FIREPLACE MANUFACTURERS INC
10-K405, 1998-06-05
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, 1998

                                         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 15, 1998 was $18,297,000 and $19,528,000, respectively.

The number of shares outstanding of each of the Registrant's classes of Common
Stock as of May 15, 1998, was as follows:

Common Stock, $0.01 Par Value per share - 3,326,775

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.

RECENT SIGNIFICANT DEVELOPMENTS The company entered into an Agreement and 
Plan of Reorganization with DESA International on May 13, 1998 in which the 
Company will be merged with and into DESA International.  As part of such 
merger the Company's common stock will be exchanged for $7.14 per share, not 
to exceed $23,750,000.  Upon consummation of the merger, all outstanding 
stock options, subject to possible adjustment, will be canceled and all 
existing employment agreements and severance compensation agreements will be 
terminated.  Upon closing, three members of the executive management team 
will enter into three year non-compete agreements with the buyer. 
Consummation of the merger is dependent upon certain regulatory clearance and 
the approval of the shareholders at a special meeting scheduled to be held in 
August 1998.  No assurances can be given that the merger will be consummated.

METAL FIREPLACE SYSTEMS AND RELATED PRODUCTS
Fireplace Manufacturers, Inc., designs, manufacturers, 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 manufactured housing.  They
can be used as part of a wall, in a corner, or as a room divider.  Fireplaces
are sold mainly to one and two step distributors who install the system for home
builders in new construction and to 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.  All fireplaces are
finished with a durable powder coat spray finish which resists scuffing,
scraping and fading.

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 $400 to $4,000.  Twenty-nine of these
fireplaces are gas-only models.


                                          3
<PAGE>

FMI has developed a line of ventfree fireplaces and gas log heaters that have
grown in popularity over the last five (5) years.  The Company expects the
ventfree product to gain popularity in 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 ventfree 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 next to a wall
with no chimney or ductwork.  The free standing stoves use natural or propane
fuel.

VENTED AND VENTFREE 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", and 24", with a burner grate, connector, volcanic rock, and rock wool.
Ventfree gas logs can be installed in any FMI vented or ventfree fireplace,
masonry fireplaces, as well as other zero clearance manufactured boxes that have
approval with FMI ventfree log sets.  The log sets can be produced as either
round oak or split oak and range in size from 18" to 24".  For safety, the ODS
(oxygen depletion sensor) will shut the gas logs off if oxygen is depleted or
fuel is interrupted in the room.

CUSTOMERS AND MARKETING
The Company has developed three distribution markets for its products:

HOME BUILDERS
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.

RETAIL
FMI has turned its focus toward the two-step distribution process in marketing
to fireplace centers.

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 manufactured housing industry.
Eighteen percent of the manufactured housing manufactured each year have a
fireplace.

The Company has an agreement with the Evcon Group to provide fireplaces for the
manufactured housing industry.  This agreement provides for the Evcon Group to
be the distributor to the manufactured housing industry for the Company's
products.  This agreement is renewable annually.

The Company also sells in limited international markets:  Japan, Canada, Norway,
Holland, England and Saudi Arabia.  Total sales to all foreign markets are less
than 5%.


                                          4
<PAGE>

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.

For the fiscal year ended March 31, 1998, 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, 1998, 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 Company filed a trademark
application on October 3, 1997 with the U.S. Patent and Trademark Office and
anticipates final approval during 1998.  The trademarked name is Universal
Ventfree Fireplace.

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, 1998, 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., Canadian 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 manufactured
housing.


                                          5
<PAGE>

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.

RESEARCH AND DEVELOPMENT
The Company incurs research and development costs on new product development,
improvement of existing products, and product line extension.  During 1998, 1997
and 1996, the Company investment in research and development totaled $766,000,
$607,000, and $586,000 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.  Hand built masonry
fireplaces take longer to install and require on-site preparation of the
building.  Metal fireplaces require no on-site preparation.

EMPLOYEES
As of March 31, 1998, FMI employed 200 persons, including approximately 175 in
fabrication and a staff of 25 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 104,000
square feet.  Effective May 1, 1994, FMI entered into a five-year lease for such
facility with monthly rentals of $29,000.

ITEM 3    LEGAL PROCEEDINGS

A claim was asserted against the Company alleging infringement of a company's
patent.  The district court granted the Company's motion for summary judgment
and held that the Company's products do not infringe the patent at issue, either
literally or by operation of the doctrine of equivalents.  The summary judgment
has been appealed.  The Company's independent counsel is unable to express an
opinion as to the probably outcome of the action and therefore no estimate can
be made of a range of amount of loss, if any, 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.


                                          6
<PAGE>

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.

                                      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.

<TABLE>
<CAPTION>

          Fiscal Quarter      Common Stock Bid Prices
          Ended               High                   Low
          ----------------    --------------------------
<S>       <C>                 <C>            <C>
1996      March 31             $.78                $.40
          June 30               .93                 .81
          September 30          .93                 .37
          December 31           .93                 .53

1997      March 31             1.12                 .75
          June 30              1.69                1.12
          September 30         2.88                1.56
          December 31          3.25                2.75

1998      March 31             5.88                2.56

</TABLE>

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:

<TABLE>
<CAPTION>

                                             Approximate Number of
                                             Record Holders
               Title of Class                As of May 19, 1998
               --------------                ------------------
               <S>                           <C>
               Common Stock, $0.01                815 (1)
               par value

</TABLE>


                                          7
<PAGE>

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

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 July 22,1997 the Board of Directors approved and on January 19, 1998 the
Company issued to 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 1998 compensation.

