<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, 1999 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 (IRS 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
22, 1999 was $4,945,728.
As of September 30, 1999, there were 1,626,935 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.
-1-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
- ------ ----
<S> <C>
Item 1 Business 3
Item 2 Properties 7
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 7
PART II
- -------
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters 8
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 8 Financial Statements and Supplementary Data 13
Item 9 Disagreements on Accounting and Financial Disclosure 13
PART III
- --------
Item 10 Directors and Executive Officers of the Registrant 14
Item 11 Executive Compensation 14
Item 12 Security Ownership of Certain Beneficial Owners and Management 14
Item 13 Certain Relationships and Related Transactions 14
PART IV
- -------
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 15
SIGNATURES
</TABLE>
-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 that 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 PRC-DeSoto Int'l
Corp., formerly known as Courtaulds Aerospace, Inc. wherein PRC-DeSoto Int'l
Corp. granted to Flamemaster a license with respect to certain technology and
proprietary rights of PRC-DeSoto Int'l Corp. that Flamemaster expects to
enhance its sealant 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 Ltd. 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
$10,399 in 1998 to $4,462 in 1999.
-3-
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
ROYALTIES (CONTINUED):
Flamemaster pays royalties to PRC-DeSoto Int'l Corp. 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 PRC-DeSoto were $59,112
for the fiscal year ended l999.
METHODS OF DISTRIBUTION:
Flamemaster products are sold directly by four full time employees, one
commissioned sales representative and through a network of 15 distributors.
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's sealant product line is sold to large and small manufacturers,
distributors, airlines and the United States Government. The fire retardant
coatings are sold to utilities and other industrial plants and the high heat
ablative coatings are sold mainly to the aerospace industry.
RAW MATERIALS:
Registrant buys most of its raw materials from a variety of large,
well-established suppliers and manufacturers of the chemicals required making
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.
-4-
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
PRINCIPAL PRODUCTS:
The principal product classes produced by the Registrant consist of sealants and
coatings. Sales of sealants were $3,899,481, $3,246,210 and $2,671,118 for the
fiscal years ended September 30, 1999, 1998 and 1997, respectively. Sales of
coatings were $395,796, $523,017 and $395,213 for the fiscal years ended
September 30, 1999, 1998 and 1997, respectively.
PATENTS AND TRADEMARKS:
The Company has protected trademarks in 12 Far East countries and previously
owned patents in these countries as well as many other countries for its
flame-retardant coatings. Registrant believes that its trademarks, experience
and creative skill of its employees will give continued success rather than
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 $5,718,492 of working capital, including
approximately $4,363,182 of cash and current portfolio of marketable securities.
The Company believes that its working capital is sufficient to finance its
operations for the 2000 fiscal year.
PRINCIPAL CUSTOMERS:
During the fiscal year ended September 30, 1999, an agency (General Services
Administration) of the United States Government accounted for $1,190,819
(27.71%) of sales as compared to $490,896 (12.96%) in 1998. Another major
customer in l999 was a distributor, which accounted for $625,879 or 14.56% of
sales. No other single customer accounted for 10% or more of sales.
BACKLOGS:
Backlog of orders at September 30, 1999 was $529,236 as compared to $736,598 in
1998.
-5-
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
RENEGOTIATIONS:
Registrant's business is not subject to possible renegotiations 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. This industry is highly competitive,
however, 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 volumes,
there is a limited amount of competition in this niche of our product group.
RESEARCH AND DEVELOPMENT:
Net laboratory costs at September 30, 1999 were $270,507. In fiscal years ended
September 30, 1998 and September 30, 1997, laboratory costs were $246,442 and
$243,378, respectively. Flamemaster received no revenues to offset laboratory
costs in 1999, 1998 or 1997.
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.
-6-
<PAGE>
THE FLAMEMASTER CORPORATION
PART I
EMPLOYEES:
As of September 30, 1999 Registrant employed 28 persons as compared to 26
persons in the prior year.
EXPORT SALES:
Export sales totaled $177,808, $335,910 and $372,209 in 1999, 1998, and 1997,
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
ITEM 3. LEGAL PROCEEDINGS
In February 1994 a suit was filed against the Company for an environmental claim
related to property 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. 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. 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, 1999.
