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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K SBA
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2003 Commission File No: 0-2712
THE FLAMEMASTER CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
NEVADA 95-2018730
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
11120 SHERMAN WAY, SUN VALLEY, CALIFORNIA 91352
-----------------------------------------------
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (818) 982-1650
--------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK - $.01 PAR VALUE
-----------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any other amendment
to this Form 10-K. [_]
The aggregate market value of common stock held by non-affiliates at May 20,
2004 was $3,434,883.
As of May 20, 2004, there were 1,810,257 shares of common stock, $.01 par value,
outstanding.
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EXPLANATORY NOTE
This Amendment number 1 on Form 10 KSB/A amends and supplements the Company's
Annual Report on Form 10 KSB for the year ended September 30, 2003, originally
filed on December 19, 2003.
The Company has amended the aggregate market value of common stock held by
non-affiliates and the outstanding shares of common stock listed on the first
page to reflect the most recent information.
Also, the Company to include the information required in Part III, Item 9, 10,
and 11 as listed in the Company's definitive proxy statement for the year ending
September 30, 2003. Accordingly, the refer statement on the cover page has been
deleted.
Item 13, Exhibits and Reports on Form 8-K, has been amended to include the
Report of Independent Auditor - Sarna & Company for financial statements for
year 2003. Report of Independent Auditors - Beckman Kirkland & Whitney on 2002
financial statements.
Sarna & Company has re-audited our September 30, 2003 Form 10-KSB as discussed
in our 8-K/A filing dated May 5, 2004. Sarna and Company is a registered member
of the Public Company Accounting Oversight Board (PCAOB).
The date on the Signature page and Exhibit 31, and Exhibit 32 has changed to
reflect the date of earliest event reported.
Except as set forth above, we have not made any changes to, nor updated any
disclosures contained in the 2003 Form 10 KSB.
TABLE OF CONTENTS
PART I PAGE
------ ----
Item 1 Business ......................................................... 3
Item 2 Properties ....................................................... 7
Item 3 Legal Proceedings ................................................ 7
Item 4 Submission of Matters to a Vote of Security Holders .............. 7
PART II
-------
Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters .............................................. 8
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 9
Item 7 Financial Statements and Supplementary Data ...................... 11
Item 8 Disagreements on Accounting and Financial Disclosure ............. 11
PART III
--------
Item 9 Directors and Executive Officers of the Registrant ............... 12
Item 10 Executive Compensation ........................................... 13
Item 11 Security Ownership of Certain Beneficial Owners
and Management ................................................... 13
Item 12 Certain Relationships and Related Transactions ................... 13
Item 13 Exhibits and Reports on Form 8-K ................................. 14
SIGNATURES
2
THE FLAMEMASTER CORPORATION
PART I
ITEM 1. BUSINESS
The Flamemaster Corporation (Registrant or the Company) develops, manufactures,
and sells coatings and sealants. In addition, Registrant receives royalties from
other manufacturers who produce certain of the Registrant's products under
license. Registrant was incorporated under the laws of Nevada on September 14,
1942.
Coatings:
---------
Registrant produces flame-retardant coatings and high-heat resistant coatings.
Flame retardant coatings are used in industrial applications to prevent the
propagation of fire in electrical cables that are grouped together in cable
trays, junction boxes, cable trenches, and similar locations. These coatings are
also used in the construction of fire stops used to seal openings in walls or
ceilings through which electrical cables pass.
High heat resistant coatings are used to protect structural surfaces, such as
the aluminum deck of a naval vessel, from the destructive temperatures and blast
effects of a missile. Other applications include the protection of certain
surfaces on land-based mobile missile launchers and the control surfaces of air
launched missiles.
Sealants:
---------
Sealants are used in various aerospace applications such as the sealing of seams
in aircraft fuel tanks and pressurized passenger or crew compartments and
optical devices.
In August 1994, Registrant entered into an agreement with PRC-DeSoto Int'l
Corp., formerly known as Courtaulds Aerospace, Inc. wherein PRC-DeSoto Int'l
Corp. granted to Flamemaster a license with respect to certain technology and
proprietary rights of PRC-DeSoto Int'l Corp. that Flamemaster expects to enhance
its sealant line.
Royalties:
----------
In 2003, less than 1% of the Registrant's revenues were derived from royalties.
Some protection exists for the Company's products through patents. However, not
a major portion of business is subject to licenses.
Hitachi Cable Ltd. produces the Registrant's flame retardant coating in Japan
under a nonexclusive license agreement. Royalties received are 3% and 6% of net
sales and are reported and paid annually.
This agreement expired in November of 1999 and was retroactively renewed in
2002. As a result, no royalties were paid in 2002. Retroactive royalty payments
for the period October 1999 through September 2002 were $6,049 paid in February
2002. Royalty payments for fiscal 2002 were $1,366. Royalty payments for fiscal
2003 were $2,935.
3
Royalties (Continued):
----------------------
Flamemaster pays royalties to PRC-DeSoto Int'l Corp. on proprietary aircraft
sealant sales based on new technology and marketing information acquired through
a nonexclusive licensing agreement. Under the agreement, Flamemaster pays
royalties of 4% of sales of all licensed aerospace products and Modified Chem
Seal Products and royalties of 6% on all sales of PRMS, a non-chromate corrosion
inhibitive sealant. The minimum required royalty payment is $25,000 per year
from 1996 through 2003. Royalties paid to PRC-DeSoto were $35,249 and $43,166
for the fiscal years ended September 30, 2002 and 2003, respectively.
Subsequent to year end, the Company and PRC-Desoto, a division of PPG, extended
the license agreement through December 31, 2008, with two 30 month extensions at
the mutual option of both parties.
Methods of Distribution:
------------------------
Flamemaster products are sold directly by four full time employees, one
commissioned sales representative and through a network of 15 distributors.
Most of the products manufactured by Flamemaster are required to be qualified or
listed by either government or civilian agencies. The qualification and listing
process involves independent testing of new products to determine that they meet
minimum criteria of performance as established by government and civilian
agencies. Once a new product is qualified and listed, the product may be
marketed. The product mix includes products of which the registrant is the sole
qualified supplier. Flamemaster's sales are a mixture of competitive bids and
sales at catalog price to a variety of customers.
Flamemaster's sealant product line is sold to large and small manufacturers,
distributors, airlines and the United States Government. The fire retardant
coatings are sold to utilities and other industrial plants and the high heat
ablative coatings are sold mainly to the aerospace industry.
Raw Materials:
--------------
Registrant buys most of its raw materials from a variety of large,
well-established suppliers and manufacturers of the chemicals required making
sealants and coatings. These suppliers are under no obligation to continue
supplying these chemicals to Flamemaster, but these chemicals are readily
available from other suppliers.
