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FORM 10-KSB
-----------
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
/ X / ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
OR
/ / TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-13746
FIREPLACE MANUFACTURERS, INC.
(Exact Name of Registrant as specified in its charter)
California 95-3244946
- ---------------------------------------------- -------------------------
(State or other jurisdiction of Incorporation) (I.R.S. Employer I.D. No.)
2701 South Harbor Boulevard, Santa Ana, California 92704
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 549-7782
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
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NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
(Title of Class)
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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 than 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 filer's pursuant to Item 405
of Regulation S-KSB 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-KSB or any amendment to
this Form 10-KSB. X
---------------
The registrants operating revenues for its most recent fiscal year were
$28,729,000.
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
Voting stock at the average bid price on June 7, 1996 was $2,896,000 and at the
average ask price on June 7, 1996 was $3,765,000.
The number of shares outstanding of each of the Registrant's classes of Common
Stock as of June 1, 1996, was as follows:
Common Stock, $0.01 Par Value per share - 3,401,450
Documents incorporated by reference. None
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PART I
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ITEM 1 DESCRIPTION OF BUSINESS
Fireplace Manufacturers, Inc. ("FMI" or "the Company") was incorporated in 1976
and is engaged in the manufacture and sale of factory-built metal fireplace
systems and gas fireplace appliances.
METAL FIREPLACE SYSTEMS
Fireplace Manufacturers, Inc., designs, manufacturers, and sells factory-built,
energy-efficient metal fireplace systems. The Company currently produces wood-
burning metal fireplaces and decorative gas appliances with refractory-lined
fireboxes and related chimney flues. Optional features of the fireplaces
include the ability to accept natural gas, glass doors, decorative facings,
outside air intakes, and electrical fans. The fireplaces are used in single-
family homes, condominiums, apartments, other multiple-family dwellings, and in
mobile homes. They can be used as part of a wall, in a corner, or as a room
divider. Fireplaces are sold mainly to homebuilders who install the system in
new construction, and to the "Do-It-Yourself" (DIY) homecenters and retail
distributors.
Each fireplace consists of an inner sheet metal firebox, which is lined with an
insulating brick-textured refractory material, and an outer sheet metal shell
separated from the heat-bearing box. Chimney components, which are attached to
the firebox in accordance to the height of the dwelling, are of double-wall
construction so that the outer shell may be installed within two inches (2") of
the heat chamber between the firebox and the outer shell. The firebox has
specifically designed vents, which permits convection flow to recirculate warm
air heated in that chamber into the room where the fireplace is installed.
The Company currently produces forty eight models of fireplaces, varying in size
and shape with slightly different grillwork styles. The fireplace units are
generally sold to distributors at competitive prices. The distributors sell the
fireplaces to builders at prices from $345 to $3,200. Twenty-five of these
fireplaces are gas-only models.
CUSTOMERS AND MARKETING
The Company has developed three distribution markets for its products:
HOMEBUILDERS
This market is the largest and has been a focus for FMI throughout its 19 year
history. FMI sells directly to fireplace distributors or "jobbers" who sell,
service, and install the fireplaces. National home-building is growing at a
conservative rate.
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RETAIL
The DIY market is growing rapidly; FMI has been distributing through this
channel since 1989. More and more custom homebuilders, small builders, and
remodelers are purchasing their building materials from discount centers. FMI
has turned its focus toward the two-step distribution process in marketing to
fireplace centers.
MOBILE HOMES AND MANUFACTURED HOUSING
Growth in this market has been at approximately 15% annually, and the
competition is substantial. FMI sells exclusively to the Evcon Group, a
national distributor of furnaces and fireplaces to the mobile home industry.
Eighteen percent of the mobile homes manufactured each year have a fireplace.
The Company has an exclusive agreement with the Evcon Group to provide
fireplaces for the mobile home industry. This agreement provides for Evcon
Group to be the exclusive distributor to the mobile home industry for the
Company's products. This agreement is renewable annually.
The Company also sells into manufactured housing in limited international
markets: Japan, Canada, Norway, Holland and Saudi Arabia. Total sales to all
foreign markets are less than 10%.
The sales and marketing functions are currently managed by a new National
Director of Marketing. FMI employs four regional sales managers. Each manager
covers a multi-state region, selling through independent representative
agencies. The Company's regional sales managers are based in Brandon, Florida;
Campbell, California; Poway, California and Butler, Pennsylvania. Homecenter
sales and service are managed by the regional sales person in that area.
For the fiscal year ended March 31, 1996, sales to the Evcon Group accounted for
23% of FMI sales. Sales to Quality Insulation accounted for 11% of FMI sales.
Except for these customers, no other customer accounted for more than 10 percent
of metal fireplace sales. The total number of customers is 225.
The loss of the relationship of any major distributor could have an adverse
effect on FMI, at least until FMI could establish a new distributor for the
area.
As of March 31, 1996, the backlog of firm orders for the metal fireplace systems
was not significant. Backlogs typically only represented approximately one or
two weeks of sales since products are usually shipped within a few days of an
order.
TRADEMARKS AND TRADENAMES
FMI's fireplaces are marketed under the name "FMI Fireplace Systems".
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FABRICATION OF FIREPLACES
The fireplaces are produced at FMI's plant in Santa Ana, California. Metal
forming presses and related equipment are utilized to cut, bend, weld, and rivet
a fireplace's component parts. After assembly, the fireboxes are lined with
refractory material and painted. As of March 31, 1996, FMI was producing over
450 fireplaces per day.
