UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2005

or

For the transition period from ____________ to ____________

Commission file number 1-8485

MILACRON INC.

(513) 487-5000

     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     o     No     þ

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act)

Yes     þ     No     o

     Number of shares of Common Stock, $.01 par value, outstanding as of April 30, 2005: 49,795,114

Milacron Inc. and Subsidiaries
Index

2

PART I Financial Information

Consolidated Condensed Statements of Operations

See notes to consolidated condensed financial statements.

3

Consolidated Condensed Balance Sheets

See notes to consolidated condensed financial statements.

4

Consolidated Condensed Statements of Comprehensive Income and
Shareholders’ Equity (Deficit)

See notes to consolidated condensed financial statements.

5

Consolidated Condensed Statements of Cash Flows

See notes to consolidated condensed financial statements.

6

Notes to Consolidated Condensed Financial Statements

Basis of Presentation

     In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements contain all adjustments, which consist only of normal recurring adjustments except for the matters discussed in the notes captioned “Refinancing Costs” and “Restructuring Costs,” necessary to present fairly the company’s financial position, results of operations and cash flows.

     The Consolidated Condensed Balance Sheet at December 31, 2004 has been derived from the audited Consolidated Financial Statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

     The accounting policies followed by the company are set forth in the “Summary of Significant Accounting Policies” note to the Consolidated Financial Statements included in the company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Stock-Based Compensation

     The company currently accounts for stock-based compensation, including stock options, under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and the related interpretations. Because all stock options outstanding under the company’s 1997 and 2004 Long-Term Incentive Plans and a predecessor plan have exercise prices equal to the fair market value of the underlying common shares at the respective grant dates, no compensation expense is recognized in earnings. The following table illustrates on a pro forma basis the effect on net loss and net loss per common share if the stock options granted from 1995 through 2004 had been accounted for based on their fair values as determined under the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation.”

     The conversion of $30.0 million of Series A Notes into 15.0 million common shares on April 15, 2004 (see Refinancing Transactions) resulted in a change in control under the provisions of the 1997 Plan which triggered the early vesting of all stock options outstanding as of that date. In the first quarter of 2005, the pro forma expense amount related to stock options granted subsequent to April 15, 2004 is less that $.1 million.

     As discussed more fully below, a newly issued accounting standard will require the company to include expense related to stock options in its financial statements beginning in the first quarter of 2006 rather than reporting it on a pro forma basis as in the past.

Change in Method of Accounting

     In the fourth quarter of 2004, the company elected to change its method of accounting for certain inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method, retroactive to the beginning of the year. The company’s financial statements for all prior years were restated to conform to the 2004 presentation. The effect of the restatement was to decrease the accumulated deficit as of December 31, 2003 by $10.3 million.

Recently Issued Pronouncements

     In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (SFAS No. 123R). Among other things, this standard requires that

7

Notes to Consolidated Condensed Financial Statements
(Unaudited)

expense related to stock options be included in a company’s primary financial statements over the vesting periods based on their fair values as of the grant dates. The company will comply with the new standard beginning in the first quarter of 2006 but because there are currently only 14,000 stock options that are not fully vested, the effect of complying with the new standard is not currently expected to be material. The company will use the “modified-prospective” transition method and prior years’ financial statements will therefore not be restated. The company is evaluating the other provisions of SFAS No. 123R but currently does not expect their effects to be significant.

Discontinued Operations

     In the third quarter of 2002, the company announced a strategy of focusing its capital and resources on building its position as a premier supplier of plastics processing technologies and strengthening its worldwide industrial fluids business. In connection with this strategy, during 2002 the company initiated plans for the sale of its grinding wheels business. The business was sold on April 30, 2004.

     The grinding wheels business is reported as a discontinued operation in the Consolidated Condensed Financial Statements through the date of its disposition. Operating results for this business are presented in the following table.

     Allocated interest expense represents an allocated portion of consolidated interest expense based on the ratio of net assets sold or to be sold to consolidated assets.

8

Notes to Consolidated Condensed Financial Statements
(Unaudited)

Refinancing Costs

     During the first quarter of 2004, the company charged to expense $6.4 million of refinancing costs incurred in pursuing various alternatives to the March 12, 2004 refinancing of approximately $200 million in debt and other obligations (see Refinancing Transactions).

Restructuring Costs

     During 2001, the company’s management approved a plan to integrate the operations of EOC and Reform, two businesses that were acquired earlier in that year, with the company’s existing European mold base and components business. These businesses are included in the mold technologies segment. The plan involved the consolidation of the manufacturing operations of five facilities located in Germany and Belgium into three facilities, the reorganization of warehousing and distribution activities in Europe and the elimination of approximately 230 positions. The total cost of the plan was $11.2 million, of which $1.2 million was included in reserves for employee termination benefits that were established in the allocations of the EOC and Reform acquisition costs. The remaining $10.0 million was charged to expense. Of the total cost of the plan, $4.4 million related to employee termination costs, $2.7 million to facility exit costs and $4.1 million to other costs, including $3.1 million to relocate employees, inventory and machinery. The cash cost of the integration will be approximately $9.4 million, of which $.1 million was spent in the first quarter of 2004. Cash costs for all of 2005 are expected to be approximately $.1 million. The non-cash costs of the integration relate principally to the write-down of one of the closed facilities to its expected realizable value. As of March 31, 2005 reserves for employee termination benefits and facility exit costs totaled $1.2 million and related principally to supplemental retirement benefits that will be paid to certain former employees in Belgium at a rate of approximately $.1 million per year for the next several years.

