-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HpMd5UJGPi3NUUGXtSZXrccDtlEZ42RA/ZVuxDf4BI35zQMCE9+asRQgEOL9i5I2 oImc/HKcgK16SYyV8QmI9w== 0000897101-01-500535.txt : 20010821 0000897101-01-500535.hdr.sgml : 20010821 ACCESSION NUMBER: 0000897101-01-500535 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010820 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REUTER MANUFACTURING INC CENTRAL INDEX KEY: 0000083490 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY APPARATUS & FURNITURE [3821] IRS NUMBER: 410780999 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-01561 FILM NUMBER: 1719126 BUSINESS ADDRESS: STREET 1: 410 11TH AVE SOUTH CITY: HOPKINS STATE: MN ZIP: 55343 BUSINESS PHONE: 6129356921 MAIL ADDRESS: STREET 1: 410 11TH AVENUE SOUTH CITY: HOPKINS STATE: MN ZIP: 55343 FORMER COMPANY: FORMER CONFORMED NAME: GREEN ISLE ENVIRONMENTAL SERVICES INC DATE OF NAME CHANGE: 19940210 FORMER COMPANY: FORMER CONFORMED NAME: REUTER INC DATE OF NAME CHANGE: 19920703 10QSB 1 magstar013151_10qsb.txt MAGSTAR TECHNOLOGIES, INC. FORM 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ Commission File Number 0-1561 MAGSTAR TECHNOLOGIES, INC. -------------------------- (f/k/a Reuter Manufacturing, Inc.) (Exact name of registrant as specified in its charter) Minnesota 41-0780999 --------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 410 - 11th Avenue South, Hopkins, Minnesota 55343 - ------------------------------------------- ----- (Address of principal executive offices) (Zip Code) 952/935-6921 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during past 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 ___ As of August 20, 2001, there were 8,740,673 and 1,000,000 shares of the registrant's $.1875 and $.01 par value Common Stock and Preferred Stock, respectively, outstanding. PART I. FINANCIAL INFORMATION - ----------------------------- ITEM 1. FINANCIAL STATEMENTS. - ----------------------------- MAGSTAR TECHNOLOGIES, INC. BALANCE SHEETS
June 30, 2001 December 31, (Unaudited) 2000 ------------ ------------ ASSETS Current assets: Cash $ 500 $ 500 Accounts receivable, net 1,454,049 1,814,791 Inventories 1,674,654 1,898,086 Other current assets 114,165 38,414 ------------ ------------ Total current assets 3,243,368 3,751,791 Property, plant and equipment, net 2,194,591 2,820,048 ------------ ------------ Total assets $ 5,437,959 $ 6,571,839 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Current maturities of senior debt $ 5,206,907 $ 6,643,960 Current maturities of subordinated debt 349,749 405,270 Payable to related party 375,581 55,000 Book overdraft 152,985 106,502 Accounts payable, trade 890,732 513,434 Accrued expenses 1,150,146 1,111,942 Deferred gain on equipment sale 348,137 ------------ ------------ Total current liabilities 8,474,237 8,836,108 Subordinated debt, less current maturities 535,394 675,426 Note payable - related party 1,015,000 376,693 Long-term deferred gain on equipment sale 932,916 Long-term accounts payable 242,972 242,972 Other liabilities 22,467 28,380 ------------ ------------ Total liabilities 11,222,986 10,159,579 ------------ ------------ Stockholders' deficiency: Preferred stock, par value $.01 per share, authorized 1,000,000 shares; 1,000,000 issued 10,000 10,000 Common stock, par value $.1875 per share; authorized 9,000,000 shares; issued and outstanding 8,740,673 and 8,740,173 shares at June 30, 2001 and December 31, 2000, respectively 1,638,876 1,638,782 Additional paid-in capital 17,996,800 17,996,479 Accumulated deficit (25,430,703) (23,233,001) ------------ ------------ Total stockholders' deficiency (5,785,027) (3,587,740) ------------ ------------ Total liabilities and stockholders' deficiency $ 5,437,959 $ 6,571,839 ============ ============
The accompanying notes are an integrated part of the financial statements. 2 MAGSTAR TECHNOLOGIES, INC. STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited) For the three months ended For the six months ended June 30, June 30, 2001 2000 2001 2000 ----------- ----------- ----------- ---------- Net sales $ 2,232,444 $ 2,851,441 $ 5,117,148 $ 5,965,661 Cost of sales 2,842,643 2,521,554 5,644,108 5,036,657 ----------- ----------- ----------- ----------- Gross profit (610,199) 329,887 (526,960) 929,004 Selling, general and administrative expenses 857,049 468,383 1,545,709 887,048 ----------- ----------- ----------- ----------- Operating income (loss) (1,467,248) (138,496) (2,072,669) 41,956 ----------- ----------- ----------- ----------- Other (expense) income: Interest expense (118,305) (190,133) (273,464) (385,170) Other, net 153,214 11,600 148,431 20,948 ----------- ----------- ----------- ----------- Total other expense, net 34,909 (178,533) (125,033) (364,222) ----------- ----------- ----------- ----------- Net loss $(1,432,339) $ (317,029) $(2,197,702) $ (322,266) =========== =========== =========== =========== Net loss per share (basic and diluted) $ (0.16) $ (0.06) $ (0.25) $ (0.07) =========== =========== =========== =========== Weighted average common shares outstanding (basic and diluted) 8,740,673 4,899,385 8,740,474 4,899,385 =========== =========== =========== ===========
