Milastar Corporation and Consolidated Subsidiaries
Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 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
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.05 per share
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the Class A Common Stock held by
non-affiliates of the Registrant on July 11, 1997 was $1,968,000 based upon
the bid price of the Class A common stock as quoted on OTC Electronic
Bulletin Board. On that date there were 2,738,264 shares of Class A
Common Stock issued and outstanding.
Documents Incorporated by Reference
Parts I and III incorporate by reference certain information to be included in
Registrant's definitive Information Statement relating to action taken by
written consent of the Board of Directors and Majority Stockholders, which
Registrant intends to file with the Securities and Exchange Commission
pursuant to Regulation 14C on or before August 8, 1997.
PART I
Item 1. Business
General
Milastar Corporation ("Milastar" and sometimes the "Company") sells
special metallurgical services to a diversified list of manufacturers primarily
located in the greater Midwest and New England regions. The customer base
manufactures a wide variety of mechanical end-products and customarily
outsources (subcontracts) the processing of some components incorporated
in those end-products. The menu of special processing services performed
include metallurgical engineering, heat treating, brazing and surface
finishing.
Milastar owns three wholly-owned subsidiaries; Flame Metals Processing
Corporation ("Flame Metals") located in Minnesota and two inactive
corporations, Milastar Services Corporation and Northwest Engineering Labs,
Inc. In addition, New England Metal Treating Corporation ("NEMT")
located in Auburn, Massachusetts is a wholly-owned subsidiary of Flame
Metals.
Flame Metals and its subsidiary generate 100% of Milastar's consolidated
net sales, which flow from the sale of a variety of sub-contract services to
industrial customers. These special services include metallurgical-related
processing involving the heating and cooling of metal products under
controlled conditions in order to restructure the molecular property of such
products to achieve specified characteristics. The following primary
categories of services accounted for more than 15 percent of total net sales in
fiscal 1997, 1996 and 1995:
1997 1996 1995
Harden - Neutral/Case 60% 53% 57%
Salt Bath Nitriding 26% 29% 25%
Flame Metals' customer list includes over 800 firms generally classified
as manufacturers. The customer furnishes all direct materials and
components processed for their account. These parts are then heat treated,
primarily to achieve a certain hardness or surface finish, in preparation of the
metal parts for their designated use. The Company does not have any
customer accounting for more than 10 percent of total net sales.
Flame Metals' operating assets were acquired by Milastar in May 1985.
Flame Metals has since been expanded by a succession of acquisitions of
complementary businesses. The initial acquisition was consummated in
October 1988 when Milastar directly acquired certain assets of Northwest
Engineering Labs, Inc. ("Northwest") located in Minneapolis, MN for
approximately $390,000. These assets were concurrently contributed to
Flame Metals thus rendering the Northwest entity inactive. The second
acquisition was consummated in November 1991 when Flame Metals directly
acquired certain assets and assumed certain liabilities from Getchell Steel
Treating Company, Inc. located in Bloomington, MN for a purchase price of
$1,358,365. Both of these acquired companies competed directly with Flame
Metals in the greater Minneapolis-St. Paul market; nevertheless, the said
acquisitions broadened market coverage, added metal treating capabilities and
expanded production capacity. The third acquisition occurred in April 1996
when Flame Metals directly acquired certain assets and assumed certain
liabilities from New England Metal Treating Inc. located in Auburn,
Massachusetts for a purchase price of $731,000. Flame Metals operates this
entity as the wholly owned subsidiary New England Metal Treating
Corporation.
The Company has two plants located in the Minneapolis-St. Paul,
Minnesota area and one plant in Massachusetts. These facilities include
Flame Metals - St. Louis Park, MN (35,000 sq. ft. owned) and Flame
Metals - Bloomington, MN (35,000 sq. ft. leased). The Company's third
plant is operated by New England Metal Treating Corporation - Auburn, MA
(9,000 sq. ft. leased).
Milastar incurred net losses before income taxes of $62,000 in fiscal 1997
and $252,000 in fiscal 1996. Fiscal 1997 operating results improved
primarily as a result of increased labor efficiency. The net loss after taxes
amounted to $63,000 in fiscal 1997 and $254,000 in fiscal 1996. Results of
operations are discussed more fully in "Management's Discussion and
Analysis" beginning on page 6.
The Company's non-operating other income (expense) resulted in a net
expense of $124,000 in fiscal 1997, up $76,000 from the $48,000 in expense
recorded in 1996. Current assets as a percent of total assets amounted to 26%
at April 30, 1997 and 1996. The book value per share was $1.29 per share
at April 30, 1997 compared to $1.32 per share at April 30, 1996. The bid
price per share, as quoted on the OTC Electronic Bulletin Board, was $0.56
as of April 30, 1997.
Competition
The heat treat business is highly competitive, with price, quality and
consistency of service being the principal factors affecting customer
preferences. Since the customers' outside manufactured product components
are sensitive to freight charges, the proximity of the heat treat facility to
the customers' production location is also a primary competitive factor. Thus
Flame Metals' business is generally localized and, to a lesser degree,
regionalized. In this regard, Flame Metals has approximately six or seven
metallurgical processing competitors in both the Minneapolis-St. Paul,
Minnesota and Auburn, Massachusetts markets who can be classified as
being competitive with Flame Metals. Some of these competitors may
possess greater resources and may be more cost efficient. Nevertheless, the
Company believes Flame Metals' geographical location to customers,
relative price structure, processing quality and reliability, collectively,
provide Flame Metals with the resources to be competitive.
Seasonality and Raw Materials
The heat treat business is affected during the winter holiday season and
mid-summer due to vacations and plant shutdowns by Flame Metals'
customers. Flame Metals is not materially impacted by the sources or
availability of raw material in that virtually all revenue is generated by
services performed on customer owned products.
Corporate
Milastar was organized under Delaware law on February 24, 1969. Its
principal executive offices are located at No. 9 Via Parigi, Palm Beach,
Florida 33480. Its communications numbers are: Telephone (561) 655-9590
and fax number (561) 833-7253.
Environmental
To the best of its knowledge, the Company believes that it is presently in
substantial compliance with all existing applicable environmental laws and
does not anticipate that such compliance will have a material effect on its
future capital expenditures, liquidity, earnings or competitive position.
Employee Relations
The Company operates three separate plant locations and employs a total
of approximately 80 employees; 43 in St. Louis Park, MN, 30 in
Bloomington, MN and 7 in Auburn, MA. The Company believes the
prevailing wage rates, fringe benefits and working conditions afforded its
employees compare favorably with those received by employees employed
by regional businesses competitive with the Company. The Company
believes its employee relations are satisfactory; therefore the Company does
not anticipate any labor disruption during the forthcoming fiscal 1998.
Twenty-six production employees at the Bloomington, MN plant are
represented by the International Union of Electronic, Electrical, Salaried,
Machine and Furniture Workers, AFL-CIO Local 1140. The plants in St.
Louis Park, MN and Auburn, MA are not subject to a collective bargaining
agreement.
Item 2. Properties
The Company believes that its property and equipment are well
maintained, in good working condition, and are adequately insured.
Executive Offices
The Company currently maintains its executive offices located in leased
facilities in a building owned by J. Russell Duncan, Chairman of the Board
and a director of the Company, located at No. 9 Via Parigi, Palm Beach,
Florida (see also "Corporate" above). The lease covers 1,200 square feet, is
on a month-to-month basis, and provides for rental at a rate of $250 per
month, which rate is below prevailing rental rates for comparable facilities
in the area. Management regards such lease as being favorable and in the
best interests of the Company and its stockholders.
Flame Metals
Flame Metals owns or leases three industrial properties as listed
below:
ACTIVITY LOCATION SIZE(SQ. FT.) STATUS
Flame Metals St. Louis Park,MN 35,000 Owned
Flame Metals Bloomington, MN 35,000 Leased
New England MetalTreating Auburn, MA 9,000 Leased
The lease on the Bloomington, MN plant is a ten year lease providing for
annual rent of $72,000 per lease year in years one through five and $75,600
per lease year in years six through ten. Such rental payments are payable in
monthly installments due and payable on the first day of each calendar month.
The Company is obligated under the lease to pay all real estate taxes,
maintenance expense and insurance. The lease is renewable and the
Company has the right to purchase the leased building at any time during the
lease term subject to the terms and conditions specified in the lease.
The lease on the Auburn, MA plant is a five year lease providing for annual
rent of $46,000 adjusted each year for changes in the Consumer Price Index.
Such rental payments are payable in monthly installments due and payable on
the first day of each calendar month. The Company is obligated under the
lease to pay all real estate taxes and maintenance expense. The lease is
renewable and the Company does not have a purchase option.
Item 3. Legal Proceedings
The Company has been party to various legal proceedings incidental to its
normal operating activities. Although it is impossible to predict the outcome
of such proceedings, we believe, based on the facts currently available to us,
that none of such claims will result in losses that would have a materially
adverse effect on the Company's financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's security holders
during its fiscal year ended April 30, 1997.
