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, 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 (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, 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, 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
January 31, April 30,
1997 1996
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<C> <C>
Current assets:
Cash and cash equivalents 36,000 144,000
Marketable securities and other investments,
at fair value 41,000
Accounts receivable:
Trade, less allowance for doubtful accounts of
$33,000 (January 31, 1997) and $37,000
(April 30, 1996) 1,005,000 959,000
Other 8,000 6,000
Inventory 151,000 224,000
Prepaid expenses and other 171,000 182,000
Total current assets 1,371,000 1,556,000
Property, plant and equipment:
Land 199,000 199,000
Buildings and improvements 738,000 662,000
Equipment 6,470,000 5,465,000
7,407,000 6,326,000
Less accumulated depreciation (2,833,000) (2,360,000)
4,574,000 3,966,000
Other assets:
Non-compete agreements 77,000 125,000
Building held for sale,
net of valuation allowance 255,000
Total assets 6,022,000 5,902,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to stockholders 190,000 271,000
Note payable to bank 60,000
Current maturities of long-term debt 208,000 208,000
Accounts payable 288,000 416,000
Income taxes payable 2,000 5,000
Accrued payroll and benefits 251,000 193,000
Accrued real estate taxes 70,000 96,000
Other accrued liabilities 163,000 184,000
Total current liabilities 1,172,000 1,433,000
Long-term debt, less current maturities 1,254,000 842,000
Deferred tax refund, net 118,000
Total liabilities 2,544,000 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 January 31, 1997 and
April 30, 1996 137,000 137,000
Note receivable from officer (20,000) (20,000)
Unrealized holding gains on marketable securities 36,000
Additional paid-in capital 1,666,000 1,666,000
Retained earnings 1,695,000 1,808,000
Total stockholders' equity 3,478,000 3,627,000
Total liabilities and stockholders' equity 6,022,000 5,902,000
</TABLE>
<TABLE>
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MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
January 31, January 31,
1997 1996 1997 1996
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Net Sales 1,672,000 1,374,000 5,412,000 5,020,000
Cost of Sales 1,315,000 1,180,000 4,101,000 3,867,000
Gross margin 357,000 194,000 1,311,000 1,153,000
Selling general and administrative expenses 415,000 405,000 1,320,000 1,276,000
Amortization of non-compete agreements 8,000 14,000 48,000 42,000
Operating income (loss) (66,000) (225,000) (57,000) (165,000)
Other income (expense):
Dividend and interest income 3,000 4,000 8,000 14,000
Interest expense (38,000) (8,000) (107,000) (24,000)
Net gain (loss) on sale of property and equipment 44,000 (9,000)
Unrealized gain (loss) on valuation of building
held for sale 43,000 (30,000)
Total other income (expense) 9,000 (4,000) (65,000) (40,000)
Income (loss) before income taxes (57,000) (229,000) (122,000) (205,000)
Provision (benefit) for income taxes (8,000)
Net income (loss) (57,000) (229,000) (114,000) (205,000)
Net income (loss) per common share (.02) (.08) (.04) (.07)
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)
1997 1996
<S>
<C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (114,000) (205,000)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 521,000 404,000
Net loss (gain) on sale of property and equipment 9,000
Unrealized market loss (gain) on valuation of
building held for sale (43,000) 30,000
Changes in operating assets and liabilities:
Accounts receivable (48,000) 374,000
Inventory 73,000 17,000
Prepaid supplies and other assets 11,000 34,000
Accounts payable and accrued expenses (119,000) (212,000)
Income tax refund, net 118,000
Net cash provided by operating activities 408,000 442,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,081,000) (429,000)
Proceeds from sale of property and equipment 294,000
Net cash used in investing activities (787,000) (429,000)
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 (152,000) (52,000)
Proceeds from issuance note payable - stockholder 6,000
Repayments on note payable - stockholder (87,000) (174,000)
Net cash provided by (used in) financing
activities 271,000 (179,000)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (108,000) (166,000)
CASH AND CASH EQUIVALENTS BALANCE AT BEGINNING
OF YEAR 144,000 365,000
CASH AND CASH EQUIVALENTS BALANCE AT END OF
THE THIRD QUARTER 36,000 199,000
Supplemental disclosures of cash flow information:
Cash paid during the first three quarters for:
Interest 154,000 5,000
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, fully amortized at January 31, 1997, which were
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 January 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 both fiscal
quarters ended January 31, 1997 and 1996 amounted to $500.
