<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, 2000 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 December
18, 2000 was $4,200,869.
As of September 30, 2000, there were 1,595,757 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
PART I PAGE
Item 1 Business 3
Item 2 Properties 7
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 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
-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:
Less than 0.001% 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 expired in November of 1999. Royalty income decreased from $4,462
in 1999 to $813 in 2000.
-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 $36,655 for the fiscal
year ended 2000.
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 $3,466,322, $3,899,481 and $3,246,210 for the
fiscal years ended September 30, 2000, 1999 and 1998, respectively. Sales of
coatings were $350,870, $395,796 and $523,017 for the fiscal years ended
September 30, 2000, 1999 and 1998, 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 $7,211,653 of working capital, including
approximately $6,353,486 of cash and current portfolio of marketable securities.
The Company believes that its working capital is sufficient to finance its
operations for the 2001 fiscal year.
PRINCIPAL CUSTOMERS:
During the fiscal year ended September 30, 2000, an agency (General Services
Administration) of the United States Government accounted for $659,750 (17.26%)
of sales as compared to $1,190,819 (27.71%) in 1999. There were two other major
customers in 2000. Sales to one customer were $840,878 or (22%) in 2000 and
$625,879 or (14.56%) in 1999. Sales to one other company were $451,301 or
(11.81%) in 2000. No other single customer accounted for 10% or more of sales.
BACKLOGS:
Backlog of orders at September 30, 2000 was $531,985 as compared to $529,236 in
1999.
-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, 2000 were $270,134. In fiscal years ended
September 30, 1999 and September 30, 1998, laboratory costs were $270,507 and
$246,442, respectively. Flamemaster received no revenues to offset laboratory
costs in 2000, 1999 or 1998.
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, 2000 Registrant employed 25 persons as compared to 28
persons in the prior year.
EXPORT SALES:
Export sales totaled $171,435, $177,808 and $335,910 in 2000, 1999, and 1998,
respectively.
ITEM 2. PROPERTIES
Registrant occupies approximately 28,000 square feet of office and manufacturing
space located at 11120 Sherman Way, Sun Valley, California 91352 under terms of
a lease expiring in September 2001.
Registrant believes its facilities are adequate for present and anticipated
operations.
ITEM 3. LEGAL PROCEEDINGS
In February 1994 a suit was filed against the Company for an environmental claim
related to property 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, 2000 and 1999.
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 2000 and 1999.
<TABLE>
<CAPTION>
Low Bid High Bid
-------------------------------------
<S> <C> <C>
October-December 1999 $5.63 $5.85
January-March 2000 $7.96 $8.74
April-June 2000 $8.45 $9.15
July-September 2000 $6.53 $6.74
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
</TABLE>
The stock quote as of December 18, 2000 was $ 5.22 bid and $ 5.50 asking price.
As of December 18, 2000, there were approximately 1,000 beneficial holders of
Registrant's common stock.
The common stock dividend was increased on January 6, 2000 from $.03 to $.032
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,
2000 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,
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Sales $3,821,560 $4,298,137 $3,775,966 $3,392,955 $3,248,641
Income from Continuing
Operations 1,190,722 876,396 523,308 375,402 393,710
Income from Continuing
Operations per share,
Basic 0.74 0.54 0.32 0.21 0.23
Income from Continuing
Operations per Common
share, Diluted 0.71 0.52 *** *** 0.23
Cash Dividends Declared
per Common share 0.126 0.12 0.12 0.12 0.10
Total Assets 8,112,648 5,958,410 5,285,098 4,951,385 4,900,498
Working Capital 7,211,653 5,718,492 4,977,648 4,603,527 3,449,987
Shareholders' Equity 6,952,870 5,450,714 4,733,440 4,761,323 4,598,726
</TABLE>
*** Diluted earnings per share for 1997 and 1998 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 2000:
FINANCIAL CONDITION AND LIQUIDITY:
The Company's financial condition is strong. Current assets were $7,971,234
compared to current liabilities of $759,581 at September 30, 2000 for a current
ratio of 10.5 to 1. Working capital increased by $1,493,161 to $7,211,653
compared to $5,718,492 at September 30, l999.
