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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: MARCH 31, 2005 COMMISSION FILE NO: 0-2712
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 Number)
incorporation or organization)
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:
March 31, 2005 1,253,693
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THE FLAMEMASTER CORPORATION
CONDENSED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
TABLE OF CONTENTS
Page
----
Condensed Balance Sheets 1
Condensed Statements of Operations 2-3
Condensed Statements of Cash Flows 4-5
Notes to the Condensed Financial Statements 6-7
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ITEM 1. FINANCIAL STATEMENTS
THE FLAMEMASTER CORPORATION
CONDENSED BALANCE SHEET
MARCH 31,
2005
(UNAUDITED)
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ASSETS:
CURRENT ASSETS:
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Cash and cash equivalents $ 2,111,707
Marketable securities 81,355
Accounts receivable net 761,472
Inventories 1,084,291
Prepaid expenses 83,650
Deferred income taxes 35,005
Other investment 328,713
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TOTAL CURRENT ASSETS: 4,486,193
Machinery & improvements, net of
Accumulated depreciation 133,449
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TOTAL ASSETS $ 4,619,642
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LIABILITIES AND SHOREHOLDERS' EQUITY:
CURRENT LIABILITIES:
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Accounts payable $ 129,414
Accrued expenses 34,837
Accrued income taxes payable 91,921
Deferred tax liability 48,595
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TOTAL CURRENT LIABILITIES: 304,767
SHAREHOLDERS' EQUITY:
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COMMON STOCK, par value, $.001 per share,
authorized 60,000,000 shares; issued and
outstanding 1,253,693 shares at 03/31/05 1,254
Additional paid-in Capital 3,759,141
Retained earning 544,321
Accumulated other comprehensive income 10,159
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TOTAL STOCKHOLDERS' EQUITY $ 4,314,875
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TOTAL LIABILITY AND EQUITY $ 4,619,642
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The accompanying notes are an integral part of these financial statements.
1
Item 1 Financial Statements (continued)
THE FLAMEMASTER CORPORATION
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 2005
2005 2004
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Net sales $ 1,258,280 $ 1,224,709
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Total Revenues 1,258,280 1,224,709
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Costs and expenses:
Cost of sales 655,863 647,131
Selling 79,971 78,116
General and administrative 147,737 212,381
Laboratory costs 103,339 101,204
Other (income) expenses, net 14,706 15,206
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Total costs and expenses: 1,001,616 1,054,038
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INCOME BEFORE PROVISION FOR INCOME TAXES 256,664 170,671
Interest, royalties and other income 71,098 6,431
Provision for income taxes 131,500 53,357
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Net income $ 196,262 $ 123,745
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Other comprehensive income
Net of income tax
Unrealized holding gains (losses) (1,965) 330
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Comprehensive Income 194,297 124,075
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Net income per share, basic $ .17 $ .10
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Weighted average shares outstanding:
Basic and Diluted 1,174,824 1,269,605
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The accompanying notes are an integral part of these financial statements
2
Item 1 Financial Statements (continued)
THE FLAMEMASTER CORPORATION
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED MARCH 31,
2005 2004
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Net Sales $ 2,380,720 $ 2,281,333
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Total Revenues 2,380,720 2,281,333
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Costs and expenses:
Cost of Sales 1,299,420 1,206,676
Selling 170,932 157,230
General and administrative 367,187 383,059
Laboratory 206,513 222,758
Other (income) expenses, net 25,963 25,689
Interest on convertible notes -- 7,314
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Total Costs and Expenses 2,070,015 2,002,726
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INCOME BEFORE PROVISION FOR INCOME TAXES 310,705 278,607
Interest, royalties and other income 81,073 24,368
Provision for income taxes 156,212 106,536
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Net income $ 235,566 $ 196,439
Other comprehensive income
Net of income taxes
Unrealized holding gains (losses) 3,370 (3,700)
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Comprehensive Income $ 238,936 $ 192,739
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Net income per share, basic $ .21 $ .16
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Weighted average shares outstanding:
Basic and diluted 1,140,393 1,239,379
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The accompanying notes are an integral part of these financial statements
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THE FLAMEMASTER CORPORATION
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31,
2005
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(Unaudited)
Cash Flows From Operating Activities:
Net Comprehensive Income $ 238,937
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 13,567
Allowance for doubtful accounts 5,000
Unrealized gain on marketable securities (3,370)
