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, 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 July 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
July 31, April 30,
2000 2000
(unaudited) (audited)
Current assets: <C> <C>
Cash and cash equivalents. . . . . . . . 86,000 56,000
Accounts receivable:
Trade, less allowance for doubtful
accounts of $55,000 (July 31, 2000)
and $50,000 (April 30, 2000). . . . . . 1,249,000 1,281,000
Other . . . . . . . . . . . . . . . . . 17,000 16,000
Inventory. . . . . . . . . . . . . . . . 132,000 116,000
Prepaid expenses and other . . . . . . . 145,000 158,000
Total current assets . . . . . . . . 1,629,000 1,627,000
Property, plant and equipment:
Land. . . . . . . . . . . . . . . . . . 420,000 420,000
Buildings and improvements. . . . . . . 2,285,000 2,274,000
Deposits on equipment . . . . . . . . . 45,000
Equipment . . . . . . . . . . . . . . . 9,111,000 8,704,000
11,816,000 11,443,000
Less accumulated depreciation. . . . . (4,949,000) (4,714,000)
6,867,000 6,729,000
Other assets:
Non-compete agreement, net of
accumulated amortization of
of $215,000 & $191,000 respectively. . 231,000 255,000
Total assets . . . . . . . . . . . . 8,727,000 8,611,000
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: <C> <C>
Notes payable to bank . . . . . . . . . 250,000 250,000
Current maturities of long-term debt . . 788,000 844,000
Accounts payable . . . . . . . . . . . . 478,000 382,000
Income taxes payable . . . . . . . . . . 1,000
Accrued payroll and benefits . . . . . . 322,000 303,000
Accrued real estate taxes. . . . . . . . 79,000 105,000
Other accrued liabilities. . . . . . . . 151,000 104,000
Total current liabilities. . . . . . 2,069,000 1,988,000
Long-term debt,
less current maturities . . . . . . . . 1,827,000 1,947,000
Total liabilities. . . . . . . . . . 3,896,000 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
July 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. . . . . . . . . . . . 3,048,000 2,893,000
Total stockholders' equity. . . . . . 4,831,000 4,676,000
Total liabilities and
stockholders' equity . . . . . . . . 8,727,000 8,611,000
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended July 31,
(Unaudited)
2000 1999
<C> <C>
Net Sales. . . . . . . . . . . . . . . . 2,484,000 2,183,000
Cost of Sales. . . . . . . . . . . . . . 1,677,000 1,639,000
Gross margin . . . . . . . . . . . . . . 807,000 544,000
Selling general and administrative
expenses. . . . . . . . . . . . . . . . 560,000 450,000
Amortization of non-compete agreement. . 24,000 20,000
Operating income . . . . . . . . . . . . 223,000 74,000
Other expense:
Interest expense. . . . . . . . . . . . (67,000) (70,000)
Total other expense. . . . . . . . . . (67,000) (70,000)
Income before provision for
income taxes. . . . . . . . . . . . . . 156,000 4,000
Provision for income taxes . . . . . . . 2,000 2,000
Net income . . . . . . . . . . . . . . . 154,000 2,000
Net income per Class A
common share - basic. . . . . . . . . . .06 .00
Net income per Class A
common share - diluted. . . . . . . . . .06 .00
</TABLE>
<TABLE>
<CAPTION>
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended July 31,
(Unaudited)
2000 1999
<C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . 154,000 2,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization . . . . 259,000 283,000
Changes in operating assets and
liabilities:
Accounts and other receivables. . . . 31,000 185,000
Inventory . . . . . . . . . . . . . . (16,000) 7,000
Prepaid supplies and other. . . . . . 13,000 (36,000)
Accounts payable and accrued
expenses . . . . . . . . . . . . . . 138,000 (131,000)
Net cash provided by operating
activities . . . . . . . . . . . . . . 579,000 310,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant
and equipment. . . . . . . . . . . . . (373,000) (153,000)
Net cash used in investing
activities . . . . . . . . . . . . . . (373,000) (153,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit . . . 50,000
Principal payments on long-term debt. . (176,000) (171,000)
Net cash used in
financing activities . . . . . . . . . (176,000) (121,000)
NET INCREASE IN CASH AND
CASH EQUIVALENTS. . . . . . . . . . . . 30,000 36,000
CASH AND CASH EQUIVALENTS BALANCE
AT BEGINNING OF YEAR. . . . . . . . . . 56,000 19,000
CASH AND CASH EQUIVALENTS BALANCE
AT END OF THE FIRST QUARTER . . . . . . 86,000 55,000
Supplemental disclosures of cash flow information:
Cash paid during the first quarter for:
Interest . . . . . . . . . . . . . . . . 67,000 71,000
Income taxes . . . . . . . . . . . . . . 1,000 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 July 31,
2000 and for the three month periods ended July 31, 2000 and July
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 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, 2001. 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, 2000 and 1999 was
$600.