Executive Officers of the Company
The following table sets forth with respect to each executive officer of the
Company his name, age and all positions and offices with the Company held
by him since May 1, 1988. Unless otherwise indicated in the table below, all
positions and offices indicated have been continuously held since May 1,
1988. All executive officers serve at the will of the Board of Directors until
their successors are duly appointed and qualified. Mr. J. Russell Duncan,
Chairman of the Board and a director of the Company, is the father of Mr.
Lance H. Duncan, Secretary and a director of the Company. With the
foregoing exception, no family relationship exists among the directors or
officers of the Company.
Positions andOffices Held with
Name Age the Company and Period Held
J. Russell Duncan (1) . . .80 Chairman of the Board;
Treasurer until April 19,
1995.
L. Michael McGurk . . . . .46 President and Chief
Operating Officer since
March 4, 1991; prior
thereto Vice President and
Secretary from April 29,
1988 to March 4, 1991.
President and Treasurer of
Flame Metals since April,
29 1988; prior thereto
Vice President of Flame
Metals from May 29,
1985 to April 29, 1988
Lance H. Duncan (2) . . . .41 Secretary since March 4,
1991; prior thereto
President from April 29,
1988 to March 4, 1991
and Secretary from
August 24, 1983 to April
29, 1988
Dennis J. Stevermer . . . .36 Treasurer since April 19,
1995 and Chief Financial
Officer of Flame Metals
since September 1993;
prior thereto financial
manager at Unisys from
May 1, 1988 to
September 1993.
(1) Mr. J. Russell Duncan is Chairman and a director of Sound Techniques,
Inc. (audio-video production studios) and has otherwise been engaged in
private investment activities since September 1988 and prior thereto was
Chairman of the Board of Steego Corporation and Director of other
public companies.
(2) Mr. Lance H. Duncan is President and Chief Operating Officer of
Sound Techniques, Inc. (audio-video production studios) and has
been engaged in private investment activities for more than the past
five years.
Similar information respecting the directors of the Company will be
included under the heading "Respecting the Election of Directors" in the
Company's definitive Information Statement ("Information Statement") to be
distributed to the stockholders of the Company and filed with the Securities
and Exchange Commission pursuant to the Securities and Exchange Act of
1934, as amended, respecting notification of certain action taken by written
consent in lieu of the Company's Annual Meeting of Stockholders for its
1997 fiscal year. The Company expects to file the Information Statement
with the Securities and Exchange Commission on or prior to August 8, 1997
and reference is expressly made thereto for the information incorporated
herein by the aforesaid reference.
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
The Company's Class A Common Stock is traded on the OTC Bulletin
Board and the Pink Sheets under the ticker symbol "MILAA". The following
table provides, for the periods indicated, the high and low bid prices per share
of the Company's Class A Common Stock. The Class A share prices
represent prices established between broker-dealers and therefore do not
reflect prices of actual transactions.
Fiscal 1997 Fiscal 1996
High Low High Low
First Quarter . . . . . . . . . . 0.75 0.63 0.44 0.44
Second Quarter. . . . . . . . . . 0.75 0.69 0.69 0.41
Third Quarter . . . . . . . . . . 0.75 0.63 0.69 0.56
Fourth Quarter. . . . . . . . . . 0.63 0.50 0.63 0.50
On July 11, 1997 there were approximately 5,000 holders of record of the
Company's Common Stock. The Company has not paid any cash dividends
in respect of its Class A Common Stock, and it is not presently anticipating
paying any cash dividends, thereon, in the near term.
Item 6. Selected Financial Data
Year Ended April 30,
1997 1996 1995 1994 1993
(In thousands except per share data)
Net sales. . . . . . . . . . . . . . . 7,325 6,642 6,708 5,307 5,518
Loss before cumulative effect
of changes in accounting principles . . (63) (254) (614) (960) (423)
Cumulative effect of changes in
accounting principles - - - - 66
Net loss . . . . . . . . . . . . . . . . (63) (254) (614) (960) (357)
Net loss before extraordinary credit
and cumulative effect of changes in
accounting principles per common share (.02) (.09) (.22) (.35) (.15)
Cumulative effect of changes in
accounting principles - - - - .02
Net loss per common share. . . . . . (.02) (.09) (.22) (.35) (.13)
Financial Position:
Total assets. . . . . . . . . . . .6,093 5,902 5,315 15,042 18,442
Short-term obligations. . . . . . .1,493 1,433 1,410 10,501 12,524
Long-term obligations . . . . . . 1,072 842 40 82 299
Stockholders' equity. . . . . . . 3,528 3,627 3,865 4,459 5,619
During the periods presented, no cash dividends were declared.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company's operating results for the fiscal year ended April 30, 1997
improved as a result of lower operating expenses. This is the fourth
consecutive year that Milastar has shown a significant improvement yet
failed to generate a net profit.
Milastar's primary revenues flow from metallurgical services provided by
Flame Metals Processing Corporation and New England Metal Treating
Corporation. The Company's management continues to increase prices and
cut operating costs. The price increases, which are quoted individually by
each customer's particular products, are taking effect on an on-going basis
focused on low margin accounts. Significant reductions in cost of sales,
including factory labor and primary production supply costs as a percentage of
sales, is being accomplished. These major areas will continue to receive
increased focus as the Company strives to increase equipment utilization,
expand capacity and absorb fixed overhead costs.
Milastar has net operating loss carry forwards for state and federal
purposes of approximately $3,200,000 and $1,735,000 respectively, available
to offset future taxable income, if any, which in the future may enhance
earnings as well as cash flow. See note 5 to "Notes to Consolidated Financial
Statements." With working capital at year-end of $76,000, the Company
believes it has sufficient capital resources to meet fiscal 1998 requirements.
Results of Operations
Fiscal 1997 Compared to Fiscal 1996. Net sales for fiscal 1997 totaled
$7,325,000 a 10% increase from $6,642,000 in fiscal 1996. The increase was
primarily attributable to the additional sales from New England Metal
Treating Corporation.
Cost of sales as a percentage of sales was reduced to 74% in fiscal 1997,
down from 76% in fiscal 1996. The reduction reflects the progressive cuts in
total payroll which coincidently increased productivity. Management
continues to provide training to increase efficiency and has significantly
reduced employee turnover.
Selling, general and administrative expense decreased as a percentage of
sales to 25% in fiscal 1997, down 1% from 26% in fiscal 1996. The decrease
as a percent of sales is the result of overhead costs being absorbed by the
additional sales from New England Metal Treating Corporation.
Total other expense amounted to $124,000 in fiscal 1997, compared to
other expense of $48,000 reported in fiscal 1996. The increase was directly
attributable to an increase in interest expense due to additional debt resulting
from the acquisition of New England Metal Treating and the purchase of a
mesh belt furnace.
Fiscal 1996 Compared to Fiscal 1995. Net sales for fiscal 1996 totaled
$6,642,000 a 1% decrease from $6,708,000 in fiscal 1995. The slight
decrease was primarily attributable to lower sales in the third quarter which
was the result of a softening economy. Several of the Company's key
customers experienced lower bookings which in turn translated into reduced
outsourcing of heat treating orders.
Cost of sales as a percentage of sales was 76% in fiscal 1996 compared
to 79% in fiscal 1995. The drop as a percent of sales was the result of
increased productivity on the same level of sales and a reduction of factory
support costs. Management continued to provide training for its
inexperienced work force and had significantly reduced employee turnover.
Selling, general and administrative expense decreased slightly as a
percentage of sales to 26% in fiscal 1996, down 1% from 27% in fiscal 1995.
The decrease as a percent of sales and in total dollars was the result of
managements concentration on reducing overhead as a percent of sales.
Total other expense amounted to $48,000 in fiscal 1996, compared to
other expense of $117,000 reported in fiscal 1995. The decrease was directly
attributable to the sale of the Company's remaining reverse repurchase
agreements in fiscal 1995. There was an additional $43,000 expense in fiscal
1996 which resulted from a write down to net realizable value on the
Northwest building sold after year end.
Effects of Inflation
During fiscal 1997 and 1996 the Company's monetary assets materially
exceeded its monetary liabilities resulting in a positive monetary position.
During periods of significant price inflation, the Company's purchasing
power could be eroded if the value of the Company's underlying tangible
assets fail to appreciate in value. Under such a scenario, the Company may
be positioned to raise prices to offset the inflation effect and in addition
take advantage of revaluation of underlying tangible assets to bolster borrowing
capacity. There is no clear correlation between the side effects from inflation
and the Company's earning capacity.
Liquidity and Capital Resources
At April 30, 1997 the Company's working capital was $76,000 compared
to $123,000 as of April 30, 1996, and the ratio of current assets to current
liabilities was 1.1 to 1 at April 30, 1997 and 1996. Cash, marketable
securities and current receivables represented 78% (74% at April 30, 1996)
and 20% (19% at April 30, 1996) of total current assets and total assets, at
April 30, 1997 respectively.
