<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996 Commission File No: 0-2172
------------
THE FLAMEMASTER CORPORATION
- -----------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
NEVADA 95-2018730
- --------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11120 SHERMAN WAY, SUN VALLEY, CALIFORNIA 91352
- -----------------------------------------------------------------------------
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (818) 982-1650
-------------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
- -----------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK - $.01 PAR VALUE
- -----------------------------------------------------------------------------
(Title of Class)
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 X NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
other amendment to this Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates at December
20, 1996 was $3,035,456.
As of September 30, 1996, there were 1,246,463 shares of common stock, $.01
par value, outstanding.
Part III is incorporated by reference from the proxy statement for the next
annual meeting of the shareholders.
<PAGE>
TABLE OF CONTENTS
PART I PAGE
- ------ ----
Item 1 Business 3
Item 2 Properties 7
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
- -------
Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters 9
Item 6 Selected Financial Data 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 8 Financial Statements and Supplementary Data 14
Item 9 Disagreements on Accounting and Financial
Disclosure 14
PART III
- --------
Item 10 Directors and Executive Officers of the Registrant 15
Item 11 Executive Compensation 15
Item 12 Security Ownership of Certain Beneficial Owners
and Management 15
Item 13 Certain Relationships and Related Transactions 15
PART IV
- -------
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 16
SIGNATURES 35
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
ITEM 1. BUSINESS
The Flamemaster Corporation (Registrant or the Company) develops,
manufactures, and sells coatings and sealants. In addition, Registrant
receives royalties from other manufacturers who produce certain of the
Registrant's products under license.
Registrant was incorporated under the laws of Nevada on September 14, 1942.
COATINGS:
Registrant produces flame retardant coatings and high-heat resistant coatings.
Flame retardant coatings are used in industrial applications to prevent the
propagation of fire in electrical cables which are grouped together in cable
trays, junction boxes, cable trenches, and similar locations. These coatings
are also used in the construction of fire stops used to seal openings in
walls or ceilings through which electrical cables pass.
High heat resistant coatings are used to protect structural surfaces, such as
the aluminum deck of a naval vessel, from the destructive temperatures and
blast effects of a missile. Other applications include the protection of
certain surfaces on land-based mobile missile launchers and the control
surfaces of air launched missiles.
SEALANTS:
Sealants are used in various aerospace and marine applications typically to
seal aircraft fuel tanks and pressurized passenger or crew compartments, to
seal optical devices, and in connection with seaworthiness of commercial and
naval vessels as well as pleasure craft.
In August 1994, Registrant entered into an agreement with Courtaulds,
Aerospace, Inc. wherein Courtaulds granted to Flamemaster a license with
respect to certain technology and proprietary rights of Courtaulds which
Flamemaster expects to enhance its sealants line.
ROYALTIES:
Approximately 0.5% of the Registrant's revenues were derived from royalties.
Some protection exists for the Company's products through patents. However,
not a major portion of business is subject to licenses.
Registrant receives royalty income from Hitachi Cable, Ltd. of Japan.
Hitachi Cable produces the Registrant's flame retardant coating in Japan
under a nonexclusive license agreement. Royalties paid are 3% and 6% of net
sales and are reported and paid annually.
This agreement expired in November of 1994 and was renewed for an additional
five year period. Royalties decreased to $17,163 during 1996 from $17,650 in
fiscal l995.
3
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
(Continued)
ROYALTIES (CONTINUED):
Flamemaster pays royalties to Courtaulds Aerospace, Inc. on proprietary
aircraft sealant sales based on new technology and marketing information
acquired through a nonexclusive licensing agreement. Under the agreement,
Flamemaster pays royalties of 4% of sales of all licensed aerospace products
and Modified Chem Seal Products and royalties of 6% on all sales of PRMS, a
non-chromate corrosion inhibitive sealant. The minimum required royalty
payment is $25,000 per year from 1996 through 2003. Royalties paid to
Courtaulds were $25,000 for fiscal l996.
Additionally, Flamemaster paid royalties to an individual as compensation for
an invention of such individual while working for Flamemaster. The royalties
paid were $1,892 and $5,854 for l995 and 1994, respectively. This agreement
expired in fiscal l995.
METHODS OF DISTRIBUTION:
Flamemaster products are sold to customers through a network of 24
distributors, six of which are for construction products and 18 are for
coating and sealants. Of the 18 coating and sealant distributors eight are
full service repacking distributors. Additionally, Flamemaster products are
sold directly by four full time employees of the registrant. The registrant
also has agreements with two commissioned sales representatives, one in Texas
and one in Southern California.
Most of the products manufactured by Flamemaster are required to be qualified
or listed by either government or civilian agencies. The qualification and
listing process involves independent testing of new products to determine
that they meet minimum criteria of performance as established by government
and civilian agencies. Once a new product is qualified and listed, the
product may be marketed. The product mix includes products of which the
registrant is the sole qualified supplier. Flamemaster product sales are a
mixture of competitive bids and sales at catalog price to a variety of
customers.
The customer base of Flamemaster sealants includes agencies of the government
of the United States, prime manufacturers and their sub-contractors, as well
as the operators of air and ground transportation equipment, both in the
United States and Canada. Flamemaster construction related products are sold
to electric utilities and the pulp and paper industry as well as the metal
manufacturing and process industry. For the most part, the products are
utilized as systems providing passive fire protection.
4
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
(Continued)
RAW MATERIALS :
Registrant has no material agreements with its suppliers. Registrant obtains
its raw materials from a variety of large, well-established suppliers and
manufacturers of the chemical products required in its operations. Such
products are generally readily available, except as described in the
following paragraphs.
Registrant's principal sealants utilize a liquid polymer produced by only one
manufacturer (Morton International). The inability of this manufacturer to
supply such raw material would seriously and adversely affect Registrant and
all of its competitors who produce poly-sulfide based sealants and rely on
this same single source of supply. The Morton polymer has been supplied for
over forty years without interruption and the Company expects no
interruptions in the future.
PRINCIPAL PRODUCTS:
The principal product classes produced by the Registrant consist of sealants
and coatings. Sales of sealants were $2,416,293, $2,344,284 and $2,218,402
for the fiscal years ended September 30, 1996, 1995 and 1994, respectively.
Sales of coatings were $477,423, $564,645 and $746,371 for the fiscal years
ended September 30, 1996, 1995, and 1994, respectively.
PATENTS AND TRADEMARKS:
The registrant currently holds approximately 16 foreign patents, mostly in
the Far East, which are renewed annually. In the opinion of management, the
patents are not critical to the Company's business due to the fact that
products similar to the Company's are on the market. Additionally, the
Company has protected trademarks in the Far East nations in which it holds
patents. Registrant believes that its continued success will depend more upon
the experience and creative skill of its employees than upon its ownership of
patents.
