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, 1999
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.)
7317 West Lake Street, Minneapolis, MN 55426
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (612) 929-4774
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, 1999, 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, 1999.
The condensed financial statements included herein, which are
unaudited, include, in the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary to present fairly
the financial position and results of operations of the Company for the
periods presented.
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MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
July 31, April 30,
1999 1999
Current assets: <C> <C>
Cash and cash equivalents. . . . . . . . 55,000 19,000
Accounts receivable:
Trade, less allowance for doubtful
accounts of $55,000 (July 31, 1999)
and $50,000 (April 30, 1999). . . . . . 1,224,000 1,408,000
Other . . . . . . . . . . . . . . . . . 13,000 14,000
Inventory. . . . . . . . . . . . . . . . 160,000 167,000
Prepaid expenses and other . . . . . . . 195,000 159,000
Total current assets . . . . . . . . 1,647,000 1,767,000
Property, plant and equipment:
Land. . . . . . . . . . . . . . . . . . 420,000 420,000
Buildings and improvements. . . . . . . 2,145,000 2,145,000
Equipment . . . . . . . . . . . . . . . 8,467,000 8,314,000
11,032,000 10,879,000
Less accumulated depreciation. . . . . (4,094,000) (3,831,000)
6,938,000 7,048,000
Other assets:
Non-compete agreement, net of
accumulative amortization of
of $116,000 & $96,000 respectively . . 330,000 350,000
Total assets . . . . . . . . . . . . 8,915,000 9,165,000
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: <C> <C>
Notes payable to bank . . . . . . . . . 150,000 100,000
Current maturities of long-term debt . . 770,000 792,000
Accounts payable . . . . . . . . . . . . 314,000 321,000
Income taxes payable . . . . . . . . . . 118,000 121,000
Accrued payroll and benefits . . . . . . 269,000 332,000
Accrued real estate taxes. . . . . . . . 80,000 106,000
Other accrued liabilities. . . . . . . . 121,000 154,000
Total current liabilities. . . . . . 1,822,000 1,926,000
Long-term debt,
less current maturities . . . . . . . . 2,616,000 2,765,000
Total liabilities. . . . . . . . . . 4,438,000 4,691,000
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, 1999 and April 30, 1999. . . . 137,000 137,000
Note receivable from officer . . . . . . (20,000) (20,000)
Additional paid-in capital . . . . . . . 1,666,000 1,666,000
Retained earnings. . . . . . . . . . . . 2,694,000 2,691,000
Total stockholders' equity. . . . . . 4,477,000 4,474,000
Total liabilities and
stockholders' equity . . . . . . . . 8,915,000 9,165,000
</TABLE>
<TABLE>
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MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended July 31,
(Unaudited)
1999 1998
<C> <C>
Net Sales. . . . . . . . . . . . . . . . 2,183,000 2,344,000
Cost of Sales. . . . . . . . . . . . . . 1,639,000 1,641,000
Gross margin . . . . . . . . . . . . . . 544,000 703,000
Selling general and administrative
expenses. . . . . . . . . . . . . . . . 450,000 462,000
Amortization of non-compete agreement. . 20,000 22,000
Operating income . . . . . . . . . . . . 74,000 219,000
Other income (expense):
Dividend and interest income. . . . . . 3,000
Interest expense. . . . . . . . . . . . (70,000) (86,000)
Other . . . . . . . . . . . . . . . . . 31,000
Total other income (expense) . . . . . (70,000) (52,000)
Income before provision for
income taxes. . . . . . . . . . . . . . 4,000 167,000
Provision for income taxes . . . . . . . 2,000 3,000
Net income . . . . . . . . . . . . . . . 2,000 164,000
Net income per Class A
common share - basic. . . . . . . . . . .00 .06
Net income per Class A
common share - diluted. . . . . . . . . .00 .06
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended July 31,
(Unaudited)
1999 1998
<C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . 2,000 164,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization . . . . 283,000 245,000
Changes in operating assets and
liabilities:
Accounts and other receivables. . . . 185,000 151,000
Inventory . . . . . . . . . . . . . . 7,000 (28,000)
Prepaid supplies and other. . . . . . (36,000) (51,000)
Accounts payable and accrued
