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 January 31, 1996 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 January 31, 1996, 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
January 31, April 30,
1996 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . 199,000 365,000
Marketable securities and other investments, at fair value . . . . . . 35,000 25,000
Accounts receivable:
Trade, less allowance for doubtful accounts of $33,000
(January 31, 1996) and $26,000 (April 30, 1995) . . . . . . . 694,000 1,070,000
Other . . . . . . . . . . . . . . . . . . . . . . . 6,000 4,000
Inventory. . . . . . . . . . . . . . . . . . . . . . 175,000 192,000
Prepaid expenses and other . . . . . . . . . . . . . 221,000 255,000
Total current assets . . . . . . . . . . . . . . . 1,330,000 1,911,000
Property, plant and equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . . 199,000 199,000
Buildings and improvements . . . . . . . . . . . . . 651,000 605,000
Equipment. . . . . . . . . . . . . . . . . . . . . . 4,561,000 4,178,000
5,411,000 4,982,000
Less accumulated depreciation . . . . . . . . . . . (2,324,000) (1,962,000)
3,087,000 3,020,000
Other assets:
Non-compete agreement. . . . . . . . . . . 44,000 86,000
Building held for sale, net of valuation allowance . 268,000 298,000
Total assets . . . . . . . . . . . . . . 4,729,000 5,315,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable (shareholder). . . . . . . . . . . . . 171,000 345,000
Current maturities of long-term debt . . . . . . . . 59,000 59,000
Accounts payable . . . . . . . . . . . . . . . . . . 337,000 483,000
Income taxes payable . . . . . . . . . . . . . . . . 5,000 5,000
Accrued payroll and benefits . . . . . . . . . . . . 130,000 201,000
Accrued real estate taxes. . . . . . . . . . . . . . 93,000 145,000
Other accrued liabilities. . . . . . . . . . . . . . 229,000 172,000
Total current liabilities. . . . . . . . . . . . . 1,024,000 1,410,000
Long-term debt, less current maturities. . . . . . . . 35,000 40,000
Total liabilities. . . . . . . . . . . . . . . . . 1,059,000 1,450,000
Stockholders' equity:
Preferred stock, $1.00 par; auth 5,000,000 shares, none issued
Common stock, $.05 par; auth 7,500,000 shares, issued and
outstanding 2,728,264 shares at 1/31/96 and 4/30/95 . . . . . 137,000 137,000
Note receivable from officer . . . . . . . . . . . . (20,000) (20,000)
Unrealized holding gains on marketable securities. . . . . . . 30,000 20,000
Additional paid-in capital . . . . . . . . . . . . . 1,666,000 1,666,000
Retained earnings. . . . . . . . . . . . . . . . . . 1,857,000 2,062,000
Total stockholders' equity. . . . . . . . . . . . . 3,670,000 3,865,000
Total liabilities and stockholders' equity . . . . . . . . . 4,729,000 5,315,000
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
January 31, January 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Sales . . . . . . . . . . . 1,374,000 1,644,000 5,020,000 4,859,000
Cost of Sales . . . . . . . . . 1,180,000 1,327,000 3,867,000 3,967,000
Gross margin. . . . . . . . . . 194,000 317,000 1,153,000 892,000
Selling general and admin expenses . 405,000 438,000 1,276,000 1,362,000
Amortization of non-comp agreement . 14,000 14,000 42,000 42,000
Operating income (loss) . . . . (225,000) (135,000) (165,000) (512,000)
Other income (expense):
Dividend and interest income. . 4,000 146,000 14,000 428,000
Interest expense. . . . . . . . (8,000) (94,000) (24,000) (303,000)
Unrealized loss on bdg held for sale (30,000)
Net gain (loss) on sale of mkt sec. . (115,000) (143,000)
Total other income (expense). . (4,000) (63,000) (40,000) (18,000)
Income (loss) before income taxes . . (229,000) (198,000) (205,000) (530,000)
Provision (benefit) for income taxes. .