<TABLE>
<CAPTION>

                                                                 Number
     Name and Principal Position                                 of Shares        Amount
     ---------------------------                                 ---------        ------
<S>                                                              <C>            <C>
     Willard V. Harris, Jr., Chairman of the Board               15,000         $  24,450
     Willard P. Harris, President, Chief Executive               15,000         $  24,450
     John D. Hornsby, Chief Operating Officer                    15,000         $  24,450
     James L. Behrens, Vice President of Sales & Marketing       63,000         $ 102,690
     Jane A. Iovine, Vice President of Finance                   11,000         $  17,930

</TABLE>

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.

<TABLE>
<CAPTION>

                                                                 Number
     Name and Principal Position                                 of Shares        Amount
     ---------------------------                                 ---------        ------
<S>                                                              <C>            <C>

     Willard V. Harris, Jr., Chairman of the Board               50,000         $  38,000
     Willard P. Harris, President, Chief Executive               50,000         $  38,000
     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
</TABLE>

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


                                          8
<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.

<TABLE>
<CAPTION>

                                                       FOR THE YEARS ENDED MARCH 31
                                      ------------------------------------------------------------------
                                        1998           1997           1996           1995           1994
                                        ----           ----           ----           ----           ----
                                             (DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNT)
<S>                                   <C>            <C>            <C>            <C>            <C>

Net sales                             $28,999        $31,844        $28,729        $26,705        $19,813

Net income                            $ 1,321        $   994        $    44        $   457        $   43

Average shares
outstanding, basic                      3,400          3,323          3,536          3,553          3,553

Net Income                            $  0.39        $  0.30        $  0.01        $  0.13        $  0.01
per common share, basic

Total assets                          $ 6,647        $ 6,937        $ 8,832        $ 8,988        $ 6,379

Total long-term
obligations (excluding
current portion)                      $     0        $   235        $   904        $   998        $   732

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

</TABLE>

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, 1998,
and 1997 there were no amounts outstanding under the line of credit.  The net
availability remaining under this revolving line of credit is $1,663,000 at
March 31, 1998.  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 line
of credit is subject to renewal on August 3, 1998.  The Company does not
anticipate the need to renew this line of credit.

The Company also has available a $500,000 equipment line of credit which
converts to a forty-eight month term loan on August 1, 1998.  The borrowings
under the line bear interest at the bank's prime rate plus .75%.  The line is
subject to the same covenants as the line of credit.  At March 31, 1998, there
were no amounts outstanding under this agreement.


                                          9
<PAGE>

Accounts receivable (before allowances for doubtful accounts) at March 31, 1998
were $2,063,000, compared to $2,579,000 at March 31, 1997.  The 20% decrease is
primarily attributed to improved credit collections.  Days sales outstanding at
March 31, 1998 was 25 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
repurchase the repossessed inventory.  There have not been and the Company does
not anticipate any material repurchases of inventory.  The Company accounts for
this arrangement as a sale of receivable.  During 1997, the Company sold
receivables of approximately $4,267,000.  The balance sheet at March 31, 1998
includes approximately $150,000 due from the finance company.  The allowances
for doubtful accounts decreased for the year $11,000 from $272,000  to $261,000
at March 31, 1998.  The decreased reserve is related to the lower accounts
receivable balance.

The current ratio increased by 29.4% during fiscal year 1998.  At March 31, 1998
the current ratio was 1.76:1 as compared to 1.36:1 at March 31, 1997.  The
Company benefited from higher margins and reductions in accounts payable
balances.

Inventories decreased $276,000 to $1,571,000 at March 31, 1998 from $1,847,000
at March 31, 1997.  The purchased parts inventory was responsible for the
majority of this decrease due to an improved purchasing approach that allows for
shorter lead time and smaller quantity purchased per transaction.

The Company has made equipment additions of $243,000 and $345,000 for 1998 and
1997 respectively.  Purchases of fixed assets are anticipated to increase for
the fiscal year ended March 31, 1999 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 approved the repurchase of up to 500,000 
shares of common stock from time to time.  At various times throughout 1998 
240,275 shares were repurchased for $644,000. As required by California law 
all repurchased shares were retired. The Company has suspended the  
repurchase of stock due to the pending acquisition discussed in Item 1. 
Business - Recent Significant Developments.  On July 21, 1997 the Company 
issued 119,100 shares valued at $194,133 using the bid price per share on 
that date, as compensation to the Board of Directors and executive officers.

RESULTS OF OPERATIONS 1998 COMPARED TO 1997
Sales for the fiscal year 1998 decreased 8.9% from fiscal year 1997.  The
decrease in sales is attributed to a 12.0% decrease in unit sales offset by a
3.6% increase in average selling price.  Decreased unit sales are primarily
attributable to a decrease in the manufactured housing industry unit sales
during fiscal year 1998.  Based on present market conditions, the Company
believes sales will remain constant for fiscal year 1999 although there can be
no assurances in that regard.


                                          10
<PAGE>

Cost of sales for fiscal year 1998 were 75.1% of sales as compared with 79.1% of
sales in fiscal year 1997.  This decrease is attributed to the 3.6% increase in
average selling price along with savings on materials costs through improved
purchasing techniques.  Management's goal is to continue to improve this
percentage in fiscal year 1999 although there can be no assurances in this
regard.

Selling, general and administrative expenses increased as a percent of sales by
1.5% to 17.9% of sales in fiscal 1998 compared to 16.4% in fiscal 1997.  This
increase is attributed to higher bonus expense calculated on the higher 1998 net
profit.  The Company anticipates a decrease in this percentage in fiscal year
1999 due to the lower bonus rates which were announced for the new year.

