SECURITIES AND EXCHANGE COMMISSION
| For the quarter ended July 31, 2002 | Commission File Number: 0-5105 |
| DELAWARE
(State or other jurisdiction of incorporation or organization) |
13-2636669
(I.R.S. Employer Identification No.) |
| 7317 West Lake Street, Minneapolis, MN
(Address of principal executive offices) |
55426
(Zip code) |
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, 2002, 2,723,264 shares of common stock of the Registrant were issued and outstanding.
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 accounting principles generally accepted in the United States of America 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, 2002.
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.
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
|
July 31, 2002 (Unaudited) |
April 30, 2002 (Audited) | ||
| Current assets: | |||
| Cash and cash equivalents | $ 119,000 | $ 69,000 | |
| Accounts and other receivables: | |||
| Trade, less allowance for doubtful accounts of $54,000 | |||
| (July 31, 2002) and $50,000 (April 30, 2002) | 1,023,000 | 1,027,000 | |
| Inventory | 148,000 | 183,000 | |
| Prepaid supplies and other | 387,000 | 312,000 | |
| Total current assets | 1,677,000 | 1,591,000 | |
| Property, plant and equipment: | |||
| Land | 420,000 | 420,000 | |
| Buildings and improvements | 2,964,000 | 2,935,000 | |
| Deposits on equipment | -- | 564,000 | |
| Equipment | 10,538,000 | 9,491,000 | |
| 13,922,000 | 13,410,000 | ||
| Less accumulated depreciation | (5,601,000) | (5,377,000) | |
| 8,321,000 | 8,033,000 | ||
| Other assets: | |||
| Non-compete agreement, net of accumulated amortization | |||
| of $390,000 and $368,000 respectively | 56,000 | 78,000 | |
| Total assets | $ 10,054,000 | $ 9,702,000 |
LIABILITIES AND STOCKHOLDERS' EQUITY
| Current liabilities: | |||
| Current maturities of long-term debt | $ 820,000 | $ 755,000 | |
| Accounts payable | 548,000 | 441,000 | |
| Accrued payroll and benefits | 221,000 | 272,000 | |
| Accrued real estate taxes | 69,000 | 92,000 | |
| Other accrued liabilities | 90,000 | 100,000 | |
| Total current liabilities | 1,748,000 | 1,660,000 | |
| Long-term debt, less current maturities | 3,585,000 | 3,362,000 | |
| Total liabilities | 5,333,000 | 5,022,000 | |
| Stockholders' equity: | |||
| Common stock, $.05 par value; authorized 7,500,000 shares, issued and | |||
| outstanding 2,723,264 shares at July 31, 2002 and April 30, 2002 | 136,000 | 136,000 | |
| Additional paid-in capital | 1,647,000 | 1,647,000 | |
| Retained earnings | 2,938,000 | 2,897,000 | |
| Total stockholders' equity | 4,721,000 | 4,680,000 | |
| Total liabilities and stockholders' equity | $ 10,054,000 | $ 9,702,000 |
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended July 31,
(Unaudited)
| 2002 | 2001 | ||
| Net sales | $ 2,236,000 | $ 2,064,000 | |
| Cost of sales | 1,636,000 | 1,453,000 | |
| Gross profit | 600,000 | 611,000 | |
| Selling, general and administrative expenses | 470,000 | 487,000 | |
| Amortization of non-compete agreements | 22,000 | 14,000 | |
| Operating income | 108,000 | 110,000 | |
| Other expense: | |||
| Net loss on disposal of property and equipment | (15,000) | (21,000) | |
| Interest expense | (50,000) | (63,000) | |
| Total other expense | (65,000) | (84,000) | |
| Income before income taxes | 43,000 | 26,000 | |
| Income tax expense | 2,000 | 2,000 | |
| Net income | $ 41,000 | $ 24,000 | |
| Net income per Class A common share - basic | $ 0.02 | $ 0.01 | |
| Net income per Class A common share - diluted | $ 0.01 | $ 0.01 |
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended July 31,
(Unaudited)
| 2002 | 2001 | ||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||
| Net income | $ 41,000 | $ 24,000 | |
| Adjustments to reconcile net income to net cash | |||
| provided by (used in) operating activities: | |||
| Depreciation and amortization | 244,000 | 239,000 | |
| Net loss on disposal of property and equipment | 15,000 | 21,000 | |
| Changes in operating assets and liabilities: | |||
| Accounts and other receivables | 4,000 | (70,000) | |
| Inventory | 36,000 | (57,000) | |
| Prepaid supplies and other | (75,000) | 34,000 | |
| Accounts payable and accrued expenses | 23,000 | (209,000) | |
| Net cash provided by (used in) operating activities | 288,000 | (18,000) | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||
| Purchases of property, plant and equipment | (526,000) | (263,000) | |
| Net cash used in investing activities | (526,000) | (263,000) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||
| Proceeds from bank line of credit | -- | 250,000 | |
| Principal payments of long-term debt | (212,000) | (136,000) | |
| Proceeds from issuance of long-term debt | 500,000 | -- | |
| Net cash provided by financing activities | 288,000 | 114,000 | |
| NET INCREASE (DECREASE) IN CASH AND CASH | |||
| EQUIVALENTS | 50,000 | (167,000) | |
| CASH AND CASH EQUIVALENTS AT BEGINNING | |||
| OF YEAR | 69,000 | 229,000 | |
| CASH AND CASH EQUIVALENTS AT END OF | |||
| THE FIRST QUARTER | $ 119,000 | $ 62,000 | |
| Supplemental disclosures of cash flow information: | |||
| Cash paid during the first quarter for: | |||
| Interest | $ 50,000 | $ 63,000 | |
| Income taxes | $ -- | $ -- | |
