<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, 1998 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 November
23, 1998 was $4,666,398.
As of September 30, 1998, there were 1,645,016 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
<TABLE>
<CAPTION>
PART I PAGE
- ------ ----
<S> <C>
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
- -------
Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8 Financial Statements and Supplementary Data
Item 9 Disagreements on Accounting and Financial
Disclosure
PART III
- --------
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners
and Management
Item 13 Certain Relationships and Related Transactions
PART IV
- -------
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
SIGNATURES
</TABLE>
2
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
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 applications such as the sealing of
seams in aircraft fuel tanks and pressurized passenger or crew compartments
and optical devices.
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 0.002% 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 will expire in November of 1999. Royalty income decreased from
$13,484 in 1997 to $10,399 in 1998.
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 l998.
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's sales are a mixture
of competitive bids and sales at catalog price to a variety of customers.
Flamemaster sells sealants to the United States Government, large and small
manufacturers, and airlines in the United States and Canada. Coatings are
sold for use in the construction of electric utilities and other industrial
plants requiring flame retardant coatings.
4
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
(Continued)
RAW MATERIALS:
Registrant buys most of its raw materials from a variety of large,
well-established suppliers and manufacturers of the chemicals required to
make sealants and coatings. These suppliers are under no obligation to
continue supplying these chemicals to Flamemaster, but these chemicals are
readily available from other suppliers.
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 $3,246,210, $2,671,118 and $2,416,293
for the fiscal years ended September 30, 1998, 1997 and 1996, respectively.
Sales of coatings were $523,017, $395,213 and $477,423 for the fiscal years
ended September 30, 1998, 1997, and 1996, 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 $4,977,648 of working capital, including
approximately $3,713,164 of cash and current portfolio of marketable
securities. The Company believes that its working capital is sufficient to
finance its operations for the 1999 fiscal year.
5
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
(Continued)
PRINCIPAL CUSTOMERS:
During the fiscal year ended September 30, 1998, an agency (General Services
Administration) of the United States Government, accounted for $490,896
(12.96%) of sales as compared to $408,344 (12.03%) in 1997. Two other
customers accounted for more than 10% of sales during l998. Sales to these
companies were $653,676 and $387,391 or 17.26% and 10.23% of sales. No other
single customer accounted for 10% or more of sales.
BACKLOGS:
Backlog of orders at September 30, 1998 was $736,598 as compared to $711,989
in 1997.
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, 1998 were $246,442. In fiscal years
ended September 30, 1997 and September 30, 1996, laboratory costs were
$243,378 and $224,457, respectively. Flamemaster received no revenues to
offset laboratory costs in 1998, 1997 or 1996.
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.
EMPLOYEES:
As of September 30, 1998 Registrant employed 26 persons as compared to 26 in
the prior year.
EXPORT SALES:
Export sales totalled $335,910, $372,209 and $342,257 in 1998, 1997, and
1996, 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 2001.
Registrant believes its facilities are adequate for present and anticipated
operations.
7
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
(Continued)
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 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 was 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. In August of
1998, Flamemaster completed its settlement obligation.
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, 1998.
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 has not been served in three of the cases and was
dismissed by the Plaintiff in one of the other cases. Another of the cases
has been dismissed, but the Plaintiff has appealed that ruling and the sixth
case is in discovery. 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.
<TABLE>
<CAPTION>
Low Bid High Bid
------------ -------------
<S> <C> <C>
October-December 1996 $3.98 $4.42
January-March 1997 $4.63 $5.88
April-June 1997 $4.17 $5.10
July-September 1997 $3.13 $4.25
October-December 1997 $3.50 $5.50
January-March 1998 $5.75 $7.25
April-June 1998 $4.63 $6.50
July-September 1998 $3.06 $5.63
</TABLE>
The stock quote as of November 23, 1998 was $ 4.75 bid and $ 5.13 asked.
As of November 23, 1998, there were approximately 1,000 beneficial holders of
Registrant's common stock.
