SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended July 31, 1998
Commission File Number: 0-5105
MILASTAR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2636669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
No. 9 Via Parigi, Palm Beach, Florida 33480
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (561) 655-9590
Not Applicable
Former name, former address and former fiscal year, if changed since
last report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
At July 31, 1998, 2,738,264 shares of common stock of the Registrant
were issued and outstanding.
MILASTAR CORPORATION AND SUBSIDIARIES
PART I
Item 1. Financial Statements
The condensed financial statements included herein have been
prepared by Milastar Corporation (the "Company") without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed financial statements be
read in conjunction with the financial statements and the notes thereto
included in the Company's annual report on Form 10-K for the fiscal
year ended April 30, 1998.
The condensed financial statements included herein, which are
unaudited, include, in the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary to present fairly
the financial position and results of operations of the Company for the
periods presented.
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
July 31, April 30,
1998 1998
Current assets: <C> <C>
Cash and cash equivalents. . . . . . . . 423,000 164,000
Accounts receivable:
Trade, less allowance for doubtful
accounts of $57,000 (July 31, 1998)
and $50,000 (April 30, 1998). . . . . . 1,185,000 1,311,000
Other . . . . . . . . . . . . . . . . . 12,000 37,000
Inventory. . . . . . . . . . . . . . . . 181,000 153,000
Prepaid expenses and other . . . . . . . 190,000 139,000
Total current assets . . . . . . . . 1,991,000 1,804,000
Property, plant and equipment:
Land. . . . . . . . . . . . . . . . . . 420,000 420,000
Buildings and improvements. . . . . . . 1,912,000 1,868,000
Deposits on Equipment . . . . . . . . . 279,000
Equipment . . . . . . . . . . . . . . . 8,520,000 7,645,000
10,852,000 10,212,000
Less accumulated depreciation. . . . . (3,698,000) (3,475,000)
7,154,000 6,737,000
Other assets:
Non-compete agreements. . . . . . . . . 412,000 481,000
Total assets . . . . . . . . . . . . 9,557,000 9,022,000
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: <C> <C>
Notes payable to stockholders. . . . . . 100,000 100,000
Current maturities of long-term debt . . 713,000 774,000
Accounts payable . . . . . . . . . . . . 498,000 321,000
Income taxes payable . . . . . . . . . . 119,000 119,000
Accrued payroll and benefits . . . . . . 285,000 243,000
Accrued real estate taxes. . . . . . . . 90,000 86,000
Other accrued liabilities. . . . . . . . 208,000 195,000
Total current liabilities. . . . . . 2,013,000 1,838,000
Long-term debt,
less current maturities . . . . . . . . 3,368,000 3,172,000
Total liabilities. . . . . . . . . . 5,381,000 5,010,000
Stockholders' equity:
Preferred stock, $1.00 par value;
authorized 5,000,000 shares, none
issued. . . . . . . . . . . . . . . . .
Common stock, $.05 par value;
Authorized 7,500,000 shares, issued
and outstanding 2,728,264 shares at
July 31, 1998 and April 30, 1998. . . . 137,000 137,000
Note receivable from officer . . . . . . (20,000) (20,000)
Additional paid-in capital . . . . . . . 1,666,000 1,666,000
Retained earnings. . . . . . . . . . . . 2,393,000 2,229,000
Total stockholders' equity. . . . . . 4,176,000 4,012,000
Total liabilities and
stockholders' equity . . . . . . . . 9,557,000 9,022,000
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended July 31,
(Unaudited)
1998 1997
<C> <C>
Net Sales. . . . . . . . . . . . . . . . 2,344,000 2,241,000
Cost of Sales. . . . . . . . . . . . . . 1,641,000 1,496,000
Gross margin . . . . . . . . . . . . . . 703,000 745,000
Selling general and administrative
expenses. . . . . . . . . . . . . . . . 462,000 489,000
Amortization of non-compete agreement. . 22,000 6,000
Operating income . . . . . . . . . . . . 219,000 250,000
Other income (expense):
Dividend and interest income. . . . . . 3,000 2,000
Interest expense. . . . . . . . . . . . (86,000) (35,000)
Other . . . . . . . . . . . . . . . . . 31,000
Total other income (expense) . . . . . (52,000) (33,000)
Income before provision for
income taxes. . . . . . . . . . . . . . 167,000 217,000
Provision for income taxes . . . . . . . 3,000 2,000
Net income . . . . . . . . . . . . . . . 164,000 215,000
Net income per Class A
common share - basic. . . . . . . . . . .06 .08
Net income per Class A
common share - diluted. . . . . . . . . .06 .08
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended July 31,
(Unaudited)
1998 1997
<C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . 164,000 215,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization . . . . 245,000 176,000
Changes in operating assets and
liabilities:
Accounts receivable . . . . . . . . . 151,000 (54,000)
Inventory . . . . . . . . . . . . . . (28,000) 4,000
Prepaid supplies and other assets . . (51,000) (15,000)
Accounts payable and accrued
expenses . . . . . . . . . . . . . . 236,000 (82,000)
Net cash provided by operating
activities . . . . . . . . . . . . . . 717,000 244,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant
and equipment. . . . . . . . . . . . . (640,000) (163,000)