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, 2002 and for the three month periods ended July 31, 2002 and July 31, 2001, 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 accounting principles generally accepted in the United States of America 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 notes thereto included in the Company's 2002 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 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, 2002 and 2001:
| Three Months Ended
July 31, |
| 2002 | 2001 | ||||||
| Weighted shares of Class A Stock outstanding - basic | 2,723,264 | 2,723,264 | |||||
| Weighted shares of Class A Stock assumed
upon exercise of stock options |
167,869 |
121,978 | |||||
| Weighted shares of Class A Stock outstanding - diluted | 2,891,133 | 2,845,242 | |||||
3 LONG TERM DEBT
In July 2002, the Company established a term note payable in the amount of $500,000 for the purpose of borrowing money for the purchase of capital equipment. The note is payable in monthly installments of $9,286 including interest at 2.5% above the LIBOR rate through August, 2007.
4 INCOME TAXES
The low effective tax rate for the three months ended July 31, 2002 and 2001, compared to the federal statutory rate, is due to a reduction of the valuation allowance resulting from the utilization of net operating loss carryforwards. The income tax expense in the three month periods ended July 31, 2002 and 2001 is due to minimum state income tax fees.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Three Months Ended July 31, 2002 as Compared with the Three Months Ended July 31, 2001. The Company recorded sales of $2,236,000 during the first quarter of fiscal year 2003 as compared with $2,064,000 for the same period last year, a $172,000 (8%) increase. The increase was primarily attributable to additional work received from existing customers.
Cost of sales of $1,636,000 (73% of net sales) during the first quarter of fiscal year 2003 increased $183,000 (13%) from $1,453,000 (70% of net sales) for the same period a year earlier. The increase was primarily attributable to increased labor costs, factory supplies and outside services. Gross margin decreased to $600,000 as compared with $611,000 for the prior year first quarter.
Selling, general and administrative (SG&A) expenses of $470,000 (21% of net sales) decreased $17,000 (3%) from $487,000 (24% of net sales) for the same period a year earlier. The change in SG&A expenses is primarily due to immaterial fluctuations.
The Company recorded operating income of $108,000 in the first quarter of fiscal 2003 as compared with operating income of $110,000 recorded in the prior year first quarter. The decrease is primarily due to immaterial fluctuations.
Total other expense amounted to $65,000 in the first quarter of fiscal 2003 as compared with other expense of $84,000 in the first quarter of last year. Other expense in both first quarters relates primarily to interest expense, which decreased $13,000 due to lower interest rates.
The Company recorded net income of $41,000 in the first quarter of fiscal 2003 as compared with net income of $24,000 in the prior year first quarter.
Income Taxes
The provision for income taxes for the three months ended July 31, 2002 was $2,000, or an effective tax rate of 4.7%, compared to a provision for income taxes of $2,000, or an effective tax rate of 7.7%, for the three months ended July 31, 2001. The low effective income tax rate, compared to the federal statutory rate of 34% plus state and local taxes for the three months ended July 31, 2002 and 2001, is due to a reduction in the valuation allowance resulting from the utilization of net operating loss carryforwards in each respective period.
Liquidity and Capital Resources
At July 31, 2002, the Company had negative working capital of $71,000 compared with $69,000 of negative working capital at April 30, 2002. Cash and accounts receivables represented 68% (69% at April 30, 2002) and 11% (11% at April 30, 2002) of total current assets and total assets, respectively. During the first quarter of fiscal 2003, net cash provided by operating activities amounted to $288,000 compared to $18,000 used in operating activities in the first quarter of fiscal 2002. Working capital requirements for the first quarter of fiscal 2003 was funded primarily from available cash, cash generated from operations and issuance of long-term debt. 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.
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 long-term debt and $500,000 line of credit of which $0 is outstanding at July 31, 2002. The majority of long-term debt bears interest at 2.5% above the LIBOR rate and the line of credit bears interest at the bank's reference rate.
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:
99.1 A certification of the Chief Executive Office pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350.
99.2 A certification of the Chief Financial Office pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350.
(b) Reports on Form 8-K: None
MILASTAR CORPORATION AND SUBSIDIARIES
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
Chairman of the Board, Chief Executive Officer and Director |
Dennis J. Stevermer
Vice President Treasurer, Principal Financial and Accounting Officer |
Dated: September 12, 2002