UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~April~~July 2, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-17237

HOME PRODUCTS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


Delaware		36-4147027

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

4501 West 47th Street
Chicago, Illinois		60632

(Address of principal		(Zip Code)
executive offices)

Registrant’s telephone number including area code (773) 890-1010.

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes o No þ

~~Common~~Indicate by ~~shares,~~check ~~par~~mark ~~value~~whether ~~$0.01,~~the ~~outstanding~~registrant is a shell company (as defined in Rule 12b-2 of ~~May 7,~~the ~~2005~~Exchange –Act). ~~8,154,587~~Yes o No þ

Common shares, par value $0.01, outstanding as of August 6, 2005 – 8,154,587

HOME PRODUCTS INTERNATIONAL, INC.

INDEX

	~~Page~~		Page
	~~Number~~		Number
Part I. Financial Information
Part I.	Financial Information
~~Item 1. Financial Statements~~	Item 1. Financial Statements
~~Condensed Consolidated Balance Sheets~~	Condensed Consolidated Balance Sheets	3	3
~~Condensed Consolidated Statements of Operations~~	Condensed Consolidated Statements of Operations	4	4
~~Condensed Consolidated Statements of Cash Flows~~	Condensed Consolidated Statements of Cash Flows	5	5
~~Notes to Condensed Consolidated Financial Statements~~	Notes to Condensed Consolidated Financial Statements	6	6
~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13	13
~~Item 3. Quantitative and Qualitative Disclosures About Market Risk~~	Item 3. Quantitative and Qualitative Disclosures About Market Risk	22	26
~~Item 4. Controls and Procedures~~	Item 4. Controls and Procedures	23	26
Part II. Other Information
Part II.	Other Information
~~Item 1. Legal Proceedings~~	Item 1. Legal Proceedings	24	27
~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	24	28
~~Item 3. Defaults Upon Senior Securities~~	Item 3. Defaults Upon Senior Securities	24	28
~~Item 4. Submission of Matters to a Vote of Security Holders~~	Item 4. Submission of Matters to a Vote of Security Holders	24	28
~~Item 5. Other Information~~	Item 5. Other Information	24	28
~~Item 6. Exhibits~~	Item 6. Exhibits	25	28
Signatures		26	29
Certification by Douglas R. Ramsdale, CEO
Amended and Restated By-Laws of the Company
Certification of James E. Winslow, Executive Vice President and CFO
Certification of CEO
Certification of CFO

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HOME PRODUCTS INTERNATIONAL, INC.

Condensed Consolidated Balance Sheets (Amounts in thousands, except share and per share amounts) (Unaudited)

	April 2,			January 1,
	July 2,			January 1,
	2005			2005
Assets
				As Restated
Assets
Current assets:
Cash and cash equivalents	$	~~1,421~~414		$	1,146
Accounts receivable, net		3038,512			51,473
Inventories		33,~~974~~051			30,292
Prepaid expenses and other current assets		1,~~843~~432			2,787
Total current assets		6773,~~750~~409			85,698
Property, plant and equipment - at cost		95,367			95,361
Property, plant and equipment — at cost		94,831			95,419
Less accumulated depreciation		(6566,~~383~~183	)		(63,~~718~~951	)
Property, plant and equipment, net		2928,~~984~~648			31,~~643~~468
Other intangibles, net		7551			100
Goodwill, net		72,780			73,182
Other non-current assets		12,~~734~~107			1,865
Total assets	$	~~172~~176,~~323~~995		$	192,~~488~~313
Liabilities and Stockholders’ Equity (Deficit)
Liabilities and Stockholders’ Deficit
Current liabilities:
Revolving line of credit and other current debt	$	1120,~~852~~336		$	25,091
Accounts payable		2022,~~653~~580			25,723
Accrued liabilities		1715,~~455~~819			14,450
Total current liabilities		4958,~~960~~735			65,264
Long-term obligations - net of current debt		120,646			120,655
Long-term obligations — net of current debt		120,624			120,655
Other liabilities		4,397			4,199
Deferred tax liability		4,282			2,852
Total liabilities		175,003			190,118
Other liabilities		4,557			4,449
Stockholders’ equity (deficit):
Total liabilities		188,198			193,220
Preferred Stock - authorized, 500,000 shares, $.01 par value; - None issued		—			—
Stockholders’ deficit:
Common Stock - authorized 15,000,000 shares, $.01 par value; 8,964,781 shares issued at April 2, 2005 and January 1, 2005		90			90
Preferred Stock — authorized, 500,000 shares, $.01 par value; — None issued		—			—
Common Stock — authorized 15,000,000 shares, $.01 par value; 8,964,761 shares issued at July 2, 2005 and January 1, 2005		90			90
Additional paid-in capital		50,677			50,677
Accumulated deficit		(4655,~~898~~469	)		(4145,~~848~~173	)
Common stock held in treasury - at cost; 810,194 shares at April 2, 2005 and January 1, 2005		(6,501	)		(6,501	)
Common stock held in treasury — at cost; 810,174 shares at July 2, 2005 and January 1, 2005		(6,501	)		(6,501	)
Accumulated other comprehensive loss		(48	)		(48	)
Total stockholders’ deficit		(11,203	)		(907	)
Total stockholders’ equity (deficit)		(2,680	)		2,370
Total liabilities and stockholders’ deficit	$	176,995		$	192,313
Total liabilities and stockholders’ equity (deficit)	$	172,323		$	192,488

The accompanying notes are an integral part of the condensed consolidated financial statements.

HOME PRODUCTS INTERNATIONAL, INC.

Condensed Consolidated Statements of Operations (Amounts in thousands, except share and per share amounts) (Unaudited)

(Amounts in thousands, except share and per share amounts) (Unaudited)


	Thirteen weeks						Twenty-six weeks
	ended						ended
				June 26,						June 26,
	July 2,			2004			July 2,			2004
	2005			As restated			2005			As restated
Net sales	$	56,555		$	64,206		$	107,946		$	117,396
Cost of goods sold		49,320			53,537			94,427			96,870

Gross profit		7,235			10,669			13,519			20,526

Operating expenses:
Selling and marketing		4,061			3,811			7,857			7,487
General and administrative		3,292			3,561			7,177			6,281
Shareholder transaction costs		190			488			308			761
Amortization of intangible assets		24			124			49			248

Operating profit (loss)		(332	)		2,685			(1,872	)		5,749


Non-operating income (expense):
Interest income		—			1			—			4
Interest expense		(3,475	)		(3,274	)		(6,961	)		(6,529	)
Other income (expense), net		(6	)		29			(19	)		21

Net non-operating expense		(3,481	)		(3,244	)		(6,980	)		(6,504	)


Loss before income taxes		(3,813	)		(559	)		(8,852	)		(755	)

Income tax expense		(718	)		(723	)		(1,444	)		(1,443	)


Net loss	$	(4,531	)	$	(1,282	)	$	(10,296	)	$	(2,198	)


Net loss per common share:
Basic	$	(0.56	)	$	(0.16	)	$	(1.26	)	$	(0.28	)

Diluted	$	(0.56	)	$	(0.16	)	$	(1.26	)	$	(0.28	)


Weighted average common shares outstanding-basic		8,154,587			7,986,614			8,154,587			7,986,585

Weighted average common shares outstanding-diluted		8,154,587			7,986,614			8,154,587			7,986,585

	Thirteen weeks
	ended
	April 2,			March 27,
	2005			2004
Net sales	$	51,391		$	53,190
Cost of goods sold		45,107			43,289
Gross profit		6,284			9,901
Operating expenses:
Selling and marketing		3,796			3,720
General and administrative		3,885			2,720
Shareholder transaction costs		118			273
Amortization of intangible assets		25			124
Operating profit (loss)		(1,540	)		3,064
Non-operating income (expense):
Interest income		—			3
Interest expense		(3,486	)		(3,255	)
Other expense, net		(13	)		(8	)
Net non-operating expense		(3,499	)		(3,260	)
Loss before income taxes		(5,039	)		(196	)
Income tax expense		(11	)		(7	)
Net loss	$	(5,050	)	$	(203	)
Net loss per common share:
Basic	$	(0.62	)	$	(0.03	)
Diluted	$	(0.62	)	$	(0.03	)
Weighted average common shares outstanding-basic		8,154,587			7,986,556
Weighted average common shares outstanding-diluted		8,154,587			7,986,556

The accompanying notes are an integral part of the condensed consolidated financial statements.

~~The accompanying notes are an integral part of the condensed consolidated financial statements.~~4

4 Table of Contents

~~Table~~HOME ofPRODUCTS ~~Contents~~INTERNATIONAL, INC.

~~HOME~~Condensed ~~PRODUCTS~~Consolidated ~~INTERNATIONAL,~~Statements ~~INC.~~of Cash Flows (Amounts in thousands) (Unaudited)

Condensed Consolidated Statements of Cash Flows (Amounts in thousands) (Unaudited)


	Twenty-six weeks ended
				June 26,
	July 2,			2004
	2005			As restated
Operating activities:
Net loss	$	(10,296	)	$	(2,198	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		3,904			4,369
Noncash gain on insurance settlement		—			(150	)
Deferred income taxes		1,430			1,426
Loss on the disposal of assets		13			6
Changes in working capital:
Decrease in accounts receivable		12,961			5,302
Increase in inventories		(2,759	)		(14,976	)
(Increase) decrease in other current assets		1,355			(363	)
(Decrease) increase in accounts payable		(3,143	)		6,688
Increase (decrease) in accrued liabilities		1,369			(1,581	)
Other non current assets		(242	)		2,036
Other long term liabilities		108			474
Other, net		—			551

Net cash provided by operating activities		4,700			1,584


Investing activities:
Settlement of environmental escrow		402			—
Capital expenditures		(1,048	)		(3,627	)

Net cash used in investing activities		(646	)		(3,627	)


Financing activities:
Net borrowings (repayments) under loan and security agreement		(4,740	)		1,710
Payments of capital lease obligation		(46	)		(61	)
Exercise of stock options, issuance of common stock under stock purchase plan and other		—			8

Net cash (used in) provided by financing activities		(4,786	)		1,657

Net decrease in cash and cash equivalents		(732	)		(386	)
Cash and cash equivalents at beginning of period		1,146			797

Cash and cash equivalents at end of period	$	414		$	411


Supplemental disclosures
Cash paid in the period:
Interest	$	6,656		$	6,207

Income taxes	$	5		$	23

	Thirteen weeks ended
	April 2,			March 27,
	2005			2004
Operating activities:
Net loss	$	(5,050	)	$	(203	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,938			2,130
Loss on the disposal of assets		13			—
Changes in working capital:
Decrease in accounts receivable		20,961			13,769
Increase in inventories		(3,682	)		(5,185	)
(Increase) decrease in other current assets		944			(381	)
(Decrease) increase in accounts payable		(5,070	)		1,713
Increase in accrued liabilities		3,005			590
Other non current assets		131			798
Other long term liabilities		198			255
Other, net		—			(14	)
Net cash provided by operating activities		13,388			13,472
Investing activities:
Settlement of environmental escrow		402			—
Capital expenditures, net		(267	)		(924	)
Net cash used in investing activities		135			(924	)
Financing activities:
Net repayments under loan and security agreement		(13,222	)		(9,811	)
Payments of capital lease obligation		(26	)		(32	)
Exercise of stock options, issuance of common stock under stock purchase plan and other		—			8
Net cash used in financing activities		(13,248	)		(9,835	)
Net increase in cash and cash equivalents		275			2,713
Cash and cash equivalents at beginning of period		1,146			797
Cash and cash equivalents at end of period	$	1,421		$	3,510
Supplemental disclosures
Cash paid in the period:
Interest	$	558		$	334
Income taxes	$	4		$	14

The accompanying notes are an integral part of the condensed consolidated financial statements.

~~The accompanying notes are an integral part of the condensed consolidated financial statements.~~5

5 Table of Contents

~~Table~~HOME ofPRODUCTS ~~Contents~~INTERNATIONAL, INC.

~~HOME~~Notes ~~PRODUCTS~~to ~~INTERNATIONAL~~Condensed Consolidated Financial Statements (Dollar amounts in thousands, ~~INC.~~except per share amounts) (Unaudited)

~~Notes~~Note to1. ~~Condensed~~Summary ~~Consolidated~~of ~~Financial~~Significant ~~Statements (Dollar~~Accounting ~~amounts in thousands, except per share amounts)~~Policies ~~(Unaudited)~~

~~Note~~The ~~1. Summary of Significant Accounting Policies~~Company

~~The~~ Home Products International, Inc. (the “Company”), based in Chicago, is a leading designer, manufacturer and marketer of a broad range of value-priced, quality consumer houseware products. The Company’s products are marketed principally through mass-market trade channels in the United States and internationally.

~~Home~~Financial ~~Products~~Statement ~~International, Inc. (the “Company”), based in Chicago, is a leading designer,~~Presentation manufacturer and marketer of a broad range of value-priced, quality consumer houseware products. The Company’s products are marketed principally through mass-market trade channels in the United States and internationally.

~~Financial~~ The Company ~~Statement~~reports ~~Presentation~~on a 52/53 week fiscal year basis concluding on the Saturday nearest to December 31. References to 2004 are for the fifty-three weeks ended January 1, 2005.

The condensed consolidated financial statements for the thirteen and twenty-six weeks ended ~~April~~ July 2, 2005 and ~~March~~ June 2726, 2004, include, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of ~~operations~~ operations and cash flows as of ~~April~~July 2, 2005 and for all periods presented. As a result of a determination that the audited consolidated financial statements for the fiscal year ended January 1, 2005 must be restated, the information presented at January 1, 2005 is unaudited pending such restatement (See Note 2).

Certain information and note disclosures normally included in financial statements prepared in accordance with U. S. generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Form 10-K for the year ended January 1, 2005. The results of operations for the thirteen and twenty-six weeks ended ~~April~~July 2, 2005 are not necessarily indicative of the operating results to be expected for the full year.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles generally requires management to make certain estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year’s presentation.

Recent Accounting Pronouncements

In March 2005, Staff Accounting Bulletin No. 107 (“SAB 107”) was issued which expressed views of the Securities and Exchange Commission (“SEC”) regarding the interaction between Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-based Payment” and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. The accounting provisions of SFAS 123R are effective as of the beginning of the first annual period beginning after June 15, 2005. Although the Company has not yet determined whether adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, the Company is evaluating the ~~requirement~~requirements ~~under~~of SFAS 123R, acceptable methods of determining fair market value, and the magnitude of the impact on its fiscal 2006 consolidated ~~net~~results ~~income~~of ~~and earnings per share~~operations.

6 In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154 (“SFAS No. 154”), “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and SFAS

~~Table of Contents~~6

NoteTable 2.of Stock-Based Compensation Plans Contents

~~SFAS~~Statement No. ~~123~~3”. APB No. 20, “Accounting ~~for Stock-Based Compensation~~Changes” ~~encourages~~and ~~companies~~SFAS toNo. 3, ~~adopt~~“Reporting ~~a fair~~Accounting ~~value~~Changes ~~approach~~in toInterim ~~valuing~~Financial ~~stock-based~~Statements” ~~compensation~~requiring ~~that would require compensation cost to be recognized based upon~~ the ~~fair~~inclusion ~~value~~ of the ~~stock-based~~cumulative ~~instrument~~effect ~~issued.~~of ~~The Company has~~changes ~~elected,~~in asaccounting ~~permitted~~principle byin ~~SFAS~~net ~~No. 123,~~income toin ~~apply~~ the ~~provisions~~period of ~~Accounting~~the ~~Principles~~change. ~~Board (“APB”)~~SFAS ~~Opinion~~ No. 25154 ~~“Accounting~~establishes, ~~for~~unless impracticable, ~~Stock~~retrospective ~~Based~~application ~~Compensation”~~to ~~and~~prior ~~the~~periods’ ~~related~~financial ~~interpretations~~statements inas the required ~~accounting~~method for ~~stock~~reporting ~~option~~a ~~awards~~voluntary ~~under~~change ~~the~~in ~~stock~~accounting ~~option~~principle ~~plans.~~in ~~Under~~the ~~APB~~absence ~~Opinion~~of ~~No. 25,~~explicit ~~compensation~~transition ~~expense~~requirements isspecific ~~recognized~~to if the ~~market~~newly ~~price~~adopted onaccounting ~~the~~principle. ~~date~~This ofstatement ~~grant exceeds the exercise~~is ~~price.~~effective ~~All~~for ~~options~~accounting ~~granted~~changes byand ~~the~~corrections ~~Company~~of ~~have~~errors ~~been~~made ~~granted~~in atfiscal ~~the~~years ~~market~~beginning ~~price of stock on the~~after ~~date~~December 15, ~~of grant~~2005. The ~~following~~Company ~~table~~will ~~shows~~assess the ~~effect~~impact onof ~~net~~a ~~loss~~retrospective ~~and~~application ~~loss~~of ~~per share~~a ifchange ~~the~~in accounting ~~Company~~principle ~~had~~in ~~applied~~accordance ~~the~~with ~~fair value recognition provisions of~~ SFAS No. ~~123.~~154 ~~The~~if ~~fair~~the ~~value~~need offor ~~these~~such ~~stock~~a ~~options~~change ~~was~~arises ~~estimated~~after at the ~~date of grant using a~~ ~~Black-Scholes~~effective ~~option pricing model~~date.

	Thirteen weeks
	ended
	April 2,			March 27 ,
	2005			2004
Net loss as reported	$	(5,050	)	$	(203	)
Less: total stock-based compensation expense determined under fair value based method for all awards		(12	)		(31	)
Pro forma net loss	$	(5,062	)	$	(234	)
Basic loss per common share – as reported	$	(0.62	)	$	(0.03	)
Basic loss per common share – pro forma	$	(0.62	)	$	(0.03	)
Diluted loss per common share – as reported	$	(0.62	)	$	(0.03	)
Diluted loss per common share – pro forma	$	(0.62	)	$	(0.03	)

In May 2005, the FASB issued SFAS No. 151 (“SFAS No. 151”), Inventory Costs – an amendment of ARB No. 43, Chapter 4, which relates to inventory costs and the treatment of abnormal amounts of idle facility expense, freight, handling costs and spoilage. The provisions of SFAS No. 151 are effective for inventory costs incurred beginning in the first quarter of 2006. We are currently evaluating the impact of adopting SFAS No. 151 on our financial statements, but we do not expect the impact to be significant.

In June 2005, the Emerging Issues Task Force (“EITF”) reached consensus on Issue No. 05-06, “Determining ~~stock~~the ~~options~~Amortization ~~were~~Period ~~granted~~for ~~during~~Leasehold Improvements,” which requires that leasehold improvements acquired in a business combination or purchased subsequent to the ~~thirteen~~inception ~~weeks~~of ~~ended~~a ~~April~~lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. EITF No. 2,05-06 ~~2005~~is effective ~~and~~for ~~March~~periods beginning after June 2729, ~~2004~~ 2005. The Company does not expect the provisions of this consensus to have a material impact on the Company’s results of operations or financial condition.

Note 3 2. ~~Shareholder Transaction~~Restatement

~~On December 13, 2004, Storage Acquisition~~ The Company, ~~L.L.C.,~~will arestate ~~Delaware~~its ~~limited~~financial ~~liability company~~statements ~~(“Acquirer”)~~as ~~completed~~of ~~its~~and ~~tender offer~~ for the ~~outstanding shares of common stock~~ ~~(including~~periods ~~the~~ended ~~associated preferred stock purchase rights) of the Company for $~~April 2~~.25~~, ~~per share~~2005, ~~net to the seller~~January 1, ~~in cash~~2005, ~~without~~and ~~interest.~~each ~~As a result~~ of the ~~tender~~interim ~~offer,~~periods ~~the~~in ~~Acquirer~~fiscal ~~obtained 93%~~year of2004 ~~the~~by ~~Company’s~~amending ~~outstanding common shares. Collectively~~its April 2, ~~the~~2005 ~~process~~Form 10-Q ~~that~~and ~~led~~its toJanuary 1, ~~the offer~~2005 ~~and~~Form 10-K. ~~the~~Reflected ~~completion~~within ofthis ~~the~~footnote ~~tender~~are ~~offer is referred to herein as~~ the ~~“Shareholder~~effects ~~Transaction”~~of these adjustments.

