SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended October 31, 1995 Commission File Number: 0-5105
MILASTAR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2636669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
No. 9 Via Parigi, Palm Beach, Florida 33480
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (407)655-9590
Not Applicable
Former name, former address and former fiscal year, if changed since last
report.
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
At October 31, 1995, 2,738,264 shares of common stock of the Registrant were
issued and outstanding.
MILASTAR CORPORATION AND SUBSIDIARIES
PART I
Item 1. Financial Statements
The condensed financial statements included herein have been prepared
by Milastar Corporation (the "Company") without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. However, the Company
believes that the disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's annual report on Form 10-K for the fiscal year ended April 30,
1995.
The condensed financial statements included herein, which are unaudited,
include, in the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the financial position
and results of operations of the Company for the periods presented.
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MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
October 31, April 30,
1995 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . $ 264,000 $ 365,000
Marketable securities and other investments, at fair value . . . . . . 25,000 25,000
Accounts receivable:
Trade, less allowance for doubtful accounts of $37,000
(October 31, 1995) and $26,000 (April 30, 1995) . . . . . . . 827,000 1,070,000
Other . . . . . . . . . . . . . . . . . . . . . . . 5,000 4,000
Inventory. . . . . . . . . . . . . . . . . . . . . . 171,000 192,000
Prepaid expenses and other . . . . . . . . . . . . . 197,000 255,000
Total current assets . . . . . . . . . . . . . . . 1,489,000 1,911,000
Property, plant and equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . . 199,000 199,000
Buildings and improvements . . . . . . . . . . . . . 646,000 605,000
Equipment. . . . . . . . . . . . . . . . . . . . . . 4,457,000 4,178,000
5,302,000 4,982,000
Less accumulated depreciation . . . . . . . . . . . (2,203,000) (1,962,000)
3,099,000 3,020,000
Other assets:
Non-compete agreement. . . . . . . . . . . 58,000 86,000
Building held for sale, net of valuation allowance . 268,000 298,000
Total assets . . . . . . . . . . . . . . $ 4,914,000 $ 5,315,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable (shareholder). . . . . . . . . . . . . $ 285,000 $ 345,000
Current maturities of long-term debt . . . . . . . . 59,000 59,000
Accounts payable . . . . . . . . . . . . . . . . . . 230,000 483,000
Income taxes payable . . . . . . . . . . . . . . . . 5,000 5,000
Accrued payroll and benefits . . . . . . . . . . . . 140,000 201,000
Accrued real estate taxes. . . . . . . . . . . . . . 72,000 145,000
Other accrued liabilities. . . . . . . . . . . . . . 187,000 172,000
Total current liabilities. . . . . . . . . . . . . 978,000 1,410,000
Long-term debt, less current maturities. . . . . . . . 48,000 40,000
Total liabilities. . . . . . . . . . . . . . . . . 1,026,000 1,450,000
Stockholders' equity:
Preferred stock, $1.00 par value; authorized 5,000,000 shares, none issued
Common stock, $.05 par value; Authorized 7,500,000 shares, issued and
outstanding 2,738,264 shares at October 31, 1995 and April 30, 1995 137,000 137,000
Note receivable from officer . . . . . . . . . . . . (20,000) (20,000)
Unrealized holding gains on marketable securities. . . . . . . 20,000 20,000
Additional paid-in capital . . . . . . . . . . . . . 1,666,000 1,666,000
Retained earnings. . . . . . . . . . . . . . . . . . 2,085,000 2,062,000
Total stockholders' equity. . . . . . . . . . . . . 3,888,000 3,865,000
Total liabilities and stockholders' equity . . . . . . . . . $ 4,914,000 $ 5,315,000
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
October 31, October 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . $ 1,715,000 $ 1,630,000 $ 3,646,000 $ 3,215,000
Cost of Sales . . . . . . . . . . . . 1,267,000 1,334,000 2,687,000 2,640,000
Gross margin. . . . . . . . . . . . . 448,000 296,000 959,000 575,000
Selling general and admin expenses . 447,000 462,000 872,000 924,000
Amortization of non-compete agreement. 14,000 14,000 28,000 28,000
Operating income (loss) . . . . . . . (13,000) (180,000) 59,000 (377,000)
Other income (expense):
Dividend and interest income . . . . 4,000 139,000 10,000 282,000
Interest expense . . . . . . . . . . (8,000) (109,000) (16,000) (209,000)
Unrealized loss on valuation of
building held for sale . . (30,000)
Net gain (loss) on sale of
marketable securities . . 9,000 (28,000)
Total other income (expens (4,000) 39,000 (36,000) 45,000
Income (loss) before income taxes . . (17,000) (141,000) 23,000 (332,000)
Provision (benefit) for income taxes.
