FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
/x/ ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
OR
/ / TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-13746
FIREPLACE MANUFACTURERS, INC.
(Exact Name of Registrant as specified in its charter)
California 95-3244946
- ---------------------------------------------- ------------------------------
(State or other jurisdiction of Incorporation) (I.R.S. Employer I.D. No.)
2701 South Harbor Boulevard, Santa Ana, California 92704
- --------------------------------------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (714) 549-7782
---------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- -------------------
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period than the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /x/ NO / /
Indicate by check mark if disclosure of delinquent filer's pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----------
The aggregate market value of the Registrant's Common Stock held by non-
affiliates based on the average bid and asked prices of such stock, as of May
23, 1997 was $2,633,000 and $2,896,000, respectively.
The number of shares outstanding of each of the Registrant's classes of Common
Stock as of May 23, 1997, was as follows:
Common Stock, $0.01 Par Value per share - 3,417,550
Documents incorporated by reference. None
2
PART I
ITEM 1 BUSINESS
Fireplace Manufacturers, Inc. ("FMI" or "the Company") was incorporated in 1976
and is engaged in the manufacture and sale of factory-built metal fireplace
systems and gas fireplace appliances.
METAL FIREPLACE SYSTEMS AND RELATED PRODUCTS
Fireplace Manufacturers, Inc., designs, manufactures, and sells factory-built,
energy-efficient metal fireplace systems. The Company currently produces wood-
burning metal fireplaces, decorative gas appliances with refractory-lined
fireboxes, horizontal/vertical gravity direct vent wall furnaces, and related
chimney flues. Optional features of the fireplaces include the ability to
accept natural gas, glass doors, decorative facings, outside air intakes, and
electrical fans. The fireplaces are used in single-family homes, condominiums,
apartments, other multiple-family dwellings, and in mobile homes. They can be
used as part of a wall, in a corner, or as a room divider. Fireplaces are sold
mainly to homebuilders who install the system in new construction, and to the
"Do-It-Yourself" (DIY) homecenters and retail distributors.
Each fireplace consists of an inner sheet metal firebox, which is lined with an
insulating brick-textured refractory material, and an outer sheet metal shell
separated from the heat-bearing box. Chimney components, which are attached to
the firebox in accordance to the height of the dwelling, are of double-wall
construction so that the outer wall may be installed within two inches (2") of
the combustible building materials. The firebox has specifically designed
vents, which permits convection flow to recirculate warm air heated in that
chamber into the room where the fireplace is installed.
The Company currently produces forty eight models of fireplaces, varying in size
and shape with slightly different grillwork styles. The fireplace units are
generally sold to distributors at competitive prices. The distributors sell the
fireplaces to builders at prices from $345 to $3,200. Twenty-nine of these
fireplaces are gas-only models.
FMI has developed a line of unvented fireplaces and gas log heaters that have
grown in popularity over the last three (3) years. The Company expects the
unvented products to gain popularity over the near future, although it lacks
approval in various states.
Also added to the product line is free standing stoves and a series of vented
and unvented gas log sets:
FREE STANDING STOVES
Free standing stoves have a powder coated spray finish which resists scuffing,
scraping and fading. They can be easily placed in a corner or perpendicularly
installed with no chimney or ductwork. The free standing stoves uses natural or
propane fuel.
3
VENTED AND UNVENTED GAS LOG SETS
The vented gas log sets have the ambiance of a wood fire with the convenience of
simple ignition or the flip of a switch. The log kits come complete in 16",
18", 24" and special order 30" with logs, burner grate, connector, volcanic
rock, vermiculite and rock wool. Unvented gas logs can be installed in any FMI
vented or unvented fireplace, masonry fireplaces, as well as other zero
clearance manufactured boxes that have approval with FMI unvented log sets. The
log sets can be produced as either round oak or split oak and range in size from
18" to 30". For safety, the ODS (oxygen depletion sensor) will shut the gas
logs off if oxygen is depleted or fuel is interrupted in the room.
Historically, sales for gas logs are higher during the fall.
CUSTOMERS AND MARKETING
The Company has developed three distribution markets for its products:
HOMEBUILDERS
This market is the largest and has been a focus for FMI throughout its 20 year
history. FMI sells directly to fireplace distributors or "jobbers" who sell,
service, and install the fireplaces. National home-building is growing at a
conservative rate.
RETAIL
The DIY market is growing rapidly; FMI has been distributing through this
channel since 1989. More and more custom homebuilders, small builders, and
remodelers are purchasing their building materials from discount centers. FMI
has turned its focus toward the two-step distribution process in marketing to
fireplace centers.
MOBILE HOMES AND MANUFACTURED HOUSING
Growth in this market has been at approximately 10% annually, and the
competition is substantial. FMI sells to the Evcon Group, a national
distributor of furnaces and fireplaces to the mobile home industry. Eighteen
percent of the mobile homes manufactured each year have a fireplace.
The Company has an agreement with the Evcon Group to provide fireplaces for the
mobile home industry. This agreement provides for the Evcon Group to be the
distributor to the mobile home industry for the Company's products. This
agreement is renewable annually.
The Company also sells into manufactured housing in limited international
markets: Japan, Canada, Norway, Holland, England and Saudi Arabia. Total sales
to all foreign markets are less than 10%.
The sales and marketing functions are currently managed by FMI's Vice President
of Sales and Marketing. FMI employs three regional sales managers. Each
manager covers a multi-state region, selling through independent representative
agencies. The Company's regional sales managers are based in Campbell,
California; Poway, California; and Fredericksburg, Virginia. Homecenter sales
and service are managed by the regional sales person in that area.
4
For the fiscal year ended March 31, 1997, sales to the Evcon Group accounted for
23% of FMI sales. Sales to Quality Insulation accounted for 12% of FMI sales.
Except for these customers, no other customer accounted for more than 10 percent
of metal fireplace sales. The total number of customers is 220.
The loss of the relationship of any major distributor could have an adverse
effect on FMI, at least until FMI could establish a new distributor for the
area.
As of March 31, 1997, the backlog of firm orders for the metal fireplace systems
was not significant. Backlogs typically only represent approximately one or two
weeks of sales since products are usually shipped within a few days of an order.
PATENTS TRADEMARKS AND TRADENAMES
The Company does not own any material patents. The consumer products
manufactured by the Company are marketed under the name "FMI Fireplace Systems".
FABRICATION OF FIREPLACES
The fireplaces are produced at FMI's plant in Santa Ana, California. Metal
forming presses and related equipment are utilized to cut, bend, weld, and rivet
a fireplace's component parts. After assembly, the fireboxes are lined with
refractory material and painted. As of March 31, 1997, FMI was producing over
400 fireplaces per day.
FMI's fireplaces go through approximately seven inspections before shipment. In
addition, prototype models and samples are periodically tested by independent
testing laboratories. FMI also has a fully equipped sealed room testing
facility for assessing various characteristics of the component parts of its
metal fireplace systems. The line of fireplaces manufactured by the Company has
been successfully listed to U.S., Candian and European Standards by independent
agencies which include INCHSCAPE, American Gas Association and Underwriters
Laboratories.