During fiscal 1997 cash provided by operating activities amounted to
$560,000 compared to cash provided of $483,000 in fiscal 1996. The
Company added $1,133,000 to property, plant and equipment in fiscal 1997
compared to $962,000 in the previous year. The primary capital purchase
was a continuous mesh belt furnace which amounted to $578,000 in fiscal
1997 and $336,000 in fiscal 1996. Working capital requirements for fiscal
1997 were funded primarily from available cash generated from operations
and additional long-term borrowings.
On March 8, 1996, the Company filed Form 1139 "Corporate Application
for Tentative Refund" to carry back losses under Section 172(f) of the
Internal Revenue Code in the amount of $146,300. The Company was
notified in April 1996 that the IRS had allowed the carryback loss and
received a refund in June 1996. Section 172(f) is an area of the tax law
without substantial legal precedent or guidance. Accordingly, assurances
cannot be made as to whether the IRS would later challenge the Company's
entitlement to such refund. Consequently, a valuation allowance of $118,000
has been recorded in the amount of the refund net of the collection expenses
which will be reimbursed if the Company's position does not withstand any
such challenge and the refund is reversed.
The Company believes it has sufficient capital resources to meet its fiscal
1998 operations cash flow requirements as well as for potential acquisitions.
At April 30, 1997 the Company did not have any material commitments for
capital resources.
Forward-Looking Statements
Certain statements contained in Management's Discussion and Analysis
and elsewhere in the annual report are forward-looking statements. These
statements discuss, among other things, expected growth, future revenues and
future performance. The forward-looking statements are subject to risks and
uncertainties, including, but not limited to, competitive pressures, inflation,
consumer debt levels, currency exchange fluctuations, trade restrictions,
changes in tariff and freight rates, capital market conditions and other risks
indicated in the Company's filings with the Securities and Exchange
Commission. Actual results may materially differ form anticipated results
described in these statements.
Item 8. Financial Statements and Supplementary Data
AUDITORS' REPORT
The Stockholders and Board of Directors
Milastar Corporation:
We have audited the consolidated balance sheets of Milastar Corporation and
subsidiaries as of April 30, 1997 and 1996, and the related consolidated
statements of operations, cash flows and changes in stockholders' equity for
each of the fiscal years in the three-year period ended April 30, 1997. In
connection with our audits of the consolidated financial statements, we have
also audited the accompanying consolidated financial statement schedule.
These consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Milastar Corporation
and subsidiaries as of April 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the fiscal years in the three-year
period ended April 30, 1997 in conformity with generally accepted
accounting principles. Also in our opinion, the related consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, Milastar
Corporation and subsidiaries adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
during the year ended April 30, 1995.
KPMG Peat Marwick
Minneapolis, Minnesota
June 6, 1997
<TABLE>
<CAPTION>
Milastar Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
April 30, 1997 and 1996
ASSETS
1997 1996
<S>
Current assets: <C> <C>
Cash and cash equivalents. . . . . . . . . . . . . . 71,000 144,000
Marketable securities, at fair value . . . . . . . . 41,000
Accounts and other receivables:
Trade, less allowance for doubtful accounts of
$35,000 in 1997 and $37,000 in 1996 . . . . . . . 1,151,000 959,000
Other. . . . . . . . . . . . . . . . . . . . . . . 9,000 6,000
Inventory. . . . . . . . . . . . . . . . . . . . . . 185,000 224,000
Prepaid supplies and other . . . . . . . . . . . . . 153,000 182,000
Total current assets . . . . . . . . . . . . . . 1,569,000 1,556,000
Property, plant and equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . 199,000 199,000
Buildings and improvements . . . . . . . . . . . . 742,000 662,000
Equipment. . . . . . . . . . . . . . . . . . . . . 6,337,000 5,465,000
7,278,000 6,326,000
Less accumulated depreciation. . . . . . . . . . (2,825,000) (2,360,000)
4,453,000 3,966,000
Other assets:
Non-compete agreements . . . . . . . . . . . . . . 71,000 125,000
Building held for sale, net of valuation allowance 255,000
Total assets . . . . . . . . . . . . . . . . . . . 6,093,000 5,902,000
</TABLE>
<TABLE>
<CAPTION>
Milastar Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
April 30, 1997 and 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
<S>
Current liabilities: <C> <C>
Note payable to stockholder. . . . . . . . . . . . 165,000 271,000
Note payable to bank . . . . . . . . . . . . . . . 60,000
Current maturities of long-term debt . . . . . . . 342,000 208,000
Accounts payable . . . . . . . . . . . . . . . . . 426,000 416,000
Income taxes payable . . . . . . . . . . . . . . . 119,000 5,000
Accrued payroll and benefits . . . . . . . . . . . 243,000 193,000
Accrued real estate taxes. . . . . . . . . . . . . 68,000 96,000
Other accrued liabilities. . . . . . . . . . . . . 130,000 184,000
Total current liabilities. . . . . . . . . . . 1,493,000 1,433,000
Long-term debt, less current maturities. . . . . . 1,072,000 842,000
Total liabilities. . . . . . . . . . . . . . . 2,565,000 2,275,000
Commitments (Note 10)
Stockholders' equity:
Preferred stock, $1.00 par value; authorized
5,000,000 shares, none issued . . . . . . . . . .
Common stock, Class A, $.05 par value.
Authorized 7,500,000 shares, issued and
outstanding 2,738,264 shares in 1997 and 1996 . . 137,000 137,000
Note receivable from officer . . . . . . . . . . . (20,000) (20,000)
Unrealized holding gains on marketable equity
securities . . . . . . . . . . . . . . . . . . . 36,000
Additional paid-in capital . . . . . . . . . . . . 1,666,000 1,666,000
Retained earnings. . . . . . . . . . . . . . . . . 1,745,000 1,808,000
Total stockholders' equity . . . . . . . . . . 3,528,000 3,627,000
Total liabilities and stockholders' equity. . 6,093,000 5,902,000
</TABLE>
<TABLE>
<CAPTION>
Milastar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended April 30,
1997 1996 1995
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . 7,325,000 6,642,000 6,708,000
Cost of sales. . . . . . . . . . . . . . . 5,414,000 5,036,000 5,299,000
Gross profit . . . . . . . . . . . . . . . 1,911,000 1,606,000 1,409,000
Selling, general and administrative exp. . 1,795,000 1,754,000 1,817,000
Amortization of non-compete agreements . . 54,000 56,000 56,000
Other operating expenses . . . . . . . . . 31,000
Operating income (loss). . . . . . . . . . 62,000 (204,000) (495,000)
Other income (expense):
Dividend and interest income . . . . . . 9,000 16,000 500,000
Interest expense . . . . . . . . . . . . (142,000) (36,000) (336,000)
Net gain (loss) on sale of marketable sec 45,000 (281,000)
Net gain (loss) on sale of property
and equipment . . . . . . . . . . . . . (36,000) 15,000
Unrealized market gain (loss) on
building held for sale . . . . . . . . (43,000)
Total other income (expense). . . . . (124,000) (48,000) (117,000)
Loss before income taxes . . . . . . . . . (62,000) (252,000) (612,000)
Income tax expense . . . . . . . . . . . . 1,000 2,000 2,000
Net loss . . . . . . . . . . . . . . . . . (63,000) (254,000) (614,000)
Net loss per Class A common share. . . . . (.02) (.09) (.22)
Weighted average number of Class A common
shares outstanding during the period. . . 2,738,264 2,738,264 2,738,264
</TABLE>
<TABLE>
>CAPTION>
Milastar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended April 30,
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . (63,000) (254,000) (614,000)
Adjustments to reconcile net loss to
net cashprovided by (used in)
operating activities:
Depreciation and amortization . . . . 666,000 535,000 465,000
Net loss (gain) on disposal of
property and equipment . . . . . . . 79,000 (15,000)
Net loss (gain) on marketable sec . . (45,000) 281,000
Unrealized market loss (gain)
on building held for sale. . . . . . (43,000) 43,000
Changes in operating assets and
liabilities, net of effect of the
purchase of the net assets of a business:
Accounts and other receivables . . . . (194,000) 269,000 (207,000)
Inventory. . . . . . . . . . . . . . . 39,000 (32,000) (124,000)
Prepaid supplies and other . . . . . . 29,000 77,000 (95,000)
Accounts payable and accrued expenses. (22,000) (140,000) (133,000)
Income taxes payable . . . . . . . . . 114,000
Net cash provided by (used in)
operating activities . . . . . . . . . 560,000 483,000 (427,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment, net of effect of the purchase
of the net assets of a business. . . . (1,133,000) (962,000) (803,000)
Proceeds from disposal of property,
plant and equipment. . . . . . . . . . 253,000 52,000
Proceeds from sale of marketable sec. . 49,000 10,255,000
Payment for purchase of net assets
of a business. . . . . . . . . . . . . (731,000)
Proceeds from related parties . . . . . 76,000
Net cash provided by (used in)
investing activities . . . . . . . . . (831,000) (1,641,000) 9,528,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit
borrowing. . . . . . . . . . . . . . . 60,000
Repayments on bank line of credit. . . (60,000)
Principal payments of long-term debt. . (200,000) (67,000) (53,000)
Proceeds from issuance of long-term debt 564,000 1,018,000 18,000
Proceeds from issuance of note
payable - stockholder. . . . . . . . . 6,000 100,000 457,000
Repayments on note payable - stockholder (112,000) (174,000) (95,000)
Repayments on note payable - repo . . . (9,310,000)
Net cash provided by (used in)
financing activities . . . . . . . . . 198,000 937,000 (8,983,000)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS. . . . . . . . . . . . (73,000) (221,000) 118,000
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR . . . . . . . . . . . . . . . . 144,000 365,000 247,000
CASH AND CASH EQUIVALENTS, END OF YEAR . 71,000 144,000 365,000
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . 189,000 7,000 344,000
Income taxes . . . . . . . . . . . 5,000 2,000 2,000
</TABLE>
<TABLE>
<CAPTION>
Milastar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'EQUITY
Fiscal Years Ended April 30, 1997, 1996 and 1995
Note Unrealized
Common Common receivable holding Additional
Stock Stock from gains on paid in Retained
Shares Amount officer securities capital earnings
<S> <C> <C> <C> <C> <C> <C>
Balance, April 30, 1994. . 2,738,264 137,000 (20,000) 1,666,000 2,676,000
Unrealized holding
gains on marketable
equity securities . . . . 20,000
Net loss for 1995. . . . . (614,000)
Balance, April 30, 1995. . 2,738,264 137,000 (20,000) 20,000 1,666,000 2,062,000
Unrealized holding
gains on marketable
equity securities . . . . 16,000
Net loss for 1996. . . . . (254,000)
Balance, April 30, 1996. . 2,738,264 137,000 (20,000) 36,000 1,666,000 1,808,000
Unrealized holding
gains on marketable
equity securities . . . . (36,000)
Net loss for 1997. . . . . (63,000)
Balance, April 30, 1997. . 2,738,264 137,000 (20,000) 0 1,666,000 1,745,000
</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") sells special metallurgical services to a diversified list of
manufacturers primarily located in the greater Midwest and New England
regions. The menu of special processing services performed include
metallurgical engineering, heat treating, brazing and surface finishing. 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 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 were 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.
