10-K 1 a2033873z10-k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended SEPTEMBER 30, 2000 Commission File No: 0-2712 THE FLAMEMASTER CORPORATION ---------------------------- (Exact name of Registrant as specified in its Charter) NEVADA 95-2018730 ------ ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 11120 SHERMAN WAY, SUN VALLEY, CALIFORNIA 91352 -------------------------------------------------------------- (Address of Principal Executive Offices) Zip Code Registrant's telephone number, including area code: (818) 982-1650 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE ---- Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK - $.01 PAR VALUE ----------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any other amendment to this Form 10-K. [ ] The aggregate market value of common stock held by non-affiliates at December 18, 2000 was $4,200,869. As of September 30, 2000, there were 1,595,757 shares of common stock, $.01 par value, outstanding. Part III is incorporated by reference from the proxy statement for the next annual meeting of the shareholders. -1- TABLE OF CONTENTS PART I PAGE Item 1 Business 3 Item 2 Properties 7 Item 3 Legal Proceedings 7 Item 4 Submission of Matters to a Vote of Security Holders 7 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters 8 Item 6 Selected Financial Data 9 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8 Financial Statements and Supplementary Data 13 Item 9 Disagreements on Accounting and Financial Disclosure 13 PART III Item 10 Directors and Executive Officers of the Registrant 14 Item 11 Executive Compensation 14 Item 12 Security Ownership of Certain Beneficial Owners and Management 14 Item 13 Certain Relationships and Related Transactions 14 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 15 SIGNATURES -2- THE FLAMEMASTER CORPORATION PART I ITEM 1. BUSINESS 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. Registrant was incorporated under the laws of Nevada on September 14, 1942. COATINGS: Registrant produces flame-retardant coatings and high-heat resistant coatings. Flame retardant coatings are used in industrial applications to prevent the propagation of fire in electrical cables that are grouped together in cable trays, junction boxes, cable trenches, and similar locations. These coatings are also used in the construction of fire stops used to seal openings in walls or ceilings through which electrical cables pass. High heat resistant coatings are used to protect structural surfaces, such as the aluminum deck of a naval vessel, from the destructive temperatures and blast effects of a missile. Other applications include the protection of certain surfaces on land-based mobile missile launchers and the control surfaces of air launched missiles. SEALANTS: Sealants are used in various aerospace applications such as the sealing of seams in aircraft fuel tanks and pressurized passenger or crew compartments and optical devices. In August 1994, Registrant entered into an agreement with PRC-DeSoto Int'l Corp., formerly known as Courtaulds Aerospace, Inc. wherein PRC-DeSoto Int'l Corp. granted to Flamemaster a license with respect to certain technology and proprietary rights of PRC-DeSoto Int'l Corp. that Flamemaster expects to enhance its sealant line. ROYALTIES: Less than 0.001% of the Registrant's revenues were derived from royalties. Some protection exists for the Company's products through patents. However, not a major portion of business is subject to licenses. Registrant receives royalty income from Hitachi Cable, Ltd. of Japan. Hitachi Cable Ltd. produces the Registrant's flame retardant coating in Japan under a nonexclusive license agreement. Royalties paid are 3% and 6% of net sales and are reported and paid annually. This agreement expired in November of 1999. Royalty income decreased from $4,462 in 1999 to $813 in 2000. -3- THE FLAMEMASTER CORPORATION PART I ROYALTIES (CONTINUED): Flamemaster pays royalties to PRC-DeSoto Int'l Corp. on proprietary aircraft sealant sales based on new technology and marketing information acquired through a nonexclusive licensing agreement. Under the agreement, Flamemaster pays royalties of 4% of sales of all licensed aerospace products and Modified Chem Seal Products and royalties of 6% on all sales of PRMS, a