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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, 1996 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.)
No. 9 Via Parigi, Palm Beach, Florida 33480
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (561)655-9590
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 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
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. X
The aggregate market value of the Class A Common Stock held by
non-affiliates of the Registrant on July 12, 1996 was $2,225,000 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 9, 1996.
PART I
Item 1. Business
General
Milastar Corporation ("Milastar" and sometimes the "Company") is
primarily involved in selling special metallurgical and secondary metal
processing services to a diversified list of customers located in the greater
Midwest and New England regions who manufacture a wide variety of
end-products and depend upon out sourcing of specialized processing of
their metal components. Milastar provides a wide spectrum of
metallurgical services. The menu of services include commercial heat
treating, metallurgical engineering, brazing and surface finishing, all
selectively applied to customer consigned components.
Milastar owns four wholly-owned subsidiaries; Flame Metals
Processing Corporation ("Flame Metals") located in Minnesota and three
inactive corporations, Milastar Services Corporation, Jardun Apparel Corp
("Jardun") and Northwest Engineering Labs, Inc. In addition, 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 sub-contract
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 desired characteristics.
The following primary categories of services accounted for more than 15
percent of total net sales in fiscal 1996, 1995 and 1994.
1996 1995 1994
Harden - Neutral/Case 53% 57% 52%
Salt Bath Nitriding 29% 25% 25%
Flame Metal's customer list includes over 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 representing 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 for approximately $390,000. These assets were
concurrently contributed to Flame Metals thus rendering the Northwest
entity inactive. 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 for a purchase price of $1,358,365. Both of these
acquired companies competed directly with Flame Metals in the greater
Minneapolis-St. Paul market; never the less, the said acquisitions
broadened market coverage, added metal treating capabilities and
expanded production capacity. 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 for a purchase price of $731,000. Flame Metals
operates this entity as the wholly owned subsidiary New England Metal
Treating Corporation.
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) and Flame
Metals - Bloomington, MN (35,000 sq. ft. leased). The Northwest
plant in Minneapolis, MN (15,000 sq. ft. owned) was closed in May
1993 and its activities integrated into the St. Louis Park facility. The
Northwest facility has been leased out and was sold for $255,000 in May
1996 to a non-related third party. The Company's fourth plant is operated
by New England Metal Treating Corporation - Auburn, MA (9,000 sq. ft.
leased).
Flame Metals incurred net losses before income taxes of $252,000 in
fiscal 1996 and $612,000 in fiscal 1995. Fiscal 1996 operating results
improved primarily as a result of a 5% decrease in operating costs. The
net loss after taxes amounted to $254,000 in fiscal 1996 and $614,000 in
fiscal 1995. 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 $48,000 in fiscal 1996, down $69,000 from the $117,000 in
expense recorded in 1995. Current assets as a percent of total assets at
April 30, 1996 accounted for 26% compared to 36% at April 30, 1995.
The book value per share was $1.32 per share at April 30, 1996 compared
to $1.41 per share at April 30, 1995. The bid price per share, as quoted on
the OTC Electronic Bulletin Board, was $0.63 as of April 30, 1996.
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 six
or seven 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
mid-summer due to vacations and plant shutdowns by Flame Metals'
customers. Flame Metals is not materially impacted by the sources or
availability of raw material in that virtually 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 No. 9 Via Parigi, Palm Beach,
Florida 33480. Its communications numbers are: Telephone (561) 655-9590
and fax number (561) 833-7253.
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 three separate plant locations and employs a
total of approximately 95 employees; 62 in St. Louis Park, MN, 27 in
Bloomington, MN and 6 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
1997. Twenty-two 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 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
The Company currently maintains its executive offices located in
leased facilities in a building owned by J. Russell Duncan, Chairman of
the Board and a director of the Company, located at No. 9 Via Parigi,
Palm Beach, Florida (see also "Corporate" above). The lease covers 1,200
square feet, is on a month to month basis, and provides for rental at a rate
of $250 per month, which rate is below prevailing rental rates for
comparable facilities in the area. Management regards such lease as being
favorable and in the best interests of the Company and its stockholders.
Flame Metals
Flame Metals owns or leases four industrial properties as listed
below:
ACTIVITY LOCATION SIZE (SQ. FT.) STATUS
Flame Metals St. Louis Park, MN 35,000 Owned
Northwest Minneapolis, MN 15,000 Owned
Flame Metals Bloomington, MN 35,000 Leased
New England Metal Treating Auburn, MA 9,000 Leased
As pointed out on Page 1 the Northwest building was being leased to a
third party and was sold in May 1996.
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 at any time
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 Company is
obligated under the lease to pay all real estate taxes and maintenance
expense. The lease is renewable and the Company does not have a
purchase option.
Item 3. Legal Proceedings
Neither the Company nor any of its consolidated subsidiaries is a party
to any material pending legal or administrative proceedings.
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, 1996.
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, 1988. Unless otherwise indicated in
the table below, all positions and offices indicated have been continuously
held since May 1, 1988. 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) 79 Chairman of the Board; Treasurer until April
19, 1995.
L. Michael McGurk 45 President and Chief Operating Officer since
March 4, 1991; prior thereto Vice President
and Secretary from April 29, 1988 to March
4, 1991. President and Treasurer of Flame
Metals since April, 29 1988; prior thereto
Vice President of Flame Metals from May
29, 1985 to April 29, 1988
Lance H. Duncan (2) 40 Secretary since March 4, 1991; prior thereto
President from April 29, 1988 to March 4,
1991 and Secretary from August 24, 1983 to
April 29, 1988
Dennis J. Stevermer 35 Treasurer since April 19, 1995 and Chief
Financial Officer of Flame Metals since
September 1993; prior thereto financial
manager at Unisys from May 1, 1988 to
September 1993.
Michael M. Gumma 54 Executive Vice President since March 1993;
prior thereto Vice President and General
Manager of Wyman-Gordon from
September 1, 1990 to December 31, 1992
and Director of Turbine Programs of
Wyman-Gordon from May 1, 1988 to
September 1, 1990.