Changes in current assets and liabilities:
Accounts receivable (75,077)
Inventory (50,004)
Prepaid expenses (30,350)
Accounts payable (74,041)
Accrued expenses (10,509)
Accrued income taxes payable 68,184
Deferred income tax 5,125
Deferred tax liability 1,117
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Net Cash Provided by (Used in) Operating Activities 88,579
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Cash Flows from Investing Activities:
Purchase of equipment and improvements --
Investments in marketible securities (3,976)
Principal payments on notes receivable 7,853
Other investments --
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Net Cash Provided by (Used in) Investing Activities 3,877
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Cash Flows from Financing Activities:
Issuance of common stock --
Repurchase of common stock (3,704)
Dividends (83,837)
Notes payable --
Minority interest --
Issuance of preferred restricted stock --
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Net cash provided by Financing Activities (87,541)
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Net Decrease in Cash and Cash Equivalents 4,915
Cash and Cash Equivalents - Beginning of Period $ 2,106,792
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Cash and Cash Equivalents - End of Period $ 2,111,707
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The accompanying notes are an integral part of these financial statements
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THE FLAMEMASTER CORPORATION
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31,
2004
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Net cash provided (used) by operating activities: $ 179,478
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment & improvements 21,342
Net purchases and sales of investment securities (4,893)
Other Investments (303,713)
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NET CASH USED IN INVESTING ACTIVITIES: (287,264)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Company's Common Stock 1,574,821
Dividends paid (118,387)
Notes Payable (913,500)
Minority interest (1,900)
Issuance of Preferred Restricted Stock (742,000)
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NET CASH USED IN FINANCING ACTIVITIES (200,966)
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NET INCREASE, (DECREASE), IN CASH (308,752)
Cash, beginning of period 2,221,905
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Cash, end of period $ 1,913,153
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Cash paid during period for income taxes $ 130,000
Cash paid during period for interest expense $ 7,314
The accompanying notes are an integral part of these financial statements
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THE FLAMEMASTER CORPORATION
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
NOTE A - DESCRIPTION OF THE BUSINESS
Business Activity
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The Flamemaster Corporation (Registrant or the Company) develops, manufactures,
and sells coatings and sealants. In addition, Registrant receives royalties from
other manufacturers who produce certain of the Registrant's products under
license.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
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The interim financial statements presented herein have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations. The interim financial statements should be read in
conjunction with the Company's annual financial statements, notes and accounting
policies included in the Company's annual report on Form 10-KSB for the year
ended September 30, 2004 as filed with the SEC. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments) which are
necessary to provide a fair presentation of financial position as of March 31,
2005 and the related operating results and cash flows for the interim period
presented have been made. The results of operations, for the period presented
are not necessarily indicative of the results to be expected for the year.
Use of Estimates
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Use of estimates and assumptions by management is required in the preparation of
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates and assumptions.
Inventory
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Inventories are summarized as follows:
March 31, 2005
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Raw materials $ 503,501
Shipping materials 154,378
Finished goods 426,412
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$ 1,084,291
Earnings Per Share
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Basic earnings per share ("EPS") is computed by dividing earnings available to
common shareholders by the weighted-average number of common shares outstanding
for the period as required by the Financial Accounting Standards Board (FASB)
under Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Shares". Diluted EPS reflects the potential dilution of securities that could
share in the earnings.
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THE FLAMEMASTER CORPORATION
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
NOTE C - STOCKHOLDERS' EQUITY
In December 2004, the Company amended articles 3 of the Articles of
Incorporation to read 60,000,000 authorized common shares @ $.001 par value. The
corporation had previously been authorized 6,000,000 common shares @ $.01 par
value. The number of preferred shares remains 500,000 preferred shares
authorized @ $.01 par value.
NOTE D - SUBSEQUENT EVENTS
Acquisition of Best Candy & Tobacco Co.
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Subsequent to quarter ended March 31, 2005, Flamemaster issued a non-voting
convertible preferred (Preferred A) for 100% of the equity in Best Candy &
Tobacco Co.
