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 July 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 July 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, 1996.
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.
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
July 31, April 30,
1996 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . 191,000 144,000
Marketable securities and other investments, at fair value . . . . . . 41,000 41,000
Accounts receivable:
Trade, less allowance for doubtful accounts of $35,000
(July 31, 1996) and $37,000 (April 30, 1996). . . . . . . . . 997,000 959,000
Other . . . . . . . . . . . . . . . . . . . . . . . 7,000 6,000
Inventory. . . . . . . . . . . . . . . . . . . . . . 195,000 224,000
Prepaid expenses and other . . . . . . . . . . . . . 193,000 182,000
Total current assets . . . . . . . . . . . . . . . 1,624,000 1,556,000
Property, plant and equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . . 199,000 199,000
Buildings and improvements . . . . . . . . . . . . . 730,000 662,000
Equipment. . . . . . . . . . . . . . . . . . . . . . 5,951,000 5,465,000
6,880,000 6,326,000
Less accumulated depreciation . . . . . . . . . . . (2,512,000) (2,360,000)
4,368,000 3,966,000
Other assets:
Non-compete agreements . . . . . . . . . . 105,000 125,000
Building held for sale, net of valuation allowance . 255,000
Total assets . . . . . . . . . . . . . . 6,097,000 5,902,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to stockholders. . . . . . . . . . . . 277,000 271,000
Note payable to bank . . . . . . . . . . . . 60,000
Current maturities of long-term debt . . . . 208,000 208,000
Accounts payable . . . . . . . . . . . . . . 320,000 416,000
Income taxes payable . . . . . . . . . . . . 3,000 5,000
Accrued payroll and benefits . . . . . . . . 210,000 193,000
Accrued real estate taxes. . . . . . . . . . 70,000 96,000
Other accrued liabilities. . . . . . . . . . 128,000 184,000
Total current liabilities. . . . . . . . . 1,216,000 1,433,000
Long-term debt, less current maturities. . . . 1,170,000 842,000
Deferred tax refund, net . . . . . . . . . . . 118,000
Total liabilities. . . . . . . . . . . . . 2,504,000 2,275,000
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 2,728,264 shares at July 31, 1996 and April 30, 1996 137,000 137,000
Note receivable from officer . . . . . . . . (20,000) (20,000)
Unrealized holding gains on marketable securities. . 36,000 36,000
Additional paid-in capital . . . . . . . . . 1,666,000 1,666,000
Retained earnings. . . . . . . . . . . . . . 1,774,000 1,808,000
Total stockholders' equity. . . . . . . . . 3,593,000 3,627,000
Total liabilities and stockholders' equity. 6,097,000 5,902,000
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended July 31,
(Unaudited)
1996 1995
<S> <C> <C>
Net Sales . . . 1,856,000 1,931,000
Cost of Sales . . . 1,379,000 1,420,000
Gross margin . . . 477,000 511,000
Selling general and administrative expenses. . . . . . 450,000 425,000
Amortization of non-compete agreement. . . . . . . . . 20,000 14,000
Operating income (loss). . . . . . . . . . . . . . . . 7,000 72,000
Other income (expense):
Dividend and interest income. . . . . . . . . . . . . 3,000 6,000
Interest expense. . . . . . . . . . . . . . . . . . . (34,000) (8,000)
Net loss on sale of property and equipment. . . . . . (53,000)
Unrealized market gain (loss) on valuation of building held for sale. . . . 43,000 (30,000)
Total other income (expense) . . . . . . . . . (41,000) (32,000)
Income (loss) before provision for income taxes. . . . (34,000) 40,000
Provision for income taxes . . . . . . . . . . . . . .
