FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
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
--------------------------
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 / /
The number of shares outstanding of each of the Registrant's classes of
Common Stock as of July 22, 1998, was as follows:
Common Stock, $0.01 Par Value per share - 3,326,775
Documents incorporated by reference. None
PART I
FINANCIAL INFORMATION
The following comparative financial statements for the three month period
ended June 30, 1998, have not been audited by independent public accountants;
but, in the opinion of management, all adjustments necessary to present
fairly the results of operations for the periods have been included.
The statements have been prepared by the company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures, normally included in the financial statements
prepared in accordance with generally accepted accounting principles, have
been condensed or omitted pursuant to such rules and regulations.
Operating results for the three month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year
ending March 31, 1999. It is suggested that the condensed financial
statements be read in conjunction with the financial statements and
accompanying notes included in the Company's 1998 Annual Report on Form 10-K.
2
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30
1998 MARCH 31
(UNAUDITED) 1998
------------ ----------
ASSETS
Current Assets:
Cash and Cash Equivalents $1,303,000 $1,232,000
Trade accounts and notes receivable, less
allowance for doubtful accounts of $249,000
at June 30, 1998, and $261,000 at
March 31, 1998 1,985,000 1,802,000
Inventories (Note 2) 1,550,000 1,571,000
Prepaid expenses and other assets 74,000 74,000
Deferred Income Taxes 411,000 411,000
---------- ----------
TOTAL CURRENT ASSETS 5,323,000 5,090,000
Property and Equipment at cost, Net (Note 3) 1,241,000 1,339,000
Other Assets 50,000 218,000
---------- ----------
$6,614,000 $6,647,000
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable 1,351,000 1,163,000
Accrued Liabilities 1,166,000 1,719,000
---------- ----------
TOTAL CURRENT LIABILITIES 2,517,000 2,882,000
---------- ----------
Long-Term Debt 0 0
Deferred Income Taxes 181,000 181,000
---------- ----------
TOTAL LONG TERM LIABILITES 181,000 181,000
---------- ----------
Preferred Stock: $1.00 par value, authorized
1,000,000 shares; none issued or outstanding
Common Stock: $.01 par value, authorized
10,000,000 shares; issued and outstanding
3,326,775 shares at June 30, 1998 and
3,326,775 at March 31, 1998 33,000 33,000
Retained Earnings 3,883,000 3,551,000
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 3,916,000 3,584,000
---------- ----------
$6,614,000 $6,647,000
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statements.
3
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
JUNE 30 JUNE 30
1998 1997
(UNAUDITED) (UNAUDITED)
----------- -----------
Net Sales $6,797,000 $7,768,000
Cost of Sales 5,060,000 5,707,000
---------- ----------
Gross Margin 1,737,000 2,061,000
Selling, General, and Administrative Expenses 1,199,000 1,597,000
---------- ----------
Operating Income 538,000 464,000
Interest Income or (Expense) 12,000 (7,000)
---------- ----------
Earnings before income taxes 550,000 457,000
Provision for Income Taxes 220,000 183,000
---------- ----------
NET EARNINGS 330,000 274,000
---------- ----------
---------- ----------
Basic and Diluted Earnings per Common Share (Note 6) $0.10 $0.08
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statements.
4
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
JUNE 30 JUNE 30
1998 1997
(UNAUDITED) (UNAUDITED)
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net earnings $330,000 $274,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization before retirements 149,000 147,000
Loss (gain) on sale of property and equipment
Changes in operating assets and liabilities:
Trade accounts and notes receivable (183,000) 370,000
Inventories 21,000 (104,000)
Prepaid expenses and other assets 168,000 (26,000)
Accounts payable and accrued liabilities (364,000) (120,000)
---------- --------
Net cash provided by operating activities 121,000 541,000
---------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of property and equipment (51,000) (85,000)
Proceeds from sale of property and equipment 1,000
---------- --------
Net cash used in investing activities (50,000) (85,000)
---------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Payments on long-term debt (53,000)
Repurchase of common stock (37,000)
---------- --------
Net cash used in financing activities 0 (90,000)
---------- --------
Net increase in cash and cash equivalents 71,000 366,000
Cash and cash equivalents at beginning of period 1,232,000 333,000
---------- --------
Cash and cash equivalents at end of period $1,303,000 $699,000
---------- --------
---------- --------
The accompanying notes are an integral part of these financial statements.