Cash and cash equivalents, and marketable securities increased by $1,990,304 to
$6,353,486.
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 $538,466 at September 30, 2000 from $496,776 in
the previous year.
Sales of aircraft sealants decreased to $3,466,322 ( 90.70% of product sales)
from $3,899,481 (90.72% of product sales) in the prior year and sales of
Flamemastic (fire-retardant coating) and Dyna-Therm (aerospace coatings)
decreased to $350,870 (9.18% of product sales) of sales from $395,796 (9.21% of
product sales) Three customers each accounted for more than 10% of sales. These
three customers accounted for a total of 51.1%. The U.S. Government accounted
for 17.26% of sales in fiscal 2000 compared to 27.71% in the year earlier.
Royalty income for fiscal 1999 was $813, down from $4,462 in the previous year.
Royalty income is not a significant factor affecting the Company's earnings or
revenues.
The Company believes that liquidity and working capital are adequate to fund the
Company's operations and capital requirements for the 2001 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, 2000 was $531,985 up from $529,236 in the
previous year. This reflects the stability of the Company's operations.
Future income from capital gains on investments cannot be predicted and should
not be expected to remain at 2000 levels.
The common stock dividend was increased on January 6, 2000 from $.03 to $.032
per quarter and remained constant throughout the year. Dividends are expected to
remain constant in the near future.
FISCAL 2000 VS. 1999:
Sales of products for the fiscal year ended September 30, 2000 were $3,821,560 a
decrease of $476,577 or 11.1% over the prior fiscal year. Sales of Flamemastic
(fire retardant coatings) and Dyna-Therm (aerospace coatings) decreased to 9.18%
of sales or $350,870 from 9.21% of sales or $395,796. Sales of aircraft sealants
decreased as a result of decline in demand of aerospace products. Sales of Chem
Seal (sealant) products decreased to $3,466,322 from $3,899,481 in the prior
year, mostly as a result of decreased U.S. Military activities in Europe. Three
customers accounted for a total of 51.1% of sales. The U.S. Government accounted
for 17.3% of sales, compared to the year earlier level of 27.7%. The company's
largest customer was a distributor accounted for 22% of sales. The Company's
third largest customer accounted for 11.8% of sales.
Net investment income of $1,320,217 sparked the Company's rise in earnings. This
income was comprised of net realized capital gains of $835,960, option income of
$268,836, dividend income of $125,560, and interest income of $89,861. This
income represents an increase of 272%, or $965,202 over 1999.
Royalty income decreased to $813 from $4,462 in the previous year.
-11-
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
FISCAL 2000 VS. 1999 (CONTINUED):
Costs of products sold in fiscal 2000 were $1,944,114 compared to $1,973,444 in
the previous year. These amounts represent 51% and 46% of the sales in 2000 and
1999, respectively. Increase in cost of products as a percent of sales is due to
the decreased sales of higher profit margin items of desired aircraft sealant
products.
Selling, general and administrative expenses increased to $891,078 from $853,032
while gross laboratory costs decreased to $270,134 from $270,507.
The increase in selling, general and administrative expenses was due to
increases in personnel expenses, travel and advertising and the decrease in
laboratory costs was not significant.
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 2000, this royalty
amounted to $36,655.
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 $395,796 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.
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.
-12-
<PAGE>
THE FLAMEMASTER CORPORATION
PART II
FISCAL 1999 VS. 1998 (CONTINUED)
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.
IMPACT OF INFLATION AND CHANGING PRICES:
Raw material costs and wages remained steady in 2000, as average selling prices
also remained constant. No significant changes are anticipated for 2001.