~~On December 15~~ Historically, the Company has accounted for its deferred income taxes related to goodwill as a reversing taxable temporary difference. During fiscal year 2004, the Company’s ~~common~~temporary ~~stock~~difference ~~was~~related ~~deregistered~~to ~~and~~goodwill isbecame noa ~~longer~~liability as ~~trading~~the ontax basis of goodwill became lower than the book basis due to ~~The~~the ~~NASDAQ~~continued ~~SmallCap~~amortization ~~Market~~of goodwill for tax purposes. ~~There~~Pursuant isto SFAS noNo. ~~assurance~~142, ~~that~~“Goodwill and Other Intangible Assets,” the deferred tax liability related to the Company’s ~~shares~~goodwill ~~will~~ must be ~~traded~~considered onas ~~the~~a ~~over-the-counter~~liability ~~bulletin~~related ~~board~~to an asset with an indefinite life. Therefore, orthe ~~that~~deferred ~~price~~tax ~~quotations~~liability ~~will~~was benot ~~reported~~available ~~through any~~to support the realization of deferred tax assets created by other ~~sources~~deductible temporary differences. InGiven ~~addition,~~ the Company’s ~~has~~determination ~~suspended~~that, based on cumulative historical operating losses, it was more likely than not that its ~~reporting~~deferred ~~obligations~~tax ~~under~~assets ~~the~~would not be realized, this ~~Securities~~unavailability ~~Exchange~~to ~~Act~~offset has resulted in the creation of ~~1934,~~a ~~effective~~deferred tax asliability and an additional tax expense in respect of ~~March 15,~~the ~~2005~~resulting increase in the deferred tax asset valuation allowance. These restatement adjustments were non-cash and had no effect on operating cash flows nor on the Company’s compliance with its debt covenants.

~~Notwithstanding~~ As a result of the ~~suspension~~deferred oftax ~~its~~liability ~~obligation~~restatement, toincome ~~file~~tax expense ~~periodic~~in ~~financial~~fiscal ~~reports,~~year 2004 increased by ~~the~~approximately $2,852 (approximately $713 per quarter in ~~terms~~2004). Income oftax expense in the ~~Company’s~~first ~~indenture~~quarter ~~governing~~of ~~its~~2005 ~~9-5/8%~~increased ~~Senior~~by ~~Subordinated~~$715. ~~Notes~~Loss ~~due~~per ~~May 14,~~share ~~2008,~~on a ~~the~~diluted ~~Company~~basis isincreased ~~required~~by approximately to$0.36 ~~voluntarily~~(approximately ~~file~~$0.09 ~~annual,~~per ~~periodic~~quarter ~~and~~in ~~current~~2004) ~~reports~~in ~~with~~fiscal ~~the~~2004. ~~SEC~~Loss asper share on a ~~voluntary~~diluted ~~filer~~basis soincreased ~~long~~by as$0.09 in the ~~indenture~~first ~~covenants~~quarter ~~remain~~of 2005. This adjustment increases the deferred tax liability in ~~effect~~the consolidated balance sheets by $2,852 at January 1, 2005 and by $3,567 at April 2, 2005. See item (a) in the following summary tables for adjustments by year and quarter).

In The ~~connection~~adjustments ~~with~~presented ~~the~~in ~~Shareholder Transaction,~~ the ~~Company~~following ~~incurred~~tables ~~costs~~include ~~during~~ the ~~first quarter~~deferred ofincome ~~2005~~tax ~~and~~restatement adjustments ~~2004.~~(discussed ~~These~~above) ~~costs included legal fees~~ and other ~~related~~adjustments ~~costs.~~described ~~The costs incurred during the first quarter of 2004 were associated with terminated Agreement and Plan of Merger, by and between the Company and JRT Acquisition, Inc~~below. ~~For further information please see the Company’s Form 10-K for fiscal 2004, which is incorporated by reference. The following table~~ ~~provides a breakdown of the costs incurred in the first quarter of 2005 and 2004.~~

7 In connection with the second quarter close process the Company identified a lease agreement that contained escalating rental payments that were not appropriately straight-lined over the lease term in accordance with the requirements of SFAS No. 13, “Accounting for Leases” and FASB Technical Bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent Increases”. Accordingly, the Company is required to record a rent deferral within other liabilities for the excess of the straight-line rental expense over the rental payments made to date. As a result of the lease accounting adjustment, cost of goods sold in fiscal year 2004 increased by approximately $250. Loss per share on a fully diluted basis increased by approximately $0.03. This adjustment increased other liabilities on the consolidated balance sheets by approximately $250 at January 1, 2005 and at April 2, 2005. See item (b) in the following summary tables for adjustments by year and quarter).

~~Table~~ The Company also identified two adjustments related to the accounting for its Mexico subsidiary. The first adjustment relates to an error in translating fixed asset additions and recording depreciation expense where the Company understated depreciation expense on the fixed assets of ~~Contents~~the Mexico operation and the second adjustment relates to management’s inappropriate use of the Mexican Peso as its functional currency for the Mexico operation. As a result of these adjustments, cost of goods sold increased by approximately $233 and other income increased by $10 in fiscal year 2004. Loss per share on a fully diluted basis increased by approximately $0.03 due to those adjustments. These adjustments increased property, plant and equipment (by $58) and accumulated depreciation (by $233) and reduced accumulated other comprehensive loss (by $48) on the consolidated balance sheets at January 1, 2005 and at April 2, 2005. See item (c) in the following summary tables for adjustments by year and quarter).

	Thirteen weeks ended
	April 2,		March 27,
	2005		2004
Legal fees	$	117	$	223
Other related costs		1		50
Total	$	118	$	273

The impact of the lease accounting and Mexico subsidiary adjustments was not material to the interim periods of fiscal year 2004 and prior periods. Accordingly, the restated results for the fourth quarter of fiscal year 2004 include an amount of $388 in respect of these prior periods.

~~Note~~ Following 4.is ~~Eagan~~a ~~Shutdown~~summary of the effects of these changes on the Company’s previously issued consolidated balance sheet as of April 2, 2005, January 1, 2005, and as of the end of each of the interim periods in fiscal year 2004 as well as the effects of these changes on the Company’s consolidated statements of operations and cash flows for the quarter ended April 2, 2005, the fiscal year ended January 1, 2005 and for each of the interim periods in fiscal year 2004:

On July 29, 2003, the Company announced its intention to close its Eagan, Minnesota manufacturing and warehouse facility in January 2004 (“Eagan Shutdown”). The facility was exited on January 31, 2004. The Eagan, Minnesota facility was closed as part of an effort to reduce operating costs and utilize capacity in the Company’s other injection molding plants. The Company terminated approximately 130 hourly and salaried employees as part of the Eagan Shutdown.


	Condensed Consolidated Statements of Operations
	(In thousands, except per share data)
	As Previously
Thirteen weeks ended April 2, 2005 (Restated):	Reported			Adjustments			As Restated
Income tax expense	$	(11	)	$	(715	)(a)	$	(726	)
Net loss	$	(5,050	)	$	(715	)(a)	$	(5,765	)
Net loss per common share:
Basic and Diluted	$	(0.62	)	$	(0.09	)(a)	$	(0.71	)

During the first quarter of 2005 and 2004, the Company incurred $32 and $606, respectively, of Eagan Shutdown charges. These charges related to costs associated with the Eagan, Minnesota plant closure, employee severance, costs associated with the relocation of equipment and inventory and employee related fringe benefits. Eagan Shutdown charges incurred were included in cost of goods sold in the Company’s condensed consolidated statements of operations.


	As Previously
Fiscal year ended January 1, 2005 (Restated):	Reported			Adjustments			As Restated
Cost of goods sold	$	214,854		$	250	(b)	$	215,337
				$	233	(c)

				$	483
Gross profit	$	45,423		$	(250	)(b)	$	44,940
				$	(233	)(c)

				$	(483	)
Operating profit	$	9,013		$	(250	)(b)	$	8,530
				$	(233	)(c)

				$	(483	)
Other income, net	$	—		$	10	(c)	$	10
Loss before income taxes	$	(4,520	)	$	(250	)(b)	$	(4,993	)
				$	(233	)(c)
				$	10	(c)

				$	(473	)
Income tax expense	$	(33	)	$	(2,852	)(a)	$	(2,885	)
Net loss	$	(4,553	)	$	(2,852	)(a)	$	(7,878	)
				$	(250	)(b)
				$	(233	)(c)
				$	10	(c)

Net loss per common share:				$	(3,325	)
Basic and Diluted	$	(0.57	)	$	(0.36	)(a)	$	(0.99	)
				$	(0.03	)(b)
				$	(0.03	)(c)

				$	(0.42	)(a)

The following tables reflect the changes in the accrual during the thirteen weeks ended April 2, 2005 and March 27, 2004 associated with the Eagan Shutdown. This accrual was included in accrued liabilities on the Company’s condensed consolidated balance sheets.


	As Previously
Fourteen weeks ended January 1, 2005 (Restated):	Reported			Adjustments			As Restated
Gross profit	$	14,425		$	(250	)(b)	$	13,942
				$	(233	)(c)

				$	(483	)
Net loss	$	(3,888	)	$	(713	)(a)	$	(5,074	)
				$	(250	)(b)
				$	(233	)(c)
				$	10	(c)

Net loss per common share:				$	(1,186	)
Basic and Diluted	$	(0.49	)	$	(0.09	)(a)	$	(0.64	)
				$	(0.03	)(b)
				$	(0.03	)(c)

				$	(0.15	)(a)

	Accrual			Charged								Accrual
	As Previously
	balance at			to								balance at
Thirteen and Thirty-nine weeks ended September 25, 2004 (Restated):	Reported			Adjustments			As Restated
	January 1,			Earnings			Cash			Non-Cash		April 2,
Thirteen weeks ended:
Description of Accrual	2005			2005			Utilization			Utilization		2005
Income tax expense	$	(6	)	$	(713	)(a)	$	(719	)
Employee separations	$	—		$	—		$	—		$	—	$	—
Net income (loss)	$	107		$	(713	)(a)	$	(606	)
Other		—			32			(32	)		—		—
Net income (loss) per common share:
Total Eagan Shutdown costs	$	—		$	32		$	(32	)	$	—	$	—
Basic and Diluted	$	0.01		$	(0.09	)(a)	$	(0.08	)
Thirty-nine weeks ended:
Income tax expense	$	(23	)	$	(2,139	)(a)	$	(2,162	)
Net loss	$	(665	)	$	(2,139	)(a)	$	(2,804	)
Net loss per common share:
Basic and Diluted	$	(0.08	)	$	(0.27	)(a)	$	(0.35	)

	Accrual			Charged								Accrual
	As Previously
	balance at			to								balance at
Thirteen and Twenty-six weeks ended June 26, 2004 (Restated):	Reported			Adjustments			As Restated
	December 27,			Earnings			Cash			Non-Cash		March 27,
Thirteen weeks ended:
Description of Acrual	2003			2004			Utilization			Utilization		2004
Income tax expense	$	(10	)	$	(713	)(a)	$	(723	)
Employee separations	$	428		$	—		$	(245	)	$	—	$	183
Net loss	$	(569	)	$	(713	)(a)	$	(1,282	)
Other		—			606			(606	)		—		—
Net loss per common share:
Total Eagan Shutdown costs	$	428		$	606		$	(851	)	$	—	$	183
Basic and Diluted	$	(0.07	)	$	(0.09	)(a)	$	(0.16	)
Twenty-six weeks ended:
Income tax expense	$	(17	)	$	(1,426	)(a)	$	(1,443	)
Net loss	$	(772	)	$	(1,426	)(a)	$	(2,198	)
Net loss per common share:
Basic and Diluted	$	(0.10	)	$	(0.18	)(a)	$	(0.28	)


	As Previously
Thirteen weeks ended March 27, 2004 (Restated):	Reported			Adjustments			As Restated
Thirteen weeks ended:
Income tax expense	$	(7	)	$	(713	)(a)	$	(720	)
Net loss	$	(203	)	$	(713	)(a)	$	(916	)
Net loss per common share:
Basic and Diluted	$	(0.03	)	$	(0.09	)(a)	$	(0.12	)


	Condensed Consolidated Balance Sheets
	(In thousands)
	As Previously
As of April 2, 2005 (Restated):	Reported			Adjustments			As Restated
Property, plant and equipment – at cost	$	95,367		$	58	(c)	$	95,425
Accumulated depreciation	$	(65,383	)	$	(233	)(c)	$	(65,616	)
Property, plant and equipment, net	$	29,984		$	58	(c)	$	29,809
				$	(233	)(c)

				$	(175	)
Total assets	$	172,323		$	58	(c)	$	172,148
				$	(233	)(c)

				$	(175	)
Other liabilities	$	4,397		$	250	(b)	$	4,647
Deferred tax liability	$	—		$	3,567	(a)	$	3,567
Total liabilities	$	175,003		$	250	(b)	$	178,820
				$	3,567	(a)

				$	3,817
Accumulated deficit	$	(46,898	)	$	(3,567	)(a)	$	(50,938	)
				$	(250	)(b)
				$	(233	)(c)
				$	10	(c)

				$	(4,040	)
Accumulated other comprehensive loss	$	(48	)	$	48	(c)	$	—
Total stockholders’ deficit	$	(2,680	)	$	(3,567	)(a)	$	(6,672	)
				$	(250	)(b)
				$	(233	)(c)
				$	58	(c)

				$	(3,992	)
Total liabilities and stockholders’ deficit	$	172,323		$	(175	)(c)	$	172,148

Note 5. Inventories


	As Previously
As of January 1, 2005 (Restated):	Reported			Adjustments			As Restated
Property, plant and equipment – at cost	$	95,361		$	58	(c)	$	95,419
Accumulated depreciation	$	(63,718	)	$	(233	)(c)	$	(63,951	)
Property, plant and equipment, net	$	31,643		$	58	(c)	$	31,468
				$	(233	)(c)

				$	(175	)
Total assets	$	192,488		$	58	(c)	$	192,313
				$	(233	)(c)

				$	(175	)
Other liabilities	$	4,199		$	250	(b)	$	4,449
Deferred tax liability	$	—		$	2,852	(a)	$	2,852
Total liabilities	$	190,118		$	250	(b)	$	193,220
				$	2,852	(a)

				$	3,102
Accumulated deficit	$	(41,848	)	$	(2,852	)(a)	$	(45,173	)
				$	(250	)(b)
				$	(233	)(c)
				$	10	(c)

				$	(3,325	)
Accumulated other comprehensive loss	$	(48	)	$	48	(c)	$	—
Total stockholders’ equity (deficit)	$	2,370		$	(2,852	)(a)	$	(907	)
				$	(250	)(b)
				$	(233	)(c)
				$	58	(c)

				$	(3,277	)
Total liabilities and stockholders’ equity (deficit)	$	192,488		$	(175	)(c)	$	192,313

The components of the Company’s inventory consists of direct labor, direct materials and the applicable portion of overhead required to manufacture the goods.


	As Previously
As of September 25, 2004 (Restated):	Reported			Adjustments			As Restated
Deferred tax liability	$	—		$	2,139	(a)	$	2,139
Total liabilities	$	181,649		$	2,139	(a)	$	183,788
Accumulated deficit	$	(37,960	)	$	(2,139	)(a)	$	(40,099	)
Total stockholders’ equity	$	5,667		$	(2,139	)(a)	$	3,528
Total liabilities and stockholders’ equity	$	187,316		$	—		$	187,316

	April 2,			January 1,
	As Previously
	2005			2005
As of June 26, 2004 (Restated):	Reported			Adjustments			As Restated
Finished goods	$	20,860		$	19,540
Deferred tax liability	$	—		$	1,426	(a)	$	1,426
Work-in-process		1,601			1,167
Total liabilities	$	181,164		$	1,426	(a)	$	182,590
Raw materials		11,513			9,585
Accumulated deficit	$	(38,067	)	$	(1,426	)(a)	$	(39,493	)
	$	33,974		$	30,292
Total stockholders’ equity	$	5,554		$	(1,426	)(a)	$	4,128
Total liabilities and stockholders’ equity	$	186,718		$	—		$	186,718

Note 6. Goodwill and Patents and Non-Compete Agreements


	As Previously
As of March 27, 2004 (Restated):	Reported			Adjustments			As Restated
Deferred tax liability	$	—		$	713	(a)	$	713
Total liabilities	$	166,649		$	713	(a)	$	167,362
Accumulated deficit	$	(37,498	)	$	(713	)(a)	$	(38,211	)
Total stockholders’ equity	$	6,132		$	(713	)(a)	$	5,419
Total liabilities and stockholders’ equity	$	172,781		$	—		$	172,781

Goodwill relates to the excess of purchase price over the fair value of tangible assets acquired. Goodwill is tested at least annually for impairment or more often if an event or circumstance indicates that an impairment loss has been incurred.


	Condensed Consolidated Statements of Cash Flows
	(In thousands)
	As Previously
Thirteen weeks ended April 2, 2005 (Restated):	Reported			Adjustments			As Restated
Net loss	$	(5,050	)	$	(715	)(a)	$	(5,765	)
Deferred income taxes	$	—		$	715	(a)	$	715
Net cash provided by operating activities	$	13,388		$	—		$	13,388

The change in the carrying amount of goodwill for the thirteen weeks ended April 2, 2005 was as follows:


Fiscal year ended January 1, 2005 (Fiscal	As Previously
2004 Restated—Unaudited):	Reported			Adjustments			As Restated
Net loss	$	(4,553	)	$	(2,852	)(a)	$	(7,878	)
				$	(250	)(b)
				$	(233	)(c)
				$	10	(c)

				$	(3,325	)
Depreciation and amortization	$	8,698		$	233	(c)	$	8,931
Deferred income taxes	$	—		$	2,852	(a)	$	2,852
Other long term liabilities	$	213		$	250	(b)	$	463
Other, net	$	661		$	(10	)(c)	$	651
Net cash used for operating activities	$	(8,030	)	$	—		$	(8,030	)

	Total
Thirty-nine weeks ended September 25, 2004	As Previously
Balance at January 1, 2005	$	73,182
(Restated):	Reported			Adjustments			As Restated
Settlement of environmental escrow account		(402	)
Net loss	$	(665	)	$	(2,139	)(a)	$	(2,804	)
Balance at April 2, 2005	$	72,780
Deferred income taxes	$	—		$	2,139	(a)	$	2,139
Net cash provided by operating activities	$	4,398		$	—		$	4,398

During the first quarter of 2005, the carrying amount of goodwill was decreased by $402 as a result of the settlement of an environmental escrow account related to an acquisition made in 1997.


	As Previously
Twenty-six weeks ended June 26, 2004 (Restated):	Reported			Adjustments			As Restated
Net loss	$	(772	)	$	(1,426	)(a)	$	(2,198	)
Deferred income taxes	$	—		$	1,426	(a)	$	1,426
Net cash provided by operating activities	$	1,584		$	—		$	1,584

Patents and non-compete agreements are amortized over their useful lives, and are evaluated annually to determine whether events and circumstances warrant a revision to the remaining period of amortization. For patents that remain subject to amortization provisions, amortization expense is expected to be $75 for the remainder of 2005.


	As Previously
Thirteen weeks ended March 27, 2004 (Restated):	Reported			Adjustments			As Restated
Net loss	$	(203	)	$	(713	)(a)	$	(916	)
Deferred income taxes	$	—		$	713	(a)	$	713
Net cash provided by operating activities	$	13,472		$	—		$	13,472

~~Patents~~Note ~~and~~3. ~~non~~Stock-~~compete~~Based ~~agreements~~Compensation ~~consist of the following:~~Plans

		April 2, 2005
	Average	Gross					Net
	Life	Carrying		Accumulated			Carrying
	(Yrs.)	Amount		Amortization			Amount
Amortized intangible assets:
Patents	7 to 14	$	1,008	$	(933	)	$	75
Non-compete agreements	10		2,928		(2,928	)		—
Total		$	3,936	$	(3,861	)	$	75

SFAS No. 123, “Accounting for Stock-Based Compensation” encourages companies to adopt a fair value approach to valuing stock-based compensation that would require compensation cost to be recognized based upon the fair value of the stock-based instrument issued. The Company has elected, as permitted by SFAS No. 123, to apply the provisions of Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Based Compensation” and the related interpretations in accounting for stock option awards under the stock option plans. Under APB Opinion No. 25, compensation expense is recognized if the market price on the date of grant exceeds the exercise price. Prior to 2005, all options granted by the Company had been granted at the market price of stock on the date of grant. During the second quarter of 2005, the Company awarded a total of 760,000 stock options under a new stock plan which are being accounted for as variable awards. At July 2, 2005, the formula amount of the 760,000 options granted by the Company was less than the exercise price and as a result, no compensation expense was recorded. At the end of each reporting period the Company will evaluate whether any compensation expense should be reported. The following table shows the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123. The fair value of these stock options was estimated at the date of grant using a Black-Scholes option pricing model.