non-chromate corrosion inhibitive sealant. The minimum required royalty payment is $25,000 per year from 1996 through 2003. Royalties paid to PRC-DeSoto were $36,655 for the fiscal year ended 2000. METHODS OF DISTRIBUTION: Flamemaster products are sold directly by four full time employees, one commissioned sales representative and through a network of 15 distributors. Most of the products manufactured by Flamemaster are required to be qualified or listed by either government or civilian agencies. The qualification and listing process involves independent testing of new products to determine that they meet minimum criteria of performance as established by government and civilian agencies. Once a new product is qualified and listed, the product may be marketed. The product mix includes products of which the registrant is the sole qualified supplier. Flamemaster's sales are a mixture of competitive bids and sales at catalog price to a variety of customers. Flamemaster's sealant product line is sold to large and small manufacturers, distributors, airlines and the United States Government. The fire retardant coatings are sold to utilities and other industrial plants and the high heat ablative coatings are sold mainly to the aerospace industry. RAW MATERIALS: Registrant buys most of its raw materials from a variety of large, well-established suppliers and manufacturers of the chemicals required making sealants and coatings. These suppliers are under no obligation to continue supplying these chemicals to Flamemaster, but these chemicals are readily available from other suppliers. Registrant's principal sealants utilize a liquid polymer produced by only one manufacturer (Morton International). The inability of this manufacturer to supply such raw material would seriously and adversely affect Registrant and all of its competitors who produce poly-sulfide based sealants and rely on this same single source of supply. The Morton polymer has been supplied for over forty years without interruption and the Company expects no interruptions in the future. -4- THE FLAMEMASTER CORPORATION PART I PRINCIPAL PRODUCTS: The principal product classes produced by the Registrant consist of sealants and coatings. Sales of sealants were $3,466,322, $3,899,481 and $3,246,210 for the fiscal years ended September 30, 2000, 1999 and 1998, respectively. Sales of coatings were $350,870, $395,796 and $523,017 for the fiscal years ended September 30, 2000, 1999 and 1998, respectively. PATENTS AND TRADEMARKS: The Company has protected trademarks in 12 Far East countries and previously owned patents in these countries as well as many other countries for its flame-retardant coatings. Registrant believes that its trademarks, experience and creative skill of its employees will give continued success rather than ownership of patents. SEASONABILITY: Registrant's business is not seasonal but does fluctuate in response to such factors beyond its control as strikes and other economic conditions adversely affecting its customers. WORKING CAPITAL ITEMS: Registrant does not normally carry excessive inventories to meet the requirements of its customers, since Registrant is generally able to fill customers' orders within 75 days. The Company has approximately $7,211,653 of working capital, including approximately $6,353,486 of cash and current portfolio of marketable securities. The Company believes that its working capital is sufficient to finance its operations for the 2001 fiscal year. PRINCIPAL CUSTOMERS: During the fiscal year ended September 30, 2000, an agency (General Services Administration) of the United States Government accounted for $659,750 (17.26%) of sales as compared to $1,190,819 (27.71%) in 1999. There were two other major customers in 2000. Sales to one customer were $840,878 or (22%) in 2000 and $625,879 or (14.56%) in 1999. Sales to one other company were $451,301 or (11.81%) in 2000. No other single customer accounted for 10% or more of sales. BACKLOGS: Backlog of orders at September 30, 2000 was $531,985 as compared to $529,236 in 1999. -5- THE FLAMEMASTER CORPORATION PART I RENEGOTIATIONS: Registrant's business is not subject to possible renegotiations of profits. Sales are made on a fixed-price basis, including sales to the U.S. Government. Substantially all