**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10- QSB**

 

**QUARTERLY REPORT UNDER SECTION 13 or 15 (d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**FOR QUARTER ENDED:****DECEMBER 31, 2001**

 

** COMMISSION FILE NO:  0-2172**

 

 

**THE FLAMEMASTER CORPORATION**

(Exact name of Registrant as specified in its Charter)

 

|                                          |   |                         |
|-----------------------------------------------|--------|------------------------------|
| **NEVADA**                                    |   | **95-2018730**               |
| (State or other jurisdiction of incorporation |   | (IRS Employer identification |
| or organization)                              |   | Number)                      |
|                                          |   |                         |

 

**11120 SHERMAN WAY, SUNVALLEY, CALIFORNIA 91352**

(Address of Principal Executive Office)

 

 

Registrant’s telephone number including areacode:    **(818) 982-1650**

 

Registrant’s facsimile number including areacode:    ** (818) 765-5603**

 

Indicate by checkmark whether registrant (1) has filed all reports required to be filed by Section13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

YES  ý     NO  o

 

Indicate the number of shares outstanding of eachof the issuer’s classes of common stock, as of the latest practicable date:

 

| December 31, 2001 |   | 1,448,026 |
|-------------------|--------|-----------|
|              |   |      |

 

 

 

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Item 1 Financial Information

Item1 Financial Statement

**THE FLAMEMASTER CORPORATION**

**CONDENSED BALANCE SHEET**

 
|                                                                                                                                           |   | **December 31,** |      |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|-----------|
|                                                                                                                                           |   | **2001**         |      |
|                                                                                                                                           |   | **(Unaudited)**  |      |
| **A S S E T S :**                                                                                                                              |   |             |      |
| **Current Assets:**                                                                                                                            |   |             |      |
| Cash and cash equivalents                                                                                                                      |   | $                | 2,060,457 |   |
| Marketable securities                                                                                                                          |   | 3,840,725        |      |
| Accounts receivable, less allowance of  $5,000                                                                                            |   | 623,638          |      |
| Notes Receivable                                                                                                                               |   | 26,259           |      |
| Inventories                                                                                                                                    |   | 1,270,159        |      |
| Prepaid expenses                                                                                                                               |   | 23,093           |      |
| Deferred income taxes                                                                                                                          |   | 12,119           |      |
| Other investments                                                                                                                              |   | 46,287           |      |
|                                                                                                                                           |   |             |      |
| **Total current assets:**                                                                                                                      |   | 7,902,737        |      |
|                                                                                                                                           |   |             |      |
| Machinery & improvements, net of   accumulated depreciation                                                                           |   | 116,346          |      |
| License agreement, net of accumulated  amortization                                                                                       |   | 50,037           |      |
|                                                                                                                                           |   |             |      |
| **TOTAL ASSETS**                                                                                                                               |   | $                | 8,069,120 |   |
|                                                                                                                                           |   |             |      |
|                                                                                                                                           |   |             |      |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**:                                                                                                 |   |             |      |
| **Current Liabilities:**                                                                                                                       |   |             |      |
| Accounts payable                                                                                                                               |   | $                | 300,754   |   |
| Accrued liabilities                                                                                                                            |   | 10,008           |      |
| Income tax payable                                                                                                                             |   | 61,841           |      |
| Deferred tax liability                                                                                                                         |   | 291,928          |      |
| Deferred credits                                                                                                                               |   | 4,048            |      |
|                                                                                                                                           |   |             |      |
| **Total current liabilities:**                                                                                                                 |   | 668,579          |      |
|                                                                                                                                           |   |             |      |
| Long-term liabilities:                                                                                                                         |   |             |      |
| Notes payable                                                                                                                                  |   | 1,260,508        |      |
| **Total Liabilities****:**                                                                                                                     |   | 1,929,087        |      |
|                                                                                                                                           |   |             |      |
| **SHAREHOLDERS’ EQUITY:**                                                                                                                 |   |             |      |
|                                                                                                                                           |   |             |      |
| **Common Stock****,**par value, $.01 per share, authorized 6,000,000 shares; issued and  outstanding   1,448,026 shares at 12/31/01. |   | 14,492           |      |
| Additional paid-in Capital                                                                                                                     |   | 3,336,137        |      |
| Retained earning                                                                                                                               |   | 2,407,324        |      |
| Allowance for marketable securities                                                                                                            |   | 382,080          |      |
|                                                                                                                                           |   |             |      |
| **TOTAL STOCKHOLDERS’ EQUITY**                                                                                                            |   | $                | 6,140,033 |   |
|                                                                                                                                           |   |             |      |
| **TOTAL LIABILITY AND EQUITY**                                                                                                                 |   | $                | 8,069,120 |   |

 

Seenotes to condensed financial statements.