SUPPLIES AND RAW MATERIALS
The major materials used in the production of the fireplaces are galvanized,
aluminized and stainless steel, refractory concrete, and fiberglass insulation.
These materials are generally available at competitive prices and are purchased
from more than one supplier.
BUILDING CODES
The metal fireplaces are subject to the requirements of local building codes and
have been listed by Underwriters Laboratories. FMI's fireplace systems meet the
requirements of the Veterans Administration and Federal Housing Administration
programs, and certain models of FMI fireplaces are approved for mobile homes.
Pending legislation in several states and major cities for clean air to meet
Environmental Protection Agency requirements has resulted in FMI developing
clean-burning appliances, the emphasis being on gas-burning appliances. While
continuing to manufacture wood burning fireplaces, FMI has added four gas-
burning appliances to the product line, making a total of twenty-nine gas-
burning models in their line.
5
DISTRIBUTION CENTERS
To remain competitive in the Midwest and East coast, FMI has established a
distribution center in Atlanta, Georgia. This also allows FMI to better service
the FMI distributor with their product needs quickly.
RESEARCH AND DEVELOPMENT
The Company incurs research and development costs on new product development,
improvement of existing products, and product line extension. During 1997, 1996
and 1995, the Company investment in research and development totaled $607,000,
$586,000 and $693,000, respectively.
COMPETITION
There are eight well-established US companies manufacturing metal fireplaces,
which are sold on a nationwide basis through a number of distributors and
dealers. Since these competitors are primarily privately-held companies or
divisions of larger companies, precise financial information as to their
competitive impact on FMI is not available. FMI competes, based on lower cost
of its units, design innovations, and ease of installation of its fireplace
systems.
FMI also competes with masons who hand build fireplaces and with precast
concrete fireplaces. Hand built masonry fireplaces take longer to install and
require on-site preparation of the building. Metal fireplaces require no on-
site preparation. In addition, precast masonry fireplaces weigh between 6,000
and 24,000 pounds compared to 200 to 480 pounds for a metal fireplace; and they
are also more expensive to build and ship and can effectively be shipped only
within approximately a 100-mile radius.
EMPLOYEES
As of March 31, 1997, FMI employed 211 persons, including approximately 181 in
fabrication and a staff of 30 sales, office, engineering, and administrative
personnel. None of these employees are covered by collective bargaining
agreements, and FMI considers its employee relations to be satisfactory.
ITEM 2 PROPERTIES
FMI leases a facility in Santa Ana, California, comprising approximately 85,500
square feet. Effective May 1, 1994, FMI entered into a five-year lease for such
facility with monthly rentals of $28,000.
6
ITEM 3 LEGAL PROCEEDINGS
A claim has been asserted against the Company which resulted in legal
proceedings against the Company. The matter involves two consolidated actions
pending in the United States District Court for the District of Minnesota, FMI
V. HEARTH TECHNOLOGIES, INC., Case No. 4-96-1080 (D.Minn.) (ADM/AJB) and HEARTH
TECHNOLOGIES, INC. V. FMI, Case No. 4-96-684 (D.Minn.) (ADM/AJB). The actions
involve the validity and alleged infringement of U.S. Patent No. 4,793,322 ("the
`322 patent"), which is owned by Hearth. The claimant requested a royalty
payment of $50.00 per direct vent flex unit. For fiscal year 1997 and 1996,
total units subject to this royalty would be 11,523 and 11,010 respectively.
During 1995, the Company had an independent patent attorney review the patents
in question and it was the opinion of that attorney that the Company is not
infringing on the patent. Assuming the claimant could establish infringement (a
point which the Company vigorously disputes), the Company's damages expert has
concluded that a reasonable royalty rate would be less than $10.00 per direct
vent flex unit. The Company's independent counsel feel there is a reasonable
likelihood of success in defense of this action, but is unable to express an
opinion as to the probable outcome of the action at this time.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year covered
by this form 10-K to a vote of security holders, through the solicitation of
proxies or otherwise.
7
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The following table shows the high and low bid prices for the Common Stock in
the over-the-counter market for the fiscal quarters indicated. The Common Stock
is quoted on the NASQ's Electronic Bulletin Board under the symbol: FPMI. The
quotations were obtained from the National Quotation Bureau Incorporated and
represent prices in the over-the-counter market between dealers in securities.
They do not include retail mark-ups, mark-downs, or commissions, and do not
necessarily represent actual transactions.
Fiscal Quarter Common Stock Bid Prices
Ended High Low
------------------- -------------------------
1995 March 31 11/32 5/32
June 30 3/8 1/8
September 30 5/16 1/8
December 31 1/2 3/16
1996 March 31 25/32 13/32
June 30 15/16 13/16
September 30 15/16 3/8
December 31 15/16 17/32
1997 March 31 1 1/8 3/4
In view of the limited market for and the sporadic trading of the Common Stock,
the above prices are not considered a reliable indicator of fair market value.
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS:
Approximate Number of
Record Holders
Title of Class as of May 23, 1997
-------------- ------------------
Common Stock, $0.01 903 (1)
par value
(1) Included in number of record holders are shares held in "nominee" or
"street names".
8
DIVIDENDS
The Company has not paid cash dividends on its common stock and does not intend
to pay cash dividends in the foreseeable future. It is the present policy of
the Board of Directors to retain all earnings, if any, to provide funds for the
growth of the Company. Payment of cash dividends in the future will rest within
the discretion of the Board of Directors and will depend, among other things,
upon the Company's future earnings, capital requirements, and financial
condition. Currently, the Company's loan agreement prohibits the payment of
dividends. See Note 4 of the Notes to Financial Statements. In addition,
California state law may prevent the Company from declaring any dividends if it
does not have retained earnings or meet certain ratio tests after the payment
of such dividends.
ISSUANCE OF UNREGISTERED SHARES OF COMMON STOCK
On March 25 1997, the Company issued the following members of the Board of
Directors and executive officers the following shares of the Company's common
stock. The shares were issued as part of their 1997 compensation.
Number
Name and Principal Position of Shares Amount
--------------------------- --------- ------
Willard V. Harris, Jr., Chairman of the Board 50,000 $38,000
Willard P. Harris, President, Chief Executive 50,000 $38,000
Officer, Director
John D. Hornsby, Chief Operating Officer 50,000 $38,000
James L. Behrens, Vice President of Sales & Marketing 38,252 $29,072
Jane A. Iovine, Vice President of Finance 5,000 $ 3,800
The shares were issued under an exemption from registration provided by Section
4(2) of the Securities Act of 1933.
9
ITEM 6 SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included herein.