	Thirteen weeks						Twenty-six weeks
	ended						ended
				June 26,						June 26,
	July 2,			2004			July 2,			2004
	2005			As Restated			2005			As Restated

Net loss as reported	$	(4,531	)	$	(1,282	)	$	(10,296	)	$	(2,198	)
Less: total stock-based compensation expense determined under fair value based method for all awards		(19	)		(31	)		(31	)		(62	)

Pro forma net loss	$	(4,550	)	$	(1,313	)	$	(10,327	)	$	(2,260	)


Basic net loss per common share – as reported	$	(0.56	)	$	(0.16	)	$	(1.26	)	$	(0.28	)

Basic net loss per common share – pro forma	$	(0.56	)	$	(0.17	)	$	(1.27	)	$	(0.28	)


Diluted net loss per common share – as reported	$	(0.56	)	$	(0.16	)	$	(1.26	)	$	(0.28	)

Diluted net loss per common share – pro forma	$	(0.56	)	$	(0.17	)	$	(1.27	)	$	(0.28	)

~~Table of Contents~~7

		January 1, 2005
	Average	Gross					Net
	Life	Carrying		Accumulated			Carrying
	(Yrs.)	Amount		Amortization			Amount
Amortized intangible assets:
Patents	7 to 14	$	1,008	$	(908	)	$	100
Non-compete agreements	10		2,928		(2,928	)		—
Total		$	3,936	$	(3,836	)	$	100

~~Aggregate~~Note ~~amortization~~4. ~~expense~~Shareholder ~~for the thirteen weeks ended April 2, 2005 and March 27, 2004~~Transaction ~~was $25 and $124, respectively.~~

~~Note~~ On 7December 13, 2004, Storage Acquisition Company, L.L.C., ~~Commitments~~a ~~and~~Delaware ~~Contingencies~~limited liability company (“Acquirer”) completed its tender offer for the outstanding shares of common stock (including the associated preferred stock purchase rights) of the Company for $2.25 per share, net to the seller, in cash, without interest. As a result of the tender offer, the Acquirer obtained approximately 93% of the Company’s outstanding common shares. Collectively, the process that led to the offer and the completion of the tender offer is referred to herein as the “Shareholder Transaction”.

~~The~~ On ~~Company~~December 15, ~~has~~2004 ~~entered~~the ~~into~~Company’s ~~commitments~~common tostock ~~purchase~~was ~~certain~~deregistered ~~core~~and ~~commodities~~is atno ~~formula-based~~longer trading on ~~prices~~The NASDAQ SmallCap Market. ~~The~~There ~~agreements~~is ~~expire~~no inassurance ~~2005~~that ~~and~~the ~~2006.~~Company’s ~~Future~~shares ~~related~~will ~~minimum~~be ~~commitments~~traded toon ~~purchase~~the ~~commodities~~over-the-counter bulletin board, ~~assuming~~or ~~April 2005~~that price ~~levels~~quotations will be reported through any other sources. In addition, ~~are~~the ~~$73~~Company has suspended its reporting obligations under the Securities Exchange Act of 1934,~~000~~ ineffective as of March 15, 2005.

~~The~~ Notwithstanding ~~Company~~the ~~was~~suspension aof ~~party~~its obligation to afile ~~legal~~periodic ~~action~~financial ~~described~~reports, ~~below.~~by Inthe terms ~~addition,~~of the Company’s isindenture ~~party to~~governing ~~various~~its ~~claims,~~9-5/8% ~~legal~~Senior ~~actions~~Subordinated ~~and~~Notes ~~complaints~~due ~~including product liability litigation~~May 14, ~~arising in~~2008, the ~~ordinary~~Company ~~course~~is ofrequired ~~business.~~to Involuntarily ~~the~~file ~~opinion of management~~annual, ~~all~~periodic ~~such~~and ~~matters~~current ~~are~~reports ~~adequately covered~~with bythe ~~insurance~~SEC oras ~~will not have~~ a “voluntary ~~material~~filer” ~~adverse~~so ~~effect~~long onas the ~~Company’s~~indenture ~~consolidated financial~~covenants ~~position,~~remain ~~results~~in ~~of operations or liquidity~~effect.

On In ~~June 4,~~connection ~~2004~~with the Shareholder Transaction, athe ~~complaint~~Company ~~was~~incurred ~~filed~~costs induring the ~~Chancery~~thirteen and ~~Division~~twenty ofsix ~~the~~weeks ~~Circuit~~ended ~~Court~~July 2, of2005 ~~Cook County~~and June 26, ~~Illinois~~2004. ~~against~~These ~~the~~costs ~~Company~~included legal fees, investment banking fees and ~~the~~other ~~Company’s~~related ~~directors~~costs. The ~~complaint~~costs ~~purported~~incurred toduring ~~be filed~~the bythirteen aand twenty-six ~~stockholder~~weeks ~~and~~ended ~~alleged~~June 26, ~~that~~2004 inwere ~~entering~~associated ~~into~~with the terminated Agreement and Plan of Merger, by and between the Company and JRT Acquisition, Inc. ~~(“JRT”),~~For asfurther ~~amended~~information byplease ~~the First Amendment to the~~see ~~Agreement and Plan of Merger, dated October 11, 2004 (~~the ~~“JRT Agreement”), the~~ Company’s ~~board~~Form ~~of directors~~10-K ~~breached~~for ~~their~~fiscal ~~fiduciary duties of loyalty, due care, independence, good faith and fair dealing~~2004. The ~~complaint~~following table ~~included~~provides a ~~request~~breakdown ~~for~~of athe ~~declaration~~costs ~~that~~incurred in the ~~action~~thirteen beand ~~maintained~~twenty-six asweeks ~~a class~~ended ~~action. On May~~July 52, 2005, ~~the~~and ~~Chancery Division of the Circuit Court of Cook County~~June 26, ~~Illinois~~2004: ~~dismissed the action without prejudice.~~

Note 8. Income Taxes


	Thirteen weeks				Twenty-six weeks
	ended				ended
	July 2,		June 26,		July 2,		June 26,
	2005		2004		2005		2004
Legal fees	$	116	$	228	$	233	$	451
Investment banking fees		—		232		—		232
Other related costs		74		28		75		78


Total	$	190	$	488	$	308	$	761

~~The~~ As a ~~Company~~result ~~uses~~of the ~~asset~~Shareholder ~~and~~Transaction ~~liability~~the ~~method~~Company ofincurred ~~SFAS~~$1,852 ~~No. 109 in accounting for income~~of ~~taxes.~~severance ~~Under this method deferred tax assets~~ and ~~liabilities~~retention ~~are~~costs ~~recognized~~during ~~for~~ the ~~future~~twenty-six ~~tax consequences~~weeks ~~attributable to temporary differences between the financial statement carrying amounts~~ended ~~of existing assets and liabilities and their respective tax bases~~July 2, ~~tax~~2005 ~~credits~~related ~~and~~to ~~operating~~management ~~loss carryforwards~~changes. ~~Deferred~~These ~~tax~~costs ~~assets and liabilities~~ are ~~measured~~included ~~using~~in ~~the~~selling, ~~enacted~~general ~~tax~~and ~~rates expected~~administrative toexpenses ~~apply to taxable income~~ in the ~~years in which those temporary differences are expected~~ toCompany’s becondensed ~~recovered~~consolidated orstatements ~~settled~~of operations.

~~SFAS~~Note No5. ~~109~~ ~~requires~~Eagan ~~that a valuation allowance be established when it is more likely than~~Shutdown not that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including historical earnings and projected operating results, applicable net operating loss carryforward expiration dates, and identified actions under the control of the Company in realizing the associated carryforward benefits. SFAS No. 109 further states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years and current operating losses.

10 On July 29, 2003, the Company announced its intention to close its Eagan, Minnesota manufacturing and warehouse facility in January 2004 (“Eagan Shutdown”). The facility was exited on January 31, 2004. The Eagan, Minnesota facility was closed as part of an effort to reduce operating costs and utilize capacity in the Company’s other injection molding plants. The Company terminated approximately 130 hourly and salaried employees as part of the Eagan Shutdown.

~~Table~~ During 2005 and 2004, the Company incurred charges related to the Eagan Shutdown. These charges related to costs associated with the Eagan, Minnesota plant closure, employee severance, costs associated with the relocation of ~~Contents~~equipment and inventory, and employee related fringe benefits. Eagan Shutdown charges incurred were included in cost of goods sold in the Company’s condensed consolidated statements of operations.

~~The~~During ~~Company~~the ~~expects~~twenty-six toweeks ~~provide~~ended aJuly 2, ~~full~~2005 ~~valuation~~the ~~allowance~~Company onincurred ~~future~~$32 ~~tax~~of ~~benefits~~cash ~~until an~~charges ~~appropriate~~related ~~level~~to ofemployee ~~profitability~~related isfringe ~~sustained~~benefits. ~~Until~~All anactions ~~appropriate~~have ~~level~~been ofcompleted ~~profitability~~and ~~is reached,~~ the Company does not expect to ~~recognize~~incur any ~~significant~~further ~~tax~~charges ~~benefits~~related into ~~future~~the ~~results~~Eagan ~~of operations~~Shutdown.

~~Note 9. Net Loss Per Share~~8

The followingTable informationof presents net loss per share, basic and diluted: Contents

	Thirteen weeks
	ended
	April 2,			March 27 ,
	2005			2004
Net loss	$	(5,050	)	$	(203	)
Weighted average shares outstanding - basic		8,154,587			7,986,556
Impact of stock options and warrants		—			—
Weighted average shares outstanding - diluted		8,154,587			7,986,556
Net loss per share - basic	$	(0.62	)	$	(0.03	)
Net loss per share - diluted	$	(0.62	)	$	(0.03	)

During the thirteen and twenty-six weeks ended June 26, 2004 the Company incurred $76 and $682, respectively, of charges related to the Eagan Shutdown. Total net cash outlays were $245 and $1,096 during the thirteen and twenty-six weeks ended June 26, 2004, respectively.

~~Net~~Note ~~loss per share - basic is computed based on the weighted average number of outstanding common shares~~6. ~~Net loss per share - diluted normally includes the weighted average effect of~~Inventories dilutive stock options and warrants on the weighted average shares outstanding. At April 2, 2005, stock options and warrants to purchase the Company’s common stock totaling 171,900 were not included in the net loss per share – diluted since impact would have been anti-dilutive. At March 27, 2004, stock options and warrants to purchase the Company’s common stock totaling 983,420 were not included in the net loss per share – diluted since their impact would have been anti-dilutive.

~~Note~~ The ~~10.~~components ~~Other~~of ~~Comprehensive~~the ~~Loss~~Company’s inventory consists of direct labor, direct materials and the applicable portion of overhead required to manufacture the goods.

Accumulated other comprehensive loss encompasses foreign currency translation adjustments and is recorded within stockholders’ equity.


	July 2,		January 1,
	2005		2005
Finished goods	$	23,244	$	19,540
Work-in-process		1,471		1,167
Raw materials		8,336		9,585


	$	33,051	$	30,292

~~The~~Note ~~following~~7. ~~table~~Goodwill ~~summarizes~~and ~~other comprehensive loss for the periods presented:~~Patents

	Thirteen weeks
	ended
	April 2 ,			March 27 ,
	2005			2004
Net loss	$	(5,050	)	$	(203	)
Other comprehensive loss:
Foreign currency translation adjustments		(0	)		(14	)
Total comprehensive loss	$	(5,050	)	$	(217	)

Goodwill:

11 In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill cannot be amortized; however, it must be tested annually for impairment. Goodwill relates to the excess of purchase price over the fair value of assets acquired. Goodwill is tested at least annually for impairment or more often if an event or circumstance indicates that an impairment loss has been incurred.

~~Table~~ The change in the carrying amount of ~~Contents~~goodwill for the twenty-six weeks ended July 2, 2005 was as follows:

The following is a summary of accumulated other comprehensive loss balances:


	Total
Balance at January 1, 2005	$	73,182
Settlement of environmental escrow account		(402	)

Balance at July 2, 2005	$	72,780

	April 2,			January 1,
	2005			2005
Foreign currency translation losses	$	(48	)	$	(48	)
Accumulated other comprehensive loss	$	(48	)	$	(48	)

During the first quarter of 2005, the carrying amount of goodwill was decreased by $402 as a result of the settlement of an environmental escrow account related to an acquisition made in 1997.

~~Note 11. Segment of an Enterprise~~Patents:

~~The~~Patents ~~Company~~are ~~consists~~amortized ofover atheir ~~single~~useful ~~operating segment that designs~~lives, ~~manufactures~~ and ~~markets quality~~are ~~consumer~~evaluated ~~housewares~~whenever ~~products.~~events ~~This~~and ~~segmentation~~circumstances iswarrant ~~based~~a onrevision ~~the financial information presented~~ to the ~~chief~~remaining ~~operating~~period ~~decision maker~~of amortization. ~~The~~For ~~following~~patents ~~table~~that ~~sets~~remain ~~forth~~subject ~~the~~to ~~net~~amortization ~~sales~~provisions, byamortization expense is ~~product~~expected ~~category~~to ~~within~~be ~~the~~$51 ~~Company’s~~for ~~single~~the ~~operating~~remainder ~~segment~~of 2005.

~~Product~~ Patents ~~Category~~consist ~~Information~~of –the ~~Net Sales~~following:

	Thirteen weeks ended
			As of
	April 2, 2005		March 27, 2004
			July 2, 2005
General storage	$	17,758	$	21,603
	Average		Gross					Net
Laundry management		17,701		18,028
	Life		Carrying		Accumulated			Carrying
Closet storage		10,687		8,434
	(Yrs.)		Amount		Amortization			Amount
Bathware		3,138		2,847
Amortized intangible assets:
Kitchen storage		2,107		2,278
Patents		7 to 14	$	1,008	$	(957	)	$	51
Total net sales	$	51,391	$	53,190
Total			$	1,008	$	(957	)	$	51

~~Major Customers~~9

TheTable Company is dependent upon a few customers for a large portion of its consolidated net sales. During the first quarter of 2005, Wal-mart, Kmart and Target accounted for 42.2%, 21.2% and 4.4%, respectively, of the Company’s consolidated net sales. During the first quarter of 2004, Wal-mart, Kmart and Target accounted for 33.8%, 24.4% and 15.7%, respectively, of the Company’s consolidated net sales. The loss of one of these customers could have a material adverse effect on the Company. No other customer accounted for more than 10% of consolidated net sales during the thirteen weeks ended April 2, 2005 and March 27, 2004. Contents


			As of
			January 1, 2005
	Average		Gross					Net
	Life		Carrying		Accumulated			Carrying
	(Yrs.)		Amount		Amortization			Amount
Amortized intangible assets:
Patents		7 to 14	$	1,008	$	(908	)	$	100

Total			$	1,008	$	(908	)	$	100

~~Table~~ Aggregate ofamortization ~~Contents~~expense for the twenty-six weeks ended July 2, 2005 and June 26, 2004 was $49 and $248, respectively.

~~ITEM~~Note 28. ~~Management’s~~Commitments ~~Discussion~~ and ~~Analysis of Financial Condition and Results of Operations~~Contingencies

~~This~~The ~~commentary~~Company ~~should~~has beentered ~~read~~into invarious ~~conjunction~~commitments ~~with~~to ~~the~~purchase ~~Company’s~~certain ~~consolidated~~core ~~financial~~commodities at ~~statements~~formula-based prices. The agreements expire in 2005 and 2006. Future related ~~notes~~minimum ~~and~~commitments to ~~management’s~~purchase ~~discussion~~commodities, ~~and~~assuming ~~analysis~~July 2005 ofprice ~~financial~~levels, ~~condition~~are $27,810 in 2005 and $44,870 in 2006. ~~results~~In ofthe ~~operations~~event ~~contained~~there is a major change in economic conditions affecting the Company’s ~~Annual~~overall ~~Report~~annual plastic onresin ~~Form~~volume ~~10-K~~requirements, ~~for~~the Company and the ~~year~~vendor ~~ended~~will mutually agree on how to ~~January 1,~~mitigate ~~2005~~the effects on both parties. Mitigating actions include deferral of product delivery within the agreement term, agreement term extension and/or elimination of excess quantities without liability.

~~Overview~~ The Company is party to various claims, legal actions and complaints including product liability litigation, arising in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance or will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

On June 4, 2004, a complaint was filed in the Chancery Division of the Circuit Court of Cook County, Illinois against the Company and the Company’s directors. The complaint purported to be filed by a stockholder and alleged that in entering into the Agreement and Plan of Merger, by and between the Company ~~designs~~and JRT Acquisition, ~~manufactures~~Inc. (“JRT”), as amended by the First Amendment to the Agreement and ~~markets~~Plan aof ~~broad~~Merger, ~~range~~dated October 11, 2004 (the “JRT Agreement”), the Company’s board of directors ~~quality~~breached ~~houseware~~their ~~products~~fiduciary duties of loyalty, due care, independence, good faith and fair dealing. The complaint included a request for a declaration that the action be maintained as a class action. On May 5, 2005, The ~~following~~Illinois ~~are~~Circuit ~~key~~Court ~~factors~~(lower incourt) ~~understanding~~issued its Order dismissing the ~~Company~~shareholder action, Slattery v. Home Products Int’l, Inc., as moot. The Circuit Court’s ~~performance~~May 5, 2005 Order also denied plaintiffs petition for attorneys’ fees. On June 2, 2005, plaintiffs filed an appeal from the Circuit Court’s denial of their petition for attorneys’ fees only. Plaintiffs did not appeal the portion of the May 5, 2005 Order that dismissed the complaint. The appeal is pending in the Illinois Appellate Court for the First District. The Company intends to defend this appeal vigorously.

13 On July 20, 2005, a complaint was filed in the United States District Court for the Southern District of New York by Sawaya Segalas & Co., LLC (“SSC”) against the Company. Service of process for the complaint was effected as of July 22, 2005. The complaint alleges that the Company is obligated under an engagement letter, by and between SSC and the Company, dated April 23, 2002, to pay to SSC a success fee in connection with the successful tender offer by Storage Acquisition Company, L.L.C. for all the outstanding common stock of HPI that was completed in December of 2004. SSC seeks damages from the Company in the amount of $1,224 pre-judgment interest, SSC’s attorneys’ fees,

~~Table of Contents~~10

•Table Customerof baseContents

~~The~~disbursements ~~Company’s~~and ~~business is highly concentrated among mass merchandisers~~costs, ~~including discount stores, home centers~~ and other ~~category~~relief ~~specific~~deemed ~~retailers.~~proper ~~Sales~~by ~~to our top three customers, Wal-Mart, Kmart and Target, were 68% of net sales in~~ the ~~thirteen weeks ended April 2, 2005, 72% of net sales in fiscal year 2004 and 73% of net sales in fiscal year 2003~~court. The Company~~’s products~~ ~~generally have few unique or patented features and are sold at entry level price~~is ~~points.~~evaluating ~~As such,~~ the ~~Company’s~~complaint ~~financial~~and ~~success~~ is ~~highly~~in ~~dependent~~the onprocess ~~profitably meeting certain price points as demanded by customers. The competitive atmosphere continually pressures our selling prices. After several years~~ of ~~steadily~~responding ~~falling selling prices, the Company was able~~ to ~~secure~~this ~~limited selling price increases in 2004 and into 2005~~claim.

~~The~~Note ~~size of the mass merchandisers gives them strong bargaining power with suppliers~~9. ~~They encourage~~Income ~~high levels of competition among suppliers, demand that manufacturers supply~~Taxes innovative new products, require suppliers to match or beat quoted prices received from other potential suppliers, demand reduced lead times and demanded that product be warehoused until the customer desires delivery. These customers also actively engage in the direct importation of competitive generic products from multiple sources.