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
Marketable securities consisted of common stock and were being used to
invest excess cash until an appropriate acquisition or operating need arose.
In accordance with Statement 115, at April 30, 1996, 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 April 30:
Description 1997 1996
Total cost 0 5,000
Gross unrealized holding gains 0 36,000
Fair Value 0 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 NOTES PAYABLE
On April 1, 1992 and June 18, 1993 the Company entered into two
reverse repurchase agreements ("Repos") to finance an Adjustable Rate
Mortgage ("ARM") portfolio aggregating $6,205,000 and $8,059,000,
respectively. Each ARM was leveraged at a financing to equity ratio of 9:1.
Accordingly, the Company invested $635,000 and $604,000 and entered into
notes payable for $5,570,000, and $7,455,000, respectively. The interest rate
charged on the notes payable is the London Interbank Offered Rate
("LIBOR") and ranged from 3.75% to 4.56%. As of April 30, 1995 the
Company has liquidated all of the reverse repurchase agreements and the
associated notes payable.
Each ARM, which was pledged as collateral against the respective note
payable, earned interest at the LIBOR rate plus 135 basis points and such
interest was paid monthly. Total interest costs incurred on notes payable for
the years ended April 30, 1997, 1996 and 1995 amounted to $0, $0 and
$310,000, respectively.
4 LONG-TERM DEBT
Long-term debt consisted of the following at April 30:
1997 1996
Amount due under loan agreement with Textron
Financial, payable in monthly installments
of varying amounts, including interest at 10.7%
through October, 2000. . . . . . . . . . . . . . 834,000 336,000
Amount due under non-competition agreements,
payable in monthly installments of $3,256,
without interest through November, 1996. . . . . 23,000
Amount due under loan agreement with
Paul J. Ricard as part of the purchase of NEMT,
payable in annual installments of $50,000,
without interest through January, 2000. . . . . 200,000 200,000
Amount due under loan agreement with First Mass
Bank as part of the purchase of NEMT, payable
in monthly installments of $9,926, including
interest at 8.85% through April, 2000. . . . . . 313,000 400,000
Capital lease obligations, secured by specifi
equipment. . . . . . . . . . . . . . . . . . . . 67,000 91,000
1,414,000 1,050,000
Less current maturities . . . . . . . . . . . . . (342,000) (208,000)
Total long-term debt. . . . . . . . . . . . . . 1,072,000 842,000
One loan agreement contains covenants which, among other things,
require the Company to maintain a minimum level of tangible net worth and
other financial ratios. The Company was not in compliance with the cash
flow coverage ratio as of April 30, 1997. The Company received a letter
from the bank that waived the default as of April 30, 1997.
Maturities of long-term debt and capitalized lease obligations for each of
the five years following April 30, 1997 are as follows:
1998 . . . . . . . . . . . . . . 342,000
1999 . . . . . . . . . . . . . . 336,000
2000 . . . . . . . . . . . . . . 382,000
2001 . . . . . . . . . . . . . . 354,000
2002 and thereafter. . . . . . . 0
Total obligations. . . . . . . . 1,414,000
Total interest expense incurred on long term debt and capitalized lease
obligations for the years ended April 30, 1997, 1996 and 1995 amounted to
$120,000, $12,000 and $3,000, respectively.
5 INCOME TAXES
Income tax expense attributable to net loss from operations consists of:
Current Deferred Total
Year ended April 30, 1997:
U.S. Federal $ - $ - $ -
State and local 1,000 - 1,000
Total $ 1,000 $ - $ 1,000
Year ended April 30, 1996:
U.S. Federal $ - $ - $ -
State and local 2,000 - 2,000
Total $ 2,000 $ - $ 2,000
Year ended April 30, 1995:
U.S. Federal $ - $ - $ -
State and local 2,000 - 2,000
Total $ 2,000 $ - $ 2,000
The provision for income taxes differs from the amount computed by
applying the statutory U.S. federal income tax rate to operations for the
following reasons:
1997 1996 1995
Computed expected tax benefit at 34% . . . (21,200) (85,000) (208,200)
State taxes, net of federal effect . . . . 700 1,000 1,000
Dividends received deduction . . . . . . . - (300) (1,600)
Increase in valuation allowance. . . . . . 15,000 95,900 245,700
Adjustment to net operating loss
carryforward . . . . . . . . . . . . . . 10,000 (16,000) (37,700)
Other net. . . . . . . . . . . . . . . . . (3,500) 6,400 2,800
$ 1,000 $ 2,000 $ 2,000
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets (liabilities) at April 30, 1997 and 1996 are
as follows:
1997 1997 1996 1996
Current Non-current Current Non-current
Allowance for doubtful accounts. . . 14,000 - 14,900 -
Accrued vacation pay . . . . . . . . 38,300 - 13,400 -
Differences in tax and book
depreciation of plant and equipment - (404,300) - (380,300)
Differences in tax and book
treatment of prepaid supplies . . .(11,600) (11,600) (11,600) (23,300)
Plant closing, principally due
to accrual for financial
reporting purposes. . . . . . . . . - - - -
Foreign tax credit carryforward. . . - 16,600 - 16,600
Alternative minimum tax credit
carry forwards. . . . . . . . . . . - 74,200 - 79,300
State net operating loss carryforward - 306,300 - 230,000
Net operating and other
loss carryforward . . . . . . . . . - 813,500 - 888,000
Other. . . . . . . . . . . . . . . .(17,300) 15,200 - (8,700)
Total gross deferred tax asset 23,400 809,900 16,700 801,600
Less valuation allowance (23,400) (809,900) (16,700) (801,600)
Net deferred tax asset $ - $ - $ - $ -
A reconciliation of the valuation allowance for deferred taxes is as follows:
1997 1996
Valuation allowance at beginning of year $ 818,300 $ 722,400
Increase in allowance 15,000 95,900
Valuation allowance at end of year $ 833,300 $ 818,300
At April 30, 1997 the Company has federal and state alternative minimum
tax credit carry forwards of approximately $74,200 which are available to
reduce future federal and state regular income taxes, if any, over an indefinite
period, in addition the Company also has foreign tax credit carry forwards of
approximately $16,600 which are available to reduce future foreign income
taxes, if any, which begin to expire in 1997. The Company also has net
operating loss carry forwards for state purposes which are available to offset
future state taxable income, if any, and expire between April 30, 2008 and
2012. The Company has net operating loss carry forwards for federal
purposes of $1,735,000 which are available to offset future federal taxable
income, if any, and expire between April 30, 2008 and 2012.
