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, 1997
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 (561) 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, 1997, 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, 1997.
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,
1997 1997
<S>
Current assets: <C> <C>
Cash and cash equivalents. . . . . . . . . . . . . . . 243,000 71,000
Accounts receivable:
Trade, less allowance for doubtful accounts of $40,000
(July 31, 1997) and $35,000 (April 30, 1997). . . . . 1,205,000 1,151,000
Other . . . . . . . . . . . . . . . . . . . . . . . . 9,000 9,000
Inventory. . . . . . . . . . . . . . . . . . . . . . . 181,000 185,000
Prepaid expenses and other . . . . . . . . . . . . . . 168,000 153,000
Total current assets . . . . . . . . . . . . . . . . 1,806,000 1,569,000
Property, plant and equipment:
Land. . . . . . . . . . . . . . . . . . . . . . . . . 199,000 199,000
Buildings and improvements. . . . . . . . . . . . . . 766,000 742,000
Equipment . . . . . . . . . . . . . . . . . . . . . . 6,476,000 6,337,000
7,441,000 7,278,000
Less accumulated depreciation . . . . . . . . . . . . (2,995,000) (2,825,000)
4,446,000 4,453,000
Other assets:
Non-compete agreements . . . . . . . . . . . . . . . . 65,000 71,000
Total assets. . . . . . . . . . . . . . . . . . . . . 6,317,000 6,093,000
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S>
Current liabilities: <C> <C>
Notes payable to stockholders . . . . . . . . . . . . 165,000 165,000
Current maturities of long-term debt. . . . . . . . . 342,000 342,000
Accounts payable. . . . . . . . . . . . . . . . . . . 286,000 426,000
Income taxes payable. . . . . . . . . . . . . . . . . 118,000 119,000
Accrued payroll and benefits. . . . . . . . . . . . . 265,000 243,000
Accrued real estate taxes . . . . . . . . . . . . . . 51,000 68,000
Other accrued liabilities . . . . . . . . . . . . . . 184,000 130,000
Total current liabilities. . . . . . . . . . . . . 1,411,000 1,493,000
Long-term debt, less current maturities. . . . . . . . . 1,163,000 1,072,000
Total liabilities. . . . . . . . . . . . . . . . . 2,574,000 2,565,000
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, 1997 and April 30, 1997. . . . . . . . . . 137,000 137,000
Note receivable from officer. . . . . . . . . . . . . (20,000) (20,000)
Additional paid-in capital. . . . . . . . . . . . . . 1,666,000 1,666,000
Retained earnings . . . . . . . . . . . . . . . . . . 1,960,000 1,745,000
Total stockholders' equity . . . . . . . . . . . . 3,743,000 3,528,000
Total liabilities and stockholders' equity . . . . . 6,317,000 6,093,000
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended July 31,
(Unaudited)
1997 1996
<S> <C> <C>
Net Sales. . . . . . . . . . . . . . . . . . . . . . 2,241,000 1,856,000
Cost of Sales. . . . . . . . . . . . . . . . . . . . 1,496,000 1,379,000
Gross margin . . . . . . . . . . . . . . . . . . . . 745,000 477,000
Selling general and administrative expenses. . . . . 489,000 450,000
Amortization of non-compete agreement. . . . . . . . 6,000 20,000
Operating income . . . . . . . . . . . . . . . . . . 250,000 7,000
Other income (expense):
Dividend and interest income . . . . . . . . . . . 2,000 3,000
Interest expense . . . . . . . . . . . . . . . . . (35,000) (34,000)
Net loss on sale of property and equipment . . . . (10,000)
Total other income (expense) . . . . . . . . . . . . (33,000) (41,000)
Income (loss) before provision for income taxes. . . 217,000 (34,000)
Provision for income taxes . . . . . . . . . . . . . 2,000
Net income (loss). . . . . . . . . . . . . . . . . . 215,000 (34,000)
Net income (loss) per common share . . . . . . . . . .08 (.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)
1997 1996
<S>
CASH FLOWS FROM OPERATING ACTIVITIES: <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . 215,000 (34,000)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . 176,000 171,000
Net loss on sale of property and equipment . . . . . 10,000
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . (54,000) (39,000)
Inventory. . . . . . . . . . . . . . . . . . . . . . 4,000 29,000
Prepaid supplies and other assets. . . . . . . . . . (15,000) (11,000)
Accounts payable and accrued expenses. . . . . . . . (82,000) (162,000)
Income tax refund, net . . . . . . . . . . . . . . . 118,000
Net cash provided by operating activities. . . . . . 244,000 82,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment . . . . . (163,000) (554,000)
Proceeds from sale of property and equipment . . . . 245,000
Net cash used in investing activities. . . . . . . . (163,000) (309,000)
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 . . . . . . 155,000 373,000
Principal payments on long-term debt . . . . . . . . (64,000) (45,000)
Proceeds from issuance of note payable-stockholder . 6,000
Net cash provided by financing activities. . . . . . 91,000 274,000
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . 172,000 47,000
CASH AND CASH EQUIVALENTS BALANCE AT BEGINNING
OF YEAR. . . . . . . . . . . . . . . . . . . . . . . 71,000 144,000
CASH AND CASH EQUIVALENTS BALANCE AT END OF
THE FIRST QUARTER. . . . . . . . . . . . . . . . . . 243,000 191,000
Supplemental disclosures of cash flow information:
Cash paid during the first quarter for:
Interest. . . . . . . . . . . . . . . . . . . . . . 33,000 75,000
Income taxes. . . . . . . . . . . . . . . . . . . . 2,000 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"), 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 a 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 whichthose 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.