The common stock dividend was increased on April 1, 1997 from $.024 to $.03 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,
1998 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
------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $3,775,966 $3,392,955 $3,248,641 $3,193,513 $3,249,110
Income from con-
tinuing operations 523,308 375,402 393,710 243,262 212,352
Income from con-
tinuing operations
per share, Basic 0.32 0.21 0.23 0.13 0.08
Income from con-
tinuing operations
per common
share, Diluted (1) (1) 0.23 (1) (1)
Cash dividends
declared per
common share 0.12 0.12 0.10 0.10 0.10
Total assets 5,285,098 4,951,385 4,900,498 4,820,174 4,794,312
Working capital 4,977,648 4,603,527 3,449,987 3,383,059 2,743,844
Shareholders'
equity 4,733,440 4,761,323 4,598,726 4,491,980 4,436,248
</TABLE>
1) Fully diluted earnings per share for 1994, 1995, 1997 and 1998 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 1998:
FINANCIAL CONDITION AND LIQUIDITY:
The Company's financial condition is strong. Current assets were $5,152,650
compared to current liabilities of $175,002 at September 30, 1998 for a current
ratio of 29.4 to 1. Working capital increased by $374,121 to $4,977,648 compared
to $4,603,527 at September 30, 1997.
Cash and cash equivalents, and marketable securities increased by $164,477 to
$3,713,164.
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 $483,706 at September 30, 1998 from $451,908 in
the previous year. The increase is a result of increased sales for 1998, as well
as increased export sales.
Revenues for the fiscal year ended September 30, 1998 were $4,029,705 compared
to $3,611,091 in the prior year, an increase of 11.6%. All product segments
experienced gains. Sales of Flamemastic (fire-retardant coating) and Dyna-Therm
(aerospace coatings) increased to $523,017 or 13.85% of sales from $395,213 or
12.85% and sales of aircraft sealants expanded to $3,246,210 from $2,671,118 in
the prior year. Three customers each accounted for more than 10% of sales. The
three customers accounted for a total of 40.5% of sales. The U.S. Government
accounted for 13% of sales in fiscal 1998 compared to 13% in the year earlier
and historical levels of over 20%.
Royalty income for fiscal 1998 was $10,399 down from $13,484 in the previous
year. Royalty income is not a significant factor affecting the Company's
earnings or revenues.
The Company has completed its review of its computer systems and determined that
those systems will need some minor adjustments to be compatible with the
Company's year 2000 requirements. No significant year 2000 issues are
anticipated by the Company based on the complete systems review.
The Company believes that liquidity and working capital are adequate to fund the
Company's operations and capital requirements for the 1999 fiscal year.
11
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
(Continued)
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, 1998 were $736,598. This compares to $711,989
in 1997. Increase is due to increase in order activity and a larger market share
in the industry.
The common stock dividend was increased on April 1, 1997 from $.024 to $.03 per
quarter. Dividends are expected to remain constant in the near future.
FISCAL 1998 VS. 1997:
Sales for the fiscal year ended September 30, 1998 were $3,775,966 an
increase of $383,011 or 10.14% over the prior fiscal year. Sales of
Flamemastic (fire retardant coatings) and Dyna-Therm (aerospace coatings)
increased to 13.85% of sales or $523,017 from 11.6% of sales or $395,213.
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 $3,246,210
from $2,671,118 in the prior year. Three customers each accounted for more
than 10% of sales. The Company's largest customer purchased sealants
accounting for approximately 17.3% of sales, compared to the year earlier
level of 6.01%. The company's second largest customer was the United States
Government which purchased sealants accounting for approximately 13.0% during
both 1998 and 1997. The other company purchased sealants that accounted for
10.3% of sales in the current year compared to 12.6% in the prior year. No
other company accounted for 10% or more of sales.
Royalty income decreased to $10,399 from $13,484 in the previous year.
Costs of products sold in fiscal 1998 were $1,967,790 compared to $1,794,639 in
the previous year. The increase in cost of products the significant increase in
sales for the year.