The preferred shares do not participate in the earnings or dividend distribution
of the Company's chemical operation. The shares can be converted into common
stock only after the spin-off via a property dividend of the chemical operation
and all cash and marketable securities associated with the operations of the
Company prior to the acquisition of Best.
Furthermore, the series A Preferred Stock is not convertible until receipt of
stockholder and Nasdaq approval and does not enable its holders to exercise
control on any manner over the over the business or activities of the Company.
Flamemaster's common stock shareholders, prior to conversion of the convertible
preferred A shares, will not be diluted as to earnings, dividend, or assets.
As a result of the transactions with Best, the Company received a Nasdaq Staff
Determination letter dated May 5, 2005 indicating that the Company fails to
comply with marketplace rules 4310(C)(17) regarding notification of the issuance
of additional shares, rule 4350(i)(1)(C) regarding shareholder approval, rule
4330(B) regarding reverse mergers. The staff also noted that non-compliance with
these rules raises public interest concerns pursuant to rules 4399 and
4330(a)(3).
In response to Nasdaq Staff concerns, the Company and The Best Group have agreed
to rescind the closing of the transactions outlined above. Such rescission to be
effective by close of business May 17, 2005.
In connection with such rescission, it is the intention of the Company and Best
to enter into a revised agreement containing substantially the same terms and
conditions; provided, that the closing of the transaction will be subject to
compliance with all Nasdaq Marketplace rules. If these conditions to closing are
not satisfied by the close of business June 30, 2005, then either party may
terminate the proposed transaction.
It is the intent of Flamemaster Corporation to file a Form 15 and de-register to
become a non-SEC reporting company, if the transaction is terminated.
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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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March 31, 2005 compared to September 30, 2004 and
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March 31, 2005 compared to March 31, 2004.
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FINANCIAL CONDITION AND LIQUIDITY:
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The Company's financial condition is strong with current assets of $4,486,193
compared to current liabilities of $304,767 at March 31, 2005 for a current
ratio of better than 14.7 to 1. Working capital stood at $4,181,426 on March 31,
2005 compared to $3,800,535 the year earlier and $4,016,463 at year end
September 30, 2004. The increase is due to the Company's strong performance in
the current period. Accounts receivable increased moderately to $761,472 from
$704,795 in the prior year's quarter ended March 31, 2004 due to increase in
sales. Inventories were slightly lower at $1,084,291 from the $1,100,523 on
March 31, 2004, but up moderately from $1,034,287 at year end September 30,
2004.
Revenues for March 31, 2005 quarter increased moderately to $1,258,280 from the
$1,224,709 in the year earlier period, a 2.7% increase. For the six months
period ended March 31, 2005, revenues were $2,380,720 as compared to $2,281,333,
a 4.2% increase. Sales of aircraft sealants expanded modestly, coatings remained
steady.
RESULTS OF OPERATIONS:
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For the three months ended March 31, 2005, net income expanded to $196,262
compared to $123,745 in the year earlier period. For the six month period, net
income increased to $235,566 from $196,439. Per share results for the quarter
ended March 31, 2005 were $.17 vs $.10 in the prior year's period. For the six
months, per share income expanded to $.21 from $.16 in the prior year. The
increase in earnings was due to a higher sales level, a better product mix (sale
of higher margin products) and a higher level of interest income. Laboratory
costs including Research and Development for the quarter were up slightly to
$103,339 from $101,204 in the year earlier quarter. For the six months,
Laboratory expense declined moderately to $206,513 from $222,758 the year
before. General and Administrative expenses declined to $147,737 in the quarter
from $212,381 of the prior year, due to cost savings efforts instituted and a
reduction of expenses relating to information technology programs, while the six
months G & A expense were modestly lower at $367,187 from $383,059 in the 2004
period.
Management believes that future working capital requirements will be provided
primarily from operations and that the Company's liquidity and working capital
requirements are adequate for the next 12 months of operation. Management
believes that the Company's creditworthiness is substantial relative to its
size.
Flamemaster paid a $.034 quarterly cash dividend in March of 2005 on the
Company's common stock. The Company also declared a $.034 quarterly cash
dividend on it's common shares payable on June 17, 2005 to shareholders of
record May 24, 2005.