Net income (loss) . . . . . . . . . . $ (17,000) $ (141,000) $ 23,000 $ (332,000)
Net income (loss) per common share. . $(.01) $(.05) $.01 $.(12)
Weighted average number of shares
outstanding during the period. . . . 2,728,264 2,738,264 2,728,264 2,738,264
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended October 31,
(Unaudited)
1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . $ 23,000 $ (332,000)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . 269,000 240,000
Net gain (loss) on sale of marketable securities (28,000)
Unrealized market loss on valuation of building
held for sale. . . . . 30,000
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . 243,000 (165,000)
Inventory . . . . . . . . . . . . . . . . . 21,000 (41,000)
Prepaid supplies and other assets . . . . . 58,000 (51,000)
Accounts payable and accrued expenses . . . (373,000) 96,000
Income taxes payable. . . . . . . . . . . .
Net cash provided (used) by operating activities 271,000 (281,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment. (320,000) (395,000)
Proceeds from sale of mkt securities and other
investments (classified as available-for-sale) 1,697,000
Net cash provided (used) by investing activities (320,000) 1,302,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt. . 47,000
Principal payments on long-term debt. . . . (39,000) (23,000)
Reduction of note payable - repo. . . . . . (1,340,000)
Proceeds from issuance of note
payable - shareholder. . . . 295,000
Reduction of note payable - shareholder . . (60,000)
Net cash used by financing activities. . . . (52,000) (1,068,000)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . (101,000) (47,000)
CASH AND CASH EQUIVALENTS BALANCE AT BEGINNING
OF YEAR . . . . . . . . . . . . . . . . . . 365,000 247,000
CASH AND CASH EQUIVALENTS BALANCE AT END OF
THE SECOND QUARTER. . . . . . . . . . . . . $ 264,000 $ 200,000
Supplemental disclosures of cash flow information:
Cash paid during the first half for:
Interest . . . . . . . . . . . . . . . . . $ 2,000 $ 199,000
Income taxes . . . . . . . . . . . . . . . $ $
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MILASTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries, Flame Metals
Processing Corporation which was acquired in May 1985, Northwest Engineering
Labs, Inc. which was acquired in October 1988 and Milastar Services
Corporation. In consolidation, all significant intercompany accounts and
transactions are eliminated.
Cash and cash equivalents The Company considers cash equivalents to
include all investments purchased with an original maturity of 90 days or less
which have virtually no risk of loss of value of the principal amount of the
investment.
Marketable securities and other investments Marketable securities as of
October 31, 1995, consist of equity securities. The Company adopted the
provisions of Statement of Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities (Statement 115) on May 1,
1994. Under Statement 115, the Company classifies its debt and equity securities
in one of three categories: trading, available-for-sale, or held-to-maturity.
Trading securities are bought and held principally for the purpose of selling
them in the near term. Held-to-maturity securities are those securities in
which the Company has the ability and intent to hold the security until
maturity. All other securities not included in trading or held-to-maturity
are classified as available-for-sale. Trading and available-for-sale
securities are recorded fair value. Held-to-maturity securities are recorded at
amortized cost, adjusted for the amortization or accretion of premiums of
discounts. Unrealized holding gains and losses on trading securities are
included in earnings. Unrealized holding gains and losses on available-for-
sale securities are excluded from earnings and are reported as a separate
component of stockholders' equity until realized. Transfers of securities
between categories are recorded at fair value at the date of transfer. A
decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to
earnings resulting in the establishment of a new cost basis for the security.
Property, plant and equipment Property, plant and equipment are carried
at cost. Depreciation is computed using the straight-line method. When assets
are retired or otherwise disposed of, the cost and related depreciation are
removed from the accounts, and any gain or loss is reflected in income for the
period. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized and deduction is
made for retirements resulting from the renewals or betterments.
The estimated useful lives of the fixed assets are as follows:
Buildings 35 years
Equipment 5 to 12 years
Vehicles 3 to 5 years
Other assets Other assets are comprised of two five-year non-
competition agreements which are being amortized over 60 months using the
straight-line method and the Minneapolis building which is being held out
for sale.
Income taxes In February 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Statement 109 requires a change from the deferred method of
accounting for income taxes of APB Opinion 11 to the asset and liability method
of accounting for income taxes. Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Effective May 1, 1992, the Company adopted Statement 109 and has reported
the cumulative effect of that change in the method of accounting for income
taxes in the 1993 consolidated statement of earnings.
