----

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**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: | **JUNE 30, 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 or organization) | (IRS Employer  identification Number) |

 

| **11120 SHERMAN WAY, SUN VALLEY, CALIFORNIA 91352** |
|-----------------------------------------------------|
|                                                     |
| (Address  of Principal Executive Office)            |

 

| Registrant's telephone number including area  code: | **(818) 982-1650** |   |
|-----------------------------------------------------|--------------------|--------|
|                                                | ****               |   |
| Registrant's facsimile number including area  code: | **(818) 765-5603** |   |
|                                                | ****               |   |

Indicate bycheck mark whether registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

| YES  ý | NO  o |
|------------------|------------|

Indicate thenumber of shares outstanding of each of the issuer's classes of common stock,as of the latest practicable date:

| June  30, 2001 | 1,598,200 |
|----------------|-----------|

----

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Item 1 Financial InformationItem 1 Financial Statement

**THE FLAMEMASTER CORPORATIONCONDENSED BALANCE SHEET**

|                                                                                                                            | **JUNE 30**** 2001 ****(Unaudited)** |      |
|---------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------|-----------|
|                                                                                                                            | ****                                           |      |
| **A S S E T S :**                                                                                                               |                                           |      |
| **Current Assets:**                                                                                                             |                                           |      |
| Cash and cash  equivalents                                                                                                      | $                                              | 2,085,729 |   |
| Marketable securities                                                                                                           | 2,896,506                                      |      |
| Accounts receivable,  less allowance of $5,000                                                                                  | 561,663                                        |      |
| Notes Receivable                                                                                                                | 55,996                                         |      |
| Inventories                                                                                                                     | 937,619                                        |      |
| Prepaid expenses                                                                                                                | 39,239                                         |      |
| Deferred income taxes                                                                                                           | 116,522                                        |      |
| Other investments                                                                                                               | 46,287                                         |      |
|                                                                                                                            |                                                |      |
| **Total current assets:**                                                                                                       | 6,739,561                                      |      |
|                                                                                                                            |                                           |      |
| Machinery &  improvements, net of accumulated depreciation                                                                  | 107,393                                        |      |
| License agreement, net  of accumulated amortization                                                                             | 58,377                                         |      |
|                                                                                                                            |                                                |      |
| **TOTAL ASSETS**                                                                                                                | $                                              | 6,905,331 |   |
|                                                                                                                            |                                                |      |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**                                                                                  |                                           |      |
| **Current Liabilities:**                                                                                                        |                                           |      |
| Accounts payable                                                                                                                | $                                              | 91,032    |   |
| Accrued liabilities                                                                                                             | 9,288                                          |      |
| Income tax payable                                                                                                              | 18,548                                         |      |
| Deferred tax liability                                                                                                          | 15,468                                         |      |
| Deferred credits                                                                                                                | 8,095                                          |      |
|                                                                                                                            |                                                |      |
| **Total current liabilities:**                                                                                                  | 142,431                                        |      |
|                                                                                                                            |                                           |      |
| Long-term  liabilities:                                                                                                         |                                           |      |
| Notes payable                                                                                                                   | 417,853                                        |      |
|                                                                                                                            |                                                |      |
| **Total Liabilities****:**                                                                                                      | 560,284                                        |      |
|                                                                                                                            |                                           |      |
| **SHAREHOLDERS' EQUITY:**                                                                                                       |                                           |      |
| **Common Stock**,  par value,$.01  per share, authorized 6,000,000 shares; issued and outstanding 1,598,200  shares at 06/30/01 | 15,982                                         |      |
| Additional paid-in  Capital                                                                                                     | 3,677,392                                      |      |
| Retained earning                                                                                                                | 2,709,774                                      |      |
| Allowance for  marketable securities                                                                                            | (58,101                                        | )         |
|                                                                                                                            |                                                |      |
| **TOTAL STOCKHOLDERS’ EQUITY**                                                                                             | $                                              | 6,345,047 |   |
|                                                                                                                            |                                                |      |
| **TOTAL LIABILITY AND EQUITY**                                                                                                  | $                                              | 6,905,331 |   |
|                                                                                                                            |                                                |      |

See notes to condensed financialstatements.