The ~~high concentration of sales to mass merchandisers also makes the~~ Company’s ~~results dependent~~uses ~~upon~~ the ~~operating~~asset ~~results~~ and ~~financial~~liability ~~viability~~method of ~~its~~SFAS ~~key customers~~No. 109 ~~The Company’s~~in ~~operating~~accounting ~~results~~for inincome taxes. ~~recent~~Under ~~years~~this ~~have~~method ~~been~~deferred ~~impacted~~tax byassets ~~developments~~and atliabilities ~~Kmart,~~are ~~one~~recognized of for the ~~Company’s~~future ~~largest~~tax consequences ~~customers.~~attributable Asto ~~set~~temporary ~~forth~~differences inbetween ~~Kmart’s public~~the ~~filings,~~financial ~~since~~statement ~~emerging~~carrying ~~from~~amounts of ~~bankruptcy~~existing inassets ~~May 2003,~~and ~~Kmart~~liabilities ~~has~~and ~~improved its~~their ~~financial~~respective ~~performance.~~tax ~~However~~bases, ~~Kmart~~tax ~~continues~~credits toand ~~report~~operating ~~that it~~loss ~~has~~carryforwards. ~~experienced~~Deferred ~~declines~~tax inassets ~~same store sales~~ and ~~has~~liabilities ~~announced~~are ~~further~~measured ~~reductions~~using inthe ~~store~~enacted ~~count~~tax inrates expected ~~connection~~to ~~with~~apply ~~its~~to ~~merger~~taxable ~~with~~income ~~Sears. Kmart~~in ~~has~~the ~~paid~~years ~~all~~in ofwhich ~~its~~those ~~current~~temporary ~~obligations~~differences are expected to ~~the~~be ~~Company~~recovered onor ~~time~~settled.

• SFAS ~~Cost~~No. 109 requires that a valuation allowance be established when it is more likely than not that all or a portion of ~~raw~~deferred ~~materials~~tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including historical earnings and projected operating results, applicable net operating loss carryforward expiration dates, and identified actions under the control of the Company in realizing the associated carryforward benefits. SFAS No. 109 further states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years and current operating losses.

~~The Company’s primary raw materials are plastic resin and steel. Changing prices for such~~ As ~~raw~~further ~~materials~~discussed can cause the Company’s results of operations to fluctuate significantly. The cost of raw materials is impacted by several factors outside the control of the Company including supply and demand characteristics, oil and natural gas prices and the overall state of the economy. As the cost of raw materials rises it results in ~~immediate declines in profitability since the Company has historically been unable to recover all of the cost increase by passing it through to customers. Conversely~~Note 2, ~~when raw material costs decline,~~ the Company’s ~~margins~~ ~~generally~~Form ~~are favorably impacted in the short~~10-~~term,~~K ~~though competitive factors may force~~for ~~a decrease in selling prices that erodes some of~~ the ~~improved~~year ~~profitability.~~ended ~~During~~January 1, ~~the first thirteen weeks of fiscal~~ 2005, ~~the average cost of plastic resin increased approximately 48%~~ and ~~average~~ ~~steel~~Form ~~prices~~10-Q ~~increased~~for ~~approximately 59% as compared to~~ the ~~average~~quarter ~~costs in the first~~ended ~~thirteen~~April 2, ~~weeks~~2005 ofwill ~~2004.~~be ~~The~~restated ~~increase in steel and plastic resin costs added approximately $5.9 million~~ to ~~cost~~correct ofan ~~goods sold. Management expects the average cost of both plastic resin and~~error ~~steel~~related to ~~increase~~deferred ~~during~~income ~~2005 as compared to 2004~~taxes.

• During the ~~Product~~second ~~mix~~quarter of 2005 and 2004 the Company recorded a non-cash income tax provision of $715 and $713, respectively. During the twenty-six weeks ended July 2, 2005 and June 26, 2004 the Company recorded a non-cash income tax provision of $1,430 and $1,426, respectively. This charge was required because the Company currently has significant deferred tax liabilities related to goodwill with lower tax than book basis as a result of accelerated and continued amortization of goodwill for tax purposes. Following the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets”, the deferred tax liability related to the Company’s goodwill must now be considered as a liability related to an asset with an indefinite life and can no longer support the realization of deferred tax assets. Historically, the Company did not need a valuation allowance as the book basis of goodwill was lower than the tax basis. This was a result of a goodwill impairment charge which was recorded in fiscal year 2000. In 2004 the continued amortization of goodwill for tax purposes has resulted in a lower tax basis than book basis. Therefore, the Company will record an additional income tax provision to increase its deferred tax valuation allowance. In the future the Company will increase the valuation allowance with a corresponding deferred tax provision as the deferred tax liabilities related to the goodwill amortization increase.

The Company ~~sells~~expects ato ~~variety~~provide ofa ~~household~~full ~~items.~~valuation ~~For~~allowance ~~various~~on ~~reasons,~~future ~~some~~tax ~~items~~benefits ~~provide~~until aan ~~better~~appropriate ~~return~~level ~~than others. As the mix~~ of ~~items sold changes,~~ profitability ~~and~~is ~~cash flow are affected~~sustained. ~~Although we have had some success at getting an increase in selling prices during 2005~~Accordingly, ~~there can be no assurance that~~ we ~~will~~continue ~~be able~~ to ~~secure~~record ~~additional~~a ~~selling~~deferred ~~price~~tax ~~increases~~valuation toallowance ~~offset~~against ~~any~~our ~~future~~deferred ~~rise~~tax ~~in raw material costs~~assets. ~~To the extent that selling price~~ increases can not be achieved, certain unprofitable products may be discontinued. The costs related to discontinuing a product are relatively minor and relate primarily to the non-cash write-off of related tooling.

14Note 10. Net Loss Per Share

~~Table~~ The following ofinformation ~~Contents~~presents net loss per common share basic and diluted:

• Molding machine utilization


	Thirteen weeks						Twenty-six weeks
	ended						ended
				June 26,						June 26,
	July 2,			2004			July 2,			2004
	2005			As restated			2005			As restated

Net loss	$	(4,531	)	$	(1,282	)	$	(10,296	)	$	(2,198	)


Weighted average shares outstanding — basic		8,154,587			7,986,614			8,154,587			7,986,585
Impact of stock options and warrants		—			—			—			—

Weighted average shares outstanding — diluted		8,154,587			7,986,614			8,154,587			7,986,585


Net loss per common share — basic	$	(0.56	)	$	(0.16	)	$	(1.26	)	$	(0.28	)


Net loss per common share — diluted	$	(0.56	)	$	(0.16	)	$	(1.26	)	$	(0.28	)

~~The Company has four injection molding facilities with a variety of injection molding~~11 machine sizes. Customer ordering patterns and mix of product manufactured impacts utilization of these machines. When demand exceeds capacity, the Company must place production at third party facilities that are more costly than internal manufacturing. In addition, the mix of product sold impacts profitability since low margin items take the same amount of production time as higher margin items. The Company’s future profitability is dependent on selling to its optimum capacity and product mix so that constrained capacity is devoted to products with higher margins. We have no plans for expansion or reduction of our molding capacity until it can profitably operate the facilities it currently owns

•Table Financialof liquidityContents

~~Seasonal~~ “Net ~~working~~loss ~~capital~~per ~~needs~~common ~~are~~share ~~provided~~– bybasic” ~~the~~is ~~Company’s~~computed ~~$60 million asset-~~based ~~line of~~on ~~credit.~~the ~~Ability~~weighted toaverage ~~borrow~~number ~~is a function~~ of ~~the Company’s eligible asset base and~~ outstanding ~~borrowings~~common shares. ~~During~~“Net ~~the~~loss ~~first~~per ~~thirteen~~common ~~weeks~~share of– ~~2005,~~diluted” ~~cash~~normally ~~flow~~includes ~~was~~the ~~positive~~weighted ~~and~~average oneffect ~~April 2,~~of ~~2005~~dilutive ~~there~~stock ~~were~~options ~~$11.8 million~~and ofwarrants ~~borrowings~~on ~~outstanding~~the ~~under~~weighted ~~the~~average ~~line~~common ofshares ~~credit~~outstanding. At ~~April~~July 2, 2005, and ~~unused available line of credit was $31.4~~June ~~million.~~26, ~~A significant decline in eligible asset base or cash flow could result in constrained funds for operations. In recent years~~2004, ~~the Company~~stock ~~has~~options ~~experienced positive cash flow in the first quarter~~ and ~~negative~~warrants ~~cash flow for the balance of the year. This is due~~ to ~~seasonal~~purchase ~~cash needs as well as~~ the ~~semi~~Company’s ~~annual~~common ~~payments~~stock intotaling ~~May~~1,011,004 and ~~November~~943,420, ~~of interest on subordinated debt. However~~respectively, ~~management~~were ~~believes~~not itincluded ~~has sufficient~~in ~~borrowing capability for at least~~ the ~~next 12 months. See “Capital Resources and~~net ~~Liquidity”~~loss ~~below~~per ~~for~~common ~~additional~~share ~~discussion~~– ofdiluted ~~the~~since their ~~Company’s~~impact ~~cash~~would ~~flows~~have ~~and~~been ~~financing situation~~anti-dilutive.

~~Shareholder Transaction~~12

OnTable December 13, 2004, Storage Acquisition Company, L.L.C., a Delaware limited liability company (“Acquirer”) completed its tender offer for the outstanding shares of common stock (including the associated preferred stock purchase rights) of the Company for $2.25 per share, net to the seller, in cash, without interest. As a result of the tender offer, the Acquirer obtained 93% of the Company’s outstanding common shares. Collectively, the process that led to the offer and the completion of the tender offer is referred to herein as the “Shareholder Transaction”. Contents

OnNote ~~December 15, 2004 the Company’s common stock was deregistered and is no longer trading on The NASDAQ SmallCap Market~~11. ~~There~~Segment is no assurance that the Company’s shares will be traded on the over-the-counter bulletin board, or that price quotations will be reported through any other sources. In addition, the Company has suspended its reporting obligations under the Securities Exchange Act of ~~1934,~~an ~~effective as of March 15, 2005.~~Enterprise

~~Notwithstanding~~ The ~~the~~Company ~~suspension~~consists of ~~its~~a ~~obligation~~single tooperating ~~file~~segment ~~periodic~~that ~~financial reports~~designs, bymanufactures ~~the~~and markets ~~terms~~quality ofconsumer ~~the~~housewares ~~Company’s~~products. ~~indenture~~This ~~governing~~segmentation ~~its~~is ~~9-5/8%~~based ~~Senior~~on ~~Subordinated~~the ~~Notes~~financial ~~due~~information presented ~~May 14,~~to ~~2008,~~ the ~~Company~~chief isoperating ~~required~~decision tomaker. ~~voluntarily~~The ~~file~~following ~~annual,~~table ~~periodic~~sets ~~and~~forth ~~current reports with~~ the ~~SEC~~net assales aby ~~voluntary~~product ~~filer~~category sowithin ~~long as~~ the ~~indenture~~Company’s ~~covenants~~single ~~remain~~operating ~~in effect~~segment.

InProduct ~~connection~~Category ~~with~~Information ~~the~~– ~~Shareholder~~Net ~~Transaction, the Company incurred costs during the first~~Sales ~~quarters of 2005 and 2004 of $0.1 million and $0.3 million, respectively. These costs included legal fees and other related costs.~~

Critical Accounting Estimates


	Thirteen weeks				Twenty-six weeks
	ended				ended
	July 2,		June 26,		July 2,		June 26,
	2005		2004		2005		2004
General storage	$	20,470	$	28,578	$	38,228	$	50,181
Laundry management		20,800		20,500		38,501		38,528
Closet storage		10,199		9,328		20,886		17,762
Bathware		3,004		3,085		6,142		5,932
Kitchen storage		2,082		2,715		4,189		4,993

Total net sales	$	56,555	$	64,206	$	107,946	$	117,396

~~The~~Major ~~estimates and assumptions involved in the application of generally accepted accounting~~Customers principles (“GAAP”) have an impact on the Company’s reported financial condition and operating performance. The Company has identified the critical accounting estimates as those that involve high

15 The Company is dependent upon a few customers for a large portion of its consolidated net sales. The table below sets forth the customers that each account for more than 10% of consolidated net sales. The loss of one of these customers could have a material adverse effect on the Company. No other customer accounted for more than 10% of consolidated net sales during the thirteen and twenty-six weeks ended July 2, 2005 and June 26, 2004.


	Thirteen weeks ended						Twenty-six weeks ended
	July 2,			June 26,			July 2,			June 26,
	2005			2004			2005			2004
	Net Sales %			Net Sales %			Net Sales %			Net Sales %
Wal-Mart		36.2	%		29.6	%		39.1	%		31.5	%
Kmart		20.2	%		28.2	%		20.7	%		26.5	%
Target		6.2	%		15.3	%		5.3	%		15.5	%

Total		62.6	%		73.1	%		65.1	%		73.5	%

~~levels~~ITEM of2. ~~subjectivity~~Management’s Discussion and ~~judgment~~Analysis toof ~~account~~Financial ~~for~~Condition ~~uncertain~~and orResults ~~difficult~~of ~~to predict matters~~Operations ~~that could have a material impact on financial condition or operating performance.~~

AForward ~~summary~~Looking ~~of the critical accounting estimates is as follows:~~Statements

• This ~~Allowances~~quarterly ~~for~~report ~~retailer~~on ~~deductions~~Form 10-Q, including the “Management’s Discussion and ~~trade~~Analysis ~~programs~~of Financial Condition and Results of Operations”, “Business Risks and Management Outlook” and “Quantitative and Qualitative Disclosures about Market Risk” sections, contain forward-looking statements within the meaning of the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally may be identified by the use of terminology such as “may,” “will,” “could,” “should,” “potential,” “continue,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” or similar phrases or the negatives of such terms. Such statements are based on management’s current expectations and are subject to risks, uncertainties and assumptions, including those identified below and in the foregoing “Business Risks and Management Outlook”, as well as other matters not yet known to the Company or not currently considered material by the Company, which could cause actual results to

~~Allowances for retailer deductions and customer programs are recognized when sales are~~13 recorded. Allowances are based on various market data, historical trends and information from customers. Although the best information reasonably available to the Company is used to establish the allowances, such information is often based on estimates of retailer recovery rates and future sales to retailers. Retailer programs are often based on annual sales levels in total and by product category. Different recovery rates apply depending on the annual sales levels achieved. As such, judgments are required on an interim basis of the expected full year sales level by customer and product category. Because of the judgment involved, interim estimates can vary significantly from the full year actual determination of program costs. At year-end a more accurate assessment of the current year’s costs can be made. Retailers recover the program costs through deductions against future amounts owed to the Company. It is not unusual for retailers to have a different judgment of the amounts earned than does the Company. Accordingly, the Company maintains allowances for any differences that may arise. Resolution of such differences can sometimes take up to several years depending on the particular program. Allowances are reviewed quarterly and are adjusted based on current estimates of retailer recovery and future sales. Due to changes in estimates, changes in retailer activity and the length of time required for many programs to run their course, it is possible for allowance activity to materially impact operating performance and financial condition in any given period. In the first thirteen weeks of 2005, the allowances for retailer deductions and trade programs as a percentage of gross sales were 5.8%, unchanged from the first quarter of 2004. Due to changes in estimates during the year, interim results can vary from the full year result.

•Table Allowanceof for doubtful accountsContents

~~The~~differ ~~Company~~materially ~~evaluates~~from ~~the~~those ~~collectibility~~described ofin ~~its accounts receivable based upon an analysis of historical trends, aging of accounts receivable, write-off experience and credit evaluations of selected high risk customers. In~~ the event of a specific customer bankruptcy or reorganization, specific allowances are established to write down accounts receivable to the level of anticipated recovery. The Company may consult with thirdforward-~~party~~looking ~~purchasers of bankruptcy receivables when establishing specific allowances~~statements. ~~The~~Such ~~determination~~factors of specific allowances involves management judgments about the expected financial viability of its customers. Changes in specific allowances for doubtful accounts would only be material to financial condition and ~~operating performance to the extent any change involved one of the~~ ~~Company’s~~uncertainties ~~10 largest customers. The 10 largest customers accounted for approximately 82% of net sales in the first thirteen weeks of 2005 and 75% of accounts receivable at April 2~~include, ~~2005.~~but ~~No material~~are ~~changes~~not inlimited ~~allowances for doubtful accounts involving any of our 10 largest customers~~to: ~~was recorded in the first thirteen weeks of 2005.~~

• ~~Inventory~~general ~~valuation~~economic conditions and conditions in the retail environment; • the Company’s dependence on a few large customers; • price fluctuations in the raw materials used by the Company; • competitive conditions in the Company’s markets; • the impact of the level of the Company’s indebtedness; • restrictive covenants contained in the Company’s various debt documents; • the seasonal nature of the Company’s business; • the extent to which the Company is able to retain and attract key personnel; • relationships with retailers; • the impact of federal, state and local environmental requirements (including the impact of future environmental claims against the Company); • the Company’s ability to develop and introduce new products and product modifications necessary to remain competitive; and • other factors discussed in “Business Risks and Management Outlook” below.

~~The~~ Given these ~~Company~~risks ~~values~~and ~~inventory~~uncertainties, atreaders ~~cost~~are (cautioned not into ~~excess~~place ofundue ~~market)~~reliance ~~determined~~on such byforward-looking ~~the~~statements. ~~first~~Forward-~~in, first-out~~looking ~~(FIFO) method.~~statements ~~Inventory~~do ~~costs~~not ~~are~~guarantee ~~based~~future onperformance. The ~~standard~~Company’s ~~costs,~~operating ~~adjusted~~results ~~for~~may ~~actual manufacturing~~fluctuate, ~~and~~especially ~~raw~~when ~~material~~measured ~~purchase~~on ~~price~~a ~~variances~~quarterly basis. Except ~~The~~as ~~Company~~required ~~includes~~by ~~material~~law, ~~labor and~~the ~~manufacturing~~Company ~~overhead~~undertakes inno ~~the~~obligation ~~cost~~to ofrepublish ~~inventories.~~revised forward-looking ~~Management~~statements ~~regularly~~to ~~reviews~~reflect ~~inventory for~~events ~~salability~~or ~~and~~circumstances ~~has~~after ~~established~~the ~~allowances~~date tohereof ~~record~~or ~~inventory~~to at reflect the ~~lower~~occurrence of ~~cost~~unanticipated ~~or market~~events. ~~The~~Readers ~~allowances~~ are ~~based~~also onurged ~~management’s~~to ~~judgments~~carefully ~~regarding~~review ~~future selling prices~~ and consider ~~costs~~the ofvarious ~~disposal.~~disclosures ~~Such~~made ~~judgments~~by ~~are~~the ~~impacted~~Company byin ~~economic~~this ~~conditions,~~report ~~condition~~and ofin the ~~inventory~~ ~~and~~Company’s ~~age~~reports ofon ~~the~~Forms 10-K, ~~inventory.~~10-Q ~~Such~~and ~~judgments~~8-K ~~involve~~and ~~high~~other ~~degrees~~filings ofwith ~~uncertainty~~the Securities and ~~subjectivity~~ Exchange Commission. ~~Accordingly,~~Such ~~changes~~reports attempt into ~~estimates~~advise ~~can~~interested ~~have~~parties aof ~~material~~the ~~impact~~factors onthat ~~reported~~affect ~~results or~~the ~~financial~~Company’s ~~condition~~business.

16 This commentary should be read in conjunction with the Company’s consolidated financial statements and related notes and management’s discussion and analysis of financial condition and results of operations contained in the Company’s Annual Report on Form 10-K for the year ended January 1, 2005.

~~Table of Contents~~Restatement

• The Company ~~Valuation~~will restate its financial statements as of ~~deferred~~and ~~income~~for ~~tax~~the periods ~~assets~~ended April 2, 2005, January 1, 2005, and each of the interim periods in fiscal year 2004 by amending its April 2, 2005 Form 10-Q and its January 1, 2005 Form 10-K. Reflected within this footnote are the effects of these adjustments.

