<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended DECEMBER 31, 1994
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the transition period from N/A to N/A
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Commission File Number 0-13817
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MARGATE INDUSTRIES, INC.
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(Exact Name of Registrant as specified in its Charter)
DELAWARE 84-8963939
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State or Other Jurisdiction of (IRS EmployerIdentification
Incorporation or Organization Number)
129 NORTH MAIN STREET, YALE, MICHIGAN 48097
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code (810) 387-4300
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.005 PAR VALUE
-----------------------------
Title of Class
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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At March 16, 1995, 4,659,614 shares of Common Stock , no par value, were
outstanding. The aggregate market value of the Common Stock held by non-
affiliates of the Registrant on that date was approximately $6,804,231.
Documents incorporated by reference: NONE
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes X No
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Page 1 of 64 pages Exhibits are indexed on page 23.
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PART I
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 moved
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"), a non-affiliated entity, for $1,589,000 consisting
of $1,500,000 cash and an $89,000 five-year Promissory Note. Wesley is
50%-owned by Mr. Delbert W. Mullens, who was appointed a Director of the Company
after the sale 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 will
now begin in April, 1994. Upon repayment of the promissory note, Wesley has 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 can 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 receives
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$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 will 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 will provide cleaning services on all castings
produced by NHF on an exclusive basis, so long as the Company retains an
ownership interest in NHF.
Pursuant to the sale, Mr. Mullens was elected to the Company's Board of
Directors. Conversely, the Company has representatives that account for forty
five percent (45%) of the Directors/Voters on the NHF Board of Directors. In
addition, Mr. Mullens is restricted from transferring his interest in NHF stock
without the consent of the Company and also he has 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 has
the option to purchase 100,000 shares of the Company's common stock at $1.50 per
share and an additional 100,000 shares at $2.50 per share upon purchase of the
first 100,000 shares. Mr. Mullens' shares subject to option and the exercise
price thereof were adjusted to reflect the reverse stock split described below.
The Company sold its 55% interest in NHF to enhance its sales as Wesley was
an approved minority supplier to the auto industry. For the fiscal year ended
December 31, 1994 revenues at NHF have doubled from 1991. The transaction and
sale of the 55% interest in NHF was approved by the Company's shareholders
in June 1990.
Effective June 21, 1993, the Company initiated operations at Yale, Michigan
and relocated its corporate offices to that location. Yale Industries employs
approximately ninety (90) workers at the facility, which 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).
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. The Company's
activities are confined to the finishing and testing of grey iron 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.
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(c) NARRATIVE DESCRIPTION OF BUSINESS.
GENERAL
The Company engages in the business of performing finishing operations on
grey iron castings for the foundry industry and owns a minority interest in NHF,
a foundry located in New Haven, Michigan that manufactures grey iron castings
for the automotive industry. The following is a description of the Company's
two wholly-owned subsidiaries and NHF.
Michigan Casting Corporation ("MCC"), 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. MCC commenced operations in June of 1987, and
its facilities are currently located in Romeo, Michigan, approximately 15 miles
from New Haven, Michigan where NHF's facilities are located. NHF uses the
services of MCC 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 MCC, as a separate company devoted
to these activities, has been able to handle these functions more cost
effectively. In addition, since MCC is capable of providing these services to
other customers as well as NHF, MCC together with Yale Industries generates
additional revenues of approximately 40% of total revenues for the Company.
Yale Industries is also engaged in the business of performing finishing
operations on grey iron 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.
New Haven Foundry, a 45% owned subsidiary of the Company, is a manufacturer
of grey iron castings for the North American automotive industry and is
currently a supplier of cylinder heads, manifolds, bearing caps, flywheels, and
transmission casings for Detroit-based car manufacturers. Its principal
customers include the Chrysler Corporation and Detroit Diesel Corporation.
Approximately 79% of NHF's total sales are to Chrysler Corporation to whom it is
the only supplier of grey iron cylinder heads. Although NHF is presently
attempting to expand its customer base, the loss of this customer could have a
materially adverse effect on NHF and consequently the Company.
Complete Engineering Development Services, Inc. ("CEDS") is a certified
engineering firm which supplies off-site contract engineers
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for design and build services. CEDS began operations on October 1, 1993.
Currently its services are used as a second tier supplier to the auto industry.
(i) PRINCIPAL PRODUCTS PRODUCED AND SERVICE RENDERED AND PRINCIPAL
MARKETS. The principal service rendered by the Company is the finishing,
cleaning and testing of grey iron castings produced by NHF for the automotive
industry and other component manufacturers in the United States and Canada.
Once the service has been completed, the Company ships the castings by truck to
the end user which is generally the automobile company itself.
(ii) STATUS OF NEW PRODUCTS OR INDUSTRY SEGMENTS. 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 Company competes for manpower with the automobile industry. When
the automobile manufacturers are at full capacity, there may be a shortage of
manpower thereby forcing the Company to utilize more overtime. 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, 1994, in an amount which
equals 10% or more of the Company's revenue and the Company's relationship to
each:
<TABLE>
<CAPTION>
Relationship Percent
to Amount of of Total
Customer Company Sales Revenue
----------------------- ------------ ---------- --------
<S> <C> <C> <C>
New Haven Foundry, Inc. Subsidiary $5,065,000 59.5%
Ford Motor Co. None $ 968,000 11.4%
</TABLE>
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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 substantially lower labor
costs, and modern facilities. The Company does have a geographical advantage,
however, as it is located closer to the end user primarily automobile
manufacturers.
(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 will 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.
As more fully described in Note 15 of the Financial Statements, NHF,
the Company's 45% owned subsidiary, has entered into discussions with the
Michigan Department of Natural Resources and the United States Environmental
Protection Agency regarding used foundry sand on its property. Costs of a
remedial plan are currently estimated to range from $200,000 to $6,000,000.
Results of further investigation and testing performed in 1995 are expected to
provide management with information necessary to assess whether resolution of
this matter will have a materially adverse impact on NHF's future results of
operations. The ultimate outcome of this matter is unknown and management is
unable to predict whether this matter and its resolution will have a
materially adverse effect on the Company's financial position and future
results of operations.
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(xiii) EMPLOYEES. As of December 31, 1994, the Company had 196 hourly
employees and 19 salaried employees at MCC and Yale 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 $532,000 in 1994, $1,296,000 in 1993 and $1,383,000 in
1992 to Western Foundry, a Canadian company and $968,000 in 1994 to Ford of
Canada.
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ITEM 2. PROPERTIES
MCC's facilities are located in Romeo, Michigan, approximately 40 miles
from Detroit, in leased facilities covering 42,000 square feet. MCC has leased
this facility for a period of four years, beginning in June of 1994, during
which time MCC will pay an average of $9,000 per month. MCC's equipment is
suitable for its present needs and is capable of handling anticipated increases
in production.
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.
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. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No response required.
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PART II
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.
<TABLE>
<CAPTION>
BID PRICE
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HIGH LOW
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<S> <C> <C>
Quarter ended March 31, 1994 $3.31 $3.13
Quarter ended June 30, 1994 $3.00 $3.00
Quarter ended September 30, 1994 $2.63 $2.50
Quarter ended December 31, 1994 $1.81 $1.75
Quarter ended March 31, 1993 $2.03 $1.41
Quarter ended June 30, 1993 $1.56 $1.25
Quarter ended September 30, 1993 $3.28 $1.41
Quarter ended December 31, 1993 $3.59 $2.50
Quarter ended March 31, 1992 $1.55 $0.15
Quarter ended June 30, 1992 $1.05 $0.60
Quarter ended September 30, 1992 $1.70 $0.90
Quarter ended December 31, 1992 $1.70 $0.75
</TABLE>
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The approximate number
of holders of record or the Company's common stock at March 15, 1995 was 513.
(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. The Company intends to continue payment of dividends
for the foreseeable future.
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The following table sets forth certain selected financial data with respect
to the Company.
(In Thousands, Except for Share Data)
<TABLE>
<CAPTION>
Year Ended December 31
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1994 1993 1992 1991 1990
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Net sales $ 8,486 $ 8,183 $ 6,122 $ 4,249 $4,977
Net income (loss) $ 1,445 $ 1,246 $ 1,682 $ 38 $ 731
Net income (loss) per
common share $ 0.31 $ 0.27 $ 0.37 $ 0.01 $ 0.15
Dividends declared per
common share $0.0525 $0.0425 $0.0288 $0.0188 $ -
Total assets $ 7,330 $ 6,162 $ 5,119 $ 3,418 $3,792
Long-term debt $ 26 $ - $ 4 $ 6 $ 9
Stockholders' equity $ 6,392 $ 5,068 $ 4,002 $ 2,416 $2,396
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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:
<TABLE>
<CAPTION>
1994 1993
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<S> <C> <C>
Working Capital $2,188,682 $2,256,955
Current Ratio 5.08 : -1 3.71 : 1
Quick Assets (Cash, Securities
and Receivables) $2,000,418 $2,712,090
Quick Ratio 3.40 : 1 3.26 : 1
</TABLE>
As noted by the above computations, the current ratio has increased from
3.71:1 to 5.08 and working capital has decreased by $68,273 for the period
from December 31, 1993 to December 31, 1994. The quick ratio has increased from
3.26:1 to 3.40:1. The largest single factor contributing to the decrease in
working capital is the investment in property, plant and equipment of
approximately $972,000. The majority of the increase in assets is attributable
to the renovation of the Yale Industries, Inc. facilities which will increase
their operational capacity.
The Company's cash, cash equivalents and securities of approximately
$1,039,824 are invested in bank deposits and marketable securities, consisting
of investments in money market funds and equity securities. These funds will be
used to support the increased sales volumes at the Company's subsidiaries. At
December 31, 1994, market values were approximately $35,000 less than cost.