Net income (loss) . . . . . . . (229,000) (198,000) (205,000) (530,000)
Net income (loss) per common share. . (.08) (.07) (.07) (.19)
Weighted average number of shares
outstanding during the period . 2,738,264 2,738,264 2,738,264 2,738,264
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended January 31,
(Unaudited)
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . (205,000) (530,000)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . 404,000 360,000
Net gain (loss) on sale of mkt securities. . 143,000
Unrealized market loss on bldg held for sale. . . 30,000
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . 374,000 (172,000)
Inventory . . . . . . . . . . . . . . . . . 17,000 (71,000)
Prepaid supplies and other assets . . . . . 34,000 4,000
Accounts payable and accrued expenses . . . (212,000) (109,000)
Net cash provided (used) by operating act. . 442,000 (375,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment. (429,000) (621,000)
Proceeds from sale of mkt securities and other
investments (classified as available-for-sale) . 5,173,000
Net cash provided (used) by investing activities (429,000) 4,552,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt. . 47,000
Principal payments on long-term debt. . . . (52,000) (36,000)
Reduction of note payable - repo. . . . . . (4,662,000)
Proceeds from issuance of NP - shareholder. 500,000
Reduction of note payable - shareholder . . (174,000)
Net cash used by financing activities. . . . (179,000) (4,198,000)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . (166,000) (21,000)
CASH AND CASH EQUIVALENTS BALANCE AT
BEGINNING OF YEAR . . . . . . . . . . . . . 365,000 247,000
CASH AND CASH EQUIVALENTS BALANCE AT
END OF THE SECOND QUARTER. . . . . . . . . 199,000 226,000
Supplemental disclosures of cash flow information:
Cash paid during the first three quarters for:
Interest . . . . . . . . . . . . . . . . . 5,000 301,000
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 January 31, 1996, 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 at 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 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 January 31, 1996 and 1995:
Description 1996 1995
Sears Mtg. Securities
ARM (Reverse Repurchase Agreement) 5,234,000
First Colonial Bank Shares
Common Stock 5,000 5,000
Total cost 5,000 5,239,000
Gross unrealized holding losses
Gross unrealized holding gains 30,000 22,000
Fair value 35,000 5,261,000
3 RELATED PARTY TRANSACTIONS
The Company entered into two Note Agreements during fiscal 1993. The
first note of $76,000 was dated October 1, 1992, beared interest at 8.0% and
was due in 48 monthly installments commencing June 1, 1994. The note was
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
January 31, 1996 and January 31, 1995 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 was 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 January 31, 1996 and January 31, 1995
was $0 and $86,000, 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. The balance of the note as of January 31, 1996 and January 31,
1995 was $171,000 and $345,000, respectively. Total interest expense
related to this note for the quarters ended January 31, 1996 and January 31,
1995 was $5,000 and $8,000, 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
January 31,
1996 1995
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 January 31, 1996 Compared to Three Months Ended
January 31, 1995. The Company recorded sales of $1,374,000 during the
third quarter of fiscal 1996 as compared to $1,644,000 for the same period
last year, a $270,000 (16%) decrease. The decrease is primarily attributable
to a softening economy. Several of the Company's key manufacturing
customers have experienced lower bookings which have in turn translated
into reduced out sourcing of heat treating orders.
Cost of sales of $1,180,000 (86% of net sales) decreased $147,000 (11%)
from $1,327,000 (81% of net sales) for the same period a year earlier. The
decreased cost of sales is the result of reduced labor and decreased industrial
gas usage which was accomplished through the purchase and installation of cost
saving processing equipment. Gross margin decreased to $194,000 compared to
$317,000 in the prior year third quarter.