     In November 2002, the company announced restructuring initiatives intended to improve operating efficiency and customer service. One of these actions involved the transfer of all manufacturing of container blow molding machines and structural foam systems from the plant in Manchester, Michigan to the company’s more modern and efficient facility near Cincinnati, Ohio. The mold making operation has also been moved to a smaller location near Manchester. These operations are included in the machinery technologies – North America segment. The relocations, which involved the elimination of approximately 40 positions, are resulting in restructuring costs of $13.4 million, including $.3 million in the first quarter of 2005 and $.9 million in the comparable period of 2004. An additional $.4 million is expected to be expensed during the remainder of 2005. The 2005 costs relate principally to completing the move of the mold making operation. Of the total cost of $13.4 million, $1.5 million relates to employee severance costs, $6.1 million to plant closing and facility exit costs (including adjustments of the carrying values of the Manchester facility and other assets to be disposed of), $1.9 million to inventory adjustments related to discontinued product lines and $3.9 million to other move-related costs, including employee, inventory and machinery relocation. The cash cost of the relocations will be approximately $6.2 million, including $1.7 million for severance and termination benefits, $.3 million for plant clean up costs and $4.2 million for other costs, primarily to relocate inventory and machinery. The non-cash costs of $7.2 million relate principally to the previously mentioned adjustments related to inventories of discontinued product lines and assets to be disposed of as a result of the plant closure.

     In the third quarter of 2003, the company announced additional restructuring initiatives that focused on further overhead cost reductions in each of its plastics technologies segments and at the corporate office. These actions, which involved the relocation of production and warehousing (including the closure of one small facility and the downsizing of two others), closures of sales offices, voluntary early retirement programs and general overhead reductions, have resulted in the elimination of approximately 300 positions worldwide. A total of $11.2 million was charged to expense in 2003 in connection with these initiatives and an additional $.6 million was expensed in 2004, including $.3 million in the first quarter. Of the total cost of the initiatives of $11.8 million, $3.7 million related to the machinery technologies – North America segment, $2.7 million to the machinery technologies – Europe segment, $5.0 million to the mold technologies segment and $.4 million to corporate expenses. The total cost of the 2003 actions includes $3.2 million for supplemental early retirement benefits that will be paid through the company’s defined benefit pension plan for certain U.S. employees, $6.8 million for severance and other termination benefits for certain other employees, $.6 million for facility exit costs and $1.2 million for moving expenses. The supplemental early retirement benefits will have the effect of increasing the amount of the company’s funding requirements in future years. The cash costs of the initiatives – including $6.8 million for severance and other termination benefits, $.5 million for lease termination and other facility exit costs and $1.1 million for other costs – are expected to total approximately $8.4 million. In 2003, $3.5 million was spent and another $4.7 million was spent in 2004. Of the latter amount, $2.3 million was spent in the first quarter. Cash costs for 2005 will be approximately $.2 million, including $.1 million that was spent in the first quarter. The non-cash costs of the 2003

9

Notes to Consolidated Condensed Financial Statements
(Unaudited)

initiatives will be approximately $3.4 million and relate principally to the early retirement benefits funded through the pension plan as discussed above.

     In the second quarter of 2004, the company initiated additional actions to further enhance customer service while reducing the overhead cost structure of its machinery technologies — North America segment. These overhead reductions resulted in restructuring expense of $1.1 million in 2004 and $.2 million in the first quarter of 2005. An additional $.3 million is expected to be charged to expense during the remainder of 2005 in connection with these actions. Termination benefits will account for $1.0 million of the total cost of $1.6 million while facility exit costs represent a substantial majority of the remaining $.6 million. Total cash costs are expected to be approximately $1.5 million, of which $.8 million was spent in 2004. The remainder is being spent in 2005, including $.2 million in the first quarter. The cash costs include $.9 million for severance and $.6 million for facility exit and moving costs. These actions resulted in the elimination of 66 positions, a majority of which occurred during 2004.

     In the fourth quarter of 2004, the company initiated a plan to reduce employment levels at a mold technologies facility in Germany due to sluggish demand in Europe. The plan will result in the elimination of approximately 25 positions at a cost of $1.1 million, all of which was charged to expense in 2004. In addition, certain surplus assets were written down to estimated realizable values through non-cash charges totaling $1.1 million. The cash costs, principally for severance benefits, will be approximately $1.0 million. Of this amount, $.6 million was spent in 2004. The remainder will be spent in 2005, including $.2 million that was spent in the first quarter.

     In the fourth quarter of 2004, the company initiated additional headcount reductions in its European mold base and components business that resulted in expense of $.6 million. These reductions represent a continuation of the actions initiated in the third quarter of 2003 (as discussed above) and were undertaken due to continued slow economic conditions in Europe. The cash costs of these initiatives will be approximately $.6 million, of which $.4 million was spent in the first quarter of 2005. The remainder will be spent later in 2005.

     The following table presents the components of the restructuring costs that are included in the Consolidated Condensed Statements of Operations for the first quarters of 2005 and 2004.

     As presented in the above table, the costs under the line captioned “Costs charged to expense as incurred” do not meet the conditions for accrual under U.S. generally accepted accounting principles and are therefore expensed when the related contractual liabilities are incurred. Accordingly, no reserves related to these costs have been established.

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Notes to Consolidated Condensed Financial Statements
(Unaudited)

     The status of the reserves for the initiatives discussed above is summarized in the following tables. The amounts included therein relate solely to continuing operations.