Receivables decreased by $244,109 from December 31, 1993 to December 31,
1994. The decrease was due primarily to the increased cash collections from
customers.
The Company's subsidiaries, Yale Industries and Michigan Casting
Corporation have a consolidated facility line of credit of $500,000, with
monthly interest payments at .5% over the prime rate. This line of credit is
collateralized by substantially all the assets of Yale and MCC. No borrowings
were outstanding as of December 31, 1994.
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.
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RESULTS OF OPERATIONS
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YEAR ENDED DECEMBER 31, 1994 VS. YEAR ENDED DECEMBER 31, 1993
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Sales increased by $302,979 or 3.7% from December 31, 1993 to December 31,
1994. The Company's net income increased by $198,946 over the prior year's net
income of $1,245,924. The growth rate in sales for 1994 is mostly attributable
to increased activity in the automobile industry.
Cost of sales as a percentage of sales was 79.5% for the year ending
December 31, 1994 as compared to 75.6% for the year ending December 31, 1993.
The major reasons for the increase was higher insurance costs (1.8%) and
increased repairs and maintenance costs (2.5%). The higher insurance cost is
attributed to increased costs of insurance and increased benefits offered to
retain employees due to lower unemployment rates. Increased repairs related to
renovation cost of existing equipment to handle new business and products.
Selling, general and administrative expenses increased by $17,904 from 1993
to 1994. This was mainly due to the above noted increase in sales, as most of
these costs are variable.
Interest income for the year ending December 31, 1994 decreased from
$103,600 in 1993 to $43,945 in 1994. This decrease was a result of the payoff
of NHF of its loan.
Related party services and sales commissions increased from $41,111 in 1993
to $79,222 in 1994. This increase was for new customers obtained through the
use of sales representatives (Casting Sales, Inc.).
YEAR ENDED DECEMBER 31, 1993 VS. YEAR ENDED DECEMBER 31, 1992
-------------------------------------------------------------
Sales increased by $2,061,173 or 34% from December 31, 1992 to December 31,
1993. The Company's net income decreased by $435,660 over the prior year's net
income of $1,681,584. The growth rate in sales for 1993 is mostly attributable
to increased activity with NHF, which is a result of increased business with
Chrysler Corporation and the improvement in the automobile industry.
Cost of sales as a percentage of sales was 75.6% for the year ending
December 31, 1993 as compared to 70.7% for the year ending December 31, 1992.
The major reason for the increase was the costs associated with the introduction
of new jobs and new customers together with lower profit margins on new
business.
Selling, general and administrative expenses increased by $251,947 or 40%
from 1992 to 1993. This increase was mainly due to the increase in sales, as
most of these costs are variable.
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Interest income for the year ending December 31, 1993 increased from
$77,098 in 1992 to $103,600 in 1993. This increase was a result of the increase
in cash in money market funds and loans to NHF.
Related party services and sales commissions decreased from $108,018 in
1992 to $41,111 in 1993. This decrease was a result of reduced services
performed by NHF on behalf of the Company.
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 1994, 1993 and 1992 there were no significant changes in prices.
The Company has commitments for the purchase of, or the installation of,
fixed assets at the Yale Industries facility. The Company has agreed to
purchase $1.5 million in assets between July 1, 1993 and June 30, 1995. This
commitment has been met as of December 31, 1994. The Company has an option to
buy the facility for $1.00.
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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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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:
Period Served
as Director
Name Age All Positions with the Company of Company
---- --- ------------------------------ ----------
Frederick G. Schriever 70 Chairman of the Board November 1987
and Director of the Company, to present
MCC, and Yale Industries
Delbert W. Mullens 50 Vice Chairman of the Board July 1990
and Director of the Company, to present
MCC, and Yale Industries
William H. Hopton 60 President and Director January 1986
of the Company, MCC, to present
and Yale Industries
Frederick G. Berlet 66 Treasurer and Director November 1987
of the Company, MCC, to present
and Yale Industries
David A. Widlak 46 Secretary and Director November 1987
of the Company, MCC, to present
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 Arrow Exit Systems, 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
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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 is Vice Chairman of Flock
Manufacturing, Inc. He also serves as Director of Waterloo Scientific, Inc. and
President - Director of N.W.W. Management 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 of Mergers and
Acquisitions. 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 term of 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.
-15
<PAGE>
COMMITTEES, MEETINGS OF THE BOARD OF DIRECTORS. The Company has an audit
and compensation committee consisting of David Widlak and Frederick Berlet 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 two meetings during the year. The
Company's Board of Directors held four (4) meetings during the fiscal year ended
December 31, 1994, 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, 1994, 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.
-16-
<PAGE>
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, 1993 and the prior
two years to the Chief Executive Officer, the only executive office whose total
cash and non cash compensation exceeded $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------
Long Term Compensation
------------------------------
Annual Compensation Awards Pay-
outs
-----------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Restricted LTIP Other
and Compen- Stock Options/ Pay- Compen-
Principal Salary Bonus sation Award(s) SARs outs sation
Position Year(1) ($) ($) ($)(2) ($) (#)(3) ($) ($)(4)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William H. Hopton 1994 $ 75,000 $18,000 $ 24,000 $8,342
President and CEO 1993 $ 65,000 $10,000 $ 24,000 $7,342
1992 $ 60,000 $15,000 $ 24,000 $7,342
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
(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 of $5,342, disability
insurance of $500 and car allowance of $2400.
</TABLE>
COMPENSATION OF DIRECTORS
The Directors receive $6,000 for each meeting they attend plus expenses.
The Chairman of the Board of Directors receives $7,000 per meeting.
-17-
<PAGE>
OPTIONS GRANTED
The following table sets forth the options that have been granted to the Chief
Executive Officer and President listed in the Executive Compensation Table
during the Company's last fiscal year ended December 31, 1994.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR (1994)
--------------------------------------------
Individual Grants
-------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
% of Total
Options/ Options/SARs Exercise
SARs Granted to or Base
Granted Employees Price Expiration
Name (#) in Fiscal Year ($/Share) Date
---- -------- -------------- --------- ----------
<S> <C> <C> <C> <C>
William H. Hopton N/A N/A N/A N/A
President and CEO
</TABLE>
AGGREGATE OPTIONS EXERCISED IN 1994 AND OPTION VALUES AT DECEMBER 31, 1994
The following table sets forth certain information regarding options to purchase
shares of Common Stock exercised during the Company's 1994 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 1994 fiscal year by the
Executive Officers of the Company named in the Summary Compensation Table:
<TABLE>
<CAPTION>
Aggregated Options Exercised in 1994
and Option Values at December 31, 1994
--------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
12/31/94 12/31/94
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized(1) Unexercisable Exercisable(2)
---- -------------- ----------------- ------------- --------------
<S> <C> <C> <C> <C>
William H. Hopton 16,000 $50,000 0/48,000 $0/$86,880
President and CEO
--------------------------------------------------------------------------------
(1) Value realized is equal to the difference between the fair market value per
share of Common Stock on the date of exercise and the option exercise price
per share multiplied by the number of shares acquired upon exercise of an
option.
(2) Value of exercisable/unexercisable in-the-money options is equal to the
difference between the fair market value per share of Common Stock of $1.81
at December 31, 1994, and the option exercise price per share multiplied by
the number of shares subject to options.
</TABLE>
-18-
<PAGE>
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLANS. As of December 31, 1994,
Mr. Hopton held options to purchase 48,000 shares of the Company's common stock,
at a price of $.50 per share. These options are exercisable through December
15, 1997. Delbert W. Mullens, Vice-Chairman, held options to purchase 100,000
shares at a price of $1.50 per share and 100,000 shares at a price of $2.50 per
share. Mr. Mullens' options are exercisable at any time, provided that he holds
a minimum 55% ownership interest in NHF and the Company also holds an ownership
interest in NHF.
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 December 31, 1994, 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:
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address of Beneficial Percent of
Beneficial Owner Ownership Class (1)
------------------ ---------- ----------
<S> <C> <C>
Calhoun Foundry Company 232,660 5.0%
506 South Clay Street
Homer, MT 49245
Paul L. Cosper 284,120 (2) 6.1%
P.O. Box 96050
Wixom, MI 48096
Charles H. Raches, Jr. 252,840 5.4%
2686 Birch Harbor Lane
West Bloomfield, MI 48003
Frederick G. and 795,147 (3) 17.1%
Patricia W. Schriever
64 Clairview
Grosse Pointe Shores,
MI 48236
Frederick G. Berlet 225,416 (4) 4.8%
S.W.O. Management
Consultants, Ltd.
35 Parkwood Drive
Tillsonburg, Ontario
Canada N4G 2B7
-19-
<PAGE>
David A. Widlak 85,000 1.8%
P.O. Box 482
Washington, MI 48094
Delbert W. Mullens 200,000 (5) 4.3%
2888 Bloomfield Crossings
Bloomfield Hills, MI 48013
William H. Hopton 152,060 (6) 3.3%
604 Maple Lane
Columbus, MI 48063
All Officers and Directors 1,457,623 31.3%
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) The shares beneficially owned by Mr. Cosper are held in the name of Paul L.
Cosper, Trustee under an Agreement of Trust executed by Paul L. Cosper as
Grantor. The beneficiaries of this trust are Mr. Cosper's wife and
children.
(3) Includes 562,487 shares held individually and jointly with Patricia W.
Schriever, Mr. Schriever's wife and 232,660 shares which are held by
Calhoun Foundry Company, Inc. of which Mr. Schriever is a principal
shareholder.
(4) The shares beneficially owned by Mr. Berlet are held in joint tenancy with
his wife and children.
(5) Includes 200,000 options to purchase common stock.
(6) Includes 48,060 shares held by William Hopton, individually, 40,000 shares
held jointly with his four children, and 48,000 options not exercised as of
this date.