12
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
(Continued)
Selling, general and administrative expenses decreased to $873,693 from $929,650
while gross laboratory costs remained steady at about $246,442 from $243,378.
The decrease in selling, general and administrative expenses was primarily due
to a decrease in profit sharing contributions.
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 l998, this royalty
amounted to $25,000.
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
12.85% 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 13.28% of sales compared to
the year earlier level of 20.03% of sales. The other company purchased
sealants that accounted for 12.6% 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 remained steady at $13,484 compared to $17,163 in the previous
year.
Costs of products sold in fiscal l997 were $1,794,639 compared to $1,826,537.
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 increased to $929,650 from
$837,052, while gross laboratory costs increased slightly to $243,378 from
$224,457. 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 l997, 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 1998, as average selling prices
also remained constant. No significant changes are anticipated for 1999.
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 25.5% 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 Kirkland & Whitney
on 1998, 1997 and 1996 financial statements.
Balance Sheets, September 30, 1998 and 1997.
Statements of Income for the years ended September 30, 1998,
1997, and 1996.
Statements of Shareholders' Equity for the years ended
September 30, 1998, 1997, and 1996.
Statements of Cash Flows for the years ended September 30,
1998, 1997, and 1996.
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 AUDITORS' REPORT
November 20, 1998
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, 1998 and 1997, and the related statements of
income, shareholders' equity, and cash flows for the years ended September
30, 1998, 1997 and 1996. 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, 1998, and 1997, and the results of
their operations and their cash flows for the years ended September 30, 1998,
1997 and 1996, in conformity with generally accepted accounting principles.
/s/ Beckman Kirkland & Whitney
17
<PAGE>
<TABLE>
<CAPTION>
September 30,
ASSETS 1998 1997
------------------ -------------------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 1,404,347 $ 1,375,947
Marketable Securities (Note C) 2,308,817 2,172,740
Accounts Receivable, less Allowance
For Doubtful Accounts of $5,000 483,706 451,908
Inventories (Note D) 654,551 660,289
Settlement Receivable (Note I) 48,191 0
Prepaid Expenses and Other Assets 32,475 36,986
Deferred Income Taxes (Note K) 24,273 49,432
Income Taxes Receivable 0 63,347
Other Investments 196,290 46,287
------------------ -------------------
TOTAL CURRENT ASSETS 5,152,650 4,856,936
------------------ -------------------
EQUIPMENT AND IMPROVEMENTS, at cost
Machinery and Equipment 592,286 597,724
Furniture and Fixtures 117,899 117,899
Laboratory Equipment 56,434 54,565
Leasehold Improvements 119,185 116,752
------------------ -------------------
885,804 886,940
Less Accumulated Depreciation (857,603) (850,071)
------------------ -------------------
28,201 36,869
------------------ -------------------
PRC LICENSE AGREEMENTS, net of
Accumulated Amortization of
$68,110 (1998) and $51,430 (1997) (Note F) 104,247 120,927
------------------ -------------------
TOTAL ASSETS $ 5,285,098 $ 5,014,732
------------------ -------------------
------------------ -------------------
</TABLE>
See Notes To Financial Statements.
18
<PAGE>
<TABLE>
<CAPTION>
September 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
------------------- ------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $ 95,607 $ 95,216
Accrued Expenses 9,733 9,686
Income Taxes Payable 24,937 0
Deferred Tax Liability (Note K) 15,379 57,670
Environmental Reserve (Note I) 0 53,135
Deferred Credits (Notes A and E) 29,346 37,702
------------------- ------------------
TOTAL CURRENT LIABILITIES 175,002 253,409
------------------- ------------------
LONG-TERM LIABILITIES
Notes Payable (Note O) 376,656 0
------------------- ------------------
TOTAL LIABILITIES 551,658 253,409
------------------- ------------------
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 -0-
in 1998 and 68,250 in 1997 0 682
Common Stock, par value $.01 per share, authorized
6,000,000 shares; issued and outstanding 1,645,015 shares
in 1998 and 1,306,412 shares in 1997 16,450 13,064
Additional Paid-In Capital 3,775,397 2,538,088
Retained Earnings 924,052 2,236,753
Allowance For Marketable Securities 17,541 (27,264)
------------------- ------------------
TOTAL SHAREHOLDERS' EQUITY 4,733,440 4,761,323
------------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,285,098 $ 5,014,732
------------------- ------------------
------------------- ------------------
</TABLE>
See Notes To Financial Statements.