Selling, general and administrative expenses of $405,000 (29% of net
sales) decreased $33,000 (8%) from $438,000 (27% of net sales) recorded
during the third quarter of fiscal 1995. The decrease is primarily the result
of reductions in payroll expenses. Management's goal is to reduce or hold
constant selling and G&A expenses while increasing sales.
The Company recorded an operating loss of $225,000 in the third quarter
of fiscal 1996 as compared to an operating loss of $135,000 recorded in the
prior year third quarter. The loss was primarily caused by lower sales
revenues. Management, in reaction, continues to selectively increase prices
and trim expenses while concurrently implementing sales building programs
focused upon enlisting new accounts and getting additional business from
existing clients.
Total other expense amounted to $4,000 in the third quarter of fiscal 1996
compared to other expense of $63,000 in the third quarter of last year. The
decrease was primarily due to the absence of losses sustained on sales of
equity securities during late fiscal 1995.
Nine Months Ended January 31, 1996 Compared to Nine Months Ended
January 31, 1995. The Company recorded sales of $5,020,000 during the
first three quarters of fiscal 1996 as compared to $4,859,000 for the same
period last year, a $161,000 (3%) increase. The slight increase is primarily
attributable to improved equipment utilization and the addition of new
customer accounts.
Cost of sales of $3,867,000 (77% of net sales) decreased $100,000 (3%)
from $3,967,000 (82% of net sales) for the same period a year earlier. The
decreased cost of sales, both in total dollars and as a percent of sales, is the
result of improved labor efficiency, decreased supply usage and the
absorption of fixed costs. Gross margin improved significantly to $1,153,000
compared to $892,000 in the prior year first three quarters.
Selling, general and administrative expenses of $1,276,000 (25% of net
sales) decreased $86,000 (6%) from $1,362,000 (28% of net sales) recorded
during the first three quarters of fiscal 1996. The decrease is primarily the
result of reductions in payroll expenses. The reduction of selling and G&A
expenses, with a 3% increase in sales, is the result of management's focus on
overhead expenses.
The Company recorded operating loss of $165,000 in the first three
quarters of fiscal 1996 as compared to an operating loss of $512,000 recorded
in the same period last year. While the operating loss is disappointing, it is
a considerable improvement over the prior year three quarters.
Total other expense amounted to $40,000 in the first three quarters of
fiscal 1996 compared to other expense of $18,000 in the same period last
year. The decrease was a primarily due to a combination of the absence of
the differential on interest income and interest expense on the repo holdings
which were sold in late fiscal 1995 and losses sustained on sales of equity
securities during the first three quarters of fiscal 1995.
Liquidity and Capital Resources
At January 31, 1996, the Company's working capital was $306,000
compared to $501,000 at April 30, 1995 and the ratio of current assets to
current liabilities was 1.3 to 1 and 1.4 to 1, respectively. Cash, marketable
securities and other investments and current receivables represented 70%
(76% at April 30, 1995) and 19% (27% at April 30, 1995) of total current
assets and total assets, respectively. During the first three quarters of
fiscal 1996 cash provided by operating activities amounted to $442,000 compared
to $375,000 used in the first three quarters of fiscal 1995. Cash requirements
for the first three quarters 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: February 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> JAN-31-1996
<CASH> 199,000
<SECURITIES> 35,000
<RECEIVABLES> 733,000
<ALLOWANCES> 33,000
<INVENTORY> 175,000
<CURRENT-ASSETS> 1,330,000
<PP&E> 5,411,000
<DEPRECIATION> 2,324,000
<TOTAL-ASSETS> 4,729,000
<CURRENT-LIABILITIES> 1,024,000
<BONDS> 0
<COMMON> 137,000
0
0
<OTHER-SE> 3,533,000
<TOTAL-LIABILITY-AND-EQUITY> 4,729,000
<SALES> 1,374,000
<TOTAL-REVENUES> 1,374,000
<CGS> 1,180,000
<TOTAL-COSTS> 419,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,000
<INCOME-PRETAX> (229,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (229,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (229,000)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