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
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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.
SUBSEQUENT EVENTS:
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Acquisition of Best Candy & Tobacco Co.
---------------------------------------
Subsequent to quarter ended March 31, 2005, Flamemaster issued a non-voting
convertible preferred (Preferred A) for 100% of the equity in Best Candy &
Tobacco Co.
The preferred shares do not participate in the earnings or dividend distribution
of the Company's chemical operation. The shares can be converted into common
stock only after the spin-off via a property dividend of the chemical operation
and all cash and marketable securities associated with the operations of the
Company prior to the acquisition of Best.
Furthermore, the series A Preferred Stock is not convertible until receipt of
stockholder and Nasdaq approval and does not enable it's holders to exercise
control in any manner over the business or activities of the Company.
Flamemaster's common stock shareholders, prior to conversion of the convertible
preferred A shares, will not be diluted as to earnings, dividend, or assets.
As a result of the transactions with Best, the Company received a Nasdaq Staff
Determination letter dated May 5, 2005 indicating that the Company fails to
comply with marketplace rules 4310(C)(17) regarding notification of the issuance
of additional shares, rule 4350(i)(1)(C) regarding shareholder approval, rule
4330(B) regarding reverse mergers. The staff also noted that non-compliance with
these rules raises public interest concerns pursuant to rules 4300 and 4330
(a)(3).
In response to Nasdaq Staff concerns, the Company and The Best Group have agreed
to rescind the closing of the transactions outlined above. Such rescission to be
effective by close of business May 17, 2005.
In connection with such rescission, it is the intention of the Company and Best
to enter into a revised agreement containing substantially the same terms and
conditions; provided, that the closing of the transaction will be subject to
compliance with all Nasdaq Marketplace rules. If these conditions to closing are
not satisfied by the close of business June 30, 2005, then either party may
terminate the proposed transaction.
It is the intent of Flamemaster Corporation to file a Form 15 and de-register to
become a non-SEC reporting company, if the transaction with Best is terminated.
Change in Certifying Accountants
--------------------------------
On May 10, 2005, the Company's auditor Sarna & Company resigned as the Company's
independent auditors. The resignation of Sarna & Company was accepted by the
Company's Audit Committee and Board of Directors on May 12, 2005.
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On May 13, 2005, the Company engaged Jewett Schwartz & Associates, based in
Hollywood, Florida to serve as its new auditors.
For further information, please see the Company's Form 8-KA filed with the SEC
May 24, 2005.
Notice of Delisting
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On May 16, 2005, the Company received a notice from the Nasdaq listing
Qualifications Panel advising that Flamemaster's Common Stock would de delisted
from The Nasdaq Small Cap Market effective with the opening of trading on May
18, 2005. The Company's common stock would thereafter be eligible for quotations
on the Pink Sheets.
For further information, please see our Form 8-K filed with the SEC May 18,
2005.
On May 18, 2005, the Company's Common Stock was being quoted on the Pink Sheets.
ITEM 3. CONTROLS AND PROCEDURES
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Disclosure Controls and Procedures
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At the end of the period reported on in this report, the Company carried out an
evaluation, under the supervision and participation of the Company's Chief
Executive and Financial Officer (the "Officer") of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Securities Exchange Act Rule 13a-14. Based upon that evaluation, the
Officer concluded that the Company's disclosure controls and procedures are
effective in all material respects, with respect to the recording, processing,
summarizing and reporting, within the time periods specified in the SEC's rules
and forms, of information required to be disclosed by the Company in the reports
the Company files or submits under the Exchange Act.
Internal Controls
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There were no significant changes made in the Company's internal controls during
the quarter ended March 31, 2005, or in other factors that could significantly
affect these controls subsequent to the date of the evaluation described above.
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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: May 23, 2005 /s/ JOSEPH MAZIN
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Joseph Mazin, President and Chairman
And Chief Executive Officer And Chief
Financial Officer
DATE: May 23, 2005 /s/ MARY KAY EASON
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Mary Kay Eason, Treasurer and Secretary
DATE: May 23, 2005 /s/ DONNA MAZIN
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Donna Mazin, Director
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