<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, 1997 Commission File No: 0-2712
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
16, 1997 was $2,468,613.
As of September 30, 1997, there were 1,306,412 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 36
2
<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 0.4% 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 $13,484 during 1997 from $17,163 in
fiscal l996.
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 $28,600 for fiscal
l997.
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 $2,671,118, $2,416,293 and $2,344,284 for the
fiscal years ended September 30, 1997, 1996 and 1995, respectively. Sales of
coatings were $395,213, $477,423 and $564,645 for the fiscal years ended
September 30, 1997, 1996, and 1995, 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 $4,603,527 of working capital, including
approximately $3,548,687 of cash and current portfolio of marketable securities.
The Company believes that its working capital is sufficient to finance its
operations for the 1998 fiscal year.
5
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
(Continued)
PRINCIPAL CUSTOMERS:
During the fiscal year ended September 30, 1997, an agency (General Services
Administration) of the United States Government, accounted for $408,344 (12.03%)
of sales as compared to $582,974 (17.95%) in 1996. One other customer accounted
for more than 10% of sales during l997. Sales to this company were $387,264 or
11.41% of sales. No other single customer accounted for 10% or more of sales.
BACKLOGS:
Backlog of orders at September 30, 1997 was $711,989 as compared to $525,436 in
1996.
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, 1997 were $243,378. In fiscal years ended
September 30, 1996 and September 30, 1995, laboratory costs were $224,457 and
$223,307, respectively. Flamemaster received no revenues to offset laboratory
costs in 1997, 1996 or 1995.
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, 1997 Registrant employed 26 persons as compared to 27 in the
prior year.
EXPORT SALES:
Export sales totalled $372,209, $342,257 and $378,031 in 1997, 1996, and 1995,
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 March 1998.
Registrant believes its facilities are adequate for present and anticipated
operations.
ITEM 3. LEGAL PROCEEDINGS
During August 1994, the Registrant reached a settlement of a lawsuit it had
filed in 1993 against Courtaulds Aerospace. The terms of the settlement include
the return of 429,321 shares of Flamemaster common stock held by Courtaulds in
exchange for termination of a license agreement under which registrant was given
the right to manufacture and sell certain Courtaulds products in North America.
7
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
(Continued)
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
A new license agreement was signed, giving registrant licensing rights to
certain Courtaulds products through 2003. Legal fees associated with this
proceeding were $195,045 and have been allocated between the cost of reacquiring
the common stock and the cost of the new license agreement. Additionally,
$65,624 of dividends previously declared on the stock owned by Courtaulds were
returned to the company. This was recorded as a credit to retained earnings
during fiscal l995.
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 was seeking reimbursement
by the Company for the costs related to the clean-up. The action was settled
during January 1997. The bulk of the settlement was paid for by the insurance
carriers of the Company. The Company is required to contribute $110,000 toward
the settlement with $60,000 payable during the 1997 calendar year and $50,000
payable during 1998. The Company has already accrued and expensed the $110,000
during 1994, 1995 and 1997.
As a condition of the settlement agreement, any settlement monies paid by the
Company must be applied to the remediation of the subject site. It is legal
counsels opinion that the significance of this arrangement is that the Company
will be able to seek reimbursement of settlement monies from the State of
California's Underground Storage Tank (UST) Clean Up Fund. This claim is
currently pending with the UST Clean Up Fund and will be under consideration for
two or three years. No reimbursement of settlement monies has been accrued as of
September 30, 1997.
There were four wrongful death claims filed against the Company during 1996 and
two additional companion lawsuits filed in 1997. All six cases involved
merchant seamen dying from Leukemia. All six 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.
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 1995 $2.729 $3.417
January-March 1996 $3.458 $4.083
April-June 1996 $3.875 $5.333
July-September 1996 $3.896 $4.979
October-December 1996 $3.979 $4.416
January-March 1997 $4.625 $5.875
April-June l997 $4.166 $5.104
July-September l997 $3.125 $4.250
The stock quote as of December 16, 1997 was $ 3.59 bid and $ 3.75 asked.
As of December 16, 1997, there were approximately 1,000 beneficial holders of
Registrant's common stock.
In January 1992, the regular quarterly cash dividend was increased to $.03 per
share. The common stock dividend was further increased on November 1, 1996 from
$.03 to $.035 per quarter. Dividends are expected to remain constant in the
near future.
