<PAGE>
FORM 10- Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED: MARCH 31, 1998 COMMISSION FILE NO: 0-2172
----------------- --------
THE FLAMEMASTER CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
NEVADA 95-2018730
- --------------------------------------------- ----------------------------
(State or other jurisdiction of incorporation (IRS Employer identification
or organization) Number)
11120 SHERMAN WAY, SUN VALLEY, CALIFORNIA 91352
- -------------------------------------------------------------------------------
(Address of Principal Executive Office)
Registrant's telephone number including area code: (818) 982-1650
-----------------
Registrant's facsimile number including area code: (818) 765-5603
-----------------
Indicate by check mark whether 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
APRIL 10, 1998 1,652,710
----------------------------------
<PAGE>
Item 1 Financial Information
Item 1 Financial Statements
<TABLE>
<CAPTION>
THE FLAMEMASTER CORPORATION
CONDENSED BALANCE SHEETS
MARCH 31 SEPTEMBER 30
1998 1997
(UNAUDITED) (NOTE)
----------- ------------
<S> <C> <C>
CURRENT ASSETS :
Cash and short-term investment $1,424,725 $1,375,947
Marketable securities 2,353,061 2,172,740
Accounts receivable, less allowance of
$5,000 and $5,000, respectively 577,715 451,908
Inventories 664,243 660,289
Prepaid expenses & other assets 100,411 36,986
Other investments 46,287 46,287
Deferred income taxes 37,175 49,432
------ ------
TOTAL CURRENT ASSETS: 5,203,617 4,793,589
License agreement 112,587 120,927
Equipment and improvements, net of
accumulated depreciation 32,658 36,869
------ ------
TOTAL ASSETS $5,348,862 $4,951,385
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $100,871 $95,216
Accrued liabilities 10,989 9,686
Income taxes payable 93,857 (63,347)
Deferred tax liability 56,522 57,670
Environmental reserve 8,456 53,135
Deferred credits 37,702 37,702
------ ------
TOTAL CURRENT LIABILITIES: 308,397 190,062
Long-Term debt 376,656 -
------- -------
Total Liabilities: 685,053 190,062
SHAREHOLDERS' EQUITY
PREFERRED STOCK,par value,$.01 per share,
cumulative,$.56 dividend, convertible,callable,
at $5.95, authorized 500,000 shares, issued and
outstanding, zero at 3/31/98 and 68,250 9/30/97 -0- 682
COMMON STOCK, par value,$.01 per share,
authorized 6,000,000 shares; issued and outstanding
1,652,710 shares at 3/31/98 and 1,567,066 shares
at 9/30/97. 13,779 13,064
Additional paid-in Capital 2,276,799 2,538,088
Retained earnings 2,231,112 2,236,753
Allowance for marketable securities 142,119 (27,264)
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TOTAL STOCKHOLDERS' EQUITY $4,663,809 $4,761,323
---------- ----------
---------- ----------
TOTAL LIABILITY AND EQUITY $5,348,862 $4,951,385
---------- ----------
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</TABLE>
Note: Balance sheet as of September 30, 1997 has been derived from the audited
balance sheet at that date. See notes to condensed financial statements.
<PAGE>
Item 1 Financial Statements (continued)
<TABLE>
<CAPTION>
THE FLAMEMASTER CORPORATION
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales and gross revenues $1,018,351 $875,143
---------- ----------
---------- ----------
Costs and expenses:
Cost of sales 484,127 465,382
Selling 67,177 70,001
General and administrative 148,399 161,171
Laboratory costs 59,703 56,095
Other, (income), expenses, net (18,406) (57,909)
---------- ----------
741,000 694,740
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Income before income taxes 277,351 180,403
Income taxes 104,495 70,868
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Net income $172,856 $109,535
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---------- ----------
Net income per share, primary $.11 $.07
---- ----
---- ----
Net income per share, fully diluted $.11
---- ----
---- ----
Weighted average shares outstanding:
Basic 1,652,710 1,540,471
---------- ----------
---------- ----------
Diluted 1,769,097 1,768,620
---------- ----------
---------- ----------
</TABLE>
See notes to condensed financial statements.
