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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED: DECEMBER 31, 2004 COMMISSION FILE NO: 0-2172
THE FLAMEMASTER CORPORATION
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(Exact name of Registrant as specified in its Charter)
NEVADA 95-2018730
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(State or other jurisdiction of (IRS Employer identification
incorporation or organization) Number)
11120 SHERMAN WAY, SUN VALLEY, CALIFORNIA 91352
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(Address of Principal Executive Office)
Registrant's telephone number including area code: (818) 982-1650
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Registrant's facsimile number including area code: (818) 765-5603
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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 [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
December 31, 2004 1,254,106
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Item 1 Financial Information
Item 1 Financial Statement
THE FLAMEMASTER CORPORATION
CONDENSED BALANCE SHEET
DECEMBER 31,
2004
(UNAUDITED)
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ASSETS:
CURRENT ASSETS:
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Cash and cash equivalents $ 2,027,270
Marketable securities 78,416
Accounts receivable, less allowance of $5,000 642,951
Inventories 1,036,932
Prepaid expenses 61,450
Deferred income taxes 38,004
Other Investments 328,713
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TOTAL CURRENT ASSETS: 4,213,736
Machinery & improvements, net of
accumulated depreciation 137,301
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TOTAL ASSETS $ 4,351,037
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LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
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Accounts payable $ 80,380
Accrued liabilities 42,445
Income taxes payable 25,921
Deferred tax liability 49,595
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TOTAL CURRENT LIABILITIES: 198,341
SHAREHOLDERS' EQUITY:
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COMMON STOCK, par value, $.001 per share,
authorized 60,000,000 shares; issued and outstanding
1,254,106 shares at 12/31/04 1,254
Additional paid-in Capital 3,762,788
Retained earning 383,319
Allowance for marketable securities 5,335
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TOTAL STOCKHOLDERS' EQUITY $ 4,152,696
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TOTAL LIABILITY AND EQUITY $ 4,351,037
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See notes to condensed financial statements.
Item 1 Financial Statements (continued)
THE FLAMEMASTER CORPORATION
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
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2004 2003
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Net Sales $ 1,122,441 $ 1,056,624
Royalties 0 675
Interest and Other Income 9,975 17,260
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Total Revenues 1,132,416 1,074,559
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Costs and expenses:
Cost of Sales 643,558 559,545
Selling 90,961 79,114
General and administrative 219,449 188,981
Laboratory 103,174 103,251
Other (income)/ Expenses, Net 11,257 10,483
Interest on Convertible Notes 0 7,314
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Total Costs and Expenses 1,068,399 948,688
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Income before income taxes 64,017 125,871
Income taxes 24,712 53,179
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Net income 39,305 72,692
Other comprehensive income
Net of income taxes
Unrealized holding gains (losses) 5,335 (4,030)
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Comprehensive Income $ 44,640 $ 68,662
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Net income per share, basic $ .04 $ .06
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Weighted average shares outstanding:
Basic 1,116,590 1,222,138
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Diluted 1,116,590 1,222,138
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See notes to condensed financial statements
Item 1 Financial Statements (continued)
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
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2004
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Net cash provided (used) by operating activities: $ (21,204)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment & improvements (4,430)
Net purchases and sales of investment securities (5,862)
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NET CASH USED IN INVESTING ACTIVITIES: (10,292)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (48,026)
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NET CASH USED IN FINANCING ACTIVITIES (48,026)
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NET INCREASE, (DECREASE), IN CASH (79,522)
Cash, beginning of period 2,106,792
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Cash, end of period $ 2,027,270
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Cash paid during period for income taxes $ 9,000
Cash paid during period for interest expense $ 0
See notes to Condensed Financial Statements.
Item 1 Financial Statements (continued)
THE FLAMEMASTER CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2004
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 three months ended December
31, 2004 are not indicative of the results that may be expected for the
year ending September 30, 2005.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form
10-KSB for the year ended September 30, 2004.
Item 1 Financial Statements (continued)
THE FLAMEMASTER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2004
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
December 31, 2004 the Company had no investments that qualified as
trading or held to maturity. The amortized cost of zero-coupon debt
securities classified as available for sale is adjusted for accretion
of discounts to maturity. Such amortization and interest are included
in interest income. Realized gains and losses are included in other
income or expense. The cost of securities sold is based on specific
identification method.
Item 1 Financial Statements (continued)
THE FLAMEMASTER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 2004
Note 4: INVENTORIES ARE SUMMARIZED AS FOLLOWS:
December 31,
2004
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Raw materials $ 426,142
Shipping materials 184,892
Finished goods 425,898
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$ 1,036,932
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Note 5: During the three months ended December 31, 2004, the Company purchased
19 shares of its outstanding common stock at a cost of $608. The
purchase was made after the reverse stock split and before the forward
stock split.
Note 6: MARKETABLE SECURITIES:
Marketable securities classified as current assets at December 31, 2004
include the following:
FAIR VALUE COST
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Corporate debt securities $ 2,781 $ 9,544
Mortgage backed securities 34,421 34,862
Marketable equity securities 41,214 36,725
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$ 78,416 $ 81,131
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The contractual maturities of debt securities available for sale at
December 31, 2004 is as follows:
FAIR VALUE COST
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Due after 10 years $ 34,421 $ 34,862
Not due at single maturity date 2,781 9,544
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$ 37,202 $ 44,406
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Gross unrealized holding gains and losses at December 31, 2004 were $4,585 and
$7,300, respectively. There were no realized gains or losses from the sale of
securities for the three months ending December 31, 2004.
