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, 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
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 twelve months (or for such a 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 9, 1999 was $2,823,000 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 6, 1999.
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 variety of mechanical end-products and customarily out sources
(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 the wholly-owned subsidiary; Flame Metals Processing
Corporation ("Flame Metals") located in Minnesota. 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 subcontract 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.
Flame Metals' customer list includes more than 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. 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. 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. Flame Metals operates this entity as the wholly owned
subsidiary, New England Metal Treating Corporation. The fourth acquisition
occurred in March 1998 when Flame Metals directly acquired certain assets and
assumed certain liabilities from Twin City Steel Treating Company, Inc.
located in Rogers, MN.
The Company has three 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), Flame Metals - Bloomington, MN
(35,000 sq. ft. leased) and Flame Metals - Rogers, MN (33,000 sq. ft.
owned). The Company's fourth plant is operated by New England Metal Treating
Corporation - Auburn, MA (9,000 sq. ft. leased).
Milastar earned a profit before income taxes of $474,000 in fiscal 1999 and
$498,000 in fiscal 1998. Net income after taxes amounted to $462,000 in
fiscal 1999 and $484,000 in fiscal 1998. Results of operations are discussed
more fully in "Management's Discussion and Analysis" beginning on page 5.
The Company's non-operating other income (expense) resulted in a net expense
of $333,000 in fiscal year 1999, up $175,000 from the $158,000 in expense
recorded in fiscal year 1998. Current assets as a percent of total assets
amounted to 19% and 20% at April 30, 1999 and 1998, respectively. The book
value per share was $1.63 per share at April 30, 1999 compared with $1.47 per
share at April 30, 1998. The bid price per share, as quoted on the OTC
Electronic Bulletin Board, was $0.44 as of April 30, 1999.
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 five or six
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
midsummer due to vacations and plant shutdowns by Flame Metals' customers.
Flame Metals is not materially affected by the sources or availability of raw
material in that nearly 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 7317 West Lake Street,
Minneapolis, MN 55426. Its communication numbers are: Telephone (612) 929-
4774 and fax number (612) 925-0572.
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 four separate plant locations and employs a total of
approximately 78 employees; 39 in St. Louis Park, MN, 20 in Bloomington, MN,
11 in Rogers, MN and 8 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 2000. Eighteen 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, Rogers, 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
At the end of fiscal 1999, the Company moved its corporate headquarters from
No. 9 Via Parigi, Palm Beach, Florida to 7317 West Lake Street, Minneapolis,
Minnesota.
Flame Metals
Flame Metals owns or leases four industrial properties as listed below:
ACTIVITY LOCATION SIZE (SQ. FT.) STATUS
Flame Metals - Plant 1 St. Louis Park, MN 35,000 Owned
Flame Metals - Plant 2 Rogers, MN 33,000 Owned
Flame Metals - Plant 3 Bloomington, MN 35,000 Leased
New England Metal Treating 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 anytime 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 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, management believes, based on the facts
currently available, 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, 1999.