2 MARKETABLE SECURITIES AND OTHER INVESTMENTS
Marketable securities and other investments consists of bonds and common
stock and are being used to invest excess cash until an appropriate acquisition
or operating need arises. In accordance with Statement 115 they are classified
as available-for-sale and as such unrealized gains and losses are reported as a
separate component of shareholders' equity until realized. Dividend income,
interest income, and prepayment losses on debt securities is accrued as earned.
The Company uses specific identification to determine the fair value of
marketable securities and other investments.
Marketable securities and other investments was comprised of the
following at October 31, 1995 and 1994:
Description 1995 1994
Sears Mtg. Securities ARM 3,403,000
Sears Mtg. Securities ARM 5,579,000
First Colonial Bank Shares Common Stock 5,000 5,000
Total cost 5,000 8,987,000
Gross unrealized holding losses (140,000)
Gross unrealized holding gains 20,000 20,000
Fair value 25,000 8,867,000
3 RELATED PARTY TRANSACTIONS
The Company entered into two Note Agreements during fiscal 1993. The
first note of $76,000 is dated October 1, 1992, bears interest at 8.0% and is
due in 48 monthly installments commencing June 1, 1994. The note is between the
Company and Sound Techniques, Inc., a Subchapter S Corporation wholly-owned by
J. Russell Duncan, chairman of the Board and a director of the
Company. Lance H. Duncan, the son of J Russell Duncan and a director of the
Company is President of Sound Techniques, Inc. The note resulted from
advances to and payments by the Company on behalf of Sound Techniques, Inc.
On April 18, 1995 the entire balance of the note, which consisted of $76,000 in
principal and $17,000 in interest, was paid by Sound Techniques, Inc.
The second note is between the Company and L. Michael McGurk, President,
Chief Operating Officer and a director of the Company who, with the
encouragement of the Company, bought 15,000 shares of Milastar Class A
Common Stock and entered into a note with the Company. The note of $20,000
is dated August 15, 1992 and bears interest at 50 basis points over NYC Prime
adjustable upward or downward at the end of each six-month period, which
interest rate is subject to an 8% "cap" during the life of the loan. Interest
on the principal is payable each year on the anniversary date of the note. The
principal portion of the note that was originally due on August 15, 1995 has
been extended until August 15, 1997. The Company is holding Mr. McGurk's
15,000 shares of Milastar Class A Common Stock as collateral for the note.
Total interest income related to these notes for the quarters ended
October 31, 1995 and October 31, 1994 was $500 and $300, respectively.
4 NOTE PAYABLE
On April 1, 1992 and June 18, 1993 the Company entered into two reverse
repurchase agreements ("Repos") to finance an Adjustable Rate Mortgage
("ARM") portfolio aggregating $6,205,000 and $8,059,000, respectively. Each
ARM was leveraged at a financing to equity ratio of approximately 9:1.
Accordingly, the Company invested $635,000 and $604,000 and entered into
note payables for $5,570,000 and $7,455,000, respectively. The interest rate
charged on the notes is the London Interbank Offered Rate (LIBOR) and ranged
from 3.75% to 4.56%. Each ARM, which was pledged as collateral against the
respective note payable, earned interest at the LIBOR rate plus 135 basis points
and such interest was paid monthly. As of April 30,1995 the Company has
liquidated all of the reverse agreements and the associated notes payable.
Total interest expense related to these notes for the quarters ended October
31, 1995 and October 31, 1994 was $0 and $103,000, respectively.
During fiscal 1995 the Company entered into a series of notes payable
totaling $345,000 payable to J. Russell Duncan, Chairman of the Board and a
Director of the Company. The notes bear an interest rate of 8% and are payable
on demand. The Company classifies the notes payable as a current liability.
Total interest expense related to this note for the quarters ended October 31,
1995 and October 31, 1994 was $7,000 and $3,000, respectively.
5 INCOME TAXES
The Company has provided for current income taxes on earnings at the
appropriate statutory state and federal rates applicable to such earnings, and
any deviation is solely the result of book/tax differences arising mainly from
the recognition of tax depreciation expense.
6 EARNINGS PER COMMON SHARE
The computation of earnings per share is as follows:
Three Months Ended
October 31,
1995 1994
Weighted average number of shares of series
A Common stock outstanding. . . . 2,738,264 2,738,264
Dilutive effect of stock options after application
of treasury stock method. . . . .
Weighted average number of shares of Class A
common stock outstanding during the period . 2,738,264 2,738,264
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended October 31, 1995 Compared to Three Months Ended
October 31, 1994. The Company recorded sales of $1,715,000 during the second
quarter of fiscal 1996 as compared to $1,630,000 for the same period last year,
an $85,000 (5%) increase. The increase is primarily attributable to heat
treating services provided on new products for existing customers.
