SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended October 31, 2000
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 (952) 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 October 31, 2000, 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, 2000.
The condensed financial statements included herein, which are
unaudited, include, in the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary to present fairly
the financial position and results of operations of the Company for the
periods presented.
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
October 31, April 30,
2000 2000
(unaudited) (audited)
Current assets: <C> <C>
Cash and cash equivalents. . . . . . . . 537,000 56,000
Accounts receivable:
Trade, less allowance for doubtful
accounts of $59,000 (Ocotber 31, 2000)
and $50,000 (April 30, 2000). . . . . . 1,072,000 1,281,000
Other . . . . . . . . . . . . . . . . . 17,000 16,000
Inventory. . . . . . . . . . . . . . . . 118,000 116,000
Prepaid expenses and other . . . . . . . 165,000 158,000
Total current assets . . . . . . . . 1,909,000 1,627,000
Property, plant and equipment:
Land. . . . . . . . . . . . . . . . . . 420,000 420,000
Buildings and improvements. . . . . . . 2,276,000 2,274,000
Deposits on equipment . . . . . . . . . 45,000
Equipment . . . . . . . . . . . . . . . 8,576,000 8,704,000
11,272,000 11,443,000
Less accumulated depreciation. . . . . (4,616,000) (4,714,000)
6,656,000 6,729,000
Other assets:
Non-compete agreement, net of
accumulated amortization of
of $239,000 & $191,000 respectively. . 207,000 255,000
Total assets . . . . . . . . . . . . 8,772,000 8,611,000
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: <C> <C>
Notes payable to bank . . . . . . . . . 250,000
Current maturities of long-term debt . . 546,000 844,000
Accounts payable . . . . . . . . . . . . 285,000 382,000
Accrued payroll and benefits . . . . . . 285,000 303,000
Accrued real estate taxes. . . . . . . . 53,000 105,000
Other accrued liabilities. . . . . . . . 104,000 104,000
Total current liabilities. . . . . . 1,273,000 1,988,000
Long-term debt,
less current maturities . . . . . . . . 2,458,000 1,947,000
Total liabilities. . . . . . . . . . 3,731,000 3,935,000
Stockholders' equity:
Preferred stock, $1.00 par value;
authorized 5,000,000 shares, none
issued. . . . . . . . . . . . . . . . .
Common stock, $.05 par value;
authorized 7,500,000 shares, issued
and outstanding 2,728,264 shares at
October 31, 2000 and April 30, 2000 . . 137,000 137,000
Note receivable from officer . . . . . . (20,000) (20,000)
Additional paid-in capital . . . . . . . 1,666,000 1,666,000
Retained earnings. . . . . . . . . . . . 3,258,000 2,893,000
Total stockholders' equity. . . . . . 5,041,000 4,676,000
Commitments and contingencies (Notes 6 & 7)
Total liabilities and
stockholders' equity . . . . . . . . 8,772,000 8,611,000
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
October 31, October 31,
2000 1999 2000 1999
<C> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . 2,307,000 2,307,000 4,791,000 4,490,000
Cost of Sales . . . . . . . . . . . . 1,540,000 1,727,000 3,217,000 3,366,000
Gross margin. . . . . . . . . . . . . 767,000 580,000 1,574,000 1,124,000
Selling general and administrative
expenses . . . . . . . . . . . . . . 543,000 475,000 1,103,000 925,000
Amortization of non-compete
agreements . . . . . . . . . . . . . 24,000 24,000 48,000 44,000
Operating income. . . . . . . . . . . 200,000 81,000 423,000 155,000
Other income (expense):
Dividend and interest income . . . . 9,000 9,000
Interest expense . . . . . . . . . . (63,000) (68,000) (130,000) (138,000)
Other . . . . . . . . . . 68,000 68,000
Total other income (expense). . . . . 14,000 (68,000) (53,000) (138,000)
Income before income taxes . . . . . 214,000 13,000 370,000 17,000
Provision for income taxes. . . . . 3,000 2,000 5,000 4,000
Net income . . . . . . . . . . 211,000 11,000 365,000 13,000
Net income per common share-basic . . .08 .00 .13 .00
Net income per common share-diluted . .07 .00 .13 .00
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended October 31,
(Unaudited)
2000 1999
<C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . 365,000 13,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization . . . . 492,000 571,000
Gain on sale of the net assets
of a business. . . . . . . . . . . . (68,000)
Changes in operating assets and
liabilities, net of the effect of the
sale of the net assets of a business:
Accounts and other receivables. . . . (3,000) 150,000
Inventory . . . . . . . . . . . . . . (2,000) 34,000
Prepaid supplies and other. . . . . . (18,000) (29,000)
Accounts payable and accrued
expenses . . . . . . . . . . . . . . (167,000) (60,000)
Net cash provided by operating
activities . . . . . . . . . . . . . . 599,000 679,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment: . . . . . . . . . . . . . . (696,000) (332,000)
Proceeds from the sale of the net
assets of a business . . . . . . . . . 615,000
Net cash used in investing
activities . . . . . . . . . . . . . . (81,000) (332,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) from bank
line of credit . . . . . . . . . . . . (250,000) 100,000
Principal payments on long-term debt. . (612,000) (368,000)
Proceeds from issuance of
long-term debt . . . . . . . . . . . . 825,000
Net cash used in financing
activities . . . . . . . . . . . . . . (37,000) (268,000)
NET INCREASE IN CASH AND
CASH EQUIVALENTS. . . . . . . . . . . . 481,000 79,000
CASH AND CASH EQUIVALENTS BALANCE
AT BEGINNING OF YEAR. . . . . . . . . . 56,000 19,000
CASH AND CASH EQUIVALENTS BALANCE
AT END OF THE SECOND QUARTER. . . . . . 537,000 98,000
Supplemental disclosures of cash flow information:
Cash paid during the first six months for:
Interest . . . . . . . . . . . . . . . . 130,000 138,000
Income taxes . . . . . . . . . . . . . . 5,000 6,000
</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 October 31,
2000 and for the six month periods ended October 31, 2000 and
October 31, 1999, 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 2000 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 results 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, 2002. 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 six month periods ended October 31, 2000 and 1999
was $1,200.
