ITEM 1. BUSINESS --------
(a) GENERAL DEVELOPMENT OF BUSINESS. Margate Industries, Inc. (the "Company"), was formed under the laws of the State of Delaware on April 4, 1984. The Company sold 4,000,000 Units, at $0.02 per Unit, for total proceeds of $80,000 in a public offering which closed in May of 1985. Each Unit consisted of one share of common stock of the Company and one Warrant to purchase an additional share of common stock. The Warrants expired by their terms unexercised.
On November 17, 1986, the Company issued 12,515,580 shares of its $.001 par value common stock to the holders of 100% of the outstanding common stock of New Haven Foundry, Inc., ("NHF") in a merger transaction in which NHF became a wholly-owned subsidiary of the Company. The shares of common stock issued to the shareholders of NHF represented approximately 70% of the Company's common stock outstanding after the completion of the transaction. The shares of the Company's common stock issued to the shareholders of NHF were registered under the Securities Act of 1933, as amended, in a Registration Statement on Form S-4 (SEC File No. 33-5294), which was initially filed on April 29, 1986 and declared effective on October 8, 1987.
During 1987, the Company established a wholly-owned subsidiary, Michigan Casting Corporation, ("MCC") which provides finishing services on castings manufactured by NHF and other foundries.
In June of 1989, Brown City Casting Corporation ("BCCC"), a wholly-owned subsidiary, commenced operations to provide finishing services on castings produced by foundries in the Michigan area. In June, 1993, the Company transferred its operations to Yale, Michigan and now conducts business under the name of Yale Industries. BCCC ceased all operations in Brown City, Michigan in June, 1993.
On July 19, 1990, the Company sold 55% of the common stock of NHF to Wesley Industries, Inc., ("Wesley"), for $1,589,000 consisting of $1,500,000 cash and an $89,000 five-year Promissory Note. Wesley was 50%-owned by Mr. Delbert W. Mullens, currently a Director of the Company and 50%-owned by Ms. Lula Mullens. The promissory note called for interest at 2% over the prime rate, with no principal payments required until September, 1991. The Company extended the term of the note and payments begin in April, 1994. Upon repayment of the promissory note, Wesley had the right to purchase an additional 20% of the shares of NHF held by the Company for $800,000 or the then current book value, whichever is greater. Upon such purchase, the Company could require Mr. Mullens to purchase the remaining shares for $1,800,000 or the then current book value, whichever is greater.
The terms of the sale also provided for an annual commission contract between NHF and the Company and between NHF and Wesley relating to sales in excess of $35,000,000 annually. The Company received $150,000 each year plus 3% on the difference between actual sales in excess of $35,000,000 but less than $40,000,000 plus 2% on actual sales that exceed $40,000,000. This commissions contract would be in effect for a period of not less than fifteen (15) years. Also, for a minimum period of fifteen (15) years, the Company and its subsidiaries would provide cleaning services on all castings produced by NHF on an exclusive basis, so long as the Company retained an ownership interest in NHF.
Pursuant to the sale, Mr. Mullens was elected to the Company's Board of Directors. Conversely, the Company had representatives that account for forty five percent (45%) of the Directors/Voters on the
NHF Board of Directors. In addition, Mr. Mullens was restricted from transferring his interest in NHF stock without the consent of the Company and also he had a first right of refusal to purchase the balance of the NHF common stock in the event the Company wishes to sell or transfer any of its remaining NHF stock.
Pursuant to the agreement for the sale of NHF common stock, Mr. Mullens had an option to purchase 33,334 shares of the Company's common stock at $4.50 per share and an additional 33,334 shares at $7.50 per share upon purchase of the first 33,334 shares. Mr. Mullens' shares subject to option and the exercise price thereof were adjusted to reflect the reverse stock splits described below.
Effective June 21, 1993, the Company initiated operations at Yale, Michigan and relocated its corporate offices to that location. Yale Industries provides specialized cleaning and testing of metal castings for foundries and machine shops.
On January 12, 1994, pursuant to a vote at a Special Meeting of Shareholders, the Company approved a one for five reverse split of the outstanding shares of the Company and reduced the authorized shares of the Company from 50,000,000 to 25,000,000. Unless otherwise indicated, information in this Report reflects one for five reverse split of the Company's Common Stock effective in January, 1994.
On February 1, 1995, the Company obtained forty percent (40%) interest in Complete Engineering Development Services, Inc. (CEDS). Due to disappointing results, the Board of Directors elected to divest its interest in CEDS as of December 31, 1995.
In November 1995, the Company established a wholly-owned subsidiary, Fort Atkinson Industries, which provides finishing services on castings manufactured in the Iowa-Wisconsin area. Operations began on March 1, 1996.
In August 1996, the Company consolidated MCC with Yale Industries and operates as one company.
On March 24, 1998, the Company sold its remaining 45% interest in New Haven Foundry to Wesley Industries, Inc., which owned the other 55%. Terms of the agreement included a purchase price of $2,200,000 with $1,500,000 paid at closing and the $700,000 balance, including interest, due in the form of a promissory note payable in quarterly installments of $35,000. The promissory note is secured by the shares of New Haven Foundry. In addition, the Company entered into a new cleaning contract with New Haven Foundry which includes a per piece price and a service fee of $2,800,000 paid in quarterly installments of $140,000 over five (5) years. The gain on sale is reported on the consolidated income statement net of legal fees.
On November 13, 1998, following a vote at a Special Meeting of Shareholders, the Company approved a one for three reverse split of the outstanding shares of the Company. Unless otherwise indicated, information in this report reflects the one for three reverse split of the Company's Common Stock effective in November 1998.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. The Company's activities are confined to the finishing and testing of castings for the automotive and other industries, hence the Company has no other industry segments other than as stated herein. See Financial Statements for additional information concerning the Company's business.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
GENERAL - -------
The Company engages in the business of performing finishing operations on grey iron castings for the foundry industry.
Brown City doing business as Yale Industries, a Michigan corporation, is engaged in the business of performing finishing operations for the foundry industry. Such operations include the cleaning, grinding and testing of castings prior to shipment to the end purchaser. Yale commenced operations in June of 1987, and its facilities are currently located in Yale, Michigan, approximately 30 miles from New Haven, Michigan where NHF's facilities are located. NHF uses the services of Yale for approximately 80% of the castings and cylinder heads they manufacture for Chrysler Corporation and others. The Company formed this subsidiary because a separate company and facility provided NHF, and other foundries, certain advantages over handling finishing functions in-house. Over the past several years, automobile manufacturers have begun to require that additional finishing work and water testing be done on castings prior to shipment. These requirements have increased the amount of time and labor spent on these services. Management has found that Yale, as a separate company devoted to these activities, has been able to handle these functions more cost effectively. In addition, since Yale is capable of providing these services to other customers as well as NHF, Yale generates additional revenues for the Company.
Fort Atkinson Industries is also engaged in the business of performing finishing operations on castings for the foundry industry. The Company believes there exists a significant potential for additional sales volume for finishing operations from non-affiliated foundries and from NHF as it continues to grow and diversify into the non-automotive industries.
(i) PRINCIPAL PRODUCTS PRODUCED AND SERVICE RENDERED AND PRINCIPAL MARKETS. The principal service rendered by the Company is the finishing, cleaning and testing of castings produced by NHF for the automotive industry and other component manufacturers in the United States and Canada.
(ii) STATUS OF NEW PRODUCTS OR INDUSTRY SEGMENTS. The Company announced it began cleaning operations at Fort Atkinson in early 1996. Except as to Fort Atkinson, there has been no public announcement of, and no information otherwise has been made public about, a new product or industry segment, which would require the investment of a material amount of the Company's assets, or which otherwise is material.