expenses . . . . . . . . . . . . . . (131,000) 236,000
Net cash provided by operating
activities . . . . . . . . . . . . . . 310,000 717,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant
and equipment. . . . . . . . . . . . . (153,000) (640,000)
Net cash used in investing
activities . . . . . . . . . . . . . . (153,000) (640,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit . . . 50,000
Principal payments on long-term debt. . (171,000) (303,000)
Proceeds from issuance of
long-term debt . . . . . . . . . . . . 485,000
Net cash provided by (used in)
financing activities . . . . . . . . . (121,000) 182,000
NET INCREASE IN CASH AND
CASH EQUIVALENTS. . . . . . . . . . . . 36,000 259,000
CASH AND CASH EQUIVALENTS BALANCE
AT BEGINNING OF YEAR. . . . . . . . . . 19,000 164,000
CASH AND CASH EQUIVALENTS BALANCE
AT END OF THE FIRST QUARTER . . . . . . 55,000 423,000
Supplemental disclosures of cash flow information:
Cash paid during the first quarter for:
Interest . . . . . . . . . . . . . . . . 71,000 86,000
Income taxes . . . . . . . . . . . . . . 6,000 3,000
</TABLE>
MILASTAR CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1 CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of Milastar
Corporation (the "Company") reflect the financial position and
results of operations of the Company and its wholly owned
subsidiaries, after elimination of all material intercompany
transactions and balances.
The consolidated financial statements as of July 31,
1999 and July 31, 1998, included herein are unaudited and have
been prepared by the Company 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 principals have been condensed or omitted
pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the
information presented not misleading. The interim financial
statements reflect all adjustments (consisting of normal
recurring accruals) that are, in the opinion of management,
necessary for a fair statement of the results for the interim
periods. These consolidated financial statements should be
read in conjunction with the consolidated financial statements
and the note thereto included in the Company's 1999 Annual
Report to Shareholders and incorporated by reference in the
Company's annual report on Form 10-K filed with the Securities
and Exchange Commission. The result of operations for the
interim period should not be considered indicative of the
results to be expected for the entire year.
2 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, 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,
1999 and 1998 was $600.
Notes Payable
During fiscal 1996 the Company entered into a
$100,000 note payable, which at April 30, 1999 had a balance of
$0, including accrued interest, to L. Michael McGurk,
President, Chief Operating Officer and a director of the
Company. The note bore an interest rate of 8.7% and was
payable on demand. The Company classified the note payable as
a current liability. Total interest expense related to this
note payable for the fiscal quarters ended July 31, 1999 and
1998 was $0 and $2,100, respectively.
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, 1999 and 1998:
Three Months Ended July 31,
1999 1998
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. . . . . . . . . . . . . . . . 248,920 163,872
Weighted shares of Class A Stock
outstanding - diluted. . . . . . . . . 2,987,184 2,902,136
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Three Months Ended July 31, 1999 as Compared with the
Three Months Ended July 31, 1998. The Company recorded sales
of $2,183,000 during the first quarter of fiscal year 2000 as
compared with $2,344,000 for the same period last year, a
$161,000 (7%) decrease. The sales decrease was primarily
attributable to an overall downturn in the economy for the heat
treating industry.
Cost of sales of $1,639,000 (75% of net sales) during the
first quarter of fiscal year 2000 decreased $2,000 (0%) from
$1,641,000 (70% of net sales) for the same period a year
earlier. The percentage increase relative to sales is due to
the fixed nature of the majority of these costs. Gross margin
decreased to $544,000 as compared with $703,000 for the prior
year first quarter.
Selling, general and administrative (SG&A) expenses of
$450,000 (21% of net sales) decreased $12,000 (3%) from
$462,000 (20% of net sales) for the same period a year earlier.