**THE FLAMEMASTER CORPORATIONCONDENSED  STATEMENTS OF INCOME(UNAUDITED)THREE MONTHS ENDED JUNE 30,**

|                                  | **2001**                    |      | **2000**  |      |
|---------------------------------------|-----------------------------|-----------|-----------|-----------|
|                                  | ****                        |      | ****      |      |
| Net  sales                            | $                           | 1,005,399 |      | $         | 1,085,721 |   |
| Royalties                             | -                           |      | -         |      |
| Interest  and Other Income            | 88,663                      |      | 532,498   |      |
|                                  |                             |      |           |      |
| Total  Revenues                       | 1,094,062                   |      | 1,618,219 |      |
|                                  |                             |      |           |      |
| Costs  and expenses:                  |                        |      |      |      |
|                                  | Cost  of sales              | 525,288   |      | 528,675   |   |
|                                  | Selling                     | 83,736    |      | 73,259    |   |
|                                  | General  and administrative | 146,278   |      | 154,598   |   |
|                                  | Laboratory  costs           | 77,233    |      | 69,110    |   |
|                                  | Other  expenses             | 29,014    |      | 24,476    |   |
|                                  |                             |      |           |      |
| Total  costs and expenses:            | 861,549                     |      | 850,118   |      |
|                                  |                             |      |           |      |
| Income  before income taxes           | 232,513                     |      | 768,101   |      |
|                                  |                        |      |      |      |
| Income  taxes                         | 80,238                      |      | 327,428   |      |
|                                  |                             |      |           |      |
| Net  income                      | 152,275                     |      | 440,673   |      |
|                                  |                        |      |      |      |
| Other  comprehensive income           |                        |      |      |      |
|                                  | Net  of income tax          |      |      |      |   |
| Unrealized  Holding Gains (Losses)    | 145,021                     |      | (328,114  | )         |
|                                  |                             |      |           |      |
| Comprehensive  Income                 | 297,296                     |      | $         | 112,559   |   |
|                                  |                             |      |           |      |
| Net  income per share, basic          | $                           | .10       |      | $         | .27 |   |
|                                  |                             |      |           |      |
| Net  income per share, diluted        | ****                        |      | ****      |      |
|                                  |                        |      |      |      |
| Weighted  average shares outstanding: |                        |      |      |      |
|                                  | Basic                       | 1,580,833 |      | 1,608,552 |   |
|                                  |                             |      |           |      |
|                                  | Diluted                     | 1,616,966 |      | 1,667,483 |   |
|                                  |                             |      |           |      |

----

**** Dilutedearnings per share are not presented, as effect of the assumed conversion ofNotes Payable is anti-dilutive.

See notes to condensed financialstatements.

**THE FLAMEMASTER CORPORATIONCONDENSED STATEMENTS OF INCOME (UNAUDITED)NINE MONTHS ENDED JUNE 30,**

|                                             | **2001**                       |      | **2000**  |      |
|--------------------------------------------------|--------------------------------|-----------|-----------|-----------|
|                                             | ****                           |      | ****      |      |
| Net  Sales                                       | $                              | 2,971,175 |      | $         | 2,969,661 |   |
| Royalties                                        | -                              |      | 813       |      |
| Interest  and Other Income                       | 280,600                        |      | 1,140,513 |      |
|                                             |                                |      |           |      |
| Total  Revenues                                  | 3,251,775                      |      | 4,110,987 |      |
|                                             |                                |      |           |      |
| Costs  and expenses:                             |                           |      |      |      |
|                                             | Cost  of Sales                 | 1,548,905 |      | 1,505,221 |   |
|                                             | Selling                        | 253,505   |      | 211,577   |   |
|                                             | General  and administrative    | 450,925   |      | 474,817   |   |
|                                             | Laboratory                     | 218,596   |      | 208,178   |   |
|                                             | Other  (income)/ Expenses, Net | 71,722    |      | 68,516    |   |
|                                             |                                |      |           |      |
| Total  Costs and Expenses                        | 2,543,653                      |      | 2,468,309 |      |
|                                             |                                |      |           |      |
| Income  before income taxes                      | 708,122                        |      | 1,642,678 |      |
|                                             |                           |      |      |      |
| Income  taxes                                    | 228,909                        |      | 654,102   |      |
|                                             |                                |      |           |      |
| Net  income                                      | 479,213                        |      | 988,576   |      |
|                                             |                           |      |      |      |
| Other  comprehensive income                      |                           |      |      |      |
|                                             | Net  of income taxes           |      |      |      |   |
| Increase  (decrease) in unrealized holding gains | (891,489                       | )         | 1,076,148 |      |
|                                             |                                |      |           |      |
| Comprehensive  Income                            | $                              | (412,276  | )         | $         | 2,064,724 |   |
|                                             |                                |      |           |      |
| Net  income per share, basic                     | $                              | .30       |      | $         | .61 |   |
|                                             |                                |      |           |      |
| Net  income per share, diluted                   | ***                            |      | ***       |      |
|                                             |                                |      |           |      |
| Weighted  average shares outstanding:            |                           |      |      |      |
|                                             | Basic                          | 1,584,868 |      | 1,613,938 |   |
|                                             |                                |      |           |      |
|                                             | Diluted                        | 1,623,789 |      | 1,672,869 |   |
|                                             |                                |      |           |      |