FOR THE YEARS ENDED MARCH 31
--------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNT)
Net sales $31,844 $28,729 $26,705 $19,813 $16,290
Net income $ 994 $ 44 $ 457 $ 43 $ 37
Average shares
outstanding 3,323 3,536 3,553 3,553 3,553
Net Income $ 0.30 $ 0.01 $ 0.13 $ 0.01 $ 0.01
per common share
Total assets $6,937 $ 8,832 $ 8,988 $ 6,379 $ 5,863
Total long-term
obligations (excluding
current portion) $ 235 $ 904 $ 998 $ 732 $ 861
Cash dividends
per share N/A N/A N/A N/A N/A
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
The Company has a line of credit with a bank for an aggregate $4,000,000 with an
interest rate of .50 percent above prime, payable monthly. At March 31, 1997,
there were no amounts outstanding under the line of credit compared to
$2,263,000 at March 31, 1996. The net availability remaining under this
revolving line of credit is $2,080,000 at March 31, 1997. The line of credit
agreements contain restrictive covenants which require maintenance of working
capital and other financial ratios, prohibit the payment of dividends and have
certain other limitations. The lines of credit is subject to renewal on August
1, 1997. The Company does not anticipate any problems with its ability to
continue with its current financing.
The Company also has available a $500,000 equipment line of credit which
converts to a forty-eight month term loan on August 1, 1997. The borrowings
under the line bear interest at the bank's prime rate plus 1%. The line is
subject to the same covenants as the line of credit. At March 31, 1997, there
were no amounts outstanding under this agreement.
10
Accounts receivable (before allowances for doubtful accounts) at March 31, 1997
were $2,579,000, compared to $3,512,000 at March 31, 1996. The 26.6% decrease
is primarily attributed to improved credit collections. Days sales outstanding
at March 31, 1996 was 43 compared to 28 at March 31, 1997. In 1996, the Company
began to utilize an agreement with a finance company whereby the finance
company, with the approval of the customer, will purchase receivables from the
Company. Under the first program the invoice is paid within 15 days at a
discount of 2.25%. Under the second program the invoice is paid within 30 days
at a discount of 1.75%. The agreement contains a clause whereby if the finance
company repossess' any inventory of the customer, the Company is obligated to
buy back the repossessed inventory. The Company accounts for this arrangement
as a sale of receivables. During 1997, the Company sold receivables of
approximately $2,400,000. The balance sheet at March 31, 1997 includes
approximately $150,000 due to the finance company. Management estimates that
there will be no amounts of inventory repurchased under this agreement. The
allowances for doubtful accounts increased $33,000 from $239,000 to $272,000 at
March 31, 1997. The increased reserve is for a customer who is no longer in
business and with whom a legal settlement has not been reached as of March 31,
1997.
The current ratio increased by 21.4% during fiscal year 1997. At March 31, 1997
the current ratio was 1.36:1 as compared to 1.12:1 at March 31, 1996. The
Company benefited from higher margins, increased sales, reductions in inventory
and accounts receivable, and was able to use the higher selling price per unit,
discussed in "Results of Operations" below, to payoff its line of credit
resulting in this higher ratio.
Inventories decreased $888,000 to $1,847,000 at March 31, 1997 from $2,735,000
at March 31, 1996. Purchased parts inventory decreased by $296,000 and steel
inventory decreased by $104,000 as a result of an improved purchasing approach
that allows for shorter lead time and smaller quantity purchased per
transaction. During 1995, the Company identified a safety issue with one of the
new private label vent free log sets. In an effort to be proactive, management
made the decision to recall, rework and resell the units in question. The units
that were not resold by March 31, 1997 were scrapped.
The Company has made equipment additions of $345,000 and $479,000 for 1997 and
1996 respectively. Purchases of fixed assets are anticipated to increase for
the fiscal year ended March 31, 1998 although no specific budget has been
established at this time. If required, financing for equipment purchases are
available from financial institutions.
The Company's Board of Directors has approved the repurchase of up to 500,000
shares of common stock from time to time. During 1997 220,752 shares were
repurchased for $208,000. An additional 87,050 shares were repurchased during
1996 for $50,000. The Board of Directors approved this action due to their
belief that the shares are under valued. 193,252 of the repurchased shares
valued at $144,939 were reissued as compensation to the Board of Directors and
executive officers. As required by California law, the remaining 114,500
repurchased shares were retired. Subsequent to year end and before June 15,
1997, 30,400 additional shares have been repurchased. The Company intends to
continue to repurchase stock from time to time in the future.
11
RESULTS OF OPERATIONS 1996 TO 1997
Sales for the fiscal year 1997 increased 10.8% from fiscal year 1996. The
increase in sales is attributed to a 5.5% increase in selling price. The
remaining increase is attributable to an increase in the number of units sold.
A number of factors affected the selling price, the Company decreased the number
of special discounts available to customers, raised the price of the product and
increased sales of non fireplace items such as pipe, accessories and log sets.
The increase in units sold is explained by a surge in the manufactured housing
industry. Based on present market conditions, the Company believes sales will
remain constant for fiscal year 1998 although there can be no assurances in that
regard.
Cost of sales for fiscal year 1997 were 79.1% of sales as compared with 83.2% of
sales in fiscal year 1996. This decrease is attributed to the 5.5% increase in
average selling price along with a 1.5% increase plant variable costs.
Management's goal is to continue to improve this percentage in fiscal year 1998
although there can be no assurances in this regard.
Selling, general and administrative expenses increased by 0.90% to 16.4% of
sales in fiscal 1997 compared to 15.5% in fiscal 1996. This slight increase is
attributed to higher bonus expense which reflects the higher 1997 net profit.
The Company analyzes all costs in these areas on an individual basis for
necessity and impact on the overall profitability of the Company.
Interest expense decreased in 1997 by 0.5% as a percent of sales over the fiscal
year 1996 expense. This decrease is due to interest calculated on lower
borrowings. The Company expects interest expense to continue to decrease for
1998 although there can be no assurances in this regard.
Management estimates no evaluation allowance on deferred tax assets is needed
due to expected future taxable income will be adequate to realize the deferred
tax assets.
The Company's 1997 net income as a percent of sales increased 3.0% from 1996.
Management believes that special cost cutting efforts and better market
penetration will allow the Company to remain profitable in 1998 although there
can be no assurances in this regard.
RESULTS OF OPERATIONS 1995 TO 1996
Sales for the fiscal year 1996 increased 7.6% from fiscal year 1995. The
increase in sales is primarily due to a higher volume of unit sales offset by a
2% decrease in the average unit selling price. The increase in units can be
attributed to new product introduction and better market penetration. The 2%
decrease in the average unit selling price is due to higher and more frequent
discounts offered to stimulate sales.
Cost of sales for fiscal year 1996 were 83.2% of sales as compared with 78.5% of
sales in fiscal year 1995. This increase is due to several factors including the
decrease in average selling price per fireplace by 2%, sales of low margin
reworked product, and higher materials costs which were not passed on to
customers.