FMI's fireplaces go through approximately seven inspections before shipment. In
addition, prototype models and samples are periodically tested by independent
testing laboratories. FMI also has a fully equipped sealed room testing
facility for assessing various characteristics of the component parts of its
metal fireplace systems. The line of fireplaces manufactured by the Company has
been successfully listed to U.S., Candian and European Standards by independent
agencies which include INCHSCAPE, American Gas Association and Underwriters
Laboratories.
SUPPLIES AND RAW MATERIALS
The major materials used in the production of the fireplaces are galvanized,
aluminized and stainless steel, refractory concrete, and fiberglass insulation.
These materials are generally available at competitive prices and are purchased
from more than one supplier.
BUILDING CODES
The metal fireplaces are subject to the requirements of local building codes and
have been listed by Underwriters Laboratories. FMI's fireplace systems meet the
requirements of the Veterans Administration and Federal Housing Administration
programs, and certain models of FMI fireplaces are approved for mobile homes.
Pending legislation in several states and major cities for clean air to meet
Environmental Protection Agency requirements has resulted in FMI developing
clean-burning appliances, the emphasis being on gas-burning appliances. While
continuing to manufacture wood burning fireplaces, FMI has added three gas-
burning appliances to the product line, making a total of twenty-five gas-
burning models in their line. Also added to the product line are decorative gas
log sets to retro-fit into existing fireplaces in communities that have
restricted the burning of wood.
UNVENTED FIREPLACES
FMI has developed a line of unvented fireplaces and gas log heaters that have
grown in popularity over the last two (2) years. The Company expects the
unvented products to gain popularity over the near future, although it lacks
approval in various states.
DISTRIBUTION CENTERS
To remain competitive in the Midwest and East coast, FMI has established a
distribution center in Atlanta, Georgia. This also allows FMI to better service
the FMI distributor with their product needs quickly.
5
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COMPETITION
There are eight well-established US companies manufacturing metal fireplaces,
which are sold on a nationwide basis through a number of distributors and
dealers. Since these competitors are primarily privately-held companies or
divisions of larger companies, precise financial information as to their
competitive impact on FMI is not available. FMI competes, based on lower cost
of its units, design innovations, and ease of installation of its fireplace
systems.
FMI also competes with masons who hand build fireplaces and with precast
concrete fireplaces. Hand built masonry fireplaces take longer to install and
require on-site preparation of the building. Metal fireplaces require no on-
site preparation. In addition, precast masonry fireplaces weigh between 6,000
and 24,000 pounds compared to 200 to 480 pounds for a metal fireplace; and they
are also more expensive to build and ship and can effectively be shipped only
within approximately a 100-mile radius.
EMPLOYEES
As of March 31, 1996, FMI employed 214 persons, including approximately 179 in
fabrication and a staff of 35 sales, office, engineering, and administrative
personnel. None of these employees are covered by collective bargaining
agreements, and FMI considers its employee relations to be satisfactory.
ITEM 2 DESCRIPTION OF PROPERTIES
FMI leases a facility in Santa Ana, California, comprising approximately 85,500
square feet. Effective May 1, 1994, FMI entered into a five-year lease for such
facility with monthly rentals of $23,000.
ITEM 3 LEGAL PROCEEDINGS
Two claims have been asserted against the Company one of which has resulted in
legal proceedings against the Company. The two claims have been made by two
separate companies which claim infringement of separate patents which each
company holds. The Company had an independent patent attorney review the
patents in question during 1995 and it was the opinion of that attorney that the
Company is not infringing on the patent. The Company's independent counsel is
unable to express an opinion as to the probable outcome of the action and
therefore no estimate can be made of a range of amount of loss that is
reasonably possible.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
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ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The following table shows the high and low bid prices for the Common Stock in
the over-the-counter market for the fiscal quarters indicated. The quotations
were obtained from the National Quotation Bureau Incorporated and represent
prices in the over-the-counter market between dealers in securities. They do
not include retail mark-ups, mark-downs, or commissions, and do not necessarily
represent actual transactions.
Fiscal Quarter Common Stock Bid Prices
Ended High Low
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1994 March 31 3/16 3/16
- ---- June 30 3/16 3/16
September 30 3/8 5/16
December 31 9/32 3/16
1995 March 31 11/32 5/32
- ---- June 30 3/8 1/8
September 30 5/16 1/8
December 31 1/2 3/16
1996 March 31 25/32 13/32
- ----
In view of the limited market for and the sporadic trading of the Common Stock,
the above prices are not considered a reliable indicator of fair market value.
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS:
Approximate Number of
Record Holders
Title of Class as of March 31, 1996
-------------- ---------------------
Common Stock, $0.01 932 (1)
par value
(1) Included in number of record holders are shares held in "nominee" or
"street names".
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DIVIDENDS
The Company has not paid cash dividends on its common stock and does not intend
to pay cash dividends in the foreseeable future. It is the present policy of
the Board of Directors to retain all earnings, if any, to provide funds for the
growth of the Company. Payment of cash dividends in the future will rest within
the discretion of the Board of Directors and will depend, among other things,
upon the Company's future earnings, capital requirements, and financial
condition. Currently, the Company's loan agreement prohibits the payment of
dividends. See Note 4 of the Notes to Financial Statements. In addition,
California state law may prevent the Company from declaring any dividends if it
does not have retained earnings or meet certain ratio tests after the payment
of such dividends.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
The Company has lines of credit with a bank for an aggregate $3,500,000 with an
interest rate of .75 percent above prime, payable monthly. At March 31, 1996,
$2,263,000 was owed under one of the lines of credit compared to $1,543,000 at
March 31, 1995. The net availability remaining under this revolving line of
credit is $563,000 at March 31, 1996. The line of credit agreements contain
restrictive covenants which require maintenance of working capital and other
financial ratios, prohibit the payment of dividends and have certain other
limitations. The Company was in compliance with all but two restrictive
covenants at March 31, 1996. The Company received a waiver of non-compliance
from their bank. The lines of credit are subject to renewal on August 1, 1996.
