |   |
| **Net  income - as previously reported**        |   | $                  | 700,000     |   | $ | 401,200 |   | $ | 328,800 |   | $ | 523,700 |   |
| **Adjustment  (Note 18)**                       |   | **20,600**         | ** **  | **15,400** | ** ** | **9,500** | ** ** | **31,300** | ** ** |
| **Net  income - restated**                      |   | **$**              | **720,600** | ** ** | **$** | **416,600** | ** ** | **$** | **338,300** | ** ** | **$** | **555,000** | ** ** |
|                                            |   |               |        |   |   |   |   |   |   |
| Per share:                                      |   |               |        |   |   |   |   |   |   |
| Net income -  basic and diluted                 |   | $                  | .05         | ** ** | **$** | **.03** | ** ** | **$** | **.02** |   | $ | .04 |   |

 

F-16

----

 

**NOTE 18 - RESTATEMENTS**

 

**The Company’s consolidated financialstatements and related notes have been corrected to reflect restatements to fiscal2001 and 2000 to correctly present patent defense costs capitalized in fiscal2001 which were incurred in fiscal 2000. The correction resulted in adjustments to selling, general andadministrative expenses, income tax provision, other assets and deferred taxesto reflect a net of tax adjustment of $76,800 between the two periods.  In addition, corrections have been made toNote 17 “Unaudited Quarterly Results” to reflect corrections to the quarters inwhich the legal costs were originally incurred.  The correction did not result in any additional cash outlay nordid it change the Company’s stockholders’ equity as of June 30, 2001.  The impact of the restatements on the accompanyingfinancial statements is as follows:**

 
| **Year Ended  June 30, 2001**      |   | **As Previously  Reported** |          | **Adjustments** |       | **As  Restated** |       |
|------------------------------------|--------|-----------------------------|---------------|-----------------|------------|------------------|------------|
| **Income  before income taxes**    |   | **$**                       | **1,216,500** | ** **      | **$**      | **(128,000**     | **)**      | **$** | **1,088,500** | ** ** |
| **Income  tax provision**          |   | **(666,000**                | **)**         | **51,200**      | ** ** | **(614,800**     | **)**      |
| **Net  income**                    |   | **$**                       | **550,500**   | ** **      | **$**      | **(76,800**      | **)**      | **$** | **473,700** | ** ** |
|                               |   |                        | ** **    |            | ** ** |             | ** ** |
| **Year Ended June 30, 2000**       |   | **As Previously  Reported** |          | **Adjustments** |       | **As Restated**  |       |
| **Other  assets**                  |   | **$**                       | **222,300**   | ** **      | **$**      | **128,000**      | ** ** | **$** | **350,300** | ** ** |
| **Deferred  income tax liability** |   | **$**                       | **2,600,100** | ** **      | **$**      | **51,200**       | ** ** | **2,651,300** | ** ** |
| **Income  before income taxes**    |   | **$**                       | **3,172,200** | ** **      | **$**      | **128,000**      | ** ** | **$** | **3,300,200** | ** ** |
| **Income  tax provision**          |   | **(1,218,500**              | **)**         | **(51,200**     | **)**      | **(1,269,700**   | **)**      |
| **Net  income**                    |   | **$**                       | **1,953,700** | ** **      | **$**      | **76,800**       | ** ** | **$** | **2,030,500** | ** ** |

 

F-17

----

 

ROTONICS MANUFACTURINGINC. 

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

Years Ended June 30,2001, 2000 and 1999

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

 

----

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

(2)        Represents valuation allowancefor potential state NOL’s which will expire prior to utilization.

 

F-18

----