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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2004 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 December 7,
2004 was $2,890,930.
As of September 30, 2004, there were 1,793,798 shares of common stock, $.01 par
value, outstanding.
Part III is incorporated by reference from the proxy statement for the next
annual meeting of the shareholders.
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TABLE OF CONTENTS
PART I PAGE
------ ----
Item 1 Business 1
Item 2 Properties 5
Item 3 Legal Proceedings 5
Item 4 Submission of Matters to a Vote of Security Holders 5
PART II
-------
Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters 6
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 7 Financial Statements and Supplementary Data 9
Item 8 Disagreements on Accounting and Financial
Disclosure 9
PART III
--------
Item 9 Directors and Executive Officers of the Registrant 10
Item 10 Executive Compensation 10
Item 11 Security Ownership of Certain Beneficial Owners
and Management 10
Item 12 Certain Relationships and Related Transactions 10
Item 13 Exhibits and Reports on Form 8-K 11
SIGNATURES
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 2004, 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 quarterly.
This agreement expired in November of 1999 and was retroactively renewed in
2002. Royalty received for fiscal year 2003 and 2004 were $2,935 and $1,450,
respectively. Royalty agreement expired in September 2004 and has not been
renewed.
1
THE FLAMEMASTER CORPORATION
PART I
Royalties (Continued):
----------------------
Flamemaster pays royalties to PRC-DeSoto Int'l Corp. on proprietary aircraft
sealant sales based on new technology and marketing information acquired through
a nonexclusive licensing agreement. Under the agreement, Flamemaster pays
royalties of 4% of sales of all licensed aerospace products and Modified Chem
Seal Products and royalties of 6% on all sales of PRMS, a non-chromate corrosion
inhibitive sealant. The minimum required royalty payment is $25,000 per year
from 1996 through 2004. Royalties paid to PRC-DeSoto were $43,166 and $47,527
for the fiscal years ended September 30, 2003 and 2004, respectively. In January
2004, the royalty on licensed aerospace products were increased from 4% to 5%.
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.
Methods of Distribution:
------------------------
Flamemaster products are sold directly by five 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.
Principal Products:
-------------------
The principal product classes produced by the Registrant consist of sealants and
coatings. Sales of sealants were $4,727,613 and $4,429,596, for the fiscal years
ended September 30, 2004 and 2003, respectively. Sales of coatings were $205,641
and $259,300, for the fiscal years ended September 30, 2004 and 2003,
respectively.
2
THE FLAMEMASTER CORPORATION
PART I
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 $4,016,000 of working capital, including
approximately $2,181,000 of cash and current portfolio of marketable securities.
The Company believes that its working capital is sufficient to finance its
operations for the 2004 fiscal year.
Principal Customers:
--------------------
During the fiscal year ended September 30, 2004, an agency (General Services
Administration) of the United States Government accounted for $1,114,386
(22.47%) of sales as compared to $1,504,442 (31.37%) in 2003. There were three
other single major customers in 2004 accounted for $2,191,298 or 44.18% 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, 2004 was $872,763 as compared to $733,143 in
2003. 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.
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
3
THE FLAMEMASTER CORPORATION
PART I
Competition (Continued):
------------------------
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, 2004 were $427,096. For fiscal year ended
September 30, 2003, laboratory costs were $408,725. Flamemaster received no
revenues to offset laboratory costs in 2004 or 2003.
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, 2004 Registrant employed 31 persons same as prior year.
Export Sales:
-------------
Export sales totaled $299,119 and $280,914 in 2004 and 2003, respectively.
4
THE FLAMEMASTER CORPORATION
PART I
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. A claim for such
reimbursement is currently pending with the UST Clean Up Fund. During fiscal
year ended September 30, 2004, the Company received $68,416 from the UST Clean
Up Fund of which $13,400 was claimed to be overpaid by such Agency. The Company
still believes any of the funds used as prescribed should be fully reimbursed to
the Company by 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, 2004.
There are currently no other legal proceedings involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
5
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 2004 and 2003.