In the event that the current lines of credit are not renewed, management
believes that other short-term debt financing would be available.
The Company has achieved profitable operations for the past five years, however,
management believes that the existing debt financing will continue to be
required throughout fiscal 1997 to fund operations. Although the Company
expects profitable operating results for fiscal 1997 there can be no assurances
that such results will be obtained.
Accounts receivable (before allowances for doubtful accounts) at March 31, 1996
were $3,512,000, compared to $2,636,000 at March 31, 1995. This increase is due
to increased sales volumes during fiscal 1996. The allowances for doubtful
accounts increased $64,000 from $175,000 to $239,000 at March 31, 1996.
The current ratio has decreased slightly during fiscal year 1996. At March 31,
1996 the current ratio was 1.12:1 as compared to 1.13:1 at March 31, 1995. The
Company believes its current efforts to control costs and spending along with
consistent management of its accounts payable will help to maintain the current
ratio.
8
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Inventories decreased $767,000 to $2,735,000 at March 31, 1996 from $3,502,000
at March 31, 1995. The steel inventory decreased by $465,000 due to a change in
the company's purchasing approach that allows a shorter lead time and smaller
quantity purchased per transaction. During 1995 the Company identified a safety
issue with one of the new private label vent free log sets. In an effort to be
proactive management made the decision to recall, rework and resell the units in
question. The units were part of inventory at March 31, 1995 and the Company
has resold a portion of these units in fiscal year 1996.
The Company has made capital additions of $479,000 and $1,024,000 for 1996 and
1995 respectively. This decrease is related to a number of large purchases
during 1995 which were not repeated in 1996. The items purchased in 1995 were:
a powder coat paint system, a large capacity steel decoiler, new equipment to
manufacture fiber logs in house, equipment for an in house test facility and
finally office communication and computer systems were upgraded. Purchases of
fixed assets are anticipated to increase for the fiscal year ended March 31,
1997 although no specific budget has been established at this time. In 1996
additions were partially financed by equipment loans from financial institutions
and the Company anticipates similar financing to be available in 1997.
The Company's Board of Directors has approved the repurchase of up to 500,000
shares of common stock from time to time. During 1996 87,050 shares were
repurchased for $50,000. No shares were repurchased during 1995. The Board of
Directors approved this action due to their belief that the shares are under
valued. Subsequent to year end 74,000 additionally shares have been
repurchased. The Company intends to continue to repurchase stock from time to
time in the future.
RESULTS OF OPERATIONS
Sales for the fiscal year 1996 increased 7.6% from fiscal year 1995. The
increase in sales is primarily due to a higher volume of unit sales offset by a
2% decrease in the average unit selling price. The increase in units can be
attributed to new product introduction and better market penetration. The 2%
decrease in the average unit selling price is due to higher and more frequent
discounts offered to stimulate sales. The Company intends to limit the use of
pricing discounts in the future and instituted a price increase January 1, 1996.
Based on present market conditions, the Company believes there will be a
continued similar increase in sales for fiscal year 1997 although there can be
no assurances in that regard.
Cost of sales for fiscal year 1996 were 83.2% of sales as compared with 78.5% of
sales in fiscal year 1995. This increase is due to several factors including the
decrease in average selling price per fireplace by 2%, sales of low margin
reworked product, and higher materials costs which were not passed on to
customers. The Company has instituted a price increase as of January 1, 1996
and is decreasing pricing discounts that were in affect during 1996. Management
is reviewing price and costing structures with a goal of improving this
percentage in fiscal year 1997 although there can be no assurances in this
regard.
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Selling, general and administrative expenses were 15.5% of sales in fiscal 1996
compared to 17.9% in fiscal 1995. The Company's selling expense has decreased
mainly due to increased cost cutting measures coupled with lower bonus expense
as a percent of sales. The Company analyzes all costs in these areas on an
individual basis for necessity and impact on the overall profitability of the
Company.
Interest expense increased slightly in 1996 by .1% as a percent of sales over
the fiscal year 1995 expense. This increase was due to increased average daily
borrowings.
The Company's 1996 net income as a percent of sales decreased 1.6% from 1995.
Management believes that the effects of the increased sales price per unit
coupled with expanding unit sales will allow the Company to remain profitable in
1997.
FORWARD LOOKING STATEMENTS
Statements regarding the Company's expectations as to demand for its products in
1997, the operating efficiencies from operation of the Fireplace business, and
revenue generation from existing or future contracts and certain other
information presented in this report constitute forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Although the Company believes that its expectations with respect are based on
reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. In addition to matters affecting the economy
and the Company's industry generally, factors which could cause actual results
to differ from expectations include the following:
- - Loss of one or more significant customers
- - Reduction in gross profit margins due to competitive pricing pressures
- - Changes in governmental regulation or failure to comply with existing
regulation
- - Changes in the cost or availability of purchased parts
- - Inability to obtain needed additional capital on terms acceptable to the
Company
- - Inability to reduce costs while maintaining customer service
- - Potential default under line of credit or other material contracts
ITEM 7 FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The Company's financial statements are attached herein.