     Approximately $.5 million of the $2.3 million of reserves related to restructuring actions is expected to be utilized in the second quarter of 2005. An additional $.4 million is expected to be used in the second half of 2005. A large majority of the remaining $1.4 million represents supplemental retirement benefits for certain employees that will be paid at a rate of approximately $.1 million per year for the next several years.

11

Notes to Consolidated Condensed Financial Statements
(Unaudited)

Retirement Benefit Plans

     The tables that follow present the components of expense for all defined benefit pension plans and for postretirement health care costs for the first quarters of 2005 and 2004.

     The company expects to make contributions to the funded pension plan for certain U.S. employees totaling $2.5 million in 2005. During the first quarter, $.5 million was paid. Contributions will also be required in future years, including approximately $2.9 million in 2006 based on currently available information. Contributions are expected to increase significantly in 2007.

     On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was enacted. Among other things, the Act created new federal subsidies beginning in 2006 for employers that provide prescription drug coverage for their retirees. However, the subsidies will only be available to employers whose prescription drug coverage is determined to be “actuarially equivalent” to Medicare Part D. The principal postretirement health care plan for certain U.S. employees provides prescription drug coverage but due to the absence of definitive regulations for determining actuarial equivalency, the company is currently unable to determine the extent to which the subsidies will be available or their potential effect on postretirement health care costs. The company is evaluating its options regarding the Act, including potential modifications to the plan. However, the amounts presented in the preceding table reflect no adjustments related to the Act.

Income Taxes

     At December 31, 2004, the company had non-U.S. net operating loss carryforwards – principally in The Netherlands, Germany and Italy – totaling $193 million, of which $33 million will expire between 2007 and 2020. The remaining $160 million have no expiration dates. Deferred tax assets related to the non-U.S. loss carryforwards totaled $57 million at December 31, 2004 and valuation allowances totaling $51 million had been provided with respect to these assets as of that date. The company believes that it is more likely than not that portions of the net operating loss carryforwards in these jurisdictions will be utilized. However, there is currently insufficient positive evidence in some non-U.S. jurisdictions – primarily Germany and Italy – to conclude that no valuation allowances are required.

12

Notes to Consolidated Condensed Financial Statements
(Unaudited)

     At December 31, 2004, the company had a U.S. federal net operating loss carryforward of $113 million, of which $17 million, $40 million and $56 million expire in 2023, 2024 and 2025 respectively. Deferred tax assets related to this loss carryforward, as well as to federal tax credit carryforwards ($14 million) and additional state and local loss carryforwards ($10 million), totaled $64 million. Of the federal tax credit carryforwards, $5 million expire between 2008 and 2014 and $9 million have no expiration dates. Approximately 40% of the state and local loss carryforwards will expire by 2010 and the remainder will expire by 2019. At December 31, 2004, additional deferred tax assets totaling approximately $107 million had also been provided for book deductions not currently deductible for tax purposes including the writedown of goodwill, postretirement health care benefit costs and accrued pension liabilities. The deductions for financial reporting purposes are expected to be deducted for income tax purposes in future periods, at which time they will have the effect of decreasing taxable income or increasing the net operating loss carryforward. The latter will have the effect of extending the ultimate expiration of the net operating loss carryforward beyond 2025.

     The conversion of the Series A Notes into common stock and the exchange of such common stock and the Series B Notes for Series B Preferred Stock on June 10, 2004 (see Refinancing Transactions) triggered an “ownership change” for U.S. federal income tax purposes. As a consequence of this ownership change, the timing of the company’s utilization of its U.S. tax loss carryforwards and other tax attributes will be substantially delayed. This delay will increase tax expense and decrease available cash in future years. Although the amounts are dependent on a number of future events and are therefore not currently determinable, the company is performing its analysis to determine the annual limitations applicable to the U.S. net operating loss and tax credit carryforwards.

     As of December 31, 2004, U.S. deferred tax assets net of deferred tax liabilities totaled $171 million and U.S. valuation allowances totaled $106 million. The company continues to rely on the availability of qualified tax planning strategies to conclude that valuation allowances are not required with respect to a portion of its U.S. deferred tax assets. Tax planning strategies represent prudent and feasible actions the company could take to create taxable income to keep a tax attribute from expiring during the carryforward period. Determinations of the amounts related to tax planning strategies assume hypothetical transactions, some of which involve the disposal of substantial business assets, and certain variables that are judgmental and subjective. At December 31, 2004, valuation allowances had not been recorded with respect to $65 million of U.S. deferred tax assets based on qualified tax planning strategies of $61 million and tax carrybacks of $4 million. The review of the company’s qualified tax planning strategies at March 31, 2005 resulted in no change to the amount thereof and therefore no change in the amount of valuation allowances otherwise required.

     The company will continue to reassess its conclusions regarding qualified tax planning strategies and their effect on the amount of valuation allowances that are required on a quarterly basis. This could result in an increase in income tax expense and a corresponding decrease in shareholders’ equity in the period of the change.

     U.S. deferred tax assets and valuation allowances were both increased by an additional $3 million in the first quarter of 2005. Due to the lack of positive evidence as required by Statement of Financial Accounting Standards No. 109, the company was unable to record tax benefits with respect to its losses in the U.S. and certain other jurisdictions in the first quarter of 2005. However, results for the quarter include tax expense related to operations in profitable non-U.S. jurisdictions. This resulted in a first quarter provision for income taxes of $.2 million in 2005. In the first quarter of 2004, the provision for income taxes was $1.1 million.

     On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the Act). The Act creates a temporary (one tax year) incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividend received deduction for qualifying dividends from controlled foreign corporations. The deduction is subject to numerous requirements and limitations and uncertainty remains as to how to interpret certain provisions of the Act. The provision is elective and, for companies with a calendar year end, is available only for the years 2004 or 2005.