Low Bid High Bid
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October-December 2003 $5.73 $7.04
January-March 2004 $4.50 $6.10
April-June 2004 $3.22 $5.10
July-September 2004 $2.92 $4.06
October-December 2002 $6.13 $7.62
January-March 2003 $6.17 $6.55
April-June 2003 $6.24 $7.00
July-September 2003 $6.11 $6.95
The stock price as of December 7, 2004 was $33.38 bid and $34.95 asked. A one
for ten reverse stock split was effected on October 28, 2004.
The common stock dividend was decreased in fiscal year 2004 from $.032 to $.023
per quarter to reflect the spin-off of StarBiz. This spin-off caused Flamemaster
dividend pay out to be reduced to reflect the lower income from investment
activity. The Company paid out a 12.5% stock dividend in the form a 9 for 8
stock split in May 2004. The cash dividend remained the same thus increasing the
aggregate effective pay out by 12.5%. Subsequent to fiscal year 2004, the
Company announced 1:10 stock split.
6
THE FLAMEMASTER CORPORATION
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Fiscal 2004
-----------
Financial Condition and Liquidity:
----------------------------------
The Company's financial condition is still strong. Current assets were
$4,336,479 compared to current liabilities of $320,016 at September 30, 2004 for
a current ratio of better than 13.5 to 1. Working capital decreased by
$2,991,912 to $4,016,463 compared to $7,008,375 at September 30, 2003. The
substantial decrease was due to the spin-off of StarBiz Corporation, the
Company's management service and investment subsidiary. Marketable securities
will no longer be a significant component of the Company's assets. The Company
believes that this decline will have no adverse effect on operations, as
substantial working capital remains.
Cash and cash equivalents, and marketable securities were $2,106,792 and
$74,009, respectively. Accounts receivable increased to $691,395 at September
30, 2004 from $489,476 in the previous year. Inventories increased modestly to
$1,034,287 at September 30, 2004 from $1,004,240.
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 $4,727,613 from $4,429,596 in the prior
year and sales of Flamemastic (Fire-Retardant Coatings) and Dyna-Therm
(Aerospace Coatings) decreased to $232,315 from $339,498 the previous year.
Total operating sales continued to increase to $4,959,929 from $4,769,094 in the
prior year.
During the fiscal year ended September 30, 2004, an agency (General Services
Administration) of the United States Government accounted for $1,114,386
(22.47%) of sales as compared to $1,504,442 (31.37%) in 2003. There were three
other single major customers in 2004 accounted for $2,191,298 or 44.18% 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.
7
THE FLAMEMASTER CORPORATION
PART II
Outlook For Operations (Continued):
-----------------------------------
Flamemaster's main competitor is a multi billion dollar, multi national
corporation. Backlog of orders at September 30, 2004 was $872,763 up from
$733,144 in the previous year. This reflects the stability of the Company's
operations.
The $.023 dividend remained constant even though the Company issued a 12.5%
stock dividend in May of 2004, which effectively raised the dividend pay out by
12.5%.
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 was adjusted in 2004 to $.023. The $.023
dividend remained constant even though the Company issued a 12.5% stock dividend
in May of 2004, which effectively raised the dividend payout by 12.5%.
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 remains.
Fiscal 2004 vs. 2003:
---------------------
Sales of products for the fiscal year ended September 30, 2004 were $4,959,929
an increase of $190,835 or 4.0% over the prior fiscal year. Sales of Flamemastic
(fire retardant coatings) and Dyna-Therm (aerospace coatings) decreased to
$232,315 compared to $339,498 from prior year. However, sales of aircraft
sealants increased as a result of strong demand for aerospace products. Sales of
Chem Seal (sealant) products increased to $4,727,613 from $4,429,596 in the
prior year, mostly as a result of increased U.S. Military activities in the
World.
During the fiscal year ended September 30, 2004, an agency (General Services
Administration) of the United States Government accounted for $1,114,386
(22.47%) of sales as compared to $1,504,442 (31.37%) in 2003. There were three
other single major customers in 2004 accounted for $2,191,298 or 44.18% 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 significantly during 2004 to $35,792. The decline
was primarily due to 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.