Item 1 Financial Statements (continued)
THE FLAMEMASTER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2004
Note 7: DIVIDENDS
On December 5, 2003, the Company declared the divestiture of its
investment and management subsidiary, StarBiz Corporation. The
divestiture of StarBiz takes the form of a stock dividend to
Flamemaster shareholders who received one StarBiz share for every 120
(one hundred and twenty) Flamemaster shares owned. This distribution is
included as changes against retained earnings of $2,409,259 and to
additional paid in capital of $1,106,141. No fractional shares were
issued. Fractional shares were paid in cash at $150 per share for total
cash dividends of $32,096.
Note 8: STOCK SPLITS AND DIVIDENDS
In May, 2004, the Company paid a 12.5% stock dividend in the form of a
9 for 8 stock split. In October 2004, the Company effected a 1 for 10
reverse stock split in order to reduce the cost of maintaining and
servicing very small odd lot shareholders. Additionally, in December
2004, the Company declared a 7 for 1 forward stock split in order to
maintain the Company's NASDAQ listing requirements.
Weighted average shares outstanding and Net Income per Share for the
period ended December 31, 2003 have been restated to reflect the
effects of the above stock split, reverse stock split, and stock
dividend, for comparative purposes.
THE FLAMEMASTER CORPORATION
Item 2: Management's Discussion and Analysis of Financial Condition and Results
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of Operations:
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December 31, 2004 compared to September 30, 2004 and
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December 31, 2004 compared to December 31, 2003.
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FINANCIAL CONDITION AND LIQUIDITY:
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The Company's financial condition is strong with current assets of $4,213,736
compared to current liabilities of $194,341 at December 31, 2004 for a current
ratio of better than 21.65 to 1. Working capital stood at $4,031,107 on December
31, 2004 compared to $4,019,395 at September 30, 2004 and $3,700,382 on December
31, 2003. Cash and cash equivalents and marketable securities increased to
$2,105,686 from $2,055,836 in the year earlier period and modestly lower than
the $2,180,801 at fiscal year end September 30, 2004.
Accounts receivable increased to $642,951 from $461,502 in the prior year's
quarter ended December 31, 2003 due to a higher volume of business. Inventories
also expanded due to a higher level of business to $1,036,932 from $983,930 on
December 31, 2003 and $1,034,287 at year-end September 30, 2004.
Revenues for the December 31, 2004 quarter advanced to $1,132,416 from
$1,074,559 in the year earlier period due to slightly higher selling prices and
a broader customer base.
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 has sufficient liquidity to meet any future requirements or to cope
with any unforeseen events or uncertainties over the next 12-month period.
Management does not know of any material event that would have a material impact
on either short-term or long-term liquidity, other than the proposed merger with
The Best Group.
Flamemaster paid a 12.5% stock dividend in the form of a 9 for 8 stock split in
May of 2004 and continued to maintain a $.023 quarterly cash dividend
effectively increasing the cash distribution by 12.5%.
In October the Company effected a 1 for 10 reverse stock split in order to
reduce the cost of maintaining and servicing very small odd lot shareholders.
In December 2004, Flamemaster declared a 7 for 1 forward stock split in order to
maintain the Company's Nasdaq listing requirements.
The Company paid a $.023 cash dividend in November which was adjusted for the 1
for 10 stock split.
In January 2005, Flamemaster declared a $.034 cash dividend to be paid on March
10, 2005 to shareholders of record February 18, 2005. This is a 4% increase over
the prior quarter's cash distribution.
RESULTS OF OPERATIONS:
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For the three months ended December 31, 2004, net income declined to 39,305 from
$72,692 or $ .04 per share vs. $.06 per share in the year earlier period, which
was restated to reflect the 7 for 1 stock split, the 1 for 10 reverse split and
the 12.5 stock dividend. The decline in earnings was due to a number of factors
including higher raw material costs, increased labor costs, additional
regulatory reporting requirements of the SEC and Nasdaq. In addition, our
General and Administrative expenses increased due to legal, accounting and stock
transfer fees associated with the stock splits and merger and acquisition
activity.
Laboratory costs including research and development for the quarter remained
steady at $103,174 from $103,251 in the year earlier quarter.
General and Administrative expenses increased substantially to $219,449 from
$188,981 in the prior year due to the legal, accounting and stock transfer fees
mentioned in the previous paragraph. Selling Expense also increased modestly to
$90,961 from $79,114 due to increased salaries and I.T. (Information Technology)
requirements.
Net sales are listed as a separate item and are part of gross revenues, which
include royalties, interest and other income also listed as separate line items.
Total revenue income, including sales, royalties, and interest and other income,
are used to finance our operating activities. Therefore, becoming part of net
ordinary income. No interest expense was booked for sales to offset interest
income. Because of the size of our Company, it would not be appropriate to list
interest and other income as a separate line item.
Item 3:
CONTROLS AND PROCEDURES
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An evaluation was performed under the supervision and with the participation of
the Company's management, including our Chief Executive Officer and Chief
Financial Officer, Joseph Mazin, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures within 90 days
before the filing date of this report. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls subject to their evaluation.
The nature of the business and the size of the Company have prevented the
Company from being able to employ sufficient resources to enable it to have an
adequate segregation of duties within its internal control system. This
condition is considered a reportable condition and has been discussed with the
audit committee. The Company will continue to monitor and assess the costs and
benefits of additional staffing in the accounting area.
SIGNATURES:
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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
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(Registrant)
DATE:
February 11, 2005 /s/ JOSEPH MAZIN
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(Signature)
Joseph Mazin, President and Chairman
And Chief Executive Officer and Chief
Financial Officer
DATE:
February 11, 2005 /s/ MARY KAY EASON
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(Signature)
Mary Kay Eason, Treasurer and Secretary
DATE:
February 11, 2005 /s/ DONNA MAZIN
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(Signature)
Donna Mazin, Director