     The company does not intend to make an election for calendar year 2004 and is still evaluating the merits of making the election for the year 2005. The evaluation necessarily requires an analysis of the company’s geographic liquidity needs and the relative benefit of a repatriation that qualifies as extraordinary under the Act. Also, the tax benefits derived from this provision of the Act during 2005 would be delayed to a future date due to the company’s net operating loss and tax credit carryforwards. The decision whether or not to elect an extraordinary dividend repatriation for the year 2005 should be finalized by the end of the second quarter of 2005. The amount of any potential repatriation and the associated tax benefits have not been determined at this time. Accordingly, it remains the intention of the company to permanently reinvest earnings of its foreign subsidiaries pending the completion of its analysis.

13

Notes to Consolidated Condensed Financial Statements
(Unaudited)

     The Act also provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the Act provides for a two-year phase-out of the existing extra-territorial income exclusion (ETI) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. The company does not expect these provisions to have any impact on its effective tax rate for 2005 or 2006 based on current earnings levels and the availability of substantial net operating loss carryforwards. In the long term, the company expects that the new deduction will result in a decrease of the annual effective tax rate. However, the timing and amount of the decrease are indeterminable at this time.

Receivables

     Certain of the company’s non-U.S. subsidiaries sell accounts receivable on an ongoing basis. In some cases, these sales are made with recourse, in which case appropriate reserves for potential losses are recorded at the sale date. At March 31, 2005 and December 31, 2004, the gross amounts of accounts receivable that had been sold under these arrangements totaled $4.1 million and $6.6 million, respectively. At March 31, 2005 and December 31, 2004, these amounts were partially collateralized with $3.3 million and $5.3 million, respectively, of cash deposits that are included in cash and cash equivalents in the Consolidated Condensed Balance Sheets.

     The company also periodically sells with recourse notes receivable arising from customer purchases of plastics processing machinery and, in a limited number of cases, guarantees the repayment of all or a portion of notes from its customers to third party lenders. At both March 31, 2005 and December 31, 2004, the company’s maximum exposure under these arrangements totaled $8.0 million. In the event a customer were to fail to repay a note, the company would generally regain title to the machinery for later resale as used equipment.

     Costs related to sales of notes receivable and to guarantees have not been material in the past.

     During several preceding years and through March 12, 2004, the company maintained a receivables purchase agreement with a third party financial institution. Under this arrangement, the company sold, on a revolving basis, an undivided percentage ownership interest in designated pools of accounts receivable. As existing receivables were collected, undivided interests in new eligible receivables were sold. On March 12, 2004, all amounts sold by the company under the receivables purchase agreement were repurchased using a portion of the proceeds of the refinancing transactions entered into on that date (see Refinancing Transactions). The effect was to increase the use of cash from operating activities for the first quarter of 2004 by $33 million.

Goodwill and Other Intangible Assets

     The carrying value of goodwill totaled $85.8 million at March 31, 2005 and $86.6 million at December 31, 2004. The company’s other intangible assets, which are included in other noncurrent assets in the Consolidated Condensed Balance Sheets, are not significant.

Other Assets

     The components of other current assets and other noncurrent assets are shown in the tables that follow.

14

Notes to Consolidated Condensed Financial Statements
(Unaudited)

Liabilities

     The components of accrued and other current liabilities are shown in the following table.

     The following table summarizes changes in the company’s warranty reserves. These reserves are included in accrued and other current liabilities in the Consolidated Condensed Balance Sheets.

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Notes to Consolidated Condensed Financial Statements
(Unaudited)

     The components of long-term accrued liabilities are shown in the following table.

Refinancing Transactions

     On March 12, 2004, the company also reached a separate agreement with Credit Suisse First Boston for a $140 million credit facility having a term of approximately one year. This senior secured credit facility consisted of a $65 million revolving A facility and a $75 million term loan B facility. On March 12, 2004, extensions of credit under the facility in an aggregate amount of $84 million were utilized to repay and terminate the company’s then-existing revolving credit facility (in addition to replacing or providing credit support for outstanding letters of credit) and its then-existing receivables purchase program. As discussed below, all borrowings under the Credit Suisse First Boston facility were repaid on June 10, 2004.

     On May 26, 2004, Milacron Escrow Corporation, a wholly-owned, direct subsidiary of the company created solely to issue notes and to merge with and into the company, issued $225 million in aggregate principal amount of 11 1/2% Senior Secured Notes due 2011 in a private placement. The proceeds of this issuance were initially placed in escrow. On June 10, 2004, the conditions for release of the proceeds from escrow were satisfied, including the consummation of the merger of Milacron Escrow Corporation with and into the company.

     On June 10, 2004, (i) the common stock into which the Series A Notes were converted and (ii) the Series B Notes were exchanged for 500,000 shares of Series B Preferred Stock, a new series of the company’s convertible preferred stock with a cumulative cash dividend rate of 6%. On June 10, 2004, the company also entered into an agreement for a new $75 million asset based revolving credit facility with JPMorgan Chase Bank as administrative agent and collateral agent.