Net cash used in investing
activities . . . . . . . . . . . . . . (640,000) (163,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
long-term debt . . . . . . . . . . . . 485,000 155,000
Principal payments on long-term debt. . (303,000) (64,000)
Net cash provided by financing
activities . . . . . . . . . . . . . . 182,000 91,000
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS. . . . . . . . . . . . 259,000 172,000
CASH AND CASH EQUIVALENTS BALANCE
AT BEGINNING OF YEAR. . . . . . . . . . 164,000 71,000
CASH AND CASH EQUIVALENTS BALANCE
AT END OF THE FIRST QUARTER . . . . . . 423,000 243,000
Supplemental disclosures of cash flow information:
Cash paid during the first quarter for:
Interest . . . . . . . . . . . . . . . . 86,000 33,000
Income taxes . . . . . . . . . . . . . . 3,000 2,000
</TABLE>
MILASTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business Milastar Corporation ("Milastar" and
sometimes the "Company") 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 subsidiary,
Flame Metals Processing Corporation ("Flame Metals") and Flame
Metals' wholly owned subsidiary New England Metal Treating
Corporation ("New England Metals"). 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 The Company accounts for marketable
securities under 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.
Inventory Inventory is valued at the lower of cost or market
utilizing costing methods that approximate 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 to 40 years
Equipment . . . . . . . . . . . 5 to 12 years
Vehicles. . . . . . . . . . . . 3 to 5 years
Other assets At July 31, 1998, other assets is comprised of one five-
year non-compete agreement which is being amortized over 60 months
using the straight-line method. At April 30, 1998, other assets were
comprised one four-year non-compete agreement which was being
amortized over 48 using the straight-line method and one five-year non-
compete agreement which was being amortized over 60 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.
Stock-based compensation The Company adopted, on May 1,
1996, 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. 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.
Earnings per share In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, Earnings Per Share, which
simplifies the standards for computing earnings per share. SFAS No.
128 replaces the presentation of primary earnings per share with a
presentation of basic earnings per share, which excludes dilution. SFAS
No. 128 also requires dual presentation of basic and diluted earnings per
share on the face of the income statement for all entities with complex
capital structures, and requires a reconciliation. Diluted earnings per
share is computed similarly to fully diluted earnings per share pursuant
to APB No. 15. SFAS No. 128 was required for financial statements
issued for periods ended after December 15, 1997, including interim
periods; earlier application was not permitted. The Company adopted
SFAS No. 128 during the fiscal year ended April 30, 1998. SFAS No. 128
requires restatement of all prior-period earnings-per-share data
presented.
2 RELATED PARTY TRANSACTIONS
Notes Receivable
In fiscal 1993, with the encouragement of the Company, Michael
McGurk, President, Chief Operating Officer and a director of the
Company bought 15,000 shares of Milastar Class A Common Stock and
entered into a note agreement with the Company to finance this
purchase. The note of $20,000 is dated August 15, 1992 and bears
interest at 50 basis points over NYC Prime adjustable upward or
downward at the end of each six-month period, which interest rate is
subject to an 8% "cap" during the life of the loan. Interest on the
principal is payable each year on the anniversary date of the note. The
principal portion of the note that was originally due on August 15, 1995
has been extended until August 15, 1999. The Company is holding Mr.
McGurk's 15,000 shares of Milastar Class A Common Stock as collateral
for the note. Total interest income related to this note for both fiscal
quarters ended July 31, 1998 and 1997 was $600.
Notes Payable
During fiscal 1995 the Company entered into a series of note payable
transactions which at July 31, 1998 and April 30, 1998 had a balance of
$0, including accrued interest, payable to J. Russell Duncan, Chairman
of the Board and a director of the Company. The notes bore an interest
rate of 8% and were payable on demand. The Company classified the
notes payable as a current liability. Total interest expense related to this
note payable for the fiscal quarters ended July 31, 1998 and 1997 was $0
and $1,500, respectively.
During fiscal 1996 the Company entered into a $100,000 note payable
to L. Michael McGurk, President, Chief Operating Officer and a
director of the Company. The note bears an interest rate of 8.7% and
is payable on demand. The Company classifies the note payable as a
current liability. Total interest expense related to this note payable for
both fiscal quarters ended July 31, 1998 and 1997 was $2,100.
3 INCOME TAXES
The Company has provided for current income taxes on earnings at
the appropriate statutory state and federal rates applicable to such
earnings, and any deviation is solely the result of book/tax differences
arising mainly from the recognition of tax depreciation expense.