Interest expense decreased in 1998 by 0.7% as a percent of sales over the fiscal
year 1997 expense.  This decrease is due to interest calculated on lower
borrowings.  The Company expects interest expense to continue to decrease for
1999 although there can be no assurances in this regard.

Management has recorded a valuation allowance on deferred tax assets relating to
tax credit carryforwards which are not expected to be realized within two years.

The Company's 1998 net income as a percent of sales increased 1.5% from 1997.
Management believes that continued cost cutting efforts, lower bonuses and
better market penetration will allow the Company to remain profitable in 1999
although there can be no assurances in this regard.

RESULTS OF OPERATIONS 1997 COMPARED TO 1996
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 products
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.

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 in plant variable costs.

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.


                                          11
<PAGE>

Management estimates no valuation allowance on deferred tax assets is needed
because 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.
The increase is due to lower cost of sales offset by slightly higher selling,
general and administrative expenses.

RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 Reporting Comprehensive Income and
SFAS No. 131 Disclosures about Segments of an Enterprise and Related
Information.  SFAS No. 130 requires an enterprise to report, by major components
and as a single total, the change in its net assets during the period from
nonowner sources; and SFAS No. 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers.  Adoption of these
statements will not impact the Company's financial position, results of
operations or cash flows and any effect will be limited to the form and content
of its disclosures.  Both statements are effective for fiscal years beginning
after December 15, 1997, with earlier application permitted.

YEAR 2000
The Company's computer systems are not compliant with the year 2000
requirements.  At this time Management is considering several options to gain
compliance with prices ranging from $150,000 to $250,000.  Price differences
would allow for other system upgrades to be implemented simultaneously with the
year 2000 solution.

FORWARD LOOKING STATEMENTS
Statements regarding the Company's expectations as to demand for its products in
fiscal 1999, 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 to the
future 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


                                          12
<PAGE>

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.

                                      PART III

ITEM 10   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers and directors of Fireplace Manufacturers, Inc. are as
follows:

<TABLE>
<CAPTION>

NAME                     POSITION                                          AGE
- ----                     --------                                          ---
<S>                      <C>                                               <C>
WILLARD V. HARRIS, JR.   Chairman of the Board of Directors                64

WILLARD P. HARRIS        President, Chief Executive Officer, and Director  42

JOHN D. HORNSBY          Chief Operating Officer, Secretary, and Director  44

JAMES L. BEHRENS         Vice President of Sales and Marketing             43

JANE A. IOVINE           Vice President of Finance                         36

GERARDO C. LOZANO        Vice President of Manufacturing                   37

</TABLE>


                                          13
<PAGE>

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 A. IOVINE was named Vice President of Finance in July of 1995, she has been
with the Company since March of 1994.  Ms. Iovine is a graduate of San Diego
State University and has been 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.

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.

SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
There have been no failures to timely file forms 3, 4 or 5.


                                          14
<PAGE>

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, 1998 exceeded $100,000
for services in all capacities to the Company and its subsidiaries during such
fiscal year.


<TABLE>
<CAPTION>

                                SUMMARY COMPENSATION TABLE

                                                                         Annual Compensation
                                                       -----------------------------------------------------
Name and Principal                                                                             Other Annual
Position                                                Year       Salary (1)    Bonus (2)     Compensation
- ------------------                                      ----       ----------    ---------     ------------
<S>                                                     <C>        <C>           <C>           <C>

Willard V. Harris, Jr. (4) (5)                          1998       $190,956      $ 89,835 (7)   $137,585 (3)
Chairman of the Board                                   1997       $220,720      $ 45,500 (6)   $ 38,294 (3)
                                                        1996       $112,000      $ 55,000       $ 0

Willard P. Harris (4) (5)                               1998       $209,790      $206,808 (7)   $ 0
President, Chief Executive                              1997       $212,380      $ 63,000 (6)   $ 75,435 (3)
Officer, Director                                       1996       $195,000      $ 69,000       $ 37,000 (3)

John D. Hornsby (4) (5)                                 1998       $199,920      $203,539 (7)   $ 0
Chief Operating Officer                                 1997       $196,680      $ 63,000 (6)   $ 35,549 (3)
                                                        1996       $152,000      $ 64,000       $ 19,000 (3)

James L. Behrens (5)                                    1998       $ 75,000      $230,929 (7)   $ 0
Vice President of Sales &                               1997       $ 75,000      $ 31,032 (6)   $ 0
Marketing                                               1996       $  7,212      $ 0            $ 0

</TABLE>


(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.

(3)  This additional compensation was used to decrease notes receivable from
officers due to the Company during 1996 and 1997.  In 1998 W.V. Harris used
additional compensation to repay debt of Rampart Inc. a previously related
party.


                                          15
<PAGE>

(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).

(7) Includes the following stock bonuses; W. V. Harris 15,000 shares ($24,450);
W. P. Harris 15,000 shares ($24,450); J. D. Hornsby 15,000 shares ($24,450); and
J. L. Behrens 63,000 shares ($102,690) plus automobiles transferred at blue book
value to W.V. Harris at $8,632; W.P. Harris $23,950; and J.D. Hornsby $25,027.


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, 1998, 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.