SEASONABILITY:
Registrant's business is not seasonal but does fluctuate in response to such
factors beyond its control as strikes and other economic conditions adversely
affecting its customers.
WORKING CAPITAL ITEMS:
Registrant does not normally carry excessive inventories to meet the
requirements of its customers, since Registrant is generally able to fill
customers' orders within 75 days.
The Company has approximately $3,449,987 of working capital, including
approximately $2,639,776 of cash and current portfolio of marketable
securities. The Company believes that its working capital is sufficient to
finance its operations for the 1997 fiscal year.
5
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
(Continued)
PRINCIPAL CUSTOMERS:
During the fiscal year ended September 30, 1996, an agency (General Services
Administration) of the United States Government, accounted for $582,974
(20.03%) of sales as compared to $598,301 (20.4%) in 1995. One other customer
accounted for more than 10% of sales during l996. Sales to this company were
$394,157 or 13.54% of sales. No other single customer accounted for 10% or
more of sales.
BACKLOGS:
Backlog of orders at September 30, 1996 was $525,436 as compared to $647,481
in 1995.
RENEGOTIATION:
Registrant's business is not subject to possible renegotiation of profits.
Sales are made on a fixed-price basis, including sales to the U.S.
Government. Substantially all contract sales are made to the U.S. Government
and none are based on the cost-plus method of pricing.
COMPETITION:
Registrant is a producer of flame retardant coatings for the protection of
grouped electrical cables sold to the electric utilities, pulp and paper, and
nuclear industries, plus a fire-stop system utilized to mitigate the
potential damage by fire to commercial and industrial structures. These
products are either patented or listed approved. The product group is niche
targeted and some level of competition does exist, however, the products have
been on the market for some years and are well known. Some of the Company's
competitors are larger than Registrant and have far greater financial and
manpower resources.
Additionally, the Registrant produces sealants utilized in the manufacture of
aircraft and land transportation vehicles. These products are highly
competitive but Flamemaster continues to maintain the number two position in
the market share of these products.
Registrant also produces high temperature specialty coatings used by the
aerospace industry that are formulated to meet the requirements of specific
aerospace applications. Since these products are specialized and low volume,
there is a limited amount of competition in this niche of our product group.
RESEARCH AND DEVELOPMENT:
Net laboratory costs at September 30, 1996 were $224,457. In fiscal years
ended September 30, 1995 and September 30, 1994, laboratory costs were
$223,307 and $283,932, respectively. Flamemaster received no revenues to
offset laboratory costs in 1996, 1995 or 1994.
6
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
(Continued)
RESEARCH AND DEVELOPMENT (CONTINUED):
Research and development costs are included in laboratory costs in the
financial statements as the amounts are not material. The research and
development is in connection with new products and improvements to existing
products. All of Registrant's research and development activities are
Company-sponsored.
COMPLIANCE WITH ANTI-POLLUTION LAWS:
Periodic inspections by Federal, State and local agencies concerned with the
protection of the environment indicate that Registrant is in full compliance
with anti-pollution laws and standards. Registrant has no plans to change
its manufacturing processes in a manner likely to result in material
expenditures for additional environmental control facilities.
However, the Company has been named in a lawsuit brought by another company
seeking reimbursement for clean-up costs of contaminated property which
Flamemaster leased from 1961 to 1973. This case is further detailed under
Item 3 below.
EMPLOYEES:
As of September 30, 1996 Registrant employed 27 persons as compared to 26 in
the prior year.
EXPORT SALES:
Export sales totalled $342,257, $378,031 and $277,569 in 1996, 1995, and
1994, respectively.
ITEM 2. PROPERTIES
Registrant occupies approximately 28,000 square feet of office and
manufacturing space located at 11120 Sherman Way, Sun Valley, California
91352 under terms of a lease expiring in September 2001.
Registrant believes its facilities are adequate for present and anticipated
operations.
ITEM 3. LEGAL PROCEEDINGS
In February 1994 a suit was filed against the Company for an environmental
claim related to property it leased from 1961 to 1973. The present owner of
the property implemented remedial action on the site and is seeking
reimbursement by the Company for the costs related to the clean-up. The
Company has accrued a liability of $100,000 to cover what it feels is a
probable judgement against the Company. $50,000 was expensed in fiscal 1994
and an additional $50,000 was expensed in 1995. Flamemaster is vigorously
defending its position in this matter. Certain insurance carriers of the
Company have agreed to defray the costs of the defense.
7
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
(Continued)
ITEM 3. LEGAL PROCEEDINGS (CONTINUED):
During 1995 the Company paid an arbitration award of $30,000 to an individual
related to a stock purchase agreement between he and the Company. That
$30,000 was expensed during 1995.
There were four wrongful death claims filed against the Company during 1996.
All four cases involved merchant seamen dying from Leukemia. All four cases
alleged that products supplied by the Company, as well as numerous other
defendants, contributed to the deaths.
The Company was dismissed by the Plaintiff in one of the cases. Another of
the cases has been dismissed by courts in Texas and Michigan, but the
Plaintiff has appealed the Michigan ruling. Management believes all these
lawsuits are without merit and intends to vigorously defend against them.
The Company carries no product liability insurance which would cover these
claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
8
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Registrant's common stock is traded over-the-counter on the National Market
System with the NASDAQ symbol "FAME". The over-the-counter market quotations
reflect inter dealer prices, without retail mark-up, mark-down, or commission
and may not necessarily represent actual transactions.
Low Bid High Bid
------- --------
October-December 1994 $3.81 $4.27
January-March 1995 $3.63 $4.42
April-June 1995 $3.42 $4.21
July-September 1995 $3.48 $3.77
October-December 1995 $2.729 $3.417
January-March 1996 $3.458 $4.083
April-June l996 $3.875 $5.333
July-September l996 $3.896 $4.979
The stock quote as of December 20, 1996 was $ 4.25 bid and $ 5.00 asked.
As of December 20, 1996, there were approximately 1000 beneficial holders of
Registrant's common stock.
In March 1990, Registrant increased its regular quarterly cash dividend to
$.025 per share from $.02 per share. In July 1991 the quarterly cash
dividend was again increased, this time to $.0275 per share. In January
1992, the regular quarterly cash dividend was increased to $.03 per share,
and on November 1, 1996, the quarterly cash dividend was further increased to
$.035 per share.
9
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
(Continued)
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended September 30,
1996 are derived from the consolidated financial statements of the Company.