</TABLE>
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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The terms of the sale of NHF common stock by the Company provide for a
commission contract between NHF and the Company relating to sales in excess of
$35,000,000 annually. The Company will receive $150,000 per 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 will be in effect for a period of not less than fifteen (15) years
beginning in June 1990. The Company earned commissions from NHF in 1994 of
$607,149 and accordingly, has a receivable in the amount of $66,117 as of
December 31, 1994. Also, for a minimum period of fifteen (15) years beginning
in June 1990, the Company and its subsidiaries will provide cleaning services on
all
-20-
<PAGE>
castings produced by NHF on an exclusive basis, provided the Company retains an
ownership interest in NHF. Consolidated net sales to NHF in 1994 amounted to
$5,053,018.
Effective September 1, 1992, William Hopton retired as President of NHF but
provides consulting services to NHF, as needed. Since that date, he has devoted
his full time to the management of the Company and its subsidiaries.
-21-
<PAGE>
PART IV
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, 1994 and 1993 F-2
Consolidated Statements of Income, Years ended
December 31, 1994, 1993 and 1992 F-4
Consolidated Statements of Stockholders' Equity
For the Years ended December 31, 1994, 1993 and 1992 F-5
Consolidated Statements of Cash Flows, Years ended
December 31, 1994, 1993 and 1992 F-6
Notes to Consolidated Financial Statements F-7
(a) (2). The following Financial Statements are filed as part of this
Report:
Financial Statements of Subsidiary Not Consolidated S-1
-22-
<PAGE>
(a) (3) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
During the last quarter of the period covered by this report, the Company
did not file a report on Form 8-K.
-23-
<PAGE>
Report of Independent Public Accountants
To Margate Industries, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of MARGATE
INDUSTRIES, INC. (a Delaware corporation) and subsidiaries as of December 31,
1994 and 1993, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1994. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Margate Industries, Inc. and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As explained in Note 15 to the financial statements, the Company's 45%-owned
equity investee, New Haven Foundry ("NHF") has become aware that some
portions of used foundry sand on its property contain levels of material that
exceed environmental standards, and is currently reviewing alternatives to
remediate this situation. The ultimate cost to resolve this matter, in
excess of reserves currently provided by NHF, and the ultimate impact on the
consolidated financial statements of Margate Industries, Inc. and
subsidiaries, is not known at this time.
As explained in Note 14 to the financial statements, effective January 1,
1993, the Company changed its method of accounting for post-retirement
benefits other than pensions.
Arthur Andersen, LLP
Detroit, Michigan,
March 22, 1995.
F-1
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
ASSETS 1994 1993
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 573,957 $ 946,968
Marketable securities 465,867 560,419
Accounts receivable-
Trade 308,637 451,280
Related parties 651,957 753,423
Notes receivable - related party 17,800 217,800
Inventories 104,572 45,465
Prepaid expenses and other 288,276 103,061
Prepaid federal income tax 279,758 -
Deferred tax assets 34,000 11,000
----------- -----------
Total current assets 2,724,824 3,089,416
----------- -----------
INVESTMENT IN NEW HAVEN FOUNDRY 2,311,712 1,453,399
----------- -----------
DEFERRED TAX ASSETS - 124,000
----------- -----------
NOTES RECEIVABLE FROM RELATED PARTY, less
current portion above 53,400 71,200
----------- -----------
PROPERTY, PLANT AND EQUIPMENT -
At cost, net of accumulated depreciation and
amortization of $499,594, and $343,447 at
December 31, 1994 and 1993, respectively 2,240,281 1,424,336
----------- -----------
Total assets $ 7,330,217 $ 6,162,351
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1993
(Continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
------------------------------------ ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 325,585 $ 225,593
Accrued salaries and wages 53,354 78,672
Accrued income tax - 351,000
Dividends payable 69,828 57,902
Accrued workers' compensation 49,000 34,580
Accrued single business tax 7,000 5,500
Notes payable 23,771 3,957
Other accrued liabilities 7,604 75,257
----------- -----------
Total current liabilities 536,142 832,461
----------- -----------
DEFERRED TAX LIABILITIES 88,000 -
----------- -----------
OTHER POSTRETIREMENT BENEFITS 288,024 262,027
----------- -----------
NOTE PAYABLE - LONG-TERM 26,433 -
----------- -----------
COMMITMENTS (Note 2)
STOCKHOLDERS' EQUITY:
Common stock, $.005 par value per share;
25,000,000 shares authorized, 4,655,614 and
4,632,280 shares issued and outstanding at
December 31, 1994 and 1993, respectively 23,278 23,161
Paid in for common stock in excess of par value 7,517,749 7,359,039
Accumulated deficit (1,149,409) (2,314,337)
----------- -----------
Total stockholders' equity 6,391,618 5,067,863
----------- -----------
Total liabilities and stockholders' equity $ 7,330,217 $ 6,162,351
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES (including related party sales and
commissions of $5,660,167, $5,550,503, and
$4,574,985, in 1994, 1993 and 1992,
respectively) $8,486,410 $8,183,431 $6,122,258
COST OF SALES 6,742,792 6,183,513 4,327,956
---------- ---------- ----------
Gross profit 1,743,618 1,999,918 1,794,302
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 906,986 889,082 637,135
RELATED PARTY SERVICES AND SALES COMMISSIONS 79,222 41,111 108,018
---------- ---------- ----------
Income from operations 757,410 1,069,725 1,049,149
INTEREST AND DIVIDEND INCOME, net 43,945 103,600 77,098
EQUITY IN INCOME OF INVESTEE COMPANY 858,313 20,200 863,810
RECOGNITION OF PREVIOUSLY DEFERRED GAIN (Note 8) - 561,811 -
OTHER INCOME (EXPENSE) 4,202 29,998 (14,473)
---------- ---------- ----------
Income before provision for income
taxes and cumulative effect of
change in accounting principle 1,663,870 1,785,334 1,975,584
PROVISION FOR FEDERAL INCOME TAXES 219,000 389,000 294,000
---------- ---------- ----------
Income before cumulative effect
of change in accounting principle 1,444,870 1,396,334 1,681,584
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - OTHER POSTRETIREMENT BENEFITS - (150,410) -
---------- ---------- ----------
NET INCOME $1,444,870 $1,245,924 $1,681,584
========== ========== ==========
EARNINGS PER COMMON SHARE:
Primary-
Before Accounting Change $0.31 $ 0.30 $0.37
Accounting Change - (0.03) -
----- ------ -----
0.31 0.27 0.37
===== ====== =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
Common Stock Paid in for
---------------------- Common Stock Total
Number of in Excess of Accumulated Stockholders'
Shares Amount Par Value Deficit Equity
---------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE - December 31, 1991 4,358,947 $21,795 $7,307,739 $(4,913,856) $2,415,678
Stock options exercised 240,000 1,200 34,800 - 36,000
Net income - - - 1,681,584 1,681,584
Cash dividends declared, ($.02875 per share) - - - (131,472) (131,472)
---------- ------- ---------- ---------- ----------
BALANCE - December 31, 1992 4,598,947 22,995 7,342,539 (3,363,744) 4,001,790
Stock options exercised 33,333 166 16,500 - 16,666
Net income - - - 1,245,924 1,245,924
Cash dividends declared, ($.0425 per share) - - - (196,517) (196,517)
---------- ------- ---------- ----------- ----------
BALANCE - December 31, 1993 4,632,280 23,161 7,359,039 (2,314,337) 5,067,863
Stock options exercised 33,334 167 16,499 - 16,666
Tax benefits of options exercised 160,758 160,758
Stock purchase (10,000) (50) (18,547) (18,597)
Adjustment to fair value of equity
securities available for sale (35,413) (35,413)
Net income 1,444,870 1,444,870
Cash dividends declared, ($.0525 per share) (244,529) (244,529)
---------- ------- ---------- ----------- ----------
BALANCE - December 31, 1994 4,655,614 $23,278 $7,517,749 $(1,149,409) $6,391,618
========== ======= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Cash received from customers $ 8,730,519 $ 7,992,778 $ 6,567,200
Cash paid to suppliers and employees (7,938,392) (6,818,006) (5,121,349)
Interest and dividends received 61,298 103,600 69,600
Interest paid (17,353) (6,964) (14,473)
Income taxes paid (324,242) (370,000) (17,000)
----------- ----------- -----------
Net cash provided by operating
activities 511,830 901,408 1,483,978
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of marketable securities (229,956) (109,719) (516,913)
Proceeds from sale of securities 289,095 73,175 -
Proceeds from sale of property, plant
and equipment - - 10,387
Purchase of property, plant and equipment (906,027) (797,416) (15,169)
Net advances to related parties - - (592,246)
----------- ----------- -----------
Net cash used in investing
activities (846,888) (833,960) (1,113,941)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 16,666 16,666 36,000
Purchase of treasury stock (18,597) - -
Principal payments under long-term
obligations (21,219) (2,160) (2,465)
Net proceeds (repayments) from notes
receivable 217,800 428,700 (40,000)
Payment of dividends (232,603) (173,107) (124,326)
----------- ----------- -----------
Net cash provided by (used in)
financing activities (37,953) 270,099 (130,791)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (373,011) 337,547 239,246
CASH AND CASH EQUIVALENTS - beginning of year 946,968 609,421 370,175
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - end of year $ 573,957 $ 946,968 $ 609,421
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING TRANSACTIONS:
Fixed asset acquired under capital lease
obligation $ 67,466 $ - $ -
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Margate Industries, Inc., (the "Company"), 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 $532,000, $1,296,000, and $1,383,000
for the years ended December 31, 1994, 1993 and 1992, respectively.