In the past, registrant's principal sealants utilized a liquid polymer produced
by one manufacturer (Rohm & Haas) in the United States. Rohm & Haas shut down
the manufacturing of the product in December 2002. The registrant has secured,
and is currently purchasing and producing from two alternative sources of liquid
polymer from outside the United States. One source is located in Europe and the
other source is in Asia. The company has increased its inventory level of this
product in order to meet customer requirements.
4
Principal Products:
-------------------
The principal product classes produced by the Registrant consist of sealants and
coatings. Sales of sealants were $4,429,596 and $4,410,777, for the fiscal years
ended September 30, 2003 and 2002, respectively. Sales of coatings were $259,300
and $285,966, for the fiscal years ended September 30, 2003 and 2002,
respectively.
Patents and Trademarks:
-----------------------
The Company has protected trademarks in 12 Far East countries and previously
owned patents in these countries as well as many other countries for its
flame-retardant coatings. Registrant believes that its trademarks, experience
and creative skill of its employees will give continued success rather than
ownership of patents.
Seasonability:
--------------
Registrant's business is not seasonal but does fluctuate in response to such
factors beyond its control as strikes and other economic conditions adversely
affecting its customers.
Working Capital Items:
----------------------
Registrant does not normally carry excessive inventories to meet the
requirements of its customers, since Registrant is generally able to fill
customers' orders within 75 days.
The Company has approximately $7,008,375 of working capital, including
approximately $5,519,603 of cash and current portfolio of marketable securities.
The Company believes that its working capital is sufficient to finance its
operations for the 2003 fiscal year.
Principal Customers:
--------------------
During the fiscal year ended September 30, 2003, an agency (General Services
Administration) of the United States Government accounted for $1,504,442
(31.37%) of sales as compared to $1,275,297 (27.01%) in 2002. There was one
other major customer in 2003 totaling $837,732 or 17.47% of sales. No other
single customer accounted for 10% or more of sales. For confidentially, we do
not disclose the names of our commercial customers.
Backlogs:
---------
Backlog of orders at September 30, 2003 was $733,143 as compared to $672,369 in
2002. This was the result of orders received during August and September.
Renegotiations:
---------------
Registrant's business is not subject to possible renegotiations of profits.
Sales are made on a fixed-price basis, including sales to the U.S. Government.
Substantially all contract sales are made to the U.S. Government and none are
based on the cost-plus method of pricing.
5
Competition:
------------
Registrant is a producer of flame retardant coatings for the protection of
grouped electrical cables sold to the electric utilities, pulp and paper, and
nuclear industries, plus a fire-stop system utilized to mitigate the potential
damage by fire to commercial and industrial structures. These products are
either patented or listed approved. The product group is niche targeted and some
level of competition does exist, however, the products have been on the market
for some years and are well known. Some of the Company's competitors are larger
than Registrant and have far greater financial and manpower resources.
Additionally, the Registrant produces sealants utilized in the manufacture of
aircraft and land transportation vehicles. This industry is highly competitive,
however, Flamemaster continues to maintain the number two position in the market
share of these products.
Registrant also produces high temperature specialty coatings used by the
aerospace industry that are formulated to meet the requirements of specific
aerospace applications. Since these products are specialized and low volumes,
there is a limited amount of competition in this niche of our product group.
Research and Development:
-------------------------
Net laboratory costs at September 30, 2003 were $408,725. For fiscal year ended
September 30, 2002, laboratory costs were $374,718. Flamemaster received no
revenues to offset laboratory costs in 2003 or 2002.
Research and development costs are included in laboratory costs in the financial
statements as the amounts are not material. The research and development is in
connection with new products and improvements to existing products. All of
Registrant's research and development activities are Company-sponsored.
Compliance with Anti-Pollution Laws:
------------------------------------
Periodic inspections by Federal, State and local agencies concerned with the
protection of the environment indicate that Registrant is in full compliance
with anti-pollution laws and standards. Registrant has no plans to change its
manufacturing processes in a manner likely to result in material expenditures
for additional environmental control facilities.
Employees:
----------
As of September 30, 2003 Registrant employed 31 persons as compared to 32
persons in the prior year.
Export Sales:
-------------
Export sales totaled $280,914 and $280,050 in 2003 and 2002, respectively.
6
ITEM 2. PROPERTIES
Registrant occupies approximately 28,000 square feet of office and manufacturing
space located at 11120 Sherman Way, Sun Valley, California 91352 under terms of
a lease expiring in September 2006.
Registrant believes its facilities are adequate for present and anticipated
operations.
ITEM 3. LEGAL PROCEEDINGS
In January 1997 the Company agreed to a settlement of $110,000 in an
environmental claim. Flamemaster completed its obligation under this settlement
in August of 1998.
As a condition of the settlement agreement, any settlement monies paid by the
Company must be applied to the remediation of the subject site. The Company
believes any of the funds used as prescribed should be reimbursed to the Company
by the UST Clean Up Fund. A claim for such reimbursement is currently pending
with the UST Clean Up Fund and will be under consideration for several years. No
reimbursement of settlement monies has been accrued as of September 30, 2003.
There are currently no other legal proceedings involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
7
THE FLAMEMASTER CORPORATION
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Registrant's common stock is traded over-the-counter on the National Market
System with the NASDAQ symbol "FAME". The over-the-counter market quotations
reflect inter dealer prices, without retail mark-up, mark-down, or commission
and may not necessarily represent actual transactions. The following stock
prices represent the daily prices of the stock for fiscal 2003 and 2002.
Low Bid High Bid
------- --------
October-December 2002 $6.13 $7.62
January-March 2003 $6.17 $6.55
April-June 2003 $6.24 $7.00
July-September 2003 $5.85 $6.95
October-December 2001 $5.17 $7.29
January-March 2002 $5.83 $7.09
April-June 2002 $5.80 $6.85
July-September 2002 $6.13 $7.09
The stock price as of December 15, 2003 was $6.00 bid and $6.52 asked.
As of December 15, 2003, there were approximately 900 beneficial holders of
Registrant's common stock.
The common stock dividend was increased on January 6, 2000 from $.03 to $.032
per quarter. The quarterly common stock dividend remained constant throughout
2003 at $.032. 2004 dividends will be adjusted to reflect the spin-off of
StarBiz, causing the Flamemaster dividend pay-out to be reduced to reflect the
lower income from investment activity. However, the combined lower Flamemaster
dividend and the announced intent of StarBiz to issue a dividend should combine
to approximate the prior year dividend pay out, however, Flamemaster cannot
guarantee that StarBiz will pay any dividend.
8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Fiscal 2003
-----------
Financial Condition and Liquidity:
----------------------------------
The Company's financial condition is strong. Current assets were $7,192,080
compared to current liabilities of $183,705 at September 30, 2003 for a current
ratio of better than 39 to 1. Working capital increased by $424,006 to
$7,008,375 compared to $6,584,369 at September 30, 2002.