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, 1994. Unless otherwise indicated in the table below, all
positions and offices indicated have been continuously held since May 1,
1994. 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 and Offices Held with
Name Age the Company and Period Held
J. Russell Duncan (1) . . . 82 Chairman of the Board; Treasurer
until April 19, 1995
L. Michael McGurk . . . . . 48 President and Chief Operating
Officer
Dennis J. Stevermer . . . . 38 Vice President Treasurer since
April 19, 1995 and Chief Financial
Officer of Flame Metals since
September 1993
Lance H. Duncan (2) . . . . 43 Secretary
(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 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 1999 fiscal year. The
Company expects to file the Information Statement with the Securities and
Exchange Commission on or before August 6, 1999 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 1999 Fiscal 1998
High Low High Low
First Quarter . . . . . . . . . . $ 1.06 $ 0.75 $ 0.63 $ 0.50
Second Quarter. . . . . . . . . . $ 0.81 $ 0.56 $ 1.03 $ 0.50
Third Quarter . . . . . . . . . . $ 0.56 $ 0.44 $ 1.13 $ 0.82
Fourth Quarter. . . . . . . . . . $ 0.63 $ 0.38 $ 1.13 $ 0.94
On July 9, 1999 there were approximately 4,000 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,
1999 1998 1997 1996 1995
(In thousands except per share data)
Net sales. . . . . . . . . . . . $ 9,119 $ 8,261 $ 7,325 $ 6,642 $ 6,708
Net income (loss). . . . . . . . 462 484 (63) (254) (614)
Net income (loss) per common
share - basic . . . . . . . . . .17 .18 (.02) (.09) (.22)
Net income (loss) per common
share - diluted . . . . . . . . .16 .17 (.02) (.09) (.22)
Financial Position:
Total assets. . . . . . . . . . 9,165 9,022 6,093 5,902 5,315
Short-term obligations. . . . . 1,926 1,838 1,493 1,433 1,410
Long-term obligations . . . . . 2,765 3,172 1,072 842 40
Stockholders' equity. . . . . . $ 4,474 $ 4,012 $ 3,528 $ 3,627 $ 3,865
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, 1999
showed a 10% increase in sales and a 5% decrease in after tax profit. The
higher sales are the result of the Company's most recent acquisition and the
lower profit is due to higher interest expenses from the additional debt of
that same acquisition.
Milastar's primary revenues flow from metallurgical services provided by
Flame Metals Processing Corporation and New England Metal Treating
Corporation. Significant progress continues to be made in reducing factory
labor, energy costs and primary production supplies as a percentage of sales.
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 $3,000,000 and $1,000,000, 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."
Results of Operations
Fiscal 1999 Compared to Fiscal 1998. Net sales for fiscal 1999 totaled
$9,119,000, a 10% increase from $8,261,000 in fiscal 1998. The increase was
primarily attributable to additional production capacity as a result of the
March 1998 acquisition of the Rogers, MN facility.
Cost of sales as a percentage of sales was 69% in both fiscal 1999 and 1998.
Gross profit increased by $304,000, from $2,542,000 in fiscal 1998 to
$2,846,000 in fiscal 1999. The increase in gross profit is the result of a
combination of higher sales and the proportionately increased costs
associated with the operation of the Rogers, MN plant.
Selling, general and administrative expense decreased as a percentage of
sales to 21% in fiscal 1999, down 1% from 22% in fiscal 1998. The decrease
as a percent of sales is the result of overhead costs being absorbed by
increased net sales.
Total other expense amounted to $333,000 in fiscal 1999, compared with other
expense of $158,000 reported in fiscal 1998. The increase was directly
attributable to an increase in interest expense due to additional debt
resulting from the acquisition of the Rogers, MN facility.
Fiscal 1998 Compared to Fiscal 1997. Net sales for fiscal 1998 totaled
$8,261,000, a 13% increase from $7,325,000 in fiscal 1997. The increase was
primarily attributable to successful marketing strategies combined with a
continuing strong economy.
Cost of sales as a percentage of sales was reduced to 69% in fiscal 1998,
down from 74% in fiscal 1997. The reduction reflects the ongoing efforts to
increase productivity through effective use of labor and asset resources.
Management continued to provide training to increase efficiency and had
significantly reduced employee turnover.
Selling, general and administrative expense decreased as a percentage of
sales to 22% in fiscal 1998, down 3% from 25% in fiscal 1997. The decrease
as a percent of sales was the result of overhead costs being absorbed by
increased net sales.
Total other expense amounted to $158,000 in fiscal 1998, compared with other
expense of $124,000 reported in fiscal 1997. The increase was directly
attributable to an increase in interest expense due to additional debt
resulting from the Twin City Steel Treating, Inc. asset purchase.
Effects of Inflation
During fiscal 1999 and 1998 the Company's monetary liabilities materially
exceeded its monetary assets resulting in a net negative monetary position.
In periods in which the general price-level index is rising (inflation), it
is advantageous to maintain a net negative 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 effects of inflation and the
Company's earning capacity.