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ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective December 14, 1994, Registrant dismissed Ernst & Young LLP as its
independent auditors. For Registrant's fiscal years ended March 31, 1994 and
1993, the reports of Ernst & Young LLP on the financial statements did not
contain an adverse opinion or a disclaimer of opinion, nor were they qualified
or modified as to an uncertainty, audit scope or accounting principles by Ernst
& Young LLP. During the two fiscal years ended March 31, 1994, and 1993, and in
the interim periods subsequent to March 31, 1994, there were not any
disagreements with Ernst & Young LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of Ernst & Young LLP, would have
caused it to make a reference to the subject matter of the disagreements in
connection with its report, nor were there any "reportable events" as defined in
Regulation S-B, Item 304, paragraph (a)(1)(v).
Registrant retained McGladrey & Pullen, LLP as its independent public
accountants on December 15, 1994. The change was approved by the Audit
Committee of the Board of Directors. During the two fiscal years ended March
31, 1994, and 1993 and in the interim periods subsequent to March 31, 1994,
Registrant has not consulted with McGladrey & Pullen, LLP on the application of
accounting principles to a specified transaction, or the type of audit opinion
that might be rendered on the Registrant's financial statements or any
disagreements (as defined in Item 304 (a)(1)(iv) of Regulation S-B) or a
reportable event (as defined above).
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PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
(Compliance with Section 16(a) of the Exchange Act)
The executive officers and directors of Fireplace Manufacturers, Inc., are as
follows:
NAME POSITION AGE
- ---- -------- ---
WILLARD V. HARRIS, JR. Chairman of the Board of Directors 62
WILLARD P. HARRIS President, Chief Executive Officer, 40
and Director
JOHN D. HORNSBY Chief Operating Officer, Secretary, 42
and Director
STEVE CROPP Vice President of Engineering 35
JANE ANN IOVINE Vice President of Finance 34
JERRY LOZANO Vice President of Manufacturing 35
WILLARD V. HARRIS, JR., has been Chairman of the Board of Directors since March
1978. He was also President and Chief Executive Officer of the Company between
March 1978 and February 1983. Mr. Harris is a trustee of the University of
LaVerne and Whittier College.
WILLARD P. HARRIS has been President, Chief Executive Officer, and Director of
the Company since February 1983. From June 1980 to February 1983, he held
positions from Regional Sales Manager to General Sales Manager of the Company.
Willard P. Harris is the son of Willard V. Harris, Jr.
JOHN D. HORNSBY was named Chief Operating Officer in April 1987, and has been
Secretary-Director of the Company since February 1983. He joined the Company in
May 1978 as a manager trainee and became Operations Manager in 1979.
STEVE CROPP was named Vice President of Engineering in July 1994. He has held
technical positions in the gas appliance industry since March 1985.
JANE ANN IOVINE was named Vice President of Finance in July of 1995, she has
been with the Company since March of 1994. Ms. Iovine is a graduate of San
Diego State University and has been an accredited CPA since May of 1990.
JERRY LOZANO was named Vice President of Manufacturing in 1993, he started at
FMI as a trainee in 1983 and has served in various positions since that time.
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ITEM 10 EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the compensation of the
Chief Executive Officer of the Company and the two other most highly compensated
executive officers of the Company as of March 31, 1996 whose total salary and
bonus for the year ended March 31, 1996 exceeded $100,000 for services in all
capacities to the Company and its subsidiaries during such fiscal year.
SUMMARY COMPENSATION TABLE
Name and Principal Annual Compensation Other Annual
Position Year Salary Bonus (3) Compensation ($)(1)
Willard V. Harris, Jr. 1996 $112,000 $ 55,000 $
Chairman of the Board 1995 $108,000 $ 25,000 $
1994 $108,000 $ $
Willard P. Harris 1996 $195,000 $ 69,000 $37,000 (2)
President, Chief Executive 1995 $176,000 $ 108,000 $37,000 (2)
Officer, Director 1994 $132,000 $ 12,000 $38,000 (2)
John D. Hornsby 1996 $152,000 $ 64,000 $19,000 (2)
Chief Operating Officer 1995 $113,000 $ 93,000 $0
1994 $ 89,000 $ 68,000 $0
(1) The total amount of personal benefits paid to each named officer for fiscal
1996 is less than the lesser of (i) $50,000. or (ii) 10% of the total reported
salary and bonus for such individual.
(2) This additional compensation was used to decrease notes receivable from
officers due to the Company.
(3) Bonus earnings are reported on a cash basis for individuals, consequently
bonus' paid for fiscal year 1995 are shown here as 1996 compensation.
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ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1996, the information with
respect to Common Stock ownership of each person known by the Company to
beneficially own more than five percent of the outstanding Common Stock, by each
director who beneficially owns any Common Stock and by any Executive Officer
named in response to Item 11, and by all directors and officers as a group.
Amount
Name and Address Beneficially Percent
of Beneficial Owner Owned of Class
- -------------------- -------------------- --------
Desea International Inc. 200,300 5.8%
2701 Industrial Drive
Bowling Green, KY 47102
Benjamin C. Harris 250,000 7.2%
2701 S. Harbor Blvd.
Santa Ana, CA 92407
Willard V. Harris Jr. 353,530 10.2%
2701 S. Harbor Blvd.
Santa Ana, CA 92407
Willard P. Harris 351,725 10.1%
2701 S. Harbor Blvd.
Santa Ana, CA 92407
John D. Hornsby 412,748 11.9%
2701 S. Harbor Blvd.
Santa Ana, CA 92407
All Directors & Officers 1,118,003 32.2%
as a group (6 persons)
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ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended March 31, 1994, the Company ceased selling to Rampart
General Inc. a company partially owned by a stock holder of the Company, Willard
V. Harris, Jr. The unpaid balance due the Company at March 31, 1995 of $645,000
was determined to be uncollectable and was written off against an equal amount
of bad debt reserve, this transaction had no effect on pre tax net income in
1995 or 1996.