On March 8, 1996, the Company filed Form 1139 "Corporate
Application for Tentative Refund" to carry back losses under Section 172(f)
of the Internal Revenue Code in the amount of $146,300. The Company was
notified in April 1996 that the IRS had allowed the carryback loss and
received a refund in June 1996. Section 172(f) is an area of the tax law
without substantial legal precedent or guidance. Accordingly, assurances
cannot be made as to whether the IRS would later challenge the Company's
entitlement to such refund. Consequently, a valuation allowance of $118,000
has been recorded in the amount of the refund net of the collection expenses
which will be reimbursed if the Company's position does not withstand any
such challenge and the refund is reversed.
6 OPTIONS
Pursuant to the terms of two Promissory Notes each dated April 26, 1988,
issued by the Company to Mimi G. Duncan, the wife of J. Russell Duncan,
Chairman of the Board and a director of the Company, which Promissory
Notes have been repaid in full, the Company granted Mrs. Duncan options to
purchase an aggregate of 233,333 shares of the Company's Class A common
stock ("Class A Stock") at $0.6738 per share, 115% of the average of the
closing "bid" and "ask" quotations for a share of such Common Stock on the
date of grant. On June 19, 1989, Mrs. Duncan, exercised options to purchase
66,666 shares of the Company's Class A Stock and acquired the same for a
purchase price of $45,000. The unexercised options granted to Mrs. Duncan
were to expire on April 26, 1995. On April 19, 1995 the board of directors
elected to extend Mrs. Duncan's options to April 26, 1999 at a price of
$0.6738 per share.
In accordance with the terms of an Executive Employment Agreement
dated as of April 12, 1989, between the Company and L. Michael McGurk,
the then Vice President and Secretary of the Company, and a Stock Option
Agreement dated as of April 12, 1989, between the Company and Lance H.
Duncan, the then President of the Company, the Company granted each of
Messrs. McGurk and Duncan options to purchase 100,000 shares of the
Company's Class A Stock at $1.125 per share, the average of the closing
"bid" and "ask" quotations for a share of the Company's Class A Stock on the
date of grant. The options granted to Messrs. McGurk and Duncan expire on
April 12, 2000.
7 STOCK OPTION PLAN
In accordance with the Milastar Corporation Stock Option Plan (the
"Option Plan") options to purchase 400,000 shares of Class A Stock may be
granted to directors, key employees and key consultants. The options granted
under the Option Plan may be incentive or nonstatutory stock options and are
subject to approval by a stock option committee (the "Committee")
comprised of one or more disinterested persons and appointed by the Board
of Directors. Nonstatutory options have a per share exercise price of not less
than 85% of the fair market value of a share of Class A Stock on the effective
date of the grant of the stock option while incentive options have a per share
exercise price of not less than 100% of the fair market value of a share of
Class A Stock on the effective date of the grant. Options are exercisable in
such installments and during such period as may be fixed by the Committee
at the time of grant, but no option is exercisable after the expiration of ten
years from the date of grant of such option.
Transactions for 1997, 1996 and 1995 are as follows:
1997 1996 1995
Options outstanding May 1 273,666 156,666 156,666
Granted 230,333
Exercised
Canceled 113,333
Options outstanding at April 30 273,666 273,666 156,666
Weighted average exercise
price at April 30 $ .6640 $ .6640 $ 1.0300
Option price range at April 30 $ .5625 $ .5625 $ .9609
to to to
.9609 .9609 1.0570
Options exercisable at April 30 273,666 273,666 156,666
Options available for grant
at April 30 43,334
The Company has adopted the disclosure-only provisions of SFAS No.
123, Accounting for Stock-Based Compensation. Accordingly, no
compensation cost has been recognized with respect to the Option Plan. Had
compensation cost for the Option Plan been determined based on the fair
value methodology prescribed by SFAS 123, the Company's earnings per
share would have been reduced to the pro forma amounts indicated below:
1997 1996
Net loss - as reported $ (63,000) $ (254,000)
Net loss - pro forma $ (63,000) $ (284,000)
Loss per share - as reported $ (.02) $ (.09)
Loss per share - pro forma $ (.02) $ (.10)
The pro forma amounts may not be representative of the effects on
reported net loss for future years. The per share, weighted-average fair value
of each option granted during 1996 was $0.37 on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996:
1997 1996
Dividend yield 0% 0%
Expected volatility 0% 67%
Risk-free interest rate 0% 6.0%
Expected lives 0% 5 years
At April 30, 1997, the weighted average remaining contractual life of the
outstanding options was 4 years.
8 RELATED PARTY TRANSACTIONS
Notes Receivable
The Company entered into a note during fiscal 1993 with 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 this note for the fiscal years ended April
30, 1997, 1996 and 1995 amounted to $2,000, $2,000 and $2,000,
respectively.
Notes Payable
During fiscal 1995 the Company entered into a series of note payable
transactions which at April 30, 1997 had a balance of $70,000, 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 this note payable for the fiscal years ended
April 30, 1997, 1996 and 1995 was $13,000, $23,000 and $23,000,
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 was $9,000 for fiscal 1997 and $1,000
for fiscal 1996.
9 LOSS PER COMMON SHARE
The computation of loss per share for the years ended April 30, 1997,
1996 and 1995 is as follows:
1997 1996 1995
Weighted average shares of Class A Stock
outstanding. . . . . . . . . . . . . . 2,738,264 2,738,264 2,738,264
Dilutive effect of stock options after
application of treasury stock method .
Weighted average shares of Class A Stock
outstanding during the period. . . . . 2,738,264 2,738,264 2,738,264
10 OPERATING LEASE COMMITMENTS
Leased property is comprised of Company automobiles, plant equipment
and two buildings. The buildings represent the majority of future minimum
rental payments. The leases are renewable and provides for the Company to
pay all real estate taxes and maintenance expenses.
Future minimum rental payments under noncancelable operating leases,
excluding real estate taxes, are as follows:
1998. . . . . . . . . . . . . . $ 150,000
1999. . . . . . . . . . . . . . 139,000
2000. . . . . . . . . . . . . . 137,000
2001. . . . . . . . . . . . . . 134,000
2002. . . . . . . . . . . . . . 53,000
Thereafter. . . . . . . . . . . 19,000
$ 632,000
Total rent expense, excluding real estate taxes, for the fiscal years ended
April 30, 1997, 1996 and 1995 was $207,000, $161,000 and $155,000,
respectively.
11 LITIGATION
The Company has been party to various legal proceedings incidental to its
normal operating activities. Although it is impossible to predict the outcome
of such proceedings, we believe, based on the facts currently available to us,
that none of such claims will result in losses that would have a materially
adverse effect on the Company's financial condition.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Certain of the information respecting Registrant's executive officers
required by this Item is set forth under the caption "Executive Officers of
Registrant" in Item 4, Part I. Other information respecting the executive
officers, as well as the required information for directors, will be contained
in the Information Statement, and reference is expressly made thereto for the
information incorporated herein by the aforesaid reference.
Item 11. Executive Compensation
The information required by this Item will be contained in the
Information Statement, and reference is expressly made thereto for the
information incorporated herein by the aforesaid reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information required by this Item will be contained in the
Information Statement, and reference is expressly made thereto for the
information incorporated herein by the aforesaid reference.
Item 13. Certain Relationships and Related Transactions
Certain information required by this Item is set forth under the caption
"Related Party Transactions" in Part II, Item 8, Note 8. Other information
required by this Item will be contained in the Information Statement, and
reference is expressly made thereto for the information incorporated herein
by the aforesaid reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)The following documents are filed as part of this report:
Page No.
1. Financial Statements
Auditors' Report 8
Consolidated Balance Sheets at April 30, 1997 and 1996 9 - 10
Consolidated Statements of Operations for the
three years ended April 30, 1997 11
Consolidated Statements of Cash Flows for the
three years ended April 30, 1997 12
Consolidated Statements of Changes in Stockholders'
Equity for the three years ended April 30, 1997 13
Notes to Consolidated Financial Statements 14 - 22
2. Financial Statement Schedules
Schedule VIII-Valuation and Qualifying Accounts 25
Schedules other than those listed above have been
omitted since they are either not applicable, not
required or the information is included elsewhere herein.
