FIREPLACE MANUFACTURERS INC
10-K405, 1997-06-30
HEATING EQUIPMENT, EXCEPT ELECTRIC & WARM AIR FURNACES
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<PAGE>

                                    FORM 10-K

                       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, 1997

                                       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
                                                    ---------------

Securities registered pursuant to Section 12(b) of the Act:

                                                       Name of Each Exchange
          Title of Each Class                          on which Registered
          -------------------                          -------------------

                 NONE

Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $0.01 Par Value
                                (Title of Class)

<PAGE>

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-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 amendment to this
Form 10-K.               X
                    -----------

The aggregate market value of the Registrant's Common Stock held by non-
affiliates based on the average bid and asked prices of such stock, as of May
23, 1997 was $2,633,000 and $2,896,000, respectively.

The number of shares outstanding of each of the Registrant's classes of Common
Stock as of May 23, 1997, was as follows:

Common Stock, $0.01 Par Value per share - 3,417,550

Documents incorporated by reference.  None


                                        2

<PAGE>

                                     PART I

ITEM 1    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 AND RELATED PRODUCTS 
Fireplace Manufacturers, Inc., designs, manufactures, and sells factory-built,
energy-efficient metal fireplace systems.  The Company currently produces wood-
burning metal fireplaces, decorative gas appliances with refractory-lined
fireboxes, horizontal/vertical gravity direct vent wall furnaces, 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 wall may be installed within two inches (2") of
the combustible building materials.  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-nine of these
fireplaces are gas-only models.

FMI has developed a line of unvented fireplaces and gas log heaters that have
grown in popularity over the last three (3) years.  The Company expects the
unvented products to gain popularity over the near future, although it lacks
approval in various states.

Also added to the product line is free standing stoves and a series of vented
and unvented gas log sets:

FREE STANDING STOVES
Free standing stoves have a powder coated spray finish which resists scuffing,
scraping and fading.  They can be easily placed in a corner or perpendicularly
installed with no chimney or ductwork.  The free standing stoves uses natural or
propane fuel.  


                                        3

<PAGE>

VENTED AND UNVENTED GAS LOG SETS
The vented gas log sets have the ambiance of a wood fire with the convenience of
simple ignition or the flip of a switch.  The log kits come complete in 16",
18", 24" and special order 30" with logs, burner grate, connector, volcanic
rock, vermiculite and rock wool.  Unvented gas logs can be installed in any FMI
vented or unvented fireplace, masonry fireplaces, as well as other zero
clearance manufactured boxes that have approval with FMI unvented log sets.  The
log sets can be produced as either round oak or split oak and range in size from
18" to 30".  For safety, the ODS (oxygen depletion sensor) will shut the gas
logs off if oxygen is depleted or fuel is interrupted in the room. 
Historically, sales for gas logs are higher during the fall.

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 20 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.

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 10% annually, and the
competition is substantial.  FMI sells 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 agreement with the Evcon Group to provide fireplaces for the
mobile home industry.  This agreement provides for the Evcon Group to be the
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, England and Saudi Arabia.  Total sales
to all foreign markets are less than 10%.

The sales and marketing functions are currently managed by FMI's Vice President
of Sales and Marketing.  FMI employs three regional sales managers.  Each
manager covers a multi-state region, selling through independent representative
agencies. The Company's regional sales managers are based in Campbell,
California; Poway, California; and Fredericksburg, Virginia.  Homecenter sales
and service are managed by the regional sales person in that area.


                                        4

<PAGE>

For the fiscal year ended March 31, 1997, sales to the Evcon Group accounted for
23% of FMI sales.  Sales to Quality Insulation accounted for 12% 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 220.

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, 1997, the backlog of firm orders for the metal fireplace systems
was not significant.  Backlogs typically only represent approximately one or two
weeks of sales since products are usually shipped within a few days of an order.

PATENTS TRADEMARKS AND TRADENAMES
The Company does not own any material patents.  The consumer products
manufactured by the Company are marketed under the name "FMI Fireplace Systems".

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, 1997, FMI was producing over
400 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 four gas-
burning appliances to the product line, making a total of twenty-nine gas-
burning models in their line. 


                                        5

<PAGE>

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.

RESEARCH AND DEVELOPMENT
The Company incurs research and development costs on new product development,
improvement of existing products, and product line extension.  During 1997, 1996
and 1995, the Company investment in research and development totaled $607,000,
$586,000 and $693,000, respectively.

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, 1997, FMI employed 211 persons, including approximately 181 in
fabrication and a staff of 30 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    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 $28,000.


                                        6

<PAGE>

ITEM 3    LEGAL PROCEEDINGS

A claim has been asserted against the Company which resulted in legal
proceedings against the Company.  The matter involves two consolidated actions
pending in the United States District Court for the District of Minnesota, FMI
V. HEARTH TECHNOLOGIES, INC., Case No. 4-96-1080 (D.Minn.) (ADM/AJB) and HEARTH
TECHNOLOGIES, INC. V. FMI, Case No. 4-96-684 (D.Minn.) (ADM/AJB).  The actions
involve the validity and alleged infringement of U.S. Patent No. 4,793,322 ("the
`322 patent"), which is owned by Hearth.  The claimant requested a royalty
payment of $50.00 per direct vent flex unit.  For fiscal year 1997 and 1996,
total units subject to this royalty would be 11,523 and 11,010 respectively. 
During 1995, the Company had an independent patent attorney review the patents
in question and it was the opinion of that attorney that the Company is not
infringing on the patent.  Assuming the claimant could establish infringement (a
point which the Company vigorously disputes), the Company's damages expert has
concluded that a reasonable royalty rate would be less than $10.00 per direct
vent flex unit.  The Company's independent counsel feel there is a reasonable
likelihood of success in defense of this action, but is unable to express an
opinion as to the probable outcome of the action at this time.

ITEM 4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of the fiscal year covered
by this form 10-K to a vote of security holders, through the solicitation of
proxies or otherwise.


                                        7

<PAGE>

                                     PART II

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 Common Stock
is quoted on the NASQ's Electronic Bulletin Board under the symbol:  FPMI.  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
                         -------------------    -------------------------

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
                         June 30                  15/16             13/16
                         September 30             15/16              3/8
                         December 31              15/16             17/32

1997                     March 31               1 1/8                3/4

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 May 23, 1997
               --------------                          ------------------

               Common Stock, $0.01                           903 (1)
               par value

(1)  Included in number of record holders are shares held in "nominee" or
     "street names".


                                        8

<PAGE>

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. 

ISSUANCE OF UNREGISTERED SHARES OF COMMON STOCK
On March 25 1997, the Company issued the following members of the Board of
Directors and executive officers the following shares of the Company's common
stock.  The shares were issued as part of their 1997 compensation.

                                                             Number
     Name and Principal Position                             of Shares  Amount
     ---------------------------                             ---------  ------

     Willard V. Harris, Jr., Chairman of the Board           50,000     $38,000
     Willard P. Harris, President, Chief Executive           50,000     $38,000
       Officer, Director
     John D. Hornsby, Chief Operating Officer                50,000     $38,000
     James L. Behrens, Vice President of Sales & Marketing   38,252     $29,072
     Jane A. Iovine, Vice President of Finance                5,000     $ 3,800

The shares were issued under an exemption from registration provided by Section
4(2) of the Securities Act of 1933.


                                        9

<PAGE>

ITEM 6    SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included herein.

                                     FOR THE YEARS ENDED MARCH 31
                          --------------------------------------------------
                            1997      1996       1995       1994       1993
                            ----      ----       ----       ----       ----
                          (DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNT)

Net sales                 $31,844   $28,729    $26,705    $19,813    $16,290

Net income                 $  994   $    44    $   457    $    43    $    37

Average shares 
outstanding                 3,323     3,536      3,553      3,553      3,553

Net Income                 $ 0.30   $  0.01    $  0.13    $  0.01    $  0.01
per common share

Total assets               $6,937   $ 8,832    $ 8,988    $ 6,379    $ 5,863

Total long-term 
obligations (excluding
current portion)           $  235   $   904    $   998    $   732    $   861

Cash dividends
per share                    N/A       N/A        N/A        N/A        N/A

ITEM 7    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 
          CONDITION AND RESULTS OF OPERATION 

LIQUIDITY AND CAPITAL RESOURCES
The Company has a line of credit with a bank for an aggregate $4,000,000 with an
interest rate of .50 percent above prime, payable monthly.  At March 31, 1997,
there were no amounts outstanding under the line of credit compared to
$2,263,000 at March 31, 1996.  The net availability remaining under this
revolving line of credit is $2,080,000 at March 31, 1997.  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 lines of credit is subject to renewal on August
1, 1997.  The Company does not anticipate any problems with its ability to
continue with its current financing.

The Company also has available a $500,000 equipment line of credit which
converts to a forty-eight month term loan on August 1, 1997.  The borrowings
under the line bear interest at the bank's prime rate plus 1%.  The line is
subject to the same covenants as the line of credit.  At March 31, 1997, there
were no amounts outstanding under this agreement.


                                       10

<PAGE>

Accounts receivable (before allowances for doubtful accounts) at March 31, 1997
were $2,579,000, compared to $3,512,000 at March 31, 1996.  The 26.6% decrease
is primarily attributed to improved credit collections.  Days sales outstanding
at March 31, 1996 was 43 compared to 28 at March 31, 1997.  In 1996, the Company
began to utilize an agreement with a finance company whereby the finance
company, with the approval of the customer, will purchase receivables from the
Company.  Under the first program the invoice is paid within 15 days at a
discount of 2.25%.  Under the second program the invoice is paid within 30 days
at a discount of 1.75%.  The agreement contains a clause whereby if the finance
company repossess' any inventory of the customer, the Company is obligated to
buy back the repossessed inventory.  The Company accounts for this arrangement
as a sale of receivables.  During 1997, the Company sold receivables of
approximately $2,400,000.  The balance sheet at March 31, 1997 includes
approximately $150,000 due to the finance company.  Management estimates that
there will be no amounts of inventory repurchased under this agreement.  The
allowances for doubtful accounts increased $33,000 from $239,000  to $272,000 at
March 31, 1997.  The increased reserve is for a customer who is no longer in
business and with whom a legal settlement has not been reached as of March 31,
1997.

The current ratio increased by 21.4% during fiscal year 1997.  At March 31, 1997
the current ratio was 1.36:1 as compared to 1.12:1 at March 31, 1996.  The
Company benefited from higher margins, increased sales, reductions in inventory
and accounts receivable, and was able to use the higher selling price per unit,
discussed in "Results of Operations" below, to payoff its line of credit
resulting in this higher ratio.

Inventories decreased $888,000 to $1,847,000 at March 31, 1997 from $2,735,000
at March 31, 1996. Purchased parts inventory decreased by $296,000 and steel
inventory decreased by $104,000 as a result of an improved purchasing approach
that allows for 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
that were not resold by March 31, 1997 were scrapped.

The Company has made equipment additions of $345,000 and $479,000 for 1997 and
1996 respectively.  Purchases of fixed assets are anticipated to increase for
the fiscal year ended March 31, 1998 although no specific budget has been
established at this time.  If required, financing for equipment purchases are
available from financial institutions.

The Company's Board of Directors has approved the repurchase of up to 500,000
shares of common stock from time to time.  During 1997 220,752 shares were
repurchased for $208,000.  An additional 87,050 shares were repurchased during
1996 for $50,000. The Board of Directors approved this action due to their
belief that the shares are under valued.  193,252 of the repurchased shares
valued at $144,939 were reissued as compensation to the Board of Directors and
executive officers.  As required by California law, the remaining 114,500
repurchased shares were retired.  Subsequent to year end and before June 15,
1997, 30,400 additional shares have been repurchased.  The Company intends to
continue to repurchase stock from time to time in the future.


                                       11

<PAGE>

RESULTS OF OPERATIONS 1996 TO 1997
Sales for the fiscal year 1997 increased 10.8% from fiscal year 1996.  The
increase in sales is attributed to a 5.5% increase in selling price.  The
remaining increase is attributable to an increase in the number of units sold. 
A number of factors affected the selling price, the Company decreased the number
of special discounts available to customers, raised the price of the product and
increased sales of non fireplace items such as pipe, accessories and log sets. 
The increase in units sold is explained by a surge in the manufactured housing
industry.  Based on present market conditions, the Company believes sales will
remain constant for fiscal year 1998 although there can be no assurances in that
regard.

Cost of sales for fiscal year 1997 were 79.1% of sales as compared with 83.2% of
sales in fiscal year 1996.  This decrease is attributed to the 5.5% increase in
average selling price along with a 1.5% increase plant variable costs. 
Management's goal is to continue to improve this percentage in fiscal year 1998
although there can be no assurances in this regard. 

Selling, general and administrative expenses increased by 0.90% to 16.4% of
sales in fiscal 1997 compared to 15.5% in fiscal 1996.  This slight increase is
attributed to higher bonus expense which reflects the higher 1997 net profit. 
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 decreased in 1997 by 0.5% as a percent of sales over the fiscal
year 1996 expense.  This decrease is due to interest calculated on lower
borrowings.  The Company expects interest expense to continue to decrease for
1998 although there can be no assurances in this regard.  

Management estimates no evaluation allowance on deferred tax assets is needed 
due to expected future taxable income will be adequate to realize the deferred 
tax assets.

The Company's 1997 net income as a percent of sales increased 3.0% from 1996. 
Management believes that special cost cutting efforts and better market
penetration will allow the Company to remain profitable in 1998 although there
can be no assurances in this regard.

RESULTS OF OPERATIONS 1995 TO 1996
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.

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.


                                       12

<PAGE>

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.

FORWARD LOOKING STATEMENTS
Statements regarding the Company's expectations as to demand for its products in
1998, 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 Federal 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 7A   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
          RISKS

Not applicable.

ITEM 8    FINANCIAL STATEMENT AND SUPPLEMENTARY DATA

The Company's financial statements are attached herein.


ITEM 9    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
          ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


                                       13

<PAGE>

                                    PART III

ITEM 10   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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                63

WILLARD P. HARRIS        President, Chief Executive Officer, and Director  41

JOHN D. HORNSBY          Chief Operating Officer, Secretary, and Director  43

JAMES L. BEHRENS         Vice President of Sales and Marketing             43

JANE ANN IOVINE          Vice President of Finance                         35

GERARDO C. LOZANO        Vice President of Manufacturing                   36

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.

JAMES L. BEHRENS was named Vice President of Sales and Marketing in February
1996.  Mr. Behrens worked as a consultant for a fireplace distributor for four
years prior to joining FMI.  He has over 15 years of experience in the fireplace
industries.

JANE ANN IOVINE was named Vice President of Finance in July of 1995, and she has
been with the Company since March of 1994.  Ms. Iovine was a senior accountant
for a $500 million international computer peripherals manufacturer for two years
prior to working for FMI.  She is a graduate of San Diego State University and
has been a CPA since May of 1990.

GERARDO C. 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.

The above directors and officers have had no prior convictions or bankruptcies.


                                       14

<PAGE>

The terms of office for the Board of Directors are extended annually unless the
Board of Directors elects, at the director's meeting following the annual
stockholders' meeting, not to extend the relationship.  Officers serve at the
pleasure of the Board of Directors.

ITEM 10A  BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
There have been no failures to timely file forms 3, 4 or 5.

ITEM 11   EXECUTIVE COMPENSATION AND OTHER MATTERS

The following table sets forth information concerning the compensation of the
Chief Executive Officer and the three other executive officers of the Company
whose total salary and bonus for the year ended March 31, 1997 exceeded $100,000
for services in all capacities to the Company and its subsidiaries during such
fiscal year.