contract sales are made to the U.S. Government and none are based on the cost-plus method of pricing. COMPETITION: Registrant is a producer of flame retardant coatings for the protection of grouped electrical cables sold to the electric utilities, pulp and paper, and nuclear industries, plus a fire-stop system utilized to mitigate the potential damage by fire to commercial and industrial structures. These products are either patented or listed approved. The product group is niche targeted and some level of competition does exist, however, the products have been on the market for some years and are well known. Some of the Company's competitors are larger than Registrant and have far greater financial and manpower resources. Additionally, the Registrant produces sealants utilized in the manufacture of aircraft and land transportation vehicles. This industry is highly competitive, however, Flamemaster continues to maintain the number two position in the market share of these products. Registrant also produces high temperature specialty coatings used by the aerospace industry that are formulated to meet the requirements of specific aerospace applications. Since these products are specialized and low volumes, there is a limited amount of competition in this niche of our product group. RESEARCH AND DEVELOPMENT: Net laboratory costs at September 30, 2000 were $270,134. In fiscal years ended September 30, 1999 and September 30, 1998, laboratory costs were $270,507 and $246,442, respectively. Flamemaster received no revenues to offset laboratory costs in 2000, 1999 or 1998. Research and development costs are included in laboratory costs in the financial statements as the amounts are not material. The research and development is in connection with new products and improvements to existing products. All of Registrant's research and development activities are Company-sponsored. COMPLIANCE WITH ANTI-POLLUTION LAWS: Periodic inspections by Federal, State and local agencies concerned with the protection of the environment indicate that Registrant is in full compliance with anti-pollution laws and standards. Registrant has no plans to change its manufacturing processes in a manner likely to result in material expenditures for additional environmental control facilities. -6- THE FLAMEMASTER CORPORATION PART I EMPLOYEES: As of September 30, 2000 Registrant employed 25 persons as compared to 28 persons in the prior year. EXPORT SALES: Export sales totaled $171,435, $177,808 and $335,910 in 2000, 1999, and 1998, respectively. ITEM 2. PROPERTIES Registrant occupies approximately 28,000 square feet of office and manufacturing space located at 11120 Sherman Way, Sun Valley, California 91352 under terms of a lease expiring in September 2001. Registrant believes its facilities are adequate for present and anticipated operations. ITEM 3. LEGAL PROCEEDINGS In February 1994 a suit was filed against the Company for an environmental claim related to property leased from 1961 to 1973. The present owner of the property implemented remedial action on the site and was seeking reimbursement by the Company for the costs related to the clean up. The action was settled during January 1997. The bulk of the settlement was paid for by the insurance carriers of the Company. The Company was required to contribute $110,000 toward the settlement with $60,000 payable during the 1997 calendar year and $50,000 payable during 1998. In August of 1998, Flamemaster completed its settlement obligation. As a condition of the settlement agreement, any settlement monies paid by the Company must be applied to the remediation of the subject site. This claim is currently pending with the UST Clean Up Fund and will be under consideration for two or three years. No reimbursement of settlement monies has been accrued as of September 30, 2000 and 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE. -7- THE FLAMEMASTER CORPORATION PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Registrant's common stock is traded over-the-counter on the National Market System with the NASDAQ symbol "FAME". The over-the-counter market quotations reflect inter dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. The following stock prices represent the daily prices of the stock for fiscal 2000 and 1999.