19
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
NET SALES (Note M) $ 3,775,966 $ 3,392,955 $ 3,248,641
ROYALTIES 10,399 13,484 17,163
INTEREST AND OTHER INCOME 243,341 204,652 181,949
-------------- -------------- -------------
4,029,706 3,611,091 3,447,753
-------------- -------------- -------------
COSTS AND EXPENSES
Cost of Goods Sold 1,967,790 1,794,639 1,826,537
Selling and Administrative 873,693 929,650 837,052
Laboratory Costs 246,442 243,378 224,457
Royalties and Other 90,322 27,518 31,327
Environmental Provisions (Note I) 0 10,000 0
-------------- -------------- -------------
3,178,247 3,005,185 2,919,373
-------------- -------------- -------------
INCOME FROM OPERATIONS 851,459 605,906 528,380
EQUITY IN NET INCOME (LOSS) OF
UNCONSOLIDATED AFFILIATES (Note E) 0 (42,717) 64,554
-------------- -------------- -------------
INCOME BEFORE INCOME TAXES 851,459 563,189 592,934
PROVISION FOR INCOME TAXES 328,151 187,787 199,224
-------------- -------------- -------------
NET INCOME 523,308 375,402 393,710
PREFERRED DIVIDENDS (8,295) (42,840) (44,604)
-------------- -------------- -------------
NET INCOME ATTRIBUTABLE TO COMMON STOCK $ 515,013 $ 332,562 $ 349,106
-------------- -------------- -------------
-------------- -------------- -------------
-------------- -------------- -------------
NET INCOME PER SHARE, BASIC (Note J) $ 0.32 $ 0.21 $ 0.23
-------------- -------------- -------------
-------------- -------------- -------------
-------------- -------------- -------------
NET INCOME PER SHARE, DILUTED: $ - $ - $ 0.22
-------------- -------------- -------------
-------------- -------------- -------------
WEIGHTED AVERAGE SHARES OUTSTANDING 1,632,941 1,517,236 1,501,438
</TABLE>
See Notes To Financial Statements.
20
<PAGE>
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------- --------------------- PAID-IN RETAINED MARKETABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
-------- ------ --------- --------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1997 68,250 $ 682 1,306,412 $ 13,064 $ 2,538,088 $ 2,236,753 $ (27,264) $ 4,761,323
REDEMPTION OF COMMON STOCK (11,568) (116) (18,125) (23,476) (41,717)
REDEMPTION OF PREFERRED STOCK (7,050) (70) (35,180) (7,747) (42,997)
CONVERSION OF PREFERRED STOCK INTO
NOTES PAYABLE (47,082) (471) (234,939) (141,246) (376,656)
CONVERSION OF PREFERRED STOCK INTO
COMMON STOCK (14,118) (141) 34,898 349 (208) 0
COMMON SHARES ISSUED 40,375 404 16,357 16,761
CASH DIVIDENDS ON PREFERRED STOCK
AT $.56 PER SHARE (8,295) (8,295)
CASH DIVIDENDS ON COMMON STOCK
AT $.35 PER SHARE (143,092) (143,092)
20% STOCK DIVIDEND 274,898 2,749 1,509,196 (1,511,945)
UNREALIZED LOSS ON SECURITIES 44,805 44,805
NET INCOME 523,308 523,308
-------- ------ --------- --------- ----------- ---------- ---------- -----------
BALANCE, SEPTEMBER 30, 1998 0 $ - 1,645,015 $ 16,450 $ 3,775,397 $ 924,052 $ 17,541 $ 4,733,440
-------- ------ --------- --------- ----------- ----------- ---------- -----------
-------- ------ --------- --------- ----------- ----------- ---------- -----------
</TABLE>
See Notes To Financial Statements.