The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
<TABLE>
<CAPTION>
Years Ended September 30
----------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $3,248,641 $3,193,513 $3,249,110 $3,127,087(2) $5,262,461
Income from
continuing
operations 393,710 243,262 212,352 473,643 861,153
Income from
continuing
operations per
common share,
primary .28 .15 .10 .25 .47
Income from
continuing
operations per
common share,
fully diluted .27 (1) (1) .25 .44
Cash dividends
declared per
common share .12 .12 .12 .12 .1175
Total assets 4,900,498 4,820,174 4,794,312 5,549,436 5,406,598
Working
capital 3,449,987 3,383,059 2,743,844 3,758,359 3,595,098
Shareholders'
equity 4,598,726 4,491,980 4,436,248 5,379,073 5,242,875
</TABLE>
(1) Fully diluted earnings per share for 1994 and 1995 are not presented, as
the effect of the assumed conversion of preferred stock is anti-dilutive.
(2) A contract with the United States Government, which accounted for 30% of
l992 sales, expired and was not renewed for subsequent periods.
10
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
(Continued)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FISCAL 1996:
FINANCIAL CONDITION AND LIQUIDITY:
The Company's financial condition is strong. Current assets were $3,751,759
compared to current liabilities of $301,772 at September 30, l996 for a
current ratio of 12.4 to 1. Working capital increased by $66,928 to
$3,449,987 compared to $3,383,059 at September 30, l995.
Cash and cash equivalents, and marketable securities increased by $112,887 to
$2,639,776.
The company manufactures and sells aircraft sealants and protective coatings
for both military and commercial applications. The products are produced for
both new construction as well as maintenance and repair facilities.
Accounts receivable decreased to $303,016 at September 30, 1996 from $495,773
in the previous year. The decrease is a result of strong collection effort
and a broader and newer customer base with shorter credit terms.
The Company has no long-term debt.
The Company believes that liquidity and working capital are adequate to fund
the Company's operations and capital requirements for the l997 fiscal year.
OUTLOOK FOR OPERATIONS:
The Company is a very small manufacturer of high performance sealants and
protective coatings for defense and aerospace markets. The commercial
aerospace industry has shown an increase in activity. Flamemaster
concentrates on manufacture and sale of products for maintenance and repairs,
a more stable sector of the industry.
The Company is in a unique position of being a small domestic supplier of
products sold under QPL MIL SPECS (Qualified Products List Military
Specifications). This enables the Company to be flexible in meeting customers
needs, and to provide a greater degree of service and efficiency.
Flamemaster's two main competitors are both multi billion dollar, multi
national corporations, one of which is foreign owned.
Backlog of orders at September 30, 1996 were $525,436. This compares to
$647,481 in 1995. Reduction is due to faster order turnaround.
The common stock dividend was increased on November 1, 1996 from $.03 to
$.035 per quarter. Dividends are expected to remain constant in the near
future.
11
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
(Continued)
FISCAL 1996 VS. 1995:
Sales for the fiscal year ended September 30, 1996 were $3,248,641, an
increase of $55,128 or 1.75% over the prior fiscal year. Sales of Flamemastic
(fire retardant coatings) and Dyna-Therm (aerospace coatings) decreased to
16.4% of sales or $477,423 from 19.28% of sales or $564,645. Sales of
aircraft sealants continued to increase as a result of introduction of more
product categories and line extensions, as well as an expanded customer
base. Sales of Chem Seal (sealant) products increased to $2,416,293 from
$2,344,284 in the prior year. Two customers each accounted for more than 10%
of sales. The company's largest customer was the United States government
which purchased sealants accounting for approximately 20% of sales compared
to the year earlier level of 20.4% of sales. The other company purchased
sealants that accounted for 13.5% of sales in the current year compared to
11.8% in the prior year. No other company accounted for 10% or more of sales.
Royalty income remained steady at $17,163 compared to $17,650 in the previous
year.
Cost of products sold in fiscal l996 was $1,826,537 compared to $1,848,165.
The decrease in cost of products reflects a more profitable product mix and
the introduction of newer products with high gross margins.
Selling, general and administrative expenses decreased to $837,052 from
$861,384, while gross laboratory costs remained steady at about $224,457 from
$223,307. The reduction of general and administrative expenses was due to
reduced legal expenses.
The license agreement with Courtaulds grants Flamemaster the right to use
technical data obtained from Courtaulds in the productions of sealants. The
Company agreed to pay Courtaulds royalties of 3% to 6% (depending on product)
of net sales attributable to the licensed products. For fiscal l996, this
royalty amounted to $25,000.
FISCAL 1995 VS. 1994:
Sales for the fiscal year ended September 30, 1995 were $3,193,513, a
decrease of $55,597 from the prior fiscal year. Sales of Flamemastic (fire
retardant coatings) and Dyna-Therm (aerospace coatings) decreased from
$746,372 to $564,645 while Chem-Seal sealants increased from $2,218,402 to
$2,344,284. Sales in the sealants line of products continue to increase as a
result of an increase in sales to the United States Government under several
contracts the Company was awarded in fiscal 1994. Sales of coatings, in
general, dropped due to a decrease in demand for aerospace coatings as that
industry's recovery remains slow.
Two customers each accounted for more than 10% of sales. The Company's
largest customer was the United States government which purchased sealants
accounting for 20.4% of sales. The other company, who purchased sealants,
accounted for 11.8% of sales.
Royalty income decreased in fiscal 1995 to $17,650 compared to $31,749 in the
previous year. The decrease in royalty income was due to a decrease in Asian
sales.
12
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
(Continued)
FISCAL 1995 VS. 1994 (CONTINUED):
Cost of products sold in fiscal 1995 amounted to $1,848,165 or 58% of sales
compared to 58% of sales in fiscal 1994. Costs of products as a percentage
of sales remains consistent due to the continuation of government contracts
the Company was awarded in fiscal 1994. Sales to the government generally
yield lower margins than do other sales.
Selling, general and administrative expenses increased to $861,384 from
$845,438, while gross laboratory costs decreased to $223,307 from $283,932.
Laboratory costs as shown in the financial statements are net of payments
received pursuant to a research and development agreement with PRC of
$127,503 in 1993. The agreement with PRC expired in May 1993. Gross
laboratory costs have been reduced as a result of the expiration of the
agreement and no significant future increase in laboratory costs is
anticipated.
The current license agreement with Courtaulds grants Flamemaster the right to
use technical data obtained from Courtaulds in the production of sealants.
The Company agreed to pay Courtaulds royalties of 3% to 6% (depending on
product) of net sales attributable to the licensed products. For fiscal
1995, this royalty amounted to $30,640.
13
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
(Continued)
IMPACT OF INFLATION AND CHANGING PRICES:
Raw material costs and wages remained steady in 1996, as average selling
prices also remained constant. No significant changes are anticipated for
1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in the text on pages 18
through 33.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.