ITEM 7A. QUANITIATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is not subject to any significant market risks such as fluctuations
in foreign currencies or interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in the text on pages 16
through 29.
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 27% 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
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
2000, 1999 and 1998 financial statements.
- Balance Sheets, September 30, 2000 and 1999.
- Statements of Income for the years ended September 30, 2000,
1999, and 1998.
- Statements of Shareholders' Equity for the years ended September
30, 2000, 1999, and 1998.
- 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.
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 28, 2000
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, 2000 and 1999, and the related statements of income,
shareholders' equity, and cash flows for the years ended September 30, 2000,
1999, and 1998. 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, 2000, and 1999, and the results of
their operations and their cash flows for the years ended September 30, 2000,
1999, and 1998, in conformity with generally accepted accounting principles.
Beckman Kirkland & Whitney
Agoura Hills, California
-16-
<PAGE>
THE FLAMEMASTER CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
September 30,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,399,141 $ 1,913,201
Marketable Securities (Note C) 3,954,345 2,449,981
Accounts Receivable, less Allowance
For Doubtful Accounts of $5,000 in 2000 and 1999 538,466 496,776
Inventories (Note D) 925,771 873,504
Settlement Receivable (Note I)
- -
Prepaid Expenses and Other Assets 30,233 36,298
Deferred Income Taxes (Note K) 46,366 33,485
Other Investments 76,912 46,287
----------- -----------
TOTAL CURRENT ASSETS 7,971,234 5,849,532
----------- -----------
EQUIPMENT AND IMPROVEMENTS, at cost
Machinery and Equipment 599,683 593,122
Furniture and Fixtures 125,140 116,620
Laboratory Equipment 70,234 60,505
Leasehold Improvements 119,185 119,185
Transportation Equipment 20,036 -
----------- -----------
934,278 889,432
Less Accumulated Depreciation (863,751) (868,121)
----------- -----------
70,527 21,311
----------- -----------
PRC LICENSE AGREEMENTS, net of
Accumulated Amortization of
$101,470 in 2000 and $84,790 in 1999 (Note F) 70,887 87,567
----------- -----------
TOTAL ASSETS $ 8,112,648 $ 5,958,410
=========== ===========
</TABLE>
-17-
<PAGE>
THE FLAMEMASTER CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
September 30,
2000 1999
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 85,256 $ 85,880
Accrued Expenses 8,736 8,203
Income Taxes Payable
27,205 -
Deferred Tax Liability (Note K) 624,217 14,695
Deferred Credits (Notes A and E) 14,167 22,262
----------- -----------
TOTAL CURRENT LIABILITIES 759,581 131,040
----------- -----------
LONG-TERM LIABILITIES:
Notes Payable (Note O) 400,197 376,656
----------- -----------
TOTAL LIABILITIES 1,159,778 507,696
----------- -----------
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 2000 and 1999. - -
Common Stock, par value $.01 per share, authorized
6,000,000 shares; issued and outstanding 1,595,757 shares
in 2000 and 1,626,935 shares in 1999 15,958 16,269
Additional Paid-In Capital 3,662,137 3,733,846
Retained Earnings 2,441,387 1,562,002
Allowance For Marketable Securities 833,388 138,597
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 6,952,870 5,450,714
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,112,648 $ 5,958,410
=========== ===========
</TABLE>
-18-
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Years Ended September 30,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES (Note M) $ 3,821,560 $ 4,298,137 $ 3,775,966