The stock quote as of December 18, 2000 was $ 5.22 bid and $ 5.50 asking price. As of December 18, 2000, there were approximately 1,000 beneficial holders of Registrant's common stock. The common stock dividend was increased on January 6, 2000 from $.03 to $.032 per quarter. Dividends are expected to remain constant in the near future. -8- THE FLAMEMASTER CORPORATION PART II ITEM 6. SELECTED FINANCIAL DATA The following selected financial data for the five years ended September 30, 2000 are derived from the consolidated financial statements of the Company. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.

*** Diluted earnings per share for 1997 and 1998 and are not presented, as the effect of the assumed conversion of preferred stock is anti-dilutive. -9- THE FLAMEMASTER CORPORATION PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FISCAL 2000: FINANCIAL CONDITION AND LIQUIDITY: The Company's financial condition is strong. Current assets were $7,971,234 compared to current liabilities of $759,581 at September 30, 2000 for a current ratio of 10.5 to 1. Working capital increased by $1,493,161 to $7,211,653 compared to $5,718,492 at September 30, l999. Cash and cash equivalents, and marketable securities increased by $1,990,304 to $6,353,486. The company manufactures and sells aircraft sealants and protective coatings for both military and commercial applications. The products are produced for both new construction as well as maintenance and repair facilities. Accounts receivable increased to $538,466 at September 30, 2000 from $496,776 in the previous year. Sales of aircraft sealants decreased to $3,466,322 ( 90.70% of product sales) from $3,899,481 (90.72% of product sales) in the prior year and sales of Flamemastic (fire-retardant coating) and Dyna-Therm (aerospace coatings) decreased to $350,870 (9.18% of product sales) of sales from $395,796 (9.21% of product sales) Three customers each accounted for more than 10% of sales. These three customers accounted for a total of 51.1%. The U.S. Government accounted for 17.26% of sales in fiscal 2000 compared to 27.71% in the year earlier. Royalty income for fiscal 1999 was $813, down from $4,462 in the previous year. Royalty income is not a significant factor affecting the Company's earnings or revenues. The Company believes that liquidity and working capital are adequate to fund the Company's operations and capital requirements for the 2001 fiscal year. -10- THE FLAMEMASTER CORPORATION PART II OUTLOOK FOR OPERATIONS: The Company is a very small manufacturer of high performance sealants and protective coatings for defense and aerospace markets. The commercial aerospace industry has shown an increase in activity. Flamemaster concentrates on manufacture and sale of products for maintenance and repairs, a more stable sector of the industry. The Company is in a unique position of being a small domestic supplier of products sold under QPL MIL SPECS (Qualified Products List Military Specifications). This enables the Company to be flexible in meeting customers needs, and to provide a greater degree of service and efficiency. Flamemaster's main competitor is a multi billion dollar, multi national corporation. Backlog of orders at September 30, 2000 was $531,985 up from $529,236 in the previous year. This reflects the stability of the Company's operations. Future income from capital gains on investments cannot be predicted and should not be expected to remain at 2000 levels. The common stock dividend was increased on January 6, 2000 from $.03 to $.032 per quarter and remained constant throughout the year. Dividends are expected to remain constant in the near future. FISCAL 2000 VS. 1999: Sales of products for the fiscal year ended September 30, 2000 were $3,821,560 a decrease of $476,577 or 11.1% over the prior fiscal year. Sales of Flamemastic (fire retardant coatings) and Dyna-Therm (aerospace coatings) decreased to 9.18% of sales or $350,870 from 9.21% of sales or $395,796. Sales of aircraft sealants decreased as a result of decline in demand of aerospace products. Sales of Chem Seal (sealant) products decreased to $3,466,322 from $3,899,481 in the prior year, mostly as a result of decreased U.S. Military activities in Europe. Three customers accounted for a total of 51.1% of sales. The U.S. Government accounted for 17.3% of sales, compared to the year earlier level of 27.7%. The company's largest customer was a distributor accounted for 22% of sales. The Company's third largest customer accounted for 11.8% of sales. Net investment income of $1,320,217 sparked the Company's rise in earnings. This income was comprised of net realized capital gains of $835,960, option income of $268,836, dividend income of $125,560, and interest income of $89,861. This income represents an increase of 272%, or $965,202 over 1999. Royalty income decreased to $813 from $4,462 in the previous year. -11- THE FLAMEMASTER CORPORATION PART II FISCAL 2000 VS. 1999 (CONTINUED): Costs of products sold in fiscal 2000 were $1,944,114 compared to $1,973,444 in the previous year. These amounts represent 51% and 46% of the sales in 2000 and 1999, respectively. Increase in cost of products as a percent of sales is due to the decreased sales of higher profit margin items of desired aircraft sealant products. Selling, general and administrative expenses increased to $891,078 from $853,032 while gross laboratory costs decreased to $270,134 from $270,507. The increase in selling, general and administrative expenses was due to increases in personnel expenses, travel and advertising and the decrease in laboratory costs was not significant. The