(1) Mr. J. Russell Duncan is a director of XTRA Corporation (a trailer
leasing company) and Sound Techniques, Inc. (audio-video recording
studios) and has otherwise been engaged in private investment activities
since September 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 recording 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
1996 fiscal year. The Company expects to file the Information Statement
with the Securities and Exchange Commission on or prior to August 9, 1996
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 over-the-counter
Electronic Bulletin Board market (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 1996 Fiscal 1995
High Low High Low
First Quarter $ 0.44 $ 0.44 $ 1.44 $ 1.44
Second Quarter $ 0.69 $ 0.41 $ 1.44 $ 0.81
Third Quarter $ 0.69 $ 0.56 $ 0.81 $ 0.63
Fourth Quarter $ 0.63 $ 0.50 $ 0.63 $ 0.38
On July 12, 1996 there were approximately 5,000 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,
1996 1995 1994 1993 1992
(In thousands except per share data)
Net sales. . . . . . . . . . . . . . . . . 6,642 6,708 5,307 5,518 4,291
Income (loss) before cumulative effect
of changes in accounting principles . . . (254) (614) (960) (423) (333)
Cumulative effect of changes in
accting principles - - - 66 53
Net income (loss). . . . . . . . . . . . . (254) (614) (960) (357) (280)
Net income (loss) before extraordinary
credit and cumulative effect of changes
in accounting principles per common share (.09) (.22) (.35) (.15) (.12)
Cumulative effect of changes in
accting principles - - - .02 .02
Net income (loss) per common share (.09) (.22) (.35) (.13) (.10)
Financial Position:
Total assets. . . . . . . . . . . . 5,902 5,315 15,042 18,442 14,108
Short-term obligations. . . . . . . 1,433 1,410 10,501 12,524 7,614
Long-term obligations . . . . . . . 842 40 82 299 498
Stockholders' equity. . . . . . . . 3,627 3,865 4,459 5,619 5,996
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, 1996
improved significantly as a result of lower operating expenses. This is the
second consecutive year that Milastar has shown a significant improvement
yet failed to generate a net profit. An operating loss of $225,000 in the
third quarter, due primarily to lower sales, offset a slight operating profit in
the combined remaining quarters of $21,000. In addition, Milastar's overall
results were negatively impacted by a non-operating loss of $48,000.
Milastar's primary revenues flow from its core business, Flame Metals
Processing Corporation, a metal component processing and heat treating
operation. Flame Metals management continues to increase prices and cut
operating costs. The price increases, which are quoted individually by each
customer's particular products, are taking effect on an on-going basis with a
focus on low margin accounts. Significant progress continues to be made in
reducing factory labor, energy costs and primary production supply costs as
a percent 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 $3,872,000 and $1,474,000 respectively, available
to offset future taxable income, if any, which in the future may enhance
earnings as well as cash flow. See note 6 to "Notes to Consolidated Financial
Statements." In addition, the Northwest building was sold after year end
with the resulting proceeds added to current assets. With working capital at
year-end of $123,000, the Company believes it has sufficient capital
resources to meet fiscal 1997 requirements as well as for potential
acquisitions.
Results of Operations
Fiscal 1996 Compared to Fiscal 1995. Net sales for fiscal 1996 totaled
$6,642,000 a 1% decrease from $6,708,000 in fiscal 1995. The slight
decrease was primarily attributable to lower sales in the third quarter which
were the result of a softening economy. Several of the Company's key
customers experienced lower bookings which in turn translated into reduced
out-sourcing of heat treating orders.
Cost of sales as a percentage of sales was 76% in fiscal 1996 compared
to 79% in fiscal 1995. The drop as a percent of sales is the result of
increased productivity on the same level of sales and a reduction of factory
support costs. Management continues to provide training for its inexperienced
work force and has significantly reduced employee turnover.
Selling, general and administrative expense decreased slightly as a
percentage of sales to 26% in fiscal 1996, down 1% from 27% in fiscal 1995.
The decrease as a percent of sales and in total dollars is the result of
managements concentration on reducing overhead as a percent of sales.
Total other expense amounted to $48,000 in fiscal 1996, compared to
other expense of $117,000 reported in fiscal 1995. The decrease was directly
attributable to the sale of the Company's remaining reverse repurchase
agreements in fiscal 1995. There was an additional $43,000 expense in fiscal
1996 which resulted from a write down to net realizable value on the
Northwest building sold after year end.
Fiscal 1995 Compared to Fiscal 1994. Net sales for fiscal 1995
totaled $6,708,000 a 26% increase from $5,307,000 in fiscal 1994. The
increase was primarily attributable to a recovering economy, improved
equipment utilization, price increases and a concentration on our top twenty
customers.
Cost of sales as a percentage of sales was 79% in fiscal 1995 compared
to 83% in fiscal 1994. The drop as a percent of sales was the result of
improved labor efficiency, equipment utilization and increased equipment
reliability. Management continued to provide training for its inexperienced
work force and strived to reduce employee turnover.
Selling, general and administrative expense decreased significantly as a
percentage of sales to 27% in fiscal 1995, down 12% from 39% in fiscal
1994. The decrease as a percent of sales and in total dollars was the result of
higher sales, the elimination of non-recurring charges, and managements
concentration on reducing overhead as a percent of sales.
Total dividend and interest income, net of the related interest expense
amounted to $164,000 in fiscal 1995, a 37% decrease from the $260,000
reported in fiscal 1994. The net loss on marketable securities totaled
$281,000 in fiscal 1995 compared to a gain of $4,000 in fiscal 1994. Both
decreases were directly attributable to the continued paydown and eventual
sale of the Company's remaining reverse repurchase agreements.
Effects of Inflation
During fiscal 1996 and 1995 the Company's monetary assets materially
exceeded its monetary liabilities resulting in a positive 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 side effects from inflation
and the Company's earning capacity.
Liquidity and Capital Resources
At April 30, 1996 the Company's working capital was $123,000
compared to $501,000 as of April 30, 1995, and the ratio of current assets to
current liabilities was 1.1 to 1 at April 30, 1996 compared to 1.4 to 1 at April
30, 1995. Cash, marketable securities and current receivables represented
74% (76% at April 30, 1995) and 19% (27% at April 30, 1995) of total
current assets and total assets, at April 30, 1996 respectively.
During fiscal 1996 cash provided by operating activities amounted to
$483,000 compared to cash used of $427,000 in fiscal 1995. The Company
added $962,000 to property, plant and equipment in fiscal 1996 compared to
$803,000 in the previous year. The net cash flows from investing and
financing activities of the purchase and sale of marketable securities and
investments, along with the related note payables, provided no cash in fiscal
1996 compared to cash provided of $945,000 in fiscal 1995. Working capital
requirements for fiscal 1996 were funded primarily from available cash and
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 would later challenge the Company's
entitlement to such refund. Consequently, a valuation allowance of $109,800
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
1997 operations cash flow requirements as well as for potential acquisitions.
At April 30, 1996 the Company has a commitment for the purchase of a mesh
belt furnace at a cost of approximately $746,000. As of April 30, 1996 a
partial payment of $336,000 had been made on this purchase. Financing for
the entire amount has been secured and as such the Company does not expect
this purchase to adversely impact cashflow.
Item 8. Financial Statements and Supplementary Data
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, 1996 and 1995, and the related consolidated
statements of operations, cash flows and changes in stockholders' equity for
each of the years in the three-year period ended April 30, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended April 30, 1996 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.