8
THE FLAMEMASTER CORPORATION
PART II
Fiscal 2004 vs. 2003 (Continued):
---------------------------------
Costs of products sold in fiscal 2004 were $2,618,751 compared to $2,579,394 in
the previous year. These amounts represent 52.8% and 54.1% of the sales in 2004
and 2003, respectively. Decrease in cost of products as a percent of sales is
due to the increased sales of higher profit margin items of desired aircraft
sealant products.
Selling, general and administrative expenses increased to $1,111,737 from
$1,079,928 while gross laboratory costs increased to $427,096 from $408,725.
The increase in selling, general and administrative expenses was due to
increases in personnel expenses and insurance 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 2004, this royalty
amounted to $47,527.
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 2004 as average selling
prices also were increased moderately. No significant increases in raw material
prices are expected in fiscal 2005.
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is set forth in the text on pages 13
through 28.
ITEM 8. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.
9
THE FLAMEMASTER CORPORATION
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the Company's definitive proxy statement for
the next meeting of shareholders.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's definitive proxy statement for
the next meeting of shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated herein by reference to the Company's definitive proxy statement for
the next meeting of shareholders.
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.
10
THE FLAMEMASTER CORPORATION
PART III
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,
CPA's on 2004 financial statements.
o Balance Sheet as of September 30, 2004.
o Statements of Income for the years ended September
30, 2004 and 2003.
o Statements of Comprehensive Income for the years
ended September 30, 2004 and 2003.
o Statements of Shareholders' Equity for the years
ended September 30, 2004 and 2003.
o Statements of Cash Flows for the years ended
September 30, 2004 and 2003.
o Notes to Financial Statements.
2. Financial Statement Schedules
-----------------------------
o Schedule II - Valuation and Qualifying Accounts.
3. Exhibits
--------
o Exhibit I - Statement regarding computation of per
share earnings.
o Exhibit 31 - Certification Pursuant to Section 302
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.
11
INDEPENDENT AUDITORS' REPORT
----------------------------
December 10, 2004
Board of Directors and Shareholders
The Flamemaster Corporation
Los Angeles, California
We have audited the accompanying balance sheet of The Flamemaster Corporation as
of September 30, 2004 and the related statements of income, comprehensive
income, shareholders' equity, and cash flows for the years ended September 30,
2004 and 2003. 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 audits in accordance with the standards of Public Company
Accounting Oversight Board (United States of America). 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 financial statements referred to above present fairly, in
all material respects, the financial position of The Flamemaster Corporation as
of September 30, 2004, and the results of their operations and cash flows for
the years ended September 30, 2004 and 2003, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Sarna & Company Certified Public Accountants
Sarna & Company Certified Public Accountants
December 1, 2004
Westlake Village, California
12
THE FLAMEMASTER CORPORATION
BALANCE SHEET
SEPTEMBER 30, 2004
2004
----------
ASSETS
------
CURRENT ASSETS:
Cash and Cash Equivalents $2,106,792
Marketable Securities (Note C) 74,009
Accounts Receivable, less Allowance
For Doubtful Accounts of $5,000 in 2004 691,395
Inventories (Note D) 1,034,287
Prepaid Expenses and Other Assets 53,300
Notes Receivable 7,853
Deferred Income Taxes (Note J) 40,130
Other Investments 328,713
----------
TOTAL CURRENT ASSETS 4,336,479
----------
EQUIPMENT AND IMPROVEMENTS, at cost
Machinery and Equipment 753,156
Furniture and Fixtures 149,325
Laboratory Equipment 82,745
Leasehold Improvements 135,375
Transportation Equipment 20,036
----------
1,140,637
Less Accumulated Depreciation (993,621)
----------
NET EQUIPMENT AND IMPROVEMENTS 147,016
----------
PRC LICENSE AGREEMENTS, net of
Accumulated Amortization of
$172,357 in 2004 (Note E) --
----------
TOTAL ASSETS $4,483,495
==========
See accompanying notes to financial statements.