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,
1997 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
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $3,392,955 $3,248,641 $3,193,513 $3,249,110(2) $3,127,087
Income from
continuing
operations 375,402 393,710 243,262 212,352 473,643
Income from
continuing
operations per
common share,
primary .26 .28 .15 .10 .25
Income from
continuing
operations per
common share,
fully diluted (1) .27 (1) (1) .25
Cash dividends
declared per
common share .14 .12 .12 .12 .12
Total assets 4,951,385 4,900,498 4,820,174 4,794,312 5,549,436
Working
capital 4,603,527 3,449,987 3,383,059 2,743,844 3,758,359
Shareholders'
equity 4,761,323 4,598,726 4,491,980 4,436,248 5,379,073
</TABLE>
(1) Fully diluted earnings per share for 1994, 1995 and 1997 are not
presented, as the effect of the assumed conversion of preferred stock is
anti-dilutive.
10
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
(Continued)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FISCAL 1997:
FINANCIAL CONDITION AND LIQUIDITY:
The Company's financial condition is strong. Current assets were $4,793,589
compared to current liabilities of $190,062 at September 30, l997 for a current
ratio of 25.23 to 1. Working capital increased by $1,153,540 to $4,603,527
compared to $3,449,987 at September 30, l996.
Cash and cash equivalents, and marketable securities increased by $908,911 to
$3,548,687.
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 increased to $451,908 at September 30, 1997 from $303,016 in
the previous year. The increase is a result of increased sales for 1997, as well
as increased export sales.
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 l998 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 main competitor is a multi billion dollar, multi national
corporation which is foreign owned.
Backlog of orders at September 30, 1997 were $711,989. This compares to $545,436
in 1996. Increase is due to increase in order activity and a larger market
share in the industry.
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 1997 VS. 1996:
Sales for the fiscal year ended September 30, 1997 were $3,392,955, an increase
of $144,314 or 4.4% over the prior fiscal year. Sales of Flamemastic (fire
retardant coatings) and Dyna-Therm (aerospace coatings) decreased to 11.6% of
sales or $395,213 from 16.4% of sales or $477,423. 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 $2,671,118 from $2,416,293 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 12.03% of sales compared to the year earlier level of
approximately 18% of sales. The other company purchased sealants that accounted
for 11.4% of sales in the current year compared to 13.5% in the prior year. No
other company accounted for 10% or more of sales.
Royalty income decreased to $13,484 from $17,163 in the previous year.
Costs of products sold in fiscal l997 were $1,794,639 compared to $1,826,537 in
the previous year. 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 increased to $929,650 from
$837,052, while gross laboratory costs remained steady at about $243,378 from
$224,457. The increase in selling, general and administrative expenses was
primarily due to an increase in profit sharing contributions and an increase in
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 l997, this royalty amounted to $25,000.
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.
12
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
(Continued)
FISCAL 1996 VS. 1995 (CONTINUED):
Royalty income remained steady at $17,163 compared to $17,650 in the previous
year.
Costs of products sold in fiscal l996 were $1,826,537 compared to $1,848,165.
The decrease in cost of products reflects a more profitable product mix.
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.
13
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
(Continued)
IMPACT OF INFLATION AND CHANGING PRICES:
Raw material costs and wages remained steady in 1997, as average selling prices
also remained constant. No significant changes are anticipated for 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in the text on pages 18
through 35.
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 Investment Corporation owns approximately 27.5% of the Company's
outstanding common shares. Two of the five members of the board are on the
Altius Investment Corporation Board of Directors. The Company's President and
Chairman is Chairman of the Altius Investment Corporation as well.
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
1997, 1996 and 1995 financial statements.
Balance Sheets, September 30, 1997 and 1996.
Statements of Income for the years ended September 30, 1997,
1996, and 1995.
Statements of Shareholders' Equity for the years ended
September 30, 1997, 1996, and 1995.
Statements of Cash Flows for the years ended September 30,
1997, 1996, and 1995.
Notes to 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>
[LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
November 14, 1997
Board of Directors and Shareholders
The Flamemaster Corporation
Los Angeles, California
We have audited the accompanying balance sheets of The Flamemaster Corporation
as of September 30, 1997 and 1996, and the related statements of income,
shareholders' equity, and cash flows for the years ended September 30, 1997,
1996 and 1995. 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 financial statements referred to in the first paragraph
above present fairly, in all material respects, the financial position of The
Flamemaster Corporation at September 30, 1997, and 1996, and the results of
their operations and their cash flows for the years ended September 30, 1997,
1996 and 1995, in conformity with generally accepted accounting principles.