There were four wrongful death claims filed against the Company during 1996 and
two additional companion lawsuits filed in 1997. All six cases involved were
health-related product liability claims. The cases alleged that chemicals
supplied by the Company, as well as numerous other defendants, contributed to
the deaths of merchant seamen. The Company was never served in three of the
cases and was dismissed by the Plaintiff in two of the other cases and the court
has dismissed the final case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
-7-
<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. The following stock
prices represent the daily prices of the stock for fiscal 1999 and 1998.
<TABLE>
<CAPTION>
Low Bid High Bid
------- --------
<S> <C> <C>
October-December 1998 $3.00 $5.50
January-March 1999 $4.12 $5.75
April-June 1999 $4.18 $6.87
July-September 1999 $5.06 $6.25
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 22, 1999 was $ 5.68 bid and $ 6.12 asked.
As of November 22, 1999, 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.
-8-
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended September 30,
1999 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>
Year Ended September 30,
------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Sales $4,298,137 $3,775,966 $3,392,955 $3,248,641 $3,193,513
Income from Continuing
Operations 876,396 523,308 375,402 393,710 243,262
Income from Continuing
Operations per share,
Basic 0.54 0.32 0.21 0.23 0.13
Income from Continuing
Operations per Common
share, Diluted 0.52 *** *** 0.23 ***
Cash Dividends Declared
per Common share 0.12 0.12 0.12 0.10 0.10
Total Assets 5,958,410 5,285,098 4,951,385 4,900,498 4,820,174
Working Capital 5,718,492 4,977,648 4,603,527 3,449,987 3,383,059
Shareholders' Equity 5,450,714 4,733,440 4,761,323 4,598,726 4,491,980
</TABLE>
*** Diluted earnings per share for 1995, 1997 and1998 and are not presented, as
the effect of the assumed conversion of preferred stock is anti-dilutive.
-9-
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FISCAL 1999:
FINANCIAL CONDITION AND LIQUIDITY:
The Company's financial condition is strong. Current assets were $5,849,532
compared to current liabilities of $131,040 at September 30, l999 for a
current ratio of 44.6 to 1. Working capital increased by $740,844 to
$5,718,492 compared to $4,977,648 at September 30, l998.
Cash and cash equivalents, and marketable securities increased by $650,018 to
$4,363,182.
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 $496,776 at September 30, 1999 from $483,706
in the previous year. The increase is a result of increased sales for 1999.
Revenues for the fiscal year ended September 30, 1999 were $4,679,695
compared to $4,029,706 in the prior year, an increase of 16.1%. Sales of
aircraft sealants increased to $3,899,481 or 90.72% from $3,246,210 or 85.97%
in the prior year and sales of Flamemastic (fire-retardant coating) and
Dyna-Therm (aerospace coatings) decreased to $395,796 or 9.21% of sales from
$523,017 or 13.85%. Two customers each accounted for more than 10% of sales.
These two customers accounted for a total of 42.27%. The U.S. Government
accounted for 27.71% of sales in fiscal 1999 compared to 13.00% in the year
earlier and historical levels of over 25%.
Royalty income for fiscal 1999 was $4,462 down from $10,399 in the previous
year. Royalty income is not a significant factor affecting the Company's
earnings or revenues.
The Company is in the process of upgrading its computer systems and has
completed a review of year 2000 requirements. Some minor adjustment will be
needed to be compatible with Y2K requirements. The Company also plans to be
cautious with respect to raw material requirements and plans for unexpected
delays in delivery by increasing inventory levels. No other Y2K issues are
anticipated. Even if all of the Company's computer systems completely fail to
meet Y2K requirements, the Company can continue to function with limited
interruption through backup manual systems. Management believes that capital
expenditures for upgrading its computer systems as well as being Y2K
compliant will not exceed $25,000 and will be complete by the end of December
1999.
The Company believes that liquidity and working capital are adequate to fund
the Company's operations and capital requirements for the 2000 fiscal year.
-10-
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
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.
Backlog of orders at September 30, 1999 was $529,236 down from $736,598 in
the previous year. Decrease was primarily due to a decrease in blanket orders
and fewer GSA contracts.
The common stock dividend was increased on April 1, 1997 from $.024 to $.03
per quarter and remained constant during 1999 and 1998. Dividends are
expected to remain constant in the near future.
FISCAL 1999 VS. 1998:
Sales for the fiscal year ended September 30, 1999 were $4,298,137 an
increase of $522,171 or 13.8% over the prior fiscal year. Sales of
Flamemastic (fire retardant coatings) and Dyna-Therm (aerospace coatings)
decreased to 9.21% of sales or $355,795 from 13.85% of sales or $523,017.