13
THE FLAMEMASTER CORPORATION
BALANCE SHEET
SEPTEMBER 30, 2004
2004
----------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 203,455
Accrued Expenses 45,346
Income Taxes Payable 23,737
Deferred Tax Liability (Note J) 47,478
----------
TOTAL CURRENT LIABILITIES 320,016
----------
TOTAL LIABILITIES 320,016
----------
COMMITMENTS AND CONTINGENCIES (Note E, F and H)
SHAREHOLDERS' EQUITY (Notes A and G):
Common Stock, par value $.01 per share, authorized
6,000,000 shares; issued and outstanding 1,793,798 shares
in 2004 17,938
Additional Paid-In Capital 3,746,161
Retained Earnings 392,591
Allowance For Marketable Securities 6,789
----------
TOTAL SHAREHOLDERS' EQUITY 4,163,479
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,483,495
==========
See accompanying notes to financial statements.
14
THE FLAMEMASTER CORPORATION
STATEMENT OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
------------ ------------
NET SALES (Note L) $ 4,959,929 $ 4,769,094
ROYALTIES 1,450 2,935
INTEREST AND OTHER INCOME 74,418 325,823
------------ ------------
5,035,797 5,097,852
------------ ------------
COSTS AND EXPENSES:
Cost of Goods Sold 2,618,751 2,579,394
Selling and Administrative 1,111,737 1,079,928
Laboratory Costs 427,096 408,725
Royalties, Interest and Other 62,269 126,465
------------ ------------
4,219,853 4,194,512
------------ ------------
INCOME FROM OPERATIONS
BEFORE INCOME TAXES 815,944 903,340
PROVISION FOR INCOME TAXES 311,492 364,821
------------ ------------
NET INCOME 504,452 538,519
PREFERRED STOCK DIVIDENDS -- (5,745)
------------ ------------
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS 504,452 532,774
PREFERRED STOCK DIVIDENDS -- 5,745
INTEREST ON CONVERTIBLE NOTES, NET OF TAX -- 46,059
NET INCOME ATTRIBUTABLE TO COMMON STOCK
------------ ------------
AND ASSUMED CONVERSIONS $ 504,452 $ 584,578
============ ============
------------ ------------
NET INCOME PER SHARE, BASIC (Note I) $ 0.30 $ 0.34*
============ ============
------------ ------------
NET INCOME PER SHARE, DILUTED (Note I): N/A $ 0.31*
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 1,656,272 1,573,128*
WEIGHTED AVERAGE SHARES OUTSTANDING
DILUTED N/A 1,870,244*
* Adjusted for 12.5% stock dividend in the form of 9 for 8 stock split.
See accompanying notes to financial statements.
15
THE FLAMEMASTER CORPORATION
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
------------ ------------
NET INCOME $ 504,452 $ 538,519
CHANGE IN UNREALIZED GAIN/ (LOSSES)
ON MARKETABLE SECURITIES, NET OF TAX 6,789 (267,032)
RECLASSIFICATION ADJUSTMENT -- (97,566)
------------ ------------
COMPREHENSIVE INCOME/(LOSS) $ 511,241 $ 173,921
============ ============
See accompanying notes to financial statements.