~~The~~ Historically, the Company ~~regularly~~has ~~evaluates~~accounted for its ~~ability~~deferred income taxes related to ~~recover~~goodwill as a reversing taxable temporary difference. During fiscal year 2004, the Company’s ~~reported~~temporary ~~amount~~difference related to goodwill became a liability as the tax basis of ~~its~~goodwill ~~net~~became lower than the book basis due to ~~deferred~~the continued amortization of goodwill for tax ~~assets~~purposes. ~~The~~Pursuant ~~evaluation~~to SFAS ~~considers~~No. ~~several~~142, ~~factors~~“Goodwill and Other Intangible Assets,” ~~including~~the ~~our~~deferred ~~estimate~~tax ofliability related to the Company’s goodwill must be considered as a liability related to an asset with an indefinite ~~likelihood~~life. ~~that~~Therefore, wethe ~~will~~deferred ~~generate~~tax ~~sufficient~~liability ~~taxable~~was ~~income~~not inavailable ~~future~~to ~~years~~support inthe ~~which~~realization ~~temporary~~of deferred tax assets created by other deductible ~~differences~~temporary ~~reverse~~differences. ~~This~~Given ~~evaluation~~the isCompany’s ~~based~~determination ~~primarily~~that, based on ~~our~~cumulative historical ~~earnings~~operating losses, ~~projected~~it was more likely than ~~operating~~not ~~results,~~that ~~applicable~~its ~~net~~deferred ~~operating~~tax ~~loss~~assets ~~carryforward~~would ~~expiration~~not ~~dates~~be ~~and~~realized, ~~identified~~this ~~actions~~unavailability ~~under~~to offset deferred tax assets has resulted in the ~~control~~creation of ~~the~~a ~~Company~~deferred tax liability and an additional tax expense in ~~realizing~~respect of the ~~associated~~resulting increase ~~carryforward~~in ~~benefits~~the deferred tax asset valuation allowance. These restatement adjustments were non-cash and had no effect on operating cash flows nor on the Company’s compliance with its debt covenants.

~~The~~ As a ~~Company~~result ~~had $32 million~~ of ~~net~~the deferred tax ~~assets~~liability ~~as of January 1~~restatement, ~~2005,~~income ~~resulting~~tax ~~from~~expense ~~net~~in ~~operating~~fiscal ~~loss~~year ~~carryforwards,~~2004 increased ~~and~~by ~~other~~approximately ~~deductible~~$2.9 million ~~temporary~~(approximately $0.7 million ~~differences,~~per ~~which~~quarter ~~may~~in ~~reduce~~2004). Income ~~taxable~~tax ~~income~~expense in the ~~future~~first ~~periods~~quarter toof ~~the~~2005 ~~extent~~increased ~~the~~by ~~Company generates profits~~$0.7 million. ~~Because the~~Loss ~~value~~per ofshare ~~the~~on ~~net~~a diluted ~~deferred~~basis ~~tax~~increased ~~assets~~by approximately ~~are~~$0.36 ~~fully~~(approximately ~~reserved,~~$0.09 ~~changes~~per quarter in ~~estimates~~2004) ofin ~~future operating~~fiscal ~~performance~~2004. ~~could~~Loss ~~result~~per inshare on a diluted ~~reduction~~basis ofincreased ~~the~~by ~~valuation~~$0.09 ~~allowances~~in ~~and~~the ~~a corresponding~~first ~~decrease~~quarter inof ~~income~~2005. ~~tax~~This adjustment ~~expense.~~increases ~~The~~the ~~changes~~deferred tax liability in the ~~valuation~~consolidated ~~allowances~~balance insheets ~~any~~by $2.9 million at January ~~future~~1, ~~interim~~2005 ~~period~~and orby ~~fiscal~~$3.6 million ~~year~~at ~~could~~April be2, ~~material~~2005.

The ~~completion~~adjustments ofpresented ~~the~~in ~~Shareholder Transaction on December 13, 2004 constituted an ownership change under Section 382 of~~ the ~~Internal~~following ~~Revenue~~tables ~~Code~~include ~~of 1986, as amended, and~~ the ~~use~~deferred ofincome ~~any~~tax ofrestatement ~~the~~adjustments ~~Company’s~~(discussed ~~net~~above) ~~operating~~and ~~loss~~other ~~carryforwards~~adjustments ~~generated~~described ~~prior to the ownership change is subject to certain limitations~~below. ~~The utilization of such remaining net operating losses is~~ ~~subject to an annual limitation of approximately $0.7 million. As a result, a certain portion of the net operating losses will expire before they can be utilized.~~

• In ~~Valuation~~connection with the second quarter close process the Company identified a lease agreement that contained escalating rental payments that were not appropriately straight-lined over the lease term in accordance with the requirements of ~~Long~~SFAS No. 13, “Accounting for Leases” and FASB Technical Bulletin No. 85-~~Lived~~3, “Accounting for Operating Leases with Scheduled Rent Increases”. Accordingly, the Company is required to record a rent deferral within other liabilities for the excess of the straight-line rental expense over the rental payments made to date. As a result of the lease accounting adjustment, cost of goods sold in fiscal year 2004 increased by approximately $0.3 million. Loss per share on a fully diluted basis increased by approximately $0.03. This adjustment increased other liabilities on the consolidated balance sheet by approximately $0.3 million at January 1, 2005 and ~~Intangible~~at ~~Assets~~April 2, 2005.

The Company ~~assesses~~also ~~the~~identified ~~recoverability~~two ofadjustments ~~long-lived~~related ~~assets~~to ~~whenever~~the itaccounting ~~determines~~for its ~~that~~Mexico ~~events~~subsidiary. orThe ~~changes~~first inadjustment ~~circumstances~~relates ~~indicate~~to ~~that~~an ~~their~~error ~~carrying~~in ~~amount~~translating fixed ~~may~~asset ~~not~~additions beand ~~recoverable. In~~recording ~~accordance~~depreciation ~~with~~expense ~~GAAP,~~where ~~indefinite~~the Company ~~lived~~understated ~~intangible~~depreciation ~~assets~~expense ~~are~~on ~~subject~~the tofixed ~~annual~~assets ~~impairment tests.~~of ~~The~~the ~~Company’s~~Mexico ~~assessments~~operation and the ~~impairment~~second ~~testing~~adjustment ~~are~~relates ~~primarily~~to ~~based~~management’s ~~upon~~inappropriate ~~management~~use ~~estimates~~ of ~~future~~the ~~cash~~Mexican ~~flows~~Peso ~~associated~~as ~~with~~its ~~these~~functional currency ~~assets.~~for ~~Should~~ the ~~Company’s~~Mexico ~~operating results,~~operation. orAs ~~estimated~~a ~~future~~result ~~results,~~of ~~deteriorate~~these adjustments, ~~the~~cost ~~Company~~of ~~may~~goods ~~determine~~sold increased ~~that~~by ~~some~~approximately ~~portion of~~$0.2 million ~~our~~and ~~long-lived~~other ~~tangible~~income increased orby ~~intangible~~$0.01 million ~~assets~~in fiscal ~~are~~year ~~impaired~~2004. ~~Such~~Loss ~~determination~~per ~~could result~~share inon ~~non-cash~~a ~~charges~~fully ~~that~~diluted ~~could~~basis ~~materially~~increased ~~affect~~by ~~the~~approximately ~~Company’s~~$0.03 ~~consolidated~~due ~~financial~~to ~~position~~those oradjustments. ~~results~~These ofadjustments increased ~~operations~~property, ~~for~~plant ~~that~~and ~~period.~~equipment At(by ~~April~~$0.1 2,million) ~~2005,~~and ~~intangible~~accumulated depreciation ~~assets~~(by ~~were~~ $720.9 2 million) and ~~long-lived~~reduced ~~assets~~accumulated ~~(property,~~other ~~plant~~comprehensive loss ~~and~~(by ~~equipment) were~~ $~~30.~~0.05 million.) Noon ~~impairment~~the ~~charges~~consolidated ~~were~~balance ~~incurred~~sheets inat ~~the~~January 1, ~~first~~2005 ~~thirteen~~and ~~weeks~~at April 2, of 2005.

~~Thirteen~~ The impact ~~weeks~~of ~~ended~~the ~~April 2,~~lease ~~2005~~accounting ~~compared~~and Mexican subsidiary adjustments was not material to the ~~thirteen~~interim ~~weeks~~periods ~~ended~~of ~~March 27,~~fiscal year 2004 and prior periods. Accordingly, the restated results for the fourth quarter of fiscal year 2004 include an amount of $0.4 million in respect of these prior periods.

~~In the discussion and analysis that follows, all references to 2005 are for the thirteen week~~Overview ~~period ended April 2, 2005 and all references to 2004 are for the thirteen week period ended March 27, 2004.~~

~~The~~We ~~following~~are ~~discussion~~a ~~and~~leading ~~analysis~~designer, ~~compares~~manufacturer ~~the~~and ~~actual~~marketer ~~results for the first quarter~~ of ~~2005~~ toa ~~the~~broad ~~actual~~range ~~results for the first quarter~~ of ~~2004~~value-priced, ~~with~~quality consumer ~~reference~~houseware toproducts. ~~the~~The following ~~(dollars in~~are ~~thousands,~~key ~~except~~factors ~~net~~in ~~loss~~understanding ~~per~~the ~~share; unaudited)~~Company’s performance:

	Thirteen weeks ended
	April 2, 2005				March 27, 2004
Net sales	$	51,391	100.0	%	$	53,190	100.0	%
Cost of goods sold		45,107	87.8	%		43,289	81.4	%
Gross profit		6,284	12.2	%		9,901	18.6	%
Selling, general and administrative expenses		7,681	15.0	%		6,440	12.1	%
Shareholder transaction costs		118	0.2	%		273	0.5	%

•

Customer base

17 The Company’s business is highly concentrated among mass merchandisers, including discount stores, home centers and other category specific retailers. Sales to the Company’s top three customers, Wal-Mart, Kmart and Target, were 63% of net sales in the thirteen weeks ended July 2, 2005, 73% of net sales in the thirteen weeks ended June 26, 2004, 65% of net sales in the twenty-six weeks ended July 2, 2005 and 74% of net sales in the twenty-six weeks ended June 26, 2004. In addition net sales to the Company’s top three customers during fiscal year 2004 and 2003 were 72% and 73%, respectively. The Company’s products generally have few unique or patented features and are sold at entry level price points. As such, the Company’s financial success is highly dependent on profitably meeting certain price points as demanded by customers. The competitive atmosphere

~~Table of Contents~~14

	Thirteen weeks ended
	April 2, 2005					March 27, 2004
Amortization of intangible assets		25		0.0	%		124		0.2	%
Operating profit (loss)		(1,540	)	(3.0	%)		3,064		5.8	%
Interest expense		(3,486	)	(6.8	%)		(3,255	)	(6.1	%)
Other expense, net		(13	)	(0.0	%)		(5	)	(0.0	%)
Loss before income taxes		(5,039	)	(9.8	%)		(196	)	(0.3	%)
Income tax expense		(11	)	(0.0	%)		(7	)	(0.0	%)
Net loss	$	(5,050	)	(9.8	%)	$	(203	)	(0.3	%)
Net loss per share – basic	$	(0.62	)			$	(0.03	)
Net loss per share – diluted	$	(0.62	)			$	(0.03	)
Weighted average common shares outstanding:
Basic		8,155					7,987
Diluted		8,155					7,987

~~Net~~continually ~~sales.~~puts ~~2005~~pressure ~~first~~on ~~quarter~~selling ~~net sales of $51~~prices.~~4 million~~ ~~were~~After ~~down~~several ~~3.4%~~years asof ~~compared~~steadily ~~to net~~falling ~~sales~~selling inprices, the ~~first~~Company ~~quarter~~was ofable ~~2004 of $53.2 million. Sales were down due~~ to ~~decreased~~secure ~~unit~~limited ~~sales across~~selling ~~all~~price ~~product~~increases ~~lines to our largest customers. Sales to the top three customers were 68% of net sales as compared to 74%~~ in ~~the~~late ~~prior~~2004 ~~period. Selling prices were up $4.1 million as compared~~and tointo ~~the prior year period~~2005.

~~Gross profit.~~ The ~~Company’s~~size ~~gross~~of ~~profit~~the inmass ~~the~~merchandisers ~~first~~gives ~~quarter~~them ofstrong ~~2004~~bargaining ~~was~~power ~~$6.3 million~~with assuppliers, such ~~compared~~as tothe $9Company.~~9 million~~ inThe ~~the~~mass ~~first~~merchandisers ~~quarter~~encourage high levels of ~~2004~~competition ~~and~~among ~~gross~~suppliers, demand ~~profit~~that ~~margins~~manufacturers ~~decreased~~supply innovative new products, require suppliers to ~~12.2%~~match or beat ofquoted ~~net~~prices ~~sales~~received from ~~18.6%~~other apotential ~~year~~suppliers, ~~ago~~demand reduced lead times and demand that product be warehoused until the customer desires delivery. ~~Margins~~These ~~were~~customers ~~influenced~~also byactively aengage in ~~number~~the direct importation of ~~factors,~~competitive ~~including:~~generic products from multiple sources.

• The ~~cost~~high concentration of ~~raw~~the ~~materials~~Company’s ~~increased~~sales ~~resulting~~to inmass amerchandisers ~~$5.9~~also ~~million~~makes ~~cost~~the Company’s ~~increase~~results asdependent ~~compared~~upon to the ~~first~~operating ~~quarter~~results ofand ~~2004;~~financial •viability ~~Selling price increases~~ of $4its key customers.1 ~~million~~The ~~partially~~Company’s ~~recovered~~operating ~~the~~results ~~additional~~in ~~raw~~recent ~~material~~years ~~costs;~~have •been ~~Gross~~impacted ~~sales~~by ~~decrease~~developments at ~~(net~~Kmart, one of ~~selling~~the ~~price~~Company’s ~~increases)~~largest ~~of $6~~customers.0 ~~million~~As ~~resulted~~set forth in ~~lost~~Kmart’s ~~gross~~public ~~profit~~flings, ofsince emerging ~~$1.1~~from ~~million;~~bankruptcy •in ~~Factories~~May 2003, ~~produced~~Kmart ~~less~~has ~~units~~improved ~~resulting~~its infinancial aperformance. ~~reduction~~However, Kmart ofcontinues ~~overhead~~to ~~absorption.~~report ~~The~~that ~~lower~~it ~~running~~has ~~rates~~experienced ~~resulted~~declines in ~~additional~~same ~~costs~~store ofsales ~~$1.7~~and ~~million;~~has ~~and~~announced further •reductions ~~Costs~~in ~~related~~store tocount ~~the~~in ~~January~~connection ~~2004~~with ~~closing~~its ofmerger ~~the~~with ~~Eagan~~Sears. ~~Minnesota~~Kmart ~~facility~~has ~~were~~paid ~~$0.6~~all of ~~million~~its incurrent ~~the~~obligations ~~first~~to ~~quarter~~the ofCompany ~~2004~~on time.

~~Selling,~~• ~~general~~Cost ~~and administrative expenses. SG&A expenses~~ of ~~$7.7 million~~raw in the first quarter of 2005 were up $1.2 million compared to a year ago. SG&A expenses in 2005 included $1.2 million of severance related to management changes since the Shareholder Transaction. Expenses in 2004 were favorably impacted by a $0.5 million bad debt recovery. materials

~~Shareholder~~ The ~~transaction~~Company’s ~~costs~~primary raw materials are plastic resin and steel. InChanging prices for such raw materials can cause the ~~first~~Company’s ~~quarter~~results of ~~2005~~operations to fluctuate significantly. The cost of raw materials is impacted by several factors outside the control of the Company including supply and demand characteristics, oil and natural gas prices and the overall state of the economy. As the cost of raw materials rises it results in immediate declines in profitability since the Company ~~incurred~~has ~~$0.1~~historically ~~million~~been unable to recover all of ~~legal~~the cost increase by passing it through to customers. Conversely, when raw material costs decline, the Company’s margins generally are favorably impacted in the short-term, though competitive factors may force a decrease in selling prices that erodes some of the improved profitability. InDuring the first twenty-six ~~quarter~~weeks of ~~2004~~fiscal 2005, the ~~Company~~average ~~incurred~~cost ~~legal~~of ~~costs~~plastic ~~related~~resin toincreased approximately 47% ~~the~~and ~~process~~average ~~that~~steel ~~culminated~~prices ~~with~~increased approximately 32% as compared to the ~~Shareholder~~average ~~Transaction~~costs in the first twenty-six weeks of 2004. The increase in steel and plastic resin costs added approximately $11.4 million to cost of goods sold. Management expects the 2005 average cost of both plastic resin and steel to be higher than 2004.

~~Interest~~• ~~expense.~~Product Interest expense of $3.5 million in 2005 was up $0.2 million from the prior year period. Borrowings in late 2004 to pay expenses related to the Shareholder Transaction resulted in higher debt levels as compared to a year ago. mix

18 The Company sells a variety of household items. For various reasons, some items provide a better return than others. As the mix of items sold changes, profitability and cash flow are affected. Although the Company has had some success at getting an increase in selling prices during 2005, there can be no assurance that it will be able to secure additional selling price increases to offset any future rise in raw material costs. To the extent that selling price increases can not be achieved, certain unprofitable products may be discontinued. The costs related to discontinuing a product are relatively minor and relate primarily to the non-cash write-off of related tooling.

~~Table~~• ofMolding ~~Contents~~machine utilization

~~Income~~ The ~~tax~~Company ~~expense~~has four injection molding facilities each with a variety of injection molding machine sizes. ~~Income~~Customer ~~tax~~ordering ~~expense~~patterns ~~was~~and ~~not~~mix ~~material~~of inproduct ~~either~~manufactured ~~period~~impacts utilization of these machines. ~~The~~When demand exceeds capacity, the Company ~~was~~must place production at third ~~unable~~party tofacilities ~~benefit~~that ~~from~~are ~~current~~more ~~period~~costly ~~losses~~than ~~due~~internal tomanufacturing. In addition, the ~~uncertainty~~mix ~~regarding~~of product ~~future~~sold impacts profitability ~~for~~since low margin items take the same amount of production ~~tax~~time ~~purposes~~as higher margin items. The ~~recorded~~Company’s ~~tax~~future ~~provision~~profitability ~~relates~~is dependent on selling to ~~state~~its optimum capacity and ~~foreign~~product ~~taxes~~mix so that constrained capacity is devoted to products with higher margins. The Company currently has no plans for expansion or reduction of the Company’s molding capacity.

~~Net loss. The net loss in the first quarter of 2005 was $5.1 million, up significantly from~~15 the 2004 first quarter loss of $0.2 million. Lower sales, increased raw material costs, reduced factory running rates and the severance and retention costs related to changes in management were the primary reasons for the increased loss. The loss per diluted share was $(0.62) as compared to $(0.03) in the first quarter of 2004.

TheTable diluted weighted average number of shares outstanding increased to 8,154,587 in 2005 from 7,986,556 a year ago. Options and warrants were not included in the computation of diluted weighted average shares outstanding because the assumed exercise of such equivalents would have reduced the loss per share. Contents

~~Capital~~• ~~Resources~~Financial ~~and Liquidity~~ liquidity

~~The~~ Seasonal ~~Company’s~~working ~~primary sources of liquidity and~~ capital ~~resources~~needs ~~include~~are ~~cash~~ provided ~~from operations~~by ~~and borrowings under~~ the Company’s ~~asset-based~~ $60 million ~~Amended~~asset ~~and~~based ~~Restated~~line of ~~Loan~~credit. ~~and Security~~The ~~Agreement~~Company’s ~~(the~~ability ~~“Amended~~to ~~Loan~~borrow ~~Agreement”).~~is Ona ~~December 14,~~function ~~2004,~~of the Company’s ~~and~~eligible ~~Fleet~~asset base ~~Capital~~and ~~Corporation~~outstanding ~~entered~~borrowings. ~~into~~During the ~~Amended~~first ~~Loan~~twenty-six ~~Agreement~~weeks toof ~~accommodate~~2005, ~~operations~~cash ~~subsequent~~flow towas positive ~~the~~and ~~Shareholder~~on ~~Transaction.~~July 2, ~~The~~2005 ~~changes~~there ~~within~~were ~~the~~$20.3 million ~~Amended~~of ~~Loan~~borrowings ~~Agreement~~outstanding ~~included~~under anthe ~~increase~~line inof credit. At July 2, 2005, the unused available line of credit ~~from~~was $5027.5 million. toA ~~$60 million,~~significant andecline in ~~extension~~eligible ofasset ~~the~~base ~~term~~or ofcash ~~the~~flow ~~agreement~~could byresult ~~9 months~~in toconstrained ~~December 13,~~funds ~~2008~~for operations. In recent years, athe ~~reduction~~Company ofhas ~~applicable~~experienced ~~interest~~positive ~~rates~~cash byflow 25in ~~basis~~the ~~points~~first half of the year and anegative ~~reduction~~cash offlow for the ~~minimum~~balance ~~excess~~of ~~availability~~the ~~requirement~~year. ~~from~~This ~~$9.2 million~~is due to ~~$5.0 million.~~seasonal ~~The covenants~~cash ~~restricting~~needs ~~changes~~as ofwell ~~ownership~~as the semi annual payments in May and ~~changes~~November of ~~control~~interest ofon subordinated debt. However, management believes it has sufficient borrowing capability for at least the ~~Company~~next ~~have~~12 months. ~~been~~See ~~revised~~“Capital toResources ~~reflect~~and ~~the~~Liquidity” ~~new~~below ~~ownership~~for ~~structure~~additional discussion of the Company’s ~~following~~cash ~~the~~flows ~~Shareholder~~and financing ~~Transaction~~situation.