<TABLE>
<CAPTION>

                                        Amount
Name and Address                        Beneficially        Percent
of Beneficial Owner                      Owned               of Class
- -------------------                ------------------       ---------
<S>                                     <C>                 <C>

DESA International Inc.                 249,300               7.5%
2701 Industrial Drive
Bowling Green, KY  47102

Benjamin C. Harris                      259,250               7.8%
2701 S. Harbor Blvd.
Santa Ana, CA  92407

Willard V. Harris Jr.                   368,780              11.1%
2701 S. Harbor Blvd.
Santa Ana, CA  92407

Willard P. Harris                       413,392              12.4%
2701 S. Harbor Blvd.
Santa Ana, CA  92407

John D. Hornsby                         480,748              14.5%
2701 S. Harbor Blvd.
Santa Ana, CA  92407

James L. Behrens                        101,252               3.0%
2701 S. Harbor Blvd.
Santa Ana, CA  92407

All Directors & Officers              1,380,172              41.5%
as a group (6 persons)

</TABLE>


                                          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, 1998, the entire amount was paid.  Amounts received are recorded as
a reduction of bad debt expense in the year the cash is collected.

The Company has two monthly operating leases 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 $85,428 in
fiscal year 1998.

                                      PART IV

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

<TABLE>
<CAPTION>

FINANCIAL STATEMENTS
<S>                                                              <C>

Independent Auditors' Report                                     F-1

Consolidated Balance Sheets at March 31, 1998 and 1997           F-2

Consolidated Statements of Income for the
years ended March 31, 1998, 1997, and 1996                       F-3

Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1998, 1997, and 1996                       F-4

Consolidated Statements of Cash Flows for
the years ended March 31, 1998, 1997, and 1996                   F-5

Notes to Consolidated Financial Statements                       F-6 to F-16

</TABLE>


                                          18
<PAGE>

REPORTS ON FORM 8-K
A Report on Form 8-K item 5 was filed on April 2, 1998 regarding the merger of
the Company and DESA International.

<TABLE>
<CAPTION>

EXHIBITS
<S>       <C>

3.1       Articles of Incorporation, as amended incorporated by reference to the
          identically numbered exhibit in the 1997 10-K.
3.2       By-laws as amended incorporated by reference to the identically
          numbered exhibit in the 1997 10-K.
10.3      Severance Compensation Agreements incorporated by reference to the
          identically numbered exhibit in the 1997 10-K.
10.4      Plan and Agreement of Reorganization with DESA International, Inc. (1)
10.5      Voting and Option Agreement with DESA International, Inc. (1)

</TABLE>



Footnote (1):  Incorporated by reference to Amendment No. 3 to Schedule 13D
filed by DESA International, Inc. on June 5, 1998.


                                          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 5, 1998.


                                        FIREPLACE MANUFACTURERS, INC.



                                        /s/ WILLARD P. HARRIS
                                        ------------------------------
                                   By:  Willard P. Harris
                                        President and
                                        Chief Executive Officer



                                        /s/ JANE ANN IOVINE
                                        ------------------------------
                                   By:  Jane Ann Iovine
                                        Vice President
                                        Chief Financial 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.



/s/ WILLARD V. HARRIS
- -----------------------------------
Willard V. Harris
Chairman of the Board                             Date:  June 5, 1998


/s/ WILLARD P. HARRIS
- -----------------------------------
Willard P. Harris, Director                       Date:  June 5, 1998


/s/ JOHN D. HORNSBY
- -----------------------------------
John D. Hornsby, Director                         Date:  June 5, 1998


/s/ JANE A. IOVINE
- -----------------------------------
Jane A. Iovine, Vice President
Chief Financial Officer                           Date: June 5, 1998


                                          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, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended March 31, 1998.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1998 in conformity with generally accepted accounting
principles.






                                        MCGLADREY & PULLEN, LLP


Anaheim, California
May 7, 1998


                                         F-1
<PAGE>

FIREPLACE MANUFACTURERS, INC.
 AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997

<TABLE>
<CAPTION>

ASSETS                                                                                    1998            1997
- -----------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>            <C>
Current Assets
 Cash and cash equivalents                                                           $  1,232,000   $    333,000
 Trade accounts receivable, less allowance for doubtful
  accounts of $261,000 in 1998 and $272,000 in 1997                                     1,802,000      2,307,000
 Inventories                                                                            1,571,000      1,847,000
 Prepaid expenses and other                                                                74,000        118,000
 Deferred taxes                                                                           411,000        421,000
                                                                                     ---------------------------

          TOTAL CURRENT ASSETS                                                          5,090,000      5,026,000

Equipment and Leasehold Improvements, net                                               1,339,000      1,761,000

Other Assets                                                                              218,000        150,000
                                                                                     ---------------------------

                                                                                     $  6,647,000   $  6,937,000
                                                                                     ---------------------------
                                                                                     ---------------------------

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

Current Liabilities
 Accounts payable                                                                    $  1,163,000   $  2,042,000
 Accrued liabilities                                                                    1,719,000      1,454,000
 Current portion of long-term debt                                                              -        212,000
                                                                                     ---------------------------

          TOTAL CURRENT LIABILITIES                                                     2,882,000      3,708,000
                                                                                     ---------------------------

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

Deferred Taxes                                                                            181,000        281,000
                                                                                     ---------------------------

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 1998
   3,326,775 and 1997 3,447,950                                                            33,000         35,000
 Additional paid-in capital                                                                     -        248,000
 Retained earnings                                                                      3,551,000      2,430,000
                                                                                     ---------------------------
                                                                                        3,584,000      2,713,000
                                                                                     ---------------------------

                                                                                     $  6,647,000   $  6,937,000
                                                                                     ---------------------------
                                                                                     ---------------------------
</TABLE>

See Notes to Consolidated Financial Statements.