                           SUMMARY COMPENSATION TABLE

                                            Annual Compensation
                               ---------------------------------------------
Name and Principal                                              Other Annual
Position                       Year   Salary(1)  Bonus(2)       Compensation ($)
- --------------------           ----   ---------  --------       ----------------

Willard V. Harris, Jr. (4)(5)  1997   $220,720   $ 45,500(6)     $38,294(3)
Chairman of the Board          1996   $112,000   $ 55,000        $0
                               1995   $108,000   $ 25,000        $0

Willard P. Harris (4)(5)       1997   $212,380   $ 63,000(6)     $75,435(3)
President, Chief Executive     1996   $195,000   $ 69,000        $37,000(3)
Officer, Director              1995   $176,000   $108,000        $37,000(3)

John D. Hornsby (4)(5)         1997   $196,680   $ 63,000(6)     $35,549(3)
Chief Operating Officer        1996   $152,000   $ 64,000        $19,000(3)
                               1995   $113,000   $ 93,000        $0

James L. Behrens (5)           1997   $ 75,000   $ 31,032(6)     $0
Vice President of Sales &      1996   $  7,212   $0              $0
Marketing

(1)  FMI's audit committee uses the Employers Group Executive Salary Survey as a
tool in approving salary and bonuses.  The Employers Group Executive Salary
Survey is a comprehensive study of executive compensation in California,
published annually for the last 40 years.  Participants in this survey include a
wide variety of types and sizes of business organizations.

(2)  Bonus earnings are reported on a cash basis for individuals, consequently
bonus' paid for the prior fiscal year are shown here as compensation in the
subsequent fiscal year.  On the financial statements,  bonuses are accrued
during the period earned.


                                       15

<PAGE>

(3)  This additional compensation was used to decrease notes receivable from
officers due to the Company.

(4)  The Company entered into a severance agreement with the three Board of
Directors which expires on the earliest of the following dates:  five years
expiring in May 2001; termination of the executive's employment based on death,
disability, retirement, or cause or by the executive other than for good reason;
one year from the date of a change in control if the Director has not terminated
his employment for good reason.  The terms of the agreement require severance
compensation equal to 299% of the Director's average annualized compensation
includable in his gross income for the five taxable years immediately preceding
the date of the change in control.

(5)  Additional annual compensation did not exceed the lesser of either $50,000
or 10% of the total salary as disclosed in the summary compensation table.

(6)  Includes the following stock bonuses; W. V. Harris 50,000 shares ($38,000);
W. P. Harris 50,000 shares ($38,000); J. D. Hornsby 50,000 shares ($38,000); and
J. L. Behrens 38,252 shares ($29,072).

None of the Board of Directors or executive officers have an employment contract
with the Company.  


                                       16

<PAGE>

ITEM 12   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of March 31, 1997, 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.                      249,300                7.2%
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.                         403,530               11.7%
2701 S. Harbor Blvd.
Santa Ana, CA  92407

Willard P. Harris                             401,725               11.6%
2701 S. Harbor Blvd.
Santa Ana, CA  92407

John D. Hornsby                               462,748               13.4%
2701 S. Harbor Blvd.
Santa Ana, CA  92407

James L. Behrens                               38,252                1.1%
2701 S. Harbor Blvd.
Santa Ana, CA 92407

All Directors & Officers                    1,311,255               38.0%
as a group (6 persons)


                                       17

<PAGE>

ITEM 13   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 the Chairman of the Board of Directors
and a stockholder 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 in 1993.  In 1993, in partial settlement of this account,
Willard V. Harris, Jr. transferred a 26.25% limited partnership interest in
California Real Estate Partners with a capital account of approximately $500,000
to FMI as partial payment of its indebtedness.  The current capital account is
approximately $75,000.  Because of the limited value of this interest in the
partnership no value was recorded in the financial statements.  During 1997, a
four year repayment schedule has been established for the remaining balance of
$162,585 which includes a 10% interest rate beginning on September 1, 1996.  As
of March 31, 1997, $25,000 has been paid.  The Company expects to receive an
additional $50,000 in fiscal year 1998.  Any amounts received will be recorded
as a reduction of bad debt expense in the year the cash is collected.

During 1997, a $17,000 advance was issued to J. D. Hornsby, an officer of the
Company.  This advance as well as other outstanding advances were repaid from
discretionary bonuses to officers.  At March 31, 1997 and 1996, advances to
officers/stockholders totaled $-0- and $132,000, respectively.  These amounts
originated by cash advances which were to be repaid in 1992 and 1994.  On March
31, 1992, terms related to the repayment of these advances were modified.  Under
the terms of the revised agreements, principal payments on the advances were 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 required cash
payments were not made, the principal and interest due was to be offset against
compensation otherwise due these individuals.  The compensation used to repay
these notes was determined annually based on merit, Company profits, and
reasonable business practices.  In 1996, the Company determined the most likely
method of collection was through future compensation or bonuses and accordingly,
reclassified the receivables as a reduction of stockholder's equity. 
Compensation expense of approximately $132,000, $56,000 and $37,000 was charged
to operating results of the reduction of these notes during 1997, 1996 and 1995,
respectively.

The Company has two 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,  officers of the Company and members of the Company's Board
of Directors.  The monthly lease payments are $7,119 and totaled $63,324 in
fiscal year 1997.


                                       18

<PAGE>

                                     PART IV

ITEM 14   EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
          FORM 8-K

FINANCIAL STATEMENTS

Independent Auditors' Report                                     F-1

Consolidated Balance Sheets at March 31, 1997 and 1996           F-2

Consolidated Statements of Income for the
years ended March 31, 1997, 1996, and 1995                       F-3

Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1997, 1996, and 1995                       F-4

Consolidated Statements of Cash Flows for
the years ended March 31, 1997, 1996, and 1995                   F-5

Notes to Consolidated Financial Statements                       F-6 to F-18

REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed during the quarter ended March 31,
1997.

EXHIBITS

3.1  Articles of Incorporation, as amended
3.2  By-laws as amended
10.3 Severance Compensation Agreements


                                       19

<PAGE>

                                   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 26, 1997.


                                        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
                                        Chief Financial and Accounting
                                        Officer


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 26, 1997


WILLARD P. HARRIS
- ----------------------------------------------
Willard P. Harris, Director                       Date:  June 26, 1997


JOHN D. HORNSBY
- ----------------------------------------------
John D. Hornsby, Director                         Date:  June 26, 1997


JANE ANN IOVINE
- ----------------------------------------------
Jane A. Iovine, Chief Financial and Accounting
Officer                                           Date: June 26, 1997


                                       20

<PAGE>

                          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, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended March 31, 1997.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our 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, 1997 and 1996 and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1997, in conformity with generally accepted accounting
principles.




MMcGladrey & Pullen, LLP




Anaheim, California
May 8, 1997


                                       F-1

<PAGE>

FIREPLACE MANUFACTURERS, INC.
  AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>

ASSETS                                                              1997           1996
- ------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>
Current Assets
  Cash and cash equivalents                                     $   333,000   $    136,000
  Trade accounts receivable, less allowance for doubtful
    accounts of $272,000 in 1997 and $239,000 in 1996             2,307,000      3,273,000
  Inventories                                                     1,847,000      2,735,000
  Prepaid expenses and other current assets                         118,000        101,000
  Deferred income taxes                                             421,000        363,000
                                                                --------------------------

         TOTAL CURRENT ASSETS                                     5,026,000      6,608,000

Equipment and Leasehold Improvements                              1,761,000      2,104,000

Other Assets                                                        150,000        120,000
                                                                --------------------------

                                                                $ 6,937,000   $  8,832,000
                                                                --------------------------
                                                                --------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------

Current Liabilities
  Line of credit                                                $        -    $  2,263,000
  Accounts payable                                                2,042,000      2,647,000
  Accrued liabilities                                             1,454,000        717,000
  Current portion of long-term debt                                 212,000        235,000
                                                                --------------------------

         TOTAL CURRENT LIABILITIES                                3,708,000      5,862,000
                                                                --------------------------

Long-Term Debt, less current portion                                235,000        904,000
                                                                --------------------------

Deferred Income Taxes                                               281,000        418,000
                                                                --------------------------

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
    1997 3,447,950 and 1996 3,475,450                                35,000         35,000
  Additional paid-in capital                                        248,000        309,000
  Retained earnings                                               2,430,000      1,436,000
                                                                --------------------------
                                                                  2,713,000      1,780,000
  Notes receivable from officers/stockholders                             -       (132,000)
                                                                --------------------------
                                                                  2,713,000      1,648,000
                                                                --------------------------

                                                                $ 6,937,000   $  8,832,000
                                                                --------------------------
                                                                --------------------------
</TABLE>

See Notes to Consolidated Financial Statements.


                                       F-2

<PAGE>

FIREPLACE MANUFACTURERS, INC.
  AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                      1997              1996              1995
- --------------------------------------------------------------------------------------------------
<S>                                              <C>               <C>               <C>
Net Sales                                        $  31,844,000     $  28,729,000     $  26,705,000

Cost of Sales                                       25,186,000        23,903,000        20,950,000
                                                 -------------------------------------------------

          GROSS MARGIN                               6,658,000         4,826,000         5,755,000

Selling, General and Administrative Expenses         5,223,000         4,450,000         4,791,000
                                                 -------------------------------------------------

          OPERATING INCOME                           1,435,000           376,000           964,000

Interest Expense                                      (269,000)         (375,000)         (327,000)

Other Income                                            29,000            44,000            14,000
                                                 -------------------------------------------------

          INCOME BEFORE INCOME TAXES                 1,195,000            45,000           651,000

Provision for Income Taxes                             201,000             1,000           194,000
                                                 -------------------------------------------------

          NET INCOME                             $     994,000     $      44,000     $     457,000
                                                 -------------------------------------------------
                                                 -------------------------------------------------


Earnings per share                               $        0.30     $        0.01     $        0.13
                                                 -------------------------------------------------
                                                 -------------------------------------------------

Weighted average number of common
  equivalent shares outstanding                      3,323,173         3,536,287         3,552,500
                                                 -------------------------------------------------
                                                 -------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.


                                       F-3

<PAGE>

FIREPLACE MANUFACTURERS, INC.
  AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>

                                Common Stock           Additional
                           -----------------------       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 for retirement       (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

  Issuance of stock for
    services                 193,252         2,000        145,000                 -          147,000

  Repurchase of common
    stock for retirement    (220,752)       (2,000)      (206,000)                -         (208,000)

  Net income                       -             -              -           994,000          994,000
                           -------------------------------------------------------------------------

Balance, March 31, 1997    3,447,950     $  35,000     $  248,000     $   2,430,000     $  2,713,000
                           -------------------------------------------------------------------------
                           -------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.


                                       F-4

<PAGE>

FIREPLACE MANUFACTURERS, INC.
  AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                         1997           1996          1995
- ----------------------------------------------------------------------------------------------
<S>                                                   <C>           <C>           <C>
Cash Flows From Operating Activities
  Net income                                          $   994,000   $    44,000   $    457,000
  Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
    Depreciation and amortization                         618,000       558,000        516,000
    Deferred income taxes                                (195,000)      (11,000)       162,000
    Compensation applied to notes receivable              149,000        56,000         37,000
    Other                                                  47,000            -              -
    Bad debt expense                                      142,000       272,000        140,000
    Issuance of common stock for services                 147,000         5,000             -
    Changes in assets and liabilities:
      (Increase) decrease in:
        Trade accounts receivable                         824,000    (1,084,000)      (259,000)
        Inventories                                       888,000       767,000     (1,906,000)
        Prepaid expenses and other assets                 (33,000)       41,000          1,000
      Increase (decrease) in accounts payable
        and accrued liabilities                           132,000      (775,000)     1,675,000
                                                      ----------------------------------------
          NET CASH PROVIDED BY (USED IN)
            OPERATING ACTIVITIES                        3,713,000      (127,000)       823,000
                                                      ----------------------------------------
Cash Flows From Investing Activities
  Purchases of equipment and leasehold improvements      (345,000)     (479,000)    (1,024,000)
  Other                                                    23,000            -              -
  Increase in other assets                                (14,000)      (86,000)            -
  Payments (disbursements) on notes receivable from
    officers/stockholders                                 (17,000)       16,000         21,000
                                                      ----------------------------------------
          NET CASH (USED IN) INVESTING ACTIVITIES        (353,000)     (549,000)    (1,003,000)
                                                      ----------------------------------------

Cash Flows From Financing Activities
  Proceeds from long-term debt                                 -        146,000        625,000
  Payments on long-term debt                             (692,000)     (121,000)      (386,000)
  Net proceeds from (payments on) revolving
    line of credit                                     (2,263,000)      720,000        (57,000)
  Repurchase of common stock for retirement              (208,000)      (50,000)            -
                                                      ----------------------------------------
        NET CASH PROVIDED BY (USED IN)
          FINANCING ACTIVITIES                         (3,163,000)      695,000        182,000
                                                      ----------------------------------------
        NET INCREASE IN CASH AND
          CASH EQUIVALENTS                                197,000        19,000          2,000

Cash and Cash Equivalents
  Beginning of year                                       136,000       117,000        115,000
                                                      ----------------------------------------

  End of year                                         $   333,000   $   136,000   $    117,000
                                                      ----------------------------------------
                                                      ----------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.


                                       F-5

<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% of total sales for both 1997 and 1996 and 22%
for 1995.  Accounts receivable from this customer totaled approximately $503,000
and $625,000 at March 31, 1997 and 1996, respectively.  In addition, another
customer represented 12%  and 11% of total sales for 1997 and 1996, respectively
(sales to this customer in 1995 were less than 10% of total sales).  Accounts
receivable from this customer were approximately $279,000 and $430,000 at
March 31, 1997 and 1996, respectively.  There were no other customers who
represented greater than 10% of sales.


                                       F-6

<PAGE>

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.

The Company periodically throughout the year has amounts on deposit at a
financial institution that exceeds the Federal Deposit Insurance Corporation
Limit.

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 $464,000,
$396,000 and $372,000 during 1997, 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.

RESEARCH AND DEVELOPMENT:

The Company incurs research and development costs in developing new products.
During 1997, 1996 and 1995, the company expensed approximately $607,000,
$586,000 and $693,000, respectively, in research and development costs.


                                       F-7

<PAGE>

NOTE 1.   NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EARNINGS PER SHARE:

Earnings per share are computed using the weighted average number of common
shares and common share equivalents outstanding during the respective years.

FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying amounts of cash and cash equivalents and 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 and approximates the carrying amount.

The fair value estimates presented herein are based on pertinent information
available to management as of March 31, 1997 and 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.

RECLASSIFICATIONS:

The Company made certain reclassifications to the previously issued 1996
financial statements with no effect on income or equity.

NOTE 2.   INVENTORIES

Inventories consist of the following:

                                                      1997             1996
- --------------------------------------------------------------------------------
   Raw materials                                  $ 1,254,000     $  1,643,000
   Work-in-process                                    265,000          316,000
   Finished goods                                     328,000          776,000
                                                  ------------------------------

                                                  $ 1,847,000     $  2,735,000
                                                  ------------------------------
                                                  ------------------------------


                                       F-8

<PAGE>

NOTE 3.   EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following:

                                                          1997           1996
- --------------------------------------------------------------------------------

   Machinery and equipment                           $  2,982,000   $  3,528,000
   Tools, dies and molds                                1,322,000      2,761,000
   Furniture, fixtures and vehicles                       629,000        637,000
   Leasehold improvements                                  64,000         92,000
   Research and development equipment                     279,000        282,000
                                                     ---------------------------
                                                        5,276,000      7,300,000
   Less accumulated depreciation and amortization       3,515,000      5,196,000
                                                     ---------------------------

                                                     $  1,761,000   $  2,104,000
                                                     ---------------------------
                                                     ---------------------------


NOTE 4.   ACCRUED LIABILITIES

Accrued liabilities consist of the following.