12
Selling, general and administrative expenses were 15.5% of sales in fiscal 1996
compared to 17.9% in fiscal 1995. The Company's selling expense has decreased
mainly due to increased cost cutting measures coupled with lower bonus expense
as a percent of sales. The Company analyzes all costs in these areas on an
individual basis for necessity and impact on the overall profitability of the
Company.
Interest expense increased slightly in 1996 by .1% as a percent of sales over
the fiscal year 1995 expense. This increase was due to increased average daily
borrowings.
The Company's 1996 net income as a percent of sales decreased 1.6% from 1995.
FORWARD LOOKING STATEMENTS
Statements regarding the Company's expectations as to demand for its products in
1998, the operating efficiencies from operation of the Fireplace business, and
revenue generation from existing or future contracts and certain other
information presented in this report constitute forward looking statements
within the meaning of the Federal Private Securities Litigation Reform Act of
1995. Although the Company believes that its expectations with respect are
based on reasonable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results will not
differ materially from its expectations. In addition to matters affecting the
economy and the Company's industry generally, factors which could cause actual
results to differ from expectations include the following:
- - Loss of one or more significant customers
- - Reduction in gross profit margins due to competitive pricing pressures
- - Changes in governmental regulation or failure to comply with existing
regulation
- - Changes in the cost or availability of purchased parts
- - Inability to obtain needed additional capital on terms acceptable to the
Company
- - Inability to reduce costs while maintaining customer service
- - Potential default under line of credit or other material contracts
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISKS
Not applicable.
ITEM 8 FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The Company's financial statements are attached herein.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
13
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of Fireplace Manufacturers, Inc. are as
follows:
NAME POSITION AGE
WILLARD V. HARRIS, JR. Chairman of the Board of Directors 63
WILLARD P. HARRIS President, Chief Executive Officer, and Director 41
JOHN D. HORNSBY Chief Operating Officer, Secretary, and Director 43
JAMES L. BEHRENS Vice President of Sales and Marketing 43
JANE ANN IOVINE Vice President of Finance 35
GERARDO C. LOZANO Vice President of Manufacturing 36
WILLARD V. HARRIS, JR., has been Chairman of the Board of Directors since March
1978. He was also President and Chief Executive Officer of the Company between
March 1978 and February 1983. Mr. Harris is a trustee of the University of
LaVerne and Whittier College.
WILLARD P. HARRIS has been President, Chief Executive Officer, and Director of
the Company since February 1983. From June 1980 to February 1983, he held
positions from Regional Sales Manager to General Sales Manager of the Company.
Willard P. Harris is the son of Willard V. Harris, Jr.
JOHN D. HORNSBY was named Chief Operating Officer in April 1987, and has been
Secretary-Director of the Company since February 1983. He joined the Company in
May 1978 as a manager trainee and became Operations Manager in 1979.
JAMES L. BEHRENS was named Vice President of Sales and Marketing in February
1996. Mr. Behrens worked as a consultant for a fireplace distributor for four
years prior to joining FMI. He has over 15 years of experience in the fireplace
industries.
JANE ANN IOVINE was named Vice President of Finance in July of 1995, and she has
been with the Company since March of 1994. Ms. Iovine was a senior accountant
for a $500 million international computer peripherals manufacturer for two years
prior to working for FMI. She is a graduate of San Diego State University and
has been a CPA since May of 1990.
GERARDO C. LOZANO was named Vice President of Manufacturing in 1993, he started
at FMI as a trainee in 1983 and has served in various positions since that time.
The above directors and officers have had no prior convictions or bankruptcies.
14
The terms of office for the Board of Directors are extended annually unless the
Board of Directors elects, at the director's meeting following the annual
stockholders' meeting, not to extend the relationship. Officers serve at the
pleasure of the Board of Directors.
ITEM 10A BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
There have been no failures to timely file forms 3, 4 or 5.
ITEM 11 EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the compensation of the
Chief Executive Officer and the three other executive officers of the Company
whose total salary and bonus for the year ended March 31, 1997 exceeded $100,000
for services in all capacities to the Company and its subsidiaries during such
fiscal year.
SUMMARY COMPENSATION TABLE
Annual Compensation
---------------------------------------------
Name and Principal Other Annual
Position Year Salary(1) Bonus(2) Compensation ($)
- -------------------- ---- --------- -------- ----------------
Willard V. Harris, Jr. (4)(5) 1997 $220,720 $ 45,500(6) $38,294(3)
Chairman of the Board 1996 $112,000 $ 55,000 $0
1995 $108,000 $ 25,000 $0
Willard P. Harris (4)(5) 1997 $212,380 $ 63,000(6) $75,435(3)
President, Chief Executive 1996 $195,000 $ 69,000 $37,000(3)
Officer, Director 1995 $176,000 $108,000 $37,000(3)
John D. Hornsby (4)(5) 1997 $196,680 $ 63,000(6) $35,549(3)
Chief Operating Officer 1996 $152,000 $ 64,000 $19,000(3)
1995 $113,000 $ 93,000 $0
James L. Behrens (5) 1997 $ 75,000 $ 31,032(6) $0
Vice President of Sales & 1996 $ 7,212 $0 $0
Marketing
(1) FMI's audit committee uses the Employers Group Executive Salary Survey as a
tool in approving salary and bonuses. The Employers Group Executive Salary
Survey is a comprehensive study of executive compensation in California,
published annually for the last 40 years. Participants in this survey include a
wide variety of types and sizes of business organizations.
(2) Bonus earnings are reported on a cash basis for individuals, consequently
bonus' paid for the prior fiscal year are shown here as compensation in the
subsequent fiscal year. On the financial statements, bonuses are accrued
during the period earned.
15
(3) This additional compensation was used to decrease notes receivable from
officers due to the Company.
(4) The Company entered into a severance agreement with the three Board of
Directors which expires on the earliest of the following dates: five years
expiring in May 2001; termination of the executive's employment based on death,
disability, retirement, or cause or by the executive other than for good reason;
one year from the date of a change in control if the Director has not terminated
his employment for good reason. The terms of the agreement require severance
compensation equal to 299% of the Director's average annualized compensation
includable in his gross income for the five taxable years immediately preceding
the date of the change in control.
(5) Additional annual compensation did not exceed the lesser of either $50,000
or 10% of the total salary as disclosed in the summary compensation table.
(6) Includes the following stock bonuses; W. V. Harris 50,000 shares ($38,000);
W. P. Harris 50,000 shares ($38,000); J. D. Hornsby 50,000 shares ($38,000); and
J. L. Behrens 38,252 shares ($29,072).
None of the Board of Directors or executive officers have an employment contract
with the Company.
16
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1997, the information with
respect to Common Stock ownership of each person known by the Company to
beneficially own more than five percent of the outstanding Common Stock, by each
director who beneficially owns any Common Stock and by any Executive Officer
named in response to Item 11, and by all directors and officers as a group.