Liquidity and Capital Resources
At April 30, 1999, the Company had negative working capital of $158,000
compared with $34,000 of negative working capital as of April 30, 1998, and
the ratio of current assets to current liabilities was 0.9 to 1.0 and 1.0 to
1.0 at April 30, 1999 and 1998, respectively. Cash and current receivables
represented 82% (84% at April 30, 1998) and 16% (17% at April 30, 1998) of
total current assets and total assets, at April 30, 1999, respectively.
During fiscal 1999 cash provided by operating activities amounted to
$1,315,000 compared with cash provided of $784,000 in fiscal 1998. The
significant increase in operating cashflow is primarily the result of fiscal
1998 being adversely impacted by the payment of certain assumed payables
following the acquisition of Twin City Steel Treating Company, Inc. The
Company added $1,194,000 to property, plant and equipment in fiscal 1999
compared with $656,000 in the previous year. Working capital requirements
for fiscal 1999 were funded primarily from available cash and cash generated
from operations.
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 will 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
2000 operations and equipment acquisitions cash flow requirements.
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 from anticipated
results described in these statements.
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. Total costs were approximately $150,000 and was
funded through operating 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.
Market Risks
The Company is exposed to certain market risks with its $500,000 line of
credit of which $100,000 is outstanding at April 30, 1999. The line bears
interest at an bank's reference rate plus .25%.
Milastar Corporation and Consolidated Subsidiaries
Auditors' Report
Item 8. Financial Statements and Supplementary Data
INDEPENDENT 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, 1999 and 1998, and the related consolidated
statements of operations, cash flows and changes in stockholders' equity and
comprehensive income/(loss) for each of the fiscal years in the three-year
period ended April 30, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the fiscal years in the
three-year period ended April 30, 1999 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.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
June 4, 1999
<TABLE>
<CAPTION>
Milastar Corporation and Consolidated Subsidiaries
Financial Statements
CONSOLIDATED BALANCE SHEETS
April 30, 1999 and 1998
ASSETS
1999 1998
<S>
Current assets: <C> <C>
Cash and cash equivalents. . . . . . . . 19,000 164,000
Accounts and other receivables:
Trade, less allowance for doubtful
accounts of $50,000 in 1999 and
50,000 in 1998 . . . . . . . . . . . . 1,408,000 1,311,000
Other . . . . . . . . . . . . . . . . . 14,000 37,000
Inventory. . . . . . . . . . . . . . . . 167,000 153,000
Prepaid supplies and other . . . . . . . 159,000 139,000
Total current assets . . . . . . . . 1,767,000 1,804,000
Property, plant and equipment:
Land. . . . . . . . . . . . . . . . . . 420,000 420,000
Buildings and improvements. . . . . . . 2,145,000 1,868,000
Deposits on equipment . . . . . . . . . 279,000
Equipment . . . . . . . . . . . . . . . 8,314,000 7,645,000
10,879,000 10,212,000
Less accumulated depreciation. . . . . (3,831,000) (3,475,000)
7,048,000 6,737,000
Other assets:
Non-compete agreements, net of
accumulative amortization of
$96,000 and $61,000 respectively. . . 350,000 481,000
Total assets . . . . . . . . . . . . 9,165,000 9,022,000
</TABLE>
<TABLE>
<CAPTION>
Milastar Corporation and Consolidated Subsidiaries
Financial Statements
CONSOLIDATED BALANCE SHEETS
April 30, 1999 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
<S>
Current liabilities: <C> <C>
Note payable to stockholder. . . . . . . 100,000
Note payable to bank . . . . . . . . . . 100,000
Current maturities of long-term debt . . 792,000 774,000
Accounts payable . . . . . . . . . . . . 321,000 321,000
Income taxes payable . . . . . . . . . . 121,000 119,000
Accrued payroll and benefits . . . . . . 332,000 243,000
Accrued real estate taxes. . . . . . . . 106,000 86,000
Other accrued liabilities. . . . . . . . 154,000 195,000
Total current liabilities. . . . . . 1,926,000 1,838,000
Long-term debt, less current
maturities. . . . . . . . . . . . . . . 2,765,000 3,172,000
Total liabilities. . . . . . . . . . 4,691,000 5,010,000