                                                          1997           1996
- --------------------------------------------------------------------------------

   Compensation                                      $    841,000   $    318,000
   Income taxes payable                                   136,000             -
   Warranty                                               148,000        153,000
   Other                                                  329,000        246,000
                                                     ---------------------------

                                                     $  1,454,000   $    717,000
                                                     ---------------------------
                                                     ---------------------------

NOTE 5.   LINE OF CREDIT

The Company may borrow up to $4,000,000 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 (8.5% at March 31, 1997) plus .5%, with interest payable
monthly.  Advances are limited to 80% of eligible accounts receivable; plus 50%
of eligible inventories (inventory advances are not to exceed $500,000).  The
line of credit expires on August 1, 1997.  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.  At March 31, 1997, there were no amounts
outstanding under this agreement and $2,080,000 of availability.


                                       F-9

<PAGE>

NOTE. 5.  LINE OF CREDIT (CONTINUED)

The Company also has available to them a $500,000 equipment line of credit which
converts to a forty-eight month term loan on August 1, 1997.  The borrowings
under the line bear interest at the bank's prime rate plus 1%.  The line is
subject to the same covenants as the line of credit.  At March 31, 1997, there
were no amounts outstanding under this agreement.

NOTE 6.   LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>

                                                                  1997             1996
- ------------------------------------------------------------------------------------------
  <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 plus .5% to 1% due
    in monthly principal amounts of approximately
    $16,000, plus interest, through February 1999.
    The equipment term loans are part of the agreement
    covering the line of credit and are subject to the same
    covenants.                                                 $  367,000     $    555,000

  Notes payable to a finance company, secured by
    vehicles, bearing interest 8.75%, due in monthly
    principal and interest payments of approximately
    $2,500 through March 2000.                                     80,000          104,000

  Unsecured note payable, paid off in March 1997.                      -           480,000
                                                               ---------------------------
                                                                  447,000        1,139,000
  Less current maturities                                         212,000          235,000
                                                               ---------------------------

                                                               $  235,000     $    904,000
                                                               ---------------------------
                                                               ---------------------------
</TABLE>

Maturities of long-term debt are as follows: 1998 $212,000; 1999 $206,000 and
2000 $29,000.


                                      F-10

<PAGE>

NOTE 7.   INCOME TAXES

The provision for income taxes consists of the following:
<TABLE>
<CAPTION>

                                                      1997          1996            1995
- -------------------------------------------------------------------------------------------
<S>                                                <C>           <C>            <C>
  Current                                          $ 396,000     $   12,000     $    32,000
  Deferred                                          (195,000)       (11,000)        162,000
                                                   ----------------------------------------

                                                   $ 201,000     $    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>
                                                      1997          1996            1995
- -------------------------------------------------------------------------------------------
<S>                                                <C>           <C>            <C>
  Federal income tax                               $ 418,000     $   16,000     $   228,000
  State income tax, net of federal benefit            72,000          3,000          39,000
  Federal and state income tax credits generated    (114,000)       (15,000)       (178,000)
  Change in valuation reserve                       (192,000)        15,000          97,000
  Officers life insurance                             11,000        (30,000)             -
  Prior year state taxes assessment                       -          13,000              -
  Other                                                6,000         (1,000)          8,000
                                                   ----------------------------------------

                                                   $ 201,000     $    1,000     $   194,000
                                                   ----------------------------------------
                                                   ----------------------------------------
</TABLE>


                                      F-11

<PAGE>

NOTE 7.   INCOME TAXES (CONTINUED)

Significant components of the Company's deferred tax assets and liabilities as
of March 31, 1997 and 1996 are as follows:

                                                      1997            1996
- -----------------------------------------------------------------------------

  Deferred Tax Assets
    Tax credit carryforward                       $   155,000     $   332,000
    Bad debt reserve                                  109,000          96,000
    Accrued expenses                                   33,000          22,000
    Warranty reserve                                   59,000          61,000
    Other reserves                                     65,000          32,000
    Other                                                  -           12,000
    Valuation allowance for deferred tax assets            -         (192,000)
                                                  ---------------------------
         TOTAL DEFERRED TAX ASSETS, NET               421,000         363,000
                                                  ---------------------------

  Deferred Tax Liabilities
    Depreciation                                     (281,000)       (415,000)
    Other                                                  -           (3,000)
                                                  ---------------------------

         TOTAL DEFERRED TAX LIABILITIES              (281,000)       (418,000)
                                                  ---------------------------

                                                  $   140,000     $   (55,000)
                                                  ---------------------------
                                                  ---------------------------

Management estimates no valuation allowance is needed due to expected future
taxable income will be adequate to realize the deferred tax assets.

The components giving rise to the net deferred assets (liabilities) described
above, have been included in the accompanying consolidated balance sheet as of
March 31, 1997 and 1996 as follows:

                                                      1997            1996
- -----------------------------------------------------------------------------

  Current assets                                  $   421,000     $   363,000
  Noncurrent (liabilities)                           (281,000)       (418,000)
                                                  ---------------------------

                                                  $   140,000     $   (55,000)
                                                  ---------------------------
                                                  ---------------------------

Business enterprise zone credit carryforwards as of March 31, 1997 expire as
follows: 2011 $48,000; 2012 $107,000 (total $155,000).


                                      F-12

<PAGE>

NOTE 8.   RELATED PARTY TRANSACTIONS

At March 31, 1997 and 1996, advances to officers/stockholders totaled $-0- and
$132,000, respectively.  These amounts originated by cash advances which were to
be repaid in 1992 and 1994.  On March 31, 1992, terms related to the repayment
of these advances were modified.  Under the terms of the revised agreements,
principal payments on the advances were 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 required cash payments were not made, the principal
and interest due was to be offset against compensation otherwise due these
individuals. The compensation used to repay these notes was determined annually
based on merit, Company profits, and reasonable business practices.  In 1996,
the Company determined the most likely method of collection was through future
compensation or bonuses and accordingly, reclassified the receivables as a
reduction of stockholders' equity.  Compensation expense of approximately
$147,000, $56,000 and $37,000 was charged to operating results for the reduction
of these notes during 1997, 1996 and 1995, respectively. (See Note 11)

NOTE 9.   COMMITMENTS AND CONTINGENCIES

OPERATING LEASES:

The Company's operations are conducted at facilities under an operating lease
expiring April 30, 1999 and due in monthly payments of approximately $28,000.

The Company also leases equipment under three long-term agreements.  Two of the
long-term agreements are with a company which is wholly-owned by two
officers/stockholders of the Company.  These agreements require monthly payments
of approximately $7,000 and expire in July 2000 and November 2000 with a total
commitment of approximately $212,000.

The future rental commitment on all leases at March 31, 1997 are as follows:
1998 $433,000; 1999 $433,000; 2000 $80,000; 2001 $10,000; and 2002 $6,000 (total
$962,000).

Rent expense was $382,000, $294,000 and $288,000 during 1997, 1996 and 1995,
respectively.  Rent expense paid to related parties during 1997 and 1996 was
$63,000 and $31,000, respectively.  There was no rent expense paid to related
parties during 1995.

CONTINGENCY:

A claim has been asserted against the Company which resulted in legal
proceedings against the Company as of the date of these financial statements.
The claim is on an infringement of the Company's patent.  The Company had an
independent patent attorney review the patent 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-13

<PAGE>

NOTE 9.   COMMITMENTS AND CONTINGENCIES (CONTINUED)

ROYALTY AGREEMENT:

The Company entered into a nonexclusive license agreement which expired in March
1996.  Total royalty expenses under the agreement was approximately $-0-,
$113,000 and $207,000 during 1997, 1996 and 1995, respectively.

SEVERANCE COMPENSATION AGREEMENT:

The Company has entered into a severance compensation agreement with three of
the Company's officers which expires on the earliest of the following dates:
five years expiring in May 2001; termination of the executive's employment based
on death, disability, retirement, or cause or by the executive other than for
good reason; one year from the date of a change in control if the executive has
not terminated his employment for good reason.  The terms of the agreement
require severance compensation equal to 299% of the executive's average
annualized compensation includable in his gross income for the five taxable
years immediately preceding the date of the change in control.

SALE OF TRADE RECEIVABLES:

The Company began to utilize an agreement with a finance company whereby the
finance company, with the approval of the customer, will purchase receivables
from the Company.  The finance company then pays the Company for the invoiced
purchase under two programs.  Under the first program the invoice is paid within
15 days at a discount of 2.25%.  Under the second program the invoice is paid
within 30 days at a discount of 1.75%.  The agreement contains a clause whereby
if the finance company repossess' any inventory of the customer, the Company is
obligated to buy back the repossessed inventory.  The Company accounts for this
arrangement as a sale of receivables.  During 1997, the Company sold receivables
of approximately $2,400,000.  The balance sheet at March 31, 1997 includes
approximately $150,000 due from the finance company.  Management estimates that
there will be no amounts of inventory repurchased under this agreement.

NOTE 10.  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 $13,000, $11,000 and $10,000 during 1997,
1996 and 1995, respectively.


                                      F-14

<PAGE>

NOTE 11.  DISCRETIONARY BONUSES

The Company pays discretionary bonuses to their officers and key employees.  The
amounts of these bonuses charged to expenses were as follows:

                                      Reduction of
                                          Notes         Common
                            Cash       Receivable        Stock         Total
- -------------------------------------------------------------------------------
   1997
     Officers            $ 260,000     $  149,000     $  147,000     $  556,000
     Other employees       281,000             -              -         281,000

   1996
     Officers            $  64,000     $   56,000     $       -      $  120,000
     Other employees        10,000             -              -          10,000

   1995
     Officers            $ 402,000     $   37,000     $       -      $  439,000
     Other employees       112,000             -              -         112,000


NOTE 12.  SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION

                                  1997           1996           1995
- -----------------------------------------------------------------------
   Cash payments for:
     Interest                  $  290,000     $  370,000     $  321,000
                               ----------------------------------------
                               ----------------------------------------

     Income taxes              $  189,000     $   85,000     $   64,000
                               ----------------------------------------
                               ----------------------------------------


                                      F-15

<PAGE>

NOTE 13.  RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) has issued Statement No. 125,
"ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT
OF LIABILITIES," and Statement No. 127, "DEFERRAL OF THE EFFECTIVE DATE OF
CERTAIN PROVISIONS" of FASB Statement No. 125 (an amendment of FASB Statement
No. 125) which becomes effective for transactions occurring after December 31,
1996 and certain transactions after December 31, 1997.  These Statements do not
permit earlier or retroactive application.  The Company does not believe the
adoption of these two Statements will have a material effect on the financial
statements.

The FASB has issued Statement No. 128, "EARNINGS PER SHARE," which supersedes
APB Opinion No. 15.  Statement No. 128 requires the presentation of earnings per
share by all entities that have common stock or potential common stock, such as
options, warrants and convertible securities, outstanding that trade in a public
market.  Those entities that have only common stock outstanding are required to
present basic earnings per-share amounts.  All other entities are required to
present basic and diluted per-share amounts.  Diluted per-share amounts assume
the conversion, exercise or issuance of all potential common stock instruments
unless the effect is to reduce a loss or increase the income per common share
from continuing operations.  All entities required to present per-share amounts
must initially apply Statement No. 128 for annual and interim periods ending
after December 15, 1997.  Earlier application is not permitted.  The Company
believes that the implementation of this new pronouncement will not have a
material impact on the amounts calculated under the current earnings per share
methodology.

NOTE 14.  SUBSEQUENT EVENT

The Company has, and may continue to, repurchase its common stock.  Between
March 31, 1997 and May 8, 1997 the Company has repurchased 20,400 shares of
common stock for $25,000.


                                      F-16

<PAGE>

                          INDEPENDENT AUDITOR'S REPORT
                                 ON THE SCHEDULE


To the Board of Directors
Fireplace Manufacturers, Inc.
Santa Ana, California


Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole.  The supplemental schedule II is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements.  This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.



McGladrey & Pullen, LLP


Anaheim, California
May 8, 1997


                                      F-17

<PAGE>

FIREPLACE MANUFACTURERS, INC.
  AND SUBSIDIARY

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT
YEARS ENDED MARCH 31, 1997, 1996 AND 1995

                           Balance     Provisions
                          Beginning    Charged to                    Balance
Years Ended March 31,      of Year       Expense     Charge-Offs   End of Year
- -----------------------------------------------------------------------------

Allowance for doubtful
   accounts:

   1997                  $  239,000    $  142,000    $ (109,000)   $  272,000
                         ----------------------------------------------------
                         ----------------------------------------------------

   1996                  $  175,000    $  257,000    $ (193,000)   $  239,000
                         ----------------------------------------------------
                         ----------------------------------------------------

   1995                  $  190,000    $  155,000    $ (170,000)   $  175,000
                         ----------------------------------------------------
                         ----------------------------------------------------

                                     F-18

<PAGE>

                                     AMENDED AND

                          RESTATED ARTICLES OF INCORPORATION

                                          OF

                            FIREPLACE MANUFACTURERS, INC.

    WILLARD P. HARRIS and JOHN D. HORNSBY certify that:

    1.  They are the president and the secretary, respectively, of Fireplace
Manufacturers, Inc., a California corporation.

    2.  The articles of incorporation of the corporation, as amended to the
date of the filing of this Certificate, including amendments set forth herein
but not separately filed (and with the omissions required by Section 910 of the
Corporations Code) are restated as follows:

    ONE.  The name of the corporation is FIREPLACE MANUFACTURERS, INC.

    TWO.  The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession to be incorporated by the California Corporations
Code.

    THREE.  The Company is authorized to issue two (2) classes of shares of 
stock to be designated "Common Shares" and "Preferred Shares", respectively. 
The total number of Common Shares which the Company is authorized to issue is 
Ten Million (10,000,000) and the total number of Preferred Shares which the 
Company is authorized to issue is One Million (1,000,000).

    PREFERRED SHARES.  The Preferred Shares may be issued from time to time in
one or more series.  Preferred Shares shall have a par value of one dollar
($1.00) per share.  The Board of Directors is authorized to fix the number of
shares of any such series and to determine the designation of any such series.
The Board of Directors is also authorized to determine or alter the rights,
preferences, privileges and restrictions granted to or imposed upon any series
of Preferred Shares and, within the limits and restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the number
of shares constituting any series, to increase or decrease (but not below the
number of shares of such series then outstanding) the number of shares of any
such series subject to the issuance of that series.

<PAGE>

    FOUR.  The corporation elects to be governed by all of the provisions of
the General Corporation Law (as added to the California Corporations Code
effective January 1, 1977, and as subsequently amended) not otherwise applicable
to this corporation under Chapter 23 of said General Corporation Law.

    3.  The amendment herein set forth has been duly approved by the Board of
Directors.

    4.  The amendment herein set forth has been duly approved by the required
vote of the shareholders in accordance with Section 902 of the Corporations
Code.  The corporation has only one class of shares outstanding and the number
of outstanding shares is  2,500,000.  The number of shares voting in favor of
the amendment equaled or exceeded the vote required. The percentage vote
required for the approval of the amendment herein set forth was more than 50%.

Dated:  March    , 1984

                                       /s/ Willard P. Harris
                                       -----------------------------------
                                       WILLARD P. HARRIS, President


                                       /s/ John D. Hornsby
                                       -----------------------------------
                                       JOHN D. HORNSBY, Secretary


    WILLARD P. HARRIS and JOHN D. HORNSBY declare under penalty of perjury that
under the laws of the State of California they have read the foregoing Restated
Articles of Incorporation and know the contents thereof and that the same are
true of their own knowledge.