license agreement with PRC-DeSoto grants Flamemaster the right to use technical data obtained from PRC-DeSoto in the productions of sealants. The Company agreed to pay PRC-DeSoto royalties of 3% to 6% (depending on product) of net sales attributable to the licensed products. For fiscal 2000, this royalty amounted to $36,655. FISCAL 1999 VS. 1998 Sales for the fiscal year ended September 30, 1999 were $4,298,137 an increase of $522,171 or 13.8% over the prior fiscal year. Sales of Flamemastic (fire retardant coatings) and Dyna-Therm (aerospace coatings) decreased to 9.21% of sales or $395,796 from 13.85% of sales or $523,017. Sales of aircraft sealants continued to increase as a result of introduction of new products and more product categories, as well as an expanded customer base. Sales of Chem Seal (sealant) products increased to $3,899,481 from $3,246,210 in the prior year, mostly as a result of increased U.S. Military activities in Europe. Two customers accounted for a total of 42.3% of sales. The Company's largest customer, the U.S. Government accounted for 27.7% of sales, compared to the year earlier level of 13.0%. The company's second largest customer was a distributor accounted for 14.6% of sales. Royalty income decreased to $4,462 from $10,399 in the previous year. Costs of products sold in fiscal l999 were $1,973,444 compared to $1,967,790 in the previous year. These amounts represent 46% and 52% of the sales in 1999 and 1998, respectively. Decrease in cost of products as a percent of sales is due to the increased sales of higher profit margin items of desired aircraft sealant products. Selling, general and administrative expenses decreased to $853,032 from $873,693 while gross laboratory costs increased to $270,507 from $246,442. The decrease in selling, general and administrative expenses was due to a reduction in legal fees and stock fees and the increase in laboratory costs was primarily due to an increase in personnel in order to support research and development projects. -12- THE FLAMEMASTER CORPORATION PART II FISCAL 1999 VS. 1998 (CONTINUED) The license agreement with PRC-DeSoto grants Flamemaster the right to use technical data obtained from PRC-DeSoto in the productions of sealants. The Company agreed to pay PRC-DeSoto royalties of 3% to 6% (depending on product) of net sales attributable to the licensed products. For fiscal l999, this royalty amounted to $59,112. IMPACT OF INFLATION AND CHANGING PRICES: Raw material costs and wages remained steady in 2000, as average selling prices also remained constant. No significant changes are anticipated for 2001. ITEM 7A. QUANITIATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The Company is not subject to any significant market risks such as fluctuations in foreign currencies or interest rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is set forth in the text on pages 16 through 29. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE. -13- THE FLAMEMASTER CORPORATION PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference to the Company's definitive proxy statement for the next annual meeting of shareholders. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference to the Company's definitive proxy statement for the next annual meeting of shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference to the Company's definitive proxy statement for the next annual meeting of shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Altius Investment Corporation owns approximately 27% of the Company's outstanding common shares. Two of the six members of the board are on the Altius Investment Corporation's Board of Directors. The Company's President and Chairman is Chairman of the Altius Investment Corporation as well. -14- THE FLAMEMASTER CORPORATION PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 1. FINANCIAL STATEMENTS The following financial statements are included in Part II, Item 8: - Report of Independent Auditors - Beckman Kirkland & Whitney on 2000, 1999 and 1998 financial statements. - Balance Sheets, September 30, 2000 and 1999. - Statements of Income for the years ended September 30, 2000, 1999, and 1998. - Statements of Shareholders' Equity for the years ended September 30, 2000, 1999, and 1998. - Statements of Cash Flows for the years ended September 30, 1999, 1998, and 1997. - Notes to Financial Statements. 2. FINANCIAL STATEMENT SCHEDULES - Schedule II - Valuation and Qualifying Accounts. 3. EXHIBITS - Exhibit 11.1 - Statement regarding computation of per share earnings. All other schedules are omitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto. Separate financial statements of the Registrant have been omitted because the Registrant meets the requirements that permit omission. -15- INDEPENDENT AUDITORS' REPORT November 28, 2000 Board of Directors and Shareholders The Flamemaster Corporation Los Angeles, California We have audited the accompanying balance sheets of The Flamemaster Corporation as of September 30, 2000 and 1999, and the related statements of income, shareholders' equity, and cash flows for the years ended September 30, 2000, 1999, and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to in the first paragraph above present fairly, in all material respects, the financial position of The Flamemaster Corporation at September 30, 2000, and 1999, and the results of their operations and their cash flows for the years ended September 30, 2000, 1999, and 1998, in conformity with generally accepted accounting principles. Beckman Kirkland & Whitney Agoura Hills, California -16- THE FLAMEMASTER CORPORATION BALANCE SHEET