/s/ Beckman & Associates
<PAGE>
THE FLAMEMASTER CORPORATION
BALANCE SHEETS
September 30
ASSETS 1997 1996
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $1,375,947 $1,355,770
Marketable securities (Note C) 2,172,740 1,284,006
Accounts receivable, less allowance
of $5,000(1997) and $5,000
(1996) 451,908 303,016
Inventories (Note D) 660,289 699,283
Prepaid expenses and other assets 36,986 32,726
Deferred income taxes (Note K) 49,432 76,958
Other investments 46,287 -
----------- -----------
TOTAL CURRENT ASSETS 4,793,589 3,751,759
----------- -----------
INVESTMENT IN AFFILIATED COMPANIES
(Note E) -0- 966,886
----------- -----------
EQUIPMENT AND IMPROVEMENTS, at cost
Machinery and equipment 597,724 593,770
Furniture and fixtures 117,899 128,055
Laboratory equipment 54,565 50,460
Leasehold improvements 116,752 114,222
----------- -----------
886,940 886,507
Less accumulated depreciation and
amortization (850,071) (842,261)
----------- -----------
36,869 44,246
----------- -----------
PRC LICENSE AGREEMENTS, net of
accumulated amortization of
$51,430 (1997) and $34,750
(1996) (Note F) 120,927 137,607
----------- -----------
Total Assets $ 4,951,385 $ 4,900,498
----------- -----------
----------- -----------
See notes to financial statements.
18
<PAGE>
THE FLAMEMASTER CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
---------- ---------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 95,216 $ 81,688
Accrued expenses 9,686 13,663
Income taxes payable (63,347) 26,626
Deferred tax liability (Note K) 57,670 59,671
Environmental reserve (Note I) 53,135 100,000
Deferred Credits (Notes A and E) 37,702 0
Deferred Income -0- 20,124
----------- -----------
TOTAL CURRENT LIABILITIES 190,062 301,772
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note F, G and I)
SHAREHOLDERS' EQUITY (Notes A 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 68,250 shares in 1997
and 79,250 in 1996 682 793
Common stock, par value $.01 per share--
authorized 6,000,000 shares; issued and
outstanding 1,306,412 shares in 1997 and
1,246,463 shares in 1996 13,064 12,464
Additional paid-in capital 2,538,088 2,293,487
Retained earnings 2,236,753 2,300,089
Allowance for marketable securities (27,264) (8,107)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 4,761,323 4,598,726
----------- -----------
TOTAL LIABILITY AND SHAREHOLDERS' EQUITY $ 4,951,385 $ 4,900,498
----------- -----------
----------- -----------
</TABLE>
See notes to financial statements.
19
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended September 30
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET SALES (Note M) $ 3,392,955 $ 3,248,641 $ 3,193,513
ROYALTIES 13,484 17,163 17,650
CONSULTING FEES (Note E) 0 0 17,925
INTEREST AND OTHER INCOME 204,652 181,949 168,347
----------- ----------- -----------
3,611,091 3,447,753 3,397,435
----------- ----------- -----------
COSTS AND EXPENSES
Cost of goods sold 1,794,639 1,826,537 1,848,165
Selling and administrative 929,650 837,052 861,384
Laboratory costs 243,378 224,457 223,307
Royalties and other 27,518 31,327 48,629
Environmental Provisions (Note I) 10,000 0 50,000
----------- ----------- -----------
3,005,185 2,919,373 3,031,485
----------- ----------- -----------
INCOME FROM OPERATIONS 605,906 528,380 365,950
EQUITY IN NET INCOME (LOSS) OF
UNCONSOLIDATED AFFILIATES (Note E) (42,717) 64,554 (18,038)
GAIN ON DISPOSAL OF UNCONSOLIDATED
AFFILIATE 0 0 2,122
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 563,189 592,934 350,034
PROVISION FOR INCOME TAXES (Note K) 187,787 199,224 106,772
----------- ----------- -----------
NET INCOME 375,402 393,710 243,262
PREFERRED DIVIDENDS (42,840) (44,604) (44,604)
----------- ----------- -----------
NET INCOME ATTRIBUTABLE TO COMMON
STOCK $ 332,562 $ 349,106 $ 198,658
----------- ----------- -----------
----------- ----------- -----------
INCOME PER SHARE, PRIMARY (Note J): $ .26 $ .28 $ .15
----------- ----------- -----------
----------- ----------- -----------
NET INCOME PER SHARE, FULLY DILUTED: $ - $ .27 $ -
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING 1,264,363 1,251,198 1,263,556
</TABLE>
See notes to financial statements.