Sales of aircraft sealants continued to increase as a result of introduction
of new products and more product categories, as well as an expanded customer
base. Sales of Chem Seal (sealant) products increased to $3,899,481 from
$3,246,210 in the prior year, mostly as a result of increased U.S. Military
activities in Europe. Two customers accounted for a total of 42.3% of sales.
The Company's largest customer, the U.S. Government accounted for 27.7% of
sales, compared to the year earlier level of 13.0%. The company's second
largest customer was a distributor accounted for 14.6% of sales.
Royalty income decreased to $4,462 from $10,399 in the previous year.
Costs of products sold in fiscal l999 were $1,973,444 compared to $1,967,790
in the previous year. These amounts represent 46% and 52% of the sales in
1999 and 1998, respectively. Decrease in cost of products as a percent of
sales is due to the increased sales of higher profit margin items of desired
aircraft sealant products.
-11-
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
FISCAL 1999 VS. 1998 (CONTINUED):
Selling, general and administrative expenses decreased to $853,032 from
$873,693 while gross laboratory costs increased to $270,507 from $246,442.
The decrease in selling, general and administrative expenses was due to a
reduction in legal fees and stock fees and the increase in laboratory costs
was primarily due to an increase in personnel in order to support research
and development projects.
The license agreement with PRC-DeSoto grants Flamemaster the right to use
technical data obtained from PRC-DeSoto in the productions of sealants. The
Company agreed to pay PRC-DeSoto royalties of 3% to 6% (depending on product)
of net sales attributable to the licensed products. For fiscal l999, this
royalty amounted to $59,112.
FISCAL 1998 VS. 1997:
Sales for the fiscal year ended September 30, 1998 were $3,775,966 an
increase of $383,011 or 10.1% 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 13.00% of
sales compared to the year earlier level of approximately 12.03% of sales.
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 l998 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.
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 PRC-DeSoto Int'l Corp., formerly known as
Courtaulds Aerospace, Inc. grants Flamemaster the right to use
technical data obtained from PRC-DeSoto in the productions of sealants. The
Company agreed to pay PRC-DeSoto 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.
-12-
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
IMPACT OF INFLATION AND CHANGING PRICES:
Raw material costs and wages remained steady in 1999, as average selling
prices also remained constant. No significant changes are anticipated for
2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in the text on pages 18
through 33.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.
-13-
<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 26% of the Company's
outstanding common shares. Two of the six members of the board are on the
Altius Investment Corporation's Board of Directors. The Company's President
and Chairman is Chairman of the Altius Investment Corporation as well.
-14-
<PAGE>
THE FLAMEMASTER CORPORATION
PART IV
<TABLE>
<S><C>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The following financial statements are included in
Part II, Item 8:
- Report of Independent Auditors - Beckman Kirkland & Whitney on 1999, 1998
and 1997 financial statements.
- Balance Sheets, September 30, 1999 and 1998.
- Statements of Income for the years ended September 30, 1999, 1998, and 1997.
- Statements of Shareholders' Equity for the years ended September 30, 1999,
1998, and 1997.
- Statements of Cash Flows for the years ended September 30, 1999, 1998,
and 1997.
- Notes to Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES
- Schedule II - Valuation and Qualifying Accounts.
3. EXHIBITS
- Exhibit 11.1 - Statement regarding computation of per share earnings.
</TABLE>
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 that permit omission.
-15-
<PAGE>
INDEPENDENT AUDITORS' REPORT
November 17, 1999
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, 1999 and 1998, and the related statements of
income, shareholders' equity, and cash flows for the years ended September
30, 1999, 1998, and 1997. 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, 1999, and 1998, and the results of
their operations and their cash flows for the years ended September 30, 1999,
1998, and 1997, in conformity with generally accepted accounting principles.