 

 

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**THE FLAMEMASTER CORPORATION**

**CONDENSED  STATEMENTS OF INCOME (UNAUDITED)**

**THREE MONTHS ENDED DECEMBER31,**

____________________________________

 
|                                 |   | **2001**  |      | **2000**  |   |
|--------------------------------------|--------|-----------|-----------|-----------|--------|
|                                 |   |      |      |      |   |
| Net sales                            |   | $         | 1,162,823 |      | $      | 862,946 |   |
| Royalties                            |   | 6,049     |      | —    |   |
| Interest and Other Income            |   | 90,961    |      | 88,697    |   |
|                                 |   |      |      |      |   |
| Total Revenues                       |   | 1,259,833 |      | 951,643   |   |
|                                 |   |      |      |      |   |
| Costs and expenses:                  |   |      |      |      |   |
| Cost of sales                        |   | 678,106   |      | 445,093   |   |
| Selling                              |   | 88,602    |      | 84,855    |   |
| General and administrative           |   | 159,718   |      | 152,596   |   |
| Laboratory costs                     |   | 86,778    |      | 67,090    |   |
| Other expenses                       |   | 30,780    |      | 20,964    |   |
|                                 |   |      |      |      |   |
| Total costs and expenses:            |   | 1,043,984 |      | 770,598   |   |
|                                 |   |      |      |      |   |
| Income before income taxes           |   | 215,849   |      | 181,045   |   |
|                                 |   |      |      |      |   |
| Income taxes                         |   | 90,410    |      | 71,191    |   |
|                                 |   |      |      |      |   |
| Net   income                    |   | 125,439   |      | 109,854   |   |
|                                 |   |      |      |      |   |
| Other comprehensive income           |   |      |      |      |   |
| Net of income tax                    |   |      |      |      |   |
| Unrealized Holding Gains (Losses)    |   | 585,617   |      | (759,148  | )      |
|                                 |   |      |      |      |   |
| Comprehensive Income                 |   | $         | 711,056   |      | $      | (649,294 | ) |
|                                 |   |      |      |      |   |
| Net income per share, basic          |   | $         | . 09      |      | $      | .07 |   |
|                                 |   |      |      |      |   |
|                                 |   |      |      |      |   |
| Net income per share, diluted        |   | ****      |      | ****      |   |
|                                 |   |      |      |      |   |
|                                 |   |      |      |      |   |
| Weighted average shares outstanding: |   |      |      |      |   |
| Basic                                |   | 1,448,226 |      | 1,594,291 |   |
|                                 |   |      |      |      |   |
| Diluted                              |   | 1,487,229 |      | 1,710,678 |   |

 

**** Diluted earnings per shareare not presented, as effect of the assumed conversion of Notes Payable isanti-dilutive.

Seenotes to condensed financial statements.

 

 

2

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**THE FLAMEMASTER CORPORATION**

**CONDENSED STATEMENTS OFCASH FLOWS (UNAUDITED)**

**THREE MONTHS ENDED DECEMBER31,**

________________________________

 
|                                               |   | **2001**  |      |
|----------------------------------------------------|--------|-----------|-----------|
|                                               |   |      |      |
| Net cash provided (used) by operating  activities: |   | $         | (2,311    | ) |
|                                               |   |      |      |
|                                               |   |      |      |
| CASH FLOWS FROM INVESTING ACTIVITIES:              |   |      |      |
| Purchase of equipment & improvements           |   | (8,962    | )         |
| Net purchases and sales of investment  securities  |   | (10,606   | )         |
|                                               |   |      |      |
| NET CASH USED IN INVESTING ACTIVITIES:             |   | (19,568   | )         |
|                                               |   |      |      |
| CASH FLOWS FROM FINANCING ACTIVITIES:              |   |      |      |
| Increase in notes payable                          |   | 11,770    |      |
| Purchase of Company’s Common Stock            |   | (8,663    | )         |
| Dividends paid                                     |   | (46,348   | )         |
|                                               |   |      |      |
| NET CASH USED IN FINANCING ACTIVITIES              |   | (43,241   | )         |
|                                               |   |      |      |
|                                               |   |      |      |
|                                               |   |      |      |
| NET INCREASE, (DECREASE), IN CASH                  |   | (65,120   | )         |
|                                               |   |      |      |
|                                               |   |      |      |
| Cash, beginning of period                          |   | 2,125,577 |      |
|                                               |   |      |      |
| Cash, end of period                                |   | $         | 2,060,457 |   |
|                                               |   |      |      |
|                                               |   |      |      |
|                                               |   |      |      |
| Cash paid during period for income taxes           |   | $         | 50,000    |   |
|                                               |   |      |      |
| Cash paid during period for interest  expense      |   | $         | 9,929     |   |

 

See notes to Condensed Financial Statements.