As discussed in Note 1 to the consolidated financial statements, Milastar
Corporation and subsidiaries adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
during the year ended April 30, 1995.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
June 10, 1996
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, 1996 and 1995
ASSETS
1996 1995
Current assets:
Cash and cash equivalents. . . . . . . . . . . . 144,000 365,000
Marketable securities and other investments,
at fair value . . . . . . 41,000 25,000
Accounts and other receivables:
Trade, less allowance for doubtful accounts of
$37,000 in 1996 and $26,000 in 1995 . . . . . 959,000 1,070,000
Other . . . . . . . 6,000 4,000
Inventory. . . . . . . . . . . . . . . . . . . 224,000 192,000
Prepaid supplies and other . . . . . . . . . . 182,000 255,000
Total current assets . . . . . . . . . . . . 1,556,000 1,911,000
Property, plant and equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . . 199,000 199,000
Buildings and improvements . . . . . . . . . . . . . 662,000 605,000
Equipment. . . . . . . . . . . . . . . . . . . . . . 5,465,000 4,178,000
6,326,000 4,982,000
Less accumulated depreciation . . . . . . . (2,360,000) (1,962,000)
3,966,000 3,020,000
Other assets:
Non-compete agreements . . . . . . . . . . . . . . 125,000 86,000
Building held for sale, net of valuation allowance 255,000 298,000
Total assets . . . . . . . . . . . . . . . . . . . 5,902,000 5,315,000
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, 1996 and 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
Current liabilities:
Note payable to stockholder. . . . . . . . . . . 271,000 345,000
Note payable to bank . . . . . . . . . . . . . . 60,000
Current maturities of long-term debt . . . . . . 208,000 59,000
Accounts payable . . . . . . . . . . . . . . . . 416,000 483,000
Income taxes payable . . . . . . . . . . . . . . 5,000 5,000
Accrued payroll and benefits . . . . . . . . . . 193,000 201,000
Accrued real estate taxes. . . . . . . . . . . . 96,000 145,000
Other accrued liabilities. . . . . . . . . . . . 184,000 172,000
Total current liabilities. . . . . . . . . . . 1,433,000 1,410,000
Long-term debt, less current maturities. . . . . . 842,000 40,000
Total liabilities. . . . . . . . . . . . . . . 2,275,000 1,450,000
Commitments (Notes 12 &13)
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 1996 and 1995. . 137,000 137,000
Note receivable from officer . . . . . . . . . . (20,000) (20,000)
Unrealized holding gains on marketable equity sec 36,000 20,000
Additional paid-in capital . . . . . . . . . . . 1,666,000 1,666,000
Retained earnings. . . . . . . . . . . . . . . . 1,808,000 2,062,000
Total stockholders' equity. . . . . . . . . . . 3,627,000 3,865,000
Total liabilities and stockholders' equity . . . 5,902,000 5,315,000
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended April 30,
1996 1995 1994
Net sales. . . . . . . . . . . . . . 6,642,000 6,708,000 5,307,000
Cost of sales. . . . . . . . . . . . . 5,036,000 5,299,000 4,408,000
Gross profit . . . . . . . . . . . . . 1,606,000 1,409,000 899,000
Selling, general and administrative exp 1,754,000 1,817,000 2,047,000
Amortization of non-compete agreements . . 56,000 56,000 56,000
Other operating expenses . . . . . . . . . 31,000 15,000
Operating loss . . . . . . . . . . . . . . (204,000) (495,000) (1,219,000)
Other income (expense):
Dividend and interest income . . . . . . 16,000 500,000 733,000
Interest expense . . . . . . . . . . . . (36,000) (336,000) (473,000)
Net gain (loss) on marketable securities (281,000) 4,000
Net gain (loss) on sale of property and
equipment. . . . . . . 15,000
Unrealized market loss on valuation of
building held for sale. . . . . . . . (43,000)
Total other income (expense) . . . . (48,000) (117,000) 264,000
Loss before income taxes . . . . . . . . (252,000) (612,000) (955,000)
Income tax expense . . . . . . . . . . . 2,000 2,000 5,000
Net loss (254,000) (614,000) (960,000)
Net loss per Class A common share. . . (.09) (.22) (.35)
Weighted average number of Class A common
shares outstanding during the period. . 2,738,264 2,738,264 2,738,264
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended April 30,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . (254,000) (614,000) (960,000)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization . . . 535,000 465,000 448,000
Net loss (gain) on disposal of equip (15,000) 205,000
Net loss (gain) on marketable sec 281,000 (4,000)
Unrealized market loss on valuation
of 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. . . . . 269,000 (207,000) 284,000
Inventory . . . . . . . . . . . . . . . (32,000) (124,000) 20,000
Prepaid supplies and other. . . . . . . 77,000 (95,000) (42,000)
Accounts payable and accrued expenses . (140,000) (133,000) (294,000)
Income taxes payable. . . . . . . . . 5,000
Net cash provided by (used in) operating
activities. . . . . . 483,000 (427,000) (338,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment, net of effect of the
purchase of the net assets of a
business. . . . . . . (962,000) (803,000) (639,000)
Purchase of marketable securities and
other investments . . . . . . . (8,059,000)
Proceeds from disposal of property,
plant and equipment . . . . . . . 52,000 30,000
Proceeds from sale of marketable
securities and other investments. . 10,255,000 9,744,000
Payment for purchase of net assets
of a business. . . . . . . (731,000)
Proceeds from (advances to) related
parties . . . . . 76,000
Treasury stock purchase (Class B). . (200,000)
Net cash provided by (used in)
investing activities . . . . . . . (1,641,000) 9,528,000 876,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit
borrowing . . . . . 60,000
Principal payments of long-term debt. (67,000) (53,000) (58,000)
Proceeds from issuance of long-term
debt. . . . . . . 1,018,000 18,000
Proceeds from issuance of note
payable - stockholder. . . . . . 100,000 457,000
Repayments on note payable-stockholder (174,000) (95,000)
Proceeds from issuance of note payable
- repo . . . . . . . . 7,455,000
Repayments on note payable - repo . . (9,310,000) (9,183,000)
Net cash provided by (used in) financing
activities. . . . . . 937,000 (8,983,000) (1,786,000)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS . . . . . . . . . (221,000) 118,000 (1,248,000)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR . . . . . . 365,000 247,000 1,495,000
CASH AND CASH EQUIVALENTS, END OF YEAR . 144,000 365,000 247,000
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest. . . . . . . . . . . . . . 7,000 344,000 437,000
Income taxes. . . . . . . . . . . . 2,000 2,000 (268,000)
MILASTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Fiscal Years Ended April 30, 1996, 1995 and 1994
Note Unrealized
Common Common receivable holding Additional
Stock Stock from gains on paid in Retained
Shares Amount officer securities capital earnings
Balance, April 30, 1993. 3,706,737 185,000 (20,000) 1,818,000 3,636,000
Retirement of Class B (968,473) (48,000) (152,000)
Net loss for 1994. . (960,000)
Balance, April 30, 1994. 2,738,264 137,000 (20,000) 1,666,000 2,676,000
Unrealized holding gains
on marketable equity
securities . . . . 20,000
Net loss for 1995. . (614,000)
Balance, April 30, 1995. 2,738,264 137,000 (20,000) 20,000 1,666,000 2,062,000
Unrealized holding gains
on marketable equity
securities . . . . 16,000
Net loss for 1996. . (254,000)
Balance, April 30, 1996. 2,738,264 137,000 (20,000) 36,000 1,666,000 1,808,000
MILASTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business Milastar Corporation ("Milastar" and sometimes the
"Company") is primarily involved in selling special metallurgical and
secondary metal processing services to a diversified list of customers located
in the greater Midwest and New England regions who manufacture a wide
variety of end-products and depend upon out sourcing of specialized
processing of their metal components. 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 subsidiaries,
Flame Metals Processing Corporation ("Flame Metals"), Northwest
Engineering Labs, Inc., Jardun Apparel Corp., Milastar Services Corporation
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 and other investments On May 1, 1994 the
Company adopted the provisions of Statement of Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities
(Statement 115). Under Statement 115, 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.