Cost of sales of $1,267,000 (74% of net sales) decreased $67,000 (5%) from
$1,334,000 (82% of net sales) for the same period a year earlier. The decreased
cost of sales is a the result of improved labor efficiency and decreased
industrial gas usage which was accomplished by purchasing capital equipment.
Gross margin improved significantly to $448,000 compared to $296,000 in the
prior year second quarter.
Selling, general and administrative expenses of $447,000 (26% of net sales)
decreased $15,000 (3%) from $462,000 (28% of net sales) recorded during the
second quarter of fiscal 1995. The decrease is primarily the result of
reductions in payroll expenses. The reduction of selling and G&A expenses,
with a 5% increase in sales, is the result of management's continued focus on
overhead costs.
The Company recorded an operating loss of $13,000 in the second quarter of
fiscal 1996 as compared to an operating loss of $180,000 recorded in the prior
year second quarter. The operating improvement is primarily the result of
increased gross margin, which was achieved by reducing production costs while
maintaining sales.
Total other expense amounted to $4,000 in the second quarter of fiscal 1996
compared to other income of $39,000 in the second quarter of last year. The
decrease was a primarily due to the absence of the differential on interest
income and interest expense on the repo holdings which were sold in late
fiscal 1995.
Six Months Ended October 31, 1995 Compared to Six Months Ended October
31, 1994. The Company recorded sales of $3,646,000 during the first half of
fiscal 1996 as compared to $3,215,000 for the same period last year, a $431,000
(13%) increase. The increase is primarily attributable to improved equipment
utilization, the addition of new customer accounts and significantly increased
volume with existing customers.
Cost of sales of $2,687,000 (74% of net sales) increased $47,000 (2%) from
$2,640,000 (82% of net sales) for the same period a year earlier. The increased
cost of sales is a function of the higher sales. The decrease relative to sales
is the result of improved labor efficiency, decreased supply usage and the
absorption of fixed costs. Gross margin improved significantly to $959,000
compared to $575,000 in the prior year first half.
Selling, general and administrative expenses of $872,000 (24% of net sales)
decreased $52,000 (6%) from $924,000 (29% of net sales) recorded during the
first half of fiscal 1996. The decrease is primarily the result of reductions
in payroll expenses. The reduction of selling and G&A expenses, with a 13%
increase in sales, is the result of management's focus on overhead expenses.
The Company recorded operating income of $59,000 in the first half of fiscal
1996 as compared to an operating loss of $377,000 recorded in the same period
last year. The operating turnaround is primarily the result of improved gross
margin on higher net sales.
Total other expense amounted to $36,000 in the first half of fiscal 1996
compared to other income of $45,000 in the same period last year. The decrease
was a primarily due to the absence of the differential on interest income and
interest expense on the repo holdings which were sold in late fiscal 1995.
Liquidity and Capital Resources
At October 31, 1995, the Company's working capital was $511,000 compared
to $501,000 at April 30, 1995 and the ratio of current assets to current
liabilities was 1.5 to 1 and 1.4 to 1, respectively. Cash, marketable
securities and other investments and current receivables represented 75% (76%
at April 30, 1995) and 23% (27% at April 30, 1995) of total current assets and
total assets, respectively. During the first half of fiscal 1996 cash provided
by operating activities amounted to $271,000 compared to $281,000 used in the
first half of fiscal 1995. Cash requirements for the first half of fiscal 1996
were funded primarily from operations.
PART II
Items 1 thru 5
No response to these items is furnished, since in each case the appropriate
response would be either not applicable or none.
Item 6. Exhibits and Reports on
Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
MILASTAR CORPORATION AND SUBSIDIARIES
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this interim report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MILASTAR CORPORATION
/s/ J. RUSSELL DUNCAN
J. Russell Duncan
Chairman of the Board (Chief Executive
and Principal Financial and
Accounting Officer)
Dated: November 30, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> OCT-31-1995
<CASH> 264,000
<SECURITIES> 25,000
<RECEIVABLES> 869,000
<ALLOWANCES> 37,000
<INVENTORY> 171,000
<CURRENT-ASSETS> 1,489,000
<PP&E> 5,302,000
<DEPRECIATION> 2,203,000
<TOTAL-ASSETS> 4,914,000
<CURRENT-LIABILITIES> 978,000
<BONDS> 48,000
<COMMON> 137,000
0
0
<OTHER-SE> 3,751,000
<TOTAL-LIABILITY-AND-EQUITY> 4,914,000
<SALES> 1,715,000
<TOTAL-REVENUES> 1,715,000
<CGS> 1,267,000
<TOTAL-COSTS> 461,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,000
<INCOME-PRETAX> (17,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,000)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
