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, 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 October 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.
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MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
October 31, April 30,
1996 1996
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<C> <C>
Current assets:
Cash and cash equivalents 144,000 144,000
Marketable securities and other investments,
at fair value 41,000 41,000
Accounts receivable:
Trade, less allowance for doubtful accounts
of $39,000 (October 31, 1996) and $37,000
(April 30, 1996)
1,044,000 959,000
Other 7,000 6,000
Inventory 185,000 224,000
Prepaid expenses and other 177,000 182,000
Total current assets 1,598,000 1,556,000
Property, plant and equipment:
Land 199,000 199,000
Buildings and improvements 738,000 662,000
Equipment 6,229,000 5,465,000
7,166,000 6,326,000
Less accumulated depreciation (2,662,000) (2,360,000)
4,504,000 3,966,000
Other assets:
Non-compete agreements 85,000 125,000
Building held for sale, net of valuation
allowance 255,000
Total assets 6,187,000 5,902,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to stockholders 252,000 271,000
Note payable to bank 60,000
Current maturities of long-term debt 208,000 208,000
Accounts payable 331,000 416,000
Income taxes payable 2,000 5,000
Accrued payroll and benefits 246,000 193,000
Accrued real estate taxes 51,000 96,000
Other accrued liabilities 96,000 184,000
Total current liabilities 1,186,000 1,433,000
Long-term debt, less current maturities 1,312,000 842,000
Deferred tax refund, net 118,000
Total liabilities 2,616,000 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 October 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 1,752,000 1,808,000
Total stockholders' equity 3,571,000 3,627,000
Total liabilities and stockholders'
equity 6,187,000 5,902,000
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
October 31, October 31,
1996 1995 1996 1995
<S>
<C> <C> <C> <C>
Net Sales 1,884,000 1,715,000 3,740,000 3,646,000
Cost of Sales 1,406,000 1,267,000 2,785,000 2,687,000
Gross margin 478,000 448,000 955,000 959,000
Selling general and administrative expenses 455,000 447,000 905,000 872,000
Amortization of non-compete agreement 20,000 14,000 40,000 28,000
Operating income (loss) 3,000 (13,000) 10,000 59,000
Other income (expense):
Dividend and interest income 2,000 4,000 5,000 10,000
Interest expense (35,000) (8,000) (69,000) (16,000)
Net loss on sale of property and equipment (53,000)
Unrealized gain (loss) on valuation of
building held for sale 43,000 (30,000)
Total other income (expense) (33,000) (4,000) (74,000) (36,000)
Income (loss) before income taxes (30,000) (17,000) (64,000) 23,000
Provision (benefit) for income taxes (8,000) (8,000)
Net income (loss) (22,000) (17,000) (56,000) 23,000
Net income (loss) per common share (.01) (.01) (.02) .01
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
Six Months Ended October 31,
(Unaudited)
1996 1995
<S>
<C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (56,000) 23,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 342,000 269,000
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 (86,000) 243,000
Inventory 39,000 21,000
Prepaid supplies and other assets 5,000 58,000
Accounts payable and accrued expenses (168,000) (373,000)
Income tax refund, net 118,000
Net cash provided by operating activities 204,000 271,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (840,000) (320,000)
Proceeds from sale of property and equipment 245,000
Net cash used in investing activities (595,000) (320,000)
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 564,000 47,000
Principal payments on long-term debt (94,000) (39,000)
Proceeds from issuance note payable
- stockholder 6,000
Repayments on note payable - stockholder (25,000) (60,000)
Net cash provided by (used in) financing activities 391,000 (52,000)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (101,000)
CASH AND CASH EQUIVALENTS BALANCE AT BEGINNING
OF YEAR 144,000 365,000
CASH AND CASH EQUIVALENTS BALANCE AT END OF
THE SECOND QUARTER 144,000 264,000
Supplemental disclosures of cash flow information:
Cash paid during the first two quarters for:
Interest 116,000 2,000
Income taxes 3,000
</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 ("New England
Metal"). 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
October 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 October 31:
Description 1996 1995
First Colonial Bank Shares Common Stock 5,000 5,000
Total cost 5,000 5,000
Gross unrealized holding gains 36,000 36,000
Fair Value 41,000 41,000
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
In fiscal 1993, with the encouragement of the Company, Michael McGurk,
President, Chief Operating Officer and a director of the Company bought 15,000
shares of Milastar Class A Common Stock and entered into a note agreement with
the Company to finance this purchase. 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 this note for the fiscal quarters ended October 31, 1996 and
1995 amounted to $600 and $500, respectively.
Notes Payable
During fiscal 1995 the Company entered into a series of note payable
transactions which at October 31, 1996 had a balance of $152,000, 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 October 31, 1996 and 1995 was $4,100 and $7,000, 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
October 31, 1996 and 1995 was $2,100 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
October 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 October 31, 1996 Compared to Three Months Ended
October 31, 1995. The Company recorded sales of $1,884,000 during the second
quarter of fiscal 1997 as compared to $1,715,000 for the same period last
year, a $169,000 (10%) increase. The sales increase was caused by a
combination of decreased sales in the Midwest market area (3%) and increased
sales due to the acquisition of New England Metal (13%).