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
quarters ended July 31, 2000 and 1999:
Three Months Ended July 31,
2000 1999
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. . . . . . . . . . . . . . . . 0 248,920
Weighted shares of Class A Stock
outstanding - diluted. . . . . . . . . 2,738,264 2,987,184
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three Months Ended July 31, 2000 as Compared with the Three
Months Ended July 31, 1999. The Company recorded sales of
$2,484,000 during the first quarter of fiscal year 2001 as
compared with $2,183,000 for the same period last year, a $301,000
(14%) increase. The sales increase was primarily attributable to
a stronger economy for the heat treating industry in the Midwest.
Cost of sales of $1,677,000 (68% of net sales) during the
first quarter of fiscal year 2001 increased $38,000 (2%) from
$1,639,000 (75% of net sales) for the same period a year earlier.
The percentage decrease relative to sales is due to the fixed
nature of the majority of these costs. Gross margin increased to
$807,000 as compared with $544,000 for the prior year first
quarter.
Selling, general and administrative (SG&A) expenses of
$560,000 (23% of net sales) increased $110,000 (24%) from $450,000
(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.
The Company recorded operating income of $223,000 in the
first quarter of fiscal 2001 as compared with operating income of
$74,000 recorded in the prior year first quarter. The increase in
operating income in the first quarter of fiscal year 2001 is
primarily attributable to higher sales and relatively fixed costs.
Total other expense amounted to $67,000 in the first quarter
of fiscal 2001 as compared with other expense of $70,000 in the
first quarter of last year. Other expense in both first quarters
relates to interest expense.
The Company recorded net income of $154,000 in the first
quarter of fiscal 2001 as compared with net income of $2,000 in
the prior year first quarter.
Income Taxes
The provision for income taxes for the three months ended
July 31, 2000 was $2,000, or an effective tax rate of 1.3%,
compared to a provision for income taxes of $2,000, or an
effective tax rate of 50%, for the three months ended July 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 July 31, 2000, the Company had negative working capital
of $440,000 compared with $361,000 of negative working capital at
April 30, 2000 and the ratio of current assets to current
liabilities was 0.8 to 1.0 for both periods. Cash and accounts
receivables represented 82% (83% at April 30, 2000) and 15% (16%
at April 30, 2000) of total current assets and total assets,
respectively. During the first quarter of fiscal 2001, net cash
provided by operating activities amounted to $579,000 compared to
$310,000 provided by operating activities in the first quarter of
fiscal 2000. Working capital requirements for the first quarter
of fiscal 2001 was funded primarily from available cash and cash
generated from operations. 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. The
total 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.
Subsequent Events
Effective August 24, 2000 the Company sold its wholly
owned subsidiary New England Metal Treating Corporation located
in Auburn, Massachusetts. The transaction will be recognized in
the three month period ended October 31, 2000. The Company does
not anticipate a significant gain or loss on the transaction.
On August 10, 2000, the Company refinanced its note
payable to bank (line of credit) and established a term note
payable. The note has a 5 year term and bears interest at 8.6%.
The new note payable also included additional borrowings for the
purchase of equipment. The total new note payable was $825,000.
The annual maturities of long-term debt and capitalized
lease obligations taking into consideration the items above and
the existing debt for each of the five years following April 30,
2000 are as follows:
2001 903,000
2002 618,000
2003 514,000
2004 189,000
2005 and thereafter 1,391,000
Total obligations 3,615,000
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 $250,000 is outstanding at July
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: September 14, 2000