(iii) SOURCES AND AVAILABILITY OF RAW MATERIALS. The Company as a service orientated entity is not dependant on the availability of raw materials, however, the Company is dependant on the availability of qualified, trained manpower. The raw materials utilized by NHF are supplied by domestic suppliers and there does not appear to be any shortage of the three major raw materials used by NHF namely coke, scrap steel and sand.
(iv) PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS. The Company does not own any patents, trademarks, licenses, franchises, or concessions.
(v) SEASONAL NATURE OF BUSINESS. The Company's business is not seasonal in nature.
(vi) WORKING CAPITAL ITEMS. Practices and conditions with respect to specific working capital items are not relevant to an understanding of the Company's business. Working capital is required
for inventories and accounts receivable, to meet rapid delivery requirements, or to assure continuous allotments of goods from suppliers.
(vii) MAJOR CUSTOMERS. The following table sets forth information concerning customers, or any group of customers under common control, or customers which are affiliates of each other, to which sales were made by the Company during the fiscal year ended December 31, 1998, in an amount which equals 10% or more of the Company's revenue and the Company's relationship to each:
RELATIONSHIP PERCENT TO AMOUNT OF OF TOTAL CUSTOMER COMPANY REVENUE REVENUE -------- ------- ------- -------
New Haven Foundry, Inc. None $7,497,380 76.8%
The Company believes that if it should lose any of its present customers, primarily NHF, such loss would have a material adverse effect on the Company.
(viii) BACKLOG. Backlog is not relevant to an understanding of the Company's business.
(ix) RENEGOTIATION OR TERMINATION OF GOVERNMENTAL CONTRACTS. No portion of the Company's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government.
(x) COMPETITION. The Company's domestic competition is limited primarily to cleaning operations and captive foundries of the automobile industry. For the most part, these domestic foundries have older facilities and are not a significant threat to the Company's competitive position. Internationally, the Company faces competition from similar operations located in Europe, South America and Mexico. The Company's most serious threat of competition is from state-of-the-art operations located in Mexico and Brazil. These companies in Brazil present a competitive threat because they are subsidized by their respective governments, have labor cost advantages, and modern facilities.
(xi) RESEARCH AND DEVELOPMENT. The Company has not engaged and does not currently engage in any research and development activities.
(xii) ENVIRONMENTAL PROTECTION. The Company is subject to various federal, state, and local provisions regarding environmental matters, the existence of which has not hindered nor adversely affected the Company's business. Although the Company does not believe its business operations presently impair environmental quality, compliance with federal, state and local regulations which have been enacted or adopted regulating the discharge of materials into the environment could have an adverse effect upon the capital expenditures, earnings and competitive position of the Company. Since inception, the Company has not made any material capital expenditures for environmental control facilities and does not expect to make any such expenditures during the current and following fiscal years. However, the Company has agreed to administer the expenditure of $253,000 which the city of Yale, Michigan received as a community development block grant to perform an investigation to determine the extent of contamination at the Yale plant site and to clean up soil contamination left by previous owners and operators to a maximum of $253,000. The Company estimates the costs of administering the grant to be less than $50,000. As a result of its agreement to perform these procedures, the city of Yale, Michigan would transfer the property to the Company for use for casting, cleaning and foundry support operations within two years subject to certain conditions set forth in Item 7 of this Report. The Company
has also received a hold harmless for any existing conditions at the facility. The property was transferred to the Company in 1995.
(xiii) EMPLOYEES. As of December 31, 1998, the Company had approximately 175 hourly employees and 22 salaried employees at Yale Industries, Fort Atkinson Industries and Margate Industries. None of these employees are presently represented by a union.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES. The Company has no operations in foreign countries and no portion of its sales or revenues is derived from customers in foreign countries except Yale had sales of approximately $0 in 1998, $0 in 1997 and $19,133 in 1996 to Western Foundry, a Canadian company and $0 in 1998, $41,000 in 1997 and $122,500 in 1996 to Ford of Canada.
ITEM 2.
ITEM 2. PROPERTIES ----------
Yale Industries' facilities, which consist of a plant and the Company's corporate offices, are located in Yale, Michigan and are provided by the city of Yale, Michigan in consideration of the Company administering the expenditure of $253,000 for the investigation and cleanup at the plant site. The Company believes its plant at Yale is suitable for its present and future needs. The plant consists of approximately 70,000 square feet.
Fort Atkinson's facilities are located in Fort Atkinson, Wisconsin. It leases facilities covering approximately 73,000 square feet. The Company has leased this facility for a ten (10) year period beginning in December 1995. Base rent is $11,312.50 per month. The Company believes the plant is suitable for its present and future needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS -----------------
The Company knows of no pending or threatened legal proceeding to which it is or will be a party which, if successful, might result in a material adverse change in the business, properties, or financial condition of the Company or its subsidiaries.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS -------------------------------------------------
No response required.
PART II
ITEM 5.
ITEM 5. MARKET PRICE AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND ------------------------------------------------------------- RELATED STOCKHOLDER MATTERS ---------------------------
(a) PRINCIPAL MARKET OR MARKETS. The Company's common stock is traded on the over-the-counter market and, commencing on January 28, 1987, has been listed on the National Association of Securities Dealers, Inc., Automated Quotation System ("NASDAQ") under the symbol, "CGUL". The following tables set forth the range for high and low bid quotations for the Company's common stock, as reported by NASDAQ for the periods indicated. These prices are believed to be representative inter-dealer quotations, without retail markup, markdown or commissions, and may not represent actual transactions.
BID PRICE ADJUSTED FOR REVERSE STOCK SPLIT ON 11/13/98 ----------------------- HIGH LOW ------ -----
Quarter ended March 31, 1998 $2.06 $1.13 Quarter ended July 30, 1998 $2.53 $1.50 Quarter ended September 30, 1998 $2.67 $1.31 Quarter ended December 31, 1998 $1.88 $1.25
Quarter ended March 31, 1997 $2.52 $1.89 Quarter ended June 30, 1997 $2.52 $2.16 Quarter ended September 30, 1997 $3.18 $2.07 Quarter ended December 31, 1997 $1.98 $1.23
Quarter ended March 31, 1996 $3.75 $2.64 Quarter ended June 30, 1996 $3.18 $2.34 Quarter ended September 30, 1996 $3.75 $2.73 Quarter ended December 31, 1996 $3.48 $1.32
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The approximate number of holders of record or the Company's common stock at March 29, 1999 was 466.
(c) DIVIDENDS. The Company began paying quarterly dividends of $.00625 per share in August of 1991. Subsequently in August, 1992 the Board of Directors increased the dividend to $.0075 and in August, 1993, the quarterly dividend was increased to $.01 per share. On November 15, 1993 the quarterly dividend was increased to $.0125. On February 15, 1995 the quarterly dividend was increased to $.0150. On September 21, 1995 the quarterly dividend was suspended and will be decided at the Annual Meeting in June of each year if, or when the Company will pay a dividend.
The following table sets forth certain selected financial data with respect to the Company.
