SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended January 31, 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 January 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, 1997.
The condensed financial statements included herein,
which are unaudited, include, in the opinion of management, all
adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial position and results of
operations of the Company for the periods presented.
<TABLE>
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MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
January 31, April 30,
1998 1997
<C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . 454,000 71,000
Accounts receivable:
Trade, less allowance for doubtful accounts of $54,000
(January 31, 1998) and $35,000 (April 30, 1997) . . . . 889,000 1,151,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 9,000
Inventory. . . . . . . . . . . . . . . . . . . . . . . . 137,000 185,000
Prepaid expenses and other . . . . . . . . . . . . . . . 151,000 153,000
Total current assets . . . . . . . . . . . . . . . . . 1,641,000 1,569,000
Property, plant and equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . 199,000 199,000
Buildings and improvements . . . . . . . . . . . . . . . 768,000 742,000
Equipment. . . . . . . . . . . . . . . . . . . . . . . . 6,852,000 6,337,000
7,819,000 7,278,000
Less accumulated depreciation. . . . . . . . . . . . . . (3,332,000) (2,825,000)
4,487,000 4,453,000
Other assets:
Non-compete agreements . . . . . . . . . . . . . . . . . 52,000 71,000
Total assets . . . . . . . . . . . . . . . . . . . . . . 6,180,000 6,093,000
</TABLE>
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<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<C> <C>
Current liabilities:
Notes payable to stockholders. . . . . . . . . . . . . . 165,000 165,000
Current maturities of long-term debt . . . . . . . . . . 342,000 342,000
Accounts payable . . . . . . . . . . . . . . . . . . . . 147,000 426,000
Income taxes payable . . . . . . . . . . . . . . . . . . 119,000 119,000
Accrued payroll and benefits . . . . . . . . . . . . . . 272,000 243,000
Accrued real estate taxes. . . . . . . . . . . . . . . . 51,000 68,000
Other accrued liabilities. . . . . . . . . . . . . . . . 151,000 130,000
Total current liabilities . . . . . . . . . . . . . . . 1,247,000 1,493,000
Long-term debt, less current maturities. . . . . . . . . . 1,027,000 1,072,000
Total liabilities . . . . . . . . . . . . . . . . . . . 2,274,000 2,565,000
Stockholders' equity:
Preferred stock, $1.00 par value; authorized 5,000,000
shares, none issued . . . . . . . . . . . . . . . . . .
Common stock, $.05 par value; Authorized 7,500,000
shares, issued and outstanding 2,728,264 shares at
January 31, 1998 and April 30, 1997 . . . . . . . . . . 137,000 137,000
Note receivable from officer . . . . . . . . . . . . . . (20,000) (20,000)
Additional paid-in capital . . . . . . . . . . . . . . . 1,666,000 1,666,000
Retained earnings. . . . . . . . . . . . . . . . . . . . 2,123,000 1,745,000
Total stockholders' equity. . . . . . . . . . . . . . 3,906,000 3,528,000
Total liabilities and stockholders' equity . . . . . . . 6,180,000 6,093,000
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
January 31, January 31,
1998 1997 1998 1997
<C> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . 1,689,000 1,672,000 6,054,000 5,412,000
Cost of Sales . . . . . . . . . . . . 1,279,000 1,315,000 4,234,000 4,101,000
Gross margin. . . . . . . . . . . . . 410,000 357,000 1,820,000 1,311,000
Selling general and administrative
expenses . . . . . . . . . . . . . . 370,000 415,000 1,321,000 1,320,000
Amortization of non-compete
agreements . . . . . . . . . . . . . 6,000 8,000 18,000 48,000
Operating income. . . . . . . . . . . 34,000 (66,000) 481,000 (57,000)
Other income (expense):
Dividend and interest income . . . . 6,000 3,000 11,000 8,000
Interest expense . . . . . . . . . . (36,000) (38,000) (107,000) (107,000)
Net gain (loss) on sale of property
and equipment . . . . . . . . . . . 44,000 (9,000)
Unrealized gain (loss) on valuation
of building held for sale 43,000
Total other income (expense). . . . . (30,000) 9,000 (96,000) (65,000)
Income (loss) before income taxes . . 4,000 (57,000) 385,000 (122,000)
Provision (benefit) for income taxes. 2,000 7,000 (8,000)