On March 31, 1996, advances to Officers and Stockholders totaling $132,000 were
outstanding. Principal payments on these advances are due in semi annual
installments over the next three years. In the event that the amounts are not
repaid, the principle and interest due will be charged to these individuals as
compensation expense over the repayment period. Compensation expense of $56,000
and $37,000. was charged to 1996 and 1995 operating results respectively. The
amount outstanding at March 31, 1995 was $204,000. These notes carry interest
rates between 8% and 10%.
During fiscal year 1996 the Company entered into a monthly operating lease of
equipment with H&H Equities Incorporated. H&H Equities Incorporated is wholly
owned by Willard P. Harris and John D. Hornsby, members of the Company's Board
of Directors. The monthly lease payments are $3,872 and totaled $30,976 in
fiscal year 1996.
ITEM 13 EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
FINANCIAL STATEMENTS
Independent Auditors' Report F-1
Consolidated Balance Sheets at March 31, 1996 and 1995 F-2
Consolidated Statements of Income for the
years ended March 31, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for
the years ended March 31, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-8
REPORTS ON FORM 8-K
There was no form 8-K filed in the fourth quarter.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on June 24, 1996
FIREPLACE MANUFACTURERS, INC.
WILLARD P. HARRIS
------------------------------
By: Willard P. Harris
President and
Chief Executive Officer
JANE ANN IOVINE
------------------------------
By: Jane Ann Iovine
Vice President of Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
signed below by the following persons on behalf of the Registrants and in the
capacities and on the dates indicated.
WILLARD V. HARRIS
- -----------------------------------------
Willard V. Harris
Chairman of the Board Date: June 24, 1996
WILLARD P. HARRIS
- ----------------------------------------
Willard P. Harris, Director Date: June 24, 1996
JOHN D. HORNSBY
- ----------------------------------------
John D. Hornsby, Director Date: June 24, 1996
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INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Fireplace Manufacturers, Inc.
Santa Ana, California
We have audited the accompanying consolidated balance sheets of Fireplace
Manufacturers, Inc. and subsidiary as of March 31, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fireplace
Manufacturers, Inc. and subsidiary as of March 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Anaheim, California
May 23, 1996, except for Note 4,
for which the date is June 19, 1996
F-1
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 136,000 $ 117,000
Trade accounts receivable, less allowance for doubtful
accounts of $239,000 in 1996 and $175,000 in 1995 3,273,000 2,461,000
Inventories 2,735,000 3,502,000
Prepaid expenses and other current assets 101,000 147,000
Deferred income taxes 314,000 345,000
----------------------------
TOTAL CURRENT ASSETS 6,559,000 6,572,000
Equipment and Leasehold Improvements 2,104,000 2,183,000
Notes Receivable From Officers/Stockholders - 204,000
Other Assets 120,000 29,000
----------------------------
TOTAL ASSETS $ 8,783,000 $ 8,988,000
----------------------------
----------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities:
Line of credit $ 2,263,000 $ 1,543,000
Accounts payable 2,647,000 2,931,000
Accrued liabilities:
Compensation 318,000 506,000
Other 399,000 702,000
Current portion of long-term debt 235,000 117,000
----------------------------
TOTAL CURRENT LIABILITIES 5,862,000 5,799,000
----------------------------
Long-Term Debt, less current portion 904,000 997,000
----------------------------
Deferred Income Taxes 369,000 411,000
----------------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $1 par value; authorized shares - -
1,000,000; issued and outstanding shares - none
Common stock, $.01 par value; authorized shares
10,000,000; issued and outstanding shares
1996 3,475,450; 1995 3,552,500 35,000 36,000
Additional paid-in capital 309,000 353,000
Retained earnings 1,436,000 1,392,000
----------------------------
1,780,000 1,781,000
Notes Receivable From Officers/Stockholders (132,000) -
----------------------------
1,648,000 1,781,000
----------------------------
$ 8,783,000 $ 8,988,000
----------------------------
----------------------------
</TABLE>
F-3
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 28,729,000 $ 26,705,000
Cost of sales 23,903,000 20,950,000
----------------------------------
GROSS MARGIN 4,826,000 5,755,000
Selling, general and administrative expenses 4,450,000 4,791,000
----------------------------------
OPERATING INCOME 376,000 964,000
Interest expense (375,000) (327,000)
Other income 44,000 14,000
----------------------------------
INCOME BEFORE INCOME TAXES 45,000 651,000
Provision for income taxes 1,000 194,000
----------------------------------
NET INCOME $ 44,000 $ 457,000
----------------------------------
----------------------------------
Earnings per share $ 0.01 $ 0.13
----------------------------------
----------------------------------
Weighted average number of common
shares outstanding 3,536,287 3,552,500
----------------------------------
----------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1994 3,552,500 $ 36,000 $ 353,000 $ 935,000 $ 1,324,000
Net income - - - 457,000 457,000
-------------------------------------------------------------------------
Balance, March 31, 1995 3,552,500 36,000 353,000 1,392,000 1,781,000
Issuance of stock for
services 10,000 - 5,000 - 5,000
Repurchase of common
stock (87,050) (1,000) (49,000) - (50,000)
Net income - - 44,000 44,000
-------------------------------------------------------------------------
Balance, March 31, 1996 3,475,450 $ 35,000 $ 309,000 $ 1,436,000 $ 1,780,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 44,000 $ 457,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 558,000 516,000
Deferred income taxes (11,000) 162,000
Issuance of common stock for services 5,000 -
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable (812,000) (119,000)
Inventories 767,000 (1,906,000)
Prepaid expenses and other assets 97,000 38,000