ROYALTIES 813 4,462 10,399
INTEREST AND OTHER INCOME 1,343,913 377,096 243,341
----------- ----------- -----------
5,166,286 4,679,695 4,029,706
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of Goods Sold 1,944,114 1,973,444 1,967,790
Selling and Administrative 891,078 853,032 873,693
Laboratory Costs 270,134 270,507 246,442
----------- ----------- -----------
Royalties, Interest and Other 123,671 116,886 90,322
----------- ----------- -----------
3,228,997 3,213,869 3,178,247
INCOME FROM OPERATIONS
BEFORE INCOME TAXES 1,937,289 1,465,826 851,459
PROVISION FOR INCOME TAXES 746,567 589,430 328,151
----------- ----------- -----------
NET INCOME 1,190,722 876,396 523,308
PREFERRED DIVIDENDS - - (8,295)
NET INCOME ATTRIBUTABLE TO COMMON
STOCK ----------- ----------- -----------
$ 1,190,722 $ 876,396 $ 515,013
=========== =========== ===========
----------- ----------- -----------
NET INCOME PER SHARE, BASIC (Note J) $ 0.74 $ 0.54 $ 0.32
=========== =========== ===========
----------- ----------- -----------
NET INCOME PER SHARE, DILUTED: $ 0.71 $ 0.52 $ -
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,611,045 1,636,343 1,632,941
WEIGHTED AVERAGE SHARES OUTSTANDING
DILUTED 1,726,867 1,752,165 N/A
</TABLE>
-19-
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended September 30,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
NET INCOME $ 1,190,722 $ 876,396 $ 523,308
CHANGE IN UNREALIZED GAINS /(LOSSES)
ON MARKETABLE SECURITIES 694,791 121,056 44,805
----------- ----------- -----------
COMPREHENSIVE INCOME $ 1,885,513 $ 997,452 $ 568,113
=========== =========== ===========
</TABLE>
-20-
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
PREFERRED STOCK COMMON STOCK ADDITIONAL GAIN/(LOSS) ON
--------------- ------------ PAID-IN RETAINED MARKETABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SECURITIES
------ ------ ------ ------ ------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1998 - $ - 1,645,015 $ 16,450 $ 3,775,397 $ 924,052 $ 17,541
REDEMPTION OF COMMON STOCK (18,080) (181) (41,551) (41,679)
CASH DIVIDENDS ON COMMON STOCK
AT $.03 PER SHARE (196,767)
UNREALIZED GAIN ON SECURITIES
121,056
NET INCOME 876,396
BALANCE SEPTEMBER 30, 1999 - $ - 1,626,935 $ 16,269 $ 3,733,846 $ 1,562,002 $ 138,597
------ -------- --------- --------- ------------ ------------- ---------
REDEMPTION OF COMMON STOCK (31,178) (311) (71,709) (107,594)
CASH DIVIDENDS ON COMMON STOCK
RANGING FROM $.03 TO $.032 PER SHARE (203,743)
UNREALIZED GAIN ON SECURITIES 694,791
NET INCOME 1,190,722
------ -------- --------- --------- ------------ ------------- ---------
BALANCE, SEPTEMBER 30, 2000 - $ - 1,595,757 $ 15,958 $ 3,662,137 $ 2,441,387 $ 833,388
====== ======== ========= ========= ============ ============= =========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
-------------
<S> <C>
BALANCE, OCTOBER 1, 1998 $ 4,733,440
REDEMPTION OF COMMON STOCK (83,411)
CASH DIVIDENDS ON COMMON STOCK
AT $.03 PER SHARE (196,767)
UNREALIZED GAIN ON SECURITIES
121,056
NET INCOME 876,396
BALANCE SEPTEMBER 30, 1999 $ 5,450,714
------------
REDEMPTION OF COMMON STOCK (179,614)
CASH DIVIDENDS ON COMMON STOCK
RANGING FROM $.03 TO $.032 PER SHARE (203,743)
UNREALIZED GAIN ON SECURITIES 694,791
NET INCOME 1,190,722
------------
BALANCE, SEPTEMBER 30, 2000 $ 6,952,870
============
</TABLE>
-21-
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
PREFERRED STOCK COMMON STOCK ADDITIONAL GAIN/(LOSS) ON
--------------- ------------ PAID-IN RETAINED MARKETABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SECURITIES
------ ------ ------ ------ ---------- -------- --------------
<S> <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)
REDEMPTION OF COMMON STOCK (11,568) (116) (18,125) (23,476)