16
THE FLAMEMASTER CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2004
UNREALIZED
PREFERRED STOCK COMMON STOCK ADDITIONAL GAIN/(LOSS)
------------------------ ----------------------- PAID-IN RETAINED ON MARKETABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
---------- ----------- ----------- --------- ----------- ----------- --------- ----------
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 (25,230) (255) (84,486) (73,708) -- (158,449)
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 1,382,480 13,822 3,971,772 2,583,836 (267,032) 6,302,808
---------- ----------- ----------- --------- ----------- ----------- --------- ----------
CONVERSION OF PREFERRED TO
COMMON (41,038) (410) 110,079 1,101 (1,820) (1,129)
CALL/CONVERSION OF NOTES 125,312 1,253 910,747 912,000
STARBIZ DIVESTITURE
(PROPERTY DIV) (1,106,141) (2,409,259) (3,515,400)
CASH DIVIDEND FRACTIONAL
SHARES (32,096) (32,096)
CASH DIVIDEND ON COMMON
STOCK $.032 PER SHARE (49,211) (49,211)
CASH DIVIDEND ON COMMON
STOCK $.023 PER SHARE (78,799) (78,799)
MARKETABLE SECURITY ALLOW,
DIVESTITURE (222,759) 267,032 44,273
STOCK DIVIDEND 1,530 15 15
STOCK REPURCHASES (29,908) (299) 96,427 96,128
STOCK SPLIT 201,609 2,016 2,016
FRACTIONAL SHARE ADJUSTMENT 2,696 30 (28,397) (28,367)
UNREALIZED GAIN/(LOSS) ON
SECURITIES, NET OF TAX 6,789 6,789
NET INCOME 504,452 504,452
---------- ----------- ----------- --------- ----------- ----------- --------- ----------
BALANCE, SEPTEMBER 30, 2004 -- $ -- 1,793,798 $ 17,938 $ 3,746,161 $ 392,591 $ 6,789 $4,163,479
========== =========== =========== ========= =========== =========== ========= ==========
See accompanying notes to financial statements.
17
THE FLAMEMASTER CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 504,452 $ 538,519
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization 66,128 56,543
(Increase)/decrease in Accounts Receivable (201,919) 44,215
(Increase)/decrease in Inventories (30,047) 76,045
(Increase)/decrease in Notes Receivable 59,035 (66,888)
(Increase)/decrease in Settlement Receivable -- 95
(Increase)/decrease in Prepaid Expenses and Other Assets (13,372) (9,787)
(Increase)/decrease in Deferred Income Tax Assets Due To Operations 31,815 292,344
(Increase)/decrease in Other Investments (328,713) 46,287
Increase/(decrease) in Accounts Payable 94,733 (56,675)
Increase/(decrease) in Accrued Expenses 22,632 (35,450)
Increase/(decrease) in Income Taxes Payable 8,760 71,773
Increase/(decrease) in Deferred Income Tax Liabilities Due To Operations 10,185 15,723
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 223,689 972,744
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property, Plant and Equipment (6,483) (33,899)
(Increase)/decrease in Investment Securities 814,784 (317,344)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 808,301 (351,243)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repurchase)/issurance of the Company's Common Stock 1,271,739 (158,449)
Minority Interest (1,900) 1,900
Increase/(decrease) in Notes Payable (913,500) (787,100)
(Repuchase)/issuance of Preferred Restricted Stock (742,000) 742,000
Dividends Paid for Common Stock (756,654) (134,486)
Dividends Paid for Preferred Stock (4,788) (5,745)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (1,147,103) (341,880)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (115,113) 279,621
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,221,905 1,942,284
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,106,792 $ 2,221,905
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 7,314 $ 76,765
============ ============
Income Taxes $ 279,000 $ 281,000
============ ============
See accompanying notes to financial statements.
18
THE FLAMEMASTER CORPORATION
NOTES TO 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 generally are recorded by the company, including
those made under ongoing contracts, at the time products are shipped. Revenues
from royalties earned under licensing agreements are recognized in the period
the royalties are earned.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
MARKETABLE SECURITIES: Management determines the appropriate classification of
its investments in debt and equity securities at the time of purchase and
reevaluates such determination at each balance sheet date. Debt securities for
which the company does not have the intent or ability to hold to maturity are
classified as available for sale, along with the Company's investment in equity
securities. Securities available for sale are carried at fair value, with the
unrealized gains and losses reported in a separate component of shareholders'
equity, net of income taxes, until realized. At September 30, 2004, 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.
19
THE FLAMEMASTER CORPORATION
NOTES TO 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, 2004, the Company had approximately $1,895,000 of cash and
cash equivalents in ten different banks which exposes the Company to
concentration of credit risk to the extent that each of these amounts exceeds
$100,000.