~~The~~Shareholder ~~Company generates cash by the profitable sale of its products. Disbursements of cash for~~Transaction materials and services generally occur during the manufacturing and purchasing process, which is usually 30-90 days prior to sale. Collection of receivables generally occurs approximately 45-60 days after shipment. For certain large promotional items that typically ship in the fourth quarter, the Company begins building inventory in the second and third quarters. The inventory for these promotional items typically is not turned to cash until the first quarter of the following year. The timing of cash flows is further impacted by the semi-annual interest payments on the high-yield bonds. Interest payments of about $5.6 million occur in May and November. As a result of the operational seasonality and the timing of the interest payments, the Company normally has positive cash flow in the first quarter and negative cash flow for the balance of the year. During the first quarter of 2005, the Company had positive cash flow (which the Company defines as the net change in cash and debt) of $13.5 million as compared to positive cash flow in the first quarter of 2004 of $12.6 million.

~~During~~On December 13, 2004, ~~the~~Storage Acquisition Company’s, ~~cash~~L.L.C., ~~and~~a ~~cash~~Delaware ~~equivalents~~limited ~~increased~~liability company to(“Acquirer”) completed its tender offer for the outstanding shares of common stock (including the associated preferred stock purchase rights) of the Company for $12.~~4 million~~25 atper ~~April 2~~share, net ~~2005~~to ~~from~~the ~~$1.1 million~~seller, atin ~~January 1~~cash, ~~2005~~without interest. ~~Borrowings~~As ~~under~~a result of the ~~Amended~~tender ~~Loan~~offer, ~~Agreement~~the ~~decreased~~Acquirer obtained ~~$13~~approximately 93% of the Company’s outstanding common shares.~~2 million~~ ~~during~~Collectively, the ~~first~~process ~~quarter~~that ~~due~~led to ~~primarily~~the offer and the completion of the tender offer is referred to ~~reductions~~herein inas ~~working~~the ~~capital~~“Shareholder Transaction”.

~~Working~~On ~~capital~~December 15, ~~(excluding~~2004, ~~cash~~the ~~and~~Company’s ~~short~~common ~~term~~stock ~~debt)~~was atderegistered ~~April 2,~~and ~~2005~~is ~~was~~no ~~$28.2 million,~~longer ~~down~~trading on ~~$16.2 million~~The ~~from~~NASDAQ ~~January 1,~~SmallCap ~~2005~~Market. ~~Receivables~~There ~~decreased~~is ~~$21 million~~no ~~due~~assurance tothat ~~seasonally lower sales in~~ the ~~first~~Company’s ~~quarter~~shares ofwill ~~2005~~be astraded ~~compared~~on to the over-the-counter ~~fourth~~bulletin ~~quarter~~board, ofor ~~2004.~~that ~~Inventories increased~~price ~~$3.7 million~~quotations ~~due~~will tobe ~~higher~~reported ~~raw~~through ~~material~~any ~~costs~~other sources. ~~and~~In ~~seasonal~~addition, ~~builds~~the ~~for~~Company ~~later~~has ~~shipment. Accounts~~suspended ~~payable~~its ~~and~~reporting ~~accrued~~obligations ~~liabilities~~under ~~decreased~~the ~~$2.1 million~~Securities Exchange ~~due~~Act ~~primarily~~of to1934, ~~the~~effective ~~timing~~as of ~~certain~~ ~~payments~~March 15, ~~to vendors~~2005.

~~Capital~~Notwithstanding ~~spending in~~ the ~~first~~suspension ~~quarter~~ of ~~2005~~its ~~was~~obligation ~~$0.3 million~~to asfile ~~compared~~periodic tofinancial ~~$0.9 million~~reports, inby the ~~2004.~~terms ~~Capital~~of ~~spending~~the ~~was~~Company’s ~~primarily~~indenture ~~related~~governing toits ~~new~~9-5/8% ~~product~~Senior ~~tooling~~Subordinated ~~and~~Notes ~~normal~~due ~~replacement~~May 14, of2008, ~~equipment.~~the InCompany ~~addition,~~is ~~the~~required ~~settlement~~to ofvoluntarily anfile ~~environmental~~annual, ~~escrow~~periodic ~~account~~and ~~related~~current toreports awith ~~1997 acquisition~~the ~~generated~~SEC ~~$0.4 million~~as ofa voluntary ~~cash~~filer inso long as the ~~first~~indenture ~~quarter~~covenants ofremain ~~2005~~in effect.

19 In connection with the Shareholder Transaction, the Company incurred costs during the twenty six weeks ended July 2, 2005 and June 26, 2004 of $0.3 million and $0.8 million, respectively. These costs included legal fees, investment banking fees and other related costs. The costs incurred during the twenty-six weeks ended June 26, 2004 were associated with the terminated Agreement and Plan of Merger, by and between the Company and JRT Acquisition, Inc.

~~Table~~Critical ofAccounting ~~Contents~~Estimates

The ~~Amended~~estimates ~~Loan~~and ~~Agreement~~assumptions ~~covenants~~involved ~~require~~in the ~~Company~~application toof ~~maintain~~generally ~~excess~~accepted ~~availability at~~accounting ~~all~~principles ~~times~~(“GAAP”) ofhave atan ~~least~~impact ~~$5.0 million.~~on ~~At April 2, 2005,~~ the ~~eligible asset base was $50.1 million. Thus, the~~ Company’s ~~could~~reported ~~borrow~~financial upcondition toand ~~$45.1 million under the Amended Loan Agreement. At April 2,~~operating ~~2005, there were $11~~performance.~~8 million~~ ofThe ~~borrowings~~Company ~~under~~has ~~the~~identified ~~Amended Loan Agreement and outstanding letters of credit totaled $1.9 million. Accordingly,~~ the ~~Company~~critical ~~still~~accounting ~~had~~estimates ~~availability~~as ~~under~~those ~~the~~that involve ~~Amended~~high ~~Loan~~levels ~~Agreement~~ of ~~$31.4 million.~~subjectivity ~~Despite~~and ~~the~~judgment ~~first~~to ~~quarter~~account ~~operating~~for ~~loss~~uncertain ~~the~~or ~~Company expects~~difficult ~~there~~ to bepredict ~~sufficient~~matters that ~~financing~~could ~~capability~~have toa ~~fund~~material ~~operations~~impact ~~for~~on atfinancial ~~least~~condition ~~the~~or ~~next~~operating ~~twelve months~~performance.

~~The~~A ~~Company’s~~summary ~~Amended Loan Agreement contains one financial covenant pertaining to a minimum cash interest coverage ratio. The cash interest coverage ratio was required to be no lower than 1.0 at the end~~ of ~~2004 at which point~~ the ~~ratio~~critical ~~begins~~accounting aestimates ~~quarterly increase until it reaches 1.25 in June 2005. At April 2, 2005, the Company’s cash interest coverage ratio was 1.78. The earnings component of the covenant~~ is the trailing twelve-month earnings before interest, taxes, depreciation and amortization. Certain costs related to factory realignments and the Shareholder Transaction are excluded. For the twelve months ended April 2, 2005, the earnings component of the covenant was $23.4 million. For a definition of cash interest coverage ratio as ~~it is used in the~~follows: ~~Amended Loan Agreement, refer to the Amended Loan Agreement that was filed as an exhibit to the Company’s 2004 Annual Report on Form 10-K.~~

~~The~~• ~~Company~~Allowances ~~was~~for inretailer ~~compliance~~deductions ~~with~~and ~~all~~trade ~~Amended Loan Agreement covenants as of April 2, 2005.~~ programs

~~The~~ Allowances ~~following~~for isretailer adeductions ~~table~~and ~~providing~~customer programs are recognized when sales are recorded. Allowances are based on various market data, historical trends and information from customers. Although the ~~aggregate~~best ~~annual~~information ~~contractual~~reasonably ~~obligations~~available ofto the Company is used to ~~including~~establish ~~debt~~the allowances, ~~capital~~such ~~lease~~information ~~obligations,~~is ~~future~~often ~~minimum~~based ~~rental~~on ~~commitments~~estimates ~~under~~of ~~operating~~retailer ~~leases~~recovery rates and ~~purchase~~future ~~obligations~~sales atto ~~April 2,~~retailers. ~~2005~~Retailer ~~and~~programs ~~the~~are ~~effect~~often ~~such~~based ~~obligations~~on ~~are~~annual ~~expected~~sales tolevels in ~~have~~total ~~on the~~and ~~Company’s~~by ~~liquidity~~product ~~and~~category. ~~cash~~Different ~~flows~~recovery inrates ~~future~~apply ~~periods~~depending on the annual sales levels achieved. As such,

	Payments Due by Period
	(in thousands)
			Less than						After
Contractual Obligations	Total		1 year		1-3 years		3-5 years		5 years
Long-term debt	$	116,050	$	—	$	—	$	116,050	$	—
Capital lease obligations		4,667		71		182		254		4,160
Minimum rental commitments under operating leases		17,948		4,915		7,646		5,387
Purchase obligations (estimated) (1)		131,500		73,000		58,500		—		—
Total contractual cash obligations	$	270,165	$	77,986	$	66,328	$	121,691	$	4,141

(1)Table The Company has entered into commitments to purchase certain core commodities at formula-based prices. The agreements expire in 2005 and 2006. Future related minimum commitments to purchase commodities, assuming April 2005 price levels, are $73 million in 2005. The purchase commitment pricing is not tied to fixed rates; therefore, the Company’s results of operations or financial position could be affected by significant changes in the market cost of the commodities. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk – Commodity Risk” in the Company’s Form 10-K for fiscal 2004, which is incorporated herein by reference, for further details.Contents

20judgments are required on an interim basis of the expected full year sales level by customer and product category. Because of the judgment involved, interim estimates can vary significantly from the full year actual determination of program costs. At year-end a more accurate assessment of the current year’s costs can be made. Retailers recover the program costs through deductions against future amounts owed to the Company. It is not unusual for retailers to have a different judgment of the amounts earned than does the Company. Accordingly, the Company maintains allowances for any differences that may arise. Resolution of such differences can sometimes take up to several years depending on the particular program. Allowances are reviewed quarterly and are adjusted based on current estimates of retailer recovery and future sales. Due to changes in estimates, changes in retailer activity and the length of time required for many programs to run their course, it is possible for allowance activity to materially impact operating performance and financial condition in any given period. In the first twenty-six weeks of 2005, the allowances for retailer deductions and trade programs as a percentage of gross sales were 5.7% compared to 5.1% in the first twenty-six weeks of 2004. Due to changes in estimates during the year, interim results can vary from the full year results.

~~Table~~• ofAllowance ~~Contents~~for doubtful accounts

	Financing commitments expiring by period
	(in thousands)
									After
	Total		1 year		2-3 years		4-5 years		5 years
Standby letters of credit	$	1,850	$	1,850	$	—	$	—	$	—

The Company evaluates the collectibility of its accounts receivable based upon an analysis of historical trends, aging of accounts receivable, write-off experience and credit evaluations of selected high risk customers. In the event of a specific customer bankruptcy or reorganization, specific allowances are established to write down accounts receivable to the level of anticipated recovery. The Company may consult with third-party purchasers of bankruptcy receivables when establishing specific allowances. The determination of specific allowances involves management judgments about the expected financial viability of its customers. Changes in specific allowances for doubtful accounts would only be material to financial condition and operating performance to the extent any change involved one of the Company’s 10 largest customers. The Company’s 10 largest customers accounted for approximately 80% of net sales in the first twenty-six weeks of 2005 and 68% of accounts receivable at July 2, 2005. No material changes in allowances for doubtful accounts involving any of these 10 largest customers was recorded in the first twenty-six weeks of 2005.

~~Off-Balance~~• ~~Sheet~~Inventory ~~Arrangements~~ valuation

The Company ~~has~~values noinventory ~~off~~at cost (not in excess of market) determined by the first-~~balance~~in, first-out ~~sheet~~(FIFO) method. ~~arrangements~~Inventory costs are based on standard costs, adjusted for actual manufacturing and raw material purchase price variances. The Company includes material, labor and manufacturing overhead in the cost of inventories. Management regularly reviews inventory for salability and has established allowances to record inventory at the lower of cost or market. The allowances are based on management’s judgments regarding future selling prices and costs of disposal. Such judgments are impacted by economic conditions, condition of the inventory and age of the inventory. Such judgments involve high degrees of uncertainty and subjectivity. Accordingly, changes in estimates can have a material impact on reported results or financial condition.

~~Business~~• ~~Risks~~Valuation ~~and~~of ~~Management~~deferred ~~Outlook~~ income tax assets

~~• One of the Company’s largest customers is Kmart.~~ The Company’s ~~net~~regularly ~~sales~~evaluates ~~to Kmart were $73 million in 2004 and $77 million in 2003. After emerging from bankruptcy in May 2003, Kmart has improved~~ its ~~financial~~ability ~~performance and has operated within its financial covenants. However, Kmart continues~~ to ~~experience~~recover ~~declines in same store sales and has further reduced its store count during 2004. Kmart has paid all of its current obligations to~~ the ~~Company~~reported onamount ~~time and we do not believe that Kmart’s current situation will negatively impact the Company in the near term. Given the size~~ of the Company’s sales to Kmart, future results may be either favorably or unfavorably impacted by any number of factors related to the retailer. In 2004, Kmart announced two transactions involving the sale of up to 74 stores, or approximately 5% of Kmart’s store base. In addition Kmart has recently completed its deferred ~~merger~~tax ~~with Sears~~assets. ItThe isevaluation ~~not~~considers yet possible to determine the potential impact of these transactions on Kmart’s purchases with the Company. • Historically, plastic resin has represented approximately 20% to 25% of the Company’s cost of goods sold. In 2004, the percentage increased to 35% due to higher plastic resin costs and usage. Plastic resin costs are impacted by several factors, ~~outside the control of the Company~~ including ~~supply~~our ~~and~~estimate ~~demand characteristics, oil and natural gas prices and the overall health~~ of the likelihood economy. Any of these factors could potentially have a positive or negative impact on plastic resin prices and the Company’s profitability. Resin costs have continued to increase in 2005 and the Company expects that ~~costs~~we ~~in the remainder of 2005~~ will ~~exceed~~generate ~~costs~~sufficient ~~incurred~~taxable ~~during~~income ~~2004.~~in ~~While the Company will make every effort to recover the higher cost of plastic resin, there is no assurance that~~ future ~~resin~~years ~~cost increases can be passed on to customers. • The Company currently manufactures a significant portion of its laundry products~~ in ~~the~~which ~~U.S.~~temporary differences ~~Management believes that the Company’s current manufacturing structure provides increased flexibility to meet customer needs~~reverse. ~~All~~This ofevaluation ~~the~~is ~~Company’s~~based ~~major~~primarily ~~laundry competitors rely heavily~~ on ~~foreign~~our ~~sourced~~historical ~~products. Such products are produced in several countries~~earnings, ~~including~~projected operating ~~a significant portion from China. Over the past few years~~results, ~~these~~applicable ~~foreign~~net ~~sourced~~operating ~~competitive~~loss ~~products~~carryforward ~~were~~expiration ~~introduced~~dates ~~at selling prices below ours. This has caused our profit margins~~ and ~~market~~identified actions ~~share~~under ~~to decline. The Company has initiated many cost cutting and other steps to protect our market share and profit margins. The Company is also aggressively pursuing~~ the ~~increased~~control ~~importation~~ of ~~certain laundry products. We~~ the Company continue to analyze the competitiveness of our North American based laundry manufacturing operations. In addition, the Company filed an action with the U.S. International Trade Commission (“ITC”) and the U.S. Department of Commerce (“Department of Commerce”) on June 30, 2003 seeking relief from a surge in ~~the~~realizing ~~importation of unfairly priced Chinese ironing boards. On July 15, 2004,~~ the ~~ITC~~associated ~~unanimously~~carryforward ~~determined that the U~~benefits.S. ironing board industry was facing material injury as a result of the importation of unfairly priced ironing boards from China. The ITC’s action resulted in the issuance of an antidumping duty order by the Secretary of Commerce in August 2004. As a result, the Department of Commerce assigned revised dumping margins ranging from 9.47 percent to 157.68 percent. As necessary, the Company will vigorously defend or otherwise support the antidumping order, which may require it to devote financial and other resources, including management time and legal expenses.

21 The Company had approximately $35 million of deferred tax assets as of January 1, 2005, resulting from net operating loss carryforwards, and other deductible temporary differences, which may reduce taxable income in future periods to the extent the Company generates profits. Because the value of the deferred tax assets is fully reserved, changes in estimates of future operating performance could result in a reduction of the valuation allowances and a corresponding decrease in

~~Table of Contents~~17

•Table The Company’s three largest customers all have unique aspects that require additional packaging, handling and technical support. Distribution systems are constantly evolving as retailers search for additional costs to remove from the distribution system. A coming technology is radio frequency identification (RFID) which attaches a computer chip to each product. This chip gives off a radio signal that can be tracked by the retailer for inventory and sale purposes. RFID has the potential to replace current bar code technology. Wal-Mart has indicated that vendors should prepare for a conversion to RFID technology over the next one to two years. The cost to transition to RFID is unknown but is expected to be significant. • The Company’s Amended Loan Agreement takes into account seasonal fluctuations and changes to the Company’s collateral base. Because the financing is asset-based, availability of funds to borrow is dependent on the quality of the Company’s asset base, primarily its receivables and inventory. Should the lender determine that such assets do not meet the bank’s credit tests, availability can be restricted. Given the Company’s retail customer base, it is possible that certain customers could be excluded from the asset base thus reducing credit availability. • In an environment where customers largely control selling prices and vendors largely control raw material costs, sustained profitability and cash flow is a challenging goal. The Company will continue to focus on controlling our costs of production and holding operating expenses to below industry levels. The Company also intends to continue to develop new products and categories, as management believes that such items have a better opportunity for reasonable profit margins. Given the declining profitability of certain products and the increasing cost of raw materials, The Company has announced selective price increases. The success of these price increases is predicated on the competitive market place. If such price increases are not successfully implemented, certain products will be discontinued. • Given the Company’s line of credit availability, The Company may from time-to-time look at opportunities to buy its high-yield bonds. A buyback might be done if such transactions are accretive to shareholders through either a reduction of interest expense or a buyback of bonds at a discount.Contents

~~ITEM~~income 3tax expense. ~~Quantitative~~The ~~and~~changes ~~Qualitative~~in ~~Disclosures~~the ~~About~~valuation ~~Market~~allowances ~~Risk~~in any future interim period or fiscal year could be material.

The completion of the Shareholder Transaction on December 13, 2004 constituted an ownership change under Section 382 of the Internal Revenue Code of 1986, as amended, and the use of any of the Company’s ~~primary~~net ~~market~~operating ~~risk~~loss carryforwards generated prior to the ownership change is subject ~~impacted~~to bycertain ~~changes~~limitations. inThe ~~interest~~utilization ~~rates~~of ~~and~~such ~~price~~remaining net operating losses is ~~volatility~~subject ofto ~~certain~~an ~~commodity~~annual ~~based~~limitation ~~raw~~of ~~materials~~approximately $0.7 million. The Company is in the process of evaluating the impact of the net built-in gain on this limitation. As a result, a certain portion of the net operating losses will expire before they can be utilized.