(In Thousands, Except for Share Data)
Year Ended December 31 ----------------------------------------------
1998 1997 1996 1995 1994 ------ ------ ------ ------ ------
Net sales $ 9,769 $10,472 $ 9,442 $ 9,311 $ 8,486
Net income (loss) $ 1,971 $ 149 $ (773) $(1,744) $ 1,445
Net income (loss) per common share $ 1.30 $ 0.10 $ (0.51) $ (1.11) $ 0.93
Dividends declared per common share $ 0 $ 0 $ 0 $0.0900 $0.1575
Total assets $ 7,562 $ 6,221 $ 6,195 $ 5,465 $ 7,328
Long-term debt $ 192 $ 412 $ 344 $ 184 $ 26
Stockholders' equity $ 5,716 $ 3,811 $ 3,662 $ 4,465 $ 6,392
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS ---------------------
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS INCLUDING CERTAIN PREDICTIONS AND PROJECTIONS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934. SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THIS SECTION AND UNDER "ITEM 1. DESCRIPTION OF BUSINESS." ACTUAL EVENTS OR RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS INCLUDING ECONOMIC, COMPETITIVE, GOVERNMENTAL AND TECHNOLOGICAL FACTORS AFFECTING THE COMPANY'S PROPERTIES, OPERATIONS, MARKETS, PRODUCTS, SERVICES AND PRICES.
The following is management's discussion and analysis of certain significant factors which have affected the Company's financial condition and results of operations during the periods included in the accompanying consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES: - -------------------------------
The current and quick ratios, which provide an indication of the Company's short-term assets in relation to its short-term obligations, for the comparable periods are as follows:
1998 1997 ---------- ----------
Working Capital $2,371,838 $ 783,440
Current Ratio 3.51 : 1 1.58 : 1
Quick Assets (Cash, Securities and Receivables) $3,074,171 $1,975,062
Quick Ratio 3.25 : 1 1.47 : 1
As noted by the above computations, the current ratio has increased from 1.58:1 to 3.51:1 and working capital has increased by $1,588,398 for the period from December 31, 1997 to December 31, 1998. The quick ratio has increased from 1.47:1 to 3.25:1. The largest single factor contributing to the increase in working capital is the sale of NHF of $2,075,212 of which $1,551,429 was received in cash in 1998.
Receivables decreased by $294,794 from December 31, 1997 to December 31, 1998. The decrease was due primarily to decreased sales volume and increased collections.
The Company has a facility line of credit of $1,300,000, with monthly interest payments at 1/2 below the prime rate. This line of credit is collateralized by substantially all the assets of the Company. Borrowings as of December 31, 1998 were $585,212.
The Company believes its cash flow from operations is sufficient to fund its current level of operations.
The Company has in the past and will in the future seek qualified acquisitions in similar and related industries for expansion opportunities and larger market penetration. The Company currently has no agreement or arrangement to acquire any other business entity.
RESULTS OF OPERATIONS - ---------------------
YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1998 - -------------------------------------------------------------
Sales decreased by $703,136 or 6.7% from December 31, 1997 to December 31, 1998. The Company's net income increased by $1,822,117 over the prior year's income of $148,999. The decrease in sales for 1998 is mostly attributable to a loss of a major customer at the Fort Atkinson Plant.
Cost of sales as a percentage of sales was 90.6% for the year ending December 31, 1998 as compared to 87.5% for the year ending December 31, 1997. The major reasons for the increase was higher labor costs and the effect of fixed costs which will not decrease with reduced sales.
Selling, general and administrative expenses decreased by $166,701 from 1997 to 1998. This was mainly due to reduced sales and cost reductions.
Interest income (net of interest expense) for the year ending December 31, 1998 increased by $125,140 from 1997. This increase was a result of increased interest income from notes receivable on the sale of NHF and a decrease in interest expense from lower interest rates and use of operating funds.
Related party services and sales commissions decreased from $18,098 in 1997 to $4,232 in 1998. This decrease was in sales volume from customers from outside sales representatives.
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1997 - -------------------------------------------------------------
Sales increased by $1,030,221 or 10.9% from December 31, 1996 to December 31, 1997. The Company's net income increased by $922,469 over the prior year's net loss of $773,470. The growth rate in sales for 1997 is mostly attributable to increased activity at the New Facility at Fort Atkinson which began operating in 1996.
Cost of sales as a percentage of sales was 87.5% for the year ending December 31, 1997 as compared to 93.3% for the year ending December 31, 1997. The major reason for the decrease was increased efficiency in labor costs.
Selling, general and administrative expenses increased by $54,851 from 1996 to 1997. This was mainly due to the above noted increase in sales, as most of these costs are variable.
Interest expense (net of interest income and dividends) for the year ending December 31, 1997 increased from $47,888 in 1996 to $105,143 in 1997. The increase is the result of interest expense to finance the Fort Atkinson plant and use of operating funds.
Related party services and sales commissions increased from $6,316 in 1996 to $18,098 in 1997. The increase was in sales volume from customers from outside sales representatives.
EFFECTS OF CHANGES IN PRICES - ----------------------------
When possible, the Company attempts to adjust the selling prices of its products in response to increases in its costs of labor, raw materials and capital. However, the market served by the Company is competitive and that competition may limit the allowance of price increases.
During 1998, 1997 and 1996 there were no significant changes in prices.
The Company had commitments for the purchase of, or the installation of, fixed assets at the Yale Industries facility. The Company had agreed to purchase $1.5 million in assets between July 1, 1993 and June 30, 1995. This commitment had been met as of December 31, 1994. The Company had an option to buy the facility for $1.00. The Company met its commitments and exercised the option in 1995.
IMPACT OF THE YEAR 2000 ISSUE - -----------------------------
The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on an assessment of its computer systems, the Company believes that it will not encounter significant operational problems or be required to modify or replace significant portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. In particular, the Company has installed current compliant software for its inventory and made inquiries of its vendors to insure they are taking proper steps to insure 2000 compliance. However, if problems are encountered and modifications and conversions are not timely made, the Year 2000 problem may have an impact on the operations of the Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -------------------------------------------
Information with respect to this item is contained in the financial statements appearing on Item 14 of this Report. Such information is incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE --------------------
None.
ITEM 10.
ITEM 10. IDENTIFICATION OF OFFICERS AND DIRECTORS ----------------------------------------
The following table sets forth the names and ages of all Officers and Directors of the Company, indicating all positions and offices with the Company held by each such person, and any periods during which he has served as such:
Position Served Positions with as Director Name Age All the Company of Company ---- --- --------------- ----------
Frederick G. Schriever 74 Chairman of the Board November 1987 to present and Director of the Company, Ft. Atkinson, and Yale Industries
Delbert W. Mullens 54 Vice Chairman of the July 1990 to present Board and Director of the Company, Ft. Atkinson, and Yale Industries
William H. Hopton 64 President and Director January 1986 to present of the Company, Ft. Atkinson, and Yale Industries
Frederick G. Berlet 70 Treasurer and Director November 1987 to present of the Company, Ft. Atkinson, and Yale Industries
David A. Widlak 50 Vice President, Secretary November 1987 to present and Director of the Company, Ft. Atkinson, and Yale Industries
BUSINESS EXPERIENCE OF DIRECTORS AND OFFICERS - ---------------------------------------------
FREDERICK G. SCHRIEVER has been Chairman of the Company's Board of Directors since November of 1987. He has been President of Casting Sales, Inc. from 1972 to present. Casting Sales, Inc. acts as a manufacturer's representative of foundries. Since 1955 to the present, Mr. Schriever has also been President of Amber Tool and Engineering which holds real estate and owns an interest in several companies and President of Trio Machine Products Corp., a production machine shop. Since 1960 to the present, he has also been President of J.P. Bell Co., a company specializing in machine levelers, Vice President of Casting Industries, Inc. and Chairman of Snap Fast, Inc. Mr. Schriever received a Bachelor of Science Degree in chemistry in 1949 from the University of Michigan. Mr. Schriever devotes as much time as necessary to the business of the Company and its subsidiaries.