The accompanying notes are an integrated part of the financial statements. 3 MAGSTAR TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS
(Unaudited) For the six months ended June 30, - ----------------------------------------------------------------------------------------------------- 2001 2000 - ----------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net loss $(2,197,702) $ (322,266) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 229,026 306,930 Accretion of debentures payable 11,040 Gain on sale of assets (111,239) Provision for write-down of inventories (10,000) Changes in operating assets and liabilities: Receivables 360,742 (106,188) Inventories 233,432 19,272 Other current assets (68,776) (15,500) Accounts payable, trade 377,298 130,441 Accrued expenses 56,271 113,109 Other liabilities (5,913) (5,300) ----------- ----------- Net cash provided by (used in) operating activities (1,125,821) 120,498 ----------- ----------- Cash flows from investing activities: Additions to property, plant and equipment (569) Proceeds from sale of fixed assets 538,501 ----------- ----------- Net cash provided by (used in) investing activities 537,932 -- ----------- ----------- Cash flows from financing activities: Repayment of long-term equipment financing (190,417) (65,008) Proceeds from asset-based line of credit and term obligations, bank 6,070,845 6,184,932 Repayment of asset-based line of credit (6,480,898) (6,201,848) Proceeds from note payable - related party 1,141,461 Proceeds from private placement of debentures 11,040 Proceeds from exercise of stock options 415 20,838 ----------- ----------- Net cash provided by (used in ) financing activities 541,406 (50,046) ----------- ----------- Net (decrease) increase in cash (46,483) 70,452 Cash, beginning of year (106,002) (431,119) ----------- ----------- Cash, end of period $ (152,485) $ (360,667) =========== =========== Supplemental disclosures of cash flow information: Cash paid for interest $ 231,131 $ 341,820 =========== =========== Noncash investing and financing activities: Purchase of equipment in exchange for notes payable $ 357,460 =========== =========== Gain on the sale-leaseback of equipment $ 1,368,087 =========== ===========
The accompanying notes are an integrated part of the financial statements. 4 MagStar Technologies, Inc. Notes to Financial Statements (Unaudited) 1. Financial Statements: -------------------- The unaudited financial statements of MagStar Technologies, Inc. (the "Company") for the three month and six month periods ended June 30, 2001 and 2000, reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position at June 30, 2001, and the results of operations and cash flows for the reported periods. The results of operations for any interim period are not necessarily indicative of results expected for the full year. The December 31, 2000, balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These unaudited interim financial statements should be read in conjunction with the financial statements and related notes for the year ended December 31, 2000, which are included in the Company's 2000 Annual Report on Form 10-KSB. Earnings Per Share: ------------------ Basic earnings per common share is computed using the weighted average number of shares outstanding for the period. Diluted earnings per common share is computed using the weighted average number of shares outstanding per common share adjusted for the incremental dilutive shares attributed to outstanding stock options under the Company's stock option plans and stock purchase warrants. The Company incurred a loss for the three and six month periods ended June 30, 2001 and 2000, and as a result, incremental shares attributable to the assumed exercise of stock options and warrants were excluded from the computation of diluted earnings per share, as the effect would be antidilutive. 2. Significant Customer: -------------------- The Company has certain customers that comprise a significant percentage of net sales as follows:
(Unaudited) (Unaudited) Net sales for the three months Net sales for the six months Ended June 30, Ended June 30, 2001 2000 2001 2000 ---- ---- ---- ---- Amount % Amount % Amount % Amount % Customer A $389,840 17.5% $1,298,147 46.2% $1,098,240 21.5% $2,689,949 45.3% Customer B 183,161 8.2% -- --% 487,924 9.5% 601,640 10.1%