Net income (loss) . . . . . . . . . . 2,000 (57,000) 378,000 (114,000)
Net income (loss) per common share. . .00 (.02) .14 (.04)
Weighted average number of shares
outstanding during the period. . . . 2,738,264 2,738,264 2,738,264 2,738,264
</TABLE>
<TABLE>
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MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended January 31,
(Unaudited)
1998 1997
<C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . 378,000 (114,000)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . 525,000 521,000
Net loss on sale of property and equipment. . . 9,000
Unrealized market loss (gain) on valuation
of property held for sale. . . . . . . . . . . (43,000)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . 261,000 (48,000)
Inventory . . . . . . . . . . . . . . . . . . . 49,000 73,000
Prepaid supplies and other assets . . . . . . . 2,000 11,000
Accounts payable and accrued expenses . . . . . (245,000) (119,000)
Income tax refund, net. . . . . . . . . . . . . 118,000
Net cash provided by operating activities. . . . 970,000 408,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment . . . (541,000) (1,081,000)
Proceeds from sale of property and equipment . . 294,000
Net cash used in investing activities. . . . . . (541,000) (787,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit. . . . . . . . 25,000
Repayments on bank line of credit. . . . . . . . (85,000)
Proceeds from issuance of long-term debt . . . . 155,000 564,000
Principal payments on long-term debt . . . . . . (201,000) (152,000)
Repayments on note payable - stockholder . . . . (87,000)
Proceeds from issuance of note payable -
stockholder . . . . . . . . . . . . . . . . . . 6,000
Net cash provided by financing activities. . . . (46,000) 271,000
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . 383,000 (108,000)
CASH AND CASH EQUIVALENTS BALANCE AT BEGINNING
OF YEAR . . . . . . . . . . . . . . . . . . . . 71,000 144,000
CASH AND CASH EQUIVALENTS BALANCE AT END OF
THE THIRD QUARTER . . . . . . . . . . . . . . . 454,000 36,000
Supplemental disclosures of cash flow information:
Cash paid during the first three quarters for:
Interest. . . . . . . . . . . . . . . . . . 105,000 154,000
Income taxes. . . . . . . . . . . . . . . . 7,000 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") is primarily involved in selling special metallurgical
and secondary metal processing services to a diversified list of customers
located in the greater Midwest and New England regions who manufacture a
wide variety of end-products and depend upon out- sourcing of specialized
processing of their metal components. The Company extends credit to many
of its customers.
Principles of consolidation - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries, Flame Metals
Processing Corporation ("Flame Metals"), Milastar Services Corporation and
Flame Metals' wholly owned subsidiary New England Metal Treating Corporation
("New England Metal"). In consolidation, all significant intercompany
accounts and transactions are eliminated.
Cash and cash equivalents - The Company considers cash equivalents to
include all investments purchased with an original maturity of 90 or
fewer days.
Marketable securities and other investments - On May 1, 1994 the Company
adopted the provisions of Statement of Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (Statement
115). Under Statement 115, the Company classifies its debt and equity
securities in one of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are bought and held principally for
the purpose of selling them in the near term. Held-to-maturity securities
are those securities in which the Company has the ability and intent to hold
the security until maturity. All other securities not included in trading
or held-to-maturity are classified as available-for-sale. Trading and
available-for-sale securities are recorded at fair value. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization or
accretion of premiums of discounts. Unrealized holding gains and losses on
trading securities are included in earnings. Unrealized holding gains and
losses on available-for-sale securities are excluded from earnings and are
reported as a separate component of stockholders' equity until realized.