3 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
three and six month periods ended October 31, 2000 and 1999:
Three Months Ended Six Months Ended
October 31, October 31,
2000 1999 2000 1999
Weighted shares
outstanding - basic. . . 2,738,264 2,738,264 2,738,264 2,738,264
Weighted shares assumed
upon exercise of
stock options. . . . . . 91,354 235,637 51,178 242,376
Weighted shares
outstanding - diluted. . 2,829,618 2,973,901 2,789,442 2,980,640
4 SALE OF SUBSIDIARY
On August 25, 2000, the Company sold all of the
assets of its wholly owned subsidiary, New England Metal Treating
Corporation located in Auburn, Massachusetts. The Company
received $615,000 in cash from the sale and recorded a $68,000
gain. The net book value of the assets sold consisted of the
following:
Machinery & Equipment . . . . . . . . . . $325,000
Accounts Receivables. . . . . . . . . . . 211,000
Other . . . . . . . . . . . . . . . . . . 11,000
Total . . . . . . . . . . . . . . . . . . $547,000
5 LONG TERM DEBT
In August 2000, the Company refinanced its note
payable to bank (line of credit) and established a term note
payable with interest at 8.6%. The new term note payable of
$825,000 included borrowings for the purchase of equipment. The
amount available on the line of credit after the refinancing is
$500,000.
6 ENVIRONMENTAL ACTIONS
The Company is currently in discussions with the
Minnesota Pollution Control Agency (MPCA) concerning alleged
violations of past air permit rules. The MPCA is proposing a
$73,000 penalty. Management's position is that the MPCA has
waived enforcement action against the Company. However, the
Company has established a reserve which it believes is adequate to
cover legal expenses and any potential penalties.
7 COMMITMENTS AND CONTINGENCIES
In November 2000, the Company made commitments under
contract for the construction of a 15,000 square foot addition to
the Company's facility located in Rogers, Minnesota. The total
cost of the construction contract is $600,000.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Three Months Ended October 31, 2000 as Compared with
the Three Months Ended October 31, 1999. The Company recorded
sales of $2,307,000 during the second quarter of fiscal year 2000
as compared with $2,307,000 for the same period last year. The
steady sales were primarily attributable to a strong economy for
the heat treating industry in the Midwest being offset by the loss
of revenue from the sale of New England Metal Treating.
Cost of sales of $1,540,000 (67% of net sales) during
the second quarter of fiscal year 2000 decreased $187,000 (11%)
from $1,727,000 (75% of net sales) for the same period a year
earlier. The decrease in total dollars was primarily attributable
to the sale of New England Metal Treating. The decrease in cost
of sales as a percent of net sales from 75% to 67% was primarily
the result of higher sales in the Midwest. Gross margin increased
to $767,000 as compared with $580,000 for the prior year second
quarter. The increase was primarily attributable to decreased
cost of sales that resulted from the sale of New England Metal
Treating.
Selling, general and administrative (SG&A) expenses
of $543,000 (24% of net sales) increased $68,000 (14%) from
$475,000 (21% of net sales) for the same period a year earlier.
The change in SG&A expenses is primarily due to an increase in the
provision for incentive compensation and a reserve for legal fees
associated with a state air permit.
The Company recorded operating income of $200,000 in
the second quarter of fiscal 2000 as compared with operating
income of $81,000 recorded in the prior year second quarter. The
increase in operating income in the second quarter of fiscal year
2000 is primarily attributable to the same revenue being generated
with decreased cost of sales that resulted from the sale of New
England Metal Treating.