See notes tocondensed financial statements

**THE FLAMEMASTER CORPORATIONCONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)NINE  MONTHS ENDED JUNE 30,**

|                                               | **2001**  |      |
|----------------------------------------------------|-----------|-----------|
|                                               |           |      |
| Net  cash provided (used) by operating activities: | $         | 414,893   |   |
|                                               |           |      |
| CASH  FLOWS FROM INVESTING ACTIVITIES:             |      |      |
| Purchase  of equipment & improvements          | (55,594   | )         |
| Net  purchases and sales of investment securities  | (494,821  | )         |
|                                               |           |      |
| NET  CASH USED IN INVESTING ACTIVITIES:            | (550,415  | )         |
| CASH  FLOWS FROM FINANCING ACTIVITIES:             |      |      |
| Issuance  of stock                                 | 60,313    |      |
| Increase  in notes payable                         | 17,656    |      |
| Purchase  of Company’s Common Stock           | (103,662  | )         |
| Dividends  paid                                    | (152,197  | )         |
|                                               |           |      |
| NET  CASH USED IN FINANCING ACTIVITIES             | (177,890  | )         |
|                                               |           |      |
|                                               |      |      |
| NET  INCREASE, (DECREASE), IN CASH                 | (313,412  | )         |
|                                               |           |      |
| Cash,  beginning of period                         | 2,399,141 |      |
|                                               |           |      |
| Cash,  end of period                               | $         | 2,085,729 |   |
|                                               |           |      |
| Cash  paid during period for income taxes          | $         | 255,300   |   |
|                                               |      |      |
| Cash  paid during period for interest expense      | $         | 19,774    |   |

See notes toCondensed Financial Statements.

**THE FLAMEMASTER CORPORATIONNOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)JUNE 30, 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 "safeharbor" provisions of the Private Securities Litigation Reform Act of1995, the Company is hereby identifying information that is forward-looking,including, without limitations, statements regarding the Company's future financialperformance, the effect of government regulations, national and local economicconditions, the competitive environment in which the Company operates, resultsor success of discussions with other entities on mergers, acquisitions, oralliance possibilities and expansion of product offerings.  Actual results may differ materially fromthose described in the forward-looking statement.  The Company cautions that the foregoing list of important factorsis not exclusive.The Company does not undertake to update any forward-looking statements that   may be made from time to time by or on behalfof the Company.

Note 2: **Basis ofPresentation:**

The accompanying unaudited condensed financialstatements have been prepared in accordance with generally accepted accountingprinciples for interim financial information and with the instructions to Form10-QSB and Article 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 nine months andthree months ended June 30, 2001 are not indicative of the results that may beexpected for the year ending September 30, 2001.For further information, refer to the consolidated financial statements andfootnotes thereto included in the Company's annual report on Form 10-K for theyear ended September 30, 2000.

Note 3: **Summary ofSignificant Accounting Policies:             Investment in Debt and EquitySecurities:**

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 available for sale are carried at fair value, with the unrealizedgains and losses reported in a separate component of shareholders' equity netof income taxes, until realized.At June 30, 2001 the Company had no investments that qualified as trading orheld to maturity.The amortized cost of zero-coupon debt securities classified as available forsale is adjusted for accretion of discounts to maturity.  Such amortization and interest are includedin interest income.  Realized gains andlosses are included in other income or expense. The cost of securities sold isbased on specific identification method.

**             Reclassificationof Financial Statements:**

Beginning in the first quarter of fiscal 2000,various items of portfolio income, which were previously classified as"other (income), expenses, net" are classified as "interest andother income" in the condensed Statements of Income.  Amounts reported for the prior quarters havebeen reclassified to conform to the quarter 2000 presentation.

Note 4: Inventories are summarized as follows:

|                | June 30  2001 |    |
|---------------------|---------------|---------|
|                |               |    |
| Raw  materials      | $             | 513,143 |   |
| Shipping  materials | 90,129        |    |
| Finished  goods     | 334,347       |    |
|                |               |    |
|                | 937,619       |    |
|                |               |    |
|                     |               |         |  |

 

| Note 5: During the three months ended June 30, 2001, the Company  purchased 7,510 shares of its outstanding common stock at a cost |
|------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                               | of $37,605. |

 

Note 6: MARKETABLE SECURITIES:

             Marketable securities classified ascurrent assets at June 30, 2001 include the following:

|                          | Fair Value |   | Cost      |   |
|-------------------------------|------------|--------|-----------|--------|
|                          |            |   |           |   |
| U.S.  Treasury obligations    | 579,599    |   | 546,840   |   |
| Other  Government Bonds       | 43,341     |   | 43,364    |   |
| Corporate  debt securities    | 12,331     |   | 26,090    |   |
| Mortgage  backed securities   | 792        |   | 1,183     |   |
| Marketable  equity securities | 2,260,443  |   | 2,411,712 |   |
|                          |            |   |           |   |
|                          | 2,896,506  |   | 3,029,189 |   |
|                          |            |   |           |   |