Cost of sales of $1,406,000 (75% of net sales) increased $139,000 (11%)
from $1,267,000 (74% of net sales) for the same period a year earlier. The
increase in cost of sales is primarily due to a combination of decreased cost
of sales at Flame Metals as a result of decreased sales and improved efficiencie
s (5%) and increased sales resulting from the addition of New England Metal
(16%). Gross margin increased to $478,000 compared to $448,000 in the prior
year second quarter.
Selling, general and administrative expenses of $455,000 (24% of net
sales) increased $8,000 (2%) from $447,000 (26% of net sales) recorded during
the second quarter of fiscal 1996. The increase is primarily the result of
the addition of New England Metal. Management's goal is to reduce or hold
constant selling and G&A expenses while increasing sales.
The Company recorded operating income of $3,000 in the second quarter of
fiscal 1997 as compared to an operating loss of $13,000 recorded in the prior
year second quarter. Higher operating income was primarily due to reduced
labor costs at Flame Metals. Management continues to reduce labor costs
relative to sales and as such has increased the Company's revenue per
employee.
Total other expense amounted to $33,000 in the second quarter of fiscal
1997 compared to other expense of $4,000 in the second quarter of last year.
The increase was primarily due to higher interest expense related to the
purchase and financing of a new mesh belt furnace at Flame Metals and to the
debt incurred on the financing of the New England Metal acquisition.
The Company recorded a net loss in the second quarter of fiscal 1997 of
$22,000 compared to a $17,000 net loss in the prior year second quarter. The
loss in the current second quarter was primarily due to New England Metal
which experienced lower than expected sales as a result of a major customer
moving out of the market.
Six Months Ended October 31, 1996 Compared to Six Months Ended October
31, 1995. The Company recorded sales of $3,740,000 during the first half of
fiscal 1997 as compared to $3,646,000 for the same period last year, a $94,000
(3%) increase. The increase was caused by a combination of decreased sales in
the Midwest market area (9%) and increased sales due to the acquisition of New
England Metal Treating (12%).
Cost of sales of $2,785,000 (75% of net sales) increased $98,000 (4%)
from $2,687,000 (74% of net sales) for the same period a year earlier. The
increase in cost of sales is primarily due to a combination of decreased cost
of sales at Flame Metals as a result of decreased sales and improved
efficiencies (11%) and increased sales resulting from the addition of New
England Metal Treating (15%). Gross margin decreased slightly to $955,000
compared to $959,000 in the prior year first half.
Selling, general and administrative expenses of $905,000 (24% of net
sales) increased $33,000 (4%) from $872,000 (24% of net sales) recorded during
the first half of fiscal 1996. The increase is primarily due to the
acquisition of New England Metal Treating.
The Company recorded operating income of $10,000 in the first half of
fiscal 1997 as compared to operating income of $59,000 recorded in the same
period last year. Lower operating income was primarily caused by lower sales
revenues. The new mesh belt furnace installed at Flame Metals will be in
operation in the third quarter and is expected to reduce costs and increase
sales.
Total other expense amounted to $74,000 in the first half of fiscal 1997
compared to other expense of $36,000 in the same period last year. The
increase was primarily due to higher interest expense related to the purchase
and financing of a new mesh belt furnace at Flame Metals and to the debt
incurred on the financing of the New England Metal acquisition.
The Company recorded a net loss in the first half of fiscal 1997 of
$56,000 compared to net income of $23,000 in the first half of the prior
year. The loss in the first half of fiscal 1997 was primarily due to New
England Metal which experienced lower than expected sales as a result of a
major customer moving out of the market.
Liquidity and Capital Resources
At October 31, 1996, the Company's working capital was $412,000 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 77% (74%
at April 30, 1996) and 20% (19% at April 30, 1996) of total current assets and
total assets, respectively. During the first half of fiscal 1997, cash
provided by operating activities amounted to $204,000 compared to $271,000
provided by operating activities in the first half of fiscal 1996. Working
capital requirements for the first half 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: December 10, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> OCT-31-1996
<CASH> 144,000
<SECURITIES> 41,000
<RECEIVABLES> 1,090,000
<ALLOWANCES> 39,000
<INVENTORY> 185,000
<CURRENT-ASSETS> 1,598,000
<PP&E> 7,166,000
<DEPRECIATION> 2,662,000
<TOTAL-ASSETS> 6,187,000
<CURRENT-LIABILITIES> 1,186,000
<BONDS> 1,312,000
0
0
<COMMON> 137,000
<OTHER-SE> 3,418,000
<TOTAL-LIABILITY-AND-EQUITY> 6,187,000
<SALES> 1,884,000
<TOTAL-REVENUES> 1,884,000
<CGS> 1,406,000
<TOTAL-COSTS> 475,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,000
<INCOME-PRETAX> (22,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,000)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
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