                                       /s/ Willard P. Harris
                                       -----------------------------------
                                       WILLARD P. HARRIS


                                       /s/ John D. Hornsby
                                       -----------------------------------
                                       JOHN D. HORNSBY



                                         -2-

<PAGE>

                                      BY-LAWS OF
                                           
                                           
                            FIREPLACE MANUFACTURERS, INC.
                               a California corporation
                                           
                                      ARTICLE I
                                           
                                       Offices
                                           
    Section 1.  PRINCIPAL EXECUTIVE OFFICE.  The principal executive office of
the corporation is hereby fixed and located at:  2701 South Harbor Boulevard,
Santa Ana, California 92704.  The board of directors is hereby granted full
power and authority to change said principal executive office from one location
to another.  Any such change shall be noted on the by-laws by the secretary,
opposite this section, or this section may be amended to state the new location.
    
    Section 2.  OTHER OFFICES.  Other business offices may at any time be
established by the board of directors at any place or places where the
corporation is qualified to do business.
    
                                      ARTICLE II
                                           
                               Meetings of Shareholders
                                           
    Section 1.  PLACE OF MEETINGS.  All annual or other meetings of
shareholders shall be held at the principal executive office of the corporation,
or at any other place within or without the State of California which may be
designated either by the board of directors or by the written consent of all
persons entitled to vote thereat and not present at the meeting, given either
before or after the meeting and filed with the secretary of the corporation.
    
    Section 2.  ANNUAL MEETINGS.  Annual meetings shall be held at such date
and time as the directors may from time to time fix; provided, however, that
each annual meeting shall be held within fifteen months of the date of the
preceding annual meeting.  At such meetings directors shall be elected, reports
of the affairs of the corporation shall be considered, and any other business
may be transacted which is within the powers of the shareholders.

<PAGE>

    Written notice of each annual meeting shall be given to each shareholder
entitled to vote, either personally or by first class mail (third class mail if
the corporation has 500 shareholders of record on the record date) or other
means of  written communication, charges prepaid, addressed to such shareholder
at his address appearing on the books of the corporation or given by him to the
corporation for the purpose of notice.  If any notice or report addressed to the
shareholder at the address of such shareholder appearing on the books of the
corporation is returned to the corporation by the United States Postal Service
marked to indicate that the United States Postal Service is unable to deliver
the notice or report to the shareholder at such address, all future notices or
reports shall be deemed to have been duly given without further mailing if the
same shall be available for the shareholder upon written demand of the
shareholder at the principal executive office of the corporation for a period of
one year from the date of the giving of the notice or report to all other
shareholders.  If a shareholder gives no address, notice shall be deemed to have
been given him if sent by mail or other means of written communication addressed
to the place where the principal executive office of the corporation is
situated, or if published at least once in some newspaper of general circulation
in the county in which said principal executive office is located.

    All such notices shall be given to each shareholder entitled thereto not
less than ten (10) days nor more than sixty (60) days before each annual
meeting.  Any such notice shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by other means of written
communication.
    
    An affidavit of mailing of any such notice in accordance with the foregoing
provisions, executed by the secretary, assistant secretary or any transfer agent
of the Corporation shall be PRIMA FACIE evidence of the giving of the notice.

    Such notices shall specify
    
         (a)  the place, the date, and the hour of such meeting;
    
         (b)  those matters which the board, at the time of the mailing of the
    notice, intends to present for action by the shareholders;
    
         (c)  if directors are to be elected, the names of nominees intended at
    the time of the notice to be presented by management for election;
    
                                         -2-     

<PAGE>

         (d)  the general nature of a proposal, if any, to take action with
    respect to approval of, (i) a contract or other transaction with an
    interested director, (ii) an amendment of the articles of incorporation,
    (iii) a reorganization of the corporation as defined in Section 181 of the
    General Corporation Law, (iv) a voluntary dissolution of the corporation,
    or (v) a distribution in dissolution other than in accordance with the
    rights of outstanding preferred shares, if any; and 
    
         (e)  such other matters, if any, as may be expressly required by
    statute.
    
    Section 3.   SPECIAL MEETINGS.  Special meetings of the shareholders, for
the purpose of taking any action permitted by the shareholders under the General
Corporation Law and the articles of incorporation of this corporation may be
called at any time by the chairman of the board or the president, or by the
board of directors, or by one or more shareholders holding not less than ten
percent (10%) of the votes at the meeting.  Upon request in writing that a
special meeting of shareholders be called for any proper purpose, directed to
the chairman of the board, president, vice president or secretary by any person
(other than the board) entitled to call a special meeting of shareholders, the
officer forthwith shall cause notice to be given to shareholders entitled to
vote that a meeting will be held at a time requested by the person or persons
calling the meeting, not less than thirty-five (35) nor more than sixty (60)
days after receipt of the request.  If the notice is not given within twenty
(20) days after receipt of the request, the person or persons requesting the
meeting may give the notice.  Except in special cases where other express
provision is made by statute, notice of such special meetings shall be given in
the same manner as for annual meetings of shareholders.  In addition to the
matters required by items (a) and, if applicable, (c) of the preceding Section
2, notice of any special meeting shall specify the general nature of the
business to be transacted, and that no other business may be transacted at such
meeting.

    If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president, any
vice president, or the secretary of the corporation.


                                         -3-
<PAGE>

    Section 4.  QUORUM.  The presence in person or by proxy of the persons
entitled to vote a majority of the voting shares at any meeting shall constitute
a quorum for the transaction of business.  The shareholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.

    Section 5.  ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders'
meeting, annual or special, whether or not a quorum is present, may be adjourned
from time to time by the vote of a majority of the shares, the holders of which
are either present in person or represented by proxy thereat, but in the absence
of a quorum no other business may be transacted at such meeting, except as
provided in the preceding Section 4.
    
    When any shareholders' meeting, either annual or special, is adjourned for
forty-five days or more, or if after adjournment a new record date is fixed for
the adjourned meeting, notice of the adjourned meeting shall be given as in the
case of an original meeting.  Except as provided above, it shall not be
necessary to give notice of the time and place of the adjourned meeting or of
the business to be transacted thereat, other than by announcement of the time
and place thereof at the meeting at which such adjournment is taken.
    
    Section 6.  VOTING.  Unless a record date for voting purposes be fixed as
provided in Section 1 of Article V of these by-laws then, subject to the
provisions of Section 4 of Article V of these by-laws, only persons in whose
names shares entitled to vote stand on the stock records of the corporation at
the close of business on the business day next preceding the day on which notice
of the meeting is given or if such notice is waived, at the close of business on
the business day next preceding the day on which the meeting of shareholders is
held, shall be entitled to vote at such meeting, and such day shall be the
record date for such meeting.  Such vote may be a voice vote or by ballot;
provided, however, that all elections for directors must be by ballot upon
demand made by a shareholder at any election and before the voting begins.
    
    If a quorum is present except with respect to election of directors, the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also
    
                                         -4-

<PAGE>

constitute a majority of the required quorum) on any matter shall be the act of
the shareholders, unless the vote of a greater number or voting by classes is
required by the General Corporation Law or the articles of incorporation.
Subject to the requirements of the next sentence, every Shareholder entitled to
vote at any election for directors shall have the right to cumulate his votes
and give one candidate a number of votes equal to the number of directors to be
elected multiplied by the number of votes to which his shares are entitled, or
to distribute his votes on the same principle among as many candidates as he
shall think fit.  No shareholder shall be entitled to cumulative votes unless
the name of the candidate or candidates for whom such votes would be cast has
been placed in nomination prior to the voting and any shareholder has given
notice at the meeting prior to the voting of such shareholder's intention to
cumulate his votes.  The candidates receiving the highest number of affirmative
votes of shares entitled to be voted for them, up to the number of directors to
be elected, shall be elected.  Votes against the director and votes withheld
shall have no legal effect.

    Section 7.  VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS.  The
transactions of any meeting of shareholders, either annual or special, however
called and noticed, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present either in person or by proxy,
and if, either before or after the meeting, each of the persons entitled to
vote, not present in person or by proxy, or who, though present, has, at the
beginning of the meeting, properly objected to the transaction of any business
because the meeting was not lawfully called or convened, or to particular
matters of business legally required to be included in the notice, but not so
included, signs a written waiver of notice, or a consent to the holding of such
meeting, or an approval of the minutes thereof; provided, however, that unless
there has been unanimous approval by those entitled to vote, such written
waivers, consents or approvals shall contain a general statement of a proposal,
if any, to take action with respect to approval of, (i) a contract or other
transaction with an interested director, (ii) an amendment of the articles of
incorporation, (iii) a reorganization of the corporation as defined in Section
181 of the General Corporation Law, (iv) a voluntary dissolution of the
corporation, or (v) a distribution in dissolution other than in accordance with
the rights of outstanding preferred shares. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.

                                         -5-

<PAGE>

    All written waivers of notice, or a consent to the holding of a meeting, or
any approval of the minutes shall state the general nature of a proposal, if
any, to take action with respect to approval of, (i) a contract or other
transaction with an interested director, (ii) an amendment of the articles of
incorporation, (iii) a reorganization of the corporation as defined in Section
181 of the General Corporation Law, (iv) a voluntary dissolution of the
corporation, or (v) a distribution in dissolution other than in accordance with
the rights of outstanding preferred shares, if any.

    Section 8.  ACTION WITHOUT MEETING.  Directors may be elected without a
meeting by a consent in writing, setting forth action so taken, signed by all of
the persons who would be entitled to vote for the election of directors,
provided that, without notice except as hereinafter set forth, a director may be
elected at any time to fill a vacancy not filled by the directors by the written
consent of persons holding a majority of the outstanding shares entitled to vote
for the election of directors.

    Any other action which, under any provision of the General Corporation Law,
may be taken at a meeting of the shareholders, may be taken without a meeting,
and without notice except as hereinafter set forth, if a consent in writing,
setting forth the action so taken, is signed by the holders of outstanding
shares having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted.

    Unless the consents of all shareholders entitled to vote have been
solicited in writing,
    
         (a)  Notice of any proposed shareholder approval of, (i) a contract or
    other transaction with an interested director, (ii) an indemnification of
    an agent of the corporation as authorized by Section 16, of Article III, of
    these by-laws, (iii) a reorganization of the corporation as defined in
    Section 181 of the General Corporation Law, or (iv) a distribution in
    dissolution other than in accordance with the rights of outstanding
    preferred shares, if any, without a meeting by less than unanimous written
    consent, shall be given at least ten (10) days before the consummation of
    the action authorized by such approval; and
    
         (b)  Prompt notice shall be given of the taking of any other corporate
    action approved by shareholders
    
                                         -6-

<PAGE>

    without a meeting by less than unanimous written consent, to those
    shareholders entitled to vote who have not consented in writing.
    
Such notices shall be given in the manner and shall be deemed to have been given
as provided in Section 2 of Article II of these by-laws.

    Unless, as provided in Section 1 of Article V of these by-laws, the board
of directors has fixed a record date for the determination of shareholders
entitled to notice of and to give such written consent the record date for such
determination shall be the day on which the first written consent is given.  All
such written consents shall be filed with the secretary of the corporation.
    
    Any shareholder giving a written consent, or the shareholder's
proxyholders, or a transferee of the shares or a personal representative of the
shareholder or their respective proxyholders, may revoke the consent by a
writing received by the corporation prior to the time that written consents of
the number of shares required to authorize the proposed action have been filed
with the secretary of the corporation, but may not do so thereafter.  Such
revocation is effective upon its receipt by the secretary of the corporation.

    Section 9.  PROXIES.  Every person entitled to vote or execute consents
shall have the right to do so either in person or by one or more agents
authorized by a written proxy executed by such person or his duly authorized
agent and filed with the secretary of the corporation.  Any proxy duly executed
is not revoked and continues in full force and effect until, (i) an instrument
revoking it or a duly executed proxy bearing a later date is filed with the
secretary of the corporation prior to the vote pursuant thereto, (ii) the person
executing the proxy attends the meeting and votes in person, or (iii) written
notice of the death or incapacity of the maker of such proxy is received by the
corporation before the vote pursuant thereto is counted; provided that no such
proxy shall be valid after the expiration of eleven (11) months from the date of
its execution, unless the person executing it specifies therein the length of
time for which such proxy is to continue in force.
    
    A proxy is any written authorization signed by a shareholder or the
shareholder's attorney-in-fact giving another person or persons power to vote
with respect to the shares of such shareholder.  Signed, for the purpose


                                         -7-
<PAGE>

of a proxy, means the placing of the shareholder's name on the proxy (whether by
manual signature, typewriting, telegraphic transmission or otherwise) by the
shareholder or the shareholder's attorney-in-fact.

    Section 10.  INSPECTORS OF ELECTION.  In advance of any meeting of
shareholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment
thereof.  If inspectors of election are not so appointed, the chairman of any
such meeting may, and on the request of any shareholder or his proxy shall, make
such appointment at the meeting.  The number of inspectors shall be either one
or three.  If appointed at a meeting on the request of one or more shareholders
or proxies, the majority of shares represented in person or by proxy shall
determine whether one or three inspectors are to be appointed.  In case any
person appointed as inspector fails to appear or fails or refuses to act, the
vacancy may, and on the request of any shareholder or a shareholder's proxy
shall, be filled by appointment by the board of directors in advance of the
meeting, or at the meeting by the chairman of the meeting.

    The duties of such inspectors shall be as prescribed by Section 707 of the
General Corporation Law and shall include:  determining the number of shares
outstanding and the voting power of each; the shares represented at the meeting;
the existence of a quorum; the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining when the polls shall close;
determining the result; and such acts as may be proper to conduct the election
or vote with fairness to all shareholders.  In the determination of the validity
and effect of proxies the dates contained on the forms of proxy shall
presumptively determine the order of execution of the proxies, regardless of the
postmark dates on the envelopes in which they are mailed.
    
    The inspectors of election shall perform their duties impartially, in good
faith, to the best of their ability and as expeditiously as is practical.  If
there are three inspectors of election, the decision, act or certificate of a
majority is effective in all respects as the decision, act or certificate of
all.  Any report or certificate made by the inspectors of election is PRIMA
FACIE evidence of the facts stated therein.
    
                                         -8-

<PAGE>

    Section 11.  PRESIDING OFFICER; ORDER OF BUSINESS; CONDUCT OF MEETING.
    
         (a)  Meetings of the shareholders shall be presided over by such
    person as shall be designated by the board of directors or if no
    designation is made, then by the chairman of the board of directors, or if
    there is no chairman of the board of directors, then the president.  The
    secretary of this corporation, or in his absence, an assistant secretary,
    shall act as secretary of the meeting.
    
         (b)  Subject to the following, meetings of shareholders shall
    generally follow accepted rules of parliamentary procedure.
         
              (1)  The chairman of the meeting shall have absolute authority
         over matters of procedure and there shall be no appeal from the ruling
         of the chairman.  If the chairman, in his absolute discretion, deems
         it advisable to dispense with the rules of parliamentary procedure as
         to any one meeting of shareholders or a part thereof, the chairman
         shall so state and shall clearly state the rules under which the
         meeting or appropriate part thereof shall be conducted.
              
              (2)  If disorder shall arise which prevents continuation of the
         legitimate business of the meeting, the chairman may quit the chair
         and announce the adjournment of the meeting; and upon his so doing,
         the meeting is immediately adjourned.
              
              (3)  The chairman may ask or require that anyone not a bona fide
         shareholder or proxy holder leave the meeting.
              
              (4)  A resolution or motion shall be only considered for a vote
         if proposed by a shareholder or duly authorized proxy holder, and
         seconded by an individual, who is a shareholder or a duly authorized
         proxy holder, other than the individual who proposed the resolution or
         motion.
              