                                         F-2
<PAGE>

FIREPLACE MANUFACTURERS, INC.
 AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                               1998                 1997                 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                 <C>                  <C>
Net Sales                                                                 $ 28,999,000        $   31,844,000       $   28,729,000

Cost of Sales (including $85,000, $63,000 and
  $31,000 of rent to officers)                                              21,783,000            25,186,000           23,903,000
                                                                          --------------------------------------------------------

           GROSS MARGIN                                                      7,216,000             6,658,000            4,826,000

Selling, General and Administrative Expenses                                 5,179,000             5,223,000            4,450,000
                                                                          --------------------------------------------------------

           OPERATING INCOME                                                  2,037,000             1,435,000              376,000

Interest Expense                                                               (37,000)             (269,000)            (375,000)

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

           INCOME BEFORE INCOME TAXES                                        2,000,000             1,195,000               45,000

Provision for Income Taxes                                                     679,000               201,000                1,000
                                                                          --------------------------------------------------------

           NET INCOME                                                     $  1,321,000        $      994,000       $       44,000
                                                                          --------------------------------------------------------
                                                                          --------------------------------------------------------

Earnings per share

  Basic                                                                   $       0.39        $         0.30       $         0.01
                                                                          --------------------------------------------------------
                                                                          --------------------------------------------------------

  Diluted                                                                 $       0.38        $         0.30       $         0.01
                                                                          --------------------------------------------------------
                                                                          --------------------------------------------------------

Weighted-average number of common
  shares outstanding

  Basic                                                                      3,399,632             3,323,173            3,536,287
                                                                          --------------------------------------------------------
                                                                          --------------------------------------------------------

  Diluted                                                                    3,456,545             3,323,173            3,536,287
                                                                          --------------------------------------------------------
                                                                          --------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.


                                         F-3
<PAGE>

FIREPLACE MANUFACTURERS, INC.
 AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                    Common Stock                 Additional
                                                ----------------------            Paid-In            Retained
                                                Shares          Amount            Capital            Earnings             Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>          <C>               <C>              <C>                  <C>
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

 Issuance of stock for
   services                                      119,100         1,000            193,000                   -             194,000

 Repurchase of common                           (240,275)       (3,000)          (441,000)           (200,000)           (644,000)
   stock for retirement

 Net income                                            -             -                  -           1,321,000           1,321,000
                                              ------------------------------------------------------------------------------------

Balance, March 31, 1998                        3,326,775    $   33,000        $         -      $    3,551,000       $   3,584,000
                                              ------------------------------------------------------------------------------------
                                              ------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.


                                         F-4
<PAGE>


FIREPLACE MANUFACTURERS, INC.
 AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                  1998                1997                 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                <C>                   <C>
Cash Flows From Operating Activities
 Net income                                                                 $   1,321,000       $     994,000        $     44,000
 Adjustments to reconcile net income to net cash
   provided by (used in) operating activities:
   Depreciation and amortization                                                  583,000             618,000             558,000
   Deferred income taxes                                                          (90,000)           (195,000)            (11,000)
   Compensation applied to notes receivable                                           -               132,000              56,000
   Other                                                                           29,000              47,000                   -
   Bad debt expense                                                                39,000             142,000             272,000
   Issuance of common stock for services                                          194,000             147,000               5,000
   Changes in working capital components:
     (Increase) decrease in:
       Trade accounts receivable                                                  464,000             824,000          (1,084,000)
       Inventories                                                                276,000             888,000             767,000
       Prepaid expenses and other assets                                           46,000             (33,000)             41,000
     Increase (decrease) in accounts payable
       and accrued liabilities                                                   (614,000)            132,000            (775,000)
                                                                            ------------------------------------------------------
         NET CASH PROVIDED BY (USED IN)
           OPERATING ACTIVITIES                                                 2,248,000           3,696,000            (127,000)
                                                                            ------------------------------------------------------

Cash Flows From Investing Activities
  Purchases of equipment and leasehold improvements                              (243,000)           (345,000)           (479,000)
  Other                                                                            53,000              23,000                   -
  Increase in other assets                                                        (68,000)            (14,000)            (86,000)
  Payments on notes receivable from officers/
    stockholders                                                                      -                   -                16,000
                                                                            ------------------------------------------------------
           NET CASH (USED IN) INVESTING ACTIVITIES                               (258,000)           (336,000)           (549,000)
                                                                            ------------------------------------------------------

Cash Flows From Financing Activities
  Proceeds from long-term debt                                                        -                   -               146,000
  Payments on long-term debt                                                     (447,000)           (692,000)           (121,000)
  Net proceeds from (payments on) revolving
    line of credit                                                                    -            (2,263,000)            720,000
  Repurchase of common stock for retirement                                      (644,000)           (208,000)            (50,000)
                                                                            ------------------------------------------------------
           NET CASH PROVIDED BY (USED IN)
             FINANCING ACTIVITIES                                              (1,091,000)         (3,163,000)            695,000
                                                                            ------------------------------------------------------
           NET INCREASE IN CASH AND
             CASH EQUIVALENTS                                                     899,000             197,000              19,000

Cash and Cash Equivalents
  Beginning of year                                                               333,000             136,000             117,000
                                                                            ------------------------------------------------------

  End of year                                                               $   1,232,000       $     333,000        $    136,000
                                                                            ------------------------------------------------------
                                                                            ------------------------------------------------------
</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
the United States and Canada on terms established by the Company.  The
fireplaces are used in single-family homes, condominiums, apartments, other
multiple-family dwellings and in manufactured housing.  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 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 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.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES IS AS FOLLOWS:

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.