DELBERT W. MULLENS has been a Director since July of 1990 and President of NHF since September 1, 1992. He has been the President, Director, and principal shareholder of Flint Coatings of Flint, Michigan, a company engaged in painting automotive parts for major car manufacturers including General Motors Corporation. Mr. Mullens is also Chairman of Product-SDL Chemical, Inc. Mr. Mullens received a Bachelor of Science Degree in Business Administration from Tennessee State University. Mr. Mullens devotes as much time as is necessary to the business of the Company and its subsidiaries.
WILLIAM H. HOPTON has been President of the Company since April of 1988, and a Director of the Company since January of 1986. Mr. Hopton also served as the Company's vice President from January of 1986 to April of 1988. Since 1984, Mr. Hopton has been President of NHF. Effective September 1, 1992, Mr. Hopton retired as President of NHF but will provide consulting services to NHF as needed. Also, as of that date, he is devoting his business time to the management of Margate
Industries, Inc. Mr. Hopton received a B.A. Degree in Business Administration from the University of Detroit in 1964.
FREDERICK G. BERLET has been a Director of the Company since November of 1987 and its Treasurer since April of 1988. He also serves as Director of numerous Canadian and U.S. corporations and is President of S.W.O. Managements Consultants Limited. He graduated with a Masters Degree in Business Administration in 1953 from the University of Western Ontario. Mr. Berlet devotes as much time as is necessary to the business of the Company and its subsidiaries.
DAVID A. WIDLAK has been Secretary and a Director of the Company since November of 1987. In February 1994 he was named Vice President. He received a Bachelors Degree from Wayne State University in 1969 and a juris doctorate Degree in Law from the University of Michigan in 1972. Mr. Widlak devotes as much time as is necessary to the business of the Company and its subsidiaries.
The Directors of the Company and its subsidiaries hold office for a three year term until the annual meeting of the shareholders and until their successors have been elected and qualified in the year in which their term expires. The terms of one or two Directors expire each year.
The Officers of the Company and its subsidiaries are elected by the respective Board of Directors at the first meeting after each annual meeting of shareholders and hold office until the next annual meeting of directors or their earlier resignation or removal.
The date of the next annual meeting of the Company will be determined by the Company's Board of Directors in accordance with Delaware law.
No Director holds a directorship in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
COMMITTEES, MEETINGS OF THE BOARD OF DIRECTORS. The Company has an audit and compensation committee consisting of Frederick Schriever, Frederick Berlet and David Widlak, which consults with and reviews the reports of the Company's independent auditors and the Company's internal financial staff. This committee also makes recommendations to the Company's Board of Directors as to compensation matters. The audit and compensation committee held one meeting during the year. The Company's Board of Directors held four regular meetings and three special meetings during the fiscal year ended December 31, 1998, at which time all of the then Directors were present or consented in writing to the actions taken at such meetings.
COMPLIANCE WITH SECURITIES EXCHANGE ACT REPORTING REQUIREMENTS. To the Company's knowledge, during the fiscal year ended December 31, 1998, the Company's Officers and Directors complied with all applicable Section 16(a) filing requirements. This statement is based solely on a review of the copies of such reports furnished to the Company by its Officers and Directors and their written representations that such reports accurately reflect all reportable transactions.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION ----------------------
CASH COMPENSATION. The following table sets forth the total remuneration paid during the Company's last fiscal year ended December 31, 1998 and the prior two years to the Chief Executive Officer, the only executive office whose total cash and non cash compensation exceeded $100,000 prior to 1995. In 1995 David Widlak's, Vice President of Mergers and Acquisitions, compensation exceeded $100,000.
(1) Periods presented are for the year ended December 31. (2) Represents Directors fees. (3) Number of shares of Common Stock subject to options granted during the year indicated. (4) Represents employer contributions for insurance, disability insurance, pension and car allowance.
COMPENSATION OF DIRECTORS
The Directors receive $6,000 for each regular meeting they attend plus expenses. The Chairman of the Board of Directors receives $7,000 per meeting. Special meetings were paid at $3,000, but have been reduced currently to $1,500.
OPTIONS GRANTED
The following table sets forth the options that have been granted to the Chief Executive Officer and President listed in the Executive Compensation Table during the Company's last fiscal year ended December 31, 1998.
Option/SAR Grants in Last Fiscal Year (1998) -------------------------------------------- Individual Grants - --------------------------------------------------------------------------- (a) (b) (c) (d) (e) % of Total Options/ Options/SARs Exercise SARs Granted to or Base Granted Employees Price Expiration Name (#) in Fiscal year ($/Share) Date ---- ------- -------------- -------- ----------
William H. Hopton N/A N/A N/A N/A President and CEO
AGGREGATE OPTIONS EXERCISED IN 1998 AND OPTION VALUES AT DECEMBER 31, 1998
The following table sets forth certain information regarding options to purchase shares of Common Stock exercised during the Company's 1998 fiscal year and the number and value of exercisable and unexercisable options to purchase shares of Common Stock held as of the end of the Company's 1998 fiscal year by the Executive Officers of the Company named in the Summary Compensation Table:
Aggregated Options Exercised in 1998 and Option Values at December 31, 1998 - -------------------------------------------------------------------------- (a) (b) (c) (d) (e) Value of Number of Unexercised Unexercised In-the-Money Options at Options at Shares 12/31/98 12/31/98 Acquired Value Exercisable/ Exercisable/ Name on Exercise Realized(1) Unexercisable Unexercisable ---- ----------- ----------- ------------- -------------
William H. Hopton None $0 -0- $0 President and CEO - --------------------------------------------------------------------------
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT --------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth as of March 29, 1999, information with respect to the ownership of the Company's $.005 par value common stock by each person known by the Company to own beneficially more than 5% of the outstanding common stock, and by each of its officers and directors and by all officers and directors collectively as a group:
Amount and Nature of Name and Address of Beneficial Percent of Beneficial Owner Ownership Class (1) - ------------------ ---------- ----------
Frederick G. and Patricia W. Schriever 266,549 17.9%
Frederick G. Berlet 0 (2) 0% S.W.O. Management Consultants, Ltd.
David A. Widlak 64,766 4.3%
Delbert W. Mullens 6,966 0.5%
William H. Hopton 47,353 (3) 3.2%
All Officers and Directors 385,634 25.9% of the Company & Subsidiaries as a Group (5 Persons) _______________
(1) Each person has sole voting and investment power with respect to the shares shown except as noted.
(2) 75,139 shares are held in a trust for Mr. Berlet's children. Mr. Berlet has no voting or dispositive power over the trust and hence, discloses no beneficial interest in those shares held in trust.
(3) Includes 37,353 shares held by William Hopton, individually, 10,000 shares held by his three children.
CHANGES IN CONTROL. The Company knows of no contractual arrangements, including any pledge by any person of securities, which may at a subsequent date result in a change in control of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ----------------------------------------------
None
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ---------------------------------------------------------------
(a) (1). The following Financial Statements are filed as part of this Report: Page ----
Independent Auditors' Report. . . . . . . . . . . . . . . . . . .F-1
Consolidated Balance Sheets, December 31, 1998 and 1997 . . . . .F-2
Consolidated Statements of Income, Years ended December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Equity For the Years ended December 31, 1998, 1997 and 1996. . . . . . . . . . . . . .F-5
Consolidated Statements of Cash Flows, Years ended December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . . . .F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . .F-7
(a) (3) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES ________
FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT ________
DECEMBER 31, 1998
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
- CONTENTS -
PAGE NUMBER -----------
Independent Auditors' Report 1
Financial Statements:
Consolidated Balance Sheet 2
Consolidated Statement of Operations 3
Consolidated Statement of Changes in Stockholders' Equity 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 22
Independent Auditors' Report ----------------------------
To the Board of Directors Margate Industries, Inc. and Subsidiaries Yale, Michigan
We have audited the accompanying consolidated balance sheets of MARGATE INDUSTRIES, INC. AND SUBSIDIARIES as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of NEW HAVEN FOUNDRY, the investment in which, as discussed in Note 1 to the financial statements, is accounted for by the equity method of accounting. The financial statements of NEW HAVEN FOUNDRY were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for NEW HAVEN FOUNDRY, is based solely on the report of the other auditors.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MARGATE INDUSTRIES, INC. AND SUBSIDIARIES at December 31, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles.