NOTE C - MARKETABLE SECURITIES
------------------------------
Marketable securities classified as current assets at September 30, 2004 include
the following:
Fair Value Cost
---------- ----------
U.S. Treasury bonds $ -- $ --
Other government obligations -- --
Corporate debt securities 2,773 9,544
Mortgage-backed securities 34,940 34,863
Marketable equity securities 36,296 30,863
---------- ----------
$ 74,009 $ 75,270
========== ==========
The contractual maturities of debt securities available for sale at September
30, 2004 as follows:
Fair Value Cost
---------- ----------
Due within one year $ -- $ --
Due after one year thru five years -- --
Due after five years thru ten years -- --
Due after ten years 34,940 34,863
Not due at single maturity date 2,773 9,544
---------- ----------
$ 37,713 $ 44,407
========== ==========
Gross unrealized holding gains and losses at September 30, 2004, were $5,510 and
$6,770, respectively. Realized gains and losses from the sale of securities for
the year ended September 30, 2004 were $59,513 and $49,997, respectively.
20
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE D - INVENTORIES
--------------------
Inventories consist of the following:
September 30,
----------------------------
2004 2003
Raw Materials $ 511,800 $ 451,844
Shipping Materials 155,138 203,159
Finished Goods 367,349 349,237
---------- ----------
$1,034,287 $1,004,240
========== ==========
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. 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. Royalties paid under this
agreement were $47,527 in 2004 and $43,166 in 2003.
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 expenses charged to operations were $207,498 in 2004 and
$200,532 in 2003.
As of September 30, 2004, future minimum payments under this lease are:
2005 $ 214,812
2006 $ 222,336
Thereafter $ --
----------
Total $ 437,148
==========
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, 2004 no options have been exercised under this plan.
21
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
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.
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, 2002 1,250 $ 7.125 1,250 $ 7.125
Granted -- $ -- -- $ --
Forfeited -- $ -- -- $ --
-----------------------------------------------------------
Outstanding at September 30, 2003 1,250 $ 7.125 1,250 $ 7.125
Granted -- $ -- -- $ --
Forfeited -- $ -- -- $ --
-----------------------------------------------------------
Outstanding at September 30, 2004 1,250 $ 7.125 1,250 $ 7.125
===========================================================
The following is a summary of options outstanding and exercisable as of
September 30, 2004:
--------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Number Weighted Average
Range of Exercise Prices Number 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 During fiscal year
ended September 30, 2004, the Company received $68,416 from the UST Clean Up
Fund of which $13,400 was claimed to be overpaid by such Agency. The Company
still believes any of the funds used as prescribed should be fully reimbursed to
the Company by the UST Clean Up Fund and will be under consideration for several
years. No accrual for an additional reimbursement has been recorded at September
30, 2004.
The company is currently involved in no other litigation.
22
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
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.
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 $1,000
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 $1,000 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 $1,000 notes.
During 2003, the Company called the $100, $200 and $1,000 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 $1,000 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.
23
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
The components of income tax expense are:
Year Ended September 30,
----------------------------
2004 2003
---------- ----------
Current:
Federal $ 217,303 $ 267,369
State and foreign 51,686 79,358
---------- ----------
268,989 346,727
Deferred:
Net change in deferred tax asset 32,318 2,371
Net change in deferred tax liability 10,185 15,723
---------- ----------
$ 311,492 $ 364,821
========== ==========
The following reconciles the federal statutory tax rate to the effective rate of
the provision for income taxes:
Year Ended September 30,
----------------------------
2004 2003
---------- ----------
Federal statutory rate 34.00% 34.00%
Increases (decrease):
California franchise tax, net of
Federal income tax benefit 5.83% 5.83%
Dividends -0.40% -1.72%
Tax credits -0.01% 0.75
Other -1.26% 1.49%
---------- ----------
38.16% 40.35%
========== ==========
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 2004 and 2003 were $41,100 and $38,600,
respectively.
NOTE L - SALES INFORMATION AND MAJOR CUSTOMERS
----------------------------------------------
Sales of aircraft sealants increased to $4,727,613 from $4,429,596 in the prior
year and sales of Flamemastic (Fire-Retardant Coatings) and Dyna-Therm
(Aerospace Coatings) increased to $232,315 from $339,498 the previous year.