14
<PAGE>
THE FLAMEMASTER CORPORATION
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the Company's definitive proxy statement
for the next annual meeting of shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's definitive proxy statement
for the next annual meeting of shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Company's definitive proxy statement
for the next annual meeting of shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Altius Corporation owns approximately 25% of the Company's outstanding common
shares. Four of the five members of the board are of the Altius Corporation
Board of Directors. The Company's President and Chairman is Chairman of the
Altius Corporation as well. The Company leased storage space from Altius
Corporation on a month-to-month basis. The rent paid to Altius Corporation
under the lease was $2,800 and $25,950 for the years ended September 30, 1995
and 1994, respectively. In November l995, the Company determined that
additional storage space was not needed and terminated the lease agreement.
Management feels that the lease payments accurately reflect the market for
industrial property in the area.
15
<PAGE>
THE FLAMEMASTER CORPORATION
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following financial statements are included in Part II,
Item 8:
Report of Independent Auditors - Beckman & Associates on
1996, 1995 and 1994 consolidated financial statements.
Consolidated Balance Sheets, September 30, 1996 and 1995.
Consolidated Statements of Income for the years ended
September 30, 1996, 1995, and 1994.
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 1996, 1995, and 1994.
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1995, and 1994.
Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts.
3. EXHIBITS
Exhibit I - Statement regarding computation
of per share earnings.
All other schedules are omitted because they are not applicable
or not required, or because the required information is included
in the financial statements or notes thereto. Separate
financial statements of the Registrant have been omitted because
the Registrant meets the requirements which permit omission.
16
<PAGE>
INDEPENDENT AUDITOR'S REPORT
November 14, 1996
Board of Directors and Shareholders
The Flamemaster Corporation
Los Angeles, California
We have audited the accompanying consolidated balance sheets of The
Flamemaster Corporation and Subsidiary as of September 30, 1996 and 1995, and
the related consolidated statements of income, shareholders' equity, and cash
flows for the years ended September 30, 1996, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the
first paragraph above present fairly, in all material respects, the financial
position of The Flamemaster Corporation and Subsidiary at September 30, 1996,
and 1995, and the results of their operations and their cash flows for the
years ended September 30, 1996, 1995 and 1994, in conformity with generally
accepted accounting principles.
Beckman & Associates
Woodland Hills, California
17
<PAGE>
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30
ASSETS 1996 1995
------ ------
CURRENT ASSETS
Cash and cash equivalents $1,355,770 $1,301,225
Marketable securities (Note C) 1,284,006 1,225,664
Accounts receivable, less allowance
of $5,000(1996) and $5,000
(1995) 303,016 495,773
Inventories (Note D) 699,283 593,991
Prepaid expenses and other assets 32,726 37,015
Deferred income taxes (Note K) 76,958 57,585
---------- ----------
TOTAL CURRENT ASSETS 3,751,759 3,711,253
INVESTMENT IN AFFILIATED COMPANIES
(Note E) 966,886 902,332
EQUIPMENT AND IMPROVEMENTS, at cost
Machinery and equipment 593,770 615,163
Furniture and fixtures 128,055 134,224
Laboratory equipment 50,460 54,224
Leasehold improvements 114,222 117,794
---------- ----------
886,507 921,405
Less accumulated depreciation and
amortization (842,261) (869,103)
---------- ----------
44,246 52,302
PRC LICENSE AGREEMENTS, net of
accumulated amortization of
$34,750 (1996) and $18,070
(1995) (Note F) 137,607 154,287
---------- ----------
Total Assets $4,900,498 $4,820,174
---------- ----------
---------- ----------
See notes to consolidated financial statements.
18
<PAGE>
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30
LIABILITIES AND SHAREHOLDER'S EQUITY 1996 1995
------- --------
CURRENT LIABILITIES
Accounts payable $ 81,688 $ 79,877
Accrued expenses 13,663 15,659
Income taxes payable 26,626 37,195
Deferred tax liability (Note K) 59,671 46,054
Environmental reserve (Note I) 100,000 100,000
Deferred Credits 0 22,576
Deferred Income 20,124 26,833
---------- ----------
TOTAL CURRENT LIABILITIES 301,772 328,194
COMMITMENTS AND CONTINGENCIES (Note F, G and I)
SHAREHOLDERS' EQUITY (Notes A, F and H)
Preferred stock, nonvoting, par value $.01 per
share-- $.56 cumulative dividend, convertible,
callable at $5.95--authorized 500,000 shares,
issued and outstanding 79,250 shares in 1996
and 79,650 in 1995 793 797
Common stock, par value $.01 per share--
authorized 6,000,000 shares; issued and
outstanding 1,246,463 shares in 1996 and
1,261,737 shares in 1995 12,464 12,617
Additional paid-in capital 2,293,487 2,318,504
Retained earnings 2,300,089 2,129,402
Allowance for marketable securities (8,107) 30,660
---------- ----------
TOTAL STOCKHOLDER'S EQUITY 4,598,726 4,491,980
---------- ----------
TOTAL LIABILITY AND EQUITY $4,900,498 $4,820,174
---------- ----------
---------- ----------
See notes to consolidated financial statements.
