SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended October 31, 1998
Commission File Number: 0-5105
MILASTAR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE (State or other jurisdiction of
incorporation or organization)
13-2636669 (I.R.S. Employer Identification No.)
No. 9 Via Parigi, Palm Beach, Florida
(Address of principal executive offices)
33480
(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 October 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
October 31, April 30,
1998 1998
Current assets: <C> <C>
Cash and cash equivalents. . . . . . . . 120,000 164,000
Accounts receivable:
Trade, less allowance for doubtful
accounts of $41,000 (October 31, 1998)
and $50,000 (April 30, 1998). . . . . . 1,327,000 1,311,000
Other . . . . . . . . . . . . . . . . . 12,000 37,000
Inventory. . . . . . . . . . . . . . . . 159,000 153,000
Prepaid expenses and other . . . . . . . 166,000 139,000
Total current assets . . . . . . . . 1,784,000 1,804,000
Property, plant and equipment:
Land. . . . . . . . . . . . . . . . . . 420,000 420,000
Buildings and improvements. . . . . . . 1,936,000 1,868,000
Deposits on Equipment . . . . . . . . . 279,000
Equipment . . . . . . . . . . . . . . . 8,734,000 7,645,000
11,090,000 10,212,000
Less accumulated depreciation. . . . . (3,921,000) (3,475,000)
7,169,000 6,737,000
Other assets:
Non-compete agreements. . . . . . . . . 390,000 481,000
Total assets . . . . . . . . . . . . 9,343,000 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 . . . . . . . . . . . . 330,000 321,000
Income taxes payable . . . . . . . . . . 119,000 119,000
Accrued payroll and benefits . . . . . . 304,000 243,000
Accrued real estate taxes. . . . . . . . 61,000 86,000
Other accrued liabilities. . . . . . . . 177,000 195,000
Total current liabilities. . . . . . 1,804,000 1,838,000
Long-term debt,
less current maturities . . . . . . . . 3,189,000 3,172,000
Total liabilities. . . . . . . . . . 4,993,000 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
October 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. . . . . . . . . . . . 2,567,000 2,229,000
Total stockholders' equity. . . . . . 4,350,000 4,012,000
Total liabilities and
stockholders' equity . . . . . . . . 9,343,000 9,022,000
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
October 31, October 31,
1998 1997 1998 1997
<C> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . 2,399,000 2,124,000 4,743,000 4,365,000
Cost of Sales . . . . . . . . . . . . 1,647,000 1,460,000 3,289,000 2,956,000
Gross margin. . . . . . . . . . . . . 752,000 664,000 1,454,000 1,409,000
Selling general and administrative
expenses . . . . . . . . . . . . . . 465,000 461,000 927,000 949,000
Amortization of non-compete
agreements . . . . . . . . . . . . . 22,000 6,000 44,000 12,000
Operating income. . . . . . . . . . . 265,000 197,000 483,000 448,000
Other income (expense):
Dividend and interest income . . . . 2,000 4,000 5,000 5,000
Interest expense . . . . . . . . . . (90,000) (36,000) (176,000) (71,000)
Other . . . . . . . . . . 31,000
Total other income (expense). . . . . (88,000) (32,000) (140,000) (66,000)
Income before income taxes . . . . . 177,000 165,000 343,000 382,000
Provision for income taxes. . . . . 3,000 3,000 5,000 5,000
Net income . . . . . . . . . . 174,000 162,000 338,000 377,000
Net income per common share-basic . . .06 .06 .12 .14
Net income per common share-diluted . .06 .06 .12 .13
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended October 31,
(Unaudited)
1998 1997
<C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . 164,000 377,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . 491,000 350,000
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . 9,000 39,000
Inventory . . . . . . . . . . . . . . . . . . . (6,000) 46,000
Prepaid supplies and other assets . . . . . . . (27,000) (15,000)
Accounts payable and accrued expenses . . . . . 26,000 (105,000)
Net cash provided by operating activities. . . . 831,000 692,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment . . . (878,000) (365,000)
Net cash used in investing activities. . . . . . (878,000) (365,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt . . . . 485,000 155,000
Principal payments on long-term debt . . . . . . (482,000) (131,000)
Net cash provided by financing activities. . . . 3,000 24,000
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . (44,000) 351,000
CASH AND CASH EQUIVALENTS BALANCE AT BEGINNING
OF YEAR . . . . . . . . . . . . . . . . . . . . 164,000 71,000
CASH AND CASH EQUIVALENTS BALANCE AT END OF
THE THIRD QUARTER . . . . . . . . . . . . . . . 120,000 422,000
Supplemental disclosures of cash flow information:
Cash paid during the first three quarters for:
Interest. . . . . . . . . . . . . . . . . . 176,000 68,000
Income taxes. . . . . . . . . . . . . . . . 5,000 3,000
</TABLE>
MILASTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business Milastar Corporation ("Milastar" and
sometimes the "Company") 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 October 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 October 31, 1998
and 1997 was $600.