                                         -9-

<PAGE>

                                     ARTICLE III
                                           
                                      Directors
                                           
    Section 1.  POWERS.  Subject to limitations of the articles of
incorporation and of the General Corporation Law as to action to be authorized
or approved by the shareholders, and subject to the duties of directors as
prescribed by the by-laws, all corporate powers shall be exercised by or under
the authority of, and the business and affairs of the corporation shall be
controlled by, the board of directors.  Without prejudice to such general
powers, but subject to the same limitations, it is hereby expressly declared
that the directors shall have the following powers, to wit:
 
         FIRST - To select and remove all the officers, agents and employees of
the corporation, prescribe such powers and duties for them as may not be
inconsistent with law, with the articles of incorporation or the by-laws, fix
their compensation and require from them security for faithful service.

         SECOND - to conduct, manage and control the affairs and business of
the corporation, and to make such rules and regulations therefor not
inconsistent with law, or with the articles of incorporation or the by-laws, as
they may deem best.
         
         THIRD - To change the principal executive office and principal office
for the transaction of the business of the corporation from one location to
another as provided in Article I, Section 1, of these by-laws; to fix and locate
from time to time one or more subsidiary offices of the corporation within or
without the State of California, as provided in Article I, Section 2, of these
by-laws; to designate any place within or without the State of California for
the holding of any shareholders' meeting or meetings; and to adopt, make and use
a corporate seal, and to prescribe the forms of certificates of stock, and to
alter the form of such seal and of such certificates from time to time, as in
their judgment they may deem best, provided such seal and such certificates
shall at all times comply with the provisions of law.
         
         FOURTH - To authorize the issue of shares of stock of the corporation
from time to time, upon such terms as may be lawful.
         
         FIFTH - To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to
         
                                         -10-

<PAGE>

be executed and delivered therefor, in the corporate name, promissory notes,
bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other
evidences of debt and securities therefor.

         SIXTH - By resolution adopted by a majority of the authorized number
of directors, to designate an executive and other committees, each consisting of
two or more directors, to serve at the pleasure of the board, and to prescribe
the manner in which proceedings of such committee shall be conducted.  Unless
the board of directors shall otherwise prescribe the manner of proceedings of
any such committee, meetings of such committee may be regularly scheduled in
advance and may be called at any time by any two members thereof; otherwise, the
provisions of these by-laws with respect to notice and conduct of meetings of
the board shall govern.  Any such committee, to the extent provided in a
resolution of the board, may have all of the authority of the board, except with
respect to:

              (i)  the approval of any action for which the General Corporation
    Law or the articles of incorporation also require shareholder approval;
    
             (ii)  the filling of vacancies on the board or in any committee;
    
            (iii)  the fixing of compensation of the directors for serving on
    the board or on any committee;
    
             (iv)  the adoption, amendment or repeal of by-laws;
    
              (v)  the amendment or repeal of any resolution of the board;
    
             (vi)  any distribution to the shareholders, except at a rate or in
    a periodic amount or within a price range determined by the board; and
    
             (vii)  the appointment of other committees of the board or the
    members thereof.
    
    Section 2.  NUMBER AND QUALIFICATION OF DIRECTORS. The number of directors
of the corporation shall not be less than four (4) nor more than seven (7) until
changed by amendment of the articles of incorporation or by a by-law amending
this Section 2 duly adopted  by the vote or written consent of holders of a
majority of the outstanding shares

                                         -11-

<PAGE>

entitled to vote; provided, however, that if the number of shareholders of the
corporation is at any time fewer than five (5), the number of directors of the
corporation shall be equal to such number of shareholders.  The exact number of
directors shall be fixed from time to time, within the limits specified in the
articles of incorporation or in this Section 2, by a by-law or amendment thereof
duly adopted by the vote of a majority of the shares entitled to vote
represented and voting at a duly held meeting at which a quorum is present
(which shares voting affirmatively also constitute a majority of the required
quorum), or by the written consent of the holders of a majority of the
outstanding shares entitled to vote, or by the board of directors.

    Subject to the foregoing provisions for changing the number of directors,
the number of directors of this corporation has been fixed at five (5).
    
    Section 3.  ELECTION AND TERM OF OFFICE.  The directors shall be elected at
each annual meeting of shareholders but, if any such annual meeting is not held
or the directors are not elected thereat, the directors may be elected at any
special meeting of shareholders held for that purpose.  All directors shall hold
office until their respective successors are elected, subject to the General
Corporation Law and the provisions of these by-laws with respect to vacancies on
the board.
    
    Section 4.  VACANCIES.  A vacancy in the board of directors shall be deemed
to exist in case of the death, resignation or removal of any director, if the
authorized number of directors be increased, or if the shareholders fail, at any
annual or special meeting of shareholders at which any director or directors are
elected, to elect the full authorized number of directors to be voted for at
that meeting.  The Board of Directors may also declare vacant the office of a
director who has been declared of unsound mind by an order of court or who has
been convicted of a felony.
    
    Any or all of the directors may be removed without cause if such removal is
approved by the affirmative vote of a majority of the outstanding shares
entitled to vote, subject to the following:
    
    (1)  No director may be removed (unless the entire board is removed) when
the votes cast against removal, or not consenting in writing to such removal,
would be sufficient to elect such director if voted cumulatively

    
                                         -12-

<PAGE>

at an election at which the same total number of votes were cast (or, if such
action is taken by written consent, all shares entitled to vote were voted) and
the entire number of directors authorized at the time of the director's most
recent election were then being elected; and

    (2)  When by the provisions of the articles of incorporation the holders of
the shares of any class or series, voting as a class or series, are entitled to
elect one or more directors, any director so elected may be removed only by the
applicable vote of the holders of the shares of that class or series.
    
    Vacancies in the board of directors, except for a vacancy created by the
removal of a director, may be filled by a majority of the remaining directors,
though less than a quorum, or by a sole remaining director, and each director so
elected shall hold office until his successor is elected at an annual or a
special meeting of the shareholders.  A vacancy in the board of directors
created by the removal of a director may only be filled by the vote of a
majority of the shares entitled to vote represented at a duly held meeting at
which a quorum is present, or by the written consent of the holders of a
majority of the outstanding shares.
    
    The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors.  Any such election by written
consent shall require the consent of holders of a majority of the outstanding
shares entitled to vote.
    
    Any director may resign effective upon giving written notice to the
chairman of the board, the president, the secretary or the board of directors of
the corporation, unless the notice specifies a later time for the effectiveness
of such resignation.  If the board of directors accepts the resignation of a
director tendered to take effect at a future time, the board or the shareholders
shall have the power to elect a successor to take office when the resignation is
to become effective.
    
    No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of his term of office.
    
    Section 5.  PLACE OF MEETING.  Meetings of the board of directors shall be
held at any place within or without the State which has been designated from
time to time by resolution of the board or by written consent of all members of
the board.  In the absence of such designation regular


                                         -13-

<PAGE>

meetings shall be held at the principal executive office of the corporation. 
Special meetings of the board may be held either at a place so designated or at
the principal executive office.

    Section 6.  ORGANIZATION MEETING.  Immediately following each annual
meeting of shareholders the board of directors shall hold a regular meeting at
the place of said annual meeting or at such other place as shall be fixed by the
board of directors, for the purpose of organization, election of officers, and
the transaction of other business. Call and notice of such meetings are hereby
dispensed with.
    
    Section 7.  OTHER REGULAR MEETINGS.  Until otherwise determined by a
majority of the board of directors, other regular meetings of the board of
directors shall not be held and, in lieu thereof, special meetings shall be held
at such times and places as may be appropriately designated in accordance with
Article III, Section 8 of these by-laws.
    
    Section 8.  SPECIAL MEETINGS.  Special meetings of the board of directors
for any purpose or purposes shall be called at any time by the chairman of the
board, the president, any vice president, the secretary or by any two directors.

    Written notice of the date, time and place of special meetings shall be
delivered personally to each director or communicated to each director by
telephone, or by telegraph or mail, charges prepaid, addressed to him at his
address as it is shown upon the records of the corporation or, if it is not so
shown on such records or is not readily ascertainable, at the place at which the
meetings of the directors are regularly held.  In case such notice is mailed or
telegraphed, it shall be deposited in the United States mail or delivered to the
telegraph company in the place in which the principal executive office of the
corporation is located at least forty-eight hours prior to the time of the
holding of the meeting.  In case such notice is delivered, personally or by
telephone, as above provided, it shall be so delivered at least twenty-four
hours prior to the time of the holding of the meeting.  Such mailing,
telegraphing or delivery, personally or by telephone, as above provided, shall
be due, legal and personal notice to such director.
    
    Any notice shall state the date, place and hour of the meeting and may
state the general nature of the business to be transacted.
    
    Section 9.  ACTION WITHOUT MEETING.  Any action by the board of directors
may be taken without a meeting

                                           
                                         -14-

<PAGE>

if all members of the board shall individually or collectively consent in
writing to such action.  Such written consent or consents shall be filed with
the minutes of the proceedings of the board and shall have the same force and
effect as a unanimous vote of such directors.

    Section 10.  ACTION AT A MEETING:  QUORUM AND REQUIRED VOTE.  Presence of a
majority of the authorized number of directors at a meeting of the board of
directors constitutes a quorum for the transaction of business, except as
hereinafter provided.  Members of the board may participate in a meeting through
use of conference telephone or similar communications equipment, so long as all
members participating in such meeting can hear one another.  Participation in a
meeting as permitted in the preceding sentence constitutes presence in person at
such meeting.  Every act or decision done or made by a majority of the directors
present at a meeting duly held at which a quorum is present shall be regarded as
the act of the board of directors, unless a greater number, or the same number
after disqualifying one or more directors from voting, is required by the
General Corporation Law, by the articles of incorporation, or by these by-laws. 
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of a director, provided that any action
taken is approved by at least a majority of the required quorum for such
meeting.
    
    Section 11.  WAIVER OF DEFECTIVELY CALLED OR NOTICED MEETINGS.  Notice of a
meeting need not be given to a director who signs a waiver of notice, or a
consent to holding the meeting or an approval of the minutes thereof, whether
before or after the meeting, or who attends the meeting without protesting the
lack of proper notice to him or her prior to or at the commencement of the
meeting. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
    
    Section 12.  ADJOURNMENT.  A majority of the directors present may adjourn
any directors' meeting to meet again at a stated date, hour and place.
    
    Section 13.  NOTICE OF ADJOURNMENT.  If the meeting is adjourned for more
than 24 hours, notice of any adjournment to another date, time or place shall be
given prior to the time of the adjourned meeting to the directors who were not
present at the time of adjournment.  Otherwise notice of the time and place of
holding an adjourned meeting need not be given to absent directors if the date,
time and place be fixed at the meeting adjourned.


                                         -15-

<PAGE>

    Section 14.  COMPENSATION.  Directors, and members of any committee of the
Board of Directors, shall be entitled to such reasonable compensation for their
services as directors and members of any such committee as shall be fixed from
time to time by resolution of the board of directors and shall also be entitled
to reimbursement for any reasonable expenses incurred in attending such
meetings.  The compensation of directors may be on such basis as is determined
by the resolution of the board of directors.  Any director receiving
compensation under these provisions shall not be barred from serving the
corporation in any other capacity and receiving reasonable compensation for such
other services.

    Section 15.  LOANS.
    
    (a)  The corporation shall not make any loan of money or property to, or
guarantee the obligation of, any director or officer of the corporation or its
parent or subsidiary, unless the transaction or an employee benefit plan
authorizing such loans or guaranties, after disclosure of the right under such a
plan to include officers or directors, (1) is approved by a vote of the
shareholders pursuant to Sections 6 or 8 of Article II of these by-laws, with
the shares owned by the director or officer, or by the directors or officers
then eligible to participate in such plan not being entitled to vote thereon or
(2) is approved by the unanimous vote of the shareholders.

    (b)  Notwithstanding subdivision (a), if the corporation has outstanding
shares held of record by 100 or more persons (determined as provided in Section
605 of the General Corporation Law) on the date of approval by the board of
directors, a loan or guaranty to an officer, whether or not a director, or an
employee benefit plan authorizing such a loan or guaranty to an officer, may be
approved by the board of directors alone by a vote sufficient without counting
the vote of any interested director or directors if the board determines that
such a loan or guaranty or plan may reasonably be expected to benefit the
corporation.

    (c)  A corporation shall not make any loan of money or property to, or
guarantee the obligation of, any person upon the security of shares of the
corporation or of its parent, unless the loan or guaranty is (1) otherwise
adequately secured, (2) made pursuant to an employee benefit plan permitted by
Section 408 of the General Corporation Law, (3) approved by the shareholders
pursuant to Sections 6 or 8 of Article II of these by-laws, with the shares
owned by the borrower not entitled to vote, or (4) approved by unanimous vote of
the shareholders.

                                         -16-

<PAGE>

    (d)  Notwithstanding subdivision (a), a corporation may advance money to a
director or officer of the corporation or of its parent or any subsidiary for
any expenses reasonably anticipated to be incurred in the performance of the
duties of such director or officer, provided that in the absence of such advance
such director or officer would be entitled to be reimbursed for such expenses by
such corporation, its parent or any subsidiary.

    (e)  The provisions of subdivision (a) do not apply to the payment of
premiums in whole or in part by a corporation on a life insurance policy on the
life of a director or officer so long as repayment to the corporation of the
amount paid by it is secured by the proceeds of the policy and its cash
surrender value.

    Section 16.  INDEMNIFICATION OF AGENTS OF THE CORPORATION; PURCHASE OF
LIABILITY INSURANCE.
    
    (a)  For the purposes of this section, "agent" means any person who is or
was a director, officer, employee or other agent of this corporation, or is or
was serving at the request of this corporation as a director, officer, employee
or agent of another foreign or domestic corporation, partnership, joint venture,
trust or other enterprise, or was a director, officer, employee or agent of a
foreign or domestic corporation which was a predecessor corporation of this
corporation or of another enterprise at the request of such predecessor
corporation; "proceeding" means any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative; and
"expenses" includes, without limitation, attorneys' fees and any expenses of
establishing a right to indemnification under subdivision (d) or subdivision
(e)(3) of this Section 16.

    (b)  This corporation shall indemnify any person who was or is a party, or
is threatened to be made a party, to any proceeding (other than an action by or
in the right of this corporation to procure a judgment in its favor) by reason
of the fact that such person is or was an agent of this corporation, against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with such proceeding if such person acted in
good faith and in a manner such person reasonably believed to be in the best
interests of this corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of such person was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contendere or its equivalent shall not, of itself, create a
presumption

                                         -17-

<PAGE>

that the person did not act in good faith and in a manner which the person
reasonably believed to be in the best interests of this corporation or that the
person had reasonable cause to believe that his conduct was unlawful.

    c)  This corporation shall indemnify any person who was or is a party, or
is threatened to be made a party, to any threatened, pending or completed action
by or in the right of this corporation to procure a judgment in its favor by
reason of the fact that such person is or was an agent of this corporation,
against expenses actually and reasonably incurred by such person in connection
with the defense or settlement of such action if such person acted in good
faith, in a manner such person believed to be in the best interests of this
corporation and with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances.  No
indemnification shall be made under this subdivision (c):
 
         (1)  In respect of any claim, issue or matter as to which such person
    shall have been adjudged to be liable to this corporation in the
    performance of such person's duty to this corporation, unless and only to
    the extent that the court in which such proceeding is or was pending shall
    determine upon application that, in view of all the circumstances of the
    case, such person is fairly and reasonably entitled to indemnity for the
    expenses which such court shall determine;
    
         (2)  Of amounts paid in settling or otherwise disposing of a
    threatened or pending action, with or without court approval; or
         
         (3)  Of expenses incurred in defending a threatened or pending
    action which is settled or otherwise disposed of without court
    approval.
         