Amount
Name and Address Beneficially Percent
of Beneficial Owner Owned of Class
- ------------------- ---------------------- --------
Desea International Inc. 249,300 7.2%
2701 Industrial Drive
Bowling Green, KY 47102
Benjamin C. Harris 250,000 7.2%
2701 S. Harbor Blvd.
Santa Ana, CA 92407
Willard V. Harris Jr. 403,530 11.7%
2701 S. Harbor Blvd.
Santa Ana, CA 92407
Willard P. Harris 401,725 11.6%
2701 S. Harbor Blvd.
Santa Ana, CA 92407
John D. Hornsby 462,748 13.4%
2701 S. Harbor Blvd.
Santa Ana, CA 92407
James L. Behrens 38,252 1.1%
2701 S. Harbor Blvd.
Santa Ana, CA 92407
All Directors & Officers 1,311,255 38.0%
as a group (6 persons)
17
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended March 31, 1994, the Company ceased selling to Rampart
General Inc. a company partially owned by the Chairman of the Board of Directors
and a stockholder of the Company, Willard V. Harris, Jr. The unpaid balance due
the Company at March 31, 1995 of $645,000 was determined to be uncollectable and
was written off in 1993. In 1993, in partial settlement of this account,
Willard V. Harris, Jr. transferred a 26.25% limited partnership interest in
California Real Estate Partners with a capital account of approximately $500,000
to FMI as partial payment of its indebtedness. The current capital account is
approximately $75,000. Because of the limited value of this interest in the
partnership no value was recorded in the financial statements. During 1997, a
four year repayment schedule has been established for the remaining balance of
$162,585 which includes a 10% interest rate beginning on September 1, 1996. As
of March 31, 1997, $25,000 has been paid. The Company expects to receive an
additional $50,000 in fiscal year 1998. Any amounts received will be recorded
as a reduction of bad debt expense in the year the cash is collected.
During 1997, a $17,000 advance was issued to J. D. Hornsby, an officer of the
Company. This advance as well as other outstanding advances were repaid from
discretionary bonuses to officers. At March 31, 1997 and 1996, advances to
officers/stockholders totaled $-0- and $132,000, respectively. These amounts
originated by cash advances which were to be repaid in 1992 and 1994. On March
31, 1992, terms related to the repayment of these advances were modified. Under
the terms of the revised agreements, principal payments on the advances were due
in semiannual installments over the next five years, with the notes bearing
interest at rates ranging from 8% to 10%. In the event that the required cash
payments were not made, the principal and interest due was to be offset against
compensation otherwise due these individuals. The compensation used to repay
these notes was determined annually based on merit, Company profits, and
reasonable business practices. In 1996, the Company determined the most likely
method of collection was through future compensation or bonuses and accordingly,
reclassified the receivables as a reduction of stockholder's equity.
Compensation expense of approximately $132,000, $56,000 and $37,000 was charged
to operating results of the reduction of these notes during 1997, 1996 and 1995,
respectively.
The Company has two monthly operating lease of equipment with H&H Equities
Incorporated. H&H Equities Incorporated is wholly owned by Willard P. Harris
and John D. Hornsby, officers of the Company and members of the Company's Board
of Directors. The monthly lease payments are $7,119 and totaled $63,324 in
fiscal year 1997.
18
PART IV
ITEM 14 EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
FINANCIAL STATEMENTS
Independent Auditors' Report F-1
Consolidated Balance Sheets at March 31, 1997 and 1996 F-2
Consolidated Statements of Income for the
years ended March 31, 1997, 1996, and 1995 F-3
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1997, 1996, and 1995 F-4
Consolidated Statements of Cash Flows for
the years ended March 31, 1997, 1996, and 1995 F-5
Notes to Consolidated Financial Statements F-6 to F-18
REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed during the quarter ended March 31,
1997.
EXHIBITS
3.1 Articles of Incorporation, as amended
3.2 By-laws as amended
10.3 Severance Compensation Agreements
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on June 26, 1997.
FIREPLACE MANUFACTURERS, INC.
WILLARD P. HARRIS
-----------------------------
By: Willard P. Harris
President and
Chief Executive Officer
JANE ANN IOVINE
-----------------------------
By: Jane Ann Iovine
Vice President of Finance
Chief Financial and Accounting
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
signed below by the following persons on behalf of the Registrants and in the
capacities and on the dates indicated.
WILLARD V. HARRIS
- ---------------------------------------------
Willard V. Harris
Chairman of the Board Date: June 26, 1997
WILLARD P. HARRIS
- ----------------------------------------------
Willard P. Harris, Director Date: June 26, 1997
JOHN D. HORNSBY
- ----------------------------------------------
John D. Hornsby, Director Date: June 26, 1997
JANE ANN IOVINE
- ----------------------------------------------
Jane A. Iovine, Chief Financial and Accounting
Officer Date: June 26, 1997
20
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Fireplace Manufacturers, Inc.
Santa Ana, California
We have audited the accompanying consolidated balance sheets of Fireplace
Manufacturers, Inc. and Subsidiary as of March 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended March 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fireplace
Manufacturers, Inc. and Subsidiary as of March 31, 1997 and 1996 and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1997, in conformity with generally accepted accounting
principles.
MMcGladrey & Pullen, LLP
Anaheim, California
May 8, 1997
F-1
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 333,000 $ 136,000
Trade accounts receivable, less allowance for doubtful
accounts of $272,000 in 1997 and $239,000 in 1996 2,307,000 3,273,000
Inventories 1,847,000 2,735,000
Prepaid expenses and other current assets 118,000 101,000
Deferred income taxes 421,000 363,000
--------------------------
TOTAL CURRENT ASSETS 5,026,000 6,608,000
Equipment and Leasehold Improvements 1,761,000 2,104,000
Other Assets 150,000 120,000
--------------------------
$ 6,937,000 $ 8,832,000
--------------------------
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------
Current Liabilities
Line of credit $ - $ 2,263,000
Accounts payable 2,042,000 2,647,000
Accrued liabilities 1,454,000 717,000
Current portion of long-term debt 212,000 235,000
--------------------------
TOTAL CURRENT LIABILITIES 3,708,000 5,862,000
--------------------------
Long-Term Debt, less current portion 235,000 904,000
--------------------------
Deferred Income Taxes 281,000 418,000
--------------------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $1 par value; authorized shares 1,000,000;
issued and outstanding shares - none - -
Common stock, $.01 par value; authorized shares 10,000,000;
issued and outstanding shares
1997 3,447,950 and 1996 3,475,450 35,000 35,000
Additional paid-in capital 248,000 309,000
Retained earnings 2,430,000 1,436,000
--------------------------
2,713,000 1,780,000
Notes receivable from officers/stockholders - (132,000)
--------------------------
2,713,000 1,648,000
--------------------------
$ 6,937,000 $ 8,832,000
--------------------------
--------------------------
See Notes to Consolidated Financial Statements.