Net sales to certain major customers that represented 10% or more of
the consolidated net sales are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Western Foundry, Ltd. $ 532,000 $1,296,000 $1,383,000
New Haven Foundry 5,065,000 5,141,000 4,321,000
Ford Motor Co. 968,000 - -
</TABLE>
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Michigan Casting Corporation,
("MCC"), and Yale Industries ("Yale") and its 80% owned subsidiary,
West Haven Castings Co., ("West Haven"). West Haven ceased operations
during 1993. Ten percent of the minority interest of West Haven is
owned by a director of the Company. All intercompany accounts and
transactions have been eliminated in the accompanying consolidated
financial statements.
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.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories, consisting primarily of grinding wheels, are stated at the
lower of cost, determined on the first-in, first-out method, or
market.
F-7
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 $157,548,
$91,512 and $74,050 in 1994, 1993 and 1992, 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
Autos, furniture and fixtures 12 years
REVENUE RECOGNITION
Revenues derived from the clearing of costings are recognized as
services are provided.
Sales commissions are recognized as revenue when earned.
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. The total weighted average
number of shares of common stock and common stock equivalents was
4,677,652, 4,613,117, and 4,515,613 for the years ended December
31, 1994, 1993, and 1992, respectively.
On January 12, 1994, the Company's Board of Directors approved a proposal
to reduce the authorized number of shares of common stock from
50,000,000 shares to 25,000,000 shares. In addition, a reverse stock
split of one share of common stock for each five shares presently
issued to and held by each shareholder was declared and the par value
of the common stock was increased from $.001 to $.005 per share. All
references in the financial statements to average number of shares
outstanding, per share amounts, and stock option plan data have been
restated to reflect the reverse-split.
F-8
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
WORKERS' COMPENSATION
In 1992, the Company became fully insured for workers' compensation.
Prior to this time the Company was partially self-insured. All
significant partially insured claims have been accrued.
RECLASSIFICATIONS
Certain amounts in the 1993 financial statements have been reclassified
to conform to 1994 presentation.
(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.
The terms of the 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. The Company earned commissions from NHF
amounting to $607,149, $410,000 and $254,000 in 1994, 1993 and 1992,
respectively.
The Company incurred costs for administrative and accounting services
provided by NHF in the amount of $28,000 in 1992. During 1994 and
1993, the Company performed these functions internally.
During 1994, 1993 and 1992, the Company earned interest income of $2,125,
$45,862 and $39,543, respectively on notes receivable and past due
accounts receivable from NHF.
Any unpaid balances of the aforementioned amounts are included in the
related party balances in the accompanying balance sheet.
NHF has received authorization from the Internal Revenue Service to defer
funding requirements for its hourly pension plan for the years 1981
through 1984 and 1986. These deferred obligations are being funded
over a 15 year period. These Pension Benefit Guaranty Corporation
("PBGC") has required that the Company guarantee the deferred
obligations and has second and third liens on substantially all of the
Company assets as
F-9
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
collateral for the funding waivers. Accordingly, the Company is
contingently liable for the following contributions, including interest,
to be made by NHF.
<TABLE>
<CAPTION>
Annual
Years Contribution
----- ------------
<S> <C>
1995 $312,204
1996 252,195
1997 191,878
1998 126,209
1999 and 2000 60,422
</TABLE>
The Company also has several notes receivable from related parties (See
Note 5).
(3) INVESTMENT IN UNCONSOLIDATED COMPANY
As described in Note 1, the Company accounts for its 45% investment in NHF
using the equity method. Summarized financial information of NHF is as
follows as of December 31:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Current assets $12,613,943 $ 8,913,751 $ 9,231,745
Net property, plant and equipment 8,886,886 7,176,045 6,317,700
Other assets 1,201,933 1,284,841 1,148,033
----------- ----------- -----------
Total assets $22,702,762 $17,374,637 $16,697,478
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities $12,624,715 $10,286,696 $11,176,983
Non-current liabilities 4,940,482 3,857,738 2,335,183
Stockholders' equity 5,137,565 3,230,203 3,185,312
----------- ----------- -----------
Total liabilities and
stockholders' equity $22,702,762 $17,374,637 $16,697,478
=========== =========== ===========
NET SALES $55,816,957 $46,935,738 $38,746,392
OPERATING EXPENSES 52,656,595 46,357,847 36,376,815
----------- ----------- -----------
Income before income taxes 3,160,362 577,891 2,369,577
INCOME TAXES 1,253,000 533,000 450,000
----------- ----------- -----------
NET INCOME $ 1,907,362 $ 44,891 $ 1,919,577
=========== =========== ===========
</TABLE>
F-10
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
post-retirement 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.
In connection with Wesley Industries' purchase of 55% of NHF (in 1990),
a shareholder of Wesley received an option to purchase an additional
20% of NHF's stock from Margate for a price equal to the greater of
$800,000 or book value. If this option is exercised, Margate can
require that the shareholder purchase all of the NHF shares held by
Margate for an amount equal to the greater of $1,800,000 or book
value.
(4) MARKETABLE SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). The effect of adopting
the provisions of SFAS 115 on the Company's financial statements
were immaterial. This statement requires management to classify
investments in equity and debt securities as either: held-to-maturity
securities and reported at amortized cost; trading securities and
reported at fair value, with unrealized gains and losses included in
earnings; or as available-for-sale securities and reported at fair
value, with unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders' equity. At
January 1, 1994, the Company classified its securities as
available-for-sale. At December 31, 1994, the Company reported
all equity securities as available-for-sale, with a fair value of
$465,867, and an unrealized loss of $35,413. This unrealized loss
is included in stockholders' equity as an adjustment to fair value
of equity securities available-for-sale. At December 31, 1994,
investments in equity securities were valued at lower of aggregate
cost or market and totaled $560,419.
F-11
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(5) NOTES RECEIVABLES - RELATED PARTY
Notes receivable consisted of the following as of December 31:
<TABLE>
<CAPTION>
1994 1993
-------- ---------
<S> <C> <C>
NHF - paid off in March, 1994 $ - $200,000
Wesley Industries, Inc. - principal payable
$4,450 per quarter beginning April 30, 1994 and
expiring January 31, 1999, plus interest at the
prime rate established by National Bank of
Detroit. Interest is payable quarterly.
Unsecured. 71,200 89,000
-------- --------
71,200 289,000
Less- current portion 17,800 217,800
-------- --------
$ 53,400 $ 71,200
======== ========
</TABLE>
The prime rate at December 31, 1994 was 8.5%.
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows as of December
31:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Building and improvements $ 530,043 $ 393,705
Machinery and equipment 2,094,390 1,279,707
Automotive equipment 25,148 19,235
Furniture and fixtures 90,294 75,136
---------- ----------
Total cost 2,739,875 1,767,783
Less- accumulated depreciation and amortization 499,594 343,447
---------- ----------
Net property, plant and equipment $2,240,281 $1,424,336
========== ==========
</TABLE>
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.
The Company has commitments for the purchase and installation of
1.5 million of fixed assets at the Yale facility between July 1, 1993
and June 30, 1995. This commitment has been met as of December 31,
1994. The Company also has an option to buy the facility for $1.00,
subject to the purchase commitment being met.
F-12
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(7) NOTES PAYABLE
During 1994, MCC entered into a capital lease of machinery and
equipment. The related note payable requires monthly payments of
$2,102, bears interest at 3.7%, and matures in February 1997.
MCC and Yale have a line of credit of $500,000 with monthly interest
payments at .50% over the prime rate, the line of credit is
collateralized by substantially all assets of Yale and MCC.
(8) DEFERRED GAIN ON SALE OF NHF COMMON STOCK
The sale of NHF common stock in 1990 provided cash proceeds of
$1,500,000 and a six-year promissory note in the amount of $89,000.
At that time, the gain on the sale of $561,811 was deferred because
the financial condition of NHF raised significant doubts as to NHF's
ability to meet financial commitments to the Pension Benefit Guaranty
Corporation (PBGC). Margate is a guarantor of this pension liability,
as explained in Note 2. As a result of significant improvement in
NHF's operations, positive cash flows and scheduled timely payments on
the PBGC obligation, the gain was recognized during 1993.
(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.
At December 31, components of deferred income taxes include the
following:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Current deferred taxes-
Gross assets $ 34,000 $ 11,000
--------- ---------
Current deferred
tax-assets 34,000 11,000
--------- ---------
Noncurrent deferred taxes-
Gross assets 98,000 458,000
Gross liabilities (186,000) (137,000)
--------- ---------
Valuation allowance - (197,000)
--------- ---------
Net noncurrent deferred
tax-assets(liabilities) (88,000) 124,000)
--------- ---------
--------- ---------
Total deferred tax-assets
(liabilities) $ (54,000) $ 135,000
--------- ---------
--------- ---------
</TABLE>
F-13
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The 1990 sale of the New Haven Foundry stock, as discussed in Note 8,
resulted in a Federal tax capital loss to Margate. Due to the
uncertainty of realization, a valuation allowance was established for
this deferred tax asset in 1993. This capital loss carryforward
expired during 1994.
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.
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
CDBG proceeds $ - $ 140,000
Depreciation and amortization (186,000) (105,000)
Capital loss carryforward - 197,000
Other postretirement benefits 98,000 88,000
Workers' compensation expense 17,000 33,000
Vacation expense 17,000 -
Other - (21,000)
--------- ---------
Total $(54,000) $ 332,000
--------- ---------
--------- ---------
</TABLE>
The components of the provision for income taxes are as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Current tax expense $ 170,000 $ 536,000 $ 204,000
Deferred tax expense (benefit) 49,000 (147,000) 90,000
Operating and capital loss
carryforwards - - (167,000)
Adjustment to valuation allowance - - 167,000
--------- --------- ---------
Provision for income taxes $ 219,000 $ 389,000 $ 294,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of the statutory tax rate to the effective tax rates
recorded follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Statutory rate 34% 34% 34%
Earnings of unconsolidated subsidiary (17) (1) (15)
Deferred income related to CDBG proceeds (1) - -
Operating loss - - (4)
Recognition of previously deferred gain - (13) -
Other (3) - -
------ ------ ------
Effective rate 13% 20% 15%
------ ------ ------
------ ------ ------
</TABLE>
F-14
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(10) DIVIDENDS PAYABLE
In December 1994, the Company declared a quarterly cash dividend of
$.0150 per share of its common stock. The dividend is payable
February 15, 1995 to shareholders of record at the close of
business on January 13, 1995.