    (d)  To the extent that an agent of this corporation has been successful on
the merits in defense of any proceeding referred to in subdivision (b) or (c) or
in defense of any claim, issue or matter therein, the agent shall be indemnified
against expenses actually and reasonably incurred by the agent in connection
therewith.

    (e)  Except as provided in subdivision (d), any indemnification under this
Section 16 shall be made by this corporation only if authorized in the specific
case, upon a determination that indemnification of the agent is proper in the
circumstances because the agent has met the applicable standard of conduct set
forth in subdivision (b) or (c), by:

                                         -18-

<PAGE>

         (1)  A majority vote of a quorum consisting of directors who are not
    parties to such proceeding;
         
         (2)  Approval or ratification by the affirmative vote of a majority of
    the shares of this corporation entitled to vote represented at a duly held
    meeting at which a quorum is present or by the written consent of holders
    of a majority of the outstanding shares entitled to vote.  For such
    purpose, the shares owned by the person to be indemnified shall not be
    considered outstanding or entitled to vote thereon; or
         
         (3)  The court in which such proceeding is or was pending, upon
    application made by this corporation or the agent or the attorney or other
    person rendering services in connection with the defense, whether or not
    such application by the agent, attorney or other person is opposed by this
    corporation.
         
    (f)  Expenses incurred in defending any proceeding shall be advanced by
this corporation prior to the final disposition of such proceeding upon receipt
of an undertaking by or on behalf of the agent to repay such amount unless it
shall be determined ultimately that the agent is entitled to be indemnified as
authorized in this Section 16.

    (g)  Nothing contained in this Section 16 shall affect any right to
indemnification to which persons other than directors and officers of this
corporation or any subsidiary hereof may be entitled by contract or otherwise.

    (h)  No indemnification or advance shall be made under this Section 16,
except as provided in subdivision (d) or subdivision (e)(3), in any circumstance
where it appears:

         (1)  That it would be inconsistent with a provision of the articles of
    incorporation of this corporation, a resolution of the shareholders or an
    agreement in effect at the time of the accrual of the alleged cause of
    action asserted in the proceeding in which the expenses were incurred or
    other amounts were paid, which prohibits or otherwise limits
    indemnification; or
         
         (2)  That it would be inconsistent with any condition expressly
    imposed by a court in approving a settlement.

                                            
                                         -19-
<PAGE>

    (i)  Upon and in the event of a determination by the Board of Directors of
this corporation to purchase such insurance, this corporation shall purchase and
maintain insurance on behalf of any agent of the corporation against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such whether or not this corporation would have the
power to indemnify the agent against such liability under the provisions of this
section.

    Section 17.  TRANSFER AGENTS AND REGISTRARS.  The board of directors may
appoint one or more transfer agents or transfer clerks, and one or more
registrars, either domestic or foreign, who shall be appointed at such times and
places as the requirements of the corporation may necessitate and the board of
directors may designate.
    
                                     ARTICLE IV 

                                       OFFICERS
                                           
    Section l.  OFFICERS.  The officers of the corporation shall be a 
president, a vice president, a secretary and a chief financial officer.  The
corporation may also have, at the discretion of the board of directors, a
chairman of the board, one or more additional vice presidents, one or more
assistant secretaries, one or more assistant chief financial officers, and such
other officers as may be appointed in accordance with the provisions of Section
3 of this Article IV.  One person may hold two or more offices, except that the
offices of president and secretary shall not be held by the same person.

    Section 2.  ELECTION.  The officers of the corporation, except such
officers as may be appointed in accordance with the provisions of Section 3 or
Section 5 of this Article IV, shall be chosen annually by the board of
directors, and each shall hold his office until he shall resign or shall be
removed or otherwise disqualified to serve, or his successor shall be elected
and qualified.
    
    Section 3.  SUBORDINATE OFFICERS, ETC.  The board of directors may appoint,
and may empower the chairman of the board or the president to appoint, such
other officers as the business of the corporation may require, each of whom
shall hold office, for such period, have such authority and perform such duties
as are provided in the by-laws or as the board of directors may from time to
time determine.
    
                                         -20-

<PAGE>

    Section 4.  REMOVAL AND RESIGNATION.  Any officer may be removed, either
with or without cause, by the board of directors, at any regular or special
meeting thereof, or, except in case of an officer chosen by the board of
directors, by any officer upon whom such power of removal may be conferred by
the board of directors (subject, in each case, to the rights, if any, of an
officer under any contract of employment).

    Any officer may resign at any time by giving written notice to the board of
directors or to the president, or to the secretary of the corporation, without
prejudice, however, to the rights, if any, of the corporation under any contract
to which such officer is a party.  Any such resignation shall take effect at the
date of the receipt of such notice or at any later time specified therein; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
    
    Section 5.  VACANCIES.  A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in the by-laws for regular appointments to such office.
    
    Section 6.  CHAIRMAN OF THE BOARD.  The chairman of the board, if there
shall be such an officer, shall, if present, preside at all meetings of the
board of directors and exercise and perform such other powers and duties as may
be from time to time assigned to him by the board of directors or prescribed by
the by-laws.
    
    Section 7.  PRESIDENT.  Subject to such supervisory powers, if any, as may
be given by the board of directors to the chairman of the board, if there be
such an officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors, have
general supervision, direction and control of the business and officers of the
corporation.  He shall preside at all meetings of the shareholders and, in the
absence of the chairman of the board, or if there be none, at all meetings of
the board of directors.  He shall be ex officio a member of all the standing
committees, including the executive committee, if any, and shall have the
general powers, and duties of management usually vested in the office of
president of a corporation, and shall have such other powers and duties as may
be prescribed by the hoard of directors or the by-laws.
    
    Section 8.  VICE PRESIDENT.  In the absence or disability of the president,
the vice presidents in order of their rank as fixed by the board of directors
or, if not
    
                                         -21-

<PAGE>

ranked, the vice president designated by the board of directors, shall perform
all the duties of the president, and when so acting shall have all the powers
of, and be subject to all the restrictions upon, the president.  The vice
presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the board of directors
or the by-laws.

    Section 9.  SECRETARY.  The secretary shall record or cause to be recorded,
and shall keep or cause to be kept, at the principal executive office and such
other place as the board of directors may order, a book of minutes of actions
taken at all meetings of directors and shareholders, with the time and place of
holding, whether regular or special, and, if special, how authorized, the notice
thereof given, the names of those present at directors' meetings, the number of
shares present or represented at shareholders' meetings, and the proceedings
thereof.
    
    The secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent, a share register,
or a duplicate share register, showing the names of the shareholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for the same, and the number and date of cancellation of
every certificate surrendered for cancellation.
    
    The secretary shall give, or cause to be given, notice of all the meetings
of the shareholders and of the board of directors required by the by-laws or by
law to be given, and shall keep the seal of the corporation in safe custody, and
shall have such other powers and perform such other duties as may be prescribed
by the board of directors or by the by-laws.
    
    Section 10.  CHIEF FINANCIAL OFFICER.  The chief financial officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
accounts of the properties and business transactions of the corporation,
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital, surplus and shares. The books of account shall at all
reasonable times be open to inspection by any director.
    
    The chief financial officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors.  He shall disburse the funds of the
corporation as may be ordered by the board of directors,
    
                                         -22-

<PAGE>

shall render to the president and board of directors, whenever they request it,
an account of all of his transactions as chief financial officer and of the
financial condition of the corporation, and shall have such other powers and
perform such other duties as may be prescribed by the board of directors or by
the by-laws.

    Section 11.  SALARIES.  The salaries for the principal officers of the
corporation shall be fixed, from time to time, by the board of directors.  No
officer shall be disqualified from receiving a salary by reason of his also
being a director of the corporation.
    
                                      ARTICLE V
                                           
                            Shares and Share Certificates
                                           
    Section 1.  RECORD DATE.  The board of directors may fix a time in the
future as a record date for the determination of the shareholders entitled to
notice of and to vote at any meeting of shareholders or entitled to give consent
to corporate action in writing without a meeting, to receive any report, to
receive any dividend or distribution, or any allotment of rights, or to exercise
rights in respect to any change, conversion, or exchange of shares.  The record
date so fixed shall be not more than sixty (60) days nor less than ten (10) days
prior to the date of any meeting, nor more than sixty (60) days prior to any
other event for the purposes of of which it is fixed.  When a record date is so
fixed, only shareholders of record on the close of business on that date are
entitled to notice of and to vote at any such meeting, to give consent without a
meeting, to receive any report, to receive a dividend, distribution, or
allotment of rights, or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided in Section 4 of this Article V.

    Section 2.  CERTIFICATE FOR SHARES.  Every holder of shares in the
corporation shall be entitled to have a certificate signed in the name of the
corporation by the chairman or vice chairman of the board or the president or a
vice president and by the chief financial officer or an assistant chief
financial officer or the secretary or any assistant secretary, certifying the
number of shares and the class or series of shares owned by the shareholder. 
Any of the signatures on the certificate may be facsimile.  In case any officer,
transfer agent

                                         -23-

<PAGE>

or registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if such person were an officer, transfer agent or registrar at
the date of issue.

    Any such certificate shall also contain such legend or other statement as
may be required by Section 418 of the General Corporation Law, the California
Corporate Securities Law of 1968, the federal securities laws, and any agreement
between the corporation and the issuee thereof.
    
    Certificates for shares may be issued prior to full payment under such
restrictions and for such purposes as the board of directors or the by-laws may
provide; provided, however, that any such certificate so issued prior to full
payment shall state on the face thereof the amount remaining unpaid and the
terms of payment thereof.
    
    No new certificate for shares shall be issued in lieu of an old certificate
unless the latter is surrendered and cancelled at the same time; provided,
however, that a new certificate will be issued without the surrender and
cancellation of the old certificate if (1) the old certificate is lost,
apparently destroyed or wrongfully taken; (2) the request for the issuance of
the new certificate is made within a reasonable time after the owner of the old
certificate has notice of its loss, destruction, or theft; (3) the request for
the issuance of a new certificate is made prior to the receipt of notice by the
corporation that the old certificate has been acquired by a bona fide purchaser;
(4) the owner of the old certificate files a sufficient indemnity bond with or
provides other adequate security to the corporation; and (5) the owner satisfies
any other reasonable requirements imposed by the corporation.  In the event of
the issuance of a new certificate, the rights and liabilities of the
corporation, and of the holders of the old and new certificates, shall be
governed by the provisions of Section 8104 and 8405 of the California Commercial
Code.

    Section 3.  TRANSFER OF SHARES.  Upon surrender to the secretary or
transfer agent of the corporation of a certificate for shares fully endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to
    
                                         -24-

<PAGE>

issue a new certificate to the person entitled thereto, cancel the old
certificate and record the transaction upon its books, unless under the
California Corporate Securities Law of 1968 or the Securities Act of 1933 or
otherwise such transfer would be adverse to the best interests of the
corporation or unless the corporation has notice of an adverse claim, which may
be an adverse claim of the corporation, to the certificate.

    Section 4.  SHAREHOLDERS OF RECORD.  Voting by shareholders shall in all
cases be subject to the following provisions:
    
    (a)  Subject to clause (g) of this Section 4, shares held by an
administrator, executor, guardian, conservator or custodian may be voted by such
holder either in person or by proxy, without a transfer of such shares into the
holder's name; and shares standing in the name of a trustee may be voted by the
trustee, either in person or by proxy, but no trustee shall be entitled to vote
shares held by such trustee without a transfer of such shares into the trustee's
name.

     (b)  Shares standing in the name of a receiver may be voted by such
receiver; and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into the receiver's name if authority
to do so is contained in the order of the court by which such receiver was
appointed.

    (c)  Subject to the provisions of Section 705 of the General Corporation
Law, and except where otherwise agreed in writing between the parties, a
shareholder whose shares are pledged shall be entitled to vote such shares until
the shares have been transferred into the name of the pledgee, and thereafter
the pledgee shall be entitled to vote the shares so transferred.

     (d)  Shares standing in the name of a minor may be voted and the
corporation may treat all rights incident thereto as exercisable by the minor,
in person or by proxy, whether or not the corporation has notice, actual or
constructive, of the nonage, unless a guardian of the minor's property has been
appointed and written notice of such appointment given to the corporation.

    (e)  Shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxyholder as the by-laws of
such other corporation may prescribe or, in the absence of such provision, as
the Board of Directors of such other corporation may determine or, in the
absence of such determination, by the

                                         -25-

<PAGE>

chairman of the board, president or any vice president of such other
corporation, or by any other person authorized to do so by the board, president
or any vice president of such other corporation.  Shares which are purported to
be voted or any proxy purported to be executed in the name of a corporation
(whether or not any title of the person signing is indicated) shall be presumed
to be voted or the proxy executed in accordance with the provisions of this
subdivision, unless the contrary is shown.

    (f)  Shares of the corporation owned by any subsidiary shall not be
entitled to vote on any matter.

    (g)  Shares held by the corporation in a fiduciary capacity, and shares of
the corporation held in a fiduciary capacity by any subsidiary, shall not be
entitled to vote on any matter, except to the extent that the settlor or
beneficial owner possesses and exercises a right to vote or to give the
corporation binding instructions as to how to vote such shares.

    (h)  If shares stand of record in the names of two or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, husband
and wife as community property, tenants by the entirety, voting trustees,
persons entitled to vote under a shareholder voting agreement or otherwise, or
if two or more persons (including proxyholders) have the same fiduciary
relationship respecting the same shares, unless the secretary of the corporation
is given written notice to the contrary and is furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it is
so provided, their acts with respect to voting shall have the following effect:

        (i)  If only one votes, such act binds all;

       (ii)  If more than one vote, the act of the majority so voting binds
    all;
    
      (iii)  If more than one vote, but the vote is evenly split on any
    particular matter, each faction may vote the securities in question
    proportionately.
    
If the instrument so filed or the registration of the shares shows that any such
tenancy is held in unequal interests, a majority or even split for the purpose
of this section shall be a majority or even split in interest.

                                         -26-

<PAGE>

                                      ARTICLE VI
                                           
                                 Records and Reports
                                           
    Section 1.  INSPECTION OF CORPORATE RECORDS.  The accounting books and
records, the record of shareholders, and minutes of proceedings of the
shareholders and the board and committees of the board of this corporation and
any subsidiary of this corporation shall be open to inspection upon the written
demand on the corporation of any shareholder or holder of a voting trust
certificate at any reasonable time during usual  business hours, for a purpose
reasonably related to such holder's interests as a shareholder or as the holder
of such voting trust certificate.  Such inspection by a shareholder or holder of
a voting trust certificate may be made in person or by agent or attorney, and 
the right of inspection includes the right to copy and make extracts.

    A shareholder or shareholders holding at least 5 percent in the aggregate
of the outstanding voting shares of the corporation or who hold at least one
percent  of such voting shares and have filed a Schedule 14B with the United
States Securities and Exchange Commission relating to the election of directors
of the corporation shall have (in person, or by agent or attorney) the right to
inspect and copy the record of shareholders' names and addresses and
shareholdings during usual business hours upon five business days' prior written
demand upon the corporation and to obtain from the transfer agent for the
corporation, upon written demand and upon the tender of its usual charges, a
list of the shareholders' names and addresses, who are entitled to vote for the
election of directors, and their shareholdings, as of the most recent record
date for which it has been compiled or as of a date specified by the shareholder
subsequent to the date of demand.  The list shall be made available on or before
the later of five business days after the demand is received or the date
specified therein as the date as of which the list is to be compiled.

    Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records and documents of every kind and to inspect
the physical properties of the corporation.  Such inspection by a director may
be made in person or by agent or attorney and the right of inspection includes
the right to copy and make extracts.
    