Transfers of securities between categories are recorded at fair value at the
date of transfer. A decline in the market value of any available-for-sale
or held-to-maturity security below cost that is deemed other than temporary
is charged to earnings resulting in the establishment of a new cost basis
for the security. At April 30, 1994 marketable securities were carried at
the lower of aggregate cost or market.
Inventory - Inventory is carried at cost as determined by the First-In-
First-Out (FIFO) method.
Prepaid supplies - Prepaid supplies are expensed as used.
Property, plant and equipment - Property, plant and equipment are carried
at cost. Depreciation is computed using the straight-line method. When
assets are retired or otherwise disposed of, the cost and related
depreciation are removed from the accounts, and any gain or loss is reflected
in income for the period. The cost of maintenance and repairs is charged to
income as incurred, whereas significant renewals and betterments are
capitalized and deductions are made for retirements resulting from the
renewals or betterments.
The estimated useful lives of the fixed assets are as follows:
Buildings . . . . . . . 35 years
Equipment . . . . . . . 5 to 12 years
Vehicles. . . . . . . . 3 to 5 years
Other assets - Other assets are comprised of a four-year non-compete
agreement which is being amortized over 48 months using the straight-line
method.
Income taxes - The Company accounts for income taxes under Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109).
Statement 109 requires the use of the asset and liability method of
accounting for income taxes. Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in 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 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
fiscal quarters ended January 31, 1998 and 1997 was $600 and $500,
respectively.
Notes Payable
During fiscal 1995 the Company entered into a series of note payable
transactions, which at January 31, 1998 had a balance of $75,000, including
accrued interest, payable to J. Russell Duncan, Chairman of the Board and a
director of the Company. The notes bear an interest rate of 8% and are
payable on demand. The Company classifies the notes payable as a current
liability. Total interest expense related to the notes payable for the
fiscal quarters ended January 31, 1998 and 1997 was $1,500 and $2,700,
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
January 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 EARNINGS PER COMMON SHARE
The computation of earnings per share is as follows:
Three Months Ended January 31,
1998 1997
Weighted average number of shares of
series A Common stock outstanding . . . . 2,738,264 2,738,264
Dilutive effect of stock options after
application of treasury stock method. . .
Weighted average number of shares of
Class A common stock outstanding during
the period. . . . . . . . . . . . . . . . 2,738,264 2,738,264
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended January 31, 1998 Compared to Three Months Ended January
31,1997 - The Company recorded sales of $1,689,000 during the third quarter of
fiscal 1998 as compared to $1,672,000 for the same period last year, a
$17,000 (1%) increase. The sales increase was primarily attributable to
immaterial fluctuations.
Cost of sales of $1,279,000 (76% of net sales) decreased $36,000 (3%)
from $1,315,000 (79% of net sales) for the same period a year earlier. The
decrease relative to sales is the result of the continued improvement in labor
efficiencies. Gross margin increased to $410,000 as compared to $357,000 for
the prior year third quarter.
Selling, general and administrative (SG&A) expenses of $370,000 (22% of
net sales) decreased $45,000 (11%) from $415,000 (25% of net sales) for the
same period a year earlier. The decrease in SG&A expenses as a percentage of
sales is the result of management's continued focus on overhead costs.
Management's goal is to reduce or hold constant SG&A expenses while
increasing sales.
The Company recorded operating income of $34,000 in the third quarter of
fiscal 1998 as compared to an operating loss of $66,000 recorded in the prior
year third quarter. The improvement in operating performance was primarily
due to a combination of increased sales and reduction of cost of sales as a
percentage of sales. Management continues to reduce labor costs relative to
sales and strives to increase the Company's revenue per employee.
Total other expense amounted to $30,000 in the third quarter of fiscal
1998 as compared to other income of $9,000 in the third quarter of last year.
The other expense in both third quarters was primarily due to interest
expense, with the previous quarter expense being off-set by a gain of
$44,000 on the sale of a building.
The Company recorded net income of $2,000 in the third quarter of fiscal
1998 as compared to a $57,000 net loss in the prior year third quarter. Net
income in the current third quarter was primarily due to increased sales and
a reduction of cost of sales as a percentage of sales.