REDEMPTION OF PREFERRED STOCK (7,050) (70) (35,180) (7,747)
CONVERSION OF PREFERRED STOCK INTO
NOTES PAYABLE (47,082) (471) (234,939) (141,246)
CONVERSION OF PREFERRED STOCK INTO
COMMON STOCK (14,118) (141) 34,898 349 (208)
COMMON SHARES ISSUED 40,375 404 16,357
CASH DIVIDENDS ON PREFERRED STOCK
AT $.56 PER SHARE (8,295)
CASH DIVIDENDS ON COMMON STOCK
AT $.03 PER SHARE (143,092)
20% STOCK DIVIDEND 274,898 2,749 1,509,196 (1,511,945)
UNREALIZED GAIN (LOSS) ON SECURITIES 44,805
NET INCOME 523,308
------ ------ --------- -------- ------------ ---------- ----------
BALANCE, SEPTEMBER 30, 1998 - $ - 1,645,015 $ 16,450 $ 3,775,397 $ 924,052 $ 17,541
====== ====== ========= ======== ============ ========== ==========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
-----------
<S> <C>
BALANCE, OCTOBER 1, 1997 $ 4,761,323
REDEMPTION OF COMMON STOCK (41,717)
REDEMPTION OF PREFERRED STOCK (42,997)
CONVERSION OF PREFERRED STOCK INTO
NOTES PAYABLE (376,656)
CONVERSION OF PREFERRED STOCK INTO
COMMON STOCK -
COMMON SHARES ISSUED 16,761
CASH DIVIDENDS ON PREFERRED STOCK
AT $.56 PER SHARE (8,295)
CASH DIVIDENDS ON COMMON STOCK
AT $.03 PER SHARE (143,092)
20% STOCK DIVIDEND
UNREALIZED GAIN (LOSS) ON SECURITIES 44,805
NET INCOME 523,308
----------
BALANCE, SEPTEMBER 30, 1998 $4,733,440
==========
</TABLE>
-22-
<PAGE>
THE FLAMEMASTER CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,190,722 $ 876,396 $ 523,308
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization 34,600 27,198 38,334
(Increase)decrease in Accounts Receivable (41,690) (13,070) (31,798)
(Increase)decrease in Inventories (52,267) (218,953) 5,738
(Increase)decrease in Income Taxes Receivable - - 63,347
(Increase)decrease in Settlement Receivable - 48,191 (48,191)
(Increase)decrease in Prepaid Expenses and Other Assets 3,107 (3,823) 4,511
(Increase)decrease in Deferred Income Tax Assets (12,881) (9,212) 25,159
(Increase)decrease in Other Investments (30,625) 150,003 (150,003)
Increase(decrease) in Accounts Payable (624) (9,727) 391
Increase(decrease) in Accrued Expenses 533 (1,530) 47
Increase(decrease) in Income Taxes Payable 30,163 (24,937) 24,937
Increase(decrease) in Deferred Income Tax Liabilities 1,204 (684) (42,291)
Increase(decrease) in Environmental Reserve - - (53,135)
Increase(decrease) in Deferred Credits and Income (8,356) (8,095) (7,084)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,114,147 812,768 351,998
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property, Plant and Equipment (67,136) (3,628) (12,986)
(Increase)decrease in investment securities, net (201,255) (20,108) (91,272)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (268,391) (23,736) (104,258)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of the Company's Common Stock (179,614) (83,411) (41,716)
Increase in notes payable 23,541 - -
Repurchase of the Company's Preferred Stock - - (42,998)
Stock Options exercised - - 16,761
Dividends paid (203,743) (196,767) (151,387)
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (359,816) (280,178) (219,340)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 485,940 508,854 28,400
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,913,201 1,404,347 1,375,947
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,399,141 $ 1,913,201 $ 1,404,347
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 26,366 $ 26,399 $ 21,690
=========== =========== ===========
Income taxes $ 728,000 $ 624,258 $ 257,000
=========== =========== ===========
</TABLE>
-23-
<PAGE>
FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES: The financial statements have been prepared in accordance with
generally accepted accounting principles and necessarily include amounts based
on estimates and assumptions by management. Actual results could differ from
those amounts.