     On June 10, 2004, the company applied the proceeds of the issuance of the 11 1/2% Senior Secured Notes due 2011, together with $7.3 million in borrowings under the asset based facility and approximately $10.3 million of cash on hand, to:

•

purchase €114,990,000 of the €115 million aggregate outstanding principal amount of Milacron Capital Holdings B.V.’s 7 5/8% Guaranteed Bonds due in April 2005 at the settlement of a tender offer therefor;

16

Notes to Consolidated Condensed Financial Statements
(Unaudited)

	•	terminate and repay $19 million of borrowings outstanding under the revolving A facility of the Credit Suisse First Boston facility, which included additional amounts borrowed subsequent to March 12, 2004. The company also used $17.4 million in availability under the asset based facility to replace or provide credit support for the outstanding letters of credit under the revolving A facility of the Credit Suisse First Boston facility;
	•	repay the $75 million term loan B facility of the Credit Suisse First Boston facility; and
	•	pay transaction expenses.

     The conversion of the Series A Notes into common stock on April 15, 2004 and the exchange of such common stock and the Series B Notes for Series B Preferred Stock on June 10, 2004 triggered an “ownership change” for U.S. federal income tax purposes. As a consequence of the ownership change, timing of the company’s utilization of tax loss carryforwards and other tax attributes will be substantially delayed. This delay will increase income tax expense and decrease available cash in future years, although the amounts are dependent upon a number of future events and are therefore not determinable at this time.

Short-Term Borrowings

     Borrowings under the asset based facility are secured by a first priority security interest, subject to permitted liens, in, among other things, U.S. and Canadian accounts receivable, cash and cash equivalents, inventories and, in the U.S., certain related rights under contracts, licenses and other general intangibles, subject to certain exceptions. The asset based facility is also secured by a second priority security interest in the assets that secure the 11 1/2% Senior Secured Notes due 2011 on a first priority basis. The availability of loans under the facility is limited to a borrowing base equal to specified percentages of eligible U.S. and Canadian accounts receivable and U.S. inventories and is subject to other conditions and limitations, including an excess availability reserve (the minimum required availability) of $10 million and an additional $1 million hedging reserve as a result of an interest rate swap that was entered into on July 30, 2004 (see Long-Term Debt).

     Pursuant to the terms of the asset based facility, the cash the company receives from collection of receivables is subject to an automatic “sweep” to repay any outstanding borrowings under the asset based facility on a daily basis. As a result, the company relies on borrowings under the asset based facility as the primary source of cash for use in its North American operations. The availability of borrowings under the asset based facility is subject to the borrowing base limitations, including the excess availability and hedging reserves, which may be adjusted from time to time by the administrative agent at its discretion, and the satisfaction of certain conditions to borrowing, including, among other things, conditions related to the continued accuracy of the company’s representations and warranties and the absence of any unmatured or matured defaults (including under financial covenants) or any material adverse change in the company’s business or financial condition.

     The asset based facility originally contained, for the first five quarters, a financial covenant requiring the company to maintain a minimum level of cumulative consolidated EBITDA (earnings before interest, taxes, depreciation and amortization), as defined in the facility, to be tested quarterly. The facility was amended on February 11, 2005 to modify these requirements as more fully discussed below. In addition, the facility originally contained a limit on capital expenditures to be complied with on a quarterly basis through September 30, 2005 but on February 11, 2005, the facility was amended to extend this limit through December 31, 2005. Thereafter, the company will have to comply with a fixed

17

Notes to Consolidated Condensed Financial Statements
(Unaudited)

charge coverage ratio to be tested quarterly beginning in the first quarter of 2006. This test was originally to have been effective for the fourth quarter of 2005 but was delayed by the February 11, 2005 amendment.

     As discussed above, the asset based facility requires the company to maintain minimum levels of cumulative consolidated EBITDA to be tested quarterly. This test was originally required through September 30, 2005 but the previously discussed amendment to the facility extended it through December 31, 2005 and established a minimum cumulative consolidated EBITDA requirement of $38.0 million for the twelve consecutive calendar months ending December 31, 2005. The February 11, 2005 amendment also reduced the minimum cumulative consolidated EBITDA requirements for 2005 as follows: for the nine consecutive calendar months ending March 31, 2005 from $32.3 million to $26.4 million; for the twelve consecutive calendar months ending June 30, 2005 from $43.0 million to $35.8 million; and for the twelve consecutive calendar months ending September 30, 2005 from $48.4 million to $36.6 million. Subsequent to February 11, 2005, the company identified additional adjustments that resulted in reducing fourth quarter 2004 EBITDA to below the minimum level required under the facility. However, the company reached an agreement with the lenders on March 16, 2005 to waive any noncompliance in the fourth quarter resulting from certain of these adjustments. Accordingly, after giving effect to the waiver, the company was in compliance with the EBITDA requirements as of both December 31, 2004 and March 31, 2005. The February 11, 2005 amendment also corrected a minor technical violation related to an investment and allowed for a change in the method of accounting for certain U.S. plastics machinery inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.

     The company’s ability to continue to meet the cumulative consolidated EBITDA covenant will be contingent on a number of factors, many of which are beyond its control. These include the company’s need for a continued increase in capital spending in the plastics processing industry and the resulting increases in sales revenues and operating margins, the need for no material decrease in price realization for the products the company sells, the company’s ability to absorb recent raw material price increases or pass such price increases through to customers, and the company’s continued ability to realize the benefits of its cost reduction and process improvement initiatives. If the company is unable to meet or exceed the minimum cumulative consolidated EBITDA requirements or any other conditions to borrowing of the asset based facility, it will attempt to further renegotiate this covenant or those conditions with its lenders to assure compliance. However, the company cannot control its lenders’ actions and, if the negotiations are not successful, the company could be forced to seek alternative sources of liquidity. This may include, but is not necessarily limited to, seeking alternative lenders, sales of assets or business units and the issuance of additional indebtedness or equity. Failure to meet or exceed the minimum cumulative consolidated EBITDA requirements of the asset based facility would constitute an event of default under the facility, which would permit the lenders to accelerate indebtedness owed thereunder (if such indebtedness remained unpaid) and terminate their commitments to lend. The acceleration of the indebtedness under the asset based facility would also create a cross-default under the company’s 11 1/2% Senior Secured Notes due 2011 if the principal amount of indebtedness accelerated, together with the principal amount of any other such indebtedness under which there has been a payment default or the maturity has been so accelerated, aggregated $15 million or more. Such cross-default would permit the trustee under the indenture governing the 11 1/2% Senior Secured Notes due 2011 or the holders of at least 25% in principal amount of the then outstanding notes to declare the notes to be due and payable immediately. Events of default under the asset based facility and the 11 1/2% Senior Secured Notes due 2011 in addition to those described above, including, without limitation, the failure to make required payments in respect of such indebtedness in a timely manner, may result in the acceleration of indebtedness owed under these instruments. The acceleration of obligations under the company’s outstanding indebtedness would have a material adverse effect on its business, financial condition and results of operations.