             The contractual maturities of debtsecurities available for sale at June 30, 2001 is as follows:

|                             | Fair Value |   | Cost    |   |
|----------------------------------|------------|--------|---------|--------|
|                             |            |   |         |   |
| Due  within one year             | -          |   | -       |   |
| Due  after one year thru 5 years | 417,373    |   | 413,485 |   |
| Due  after 5 years thru 10 years | 127.508    |   | 110,409 |   |
| Due  after 10 years              | 90,390     |   | 92,400  |   |
| Not  due at single maturity date | 792        |   | 1,183   |   |
|                             |            |   |         |   |
|                             | 636,063    |   | 617,477 |   |
|                             |            |   |         |   |

Gross unrealized holding gains and losses atJune 30, 2001 were $276,054 and $408,737, respectively.  Realized gains and losses from the sale ofsecurities for the nine months ended June 30, 2001 were $72,052 and $1,231respectively.          .                .

**THE FLAMEMASTER CORPORATION**Item 2:Management's Discussion and Analysis of Financial Condition and Results ofOperations:

June30, 2001 compared to September 30, 2000 andJune 30, 2001 compared to June 30, 2000.

**FINANCIAL CONDITION AND LIQUIDITY:**

The Company’sfinancial condition is strong with current assets of $6,739,561 compared tocurrent liabilities of $142,431 at June 30, 2001 for a current ratio of morethan 47 to 1.  Working capital decreasedto $6,597,130 on June 30, 2001 compared to $7,211,653 at September 30, 2000,but was up from the $6,309,839 on March 31, 2001.  Cash and cash equivalents and Marketable Securities stood at$4,982,235.  Accounts Receivableincreased modestly to $561,663 from $554,251 in the prior year’s quarter endedJune 30, 2000.  Inventories decreasedmoderately to $937,619 on June 30, 2001 from $1,098,329 in the year earlierperiod, but up slightly from the $925,771 at fiscal year end, September 30,2000.  Revenues for the June 30, 2001quarter were $1,094,062 compared to $1,618,219 in the year earlier quarter dueto a lower level of investment income. Sales from operations were modestly lower to $1,005,399 for the June 30,2001 quarter due to product mix, compared to $1,085,721 in the year earlierperiod.

During thequarter the Company experienced two price increases on liquid Polysulfide, akey ingredient of many of the Company’s aircraft sealants.  Flamemaster’s only supplier of Polysulfides(Rohm & Haas) has announced plans to shut down the manufacturing of theproduct in December of 2001.  TheCompany has secured two alternative sources of Polysulfides from outside theUnited States.  One source is located inGermany and the other source is in Japan. However, there is no assurance that supplies of this key raw materialwill not be disrupted in the future, therefore, the Company must increase it’sinventory levels in order to meet customer demands.

Managementbelieves that future working capital requirements will be provided primarilyfrom operations and that the Company’s liquidity and working capitalrequirements are adequate for the next 12 months of operation.  Management believes that the Company’screditworthiness is substantial relative to its size.

The Companypaid a $.032 dividend on its common stock in June 2001.

**RESULTS OF OPERATIONS:**

For the threemonths ended June 30, 2001 net income was $152,275 compared to $440,673 or $.10per share vs. $.27 per share in the year earlier period.  The decrease in earnings was due to lowerlevels of investment gains.  During thequarter, the Company experienced an increase in the price of a key raw material(liquid Polysulfide) for it’s aircraft sealants.  The Company’s development efforts are now centered on developingmore high end products, as well as increasing prices on a select number ofstandard products.

Laboratorycosts, including research and development, for the quarter increased moderatelyto $77,233 from $69,110 in the year earlier quarter.  General and Administration expenses decreased moderately to $146,278from $154,598 in the prior year, while Selling Expense rose to $83,736 from$73,259.

 

 

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                            |
| August 7, 2001 |                                         |
|                | (Signature)                             |
|           | Joseph Mazin, President and Chairman    |
|           | and Chief Executive Officer             |
|           |                                    |
| DATE:          | MARY KAY EASON                          |
| August 7, 2001 |                                         |
|                | (Signature)                             |
|           | Mary Kay Eason, Assistant Treasurer and |
|           | Assistant Secretary                     |
|           |                                    |
| DATE:          | DONNA MAZIN                             |
| August 7, 2001 |                                         |
|                | (Signature)                             |
|           | Donna Mazin, Director                   |