Net income (loss). . . . . . . . . . . . . . . . . . . (34,000) 40,000
Net income (loss) per common share:. . . . . . . . . . $ (.01) $ .01
Weighted average number of common shares
outstanding during the period . . . . . . . . . . . . 2,738,264 2,738,264
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended July 31,
(Unaudited)
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . (34,000) 40,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . 171,000 134,000
Net loss on sale of property and equipment. 53,000
Unrealized market loss (gain) on valuation of building held for sale (43,000) 30,000
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . (39,000) 154,000
Inventory . . . . . . . . . . . . . . . . . 29,000 56,000
Prepaid supplies and other assets . . . . . (11,000) 6,000
Accounts payable and accrued taxes. . . . . (162,000) 6,000
Income tax refund, net . . . . . . . . . . 118,000
Net cash provided by operating activities. . 82,000 201,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment. (554,000) (197,000)
Proceeds from sale of property and equipment . . . 245,000
Net cash used in investing activities. . . . (309,000) (197,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit . . . . . 25,000
Repayments on bank line of credit . . . . . (85,000)
Proceeds from issuance of long-term debt. . 373,000
Principal payments on long-term debt. . . . (45,000) (11,000)
Proceeds from issuance note payable - stockholder . 6,000
Repayments on note payable - stockholder. . (10,000)
Net cash provided by (used in) financing activities. 274,000 (21,000)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . 47,000 (17,000)
CASH AND CASH EQUIVALENTS BALANCE AT BEGINNING
OF YEAR . . . . . . . . . . . . . . . . . . 144,000 365,000
CASH AND CASH EQUIVALENTS BALANCE AT END OF
THE SECOND QUARTER. . . . . . . . . . . . . 191,000 348,000
Supplemental disclosures of cash flow information:
Cash paid during the first quarter for:
Interest . . . . . . . . . . . . . . . . . 75,000 1,000
Income taxes . . . . . . . . . . . . . . . 2,000
</TABLE>
MILASTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business Milastar Corporation ("Milastar" and sometimes
the "Company") is primarily involved in selling special metallurgical and
secondary metal processing services to a diversified list of customers located
in the greater Midwest and New England regions who manufacture a wide
variety of end-products and depend upon out- sourcing of specialized
processing of their metal components. The Company extends credit to many
of its customers.
Principles of consolidation The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries,
Flame Metals Processing Corporation ("Flame Metals"), Northwest
Engineering Labs, Inc., Jardun Apparel Corp., Milastar Services Corporation
and Flame Metals wholly owned subsidiary New England Metal Treating
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.
Marketable securities and other investments On May 1, 1994 the
Company adopted the provisions of Statement of Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities
(Statement 115). 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.
At April 30, 1994 marketable securities were carried at the lower of
aggregate cost or market.
Inventory Inventory is carried at cost as determined by the First-In-First-
Out (FIFO) method.
Prepaid supplies Prepaid supplies are expensed as used.
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 deductions are 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-compete
agreements which are being amortized over 60 months using the straight-line
method and one four-year non-compete agreement which is being amortized
over 48 months using the straight-line method.
Income taxes The Company accounts for income taxes under Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (Statement
109). Statement 109 requires the use of 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.
Accounting estimates The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fair value of financial instruments The Company's financial
instruments are recorded on its balance sheet. The carrying amount for cash,
accounts receivable, accounts payable, and accrued expenses approximates
fair value due to the immediate or short-term maturity of these financial
instruments. The fair value of notes receivable and notes payable
approximate their carrying value.
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, at
July 31, 1996 and 1995, marketable securities and other investments are
classified as available-for-sale and as such unrealized gains and losses are
reported as a separate component of stockholders' equity until realized.
Dividend income, interest income, and prepayment losses on debt securities
are accrued as earned. The Company uses specific identification to determine
the fair value of marketable securities and other investments.
Marketable securities and other investments were comprised of the
following at July 31:
Description 1996 1995
First Colonial Bank SharesCommon Stock $5,000 $5,000
Total cost 5,000 5,000
Gross unrealized holding gains 36,000 20,000
Fair Value $41,000 $25,000
Prior to the adoption of Statement 115, the Company recorded unrealized
gains and losses in accordance with Statement of Financial Accounting
Standards No. 12, Accounting for Certain Marketable Securities.
3 RELATED PARTY TRANSACTIONS
Notes Receivable
The Company entered into two Note Agreements during fiscal 1993. The
first note of $76,000 was dated October 1, 1992, bore interest at 8.0% and is
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 fiscal quarters
ended July 31, 1996 and 1995 amounted to $500 and $300, respectively.