     At March 31, 2005, no amounts were drawn against the asset based credit facility but $10 million was utilized for outstanding letters of credit. Under the terms of the facility, the company’s additional borrowing capacity based on the assets included in the borrowing base at March 31, 2005 was approximately $41 million after taking into account then-outstanding letters of credit and the minimum availability and existing reserve requirements. The effective interest rate for borrowings under the asset based credit facility at March 31, 2005 would have been 5.9%.

     As discussed above, the asset based facility includes a number of covenants. On March 14, 2005, the company reached an agreement with the lenders to waive certain provisions under the facility as they relate solely to any delay in filing an amendment to its Annual Report on Form 10-K for the year ended December 31, 2004 containing management’s report and the auditor’s attestation on internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. Such waiver, however, is subject to certain conditions, including that management’s report and the

18

Notes to Consolidated Condensed Financial Statements
(Unaudited)

auditor’s attestation are filed no later than June 30, 2005. Failure to meet the June 30, 2005 deadline, without a subsequent waiver, could result in the company being in default or unable to borrow under the facility.

     At March 31, 2005, the company had other lines of credit with various U.S. and non-U.S. banks totaling approximately $24 million. These credit facilities support the discounting of receivables, letters of credit, guarantees and leases in addition to providing borrowings under varying terms. Approximately $15 million was available to the company under these lines under certain circumstances.

     During several preceding years and through March 12, 2004, the company had a $65 million committed revolving credit facility with certain U.S. and non-U.S. banks. All amounts borrowed under the facility were repaid using a portion of the proceeds of the refinancing transactions entered into on March 12, 2004 (see Refinancing Transactions).

Long-Term Debt

     The 11 1/2% Senior Secured Notes due 2011 are jointly and severally guaranteed on a senior secured basis by substantially all of the company’s U.S. and Canadian subsidiaries and on a senior unsecured basis by Milacron Capital Holdings B.V., a Dutch subsidiary. The notes and guarantees are secured by a first priority security interest in certain of the company’s U.S. assets other than those securing the asset based credit facility on a first priority basis (see Short-Term Borrowings) as well as the capital stock of certain subsidiaries and a second priority security interest in all of the assets securing the company’s asset based credit facility on a first priority basis.

     Subject to a number of important limitations, exceptions and qualifications, the indenture governing the 11 1/2% Senior Secured Notes due 2011 contains covenants that limit the ability of the company and its restricted subsidiaries to incur additional indebtedness, create liens, engage in sale and leaseback transactions, pay dividends or make other equity distributions, purchase or redeem capital stock, make investments, sell assets, engage in transactions with affiliates and effect a consolidation or merger.

     As discussed more fully in the note captioned “Subsequent Events,” the 11 1/2% Senior Secured Notes due 2011 could be declared due and payable if the company fails to file by July 5, 2005 an amendment to its Annual Report on Form 10-K for the year ended December 31, 2004 containing management’s report and the auditor’s attestation on internal control over financial reporting that is required by Section 404 of the Sarbanes-Oxley Act of 2002.

     As presented in the above table, the value of the 11 1/2% Senior Secured Notes due 2011 is net of the unamortized portion of a $5.1 million discount at issuance. As a result of this discount, the effective interest rate for financial reporting purposes is approximately 12%.

     On July 30, 2004, the company entered into a $50 million (notional amount) interest rate swap that effectively converts a portion of fixed-rate debt into a floating-rate obligation. The swap, which was amended in the first quarter of 2005 to, among other things, extend its maturity from November 15, 2008 to November 15, 2009, is intended to achieve a better balance between fixed-rate and floating-rate debt. The floating rate is calculated based on six-month LIBOR set in arrears. The interest rate swap had the effect of increasing interest expense for the first quarter of 2005 by $.7 million. Any positive or negative effects in future periods cannot be determined at this time. The fair value of the swap, which is included in other noncurrent assets in the Consolidated Condensed Balance Sheets, can change dramatically based on a number of variables, including a significant change in the shape of the yield curve and the passage of time. Changes in

19

Notes to Consolidated Condensed Financial Statements
(Unaudited)

the fair value of the swap are reported as non-cash increases or decreases in interest expense. At March 31, 2005 and December 31, 2004, the fair value of the swap was not material.

     Certain of the company’s long-term debt obligations contain various restrictions and financial covenants, including those described above. The 11 1/2% Senior Secured Notes due 2011 and the asset based credit facility are secured as described above. Except for obligations under capital leases and as discussed above, no significant indebtedness is secured.

