Flamemaster (FAME) 10QSB 2001 Q3 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: JUNE 30, 2001 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:

June 30, 2001 1,598,200

Item 1 Financial Information
Item 1 Financial Statement

THE FLAMEMASTER CORPORATION
CONDENSED BALANCE SHEET

	JUNE 30  2001  (Unaudited)
A S S E T S :
Current Assets:
Cash and cash equivalents	$	2,085,729
Marketable securities	2,896,506
Accounts receivable, less allowance of $5,000	561,663
Notes Receivable	55,996
Inventories	937,619
Prepaid expenses	39,239
Deferred income taxes	116,522
Other investments	46,287
Total current assets:	6,739,561
Machinery & improvements, net of accumulated depreciation	107,393
License agreement, net of accumulated amortization	58,377
TOTAL ASSETS	$	6,905,331
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current Liabilities:
Accounts payable	$	91,032
Accrued liabilities	9,288
Income tax payable	18,548
Deferred tax liability	15,468
Deferred credits	8,095
Total current liabilities:	142,431
Long-term liabilities:
Notes payable	417,853
Total Liabilities:	560,284
SHAREHOLDERS' EQUITY:
Common Stock, par value,$.01 per share, authorized 6,000,000 shares; issued and outstanding 1,598,200 shares at 06/30/01	15,982
Additional paid-in Capital	3,677,392
Retained earning	2,709,774
Allowance for marketable securities	(58,101		)
TOTAL STOCKHOLDERS’ EQUITY	$	6,345,047
TOTAL LIABILITY AND EQUITY	$	6,905,331

See notes to condensed financial statements.

THE FLAMEMASTER CORPORATION
CONDENSED  STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED JUNE 30,

		2001		2000
Net sales		$	1,005,399	$	1,085,721
Royalties		-		-
Interest and Other Income		88,663		532,498
Total Revenues		1,094,062		1,618,219
Costs and expenses:
	Cost of sales	525,288		528,675
	Selling	83,736		73,259
	General and administrative	146,278		154,598
	Laboratory costs	77,233		69,110
	Other expenses	29,014		24,476
Total costs and expenses:		861,549		850,118
Income before income taxes		232,513		768,101
Income taxes		80,238		327,428
Net  income		152,275		440,673
Other comprehensive income
	Net of income tax
Unrealized Holding Gains (Losses)		145,021		(328,114		)
Comprehensive Income		297,296		$	112,559
Net income per share, basic		$	.10	$	.27
Net income per share, diluted		****		****
Weighted average shares outstanding:
	Basic	1,580,833		1,608,552
	Diluted	1,616,966		1,667,483

**** 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.

THE FLAMEMASTER CORPORATION
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED JUNE 30,

		2001			2000
Net Sales		$	2,971,175		$	2,969,661
Royalties		-			813
Interest and Other Income		280,600			1,140,513
Total Revenues		3,251,775			4,110,987
Costs and expenses:
	Cost of Sales	1,548,905			1,505,221
	Selling	253,505			211,577
	General and administrative	450,925			474,817
	Laboratory	218,596			208,178
	Other (income)/ Expenses, Net	71,722			68,516
Total Costs and Expenses		2,543,653			2,468,309
Income before income taxes		708,122			1,642,678
Income taxes		228,909			654,102
Net income		479,213			988,576
Other comprehensive income
	Net of income taxes
Increase (decrease) in unrealized holding gains		(891,489		)	1,076,148
Comprehensive Income		$	(412,276	)	$	2,064,724
Net income per share, basic		$	.30		$	.61
Net income per share, diluted		***			***
Weighted average shares outstanding:
	Basic	1,584,868			1,613,938
	Diluted	1,623,789			1,672,869

See notes to condensed financial statements

THE FLAMEMASTER CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE  MONTHS ENDED JUNE 30,

	2001
Net cash provided (used) by operating activities:	$	414,893
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment & improvements	(55,594		)
Net purchases and sales of investment securities	(494,821		)
NET CASH USED IN INVESTING ACTIVITIES:	(550,415		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock	60,313
Increase in notes payable	17,656
Purchase of Company’s Common Stock	(103,662		)
Dividends paid	(152,197		)
NET CASH USED IN FINANCING ACTIVITIES	(177,890		)
NET INCREASE, (DECREASE), IN CASH	(313,412		)
Cash, beginning of period	2,399,141
Cash, end of period	$	2,085,729
Cash paid during period for income taxes	$	255,300
Cash paid during period for interest expense	$	19,774

See notes to Condensed Financial Statements.

THE FLAMEMASTER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2001

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 nine months and three months ended June 30, 2001 are not indicative of the results that may be expected for the year ending September 30, 2001.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 2000.