21
<PAGE>
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------- -------------------- PAID-IN RETAINED MARKETABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
------- ------ --------- -------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1996 79,250 $ 793 1,246,463 $ 12,464 $ 2,293,487 $2,300,089 $ (8,107) $4,598,726
REDEMPTION OF COMMON STOCK (21,526) (215) (40,899) (51,627) (92,741)
REDEMPTION OF PREFERRED STOCK (11,000) (111) (97,890) (98,001)
COMMON SHARES ISSUED IN CONJUNCTION
WITH MERGER WITH AFFILIATE 44,806 448 218,029 218,477
COMMON SHARES ISSUED AS STOCK
DIVIDEND 36,669 367 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 68,250 $ 682 1,306,412 $ 13,064 $ 2,538,088 $2,236,753 $ (27,264) $4,761,323
------- ------ --------- -------- ----------- ---------- ---------- ----------
------- ------ --------- -------- ----------- ---------- ---------- ----------
</TABLE>
See Notes To Financial Statements.
22
<PAGE>
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- --------------------- 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 Financial Statements.
23
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
1998 1997 1996
------------------- ------------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 523,308 $ 375,402 $ 393,710
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization 38,334 36,069 37,936
Common Stock issued to employees 0 0 8,438
(Increase)decrease in Accounts Receivable (31,798) (148,892) 192,757
(Increase)decrease in Inventories 5,738 38,994 (105,292)
(Increase)decrease in Income Taxes Receivable 63,347 (63,347) 0
(Increase)decrease in Settlement Receivable (48,191) 0 0
(Increase)decrease in Prepaid Expenses and
Other Assets 4,511 (4,260) 4,289
(Increase)decrease in Deferred Income Tax Assets 25,159 27,526 (19,373)
(Increase)decrease in Other Investments (150,003) (46,287) 0
Increase(decrease) in Accounts Payable 391 13,528 1,811
Increase(decrease) in Accrued Expenses 47 (3,977) (1,996)
Increase(decrease) in Income Taxes Payable 24,937 (26,626) (10,569)
Increase(decrease) in Deferred Income Tax Liabilities (42,291) (2,001) 13,617
Increase(decrease) in Environmental Reserve (53,135) (46,865) 0
Increase(decrease) in Deferred Credits and Income (8,356) 17,578 (29,285)
------------------- ------------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 351,998 $ 166,842 $ 486,043
------------------- ------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property, Plant and Equipment $ (12,986) $ (12,013) $ (13,200)
(Increase)decrease in investment securities, net (91,272) (907,891) (97,109)
(Increase)decrease in investment in affiliated company 0 966,886 (64,554)
Stock issued in merger 0 218,477 0
------------------- ------------------- -----------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ (104,258) $ 265,459 $ (174,863)
------------------- ------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of the Company's Common Stock $ (41,716) $ (92,741) $ (59,282)
Repurchase of the Company's Preferred Stock (42,998) (98,000) (2,700)
Stock Options exercised 16,761 0 0
Dividends paid (151,387) (221,383) (194,653)
------------------- ------------------- -----------------
NET CASH USED IN FINANCING ACTIVITIES $ (219,340) $ (412,124) $ (256,635)
------------------- ------------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 28,400 $ 20,177 $ 54,545
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 1,375,947 $ 1,355,770 $ 1,301,225
------------------- ------------------- -----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,404,347 $ 1,375,947 $ 1,355,770
------------------- ------------------- -----------------
------------------- ------------------- -----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 21,690 $ - $ -
Income taxes $ 257,000 $ 271,767 $ 215,550
</TABLE>
See Notes To Financial Statements.
24
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
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.
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, 1998, 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.