 

 

3

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**THE FLAMEMASTER CORPORATION**

**NOTES TO CONDENSEDFINANCIAL STATEMENTS (UNAUDITED)**

**DECEMBER 31, 2001**

 

 

Note 1:         Forward-Lookingand Cautionary Statements

 

The Company and its representatives may fromtime to time make written or oral forward-looking statements, includingstatements contained in the Company’s filings with Securities and ExchangeCommission and its reports to stockholders. In connection with the “safe harbor”provisions of the Private Securities Litigation Reform Act of 1995, the Companyis hereby identifying information that is forward-looking, including, withoutlimitations, 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 successof discussions with other entities on mergers, acquisitions, or alliancepossibilities and expansion of product offerings.  Actual results may differ materially from those described in theforward-looking statement.  The Companycautions that the foregoing list of important factors is not exclusive. TheCompany does not undertake to update any forward-looking statements that may bemade from time to time by or on behalf of the Company.

 

 

Note 2:         **Basis of Presentation:**

The accompanying unaudited condensed financial statements have beenprepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-QSB andArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals),considered necessary for a fair presentation have been included.  Operating results for the three months endedDecember 31, 2001 are not indicative of the results that may be expected forthe year ending September 30, 2002. For further information, refer to theconsolidated financial statements and footnotes thereto included in theCompany’s annual report on Form 10-K for the year ended September 30, 2001.

 

 

4

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**THE FLAMEMASTER CORPORATION**

**NOTES TO CONDENSEDFINANCIAL STATEMENTS (UNAUDITED)**

**DECEMBER 31, 2001**

 

 

Note 3:         **Summary of Significant Accounting Policies:**

**Investment in Debt andEquity Securities:**

The Company adopted Statement of FinancialAccounting Standards No: 115 (“SFAS No: 115”), Accounting for CertainInvestments in Debt and Equity Securities, effective January 1,1995. Managementdetermines the appropriate classification of its Investments in debt and equitysecurities at the time of purchase and reevaluates such determination at eachbalance sheet date. Debt securities for which the Company does not have theintent or ability to hold to maturity are classified as available for sale,along with the Company’s investment in equity securities. Securities availablefor sale are carried at fair value, with the unrealized gains and lossesreported in a separate component of shareholders’ equity net of income taxes,until realized. At December 30, 2001 the Company had no investments thatqualified as trading or held to maturity. The amortized cost of zero-coupondebt securities classified as available for sale is adjusted for accretion ofdiscounts to maturity.  Suchamortization and interest are included in interest income.  Realized gains and losses are included inother income or expense. The cost of securities sold is based on specificidentification method.

 

**Reclassification ofFinancial Statements:**

Beginning in the first quarter of fiscal2000, various items of portfolio income, which were previously classified as“other (income), expenses, net” are classified as “interest and other income”in the condensed Statements of Income. Amounts reported for the prior quarters have been reclassified toconform to the quarter 2000 presentation.

 

 

5

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**THE FLAMEMASTER CORPORATION**

**NOTES TO CONDENSEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

**DECEMBER 31, 2001**

 

Note 4:           Inventoriesare summarized as follows:

 
|               |   | **December 31,** |    |
|--------------------|--------|------------------|---------|
|               |   | **2001**         |    |
| Raw materials      |   | $                | 765,431 |   |
| Shipping materials |   | 140,716          |    |
| Finished goods     |   | 364,012          |    |
|               |   |             |    |
|               |   | 1,270,159        |    |
|                    |        |                  |         |  |

 

Note 5:           Duringthe three months ended December 31, 2001, the Company purchased

1,570 shares of its outstanding common stockat a cost of $8,663.