Accounts receivable credit concentrations associated with these customers totaled $506,837 at June 30, 2001. Significant inventory, related to production in process according to customers' specifications, is allocated for these customers at June 30, 2001. 3. Asset-Based Line of Credit: -------------------------- In October 2000, the Company and its bank entered into an amended and restated senior credit agreement. The credit facilities under the credit agreement consist of an asset-based line of credit with availability of up to $1,500,000, subject to a borrowing base limitation of 80% of the Company's eligible accounts receivable plus $250,000, and three term notes of $2,800,000 ("Term Loan A"), $1,100,000 ("Term Loan B"), and $1,325,000 ("Term Loan C"). At June 30, 2001, the Company had borrowed approximately $5,207,000 under its credit facilities. On March 21, 2001, the Company paid Term Loan B in full, using proceeds from the sale-leaseback of fixed assets to a related party (See Note 5). The asset-based line of credit bears interest at the bank's reference rate and is payable in full in October 2002. Term Loan A bears interest at a fixed rate of 10% per year and is payable in monthly principal installments of $27,020 commencing November 2000, with a final balloon payment due in October 2005. On November 1, 2000 and for each month thereafter, interest will be paid monthly on Term Note A, in addition to the principal payments noted. Term Loan C is non-interest bearing and is due and payable in full on September 2003. If the line of credit and Term Loan A are paid in full on or before September 2003, or if no event of default exists at October 1, 2003, then Term Loan C shall be forgiven. The credit facilities restrict the payment of dividends and the Company's ability to incur other indebtedness. The credit agreement also contains a covenant that requires the Company to meet certain net income targets for 2002. The Bank may at any time apply the funds available in any Company bank account against the outstanding loan balances. In addition, the credit facilities are collateralized by all of the Company's assets, except for certain equipment purchased with notes payable. The senior debt obligations have scheduled maturity dates; however, their borrowings are due on demand; accordingly, they have been classified as current in the Company's June 30, 2001 and December 31, 2000 balance sheets. 4. Accounts Payable: ----------------- In July 2000, the Company presented a settlement offer to trade creditors. The settlement plan required certain trade creditors to reduce their amounts outstanding above $200 by 47% of the total amount owed to the creditor. The remaining 53% of their trade creditor balance above $200 would then be paid by the Company in 12 equal bi-monthly installments, which commenced on October 30, 2000. Trade creditors with balances less than or equal to $200 were paid in full. All bi-monthly installments due to the participating vendors under the settlement offer have been made. Approximately 62.4% of the trade creditors responded to the settlement offer and approximately $602,000 of trade creditor balances have been settled under the offer. Of the total settlement amount of $602,000, approximately $331,000 relates to amounts outstanding at December 31, 1999. The Company recorded a gain of approximately $602,000 as a result of these trade creditor settlements in the fourth quarter of fiscal 2000. The Company is continuing to pursue settlements with the non-responding trade creditors. 5. Related Party Transaction On February 23, 2001, the Company acquired certain of the assets of Quickdraw Conveyor Systems, Inc. To fund the purchase, the Company borrowed $150,000 from Activar Properties, Inc., which is owned by a major shareholder of the Company, pursuant to a promissory note that is due on demand and bears interest at 10%. The Company believes that the terms and conditions of the promissory note given to Activar are substantially the same as the terms and conditions on which the Company could have obtained credit from an unaffiliated third party. On March 21, 2001, the Company entered into two Master Equipment Lease Agreements, for the sale-leaseback of specific fixed assets, with Activar Properties, Inc. ("Lessor"), which is owned by a major shareholder of the Company. Under these agreements, the Company has leased two sets of equipment for terms of 61 months and 25 months, respectively, for monthly payments of $30,279 and $17,399, respectively. The Lessor has assigned its rights under these leases to its bank. The Company believes that the terms and conditions of these agreements are substantially the same as the terms and conditions on which it could have leased similar equipment from an unaffiliated third party. Proceeds from the sale-leaseback were used to pay off Term Note B in the principal amount of $1,027,000 plus accrued interest due to the bank (Note 3) and pay off of $540,034 owed to Activar, Inc. for equipment purchases. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS GENERAL MagStar Technologies, Inc. (MagStar) is a publicly owned company headquartered in Hopkins, Minnesota that trades locally, over the counter, under the symbol "MGST". MagStar is a contract manufacturer of custom motion controlled devices for factory automation and medical original equipment manufacturers (OEM's). The Company's contract manufacturing business is concentrated in the medical device field, which includes production of blood centrifuges, blood pumps, blood analyzers, thrombectomy proximal motors, organic chemical synthesizers and valves for medical oxygen delivery. The Company also contract manufactures gas regulators, cryogenic parts and miscellaneous industrial parts. The Company also manufactures products under its own trade names in two principal areas. The Company produces Envi-ro-fuge 2000(R) self-powered oil centrifuges for stationary and mobile internal combustion engines. The Company also sells a limited line of full flow oil filters as a complement to the oil centrifuges. The Company's other principal trade name manufacturing products are Reuter/Sollami(R) rotary vane actuators, hydraulic and pneumatic, which are used to impart motion in diverse industrial and special applications. The Company's trade name manufacturing business requires substantial design and development engineering input. On February 23, 2001, the Company acquired certain assets of Quickdraw Conveyor Systems, Inc. To fund the purchase, the Company borrowed $150,000 from Activar Properties, Inc., which is owned by a major shareholder of the Company, pursuant to a promissory note that is due on demand and bears interest at 10%. The Company believes that the terms and conditions of the promissory note given to Activar are substantially the same as the terms and conditions on which the Company could have obtained credit from an unaffiliated third party. On March 21, 2001, the Company entered into two Master Equipment Lease Agreements with Activar Properties, Inc. ("Lessor"), which is owned by a major shareholder of the Company. Under these agreements, the Company has leased two sets of equipment for terms of 61 months and 25 months, respectively, for monthly payments of $30,279 and $17,399, respectively. The Lessor has assigned its rights under these leases to its bank. The Company believes that the terms and conditions of these agreements are substantially the same as the terms and conditions on which it could have leased similar equipment from an unaffiliated third party. Proceeds from the sale were used to pay off Term Note B in the principal amount of $1,027,000 plus accrued interest due to the bank (Note 3) and pay off of $540,034 owed to Activar, Inc. for equipment purchases. RESULTS OF OPERATIONS The Company's net sales of $2,232,444 for the second quarter ended June 30, 2001 decreased by approximately 21.7% or $618,997 from $2,851,441 for the same period in 2000. The decrease in net sales for the second quarter of 2001 compared to the same quarter for 2000 was due primarily to a decrease in sales for the medical products, which were partially offset by increased sales for high-tech/factory automation and magnet sales. However, the increases in the high-tech/factory automation and magnet product lines were not enough to offset the decreases in the medical product line. Net sales from medical, high-tech/factory automation (which includes proprietary products), and magnet sales were $908,218, $1,028,628, and $295,598, respectively, for the second quarter ended June 30, 2001, compared to $2,079,048, $772,393, and $0, respectively, for the comparable period in 2000. The magnet product line did not exist in 2000 and came about in December of 2000 with the Company's acquisition of that product line. Sales to the Company's largest medical product customer were $389,840 or 17.5% of net sales for the second quarter of 2001 compared to $1,298,147 or 46.2% of net sales for the same period in 2000. The Company's net sales of $5,117,148 for the six months ended June 30, 2001 decreased by approximately 14.2% or $848,513 from $5,965,661 for the same period in 2000. The decrease in net sales for the first six months of 2001 compared to the same period in 2000 was due primarily to weaker customer demand and work on prototype orders, which will result in sales in the third and fourth quarters. Net sales from medical, high-tech/factory automation (which includes proprietary products), and magnet products were $2,322,212, $2,115,710, and $679,226, respectively, for the six months ended June 30, 2001 compared to $4,302,760, $1,662,901, and $0, respectively, for the comparable period in 2000. Sales to the Company's largest medical product customer were $1,098,240 or 21.5% of net sales for the six months ended June 30, 2001 compared to $2,689,949 or 45.3% of net sales for the same period in 2000. Gross profit was -27.3% in the second quarter of 2001, compared to 11.6% for the same period in 2000. Gross profit was -10.3% for the six months ended June 30, 2001, compared to 15.6% for the same period in 2000. The decrease in gross profit for the second quarter and for the first six months of 2001 was to shorter run prototype jobs and maintaining the Company's factory labor infrastructure at the same level necessary to support periods of higher sales levels. While the Company did layoff approximately 9% of its workforce, it made the decision to keep the labor infrastructure intact such that the expected higher sales levels for the third and fourth quarters can be handled properly. Selling, general and administrative expenses were $857,048 or 38.4% of net sales for the second quarter of 2001, compared to $468,383 or 16.4% of net sales for the same period in 2000. For the six months ended June 30, 2001, selling, general and administrative expenses were $1,545,709 or 30.2% of net sales, compared to $887,048 or 14.9% of net sales for the same period in 2000. The increase for the quarter and for the six months ended June 30, 2001 in selling, general and administrative expenses of $388,666 and $658,661, respectively, were due to increases in the number of employees from the two acquisitions, which increased salaries, advertising, rent and payroll related benefits and taxes. Late in the second quarter, the Company did make labor adjustments in this area, which will show up in the third and fourth quarters. In the second quarter of 2001, the Company had an operating loss of $1,467,248, compared to an operating loss of $138,496 in the same period of 2000. For the six months ended June 30, 2001, the Company had an operating loss of $2,072,669 compared to an operating income of $41,956 for the same period in 2000. The increase in the operating loss for the second quarter and first six months of 2001 compared to 2000 was due primarily to lower sales from the Company's largest customers and shorter run prototype units, which will result in sales in the third and fourth quarters. In addition, the Company maintained a higher labor infrastructure to allow the Company to handle projected sales increases in the third and fourth quarters. Other expenses, net, decreased $213,443 for the second quarter of 2001 compared to the same period in 2000. For the six months ended June 30, 2001, other expenses, net, decreased $239,190 compared to the same period in 2000. The decreases for the second quarter and for the first six months of 2001 compared to 2000 was due to decreased interest expense of about $72,000 and write off of the deferred gain on the sale of equipment, which resulted in a gain of approximately $88,000. The Company incurred a net loss during the second quarter and first six months of 2001 and 2000, and consequently did not record a provision for income taxes for these periods. The Company generally does not pay regular income taxes because of the availability of its net operating loss carryforwards. The Company is, however, generally subject to the alternative minimum tax under the Internal Revenue Code of 1986, as amended (the "Code"), because only 90% of the net operating loss carryforward is allowed as a deduction before arriving at the alternative minimum taxable income. Therefore, 10% of the Company's taxable income is generally subject to the flat alternative minimum tax rate of 21%. Because the Company did not generate taxable income during the first quarter of 2001 and 2000, no provision for income taxes was recorded. The effect of inflation on the Company's results has not been significant. The net loss for the second quarter of 2001 was $1,432,339 or $0.16 per basic and diluted share, compared to a net loss of $317,029 or $0.06 per basic and diluted share for the second quarter of 2000. The net loss for the six month period ended June 30, 2001 was $2,197,702 or $0.25 per basic and diluted share, compared to a net loss of $322,266 or $0.07 per basic and diluted share for the comparable period in 2000. The net loss for the three month and six month period ended June 30, 2001 compared to the same period in 2000 was due to the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2001, the Company had a working capital deficiency of $5,230,869, compared to a working capital deficiency of $5,084,317 at December 31, 2000. The current ratio was .38 at June 30, 2001 and .42 at December 31, 2000. The increase in the working capital deficiency is principally due to the positive effect of the restructuring of certain debt related to the Company's equipment, increases in certain current liabilities of over $1,000,000, and decreases in accounts receivable and inventory of about $580,000. Although the term notes under the Company's asset-based line of credit have scheduled repayment dates, the term notes may be due upon