Commitments and contingencies (Notes 9 and 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 1999 and 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. . . . . . . . . . . . 2,691,000 2,229,000
Total stockholders' equity. . . . . . 4,474,000 4,012,000
Total liabilities and
stockholders' equity. . . . . . . . 9,165,000 9,022,000
</TABLE>
<TABLE>
<CAPTION>
Milastar Corporation and Consolidated Subsidiaries
Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended April 30,
1998 1998 1997
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . 9,119,000 8,261,000 7,325,000
Cost of sales. . . . . . . . . . 6,273,000 5,719,000 5,414,000
Gross profit . . . . . . . . . . 2,846,000 2,542,000 1,911,000
Selling, general and
administrative expenses . . . . 1,954,000 1,851,000 1,795,000
Amortization of non-compete
agreements. . . . . . . . . . . 85,000 35,000 54,000
Operating income . . . . . . . . 807,000 656,000 62,000
Other income (expense):
Dividend and interest income. . 8,000 15,000 9,000
Interest expense. . . . . . . . (346,000) (177,000) (142,000)
Net gain on sale of
marketable securities. . . . . 45,000
Net gain on settlement
of non-compete agreement . . . 54,000
Net gain (loss) on sale
of property and equipment. . . (49,000) 4,000 (36,000)
Unrealized market loss on
building held for sale . . . .
Total other income (expense) . . (333,000) (158,000) (124,000)
Income (loss) before
income taxes. . . . . . . . . . 474,000 498,000 (62,000)
Income tax expense . . . . . . . 12,000 14,000 1,000
Net income (loss). . . . . . . . 462,000 484,000 (63,000)
Net income (loss) per Class A
common share - basic. . . . . . .17 .18 (.02)
Net income (loss) per Class A
common share - diluted. . . . . .16 .17 (.02)
</TABLE>
<TABLE>
<CAPTION>
Milastar Corporation and Consolidated Subsidiaries
Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended April 30,
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss). . . . . . . 462,000 484,000 (63,000)
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Depreciation and
amortization . . . . . . . . 895,000 718,000 666,000
Net gain on settlement
of non-compete agreement . . (54,000)
Net loss (gain) on disposal
of property and equipment. . 49,000 (4,000) 79,000
Net loss (gain) on
marketable securities. . . . (45,000)
Unrealized market loss
(gain) on building held
for sale . . . . . . . . . . (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. . . . . . . . . (74,000) 78,000 (194,000)
Inventory . . . . . . . . . . (14,000) 32,000 39,000
Prepaid supplies and other. . (20,000) 14,000 29,000
Accounts payable and
accrued expenses . . . . . . 69,000 (538,000) (22,000)
Income taxes payable. . . . . 1,000 114,000
Net cash provided by
operating activities. . . . . . 1,314,000 784,000 560,000
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property, plant
and equipment, net of effect
of the purchase of the net
assets of a business. . . . . (1,194,000) (656,000) (1,133,000)
Proceeds from disposal of
property, plant and
equipment . . . . . . . . . . 39,000 24,000 253,000
Proceeds from sale of
marketable securities and
other investments . . . . . . 49,000
Deposits made for equipment. . (279,000)
Payment for purchase of net
assets of a business. . . . . (174,000)
Net cash used in investing
activities. . . . . . . . . . . (1,155,000) (1,085,000) (831,000)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds (repayments) from
bank line of credit . . . . . 100,000 (60,000)
Principal payments of
long-term debt. . . . . . . . (789,000) (317,000) (200,000)
Proceeds from issuance of
long-term debt, net of effect
of the purchase of the net
assets of a business. . . . . 485,000 776,000 564,000
Proceeds from issuance of
note payable - stockholder . 6,000
Repayments on note
payable - stockholder. . . . (100,000) (65,000) (112,000)
Net cash provided by (used in)
financing activities. . . . . . (304,000) 394,000 198,000
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS. . (145,000) 93,000 (73,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR . . . . . . . 164,000 71,000 144,000
CASH AND CASH EQUIVALENTS,
END OF YEAR . . . . . . . . . . 19,000 164,000 71,000
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest. . . . . . . . . . . 346,000 181,000 189,000
Income taxes. . . . . . . . . 12,000 14,000 5,000
Supplemental disclosures of
non-cash investing and
financing activities:
Capital lease obligations for