Beckman Kirkland & Whitney
Agoura Hills, California
-16-
<PAGE>
THE FLAMEMASTER CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
September 30,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $1,913,201 $1,404,347
Marketable Securities (Note C) 2,449,981 2,308,817
Accounts Receivable, less Allowance
For Doubtful Accounts of $5,000 in 1999 and 1998 496,776 483,706
Inventories (Note D) 873,504 654,551
Settlement Receivable (Note I) - 48,191
Prepaid Expenses and Other Assets 36,298 32,475
Deferred Income Taxes (Note K) 33,485 24,273
Other Investments 46,287 196,290
---------- ----------
TOTAL CURRENT ASSETS 5,849,532 5,152,650
---------- ----------
EQUIPMENT AND IMPROVEMENTS, at cost
Machinery and Equipment 593,122 592,286
Furniture and Fixtures 116,620 117,899
Laboratory Equipment 60,505 56,434
Leasehold Improvements 119,185 119,185
---------- ----------
889,432 885,804
Less Accumulated Depreciation (868,121) (857,603)
---------- ----------
21,311 28,201
---------- ----------
PRC LICENSE AGREEMENTS, net of
Accumulated Amortization of
$68,110 (1999) and $51,430 (1998) (Note F) 87,567 104,247
---------- ----------
TOTAL ASSETS $5,958,410 $5,285,098
---------- ----------
---------- ----------
</TABLE>
-17-
<PAGE>
THE FLAMEMASTER CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
September 30,
1999 1998
-------- -------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $85,880 $95,607
Accrued Expenses 8,203 9,733
Income Taxes Payable - 24,937
Deferred Tax Liability (Note K) 14,695 15,379
Deferred Credits (Notes A and E) 22,262 29,346
-------- -------
TOTAL CURRENT LIABILITIES 131,040 175,002
LONG-TERM LIABILITIES:
Notes Payable (Note O) 376,656 376,656
-------- -------
TOTAL LIABILITIES 507,696 551,658
-------- -------
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 1999 and 1998. - -
Common Stock, par value $.01 per share, authorized
6,000,000 shares; issued and outstanding 1,626,935 shares
in 1999 and 1,645,015 shares in 1998 16,269 16,450
Additional Paid-In Capital 3,733,846 3,775,397
Retained Earnings 1,562,002 924,052
Allowance For Marketable Securities 138,597 17,541
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 5,450,714 4,733,440
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,958,410 $5,285,098
---------- ----------
---------- ----------
</TABLE>
-18-
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Years Ended September 30,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES (Note M) $4,298,137 $3,775,966 $3,392,955
ROYALTIES 4,462 10,399 13,484
INTEREST AND OTHER INCOME 377,096 243,341 204,652
---------- ---------- ----------
4,679,695 4,029,706 3,611,091
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Goods Sold 1,973,444 1,967,790 1,794,639
Selling and Administrative 853,032 873,693 929,650
Laboratory Costs 270,507 246,442 243,378
Royalties and Other 116,886 90,322 27,518
Environmental Provision (Note I) - - 10,000
---------- ---------- ----------
3,213,869 3,178,247 3,005,185
---------- ---------- ----------
INCOME FROM OPERATIONS 1,465,826 851,459 605,906
EQUITY IN NET INCOME (LOSS) OF
UNCONSOLIDATED AFFILIATES (Note E) - - (42,717)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,465,826 851,459 563,189
PROVISION FOR INCOME TAXES 589,430 328,151 187,787
---------- ---------- ----------
NET INCOME 876,396 523,308 375,402
PREFERRED DIVIDENDS - (8,295) (42,840)
---------- ---------- ----------
NET INCOME ATTRIBUTABLE TO COMMON STOCK $876,396 $515,013 $332,562
---------- ---------- ----------
---------- ---------- ----------
---------- ---------- ----------
NET INCOME PER SHARE, BASIC (Note J) $0.54 $0.32 $0.21
---------- ---------- ----------
---------- ---------- ----------
---------- ---------- ----------
NET INCOME PER SHARE, DILUTED: $0.52 $ - $ -
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING 1,636,343 1,632,941 1,517,236
</TABLE>
-19-
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended September 30,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET INCOME $876,396 $523,308 $375,402
CHANGE IN UNREALIZED GAINS /(LOSSES)
ON MARKETABLE SECURITIES 121,056 44,805 (19,157)
-------- -------- --------
COMPREHENSIVE INCOME $997,452 $568,113 $356,245
-------- -------- --------
-------- -------- --------
</TABLE>
-20-
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL GAIN/(LOSS) ON
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, 1998 - $ - 1,645,015 $16,450 $3,775,397 $924,052 $17,541 $4,733,440
REDEMPTION OF COMMON STOCK (18,080) (181) (41,551) (41,680) (83,411)
CASH DIVIDENDS ON COMMON STOCK
AT $.03 PER SHARE (196,767) (196,767)
UNREALIZED LOSS ON SECURITIES 121,056 121,056
NET INCOME 876,396 876,396
-------- -------- --------- --------- ----------- ---------- -------------- ----------
BALANCE, SEPTEMBER 30, 1999 - $ - 1,626,935 $16,269 $3,733,846 $1,562,002 $138,597 $5,450,714
</TABLE>
-21-
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL GAIN/(LOSS) ON