3. Exhibits 24
INDEX TO EXHIBITS
Exhibit
No. Description
3.1 Certificate of Incorporation, as amended, a copy of which was filed
as Exhibit (1) to Registrant's Registration Statement on Form 10
dated August 27, 1970 and, by this reference, such Exhibit is
incorporated herein
3.2 By-laws, as amended a copy of which was filed as Exhibit 1(2) to
Registrant's Registration Statement on Form 10 dated August 27,
1970 and, by this reference, such Exhibit is incorporated herein
3.3 Certificate of Amendment to Certificate of Incorporation, a copy of
which was filed as Exhibit 3.3 to Registrant's Annual Report on
Form 10-K for the fiscal year ended April 30, 1984 and, by this
reference, such Exhibit is incorporated herein
3.4 Certificate of Amendment to Restated Certificate of Incorporation a
copy of which was filed as Exhibit 3.4 to Registrant's Annual
Report on Form 10-K for the fiscal year ended April 30, 1987 and,
by this reference, such Exhibit is incorporated herein
3.5 Certificate of Amendment to Certificate of Incorporation of Milastar
Corporation, a copy of which was filed as Exhibit 3.5 to
Registrant's Form 10-Q for the quarter ended January 31, 1989 and,
by this reference, such Exhibit is incorporated herein
10.1 Milastar Corporation Stock Option Plan dated as of March 4, 1991 a
copy of which was filed as Exhibit 10.6 to Registrant's Form 10-K
for the fiscal year ended April 30, 1991 and, by this reference,
such Exhibit is incorporated herein
10.2 Asset Purchase Agreement dated as of April 4, 1996, between
Registrant and New England Metal Treating Inc., a copy of which
was filed as Exhibit 10.10 to the Registrant's Current Report on
Form 8-K dated April 17, 1996 and, by this reference, such Exhibit
is incorporated herein
10.3 Executive Employment Agreement dated as of April 30, 1997 by and
between Registrant and L. Michael McGurk
10.4 Executive Employment Agreement dated as of April 30, 1997 by and
between Registrant and J. Russell Duncan
21.1 List of Significant Subsidiaries
Subsidiary State of Incorporation
Flame Metals Processing Corporation Delaware
New England Metal Treating Corporation Massachusetts
(b)Reports on Form 8-K: None
Schedule VIII
VALUATION AND QUALIFYING ACCOUNTS
Balance Balance
at beginning at end
of year Additions Deductions(1) of year
Allowance for doubtful accounts:
April 30, 1997 $ 37,000 $ 8,000 $ 10,000 $ 35,000
April 30, 1996 $ 26,000 $ 24,000 $ 13,000 $ 37,000
April 30, 1995 $ 32,000 $ - $ 6,000 $ 26,000
(1) Direct write-off of accounts deemed uncollectible.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MILASTAR CORPORATION
(REGISTRANT)
By: /s/ J. RUSSELL DUNCAN
J. Russell Duncan
Chairman of the Board
Dated: July 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on July 28, 1997.
/s/ J. RUSSELL DUNCAN /s/ L. MICHAEL McGURK
J. Russell Duncan, L. Michael McGurk
Chairman of the Board, Chief Executive President, Chief Operating
Officer and Director Officer and Director
/s/ DENNIS J. STEVERMER /s/ LANCE H. DUNCAN
Dennis J. Stevermer Lance H. Duncan
Treasurer, Principal Financial Secretary and Director
and Accounting Officer
Exhibit 10.3
EXECUTIVE EMPLOYMENT AGREEMENT
EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement"),
dated as of April 30, 1997 between MILASTAR CORPORATION, a
Delaware corporation ("Milastar") having its principal place of business at
No. 9 Via Parigi, Palm Beach, Florida 33480, and L. MICHAEL
MCGURK, residing at 6646 Harbor Drive, Canton, Ohio 44718
("McGurk").
W I T N E S S E T H:
WHEREAS, McGurk is currently employed as President and Chief
Operating Officer of Milastar pursuant to the terms and subject to the
conditions of that certain Executive Employment Agreement dated as of
April 13, 1992, (the "Existing Employment Agreement");
WHEREAS, the Existing Employment Agreement terminated on April
13, 1997 and Milastar desires to continue to employ McGurk, and McGurk
desires to continue to be employed by Milastar, as President and Chief
Operating Officer on the terms and subject to the conditions hereinafter set
forth; and
WHEREAS, McGurk desires to provide certain consulting services to
third parties and Milastar desires to permit McGurk to provide such
services as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, it is hereby agreed as follows:
1. Duties and Responsibilities. Milastar hereby employs McGurk as President
and Chief Operating Officer of Milastar and McGurk hereby accepts employment for
the term and upon the conditions hereinafter set forth. In such capacity,
McGurk's duties shall include application of his skills, knowledge and
experience towards the evaluation and negotiation of business
opportunities, management supervision, implementation of directives of
Milastar's Board of Directors and its Chairman of the Board and such other
duties as are customarily vested in the president and chief operating officer
of a corporation, including those duties specified in the Milastar By-Laws.
McGurk further agrees to serve in such other executive capacities as shall
be designated from time to time by the Milastar Board of Directors and, if
elected, as an executive office or a member of the board of directors of any
subsidiary or affiliate corporation of Milastar. McGurk hereby accepts the
above employment and conditions thereto and agrees to devote his best
efforts to the performance of his duties hereunder and to devote his full
exclusive working time and attention, except as set forth in section 12
hereof, to such duties and other activities as he may be assigned from time
to time.
2. Term of Agreement. Milastar hereby agrees to employ McGurk and McGurk
hereby agrees to serve Milastar as an employee on the terms and subject to the
conditions set forth herein for the period commencing on the effective date
of this Agreement and continuing in effect until the fifth anniversary
hereof, or sooner as herein provided.
3. Compensation. Subject to the provisions of this Agreement, Milastar
shall pay to McGurk during the term of this Agreement a base salary at an
annual rate of not less than $95,000 per annum (the "Base Salary"), payable
in equal semi-monthly installments subject to such withholdings and deductions
as are required by law or otherwise agreed. Milastar's Board of Directors
(or a committee thereof) shall review the Base Salary hereunder from time to
time and, in its discretion, may increase such Base Salary in such amount
as may be deemed appropriate for any future year of the Agreement;
provided, however, that any increase in Base Salary shall in no way limit
or reduce any other obligation of Milastar hereunder and such Base Salary
as periodically in effect shall not be reduced.
4. Expenses. Milastar will reimburse in accordance with written policies
McGurk for all reasonable business-related expenses incurred in the performance
of his duties hereunder, including his expenses for business entertainment,
travel and similar items, upon presentation by McGurk to Milastar of reasonable
documented itemized accounts of such expenditures in form consistent with
Internal Revenue Service regulations.
5. Disability. If, at any time, or from time to time, during the term of
this Agreement, McGurk shall be unable to perform his duties hereunder by
reasons of physical or mental illness or other disabling disability, then this
Agreement shall continue in full force and effect and McGurk shall continue
to be entitled to receive the full compensation provided for in section 3
hereof for a period of twelve months immediately following the commencement
of such incapacity. If such disability shall continue for a period in excess
of twelve consecutive months after commencement thereof, either Milastar
or McGurk shall have the right to elect:
(a) to treat the remaining period of his continued disability (through
the end of the term of this Agreement) as a leave of absence, in which case all
compensation hereunder shall cease as of the end of the said twelve month
period, provided that McGurk's full compensation shall be reinstated upon the
date of his official return to employment, it being understood that such
reinstatement shall be deemed effective notwithstanding the fact that McGurk
may still be in a period of partial convalescence and may not initially be
able to devote full working days to his duties hereunder. During any such
Leave of absence, Milastar may without notice elect to appoint another person
to act as President and Chief Operating Officer of Milastar; or
(b) to terminate this Agreement effective as of the expiration of said
twelve month period, in which case all compensation shall cease as of the date
of such termination.
McGurk and Milastar shall have the right to make the above elections at
any time during the twelve month initial period of disability, or within
twenty days following the expiration of such twelve month period, each by
written notice to the other party. If either party shall fail to exercise
either election, such party shall be deemed to have elected to treat the
remaining period of disability as a leave of absence as provided in Subsection
(a) above. If McGurk and Milastar shall make contrary elections, the election
of Milastar shall control.
In the event McGurk shall receive any indemnity, insurance or other
payments during the period of his disability pursuant to the provisions of
any accident and health or disability insurance policy or similar plans
funded by Milastar or for which Milastar pays the premiums, such
indemnity payments shall be credited by Milastar against the annual base
compensation that would otherwise be due to McGurk during the period of
such disability, provided that if McGurk shall have paid a portion of the
cost of any such insurance policy or plans, any such credit shall be
prorated between the parties based on the ratio of the costs paid by
Milastar and McGurk.
6. Retirement; Retention of Services as Consultant. If during the term of
this Agreement or any renewal or extension thereof, McGurk retires in
accordance with the provisions of any pension plan adopted by Milastar,
whether such retirement constitutes early retirement, normal retirement or
mandatory retirement under the terms of said pension plan, he may elect to
serve Milastar as a consultant, subject to the approval of the Milastar Board
of Directors, for which position he shall receive his full annual base
compensation as provided in section 3 hereof, and any benefits to which he
would otherwise become entitled at retirement shall be deferred until the
earlier of termination of his consulting services or mandatory retirement.