demand in the event that the asset-based lender demands repayment. Accordingly, the Company has classified all of the amounts owing under the credit facilities at June 30, 2001 and December 31, 2000, as current liabilities. The credit facilities agreement includes a subjective material adverse change clause under which the borrowings could become due and payable. On October 10, 2000, the Company and US Bank National Association entered into an amended and restated senior credit agreement. The credit facilities under the credit agreement consist of an asset-based line of credit with availability of up to $1,500,000, subject to a borrowing base limitation of 80% of the Company's eligible accounts receivable plus $250,000, and three term notes of $2,800,000 ("Term Note A"), $1,100,000 ("Term Note B") and $1,325,000 ("Term Note C"). On March 21, 2001, the Company paid Term Loan B in full, using proceeds from the sale-leaseback of fixed assets to a related party (See Note 5). The asset-based line of credit bears interest at the US Bank National Association's reference rate and is payable in full in October 2002. Term Note A bears interest at a fixed rate of 10% per year and is payable in monthly principal installments of $27,020 commencing November 2000, with a final balloon payment due in October 2005. On November 1, 2000 and for each month thereafter, interest will be paid monthly on Term Note A, in addition to the principal payments noted. Term Note C is non-interest bearing and is due and payable in full on September 2003. If the line of credit and Term Note A are paid in full on or before September 2003, or if no event of default exists at October 1, 2003, then Term Note C shall be forgiven. The credit facilities restrict the payment of dividends and the Company's ability to incur other indebtedness. The credit agreement also contains a covenant that requires the Company to meet certain net income targets for 2002. US Bank National Association may at any time apply the funds available in any Company bank account against the outstanding loan balances. In addition, the credit facilities are collateralized by all of the Company's assets, except for certain equipment purchased with notes payable. The senior debt obligations have scheduled maturity dates; however, their borrowings are due on demand; accordingly, they have been classified as current in the Company's June 30, 2001 and December 31, 2000 balance sheets. Net cash used in operating activities was $1,125,821 for the six months ended June 30, 2001, compared to net cash provided by operating activities of $120,498 for the comparable period in 2000. The decrease in cash flows from operating activities for the six months ended June 30, 2001, from the comparable period in 2000 was due primarily to an increased net loss. The increased net loss resulted from lower sales from the Company's largest customers and shorter run prototype units, which will result in sales during the third and fourth quarters. In addition, the Company maintained a higher labor infrastructure to allow the Company to handle projected sales increases in the third and fourth quarters. The Company's ability to meet its continuing cash flow requirements in the future is dependent on achieving adequate sales and margins from its manufacturing operations. Net cash provided by investing activities of $537,932 for the six month period ended June 30, 2001, compared to no cash used in investing activities for the same period in 2000. The increase was due to the sale and leaseback of most of the Company's equipment. Net cash used in financing activities was $152,485 for the six month period ended June 30, 2001, compared to cash used in financing activities of $50,046 for the same period in 2000. The change was primarily due to increased payments of the Company's asset-based line of credit offset by a note payable from a related party. As of June 30, 2001, the Company had borrowed approximately $5,207,000 under the credit facilities. The total liability relating to the debentures issued in 1998 and 1999 was $388,960 as of June 30, 2001. These debentures are due on December 31, 2001, although the Company has the right to prepay the debentures before this time. The proceeds were used to fund operating activities. TROUBLED FINANCIAL CONDITION AND MANAGEMENT'S PLANS The Company incurred a net loss of $2,197,702 for the six months ended June 30, 2001 and has working capital and stockholders' deficiencies of $5,230,869 and $5,785,027, respectively, at June 30, 2001. As of August 20, 2001, management's plans and objectives to improve the financial condition of the Company are as follows: * Expand the volume of business in the high-tech/factory automation segments of the market, most notably with their newly developed customer base - PRI Automation, Kollmorgan and MTI. * Expand the volume