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) -
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 $.03 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 - $ - 1,645,015 $16,450 $3,775,397 $ 924,052 $ 17,541 $4,733,440
-------- ----- ---------- -------- ---------- ---------- -------- ----------
-------- ----- ---------- -------- ---------- ---------- -------- ----------
</TABLE>
-22-
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL GAIN/(LOSS) ON
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) -
CASH DIVIDENDS ON PREFERRED STOCK
AT $.56 PER SHARE (42,840) (42,840)
CASH DIVIDENDS ON COMMON STOCK
AT $.024 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>
-23-
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 876,396 $ 523,308 $ 375,402
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization 27,198 38,334 36,069
(Increase)decrease in Accounts Receivable (13,070) (31,798) (148,892)
(Increase)decrease in Inventories (218,953) 5,738 38,994
(Increase)decrease in Income Taxes Receivable -- 63,347 (63,347)
(Increase)decrease in Settlement Receivable 48,191 (48,191) --
(Increase)decrease in Prepaid Expenses and Other Assets (3,823) 4,511 (4,260)
(Increase)decrease in Deferred Income Tax Assets (9,212) 25,159 27,526
(Increase)decrease in Other Investments 150,003 (150,003) (46,287)
Increase(decrease) in Accounts Payable (9,727) 391 13,528
Increase(decrease) in Accrued Expenses (1,530) 47 (3,977)
Increase(decrease) in Income Taxes Payable (24,937) 24,937 (26,626)
Increase(decrease) in Deferred Income Tax Liabilities (684) (42,291) (2,001)
Increase(decrease) in Environmental Reserve -- (53,135) (46,865)
Increase(decrease) in Deferred Credits and Income (7,084) (8,356) 17,578
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 812,768 351,998 166,842
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property, Plant and Equipment (3,628) (12,986) (12,013)
(Increase)decrease in investment securities, net (20,108) (91,272) (907,891)
(Increase)decrease in investment in affiliated company -- -- 966,886
Stock issued in merger -- -- 218,477
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (23,736) (104,258) 265,459
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of the Company's Common Stock (83,411) (41,716) (92,741)
Repurchase of the Company's Preferred Stock -- (42,998) (98,000)
Stock Options exercised -- 16,761 --
Dividends paid (196,767) (151,387) (221,383)
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES (280,178) (219,340) (412,124)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 508,854 28,400 20,177
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,404,347 1,375,947 1,355,770
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $1,913,201 $1,404,347 $1,375,947
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 26,399 $ 21,690 $ --
---------- ---------- ----------
---------- ---------- ----------
Income taxes $ 624,258 $ 257,000 $ 271,767
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
-24-
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
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, 1999, 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 identification 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:
<TABLE>
<CAPTION>
<S> <C>
Machinery, equipment, furniture and fixtures 2-10 years
Leasehold improvements Terms of leases
</TABLE>
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.
-25-
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
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, 1999, the Company had approximately $177,124, $100,422, and
$552,785 of cash and cash equivalents in three banks which exposes the Company
to concentration of credit risk.
NOTE C - MARKETABLE SECURITIES
Marketable securities classified as current assets at September 30, 1999 include
the following:
<TABLE>
<CAPTION>
Fair Value Cost
---------- ----------
<S> <C> <C>
U.S. Treasury bonds $ 610,658 $ 593,807
Other government obligations 56,351 57,170
Corporate debt securities 22,525 19,551
Mortgage-backed securities 1,643 1,986
Marketable equity securities 1,758,804 1,660,599
---------- ----------
$2,449,981 $2,333,113
---------- ----------
---------- ----------
</TABLE>
The contractual maturities of debt securities available for sale at September
30, 1999 follows:
<TABLE>
<CAPTION>
Fair Value Cost
---------- --------
<S> <C> <C>
Due within one year $ 9,325 $ 10,007
Due after one year thru five years 252,978 247,616
Due after five years thru ten years 121,011 105,866
Due after ten years 56,351 57,170
Not due at single maturity date - -
---------- --------
$439,665 $420,659
---------- --------
---------- --------
</TABLE>
Gross unrealized holding gains and losses at September 30, 1999, were
$426,958, $310,091, respectively. Realized gains and losses from the sale of
securities for the year ended September 30, 1999 were $152,256 and $24,626,
respectively.