Cash and cash equivalents, and marketable securities increased by $801,688 to
$5,519,603, while, accounts receivable decreased to $489,476 at September 30,
2003 from $533,691 in the previous year. Inventories decreased modestly to
$1,004,240 on September 30, 2003 from $1,080,285.
The Company believes that liquidity and working capital are adequate to fund the
Company's operations and capital requirements for the 2004 fiscal year.
Sales of aircraft sealants increased to $4,429,596 from $4,410,777 in the prior
year and sales of Flamemastic (Fire-Retardant Coatings) and Dyna-Therm
(Aerospace Coatings) increased to $339,498 from $285,966 the previous year.
Total operating sales increased to $4,769,094 from $4,721,131 in the prior year.
During the fiscal year ended September 30, 2003, an agency (General Services
Administration) of the United States Government accounted for $1,504,442
(31.37%) of sales as compared to $1,275,297 (27.01%) in 2002. There was one
other major customer in 2003 totaling $837,732 or 17.47% of sales. No other
single customer accounted for 10% or more of sales. For confidentially, we do
not disclose the names of our commercial customers.
Outlook For Operations:
-----------------------
The Company is a very small manufacturer of high performance sealants and
protective coatings for defense and aerospace markets. The commercial aerospace
industry has shown an increase in activity. Flamemaster concentrates on
manufacture and sale of products for maintenance and repairs, a more stable
sector of the industry.
The Company is in a unique position of being a small domestic supplier of
products sold under QPL MIL SPECS (Qualified Products List Military
Specifications). This enables the Company to be flexible in meeting customer's
needs, and to provide a greater degree of service and efficiency.
Flamemaster's main competitor is a multi billion dollar, multi national
corporation. Backlog of orders at September 30, 2003 was $733,144 up from
$672,369 in the previous year. This reflects the stability of the Company's
operations.
9
Subsequent to Year End
----------------------
In November 2003, the Company announced the spin-off of StarBiz Corporation, the
Company's management service and investment subsidiary. Income from capital
gains on investments will no longer be a significant component of the Company's
income.
The quarterly common stock dividend remained constant throughout 2003 at $.032.
Dividends for 2004 will be adjusted to reflect the spin-off of StarBiz, causing
the Flamemaster dividend pay out to be reduced to reflect the lower income from
investment activity. However, the combined lower Flamemaster dividend and the
announced intent of StarBiz to issue a dividend should combine to approximate
the prior year dividend pay out, however, Flamemaster cannot guarantee that
StarBiz will pay any dividend.
Additionally, the spin-off will result in a decline in the Company's working
capital during 2004. The Company believes that this decline will have no adverse
effect on operations, as substantial working capital will remain.
On November 11, 2003, the Flamemaster Corporation Board of Directors approved
the calling (redemption) of the outstanding $250 and $500 Notes along with the
non-voting preferred shares. The $250 Notes were called pursuant to the terms of
issue, whereby the note holder could redeem the note for cash or convert the
note into 29 shares of restricted common stock. The $500 Notes were called
pursuant to the terms of issue, whereby the note holder could redeem the note
for cash or convert the note into 138 shares of restricted common stock. The
non-voting preferred shares were called pursuant to the terms of issue, whereby
the note holder could redeem the note for cash in the amount of $18 per share or
convert the stock into 2.7 shares of restricted common stock.
Fiscal 2003 vs. 2002:
---------------------
Sales of products for the fiscal year ended September 30, 2003 were $4,769,094
an increase of $47,963 or 1.0% over the prior fiscal year. Sales of Flamemastic
(fire retardant coatings) and Dyna-Therm (aerospace coatings) increased to 7.1%
of sales or $339,498 from 6.1% of sales or $285,966. Sales of aircraft sealants
increased as a result of strong demand for aerospace products. Sales of Chem
Seal (sealant) products increased to $4,429,596 from $4,410,777 in the prior
year, mostly as a result of increased U.S. Military activities in the World.
During the fiscal year ended September 30, 2003, an agency (General Services
Administration) of the United States Government accounted for $1,504,442
(31.37%) of sales as compared to $1,275,297 (27.01%) in 2002. There was one
other major customer in 2003 totaling $837,732 or 17.47% of sales. No other
single customer accounted for 10% or more of sales. For confidentially, we do
not disclose the names of our commercial customers.
Net investment income declined 2.1% during 2003 to $325,823. The decline was
primarily due to continued economic uncertainty in the equity markets along with
lower interest rates.
Retroactive royalty payments for the period October 1999 through September 2002
were $6,049 paid in February 2002. Royalty payments for fiscal 2002 and fiscal
2003 were $1,366 and $2,935, respectively.
10
Costs of products sold in fiscal 2003 were $2,579,394 compared to $2,533,676 in
the previous year. These amounts represent 54.1% and 53.7% of the sales in 2003
and 2002, respectively. Increase in cost of products as a percent of sales is
due to the decreased sales of higher profit margin items of desired aircraft
sealant products.
Selling, general and administrative expenses increased to $1,079,928 from
$985,712 while gross laboratory costs increased to $408,725 from $374,718.
The increase in selling, general and administrative expenses was due to
increases in personnel expenses, travel and advertising and the increase in
laboratory costs was due to greater research and development.
The license agreement with PRC-DeSoto grants Flamemaster the right to use
technical data obtained from PRC-DeSoto in the productions of sealants. The
Company agreed to pay PRC-DeSoto royalties of 3% to 6% (depending on product) of
net sales attributable to the licensed products. For fiscal 2003, this royalty
amounted to $43,166.
Subsequent to year-end, the Company and PRC-Desoto, a division of PPG, have
extended the license agreement through December 31, 2008 with two 30-month
extensions at the mutual option of both parties.
Impact of Inflation and Changing Prices:
----------------------------------------
Raw material costs and wages increased moderately in 2003 as average selling
prices also were increased moderately. No significant increases in raw material
prices are expected in fiscal 2003.
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is set forth in the text on pages 14
through 28.
ITEM 8. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.
11
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AS OF MAY 20, 2004.
Director of Common Percentage
Company Bennefic- of class
Name Age Occupation Since ally Owned (Common)
---------------- ----- ------------------- ----- ---------- --------
William Deutsch 77 Retired Businessman 1998 2,256 .12%
Leon Gutowicz 85 Officer,Director 1984 86,743 4.79%
Charitable
Organization
Joseph Mazin 57 President, CEO, 1982 800,989(1,2) 44.25%
CFO and Chairman
Donna Mazin 56 President 1993 779,177(1) 43.04%
Altius Investment
Joshua M. Mazin 25 Vice President 2004 4,115 .23%
Administration
Bishop George Vlahos 63 Retired Businessman 2004 60,750 3.36%
Stuart Weinstein 55 Vice President 1997 19,800 1.09%
PTL Realty
All Officers and
Directors as a group 491,462 27.15%
(10)
1) Includes 469,082 shares (inclusive) owned of record by Altius Investment
Corp, and StarBiz Corp., entities of which Mr. Mazin is a principal and/or
has voting control.