At April 30, 1994 marketable securities were carried at the lower of aggregate
cost or market.
Inventory Inventory is carried at cost as determined by 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 years
Equipment 5 to 12 years
Vehicles 3 to 5 years
Other assets Other assets are comprised of two five-year non-compete
agreements which are being amortized over 60 months using the straight-line
method and one four-year non-compete agreement which is being amortized
over 48 months using the straight-line method.
Income taxes The Company accounts for income taxes under Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (Statement
109). Statement 109 requires the use of the asset and liability method of
accounting for income taxes. Under the asset and liability method of
Statement 109, 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. Under Statement 109, 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.
2 ACQUISITION
On April 4, 1996, the Company, in a cash transaction, acquired certain
assets and assumed certain liabilities from New England Metal Treating Inc.
(NEMT), a commercial heat treater, located in Auburn, Massachusetts. 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 NEMT have been included in the Company's
statement of operations for fiscal 1996 from the acquisition date forward.
The Company paid $730,860, net of cash acquired, for NEMT.
The assets acquired and liabilities assumed consist of the following:
Accounts Receivable. . $ 160,136
Deposits. . . . . 4,000
Property and Equipment 497,550
Non-compete agreement. 96,454
Accounts Payable. (27,280)
Total . . $ 730,860
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 1995, after giving
effect to certain adjustments, including amortization of goodwill, interest
expense on the acquisition debt and related tax effects. These 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 1996 Fiscal 1995
Net Sales 7,578,000 7,649,000
Net income (loss) (100,000) (595,000)
Net income (loss) per share (0.04) (0.22)
3 MARKETABLE SECURITIES AND OTHER INVESTMENTS
Marketable securities and other investments consists of bonds and
common stock and are being used to invest excess cash until an appropriate
acquisition or operating need arises. In accordance with Statement 115, at
April 30, 1996 and 1995, marketable securities and other investments are
classified as available-for-sale and as such unrealized gains and losses are
reported as a separate component of stockholders' equity until realized.
Dividend income, interest income, and prepayment losses on debt securities
are accrued as earned. The Company uses specific identification to determine
the fair value of marketable securities and other investments.
Marketable securities and other investments were comprised of the
following at April 30:
Description 1996 1995
First Colonial Bank Shares Common Stock 5,000 5,000
Total cost 5,000 5,000
Gross unrealized holding gains 36,000 20,000
Fair Value 41,000 25,000
Prior to the adoption of Statement 115, the Company recorded unrealized
gains and losses in accordance with Statement of Financial Accounting
Standards No. 12, Accounting for Certain Marketable Securities.
4 NOTES PAYABLE
On April 1, 1992 and June 18, 1993 the Company entered into two
reverse repurchase agreements ("Repos") to finance an Adjustable Rate
Mortgage ("ARM") portfolio aggregating $6,205,000 and $8,059,000,
respectively. Each ARM was leveraged at a financing to equity ratio of 9:1.
Accordingly, the Company invested $635,000 and $604,000 and entered into
notes payable for $5,570,000, and $7,455,000, respectively. The interest rate
charged on the notes payable is the London Interbank Offered Rate
("LIBOR") and ranged from 3.75% to 4.56%. As of April 30, 1995 the
Company has liquidated all of the reverse repurchase agreements and the
associated notes payable.
Each ARM, which was pledged as collateral against the respective note
payable, earned interest at the LIBOR rate plus 135 basis points and such
interest was paid monthly. Total interest costs incurred on notes payable for
the years ended April 30, 1996, 1995 and 1994 amounted to $0, $310,000 and
$468,000, respectively.
The Company has a $100,000 line of credit agreement (the Line of
Credit) with a bank. Amounts outstanding under the Line of Credit bear
interest at a rate dependent upon the prime rate and interest is payable
monthly. The Line of Credit does not contain any affirmative action or
restrictive financial covenants. Outstanding borrowings against the Line of
Credit as of April 30, 1996 and 1995 were $60,000 and $0, respectively.
5 LONG-TERM DEBT
Long-term debt consisted of the following at April 30:
1996 1995
Amount due under loan agreement with Textron Financial,
payable in monthly installments of varying amounts,
including interest at 10.3% through October, 2000 336,000
Amount due under non-competition agreements, payable
in monthly installments of $3,256, without interest
through November, 1996. . . . . . . . . . . . 23,000 62,000
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. . . . . . . . . . 400,000
Capital lease obligations, secured by specific equipment 91,000 37,000
1,050,000 99,000
Less current maturities. . . . . . . . . . . . (208,000) (59,000)
Total long-term debt . . . . . . . . . . . . 842,000 40,000
Maturities of long-term debt and capitalized lease obligations for each of
the five years following April 30, 1996 are as follows:
1997 208,000
1998 212,000
1999 236,000
2000 258,000
2001 135,000
Total obligations 1,049,000
Total interest expense incurred on long term debt and capitalized lease
obligations for the years ended April 30, 1996, 1995 and 1994 amounted to
$12,000, $3,000 and $4,000, respectively.
6 INCOME TAXES
Income tax expense attributable to net loss from operations consists of:
Current Deferred Total
Year ended April 30, 1996:
U.S. Federal $ - $ - $ -
State and local 2,000 - 2,000
Total $ 2,000 $ - $ 2,000
Year ended April 30, 1995:
U.S. Federal $ - $ - $ -
State and local 2,000 - 2,000
Total $ 2,000 $ - $ 2,000
Year ended April 30, 1994:
U.S. Federal $ - $ - $ -
State and local 5,000 - 5,000
Total $ 5,000 $ - $ 5,000
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:
1996 1995 1994
Computed expected tax benefit at 34% . . . (85,000) (208,200) (324,700)
State taxes, net of federal effect . . . . 1,000 1,000 3,000
Dividends received deduction . . (300) (1,600) (15,000)
Increase in valuation allowance. 95,900 245,700 380,700
Effect of state tax net operating loss
carryforward. (16,000) (37,700) (39,000)
Other net 6,400 2,800 -
2,000 2,000 5,000
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets (liabilities) at April 30, 1996 are as
follows:
1996 1996 1995 1995
Current Non-current Current Non-current
Allowance for doubtful accounts. . . 14,900 - 10,500 -
Accrued vacation pay . . . 13,400 - 32,800 -
Differences in tax and book
depreciation of plant and equipment - (380,300) - (359,800)
Differences in tax and book treatment
of prepaid supplies . . . . (11,600) (23,300) (11,600) (34,900)
Plant closing, principally due to accrual
for financial reporting purposes . - - - -
Foreign tax credit carryforward. . . - 16,600 - 12,500
Alternative minimum tax credit carry
forwards - 79,300 - 75,000
State net operating loss carryforward - 230,000 - 223,600
Net operating and other loss carryforward - 888,000 - 774,100
Other . . . . - (8,700) - 200
Total gross deferred tax asset . . 16,700 801,600 31,700 690,700
Less valuation allowance (16,700) (801,600) (31,700) (690,700)
Net deferred tax asset - - - -
A reconciliation of the valuation allowance for deferred taxes is as follows:
1996 1995
Valuation allowance at beginning of year 722,400 476,700
Increase in allowance 95,900 245,700
Valuation allowance at end of year 818,300 722,400
At April 30, 1996 the Company has federal and state alternative
minimum tax credit carry forwards of approximately $79,300 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 begin to expire in 1997. The Company
also has net operating loss carry forwards for state purposes of
approximately $3,872,000 which are available to offset future state taxable
income, if any, through the year 2010. The Company has net operating loss
carry forwards for federal purposes of $1,474,000 which are available to
offset future federal taxable income, if any, through the year 2010.