<PAGE>
Item 1 Financial Statements (continued)
<TABLE>
<CAPTION>
THE FLAMEMASTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME(UNAUDITED)
SIX MONTHS ENDED MARCH 31, 1998
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales and gross revenues $1,938,773 $1,612,121
---------- ----------
---------- ----------
Costs and expenses:
Cost of sales 997,598 914,287
Selling 141,015 143,625
General and administrative 305,067 308,950
Laboratory costs 122,097 110,830
Other, (income), expenses, net (47,548) (91,817)
---------- ----------
1,518,229 1,385,875
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Income before income taxes 420,544 226,246
Income taxes 158,313 90,050
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Net income $262,231 $136,196
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---------- ----------
Net income per share, basic $.16 $.09
---- ----
---- ----
Net income per share, diluted $.16
----
----
Weighted average shares outstanding:
Basic 1,614,952 1,529,870
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---------- ----------
Diluted 1,731,339 1,758,019
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---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
Item 1 Financial Statements (continued)
<TABLE>
<CAPTION>
THE FLAMEMASTER CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998
1998 1997
---- ----
<S> <C> <C>
Net cash provided (used) by operating activities: (79,478) $57,403
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment & improvements (1,870) (8,814)
Net purchases and sales of investment
securities 144,610 35,773
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142,740 26,959
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CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Company's Preferred Stock (42,998) -0-
Purchase of Company's Common Stock -0- (44,293)
Dividends paid (47,420) (109,041)
Issuance of common stock 16,761 -0-
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Net cash used in financing activities (73,657) (153,334)
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NET INCREASE, (DECREASE), IN CASH (10,395) $(68,972)
Cash, beginning of period $1,435,120 $1,355,770
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Cash, end of period $1,424,725 $1,286,798
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---------- ----------
Cash paid during period for income taxes $20,000 $40,000
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</TABLE>
See notes to Condensed Financial Statements.
<PAGE>
Item 1 Financial Statements (continued)
THE FLAMEMASTER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 1: The accompanying unaudited condensed financial statements
have been prepaid in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals), considered necessary
for a fair presentation have been included.
Operating results for the six months ended March 31, 1998,
are not necessarily indicative of the results that may be expected
for the year ending September 30, 1998. For further information,
refer to the consolidated financial statements and footnotes
threto included in the Company's annual report on Form 10-K for
the year ended September 30, 1997.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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 March 31, 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 or expense. The cost of securities sold is based on
specific indentification method.
<PAGE>
Item 1 Financial Statements (continued)
THE FLAMEMASTER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2: Inventories are summarized as follows:
<TABLE>
<CAPTION>
March 31, September 30
1998 1997
---- ----
<S> <C> <C>
Raw materials $271,405 $269,518
Shipping materials 58,053 58,897
Finished goods 334,785 331,874
-------- --------
$664,243 $660,289
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</TABLE>
Note 3: During the three months ended March 31,1998 , the Company did not
purchase any of its outstanding common stock.
Note 4: MARKETABLE SECURITIES:
Marketable securities classified as current assets at March 31, 1998
include the following:
<TABLE>
<CAPTION>
Fair Value Cost
---------- ----
<C> <C> <C>
Other Govt Bonds $57,260 $57,251
U.S.Treasury obligations 455,264 429,265
Corporate debt securities 28,070 22,575
Mortgage backed securities 2,440 2,749
Marketable equity securities 1,810,027 1,720,830
---------- ----------
$2,353,061 $2,232,670
The contractual maturities of debt
securities available for sale at
March 31, 1998 are as follows:
Fair Value Cost
---------- ----
Due within one year $ -0- $ -0-
Due after one year thru 5 years 200,414 193,634
Due after 5 years thru 10 years 282,920 258,207
Due after 10 years 57,260 57,251
Note due at single maturity date 2,440 2,749
-------- --------
$543,034 $511,841
</TABLE>
Gross unrealized holding gains and losses at March 31, were $208,772
and $88,380 respectively. Realized losses from the sale of securities
for the three months ended March 31, were $4,853.
<PAGE>
Item 1 Financial Statements (continued)
THE FLAMEMASTER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 5:
On February 26, 1998, Flamemaster's Board of Directors approved a 20%
stock dividend to be paid April 9, 1998 to all shareholders of record
as of March 26, 1998. Flamemaster will treat this dividend as a stock
split for financial reporting purposes; as such, earnings per common
share amounts, after giving retroactive effect for the dividend, have
been presented in the financial statements for all per share amounts
disclosed therein.
Note 6: In October 1997, pursuant to the terms of the Company's Preferred
stock issue, Flamemaster's Board of Directors approved the calling
(redemption) of all Flamemaster Preferred stock at $5.95 per share.