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.
MARKETABLE SECURITIES: 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, 2000, 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:
Machinery, equipment, furniture and fixtures 2-10 years
Leasehold improvements Terms of leases
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.
-24-
<PAGE>
STOCK-BASED COMPENSATION: As Described in Note H, the Company has elected to
follow the accounting provisions of APB 25, Accounting for Stock Issued to
Employees, for stock options and to furnish the pro forma disclosures required
under SFAS No. 123, Accounting for Stock-Based Compensation.
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, 2000, the Company had approximately $118,922, $150,786, and
$350,161, 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, 2000 include
the following:
<TABLE>
<CAPTION>
Fair Value Cost
---------- ----------
<S> <C> <C>
U.S. Treasury bonds $ 477,355 $ 458,370
Other government obligations 40,378 42,567
Corporate debt securities 8,959 16,759
Mortgage-backed securities 1,491 1,880
Marketable equity securities 3,426,162 2,014,792
---------- ----------
$3,954,345 $2,534,368
========== ==========
</TABLE>
The contractual maturities of debt securities available for sale at September
30, 2000 as follows:
<TABLE>
<CAPTION>
Fair Value Cost
---------- ----------
<S> <C> <C>
Due within one year $ -- $ --
Due after one year thru five years 384,783 386,314
Due after five years thru ten years 117,295 104,348
Due after ten years 24,614 27,034
Not due at single maturity date 1,491 1,880
---------- ----------
$ 528,183 $ 519,576
========== ==========
</TABLE>
Gross unrealized holding gains and losses at September 30, 2000, were
$1,687,916, $267,939, respectively. Realized gains and losses from the sale of
securities for the year ended September 30, 2000 were $839,966 and $5,990
respectively. Gross proceeds from the sale of securities for the year ended
September 30, 2000 was $1,526,855.
-25-
<PAGE>
NOTE D - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Raw Materials $469,384 $429,320
Shipping Materials 105,767 51,992
Finished Goods 350,620 392,192
-------- --------
925,771 873,504
======== ========
</TABLE>
NOTE E - INVESTMENTS IN AFFILIATED COMPANIES
At the end of June 1997, Dynamastic, a wholly owned subsidiary, 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 until July 1997, when 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. At the time of the change in
ownership, the Company's undistributed earnings from PerfectData represented
$35,469 of the Company's retained earnings. 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 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. Royalties paid under this agreement were $36,655 in
2000, $59,112 in 1999 and $25,000 in 1998. 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 $185,328 in 2000, $180,273 in
1999, and $175,214 in 1998.
-26-
<PAGE>
NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of September 30, 2000, future minimum payments under this lease are:
<TABLE>
<S> <C>
2001 $ 188,698
Thereafter -
----------
Total minimimun lease payments $ 188,698
==========
</TABLE>
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.
In April 2000, the Company's Board of Directors approved a stock option plan
whereby directors and key personnel were granted options to purchase 35,000 of
the Company's common stock or receive $.10 for each option to which they would
otherwise be entitled. Employees and directors opted to receive 3,650 of the
options. These options carry an exercise price of $7.125 per share. The options
vest on December 31, 2000 have a five-year term expiring April 30, 2005. As of
September 30, 2000 no options have been exercised under this plan.
The Company applies APB 25 in accounting for its stock options. The option price
equals or exceeds the fair market value of the common shares on the date of the
grant and, accordingly, no compensation cost has been recognized under the
provisions of APB 25 for stock options. Compensation cost is measured at the
grant date based on the value of the award and is recognized over the vesting
period.