During fiscal year ended April 30, 1996, the Company filed for a federal
refund of $146,300 resulting from the carry back of losses as described in
Section 172(f) of the Internal Revenue Code which was received after year-end.
Section 172(f) is an area of the law without substantial legal precedent
or guidance. Accordingly, assurances cannot be made as to whether the
Internal Revenue Service would challenge the Company's ability to carry
back such a substantial portion of losses under this provision. Consequently,
an income tax reserve of $109,800 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. If the carry back of the losses described above are not allowed, the
net operating loss carry forwards for federal purposes of $1,474,000
described in the previous paragraph would increase to $1,904,000.
7 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 were to expire on April 26, 1995. On April 19, 1995 the board
of directors elected to extend Mrs. Duncans' options to April 26, 1999 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.
8 STOCK OPTION PLAN
In accordance with the Milastar Corporation Stock Option Plan (the
"Option Plan") adopted at the March 4, 1991 Board of Directors meeting,
options to purchase 200,000 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 1996, 1995 and 1994 are as follows:
1996 1995 1994
Options outstanding May 1 156,666 156,666 156,666
Granted* 230,333
Exercised
Canceled 113,333
Options outstanding at April 30 273,666 156,666 156,666
Option price range at April 30 .5625 .9609 .9609
to to to
1.0570 1.0570 1.0570
Options exercisable at April 30* 273,666 156,666 156,666
Options available for grant at April 30 43,334 43,334
* Includes 73,666 options granted which are contingent upon stockholder
approval of an increase in the options available for grant at April
30, 1996.
9 RELATED PARTY TRANSACTIONS
Notes Receivable
The Company entered into two Note Agreements during fiscal 1993. The
first note of $76,000 was dated October 1, 1992, bore interest at 8.0% and is
due in 48 monthly installments commencing June 1, 1994. The note was
between the Company and Sound Techniques, Inc., a Subchapter S
Corporation wholly-owned by J. Russell Duncan, chairman of the Board and
a director of the Company. Lance H. Duncan, the son of J. Russell Duncan
and a director of the Company, is President of Sound Techniques, Inc. The
note resulted from advances to and payments by the Company on behalf of
Sound Techniques, Inc. On April 18, 1995 the entire balance of the note
which consisted of $76,000 in principal and $17,000 in interest was paid by
Sound Techniques, Inc.
The second note is between the Company and 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, 1997. 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 these notes for the fiscal years ended
April 30, 1996, 1995 and 1994 amounted to $2,000, $10,000 and $6,000,
respectively.
Notes Payable
During fiscal 1995 the Company entered into a series of note payable
transactions which at April 30, 1996 had a balance of $218,000, including
accrued interest, payable to J. Russell Duncan, Chairman of the Board and a
director of the Company. The notes bear a interest rate of 8% and are
payable on demand. The Company classifies the notes payable as a current
liability. Total interest expense related to this note payable for the fiscal
years ended April 30, 1996 and 1995 was $23,000 and $23,000, respectively.
During fiscal 1996 the Company entered into a $100,000 note payable to
L. Michael McGurk, President, Chief Operating Officer and a director of the
Company. The note bears an interest rate of 8.7% and is payable on demand.
The Company classifies the note payable as a current liability. Total interest
expense related to this note payable was $1,000 for fiscal 1996.
10 LOSS PER COMMON SHARE
The computation of loss per share for the years ended April 30, 1996,
1995 and 1994 is as follows:
1996 1995 1994
Weighted average shares
of Class A Stock outstanding 2,738,264 2,738,264 2,738,264
Dilutive effect of stock options after
application of treasury stock method
Weighted average shares of Class A
Stock outstanding during the period 2,738,264 2,738,264 2,738,264
11 TREASURY STOCK
In April 1994, the Company purchased all of its 968,473 issued and
outstanding Class B Common Shares for cash consideration amounting to
$200,000. On August 10, 1994 in an Information Statement distributed to the
stockholders, the Company eliminated the 2,500,000 authorized shares of
Class B Common Stock. The Company purchased 178 shares of its Class A
Stock at prevailing market prices ($214 total value) during fiscal 1993. The
Company recorded the Class A shares as treasury stock.
12 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 provides for the Company to
pay all real estate taxes and maintenance expenses.
Future minimum rental payments under noncancelable operating leases,
excluding real estate taxes, are as follows:
1997 161,000
1998 148,000
1999 143,000
2000 124,000
2001 122,000
Thereafter 45,000
743,000
Total rent expense, excluding real estate taxes, for the fiscal years ended
April 30, 1996, 1995 and 1994 was $161,000, $155,000 and $162,000,
respectively.
13 COMMITMENT
At April 30, 1996, the Company had a commitment for the purchase of a
mesh belt furnace at a cost of approximately $746,000. As of April 30, 1996,
a partial payment of $336,000 was financed with a note payable to Textron
Financial. Subsequent to year end, the Company made an additional payment
of $373,000 towards this purchase.
14 SUBSEQUENT EVENT
On May 30, 1996, the Company sold land and building relating to one of
its facilities. The accompanying April 30, 1996 consolidated financial
statements include a charge of $43,000 in other expenses to reduce the net
book value of the assets sold to net realizable value based upon the selling
price of the assets.
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 Item 4, 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 9. 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, 1996 and 1995 . 9-10
Consolidated Statements of Operations for the three years
ended April 30, 1996 . . . . . . 11
Consolidated Statements of Cash Flows for the three years
ended April 30, 1996. . . . . . . . . . . . . . . . . 12
Consolidated Statements of Changes in Stockholders' Equity for the
three years ended April 30, 1996. . . . . . . . . . . 13
Notes to Consolidated Financial Statements . . . . . . . 14-22
2. Financial Statement Schedules
Schedule VIII-Valuation and Qualifying Accounts. . . . . . 25
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 . . . . . . . . . . . . . . . . . . . . . . . . 24
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 1(2) to
Registrant's Registration Statement on Form 10 dated August 27,
1970 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 Executive Employment Agreement dated as of April 13, 1992 by
and between Registrant and L. Michael McGurk
10.3 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
10.4 Executive Employment Agreement dated as of February 28, 1996
by and between Registrant and J. Russell Duncan
21.1 List of Significant Subsidiaries
Subsidiary State of Incorporation
Flame Metals Processing Corporation Delaware
New England Metal Treating Corporation Massachusetts
(b) Reports on Form 8-K: None
Schedule VIII
MILASTAR CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance Charged to Balance
at beginning costs and other at end
of year expenses accounts(2) Deductions(1) of year
Allowance for doubtful accounts:
April 30, 1996 26,000 24,000 - 13,000 37,000
April 30, 1995 32,000 - - 6,000 26,000
April 30, 1994 115,000 - (68,000) 15,000 32,000
(1) Direct write-off of accounts deemed uncollectible.