PERRIN, FORDREE & COMPANY, P.C.
Troy, Michigan February 10, 1999
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998
ASSETS ------
DECEMBER 31, --------------------------- 1998 1997 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents: $ 1,504,725 $ 110,822 Accounts receivable: Trade 1,569,446 378,301 Related parties - 1,485,939 Current maturities of notes receivable 108,571 - Notes receivable - related party - 17,800 Inventories 43,000 41,991 Prepaid expenses and other 60,049 37,394 Prepaid federal income tax 21,700 41,000 Deferred tax assets 10,500 12,400 ----------- ----------- Total current assets 3,317,991 2,125,647
PROPERTY, PLANT AND EQUIPMENT - At cost, net of accumulated depreciation and amortization of $1,631,533 and $1,324,045 at December 31, 1998 and 1997, respectively 3,763,902 4,038,979
NOTES RECEIVABLE - net of current maturities 440,000 -
OTHER 39,800 56,764
INVESTMENT IN NEW HAVEN FOUNDRY - -
----------- -----------
$ 7,561,693 $ 6,221,390 =========== ===========
The accompanying notes are an integral part of the financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------
DECEMBER 31, --------------------------- 1998 1997 ------------ ------------ CURRENT LIABILITIES: Line-of-credit $ 585,212 $ 626,000 Current portion of long term notes payable 61,710 213,832 Accounts payable 212,306 425,746 Accrued salaries and wages 67,233 63,924 Accrued workers' compensation 4,651 6,870 Other accrued liabilities 15,041 5,835 ----------- ----------- Total current liabilities 946,153 1,342,207
DEFERRED TAX LIABILITIES 255,500 235,700
OTHER POSTRETIREMENT BENEFITS 452,075 419,856
NOTES PAYABLE - Long-term 191,599 412,160
CONTINGENCIES - -
STOCKHOLDERS' EQUITY: Common stock - $.015 par value: Authorized - 25,000,000 shares Issued and outstanding - 1,489,214 and 1,524,546 at December 31, 1998 and 1997, respectively 22,338 22,868 Paid-in for common stock in excess of par value 7,345,038 7,410,725 Accumulated deficit (1,651,010) (3,622,126) ----------- ----------- Total stockholders' equity 5,716,366 3,811,467 ----------- -----------
$ 7,561.693 $ 6,221,390 =========== ===========
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------ ------ ------ NET SALES (Including related party sales and commissions of $1,889,000, $7,010,000 and $7,076,000 in 1998, 1997 and 1996, respectively) $ 9,768,537 $10,471,673 $ 9,441,452
COST OF SALES 8,851,386 9,159,159 8,812,222 ----------- ----------- -----------
GROSS PROFIT 917,151 1,312,514 629,230
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 835,573 1,002,274 947,423
RELATED PARTY SERVICES AND SALES COMMISSIONS 4,232 18,098 6,316 ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 77,346 292,142 (324,509)
DIVIDEND AND INTEREST INCOME (EXPENSE) - NET 19,997 (105,143) (47,888)
EQUITY LOSS OF INVESTEE COMPANIES - - (531,712)
LOSS ON SALE OF MARKETABLE SECURITIES - - (41,721)
LOSS ON ABANDONMENT OF LEASEHOLD IMPROVEMENTS (143,214) - -
OTHER INCOME - Net 15,773 - 7,360 ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (30,098) 186,999 (938,470)
PROVISION FOR FEDERAL INCOME TAXES 10,000 38,000 (165,000) ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (20,098) 148,999 (773,470)
EXTRAORDINARY ITEM - gain on sale of equity investee (net of applicable income tax expense of $84,000) 1,991,214 - - ----------- ----------- ----------- NET INCOME (LOSS) $ 1,971,116 $ 148,999 $ (773,470) =========== =========== =========== BASIC EARNINGS (LOSS) PER SHARE: CONTINUING OPERATIONS $ (.01) $ .10 $ (.51) EXTRAORDINARY ITEM 1.31 - - ----------- ----------- -----------
NET INCOME $ 1.30 $ .10 $ (.51) =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The accompanying notes are an integral part of the financial statements.
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------ ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $10,079,104 $10,276,690 $ 9,335,461 Cash paid to suppliers and employees (9,526,810) (9,896,955) (9,220,793) Interest and dividends received 79,322 2,491 23,021 Interest paid (67,896) (107,804) (70,908) Income taxes refunded (paid) (33,000) 215,870 81,113 ----------- ----------- ----------- Net cash from operating activities 530,720 490,292 147,894
CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equity investment 1,475,214 - - Proceeds from sale of securities - - 169,661 Deposits (made) refunded 16,964 2,371 (10,716) Proceeds from sale of assets - - 175,100 Purchase of property, plant and equipment (192,624) (246,250) (1,952,960) ----------- ----------- ----------- Net cash from (to) investing activities 1,299,554 (243,879) (1,618,915)
CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock - - 10,000 Purchase of treasury stock (66,217) - (103,655) Proceeds from line-of- credit -net (40,788) 44,000 582,000 Proceeds from long-term debt - - 692,000 Principal payments under long-term obligations (398,596) (203,927) (234,288) Proceeds from notes receivable 69,230 22,250 13,350 ----------- ----------- ----------- Net cash from (to) financing activities (436,371) (137,677) 959,407 ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,393,903 108,736 (511,614)
CASH AND CASH EQUIVALENTS: Balance - beginning of year 110,822 2,086 513,700 ----------- ----------- -----------
Balance - end of year $ 1,504,725 $ 110,822 $ 2,086 =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONS -----------------------------------------------------------------------
EQUIPMENT ACQUIRED UNDER CAPITAL LEASE OBLIGATION $ 25,913 $ 22,774 $ - =========== =========== ===========
NOTE RECEIVABLE ACQUIRED FROM SALE OF INVESTEE $ 600,000 $ - $ - =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
This summary of significant accounting policies of Margate Industries, Inc. (the Company) is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.
BUSINESS ACTIVITY -----------------
Margate Industries, Inc. is a holding company for subsidiaries involved in the cleaning of small and medium-sized grey iron castings that are sold primarily to the North American automobile industry.
Export sales totaled approximately $-0-, $41,000 and $142,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Net sales to major customers that represented 10% or more of the consolidated net sales are as follows:
1998 1997 1996 ------ ------ ------
New Haven Foundry $6,933,000 $6,480,000 $6,387,000 John Deere - 1,777,000 1,313,000
PRINCIPLES OF CONSOLIDATION ---------------------------
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Michigan Casting Corporation (MCC), Brown City Castings Corporation d/b/a Yale Industries (Yale), and Fort Atkinson Industries, Inc. (FAI). All intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements.
In November 1995, the Company established a wholly-owned subsidiary, Fort Atkinson Industries, Inc., which provides finishing services on castings manufactured in the Iowa-Wisconsin area. Operations began on March 1, 1996.
Effective July 1996, Michigan Castings Corporation combined its operations and assets with Yale Industries. Due to this combination, Michigan Castings Corporation abandoned its leasehold improvements upon expiration of its building lease, which resulted in a $143,214 loss for 1998.