19
<PAGE>
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30
1996 1995 1994
----------- ----------- -----------
NET SALES (Note M) $ 3,248,641 $ 3,193,513 $ 3,249,110
ROYALTIES 17,163 17,650 31,749
CONSULTING FEES (Note E) 0 17,925 -0-
INTEREST AND OTHER INCOME 181,949 168,347 36,776
----------- ----------- -----------
3,447,753 3,397,435 3,317,635
----------- ----------- -----------
COSTS AND EXPENSES
Cost of goods sold 1,826,537 1,848,165 1,890,463
Selling and administrative 837,052 861,384 845,438
Laboratory costs 224,457 223,307 283,932
Royalties and other 31,327 48,629 12,247
Environmental Provisions (Note I) 0 50,000 50,000
----------- ----------- -----------
2,919,373 3,031,485 3,082,080
----------- ----------- -----------
INCOME FROM OPERATIONS 528,380 365,950 235,555
EQUITY IN NET INCOME OF
UNCONSOLIDATED AFFILIATES (Note E) 64,554 (18,038) 59,680
GAIN ON DISPOSAL OF UNCONSOLIDATED
AFFILIATE 0 2,122 -0-
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 592,934 350,034 295,235
PROVISION FOR INCOME TAXES (Note K) 199,224 106,772 82,883
----------- ----------- -----------
NET INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 393,710 243,262 212,352
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NOTE K) -0- -0- (82,479)
----------- ----------- -----------
NET INCOME 393,710 243,262 129,873
PREFERRED DIVIDENDS (44,604) (44,604) (44,604)
----------- ----------- -----------
NET INCOME ATTRIBUTABLE TO COMMON
STOCK $ 349,106 $ 198,658 $ 85,269
----------- ----------- -----------
----------- ----------- -----------
INCOME PER SHARE, PRIMARY (Note J):
BEFORE CUMULATIVE EFFECTS OF CHANGE
IN ACCOUNTING PRINCIPLES $ .28 $ .15 $ .10
CUMULATIVE EFFECT ON PRIOR YEARS INCOME
OF CHANGE IN ACCOUNTING PRINCIPLES -0- -0- (.05)
---- ---- ----
$ .28 $ .15 $ .05
------ ----- ------
------ ----- ------
NET INCOME PER SHARE, FULLY DILUTED:
BEFORE CUMULATIVE EFFECTS OF CHANGE
IN ACCOUNTING PRINCIPLES .27 -- --
CUMULATIVE EFFECT ON PRIOR YEARS INCOME
OF CHANGE IN ACCOUNTING PRINCIPLES -0- -- --
------ ----- ------
.27 -- --
------ ----- ------
------ ----- ------
WEIGHTED AVERAGE SHARES OUTSTANDING 1,251,198 1,263,556 1,669,519
See notes to consolidated financial statements
20
<PAGE>
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED GAIN/
PREFERRED STOCK COMMON STOCK ADDITIONAL (LOSS) ON
--------------- ------------ PAID-IN RETAINED MARKETABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
------ ------ ------ ------- ----------- -------- --------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE OCTOBER 1, 1993 79,650 797 1,708,644 17,086 3,125,113 2,236,077 0 5,379,073
REDEMPTION OF COMMON STOCK (442,189) (4,422) (813,628) (20,477) (838,527)
COMMON SHARES ISSUED 4,000 40 15,085 15,125
CASH DIVIDENDS ON PREFERRED STOCK
AT $.56 PER SHARE (44,604) (44,604)
CASH DIVIDENDS ON COMMON STOCK
AT $.12 PER SHARE (204,692) (204,692)
NET INCOME 129,873 129,873
------ ---- --------- ------- ---------- ---------- ------- ----------
BALANCE, SEPTEMBER 30, 1994 79,650 797 1,270,455 12,704 2,326,570 2,096,177 0 4,436,248
REDEMPTION OF COMMON STOCK (12,718) (127) (23,402) (26,223) (49,752)
COMMON SHARES ISSUED 4,000 40 15,336 15,376
CASH DIVIDENDS ON PREFERRED STOCK
AT $.56 PER SHARE (44,604) (44,604)
CASH DIVIDENDS ON COMMON STOCK
AT $.12 PER SHARE (151,707) (151,707)
RETURN OF CASH DIVIDENDS ON COMMON
STOCK REACQUIRED (NOTE E) 65,624 65,624
PROPERTY DIVIDENDS ON COMMON STOCK
(NOTE D) (53,127) (53,127)
UNREALIZED GAIN ON SECURITIES 30,660 30,660
NET INCOME 243,262 243,262
------ ---- --------- ------- ---------- ---------- ------- ----------
BALANCE, SEPTEMBER 30, 1995 79,650 $797 1,261,737 $12,617 $2,318,504 $2,129,402 $30,660 $4,491,980
------ ---- --------- ------- ---------- ---------- ------- ----------
------ ---- --------- ------- ---------- ---------- ------- ----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21
<PAGE>
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED GAIN/
PREFERRED STOCK COMMON STOCK ADDITIONAL (LOSS) ON
--------------- ------------ PAID-IN RETAINED MARKETABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
------ ------ ------ ------- ---------- -------- --------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE OCTOBER 1, 1995 79,650 $797 1,261,737 $12,617 $2,318,504 $2,129,402 $ 30,660 $4,491,980
REDEMPTION OF COMMON STOCK (18,274) (183) (33,425) (25,674) (59,282)
REDEMPTION OF PREFERRED STOCK (400) (4) (2,696) (2,700)
COMMON SHARES ISSUED 3,000 30 8,408 8,438
CASH DIVIDENDS ON PREFERRED STOCK
AT $.56 PER SHARE (44,489) (44,489)
CASH DIVIDENDS ON COMMON STOCK
AT $.12 PER SHARE (150,164) (150,164)
UNREALIZED LOSS ON SECURITIES (38,767) (38,767)
NET INCOME 393,710 393,710
------ ---- --------- ------- ---------- ---------- -------- ----------
BALANCE, SEPTEMBER 30, 1996 79,250 $793 1,246,463 $12,464 $2,293,487 $2,300,089 $ (8,107) $4,598,726
------ ---- --------- ------- ---------- ---------- -------- ----------
------ ---- --------- ------- ---------- ---------- -------- ----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22
<PAGE>
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 393,710 $ 243,262 $ 129,873
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 37,936 38,972 112,886
Common stock issued to employees 8,438 15,375 15,125
Unrealized (gain) loss on current securities -0- -0- 35,161
(Increase) decrease in deferred income tax asset (19,373) (27,507) 37,701
(Increase) decrease
in accounts receivable 192,757 (41,471) 82,131
(Increase) decrease in inventories (105,292) 28,366 41,450
(Increase) decrease in prepaid
expenses and other assets 4,289 (17,081) 775
Increase (decrease) in accounts payable 1,811 (145,001) 145,216
Increase (decrease) in deferred income tax liability 13,617 (32,040) 78,094
Increase (decrease) in accrued expenses (1,996) 10,567 (3,372)
Increase (decrease) in income taxes receivable 0 28,335 (28,335)
Increase (decrease) in income taxes payable (10,569) 37,195 (82,237)
Increase (decrease) in environment reserve 0 50,000 50,000
Increase (decrease) in deferred credits and income (29,285) 49,409 -0-
---------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 486,043 238,381 614,468
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase of property, plant, and equipment, net (13,200) (3,981) (16,933)
Increase (decrease) in investment securities, net (97,109) (61,626) 207,603
Increase in investment in affiliated company (64,554) (34,676) (766,730)
Acquisition of 10-year license agreement -0- -0- (172,357)
---------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (174,863) (100,283) (748,417)
---------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Years ended September 30
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of the Company's common stock $ (59,282) (49,748) $ (66,971)
Repurchase of the Company's Preferred Stock (2,700) -0- -0-
Dividends paid (194,653) (249,441) (249,296)
Dividends returned -0- 64,624 -0-
---------- ---------- ----------
NET CASH USED IN
FINANCING ACTIVITIES (256,635) (233,565) (316,267)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 54,545 (95,367) (450,216)
Cash and cash equivalents,
beginning of the year 1,301,225 1,396,592 1,846,808
---------- ---------- ----------
CASH AND CASH EQUIVALENTS END OF YEAR $1,355,770 $1,301,225 $1,396,592
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ -0- $ -0- $ -0-
Income taxes $ 215,550 $ 114,000 $ 160,140
Supplemental of noncash investing
and financing activities:
Repurchase of the Company's common stock:
Retirement of license agreement $ 771,556
Value of shares reacquired (771,556)
----------
-0-
Stock issued in exchange
for options (Note H):
Issue of common stock $ 23,125
Value of options (23,125)
----------
-0-
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of the Flamemaster Corporation (Flamemaster or the Company), and
Falcon Wings International, Inc. (100% owned). All material intercompany
transactions are eliminated.