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
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996 (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, 1998, the Company had approximately $263,151 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, 1998 include
the following:
<TABLE>
<S> <C> <C>
Other government obligations 56,870 57,224
Corporate debt securities 39,247 34,405
Mortgage-backed securities 328 449
Marketable equity securities 1,725,899 1,782,566
---------------- ----------------
$ 2,314,817 $ 2,319,005
---------------- ----------------
---------------- ----------------
</TABLE>
The contractual maturities of debt secutires available for sale at
September 30, 1998 follows:
<TABLE>
<CAPTION>
Fair Value Cost
---------------- ----------------
<S> <C> <C>
Due within one year $ 126,709 $ 122,230
Due after one year thru five years 165,615 153,787
Due after five years thru ten years 237,782 200,926
Due after ten years 57,198 57,673
Note due at single maturity date 1,614 1,823
---------------- ----------------
$ 588,918 $ 536,439
---------------- ----------------
---------------- ----------------
</TABLE>
Gross unrealized holding gains and losses at September 30, 1998, were $189,412,
$193,600 respectively. Realized gains and losses from the sale of securities for
the year ended September 30, 1998 were $18,028 and $7,868, respectively.
26
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996 (CONTINUED)
NOTE D- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30
------------------------
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 269,959 $ 269,518
Shipping materials 52,718 58,897
Finished goods 331,874 331,874
$ 654,551 $ 660,289
--------- ---------
--------- ---------
</TABLE>
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.
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.
27
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996 (CONTINUED)
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.
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 $175,214 (1998), $163,949
(1997), and $154,886 (1996).
As of September 30, 1998, future minimum payments under this lease are:
<TABLE>
<S> <C>
1999 180,273
2000 185,328
2001 (expires March 31, 2001) 94,349
--------
Total minimum lease payments $459,950
--------
--------
</TABLE>
28
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996 (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, 1999. 40,375 options were exercised
during the year for $16,761. No common stock options were outstanding at
September 30, 1998.
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. In August 1998, Flamemaster completed its settlement
obligation.
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, 1998.
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 has not been served in three of the cases and was dismissed by the
Plaintiff in one of the other cases. Another of the cases has been dismissed,
but the Plaintiff has appealed that ruling and the sixth case is in discovery.
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
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996 (CONTINUED)
NOTE J -- INCOME PER COMMON SHARE
Basic 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 diluted earnings per share.
Outstanding options were considered in the basic and diluted earnings per share
calculations using the treasury stock method. Diluted earnings per share for
1997 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 components of the income tax provision charged to operations were:
<TABLE>
<S> <C> <C> <C>
Current:
Federal $ 273,875 $ 129,428 $ 156,946
State and foreign 710,408 50,531 48,034
------------- -------------- --------------
$ 345,283 $ 179,959 $ 209,980
Deferred:
Net change in deferred tax asset $ 25,159 $ 32,287 $ (19,373)
Net change in deferred tax liability (42,291) (24,459) 13,617
------------- -------------- --------------
$ 328,151 $ 187,787 $ 199,224
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
The following reconciles the federal statutory tax rate to the effective rate of
the provision for income taxes:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
Increases (decrease):
California franchise tax, net of
Federal income tax benefit 5.50 5.70 5.70
Dividends (5.40) (2.70) (6.30)
Other 4.40 (3.70) 0.20
------------ ------------ ------------
38.5% 33.3% 33.6%
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
30
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996 (CONTINUED)
The principal components of deferred tax assets were:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1998 1997
---- ----
<S> <C> <C>
Allowance for doubtful accounts $ 2,165 $ 2,165
Inventory-uniform capitalization 11,841 17,988
Accumulated amortization 9,173 6,272
Accumulated depreciation 1,094 -0-
Accrued environmental liability -0- 23,007
---------- ----------
Total for the year $ 24,273 $ 49,432
---------- ----------
---------- ----------
</TABLE>
The principal components of deferred tax liability were:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1998 1997
---- ----
<S> <C> <C>
Accumulated depreciation $ 684 $ 6,720
Investment in affiliates 14,695 50,950
---------- ----------
Total for the year $ 15,379 $ 57,670
---------- ----------
---------- ----------
</TABLE>
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 $36,000 in 1998,
$102,250 in 1997 and $41,000 in 1996.