(11) STOCK OPTIONS
The following table sets forth stock options granted, exercised and
canceled during the years ended December 31:
<TABLE>
<CAPTION>
1994 1993 1992
------------------ ------------------ ------------------
Exercise Exercise Exercise
Number Price Number Price Number Price
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Stock options outstanding at
the beginning of the year 333,334 $1.45 166,667 $ .50 166,667 $.50
Stock options granted - - 100,000 1.50 - -
Stock options granted - - 100,000 2.50 - -
Stock options granted - - - - 240,000 .15
Stock options granted - - - - 20,000 .50
Stock options exercised (33,334) .50 (33,333) .50 (240,000) .15
Stock options canceled (40,000) - - - (20,000) .50
-------- -------- -------- -------- -------- --------
Stock options outstanding at
the end of the year 260,000 $1.65 333,334 $1.45 166,667 $.50
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
Outstanding employee options of 60,000 shares of stock are exercisable
at a maximum of 20,000 per year, through 1997.
In addition, pursuant to the agreement for the sale of 55% of NHF (in
1990), stock options were granted to the owner of Wesley
Industries for 100,000 shares at a price of $1.50 and 100,000
shares at a price of $2.50. 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.
F-15
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(12) CASH FLOWS
A reconciliation of net income to net cash flows provided by (used in)
operating activities is as follows for the years ended December
31:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Net income $1,444,870 $1,245,924 $1,681,584
Adjustments to reconcile net
income to net cash from
operating activities-
Depreciation and amortization 157,548 91,512 74,050
Gain on sale of marketable
securities - (6,962) -
Loss on sale of property,
plant and equipment - 18,710 -
Equity in income of Investee
company (858,313) (20,200) (863,810)
Deferred income tax provision 49,000 (225,000) 90,000
Deferred gain on sale of
New Haven Foundry Common Stock - (561,811) -
Tax benefit of stock options
exercised 160,758 - -
Changes in assets and liabilities -
Accounts receivable-
Trade 142,643 (252,193) 1,875
Related parties 101,466 61,540 443,067
Inventories (59,107) (25,143) 18,859
Prepaid expenses and other (464,973) (32,322) (21,989)
Accounts payable 99,992 131,965 (46,526)
Accrued income tax (351,000) 166,000 185,000
Accrued workers' compensation 14,420 (29,068) (74,352)
Accrued salaries and wages (25,318) 29,660 16,107
Accrued single business tax 1,500 (28,488) 988
Other accrued liabilities (67,653) 75,257 (20,875)
Accrued pension and retiree
health benefits 25,997 262,027 -
Deferred taxes 140,000 - -
---------- ---------- ----------
Net cash provided by
operating activities $ 511,830 $ 901,408 $1,483,978
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
F-16
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(13) LEASE COMMITMENTS
MCC leases its building under an operating lease agreement which expires in
September 1998. This lease requires the Company to pay all
maintenance and insurance.
Minimum payments under these leases are as follows:
<TABLE>
<S> <C>
1995 $108,500
1996 108,500
1997 108,500
1998 85,900
--------
$411,400
--------
--------
</TABLE>
Rental expense for these leases in 1994, 1993 and 1992 was approximately
$103,000, $115,000 and $138,000, respectively.
(14) OTHER POSTRETIREMENT BENEFITS
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.
The cumulative effect at January 1, 1993 of adopting SFAS 106 was to reduce
net income by $150,410 ($228,410 before tax), or $.03 per share. The
effect of this change reduced 1993 income before cumulative effect of
accounting change by $23,617 ($33,617 before tax).
F-17
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Accumulated postretirement benefit
obligation-
Retirees $ - $ -
Fully eligible active plan participants 77,295 64,693
Other active plan participants 191,083 197,334
---------- ----------
$ 268,378 $ 262,027
---------- ----------
---------- ----------
Unrecognized net loss from past experience
different from that assumed and from
changes in assumptions $ 19,646 $ 2,565
Accrued postretirement benefit cost 268,378 259,462
---------- ----------
Accrued postretirement benefit cost $ 288,024 $ 262,027
---------- ----------
---------- ----------
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Service cost - benefits attributed to
service during the period $11,937 $ 12,779
Interest cost on accumulated other
postretirement benefit obligation 16,625 18,273
Recognition of transition obligation - 228,410
---------- ----------
Net periodic other postretirement
benefit cost $28,562 $259,46
---------- ----------
---------- ----------
</TABLE>
For measurement purposes, a 10.6 and 11.2 percent annual rate of increase
in the per capita cost of covered healthcare benefits was assumed for
1994 and 1993, respectively; the rate was assumed to decrease
gradually to 5 and 6 percent, respectively, in 2007 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
F-18
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
year would increase the accumulated postretirement benefit obligation
as of December 31, 1994 and 1993 by $73,239 and $57,813, respectively,
and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the years then ended by
$8,885 and $7,000, respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation was 8 and 7 percent as of December 31, 1994 and
1993, respectively.
(15) CONTINGENCIES
NHF, the Company's 45% owned equity investee, has entered into discussions
with the Michigan Department of Natural Resources ("MDNR") and United
States Environmental Protection Agency ("EPA") regarding used foundry
sand on its property. Based on results of preliminary investigation,
some portions of the sand pile are known to contain levels of heavy
metals which exceed environmental standards established by the EPA,
although not all portions have been tested. Although no litigation is
currently pending or threatened with respect to this matter, NHF has
engaged environmental consultants to assist in developing a
remediation plan to submit voluntarily to the MDNR and EPA for
approval. NHF has identified several options to remediate the sand
including on-site treatment, off-site disposal, treatment and use in
other products, or capping in place. Costs associated with these
alternatives are currently estimated to range from $200,000 to
$6,000,000, and NHF has recorded a reserve of $200,000. The low
estimate of the range assumes that no additional portions of the sand
pile will contain heavy metal exceeding environmental standards. Each
of these alternatives is being actively researched and NHF management
has not yet determined which of these options is most economically
viable. On the basis of preliminary investigations performed to date,
NHF does not believe that future costs associated with either the
investigation or any potential remedial action will ultimately have a
materially adverse effect on NHF's financial position. Results
of further investigation and testing performed during 1995 are
expected to provide management with the additional information
necessary to more definitely assess the impact on NHF's future results
of operations. The ultimate outcome of this matter is not known at
this time and management is unable to predict whether the resolution
of this matter will have a materially adverse effect on the Company's
financial position and future results of operations.
(16) SUBSEQUENT EVENT
In February 1995, the Company acquired a 40% interest in an engineering
service company. In exchange for its ownership interest, the Company
has guaranteed a $500,000 line of credit for the acquired company.
F-19
<PAGE>
NEW HAVEN FOUNDRY
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1994 AND 1993
INDEX OF FINANCIAL STATEMENTS
Report of Independent Public Accountants
Balance Sheets as of December 31, 1994 and 1993
Statements of Operations for the Years Ended December 31, 1994, 1993, and 1992
Statements of Changes in Stockholders' Equity for the Years Ended December 31,
1994, 1993 and 1992
Statements of Cash Flows for the Years Ended December 31, 1994, 1993, and 1992
Notes to Financial Statements
Schedule II - Valuation and Qualifying Accounts
S-1
<PAGE>
Report of Independent Public Accountants
To the Board of Directors
New Haven Foundry:
We have audited the accompanying balance sheets of NEW HAVEN FOUNDRY
("Company")(a Michigan corporation) as of December 31, 1994 and 1993, and the
related statements of operations, changes in stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1994. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New Haven Foundry as of
December 31, 1994 and 1993, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
As explained in Note 11 to the financial statements, the Company has become
aware of used foundry sand on its property which contains levels of heavy
metals that exceed environmental standards, and is currently reviewing
alternatives to remediate this situation. Although no litigation is currently
pending or threatened, the Company has engaged environmental consultants to
assist in developing a remediation plan. The Company is presently developing its
available options and has not decided upon a single alternative, although
preliminary estimated costs of the alternatives under study range from $200,000
to $6,000,000. The ultimate cost to resolve this matter, in excess of reserves
currently provided and impact on the financial statements of New Haven Foundry,
is not known at this time.
As explained in Note 9 to the financial statements, effective January 1, 1993,
the Company changed its method of accounting for postretirement benefits other
than pensions.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index of
Financial Statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
Arthur Andersen, LLP
Detroit, Michigan,
March 22, 1995.