Notes Payable
During fiscal 1995 the Company entered into a series of note payable
transactions which at July 31, 1996 had a balance of $184,000, including
accrued interest, payable to J. Russell Duncan, Chairman of the Board and a
director of the Company. The notes bear a interest rate of 8% and are
payable on demand. The Company classifies the notes payable as a current
liability. Total interest expense related to the notes payable for the fiscal
quarters ended July 31, 1996 and 1995 was $4,400 and $8,000, respectively.
During fiscal 1996 the Company entered into a $100,000 note payable to
L. Michael McGurk, President, Chief Operating Officer and a director of the
Company. The note bears an interest rate of 8.7% and is payable on demand.
The Company classifies the note payable as a current liability. Total interest
expense related to this note payable for the fiscal quarters ended July 31,
1996 and 1995 was $2,200 and $0, respectively.
4 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.
5 EARNINGS PER COMMON SHARE
The computation of earnings per share is as follows:
Three Months Ended July 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 July 31, 1996 Compared to Three Months Ended
July 31, 1995. The Company recorded sales of $1,856,000 during the first
quarter of fiscal 1997 as compared to $1,931,000 for the same period last
year, a $75,000 (4%) decrease. The sales decrease was caused by a
combination of decreased sales in the Midwest market area (15%) due to a
softening of the economy in that region and increased sales (11%) due to the
acquisition of New England Metal Treating.
Cost of sales of $1,379,000 (74% of net sales) decreased $41,000 (3%)
from $1,420,000 (74% of net sales) for the same period a year earlier. The
decreased cost of sales is the result of reduced labor on slightly lower sales
volume. Gross margin decreased to $477,000 compared to $511,000 in the
prior year first quarter.
Selling, general and administrative expenses of $450,000 (24% of net
sales) increased $25,000 (6%) from $425,000 (22% of net sales) recorded
during the first quarter of fiscal 1996. The increase is primarily the
result of the addition of New England Metal Treating. Management's goal is to
reduce or hold constant selling and G&A expenses while increasing sales.
The Company recorded operating income of $7,000 in the first quarter of
fiscal 1997 as compared to operating income of $72,000 recorded in the prior
year first quarter. Lower operating income was primarily caused by lower
sales revenues. Management continues to trim expenses while concurrently
implementing sales building programs focused upon enlisting new accounts
and getting additional business from existing clients in both the New England
and Midwest markets.
Total other expense amounted to $41,000 in the first quarter of fiscal
1997 compared to other expense of $32,000 in the first quarter of last year.
The increase was primarily due to higher interest expense.
Liquidity and Capital Resources
At July 31, 1996, the Company's working capital was $408,000 compared
to $123,000 at April 30, 1996 and the ratio of current assets to current
liabilities was 1.3 to 1 and 1.1 to 1, respectively. Cash, marketable
securities and other investments and current receivables represented 76%
(74% at April 30, 1996) and 20% (19% at April 30, 1996) of total current
assets and total assets, respectively. During the first quarter of fiscal
1997, cash provided by operating activities amounted to $82,000 compared to
$201,000 provided by operating activities in the first quarter of fiscal
1996. Working captitalrequirements for the first quarter of fiscal 1997 were
funded primarily from available cash and 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 and Chief Executive Officer
Dated: September 3, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> JUL-31-1996
<CASH> 191,000
<SECURITIES> 41,000
<RECEIVABLES> 1,039,000
<ALLOWANCES> 35,000
<INVENTORY> 195,000
<CURRENT-ASSETS> 1,624,000
<PP&E> 6,880,000
<DEPRECIATION> 2,512,000
<TOTAL-ASSETS> 6,097,000
<CURRENT-LIABILITIES> 1,216,000
<BONDS> 1,170,000
0
0
<COMMON> 137,000
<OTHER-SE> 3,440,000
<TOTAL-LIABILITY-AND-EQUITY> 6,097,000
<SALES> 1,856,000
<TOTAL-REVENUES> 1,856,000
<CGS> 1,379,000
<TOTAL-COSTS> 470,000
<OTHER-EXPENSES> 7,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,000
<INCOME-PRETAX> (34,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (34,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,000)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