2) Includes 21,812 shares owned by the Company's Profit Sharing Plan. Mr.
Mazin is trustee of this plan and has voting control.
12
ITEM 10. EXECUTIVE COMPENSATION
The following table includes information as to all directors and executive
officers of the Company who received more than $100,000 in remuneration during
each of the last three fiscal years.
Name and Principal Fiscal Salary Restricted All other
Position Year $ $ Compensation
------------------- ------ ------- ---------- ------------
Joseph Mazin 2003 187,345 -- --
Chairman, President 2002 180,740 -- --
And Chief Executive 2001 176,288 -- --
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of the
Company's common stock as of May 20, 2004. To the Company's knowledge, the
individuals or groups shown in the table are the only persons who held more than
5% of the Company's common stock at that date.
Name and address Amount and nature of Percentage of
of Beneficial Owner Beneficial Ownership Class Common
------------------- ------------------- -------------
Altius Investment 466,416 25.77%
11120 Sherman Way
Sun Valley, CA 91352
Joseph & Donna Mazin 800,989 (a,b) 44.25%
11120 Sherman Way
Sun Valley, CA 91352
Directors and Officers 491,462 27.15%
As a Group (10)
a) Joseph & Donna Mazin share voting control of the Flamemaster shares held by
Altius Investment and other affiliates.
b) Includes 490,894 shares (inclusive) owned of record by Altius Invest.
Corp., Flamemaster Profit Sharing Plan, and StarBiz Corporation, entities
of which Mr. Mazin is a principal and/or has voting control.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Altius Investment Corporation owns approximately 25% of the Company's
outstanding common shares. Three of the seven members of the board are on the
Altius Investment Corporation's Board of Directors. The Company's President and
Chairman is Chairman of the Altius Investment Corporation as well.
13
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
1. Financial Statements
--------------------
The following financial statements are included in Part II, Item 8:
o Report of Independent Auditors - Sarna & Company on 2003
financial statements.
o Report of Independent Auditors - Beckman Kirkland & Whitney on
2002 financial statements.
o Balance Sheet as of September 30, 2003.
o Statements of Income for the years ended September 30, 2003 and
2002.
o Statements of Comprehensive Income for the years ended
September 30, 2003 and 2002.
o Statements of Shareholders' Equity for the years ended
September 30, 2003 and 2002.
o Statements of Cash Flows for the years ended September 30, 2003
and 2002.
o Notes to Financial Statements.
2. Financial Statement Schedules
-----------------------------
o Schedule II - Valuation and Qualifying Accounts.
3. Exhibits
--------
o Exhibit II - Statement regarding computation of per share
earnings.
o Exhibit 31- Section 302 Certification of Executive Officers.
o Exhibit 32-Section 906 Certification of Executive Officers.
All other schedules are omitted because they are not applicable or not required,
or because the required information is included in the financial statements or
notes thereto. Separate financial statements of the Registrant have been omitted
because the Registrant meets the requirements that permit omission.
14
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
The Flamemaster Corporation
We have audited the accompanying consolidated balance sheet of The Flamemaster
Corporation and Subsidiary as of September 30, 2003 and the related consolidated
statements of income, comprehensive income, shareholders' equity, and cash flows
for the year ended September 30, 2003. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Flamemaster Corporation and subsidiary as of September 30, 2003, and the
consolidated results of their operations and cash flows for the year then ended
in conformity with accounting principles generally accepted in the United
States.
/s/ Sarna & Company Certified Public Accountants
Sarna & Company Certified Public Accountants
June 14, 2004
Westlake Village, California
15
INDEPENDENT AUDITORS' REPORT
----------------------------
November 26, 2002
Board of Directors and Shareholders
The Flamemaster Corporation and Subsidiary
Los Angeles, California
We have audited the accompanying statements of income, comprehensive income,
shareholders' equity, and cash flows of The Flamemaster Corporation and
Subsidiary for the year ended September 30, 2002. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to in the first paragraph
above present fairly, in all material respects, the results of operations and
cash flows of The Flamemaster Corporation and Subsidiary at September 30, 2002
in conformity with U. S. generally accepted accounting principles.
Beckman Kirkland & Whitney
Agoura Hills, California
16
THE FLAMEMASTER CORPORATION
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
2003
------------
ASSETS
------
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,221,905
Marketable Securities (Note C) 3,297,698
Accounts Receivable, less Allowance For
Doubtful Accounts of $5,000 in 2003 and 2002 489,476
Inventories (Note D) 1,004,240
Prepaid Expenses and Other Assets 39,928
Notes Receivable 66,888
Deferred Income Taxes (Note J) 71,945
Other Investments 0
------------
TOTAL CURRENT ASSETS 7,192,080
------------
EQUIPMENT AND IMPROVEMENTS, at cost
Machinery and Equipment 770,495
Furniture and Fixtures 134,402
Laboratory Equipment 74,490
Leasehold Improvements 134,731
Transportation Equipment 20,036
------------
1,134,154
Less Accumulated Depreciation (945,168)
------------
188,986
------------
PRC LICENSE AGREEMENTS, net of
Accumulated Amortization of
$151,510 in 2003 and $134,830 in 2002 (Note E) 20,847
------------
TOTAL ASSETS $ 7,401,913
============
See accompanying notes to consolidated financial statements.
17
THE FLAMEMASTER CORPORATION
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
2003
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 108,722
Accrued Expenses 22,713
Income Taxes Payable 14,977
Deferred Tax Liability (Note J) 37,293
------------
TOTAL CURRENT LIABILITIES 183,705
------------
LONG-TERM LIABILITIES:
Notes Payable (Note N) 913,500
------------
TOTAL LIABILITIES 1,097,205
MINORITY INTEREST IN SUBSIDIARY 1,900
------------
COMMITMENTS AND CONTINGENCIES (Note E, F and H)
SHAREHOLDERS' EQUITY (Notes A and G):
Preferred Stock, nonvoting, par value $.01 per share,
$.56 cumulative dividend, convertible, callable at
$18.00, authorized 500,000 shares; issued and
outstanding 41,038 in 2003 410
Common Stock, par value $.01 per share, authorized
6,000,000 shares; issued and outstanding 1,382,480
shares in 2003 13,822
Additional Paid-In Capital 3,971,772
Retained Earnings 2,583,836
Allowance For Marketable Securities (267,032)
------------
TOTAL SHAREHOLDERS' EQUITY 6,302,808
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,401,913
============
See accompanying notes to consolidated financial statements.