purchases of equipment. . . . 15,000
</TABLE>
<TABLE>
<CAPTION>
Milastar Corporation and Consolidated Subsidiaries
Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Fiscal Years Ended April 30, 1999, 1998 and 1997
Note Unrealized
Common Common receivable holding Additional Total
Stock Stock from gains on paid in Retained Stockholders'
Shares Amount officer securities capital earnings Equity
<S>
<C> <C> <C> <C> <C> <C> <C>
Balance,
April 30, 1996 . 2,738,264 137,000 (20,000) 36,000 1,666,000 1,808,000 3,627,000
Unrealized
holding gains
on marketable
equity
securities . . . (36,000) (36,000)
Net loss
for 1997 . . . . (63,000) (63,000)
Total
Comprehensive
income/(loss). . (99,000)
Balance,
April 30, 1997 . 2,738,264 137,000 (20,000) 0 1,666,000 1,745,000 3,528,000
Net income
for 1998 . . . . 484,000 484,000
Balance,
April 30, 1998 . 2,738,264 137,000 (20,000) 0 1,666,000 2,229,000 4,012,000
Net income
for 1999 . . . . 462,000 462,000
Balance,
April 30, 1999 . 2,738,264 137,000 (20,000) 0 1,666,000 2,691,000 4,474,000
</TABLE>
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. 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 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 Other assets are comprised of one five-year non-compete
agreement which is being amortized over 60 months using the straight-line
method.
Income taxes 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. 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
Long-lived assets and certain identifiable intangibles are 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 exceed 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 uses the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for
employee stock options. Under the intrinsic value method, compensation
expense is recorded only to the extent that the market price of the common
stock exceeds the exercise price of the stock option on the date of grant.
(See note 7).
Earnings per share Basic EPS is computed by dividing net earnings by the
weighted average number of common shares outstanding. Diluted EPS includes
the effect of all dilutive potential common shares (primarily related to
stock options).
Comprehensive income During fiscal 1999, the Company implemented Statement
of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and displaying
the components of comprehensive income. The prior year financial statements
have been restated to show the impact of this statement. The impact to the
financial statements is limited to the impact of marketable equity security
fluctuations.
New Accounting Rules During 1999, the Financial Accounting Standards
Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133 is effective for us in our fiscal 2002. We
are assessing the impact of adoption of SFAS 133 on our financial statements.
2 ACQUISITION
On March 16, 1998, the Company acquired certain assets and assumed certain
liabilities from Twin City Steel Treating Company, Inc. (TCST), a commercial
heat treater, located in Rogers, Minnesota. This acquisition was accounted
for using the purchase method and, accordingly, the aggregate acquisition
costs have been allocated to the net assets acquired based on the fair values
of such assets and liabilities at the acquisition date. The operating
results of this additional plant location have been included in the Company's
statement of operations for fiscal 1998 from the acquisition date forward.
The Company paid $174,000 in cash and issued a note payable to the former
owner of TCST for the remainder of the purchase price.
The assets acquired and liabilities assumed consist of the following:
Accounts and other receivables $ 266,000
Property, plant and equipment 2,052,000
Non-compete agreement 446,000
Accounts payable (516,000)
Long-term debt (1,620,000)
Total $ 628,000
The operating results of this acquisition are included in the
Company's consolidated results of operations from the date of
acquisition. The following unaudited pro forma summary presents the
consolidated results of operations as if the acquisition had occurred at the
beginning of fiscal 1997, after giving effect to certain adjustments,
including amortization of goodwill, interest expense on the acquisition
debt and related tax effects. These unaudited pro forma results have
been prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisition been made
as of those dates or of results which may occur in the future.