20
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- ------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 79,650 $ 797 1,270,455 $ 12,704
REDEMPTION OF COMMON STOCK (12,718) (127)
COMMON SHARES ISSUED 4,000 40
CASH DIVIDENDS ON PREFERRED STOCK
AT $.56 PER SHARE
CASH DIVIDENDS ON COMMON STOCK
AT $.12 PER SHARE
RETURN OF CASH DIVIDENDS ON COMMON
STOCK REACQUIRED (NOTE E)
PROPERTY DIVIDENDS ON COMMON STOCK
UNREALIZED GAIN ON SECURITIES
NET INCOME
--------- --------- --------- ---------
BALANCE, SEPTEMBER 30, 1995 79,650 $ 797 1,261,737 $ 12,617
--------- --------- --------- ---------
--------- --------- --------- ---------
UNREALIZED GAIN/
ADDITIONAL (LOSS) ON
PAID-IN RETAINED MARKETABLE
CAPITAL EARNINGS SECURITIES TOTAL
------- -------- ---------- -----
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 $2,326,570 $2,096,177 0 $4,436,248
REDEMPTION OF COMMON STOCK (23,402) (26,223) (49,752)
COMMON SHARES ISSUED 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 (53,127) (53,127)
UNREALIZED GAIN ON SECURITIES 30,660 30,660
NET INCOME 243,262 243,262
---------- ---------- --------- ----------
BALANCE, SEPTEMBER 30, 1995 $2,318,504 $2,129,402 $ 30,660 $4,491,980
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- ------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
BALANCE OCTOBER 1, 1995 79,650 $ 797 1,261,737 $ 12,617
REDEMPTION OF COMMON STOCK ( 18,274) ( 183)
REDEMPTION OF PREFERRED STOCK (400) (4)
COMMON SHARES ISSUED 3,000 30
CASH DIVIDENDS ON PREFERRED STOCK
AT $.56 PER SHARE
CASH DIVIDENDS ON COMMON STOCK
AT $.12 PER SHARE
UNREALIZED LOSS ON SECURITIES
NET INCOME
---------- ---------- --------- ----------
BALANCE, SEPTEMBER 30, 1996 79,250 $ 793 1,246,463 $ 12,464
---------- ---------- --------- ----------
---------- ---------- --------- ----------
UNREALIZED GAIN/
ADDITIONAL (LOSS) ON
PAID-IN RETAINED MARKETABLE
CAPITAL EARNINGS SECURITIES TOTAL
------- -------- ---------- -----
<S> <C> <C> <C> <C>
BALANCE OCTOBER 1, 1995 $2,318,504 $2,129,402 $30,660 $4,491,980
REDEMPTION OF COMMON STOCK ( 33,425) (25,674) (59,282)
REDEMPTION OF PREFERRED STOCK (2,696) (2,700)
COMMON SHARES ISSUED 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 $2,293,487 $2,300,089 $ (8,107) $4,598,726
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- ------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
BALANCE OCTOBER 1, 1996 79,250 $ 793 1,246,463 $ 12,464
REDEMPTION OF COMMON STOCK ( 21,526) ( 215)
REDEMPTION OF PREFERRED STOCK (11,000) (111)
COMMON SHARES ISSUED IN CONJUNCTION
WITH MERGER WITH AFFILIATE 44,806 448
COMMON SHARES ISSUED AS STOCK
DIVIDEND 36,669 367
CASH DIVIDENDS ON PREFERRED STOCK
AT $.56 PER SHARE
CASH DIVIDENDS ON COMMON STOCK
AT $.14 PER SHARE
UNREALIZED LOSS ON SECURITIES
NET INCOME
---------- ---------- --------- ----------
BALANCE, SEPTEMBER 30, 1997 68,250 $ 682 1,306,412 $ 13,064
---------- ---------- --------- ----------
---------- ---------- --------- ----------
UNREALIZED GAIN/
ADDITIONAL (LOSS) ON
PAID-IN RETAINED MARKETABLE
CAPITAL EARNINGS SECURITIES TOTAL
------- -------- ---------- -----
<S> <C> <C> <C> <C>
BALANCE OCTOBER 1, 1996 $2,293,487 $2,300,089 $(8,107) $4,598,726
REDEMPTION OF COMMON STOCK ( 40,899) (51,627) (92,741)
REDEMPTION OF PREFERRED STOCK (97,890) (98,001)
COMMON SHARES ISSUED IN CONJUNCTION