18
THE FLAMEMASTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002
2003 2002
------------ ------------
NET SALES (Note L) $ 4,769,094 $ 4,721,131
ROYALTIES 2,935 7,416
INTEREST AND OTHER INCOME 325,823 332,839
------------ ------------
5,097,852 5,061,386
------------ ------------
COSTS AND EXPENSES:
Cost of Goods Sold 2,579,394 2,533,676
Selling and Administrative 1,079,928 985,712
Laboratory Costs 408,725 374,718
Royalties, Interest and Other 126,465 197,680
------------ ------------
4,194,512 4,091,786
------------ ------------
INCOME FROM OPERATIONS BEFORE INCOME TAXES 903,340 969,600
PROVISION FOR INCOME TAXES 364,821 344,537
------------ ------------
NET INCOME 538,519 625,063
PREFERRED STOCK DIVIDENDS (5,745) --
------------ ------------
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS 532,774 625,063
PREFERRED STOCK DIVIDENDS 5,745 --
INTEREST ON CONVERTIBLE NOTES, NET OF TAX 46,059 45,280
------------ ------------
NET INCOME ATTRIBUTABLE TO COMMON STOCK AND ASSUMED CONVERSIONS 584,578 670,343
============ ============
------------ ------------
NET INCOME PER SHARE, BASIC (Note I) $ 0.38 $ 0.44
============ ============
------------ ------------
NET INCOME PER SHARE, DILUTED (Note I): $ 0.35 $ 0.40
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 1,398,336 1,434,394
WEIGHTED AVERAGE SHARES OUTSTANDING DILUTED 1,662,439 1,689,243
See accompanying notes to consolidated financial statements.
19
THE FLAMEMASTER CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002
2003 2002
------------ ------------
NET INCOME $ 538,519 $ 625,063
CHANGE IN UNREALIZED GAINS /(LOSSES) ON
MARKETABLE SECURITIES, NET OF TAX (267,032) (268,217)
RECLASSIFICATION ADJUSTMENT (97,566) --
------------ ------------
COMPREHENSIVE INCOME/(LOSS) $ 173,921 $ 356,846
============ ============
See accompanying notes to consolidated financial statements.
20
THE FLAMEMASTER CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2002 AND 2003
UNREALIZED
PREFERRED STOCK COMMON STOCK ADDITIONAL GAIN/(LOSS) ON
------------------------- ------------------------- PAID-IN RETAINED MARKETABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
SEPTEMBER 30, 2001 -- $ -- 1,449,599 $ 14,496 $ 3,337,058 $ 2,335,971 $ (203,538) $ 5,483,987
REDEMPTION OF
COMMON STOCK
WITH CASH (13,914) $ (139) $ (32,545) $ (52,284) $ -- $ (84,968)
REDEMPTION OF
COMMON STOCK
WITH N/P (120,362) $ (1,204) $ (284,789) $ (465,638) $ -- $ (751,631)
CASH DIVIDENDS ON
COMMON STOCK
$.032 PER SHARE $ (183,856) $ -- $ (183,856)
STOCK ISSUED IN
NOTES CONVERSION 92,387 $ 924 $ 294,944 $ -- $ -- $ 295,868
UNREALIZED GAIN/
(LOSS) ON
SECURITIES, NET
OF TAX $ (268,217) $ (268,217)
NET INCOME $ 625,063 $ -- $ 625,063
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
SEPTEMBER 30, 2002 -- $ -- 1,407,710 $ 14,077 $ 3,314,668 $ 2,259,256 $ (471,755) $ 5,116,246
REDEMPTION OF
COMMON STOCK
WITH CASH (25,229) $ (255) $ (84,486) $ (73,708) $ -- $ (158,449)
REDEMPTION OF
COMMON STOCK
WITH N/P -- $ -- $ -- $ -- $ -- $ --
CASH DIVIDENDS ON
COMMON STOCK
$.032 PER SHARE $ -- $ (134,486) $ -- $ (134,486)
PREFERRED STOCK
ISSUED IN NOTES
CONVERSION 41,038 410 -- $ -- $ 741,590 $ -- $ -- $ 742,000
CASH DIVIDENDS ON
PREFFERED STOCK
$.56 PER SHARE $ -- $ (5,745) $ -- $ (5,745)
UNREALIZED GAIN/
(LOSS) ON
SECURITIES, NET
OF TAX $ 204,723 $ 204,723
NET INCOME $ 538,519 $ -- $ 538,519
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
SEPTEMBER 30, 2003 41,038 $ 410 1,382,481 $ 13,822 $ 3,971,772 $ 2,583,836 $ (267,032) $ 6,302,808
=========== =========== =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
21
THE FLAMEMASTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 538,519 $ 625,063
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization 56,543 52,875
(Increase)decrease in Accounts Receivable 44,215 202,452
76,045 (92,212)
(Increase)decrease in Reserve for Returns and Allowances 0 0
(Increase)decrease in Notes Receivable (66,888) 0
(Increase)decrease in Settlement Receivable 95 40,691
(Increase)decrease in Prepaid Expenses and Other Assets (9,787) 1,024
(Increase)decrease in Deferred Income Tax Assets Due To Operations 292,344 169,607
(Increase)decrease in Other Investments 46,287 --
Increase(decrease) in Accounts Payable (56,675) (165,369)
Increase(decrease) in Accrued Expenses (35,450) 48,121
Increase(decrease) in Income Taxes Payable 71,773 (110,212)
Increase(decrease) in Deferred Income Tax Liabilities Due To Operations 15,723 5,332
Increase(decrease) in Deferred Credits and Income -- (6,072)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 972,744 771,300
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property, Plant and Equipment (33,899) (116,432)
(Increase)decrease in investment securities, net purchases & sales (317,344) (565,436)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (351,243) (681,868)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of the Company's Common Stock (158,449) (836,599)
Minority Interest 1,900 --
Increase (decrease) in notes payable (787,100) 451,862
Issuance of Common Stock -- 295,868
Issuance of Preferred Restricted Stock 742,000 --
Dividends paid for common stock (134,486) (183,856)
Dividends paid for preferred stock (5,745) --
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (341,880) (272,725)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 279,621 (183,293)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,942,284 2,125,577
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR 2,221,905 $ 1,942,284
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 76,765 $ 75,466
============ ============
Income taxes $ 281,000 $ 436,500
============ ============
See accompanying notes to consolidated financial statements.
22
THE FLAMEMASTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
USE OF ESTIMATES: The financial statements have been prepared in accordance with
generally accepted accounting principles and necessarily include amounts based
on estimates and assumptions by management. Actual results could differ from
those amounts.