(2) Amount represents allowance for doubtful accounts purchased in the Getchell
Acquisition.
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, thereunto duly authorized.
MILASTAR CORPORATION
(REGISTRANT
By:
/s/ J. RUSSELL DUNCAN
J. Russell Duncan
Chairman of the Board
Dated: July 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on July 28, 1996.
/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
Treasurer, Principal Financial Secretary and Director
and Accounting Officer
/s/C. PAUL JOHNSON
C. Paul Johnson
Director
EXECUTIVE EMPLOYMENT AGREEMENT
EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement")
dated as of March 1, 1996, between MILASTAR CORPORATION, a
Delaware corporation ("Milastar") having its principal place of business at
No. 9 Via Parigi, Palm Beach, Florida 33480, and J. RUSSELL
DUNCAN, residing at No. 9 Via Parigi, Palm Beach, Florida 33480 ("J.
R. Duncan").
W I T N E S S E T H:
WHEREAS, J. R. Duncan currently is employed by Milastar as
Chairman of the Board and Chief Executive Officer ("CEO") pursuant to
the terms and subject to the conditions of that certain Executive
Employment Agreement dated as of April 12, 1989, as amended by that
certain Addendum to Executive Employment Agreement dated as of
March 4, 1991 (as amended, the "Employment Agreement");
WHEREAS, Milastar desires to extend J. R. Duncan's employment
agreement and J. R. Duncan desires to continue to be employed by
Milastar as Chairman and Chief Executive Officer and/or Consultant on
the terms provided and subject to the conditions hereinafter set forth; and
WHEREAS, J. R. Duncan acting independently intermittently provides
certain business consulting services and serves as a director to
non-affiliated and non-competing third parties and Milastar hereunder
permits J. R. Duncan to engage in such ongoing services as hereinafter set
forth;
NOW, THEREFORE, in consideration of the premises, the mutual
covenants and the agreements hereinafter set forth, and for other good and
valuable consideration between the parties, the receipt and sufficiency of
which are hereby acknowledged, it is hereby agreed as follows:
1. Core Duties and Responsibilities. Milastar hereby employs J. R.
Duncan as Chairman and Chief Executive Officer of Milastar (the
Company's most senior operating position) and J. R. Duncan hereby
accepts employment for the specified term and upon the conditions
hereinafter set forth. J. R. Duncan, acting in the prescribed executive role,
shall apply his knowledge, skills and experience in the performance of
core duties under his jurisdiction including -
- - Managing, administering, planning and directing the company;
- - Implementing the directives of the Milastar Directors; and
- - Performing such other duties as are customarily vested in the
Chairman and Chief Executive Officer (including those operating duties
specified in Milastar's by-laws).
The incumbent shall direct such operating activities in a manner to
maximize the Company's profit, return-on-investment and, collaterally,
enhance the Company's financial strength.
J. R. Duncan hereby accepts the prescribed employment and conditions
related to the position and agrees to devote his best efforts to the
performance of his duties hereunder and to devote necessary working time
and attention to such prescribed dutie
s and other operating activities except as set forth in Section 11 hereof.
2. Term of Agreement. Milastar hereby agrees to employ J. R.
Duncan and J. R. Duncan hereby agrees to serve Milastar as an employee
on the terms and subject to the conditions set forth herein for the period
commencing on the effective date of this Agreement and continuing in
effect through the fifth anniversary hereof unless renewed in writing.
3. Compensation. Subject to the provisions of this Agreement,
Milastar hereunder shall pay J. R. Duncan over the term of this Agreement
a minimum annual base salary ("Base Salary") as set forth below:
1st year: $ 85,000
The Base Salary is payable in equal semi-monthly installments subject to
withholdings and deductions required by law or otherwise agreed.
Milastar's Board of Directors (or a committee thereof) shall from time to
time review J. R. Duncan's Base Salary applicable hereunder and, in its
discretion, may periodically increase such Base Salary as may be deemed
appropriate for the forthcoming year of the Employment Agreement;
provided, however, any such increase in Base Salary shall in no way limit
or reduce any other existing financial obligation of Milastar hereunder and
any such Base Salary increase shall not thereafter be reduced. The said
Base Salary does not include any directors fees from Milastar.
Pursuant to the Agreement, the Company, in its sole discretion, from time
to time, may award J. R. Duncan special bonuses which then do not get
built into the said Base Salary.
J. R. Duncan under this Agreement is entitled to vacations, holidays, sick
leave and retirement benefits as are customarily paid to key personnel
within the Company or its subsidiaries, and will be eligible for
participation in any Company group medical or hospital plan.
Milastar may from time to time grant employees stock options. J. R.
Duncan's Stock Option Agreement dated March 1, 1996 attached hereto as
Exhibit A is an integral part of this contract.
4. Expenses. Milastar shall reimburse J. R. Duncan in accordance
with the Company's policies for all reasonable business-related expenses
incurred in the performance of the duties assigned hereunder, e.g.
entertainment, travel, etc. Such business-related expenses shall include the
use of a company-furnished automobile and reimbursement of related
operating expenses. Milastar will settle with J. R. Duncan for such
expenditures upon receipt of an itemized accounting for such expenditures
complete with receipts, where practical, in a form consistent with Internal
Revenue Service regulations. Reimbursement requests shall be submitted
on a timely basis.
J. R. Duncan shall operate at an office located within the Palm Beach,
Florida area and the Company shall provide such office quarters complete
with facilities and services suitable for the performance of J. R. Duncan's
assigned duties hereunder including the services of an executive secretary,
all at the Company's expense.
5. Disability. If at any time, or from time to time, during the term of
this Agreement J. R. Duncan shall be rendered unable to perform his
assigned duties hereunder by reasons of physical or mental illness or other
disabling condition, then this Employment Agreement shall continue in
full force and effect and Duncan shall be entitled to receive the full
compensation provided for in Section 3 hereof for a period of eighteen
months immediately following the date of commencement of such
incapacity. If such degree of disability shall continue for a period in
excess of eighteen successive months beyond the said eighteen months
period, Milastar shall have the right at its discretion to reduce the Base
Salary compensation being paid to 85% of the stipulated amount.
In the event J. R. Duncan shall receive any indemnity, insurance or other
such payments during the period of his disability pursuant to the
provisions of any accident and health or disability insurance policy or
similar plans funded by Milastar or for which Milastar pays the premiums,
receipt of such indemnity payments shall be credited by Milastar against
the annual base compensation that would otherwise be due to J. R. Duncan
during the period of such disability, provided that if J. R. Duncan shall
have paid a portion of the cost of any such insurance policy or plans, any
such credit shall be prorated between the parties based on the ratio of the
costs paid by Milastar and J. R. Duncan.