~~Interest~~ During the ~~Rate~~twenty-six ~~Risk.~~weeks ~~The~~ended ~~Company’s~~July 2, ~~revolving~~2005 ~~credit~~and ~~agreement~~June 26, is2004, the ~~LIBOR~~Company recorded a non-~~based~~cash income tax provision of $1.4 million and $1.4 million, isrespectively. ~~subject~~This charge was required because the Company currently have significant deferred tax liabilities related to goodwill with lower tax than book basis as a result of accelerated and continued amortization ~~interest~~of ~~rate~~goodwill ~~movements~~for tax purposes. ~~During~~Following the ~~thirteen~~adoption ~~weeks~~of ~~ended~~SFAS ~~April~~No. 2142, ~~2005~~“Goodwill and Other Intangible Assets”, the deferred tax liability related to the Company’s goodwill must now be considered as a liability related to an asset with an indefinite life and can no longer support the realization of deferred tax assets. Historically, the Company did not ~~experience~~ ~~any~~need ~~material~~a ~~changes~~valuation inallowance ~~interest~~as the ~~rate~~book ~~risk~~basis ~~that~~of ~~would~~goodwill ~~affect~~was higher than the ~~disclosures~~tax ~~presented~~basis. This was a result of a goodwill impairment charge which was recorded in ~~the~~fiscal ~~Company’s~~year ~~Annual~~2000. ~~Report~~In on2004 ~~Form~~the continued ~~10-K~~amortization of goodwill for ~~the~~tax ~~fifty-three~~purposes ~~week~~has ~~period~~resulted ~~ended~~in ~~January 1~~a lower tax basis than book basis. Therefore, ~~2005~~the Company will record an additional income tax provision to increase its deferred tax valuation allowance. In the future we will increase the valuation allowance with a corresponding deferred tax provision as the deferred tax liabilities relate to the goodwill amortization increase.

~~Commodity~~• ~~Risk.~~Valuation ~~The~~of ~~Company~~Long-Lived ~~is subject to price fluctuations in commodity based raw materials such as plastic resin~~Assets, ~~steel~~Indefinite ~~and~~Long-Lived ~~griege~~Intangible ~~fabric.~~Assets ~~Changes in the cost of these materials may have a significant impact on the Company’s operating results. The cost of these items is affected by many factors outside of the Company’s control~~ and ~~changes~~Intangible ~~to the current trends are possible. See “Business Risks and Management Outlook” above.~~ Assets

The Company ~~has~~assesses ~~entered~~the ~~into~~recoverability ~~commitments~~of toindefinite ~~purchase~~and ~~certain~~long-lived ~~core~~assets ~~commodities~~whenever atit ~~formula-based~~determines that ~~prices.~~events ~~The~~or ~~agreements~~changes ~~expire~~ in ~~2005~~circumstances ~~and~~indicate ~~2006.~~that ~~Future~~their ~~related~~carrying ~~minimum~~amount ~~commitments~~may tonot ~~purchase~~be recoverable. ~~commodities~~In accordance with GAAP, ~~assuming~~indefinite ~~April 2005~~lived ~~price~~intangible ~~levels,~~assets are ~~$73 million~~subject into ~~2005~~annual impairment tests. The ~~purchase~~Company’s ~~commitment~~assessments and impairment testing are primarily based upon management ~~pricing~~estimates isof ~~not~~future ~~tied~~cash toflows ~~fixed~~associated ~~rates;~~with ~~therefore,~~these assets. Should the Company’s operating results, or estimated future results, deteriorate, the Company may determine that some portion of ~~operations~~our long-lived tangible or ~~financial position~~intangible ~~could~~assets beare ~~affected~~impaired. bySuch ~~significant~~determination ~~changes~~could result in non-cash charges that could materially affect the ~~market~~Company’s ~~cost~~consolidated financial position or results of ~~the~~operations ~~commodities~~for that period. At July 2, 2005, intangible assets were $72.8 million and long-lived assets (property, plant and equipment) were $28.6 million. No impairment charges were incurred in the first twenty-six weeks of 2005.

22Recent Accounting Pronouncements

~~Table~~ In March 2005, Staff Accounting Bulletin No. 107 (“SAB 107”) was issued which expressed views of ~~Contents~~the Securities and Exchange Commission (“SEC”) regarding the interaction between Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-based Payment” and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. The accounting provisions of SFAS 123R are effective as of the beginning of the first annual period beginning after June 15, 2005. Although the Company has not yet determined whether adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures of SFAS 123, the Company is evaluating the requirements of SFAS 123R, acceptable methods of determining fair market value, and the magnitude of the impact on its fiscal 2006 consolidated results of operations.

~~Item~~ In 4May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154 ~~Controls~~(“SFAS No. 154”), “Accounting Changes and ~~Procedures~~Error Corrections—a replacement of APB Opinion No. 20 and SFAS Statement No. 3”. APB No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” required the inclusion of the cumulative effect of changes in accounting principle in net income in the period of the change. SFAS No. 154 establishes, unless impracticable, retrospective application to prior periods’ financial statements as the required method for reporting a voluntary change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. This statement is effective for accounting changes and corrections of

~~The Company’s management, with the participation of its Chief Executive Officer and Chief~~18 Financial Officer, have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures, as required by Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon the results of that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in reports it files or submits under the Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

TheTable Company’s disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act of 1934 is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, believes that its disclosure controls and procedures are effective to provide such reasonable assurance. Contents

~~The~~errors ~~Company’s~~made ~~management,~~in ~~including~~fiscal ~~the~~years ~~Chief~~beginning ~~Executive~~after ~~Officer and Chief Financial Officer~~December 15, ~~believe~~ ~~that~~2005. ~~any~~The ~~disclosure~~Company ~~controls~~will ~~and~~assess ~~procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that~~ the ~~objectives~~impact of ~~the~~a ~~control~~retrospective ~~system~~application ~~are met. Further, the design~~ of a ~~control~~change ~~system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations~~ in ~~all~~accounting ~~control~~principle systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgments in ~~decision-making~~ ~~can~~accordance bewith ~~faulty, and that breakdowns can occur because of simple error or mistake.~~SFAS ~~Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control~~No. 154 ~~The~~if ~~design of any systems of controls also is based in part upon certain assumptions about~~ the ~~likelihood~~need offor ~~future~~such ~~events,~~a ~~and there~~change ~~can~~arises beafter ~~no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of~~ the ~~inherent limitations in a cost~~ effective ~~control~~ ~~system, misstatements due to error or fraud may occur and not be detected~~date.

~~There~~In ~~has~~May 2005, ~~been~~the noFASB ~~change~~issued inSFAS ~~the~~No. 151 ~~Company’s~~(“SFAS ~~internal~~No. 151”), ~~control~~Inventory ~~over~~Costs ~~financial~~– ~~reporting~~an ~~during~~amendment ~~the~~of ~~Company’s~~ARB ~~quarter~~No. 43, ~~ended April~~Chapter 24, ~~2005~~which ~~that~~relates ~~has~~to ~~materially~~inventory ~~affected,~~costs orand isthe ~~reasonably~~treatment ~~likely~~of toabnormal amounts of ~~materially~~idle ~~affect~~facility expense, freight, handling costs and spoilage. The provisions of SFAS No. 151 are effective for inventory costs incurred beginning in the first quarter of 2006. The Company’s ~~internal~~is currently ~~control~~evaluating ~~over~~the impact of adopting SFAS No. 151 on its financial ~~reporting~~statements, but does not expect the impact to be significant.

~~Forward~~ In ~~Looking~~June 2005, ~~Statements~~the Emerging Issues Task Force (“EITF”) reached consensus on Issue No. 05-06, “Determining the Amortization Period for Leasehold Improvements,” which requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. EITF No. 05-06 is effective for periods beginning after June 29, 2005. The Company does not expect the provisions of this consensus to have a material impact on the Company’s results of operations or financial condition.

~~This~~Thirteen ~~quarterly~~weeks ~~report~~ended ~~on Form 10-Q~~July 2, ~~including~~2005 ~~the~~compared “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business Risks and Management Outlook” and “Quantitative and Qualitative Disclosures about Market Risk” sections, contain forward-looking statements within the meaning of the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally may be identified by the use of terminology such as “may,” “will,” “could,” “should,” “potential,” “continue,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” or similar phrases or the negatives of such terms. Such statements are based on management’s current expectations and are subject to ~~risks, uncertainties and assumptions, including those identified below and in~~ the ~~foregoing~~thirteen ~~“Business Risks~~weeks ~~and~~ended ~~Management Outlook”~~June 26, ~~as well as other matters not yet known to the Company or not~~2004 currently considered material by the Company, which could cause actual results to differ materially from those described in the forward-looking statements. Such factors and uncertainties include, but are not limited to:

• In ~~general~~the ~~economic~~discussion ~~conditions~~ and ~~conditions~~analysis inthat ~~the~~follows, ~~retail~~all ~~environment;~~references •to 2005 are for the ~~Company’s~~thirteen ~~dependence~~week period onended aJuly 2, ~~few~~2005 ~~large~~and ~~customers;~~all references to 2004 are for the thirteen week period ended June 26, 2004.

23 The second quarter of 2004 results have been restated. For more information see Note 2 to condensed consolidated financial statements.

~~Table~~ The following discussion and analysis compares the actual results for the second quarter of 2005 ~~Contents~~to the restated results for the second quarter of 2004 with reference to the following (dollars and weighted average common shares in thousands, except net loss per share; unaudited):

• price fluctuations in the raw materials used by the Company; • competitive conditions in the Company’s markets; • the impact of the level of the Company’s indebtedness; • restrictive covenants contained in the Company’s various debt documents; • the seasonal nature of the Company’s business; • the extent to which the Company is able to retain and attract key personnel; • relationships with retailers; • the impact of federal, state and local environmental requirements (including the impact of future environmental claims against the Company); • the Company’s ability to develop and introduce new products and product modifications necessary to remain competitive; and • other factors discussed in “Business Risks and Management Outlook” above.


	Thirteen weeks ended
						June 26, 2004
	July 2, 2005					As restated
Net sales	$	56,555		100.0	%	$	64,206		100.0	%
Cost of goods sold		49,320		87.2	%		53,537		83.4	%

Gross profit		7,235		12.8	%		10,669		16.6	%

Selling, general and administrative expenses		7,353		13.0	%		7,372		11.5	%
Shareholder transaction costs		190		0.3	%		488		0.7	%
Amortization of intangible assets		24		0.0	%		124		0.2	%

Operating profit (loss)		(332	)	(0.5	%)		2,685		4.2	%

Interest expense		(3,475	)	(6.1	%)		(3,274	)	(5.1	%)
Other income (expense,) net		(6	)	(0.0	%)		30		0.0	%

Loss before income taxes		(3,813	)	(6.6	%)		(559	)	(0.9	%)

Income tax expense		(718	)	(1.3	%)		(723	)	(1.1	%)


Net loss	$	(4,531	)	(7.9	%)	$	(1,282	)	(2.0	%)


Net loss per common share – basic	$	(0.56	)			$	(0.16	)

Net loss per common share – diluted	$	(0.56	)			$	(0.16	)

Weighted average common shares outstanding:
Basic		8,155					7,987
Diluted		8,155					7,987

~~Given these risks and uncertainties, investors are cautioned not to place undue reliance on~~19 such forward-looking statements. Forward-looking statements do not guarantee future performance. The Company’s operating results may fluctuate, especially when measured on a quarterly basis. Except as required by law, the Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company in this report and in the Company’s reports on Forms 10-K, 10-Q and 8-K and other filings with the Securities and Exchange Commission. Such reports attempt to advise interested parties of the factors that affect the Company’s business.

PARTTable II.of OTHER INFORMATION Contents

~~Item~~ Net 1sales. ~~Legal~~The ~~Proceedings~~2005 second quarter net sales of $56.6 million were down 11.9% as compared to net sales in the second quarter of 2004 of $64.2 million. Sales were down due to decreased unit sales, primarily in the general storage category, related to several of the Company’s largest customers. Over one half of the core sales decline occurred in the general storage category, resulting from the aggressive pricing required to offset higher raw material costs. Selling prices were up $3.3 million as compared to the prior year period. Sales to the top three customers were 63% of net sales as compared to 73% in the prior year quarter.

Gross profit. Gross profit in the second quarter of 2005 was $7.2 million as compared to $10.7 million in the prior year quarter. The ~~Company~~decrease isin ~~party~~the gross profit was substantially due to the ~~various~~decrease ~~claims~~in net sales, ~~legal~~higher ~~actions~~raw material costs and ~~complaints~~a ~~including~~reduction ~~product~~in overhead absorption which ~~liability~~was ~~litigation,~~due ~~arising~~to lower factory production. Gross profit declined to 12.8% of net sales in the ~~ordinary~~second quarter ~~course~~ of ~~business~~2005 from 16.6% Inof net sales in the ~~opinion~~prior ofyear ~~management,~~due to increased raw material costs ~~all~~primarily ~~such~~for ~~matters~~resin ~~are~~and ~~adequately~~steel ~~covered~~and bylower ~~insurance~~production orvolume ~~will~~that ~~not~~adversely ~~have~~impacted burden absorption. Lower production volume was a ~~material~~direct ~~adverse~~result ~~effect~~of on lower sales orders as compared to the second ~~Company’s~~quarter ~~consolidated~~of ~~financial~~2004. ~~position,~~Included ~~results~~in the second quarter of ~~operations~~2004 orgross ~~liquidity~~profit was a $0.5 million gain on an insurance claim related to a fire in the Company’s Mexican manufacturing facility.

~~On June 4~~Selling, ~~2004,~~general aand ~~complaint~~administrative ~~was~~expenses ~~filed~~(SG&A). inSG&A ~~the~~expenses ~~Chancery~~of ~~Division~~$7.4 million ofin the second ~~Circuit~~quarter ~~Court~~ of ~~Cook County,~~2005 ~~Illinois~~were ~~against~~essentially ~~the~~flat ~~Company~~to ~~and~~a ~~our~~year ~~directors~~ago. ~~The~~As ~~complaint~~a ~~purported~~percentage toof benet ~~filed~~sales, ~~by a~~SG&A ~~stockholder~~expenses ~~and~~increased ~~alleged~~to ~~that~~13.0% in ~~entering into~~ the ~~Agreement~~second ~~and~~quarter ~~Plan~~ of ~~Merger,~~2005 byfrom ~~and~~11.5% ~~between~~in the ~~Company~~ ~~and~~prior ~~JRT~~year ~~Acquisition, Inc~~quarter. SG&A ~~(“JRT”),~~expenses asin ~~amended~~2005 byincluded ~~the~~$0.6 million ~~certain~~of ~~First~~severance ~~Amendment to the Agreement~~ and ~~Plan~~retention ofrelated ~~Merger,~~to ~~dated~~management changes ~~October 11,~~since ~~2004 (~~the ~~“JRT~~Shareholder ~~Agreement”),~~Transaction. In the ~~Company’s~~second ~~board~~quarter of ~~directors~~ ~~breached~~2005 ~~their~~SG&A ~~fiduciary~~expenses ~~duties~~were favorably ofimpacted ~~loyalty,~~by ~~due care, independence, good faith and fair dealing~~$0.5 million ~~The~~as ~~complaint~~a ~~included~~result aof ~~request~~lower ~~for~~employee arelated ~~declaration~~costs ~~that~~including ~~the~~incentives and ~~action~~fringes beas ~~maintained~~well as a ~~class~~ ~~action.~~reduction Onin ~~May 5,~~legal ~~2005~~costs ~~the~~associated ~~Chancery~~with ~~Division of~~ the ~~Circuit~~antidumping ~~Court~~action ~~of Cook County, Illinois~~(favorably ~~dismissed~~resolved in the ~~action~~third ~~without~~quarter ~~prejudice~~of 2004).

~~Item~~ Shareholder 2transaction costs. ~~Unregistered~~In ~~Sales~~the second quarter of ~~Equity~~2005, ~~Securities~~the Company incurred $0.2 million of legal and ~~Use~~other costs associated with the recently completed Shareholder Transaction. In the second quarter of ~~Proceeds~~2004, –the ~~None~~Company incurred $0.5 million of legal costs, investment banking and other costs related to the process that culminated with the Shareholder Transaction.

~~Item~~ Interest expense. Interest expense of $3.5 million ~~Defaults~~in ~~Upon~~2005 ~~Senior~~was ~~Securities~~up –$0.2 million ~~None~~from the prior year period. The increase in interest expense is due to the impact of higher average debt balances. Borrowings in late 2004 to pay expenses related to the Shareholder Transaction resulted in higher debt levels as compared to a year ago.

~~Item~~ Income tax 4expense. ~~Submission~~During the second quarter of ~~Matters~~2005 and 2004, the Company recorded a non-cash income tax provision related to goodwill of $0.7 million and $0.7 million, respectively. Following the adoption of SFAS No. 142, the deferred tax liability related to the Company’s goodwill must now be considered as a ~~Vote~~liability related to an asset with an indefinite life and can no longer support the realization of ~~Security~~deferred tax ~~Holders~~assets. –Therefore, ~~None~~the Company will record, on a quarterly basis, an additional income tax provision to increase its deferred tax asset valuation allowance. See Note 9. Income Taxes in the Notes to Condensed Consolidated Financial Statements for additional information. The Company continued to record a valuation allowance on its deferred tax assets through July 2, 2005, due to the uncertainty regarding future profitability.

~~Items~~ Net loss. The net loss in the second quarter of 2005 was $4.5 million, up significantly from the 2004 first quarter loss of $1.3 million. ~~Other~~Lower ~~Information~~sales, –increased ~~Not~~raw ~~applicable~~material costs, lower production volume, and severance and retention costs related to changes in management were the primary reasons for the increased loss. The second quarter of 2005 loss per diluted share was $(0.56) as compared to $(0.16) in the second quarter of 2004.

24 The diluted weighted average number of shares outstanding increased to 8,154,587 in 2005 from 7,986,614 a year ago. Dilutive options and warrants were not included in the computation of diluted

~~Table of Contents~~20

ItemTable 6.of ExhibitsContents

31.1		Certification by Douglas R. Ramsdale, Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of James E. Winslow, Executive Vice President and Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

weighted average shares outstanding because the assumed exercise of such equivalents would have reduced the loss per share.

25Twenty-six weeks ended July 2, 2005 compared to the twenty-six weeks ended June 26, 2004

~~Table~~ In ofthe ~~Contents~~discussion and analysis that follows, all references to 2005 are for the twenty-six week period ended July 2, 2005 and all references to 2004 are for the twenty-six week period ended June 26, 2004.

~~SIGNATURES~~ The results for the twenty-six weeks of 2004 have been restated. For more information see Note 2 to condensed consolidated financial statements.

~~Pursuant~~The following todiscussion and analysis compares the ~~requirements~~actual results for the first twenty-six weeks of 2005 to the ~~Securities~~restated ~~Exchange~~results ~~Act~~for the first twenty-six weeks of ~~1934,~~2004 ~~the~~with ~~registrant~~reference ~~has~~to ~~duly~~the ~~caused~~following ~~this~~(dollars ~~report~~and toweighted beaverage ~~signed~~common onshares ~~its~~in ~~behalf~~thousands, byexcept ~~the~~net ~~undersigned~~loss ~~thereunto~~per ~~duly~~share; ~~authorized.~~unaudited):

Home Products International, Inc. By: /s/ James E. Winslow James E. Winslow Executive Vice President and Chief Financial Officer (Principal Financial Officer) By: /s/ Mark J. Suchinski Mark J. Suchinski Vice President and Chief Accounting Officer (Principal Accounting Officer)


	Twenty-six weeks ended
	July 2, 2005					June 26, 2004 As restated
Net sales	$	107,946		100.0	%	$	117,396		100.0	%
Cost of goods sold		94,427		87.5	%		96,870		82.5	%

Gross profit		13,519		12.5	%		20,526		17.5	%

Selling, general and administrative expenses		15,034		13.9	%		13,768		11.8	%
Shareholder transaction costs		308		0.3	%		761		0.6	%
Amortization of intangible assets		49		0.0	%		248		0.2	%

Operating profit (loss)		(1,872	)	(1.7	%)		5,749		4.9	%

Interest expense		(6,961	)	(6.4	%)		(6,529	)	(5.6	%)
Other expense, net		(19	)	(0.1	%)		25		(0.0	%)

Loss before income taxes		(8,852	)	(8.2	%)		(755	)	(0.7	%)

Income tax expense		(1,444	)	(1.3	%)		(1,443	)	(1.2	%)


Net loss	$	(10,296	)	(9.5	%)	$	(2,198	)	(1.9	%)


Net loss per common share – basic	$	(1.26	)			$	(0.28	)

Net loss per common share – diluted	$	(1.26	)			$	(0.28	)

Weighted average common shares outstanding:
Basic		8,155					7,987
Diluted		8,155					7,987

~~Dated:~~ Net ~~May~~sales. 2005 net sales were $107.9 17million, ~~2005~~representing a decrease of $9.5 million, or 8.0%, from $117.4 million in 2004. The sales decrease resulted from a decline in unit sales, primarily in the general storage category, to several of our largest customers. Selling prices were up $7.4 million as compared to the prior year period. Sales to the top three customers were 65% of net sales as compared to 74% in the prior period.