    Section 2.  ANNUAL REPORTS.  The board of directors of the corporation
shall cause an annual report to be sent to
    
                                         -27-

<PAGE>

the shareholders not later than 120 days after the close of the fiscal or
calendar year and at least 15 days, if sent by first class mail, or 35 days, if
sent by third class mail, prior to the annual meeting of shareholders.  Such
report shall contain a balance sheet as of the end of such fiscal year and an
income statement and statement of changes in financial position for such fiscal
year, accompanied by any report thereon of independent accountants or, if there
is no such report, the certificate of an authorized officer of the corporation
that such statements were prepared without audit from the books and records of
the corporation.

    Section 3.  OTHER REPORTS.  A shareholder or shareholders holding at least
five percent of the outstanding shares of any class of the corporation may make
a written request to the corporation for an income statement of the corporation
for the three-month, six-month or nine-month period of the current fiscal year
ended more than 30 days prior to the date of the request and a balance sheet of
the corporation as of the end of such period and, in addition, if no annual
report for the last fiscal year has been sent to shareholders, an income
statement and a statement of changes in financial position of the corporation
for the last fiscal year and a balance sheet of the corporation as of the end of
the last fiscal year.  The corporation shall use its best efforts to deliver
such statement to the person making the request within 30 days thereafter.  A
copy of any such statements shall be kept on file in the principal executive
office of the corporation for 12 months and they shall be exhibited at all
reasonable times to any shareholder demanding an examination of them or a copy
shall be mailed to such shareholder.

    The income statements, statement of changes in financial position and
balance sheets referred to in this section shall be accompanied by the report
thereon, if any, of any independent accountants engaged by the corporation or
the certificate of an authorized officer of the corporation that such financial
statements were prepared without audit from the books and records of the
corporation.
    
    Section 4.  INSPECTION OF BY-LAWS.  The corporation shall keep in its
principal executive office in California, or if its principal executive office
is not in California, then at its principal business office in California the
original or a copy of the by-laws as amended or otherwise altered to date,
certified by the secretary, which shall be open to inspection by the
shareholders at all reasonable times during office hours.  If the principal
executive office of the corporation is outside the State
    
                                         -28-

<PAGE>

of California and the corporation has no principal business office in such
State, the Secretary shall, upon the written request of any shareholder, furnish
to that shareholder a copy of the by-laws as amended to date.

    Section 5.  RECORDS.  This corporation shall maintain adequate and correct
accounts, books and records of its business and properties.  All of such books,
records and accounts shall be kept at its principal executive office or at such
other location as may be convenient for the corporation.
    
    Section 6.  ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation shall,
during the period commencing on each October 1 and ending on each March 31, file
with the Secretary of State of the State of California, on the prescribed form,
a statement setting forth the authorized number of directors, the names and
complete business or residence addresses of all incumbent directors, the names
and complete business or residence addresses of the chief executive officer,
secretary, and chief financial officer, the street address of its principal
executive office or principal business office in the State of California, and
the general type of business constituting the principal business activity of the
corporation, together with a designation of the agent of the corporation for the
purpose of service of process, all in compliance with Section 1502 of the
General Corporation Law.
    
                                     ARTICLE VII
                                           
                                    Miscellaneous
                                           
    Section l.  CHECKS, DRAFTS, ETC.  All checks, drafts or other orders for
payment of money, notes or other evidences of indebtedness, issued in the name
of or payable to the corporation, shall be signed or endorsed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the board of directors.
    
    Section 2.  CONTRACTS, ETC., HOW EXECUTED.  The board of directors, except
as in the by-laws otherwise provided, may authorize any officer or officers,
agent or agents, to enter into any contract or execute any instrument in the
name of and on behalf of the corporation, and such authority may be general or
confined to specific instances; and, unless so authorized by the board of
directors, no officer, agent or employee shall
    
                                         -29-


<PAGE>

have any power or authority to bind the corporation by any contract or 
engagement or to pledge its credit or to render it liable for any purpose or 
for any amount. Subject to the provisions of applicable law, any note, 
mortgage, evidence of indebtedness, contract, share certificate, conveyance, 
or other instrument in writing and and any assignment or endorsements thereof 
executed or entered into between this corporation and any other person, 
when signed by the chairman of the board, the president or any vice 
president, and the secretary, any assistant sectretary, the chief 
financial officer or any assistant chief financial officer of this corporation
shall be valid and binding on this corporation in the absence of actual 
knowledge on the part of the other person that the signing officers did not 
have the authority to execute the same.

     Section 3. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The president 
or any vice president and the secretary or any assistant secretary of this 
corporation are authorized to vote, represent and execise on behalf of this  
corporation all rights incident to any and all shares of any other 
corporation or corporations standing in the name of this corporation. The 
authority herein granted to said officers to vote or represent on behalf 
of this corporation any and all shares held by this corporation in any other 
corporation or corporations may be exercised either by such officers in 
person or by any other person authorized so to do by proxy or power of 
atttorney duly executed by said officers.

     Section 4. SEAL. This corporation shall adopt and use a corporate seal 
consisting of a circle setting forth on its circumference the name of this 
corporation and showing the State of Incorporation.

     Section 5. FISCAL YEAR. The fiscal year of this corporation shall be 
fixed by resolution of the board of directors.

     Section 6. LOANS.  No loans shall be contracted on behalf of this 
corporation and no evidences of indebtedness shall be issued in its name 
unless authorized by a resolution of the board of directors; such authority 
may be general or confined to specific instances.

     Section 7. DEPOSITS. The board of directors shall select banks, trust 
companies or other depositories in which all funds of the corporation not 
otherwise employed shall, from time to time, be deposited to the credit of 
this corporation.


                                     -30-

<PAGE>

     Section 8.  CONSTRUCTION AND DEFINITIONS. Unless the context otherwise 
requires, the general provisions, rules of construction and definitions 
contained in the California General Corporation Law (the "General Corporation 
Law") shall govern the construction of these by-laws. Without limiting the 
generality of the foregoing, the masculine gender includes the feminine and 
neuter, the singular number includes the plural and the plural number 
includes the singular, and the term "person" includes a corporation as well 
as a natural person.

                         ARTICLE VIII

                          Amendments

     Section 1.  POWER OF SHAREHOLDERS.  New by-laws may be adopted or these 
by-laws may be amended or repealed by the affirmative vote of a majority of 
the outstanding shares entitled to vote, or by the written assent of 
shareholders entitled to vote such shares, except as otherwise provided by 
law or by the articles of incorporation.

     Section 2.  POWER OF DIRECTORS.  Subject to the right of shareholders as 
provided in Section 1 of this Article VIII to adopt, amend or repeal by-laws, 
by-laws may be adopted, amended or repealed by the board of directors; 
provided, however, that the board of directors may adopt a by-law or 
amendment thereof changing the authorized number of directors only for the 
purpose of fixing the exact number of directors within the limits specified 
in the articles of incorporation or in Section 2 of Article III of these 
by-laws.

                        CERTIFICATE OF SECRETARY

     I, the undersigned, do hereby certify:

     1.  That I am the duly elected and acting secretary of Fireplace 
Manufactures, Inc., a California corporation; and

    2.  That the foregoing by-laws, comprising 31 pages, constitute the 
by-laws of said corporation as duly adopted by action of the Board of 
Directors of the Corporation duly taken on October 19, 1984.

     IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the 
seal of said corporation this ______ day of ___________, 1984.


                                         /s/ John D. Hornsby
                                        --------------------------
                                        John D. Hornsby, Secretary


                                    -31-





<PAGE>

                           (Fireplace Manufacturing, Inc.)
                                           
                           APPROVAL OF AMENDMENT TO BY-LAWS
                                           
         The Company's By-Laws provide for a Board of Directors comprised of
from four to seven members with the exact number of directors currently set at
four by the Board of Directors. However, the Company currently has only three
directors.  From time to time, the Company has sought to add to its Board of
Directors additional members from the business community that management
believes will aid the Company in meeting its goals and objectives, but has not
been able to do so.
         
         Under the California Corporation Code (the "new Code"), a range of
directors is permitted in which the maximum number of directors is double the
minimum number, less one.  Further the minimum number of directors can not be
less than three.  A stockholders' vote is needed to change the range of
directors or to change the fixed number of directors if a range is not provided
for.  The Company proposes that the By-Laws be amended to provide for a range of
authorized directors from a number not less than three nor more than five.  Such
change would reflect the existing number of directors and provide for the
possibility of adding additional directors.  The Board of Directors can set the
exact number of directors within the range of authorized directors.
         
         Approval of the amendment to the By-Laws requires the affirmative vote
of at least a majority of the outstanding shares of Common Stock of the Company.



<PAGE>


                      SEVERANCE COMPENSATION AGREEMENT
                                                                                

    THIS SEVERANCE COMPENSATION AGREEMENT (the "Agreement") is entered into as
of the ____ day of May, 1996 (the "Effective Date"), by and between FIREPLACE
MANUFACTURERS, INC. a California corporation (the "Company"), and Willard V.
Harris, an individual (the "Executive") with reference to the following facts:

                                       RECITALS
                                           
    A. The Board of Directors of the Company (the "Board") has recognized that
the possibility of a "Change in Control" (as defined in Section 1.4, below)
exists and that the threat of or the occurrence of a Change in Control may
result in significant distractions of its key management personnel because of
the uncertainties inherent in such a situation.
                                            
    B. The Board has determined that it is essential and in the best interest
of the Company and its stockholders to retain the services of the Executive
during a threat or after the occurrence of a Change in Control and to ensure his
continued dedication and efforts in such event without undue concern for his
personal financial and employment security.
                                            
    C. In order to induce the Executive to remain in the employ of the 
Company, particularly in light of the present threat of a potential Change in 
Control, the Company desires to enter into this Agreement with the Executive 
to provide the Executive with certain benefits following a Change in Control, 
in the event his employment is terminated as a result of, or in connection 
with, a Change in Control.
    
    D. The Company and the Executive entered into that certain Severance
Compensation Agreement on December 1, 1995 ("Prior Agreement"). The parties
intend that this Agreement shall supersede the Prior Agreement.
    
    NOW, THEREFORE, in consideration at the promises and mutual covenants and
agreements contained herein, the parties to this Agreement, intending to be
legally bound, agree as follows:

                                      ARTICLE 1 
                                     DEFINITIONS
                                           
    1.1 AFFILIATE AND ASSOCIATE. "Affiliate" and "Associate" shall have the 
respective meanings ascribed to such terms in Rule 12b-2 of the General Rules 
and Regulations under the Securities Exchange Act of 1934, as amended and in 
effect on the date of this Agreement (the "Exchange Act");

    1.2 BENEFICIAL OWNER. A "Person" (as defined in Section 1.10. below) shall
be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own"
any securities;

    
                                         -1-

<PAGE>

         1.2.1 which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
         
         1.2.2 which such Person or any of such Person's Affiliates or
Associates has either:

              (a) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding, or upon the exercise of conversion rights,
exchange rights, rights, warrants or options, or otherwise; provided, however,
that a Person shall not be deemed the Beneficial Owner of, or to beneficially
own, securities tendered pursuant to a tender or exchange offer made by, or on
behalf of such Person or any of such Person's Affiliates or Associates until
such tendered securities are accepted for purchase or exchange; or

              (b) the right to vote pursuant to any agreement, arrangement or
understanding; provided, however, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, any security if the agreement,
arrangement or understanding to vote such security:

                   (i) arises solely from a revocable proxy or consent given to
such Person in response to a public proxy or consent solicitation made pursuant
to, and in accordance with, the applicable rules and regulations promulgated
under the Exchange Act and

                   (ii) is not also then reportable on Schedule 13D under the
Exchange Act (or any comparable or successor report); or

         1.2.3 which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such Person (or
any of such Person's Affiliates or Associates) has any agreement, arrangement or
understanding (other than customary agreements with and between underwriters and
selling group members with respect to a bona fide public offering of
securities) relating to the acquisition, holding, voting or disposing of any
securities of the Corporation.

    Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, the phrase "then outstanding,"  when used with reference to a Person's
Beneficial Ownership of securities of the Corporation, shall mean the number of
such securities then issued and outstanding together with the number of such
securities not then actually issued and outstanding which such Person would be
deemed to own beneficially hereunder.
    
    1.3 CAUSE. "Cause" shall have the meaning set forth in Section 3.02(c),
below.

    1.4 CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" shall mean any of the following events:
    
         1.4.1 ACQUISITION OF VOTING SECURITIES. An acquisition (other than
directly from the Company) of any voting securities of the Company (the "Voting
Securities") by any Person,
         
                                         -2-

<PAGE>
    
immediately after which such Person has Beneficial Ownership of thirty percent
(30%) or more of the combined voting power of the Company's then outstanding
Voting Securities; provided, however, in determining whether a Change in Control
has occurred, Voting Securities which are acquired in a "Non-Control
Acquisition" (as defined in Section 1.7, below) shall not constitute an
acquisition which would cause a Change in Control.

         1.4.2 CHANGE IN INCUMBENT BOARD. The individuals who, as of the
Effective Date, are members of the Board (the "Incumbent Board"), cease for any
reason to constitute at least two-thirds of the members of the Board; provided,
however, that if the election, or nomination for election by the Company's
common stockholders, of any new director was approved by a vote of at least
two-thirds of the Incumbent Board, such new director shall, for purposes of this
Agreement, be considered as a member of the Incumbent Board; provided, further,
however, that no individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-11 promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board (a "Proxy Contest") including
by reason of any agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
         
         1.4.3 STOCKHOLDER APPROVAL. Approval by stockholders of the Company
of:
    
              (a) A merger, consolidation or reorganization involving the
Company, unless such merger, consolidation or reorganization is a "Non-Control
Transaction" (as defined in Section 1.8. below.
 
              (b) A complete liquidation or dissolution of the Company; or
              
              (c) An agreement for the sale or other disposition of assets from
the Company that have a total fair market value equal to or greater than
one-third of the total fair market value of all of the Company's assets
immediately before the acquisition, to any Person (other than a transfer to a
Subsidiary, as defined below in Section 1.7.1(b)).

    Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the then outstanding Voting
Securities as a result of the acquisition of Voting Securities by the Company
which, by reducing the number of Voting Securities then outstanding, increases
the proportional number of shares Beneficially Owned by the Subject Persons,
provided that if a Change in Control would occur (but for the operation of this
sentence) as a result of the acquisition of Voting Securities by the Company,
and after such share acquisition by the Company, the Subject Person becomes the
Beneficial Owner of any additional Voting Securities which increases the
percentage of the then outstanding Voting Securities Beneficially Owned by the
Subject Person, then a Change in Control shall occur.
    
    1.5 DISABILITY. "Disability" shall have the meaning set forth in Section
3.02(b). below.
    
                                         -3-
    

<PAGE>

    1.6 GOOD REASON. "Good Reason" shall have the meaning set forth in Section
3.02(d), below.
    
    1.7 NON-CONTROL ACQUISITION. A "Non-Control Acquisition" shall mean an
acquisition by:

         1.7.1 an employee benefit plan (or a trust forming a part thereof)
maintained by:
         
              (a) the Company or
              
              (b) any corporation or other Person of which a majority of its
voting power or its voting equity securities or equity interest is owned,
directly or indirectly, by the Company (for purposes of this Agreement, a
"Subsidiary");

    1.7.2 the Company or its Subsidiaries; or
    
    1.7.3 any Person in connection with a Non-Control Transaction.
    