of business in high-tech/factory automation and motion control with their acquired business units - factory conveyor systems and rare earth magnetics. * Secure additional working capital through the sale-leaseback of the Company's facility located in Hopkins, Minnesota. * Renegotiate the Company's secured, equipment debt structure to substantially reduce their interest rates. * Control costs and expenses commensurate with the Company's current sales levels in an effort to generate cash flows from operations. * Continue to work with existing and/or new medical device companies to expand the Company's assembly related orders with them. There can be no assurance that management will be able to accomplish all of the above plans and objectives or achieve the necessary improvements in its cash flows and financial position to meet its obligations as they become due. Nor can there be any assurance that the Company's financial performance will improve if the above strategy is implemented. The Company's ability to continue operations is dependent on its ability to increase sales and maintain adequate margins on sales, as well as its ability to maintain its current credit facilities with the bank. In addition, if the Company is unable to increase sales from current levels and generate positive cash flows from operations, it would be unable to meet its debt service requirements and may be forced to cease operations or seek protection under U.S. bankruptcy laws. Accordingly, there can be no assurance that the Company will continue as a going concern in its current form. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. SUMMARY The Company had a disappointing second quarter of 2001 and first six months of 2001. Although sales in the second quarter of 2001 and the first six months of 2001 are less than the same periods in 2000, the Company believes that sales will increase in the third and fourth quarters based on its sales backlog. The Company did layoff approximately 9% of its workforce late in the second quarter, but it kept an adequate workforce to handle the expected sales increases in the third and fourth quarters of 2001. The Company has integrated its two acquisitions into its Hopkins facility and duplicated positions and facility expenses have been eliminated. The Company will see the benefit of these cost cutting measures in the third and fourth quarters. The Company recognized $88,000 in deferred revenue in the second quarter of 2001 from its sale-leaseback of equipment to Activar, a related party and major shareholder. The Company continues to negotiate with its secured equipment vendors and has already renegotiated two of its equipment leases in the third quarter. There can be no assurance that these actions and future actions, if necessary, will be sufficient for the Company to meet its continuing cash flow requirements in the future. Except for the historical financial information reported above, this Form 10-QSB contains forward-looking statements that involve risk and uncertainties, including references to anticipated and projected sales volume, the risk associated with establishing new or improving existing relationships with customers of the Company, other business development activities, anticipated financial performance, business prospects, and similar matters. In addition, the Company has a high concentration of business with one major customer and reductions in scheduled shipments to this customer were primarily responsible for the net losses in the prior year. There can be no assurance that this customer will resume shipments to prior or expected levels. Because of these and other uncertainties, actual results could differ materially from those reflected in the forward-looking statements. PART II - OTHER INFORMATION Item 6. Exhibits and Reports (a) Exhibits. The exhibits to this Report are listed in the Exhibit Index on page 16 of this Report. (b) Reports on Form 8-K. There were no reports on Form 8-K filed during the second quarter of 2001. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MAGSTAR TECHNOLOGIES, INC. -------------------------- (Registrant) Date: August 20, 2001 By: /s/ R.F. McNamara --------------- ------------------------------------- R.F. McNamara Chairman of the Board and Director Date: August 20, 2001 By: /s/ Michael J. Tate --------------- ------------------------------------- Michael J. Tate President and Chief Executive Officer and Director (principal executive and financial officer) Date: August 20, 2001 By: /s/ J.L. Reissner --------------- ------------------------------------- J.L. Reissner Director and Secretary MAGSTAR TECHNOLOGIES, INC. EXHIBIT TO QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 Item No. Item Method of Filing - -------- ---- ---------------- No exhibits have been filed with this 10-QSB. -----END PRIVACY-ENHANCED MESSAGE-----