Total other income amounted to $14,000 in the second
quarter of fiscal 2000 as compared with other expense of $68,000
in the second quarter of last year. Other income consisted of
interest income and a $68,000 gain on the sale of New England
Metal Treating being substantially offset by $63,000 in interest
expense.
The Company recorded net income of $211,000 in the
second quarter of fiscal 2000 as compared with net income of
$11,000 in the prior year second quarter.
Six Months Ended October 31, 2000 as Compared with
the Six Months Ended October 31, 1999. The Company recorded sales
of $4,791,000 during the first six months of fiscal year 2000 as
compared with $4,490,000 for the same period last year, a $301,000
(7%) increase. The sales increase was primarily attributable to
a stronger economy for the heat treating industry in the Midwest
being partially offset by the loss of revenue from the sale of New
England Metal Treating in the second quarter.
Cost of sales of $3,217,000 (67% of net sales) during
the first six months of fiscal year 2000 decreased $149,000 (4%)
from $3,366,000 (75% of net sales) for the same period a year
earlier. The decrease in total dollars was primarily attributable
to the sale of New England Metal Treating. The decrease in cost
of sales as a percent of net sales from 75% to 67% was primarily
the result of higher sales in the Midwest. Gross margin increased
to $1,574,000 as compared with $1,124,000 for the prior year six
months. The increase was primarily attributable to decreased cost
of sales that resulted from the sale of New England Metal
Treating.
Selling, general and administrative (SG&A) expenses
of $1,103,000 (23% of net sales) increased $178,000 from $925,000
(21% of net sales) for the same period a year earlier. The change
in SG&A expenses is primarily due to an increase in the provision
for incentive compensation and a reserve for legal fees associated
with a state air permit.
The Company recorded operating income of $423,000 in
the first six months of fiscal 2000 as compared with operating
income of $155,000 recorded in the prior year six months. The
increase in operating income in the first six months of fiscal
year 2000 is primarily attributable to the same revenue being
generated with decreased cost of sales that resulted from the sale
of New England Metal Treating.
Total other expense amounted to $53,000 in the first
six months of fiscal 2000 as compared with other expense of
$138,000 in the same period of last year. Other expense consisted
of interest income and a $68,000 gain on the sale of New England
Metal Treating being offset by $130,000 in interest expense.
The Company recorded net income of $365,000 in the
first six months of fiscal 2000 as compared with net income of
$13,000 in the prior year six months.
Income Taxes
The provision for income taxes for the six months
ended October 31, 2000 was $5,000, or an effective tax rate of
1.4%, compared to a provision for income taxes of $4,000, or an
effective tax rate of 23.5%, for the six months ended October
31, 1999. The low effective income tax rate, compared to the
federal statutory rate of 34% plus state and local taxes in
fiscal 2001, is due to a reduction in the valuation allowance
resulting from the utilization of net operating loss
carryforwards in the current year period.
Liquidity and Capital Resources
At October 31, 2000, the Company had working
capital of $636,000 compared with $361,000 of negative working
capital at April 30, 2000 and the ratio of current assets to
current liabilities was 1.5 to 1.0 and 0.8 to 1.0, respectively.
Cash and accounts receivables represented 85% (83% at April 30,
2000) and 19% (16% at April 30, 2000) of total current assets
and total assets, respectively. During the first six months of
fiscal 2000, net cash provided by operating activities amounted
to $599,000 compared to $679,000 provided by operating
activities in the first six months of fiscal 2000. Working
capital requirements for the first six months of fiscal 2001 was
funded primarily from available cash, cash generated from
operations and cash from the sale of New England Metal Treating.
The Company believes anticipated cash flows from operations and
its line of credit will be adequate to satisfy projected
operating requirements through the foreseeable future.
In August 2000, the Company refinanced its note
payable to bank (line of credit) and established a term note
payable with interest at 8.6%. The new term note payable of
$825,000 included borrowings for the purchase of equipment. The
amount available on the line of credit after the refinancing is
$500,000.
New Accounting Pronouncements
During 1999, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (as amended by SFAS No. 137 with respect to
the effective date and SFAS No. 138 with respect to certain
hedging activities), which establishes new standards for
recognizing all derivatives as either assets or liabilities, and
measuring those instruments at fair value. The Company will be
required to adopt the new standard beginning in fiscal 2002.
The Company is currently in the process of evaluating the impact
of this statement. Its adoption is not expected to materially
impact the Company's financial condition or results of
operations.
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.
Item 3. Qualitative and Quantitative Disclosures About Market
Risk.
Market Risks
The Company is exposed to certain market risks with
its $500,000 line of credit of which $0 is outstanding at
October 31, 2000. The line bears interest at the bank's
reference rate plus .25%.
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: December 13, 2000