Revenue Recognition: Sales generally are recorded by the company, including
those made under ongoing contracts, at the time products are shipped.
Revenues from royalties earned under licensing agreements are recognized in
the period the royalties are earned.
Cash and Cash Equivalents: The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Investment in Debt and Equity Securities: The Company adopted Statement of
Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for
Certain investments in Debt and Equity Securities," effective January 1,
1995. The adoption of SFAS No. 115 resulted in an increase in stockholders'
equity of $11,566.
Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determination at each balance sheet date. Debt securities for which the
company does not have the intent or ability to hold to maturity are
classified as available for sale, along with the Company's investment in
equity securities. Securities available for sale are carried at fair value,
with the unrealized gains and losses reported in a separate component of
shareholders' equity,net of income taxes, until realized. At September 30,
1996, the Company had no investments that qualified as trading or held to
maturity.
The amortized cost of zero-coupon debt securities classified as available for
sale is adjusted for accretion of discounts to maturity. Such amortization
and interest are included in interest income. Realized gains and losses are
included in other income and expense. The cost of securities sold is based on
the specific indentification method.
Inventories: Inventories are valued at the lower of cost (first-in,
first-out) or market.
Investment in Affiliates: The company accounts for its investments in
Dynamastic Corporation and PerfectData under the equity method (See Note E).
Laboratory Costs: Laboratory costs include product testing, quality control,
and research and development. A minor portion pertaining specifically to
research and development is not segregated.
Depreciation and Amortization: Depreciation and amortization of equipment
and improvements are computed on the straight-line method over the estimated
useful lives of the assets as follows:
Machinery, equipment, furniture and fixtures.............2-10 years
Leasehold improvements..............................Terms of leases
25
<PAGE>
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994 (CONTINUED)
Income Per Share: Per share data is based on the weighted average number of
shares outstanding.
Income Taxes: Provisions (benefits) for federal and state income taxes are
calculated on reported financial statement (income) loss based on current tax
law. Such provisions (benefits) differ from the amounts currently payable
because certain items of income and expense, known as temporary differences,
are recognized in different tax periods for financial reporting purposes than
for income tax purposes.
NOTE B -- CONCENTRATION OF RISK
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash, cash equivalents
and trade receivables.
As of March 31, 1996, the Company had approximately $200,000 of cash and cash
equivalents in one bank which exposes the Company to concentration of credit
risk.
NOTE C -- MARKETABLE SECURITIES
Marketable securities classified as current assets at September 30, 1996
include the following:
Fair Value Cost
------------- ------------
U.S. Treasury obligations $ 395,972 $ 387,461
Corporate debt securities 26,232 22,576
Mortgage-backed securities 2,787 3,153
Marketable equity securities 859,015 903,016
------------- ------------
$ 1,284,006 $ 1,316,206
------------- ------------
------------- ------------
The contractual maturities of debt securities available for sale at September
30, 1996, follows:
Fair Value Cost
------------- ------------
Due within one year $ -0- $ -0-
Due after one year thru five years 110,563 104,522
Due after five years thru ten years 261,226 262,752
Due after ten years 50,415 42,763
Note due at single maturity date 2,787 3,153
------------- ------------
$ 424,991 $ 413,190
------------- ------------
------------- ------------
Gross unrealized holding gains and losses at September 30, 1996, were
$98,178, $130,378 respectively. Realized gains and losses from the sale of
securities for the year ended September 30, 1996 were, $16,810 and $185.
26
<PAGE>
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994 (CONTINUED)
NOTE D- INVENTORIES
Inventories consist of the following:
September 30
-------------------
1996 1995
---- ----
Raw materials $ 312,765 $ 268,142
Shipping materials 32,692 32,566
Finished goods 353,826 293,283
--------- ---------
$ 699,283 $ 593,991
--------- ---------
--------- ---------
NOTE E -- INVESTMENTS IN AFFILIATED COMPANIES
In September 1989, the Company acquired a 21% interest in and serves on the
Board of Directors of Dyna-Seal Corporation (Dyna-Seal). Dyna-Seal engages
in the distribution and packaging of coatings, sealants, and adhesives for
the aircraft and marine markets. Flamemaster's initial investment in
Dyna-Seal of $7,280 was recorded at cost. The company acquired 70,295 shares
for providing certain services related to restoring the public reporting
status of Dyna-Seal. In exchange for 75,000 additional Dyna-Seal shares
acquired, the Company granted Dyna-Seal a five-year, nonexclusive license to
package and sell certain Flamemaster products. This license agreement was
renewed in December, 1994. For renewing this agreement, Dyna-Seal issued
200,000 additional shares of stock to Flamemaster. Flamemaster has recorded
deferred licensing fees of $33,542 in connection with this transaction. This
amount is based on management's estimated liquidation value of the Dyna-Seal
stock received, discounted 60%. The deferred licensing fees are being
amortized over five years.
On January 31, 1995, Dyna-Seal spun-off its operations, including all assets
and liabilities, to Dynamastic, a new company, in exchange for 100% ownership
of Dynamastic. Dyna-Seal subsequently distributed a portion of this
ownership to its shareholders as a property dividend. As its share of the
dividend, Flamemaster received 16% of Dynamastic. Additionally, Flamemaster
exchanged 287,454 shares of Dyna-Seal in exchange for an additional 23% of
Dynamastic. Flamemaster then distributed its remaining 126,500 shares of
Dyna-Seal stock as a property dividend to its shareholders.
For services rendered in conjunction with the spin-off, Dynamastic issued
2,500 shares, or 10% of ownership, to Flamemaster. The value of this stock,
$17,925, is reported as income from consulting fees.
As of September 30, 1996, Flamemaster owned 12,388 shares, or 49%, of
Dynamastic stock and no Dyna-seal stock. All Dynamastic stock has been
valued based on management's estimated liquidation value, yielding an initial
investment in this affiliate of $88,822. Undistributed earnings from
Dynamastic represent $52,382 of the company's consolidated retained earnings,
$43,274 of which was earned in 1996.