REVENUE RECOGNITION: Sales are generally recorded by the company, including
those made under ongoing contracts, at the time products are shipped. Revenues
from royalties earned under licensing agreements are recognized in the period
the royalties are earned.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
MARKETABLE SECURITIES: Management determines the appropriate classification of
its investments in debt and equity securities at the time of purchase and
reevaluates such determination at each balance sheet date. Debt securities for
which the company does not have the intent or ability to hold to maturity are
classified as available for sale, along with the Company's investment in equity
securities. Securities available for sale are carried at fair value, with the
unrealized gains and losses reported in a separate component of shareholders'
equity, net of income taxes, until realized. At September 30, 2003, the Company
had no investments that qualified as trading or held to maturity.
The amortized cost of zero-coupon debt securities classified as available for
sale is adjusted for accretion of discounts to maturity. Such amortization and
interest are included in interest income. Realized gains and losses are included
in other income and expense. The cost of securities sold is based on the
specific identification method.
INVENTORIES: Inventories are valued at the lower of cost (first-in, first-out)
or market.
LABORATORY COSTS: Laboratory costs include product testing, quality control, and
research and development. A minor portion pertaining specifically to research
and development is not segregated.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization of equipment and
improvements are computed on the straight-line method over the estimated useful
lives of the assets as follows:
Machinery, equipment, furniture and fixtures 2-10 years
Leasehold improvements Terms of leases
INCOME PER SHARE: Per share data is based on the weighted average number of
shares outstanding.
INCOME TAXES: Provisions (benefits) for federal and state income taxes are
calculated on reported financial statement (income) loss based on current tax
law. Such provisions (benefits) differ from the amounts currently payable
because certain items of income and expense, known as temporary differences, are
recognized in different tax periods for financial reporting purposes than for
income tax purposes.
STOCK-BASED COMPENSATION: As Described in Note G, the Company has elected to
follow the accounting provisions of APB 25, Accounting for Stock Issued to
Employees, for stock options and to furnish the pro forma disclosures required
under SFAS No. 123, Accounting for Stock-Based Compensation.
23
THE FLAMEMASTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - CONCENTRATION OF RISK
------------------------------
Financial instruments, which potentially subject the Company to a concentration
of credit risk, principally consist of cash, cash equivalents and trade
receivables.
As of September 30, 2003, the Company had approximately $431,000, $155,000,
$126,000, $119,000 and $101,000 of cash and cash equivalents in five banks which
exposes the Company to concentration of credit risk to the extent that each of
these amounts exceed $100,000.
NOTE C - MARKETABLE SECURITIES
------------------------------
Marketable securities classified as current assets at September 30, 2003 include
the following:
Fair Value Cost
---------- ----------
U.S. Treasury bonds $ 214,367 $ 198,400
Other government obligations 48,436 48,320
Corporate debt securities 302,880 314,428
Mortgage-backed securities 150,189 145,782
Marketable equity securities 2,581,826 2,620,384
---------- ----------
$3,297,698 $3,327,314
========== ==========
The contractual maturities of debt securities available for sale at September
30, 2002 as follows:
Fair Value Cost
---------- ----------
Due within one year $ 21,240 $ 23,129
Due after one year thru five years 100,666 113,678
Due after five years thru ten years 118,954 110,925
Due after ten years 304,018 288,002
Not due at single maturity date 170,994 171,196
---------- ----------
$ 715,872 $ 706,930
========== ==========
Gross unrealized holding gains and losses at September 30, 2003, were $250,274
and $316,620, respectively. Realized gains and losses from the sale of
securities for the year ended September 30, 2003 were $121,418 and $23,852,
respectively. Gross proceeds from the sale of securities for the year ended
September 30, 2003 was $1,016,218.
NOTE D - INVENTORIES
--------------------
Inventories consist of the following:
24
THE FLAMEMASTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
------------------------------
2003 2002
---------- ----------
Raw Materials $ 451,844 $ 580,947
Shipping Materials 203,159 130,874
Finished Goods 349,237 368,464
---------- ----------
$1,004,240 $1,080,285
========== ==========
NOTE E - AGREEMENT WITH PRODUCTS RESEARCH CORPORATION
-----------------------------------------------------
In August 1994, the Company signed a license agreement with PRC-DeSoto Int'l
Corp, formerly known as Courtaulds Aerospace, Inc. Under the license agreement,
Flamemaster was granted the right to use technical data obtained from Courtaulds
in the production of sealants. The Company agreed to pay Courtaulds royalties of
3% to 6% (depending on product) of net sales attributable to the licensed
products with an annual minimum royalty of $25,000 in 1996 and each year
thereafter through 2003. Royalties paid under this agreement were $43,166 in
2003, and $36,128 in 2002. The license agreement has been valued at $172,357 and
is being amortized over 10 years, the term of the agreement.
Subsequent to year-end, the Company and PRC-Desoto, a division of PPG, have
extended the license agreement through December 31, 2008 with two 30-month
extensions at the mutual option of both parties.
NOTE F - COMMITMENTS AND CONTINGENCIES
--------------------------------------
The Company leases office, manufacturing and storage facilities under a
noncancelable operating lease that expires in September 30, 2006. The lease
requires the Company to pay applicable property taxes, maintenance and
insurance. Rent expense charged to operations were $200,532 in 2003 and $193,752
in 2002.
As of September 30, 2003, future minimum payments under this lease are:
2004 $ 207,552
2005 $ 214,812
2006 $ 222,336
Thereafter $ --
----------
Total $ 644,700
==========
NOTE G - STOCK OPTIONS
----------------------
In April 2000, the Company's Board of Directors approved a stock option plan
whereby directors and key personnel were granted options to purchase 35,000 of
the Company's common stock or receive $.10 for each option to which they would
otherwise be entitled. Employees and directors opted to receive 1,250 of the
options. These options carry an exercise price of $7.125 per share. The options
vested on December 31, 2000 and have a five-year term expiring April 30, 2005.
As of September 30, 2003 no options have been exercised under this plan.
The Company applies APB 25 in accounting for its stock options. The option price
equals or exceeds the fair market value of the common shares on the date of the
grant and, accordingly, no compensation cost has been recognized under the
provisions of APB 25 for stock options. Compensation cost is measured at the
grant date based on the value of the award and is recognized over the vesting
period.