Fiscal 1998 Fiscal 1997
Net sales $ 10,092,000 $ 9,248,000
Net income 737,000 111,000
Net income per common share - basic .27 .04
Net income per common share - diluted $ .25 .04
3 LONG-TERM DEBT
Long-term debt consisted of the following at April 30:
1999 1998
Amount due under loan agreement
with Phoenixcor Inc., payable in
monthly installments of varying
amounts, including interest at
10.3% through October, 2000 $ 551,000 $ 710,000
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
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 114,000 218,000
Amount due under loan agreement
with TCF National Bank as part of
the purchase of TCST, payable in
monthly installments of $21,896,
including interest at 8.2% through
March, 2003 858,000 1,042,000
Amount due under loan agreement
with TCF National Bank as part of
the purchase of TCST, payable in
monthly installments of $5,891
including interest at 9.4% through
May, 2017 614,000 626,000
Amount due under loan agreement
with the Small Business
Administration, facilitated by
TCF National Bank, as part of the
purchase of TCST, payable in monthly
installments of $4,321 including
interest at 7.4% through December, 2016 493,000 507,000
Amount due under loan agreement with
Marvin Schendel as part of the
purchase of TCST, payable in monthly
installments of $10,000, including
interest at 8.0% through September, 2002 350,000 438,000
Amount due under loan agreement
with TCF National Bank, payable in
monthly installments of $9,840
including interest at 8.0% through
July, 2004 424,000
Capital lease obligations, secured by
specific equipment 153,000 205,000
3,557,000 3,946,000
Less current maturities (792,000) (774,000)
Total long-term debt $ 2,765,000 $ 3,172,000
Certain loan agreements contain covenants that, 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, 1999. The Company received a letter from the
bank that waived the default as of April 30, 1999.
Maturities of long-term debt and capitalized lease obligations for each of
the five years following April 30, 1999 are as follows:
2000 $ 792,000
2001 844,000
2002 523,000
2003 394,000
2004 and thereafter 1,004,000
Total obligations $ 3,557,000
Total interest expense incurred on long-term debt and capitalized lease
obligations for the years ended April 30, 1999, 1998 and 1997 amounted to
$343,000, $158,000 and $120,000, respectively.
4 BANK CREDIT LINE
The Company has a revolving line of credit with its bank, which permits
borrowings of up to $500,000. Borrowings under the agreement bear interest
at the bank's reference rate plus .25% and are secured by the general assets
of the Company (rate at April 30, 1999 was 7.75%). The agreement contains
covenants that, among other things,
require the Company to maintain a minimum capital base, current ratio, and
other financial ratios. The current agreement, which is subject to annual
renewal by the Company and the bank, expires on August 30, 2000. At April
30, 1999 and 1998, borrowings outstanding under this agreement were $100,000
and $0, respectively.