F-2
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
1997 1996 1995
- --------------------------------------------------------------------------------------------------
Net Sales $ 31,844,000 $ 28,729,000 $ 26,705,000
Cost of Sales 25,186,000 23,903,000 20,950,000
-------------------------------------------------
GROSS MARGIN 6,658,000 4,826,000 5,755,000
Selling, General and Administrative Expenses 5,223,000 4,450,000 4,791,000
-------------------------------------------------
OPERATING INCOME 1,435,000 376,000 964,000
Interest Expense (269,000) (375,000) (327,000)
Other Income 29,000 44,000 14,000
-------------------------------------------------
INCOME BEFORE INCOME TAXES 1,195,000 45,000 651,000
Provision for Income Taxes 201,000 1,000 194,000
-------------------------------------------------
NET INCOME $ 994,000 $ 44,000 $ 457,000
-------------------------------------------------
-------------------------------------------------
Earnings per share $ 0.30 $ 0.01 $ 0.13
-------------------------------------------------
-------------------------------------------------
Weighted average number of common
equivalent shares outstanding 3,323,173 3,536,287 3,552,500
-------------------------------------------------
-------------------------------------------------
See Notes to Consolidated Financial Statements.
F-3
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
Common Stock Additional
----------------------- Paid-In Retained
Shares Amount Capital Earnings Total
- ----------------------------------------------------------------------------------------------------
Balance, March 31, 1994 3,552,500 $ 36,000 $ 353,000 $ 935,000 $ 1,324,000
Net income - - - 457,000 457,000
-------------------------------------------------------------------------
Balance, March 31, 1995 3,552,500 36,000 353,000 1,392,000 1,781,000
Issuance of stock for
services 10,000 - 5,000 - 5,000
Repurchase of common
stock for retirement (87,050) (1,000) (49,000) - (50,000)
Net income - - - 44,000 44,000
-------------------------------------------------------------------------
Balance, March 31, 1996 3,475,450 35,000 309,000 1,436,000 1,780,000
Issuance of stock for
services 193,252 2,000 145,000 - 147,000
Repurchase of common
stock for retirement (220,752) (2,000) (206,000) - (208,000)
Net income - - - 994,000 994,000
-------------------------------------------------------------------------
Balance, March 31, 1997 3,447,950 $ 35,000 $ 248,000 $ 2,430,000 $ 2,713,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
F-4
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
1997 1996 1995
- ----------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 994,000 $ 44,000 $ 457,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 618,000 558,000 516,000
Deferred income taxes (195,000) (11,000) 162,000
Compensation applied to notes receivable 149,000 56,000 37,000
Other 47,000 - -
Bad debt expense 142,000 272,000 140,000
Issuance of common stock for services 147,000 5,000 -
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable 824,000 (1,084,000) (259,000)
Inventories 888,000 767,000 (1,906,000)
Prepaid expenses and other assets (33,000) 41,000 1,000
Increase (decrease) in accounts payable
and accrued liabilities 132,000 (775,000) 1,675,000
----------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 3,713,000 (127,000) 823,000
----------------------------------------
Cash Flows From Investing Activities
Purchases of equipment and leasehold improvements (345,000) (479,000) (1,024,000)
Other 23,000 - -
Increase in other assets (14,000) (86,000) -
Payments (disbursements) on notes receivable from
officers/stockholders (17,000) 16,000 21,000
----------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (353,000) (549,000) (1,003,000)
----------------------------------------
Cash Flows From Financing Activities
Proceeds from long-term debt - 146,000 625,000
Payments on long-term debt (692,000) (121,000) (386,000)
Net proceeds from (payments on) revolving
line of credit (2,263,000) 720,000 (57,000)
Repurchase of common stock for retirement (208,000) (50,000) -
----------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (3,163,000) 695,000 182,000
----------------------------------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 197,000 19,000 2,000
Cash and Cash Equivalents
Beginning of year 136,000 117,000 115,000
----------------------------------------
End of year $ 333,000 $ 136,000 $ 117,000
----------------------------------------
----------------------------------------
See Notes to Consolidated Financial Statements.
F-5
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
Fireplace Manufacturers, Inc. (the Company) designs, manufactures and sells
factory-built, energy-efficient metal fireplace systems to customers throughout
North America on terms established by the Company. The fireplaces are used in
single-family homes, condominiums, apartments, other multiple-family dwellings,
and in mobile homes. They can be used as part of a wall, in a corner, or as a
room divider. Fireplaces are sold mainly to homebuilders who install the system
in new construction, and to the "Do-It-Yourself" (DIY) homecenters and retail
distributors. Pending legislation in several states and major cities for clean
air to meet Environmental Protection Agency requirements has resulted in the
Company developing clean-burning appliances, the emphasis being on gas-burning
appliances. While continuing to manufacture wood burning fireplaces, the
Company has added additional gas-burning appliances to the product line. Also
added to the product line are decorative gas log sets to retro-fit existing
fireplaces in communities that have restricted the burning of wood.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES IS AS FOLLOWS:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its inactive, wholly-owned subsidiary, Fireplace Industries of California, Inc.
There have been no material intercompany transactions.
CREDIT RISK AND SIGNIFICANT CUSTOMERS:
The Company sells its products to customers throughout North America, with a
large concentration of these sales in the Western United States. Management
performs regular evaluations concerning the ability of its customers to satisfy
their obligations and records a provision for doubtful accounts based upon these
evaluations. The Company's credit losses for the periods presented have not
exceeded management's estimates.
One major customer represented 23% of total sales for both 1997 and 1996 and 22%
for 1995. Accounts receivable from this customer totaled approximately $503,000
and $625,000 at March 31, 1997 and 1996, respectively. In addition, another
customer represented 12% and 11% of total sales for 1997 and 1996, respectively
(sales to this customer in 1995 were less than 10% of total sales). Accounts
receivable from this customer were approximately $279,000 and $430,000 at
March 31, 1997 and 1996, respectively. There were no other customers who
represented greater than 10% of sales.
F-6
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
The Company periodically throughout the year has amounts on deposit at a
financial institution that exceeds the Federal Deposit Insurance Corporation
Limit.
INVENTORIES:
Inventories are generally valued at the lower of cost (first-in, first-out
method) or market.
ADVERTISING:
The Company expenses the production costs of advertising the first time the
advertising takes place. Advertising expense was approximately $464,000,
$396,000 and $372,000 during 1997, 1996 and 1995, respectively.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are recorded at cost and are depreciated
using the straight-line method over useful lives ranging from 3 to 15 years for
machinery and equipment, transportation equipment and furniture and fixtures,
and 8 years or the term of the lease, whichever is shorter, for leasehold
improvements.
INCOME TAXES:
Deferred income taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
RESEARCH AND DEVELOPMENT:
The Company incurs research and development costs in developing new products.
During 1997, 1996 and 1995, the company expensed approximately $607,000,
$586,000 and $693,000, respectively, in research and development costs.
F-7
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE:
Earnings per share are computed using the weighted average number of common
shares and common share equivalents outstanding during the respective years.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents and the equipment term loans
payable approximate fair value because the interest rate fluctuates with the
lending bank's prime rate. The fair value of the other long-term debt is
estimated based on interest rates for the same or similar debt offered to the
Company having the same or similar remaining maturities and collateral
requirements and approximates the carrying amount.