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 the United States and
Canada.  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 net sales for 1998, 1997, and 1996.
Accounts receivable from this customer totaled approximately $450,000 and
$503,000 at March 31, 1998 and 1997, respectively.  In addition, another
customer represented 12% of total net sales for both 1998 and 1997 and 11% for
1996.  Accounts receivable from this customer were approximately $348,000 and
$279,000 at March 31, 1998 and 1997, respectively.  There were no other
customers who represented greater than 10% of net sales.


                                         F-6
<PAGE>

FIREPLACE MANUFACTURERS, INC.
 AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

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

CASH AND CASH EQUIVALENTS:

The Company considers all highly liquid investments purchased with an original
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 exceed 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 $279,000,
$464,000 and $396,000 during 1998, 1997 and 1996, 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
taxable 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 1998, 1997 and 1996, the Company expensed approximately $766,000,
$607,000 and $586,000, respectively.


                                         F-7

<PAGE>

FIREPLACE MANUFACTURERS, INC.
 AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

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

EARNINGS PER SHARE:

In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 EARNINGS PER SHARE
(EPS). SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on
the face of all income statements issued after December 15, 1997 for all
entities with complex capital structures.  Basic EPS is computed as net income
divided by the weighted-average number of common shares outstanding for the
period.  Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options (56,913 shares in the year ended
March 31, 1998 and none in the fiscal years ended March 31, 1997 and 1996).  The
adoption of SFAS No. 128 had no effect on the prior years presentation.

FAIR VALUE OF FINANCIAL INSTRUMENTS:

The Company's financial instruments consist of cash, accounts receivable,
accounts payable and notes payable.  The book value of these instruments are
considered to be representative of their fair value.

The fair value estimates presented herein are based on pertinent information
available to management as of March 31, 1998 and 1997.  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 purposes
of these financial statements since that date.

STOCK-BASED COMPENSATION:

The Company accounts for stock-based employee compensation under the
requirements of Accounting Principles Board (APB) Opinion No. 25, which does not
require compensation to be recorded if the consideration to be received is at
least equal to the intrinsic value at the measurement date.  Nonemployee
stock-based transactions are accounted for under the requirements of SFAS No.
123 ACCOUNTING FOR STOCK BASED COMPENSATION which requires compensation to be
recorded based on the fair value of the securities issued or the services
received, whichever is more reliably measurable.

Note 2.   INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                                          1998          1997
- --------------------------------------------------------------------------------
<S>                                                 <C>           <C>
Raw materials                                       $  1,032,000  $  1,254,000
Work-in-process                                          239,000       265,000
Finished goods                                           300,000       328,000
                                                     ---------------------------
                                                     $  1,571,000  $  1,847,000
                                                     ---------------------------
                                                     ---------------------------
</TABLE>


                                         F-8
<PAGE>

FIREPLACE MANUFACTURERS, INC.
 AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 3.   EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following:

<TABLE>
<CAPTION>
                                                         1998           1997
- --------------------------------------------------------------------------------
<S>                                                <C>            <C>
 Machinery and equipment                           $   2,889,000  $   2,982,000
 Tools, dies and molds                                 1,389,000      1,322,000
 Furniture, fixtures and vehicles                        352,000        629,000
 Leasehold improvements                                   60,000         64,000
 Research and development equipment                      256,000        279,000
                                                   -----------------------------
                                                       4,946,000      5,276,000
 Less accumulated depreciation and amortization        3,607,000      3,515,000
                                                   -----------------------------

                                                   $   1,339,000  $   1,761,000
                                                   -----------------------------
                                                   -----------------------------
</TABLE>

NOTE 4.   ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                          1998          1997
- --------------------------------------------------------------------------------
<S>                                               <C>              <C>
 Compensation                                      $   1,344,000  $     841,000
 Income taxes payable                                     10,000        136,000
 Warranty                                                138,000        148,000
 Other                                                   227,000        329,000
                                                   -----------------------------

                                                   $   1,719,000  $   1,454,000
                                                   -----------------------------
                                                   -----------------------------
</TABLE>

NOTE 5.   LINE OF CREDIT

The Company may borrow up to $4,000,000 against eligible accounts receivable and
inventories 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, 1998) plus .5%, with interest payable
monthly.  Advances are limited to 80% of eligible accounts receivable; plus 40%
of eligible inventories (inventory advances are not to exceed $500,000). The
line of credit expires on August 3, 1998.  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, 1998, there were no amounts
outstanding under this agreement and approximately $1,663,000 of availability.


                                         F-9
<PAGE>

FIREPLACE MANUFACTURERS, INC.
 AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 5.   LINE OF CREDIT (CONTINUED)

The Company also has available a $500,000 equipment line of credit which
converts to a forty-eight month term loan on August 1, 1998.  The line bears
interest at the bank's prime rate plus .75%.  The line is subject to the same
covenants as the line of credit.  At March 31, 1998, there were no amounts
outstanding under this agreement.

NOTE 6.   LONG-TERM DEBT

As of March 31, 1998, the Company has no long-term debt outstanding.  The
long-term debt outstanding as of March 31, 1997 totaled $447,000, consisted
primarily of equipment loans and was paid-off during 1998.

NOTE 7.   STOCK OPTIONS

The Company has reserved 835,000 shares for issuance under the Company's 1997
Stock Option Plan.  In the year ended March 31, 1998, the Company granted
options to acquire 835,000 shares at a price of $2.88 per share.  The options
vest 20% on the date of grant and 20% on the anniversary of the date of grant
thereafter.  The options expire five years after the date of grant.