-26-
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
NOTE D - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Raw Materials $ 429,320 $ 269,959
Shipping Materials 51,992 52,718
Finished Goods 392,192 331,874
--------- ---------
$ 873,504 $ 654,551
========= =========
</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.
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.
-27-
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
NOTE E - INVESTMENTS IN AFFILIATED COMPANIES (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 PRC-DeSoto Int'l
Corp, formerly known as Courtaulds Aerospace, Inc. Under the license agreement,
Flamemaster was granted the right to use technical data obtained from PRC-DeSoto
in the production of sealants. The Company agreed to pay PRC-DeSoto 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. Royalties paid under this agreement were $59,112 in
1999, $25,000 in 1998 and $25,000 in 1997. 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 that expires in September 30, 2001. The lease
requires the Company to pay applicable property taxes, maintenance and
insurance. Rent expense charged to operations were $180,273 in 1999, $175,214 in
1998, and $163,949 in 1997.
As of September 30, 1999, future minimum payments under this lease are:
<TABLE>
<S> <C>
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, 1999, 1998, AND 1997
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. The
40,375 options were exercised in 1998 for $16,761. No common stock options
were exercised in the fiscal year ended September 30, 1999.
NOTE I - LITIGATION
In February 1994 a suit was filed against the Company for an environmental
claim related to property 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. 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. 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, 1999.
There were four wrongful death claims filed against the Company during 1996
and two additional companion lawsuits filed in 1997. All six cases involved
were health-related product liability claims. The cases alleged that
chemicals supplied by the Company, as well as numerous other defendants,
contributed to the deaths of merchant seamen. The Company was never served in
three of the cases and was dismissed by the Plaintiff in two of the other
cases and the court has dismissed the final case.
-29-
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
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 was convertible into
2.4 common shares at the option of the preferred shareholder for 1997.
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. In
1998, the preferred stock was exchanged for convertible notes. For 1998 and
1999, a conversion ratio of 2.46:1 was assumed in calculating earnings per
share for these notes. Diluted earnings per share for 1998 and 1997 were not
presented, as the effect of the assumed conversion 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>
<CAPTION>
Year Ended September 30,
----------------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $467,154 $273,875 $129,428
State and foreign 132,172 71,408 50,531
-------- -------- --------
599,326 345,283 179,959
Deferred:
Net change in deferred tax asset (9,212) 25,159 32,287
Net change in deferred tax liability (684) (42,291) (24,459)
-------- -------- --------
$589,430 $328,151 $187,787
-------- -------- --------
-------- -------- --------
</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,
----------------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate 34.00% 34.00% 34.00%
Increases (decrease):
California franchise tax, net of Federal
income tax benefit 6.00% 5.50% 5.70%
Dividends -3.50% -5.40% -2.70%
Other 3.71% 4.40% -3.70%
-------- -------- --------
40.21% 38.50% 33.30%
-------- -------- --------
-------- -------- --------
</TABLE>
-30-
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------
1999 1998
-------- -------
<S> <C> <C>
The principal components of deferred tax assets were:
Allowance for Doubtful Accounts $ 2,165 $ 2,165
Inventory Uniform Capitalization 14,210 11,841
Accumulated Amortization 14,286 9,173
Accumulated Depreciation 2,824 1,094
-------- -------
Total $33,485 $24,273
-------- -------
-------- -------
The principal components of deferred tax liability were:
Accumulated Depreciation $ - $ 684
Investment in Affiliates 14,695 14,695
-------- -------
Total $14,695 $15,379
-------- -------
-------- -------
</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 $43,861 in
1999, $36,000 in 1998 and $102,250 in 1997.
NOTE M - SALES INFORMATION AND MAJOR CUSTOMERS
Net sales to the United States government were $1,190,819 in 1999, $490,896
in 1998 and $408,344 in 1997. These sales were comprised principally of
sealants. Another customer accounted for more than 10% during 1999. The sales
to this company were $625,879 in 1999, $653,676 in 1998 and $184,645 in 1997.