5
INCOME TAXES
Income tax expense attributable to net income (loss) from operations consists
of:
Current Deferred Total
Year ended April 30, 1999:
U.S. Federal $ - $ - $ -
State and local 12,000 - 12,000
Total $ 12,000 $ - $ 12,000
Year ended April 30, 1998:
U.S. Federal $ 7,000 $ - $ 7,000
State and local 7,000 - 7,000
Total $ 14,000 $ - $ 14,000
Year ended April 30, 1997:
U.S. Federal $ - $ - $ -
State and local 1,000 - 1,000
Total $ 1,000 $ - $ 1,000
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:
1999 1998 1997
Computed expected tax expense
(benefit) at 34% $ 161,500 $ 169,600 $ (21,200)
State taxes, net of federal
effect 7,900 (1,500) 700
Dividends received deduction - -
Increase (decrease) in valuation
allowance (161,500) (323,900) 15,000
Adjustments to prior year timing
differences - 161,400 -
Adjustment to net operating loss
carryforward - - 10,000
Other net 4,100 8,400 (3,500)
$ 12,000 14,000 $ 1,000
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets (liabilities) at April 30, 1999 and 1998
are as follows:
1999 1999 1998 1998
Current Non-current Current Non-current
Allowance for doubtful
accounts $ 20,800 $ - $ 19,400 $ -
Accrued vacation pay 16,100 - 13,500 -
Accrued legal fees 11,600 - 19,400 -
Accrued bonus 27,200 - - -
Differences in tax and
book depreciation of
plant and equipment - (596,500) - (530,300)
Differences in tax and
book amortization of
intangibles - 23,700 - 22,800
Differences in tax and
book treatment of
prepaid supplies - - - (11,300)
Foreign tax credit
carryforward - 16,600 - 16,600
Alternative minimum tax
credit carry forwards - 76,300 - 73,500
State net operating loss
carryforward - 232,900 - 284,500
Federal net operating loss
carryforwards, net of state
net operating loss impact - 275,600 - 385,200
Capital loss carryover - 216,100 - 216,100
Total gross deferred tax asset 75,700 244,700 52,300 457,100
Less valuation allowance (75,700) (244,700) (52,300) (457,100)
Net deferred tax asset $ - $ - $ - $ -
A reconciliation of the valuation allowance for deferred taxes
is as follows:
1999 1998
Valuation allowance at beginning of year $ 509,400 $ 833,300
Increase (decrease) in allowance (189,000) (323,900)
Valuation allowance at end of year $ 320,400 $ 509,400
At April 30, 1999, the Company has net operating loss carry forwards for
federal purposes of $1,000,000 which are available to offset future federal
taxable income, if any, and expire between April 30, 2007 and April 30, 2012.
The Company also has net operating loss carry forwards for state purposes of
$3,000,000 which are available to offset future state taxable income, if any,
and expire between April 30, 2007 and April 30, 2013. The Company also has
federal and state alternative minimum tax credit carry forwards of
approximately $76,300 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
began to expire in 1997.
The valuation allowance for the period ended April 30, 1999 was $320,400. In
assessing the reliability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income, tax carryover
periods available, and tax planning strategies in making this assessment.
Based upon historical levels of taxable income, management believes it is
more likely than not the Company will realize the benefits of its deferred
tax assets, net of the existing valuation allowance at April 30, 1999.
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, for a refund amount of $146,300. The Company was notified in
April 1996 that the IRS had allowed the carry back loss and it 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 reserve 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 expired on April 26,
1999. On April 30, 1999 the board of directors elected to extend Mrs.
Duncan's options to April 30, 2001 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 1999, 1998 and 1997 are as follows:
1999 1998 1997
Options outstanding May 1 368,666 273,666 273,666
Granted 95,000
Exercised
Canceled
Options outstanding at April 30 368,666 368,666 273,666
Weighted average exercise
price at April 30 $ .6380 $ .6380 $ .6640
Option price range at April 30 $ .5625 $ .5625 $ .5625
to to to
.9609 .9609 .9609
Options exercisable at April 30 368,666 368,666 273,666
Options available for grant
at April 30
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:
1999 1998 1997
Net income (loss) - as reported $ 462,000 $ 484,000 $ (63,000)
Net income (loss) - pro forma $ 462,000 $ 464,000 $ (63,000)
Net income (loss) per
share - basic - as reported $ .17 $ .18 $ (.02)
Net income (loss) per
share - basic - pro forma $ .17 $ .17 $ (.02)
The pro forma amounts may not be representative of the effects on
reported net income (loss) for future years. The per share, weighted-average
fair value of each option granted is calculated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in the following years:
1999 1998 1997
Dividend yield 0% 0% 0%
Expected volatility 48% 59% 0%
Risk-free interest rate 6.0% 6.0% 0%
Expected lives 5 years 5 years 0 years
At April 30, 1999, the weighted average remaining contractual life of the
outstanding options was 3.5 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, 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 the fiscal years ended April
30, 1999, 1998 and 1997 amounted to $3,000, $3,000 and $2,000, respectively.
