Flamemaster (FAME) 10QSB 2003 Q2 Quarterly report (small business)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10- QSB

QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR QUARTER ENDED: MARCH 31, 2003 COMMISSION FILE NO: 0-2172

THE FLAMEMASTER CORPORATION

(Exact name of Registrant as specified in its Charter)

NEVADA	95-2018730
(State or other jurisdiction of incorporation or organization)	(IRS Employer identification Number)

11120 SHERMAN WAY, SUN VALLEY, CALIFORNIA 91352

(Address of Principal Executive Office)

Registrant's telephone number including area code:	(818) 982-1650
Registrant's facsimile number including area code:	(818) 765-5603

Indicate by check mark whether 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 ý NO o

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

March 31, 2003 1,398,194

Item 1 Financial Information
Item 1 Financial Statement

THE FLAMEMASTER CORPORATIONCONDENSED BALANCE SHEET

	March 31,
	2003
	(Unaudited)
A S S E T S :
Current Assets:
Cash and cash equivalents	$	1,846,312
Marketable securities		2,854,612
Accounts receivable, less allowance
of $5,000		640,047
Notes Receivable		174
Inventories		1,032,856
Prepaid expenses		38,808
Income Tax Receivable		19,945
Deferred income taxes		420,420
Other investments		46,282
Total current assets:		6,899,456
Machinery & improvements, net of
accumulated depreciation		175,891
License agreement, net of accumulated
amortization		29,187
TOTAL ASSETS	$	7,104,534
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current Liabilities:
Accounts payable	$	191,714
Accrued liabilities		13,176
Deferred tax liability		13,978
Total current liabilities:		218,868
Long-term liabilities:
Notes payable		1,700,600
Total Liabilities:		1,919,468
SHAREHOLDERS’ EQUITY:
Common Stock, par value, $.01 per share,
authorized 6,000,000 shares; issued and outstanding
1,398,194 shares at 03/31/03.		13,979
Additional paid-in Capital		3,292,180
Retained earning		2,430,440
Allowance for marketable securities		(551,533	)
TOTAL STOCKHOLDERS’ EQUITY	$	5,185,066
TOTAL LIABILITY AND EQUITY	$	7,104,534

See notes to condensed financial statements.

2

Item 1  Financial Statements (continued)

THE FLAMEMASTER CORPORATION
CONDENSED  STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31,

	2003			2002
Net Sales	$	1,163,147		$	1,219,531
Royalties		110			380
Interest and Other Income		68,701			75,476
Total Revenues		1,231,958			1,295,387
Costs and expenses:
Cost of Sales		623,373			638,653
Selling		97,257			89,729
General and administrative		184,639			151,403
Laboratory costs		102,400			93,484
Other expenses		30,768			26,865
Total costs and expenses		1,038,437			1,000,134
Income before income taxes		193,521			295,253
Income taxes		69,483			89,581
Net income		124,038			205,672
Other comprehensive income
Net of income tax
Unrealized Holding Gains (Losses)		(551,533	)		(639,606	)
Comprehensive Income	$	(427,495	)	$	(433,934	)
Net income per share, basic	$	.09		$	.14
Net income per share, diluted		****			****
Weighted average shares outstanding:
Basic		1,400,228			1,448,557
Diluted		1,655,077			1,492,097

****   Diluted earnings per share are not presented, as effect of the assumed conversion of Notes Payable is anti-dilutive.

See notes to condensed financial statements.