7. Death Benefits. If McGurk shall die during the term of this Agreement,
Milastar shall pay to such person or persons as McGurk shall have designated
by written instrument delivered to Milastar before his death the compensation
which would otherwise be payable to McGurk hereunder up to the end of the
month in which his death occurs. In addition, Milastar shall pay to such
person or persons an amount equal to his then current base salary, based
on the rate of base compensation in effect at the time of his death, within
sixty days after the death of McGurk. In the absence of any designation by
McGurk, such payments shall be made to such person or persons as
McGurk shall designate in his will, or, if the provisions of McGurk's will
do not govern, then to his widow, or if not survived by his widow, then per
stirpes, to those of his descendants which shall be living at the time of his
death.
8. Position. If during the term of this Agreement, because of any action
or failure to act on the part of the stockholders or directors of Milastar,
McGurk shall be removed or shall not be re-elected to the office carrying
with it the responsibilities, power and authority of the President and Chief
Operating Officer and at such time McGurk is otherwise willing to continue in
such position, then McGurk shall thereupon be relieved of all further duties
and responsibilities hereunder (with the exception that he shall still
continue to be bound by the covenants contained in Sections 10 and 11 hereof),
but this Agreement shall not terminate and McGurk shall continue to be
entitled to receive the annual base compensation provided for in Section 3
hereof for the remaining term of this Agreement.
9. Moving Expenses. In the event that, pursuant to Milastar's request,
McGurk relocates his principal office to any other city (which relocation
shall be on a voluntary basis only), or in the further event that McGurk's
employment hereunder is terminated by Milastar without cause and in violation
of this Agreement during the period in which this Agreement shall be in effect,
then and in that event, Milastar agrees to pay to McGurk, in addition to
any other sums payable to him, an additional amount equal to any loss he
may incur in the sale of his house, located at 6646 Harbor Drive, Canton,
Ohio, if (i) such sale is reasonably necessary or desirable as a result of
such relocation or termination and (ii) said property is listed with a realtor
for sale within three (3) months of the date of relocation or termination.
Milastar further agrees to reimburse McGurk for his reasonable moving
expenses with respect to such relocation or termination.
10. Proprietary Information. It is recognized that the service to be
rendered by McGurk hereunder may involve confidential information or trade
secrets of Milastar. McGurk hereby agrees that, without the prior written
consent of Milastar, he will not voluntarily disclose or publish during or
after the term of this Agreement any confidential information or trade
secrets of Milastar, except to the extent that such information otherwise
becomes part of the public domain through no wrongful action on the part of
McGurk.
11. Non-Compete. McGurk agrees that for a period of one year following the
termination of his employment, whether such termination be with or
without cause, he will not enter the employ of any person, firm or
corporation engaged in a similar line of business which is in direct
competition with Milastar, nor during such period, directly or indirectly, as
principal, agent or employee, in any such business in direct competition
with Milastar.
12. Consulting Services to Third Parties. Notwithstanding anything to the
contrary herein set forth, during the term of this Agreement or any renewal or
extension hereof, McGurk shall have the right to provide consulting services
to third parties, provided that such consulting services shall not be rendered
to a business in direct competition with Milastar, and provided further that
such consulting services shall not interfere with McGurk's duties under
this Agreement.
13. Previous Agreement. With the exception of McGurk's stock options, this
Agreement supersedes all prior agreements and understandings between the parties
hereto, including without limitation, the Existing Employment Agreement,
and may not be changed or terminated orally, and no change, termination
or attempted waiver of any provisions hereof shall be binding unless in
writing and signed by the party against whom the same is sought to be
enforced; provided, however, that McGurk's compensation may be
increased at any time by approval of the Milastar Board of Directors.
14. Notices. All notices hereunder shall be sent by registered or certified
mail to the following addresses:
To Milastar:
Milastar Corporation
Att: J. Russell Duncan, Chairman
9 Via Parigi
Palm Beach, Florida 33480
To McGurk:
L. Michael McGurk
6646 Harbor Drive
Canton, Ohio 44718
or to such other address as either party may designate in writing to the
other party.
15. General. This Agreement shall inure to the benefit of and be binding
upon the successors, assigns, heirs, executors and administrator of the
parties hereto.
16. Governing Law. The provisions of this Agreement shall be governed by
the laws of the State of Delaware.
17. Invalidity. If the scope of any of the provisions of this Agreement
shall be broader than those permitted by law, then such provisions shall be
enforceable to the extent permitted by law, and the invalidity of any
provisions of this Agreement shall not affect the validity of any other
provisions contained herein.
18. Entire Agreement. This Agreement contains the entire agreement between
the parties and may be changed only by an agreement in writing signed by all
parties.
19. Assignment. This Agreement may be assigned, in whole or in part, by
Milastar to any wholly-owned subsidiary of Milastar; provided, however, that
any such assignment shall not operate to discharge the obligations of either
party hereunder. The rights and benefits of McGurk hereunder are personal and
no such right or benefit shall be subject to voluntary or involuntary
alienation, assignment or transfer.
20. Counterparts. This Agreement may be executed simultaneously in
counterparts, each of which shall be deemed an original (including executed
copies sent via facsimile) and all of which together shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement
the day and year first above written.
MILASTAR CORPORATION
By:
J. Russell Duncan
Chairman of the Board
L. Michael McGurk
Exhibit 10.4
EXECUTIVE EMPLOYMENT AGREEMENT
EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement"),
dated as of April 30, 1997 between MILASTAR CORPORATION, a
Delaware corporation ("Milastar") having its principal place of business at
No. 9 Via Parigi, Palm Beach, Florida 33480, and J. RUSSELL
DUNCAN, residing at No. 9 Via Parigi, Palm Beach, Florida 33480 ("J. R.
DUNCAN").
W I T N E S S E T H:
WHEREAS, J. R. Duncan currently is employed by Milastar as
Chairman of the Board and Chief Executive Officer ("CEO") pursuant to
the terms and subject to the conditions of that certain Executive
Employment Agreement dated as of April 12, 1989, as amended by that
certain Addendum to Executive Employment Agreement dated as of
March 4, 1991 (as amended, the "Employment Agreement");
WHEREAS, Milastar desires to extend J. R. Duncan's employment
agreement and J. R. Duncan desires to continue to be employed by
Milastar as Chairman and Chief Executive Officer and/or Consultant on
the terms provided and subject to the conditions hereinafter set forth; and
WHEREAS, J. R. Duncan acting independently intermittently provides
certain business consulting services and serves as a director to non-
affiliated and non-competing third parties and Milastar hereunder permits
J. R. Duncan to engage in such ongoing services as hereinafter set forth;
NOW, THEREFORE, in consideration of the premises, the mutual
covenants and the agreements hereinafter set forth, and for other good and
valuable consideration between the parties, the receipt and sufficiency of
which are hereby acknowledged, it is hereby agreed as follows:
1. Core Duties and Responsibilities. Milastar hereby employs J. R. Duncan
as Chairman and Chief Executive Officer of Milastar (the Company's most senior
operating position) and J. R. Duncan hereby accepts employment for the
specified term and upon the conditions hereinafter set forth. J. R. Duncan,
acting in the prescribed executive role, shall apply his knowledge, skills
and experience in the performance of core duties under his jurisdiction
including -
Managing, administering, planning and directing the company;
Implementing the directives of the Milastar Directors; and
Performing such other duties as are customarily vested in the
Chairman and Chief Executive Officer (including those operating
duties specified in Milastar's by-laws).
The incumbent shall direct such operating activities in a manner to
maximize the Company's profit, return-on-investment and, collaterally,
enhance the Company's financial strength.
J. R. Duncan hereby accepts the prescribed employment and conditions
related to the position and agrees to devote his best efforts to the
performance of his duties hereunder and to devote necessary working time
and attention to such prescribed duties and other operating activities
except as set forth in Section 11 hereof.
2. Term of Agreement. Milastar hereby agrees to employ J.
R. Duncan and J. R. Duncan hereby agrees to serve Milastar as an
employee on the terms and subject to the conditions set forth herein for the
period commencing on the effective date of this Agreement and continuing
in effect through the fifth anniversary hereof unless renewed in writing.
3. Compensation. Subject to the provisions of this
Agreement, Milastar hereunder shall pay J. R. Duncan over the term of
this Agreement a minimum annual base salary ("Base Salary") as set forth
below:
1st year: $93,500
2nd year: $102,000
3rd year: $110,500
4th year: $119,000
5th year: $125,000
The Base Salary is payable in equal semi-monthly installments subject to
withholdings and deductions required by law or otherwise agreed.
Milastar's Board of Directors (or a committee thereof) shall from time to
time review J. R. Duncan's Base Salary applicable hereunder and, in its
discretion, may periodically increase such Base Salary as may be deemed
appropriate for the forthcoming year of the Employment Agreement;
provided, however, any such increase in Base Salary shall in no way limit
or reduce any other existing financial obligation of Milastar hereunder and
any such Base Salary increase shall not thereafter be reduced. The said
Base Salary does not include any directors fees from Milastar.