The fair value estimates presented herein are based on pertinent information
available to management as of March 31, 1997 and 1996. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purpose
of these financial statements since that date.
RECLASSIFICATIONS:
The Company made certain reclassifications to the previously issued 1996
financial statements with no effect on income or equity.
NOTE 2. INVENTORIES
Inventories consist of the following:
1997 1996
- --------------------------------------------------------------------------------
Raw materials $ 1,254,000 $ 1,643,000
Work-in-process 265,000 316,000
Finished goods 328,000 776,000
------------------------------
$ 1,847,000 $ 2,735,000
------------------------------
------------------------------
F-8
NOTE 3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
1997 1996
- --------------------------------------------------------------------------------
Machinery and equipment $ 2,982,000 $ 3,528,000
Tools, dies and molds 1,322,000 2,761,000
Furniture, fixtures and vehicles 629,000 637,000
Leasehold improvements 64,000 92,000
Research and development equipment 279,000 282,000
---------------------------
5,276,000 7,300,000
Less accumulated depreciation and amortization 3,515,000 5,196,000
---------------------------
$ 1,761,000 $ 2,104,000
---------------------------
---------------------------
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities consist of the following.
1997 1996
- --------------------------------------------------------------------------------
Compensation $ 841,000 $ 318,000
Income taxes payable 136,000 -
Warranty 148,000 153,000
Other 329,000 246,000
---------------------------
$ 1,454,000 $ 717,000
---------------------------
---------------------------
NOTE 5. LINE OF CREDIT
The Company may borrow up to $4,000,000 against eligible accounts receivable and
inventory under terms of an accounts receivable and inventory line of credit
agreement with a bank. Borrowings under this line of credit bear interest at
the bank's prime rate (8.5% at March 31, 1997) plus .5%, with interest payable
monthly. Advances are limited to 80% of eligible accounts receivable; plus 50%
of eligible inventories (inventory advances are not to exceed $500,000). The
line of credit expires on August 1, 1997. Borrowings under this line of credit
agreement are collateralized by substantially all of the Company's assets. The
line of credit contains restrictive covenants that require maintenance of
working capital and other financial ratios, prohibit payment of dividends, and
have certain other limitations. At March 31, 1997, there were no amounts
outstanding under this agreement and $2,080,000 of availability.
F-9
NOTE. 5. LINE OF CREDIT (CONTINUED)
The Company also has available to them a $500,000 equipment line of credit which
converts to a forty-eight month term loan on August 1, 1997. The borrowings
under the line bear interest at the bank's prime rate plus 1%. The line is
subject to the same covenants as the line of credit. At March 31, 1997, there
were no amounts outstanding under this agreement.
NOTE 6. LONG-TERM DEBT
Long-term debt consists of the following:
1997 1996
- ------------------------------------------------------------------------------------------
Equipment term loans payable to bank, secured by
substantially all of the Company's assets, bearing
interest at the bank's prime rate plus .5% to 1% due
in monthly principal amounts of approximately
$16,000, plus interest, through February 1999.
The equipment term loans are part of the agreement
covering the line of credit and are subject to the same
covenants. $ 367,000 $ 555,000
Notes payable to a finance company, secured by
vehicles, bearing interest 8.75%, due in monthly
principal and interest payments of approximately
$2,500 through March 2000. 80,000 104,000
Unsecured note payable, paid off in March 1997. - 480,000
---------------------------
447,000 1,139,000
Less current maturities 212,000 235,000
---------------------------
$ 235,000 $ 904,000
---------------------------
---------------------------
Maturities of long-term debt are as follows: 1998 $212,000; 1999 $206,000 and
2000 $29,000.
F-10
NOTE 7. INCOME TAXES
The provision for income taxes consists of the following:
1997 1996 1995
- -------------------------------------------------------------------------------------------
Current $ 396,000 $ 12,000 $ 32,000
Deferred (195,000) (11,000) 162,000
----------------------------------------
$ 201,000 $ 1,000 $ 194,000
----------------------------------------
----------------------------------------
A reconciliation of income tax expense to the amount computed by applying
statutory income tax rates to earnings before income taxes:
1997 1996 1995
- -------------------------------------------------------------------------------------------
Federal income tax $ 418,000 $ 16,000 $ 228,000
State income tax, net of federal benefit 72,000 3,000 39,000
Federal and state income tax credits generated (114,000) (15,000) (178,000)
Change in valuation reserve (192,000) 15,000 97,000
Officers life insurance 11,000 (30,000) -
Prior year state taxes assessment - 13,000 -
Other 6,000 (1,000) 8,000
----------------------------------------
$ 201,000 $ 1,000 $ 194,000
----------------------------------------
----------------------------------------
F-11
NOTE 7. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities as
of March 31, 1997 and 1996 are as follows:
1997 1996
- -----------------------------------------------------------------------------
Deferred Tax Assets
Tax credit carryforward $ 155,000 $ 332,000
Bad debt reserve 109,000 96,000
Accrued expenses 33,000 22,000
Warranty reserve 59,000 61,000
Other reserves 65,000 32,000
Other - 12,000
Valuation allowance for deferred tax assets - (192,000)
---------------------------
TOTAL DEFERRED TAX ASSETS, NET 421,000 363,000
---------------------------
Deferred Tax Liabilities
Depreciation (281,000) (415,000)
Other - (3,000)
---------------------------
TOTAL DEFERRED TAX LIABILITIES (281,000) (418,000)
---------------------------
$ 140,000 $ (55,000)
---------------------------
---------------------------
Management estimates no valuation allowance is needed due to expected future
taxable income will be adequate to realize the deferred tax assets.
The components giving rise to the net deferred assets (liabilities) described
above, have been included in the accompanying consolidated balance sheet as of
March 31, 1997 and 1996 as follows:
1997 1996
- -----------------------------------------------------------------------------
Current assets $ 421,000 $ 363,000
Noncurrent (liabilities) (281,000) (418,000)
---------------------------
$ 140,000 $ (55,000)
---------------------------
---------------------------
Business enterprise zone credit carryforwards as of March 31, 1997 expire as
follows: 2011 $48,000; 2012 $107,000 (total $155,000).
F-12
NOTE 8. RELATED PARTY TRANSACTIONS
At March 31, 1997 and 1996, advances to officers/stockholders totaled $-0- and
$132,000, respectively. These amounts originated by cash advances which were to
be repaid in 1992 and 1994. On March 31, 1992, terms related to the repayment
of these advances were modified. Under the terms of the revised agreements,
principal payments on the advances were due in semiannual installments over the
next five years, with the notes bearing interest at rates ranging from 8% to
10%. In the event that the required cash payments were not made, the principal
and interest due was to be offset against compensation otherwise due these
individuals. The compensation used to repay these notes was determined annually
based on merit, Company profits, and reasonable business practices. In 1996,
the Company determined the most likely method of collection was through future
compensation or bonuses and accordingly, reclassified the receivables as a
reduction of stockholders' equity. Compensation expense of approximately
$147,000, $56,000 and $37,000 was charged to operating results for the reduction
of these notes during 1997, 1996 and 1995, respectively. (See Note 11)
NOTE 9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES:
The Company's operations are conducted at facilities under an operating lease
expiring April 30, 1999 and due in monthly payments of approximately $28,000.