Audited summarized balance sheet and income statement information of
Dynamastic for the period ended September 30, 1996 was as follows:
Current Assets $579,188
Non-current assets 40,555
Current liabilities 62,211
Shareholders' equity 557,532
Sales 634,281
Net Income 88,315
27
<PAGE>
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994 (CONTINUED)
For the year ended September 30, 1996 the following transactions occurred
with Dynamastic:
Sales $338,168
Purchases 218,198
At September 30, 1996 amounts receivable and payable to Dynamastic are as
follows:
Accounts receivable $43,729
Accounts payable 7,197
During 1994, the Company acquired a 17% interest in and serves on the Board
of Directors of PerfectData Corporation. PerfectData engages in the design,
assembly and distribution of computer and office equipment care and
maintenance products. Flamemaster's initial investment in PerfectData of
$707,051 was recorded at cost. The company currently owns 21% of
PerfectData. Undistributed earnings from PerfectData represent $102,003 of
the Company's consolidated retained earnings, $21,280 of which were earned in
1996.
Unaudited summarized balance sheet and income statement information of
PerfectData as of September 30, 1996 was as follows:
Current assets $3,780,000
Noncurrent assets 870,000
Current liabilities 845,000
Shareholders' equity 3,793,000
Sales (six months) 2,910,000
Net income (six months) 1,000
For the years ended September 30, 1996 and 1995, the following transactions
occurred with PerfectData:
1996 1995
-------- --------
Sales $ 16,757 $ 19,858
NOTE F -- AGREEMENT WITH PRODUCTS RESEARCH CORPORATION
In August 1994, the Company signed a license agreement with Courtaulds
Aerospace, Inc. Under the license agreement, Flamemaster was granted the
right to use technical data obtained from Courtaulds in the production of
sealants. The Company agreed to pay Courtaulds royalties of 3% to 6%
(depending on product) of net sales attributable to the licensed products
with an annual minimum royalty of $25,000 in 1996 and each year thereafter
through 2003. The license agreement has been valued at $172,357 and is being
amortized over 10 years, the term of the agreement.
28
<PAGE>
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994 (CONTINUED)
NOTE G -- COMMITMENTS AND CONTINGENCIES
The Company leases office, manufacturing and storage facilities under a
noncancelable operating lease which expires in September 30, 2001. The lease
requires the Company to pay applicable property taxes, maintenance and
insurance. Rent expense charged to operations was $154,886 (1996), $160,945
(1995), and $173,520 (1994).
As of September 30, 1996, future minimum payments under this lease are:
1997 171,840
1998 178,589
1999 181,958
--------
Total minimum lease payments $532,387
--------
--------
NOTE H -- STOCK OPTIONS AND WARRANTS
In January 1989, the Company's Board of Directors ratified a stock option
plan whereby key personnel were granted options to purchase an aggregate of
150,000 shares of common stock. These options, which carried an exercise
price of $4.625 were repriced to $3.50 during 1994. These options were
exercisable beginning in January of 1989 and expire on April 30, 1996. No
options were exercised during the year. Options for 150,000 shares of common
stock were outstanding at September 30, 1996.
In January 1996, the Company's Board of Directors voted to extend the stock
option plan through April 30, 1999 with the price per share to remain at
$3.50.
NOTE I -- LITIGATION
In February 1994 a suit was filed against the Company for an environmental
claim related to property it leased from 1961 to 1973. The present owner of
the property implemented remedial action on the site and is seeking
reimbursement by the Company for the costs related to the clean-up. The
company has accrued a liability of $100,000 to cover what it feels is a
probable judgement against the Company. $50,000 was expensed in fiscal 1994
and an additional $50,000 was expensed in 1995. Flamemaster is vigorously
defending its position in this matter. Certain insurance carriers of the
Company have agreed to defray the costs of the defense.
During 1995 the Company paid an arbitration award of $30,000 to an individual
related to a stock purchase agreement between he and the Company. That
$30,000 was expensed during 1995.
There were four wrongful death claims filed against the Company during 1996.
All four cases involved merchant seamen dying from Leukemia. All four cases
alleged that chemicals supplied by the Company, as well as numerous other
defendants, contributed to the deaths.
The Company was dismissed by the Plaintiff in one of the cases. Another of
the cases has been dismissed, but the Plaintiff has appealed that ruling.
Management believes all these lawsuits are without merit and intends to
vigorously defend against them. The Company carries no product liability
insurance which would cover these claims.
29
<PAGE>
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994 (CONTINUED)
NOTE J -- INCOME PER COMMON SHARE
Primary income per share of common stock is computed after deducting
dividends on preferred stock and is based on the weighted average number of
shares outstanding. Each outstanding share of preferred stock is convertible
into 2.4 common shares at the option of the preferred shareholder.
Conversion of these shares has been assumed in the computation of fully
diluted earnings per share. Outstanding options were considered in the
primary and fully dilutive earnings per share calculations using the treasury
stock method. Fully diluted earnings per share for 1994 and 1995 are not
presented, as the effect of the assumed conversion of preferred stock is
anti-dilutive.
NOTE K -- INCOME TAXES
In October 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes". SFAS 109 is an
asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax
returns. Previously, the Company used the APB 11 approach that gave no
recognition to future events other than the recovery of assets and settlement
of liabilities at their carrying amounts. Under SFAS 109 the Company
recognizes to a greater degree the future tax benefits of expenses which have
been recognized in the financial statements.
The adjustments to the October 1, 1993 balance sheet to adopt SFAS 109 netted
to approximately $82,479. This amount is reflected in net income for the year
ended September 30, 1994 as the cumulative effect of a change in accounting
principle.
The components of the income tax provision charged to operations were:
YEAR ENDED SEPTEMBER 30
-----------------------
1996 1995 1994
---- ---- ----
Current:
Federal $ 156,946 $138,546 $ 45,877
State and foreign 48,034 40,984 22,021
--------- -------- ---------
$ 204,980 $179,530 $ 67,898
Deferred:
Net change in deferred tax asset $ (19,373) $(50,203) $ (9,605)
Net change in deferred tax liability 13,617 (22,555) 24,590
--------- -------- ---------
$ 199,224 $106,772 $ 82,883
--------- -------- ---------
--------- -------- ---------
The following reconciles the federal statutory income tax rate to the
effective rate of the provision for income taxes:
YEAR ENDED SEPTEMBER 30
-----------------------
1996 1995 1994
---- ---- ----
Federal statutory rate 34% 34% 34%
Increases (decreases):
California franchise tax, net of
Federal income tax benefit 5.7% 5.7% 5.7%
Dividends (6.3)% (4.2)% (8.0)%
Other 0.2% (4.1)% (3.6)%
------ ------ ------
33.6% 31.4% 28.1%
------ ------ ------
------ ------ ------
30
<PAGE>
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994 (CONTINUED)
The principal components of deferred tax assets were:
YEAR ENDED SEPTEMBER 30
-----------------------
1996 1995
---- ----
Unrealized losses on marketable securities $15,384 $ 778
Allowance for doubtful accounts 2,165 2,165
Inventory-uniform capitalization 12,297 11,342
Accumulated amortization 3,812 -0-
Accrued environmental liability 43,300 43,300
------- ---------
Total for the year $76,958 $ 57,585
------- ---------
------- ---------
The principal components of deferred tax liability were:
YEAR ENDED SEPTEMBER 30
-----------------------
1996 1995
---- ----
Accumulated depreciation $ 8,721 $ 8,360
Accumulated amortization -0- 2,434
Investment in affiliates 50,950 35,260
------- -------
Total for the year $59,671 $46,054
------- -------
------- -------
NOTE L -- PROFIT-SHARING PLAN
The Company contributes to a profit-sharing plan for the benefit of employees
meeting certain eligibility requirements and electing participation in the
plan. Contributions are made from net profits as determined by the Board of
Directors. Profit-sharing expense, which equals contributions, was $41,000 in
1996, $36,000 in 1995 and $27,000 in 1994.