WITH MERGER WITH AFFILIATE 218,029 218,477
COMMON SHARES ISSUED AS STOCK
DIVIDEND 67,471 (67,838) -0-
CASH DIVIDENDS ON PREFERRED STOCK
AT $.56 PER SHARE (42,840) (42,840)
CASH DIVIDENDS ON COMMON STOCK
AT $.14 PER SHARE (178,543) (178,543)
UNREALIZED LOSS ON SECURITIES (19,157) (19,157)
NET INCOME 375,402 375,402
---------- ---------- --------- ----------
BALANCE, SEPTEMBER 30, 1997 $2,538,088 $2,236,753 $ (27,264) $4,761,323
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $375,402 $393,710 $243,262
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 36,069 37,936 38,972
Common stock issued to employees -0- 8,438 15,375
(Increase) decrease in deferred income tax asset 27,526 (19,373) (27,507)
(Increase) decrease
in accounts receivable (148,892) 192,757 (41,471)
(Increase) decrease in inventories 38,994 (105,292) 28,366
(Increase) decrease in other investments (46,287) -0- -0-
(Increase) decrease in prepaid
expenses and other assets (4,260) 4,289 (17,081)
Increase (decrease) in accounts payable 13,528 1,811 (145,001)
Increase (decrease) in deferred income tax liability (2,001) 13,617 (32,040)
Increase (decrease) in accrued expenses (3,977) (1,996) 10,567
(Increase) decrease in income taxes receivable (63,347) -0- 28,335
Increase (decrease) in income taxes payable (26,626) (10,569) 37,195
Increase (decrease) in environment reserve (46,865) -0- 50,000
Increase (decrease) in deferred credits and income 17,578 (29,285) 49,409
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 166,842 486,043 238,381
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase of property, plant, and equipment, net (12,013) (13,200) (3,981)
(Increase) decrease in investment securities, net (907,891) (97,109) (61,626)
(Increase) decrease in investment in affiliated company 966,886 (64,554) (34,676)
Acquisition of 10-year license agreement -0- -0- -0-
Stock issued in merger 218,477 -0- -0-
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 265,459 (174,863) (100,283)
---------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Years ended September 30
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of the Company's common stock $ (92,741) ( 59,282) $ ( 49,748)
Repurchase of the Company's Preferred Stock (98,000) ( 2,700) -0-
Dividends paid (221,383) (194,653) (249,441)
Dividends returned -0- -0- 65,624
---------- ----------- -----------
NET CASH USED IN
FINANCING ACTIVITIES (412,124) (256,635) (233,565)
---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 20,177 54,545 ( 95,367)
Cash and cash equivalents,
beginning of the year 1,355,770 1,301,225 1,396,592
---------- ----------- -----------
CASH AND CASH EQUIVALENTS END OF YEAR $1,375,947 $ 1,355,770 $ 1,301,225
---------- ----------- -----------
---------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ -0- $ -0- $ -0-
Income taxes $ 271,767 $ 215,550 $ 114,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 1997, 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
26
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995 (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.
Deferred Credits: The excess of the fair value of net current assets of
companies merged with the Company over the carrying values of those companies at
the merger date is being amortized into income on the straight-line basis over
five years.