These sales were comprised principally of coatings and sealants. No other
single customer accounted for 10% or more of sales during the year.
-31-
<PAGE>
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
NOTE M - SALES INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
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,
------------------------------------------------------
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Export sales $ 177,808 $ 335,910 $ 372,209
Royalty income $ 4,462 $ 10,399 $ 13,484
</TABLE>
NOTE N - RELATED PARTIES
Altius Investment Corporation owns approximately 26% of the Company's
outstanding common shares. Two of the six 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 held 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>
FLAMEMASTER CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance Other
Beginning Charged/(Credited) to Accounts Balance
Period Costs and Expenses** Describe Additions *** Ending Period
---------- --------------------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $(5,000) $5,000 $ - $(5,000) $(5,000)
Allowance for net unrealized
loss on marketable equity
securities - current - - - - -
Allowance for net unrealized
loss on marketable equity
securities - noncurrent - - - - -
----------------------------------------------------------------------------------
Total $(5,000) $5,000 $ - $(5,000) $(5,000)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Year ended September 30, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $(5,000) $ - $ - $ - $(5,000)
Allowance for net unrealized
loss on marketable equity
securities - current - - - - -
Allowance for net unrealized
loss on marketable equity
securities - noncurrent - - - - -
----------------------------------------------------------------------------------
Total $(5,000) $ - $ - $ - $(5,000)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Year ended September 30, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $(5,000) $ - $ - $ - $(5,000)
Allowance for net unrealized
loss on marketable equity
securities - current - - - - -
Allowance for net unrealized
loss on marketable equity
securities - noncurrent - - - - -
----------------------------------------------------------------------------------
Total $(5,000) $ - $ - $ - $(5,000)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
** Credited to accounts receivable to write-off bad debt
*** Charged to bad debt expense as a reserve
-33-
<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 7,1999
----------------------------------------
/s/ Barbara E. Waite
- ---------------------------------------------
Barbara E. Waite,
Treasurer and Assistant Secretary
Date: December 7, 1999
----------------------------------------
/s/ Donna Mazin
- ---------------------------------------------
Donna Mazin,
Director
Date: December 7,1999
----------------------------------------
/s/ Sion Mazin
- ---------------------------------------------
Sion Mazin,
Director
Date: December 7, 1999
----------------------------------------
-34-
<PAGE>
FLAMEMASTERCORPORATION
EARNINGS PER SHARE CALCULATIONS
SEPTEMBER 30, 1999
EXHIBIT 11.1
<TABLE>
<S> <C> <C>
BASIC
Income from Operations $876,396
Preferred Dividends -
--------
Income Available To Common Shareholders $876,396
--------
WEIGHTED AVERAGE SHARES OUTSTANDING
Common Stock - Average Outstanding 1,636,343
Common Stock Options -
---------
Weighted Average Shares Outstanding 1,636,343
---------
BASIC EARNINGS PER SHARE $ 0.54
--------
--------
DILUTED
Income from Continuing Operations $876,396
Interest from Convertible Notes 26,399
--------
Diluted Income $902,795
--------
NET WEIGHTED SHARES OUTSTANDING
Common Stock - Average Outstanding 1,636,343
Convertible Notes 116,387
---------
Net Weighted Shares Outstanding 1,752,730
---------
DILUTED EARNINGS PER SHARE $ 0.52
--------
--------
</TABLE>
<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-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 1,913,201
<SECURITIES> 2,449,981
<RECEIVABLES> 496,776
<ALLOWANCES> 0
<INVENTORY> 873,504
<CURRENT-ASSETS> 5,849,532
<PP&E> 889,432
<DEPRECIATION> 868,121
<TOTAL-ASSETS> 5,958,410
<CURRENT-LIABILITIES> 131,040
<BONDS> 376,656
0
0
<COMMON> 16,269
<OTHER-SE> 5,434,445
<TOTAL-LIABILITY-AND-EQUITY> 5,450,714
<SALES> 4,298,137
<TOTAL-REVENUES> 4,679,695
<CGS> 1,973,444
<TOTAL-COSTS> 3,213,869
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,465,826
<INCOME-TAX> 589,430
<INCOME-CONTINUING> 876,396
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 876,396
<EPS-BASIC> .54
<EPS-DILUTED> .52
</TABLE>