6. Retirement: Retention of Services as Consultant. If during the term
of this Agreement or any renewal or extension thereof, Duncan retires in
accordance with the provisions of any Company pension plan adopted by
Milastar, whether such retirement constitutes early retirement, normal
retirement or mandatory retirement under the terms of said pension plan,
he may then elect to serve Milastar in the capacity as a consultant, subject
to the approval of the Milastar Board of Directors, for which position he
shall receive his full annual base compensation in effect as provided in
Section 3 hereof, and any benefits to which he would otherwise become
entitled at retirement shall be deferred until the earlier of the date of
termination of his consulting services or mandatory retirement.
7. Death Benefits. If Duncan shall die during the term of this
Agreement, Milastar shall pay such person or persons as J. R. Duncan
shall have designated by signed written instrument delivered to Milastar
before his death the compensation which would otherwise be payable to J.
R. Duncan under para. 3 hereof through the final date of this Employment
Agreement. Milastar is obligated to pay to such designated person or
persons an amount equal to his then current base salary in effect at the
time of his death. In the absence of any designation by J. R. Duncan,
payments hereunder shall be made to such person or persons as J. R.
Duncan shall designate in his will, or, if the provisions of J. R. Duncan's
will do not govern, then per stirpes to those of his descendants which shall
be living at the time of his death.
8. Position. If during the term of this Agreement, because of any
action or failure to act on the part of the Milastar stockholders or Milastar
directors, J. R. Duncan shall be removed as a director or officer or shall
not be re-elected to the office carrying with it the responsibilities, power
and authority of the Chairman and Chief Executive Officer, and at such
time J. R. Duncan is otherwise willing to continue in such position, then J.
R. Duncan shall thereupon be relieved of all further duties and
responsibilities hereunder (with the exception that he shall still continue to
be bound by the covenants contained in Sections 9 and 10 hereof), but this
Agreement shall not terminate and J. R. Duncan shall continue to be
entitled to receive the annual base compensation provided for in Section 3
hereof for the remaining term of this Agreement.
9. Proprietary Information. It is recognized that the service to be
rendered by J. R. Duncan hereunder may involve confidential information
or trade secrets of Milastar. J. R. Duncan hereby agrees that, without the
prior written consent of Milastar, he will not voluntarily disclose or
publish during or after the term of this Agreement any of Milastar's
confidential information or trade secrets, except to the extent such
information otherwise becomes part of the public domain through no
wrongful action of the part of J. R. Duncan.
10. Non-Compete. J. R. Duncan agrees that for a period of one year
following the termination of his employment, whether such termination be
with or without cause, he will not enter the employ of any person, firm or
corporation engaged in a similar line of business which is in direct
competition with Milastar, nor during such period, directly or indirectly, as
principal, agent or employee, in any such business in direct competition
with Milastar, unless written permission is granted by Milastar.
11. Consulting Services to Third Parties. Notwithstanding anything to
the contrary herein set forth, during the term of this Agreement or any
renewal or extension hereof, J. R. Duncan shall have the right to provide
consulting services and act as a director to unaffiliated third parties,
provided that such consulting services shall not be rendered to a business
operating in direct competition with Milastar, and provided further that
such consulting services shall not interfere with the performance of J. R.
Duncan's duties under this Agreement.
12. Previous Agreement. This Agreement supersedes all prior
agreements and understandings between the parties hereto, including
without limitation, the current Employment Agreement, and may not be
changed or terminated orally, and no change, termination or attempted
waiver of any provisions hereof shall be binding unless in writing and
signed by the party against whom the same is sought to be enforced;
provided, however, that J. R. Duncan's compensation hereunder may be
increased at any time by approval of the Milastar Board of Directors as
provided herein.
13. Notices. All notices hereunder shall be sent by registered or
certified mail to the following addresses:
To Milastar:
Milastar Corporation
Att. J. Russell Duncan, Chairman
9 Via Parigi
Palm Beach, FL 33480
To J. R. Duncan:
J. Russell Duncan
9 Via Parigi
Palm Beach, FL 33480
or to such other address as either party may designate in writing to the
other party.
14. General. This Agreement shall inure to the benefit of and be
binding upon the successors, assigns, heirs, executors and administrator of
the parties hereto.
15. Governing Law. The provisions of this Agreement shall be
governed by the laws of the State of Delaware.
16. Invalidity. If the scope of any of the provisions of this Agreement
shall be broader than those permitted by law, then such provisions shall be
enforceable to the extent permitted by law, and the invalidity of any
provisions of this Agreement shall not affect the validity of any other
provisions contained herein.
17. Entire Agreement. This Agreement constitutes the entire
agreement between the parties and may be changed only by a written
agreement signed by all parties hereto.
18. Assignment. This Agreement may be assigned, in whole or in
part, by Milastar to any wholly-owned subsidiary of Milastar; provided,
however, that any such assignment shall not operate to discharge any of
the obligations of either party hereunder. The rights and benefits of J. R.
Duncan hereunder are personal and no such right or benefit shall be
subject to voluntary or involuntary alienation, assignment or transfer.
19. Counterparts. This Agreement may be executed simultaneously in
counterparts, each of which shall be deemed an original (including
executed copies sent via facsimile) and all of which together shall
constitute one and the same instrument.
20. In the event of any dispute under this Agreement, it shall be
resolved through binding arbitration in accordance with the rules of the
American Arbitration Association.
IN WITNESS WHEREOF, the parties have executed this Agreement
this 1st day of March, 1996.
MILASTAR CORPORATION
J. Russell Duncan BY: L. Michael McGurk, President
Appended: Stock Option Agreement appended as Exhibit D-1
EXHIBIT D-1
MILASTAR CORPORATION
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is made and entered into as of the 1st day of
March, 1996, by and between MILASTAR CORPORATION, a Delaware
corporation (the "Corporation") and J. RUSSELL DUNCAN (the
"Optionee").
WHEREAS, the Optionee is a valued employee of the Corporation and
in recognition of the Optionee's responsibilities as Chairman of the Board
of the Corporation ("Chairman") and Chief Executive Officer ("CEO"),
and valuable past contributions to establishing the Corporation in its
present status, the Corporation grants to Optionee an option to purchase
shares of Class A common stock, $0.05 par value, of the Corporation (the
"Class A Common Stock") pursuant to the Milastar Corporation Stock
Option Plan (the "Plan"), heretofore adopted by the Board of Directors of
the Corporation, which Plan is incorporated herein by this reference; and
WHEREAS, the Optionee wishes to acquire the right to purchase
shares of Class A Common Stock.