Pursuant to the Agreement, the Company, in its sole discretion, from time
to time, may award J. R. Duncan special bonuses which then do not get
built into the said Base Salary.
J. R. Duncan under this Agreement is entitled to vacations, holidays, sick
leave and retirement benefits as are customarily paid to key personnel
within the Company or its subsidiaries, and will be eligible for
participation in any Company group medical or hospital plan.
Milastar may from time to time grant employees stock options. J. R.
Duncan's Stock Option Agreement dated March 1, 1996 attached hereto as
Exhibit A is an integral part of this contract.
4. Expenses. Milastar shall reimburse J. R. Duncan in
accordance with the Company's policies for all reasonable business-related
expenses incurred in the performance of the duties assigned hereunder, e.g.
entertainment, travel, etc. Such business-related expenses shall include
the use of company-furnished automobile and reimbursement of related
operating expenses. Milastar will settle with J. R. Duncan for such
expenditures upon receipt of an itemized accounting for such expenditures
complete with receipts, where practical, in a form consistent with Internal
Revenue Service regulations. Reimbursement requests shall be submitted
on a timely basis
J. R. Duncan shall operate at an office located within the Palm Beach,
Florida area and the Company shall provide such office quarters complete
with facilities and services suitable for the performance of J. R. Duncan's
assigned duties hereunder including the services of an executive secretary,
all at the Company's expense.
5. Disability. If at any time, or from time to time, during the
term of this Agreement J. R. Duncan shall be rendered unable to perform
his assigned duties hereunder by reasons of physical or mental illness or
other disabling condition, then this Employment Agreement shall continue
in full force and effect and Duncan shall be entitled to receive the full
compensation provided for in Section 3 hereof for a period of eighteen
months immediately following the date of commencement of such
incapacity. If such degree of disability shall continue for a period in
excess of eighteen successive months beyond the said eighteen months
period, Milastar shall have the right at its discretion to reduce the Base
Salary compensation being paid to 85% of the stipulated amount.
In the event J. R. Duncan shall receive any indemnity, insurance or other
such payments during the period of his disability pursuant to the
provisions of any accident and health or disability insurance policy or
similar plans funded by Milastar or for which Milastar pays the premiums,
receipt of such indemnity payments shall be credited by Milastar against
the annual base compensation that would otherwise be due to J. R. Duncan
during the period of such disability, provided that if J. R. Duncan shall
have paid a portion of the cost of any such insurance policy or plans, any
such credit shall be prorated between the parties based on the ratio of the
costs paid by Milastar and J. R. Duncan.
6. Retirement: Retention of Services as Consultant. If during
the term of this Agreement or any renewal or extension thereof, Duncan
retires in accordance with the provisions of any Company pension plan
adopted by Milastar, whether such retirement constitutes early retirement,
normal retirement or mandatory retirement under the terms of said pension
plan, he may then elect to serve Milastar in the capacity as a consultant,
subject to the approval of the Milastar Board of Directors, for which
position he shall receive his full annual base compensation in effect as
provided in section 3 hereof, and any benefits to which he would otherwise
become entitled at retirement shall be deferred until the earlier of the date
of termination of his consulting services or mandatory retirement.
7. Death Benefits. If Duncan shall die during the term of this
Agreement, Milastar shall pay such person or persons as J. R. Duncan
shall have designated by signed written instrument delivered to Milastar
before his death the compensation which would otherwise be payable to J.
R. Duncan under para. 3 hereof through the final date of this Employment
Agreement. Milastar is obligated to pay to such designated person or
persons an amount equal to his then current base salary in effect at the
time of his death. In the absence of any designation by J. R. Duncan,
payments hereunder shall be made to such person or persons as J. R.
Duncan shall designate in his will, or, if the provisions of J. R. Duncan's
will do not govern, then per stirpes to those of his descendants which shall
be living at the time of his death.
8. Position. If during the term of this Agreement, because of
any action or failure to act on the part of the Milastar stockholders or
Milastar directors, J. R. Duncan shall be removed as a director or officer or
shall not be re-elected to the office carrying with it the responsibilities,
power and authority of the Chairman and Chief Executive Officer, and at
such time J. R. Duncan is otherwise willing to continue in such position,
then J. R. Duncan shall thereupon be relieved of all further duties and
responsibilities hereunder (with the exception that he shall still continue to
be bound by the covenants contained in Sections 9 and 10 hereof), but this
Agreement shall not terminate and J. R. Duncan shall continue to be
entitled to receive the annual base compensation provided for in Section 3
hereof for the remaining term of this Agreement.
9. Proprietary Information. It is recognized that the service to
be rendered by J. R. Duncan hereunder may involve confidential
information or trade secrets of Milastar. J. R. Duncan hereby agrees that,
without the prior written consent of Milastar, he will not voluntarily
disclose or publish during or after the term of this Agreement any of
Milastar's confidential information or trade secrets, except to the extent
such information otherwise becomes part of the public domain through no
wrongful action of the part of J. R. Duncan.
10. Non-Compete. J. R. Duncan agrees that for a period of one
year following the termination of his employment, whether such
termination be with or without cause, he will not enter the employ of any
person, firm or corporation engaged in a similar line of business which is
in direct competition with Milastar, nor during such period, directly or
indirectly, as principal, agent or employee, in any such business in direct
competition with Milastar, unless written permission is granted by
Milastar.
11. Consulting Services to Third Parties. Notwithstanding
anything to the contrary herein set forth, during the term of this Agreement
or any renewal or extension hereof, J. R. Duncan shall have the right to
provide consulting services and act as a director to unaffiliated third
parties, provided that such consulting services shall not be rendered to a
business operating in direct competition with Milastar, and provided
further that such consulting services shall not interfere with the
performance of J. R. Duncan's duties under this Agreement.
12. Previous Agreement. With the exception of any stock
option agreements, this Agreement supersedes all prior agreements and
understandings between the parties hereto, including without limitation,
the current Employment Agreement, and may not be changed or
terminated orally, and no change, termination or attempted waiver of any
provisions hereof shall be binding unless in writing and signed by the party
against whom the same is sought to be enforced; provided, however, that
J. R. Duncan's compensation hereunder may be increased at any time by
approval of the Milastar Board of Directors as provided herein.
13. Notices. All notices hereunder shall be sent by registered
or certified mail to the following addresses:
To: Milastar:Milastar Corporation
Att. J. Russell Duncan, Chairman
9 Via Parigi
Palm Beach, FL 33480
To: J. R. Duncan:
J. Russell Duncan
9 Via Parigi
Palm Beach, FL 33480
or to such other address as either party may designate in writing to the
other party.
14. General. This Agreement shall inure to the benefit of and
be binding upon the successors, assigns, heirs, executors and administrator
of the parties hereto.
15. Governing Law. The provisions of this Agreement shall be
governed by the laws of the State of Delaware.
16. Invalidity. If the scope of any of the provisions of this
Agreement shall be broader than those permitted by law, then such
provisions shall be enforceable to the extent permitted by law, and the
invalidity of any provisions of this Agreement shall not affect the validity
of any other provisions contained herein.
17. Entire Agreement. This Agreement constitutes the entire
agreement between the parties and may be changed only by a written
agreement signed by all parties hereto.
18. Assignment. This Agreement may be assigned, in whole or
in part, by Milastar to any wholly-owned subsidiary of Milastar; provided,
however, that any such assignment shall not operate to discharge any of
the obligations of either party hereunder. The rights and benefits of J. R.
Duncan hereunder are personal and no such right or benefit shall be
subject to voluntary or involuntary alienation, assignment or transfer.
19. Counterparts. This Agreement may be executed
simultaneously in counterparts, each of which shall be deemed an original
(including executed copies sent via facsimile) and all of which together
shall constitute one and the same instrument.
20. In the event of any dispute under this Agreement, it shall be
resolved through binding arbitration in accordance with the rules of the
American Arbitration Association.
IN WITNESS WHEREOF, the parties have executed this
Agreement this 30th day of April, 1997.
MILASTAR CORPORATION
By:
J. Russell Duncan L.Michael McGurk
President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<CASH> 71,000
<SECURITIES> 0
<RECEIVABLES> 1,195,000
<ALLOWANCES> 35,000
<INVENTORY> 185,000
<CURRENT-ASSETS> 1,559,000
<PP&E> 7,278,000
<DEPRECIATION> 2,825,000
<TOTAL-ASSETS> 6,093,000
<CURRENT-LIABILITIES> 1,493,000
<BONDS> 0
0
0
<COMMON> 137,000
<OTHER-SE> 3,391,000
<TOTAL-LIABILITY-AND-EQUITY> 6,093,000
<SALES> 7,325,000
<TOTAL-REVENUES> 7,325,000
<CGS> 5,414,000
<TOTAL-COSTS> 1,849,000
<OTHER-EXPENSES> (18,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142,000
<INCOME-PRETAX> (62,000)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> (63,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (63,000)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