NOTE M -- SALES INFORMATION AND MAJOR CUSTOMERS
Net sales to the United States government were $490,896 (1998), $408,344 (1997)
and $582,974 (1996). These sales were comprised principally of sealants. Two
other customers accounted for more than 10% of sales during 1998. The sales to
these companies were $653,676 and $387,391, respectively. 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:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Export sales $ 335,910 $ 372,209 $ 342,257
Royalty income $ 10,399 $ 13,484 $ 17,163
</TABLE>
31
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996(CONTINUED)
NOTE N -- RELATED PARTIES
Altius Investment Corporation owns approximately 25.5% 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.
NOTE O - LONG -TERM DEBT
On October 23, 1997, the Flamemaster Corporation Board of Directors approved the
calling (redemption) of the Flamemaster Preferred stock at $5.95 per share
pursuant to the terms of the issue. The Board also approved an alternative
whereby shareholders could elect to tender their preferred shares for $10 notes
paying interest only until maturity at an annual interest rate of 5.6%. The
notes are for a term of 5 years and will mature on December 31, 2002. The notes
are convertible into common stock at a ratio of 2.472 to 1. The notes must be
hold for at least 1 year before they can be converted, and are callable at $8.00
after 1 year, $8.50 after 2 years, $9.00 after 3 years, $9.50 after 4 years, and
$10.00 after 5 years. Pursuant to the calling of the preferred shares, 7,050
shares are redeemed at a cost of $25,000, 14,118 preferred shares were converted
into 34,898 shares of common stock, and 47,082 preferred shares were converted
into notes. The Company recorded the notes at $376,656, which reflects the
47,082 shares converted into notes at $8 per share, the amount at which the
Company may call the notes after 1 year.
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, 1998
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, 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
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
(1) Credited to accounts receivable to write-off bad debt.
33
<PAGE>
EXHIBIT I
FLAMEMASTER CORPORATION
EARNINGS PER SHARE CALCULATIONS
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
BASIC
- -----
Income from Operations 523,308
Preferred Dividends (8,295)
----------
515,013
Net Weighted Average Shares Outstanding 1,632,941
Common Stock - Average Outstanding 1,632,941
Common Stock Options -0-
---------
1,632,941
Basic Earnings Per Share $ .32
----------
----------
</TABLE>
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)
/s/ Joseph Mazin
- ---------------------------------------------
Joseph Mazin,
Chairman, President, Chief Executive Officer,
Chief Financial Officer and Director
Date: December 4, 1998
--------------------------------
/s/ Barbara E. Waite
- -------------------------------------
Barbara E. Waite,
Treasurer and Assistant Secretary
Date: December 4, 1998
--------------------------------
/s/ Donna Mazin
- -------------------------------------
Donna Mazin,
Director
Date: December 4, 1998
--------------------------------
/s/ Sion Mazin
- -------------------------------------
Sion Mazin,
Director
Date: December 4, 1998
--------------------------------
35
<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-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 1,404,347
<SECURITIES> 2,308,817
<RECEIVABLES> 483,706
<ALLOWANCES> 0
<INVENTORY> 654,551
<CURRENT-ASSETS> 5,152,650
<PP&E> 885,804
<DEPRECIATION> 857,603
<TOTAL-ASSETS> 5,285,098
<CURRENT-LIABILITIES> 175,002
<BONDS> 376,656
0
0
<COMMON> 16,450
<OTHER-SE> 4,716,990
<TOTAL-LIABILITY-AND-EQUITY> 4,733,440
<SALES> 3,775,966
<TOTAL-REVENUES> 4,029,706
<CGS> 1,967,790
<TOTAL-COSTS> 3,178,247
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 851,459
<INCOME-TAX> 328,151
<INCOME-CONTINUING> 523,308
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 523,308
<EPS-PRIMARY> .32
<EPS-DILUTED> 0
</TABLE>