 

Note 6:           MARKETABLESECURITIES:

Marketable securities classified as currentassets at December 31, 2001 include the following:

 
|                                                                                                |   | **Fair Value** |   | **Cost**  |   |
|-----------------------------------------------------------------------------------------------------|--------|----------------|--------|-----------|--------|
| U.S. Treasury obligations                                                                           |   | 635,375        |   | 592,108   |   |
| Other Government Bonds                                                                              |   | 17,923         |   | 16,947    |   |
| Corporate debt securities                                                                           |   | 9,610          |   | 27,770    |   |
| Mortgage backed securities                                                                          |   | 91,727         |   | 95,665    |   |
| Marketable equity securities                                                                        |   | 3,086,090      |   | 2,467,193 |   |
|                                                                                                |   | 3,840,725      |   | 3,199,683 |   |
|                                                                                                |   |           |   |      |   |
| The contractual maturities of debtsecurities available for sale at December 31, 2001 is as follows: |   |           |   |      |   |
|                                                                                                |   | **Fair Value** |   | **Cost**  |   |
| Due within one year                                                                                 |   | 5,683          |   | 375       |   |
| Due after one year thru 5 years                                                                     |   | 428,171        |   | 427,159   |   |
| Due after 5 years thru 10 years                                                                     |   | 134,652        |   | 114,651   |   |
| Due after 10 years                                                                                  |   | 94,402         |   | 94,640    |   |
| Not due at single maturity date                                                                     |   | 91,727         |   | 95,665    |   |
|                                                                                                |   | 754,635        |   | 732,490   |   |

 

Gross unrealized holding gains and losses atDecember 31, 2001 were $1,061,098 and $464,299, respectively.  Realized gains and losses from the sale ofsecurities for the three months ended December 31, 2001 were $46,883 and $4,354respectively.

 

 

6

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**THE FLAMEMASTER CORPORATION**

 

Item 2:

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations:

 

December 31, 2001 compared to September 30,2001 and

December 31, 2001 compared to December 31,2000.

 

**FINANCIAL CONDITION ANDLIQUIDITY:**

 

The Company’sfinancial condition is strong with current assets of $7,902,737 compared tocurrent liabilities of $668,579 at December 31, 2001 for a current ratio ofmore than 11.8 to 1.  Working capitalexpanded to $7,234,158 on December 31, 2001 compared to $6,563,805 at September30, 2001.  Cash and cash equivalents andmarketable securities rose to $5,901,182 on December 31, 2001 from $4,931,174 atfiscal year end September 30, 2001.  Accountsreceivable increased moderately to $623,638 from $512,751 in the prior year’squarter ended December 31, 2000. Inventories increased significantly to $1,270,159 on December 31, 2001from 958,695 in the year earlier period, due to an expanded product line and adeliberate build up of raw materials.

 

Revenues for the December 31, 2001 quarter rose bymore than 32% to $1,259,833 from $951,643 in the year earlier quarter.  Sales of aircraft sealants gained due to therequirements of the U.S. Military and defense contractors.  The Company added a split shift to itsproduction line to meet the rise in demand.

 

Management believes that future working capitalrequirements will be provided primarily from operations and that the Company’sliquidity and working capital requirements are adequate for the next 12 monthsof operation.  Management believes thatthe Company’s creditworthiness is substantial relative to its size.

 

The Company’s Board of Directors declared a $.032dividend on the Company’s common stock during the quarter, which was paid inJanuary 2002.

 

 

**RESULTS OF OPERATIONS:**

 

For the threemonths ended December 31, 2001, net income gained 14.2% to $125,439 from$109,854 or $.09 per share vs. $.07 per share in the year earlier period.  The increase in earnings was due to thehigher level of sales.  Investment gainswere moderately higher.  The companycontinued to experience rising raw material costs.

 

Laboratory costs, including research anddevelopment for the quarter increased to $86,778 from $67,090 in the yearearlier quarter due to the hiring of additional personnel and a greater efforton developing more high end products. General and Administrative expenses increased moderately to $159,718from $152,596 in the prior year, while selling expense also rose modestly to$88,602 from $84,855 due to increased salaries.

 

 

 

7

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Signatures:

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned hereunto dulyauthorized.

 

 
|               |                                     |
|--------------------|------------------------------------------|
|               | **THE FLAMEMASTER CORPORATION**          |
|               | (Registrant)                             |
|               |                                     |
|               |                                     |
| DATE:              | JOSEPH  MAZIN                            |
| February  12, 2002 |                                     |
|               | (Signature)                              |
|               | Joseph  Mazin, President and Chairman    |
|               | and  Chief Executive Officer             |
|               |                                     |
|               |                                     |
| DATE:              | MARY  KAY EASON                          |
| February12,  2002  |                                     |
|               | (Signature)                              |
|               | Mary  Kay Eason, Treasurer and Secretary |
|               |                                     |
|               |                                     |
| DATE:              | DONNA  MAZIN                             |
| February  12, 2002 |                                     |
|               | (Signature)                              |
|               | Donna  Mazin, Director                   |
|               |                                     |

 

 

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