Increase (decrease) in accounts payable and
accrued liabilities (775,000) 1,675,000
------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (127,000) 823,000
------------------------------
Cash Flows From Investing Activities
Purchases of equipment and leasehold improvements (479,000) (1,024,000)
Increase in other assets (86,000) -
Payment on notes receivable from officer/stockholder 16,000 21,000
------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (549,000) (1,003,000)
------------------------------
Cash Flows From Financing Activities
Proceeds from long-term debt 146,000 625,000
Payments on long-term debt (121,000) (386,000)
Net proceeds from (payments on)
revolving line of credit 720,000 (57,000)
Repurchase of common stock (50,000) -
------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 695,000 182,000
------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
NET INCREASE IN CASH
AND CASH EQUIVALENTS 19,000 2,000
Cash and cash equivalents at
beginning of year 117,000 115,000
-------------------------------
Cash and cash equivalents at
end of year $ 136,000 $ 117,000
-------------------------------
-------------------------------
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest $ 370,000 $ 321,000
-------------------------------
-------------------------------
Income taxes $ 85,000 $ 64,000
-------------------------------
-------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
Fireplace Manufacturers, Inc. (the Company) designs, manufactures and sells
factory-built, energy-efficient metal fireplace systems to customers throughout
North America on terms established by the Company. The fireplaces are used in
single-family homes, condominiums, apartments, other multiple-family dwellings,
and in mobile homes. They can be used as part of a wall, in a corner, or as a
room divider. Fireplaces are sold mainly to homebuilders who install the system
in new construction, and to the "Do-It-Yourself" (DIY) homecenters and retail
distributors. Pending legislation in several states and major cities for clean
air to meet Environmental Protection Agency requirements has resulted in the
Company developing clean-burning appliances, the emphasis being on gas-burning
appliances. While continuing to manufacture wood burning fireplaces, the
Company has added additional gas-burning appliances to the product line. Also
added to the product line are decorative gas log sets to retro-fit existing
fireplaces in communities that have restricted the burning of wood.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES IS AS FOLLOWS:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its inactive, wholly-owned subsidiary, Fireplace Industries of California, Inc.
There have been no material intercompany transactions.
CREDIT RISK AND SIGNIFICANT CUSTOMERS:
The Company sells its products to customers throughout North America, with a
large concentration of these sales in the Western United States. Management
performs regular evaluations concerning the ability of its customers to satisfy
their obligations and records a provision for doubtful accounts based upon these
evaluations. The Company's credit losses for the periods presented have not
exceeded management's estimates.
One major customer represented 23% and 22% of total sales for 1996 and 1995,
respectively. Accounts receivable from this customer totaled approximately
$625,000 and $-0- at March 31, 1996 and 1995, respectively. In addition,
another customer represented 11% of total sales for 1996. Accounts receivable
from this customer were approximately $430,000 at March 31, 1996. There were no
other customers who represented greater than 10% of sales.
F-8
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
INVENTORIES:
Inventories are generally valued at the lower of cost (first-in, first-out
method) or market.
ADVERTISING:
The Company expenses the production costs of advertising the first time the
advertising takes place. Advertising expense was approximately $396,000 and
$372,000 during 1996 and 1995, respectively.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are recorded at cost and are depreciated
using the straight-line method over useful lives ranging from 3 to 15 years for
machinery and equipment, transportation equipment and furniture and fixtures,
and 8 years or the term of the lease, whichever is shorter, for leasehold
improvements.
INCOME TAXES:
Deferred income taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
EARNINGS PER SHARE:
Earnings per share are computed using the weighted average number of common
shares outstanding during the respective years.
F-9
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
In 1996, the Company adopted Financial Accounting Standards Board Statement No.
107, which requires disclosure about the fair value of the Company's financial
instruments. The carrying amount of cash, accounts receivable, accounts payable
and accrued expenses approximates fair value because of the short maturity of
those instruments. The method and assumptions used to estimate the fair value
of the following classes of financial instruments were:
LINE OF CREDIT:
The carrying amount approximates fair value because the interest rate
fluctuates with the lending bank's prime rate.
LONG-TERM DEBT:
The carrying amounts of the equipment term loans payable approximate fair
value because the interest rate fluctuates with the lending bank's prime
rate. The fair value of the other long-term debt is estimated based on
interest rates for the same or similar debt offered to the Company having
the same or similar remaining maturities and collateral requirements. The
fair value of long-term debt approximates the carrying amount.
The fair value estimates presented herein are based on pertinent information
available to management as of March 31, 1996. Although management is not aware
of any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purpose of these
financial statements since that date, and current estimate of fair values may
differ significantly from the amounts presented herein.
RECLASSIFICATION OF CERTAIN ACCOUNTS:
Certain accounts in the 1995 financial statements have been reclassified with no
effect on stockholders' equity or net income to be consistent with the
classifications adopted for 1996.