-17- THE FLAMEMASTER CORPORATION BALANCE SHEET

-18- THE FLAMEMASTER CORPORATION STATEMENT OF INCOME

-19- THE FLAMEMASTER CORPORATION STATEMENT OF COMPREHENSIVE INCOME

-20- THE FLAMEMASTER CORPORATION STATEMENT OF SHAREHOLDERS' EQUITY

-21- THE FLAMEMASTER CORPORATION STATEMENT OF SHAREHOLDERS' EQUITY

-22- THE FLAMEMASTER CORPORATION STATEMENT OF CASH FLOWS

-23- FLAMEMASTER CORPORATION NOTES TO FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES: The financial statements have been prepared in accordance with generally accepted accounting principles and necessarily include amounts based on estimates and assumptions by management. Actual results could differ from those amounts. REVENUE RECOGNITION: Sales generally are recorded by the company, including those made under ongoing contracts, at the time products are shipped. Revenues from royalties earned under licensing agreements are recognized in the period the royalties are earned. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. MARKETABLE SECURITIES: 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 September 30, 2000, 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 and expense. The cost of securities sold is based on the specific identification method. INVENTORIES: Inventories are valued at the lower of cost (first-in, first-out) or market. LABORATORY COSTS: Laboratory costs include product testing, quality control, and research and development. A minor portion pertaining specifically to research and development is not segregated. DEPRECIATION AND AMORTIZATION: Depreciation and amortization of equipment and improvements are computed on the straight-line method over the estimated useful lives of the assets as follows: Machinery, equipment, furniture and fixtures 2-10 years Leasehold improvements Terms of leases INCOME PER SHARE: Per share data is based on the weighted average number of shares outstanding. INCOME TAXES: Provisions (benefits) for federal and state income taxes are calculated on reported financial statement (income) loss based on current tax law. Such provisions (benefits) differ from the amounts currently payable because certain items of income and expense, known as temporary differences, are recognized in different tax periods for financial reporting purposes than for income tax purposes. DEFERRED CREDITS: The excess of the fair value of net current assets of companies merged with the Company over the carrying values of those companies at the merger date is being amortized into income on the straight-line basis over five years. -24- STOCK-BASED COMPENSATION: As Described in Note H, the Company has elected to follow the accounting provisions of APB 25, Accounting for Stock Issued to Employees, for stock options and to furnish the pro forma disclosures required under SFAS No. 123, Accounting for Stock-Based Compensation. NOTE B - CONCENTRATION OF RISK Financial instruments, which potentially subject the Company to a concentration of credit risk, principally consist of cash, cash equivalents and trade receivables. As of September 30, 2000, the Company had approximately $118,922, $150,786, and $350,161, of cash and cash equivalents in three banks which exposes the Company to concentration of credit risk. NOTE C - MARKETABLE SECURITIES Marketable securities classified as current assets at September 30, 2000 include the following:

The contractual maturities of debt securities available for sale at September 30, 2000 as follows:

Gross unrealized holding gains and losses at September 30, 2000, were $1,687,916, $267,939, respectively. Realized gains and losses from the sale of securities for the year ended September 30, 2000 were $839,966 and $5,990 respectively. Gross proceeds from the sale of securities for the year ended September 30, 2000 was $1,526,855. -25- NOTE D - INVENTORIES Inventories consist of the following:

NOTE E - INVESTMENTS IN AFFILIATED COMPANIES At the end of June 1997, Dynamastic, a wholly owned subsidiary, was dissolved, with all assets and liabilities being transferred to Flamemaster. At the time of the transfer, the value of Dynamastics' current assets exceeded the Company's carrying value for this investment. This excess value has been recorded as a deferred credit and is being amortized to income over five years. During 1994, the Company acquired a 17% interest in and serves on the Board of Directors of PerfectData Corporation. PerfectData engages in the design, assembly and distribution of computer and office equipment care and maintenance products. Flamemaster's initial investment in PerfectData of $707,051 was recorded at cost. Subsequently, the Company purchased additional stock and owned 21% of PerfectData at September 30, 1996. Due to the level of stock ownership, the Company's investment in PerfectData was accounted for under the equity method until July 1997, when the Company contributed 35,000 shares of PerfectData stock to its profit-sharing plan, thus reducing its investment to less than 20% of the outstanding PerfectData stock. At the time of the change in ownership, the Company's undistributed earnings from PerfectData represented $35,469 of the Company's retained earnings. The Company's investment in PerfectData is now accounted for as a marketable security. NOTE F - AGREEMENT WITH PRODUCTS RESEARCH CORPORATION In August 1994, the Company signed a license agreement with PRC-DeSoto Int'l Corp, formerly known as Courtaulds Aerospace, Inc. Under the license agreement, Flamemaster was granted the right to use technical data obtained from Courtaulds in the production of sealants. The Company agreed to pay Courtaulds royalties of 3% to 6% (depending on product) of net sales attributable to the licensed products with an annual minimum royalty of $25,000 in 1996 and each year thereafter through 2003. Royalties paid under this agreement were $36,655 in 2000, $59,112 in 1999 and $25,000 in 1998. The license agreement has been valued at $172,357 and is being amortized over 10 years, the term of the agreement. NOTE G - COMMITMENTS AND CONTINGENCIES The Company leases office, manufacturing and storage facilities under a noncancelable operating lease that expires in September 30, 2001. The lease requires the Company to pay applicable property taxes, maintenance and insurance. Rent expense charged to operations were $185,328 in 2000, $180,273 in 1999, and $175,214 in 1998. -26- NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED) As of September 30, 2000, future minimum payments under this lease are: 2001 $ 188,698 Thereafter - ---------- Total minimimun lease payments $ 188,698 ==========

NOTE H - STOCK OPTIONS AND WARRANTS In January 1989, the Company's Board of Directors ratified a stock option plan whereby key personnel were granted options to purchase an aggregate of 150,000 shares of common stock. These options, which carried an exercise price of $4.625, were repriced to $3.50 during 1994. These options were exercisable beginning in January of 1989 and expire on April 30, 1999. The 40,375 options were exercised in 1998 for $16,761. No common stock options were exercised in the fiscal year ended September 30, 1999. In April 2000, the Company's Board of Directors approved a stock option plan whereby directors and key personnel were granted options to purchase 35,000 of the Company's common stock or receive $.10 for each option to which they would otherwise be entitled. Employees and directors opted to receive 3,650 of the options. These options carry an exercise price of $7.125 per share. The options vest on December 31, 2000 have a five-year term expiring April 30, 2005. As of September 30, 2000 no options have been exercised under this plan. The Company applies APB 25 in accounting for its stock options. The option price equals or exceeds the fair market value of the common shares on the date of the grant and, accordingly, no compensation cost has been recognized under the provisions of APB 25 for stock options. Compensation cost is measured at the grant date based on the value of the award and is recognized over the vesting period. Had compensation cost for the Company's stock option plan been determined under SFAS 123, based on the fair market value at the grant dates, the Company's proforma net earnings and net earnings per share would have been reflected as follows at September 30,:

The fair value of each option is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions: Dividend yield 0%, expected volatility of 225%, risk free interest rate of 6% and term of 5 years. 27 NOTE I - LITIGATION In February 1994 a suit was filed against the Company for an environmental claim related to property leased from 1961 to 1973. The present owner of the property implemented remedial action on the site and was seeking reimbursement by the Company for the costs related to the clean up. The action was settled during January 1998. The bulk of the settlement was paid for by the insurance carriers of the Company. The Company was required to contribute $110,000 toward the settlement with $60,000 payable during the 1997 calendar year and $50,000 payable during 1998. In August of 1998, Flamemaster completed its settlement obligation. NOTE J - INCOME PER COMMON SHARE Basic income per share of common stock is based on the weighted average number of shares outstanding. Outstanding options were considered in the basic and diluted earnings per share calculations using the treasury stock method. In 1998, preferred stock was exchanged for convertible notes. A conversion ratio of 2.46:1 was assumed in calculating earnings per share for these notes. Diluted earnings per share for 1998 were not presented, as the effect of the assumed conversion is anti-dilutive. NOTE K - INCOME TAXES In October 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes". SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Previously, the Company used the APB 11 approach that gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts. Under SFAS 109 the Company recognizes to a greater degree the future tax benefits of expenses which have been recognized in the financial statements of the component