S-2
<PAGE>
NEW HAVEN FOUNDRY
BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
ASSETS 1994 1993
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 37,374 $ 21,689
Accounts receivable-
Trade, net of allowance for doubtful
accounts of $25,000 and $69,000
for 1994 and 1993, respectively 9,836,525 4,369,145
Other 89,779 207,010
Inventories 1,720,915 3,342,596
Prepaid expenses-
Tooling 380,845 717,071
Insurance and other 50,872 67,240
Federal income tax 99,633 -
Deferred tax assets 398,000 189,000
----------- -----------
Total current assets 12,613,943 8,913,751
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements 509,325 342,007
Building and improvements 3,850,495 3,752,243
Machinery and equipment 12,387,523 11,449,241
Pollution control equipment 2,552,955 1,969,019
Vehicles 156,231 124,445
Furniture and fixtures 464,701 305,650
Construction in progress 1,255,236 1,144,804
----------- -----------
21,176,466 19,087,409
Less- Accumulated depreciation
and amortization 12,289,580 11,911,364
----------- -----------
Net property, plant and equipment 8,886,886 7,176,045
----------- -----------
OTHER ASSETS:
Maintenance repair parts 1,201,933 939,414
Prepaid pension cost - 345,427
----------- ------------
Total other assets 1,201,933 1,284,841
----------- -----------
$22,702,762 $17,374,637
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
S-3
<PAGE>
NEW HAVEN FOUNDRY
BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1993
(Continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
------------------------------------ ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable-
Trade $2,398,086 $ 2,188,814
Related parties 512,721 769,161
Accrued salaries and wages 609,002 465,430
Notes payable-
Bank 7,240,615 5,411,148
Related party - 200,000
Current portion of long-term debt 109,355 169,318
Accrued income taxes - 4,405
Accrued commissions - related parties 164,190 106,153
Current portion of accrued pension cost 633,000 512,000
Other accrued liabilities 1,078,746 460,267
----------- -----------
Total current liabilities 12,745,715 10,286,696
----------- -----------
LONG-TERM DEBT - less current portion 55,200 164,555
----------- -----------
ACCRUED EMPLOYEE BENEFITS:
Retiree health 2,647,568 1,424,746
Pension cost - less current portion 1,366,714 1,632,437
Workers' compensation 750,000 636,000
----------- -----------
Total accrued employee benefits 4,764,282 3,693,183
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 stated value per
share, 65,960 shares authorized,
issued and outstanding 660 660
Paid in for common stock in excess of
stated value 6,597,602 6,597,602
Accumulated deficit (1,460,697) (3,368,059)
----------- -----------
Total stockholders' equity 5,137,565 3,230,203
----------- -----------
$22,702,762 $17,374,637
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
S-4
<PAGE>
NEW HAVEN FOUNDRY
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $55,816,957 $46,935,738 $38,746,392
COST OF SALES 47,535,223 41,240,262 33,883,949
----------- ----------- -----------
GROSS PROFIT 8,281,734 5,695,476 4,862,443
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 4,691,830 4,764,813 2,028,912
----------- ----------- -----------
OPERATING INCOME 3,589,904 930,663 2,833,531
INTEREST EXPENSE 429,542 352,772 463,954
----------- ----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 3,160,362 577,891 2,369,577
PROVISION FOR INCOME TAXES 1,253,000 533,000 450,000
----------- ----------- -----------
NET INCOME $1,907,362 $ 44,891 $ 1,919,577
----------- ----------- -----------
----------- ----------- -----------
NET INCOME PER SHARE OF COMMON
STOCK $28.92 $ 0.68 $29.10
------ ------ ------
------ ------ ------
</TABLE>
The accompanying notes are an integral part of these statements.
S-5
<PAGE>
NEW HAVEN FOUNDRY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
<TABLE>
<CAPTION>
Paid in
Common Stock for Common
------------------- Stock
Number in Excess Total
of of Stated Accumulated Stockholders
Shares Amount Value Deficit Equity
------- ------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
BALANCE - December 31, 1991 65,960 660 6,597,602 (5,332,527) 1,265,735
Net Income - - - 1,919,577 1,919,577
------- ---- ---------- ---------- ---------
BALANCE - December 31, 1992 65,960 660 6,597,602 (3,412,950) 3,185,312
Net Income - - - 44,891 44,891
------- ---- ---------- ---------- ---------
BALANCE - December 31, 1993 65,960 660 6,597,602 (3,368,059) 3,230,203
Net Income - - - 1,907,362 1,907,362
------- ---- ---------- ---------- ---------
BALANCE - December 31, 1994 65,960 660 6,597,602 (1,460,697) 5,137,565
------- ---- ---------- ---------- ---------
------- ---- ---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
S-6
<PAGE>
NEW HAVEN FOUNDRY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH:
Cash flows from operating activities-
Cash received from customers $ 50,394,076 $ 47,247,900 $ 36,903,965
Cash paid to suppliers and employees (46,927,337) (44,410,983) (34,578,853)
Interest paid (508,079) (399,285) (419,495)
Income taxes paid (1,560,000) (821,819) (100,000)
------------ ------------ ------------
Net cash provided by operating
activities 1,398,660 1,615,813 1,805,617
------------ ------------ ------------
Cash flows from investing activities-
Purchase of property, plant and equipment (2,859,230) (1,738,792) (2,036,811)
Proceeds from sale of property, plant
and equipment 16,106 - 3,780
------------ ------------ ------------
Net cash used in investing
activities (2,843,124) (1,738,792) (2,033,031)
------------ ------------ ------------
Cash flows from financing activities-
Principal payments under long-term
obligations (169,318) (765,489) (782,106)
Proceeds of short-term debt, net 1,829,467 588,421 1,622,579
Proceeds (repayments) of related
party advances, net (200,000) 277,686 (257,686)
------------ ------------ ------------
Net cash provided by
financing activities 1,460,149 100,618 582,787
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 15,685 (22,361) 355,373
CASH (BANK OVERDRAFT) - Beginning of year 21,689 44,050 (311,323)
------------ ------------ ------------
CASH - End of year $ 37,374 $ 21,689 $ 44,050
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
S-7
<PAGE>
NEW HAVEN FOUNDRY
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
New Haven Foundry (the Company) is a 55% owned subsidiary of
Wesley Industries, Inc. (Wesley) and is involved in the
manufacture of small and medium-sized grey iron castings that
are sold primarily to the North American automotive industry.
Margate Industries, Inc. (Margate) holds the remaining 45%
interest.
Export sales totaled approximately $131,000 and $1,109,000 for
the years ended December 31, 1993 and 1992, respectively.
There were no export sales in 1994. Net sales to significant
customers were as follows:
<TABLE>
<CAPTION>
Customer 1994 1993 1992
-------- ----------- ----------- ------------
<S> <C> <C> <C>
Chrysler Corporation $44,771,000 $37,006,000 $29,759,000
Kelsey-Hayes Corporation 4,204,000 - -
Detroit Diesel Corp. 1,624,000 2,468,000 2,707,000
</TABLE>
INVENTORIES
Inventories are stated at the lower of cost, determined on the
first-in, first-out method, or market. Specialized maintenance
repair parts are expensed when used. The age of the Company's
foundry requires substantial carrying levels of maintenance
repair parts to ensure continuity of production in the event of
equipment failure. Inventories, net of valuation reserves, are
comprised of the following at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Raw materials and containers $ 390,915 $ 328,596
Finished goods 1,330,000 3,014,000
---------- ----------
Total production inventories 1,720,915 3,342,596
Maintenance repair parts 1,201,933 939,414
---------- ----------
Total inventories $2,922,848 $4,282,010
---------- ----------
---------- ----------
</TABLE>
S-8
<PAGE>
NEW HAVEN FOUNDRY
NOTES TO FINANCIAL STATEMENTS
(continued)
TOOLING
The planned cost of customer tooling in excess of the customer's
purchase price and amounts recoverable through products' unit
selling price are deferred and amortized over a three year
period.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Costs of
maintenance and repairs are charged to expense when incurred.
Major renewals and improvements are capitalized. Depreciation
of property, plant and equipment is computed using the
straight-line method over the estimated useful lives of the
assets.
Estimated useful lives for assets in the various classes of
property, plant, and equipment are as follows:
Land improvements 10 Years
Buildings and improvements 40 Years
Machinery, equipment and fixtures 5-14 Years
Vehicles 5 Years
REVENUE RECOGNITION
Revenues from sales of the Company's products are recognized upon
shipment of such products to its customers.
NET INCOME PER SHARE OF COMMON STOCK
Net income per share of common stock is based upon the
weighted average number of shares of 65,960 outstanding during
the years ended December 31, 1994, 1993, and 1992.
RECLASSIFICATIONS
Certain amounts in the 1993 and 1992 financial statements have
been reclassified to conform to 1994 presentation.
S-9
<PAGE>
NEW HAVEN FOUNDRY
NOTES TO FINANCIAL STATEMENTS
(continued)
(2) RELATED PARTY TRANSACTIONS
Effective July 1, 1990, Wesley purchased 55% of the Company's
voting common stock from Margate. Pursuant to the Stock
Purchase Agreement, as amended, for a period of fifteen years
or as long as Margate retains a stock interest in the
Company, whichever is longer, in exchange for marketing and
management services the Company pays Margate and Wesley each
3% of the amount of the Company's annual gross sales between
$35,000,000 and $40,000,000, plus $150,000. On annual gross
sales over $40,000,000, Margate and Wesley will each receive
an additional 2% of annual gross sales. The Company was
charged by Margate and Wesley $607,000, $409,963, and
$253,574 each during 1994, 1993, and 1992, respectively, to
satisfy this obligation.
Michigan Casting Corporation (MCC) and Brown City Casting Corp,
doing business as Yale Industries, Inc. (Yale) effective
June 21, 1993, are subsidiaries of Margate, and provide
cleaning and finishing services to the Company. The
management of Margate and the Company mutually agree upon the
pricing and terms of these transactions, such that they are
at prices and terms equivalent to those available to and
transacted with unrelated parties. Margate and its
subsidiaries charged the Company $4,990,716, $5,140,540, and
$4,321,411 for services rendered during 1994, 1993, and 1992,
respectively.
The Company purchases coating services from an affiliated
company. Charges for these services were $1,488,426,
$1,409,182, and $650,925 in 1994, 1993, and 1992,
respectively.
A director of the Company is associated with a firm which acts
as a sales representative for the Company. The firm charged
the Company $436,813, $396,876, and $379,183 for services
rendered during 1994, 1993 and 1992, respectively.
The Company incurred costs of $20,000, and $28,500 during 1994
and 1993 for administrative and accounting services provided
by Wesley.