25
THE FLAMEMASTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of stock option activity:
------------------------------ ------------------------------
Options Outstanding Options Exercisable
------------------------------ ------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------------------------------ ------------------------------
Outstanding at September 30, 2001 1,250 $ 7.125 1,250 $ 7.125
Granted -- $ -- -- $ --
Forfeited -- $ -- -- $ --
------------------------------ ------------------------------
Outstanding at September 30, 2002 1,250 $ 7.125 1,250 $ 7.125
Granted -- $ -- -- $ --
Forfeited -- $ -- -- $ --
------------------------------ ------------------------------
Outstanding at September 30, 2003 1,250 $ 7.125 1,250 $ 7.125
============================== ==============================
The following is a summary of options outstanding and exercisable as of
September 30, 2003:
-----------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------------------------------
Range of Number Weighted Average Weighted Average Number Weighted Average
Exercise Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
-----------------------------------------------------------------------------------------------------------------------
$7.125 1,250 1.6 $7.125 1,250 $7.125
NOTE H - LITIGATION
-------------------
In February 1994 a suit was filed against the Company for an environmental claim
related to property leased from 1961 to 1973. The present owner of the property
implemented remedial action on the site and was seeking reimbursement by the
Company for the costs related to the clean up. The action was settled during
January 1998. The bulk of the settlement was paid for by the insurance carriers
of the Company. The Company was required to contribute $110,000 toward the
settlement with $60,000 payable during the 1997 calendar year and $50,000
payable during 1998. In August of 1998, Flamemaster completed its settlement
obligation. The company is currently seeking reimbursement for these amounts
with the UST cleanup fund, but cannot predict the outcome. No accrual for a
possible reimbursement has been recorded at September 30, 2003.
The company is currently involved in no other litigation.
NOTE I - INCOME PER COMMON SHARE
--------------------------------
Basic income per share of common stock is based on the weighted average number
of shares outstanding. Outstanding options were considered in the diluted
earnings per share calculations using the treasury stock method, and outstanding
convertible securities were considered using the if converted method. During
fiscal 2003, preferred stock was issued in exchange for convertible notes. A
conversion ratio of 2.7:1 was assumed in calculating earnings per share for
these notes.
26
THE FLAMEMASTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2002, the Company issued $100 convertible notes to reacquire some of its
own common stock. A conversion ratio of 12.85:1 for these notes was assumed in
calculating earnings per share for these notes. In June 2003, the Company called
these notes and gave the note holders the option of redeeming the notes for cash
or exchanging the notes for new $250 notes. A conversion ratio of 29:1 was
assumed in calculating earnings per share for the $250 notes.
During 2002, the Company issued convertible notes in $200 and $1000
denominations. The $200 notes were issued in conjunction with the call of
preferred shares converted to notes in 1998. A conversion ratio of 57:1 was
assumed in calculating earnings per share for the $200 notes. The $1000 notes
were authorized by the Board of Directors in June 2002. A conversion ratio of
150:1 was assumed in calculating earnings per share for the $1000 notes.
During 2003, the Company called the $100, $200 and $1000 notes. The call of the
$100 Note gave note holders the option of redeeming the notes for cash,
converting the note into 12.85 shares of restricted common stock or exchanging
the notes for new $250 Notes. A conversion rate of 29:1 was assumed in
calculating earnings per share for the $250 Notes.
The call of the $200 Note gave note holders the option of redeeming the notes
for cash, converting the note into 57 shares of restricted common stock or
exchanging the notes for new $500 notes. A conversion rate of 138:1 was assumed
in calculating earnings per share for the $500 notes.
The call of the $1000 Note gave note holders the option of redeeming the notes
for cash, converting the note into 150 shares of restricted common stock or
exchanging the note for convertible preferred stock. The convertible preferred
stock pays an annual dividend of $0.56 per share on a quarterly basis. A
conversion ratio of 2.7:1 was assumed in calculating earnings per share for the
convertible preferred stock.
NOTE J - INCOME TAXES
---------------------
In October 1993, the Company adopted Statement of Financial Accounting Standards
No. 109 (SFAS 109), "Accounting for Income Taxes". SFAS 109 is an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Previously, the
Company used the APB 11 approach that gave no recognition to future events other
than the recovery of assets and settlement of liabilities at their carrying
amounts. Under SFAS 109 the Company recognizes to a greater degree the future
tax benefits of expenses which have been recognized in the financial statements
but not the tax return and vice versa.
27
THE FLAMEMASTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of income tax expense are:
Year Ended September 30,
------------------------------
2003 2002
------------ ------------
Current:
Federal $ 267,369 $ 254,888
State and foreign 79,358 76,806
------------ ------------
346,727 331,694
Deferred:
Net change in deferred tax asset 2,371 2,087
Net change in deferred tax liability 15,723 10,756
------------ ------------
$ 364,821 $ 344,537
============ ============
The following reconciles the federal statutory tax rate to the effective rate of
the provision for income taxes:
Year Ended September 30,
------------------------------
2003 2002
------------ ------------
Federal statutory rate 34.00% 34.00%
Increases (decrease):
California franchise tax, net of
Federal income tax benefit 5.83% 5.83%
Dividends -1.72% -1.54%
Tax credits 0.75% -1.99%
Other 1.49% -0.77%
------------ ------------
40.35% 35.53%
============ ============
NOTE K - PROFIT-SHARING PLAN AND 401(K)
---------------------------------------
Through 2002, the Company contributed to a profit-sharing plan for the benefit
of employees meeting certain eligibility requirements and electing participation
in the plan. Contributions were made from net profits as determined by the Board
of Directors. Profit-sharing expense, which equals contributions, was $37,000 in
2002.
During fiscal 2003, the Company implemented a 401(k) plan under which employees
may make voluntary contributions. The Company matches 25% of each participant's
contribution to the plan, up to 4% of the participant's annual salary.
Additionally, at the Board's discretion, the Company may contribute an
additional 3% of each employee's salary to the plan. Total contributions by the
Company under this plan during 2003 were $38,600.
NOTE L - SALES INFORMATION AND MAJOR CUSTOMERS
----------------------------------------------
Sales of aircraft sealants increased to $4,429,596 from $4,410,777 in the prior
year and sales of Flamemastic (Fire-Retardant Coatings) and Dyna-Therm
(Aerospace Coatings) increased to $339,498 from $285,966 the previous year.
During the fiscal year ended September 30, 2003, an agency (General Services
Administration) of the United States Government accounted for $1,504,442
(31.37%) of sales as compared to $1,275,297 (27.01%) in 2002. There was one
other major customer in 2003 totaling $837,732 in sales or 17.47%. No other
single customer accounted for 10% or more of sales. For confidentially, we do
not disclose the names of our commercial customers.
28
THE FLAMEMASTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Export sales and royalty income from foreign sources are generated entirely by
The Flamemaster Corporation and are as follows:
Year Ended September 30,
------------------------------
2003 2002
------------ ------------
Export sales $ 280,914 $ 280,050
Royalty income $ 2,935 $ 7,416
NOTE M - RELATED PARTIES
------------------------
Altius Investment Corporation owns approximately 23% of the Company's
outstanding common shares. Two of the five members of the board, including the
Company's President and Chairman, who also serves as Altius Investment
Corporation's Chairman, are members of the Altius Investment Corporation's Board
of Directors.