Shareholders’ Equity

     On June 9, 2004, the company’s shareholders, among other things, approved the following resolutions:

	•	an increase in the number of authorized common shares from 50.0 million to 165.0 million;
	•	a decrease in the par value of each common share from $1.00 per share to $.01 per share;
	•	the issuance of a new series of Series B Preferred Stock that is convertible into common shares; and
	•	the issuance of contingent warrants which will be exercisable to purchase additional shares of the company’s common stock under certain circumstances.

     On June 10, 2004, the 15.0 million common shares into which the Series A Notes were converted and the $70.0 million of Series B Notes (see Refinancing Transactions) were exchanged for 500,000 shares of Series B Preferred Stock having a par value of $.01 per share and a liquidation preference of $200 per share. The 500,000 shares of Series B Preferred Stock are initially convertible into 50.0 million common shares of the company at a conversion price of $2.00 per share and have a cash dividend rate of 6% per year. Dividends may also be paid in additional shares of Series B Preferred Stock at a rate of 8% per year if the company is prohibited by the terms of its certificate of incorporation or its financing agreements from paying dividends in cash. Accrued and unpaid dividends on the Series B Preferred Stock must be paid prior to any dividend or distribution with respect to common stock and at the time of the redemption of any Series B Preferred Stock. The initial conversion price of $2.00 per share of common stock will be reset to $1.75 per share effective June 30, 2005 because a test based on the company’s financial performance for 2004 was not satisfied. The test required the company to achieve EBITDA, as defined, of at least $50 million in 2004. Assuming the conversion price reset were to have taken place as of March 31, 2005, the total number of common shares outstanding on an as-converted basis would increase from approximately 99.7 million to approximately 106.8 million. To the extent not previously converted to common shares at the option of the holders or redeemed at the option of the company, the Series B Preferred Stock must be converted to common shares on the seventh anniversary of the date of its issuance. In the event of the liquidation of the company, the Series B Preferred Stock ranks junior to the company’s 4% Cumulative Preferred Stock. Portions of the Series B Preferred Stock may be redeemed at the company’s option beginning in 2008 at an initial redemption price of $224 per share that decreases to $216 per share by 2010.

     Except as otherwise required by law or by the company’s certificate of incorporation or expressly provided for in the certification of designation governing the Series B Preferred Stock, the holders of record of shares of the Series B Preferred Stock have full voting rights and powers, and are entitled to vote on all matters put to a vote or consent of the company’s shareholders, voting together with the holders of the company’s common stock and its 4% Cumulative Preferred Stock as a single class, with each holder of shares of Series B Preferred Stock having the number of votes equal to the number of shares of common stock into which such shares of Series B Preferred Stock could be converted as of the record date for the vote or consent which is being taken. The holders of the Series B Preferred Stock, voting separately as a class, have the right to elect a number of directors to the company’s board of directors in proportion to the percentage of fully diluted common stock represented by the outstanding Series B Preferred Stock (on an as-converted basis), rounded up to the nearest whole number (up to a maximum equal to two-thirds of the total number of directors, less one).

20

Notes to Consolidated Condensed Financial Statements
(Unaudited)

     As of March 31, 2005, Glencore Finance AG and Mizuho International plc collectively owned 100% of the Series B Preferred Stock which represents approximately 50.1% of the company’s fully diluted common equity (on an as-converted basis). Glencore Finance AG reported in a Schedule 13D amendment dated June 21, 2004 with the Securities and Exchange Commission (SEC) that it has sold an undivided participation interest in its investment in the company to Triage Offshore Funds, Ltd. (Triage) equivalent to 62,500 shares of Series B Preferred Stock, representing approximately 6.3% of the company’s outstanding common equity (on an as-converted basis), with Glencore Finance AG remaining as the record holder of such shares. However, as discussed more fully in the note captioned “Subsequent Events,” Glencore Finance AG has advised the company of its intention to transfer 62,500 shares of Series B Preferred Stock to Triage and terminate the participation agreement. After giving effect to the reset of the conversion price of the Series B Preferred Stock from $2.00 per share to $1.75 and the transfer of the 62,500 shares to Triage, Glencore Finance AG’s and Mizuho International plc’s collective holdings will represent approximately 46.8% of the company’s as-converted common equity with Triage’s ownership interest representing 6.7%, in both cases assuming that no pay-in-kind dividends on the Series B Preferred Stock have been paid.

     The Series B Preferred Stock includes a beneficial conversion feature of approximately $15.9 million because it allows the holders to acquire common shares of the company at an effective conversion price of approximately $2.08 per share compared to a fair value per common share of $2.40 on March 12, 2004. In the Consolidated Condensed Balance Sheet at March 31, 2005, the $15.9 million amount related to the beneficial conversion feature is included in the recorded value of the Series B Preferred Stock and was applied as a direct increase of accumulated deficit in the second quarter of 2004.

     On June 10, 2004, the company also issued to holders of the Series B Preferred Stock contingent warrants to purchase an aggregate of one million shares of its common stock for $.01 per share. The contingent warrants are exercisable only if a test based on the company’s financial performance for 2005 is not satisfied. The test requires the company to achieve EBITDA, as defined, of at least $60 million in 2005. If the test is not satisfied, the contingent warrants will be exercisable until March 25, 2011. Based on the company’s most recent internal projections, it is unlikely to generate $60 million of EBITDA in 2005. The contingent warrants are included in shareholders’ equity at an amount representative of their relative fair value in relation to the Series B Preferred Stock. If the contingent warrants do not become exercisable, their carrying value will be transferred to the carrying value of the Series B Preferred Stock. If they should be exercised, their carrying value will be included in the value of any newly issued common stock.