5
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its presently inactive, wholly-owned subsidiary (Fireplace Industries of
California, Inc.). All material inter-company transactions have been
eliminated. All adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the results of operations have been
included.
2. INVENTORIES
Inventories are comprised of:
(UNAUDITED)
JUNE 30 MARCH 31
1998 1998
---------- ----------
Raw Materials $1,090,000 $1,032,000
Work in Progress 239,000 239,000
Finished Goods 221,000 300,000
---------- ----------
TOTAL $1,550,000 1,571,000
---------- ----------
---------- ----------
3. PROPERTY AND EQUIPMENT
The Company's investment in property and equipment, at cost, less related
accumulated depreciation and amortization is summarized below:
(UNAUDITED)
JUNE 30 MARCH 31
1998 1998
---------- ----------
Machinery and Equipment $2,926,000 $2,889,000
Tools, Dies and Molds 1,395,000 1,389,000
Furniture, Fixtures, and Vehicles 352,000 352,000
Buildings and Leasehold Improvements 60,000 60,000
Research and Development Equipment 262,000 256,000
---------- ----------
$4,995,000 $4,946,000
Accumulated Depreciation and Amortization 3,754,000 3,607,000
---------- ----------
$1,241,000 $1,339,000
---------- ----------
---------- ----------
4. RELATED PARTY TRANSACTIONS
The Company has two monthly operating leases 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
$21,357 for the three months ended June 30, 1998.
6
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. STOCK OPTIONS
During 1997, FMI granted options for 835,000 shares at an option price of
$2.88. The options vest evenly over five years from the grant date. No
options have been exercised or expired during 1998. As part of the proposed
merger with DESA International, FMI has obtained agreement from each holder
of such options to cancel his or her options immediately prior to the merger
for the aggregate consideration of $28,823.
As permitted under generally accepted accounting principles, grants under
these plans are accounted for following APB Opinion No. 25 and related
interpretations. Accordingly, no compensation cost has been recognized for
grants under the stock option plan.
6. EARNINGS PER SHARE DISCLOSURES
Effective December 31, 1997, the Company Adopted Financial Accounting
Standards Board (FASB) Statement No. 128, "Earnings Per Share", which
supersedes Accounting Principles Board (APB) Opinion No. 15. Statement No.
128 requires the presentation of basic and diluted earnings per share.
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. The Company
initially applied Statement No. 128 for its interim period ending December
31, 1997. Since December 31, 1997, is the first period the Company must
apply these provisions, the reported earnings per share for June 1997 have
been restated to conform to the new requirements.
The weighted average number of common shares and common share equivalents
outstanding during the period used to compute basic and diluted earnings per
share is as follows:
Weighted
Average Earnings Per
THREE MONTHS ENDED 6/30/98: Income Shares Share
------ --------- -------------
Basic EPS 330,000 3,326,775 0.10
Effect of Dilutive Securities
Options 0 86,437
------- --------- ----
Diluted EPS 330,000 3,413,212 0.10
THREE MONTHS ENDED 6/30/97:
Basic EPS 274,000 3,429,884 0.08
Effect of Dilutive Securities 0 0
------- --------- ----
Diluted EPS 274,000 3,429,884 0.08
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(1) LIQUIDITY AND CAPITAL RESOURCES
Accounts receivable (before allowance for doubtful accounts) at June 30, 1998
were $2,234,000 compared to $2,063,000 at March 31, 1998. This 8.3% increase
is due to timing of cash receipts. The Company's standard terms are 1% 10
Net 30 and the June 30, 1998 days sales outstanding is 28 an increase of 3
days from the March 31, 1998 days sales outstanding of 25. Management is not
aware of any significant potential uncollectable accounts. The Company
continues to utilize a financing agreement, with the approval of the
customer, where the Company is paid within 15 days at a discount of 2.25% or
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 repurchase the repossessed inventory. The Company
does not anticipate any material repurchase of inventory. The Company
accounts for this arrangement as a sale of receivables. The balance sheet at
June 30, 1998 and March 31, 1998 includes approximately $223,000 and $150,000
due from the finance company respectively. At June 30, 1998 and March 31,
1998 the amount of receivables sold to but not collected by the finance
company was approximately $430,000 and $722,000 respectively. The impact of
the sales of receivables on the days sales outstanding was to reduce the days
sales outstanding by 3 and 10 days at June 30 and March 31, 1998 respectively.