S-10
<PAGE>
NEW HAVEN FOUNDRY
NOTES TO FINANCIAL STATEMENTS
(continued)
During 1994, 1993 and 1992, the Company incurred interest
charges of $2,125, $45,862 and $39,543, respectively, on
overdue accounts payable and notes payable to Margate.
Any unpaid balances of the aforementioned charges are included
in the related party balances in the accompanying balance
sheets.
During 1992, the Company borrowed $600,000 from Margate with
principal payable of $100,000 per month beginning October 1,
1993 and expiring March 1, 1994, plus interest at 2% over
prime payable monthly beginning February 1, 1993.
The Company leased certain equipment under a capital lease from
Margate. During the current year, this lease expired and no
additional capital leases were entered into with Margate.
The amount payable to Margate was $28,700 at December 31,
1993.
(3) NOTES PAYABLE
The Company has outstanding notes payable to a bank consisting
of borrowings under a short-term line of credit agreement.
Borrowings under the line of credit agreement require monthly
interest payments at 1.25% over the prime rate and are
limited to the sum of the following, as defined in the
agreement; (a) 80% of eligible accounts receivable;
(b) the lesser of 50% of eligible inventories or $2,000,000;
and (c)$1,125,000, which is reduced $50,000 per month
beginning January 1, 1995. All amounts outstanding under
this line of credit are due on demand and are collateralized
by substantially all assets of the Company. The interest rates
at December 31, 1994, 1993 and 1992 were 9.75%, 7.5%, and 7.75%,
respectively.
S-11
<PAGE>
NEW HAVEN FOUNDRY
NOTES TO FINANCIAL STATEMENTS
(continued)
(4) LONG-TERM DEBT
Long-term debt is comprised of the following as of December 31:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Working capital loan under note agreement
with a significant customer, requiring
monthly payments of $11,665 plus interest
at the greater of 10.5% or the prime rate
through August 1995, collateralized by
substantially all assets of the Company,
subject to subordination to the notes
payable and is guaranteed by Wesley
Industries, Delbert W. Mullens and
Lula S. Mullens $ 81,755 $ 221,735
Non-interest bearing obligation payable to a
former employee requiring annual payments
of $27,600 through 1997, cancelable upon
the death of the former employee 82,800 110,400
Other - 1,738
---------- ---------
Total 164,555 333,873
Less- Current portion of
long-term debt 109,355 169,318
---------- ---------
$ 55,200 $ 164,555
---------- ----------
---------- ----------
</TABLE>
Maturities of long-term debt at December 31, 1994, are as
follows:
<TABLE>
<S> <C>
1995 $109,355
1996 27,600
1997 27,600
--------
$164,555
--------
--------
</TABLE>
During 1988, the Company terminated an employment agreement
with a former employee and entered into a new agreement that
requires annual payments of $27,600 through 1997. If the
Company fails to perform any obligation under the terms of
the new agreement, the former employee may enforce a claim
against the Company under the terms of the former agreement
for unpaid compensation and interest totaling $442,382. The
Company is contingently liable for $359,582, which represents
the difference between the potential claim under the former
agreement of $442,382 and the obligation accrued under the
new agreement, totaling $82,800 at December 31, 1994.
S-12
<PAGE>
NEW HAVEN FOUNDRY
NOTES TO FINANCIAL STATEMENTS
(continued)
(5) PENSION PLANS
The Company has two qualified noncontributory defined benefit
pension plans covering substantially all of its employees.
Pension costs are actuarially determined and prior service
costs are amortized over the estimated remaining service
period of active employees. Benefits under the hourly
employees plan are based on years of credited service and
retirement date. Benefits under the salaried employees plan
are based on years of credited service and compensation.
The following table sets forth the funded status of the
Company's pension plans for hourly and salaried employees and
amounts recognized in the balance sheets at December 31, 1994
and 1993. The plan years used for the actuarial computations
are for the years ending September 30, 1994 and 1993.
<TABLE>
<CAPTION>
1994 1993
------------------------- --------------------------
Hourly Salary Hourly Salary
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of
vested benefit obligation $6,927,479 $2,499,396 $7,941,023 $2,618,472
----------- ----------- ----------- -----------
Accumulated benefit
obligation $7,387,911 $2,552,920 $8,002,325 $2,690,522
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Projected benefit obligation $7,387,911 $3,194,727 $8,002,325 $3,285,812
Plan assets at fair value 5,458,019 3,331,076 5,857,888 3,452,962
----------- ----------- ----------- -----------
Projected benefit obligation
less than (in excess of)
plan assets (1,931,892) 136,349 (2,144,437) 167,150
Unrecognized net loss (gain) (13,494) 122,447 351,703 148,660
Prior service (gain) cost not
yet recognized in net
periodic pension cost (571,808) 62,984 (623,725) 70,947
Unrecognized net transition
amount at January 1, 1988 456,900 (261,200) 522,200 (291,500)
Adjustment required to
recognize minimum liability - - (250,178) -
----------- ----------- ----------- -----------
Prepaid (accrued) pension
cost (2,060,294) 60,580 (2,144,437) 95,257
Less- Current portion 633,000 - 512,000 -
----------- ----------- ----------- -----------
Long-term prepaid
(accrued) pension cost $(1,427,294) $ 60,580 $(1,632,437) $ 95,257
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
S-13
<PAGE>
NEW HAVEN FOUNDRY
NOTES TO FINANCIAL STATEMENTS
(continued)
Net periodic pension cost for 1994, 1993, and 1992 included the
following components:
<TABLE>
<CAPTION>
1994 1993 1992
-------------------- --------------------- ----------------------
Hourly Salary Hourly Salary Hourly Salary
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service cost - benefits
earned during
the year $ 130,280 $ 102,294 $ 92,989 $ 103,699 $ 93,622 $ 96,003
Interest cost on
projected benefit
obligation 538,274 223,358 577,055 232,007 516,016 234,735
Actual (gain) loss on
plan assets (80,923) (268,638) (463,619) (264,536) (534,269) (268,567)
Net amortization
and deferral (352,173) ( 22,337) 29,274 (18,608) 24,150 (32,596)
--------- --------- --------- --------- --------- ---------
Net periodic
pension cost $ 235,458 $ 34,677 $ 235,699 $ 52,562 $ 99,519 $ 29,575
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
The discount rate used in determining the actuarial present
value of the projected benefit obligations was 8%, 7% and 8%
for the years ended December 31, 1994, 1993, and 1992,
respectively. The rate of increase in future compensation
levels for the salaried plan was 4% and the expected long-
term rate of return on assets was 8% for the years ended
1994, 1993, and 1992, respectively.
The Company's funding policy for these plans is to make the
minimum annual contributions required by applicable
regulations. The Company has received authorization from the
Internal Revenue Service to defer minimum funding required
for its pension plans for the years 1981 through 1984 and
1986. The Company is funding its deferred obligations over a
15 year period. The Pension Benefit Guaranty Corporation has
second and third liens on all Company assets as collateral
for the funding waivers. Total contributions, including
interest, to be made by the Company in future years against
the deferred portion of the pension obligations are as
follows:
<TABLE>
<CAPTION>
Annual
Years Contributions
----- -------------
<S> <C>
1995 $ 312,204
1996 252,195
1997 191,878
1998 126,209
1999 and 2000 60,422
</TABLE>
These amounts are included in the accrued pension amounts in
the accompanying balance sheet.
S-14
<PAGE>
NEW HAVEN FOUNDRY
NOTES TO FINANCIAL STATEMENTS
(continued)
(6) WORKERS' COMPENSATION
The Company is self-insured for a substantial portion of its
workers' compensation claims. Generally, the maximum annual
loss exposure is 75 percent to 110 percent of the normal
workers' compensation insurance premiums. Losses in excess
of those amounts are insured up to an aggregate limit of
$5,000,000. The Company's maximum exposure per claim varies
by policy period from $100,000 to $250,000. As of December 31, 1994,
the Company had outstanding letters of credit in the amount of
$200,000 and $150,000, which were fully collateralized by the
Company's line of credit. The letters of credit secure the
Company's workers' compensation obligations.
(7) 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.
At December 31, 1994, the Company has available operating loss
carryforwards for financial reporting and tax purposes of
approximately $2,078,000. These losses were incurred prior to
the change in ownership in 1990. As a result of the
ownership change, the amount utilized in any one year cannot
exceed approximately $208,000. These losses can be carried
forward to future years, through 2005. The Company used
$208,000 of these carryforwards to offset taxable income in
1994.