NOTE M -- SALES INFORMATION AND MAJOR CUSTOMERS
Net sales to the United States government were $582,974 (1996), $598,301
(1995), and $642,361 (1994). These sales were comprised principally of
sealants. One other customer accounted for more than 10% of sales during
1996. The sales to this company were $394,157. These sales were comprised
principally of coatings and sealants. No other single customer accounted for
10% or more of sales during the year.
Export sales and royalty income from foreign sources are generated entirely
by The Flamemaster Corporation and are as follows:
YEAR ENDED SEPTEMBER 30
-----------------------
1996 1995 1994
---- ---- ----
Export sales $342,257 $378,031 $277,569
Royalty income $ 17,163 $ 17,650 $ 31,749
31
<PAGE>
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996,1995, AND 1994 (CONTINUED)
NOTE N -- RELATED PARTIES
Altius Corporation owns approximately 25% of the Company's outstanding common
shares. Four of the five members of the board, including the Company's
President and Chairman, who also serves as Altius Corporation's Chairman, are
members of the Altius Corporations Board of Directors. During 1995 and 1994
the Company leased storage space from Altius Corporation on a month-to-month
basis. The rent paid to Altius Corporation under this lease was $2,800 and
$25,950 for the years ended September 30, 1995 and 1994, respectively.
32
<PAGE>
THE FLAMEMASTER CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged/
Charged/ (Credited) To
Balance (Credited) To Other Balance
Beginning Costs and Accounts Deductions At End Of
Period Expenses Describe Describe Period
------ -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 5,000 $5,000
Allowance for net unrealized
Losses on marketable equity
Securities - Current $0 $0
Allowance for net unrealized
Losses on marketable equity
Securities - Noncurrent $0 $0
------- ------- -------- ------ -------
TOTAL $ 5,000 $0 $0 $0 $5,000
------- ------- -------- ------ -------
------- ------- -------- ------ -------
Year ended September 30, 1995:
Deducted from Asset Accounts:
Allowance for doubtful accounts $ 8,780 $5,000 $(8,780)(4) $5,000
Allowance for net unrealized
Losses on marketable equity
Securities - Current $35,161 $(35,161)(5) $0
Allowance for Net unrealized
Losses on marketable equity
Securities - Noncurrent $0 $0
------- ------- -------- ------ -------
TOTAL $43,941 $5,000 $(43,941) $0 $5,000
------- ------- -------- ------ -------
------- ------- -------- ------ -------
Year ended September 30, 1994:
Deducted from Asset Accounts:
Allowance for Doubtful Accounts $16,280 $ (7,500)(4) $8,780
Allowance for Net Unrealized
Losses on marketable equity
Securities - Current $0 35,161(3) $35,161
Allowance for Net Unrealized
Losses on Marketable Equity
Securities - Noncurrent $0 $0
------- ------- -------- ------ -------
TOTAL $16,280 $35,161 $ (7,500) $0 $43,941
------- ------- -------- ------ -------
------- ------- -------- ------ -------
</TABLE>
(1) Increase to aggregate market value of marketable equity securities credited
to income.
(2) Increase to aggregate market value of marketable equity securities credited
to shareholders equity.
(3) Decrease to aggregate market value of marketable equity securities charged
to income.
(4) Credited to accounts receivable to write-off bad debt.
(5) Credited directly to marketable securities due to the adoption of new method
of accounting for marketable securities.
33
<PAGE>
EXHIBIT I
FLAMEMASTER CORPORATION
EARNINGS PER SHARE CALCULATIONS
SEPTEMBER 30, 1996
PRIMARY
Income from Operations 393,710
Preferred Dividends (44,492)
-------
349,218
Net Weighted Average Shares Outstanding (2) 1,266,347
Common Stock - Average Outstanding 1,251,198
Common Stock Options (1) 15,149
---------
1,266,347(2)
Primary Earnings per share $ .2757
----------
----------
Common Stock Options
First Quarter 113,000 - 113,000 X 3.500 = -0-
DIVIDED BY
3.13
Second Quarter 113,000 - 113,000 X 3.500 = 9,466
DIVIDED BY
3.82
Third Quarter 113,000 - 113,000 X 3.500 = 27,208
DIVIDED BY
4.61
Fourth Quarter 113,000 - 113,000 X 3.500 = 23,923
DIVIDED BY ------
4.44
60,597
- 4
-------
(1) 15,149
-------
FULLY DILUTED
- -------------
Income from Operations 393,710
Net Weighted Average Shares Outstanding (4)1,456,547
Common Stock -Average Outstanding 1,251,198
Convertible Preferred Stock 190,200
Common Stock Options (1) 15,149
---------
1,456,547(4)
Fully Diluted Earnings Per Share $ .2703
--------
--------
34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
THE FLAMEMASTER CORPORATION
(Registrant)
_____________________________________________
Joseph Mazin,
Chairman, President, Chief Executive Officer,
Chief Financial Officer and Director
Date:________________________________
_____________________________________
Barbara E. Waite,
Treasurer and Assistant Secretary
Date:________________________________
___________________________________
Donna Mazin,
Director
Date:________________________________
_____________________________________
Sion Mazin,
Director
Date:________________________________
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 1,355,770
<SECURITIES> 1,284,006
<RECEIVABLES> 303,016
<ALLOWANCES> 0
<INVENTORY> 699,283
<CURRENT-ASSETS> 3,751,759
<PP&E> 886,507
<DEPRECIATION> 842,261
<TOTAL-ASSETS> 4,900,499
<CURRENT-LIABILITIES> 301,772
<BONDS> 0
0
793
<COMMON> 12,464
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,900,498
<SALES> 3,248,641
<TOTAL-REVENUES> 3,447,753
<CGS> 1,826,537
<TOTAL-COSTS> 2,919,373
<OTHER-EXPENSES> 1,092,836
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 528,380
<INCOME-TAX> 199,224
<INCOME-CONTINUING> 592,934
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 393,710
<EPS-PRIMARY> .28
<EPS-DILUTED> .27
</TABLE>