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 September 30, 1997, the Company had approximately $260,000 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, 1997 include
the following:
Fair Value Cost
----------- -----------
U.S. Treasury obligations $ 435,145 $ 414,691
Other government obligations 117,650 119,904
Corporate debt securities 26,870 22,575
Mortgage-backed securities 2,611 2,961
Marketable equity securities 1,590,464 1,661,602
----------- -----------
$ 2,172,740 $ 2,221,733
----------- -----------
----------- -----------
The contractual maturities of debt securities available for sale at September
30, 1997, follows:
Fair Value Cost
----------- -----------
Due within one year $ -0- $ -0-
Due after one year thru five years 193,511 186,805
Due after five years thru ten years 268,503 250,461
Due after ten years 117,650 119,905
Note due at single maturity date 2,612 2,960
----------- -----------
$ 582,276 $ 560,131
----------- -----------
----------- -----------
Gross unrealized holding gains and losses at September 30, 1997, were $130,952,
$179,945 respectively. Realized gains and losses from the sale of securities for
the year ended September 30, 1997 were $39,227 and $4,210, respectively.
27
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995 (CONTINUED)
NOTE D- INVENTORIES
Inventories consist of the following:
September 30
-----------------------
1997 1996
---- ----
Raw materials $ 269,518 $ 312,765
Shipping materials 58,897 32,692
Finished goods 331,874 353,826
----------- -----------
$ 660,289 $ 699,283
----------- -----------
----------- -----------
NOTE E -- INVESTMENTS IN AFFILIATED COMPANIES
In September 1989, the Company acquired a 21% interest in Dyna-Seal Corporation
(Dyna-Seal). Dyna-Seal engaged 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
recorded deferred licensing fees of $33,542 in connection with this transaction.
This amount was based on management's estimated liquidation value of the
Dyna-Seal stock received, discounted 60%. The deferred licensing fees were
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,
was reported as income from consulting fees in 1995.
As of September 30, 1996, Flamemaster owned 12,388 shares, or 49%, of Dynamastic
stock and no Dyna-seal stock. All Dynamastic stock was valued based on
management's estimated liquidation value, yielding an initial investment in this
affiliate of $88,822. Undistributed earnings from Dynamastic represented
$52,382 of the company's consolidated retained earnings.
In June 1997, Flamemaster acquired the remaining outstanding stock of Dynamastic
in exchange for 77,357 shares of Flamemaster stock. This additional investment
was recorded at the fair market value of the Flamemaster stock, or $226,165. As
of June 30, 1997, Flamemaster owned 100% of Dynamastic's outstanding stock.
This investment was carried at $391,186 which was comprised of $314,987 invested
and $76,199 of undistributed earnings from Dynamastic, $32,925 of which was
earned in 1997.
At the end of June 1997, Dynamastic was dissolved, with all assets and
liabilities being transferred to Flamemaster. At the time of the transfer, the
value of Dynamastics' current assets exceeded the Company's carrying value for
this investment. This excess value has been recorded as a deferred credit and is
being amortized to income over five years.
28
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995 (CONTINUED)
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. Subsequently, the Company purchased additional stock and owned
21% of PerfectData at September 30, 1996. Due to the level of stock ownership,
the Company's investment in Perfectdata was accounted for under the equity
method. Undistributed earnings from PerfectData represented $102,003 of the
Company's retained earnings.
During the first three quarters of fiscal 1997, the Company recorded $66,534 as
its share of the losses incurred by Perfectdata. As of June 30, 1997, the
Company's undistributed earnings from Perfectdata represented $35,469 of the
Company's retained earnings.
In July of 1997 the Company contributed 35,000 shares of Perfectdata stock to
its profit-sharing plan, thus reducing its investment to less than 20% of the
outstanding Perfectdata stock. Due to this reduction, the Company's investment
in Perfectdata is now accounted for as a marketable security.
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.
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 $163,949 (1997), $154,886
(1996), and $160,945 (1995).
As of September 30, 1997, future minimum payments under this lease are:
1998 175,214
1999 180,273
2000 185,328
--------
Total minimum lease payments $540,815
--------
--------
29
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995 (CONTINUED)
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 113,000 shares of common stock were
outstanding at September 30, 1997.
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 was seeking reimbursement
by the Company for the costs related to the clean-up. This action was settled
during January 1997. The bulk of the settlement was paid for by the insurance
carriers of the Company. The Company is required to contribute $110,000 toward
the settlement with $60,000 payable during the 1997 calendar year and $50,000
payable during 1998. The Company has already accrued and expensed the $110,000
during 1994, 1995 and 1997.
As a condition of the settlement agreement, any settlement monies paid by the
Company must be applied to the remediation of the subject site. It is legal
counsels opinion that the significance of this arrangement is that the Company
will be able to seek reimbursement of settlement monies from the State of
California's Underground Storage Tank (UST) Clean Up Fund. This claim is
currently pending with the UST Clean Up Fund and will be under consideration for
two to three years. No reimbursement of settlement monies has been accrued as
of September 30, 1997.