Had compensation cost for the Company's stock option plan been determined under
SFAS 123, based on the fair market value at the grant dates, the Company's
proforma net earnings and net earnings per share would have been reflected as
follows at September 30,:
<TABLE>
<CAPTION>
2000
-------------
<S> <C>
Net earnings
As reported $ 1,190,722
Pro forma $ 1,174,036
Net earnings per share
As reported $ 0.74
Pro forma $ 0.73
</TABLE>
The fair value of each option is estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: Dividend yield 0%, expected volatility of 225%, risk free interest
rate of 6% and term of 5 years.
27
<PAGE>
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 1998. 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.
NOTE J - INCOME PER COMMON SHARE
Basic income per share of common stock is based on the weighted average number
of shares outstanding. Outstanding options were considered in the basic and
diluted earnings per share calculations using the treasury stock method. In
1998, preferred stock was exchanged for convertible notes. A conversion ratio of
2.46:1 was assumed in calculating earnings per share for these notes. Diluted
earnings per share for 1998 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
of the component
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal $ 590,211 $ 467,154 $ 273,875
State and foreign 168,033 132,172 71,408
---------------- ---------------- ----------------
758,244 599,326 345,283
Deferred:
Net change in deferred tax asset (12,881) (9,212) 25,159
Net change in deferred tax liability 1,204 (684) (42,291)
---------------- ---------------- ----------------
$ 746,567 $ 589,430 $ 328,151
================ ================ ================
</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,
------------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Federal statutory rate 34.00% 34.00% 34.00%
Increases (decrease):
California franchise tax, net of
Federal income tax benefit 5.64% 6.00% 5.50%
Dividends -4.54% -3.50% -5.40%
Other 3.43% 3.71% 4.40%
---------------- ---------------- ----------------
38.53% 40.21% 38.50%
================ ================ ================
</TABLE>
-28-
<PAGE>
NOTE L - PROFIT-SHARING PLAN
The Company contributes to a profit-sharing plan for the benefit of employees
meeting certain eligibility requirements and electing participation in the plan.
Contributions are made from net profits as determined by the Board of Directors.
Profit-sharing expense, which equals contributions, was $41,557 in 2000, $43,861
in 1999 and $36,000 in 1998.
NOTE M - SALES INFORMATION AND MAJOR CUSTOMERS
Net sales to the United States government were $659,750 in 2000, $1,190,819 in
1999, and $490,896 in 1998. These sales were comprised principally of sealants.
Two other customers accounted for more than 10% during 2000. The sales to one
company were $840,878 in 2000, $625,879 in 1999, and $653,676 in 1998. Sales to
one other company were $451,301 in 2000, $411,579 in 1999 and $367,316 in 1998.
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,
------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Export sales $171,435 $ 177,808 $335,910
Royalty income $ 813 $ 4,462 $ 10,399
</TABLE>
NOTE N - RELATED PARTIES
Altius Investment Corporation owns approximately 27% 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.
At September 30, 2000 the notes are valued at $8.50 per share or $400,197.
-29-
<PAGE>
FLAMEMASTER CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance Charged/(Credited) to Other Additions *** Balance
Beginning Costs and Expenses** Accounts Ending
Period Describe Period
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 2000
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, 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) B $ - $ - $ - $(5,000)
=====================================================================================
</TABLE>
** Credited to accounts receivable to write-off bad debt
*** Charged to bad debt expense as a reserve
-30-
<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: 12/20/2000
-----------------------------------
/s/ LEON GUTOWICZ
-------------------------------------
Leon Gutowicz,
Director
Date: 12/20/2000
-----------------------------------
/s/ DONNA MAZIN
---------------------------------------------
Donna Mazin,
Director
Date: 12/20/2000
-----------------------------------
/s/ MARY KAY EASON
-------------------------------------
Mary Kay Eason,
Controller & Assistant Secretary
Date: 12/20/2000
-----------------------------------
-31-