Notes Payable
During fiscal 1995 the Company entered into a series of note
payable transactions which at October 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 October 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 October 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 October 31, 1998 and 1997:
Three Months Ended
October 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 132,765 147,516
Weighted shares of Class A Stock
outstanding - diluted 2,871,029 2,885,780
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three Months Ended October 31, 1998 as Compared with the Three
Months Ended October 31, 1997. The Company recorded sales of
$2,399,000 during the second quarter of fiscal year 1999 as
compared with $2,124,000 for the same period last year, a
$275,000 (13%) 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 $1,647,000 (69% of net sales) during the
second quarter of fiscal year 1999 increased $187,000 (13%)
from $1,460,000 (69% of net sales) for the same period a year
earlier. The increase is the result of additional costs
associated with the operation of the Rogers, Minnesota plant.
Gross margin increased to $752,000 as compared with $664,000
for the prior year second quarter.
Selling, general and administrative (SG&A) expenses of $465,000
(19% of net sales) increased $4,000 (1%) from $461,000 (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 increased sales. Management's goal is to
reduce or hold constant SG&A expenses while increasing sales.
The Company recorded operating income of $265,000 in the second
quarter of fiscal 1999 as compared with operating income of
$199,000 recorded in the prior year second quarter. The
increase in operating income in the second quarter of fiscal
year 1999 is primarily attributable to higher sales at the
Rogers, Minnesota plant.
Total other expense amounted to $88,000 in the second quarter
of fiscal 1999 as compared with other expense of $32,000 in the
second quarter of last year. Other expense in both second
quarters was primarily due to interest expense.
The Company recorded net income of $177,000 in the second
quarter of fiscal 1999 as compared with net income of $162,000
in the prior year second quarter. The increase in net income
in the current quarter was primarily attributable to the
additional sales associated with the Rogers, Minnesota
production plant.
Six Months Ended October 31, 1998 Compared to Six Months Ended
October 31, 1997. The Company recorded sales of $4,743,000
during the first half of fiscal 1999 as compared to $4,365,000
for the same period last year, a $378,000 (9%) 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 $3,289,000 (69% of net sales) increased
$333,000 (11%) from $2,956,000 (68% of net sales) for the same
period a year earlier. The increase is the result of
additional costs associated with the operation of the Rogers,
Minnesota plant. Gross margin increased to $1,454,000 compared
to $1,409,000 in the prior year first half.
Selling, general and administrative expenses of $927,000 in the
first half of fiscal 1999 (20% of net sales) increased $22,000
(2%) from $949,000 (22% of net sales) recorded during the first
half of fiscal 1998. The increase is primarily due to
immaterial fluctuations.
The Company recorded operating income of $483,000 in the first
half of fiscal 1999 as compared to operating income of $448,000
recorded in the same period last year. Higher operating income
was primarily caused by higher sales revenues.
Total other expense amounted to $140,000 in the first half of
fiscal 1999 compared to other expense of $66,000 in the same
period last year. The increase was primarily due to higher
interest expense off-set by a $31,000 favorable adjustment
related to the valuation of a non-compete agreement.
The Company recorded a net income in the first half of fiscal
1999 of $338,000 compared to net income of $377,000 in the
first half of the prior year. The decrease in net income for
the first half of fiscal 1999 as compared with the same period
last year is primarily due to increased interest expense.
Liquidity and Capital Resources
At October 31, 1998, the Company had negative working capital
of $20,000 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 October 31, 1998 and April
30, 1998. Cash, marketable securities and other investments
and current receivables represented 82% (84% at April 30, 1998)
and 16% (17% at April 30, 1998) of total current assets and
total assets, respectively. During the first two quarters of
fiscal 1999, net cash provided by operating activities amounted
to $831,000 compared to $692,000 provided by operating
activities in the first two quarters of fiscal 1998. Working
capital requirements for the first two quarters 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: December 8, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 120,000
<SECURITIES> 0
<RECEIVABLES> 1,380,000
<ALLOWANCES> 41,000
<INVENTORY> 159,000
<CURRENT-ASSETS> 1,784,000
<PP&E> 11,090,000
<DEPRECIATION> 3,921,000
<TOTAL-ASSETS> 9,343,000
<CURRENT-LIABILITIES> 3,189,000
<BONDS> 0
0
0
<COMMON> 137,000
<OTHER-SE> 4,213,000
<TOTAL-LIABILITY-AND-EQUITY> 9,343,000
<SALES> 4,743,000
<TOTAL-REVENUES> 4,743,000
<CGS> 3,289,000
<TOTAL-COSTS> 971,000
<OTHER-EXPENSES> (36,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 176,000
<INCOME-PRETAX> 343,000
<INCOME-TAX> 5,000
<INCOME-CONTINUING> 338,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 338,000
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