Notes Payable
During fiscal 1995 the Company entered into a series of note payable
transactions, which at January 31, 1997 had a balance of $90,000,
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 January 31, 1997 and 1996 was $2,700 and $5,000, 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 January 31, 1997 and 1996 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
January 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 January 31, 1997 Compared to Three Months
Ended January 31, 1996. The Company recorded sales of $1,672,000
during the third quarter of fiscal 1997 as compared to $1,374,000 for the
same period last year, a $298,000 (22%) increase. The sales increase was
caused by a combination of increased sales at Flame Metals (9%) and
increased sales due to the acquisition of New England Metal (13%).
Cost of sales of $1,315,000 (79% of net sales) increased $135,000
(11%) from $1,180,000 (86% 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 improved
efficiencies (7%) and increased sales resulting from the addition of New
England Metal (18%). Gross margin increased to $357,000 compared to
$194,000 for the prior year third quarter.
Selling, general and administrative expenses of $415,000 (25% of net
sales) increased $10,000 (2%) from $405,000 (29% of net sales) recorded
during the third 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 an operating loss of $66,000 in the third
quarter of fiscal 1997 as compared to an operating loss of $225,000
recorded in the prior year third quarter. The improvement in operating
performance was primarily due to reduced operating 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 income (expense) amounted to $9,000 income in the third
quarter of fiscal 1997 compared to other income (expense) of $4,000
expense in the third quarter of last year. The other income in the
current third quarter was primarily the result of a gain on the sale of
investments being partially offset by increased interest expense.
The Company recorded a net loss in the third quarter of fiscal 1997
of $57,000 compared to a $229,000 net loss in the prior year third
quarter. The loss in the current third 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.
Nine Months Ended January 31, 1997 Compared to Nine Months
Ended January 31, 1996. The Company recorded sales of $5,412,000
during the first three quarters of fiscal 1997 as compared to $5,020,000
for the same period last year, a $392,000 (8%) increase. The increase
was caused by a combination of decreased sales at Flame Metals (4%)
and increased sales due to the acquisition of New England Metal
Treating (12%).
Cost of sales of $4,101,000 (76% of net sales) increased $234,000 (6%)
from $3,867,000 (77% 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 (10%) and increased sales resulting from the
addition of New England Metal Treating (16%). Gross margin
increased to $1,311,000 compared to $1,153,000 in the prior year first
three quarters.
Selling, general and administrative expenses of $1,311,000 (24% of
net sales) increased $35,000 (4%) from 1,276,000 (25% of net sales)
recorded during the first three quarters of fiscal 1996. The increase was
primarily due to the acquisition of New England Metal Treating.
The Company recorded an operating loss of $57,000 in the first three
quarters of fiscal 1997 as compared to an operating loss of $165,000
recorded in the same period last year. The improvement in operating
performance was primarily due to continually improving efficiencies,
including introduction of the new mesh belt furnace, at Flame Metals.
The new mesh belt furnace, which became fully operational during the
current third quarter, is expected to increase sales and further reduce
costs.
Total other income (expense) amounted to $65,000 expense for first
three quarters of fiscal 1997 compared to other income (expense) of
$40,000 expense in the same period last year. The increase is primarily
due to an increase in interest expense was 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 three quarters of fiscal
1997 of $114,000 compared to a net loss of $205,000 in the first three
quarters of the prior year. The loss in the first three quarters 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 January 31, 1997, the Company's working capital was $199,000
compared to $123,000 at April 30, 1996 and the ratio of current assets to
current liabilities was 1.2 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 17% (19% at April 30,
1996) of total current assets and total assets, respectively. During the
first three quarters of fiscal 1997, cash provided by operating activities
amounted to $408,000 compared to $442,000 provided by operating
activities in the first three quarters of fiscal 1996. Working capital
requirements for the first three quarters 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
theundersigned, thereunto duly authorized.
MILASTAR CORPORATION
/s/ J. RUSSELL DUNCAN
J. RussellDuncan
Chairman of the Board and Chief
Executive Officer
Dated: March 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> JAN-31-1997
<CASH> 36,000
<SECURITIES> 0
<RECEIVABLES> 1,038,000
<ALLOWANCES> 33,000
<INVENTORY> 151,000
<CURRENT-ASSETS> 1,371,000
<PP&E> 7,407,000
<DEPRECIATION> 2,833,000
<TOTAL-ASSETS> 6,022,000
<CURRENT-LIABILITIES> 1,172,000
<BONDS> 1,254,000
0
0
<COMMON> 137,000
<OTHER-SE> 3,361,000
<TOTAL-LIABILITY-AND-EQUITY> 6,022,000
<SALES> 1,672,000
<TOTAL-REVENUES> 1,672,000
<CGS> 1,315,000
<TOTAL-COSTS> 423,000
<OTHER-EXPENSES> (47,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,000
<INCOME-PRETAX> (57,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (57,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (57,000)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
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