NOTE N - LONG-TERM DEBT
-----------------------
On October 23, 1997, the Flamemaster Corporation Board of Directors approved the
calling (redemption) of the Flamemaster Preferred stock at $5.95 per share
pursuant to the terms of the issue. The Board also approved an alternative
whereby shareholders could elect to tender their preferred shares for $10 notes
paying interest only until maturity at an annual interest rate of 5.6%. The
notes were for a term of 5 years and were to mature on December 31, 2002. The
notes were convertible into common stock at a ratio of 2.472 to 1. The notes
were required to be held for at least 1 year before they could be converted, and
were callable at $8.00 after 1 year, $8.50 after 2 years, $9.00 after 3 years,
$9.50 after 4 years, and $10.00 after 5 years. Pursuant to the calling of the
preferred shares, 7,050 shares were redeemed at a cost of $25,000, 14,118
preferred shares were converted into 34,898 shares of common stock, and 47,082
preferred shares were converted into notes. The Company recorded the notes at
$376,656, which reflected the 47,082 shares converted into notes at $8 per
share, the amount at which the Company could call the notes after 1 year.
On April 18, 2002, the Flamemaster Corporation Board of Directors approved the
calling (redemption) of these convertible notes at a price of $9.50 per note.
The $9.50 notes were called on June 1, 2002 and converted into common restricted
stock at a ratio of 2.96646 shares of common stock for each note. Pursuant to
the calling of the convertible notes, holders of the notes had the option of
converting into common restricted stock, cash, or a combination of stock, cash
and a new $200 note yielding 5% annually. These new $200 notes were convertible
into 57 shares of common restricted stock with dilution protection, and were due
on June 30, 2012. The $200 notes were converted at a ratio of 21.053 $9.50 notes
to one $200 note. As a result of this call, the Company issued 91,389 shares of
common restricted stock, paid $27,410 in cash and issued 648 $200 notes.
During September 2002, the company purchased and retired 142,436 shares of its
common stock for $24,800 cash plus 8,250 $100 convertible notes. Each note was
convertible into 12.85 shares of common stock and pays interest at 5%. Interest
only is payable quarterly on these notes. At September 30, 2002 these notes were
valued at $100 each, or a total of $825,000.
On June 6, 2002, the Flamemaster Corporation Board of Directors authorized an
issuance of $1000 convertible notes. These $1000 notes were convertible into 150
shares of common restricted stock with dilution protection, due on June 30,
2010. The $1000 notes were available for 160 shares of common stock and paid
4.25% interest, quarterly. These notes also participated in profits and would
have received a 0.75% bonus in any fiscal year the Company earned over $1.5
million pre-tax. As a result of this issuances, the Company issued 746 $1000
notes.
29
THE FLAMEMASTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The $100 notes paid interest of $41,242, annually, the $200 notes paid interest
of $6,480, annually and the $1000 notes paid interest of $31,704, annually.
On June 26, 2003, the Flamemaster Corporation Board of Directors approved the
calling (redemption) of the outstanding $100, $200 and $1000 Notes.
The $100 Notes were called pursuant to the terms of issue, whereby the note
holder could redeem the note for cash or convert the note into 12.85 shares of
restricted common stock. The Board also approved an alternative, whereby the
note holder may elect to exchange the $100 Note for new $250 Notes at a ratio of
2.5:1. The new $250 Notes pay 4.5% interest per year and are convertible into 29
shares of restricted common stock with dilution protection, due in August 2009.
As a result of this call, the Company redeemed 350 $100 Notes for cash, or
$35,000 and converted the remaining 7,900 $100 Notes to 3,160 $250 Notes. The
$250 Notes pay interest of $35,550, annually.
The $200 Notes were called pursuant to the terms of issue, whereby the note
holder could redeem the note for cash or convert the note into 57 shares of
restricted common stock. The Board also approved an alternative, whereby the
note holder may elect to exchange the $200 Note for new $500 Notes at a ratio of
2.5:1. The new $500 Notes pay interest at 4.5% per year and are convertible into
138 shares of restricted common stock with dilution protection, due on June 20,
2011. As a result of this call, the Company redeemed 28 $250 Notes and
fractional shares for cash, or $6,100 and converted the remaining 620 $200 Notes
to 247 $500 Notes. The $500 Notes pay interest at $5,558, annually.
The $1000 Notes were called pursuant to the terms of issue, whereby the note
holder could redeem the note for cash or convert the note into 150 shares of
restricted common stock. The Board of Directors also approved an alternative,
whereby the note holder may elect to exchange the $1000 Note into Non Voting
$0.01 par value preferred stock, which pays a $0.56 cumulative dividend and is
convertible after one year into 2.7 shares of restricted common stock. As a
result of this call, the Company redeemed 4 $1000 Notes and fractional shares
for cash, or $4,010 and converted the remaining 742 $1000 Notes to 41,038 shares
of preferred stock.
NOTE O - SUBSEQUENT EVENTS
--------------------------
On November 11, 2003, the Flamemaster Corporation Board of Directors approved
the calling (redemption) of the outstanding $250 and $500 Notes along with the
non-voting preferred shares. The $250 Notes were called pursuant to the terms of
issue, whereby the note holder could redeem the note for cash or convert the
note into 29 shares of restricted common stock. The $500 Notes were called
pursuant to the terms of issue, whereby the note holder could redeem the note
for cash or convert the note into 138 shares of restricted common stock. The
non-voting preferred shares were called pursuant to the terms of issue, whereby
the note holder could redeem the note for cash in the amount of $18 per share or
convert the stock into 2.7 shares of restricted common stock.
On November 18, 2003, the Company announced its Board of Directors approved the
spin-off of its subsidiary, StarBiz Corporation. The spin-off of StarBiz will
take the form of a stock dividend to be distributed December 30, 2003 to
shareholders of record December 5, 2003. The Company's shareholders will receive
one restricted common share of StarBiz stock for every 120 shares of the
Company's stock. Fractions will be paid in cash at the rate of $1.25 for each
Company share owned. No fractional shares will be issued.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
THE FLAMEMASTER CORPORATION
Registrant
/s/ Joseph Mazin
---------------------------
Joseph Mazin,
Chairman, President, Chief Executive Officer,
Chief Financial Officer and Director
Date: June 18, 2004
/s/ Leon Gutowicz
---------------------------
Leon Gutowicz,
Director
Date: June 18, 2004
/s/ Donna Mazin
---------------------------
Donna Mazin,
Director
Date: June 18, 2004
/s/ Mary Kay Eason
---------------------------
Mary Kay Eason,
Treasurer & Secretary
Date: June 18, 2004
31