Impairment of long-lived assets and long-lived assets to be disposed of The
Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-lived Assets and the Long-lived Assets to be Disposed Of
(SFAS No. 121), on May 1, 1996. SFAS No. 121 requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
Adoption of SFAS No. 121 had no impact on the Company's financial position
or results of operations.
Stock-based compensation The Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation, which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards
on the date of grant on May 1, 1996. Alternatively, SFAS No. 123 allows
entities to continue to apply the provisions of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and provide certain pro forma information. APB
Opinion No. 25 requires that compensation expense be recorded on the date of
grant only if the current market price of the underlying stock exceeds the
exercise price. The Company has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
2 MARKETABLE SECURITIES AND OTHER INVESTMENTS
Marketable securities and other investments consists of common stock and
were being used to invest excess cash until an appropriate acquisition or
operating need arises. In accordance with Statement 115, at July 31, 1996,
marketable securities and other investments were classified as available-for-
sale and as such unrealized gains and losses were 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 1997 1996
Firstar Bank Shares Common Stock $ $ 5,000
Total cost 5,000
Gross unrealized
holding gains 36,000
Fair Value $ $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 July 31, 1997 and 1996 amounted to
$600 and $500, respectively.
Notes Payable
During fiscal 1995 the Company entered into a series of note payable
transactions, which at July 31, 1997 had a balance of $71,000, 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, 1997
and 1996 was $1,500 and $4,400, 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 both fiscal quarters ended
July 31, 1997 and 1996 was $2,100.
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,
1997 1996
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, 1997 Compared to Three Months Ended July
31, 1996. The Company recorded sales of $2,241,000 during the first quarter of
fiscal 1998 as compared to $1,856,000 for the same period last year, a $385,000
(21%) increase. The sales increase was primarily attributable to additional
capacity as a result of the installation of a new continuous mesh belt furnace.
Cost of sales of $1,496,000 (67% of net sales) increased $117,000 (8%) from
$1,379,000 (75% of net sales) for the same period a year earlier. The decrease
relative to sales is the result of improved labor efficiencies and the
absorption of fixed costs. Gross margin increased to $745,000 as compared to
$477,000 for the prior year first quarter.
Selling, general and administrative (SG&A) expenses of $489,000 (22% of
net sales) increased $39,000 (9%) from $450,000 (24% of net sales) recorded
during the first quarter of fiscal 1997. The decrease in SG&A expenses as a
percentage of sales is the result of management's continued focus on overhead
costs. Management's goal is to reduce or hold constant SG&A expenses while
increasing sales.
The Company recorded operating income of $250,000 in the first quarter of
fiscal 1998 as compared to operating income of $7,000 recorded in the prior year
first quarter. The improvement in operating performance was primarily due to
a combination of increased sales and reduction of cost of sales as a percentage
of sales. Management continues to reduce labor costs relative to sales and
strives to increase the Company's revenue per employee.
Total other income (expense) amounted to $33,000 expense in the first
quarter of fiscal 1998 as compared to other income (expense) of $41,000 expense
in the first quarter of last year. The other income in the current first
quarter was primarily due to interest expense.
The Company recorded net income of $215,000 in the first quarter of fiscal
1998 as compared to a $34,000 net loss in the prior year first quarter. Net
income in the current first quarter was primarily due to increased sales and a
reduction of cost of sales as a percentage of sales.
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, there unto duly authorized.
MILASTAR CORPORATION
/s/ J.RUSSELL DUNCAN
J. Russell Duncan
Chairman of the Board
and Chief Executive Officer
Dated:
August 29, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JUL-31-1997
<CASH> 243,000
<SECURITIES> 0
<RECEIVABLES> 1,245,000
<ALLOWANCES> 40,000
<INVENTORY> 181,000
<CURRENT-ASSETS> 1,806,000
<PP&E> 7,441,000
<DEPRECIATION> 2,995,000
<TOTAL-ASSETS> 6,317,000
<CURRENT-LIABILITIES> 1,411,000
<BONDS> 0
0
0
<COMMON> 137,000
<OTHER-SE> 3,606,000
<TOTAL-LIABILITY-AND-EQUITY> 6,317,000
<SALES> 2,241,000
<TOTAL-REVENUES> 2,241,000
<CGS> 1,496,000
<TOTAL-COSTS> 495,000
<OTHER-EXPENSES> (2,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,000
<INCOME-PRETAX> 217,000
<INCOME-TAX> 2,000
<INCOME-CONTINUING> 215,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 215,000
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