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED:
PRINCIPLES OF CONSOLIDATION - CONTINUED ---------------------------------------
The Company follows the equity method of accounting for its 45% investment in New Haven Foundry (NHF). The carrying value of the Company's investment reflects its underlying equity in the net assets of NHF. The investment in NHF was sold in 1998, refer to Note 16.
CASH EQUIVALENTS ---------------
The Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents.
INVENTORIES -----------
Inventories, consisting primarily of grinding wheels, are stated at the lower of cost or market , determined by the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT -----------------------------
Property, plant and equipment are recorded at cost. Costs of maintenance and repairs are charged to expense when incurred.
Depreciation and amortization of plant and equipment is recorded using the straight-line method over the estimated useful lives of the assets. Depreciation and amortization expense totaled $350,399, $342,340 and $280,460 in 1998, 1997 and 1996, respectively. Estimated useful lives of assets in the various classes of property, plant and equipment are as follows:
Buildings and improvements 40 years Machinery and equipment 12 years Furniture and fixtures 12 years Automobiles 5 years
REVENUE RECOGNITION -------------------
Revenues derived from the cleaning of castings are recognized as services are provided.
Sales commissions are recognized as revenue when earned.
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED:
NET INCOME PER SHARE OF COMMON STOCK ------------------------------------
Net income per share of common stock is computed based on the weighted average number of shares of common stock outstanding during each year, plus the shares that would be outstanding assuming exercise of dilutive stock options and warrants. In November 1998, the Company announced a reverse stock split, effectively reducing the number of shares outstanding by one-third and increasing the par value from $0.005 to $.015 per share of common stock. The weighted average number of shares, total shares outstanding and earnings per share have been adjusted for 1998, 1997 and 1996 to reflect the effects of the reverse split. The total weighted average number of shares of common stock and common stock equivalents were 1,514,342, 1,524,546 and 1,526,176 for the years ended December 31, 1998, 1997 and 1996, respectively.
USE OF 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 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.
NOTE 2 - RELATED PARTY TRANSACTIONS:
The Company provides cleaning services to NHF for products manufactured by that Company. Pursuant to the July 1990 agreement for the sale of NHF common stock, the Company provides exclusive cleaning services on all castings produced by NHF for a minimum period of 15 years, provided the Company maintains an ownership interest in NHF.
Pursuant to the sale of the Company's equity interest in NHF on March 24, 1998 a new cleaning contract superceded and replaced the 1990 casting cleaning agreement. This new agreement grants the Company the exclusive right to clean all production castings produced by NHF for a minimum period of seven years commencing March 24, 1998. In the event of the Management and Option Agreement, as described in Note 16, being extended beyond its six year term, the term of this agreement shall extend for one year beyond the termination date of the Management and Option Agreement. This contract may be terminated upon the exercise of NHF's option to purchase the Yale Industries, Inc. facility in accordance with the terms of the Management and Option Agreement. Additionally, this contract may be terminated in the event that the operations of the Yale facility are no longer being managed by the Operations Manager as noted in the Management and Option Agreement.
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 2 - RELATED PARTY TRANSACTIONS - CONTINUED:
The terms of the 1990 sale also provided for a commission contract between NHF and the Company. The Company will receive a minimum of $150,000 per year, plus 3% of actual sales in excess of $35,000,000 but less than $40,000,000, plus an additional 2% on the actual sales that exceed $40,000,000. This commission contract is in effect for a period of not less than 15 years. Pursuant to the sale of the Company's equity interest in NHF on March 24, 1998, a new service fee contract superceded and replaced the 1990 commission agreement. The Company will receive quarterly service fee payments of $140,000 beginning on April 1, 1998, until January 1, 2003, for a total of $2,800,000 from NHF. The Company earned commissions and service fees from NHF amounting to $564,807, $610,378 and $688,706 in 1998, 1997 and 1996, respectively.
Any unpaid balances of the aforementioned amounts are included in the related party balances on the accompanying balance sheet.
The Company also has a note receivable from a related party (Refer to Note 4).
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 3 - INVESTMENT IN UNCONSOLIDATED COMPANY:
As described in Note 1, the Company accounts for its 45% investment in NHF using the equity method. As described in the Sale of New Haven Foundry, effective March 24, 1998 the Company sold its 45% investment in NHF. As such, the financial information from NHF for 1998 is not presented in these financial statements. Summarized financial information of NHF is as follows as of December 31:
1998 1997 1996 ------ ------ ------ ASSETS: Current assets $ - $15,231,417 $14,085,521 Net property, plant and equipment - 11,553,272 12,282,716 Other assets - 392,000 392,000 ----------- ----------- -----------
Total assets $ - $27,176,689 $26,760,237 =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities $ - $18,632,594 $17,407,355 Noncurrent liabilities - 9,717,867 10,325,990 Stockholders' equity - (1,173,772) (973,108) ----------- ----------- -----------
Total liabilities and stockholders' equity $ - $27,176,689 $26,760,237 =========== =========== ===========
1998 1997 1996 ------ ------ ------
NET SALES $ - $56,687,793 $62,700,025
OPERATING EXPENSES - 56,740,457 64,529,422 ----------- ----------- -----------
LOSS BEFORE INCOME TAXES - (52,664) (1,829,397)
INCOME TAXES (BENEFIT) - 148,000 327,000 ----------- ----------- -----------
NET LOSS $ - $ (200,664) $(2,156,397) =========== =========== ===========
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 3 - INVESTMENT IN UNCONSOLIDATED COMPANY - CONTINUED:
NHF implemented Statement of Financial Accounting Standards No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (SFAS 106) in the first quarter of 1993. The estimated liability as of the adoption date was $10.4 million, based on available actuarial valuations. NHF elected to amortize the transition obligation over 20 years. The annual expense for future postretirement employee benefits will include the annual amortization of this liability, future years' service cost and interest expense. The adoption of this statement had a significant impact on the Company's equity in the income of NHF.
The Company accounts for its investment in NHF using the equity method. During 1996, NHF generated a net loss resulting in a negative equity position. Accordingly, the investment in NHF has been written down to zero.
NOTE 4 - NOTES RECEIVABLE:
Notes receivable - consisted of the following at December 31:
1998 1997 ---------- ----------
Wesley Industries, Inc. - uncollateralized note receivable from related party, due in monthly installments of $4,450 per quarter through January 31, 1999, plus interest at the prime rate established by the National Bank of Detroit. $ - $ 17,800
Wesley Industries, Inc. - collateralized note receivable, as a result of the sale of 45% of New Haven Foundry (refer to Note 16), non-interest bearing, due in monthly installments of $35,000 of principal payments through March 2003. (Net of discount at an effective interest rate of 6.0%). 548,571 -
Less current portion 108,571 17,800 ----------- -----------
$ 440,000 $ - =========== ===========
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are summarized as follows as of December 31:
1998 1997 ---------- ----------
Building and improvements $1,706,681 $1,800,000 Machinery and equipment 3,472,698 3,371,498 Automotive equipment 77,297 77,297 Furniture and fixtures 138,759 114,229 ---------- ---------- Total cost 5,395,435 5,363,024 Less accumulated depreciation and amortization 1,631,533 1,324,045 ---------- ----------
Net property, plant and equipment $3,763,902 $4,038,979 ========== ==========
The Company received Community Development Block Grant (CDBG) funds through the City of Yale totaling $387,035 and land with a value of $25,000. These grants have been recorded as a credit in the property accounts and will be amortized into income over the life of the assets acquired.