3

Item 1  Financial Statements (continued)

THE FLAMEMASTER CORPORATION
CONDENSED  STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED MARCH 31,

	2003			2002
Net Sales	$	2,275,030		$	2,382,354
Royalties		189			6,429
Interest and Other Income		133,196			166,437
Total Revenues		2,408,415			2,555,220
Costs and expenses:
Cost of Sales		1,219,999			1,316,759
Selling		186,708			178,331
General and administrative		350,992			311,121
Laboratory		198,196			180,262
Other (income)/Expenses, Net		19,336			57,645
Interest on Convertible Notes		39,718			—
Total Costs and Expenses		2,014,949			2,044,118
Income before income taxes		393,466			511,102
Income taxes		139,618			179,991
Net income		253,848			331,111
Other comprehensive income
Net of income taxes
Unrealized holding gains (losses)		(551,533	)		53,989
Comprehensive Income	$	(297,685	)	$	385,100
Net income per share, basic	$	.18		$	.23
Net income per share, diluted		****			****
Weighted average shares outstanding:
Basic		1,402,126			1,447,463
Diluted		1,656,975			1,489,303

****   Diluted earnings per share are not presented, as effect of the assumed conversion of Notes Payable is anti-dilutive.

See notes to condensed financial statements.

4

Item 1  Financial Statements (continued)

THE FLAMEMASTER CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,

	2003
Net cash provided (used) by operating activities:	$	175,454
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment & improvements		(7,418	)
Net purchases and sales of investment securities		(158,759	)
NET CASH USED IN INVESTING ACTIVITIES:		(166,177	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable		-0-
Purchase of Company’s Common Stock		(60,365	)
Dividends paid		(44,884	)
NET CASH USED IN FINANCING ACTIVITIES		(105,249	)
NET INCREASE, (DECREASE), IN CASH		(95,972	)
Cash, beginning of period		1,942,284
Cash, end of period	$	1,846,312
Cash paid during period for income taxes	$	120,000
Cash paid during period for interest expense	$	39,718

See notes to condensed financial statements

5

Item 1  Financial Statements (continued)

THE FLAMEMASTER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003

Note 1:

Forward-Looking and Cautionary Statements

The Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in the Company’s filings with Securities and Exchange Commission and its reports to stockholders. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying information that is forward-looking, including, without limitations, statements regarding the Company’s future financial performance, the effect of government regulations, national and local economic conditions, the competitive environment in which the Company operates, results or success of discussions with other entities on mergers, acquisitions, or alliance possibilities and expansion of product offerings. Actual results may differ materially from those described in the forward-looking statement. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statements that may be made from time to time by or on behalf of the Company.

Note 2:	Basis of Presentation:
	The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals), considered necessary for a fair presentation have been included. Operating results for the six months ended March 31, 2003 are not indicative of the results that may be expected for the year ending September 30, 2003.
	For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-KSB for the year ended September 30, 2002.

6

Item 1  Financial Statements (continued)

THE FLAMEMASTER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003

Note 3:

Summary of Significant Accounting Policies:

Investment in Debt and Equity Securities: The Company adopted Statement of Financial Accounting Standards No: 115 (“SFAS No: 115”), Accounting for Certain Investments in Debt and Equity Securities, effective January 1,1995. 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 March 31, 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 or expense. The cost of securities sold is based on specific identification method.

7

Item 1  Financial Statements (continued)

THE FLAMEMASTER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003

Note 4: Inventories are summarized as follows:

	March 31,
	2003
Raw materials	$	484,671
Shipping materials		130,536
Finished goods		417,649
	$	1,032,856

Note 5: During the three months ended March 31, 2003, the Company purchased 3,608 shares of its outstanding common stock at a cost of $22,932.

Note 6: MARKETABLE SECURITIES:
Marketable securities classified as current assets at March 31, 2003 include the following:

	Fair Value		Cost
U.S. Treasury obligations	$	274,820	$	249,534
Other Government Bonds		46,003		43,995
Corporate debt securities		309,598		345,014
Mortgage backed securities		144,414		138,760
Marketable equity securities		2,079,776		3,031,343
	$	2,854,611	$	3,808,646
The contractual maturities of debt
securities available for sale at
March 31, 2003 is as follows:
	Fair Value		Cost
Due within one year	$	70,069	$	73,638
Due after one year thru 5 years		122,648		150,879
Due after 5 years thru 10 years		116,791		106,706
Due after 10 years		458,006		431,474
Not due at single maturity date		7,321		14,606
	$	774,835		777,303

Gross unrealized holding gains and losses at March 31, 2003 were $211,637 and $1,165,671, respectively. Realized gains and losses from the sale of securities for the three months ended March 31, 2003 were $9,837 and $ 975 respectively.