At December 31, the components of deferred income taxes include the
following:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Current deferred taxes-
Gross assets $ 398,000 $ 189,000
Gross liabilities - -
----------- -----------
Net current deferred tax assets 398,000 189,000
Noncurrent deferred taxes-
Gross assets 2,395,000 2,130,000
Gross liabilities (697,000) (631,000)
----------- -----------
Net noncurrent deferred tax assets 1,698,000 1,499,000
----------- -----------
Valuation allowance (1,698,000) (1,499,000)
----------- -----------
Total deferred tax assets $ 398,000 $ 189,000
----------- -----------
----------- -----------
</TABLE>
S-15
<PAGE>
NEW HAVEN FOUNDRY
NOTES TO FINANCIAL STATEMENTS
(continued)
The tax effects of cumulative temporary differences at December
31, are as follows:
<TABLE>
<CAPTION>
1994 1993
------------- ------------
<S> <C> <C>
Depreciation $ (677,000) $ (631,000)
Pension expense 680,000 644,000
Postretirement benefits 810,000 400,000
Workers' compensation expense 255,000 309,000
Vacation expense 165,000 159,000
Other 157,000 30,000
Operating loss carryforward 706,000 777,000
---------- ----------
Total $2,096,000 $1,688,000
---------- ----------
---------- ----------
</TABLE>
The components of the provision for income taxes are as follows
for the years ended December 31:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ----------- -----------
<S> <C> <C> <C>
Current tax expense $1,482,000 $ 843,000 $ 450,000
Deferred tax expense, exclusive
of operating loss
carryforwards (358,000) (571,000) (318,000)
Operating loss
carryforwards (70,000) (70,000) 1,359,000
Adjustment to valuation
allowance 199,000 331,000 (1,041,000)
--------- ---------- ----------
Provision for income taxes $1,253,000 $ 533,000 $ 450,000
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
The effective tax rates for the years ended December 31, 1994,
1993, and 1992, are different from the statutory rate of 34%
as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Statutory rate 34% 34% 34%
Excess of book loss over tax loss
on disposal of property 1% - -
Operating losses utilized, not (2%) (2%) 57%
benefited previously
Change in valuation reserve 6% 57% (44)%
Other 1% 3% (28)%
--- --- ---
Effective rate 40% 92% 19%
--- --- ---
--- --- ---
</TABLE>
S-16
<PAGE>
NEW HAVEN FOUNDRY
NOTES TO FINANCIAL STATEMENTS
(continued)
(8) CASH FLOWS
The reconciliation of net income to net cash provided by operating
activities is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ---------- ----------
<S> <C> <C> <C>
Net income $ 1,907,362 $ 44,891 $ 1,919,577
Adjustments to reconcile net income
to net cash provided by
operating activities-
Depreciation and amortization 998,381 880,447 835,702
Provision for (recovery of) losses
on accounts receivable (44,499) 61,234 (18,573)
Loss on disposal of equipment 133,902 - 96,275
Changes in assets and liabilities-
Accounts receivable-
Trade (5,422,881) 311,929 (1,832,197)
Other 117,231 (143,969) (10,230)
Inventories, net 1,359,162 42,736 317,286
Prepaid expenses and other 598,388 (201,790) (516,818)
Deferred tax assets (209,000) (189,000) -
Accounts payable (293,912) (64,137) 334,508
Accrued pension (144,723) 320,942 (37,111)
Accrued retiree health 1,469,566 1,178,001 -
Accrued workers compensation 114,000 - -
Accrued commissions 58,037 (400,194) (65,504)
Other accrued liabilities 757,646 (225,277) 782,702
----------- ----------- -----------
Net cash provided by operating activities $1,398,660 $ 1,615,813 $ 1,805,617
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
S-17
<PAGE>
NEW HAVEN FOUNDRY
NOTES TO FINANCIAL STATEMENTS
(continued)
(9) POSTRETIREMENT EMPLOYEE BENEFITS
Employees retiring from the Company are entitled to postretirement
health care and life insurance benefits. These benefits are based
on years of credited service and the age of the participant. The
Company may amend or change the plan periodically.
In December 1990, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 106 on Accounting
for Postretirement Benefits Other Than Pensions ("SFAS 106"). The
new standard requires that the expected cost of these benefits must
be charged to expense during the years that the employees render
service. The Company implemented SFAS 106 in the first quarter of
1993 and the transition liability of $10,732,329 will be recognized
over 20 years.
The following table sets forth the plans' funded status as of
December 31:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Accumulated postretirement benefit
obligation -
Retirees $ 5,507,078 $ 5,368,483
Fully eligible active plan participants 2,651,217 2,049,495
Other active plan participants 4,348,100 4,317,775
------------ ------------
$ 12,506,395 $ 11,735,753
------------ ------------
------------ ------------
Accumulated postretirement benefit
obligation in excess of plan assets $ 12,506,395 $ 11,735,753
Unrecognized net loss from past
experience different from that assumed 268,603 149,189
and from changes in assumptions
Unrecognized net transition obligation 9,590,224 10,161,818
----------- -----------
Accrued postretirement benefit cost $ 2,647,568 $ 1,424,746
------------ ------------
------------ ------------
</TABLE>
The Company's postretirement healthcare and life insurance plan
is not funded as the Company offers benefits on a pay-as-you-
go basis. The amount of cash benefits paid under this plan
for 1994, 1993, and 1992 were $394,767, $478,194 and $423,327,
respectively.
S-18
<PAGE>
NEW HAVEN FOUNDRY
NOTES TO FINANCIAL STATEMENTS
(continued)
Net periodic postretirement benefit cost included the following
components at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Service cost - benefits earned during the
period $ 353,685 $ 303,784
Interest cost on accumulated postretirement
benefit obligation 821,441 858,586
Amortization of transition obligation
over 20 years 570,511 570,511
Net amortization and deferral 358 -0-
---------- ----------
Net periodic postretirement benefit cost $1,745,995 $1,732,881
---------- ----------
---------- ----------
</TABLE>
For measurement purposes, a 10.6% and 11.2% annual rate of increase in
the per capita cost of covered healthcare benefits was assumed for
the years ended December 31, 1994 and 1993, respectively; the rate
was assumed to decrease gradually to 5% and 6%, respectively, in
2007 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, 1994 and 1993
by $2,351,964 and $1,553,548, respectively, and the aggregate of the
service and interest cost components of net periodic postretirement
benefit cost for the years then ended by $318,102 and $182,873,
respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation was 8 percent.
(10) STOCK OPTIONS
In connection with the Wesley purchase of 55% of the Company's voting
common stock, Delbert Mullens, a shareholder of Wesley, received an
option to purchase an additional 20% of the Company's stock from
Margate for a price equal to the greater of $800,000 or book value.
If this option is exercised, Margate can require that Mr. Mullens
purchase the remaining 25% of the Company shares held by Margate for
an amount equal to the greater of $1,800,000 or book value.
S-19
<PAGE>
NEW HAVEN FOUNDRY
NOTES TO FINANCIAL STATEMENTS
(continued)
(11) CONTINGENCIES
The Company has entered into discussions with the Michigan
Department of Natural Resources ("MDNR") and Environmental
Protection Agency ("EPA") regarding used foundry sand on its
property. Based on results of preliminary investigation, some
portions of the sand pile are known to contain levels of heavy
metals which exceed environmental standards established by the
EPA, although not all portions have been tested. Although no
litigation is currently pending or threatened with respect to this
matter, the Company has engaged environmental consultants to assist
in developing a remediation plan to submit voluntarily to the MDNR
and EPA for approval. The Company has identified several options
to remediate the sand including on-site treatment, off-site
disposal, treatment and use in other products, or capping in place.
Costs associated with these alternatives are currently estimated to
range from $200,000 to $6,000,000, and the Company has recorded a
reserve of $200,000. The low estimate of the range assumes that
no additional portions of the sand pile will contain heavy metals
exceeding environmental standards. Each of these alternatives is
being actively researched and Company management has not yet
determined which of these options is most economically viable.
Although the ultimate outcome of this matter is not known at this
time, on the basis of preliminary investigations performed to date,
the Company does not believe that future costs associated with
either the investigation or any potential remedial action will
ultimately have a materially adverse impact on the Company's
financial position. Results of further investigation and testing
performed during 1995 are expected to provide management with the
additional information necessary to more definitively assess the
impact on future results of operations.
The Company is also party to an action brought by
PIRGIM which alleges that the Company discharged potentially
contaminated water into a stream which flows to settling
ponds maintained by the Company. Settlement negotiations are
underway and it is estimated that a civil penalty in the range
of $35,000 to $100,000 will be paid by the Company to settle the
litigation. The Company does not believe resolution of this
matter will have a material adverse effect on the company's
financial position or results of operations.
S-20
<PAGE>
SCHEDULE II
NEW HAVEN FOUNDRY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Year Ended Beginning Costs and End
December 31, 1992 of Period Expenses Deductions of Period
-------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 27,000 $ (19,000) $ $ 8,000
Valuation allowance for deferred
taxes 2,209,000 (1,041,000) - 1,168,000
Year Ended
December 31, 1993
--------------------------------
Allowance for doubtful accounts 8,000 61,000 - 69,000
Valuation allowance for deferred
taxes 1,168,000 331,000 - 1,499,000
Year Ended
December 31, 1994
--------------------------------
Allowance for doubtful accounts 69,000 21,000 65,000 25,000
Valuation allowance for deferred
taxes 1,499,000 199,000 - 1,698,000
Valuation allowance for inventories - 100,000 - 100,000
</TABLE>
S-21
<PAGE>
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 30, 1995 By: /s/ William H. Hopton
----------------------
William H. Hopton, President
and Chief Executive Officer
By: /s/ Fredrick G. Berlet
----------------------
Fredrick G. Berlet, Treasurer,
Principal Financial Officer and
Principal Accounting Officer
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 30, 1995
-------------------------- and Director
Frederick G. Schriever
/s/ Delbert W. Mullens Vice Chairman March 30, 1995
-------------------------- and Director
Delbert W. Mullens
/s/ William H. Hopton President, Chief March 30, 1995
------------------------- Financial Officer
William H. Hopton and Director
/s/ David A. Widlak Secretary and Director March 30, 1995
-------------------------
David A. Widlak
/s/ Frederick G. Berlet Treasurer and Director March 30, 1995
-------------------------
Frederick G. Berlet
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 574
<SECURITIES> 466
<RECEIVABLES> 380
<ALLOWANCES> 0
<INVENTORY> 105
<CURRENT-ASSETS> 2725
<PP&E> 2740
<DEPRECIATION> 500
<TOTAL-ASSETS> 7330
<CURRENT-LIABILITIES> 536
<BONDS> 0
<COMMON> 23
0
0
<OTHER-SE> 6368
<TOTAL-LIABILITY-AND-EQUITY> 7330
<SALES> 8486
<TOTAL-REVENUES> 9393
<CGS> 6743
<TOTAL-COSTS> 79
<OTHER-EXPENSES> 907
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,664
<INCOME-TAX> 219
<INCOME-CONTINUING> 1445
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1445
<EPS-PRIMARY> .31
<EPS-DILUTED> 0
</TABLE>