The change in SG&A expenses is primarily due to immaterial
fluctuations.
The Company recorded operating income of $74,000 in the
first quarter of fiscal 2000 as compared with operating income
of $219,000 recorded in the prior year first quarter. The
decrease in operating income in the first quarter of fiscal
year 2000 is primarily attributable to lower sales and
relatively fixed costs.
Total other expense amounted to $70,000 in the first
quarter of fiscal 2000 as compared with other expense of
$52,000 in the first quarter of last year. Other expense in
both third quarters was primarily due to interest expense.
The Company recorded net income of $2,000 in the first
quarter of fiscal 2000 as compared with net income of $164,000
in the prior year first quarter.
Liquidity and Capital Resources
At July 31, 1999, the Company had negative working capital
of $175,000 compared with $159,000 of negative working capital
at April 30, 1999 and the ratio of current assets to current
liabilities was 0.9 to 1.0 for both periods. Cash and accounts
receivables represented 78% (81% at April 30, 1999) and 14%
(16% at April 30, 1999) of total current assets and total
assets, respectively. During the first quarter of fiscal 2000,
net cash provided by operating activities amounted to $310,000
compared to $717,000 provided by operating activities in the
first quarter of fiscal 1999. Working capital requirements for
the first quarter of fiscal 2000 was funded primarily from
available cash, cash generated from operations and short-term
borrowings under the line of credit.
Market Risks
The Company is exposed to certain market risks with its
$500,000 line of credit of which $150,000 is outstanding at
July 31, 1999. The line bears interest at the bank's reference
rate plus .25%.
Year 2000
Management is devoting significant resources throughout
the company to minimize the risk of potential disruption from
year 2000 issues related to computers or other equipment with
date-sensitive software and embedded chip systems. If we, or
our significant customers, suppliers or other third parties
fail to correct year 2000 issues, our ability to operate our
business could be adversely affected.
We have completed the assessment, inventory and
implementation of year 2000 issues on all of our information
systems infrastructure and assets. Information systems that
were year 2000 deficient have been modified, upgraded or
replaced and tested for compliance. Based on assessments and
testing to date, we do not expect the financial impact of
addressing internal system year 2000 issues will be material to
our financial position, results of operations or cash flows.
We have developed contingency plans in the event that a
significant supplier or third party failure disrupts our
operations. These contingency plans will not guarantee that
circumstances beyond our control will not adversely impact our
operations. However, these plans will continue to be evaluated
and modified through the year 2000 transition period as
additional information becomes available.
Forward-Looking Statements
Certain statements contained in Management's Discussion
and Analysis and elsewhere in the 10-Q are forward-looking
statements. These statements may 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 from
anticipated results described in these statements.
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 /s/ DENNIS J. STEVERMER
J. Russell Duncan Dennis J. Stevermer
Chairman of the Board, Chief Executive Vice President Treasurer, Principal
Officer and Director Financial and Accounting Officer
Dated: September 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-END> JUL-31-1999
<CASH> 55,000
<SECURITIES> 0
<RECEIVABLES> 1,279,000
<ALLOWANCES> 55,000
<INVENTORY> 160,000
<CURRENT-ASSETS> 1,647,000
<PP&E> 11,032,000
<DEPRECIATION> 4,094,000
<TOTAL-ASSETS> 8,915,000
<CURRENT-LIABILITIES> 1,822,000
<BONDS> 0
0
0
<COMMON> 137,000
<OTHER-SE> 4,340,000
<TOTAL-LIABILITY-AND-EQUITY> 8,915,000
<SALES> 2,183,000
<TOTAL-REVENUES> 2,183,000
<CGS> 1,639,000
<TOTAL-COSTS> 470,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,000
<INCOME-PRETAX> 4,000
<INCOME-TAX> 2,000
<INCOME-CONTINUING> 2,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,000
<EPS-BASIC> .00
<EPS-DILUTED> .00
</TABLE>