    1.8 NON-CONTROL TRANSACTION. A "Non-Control Transaction" shall mean a
merger, consolidation or reorganization of the Company where:
    
         1.8.1 the stockholders of the Company immediately before such merger,
consolidation or reorganization, own directly or indirectly immediately
following such merger, consolidation or reorganization, at least seventy percent
(70%) of the combined voting power of the outstanding voting securities of the
corporation resulting from such merger or consolidation or reorganization (the
"Surviving Corporation") in substantially the same proportion as their ownership
of the Voting Securities immediately before such merger, consolidation or
reorganization:

         1.8.2 the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for such merger,
consolidation or reorganization constitute at least two-thirds of the members of
the board of directors of the Surviving Corporation, or a corporation
beneficially directly or indirectly owning a majority of the Voting Securities
of the Surviving Corporation; and
 
         1.8.3 no Person other than:
              
              (a) the Company, 
              
              (b) any Subsidiary,
              
              (c) any employee benefit plan (or any trust forming a part
thereof) maintained by the Company, the Surviving Corporation, or any
Subsidiary, or
 
    
                                         -4-
    
<PAGE>
              (d) any Person who, immediately prior to such merger,
consolidation or reorganization had Beneficial Ownership of thirty percent (30%)
or more of the then outstanding Voting Securities),

has Beneficial Ownership of thirty percent (30%) or more of the combined voting
power of the Surviving Corporation's then outstanding voting securities.

    1.9 NOTICE OF TERMINATION. "Notice of Termination" shall mean a termination
notice which indicates the specific termination provision in this Agreement, if
any, relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. Any purported termination by the
Company or by the Executive shall be communicated by written Notice of
Termination to the other. For purposes of this Agreement, no such purported
termination of employment shall be effective without such Notice of Termination.
    
    1.10 PERSON. "Person" shall mean any individual, firm, partnership,
corporation, trust, association, joint venture or other entity, and shall
include any successor (by merger or otherwise) of such entity.
    
    1.11 RETIREMENT. "Retirement" shall mean the termination by the Company or
the Executive of the Executive's employment based on the Executive reaching age
70 or such other age as shall have been fixed in any arrangement established
with the Executive's consent with respect to the Executive.
    
    1.12 TERMINATION DATE. "Termination Date" shall mean in the case of the
Executive's death, his date of death, or in all other cases, the date specified
in the Notice of Termination, subject to the following:
    
         1.12.1 If the Executive's employment is terminated by the Company for
Cause or due to Disability, the date specified in the Notice of Termination
shall be at least thirty (30) days from the date the Notice of Termination is
given to the Executive, provided that in the case of Disability the Executive
shall not have returned to the full-time performance of his duties during such
period of at least thirty (30) days; and
         
         1.12.2 If the Executive's employment is terminated for Good Reason,
the date specified in the Notice of Termination shall not be more than sixty
(60) days from the date the Notice of Termination is given to the Company.
         
                                      ARTICLE 2 
                                         TERM

    The Term of this Agreement shall commence on the Effective Date, upon which
the Prior Agreement shall terminate and have no force or effect. The Term,
except to the extent that any obligation of the Company hereunder remains unpaid
at such time, shall end upon the earliest of the following:
    

                                         -5-

<PAGE>

         2.0.1 five (5) years from the Effective Date if a Change in Control
has not occurred within such five (5) year period;
         
         2.0.2 the termination of the Executive's employment with the Company
based on death, Disability, Retirement, or Cause, or by the Executive other than
for Good Reason; and
         
         2.0.3 one (1) year from the date of a Change in Control if the
Executive has not terminated his employment for Good Reason as of such time;
         
provided, however, that this Agreement shall not terminate pursuant to (a) above
unless either party gives written notice not less than ninety (90) days prior to
the end of the five (5) year period that it is terminating the Agreement on this
ground. If said notice is not given, the five (5) year period shall be extended
an additional five (5) years and for successive five (5) year periods thereafter
if no notices are given.

                                      ARTICLE 3
                           TRIGGERING OF SEVERANCE PAYMENT

    The Executive shall be entitled to the compensation set forth in Article 4,
below, if:

         3.0.1 a Change in Control occurs while the Executive is still an
employee of the Company, and
         
         3.0.2 the Executive's employment is terminated subsequent to the
Change in Control unless such termination is as a result of:
         
              (a) the Executive's DEATH;
              
              (b) the Executive's "DISABILITY", which for purposes herein,
shall mean a physical or mental infirmity which impairs the Executive's ability
to substantially perform his duties under this Agreement:
 
                   (i) which continues for a period of at least one hundred
eighty (180) consecutive days and
                    
                   (ii) which prevents the Executive from returning to the full
time performance of the Executive's duties for an additional thirty (30) days
after receipt of the Termination Notice from the Company;

              (c) "CAUSE", which for purposes herein shall mean if the
Executive:
          
                   (i) has been convicted of a felony or
    
                   (ii) has intentionally engaged in conduct which is
demonstrably and materially injurious to the Company, monetarily or otherwise;

                                         -6-

<PAGE>

provided, however, that no termination of the Executive's employment shall be
for Cause as set forth in Section 3.02(c)(ii), above until:

                        (A) there shall have been delivered to the Executive a
copy of a written notice setting forth that a finding that the Executive has
committed the conduct set forth in Section 3.02(c)(ii) and specifying the
particulars thereof in detail, and

                        (B) the Executive shall have been provided an
opportunity to be heard by the Board (with the assistance of the Executive's
counsel if the Executive so desires). No act, nor failure to act, on the
Executive's part, shall be considered "intentional" unless he has acted, or
failed to act, with an absence of good faith and without a reasonable belief
that his action or failure to act was in the best interest of the Company.
Notwithstanding anything contained in this Agreement to the contrary, no failure
to perform by the Executive after a Notice of Termination is given by the
Executive shall constitute Cause for purposes of this Agreement.

              (d) the Executive's decision other than for "GOOD REASON". For
purposes herein, "Good Reason" shall mean the occurrence after a Change in
Control of any of the following events or conditions:

                   (i) a change in the Executive's status, title, position or
responsibilities (including reporting responsibilities) which, in the
Executive's reasonable judgment, represents an adverse change from his status,
title, position or responsibilities as in effect immediately prior thereto; the
assignment to the Executive of any duties or responsibilities which, in the
Executive's reasonable judgment, are inconsistent with his status, title,
position or responsibilities or any removal of the Executive from or failure to
reappoint or reelect him to any of such offices or positions, except in
connection with the termination of his employment for Disability, Cause, as a
result of his death or by the Executive other than for Good Reason;
                   
                   (ii) a reduction in the Executive's base salary or any
failure to pay the Executive any compensation or benefits to which he is
entitled within five (5) days of the date due:
                   
                   (iii) a failure to increase the Executive's base salary at
least annually at a percentage of base salary no less than the average
percentage increases (other than increases resulting from the Executive's
promotion) granted to the Executive during the three (3) full years ended prior
to a Change in Control (or such lesser number of full years during which the
Executive was employed);

                    (iv) a relocation of the Company's principal executive
offices to a location outside of a twenty (20) mile radius of its current
location, or a requirement that the Executive be based at any place outside a
30-mile radius from the current location, except for reasonably required travel
on the Company's business which is not greater than such travel requirements
prior to the Change in Control;

    
                                         -7-
<PAGE>

                   (v) the failure by the Company to:
                   
                        (A) continue in effect (without reduction in benefit
level and/or reward opportunities) any material compensation or employee benefit
plan in which the Executive was participating immediately prior to the Effective
Date, including, but not limited to any incentive plans or stock option plans,
unless a substitute or replacement plan has been implemented which provides
substantially identical compensation or benefits to the Executive or
                        
                        (B) provide the Executive with compensation and
benefits, in the aggregate, at least equal (in terms of benefit levels and/or
reward opportunities) to those provided for under each other compensation or
employee benefit plan, program and practice as in effect at any time within
ninety (90) days preceding the Effective Date or at any time thereafter

                   (vi) the insolvency or the filing (by any party, including
the Company) of a petition for bankruptcy of the Company:
              
                   (vii) any material breach by the Company of any provision of
this Agreement:
              
                   (viii) any purported termination of the Executive's
employment for Cause by the Company which does not comply with the terms of
Section 3.02(c); or

                    (ix) the failure of the Company to obtain an agreement,
satisfactory to the Executive, from any successor or assign of the Company to
assume and agree to perform this Agreement, as contemplated in Section 6.1
hereof.

Further, any event or condition described in Section 3.02(d)(i) through (ix)
which occurs prior to a Change in Control but which the Executive reasonably
demonstrates was at the request of a third party who has indicated an intention
or taken steps reasonably calculated to effect a Change in Control (a "Third
Party") or otherwise arose in connection with, or in anticipation of a Change in
Control, shall constitute "Good Reason" for purposes of this Agreement
notwithstanding that it occurred prior to the Change in Control.

                                      ARTICLE 4
                            COMPENSATION UPON TERMINATION

    If the Company terminates the Executive's employment pursuant to Article 3,
above, the Company shall pay to the Executive, as severance pay, on or before
the fifth (5th) day following the Date of Termination, a lump sum, in cash or
cash equivalent, in an amount equal to 299% of the Executive's average
annualized compensation includible in his gross income for the five (5) taxable
years immediately preceding the date of the Change in Control ("Severance
Payment"). If the Executive has less than five (5) full years of compensation,
the average shall be based upon
    

                                         -8-

<PAGE>

the number of years for which compensation was received. Any partial year shall
be annualized, taking into account the frequency of compensatory payments.

    Notwithstanding the foregoing, if the Severance Payment, either alone, or
together with other payments which the Executive has the right to receive from
the Company, would constitute a "parachute payment" (as defined in Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code")), such Severance
Payment shall be reduced to the largest amount which will result in no portion
of the Severance Payment being subject to the excise tax imposed by Section 4999
of the Code. The determination of any reduction in the Severance Payment
pursuant to the foregoing shall be made solely by the Executive in good faith,
and such determination shall be conclusive and binding on the Company.
    
                                      ARTICLE 5
                               NO DUTY TO MITIGATE AND
                         NO EFFECT ON OTHER CONTRACT RIGHTS.

    5.1 NO DUTY TO MITIGATE. The Executive shall not be required to mitigate
damages or the amount of any payment provided for under this Agreement by
seeking other employment or otherwise, nor shall the amount of the Severance
Compensation be reduced by any compensation earned by the Executive as the
result of employment by another employer after the Date of Termination, or
otherwise.
    
    5.2 NO EFFECT ON OTHER CONTRACT RIGHTS. Neither the provisions of this
Agreement nor the Severance Payment shall reduce any amounts otherwise payable,
or in any way diminish the Executive's existing rights, or rights which would
accrue solely as a result of the passage of time, under any benefit plan,
incentive plan or securities plan, employment agreement or other contract, plan
or arrangement.
    
                                      ARTICLE 6
                                SUCCESSOR AND ASSIGNS

    6.1 OF THE COMPANY. This Agreement shall be binding upon and shall inure to
the benefit of the Company and its successors and assigns. The Company shall
require any successor or assign to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place. The
term "Company" as used herein shall include such successors and assigns. The
term "successors and assigns" as used herein shall mean a corporation or other
entity acquiring all or substantially all the assets and business of the Company
(including this Agreement) whether by operation of law or otherwise.
    
    6.2 OF THE EXECUTIVE. Neither this Agreement nor any right or interest
hereunder shall be assignable or transferable by the Executive and his
beneficiaries or legal representatives, except by will or by the laws of descent
and distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal personal representative.


                                         -9-     

<PAGE>

                                      ARTICLE 7 
                                    MISCELLANEOUS

    7.1 FEES AND EXPENSES. The Company shall pay all legal fees and related
expenses (including the costs of experts, evidence and counsel) incurred by the
Executive as they become due as a result of:
    
         7.1.1 the Executive's termination of employment including all such
fees and expenses, if any, incurred in contesting or disputing any such
termination of employment).
         
         7.1.2 the Executive seeking to obtain or enforce any right or benefit
provided by this Agreement or by any other plan or arrangement maintained by the
Company under which the Executive is or may be entitled to receive benefits, or
         
         7.1.3 the Executive's hearing before the Board as contemplated in
Section 3.02(c)(ii)(B) of this Agreement; provided. however, that the
circumstances set forth in Sections 7.1.1 and 7.1.2 occurred on or after a
Change in Control.
         
    7.2 NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement (including the Notice of
Termination) shall be in writing and shall be deemed to have been duly given
when personally delivered or sent by certified mail, return receipt requested,
postage prepaid, addressed to the addresses set forth below, provided that all
notices to the Company shall be directed to the attention of the Board with a
copy to the Secretary of the Company. All notices and communications shall be
deemed to have been received on the date of delivery thereof or on the third
business day after the mailing thereof, except that notice of change of address
shall be effective only upon receipt.
    
                                  If to the Company:
    
                                       Fireplace Manufacturers, Inc.
                                       2701 S. Harbor Blvd.
                                       Santa Ana, CA 92704
                                       Attn: Board of Directors

                                  If to the Executive:
                                       
                                       -------------------------------
                                       -------------------------------
                                       -------------------------------

    
                                         -10-

<PAGE>

    7.3 NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company or any of its
Subsidiaries and for which the Executive may qualify, nor shall anything herein
limit or reduce such rights as the Executive may have under any other agreements
with the Company or any of its Subsidiaries. Amounts which are vested benefits
or which the Executive is otherwise entitled to receive under any plan or
program of the Company or any of its Subsidiaries shall be payable in accordance
with such plan or program, except as explicitly modified by this Agreement.
    
    7.4 SETTLEMENT OF CLAIMS. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, defense, recoupment, or other right which
the Company may have against the Executive or others.
    
    7.5 MODIFICATION. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by the Executive and the Company. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreement or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement.
    
    7.6 GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of California without giving
effect to the conflict of law principles thereof. Any action brought by any
party to this Agreement shall be brought and maintained in a court of competent
jurisdiction in Orange County of the State of California.
    
    7.7 SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
    
    7.8 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior agreements, if any,
understandings and arrangements, oral or written, between the parties hereto
with respect to the subject matter hereof.
    
    
                                         -11-
    
<PAGE>

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
duly authorized officer and the Executive has executed this Agreement as of the
day and year first above written.

                                       "COMPANY"
                             
                                       FIREPLACE MANUFACTURERS. INC., a
                                       California corporation
                                  
                                       By:
                                          -------------------------------------
                                         Its:
                                             ----------------------------------
                                           
                                       "EXECUTIVE"
                             
                                       Willard V. Harris
                                       ----------------------------------------
                                       -----------





Similar agreements have been established for Willard P. Harris and John D.
Hornsby.
    
                                    -12-                    

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          MAR-31-1997
<PERIOD-START>                             APR-01-1996
<PERIOD-END>                               MAR-31-1997
<CASH>                                         333,000
<SECURITIES>                                         0
<RECEIVABLES>                                2,307,000
<ALLOWANCES>                                   272,000
<INVENTORY>                                  1,847,000
<CURRENT-ASSETS>                             5,026,000
<PP&E>                                       1,761,000
<DEPRECIATION>                               3,515,000
<TOTAL-ASSETS>                               6,937,000
<CURRENT-LIABILITIES>                        3,708,000
<BONDS>                                              0
                                0
                                          0
<COMMON>                                        35,000
<OTHER-SE>                                           0
<TOTAL-LIABILITY-AND-EQUITY>                 6,937,000
<SALES>                                     31,844,000
<TOTAL-REVENUES>                            31,844,000
<CGS>                                       25,186,000
<TOTAL-COSTS>                               25,186,000
<OTHER-EXPENSES>                             5,223,000
<LOSS-PROVISION>                               272,000
<INTEREST-EXPENSE>                             269,000
<INCOME-PRETAX>                              1,195,000
<INCOME-TAX>                                   201,000
<INCOME-CONTINUING>                            994,000
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   994,000
<EPS-PRIMARY>                                     0.30
<EPS-DILUTED>                                     0.30
        

</TABLE>


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