Notes Payable
During fiscal 1995 the Company entered into a series of note payable
transactions which at April 30, 1999 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 years
ended April 30, 1999, 1998 and 1997 was $0, $5,000 and $13,000, respectively.
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 years ended April 30,
1999, 1998 and 1997 was $8,000, $9,000 and $9,000, respectively.
9 INCOME (LOSS) PER COMMON SHARE
The following table presents a reconciliation of the denominators used in the
computation of net income (loss) per common share - basic and net income
(loss) per common share - diluted for the years ended April 30, 1999, 1998
and 1997:
1999 1998 1997
Weighted shares of Class A
Stock outstanding - basic 2,738,264 2,738,264 2,738,264
Weighted shares of Class A
Stock assumed upon exercise
of stock options 80,553 196,941
Weighted shares of Class A
Stock outstanding - diluted 2,818,817 2,935,205 2,738,264
For the fiscal year 1997, stock options were excluded from the above
calculation due to their antidilutive effect.
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 provide for the Company to pay all
real estate taxes and maintenance expenses.
Future minimum rental payments under noncancellable operating leases,
excluding real estate taxes, are as follows:
2000 $ 165,000
2001 124,000
2002 21,000
2003 12,000
2004 7,000
Thereafter -
$ 329,000
Total rent expense, excluding real estate taxes, for the fiscal years ended
April 30, 1999, 1998 and 1997 was $211,000, $203,000 and $207,000,
respectively.
11 COMMITMENTS AND CONTINGENCIES
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, management believes, based on the facts
currently available, 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 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, 1999 and 1998 9 - 10
Consolidated Statements of Operations for
the three years ended April 30, 1999 11
Consolidated Statements of Cash Flows for
the three years ended April 30, 1999 12 - 13
Consolidated Statements of Changes in
Stockholders' Equity for the
three years ended April 30, 1999 14
Notes to Consolidated Financial Statements 15 - 24
2. Financial Statement Schedules
Schedule VIII-Valuation and Qualifying Accounts 26
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 25
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 3.2
to Registrant's Form 10-K dated for the fiscal year ended
April 30, 1998 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
10.5 Asset Purchase Agreement dated as of March 16, 1998,
between Registrant and Twin City Steel Treating Inc., a copy
of which was filed as Exhibit 10.5 to the Registrant's Current
Report on Form 8-K dated March 27, 1998 and, by this
reference, such Exhibit is incorporated herein
21.1 List of Significant Subsidiaries
Subsidiary State ofIncorporation
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, 1999 $ 50,000 $ 8,000 $ 8,000 $ 50,000
April 30, 1998 $ 35,000 $ 21,000 $ 6,000 $ 50,000
April 30, 1997 $ 37,000 $ 8,000 $ 10,000 $ 35,000
(1) Direct write-off of accounts deemed uncollectible.
Milastar Corporation and Consolidated Subsidiaries
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, hereunto duly authorized.
MILASTAR CORPORATION
(REGISTRANT)
By: /s/ J. RUSSELL DUNCAN
J. Russell Duncan
Chairman of the Board
Dated: July 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant and in the capacities indicated
this report of the Registrant and in the capacities indicated on
July 28, 1999.
/s/ J. RUSSELL DUNCAN /s/ L. MICHAEL McGURK
J. Russell Duncan, L. Michael McGurk
Chairman of the Board, Chief Executive President, Chief Operating Officer
Officer and Director and Director
/s/ DENNIS J. STEVERMER /s/ LANCE H. DUNCAN
Dennis J. Stevermer Lance H. Duncan
Vice President Treasurer,
Principal Financial Secretary and Director
and Accounting Officer
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<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> APR-30-1999
<CASH> 19,000
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<RECEIVABLES> 1,472,000
<ALLOWANCES> 50,000
<INVENTORY> 167,000
<CURRENT-ASSETS> 1,767,000
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<COMMON> 137,000
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