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 June 30, 2001 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.

             Reclassification of Financial Statements:

Beginning in the first quarter of fiscal 2000, various items of portfolio income, which were previously classified as "other (income), expenses, net" are classified as "interest and other income" in the condensed Statements of Income.  Amounts reported for the prior quarters have been reclassified to conform to the quarter 2000 presentation.

Note 4: Inventories are summarized as follows:

	June 30 2001
Raw materials	$	513,143
Shipping materials	90,129
Finished goods	334,347
	937,619

Note 5: During the three months ended June 30, 2001, the Company purchased 7,510 shares of its outstanding common stock at a cost
	of $37,605.

Note 6: MARKETABLE SECURITIES:

             Marketable securities classified as current assets at June 30, 2001 include the following:

	Fair Value	Cost
U.S. Treasury obligations	579,599	546,840
Other Government Bonds	43,341	43,364
Corporate debt securities	12,331	26,090
Mortgage backed securities	792	1,183
Marketable equity securities	2,260,443	2,411,712
	2,896,506	3,029,189

             The contractual maturities of debt securities available for sale at June 30, 2001 is as follows:

	Fair Value	Cost
Due within one year	-	-
Due after one year thru 5 years	417,373	413,485
Due after 5 years thru 10 years	127.508	110,409
Due after 10 years	90,390	92,400
Not due at single maturity date	792	1,183
	636,063	617,477

Gross unrealized holding gains and losses at June 30, 2001 were $276,054 and $408,737, respectively.  Realized gains and losses from the sale of securities for the nine months ended June 30, 2001 were $72,052 and $1,231 respectively.          .                .

THE FLAMEMASTER CORPORATION
Item 2:
Management's Discussion and Analysis of Financial Condition and Results of Operations:

June 30, 2001 compared to September 30, 2000 and
June 30, 2001 compared to June 30, 2000.

FINANCIAL CONDITION AND LIQUIDITY:

The Company’s financial condition is strong with current assets of $6,739,561 compared to current liabilities of $142,431 at June 30, 2001 for a current ratio of more than 47 to 1.  Working capital decreased to $6,597,130 on June 30, 2001 compared to $7,211,653 at September 30, 2000, but was up from the $6,309,839 on March 31, 2001.  Cash and cash equivalents and Marketable Securities stood at $4,982,235.  Accounts Receivable increased modestly to $561,663 from $554,251 in the prior year’s quarter ended June 30, 2000.  Inventories decreased moderately to $937,619 on June 30, 2001 from $1,098,329 in the year earlier period, but up slightly from the $925,771 at fiscal year end, September 30, 2000.  Revenues for the June 30, 2001 quarter were $1,094,062 compared to $1,618,219 in the year earlier quarter due to a lower level of investment income.  Sales from operations were modestly lower to $1,005,399 for the June 30, 2001 quarter due to product mix, compared to $1,085,721 in the year earlier period.

During the quarter the Company experienced two price increases on liquid Polysulfide, a key ingredient of many of the Company’s aircraft sealants.  Flamemaster’s only supplier of Polysulfides (Rohm & Haas) has announced plans to shut down the manufacturing of the product in December of 2001.  The Company has secured two alternative sources of Polysulfides from outside the United States.  One source is located in Germany and the other source is in Japan.  However, there is no assurance that supplies of this key raw material will not be disrupted in the future, therefore, the Company must increase it’s inventory levels in order to meet customer demands.

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.

The Company paid a $.032 dividend on its common stock in June 2001.

RESULTS OF OPERATIONS:

For the three months ended June 30, 2001 net income was $152,275 compared to $440,673 or $.10 per share vs. $.27 per share in the year earlier period.  The decrease in earnings was due to lower levels of investment gains.  During the quarter, the Company experienced an increase in the price of a key raw material (liquid Polysulfide) for it’s aircraft sealants.  The Company’s development efforts are now centered on developing more high end products, as well as increasing prices on a select number of standard products.

Laboratory costs, including research and development, for the quarter increased moderately to $77,233 from $69,110 in the year earlier quarter.  General and Administration expenses decreased moderately to $146,278 from $154,598 in the prior year, while Selling Expense rose to $83,736 from $73,259.

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
August 7, 2001
	(Signature)
	Joseph Mazin, President and Chairman
	and Chief Executive Officer
DATE:	MARY KAY EASON
August 7, 2001
	(Signature)
	Mary Kay Eason, Assistant Treasurer and
	Assistant Secretary
DATE:	DONNA MAZIN
August 7, 2001
	(Signature)
	Donna Mazin, Director