As permitted under generally accepted accounting principles, grants under these
plans are accounted for following APB Opinion No. 25 and related
interpretations.  Accordingly, no compensation cost has been recognized for
grants under the stock option plan.  Had compensation cost been determined based
on the fair value method prescribed in SFAS No. 123, reported net income and
basic and diluted earnings per share would have been reduced to $992,000, $0.29
and $0.28, respectively.  In determining the amounts above, the value of each
grant is estimated at the grant date using the Black-Scholes option-pricing
model with the following weighted-average assumptions for grants in fiscal year
1998:  no dividends, risk-free interest rate of 5.86%, price volatility of 79%,
expected lives of five years and expected exercise rate of 100%.  The
weighted-average fair value of the options granted in fiscal year 1998 was $1.94
per share.

The above options, vested and unvested, will terminate upon consummation of the
anticipated sale of the Company disclosed in Note 15.


                                         F-10
<PAGE>

FIREPLACE MANUFACTURERS, INC.
 AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 8.   INCOME TAXES

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                               1998         1997        1996
- --------------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>
 Current                                    $  769,000   $  396,000   $  12,000
 Deferred                                      (90,000)    (195,000)    (11,000)
                                            ------------------------------------

                                            $  679,000   $  201,000   $   1,000
                                            ------------------------------------
                                            ------------------------------------
</TABLE>

A reconciliation of income tax expense to the amount computed by applying
statutory income tax rates to income before income taxes:

<TABLE>
<CAPTION>
                                               1998         1997        1996
- --------------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>
 Federal income tax                         $  700,000   $  418,000   $  16,000
 State income tax, net of federal benefit      106,000       72,000       3,000
 Federal and state income tax credits
  generated                                   (241,000)    (114,000)    (15,000)
 Change in valuation allowance                 100,000     (192,000)     15,000
 Officers' life insurance                            -       11,000     (30,000)
 Prior year state taxes assessment                   -            -      13,000
 Other                                          14,000        6,000      (1,000)
                                            ------------------------------------

                                            $  679,000   $  201,000   $   1,000
                                            ------------------------------------
                                            ------------------------------------
</TABLE>


                                         F-11
<PAGE>

FIREPLACE MANUFACTURERS, INC.
 AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 8.   INCOME TAXES (CONTINUED)

Significant components of the Company's deferred tax assets and liabilities as
of March 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                            1998         1997
- --------------------------------------------------------------------------------
<S>                                                     <C>          <C>
 Deferred Tax Assets
  Tax credit carryforward                               $  292,000   $  155,000
  Bad debt reserve                                         102,000      109,000
  Accrued expenses                                               -       33,000
  Warranty reserve                                          54,000       59,000
  Other reserves                                            63,000       65,000
  Valuation allowance for deferred tax assets             (100,000)           -
                                                        -----------------------

      TOTAL DEFERRED TAX ASSETS, NET                       411,000      421,000

 Deferred Tax Liability, accumulated depreciation         (181,000)    (281,000)
                                                        -----------------------

                                                        $  230,000   $  140,000
                                                        -----------------------
                                                        -----------------------
</TABLE>

Management has recorded a valuation allowance on deferred tax assets relating to
tax credit carryforwards which are not expected to be realized within two years.

The components giving rise to the net deferred assets (liabilities) described
above have been included in the accompanying consolidated balance sheets as of
March 31, 1998 and 1997 as follows:

<TABLE>
<CAPTION>
                                                           1998         1997
- --------------------------------------------------------------------------------

<S>                                                    <C>           <C>
 Current assets                                        $  411,000    $  421,000
 Noncurrent (liabilities)                                (181,000)     (281,000)
                                                       ------------------------

                                                       $  230,000    $  140,000
                                                       ------------------------
                                                       ------------------------
</TABLE>

Business enterprise zone credit carryforwards as of March 31, 1998 expire as
follows: 2012 $85,000; 2013 $207,000 (total $292,000).


                                         F-12
<PAGE>

FIREPLACE MANUFACTURERS, INC.
 AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 9.   RELATED PARTY TRANSACTIONS

At March 31, 1996, advances to officers/stockholders totaled $132,000.  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 were 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.

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 the Company as partial payment of the 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 fiscal 1997, a four year repayment schedule was
established for the remaining balance of approximately $163,000 which included a
10% interest rate which began on September 1, 1996.  As of March 31, 1998, the
entire amount has been considered paid by a charge to compensation expense and a
reduction of bad debt expense.

NOTE 10.  COMMITMENTS AND CONTINGENCIES

OPERATING LEASES:

The Company's operations are conducted at facilities under an operating lease
expiring April 30, 1999 and requiring monthly payments of approximately $29,000.

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 commitments on all leases at March 31, 1998 are as follows:
1999 $433,000; 2000 $124,000; 2001 $52,000; 2002 $6,000 (total $615,000).

Rent expense was $438,000, $382,000 and $294,000 during 1998, 1997 and 1996,
respectively.


                                         F-13
<PAGE>

FIREPLACE MANUFACTURERS, INC.
 AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 10.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

ROYALTY AGREEMENTS:

The Company has an agreement which expires in the year 2009, to pay royalties on
the sale of certain ceramic fiber log sets.  The agreement requires a royalty
payment of $2.25 per log set sold for the first five years and $1.50 per log set
sold in years six through fifteen with a minimum of $1,500 per month in years
six through fifteen.  Total royalty expense under the agreement was
approximately $77,000 during 1998.

The Company entered into a nonexclusive license agreement which expired in March
1996.  Total royalty expense under the agreement was approximately $207,000
during 1996.

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.  The severance
compensation agreement will be terminated upon consummation of the anticipated
sale of the Company disclosed in Note 15.