7
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Accrued liabilities decreased due to payment of fiscal year 1998 bonus'. The
bonus' were paid in May of 1998.
The current ratio has increased 19% as of June 30, 1998 to 2.11:1 from 1.76:1
at March 31, 1998. Cash balances and accounts receivable balances increased
at June 30 and accruals decreased due to payment of annual profit sharing.
The Company has made capital additions of $51,000 during the three months
ended June 30, 1998. The Company anticipates total purchases of
approximately $450,000 during the fiscal year ending March 31, 1999.
(2) RESULTS OF OPERATIONS
Sales for the three months ended June 30, 1998 Decreased by 12.5% from the
same three month period in 1997. This decrease is attributed to the
Company's decision to decrease sales of lower margin wood burning fireplaces
and accessories coupled with poor weather conditions and customer concerns
related to the proposed merger with DESA International.
Cost of sales as a percent of sales increased 1% for the three months ended
June 30, 1998 from the same period in 1997 due to the relationship of the
fixed costs included in cost of sales to the lower sales.
Selling, general, and administrative expenses were 17.6% of sales for the
three months ended June 30, 1998 compared to 20.6% for the same period in
1997. The decrease is attributed to lower bonus accruals plus lower
commissions and promotions on lower sales.
Interest income and expense changed from a $7,000 expense for the three month
ended June 30, 1997 to $12,000 of income for the three months ended June 30,
1998. The increase is due to the elimination of borrowed money coupled with
increased cash which is earning interest.
Net earnings as a percent of sales increased by 1.4% for the three months
ended June 30, 1998 compared to the same period in 1997. The increase is
attributed to lower bonus accruals and commissions expense.
(3) YEAR 2000 DISCLOSURE
The Company's computer systems are not compliant with year 2000 requirements.
At this time management is considering several options to gain compliance
with prices ranging from $50,000 to $250,000. Price differences would allow
for other system upgrades to be implemented simultaneously with the year 2000
solution.
(4) FORWARD LOOKING STATEMENTS
Certain information presented in this report constitutes forward looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Although the Company believes that its expectations 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 reduce costs while maintaining customer service
(5) NEW ACCOUNTING PRONOUNCEMENTS
No related pronouncements were issued this quarter.
8
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS
A claim was asserted against the Company alleging infringement of a company's
patent. The original claim was for $50 per unit sold that infringed upon the
patent (management estimated the potential claim at approximately
$1,000,000). The district court granted the Company's motion for summary
judgment and held that the Company's products do not infringe the patent at
issue, either literally or by operation of the doctrine of equivalents. The
summary judgment has been appealed. 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, if any, 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.
ITEM 5. OTHER INFORMATION
The company entered into an Agreement and Plan of Reorganization with DESA
International on May 13, 1998 in which the Company will be merged with and
into DESA International. As part of such merger the Company's common stock
will be exchanged for $7.14 per share, not to exceed $23,750,000. Upon
consummation of the merger, all outstanding stock options, subject to
possible adjustment, will be canceled and all existing employment agreements
and severance compensation agreements will be terminated. Upon closing,
three members of the executive management team will enter into three year
non-compete agreements with the buyer. Consummation of the merger is
dependent upon the approval of the shareholders at a special meeting
scheduled to be held on August 18, 1998. No assurances can be given that the
merger will be consummated.
ITEM 6
(a) Exhibits
(27) Financial Data Schedule: Incorporated by reference from the Electronic
filing of this report.
(b) Reports on Form 8-K
No Form 8-K was filed during this quarter.
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 thereunto duly authorized.
Date: August 11, 1998 FIREPLACE MANUFACTURERS, INC.
BY: /s/ WILLARD P. HARRIS
----------------------------------
Willard P. Harris
Chief Executive Officer
/s/ JANE ANN IOVINE
----------------------------------
Jane Ann Iovine
Chief Financial Officer
9