During the fiscal year ended September 30, 2004, an agency (General Services
Administration) of the United States Government accounted for $1,114,386
(22.47%) of sales as compared to $1,504,442 (31.37%) in 2003. There were three
other single major customers in 2004 accounted for $2,191,298 or 44.18% 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.
24
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE L - SALES INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
----------------------------------------------------------
Export sales and royalty income from foreign sources are generated entirely by
The Flamemaster Corporation and are as follows:
Year Ended September 30,
------------------------
2004 2003
---- ----
Export sales $ 299,119 $ 280,914
Royalty income $ 1,450 $ 2,935
NOTE M - RELATED PARTIES
------------------------
Altius Investment Corporation owns approximately 25% of the Company's
outstanding common shares. Three of the seven 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 (PRIOR YEARS)
-------------------------------------
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.
25
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE N - LONG-TERM DEBT (PRIOR YEARS) (CONTINUED):
--------------------------------------------------
On June 6, 2002, the Flamemaster Corporation Board of Directors authorized an
issuance of $1,000 convertible notes. These $1,000 notes were convertible into
150 shares of common restricted stock with dilution protection, due on June 30,
2010. The $1,000 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 these issuances, the Company issued 746 $1,000
notes.
The $100 notes paid interest of $41,242, annually, the $200 notes paid interest
of $6,480, annually and the $1,000 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 $1,000 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 $1,000 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 $1,000 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 $1,000 Notes and fractional shares
for cash, or $4,010 and converted the remaining 742 $1,000 Notes to 41,038
shares of preferred stock.
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.
26
THE FLAMEMASTER CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE N - LONG-TERM DEBT (PRIOR YEARS) (CONTINUED):
--------------------------------------------------
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 took
the form of a stock dividend distributed December 30, 2003 to shareholders of
record December 5, 2003. The Company's shareholders received one restricted
common share of StarBiz stock for every 120 shares of the Company's stock.
Fractions were paid in cash at the rate of $1.25 for each Company share owned.
No fractional shares were issued.
NOTE O - SUBSEQUENT EVENTS
--------------------------
On October 29, 2004, a one for ten reverse stock split became effective. The
Company's board of directors also authorized the filing of a Form 15 with the
Securities Exchange Commission to deregister and become a Non Reporting Company.
Subsequent to the authorization and announcement, a merger opportunity with Best
Candy and Tobacco presented itself which would add a potential benefit for the
Flamemaster shareholders. Therefore, the Company did not proceed with the
deregistration.
On October 7, 2004 the Company announced that it entered into a letter of intent
with Best Holdings Acquisition Company LLC and Aries Capital Partners, LLC (The
Best Group) to merge 100% of Best Candy and Tobacco Co., into Flamemaster
Corporation. The Company further announced that it withdrew its intent to file
form 15 to deregister pending the outcome of the proposed merger with the Best
Group.
On November 4, 2004, the Company received a notice of delisting from Nasdaq
indicating that the Company fails to comply with the minimum 500,000 publicly
held shares required for continued listing as set forth in Market Place rule
4310 (C) (7).
On November 10, 2004 the Company filed an appeal with Nasdaq regarding the
delisting of its common stock. A hearing was held on December 9, 2004 wherein
the Company presented its case for continued listing before a hearing review
board. No ruling was made and the Company is still awaiting a determination.
On December 14, 2004, the Company issued a press release stating that its Board
of Directors authorized a seven for one forward stock split in order to comply
with the minimum 500,000 publicly held share requirement for continued listing
on the Nasdaq SmallCap Market. The stock split will be effective on January 7,
2005 to shareholders of record December 23, 2004.
27
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: December 17, 2004
/s/ Leon Gutowicz
-------------------------------------------
Leon Gutowicz,
Director
Date: December 17, 2004
/s/ Donna Mazin
-------------------------------------------
Donna Mazin,
Director
Date: December 17, 2004
/s/ Mary Kay Eason
-------------------------------------------
Mary Kay Eason,
Treasurer & Secretary
Date: December 17, 2004
28