F-10
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 1,643,000 $ 2,399,000
Work-in-process 316,000 222,000
Finished goods 776,000 881,000
---------------------------------
$ 2,735,000 $ 3,502,000
---------------------------------
---------------------------------
</TABLE>
NOTE 3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 3,528,000 $ 3,399,000
Tools, dies and molds 2,761,000 2,537,000
Furniture, fixtures and vehicles 637,000 597,000
Leasehold improvements 92,000 140,000
Research and development equipment 282,000 257,000
---------------------------------
7,300,000 6,930,000
Less accumulated depreciation and amortization 5,196,000 4,747,000
---------------------------------
$ 2,104,000 $ 2,183,000
---------------------------------
---------------------------------
</TABLE>
F-11
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. LINE OF CREDIT
The Company may borrow up to $3,500,000 against eligible accounts receivable and
inventory under terms of an accounts receivable and inventory line of credit
agreement with a bank. Borrowings under this line of credit bear interest at
the bank's prime rate (8.25% at March 31, 1996) plus .75%, with interest payable
monthly. Advances are limited to 80% of eligible accounts receivable; plus 40%
of eligible inventories (inventory advances are not to exceed $500,000). The
line of credit expires on August 1, 1996. Borrowings under this line of credit
agreement are collateralized by substantially all of the Company's assets. The
line of credit contains restrictive covenants that require maintenance of
working capital and other financial ratios, prohibit payment of dividends, and
have certain other limitations. The Company was in compliance with all but two
of the restrictive covenants at March 31, 1996 The Company received a waiver of
non-compliance from their bank. Subsequent to year-end the Company repurchased
additional shares of common stock (see Note 10). This repurchase of shares is a
violation of the restrictive covenants and the Company has not received a waiver
of non-compliance from their bank. At March 31, 1996, the Company had
$2,263,000 outstanding under this agreement and $563,000 of additional
availability.
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Equipment term loans payable to bank, secured by substantially
all of the Company's assets, bearing interest at the bank's
prime rate (8.25% at March 31, 1996) plus 1%, due in
monthly principal amounts of approximately $7,000
to $8,000, plus interest, through March 1999. The
equipment term loans are part of the agreement covering
the line of credit and are subject to the same covenants. $ 555,000 $ 504,000
Notes payable to a finance company, secured by vehicles, bearing
interest at 8.75%, due in monthly principal and interest
payments of approximately $2,500 through March 2000. 104,000 120,000
Unsecured note payable, subordinated to the line of credit,
bearing interest at 14%, principal payments due quarterly,
increasing from $2,500 to $40,000 through December 2000. 480,000 490,000
-------------------------------
1,139,000 1,114,000
Less current maturities 235,000 117,000
-------------------------------
$ 904,000 $ 997,000
-------------------------------
-------------------------------
</TABLE>
F-12
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows for the years ending March 31: 1997
$235,000; 1998 $282,000; 1999 $326,000; 2000 $176,000; and 2001 $120,000.
NOTE 6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Current $ 12,000 $ 32,000
Deferred (11,000) 162,000
------------------------------
$ 1,000 $ 194,000
------------------------------
------------------------------
</TABLE>
A reconciliation of income tax expense to the amount computed by applying
statutory income tax rates to earnings before income taxes:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Federal income tax $ 16,000 $ 228,000
State income tax, net of federal benefit 3,000 39,000
Federal and state income tax credits generated (15,000) (178,000)
Change in valuation reserve 15,000 97,000
Nontaxable items (30,000) -
Prior year state taxes assessment 13,000 -
Other (1,000) 8,000
------------------------------
$ 1,000 $ 194,000
------------------------------
------------------------------
</TABLE>
F-13
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities as
of March 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Business, enterprise zone and AMT credits $ 332,000 $ 315,000
Bad debt reserve 96,000 70,000
Legal reserve 22,000 32,000
Warranty reserve 61,000 108,000
Other reserves 32,000 35,000
Other 12,000 11,000
Valuation allowance for deferred tax assets (241,000) (226,000)
--------------------------------
TOTAL DEFERRED TAX ASSETS, NET 314,000 345,000
--------------------------------
Deferred Tax Liabilities:
Depreciation, book over tax (366,000) (407,000)
Other (3,000) (4,000)
--------------------------------
TOTAL DEFERRED TAX LIABILITIES (369,000) (411,000)
--------------------------------
$ (55,000) (66,000)
--------------------------------
--------------------------------
</TABLE>
The components giving rise to the net deferred assets (liabilities) described
above, have been included in the accompanying consolidated balance sheets as of
March 31, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 314,000 $ 345,000
Noncurrent (liabilities) (369,000) (411,000)
--------------------------------
$ (55,000) $ (66,000)
--------------------------------
--------------------------------
</TABLE>
The valuation allowance on the deferred tax assets has been recorded to reduce
the total to an amount that management believes will ultimately be realized.
The business and credit carryforward could be limited due to alternative minimum
tax.
Business enterprise zone and AMT credit carryforwards as of March 31, 1996
expire as follows: 2001 $5,000; 2004 $5,000; 2005 $95,000; 2006 $58,000; 2009
$11,000; 2010 $66,000 2011 $72,000 (total $312,000). The alternative minimum
tax amount credit carryforward totaling $52,000 may be carried forward
indefinitely to reduce future regular income taxes payable.