8

THE FLAMEMASTER CORPORATIONItem 2:Management’s Discussion and Analysis of Financial Condition and Results of Operations:

March 31, 2003 compared to September 30, 2002 and
March 31, 2003 compared to March 31, 2002.

FINANCIAL CONDITION AND LIQUIDITY:

The company’s financial condition is strong with current assets of $6,899,456 compared to current liabilities of $218,868 at March 31, 2003 for a current ratio of more than 31.5 to 1. Working capital increased to $6,680,588 on March 31, 2003 compared to $6,584,369 at September 30, 2002. Cash and cash equivalents and marketable securities declined to $4,700,924 on March 31, 2003 from $4,717,915 at fiscal year end September 30, 2002. Accounts receivable decreased moderately to $640,047 from $727,789 in the prior year’s quarter ended March 31, 2002 due to tight monitoring of accounts receivable. Inventories declined significantly to $1,032,856 on March 31, 2003 from $1,254,372 in the year earlier period due to faster turn around time.

Revenues for the March 31, 2003 quarter declined moderately to $1,231,958 from $1,295,387 in the year earlier quarter. Sales of aircraft sealants gained due to the requirement of the U.S. Military which resulted in lower margins. Sales of our flame retardant coatings decreased due to a sluggish economy and a decline in corporate spending and expansion projects. Also affecting revenues was a decline in investment and interest income.

Management believes that future working capital requirements will be provided primarily from operations and that the Company’s liquidity and working capital requirements are adequate for the next 12 months of operation. Management believes that the Company’s creditworthiness is substantial relative to its size.

Flamemaster paid a $.032 dividend on the Company’s common stock during the quarter.

RESULTS OF OPERATIONS:

For the three months ended March  31, 2003 net income declined to $124,038 from $205,672 or $.09 per share vs. $.14 per share in the year earlier period. The decline in earnings was due to sales of lower margin products. Investment gains as well as interest declined during the period due to turmoil in the financial market and geopolitical concerns. For the six month period net income declined to $253,848 from $331,111 in 2002. Per share net for the six month period was $.18 vs. $.23 in the prior year.

Laboratory costs, including research and development for the quarter increased to $102,400 from $93,484 in the year earlier quarter due to the hiring of additional personnel and a greater effort on developing more high end products. General and Administrative expenses increased moderately to $184,639 from $151,403 in the prior year, while selling expense also rose modestly to $97,257 from $89,729 due to increased salaries.

9

Signatures:

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	THE FLAMEMASTER CORPORATION
	(Registrant)
DATE:	JOSEPH MAZIN
May 9, 2003
	(Signature)
	Joseph Mazin, President and Chairman
	And Chief Executive Officer
DATE:	MARY KAY EASON
May 9, 2003
	(Signature)
	Mary Kay Eason, Treasurer and Secretary
DATE:	DONNA MAZIN
May 9, 2003
	(Signature)
	Donna Mazin, Director

10

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying 10-QSB of The Flamemaster Corporation (the “Company”) for the fiscal year ending September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph Mazin, CEO and CFO of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1. I have reviewed the Report;

2. Based on my knowledge, the Report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this 10-QSB;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as, for the periods presented in the Report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have;

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to me by others within the Company, particularly during the period in which this 10-QSB is being prepared;

b. evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of the Report (the “Evaluation Date”); and

c. presented in the Report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation date;

5. I have disclosed, based on my most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls;

6. I have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weakness.

      /s/ Joseph Mazin

      Joseph Mazin,
      CEO and CFO
      May 9, 2003