NOTE 6 - NOTES PAYABLE:
Notes payable consist of the following at December 31:
1998 1997 ---------- ----------
Note payable - bank, due in monthly principal installments of $7,583, plus interest at prime in payment of loan guarantee for investment in CEDS, uncollateralized, maturing January 1999. $ 7,583 $ 98,583
Mortgage payable - bank, due in monthly installments of $8,300, including interest at 9% through December, 2000. The loan is collateralized by substantially all Company assets. - 260,678
Note payable, due in monthly installments of $3,992, including interest at 4% through July 2003. 206,863 245,647
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 6 - NOTES PAYABLE - CONTINUED:
Capital lease, due in monthly installments of $705, including interest at 17.9% through July 2001. 16,479 21,084
Capital lease, due in monthly installments of $402, including interest at 9%, through May 1, 2001. 10,198 -
Capital lease, due in monthly installments of $426, including interest at 9%, through August 2001. 12,186 - ---------- ---------- 253,309 625,992 Less current portion 61,710 213,832 ---------- ----------
$ 191,599 $ 412,160 ========== ==========
Maturities of notes payable obligations are as follows:
Year ending December 31: 1999 $ 61,710 2000 57,617 2001 53,212 2002 45,501 2003 35,269 ----------
$ 253,309 ==========
The Company maintains a bank line-of-credit of $1,300,000 for working capital requirements. The applicable interest rate is at 1/2% below the prime lending rate, currently 7.25% at December 31, 1998. The line-of-credit is secured by all accounts receivable, inventories and equipment of the Company. Additionally, certain required financial ratios must be maintained. The Company had borrowings against the line of $585,212 and $626,000 at December 31, 1998 and 1997, respectively.
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values of the Company's financial instruments, none of which are held for trading purposes, are as follows at December 31, 1998 and 1997:
1998 1997 --------------------- -------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- ASSETS ------
Cash and cash equivalents $1,504,725 $1,504,725 $ 110,822 $ 110,822 Notes receivable 548,571 548,571 17,800 17,800 ---------- ---------- ---------- ----------
$2,053,296 $2,053,296 $ 128,622 $ 128,622 ========== ========== ========== ========== LIABILITIES -----------
Notes payable $ 585,212 $ 585,212 $ 626,000 $ 626,000 Long-term debt 253,309 N/A 625,992 N/A Post-retirement benefits 452,075 452,075 419,856 419,856 ---------- ---------- ---------- ----------
$1,290,596 $1,037,287 $1,671,848 $1,045,856 ========== ========== ========== ==========
The carrying values of cash and equivalents approximate fair values. The notes receivable in 1997 are due from a related party and bear interest at the prime rate and payments are received when due. The notes receivable in 1998 are discounted at an imputed rate that approximates an interest rate between independent parties. Therefore, the carrying values of these notes approximate fair value.
The notes payable bear interest at prime rate which is deemed to be approximate fair value. It is currently not practicable to estimate the fair value of the long-term debt obligations. Because these note agreements contain unique terms, conditions, covenants and restrictions which were negotiated at arm's-length with the Company's lenders, there is no readily determinable similar instrument on which to base an estimate of fair value. Accordingly, no adjustment to fair value has been determined.
The postretirement benefits obligation has been determined by an outside actuary based on the actuarial present value of the expected benefits' liability.
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 8 - CAPITAL LOSS:
Margate Industries, Inc. (the Company) acquired 40% of the stock of Complete Engineering Development Services, Inc. (CEDS) in January 1995. Under the provisions of the agreement, the Company became a guarantor of CEDS' line-of-credit agreement. On December 21, 1995, CEDS defaulted on the line-of-credit and demand payment was made by the lender. The Company, as guarantor, negotiated a term note agreement with the bank for $273,000 along with a required payment of $50,000 which relieved them of all principal and interest due under the line-of-credit agreement. As a result, the Company incurred a capital loss of approximately $275,000 of which $83,000 and $181,000 were utilized for federal tax purposes in 1995 and 1998, respectively. The remaining unused capital loss of $11,000 is available for carryforward and expires in 2000.
NOTE 9 - INCOME TAXES:
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
1998 1997 ---------- ----------
Current deferred taxes: Gross assets $ 15,800 $ 12,400 Gross liabilities 5,300 - ---------- ---------- Current deferred tax - assets 10,500 12,400 ---------- ----------
Noncurrent deferred taxes: Gross assets 169,900 142,700 Gross liabilities (425,400) (378,400) ---------- ---------- (255,500) (235,700)
Valuation allowance - - ---------- ---------- Net noncurrent deferred tax - assets (liabilities) (255,500) (235,700) ---------- ----------
Total deferred tax - assets (liabilities) $ (245,000) $ (223,300) ========== ==========
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 9 - INCOME TAXES - CONTINUED:
The 1995 acquisition of CEDS resulted in a federal tax capital loss to Margate. Due to the uncertainty of the future realization, a valuation allowance was established for this deferred asset in 1995. This loss carryforward expires in 2000. In 1997, due to the expected sale of the Company's investment in New Haven Foundry , which was expected to generate a capital gain, the valuation allowance was reversed.
Deferred income taxes, included in the accompanying balance sheets, result from temporary differences related to the following items which are treated differently for financial reporting and tax reporting purposes.
1998 1997 1996 ------ ------ ------
Depreciation and amortization $(403,900) $(378,400) $(333,600) Capital and operating loss carryforward 16,200 - 65,000 Other postretirement benefits 153,700 142,700 126,400 Workers' compensation expense (26,800) - - Vacation expense 15,800 12,400 14,300 --------- --------- ---------
Total $(245,000) $(223,300) $(127,900) ========= ========= =========
The components of the provision for income taxes are as follows for the years ended December 31: 1998 1997 1996 ------ ------ ------ Current tax expense (benefit) $ 68,500 $ 72,600 $(264,300) Deferred tax expense 21,700 30,400 99,300 Capital and operating loss carryforwards (16,200) - - Adjustment to valuation allowance - (65,000) - --------- --------- ---------
Provision for income taxes $ 74,000 $ 38,000 $(165,000) ========= ========= =========
A reconciliation of the statutory tax rate to the effective tax rates recorded as follows:
1998 1997 1996 ------ ------ ------
Statutory rate 34% 34% (34)% (Earnings) losses of unconsolidated subsidiaries - - 19 Recognition of capital and operating loss carryforward (30) - - Adjustment to valuation allowance - (12) - Other - (2) (3) ----- ----- -----
Effective rate 4% 20% (18)% ===== ===== =====
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 10 - CASH FLOWS:
A reconciliation of net income (loss) to net cash flows from operating activities is as follows for the years ended December 31:
1998 1997 1996 ------ ------ ------ Net income (loss) $1,971,116 $ 148,999 $ (773,470) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 350,399 342,340 280,460 Loss on sale of marketable securities - - 41,721 (Gain) loss on sale of property, plant and equipment 143,214 - (7,302) Gain on sale of equity investee (2,075,214) - - Equity in loss of investee companies - - 531,711 Deferred income tax provision 21,700 30,400 (43,000) Tax benefit of stock options exercised - - 4,000 Changes in assets and liabilities which (increase) decrease cash flows: Accounts receivable: Trade (1,191,145) 217,302 (89,754) Related parties 1,485,939 (494,969) (16,237) Inventories (1,009) (9,527) 22,869 Interest receivable (8,571) - - Prepaid expenses and other (14,084) 46,739 (5,254) Accounts payable (213,440) (87,325) 330,825 Accrued income tax 19,300 223,300 (44,943) Accrued workers' compensation (2,219) 216 (101,606) Accrued salaries and wages 3,309 21,924 (5,232) Accrued single business tax 630 1,100 (1,000) Other accrued liabilities 8,576 1,894 (17,112) Accrued pension and retiree health benefits 32,219 47,899 41,218 ---------- ---------- ----------
Net cash from operating activities $ 530,720 $ 490,292 $ 147,894 ========== ========== ==========
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 11 - STOCK OPTIONS:
The following table sets forth stock options granted, exercised and canceled during the years ended December 31:
Pursuant to the agreement for the sale of 55% of NHF (in 1990), stock options were granted to the owner of Wesley Industries for 33,333 shares at a price of $4.50 and 33,333 shares at a price of $7.50. The options are exercisable at any time, provided that the owner of Wesley Industries holds a minimum 55% ownership interest in NHF and the Company also holds an ownership interest in NHF.