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 and
two additional companion lawsuits filed in 1997. All six cases involved
merchant seamen dying from Leukemia. All six 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.
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 1995 and 1997 are not presented, as the effect of the assumed
conversion of preferred stock is anti-dilutive.
30
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995 (CONTINUED)
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 components of the income tax provision charged to operations were:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 129,428 $156,946 $ 138,546
State and foreign 50,531 48,034 40,984
--------- --------- ---------
$ 179,959 $204,980 $ 179,530
Deferred:
Net change in deferred tax asset $ 32,287 $(19,373) $ (50,203)
Net change in deferred tax liability (24,459) 13,617 (22,555)
--------- --------- ---------
$ 187,787 $ 199,224 $ 106,772
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following reconciles the federal statutory income tax rate to the effective
rate of the provision for income taxes:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
Increases (decreases):
California franchise tax, net of
Federal income tax benefit 5.7% 5.7% 5.7%
Dividends (2.7%) (6.3%) (4.2%)
Other (3.7%) 0.2 (4.1%)
------ ------ ------
33.3% 33.6% 31.4%
------ ------ ------
------ ------ ------
</TABLE>
31
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995 (CONTINUED)
The principal components of deferred tax assets were:
YEAR ENDED SEPTEMBER 30
------------------------
1997 1996
---- ----
Unrealized losses on marketable securities $ -0- $ 15,384
Allowance for doubtful accounts 2,165 2,165
Inventory-uniform capitalization 17,988 12,297
Accumulated amortization 6,272 3,812
Accrued environmental liability 23,007 43,300
-------- ---------
Total for the year $ 49,432 $ 76,958
-------- ---------
-------- ---------
The principal components of deferred tax liability were:
YEAR ENDED SEPTEMBER 30
------------------------
1997 1996
---- ----
Accumulated depreciation $ 6,720 $ 8,721
Investment in affiliates 50,950 50,950
-------- ----------
Total for the year $ 57,670 $ 59,671
-------- ----------
-------- ----------
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 $102,250 in 1997,
$41,000 in 1996 and $36,000 in 1995.
NOTE M -- SALES INFORMATION AND MAJOR CUSTOMERS
Net sales to the United States government were $408,344 (1997), $582,974 (1996)
and $598,301 (1995). These sales were comprised principally of sealants. One
other customer accounted for more than 10% of sales during 1997. The sales to
this company were $387,264. 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
-----------------------
1997 1996 1995
---- ---- ----
Export sales $372,209 $342,257 $378,031
Royalty income $ 13,484 $ 17,163 $ 17,650
32
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995 (CONTINUED)
NOTE N -- RELATED PARTIES
Altius Investment Corporation owns approximately 27.5% of the Company's
outstanding common shares. Two of the five members of the board, including the
Company's President and Chairman, who also serves as Altius Investment
Corporation's Chairman, are members of the Altius Investment Corporation's Board
of Directors.
33
<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, 1997:
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, 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)(1) $ 5,000
Allowance for Net Unrealized
Losses on marketable equity
Securities - Current $35,161 ($35,161)(2) $ 0
Allowance for Net Unrealized
Losses on marketable equity
Securities - Noncurrent $ -0- $ -0-
------- ------- ------- ------- -------
TOTAL $43,941 $ 5,000 ($43,941) $ 0 $ 5,000
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
(1) Credited to accounts receivable to write-off bad debt.
(2) Credited directly to marketable securities due to the adoption of new method
of accounting for marketable securities.