F-14
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. RELATED PARTY TRANSACTIONS
At March 31, 1996 and, 1995, advances to officer/stockholders totaled $132,000
and $204,000, respectively. These amounts had been secured by promissory notes
which were to be repaid in 1992 and 1994. On March 31, 1992, terms related to
the repayment of these advances were renegotiated. Under the terms of the
revised agreements, principal payments on these advances will be due in
semiannual installments over the next five years, with the notes bearing
interest at rates ranging from 8% to 10%. In the event that the amounts are not
repaid, the principal and interest due will be charged to these individuals as
compensation expense over the five-year repayment period. Compensation expense
of approximately $56,000 and $37,000 was charged to operating results for the
reduction of these notes during 1996 and 1995, respectively. In 1996, the
Company determined the most likely method of collection is through future
compensation or bonuses and accordingly reclassified the receivables as a
reduction of stockholders' equity.
NOTE 8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES:
The Company's operations are conducted at facilities under an operating lease
expiring April 30, 1999, with monthly payments of approximately $23,000.
The Company also leases equipment under month-to-month agreements and one
long-term agreement. The long-term agreement is with a company which is wholly
owned by two officers/stockholders of the Company. This agreement requires
monthly payments of approximately $3,900 and expires in July 2001 with a total
commitment of approximately $250,000.
The future rental commitment on all leases at March 31, 1996 is as follows:
1997 $315,000; 1998 $320,000; 1999 $320,000; 2000 $69,000 and 2001 $15,000
(total $1,039,000).
Rent expense on the aforementioned leases was $294,000 and $288,000 during 1996
and 1995, respectively. Rent expense paid to related parties during 1996 was
$31,000. The was no rent expense paid to related parties during 1995.
CONTINGENCIES:
Two claims have been asserted against the Company, one of which has resulted in
legal proceedings against the Company as of the date of these financial
statements. The two claims have been made by two separate companies which claim
infringement of separate patents which each company holds. The Company had an
independent patent attorney review the patents in question during 1995 and it
was the opinion of that attorney that the Company is not infringing on the
patent. The Company's independent counsel is unable to express an opinion as to
the probable outcome of the action and therefore no estimate can be made of a
range of amount of loss that is reasonably possible. No amounts have been
accrued in regards to this matter and it is reasonably possible that a change in
the estimate will occur in the near term.
F-15
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ROYALTY AGREEMENT:
The Company entered into a nonexclusive license agreement for a period of two
years. The terms of the agreement require royalty payments by the Company based
upon units sold with a minimum royalty of $5,000 per month from May 1, 1994
through April 30, 1996. Total royalty expenses under the agreement was
approximately $113,000 and $207,000 during 1996 and 1995, respectively.
SEVERANCE COMPENSATION AGREEMENT:
The Company has entered into a severance compensation agreement with three of
the Company's officers for a period of five years expiring in December 2000.
The terms of the agreement require severance compensation equal to three times
the officers annual compensation paid to the officer in the prior year, in the
event of a change in control of the Company where the officer is terminated.
RESEARCH AND DEVELOPMENT:
The Company incurs research and development costs in developing new products.
During 1996 and 1995, the Company expensed approximately $586,000 and $693,000,
respectively, in research and development costs.
NOTE 9. RETIREMENT SAVINGS PLAN
The Company has a defined contribution 401(k) savings plan (Plan). The Plan
covers all employees meeting minimum age and service requirements. The Company
provides a matching contribution of 25% of the first 3% saved by the employee.
Total contributions to the Plan were $11,000 and $10,000 during 1996 and 1995,
respectively.
NOTE 10. DISCRETIONARY BONUSES
The Company pays discretionary bonuses to their officers and key employees. The
amounts of these bonuses charged to expenses were approximately $130,000 and
$551,000 during 1996 and 1995, respectively.
F-16
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. RECENT ACCOUNTING PRONOUNCEMENT
In 1995 the FASB issued Statement No 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION." Statement No. 123, establishes financial accounting and
reporting standards for stock-based employee compensation plans such as stock
option plans effective for all transactions entered into after December 15,
1995. The Statement generally suggests, but does not require, employee
stock-based compensation transactions be accounted for based on the fair value
of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. An enterprise may continue to
follow the requirements of Accounting Principles Board (APB) Opinion No. 25, for
employee based transactions, which does not require compensation to be recorded
if the consideration to be received is at least equal to the fair value at the
measurement date. If an enterprise elects to follow APB Opinion No. 25, it must
disclose the proforma effects on net income as if compensation were measured in
accordance with the suggestions of Statement No. 123. All stock based
transactions with non-employees must be accounted for at the fair value of the
instrument. The Company has determined that it will continue to follow APB
Opinion No. 25, for employee based transactions, therefore, adoption of this
pronouncement in 1996 is not expected to have a material impact on the financial
statements.
NOTE 12. SUBSEQUENT EVENT
The Company has, and may continue to, repurchase its common stock. Between
March 31, 1996 and May 23, 1996 the Company has repurchased 74,000 shares of
common stock for $66,000. .
F-17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 136,000
<SECURITIES> 0
<RECEIVABLES> 3,512,000
<ALLOWANCES> 239,000
<INVENTORY> 2,735,000
<CURRENT-ASSETS> 6,559,000
<PP&E> 7,300,000
<DEPRECIATION> 5,196,000
<TOTAL-ASSETS> 8,783,000
<CURRENT-LIABILITIES> 5,862,000
<BONDS> 0
0
0
<COMMON> 35,000
<OTHER-SE> 1,613,000
<TOTAL-LIABILITY-AND-EQUITY> 8,783,000
<SALES> 28,729,000
<TOTAL-REVENUES> 28,729,000
<CGS> 23,903,000
<TOTAL-COSTS> 4,406,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 375,000
<INCOME-PRETAX> 45,000
<INCOME-TAX> 1,000
<INCOME-CONTINUING> 44,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,000
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