Pursuant to the sale of the Company's interest in NHF on March 24, 1998, the remaining 66,666 stock options were no longer exercisable as the Company no longer maintained an ownership interest in NHF.
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 11 - STOCK OPTIONS - CONTINUED:
The Financial Accounting Standards Board issued Statement No. 123 "Accounting for Stock Based Compensation" which is effective in 1996. The Statement provides a fair value method of accounting for stock based compensation plans rather than the intrinsic value method contained in APB Opinion No. 25 which the Company currently uses. The new Statement does not require an entity to adopt the new method but, provides the option to either continue with the current method of accounting under APB 25 or adopt the fair value method of accounting under FASB 123. The Company will continue using the current method of accounting. Since the Company granted no options in 1996, 1997 and 1998 there would be no effect on adopting the fair value accounting under FASB 123 to the Company's financial statements.
NOTE 12 - LEASE COMMITMENTS:
MCC leased its building under an operating lease agreement which expired in September 1998. FAI also leases its building under an operating lease agreement that expires in December, 2005. These leases require the Company to pay all maintenance and insurance expenses. The Company also leases certain vehicles under two or three year agreements.
Minimum payments under these leases are as follows:
1999 $165,480 2000 141,845 2001 135,750 2002 135,750 2003 135,750 Thereafter 271,500 --------
$986,075 ========
Rental expense for these leases in 1998, 1997 and 1996, was approximately $257,800, $271,000 and $264,000, respectively.
NOTE 13 - OTHER POSTRETIREMENT BENEFITS:
The Company sponsors certain health-care and life insurance benefits for all retired employees. In December 1990, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 106 on ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (SFAS 106). The new standard requires that the expected cost of these benefits be charged to expense during the years that the employees render service.
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 13 - OTHER POSTRETIREMENT BENEFITS - CONTINUED:
The following table sets forth the Plan's funded status reconciled with the amount shown in the Company's consolidated balance sheet at December 31:
1998 1997 ---------- ---------- Accumulated postretirement benefit obligation: Fully-eligible active plan participants $133,499 $100,227 Other active plan participants 175,596 250,154 -------- -------- $309,095 $350,381 ======== ========
Unrecognized net loss from past experience different from that assumed and from changes in assumptions $ 39,202 $ 69,475 Unrecognized prior service costs from plan amendment 103,778 - Accrued postretirement benefit obligation 309,095 350,381 -------- --------
Accrued postretirement benefit cost $452,075 $419,856 ======== ========
The Company's postretirement healthcare and life insurance plan is not funded as the Company funds benefits on a pay-as-you-go basis.
Net periodic postretirement benefit costs included the following components:
1998 1997 ---------- ----------
Service cost - benefits attributed to service during the period $ 19,159 $ 27,808 Interest cost on accumulated other postretirement benefit obligation 19,366 21,941 Amortization of net losses (844) (1,850) Amortization of prior service costs (5,462) - -------- -------- Net periodic other postretirement benefit cost $ 32,219 $ 47,899 ======== ========
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 13 - OTHER POSTRETIREMENT BENEFITS - CONTINUED:
For measurement purposes, a 7.18% and 7.25% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 1998 and 1997, respectively, the rate was assumed to decrease to 5.25% over seven and eight years, respectively, and remain at that level thereafter. The healthcare cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed healthcare cost trend rate by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1998 and 1997, by $77,155 and $93,853, respectively, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the years then ended by $11,366 and $5,722, respectively.
The discount rate used in determining the accumulated postretirement benefit obligation was 7.25% as of December 31, 1998 and 1997.
NOTE 14 - CONTINGENCIES:
The Company has developed preliminary plans to address the possible exposures related to the impact on its computer systems of the Year 2000. Key financial information and operational systems have been assessed and detailed plans have been developed to address systems modifications required by December 31, 1999. The financial impact of making the required systems changes is not expected to be material to the company's financial position, results of operations or cash flows.
NOTE 15 - EMPLOYEE BENEFIT PLANS:
The Company maintains a 401(k) plan covering all employees that satisfy the Plan's eligibility requirements. The Company is required to match 25% (maximum 2%) of each employee's contribution, not to exceed 8% of the participant's compensation. Employer's contribution for the years ended December 31, 1998, 1997 and 1996, was $17,055, $27,134 and $22,539, respectively.
Margate maintains a Defined Contribution Plan covering substantially all employees that satisfy the Plan's eligibility requirements. Under the provisions of the Plan, Margate is required to make an annual contribution of 5% of each participant's eligible compensation. Plan contributions for the years ended December 31, 1998, 1997 and 1996, were $28,522, $20,718, and $21,712, respectively.
During 1995, MCC adopted a Cafeteria Plan under Section 125 of the Internal Revenue Code which allows employees that participate to pay for their portion of health benefits with before tax dollars. The Plan covers all employees that meet the requirements of coverage under MCC's group health benefit plan.
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1998
NOTE 16 - GAIN ON SALE OF NEW HAVEN FOUNDRY:
On March 24, 1998, the Company sold its 45% ownership interest in New Haven Foundry to Wesley Industries, Inc. who owns the remaining 55% interest. The sales price totaled $2,100,000 of which $1,500,000 was received in cash and a $600,000 note receivable, payable over five years. Legal fees relating to this transaction amounted to $24,786, which resulted in a $2,075,214 gain on sale as the equity interest in NHF was written down to zero in 1996.
As noted under related party transactions (Note 2), this sale resulted in a new casting cleaning and service fee agreement. Additionally, there is also a Management and Option Agreement ("Agreement") entered into between Yale Industries, Inc., Margate Industries, Inc., New Haven Foundry and Wesley Industries, Inc . as a result of this sale. This agreement established an Operations Manager responsible for the production operations at Yale and reports to NHF. This agreement also granted Wesley the right to purchase 100% of the stock of Yale or substantially all of the assets related to the Yale business, at Wesley's option, at any time within six years of this agreement. The purchase price under this option shall be Yale's earnings before interest and taxes (EBIT) as defined in the agreement for the 12 month period recently ended, multiplied by five, and in no event shall the purchase price under the option be less than $4,000,000 or more than $5,000,000 in cash, plus in the event of an asset purchase, the assumption of liabilities of Yale.
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.
MARGATE INDUSTRIES, INC.
Dated: March 29, 1999 By: /s/ William H. Hopton --------------------------------- William H. Hopton
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 and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ Frederick G. Schriever Chairman of the Board March 29, 1999 - -------------------------- and Director Frederick G. Schriever
/s/ Delbert W. Mullens Vice Chairman and Director March 29, 1999 - -------------------------- Delbert W. Mullens
/s/ William H. Hopton President, Chief Financial March 29, 1999 - -------------------------- Officer and Director William H. Hopton
/s/ David A. Widlak Secretary and Director March 29, 1999 - -------------------------- David A. Widlak
/s/ Frederick G. Berlet Treasurer and Director March 29, 1999 - -------------------------- Frederick G. Berlet