Shareholders were given the option of converting the preferred shares
into common shares at a 1:2.472 preferred to common ratio, or
alternatively tender the shares for convertible notes maturing
December 31, 2002. Each preferred share would be convertible into $8
note. These notes yield an annual interest rate of 11.85%, are
convertible into common stock at the ratio of 1:2.472 preferred to
common after a holding period of one year,and are callable after 1
year. Purusuant to the above, 47,082 preferred shares were converted
to notes, 14,119 shares were converted to common stock, and 7,050
shares were purchased and retired by the Company, for a total of
68,250 preferred shares. This represents a complete retirement of all
Flamemaster preferred stock outstanding as of March 31, 1998.
<PAGE>
THE FLAMEMASTER CORPORATION
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS:
MARCH 31, 1998 COMPARED TO SEPTEMBER 30, 1997 AND
MARCH 31, 1998 COMPARED TO MARCH 31, 1997.
FINANCIAL CONDITION:
The Company's financial condition is strong, current assets were
$5,203,617 compared to current liabilities of $308,397 at March 31,
1998 for a current ratio of 16.9 to 1. Working capital stood at
$4,895,220 on March 31, 1998 compared to $4,603,527 on September 30,
1997. The increase is attributable to the Company's strong financial
performance. Accounts receivable increased to $577,715 at March 31,
1998 from $451,908 at September 30, 1997 due to the growth in sales
volume. Inventories increased modestly from year end level due to
expanded product offerings. Revenues for the three months were up
$143,208 or 16.3% over the prior year's quarter, while revenues for
the six months were up $326,652 or 20.2% over the six month period
ended March 31, 1997. Sales were up due to the addition of new
customers and new products.
Management believes that future working capital requirements will be
provided primarily from operations and that the Company's liquidity
and working capital requirements are adequate for the forseeable
future. Management believes that the Company's creditworthiness is
substantial relative to its size.
The Company paid a $.028 cash dividend on an adjusted basis on its
common stock in March 1998, a 20% stock dividend was paid on April 9,
1998.
RESULTS OF OPERATIONS:
For the three months ended March 31, 1998 net income was $172,856
compared to $109,535 in the prior year. Per share income was $.11
vs $.07 in the year earlier period.
The Company expanded its product lines in high performance sealants
and added several new customers.
Selling expense decreased as a percentage of sales due to the expanded
volume of business.
Laboratory costs including research and development for the quarter
increased to $59,703 from $56,095 in the previous year, but as a
percentage of sales decreased modestly.
General and administrative expenses decreased to 14.6% of sales from
about 18% of sales in the year earlier quarter, due to a reduction in
legal expenses and consulting services as well as the growth in sales
volume.
<PAGE>
PART 11 OTHER INFORMATION
THE FLAMEMASTER CORPORATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Registrant's annual meeting was held on March 19, 1998 and the following
directors were re-elected:
Leon Gutowicz
Joseph Mazin
Donna Mazin
Sion Mazin
Stuart Weinstein
The directors were elected by a vote of 1,202,938 or a total of 90.56%.
<PAGE>
Signature:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE FLAMEMASTER CORPORATION
(Registrant)
DATE: 5-7-98 /s/ Joseph Mazin
------------------------------ ---------------------------------
(Signature)
Joseph Mazin, President and Chairman
and Chief Executive Officer
DATE: 5-7-98 /s/ Barbara E. Waite
------------------------------ ---------------------------------
(Signature)
Barbara E. Waite, Treasurer and
Secretary
DATE: 5-7-98 /s/ Donna Mazin
------------------------------ ---------------------------------
(Signature)
Donna Mazin, Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,424,725
<SECURITIES> 2,353,061
<RECEIVABLES> 582,715
<ALLOWANCES> 5,000
<INVENTORY> 664,243
<CURRENT-ASSETS> 5,203,617
<PP&E> 882,182
<DEPRECIATION> 849,524
<TOTAL-ASSETS> 5,348,862
<CURRENT-LIABILITIES> 308,397
<BONDS> 0
0
0
<COMMON> 13,779
<OTHER-SE> 4,650,030
<TOTAL-LIABILITY-AND-EQUITY> 5,348,862
<SALES> 1,915,478
<TOTAL-REVENUES> 1,938,773
<CGS> 997,598
<TOTAL-COSTS> 568,179
<OTHER-EXPENSES> (47,548)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 420,544
<INCOME-TAX> 158,313
<INCOME-CONTINUING> 262,231
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 262,231
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