Nine Months Ended January 31, 1998 Compared to Nine Months Ended January
31, 1997 - The Company recorded sales of $6,054,000 during the first three
quarters of fiscal 1998 as compared to $5,412,000 for the same period last
year, a $642,000 (12%) increase. The sales increase was primarily
attributable to the installation of new equipment and increased demand with
existing customers.
Cost of sales of $4,234,000 (70% of net sales) increased $133,000 (3%)
from $4,101,000 (76% of net sales) for the same period a year earlier. The
decrease relative to sales is the result of improved labor efficiencies and
the absorption of fixed costs. Gross margin increased to $1,820,000 compared
to $1,311,000 in the prior year first three quarters.
Selling, general and administrative expenses of $1,321,000 (22% of net
sales) increased $1,000 (1%) from $1,320,000 (24% of net sales) for the same
period a year earlier. The decrease in SG&A expenses as a percentage of
sales is the result of management's commitment to reduce or hold constant
SG&A expenses while increasing sales.
The Company recorded operating income of $481,000 in the first three
quarters of fiscal 1998 as compared to an operating loss of $57,000 recorded
in the same period last year. The significant improvement in operating
performance was primarily due to a combination of increased sales and
reduction of cost of sales as a percentage of sales. Management continues
to reduce labor costs relative to sales and strives to increase the Company's
revenue per employee.
Total other expense amounted to $96,000 in the first three quarters of
fiscal 1998 as compared to other expense of $65,000 in the same period last
year. The other expense in both periods was primarily due to interest
expense.
The Company recorded net income of $378,000 in the first three quarters of
fiscal 1998 as compared to a $114,000 net loss in the first three quarters of
the prior year. Net income in the first three quarters of fiscal 1998 was
primarily due to increased sales and a reduction of cost of sales as a
percentage of sales.
Liquidity and Capital Resources
At January 31, 1998, the Company's working capital was $394,000 compared
to $76,000 at April 30, 1997 and the ratio of current assets to current
liabilities was 1.3 to 1 and 1.1 to 1, respectively. Cash, marketable
securities and other investments and current receivables represented
82% (78% at April 30, 1997) and 22% (20% at April 30, 1997) of total current
assets and total assets, respectively. During the first three quarters of
fiscal 1998, net cash provided by operating activities amounted to $970,000
compared to $408,000 provided by operating activities in the first three
quarters of fiscal 1997. Working capital requirements for the first three
quarters of fiscal 1998 were funded primarily from available cash and cash
generated from operations.
PART II
Items 1 thru 5
No response to these items is furnished, since in each case the
appropriate response would be either not applicable or none.
Item 6.
Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
MILASTAR CORPORATION AND SUBSIDIARIES
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this interim report to be signed on its behalf by
the undersigned, there unto duly authorized.
MILASTAR CORPORATION
/s/ J. RUSSELL DUNCAN
J. Russell Duncan
Chairman of the Board and Chief Executive Officer
Dated: March 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JAN-31-1998
<CASH> 454,000
<SECURITIES> 0
<RECEIVABLES> 943,000
<ALLOWANCES> 54,000
<INVENTORY> 137,000
<CURRENT-ASSETS> 1,641,000
<PP&E> 7,819,000
<DEPRECIATION> 3,332,000
<TOTAL-ASSETS> 6,180,000
<CURRENT-LIABILITIES> 1,247,000
<BONDS> 0
0
0
<COMMON> 137,000
<OTHER-SE> 3,769,000
<TOTAL-LIABILITY-AND-EQUITY> 6,180,000
<SALES> 1,689,000
<TOTAL-REVENUES> 1,689,000
<CGS> 1,279,000
<TOTAL-COSTS> 376,000
<OTHER-EXPENSES> (6,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,000
<INCOME-PRETAX> 4,000
<INCOME-TAX> 2,000
<INCOME-CONTINUING> 2,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,000
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