NOW, THEREFORE, for good and valuable consideration, the parties
hereto, intending to be legally bound, hereby agree as follows:
1. Grant of Option.
Subject to the provisions of Section 2 hereof, the Corporation hereby
grants to the Optionee the right, privilege and option to purchase on the
terms and conditions hereinafter set forth 198,333 shares of Milastar Class
A common shares at a purchase price of $0.616 per share (the "Option"),
which price is 110% of the fair market value of a share of Class A
Common Stock on the date of grant of the Option as determined in
accordance with the provisions of the Plan. However 41,662 shares of J.
R. Duncan's option shares are contingent upon availability of additional
option shares through expirations or stockholders' approval of additional
option shares. The Option is intended to be an "Incentive Stock Option"
as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), subject to the provisions of Section 6(a) of the Plan
and Section 422 of the Code.
(a) The Option shares are exercisable by the Optionee at any time within
five years following the date of this Agreement.
(b) Purchase of shares hereunder must be made in minimum lots of no
less than 500 shares.
2. Termination of Employment
(a) If the Optionee is no longer employed by the Corporation due to
disability (as defined in Section 22(e)(3) of the Code) of the Optionee
then, notwithstanding the provisions of paragraph 2 of this Agreement, the
Option shall be exercisable in full and the Optionee or his legal
representative may, for a period of eighteen months following such
termination (but before expiration of the original exercise period), exercise
the Option in whole or in part.
(b) If Optionee is no longer employed by the Corporation due to death
of Optionee then, notwithstanding the provisions of paragraph 2 of this
Agreement, the Option shall be exercisable in full and the Optionee or his
legal representative may, for a period of eighteen months following such
termination (but before expiration of the original exercise period), exercise
the Option in whole or in part.
(c) If the Optionee is no longer employed by the Corporation due to
retirement, voluntary termination by the Optionee or termination by the
Corporation without cause the Optionee may, for a period of six months
after the date of termination (but before expiration of the original exercise
period), exercise in whole or in part that portion of the Option which has
not yet been exercised as of the date of termination. Thereafter, the
Option shall terminate and the Optionee shall have no further rights
hereunder.
If the Optionee is no longer employed by the Corporation due to
termination by the Corporation for cause (as such term is defined in
paragraph 8(b) of the Plan), the Option shall be canceled and terminated as
of the date on which the Optionee is given notice of termination.
(d) The Optionee acknowledges and understands that certain exercises
of the Option pursuant to the paragraph 3 may cause disqualification of the
Option as an Incentive Stock Option.
4. Method of Exercise
The Option may be exercised by written notice (the "Notice"), addressed
and delivered to the Secretary of the Corporation specifying the number of
shares of Class A Common Stock to be purchased and accompanied by (I)
a check, or (ii) that number of shares of Class A Common Stock which
have an aggregate fair market value as of the date of the Plan equal to the
exercise price, or (iii) any combination thereof.
5. Delivery of Stock Certificates
The Option shall be deemed to have been exercised upon receipt by the
Corporation of the Notice accompanied by the exercise price (the
"Exercise Date") and the Optionee shall be treated as the holder of record
of the shares with respect to which the Option is exercised as of the
Exercise Date for all purposes. The certificate representing the shares of
Class A Common Stock purchased upon exercise of the Option shall be
issued as of the Exercise Date and delivered by the Corporation to the
Optionee free and clear of all claims, liens and encumbrances, as soon as
practicable following the Exercise Date.
6. Adjustment Provisions
If, during the term of this Agreement, there shall be any stock dividend,
stock rights distribution, stock split, recapitalization, merger,
consolidation, sale of assets, reorganization or other similar change or
transaction of or by the Corporation, an appropriate adjustment shall be
made to the number and kind of shares remaining to be acquired upon
exercise of the Option (but without regard to fractions) and to the exercise
price of the Option so that the value to be received by the Optionee upon
exercise of the Option shall, in the aggregate, be the same as if none of the
foregoing transactions had occurred.
7. Merger, Consolidation or Sale of Assets
In the event that provision is not made in connection with any merger,
reorganization, consolidation or other change in corporate structure, for
the continuation of the Plan and assumption of the Option (or the
substitution of an option of the surviving corporation or successor
employer or a parent thereof substantially identical to the Option), the
Option shall be exercisable in full and the Optionee shall be entitled, prior
to the effective date of such transaction, to exercise the Option in whole or
in part.
8. Withholding Obligations
In the event that the exercise of the Option disqualifies the Option as an
Incentive Stock Option and the Corporation is required to satisfy certain
withholding obligations under the Code as a result of such exercise,
Optionee may request that, in lieu of withholding amounts from
Optionee's paycheck or requiring that Optionee write a check in the
amount of the withholding obligation, the Corporation withhold that
number of shares of Class A Common Stock which have a fair market
value (determined in accordance with the provisions of the Plan) on the
Exercise Date equal to the amount required to be withheld.
9. Non-Transferability
The Option is not transferable or assignable by the Optionee other than by
will or by the laws of descent and distribution and is exercisable during the
lifetime of the Optionee only by the Optionee.
10. Compliance With Law
By accepting the Option, the Optionee agrees for himself and his legal
representative that no shares of Class A Common Stock shall be delivered
pursuant to the Option until qualified for delivery under applicable
securities laws and regulations as determined by the Corporation or its
legal counsel.
11. Limitations
The Optionee shall have no rights as a stockholder with respect to shares
as to which the Option shall not have been exercised and payment made as
herein provided and shall have no rights with respect to such shares not
expressly conferred by this Agreement. Nothing contained in this
Agreement shall be construed to be a contract of employment between the
Corporation and the Optionee.
12. Construction
(a) Successors. This Agreement and all the terms and provisions
hereof shall be binding upon and shall inure to the benefit of the parties
hereto and their respective legal representatives, heirs and successors,
except as expressly herein otherwise provided.
(b) Entire Agreement; Modification. This Agreement contains the
entire understanding between the parties with respect to the matters
referred to herein and such agreement shall not be modified, except by
written agreement signed by both the Corporation and the Optionee.
(c) Headings; Pronouns; Governing Law. The descriptive headings
of the respective sections and subsections of this Agreement are inserted
for convenience of reference only and shall not be deemed to modify or
construe the provisions which follow them. Any use of any masculine
pronoun shall include the feminine and vice-versa and any use of a
singular, the plural and vice-versa, as the context and facts may require.
The construction and interpretation of this Agreement shall by governed in
all respects by the laws of the State of Delaware.
(d) Notices. All communications between the parties shall be in
writing and shall be deemed to have been duly given as of the date and
time of hand delivery or three days after mailing via certified or registered
mail, return receipt requested, proper postage prepaid to the following or
such other addresses of which the parties shall from time to time notify
one another.
(1) If to the Corporation:
Milastar Corporation
No. 9 Via Parigi
Palm Beach, Florida 33480
(2) If to the Optionee: J. Russell Duncan
No. 9 Via Parigi
Palm Beach, Florida 33480
(e) Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement or the application
thereof to any party or circumstance shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the minimal extent of
such provision or the remaining provisions of this Agreement or the
application of such provision to other parties or circumstances.
IN WITNESS WHEREOF, the parties have executed or caused to be
executed this Agreement on the date first above written.
OPTIONEE: MILASTAR CORPORATION
J. Russell Duncan BY: L. Michael McGurk, President