The following reconciles the federal statutory tax rate to the effective rate of the provision for income taxes:

-28- NOTE L - PROFIT-SHARING PLAN The Company contributes to a profit-sharing plan for the benefit of employees meeting certain eligibility requirements and electing participation in the plan. Contributions are made from net profits as determined by the Board of Directors. Profit-sharing expense, which equals contributions, was $41,557 in 2000, $43,861 in 1999 and $36,000 in 1998. NOTE M - SALES INFORMATION AND MAJOR CUSTOMERS Net sales to the United States government were $659,750 in 2000, $1,190,819 in 1999, and $490,896 in 1998. These sales were comprised principally of sealants. Two other customers accounted for more than 10% during 2000. The sales to one company were $840,878 in 2000, $625,879 in 1999, and $653,676 in 1998. Sales to one other company were $451,301 in 2000, $411,579 in 1999 and $367,316 in 1998. These sales were comprised principally of coatings and sealants. No other single customer accounted for 10% or more of sales during the year. Export sales and royalty income from foreign sources are generated entirely by The Flamemaster Corporation and are as follows:

NOTE N - RELATED PARTIES Altius Investment Corporation owns approximately 27% of the Company's outstanding common shares. Two of the six members of the board, including the Company's President and Chairman, who also serves as Altius Investment Corporation's Chairman, are members of the Altius Investment Corporation's Board of Directors. NOTE O - LONG-TERM DEBT On October 23, 1997, the Flamemaster Corporation Board of Directors approved the calling (redemption) of the Flamemaster Preferred stock at $5.95 per share pursuant to the terms of the issue. The Board also approved an alternative whereby shareholders could elect to tender their preferred shares for $10 notes paying interest only until maturity at an annual interest rate of 5.6%. The notes are for a term of 5 years and will mature on December 31, 2002. The notes are convertible into common stock at a ratio of 2.472 to 1. The notes must be held for at least 1 year before they can be converted, and are callable at $8.00 after 1 year, $8.50 after 2 years, $9.00 after 3 years, $9.50 after 4 years, and $10.00 after 5 years. Pursuant to the calling of the preferred shares, 7,050 shares are redeemed at a cost of $25,000, 14,118 preferred shares were converted into 34,898 shares of common stock, and 47,082 preferred shares were converted into notes. The Company recorded the notes at $376,656, which reflects the 47,082 shares converted into notes at $8 per share, the amount at which the Company may call the notes after 1 year. At September 30, 2000 the notes are valued at $8.50 per share or $400,197. -29- FLAMEMASTER CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

** Credited to accounts receivable to write-off bad debt *** Charged to bad debt expense as a reserve -30- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. THE FLAMEMASTER CORPORATION Registrant /s/ JOSEPH MAZIN --------------------------------------------- Joseph Mazin, Chairman, President, Chief Executive Officer, Chief Financial Officer and Director Date: 12/20/2000 ----------------------------------- /s/ LEON GUTOWICZ ------------------------------------- Leon Gutowicz, Director Date: 12/20/2000 ----------------------------------- /s/ DONNA MAZIN --------------------------------------------- Donna Mazin, Director Date: 12/20/2000 ----------------------------------- /s/ MARY KAY EASON ------------------------------------- Mary Kay Eason, Controller & Assistant Secretary Date: 12/20/2000 ----------------------------------- -31-

FLAMEMASTER CORP 10-K