34
<PAGE>
EXHIBIT I
FLAMEMASTER CORPORATION
EARNINGS PER SHARE CALCULATIONS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRIMARY
<S> <C> <C>
Income from Operations 375,402
Preferred Dividends (42,840)
-----------
332,562
Net Weighted Average Shares Outstanding (2) 1,286,883
Common Stock - Average Outstanding 1,264,363
Common Stock Options (1) 22,520
----------
1,286,883(2)
Primary Earnings Per Share $ .2584
--------
--------
Common Stock Options Calculation:
First Quarter 113,000 - 113,000 X 3.5 = 18,833
-------------
4.20
Second Quarter 113,000 - 113,000 X 3.5 = 37,667
-------------
5.25
Third Quarter 113,000 - 113,000 X 3.5 = 27,763
-------------
4.64
Fourth Quarter 113,000 - 113,000 X 3.5 = 5,818
------------- -------
3.69
90,081
-------
4
Common Stock Options (1) 22,520
--------
FULLY DILUTED
Income from Operations 375,402
Net Weighted Average Shares Outstanding (4)1,450,683
Common Stock -Average Outstanding 1,264,363
Convertible Preferred Stock 163,800
Common Stock Options (1) 22,520
------------
1,450,683(4)
Fully Diluted Earnings Per Share $ .2587
-------
-------
</TABLE>
35
<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)
/s/ JOSEPH MAZIN
- ---------------------------------------------
Joseph Mazin,
Chairman, President, Chief Executive Officer,
Chief Financial Officer and Director
Date: December 19, 1997
--------------------------------
/s/ BARBARA E. WAITE
- -------------------------------------
Barbara E. Waite,
Treasurer and Assistant Secretary
Date: December 19, 1997
--------------------------------
/s/ DONNA MAZIN
- -------------------------------------
Donna Mazin,
Director
Date: December 19, 1997
--------------------------------
/s/ SION MAZIN
- -------------------------------------
Sion Mazin,
Director
Date: December 19, 1997
--------------------------------
36
<PAGE>
STOCK INFORMATION
The Company'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 interdealer prices, without retail mark-up, mark-down, or commission and
may not necessarily represent actual transactions.
Low Bid High Bid
------- --------
October-December 1995 $2.729 $3.417
January-March 1996 $3.458 $4.083
April-June 1996 $3.875 $5.333
July-September 1996 $3.896 $4.979
October-December 1996 $3.979 $4.416
January-March 1997 $4.625 $5.875
April-June 1997 $4.166 $5.104
July-September 1997 $3.125 $4.250
As of December 16, 1997, there were approximately 1,000 beneficial holders of
Registrant's common stock. In March 1990 the Company increased its regular
quarterly cash dividend to $.025 per share from $.02 per share. In July 1991
the quarterly cash dividend was further increased to $.0275 per share. In
January 1992, the regular quarterly cash dividend was further increased to $.03
per share. 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.
37
<PAGE>
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
<S> <C> <C>
BOARD OF DIRECTORS OFFICERS ADVISORS
Joseph Mazin Joseph Mazin Robert Groves
Chairman, President and Chairman, President and
Chief Executive Officer Chief Executive Officer CONSULTANTS
Ted S. Sokol
Leon Gutowicz Kenneth F Chenard.
Office Supply/Operator Vice President, Sales
Sion Mazin Barbara E. Waite EXECUTIVE OFFICES
Retired Bank President Treasurer & Asst. Secretary 11120 Sherman Way
Sun Valley, CA 91352
Donna Mazin
President, Altius Investment Corporation
Stuart Weinstein
Investments - Real Estate & Securities TRANSFER AGENT
U.S.Stock Transfer
(818)982-1659
1745 Gardena Avenue
Glendale, CA 91204
AUDITOR
Beckman & Associates
5950 Canoga Avenue, First Floor
Woodland Hills, CA 91367-5035
FORM 10-K
The Company's Form 10-K Annual Report as filed with the Securities and Exchange Commission may be
obtained upon written request addressed to:
Barbara E. Waite, Treasurer
Flamemaster Corporation
P.O.Box 1458
Sun Valley, CA 91353-1458
</TABLE>
38
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 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-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 1,375,947
<SECURITIES> 2,172,740
<RECEIVABLES> 451,908
<ALLOWANCES> 0
<INVENTORY> 660,289
<CURRENT-ASSETS> 4,793,589
<PP&E> 886,940
<DEPRECIATION> 850,071
<TOTAL-ASSETS> 4,951,385
<CURRENT-LIABILITIES> 190,062
<BONDS> 0
0
682
<COMMON> 13,064
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,951,385
<SALES> 3,392,955
<TOTAL-REVENUES> 3,611,091
<CGS> 1,794,639
<TOTAL-COSTS> 3,005,185
<OTHER-EXPENSES> 1,210,546
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 605,906
<INCOME-TAX> 187,787
<INCOME-CONTINUING> 563,189
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 375,402
<EPS-PRIMARY> .26
<EPS-DILUTED> 0
</TABLE>