The Company also leases equipment under three long-term agreements. Two of the
long-term agreements are with a company which is wholly-owned by two
officers/stockholders of the Company. These agreements require monthly payments
of approximately $7,000 and expire in July 2000 and November 2000 with a total
commitment of approximately $212,000.
The future rental commitment on all leases at March 31, 1997 are as follows:
1998 $433,000; 1999 $433,000; 2000 $80,000; 2001 $10,000; and 2002 $6,000 (total
$962,000).
Rent expense was $382,000, $294,000 and $288,000 during 1997, 1996 and 1995,
respectively. Rent expense paid to related parties during 1997 and 1996 was
$63,000 and $31,000, respectively. There was no rent expense paid to related
parties during 1995.
CONTINGENCY:
A claim has been asserted against the Company which resulted in legal
proceedings against the Company as of the date of these financial statements.
The claim is on an infringement of the Company's patent. The Company had an
independent patent attorney review the patent in question during 1995 and it was
the opinion of that attorney that the Company is not infringing on the patent.
The Company's independent counsel is unable to express an opinion as to the
probable outcome of the action and therefore no estimate can be made of a range
of amount of loss that is reasonably possible. No amounts have been accrued in
regards to this matter and it is reasonably possible that a change in the
estimate will occur in the near term.
F-13
NOTE 9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ROYALTY AGREEMENT:
The Company entered into a nonexclusive license agreement which expired in March
1996. Total royalty expenses under the agreement was approximately $-0-,
$113,000 and $207,000 during 1997, 1996 and 1995, respectively.
SEVERANCE COMPENSATION AGREEMENT:
The Company has entered into a severance compensation agreement with three of
the Company's officers which expires on the earliest of the following dates:
five years expiring in May 2001; termination of the executive's employment based
on death, disability, retirement, or cause or by the executive other than for
good reason; one year from the date of a change in control if the executive has
not terminated his employment for good reason. The terms of the agreement
require severance compensation equal to 299% of the executive's average
annualized compensation includable in his gross income for the five taxable
years immediately preceding the date of the change in control.
SALE OF TRADE RECEIVABLES:
The Company began to utilize an agreement with a finance company whereby the
finance company, with the approval of the customer, will purchase receivables
from the Company. The finance company then pays the Company for the invoiced
purchase under two programs. Under the first program the invoice is paid within
15 days at a discount of 2.25%. Under the second program the invoice is paid
within 30 days at a discount of 1.75%. The agreement contains a clause whereby
if the finance company repossess' any inventory of the customer, the Company is
obligated to buy back the repossessed inventory. The Company accounts for this
arrangement as a sale of receivables. During 1997, the Company sold receivables
of approximately $2,400,000. The balance sheet at March 31, 1997 includes
approximately $150,000 due from the finance company. Management estimates that
there will be no amounts of inventory repurchased under this agreement.
NOTE 10. RETIREMENT SAVINGS PLAN
The Company has a defined contribution 401(k) savings plan (Plan). The Plan
covers all employees meeting minimum age and service requirements. The Company
provides a matching contribution of 25% of the first 3% saved by the employee.
Total contributions to the Plan were $13,000, $11,000 and $10,000 during 1997,
1996 and 1995, respectively.
F-14
NOTE 11. DISCRETIONARY BONUSES
The Company pays discretionary bonuses to their officers and key employees. The
amounts of these bonuses charged to expenses were as follows:
Reduction of
Notes Common
Cash Receivable Stock Total
- -------------------------------------------------------------------------------
1997
Officers $ 260,000 $ 149,000 $ 147,000 $ 556,000
Other employees 281,000 - - 281,000
1996
Officers $ 64,000 $ 56,000 $ - $ 120,000
Other employees 10,000 - - 10,000
1995
Officers $ 402,000 $ 37,000 $ - $ 439,000
Other employees 112,000 - - 112,000
NOTE 12. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
1997 1996 1995
- -----------------------------------------------------------------------
Cash payments for:
Interest $ 290,000 $ 370,000 $ 321,000
----------------------------------------
----------------------------------------
Income taxes $ 189,000 $ 85,000 $ 64,000
----------------------------------------
----------------------------------------
F-15
NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement No. 125,
"ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT
OF LIABILITIES," and Statement No. 127, "DEFERRAL OF THE EFFECTIVE DATE OF
CERTAIN PROVISIONS" of FASB Statement No. 125 (an amendment of FASB Statement
No. 125) which becomes effective for transactions occurring after December 31,
1996 and certain transactions after December 31, 1997. These Statements do not
permit earlier or retroactive application. The Company does not believe the
adoption of these two Statements will have a material effect on the financial
statements.
The FASB has issued Statement No. 128, "EARNINGS PER SHARE," which supersedes
APB Opinion No. 15. Statement No. 128 requires the presentation of earnings per
share by all entities that have common stock or potential common stock, such as
options, warrants and convertible securities, outstanding that trade in a public
market. Those entities that have only common stock outstanding are required to
present basic earnings per-share amounts. All other entities are required to
present basic and diluted per-share amounts. Diluted per-share amounts assume
the conversion, exercise or issuance of all potential common stock instruments
unless the effect is to reduce a loss or increase the income per common share
from continuing operations. All entities required to present per-share amounts
must initially apply Statement No. 128 for annual and interim periods ending
after December 15, 1997. Earlier application is not permitted. The Company
believes that the implementation of this new pronouncement will not have a
material impact on the amounts calculated under the current earnings per share
methodology.
NOTE 14. SUBSEQUENT EVENT
The Company has, and may continue to, repurchase its common stock. Between
March 31, 1997 and May 8, 1997 the Company has repurchased 20,400 shares of
common stock for $25,000.
F-16
INDEPENDENT AUDITOR'S REPORT
ON THE SCHEDULE
To the Board of Directors
Fireplace Manufacturers, Inc.
Santa Ana, California
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule II is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
McGladrey & Pullen, LLP
Anaheim, California
May 8, 1997
F-17
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
Balance Provisions
Beginning Charged to Balance
Years Ended March 31, of Year Expense Charge-Offs End of Year
- -----------------------------------------------------------------------------
Allowance for doubtful
accounts:
1997 $ 239,000 $ 142,000 $ (109,000) $ 272,000
----------------------------------------------------
----------------------------------------------------
1996 $ 175,000 $ 257,000 $ (193,000) $ 239,000
----------------------------------------------------
----------------------------------------------------
1995 $ 190,000 $ 155,000 $ (170,000) $ 175,000
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F-18