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 repossesses any inventory, the Company is obligated to
buy back the repossessed inventory.  During 1998 and 1997, the Company sold
receivables of approximately $4,267,000 and $2,400,000.  The balance sheets at
March 31, 1998 and 1997 include approximately $151,000 and $150,000 due from the
finance company.  Management estimates that there will be no amounts of
inventory repurchased under this agreement.

YEAR 2000:

Based on a preliminary study by management, the Company expects to incur
approximately $150,000 to $250,000 to modify its information systems to
accurately process information in the year 2000 and beyond.  The Company
continues to evaluate appropriate courses of corrective action, including
replacement of certain systems whose associated costs would be recorded as
assets and amortized.


                                         F-14
<PAGE>

FIREPLACE MANUFACTURERS, INC.
 AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 10.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

CONTINGENCY:

A claim was asserted against the Company alleging infringement of a company's
patent.  The district court granted the Company's motion for summary judgment
and held that the Company's products do not infringe the patent at issue, either
literally or by operation of the doctrine of equivalents.  The summary judgment
has been appealed.  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, if any, that is reasonably possible.  No
amounts have been accrued in regards to this matter and it is reasonable
possible that a change in the estimate will occur in the near term.

NOTE 11.  RETIREMENT SAVINGS PLAN

The Company has a defined contribution 401(k) savings plan (Plan) which covers
all employees meeting minimum age and service requirements.  The Company
provides a matching contribution of 25% of the first 3% saved by the employee.
Total contributions to the Plan were $11,000, $13,000 and $11,000 during 1998,
1997 and 1996, respectively.

NOTE 12.  DISCRETIONARY BONUSES

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

<TABLE>
<CAPTION>

                      Paid or        Reduction
                      Payable        of Notes       Common
                      in Cash       Receivable       Stock       Automobiles       Total
- -------------------------------------------------------------------------------------------
<S>                 <C>            <C>            <C>            <C>            <C>
 1998
  Officers          $   779,000    $   138,000    $   194,000    $    58,000    $ 1,169,000
  Key employees         540,000              -              -              -        540,000

 1997
  Officers          $   260,000    $   149,000    $   147,000    $         -    $   556,000
  Key employees         281,000              -              -              -        281,000

 1996
  Officers          $    64,000    $    56,000    $         -    $         -        120,000
  Key employees          10,000              -              -              -         10,000
</TABLE>


                                         F-15
<PAGE>

FIREPLACE MANUFACTURERS, INC.
 AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 13.  SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                1998        1997         1996
- --------------------------------------------------------------------------------
<S>                                        <C>          <C>          <C>
 Cash payments for:
  Interest                                 $    37,000  $   290,000  $  370,000
                                           -------------------------------------
                                           -------------------------------------

  Income taxes                             $   895,000  $   189,000  $   85,000
                                           -------------------------------------
                                           -------------------------------------
</TABLE>

NOTE 14.  RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued SFAS No. 130 REPORTING COMPREHENSIVE INCOME and
SFAS No. 131 DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION.  SFAS No. 130 requires an enterprise to report, by major components
and as a single total, the change in its net assets during the period from
nonowner sources; and SFAS No. 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers.  Adoption of these
statements will not impact the Company's financial position, results of
operations or cash flows and any effect will be limited to the form and content
of its disclosures.  Both statements are effective for fiscal years beginning
after December 15, 1997, with earlier application permitted.

NOTE 15.  SUBSEQUENT EVENTS

ANTICIPATED SALE OF THE COMPANY:

The Company has signed a letter of intent  to merge with another company.  The
Company's common stock will be exchanged for $7.14 per share, not to exceed
$23,750,000.  Upon consummation of the merger, all outstanding stock options
will be canceled and all existing employment agreements will be terminated.
Upon closing, three members of the executive management team will enter into
three year noncompete agreements with the buyer, each providing for one-time
payments of $1,000,000.  In addition, one additional member of the executive
team will enter into a three year noncompete agreement providing for a one-time
payment of $250,000.  The financial statements do not reflect any adjustment
which may be necessary as a result of this transaction.

1999 PROFIT SHARING PLAN:

The Company has adopted the 1999 profit sharing plan for all employees which
provides for the following profit sharing rates:  0% on the first $1,000,000 of
pre-tax income, approximately 22% of pre-tax income over $1,000,000 and up to
$2,000,000, approximately 33% of pre-tax income over $2,000,000 and up to
$3,000,000 and approximately 44% of pre-tax income over $3,000,000.


                                         F-16

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          MAR-31-1998
<PERIOD-START>                             APR-01-1997
<PERIOD-END>                               MAR-31-1998
<CASH>                                       1,232,000
<SECURITIES>                                         0
<RECEIVABLES>                                1,802,000
<ALLOWANCES>                                   261,000
<INVENTORY>                                  1,571,000
<CURRENT-ASSETS>                             5,090,000
<PP&E>                                       1,339,000
<DEPRECIATION>                               3,607,000
<TOTAL-ASSETS>                               6,647,000
<CURRENT-LIABILITIES>                        2,882,000
<BONDS>                                              0
                                0
                                          0
<COMMON>                                        33,000
<OTHER-SE>                                   3,551,000
<TOTAL-LIABILITY-AND-EQUITY>                 6,647,000
<SALES>                                     28,999,000
<TOTAL-REVENUES>                            28,999,000
<CGS>                                       21,783,000
<TOTAL-COSTS>                               26,962,000
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              37,000
<INCOME-PRETAX>                              2,000,000
<INCOME-TAX>                                   679,000
<INCOME-CONTINUING>                          1,321,000
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                 1,321,000
<EPS-PRIMARY>                                      .39
<EPS-DILUTED>                                      .38
        

</TABLE>


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