     On June 25, 2004, as permitted by the terms of the agreement with Glencore Finance AG and Mizuho International plc, the company filed a registration statement with the SEC for additional common shares to be issued through a rights offering to holders of shares of common stock. The registration statement was declared effective by the SEC on October 6, 2004. Each right was exercisable for one share of common stock at an exercise price of $2.00 per full share. The rights offering, which expired on December 10, 2004, resulted in the reissuance of 12,716,175 treasury shares and net cash proceeds of $24.2 million after deducting the related costs, including $1.1 million that was paid in the first quarter of 2005. Of the total shares issued in the rights offering, 36,600 shares were cancelled to cover withholding taxes owed by certain holders of restricted stock who participated in the offering. The company elected to use the proceeds to repay short-term borrowings and to invest the surplus cash for the purpose of improving its liquidity and to provide increased financial flexibility to satisfy anticipated working capital needs, higher levels of capital spending and any other developments in 2005.

     In the first quarter of 2005, a total of 1,149,245 treasury shares were reissued in connection with grants of restricted stock and contributions to employee benefit plans. This reduction in treasury shares was partially offset by the cancellation of 6,780 restricted shares that were added to the treasury share balance in lieu of their cancellation.

     In the first quarter of 2004, a total of 53,912 treasury shares were reissued in connection with contributions to employee benefit plans. This reduction in treasury shares was partially offset by the forfeiture of 47,946 restricted shares that were added to the treasury share balance.

     On April 15, 2004, 4,607,088 treasury shares were reissued in connection with the conversion of the 20% Secured Step-Up Series A Notes due 2007 into 15.0 million common shares (see Refinancing Transactions).

21

Notes to Consolidated Condensed Financial Statements
(Unaudited)

Comprehensive Loss

     The components of accumulated other comprehensive loss are shown in the following table.

Contingencies

     Various lawsuits arising during the normal course of business are pending against the company and its consolidated subsidiaries. In several such lawsuits, some of which seek substantial dollar amounts, multiple plaintiffs allege personal injury involving products, including metalworking fluids, supplied and/or managed by the company. The company is vigorously defending these claims and, based on current information, believes it has recorded appropriate reserves in addition to its excess carrier insurance coverage and indemnity claims against third parties. The projected availability under the company’s asset based credit facility is currently expected to be adequate to cover the company’s cash needs under these claims, assuming satisfaction or waiver of the conditions to borrowing thereunder (see Short-Term Borrowings for further information regarding those conditions to borrowing as well as the company’s dependence on its asset based credit facility for liquidity). It is possible that the company’s ultimate liability could substantially exceed its current reserves, but the amount of any such excess cannot reasonably be determined at this time. Were the company to have significant adverse judgments or determine as the cases progress that significant additional reserves should be recorded, the company’s future operating results and financial condition, particularly its liquidity, could be adversely affected.

22

Notes to Consolidated Condensed Financial Statements
(Unaudited)

Organization

(a) Represents the elimination of sales among plastics technologies segments.

23

Notes to Consolidated Condensed Financial Statements
(Unaudited)

     Consistent with the company’s internal reporting methods, segment operating profit or loss excludes restructuring costs and certain unallocated corporate and financing expenses.

Earnings Per Common Share

     In 2005, the common shares into which the Series B Preferred Stock is convertible are excluded from weighted-average common shares assuming dilution because their inclusion would result in a smaller loss per common share. In 2004, the shares into which the Series A Notes were convertible are excluded for similar reasons as are potentially dilutive restricted shares in both 2005 and 2004.

Subsequent Events

     The failure to file the Form 10-K in a timely manner is a default under the indenture governing the company’s 11 1/2% Senior Secured Notes due 2011, which, if not remedied by July 5, 2005, would allow either the trustee or the holders of 25% in

24

Notes to Consolidated Condensed Financial Statements
(Unaudited)

aggregate principal amount of the notes to declare all of the notes due and payable immediately. The company believes the filing will be made within the 60-day cure period.

     Similarly, the company’s asset based credit facility contains certain provisions that could be implicated by not filing the Form 10-K in a timely manner. However, the company reached an agreement with its lenders waiving such provisions as they relate solely to a delayed filing, subject to certain conditions, of an amendment to the Form 10-K containing management’s report and the auditor’s attestation on internal control over financial reporting not later than June 30, 2005. While the company believes it will meet this deadline, failure to do so, without a subsequent waiver, could result in the company being in default or being unable to borrow under the facility. For a description of the risks and consequences of being in default or not being able to borrow under the asset based credit facility, see the note captioned “Short-Term Borrowings”.

     Glencore Finance AG has advised the company of its intention to transfer 62,500 shares of 6% Series B Convertible Preferred Stock owned by it, representing approximately 6.3% of the company’s outstanding common equity (on an as-converted basis), and 62,500 contingent warrants which are exercisable for 125,000 common shares of the company upon the occurrence of certain events to Triage Offshore Funds, Ltd. (Triage) and certain of its affiliates and to terminate the participation agreement entered into on March 16, 2004 between Glencore Finance AG and Triage. After giving effect to the reset of the conversion price of the Series B Preferred Stock from $2.00 per share to $1.75 but not giving effect to the exercise of the contingent warrants, Triage’s holdings will represent approximately 6.7% of the company’s as-converted common equity. For a further description of the Series B Preferred Stock and the contingent warrants, see the note captioned “Shareholders’ Equity.”

Condensed Consolidating Financial Information

25

Notes to Consolidated Condensed Financial Statements
(Unaudited)

26

Notes to Consolidated Condensed Financial Statements
(Unaudited)