26 Gross profit. Gross profit in 2005 was $13.5 million as compared to $20.5 million in the prior year quarter. The decrease in the gross profit was substantially due to the decrease in net sales, higher raw material costs and a reduction in overhead absorption which was due to lower factory production. Gross profit declined to 12.5% of net sales in 2005 from 17.5% of net sales in the prior year due to increased raw material costs primarily for resins and steel and lower production volume that adversely impacted burden absorption. Lower production volume in 2005 was a direct result of lower sales orders

as compared to the prior year. The 2004 gross profit included $0.7 million of costs related to the January 2004 closing of the Eagan Minnesota facility. Included in the 2004 gross profit was a $0.5 million gain on an insurance claim related to a fire in the Company’s Mexican manufacturing facility.

Selling, general and administrative expenses (SG&A). SG&A expenses of $15.0 million in 2005 were up $1.3 million compared to a year ago. As a percentage of net sales, SG&A expenses increased to 13.9% in 2005 from 11.8% in 2004. 2005 includes $1.8 million of severance and retention costs related to management changes since the Shareholder Transaction. Incentive and fringe related expenses were approximately $0.6 million lower than a year ago. In 2004, SG&A expenses were favorably impacted by a $0.5 million bad debt recovery.

Shareholder transaction costs. In 2005, the Company incurred $0.3 million of legal and other costs associated with the recently completed Shareholder Transaction. In 2004, the Company incurred $0.8 million of legal costs, investment banking and other costs related to the process that culminated with the Shareholder Transaction.

Interest expense. Interest expense of $7.0 million in 2005 was up $0.4 million from the prior year period. The increase in interest expense is due to the impact of higher average debt balances. Our average debt balance increased by $14.2 million in 2005 versus the comparable period in 2004.

Income tax expense. During 2005 and 2004, the Company recorded a non-cash income tax provision related to goodwill of $1.4 million and $1.4 million, respectively. Following the adoption of SFAS No. 142, the deferred tax liability related to the Company’s goodwill must now be considered as a liability related to an asset with an indefinite life and can no longer support the realization of deferred tax assets. Therefore, the Company will record, on a quarterly basis, an additional income tax provision to increase our deferred tax asset valuation allowance. See Note 9. Income Taxes in the Notes to Condensed Consolidated Financial Statements for additional information. The Company has continued to record a valuation allowance on its deferred tax assets through July 2, 2005, due to the uncertainty regarding future profitability.

Net loss. The 2005 net loss was $10.3 million, up significantly from the 2004 loss of $2.2 million. Lower sales, increased raw material costs, reduced factory running rates, the severance and retention costs related to changes in management were the primary reasons for the increased loss. The 2005 loss per diluted share was $(1.26) as compared to $(0.28) in 2004.

The diluted weighted average number of shares outstanding increased to 8,154,587 in 2005 from 7,986,585 a year ago. Dilutive options and warrants were not included in the computation of diluted weighted average shares outstanding because the assumed exercise of such equivalents would have reduced the loss per share.

Liquidity and Capital Resources

Cash

Cash decreased by $0.7 million and $0.4 million for the twenty-six weeks ended July 2, 2005 and June 26, 2004, respectively. The change in cash was as follows for the twenty-six weeks ended July 2, 2005 and June 26, 2004 (Unaudited, in millions):


	Twenty-six weeks
	ended
	July 2,			June 26,
	2005			2004
Net cash provided by operating activities	$	4.7		$	1.6
Net cash used in investing activities		(0.6	)		(3.6	)
Net cash (used in) provided by financing activities		(4.8	)		1.6


Net decrease in cash and cash equivalents	$	(0.7	)	$	(0.4	)

Net cash provided by operating activities:

Net cash provided by operating activities was $4.7 million for the twenty-six weeks ended July 2, 2005 as compared to $1.6 million for the same period in 2004. The year over year increase in cash provided by operating activities was primarily due to improved working capital.

Net cash used in investing activities:

Cash used in investing activities was $0.6 million for the twenty-six weeks ended July 2, 2005 as compared to $3.6 million in the prior year period. Capital expenditures in the normal course of business were $1.0 million for the twenty-six weeks ended July 2, 2005 as compared to $3.6 million during the twenty-six weeks ended June 26, 2004. On a year to date basis, capital expenditures in 2005 were below that of the prior year due to the timing of capital projects. Capital expenditures for 2005 are expected to be in the $5.0 million to $7.0 million range. In addition, the settlement of an environmental escrow account related to a 1997 acquisition generated $0.4 million of cash in 2005.

Net cash (used in) provided by financing activities:

Cash used in financing activities of $4.8 million for the twenty-six weeks ended July 2, 2005 was primarily the result of payments made to reduce a portion of our outstanding borrowings under the Company’s amended and restated loan agreement. During the twenty-six weeks ended June 26, 2004 the cash provided by financing activities of $1.6 million was primarily due to additional borrowings under the loan and security agreement.

Capital Resources

The Company’s primary sources of liquidity and capital resources include cash provided from operations and borrowings under the Company’s asset-based $60 million Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”). On December 14, 2004, the Company and Fleet Capital Corporation entered into the Amended Loan Agreement to accommodate operations subsequent to the Shareholder Transaction. The changes within the Amended Loan Agreement included an increase in the line of credit from $50.0 million to $60.0 million, an extension of the term of the agreement by 9 months to December 13, 2008, a reduction of applicable interest rates by 25 basis points and a reduction of the minimum excess availability requirement from $9.2 million to $5.0 million. The covenants restricting changes of ownership and changes of control of the Company have been revised to reflect the new ownership structure of the Company following the Shareholder Transaction.

The Amended Loan Agreement covenants require the Company to maintain excess availability at all times of at least $5.0 million. At July 2, 2005, the eligible asset base was $55.5 million. Thus, the

Company could borrow up to $50.5 million under the Amended Loan Agreement. At July 2, 2005, there were $20.3 million of borrowings under the Amended Loan Agreement and outstanding letters of credit totaled $2.7 million. Accordingly, the Company still had availability under the Amended Loan Agreement of $27.5 million. Despite the operating loss incurred during the first twenty-six weeks of 2005, the Company expects there to be sufficient financing capability to fund operations for at least the next twelve months.

The Company’s Amended Loan Agreement contains one financial covenant pertaining to a minimum cash interest coverage ratio. The cash interest coverage ratio was required to be no lower than 1.25 in June 2005. At July 2, 2005, the Company’s cash interest coverage ratio was 1.52. The earnings component of the covenant is the trailing twelve-month earnings before interest, taxes, depreciation and amortization. Certain costs related to factory realignments and the Shareholder Transaction are excluded. For the twelve months ended July 2, 2005, the earnings component of the covenant was $20.0 million. For a definition of cash interest coverage ratio as it is used in the Amended Loan Agreement, refer to the Amended Loan Agreement that was filed as an exhibit to the Company’s 2004 Annual Report on Form 10-K.

The Company was in compliance with all applicable Amended Loan Agreement covenants as of July 2, 2005.

The following is a table providing the aggregate annual contractual obligations of the Company including debt, capital lease obligations, future minimum rental commitments under operating leases and purchase obligations at July 2, 2005 and the effect such obligations are expected to have on the Company’s liquidity and cash flows in future periods.


	Payments Due by Period
	(Dollars in thousands)
			Less than						After
Contractual Obligations	Total		1 year		1-3 years		3-5 years		5 years
Long-term debt	$	116,050	$	—	$	116,050	$	—	$	—
Capital lease obligations		4,647		73		206		265		4,103
Minimum rental commitments under operating leases		16,701		4,626		7,639		4,436
Purchase obligations (estimated) (1)		72,680		27,810		44,870		—		—


Total contractual cash obligations	$	210,078	$	32,509	$	168,765	$	4,701	$	4,103


(1)		The Company has entered into commitments to purchase certain core commodities at formula-based prices. The agreements expire in 2005 and 2006. Future related minimum commitments to purchase commodities, assuming April 2005 price levels, are $27.8 million in 2005 and $44.9 million in 2006. The purchase commitment pricing is not tied to fixed rates; therefore, the Company’s results of operations or financial position could be affected by significant changes in the market cost of the commodities. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk – Commodity Risk” in the Company’s Form 10-K for fiscal 2004, which is incorporated herein by reference, for further details.


	Financing commitments expiring by period
	(in thousands)
			Less than						After
	Total		1 year		1-3 years		3-5 years		5 years
Standby letters of credit	$	2,700	$	2,700	$	—	$	—	$	—

Business Risks and Management Outlook

•

One of the Company’s largest customers is Kmart. The Company’s net sales to Kmart were $73 million in 2004 and $77 million in 2003. As set forth in Kmart’s public filings after emerging from bankruptcy in May 2003, Kmart has improved its financial performance and has operated within its financial covenants. However, Kmart continues to report that it has experienced declines in same store sales and further reduced its store count during 2004. Kmart has paid all of its current obligations to the Company on time and the Company does not believe that Kmart’s current situation will negatively impact the Company in the near term. Given the size of the Company’s sales to Kmart, future results may be either favorably or unfavorably impacted by any number of factors related to the retailer. In 2004, Kmart announced two transactions involving the sale of up to 74 stores, or approximately 5% of Kmart’s store base. In addition, Kmart has recently completed its merger with Sears. It is not yet possible to determine the potential impact of these transactions on Kmart’s purchases with the Company.

•

Historically, plastic resin has represented approximately 20% to 25% of the Company’s cost of goods sold. In 2004, the percentage increased to 35% due to higher plastic resin costs and usage. Plastic resin costs are impacted by several factors outside the control of the Company including supply and demand characteristics, oil and natural gas prices and the overall health of the economy. Any of these factors could potentially have a positive or negative impact on plastic resin prices and the Company’s profitability. The Company expects the 2005 average cost of both plastic resin and steel to be higher than 2004. While the Company will make every effort to recover the higher cost of plastic resin, there is no assurance that future resin cost increases can be passed on to customers.

•

The Company currently manufactures a significant portion of its laundry products in the U.S. Management believes that the Company’s current manufacturing structure provides increased flexibility to meet customer needs. All of the Company’s major laundry competitors rely heavily on foreign sourced products. Such products are produced in several countries, including a significant portion from China. Over the past few years, these foreign sourced competitive products were introduced at selling prices below ours. This has caused the Company’s profit margins and market share to decline. The Company has initiated many cost cutting and other steps to protect our market share and profit margins. The Company is also aggressively pursuing the increased importation of certain laundry products. The Company continues to analyze the competitiveness of its North American based laundry manufacturing operations. In addition, the Company filed an action with the U.S. International Trade Commission (“ITC”) and the U.S. Department of Commerce (“Department of Commerce”) on June 30, 2003 seeking relief from a surge in the importation of unfairly priced Chinese ironing boards. On July 15, 2004, the ITC unanimously determined that the U.S. ironing board industry was facing material injury as a result of the importation of unfairly priced ironing boards from China. The ITC’s action resulted in the issuance of an antidumping duty order by the Secretary of Commerce in August 2004. As a result, the Department of Commerce assigned revised dumping margins ranging from 9.47 percent to 157.68 percent. As necessary, the Company will vigorously defend or otherwise support the antidumping order, which may require it to devote financial and other resources, including management time and legal expenses.

•

The Company’s three largest customers all have unique aspects that require additional packaging, handling and technical support. Distribution systems are constantly evolving as retailers search for additional costs to remove from the distribution system. A coming technology is radio frequency identification (RFID) which attaches a computer chip to each product. This chip gives off a radio signal that can be tracked by the retailer for inventory and sale purposes. RFID has the potential to replace current bar code technology. Wal-Mart has indicated that vendors should prepare for a conversion to RFID technology over the next one to two years. The cost to transition to RFID is unknown but is expected to be significant.

•

The Company’s Amended Loan Agreement takes into account seasonal fluctuations and changes to the Company’s collateral base. Because the financing is asset based, availability of funds to borrow is dependent on the quality of the Company’s asset base, primarily its receivables and inventory.

Should the lender determine that such assets do not meet the bank’s credit tests, availability can be restricted. Given the Company’s retail customer base, it is possible that certain customers could be excluded from the asset base, thus reducing credit availability.

•

In an environment where customers largely control selling prices and vendors largely control raw material costs, sustained profitability and cash flow is a challenging goal. The Company will continue to focus on controlling costs of production and holding operating expenses to below industry levels. The Company also intends to continue to develop new products and categories, as management believes that such items have a better opportunity for reasonable profit margins. Given the declining profitability of certain products and the increasing cost of raw materials, the Company has announced selective price increases. The success of these price increases is predicated on the competitive market place. If such price increases are not successfully implemented, certain products will be discontinued.

•

Given the Company’s line of credit availability, the Company may from time-to-time look at opportunities to buy its high-yield bonds. A buyback might be done if such transactions are accretive to shareholders through either a reduction of interest expense or a buyback of bonds at a discount.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary market risk is impacted by changes in interest rates and price volatility of certain commodity based raw materials.

Interest Rate Risk. The Company’s revolving credit agreement is LIBOR-based and is subject to interest rate movements. During the thirteen and twenty-six weeks ended July 2, 2005, the Company did not experience any material changes in interest rate risk that would affect the disclosures presented in the Company’s Annual Report on Form 10-K for the fifty-three week period ended January 1, 2005.

Commodity Risk. The Company is subject to price fluctuations in commodity based raw materials such as plastic resin, steel and griege fabric. Changes in the cost of these materials may have a significant impact on the Company’s operating results. The cost of these items is affected by many factors outside of the Company’s control and changes to the current trends are possible. See “Business Risks and Management Outlook” above.

The Company has entered into commitments to purchase certain core commodities at formula-based prices. The agreements expire in 2005 and 2006. Future related minimum commitments to purchase commodities, assuming July 2005 price levels, are $28 million in 2005 and $45 million in 2006. In the event there is a major change in economic conditions affecting the Company’s overall annual plastic resin volume requirements, the Company and the vendor will mutually agree on how to mitigate the effects on both parties. Mitigating actions include deferral of product delivery within the agreement term, agreement term extension and/or elimination of excess quantities without liability. The purchase commitment pricing is not tied to fixed rates; therefore, the Company’s results of operations or financial position could be affected by significant changes in the market cost of the commodities.

Item 4. Controls and Procedures

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures, as required by Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon the results of that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed by the Company in reports it files or submits under the Exchange Act of 1934 was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. This was due solely to a material weakness in internal controls over financial reporting described in the Company’s Form 8-K filed on August 22, 2005 where the Company disclosed that it had not maintained effective controls over the determination of the provision for income taxes and related deferred income tax accounts. The Company has designed and implemented improvements in its internal control over financial reporting to address the tax accounting error and will test these controls in subsequent accounting periods.

As described in Note 2 to the condensed consolidated financial statements for the periods ended July 2, 2005, included herein, the Company will restate such condensed consolidated financial statements for all periods ended April 2, 2005, January 1, 2005, and each of the interim periods in fiscal 2004 by amending its Form 10-Q for the quarter ended April 2, 2005 and its Form 10-K for the fiscal year ended January 1, 2005 to correct errors relating to accounting for income taxes and related tax liabilities. Based on management’s review, it has been determined that these errors were inadvertent and unintentional.

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

Following the end of the quarter ended July 2, 2005 and in connection with its close process for such quarter, the Company designed and implemented improvements in its procedures for internal control over financial reporting to address the material weakness in accounting for income taxes. These improvements included the following actions:

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Educating and training Company individuals involved in accounting and reporting for income taxes. Appropriate finance staff personnel have researched and reviewed accounting pronouncements on accounting and reporting for income taxes, specifically as they related to deferred income taxes. Finance personnel will also attend various conferences and seminars to maintain current knowledge with respect to deferred taxes and accounting for income taxes; and

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Enhancing the documentation regarding conclusions reached in the implementation of generally accepted accounting principles. The Company has commenced this documentation and will continue to develop and incorporate this documentation into its ongoing Sarbanes Oxley internal controls and procedures preparation.

The Company will continue to monitor and test these controls in future periods to determine their effectiveness.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is party to various claims, legal actions and complaints including product liability litigation, arising in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance or will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

On June 4, 2004, a complaint was filed in the Chancery Division of the Circuit Court of Cook County, Illinois against the Company and the Company’s directors. The complaint purported to be filed by a stockholder and alleged that in entering into the Agreement and Plan of Merger, by and between the Company and JRT Acquisition, Inc. (“JRT”), as amended by the First Amendment to the Agreement and Plan of Merger, dated October 11, 2004 (the “JRT Agreement”), the Company’s board of directors breached their fiduciary duties of loyalty, due care, independence, good faith and fair dealing. The complaint included a request for a declaration that the action be maintained as a class action. On May 5, 2005, The Illinois Circuit Court (lower court) issued its Order dismissing the shareholder action, Slattery v. Home Products Int’l, Inc., as moot. The Circuit Court’s May 5, 2005 Order also denied plaintiffs petition for attorneys’ fees. On June 2, 2005, plaintiffs filed an appeal from the Circuit Court’s denial of their petition for attorneys’ fees only. Plaintiffs did not appeal the portion of the May 5, 2005 Order that dismissed the complaint. The appeal is pending in the Illinois Appellate Court for the First District. The Company intends to defend this appeal vigorously.

On July 20, 2005, a complaint was filed in the United States District Court for the Southern District of New York by Sawaya Segalas & Co., LLC (“SSC”) against the Company. Service of process for the complaint was effected as of July 22, 2005. The complaint alleges that the Company is obligated under an engagement letter, by and between SSC and the Company, dated April 23, 2002, to pay to SSC a success fee in connection with the successful tender offer by Storage Acquisition Company, L.L.C. for all the outstanding common stock of HPI that was completed in December of 2004. SSC seeks damages from the Company in the amount of $1.2 million, pre-judgment interest, SSC’s attorneys’ fees,

disbursements and costs, and other relief deemed proper by the court. The Company is evaluating the complaint and is in the process of responding to this claim.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – None.

Item 3. Defaults Upon Senior Securities – None.

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

On August 2, 2005, the Company held its duly called its 2005 Annual Meeting of Stockholders (the “2005 Annual Meeting”). The following is a brief description of the matters duly acted upon at the meeting and tabulation of the voting results.

Proposal No. 1. The amendment of the Company’s By-Laws to provide that the Company’s Board of Directors shall consist of three classes of directors was ratified, with 7,604,484 votes for, 54,763 votes against, 3,000 abstentions and 0 broker non-votes.

Proposal No. 2. The election of the following directors, who will serve until the next annual meeting associated with their respective class or until his or her successor has been elected and qualified, their resignation, or their removal, whichever is earlier:


Nominee	Votes in Favor		Votes Withheld
Joseph Gantz (Class I)		7,658,247		4,000
James M. Gould (Class I)		7,658,247		4,000
Donald J. Liebentritt (Class I)		7,658,247		4,000
William C. Pate (Class II)		7,658,247		4,000
Douglas Ramsdale (Class II)		7,658,247		4,000
Terry Savage (Class II)		7,658,247		4,000
Ellen Havdala (Class III)		7,624,047		38,200
Robert Lawrence (Class III)		7,658,247		4,000
Mark Weber (Class III)		7,658,247		4,000

Proposal No. 3. The ratification of the Equity Award Plan for employees and officers was ratified, with 7,638,387 votes for, 23,890 votes against, 0 abstentions and 0 broker non-votes.

Pursuant to a Voting Agreement, dated October 28, 2004, by and among Mr. Joseph Gantz, the Company’s Chairman, and certain other parties thereto, and a Board Composition Agreement, entered into as of October 28, 2004, by and among Mr. Gantz and certain other parties thereto, Mr. Gantz exercised his right and ability in connection with the 2005 Annual Meeting to designate six of the directors and direct the vote of that number of shares held by our largest stockholder that were required to elect at least a majority of the Company’s Board of Directors.

Items 5. Other Information – Not applicable.

Item 6. Exhibits


3.1		Amended and Restated By-laws of the Company approved by the Company’s Stockholders and adopted by the Board of Directors on August 2, 2005.

31.1		Certification by Douglas R. Ramsdale, Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of Donald J. Hotz, Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Home Products International, Inc.

		By :		/s/ Donald J. Hotz

				Donald J. Hotz
				Chief Financial Officer
				(Principal Financial Officer)

		By:		/s/ Mark J. Suchinski

				Mark J. Suchinski
				Vice President and
				Chief Accounting Officer
				(Principal Accounting Officer)

Dated: August 22, 2005

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