4 INCOME PER COMMON SHARE
The following table presents a reconciliation of the denominators
used in the computation of net income per common share - basic and net
income per common share - diluted for the quarters ended July 31, 1998
and 1997:
Three Months Ended July 31,
1998 1997
Weighted shares of Class A Stock
outstanding - basic. . . . . . . . . . 2,738,264 2,738,264
Weighted shares of Class A Stock
assumed upon exercise of stock
options. . . . . . . . . . . . . . . . 163,872 84,118
Weighted shares of Class A Stock
outstanding - diluted. . . . . . . . . 2,902,136 2,822,382
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Three Months Ended July 31, 1998 as Compared with the Three
Months Ended July 31, 1997. The Company recorded sales of $2,344,000
during the first quarter of fiscal year 1999 as compared with $2,241,000
for the same period last year, a $103,000 (4%) increase. The sales
increase was primarily attributable to additional production capacity as
a result of the March 1998 acquisition of the Rogers, Minnesota
production plant.
Cost of sales of $1,641,000 (70% of net sales) during the first quarter
of fiscal year 1999 increased $145,000 (10%) from $1,496,000 (67% of
net sales) for the same period a year earlier. The increase is the result of
additional costs associated with the operation and the installation of new
furnaces at the Rogers, Minnesota plant. Management believes that once
the installations are complete, the cost of sales ratio will return to
previous levels. Gross margin decreased to $703,000 as compared with
$745,000 for the prior year first quarter.
Selling, general and administrative (SG&A) expenses of $462,000
(20% of net sales) decreased $27,000 (6%) from $489,000 (22% of net
sales) for the same period a year earlier. The decrease in SG&A
expenses as a percentage of sales is primarily attributable to a reduction
in legal expenses. Management's goal is to reduce or hold constant
SG&A expenses while increasing sales.
The Company recorded operating income of $219,000 in the first
quarter of fiscal 1999 as compared with operating income of $250,000
recorded in the prior year first quarter. The decrease in operating
income in the first quarter of fiscal year 1999 is primarily attributable
to higher costs of sales at the Rogers, Minnesota plant.
Total other expense amounted to $52,000 in the first quarter of fiscal
1999 as compared with other expense of $33,000 in the first quarter of
last year. Other expense in both first quarters was primarily due to
interest expense, with the current quarter expense being off-set by a
$31,000 favorable adjustment related to the valuation of a non-compete
agreement.
The Company recorded net income of $164,000 in the first quarter
of fiscal 1999 as compared with net income of $215,000 in the prior year
first quarter. The decrease in net income in the current quarter was
primarily attributable to the additional cost of sales associated with the
Rogers, Minnesota production plant.
Liquidity and Capital Resources
At July 31, 1998, the Company had negative working capital of
$22,000 compared with $34,000 of negative working capital at April 30,
1998 and the ratio of current assets to current liabilities was 1.0 to 1.0 at
both July 31, 1998 and April 30, 1998. Cash, marketable securities and
other investments and current receivables represented 81% (84% at
April 30, 1998) and 17% (17% at April 30, 1998) of total current assets
and total assets, respectively. During the first quarter of fiscal 1999, net
cash provided by operating activities amounted to $717,000 compared
to $244,000 provided by operating activities in the first quarter of fiscal
1998. Working capital requirements for the first quarter of fiscal 1999
were funded primarily from available cash, cash generated from
operations and issuance of debt.
PART II
Items 1 thru 5
No response to these items is furnished, since in each case the
appropriate response would be either not applicable or none.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
MILASTAR CORPORATION AND SUBSIDIARIES
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this interim report to be signed on its
behalf by the undersigned, there unto duly authorized.
MILASTAR CORPORATION
/s/ J. RUSSELL DUNCAN
J. Russell Duncan
Chairman of the Board
and Chief Executive Officer
Dated: September 8, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> JUL-31-1998
<CASH> 423,000
<SECURITIES> 0
<RECEIVABLES> 1,242,000
<ALLOWANCES> 57,000
<INVENTORY> 181,000
<CURRENT-ASSETS> 1,991,000
<PP&E> 10,852,000
<DEPRECIATION> 3,698,000
<TOTAL-ASSETS> 9,557,000
<CURRENT-LIABILITIES> 2,013,000
<BONDS> 0
0
0
<COMMON> 137,000
<OTHER-SE> 4,039,000
<TOTAL-LIABILITY-AND-EQUITY> 9,557,000
<SALES> 2,344,000
<TOTAL-REVENUES> 2,344,000
<CGS> 1,641,000
<TOTAL-COSTS> 484,000
<OTHER-EXPENSES> (34,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,000
<INCOME-PRETAX> 167,000
<INCOME-TAX> 3,000
<INCOME-CONTINUING> 164,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 164,000
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
