FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
-----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- -------------------
Commission File Number 0-13817
MARGATE INDUSTRIES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-8963939
- ---------------------------- ----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
129 N. Main Street Yale, Michigan 48097
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (810) 387-4300
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
As of June 30, 1997, the Company had 4,573,637 shares of its $.005 Par
Value Common Stock outstanding.
<PAGE>
MARGATE INDUSTRIES, INC.
FORM 10-Q
INDEX
-----
PART I: FINANCIAL STATEMENTS PAGE(S)
- ------- -------------------- -------
Item 1. Financial Information
Consolidated Balance Sheets . . . . . . . . . . . . .3-4
Consolidated Income Statement . . . . . . . . . . . . .5
Consolidated Statements of Changes in
Stockholders' Equity. . . . . . . . . . . . . . . . .6
Consolidated Statements of Cash Flows . . . . . . . . .7
Notes to Consolidated Financial
Statements. . . . . . . . . . . . . . . . . . . . 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 12
PART II: OTHER INFORMATION . . . . . . . . . . . . . . . . . . 13
- ------- -----------------
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-----------------------------------------
June 30 December 31
1997 1996
-------- --------
(Unaudited)
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 4,832 $ 2,086
Accounts receivable:
Trade 982,101 595,603
Related party 1,236,866 990,970
Notes receivable - related party 22,250 22,250
Inventories - parts and supplies 91,464 32,464
Prepaid expenses and other 180,317 84,133
Prepaid Federal income tax 0 264,300
Deferred tax asset 14,300 14,300
---------- ----------
Total Current Assets 2,532,130 2,006,106
Investment in New Haven Foundry 0 0
Other 43,864 59,135
Notes receivable - related party 8,900 17,800
PROPERTY, PLANT AND EQUIPMENT
At cost net of accumulated depreciation
and amortization of $1,145,705 and
$981,705 at June 30, 1997 and
December 31, 1996, respectively 4,119,750 4,112,295
---------- ----------
Total Assets $6,704,644 $6,195,336
========== ==========
See Notes to Consolidated Financial Statements.
-3-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
------------------------------------------
June 30, December 31,
1997 1996
---------- ----------
(Unaudited)
LIABILITIES & STOCKHOLDER'S EQUITY
- ----------------------------------
CURRENT LIABILITIES
Notes payable $ 854,000 $ 582,000
Current portion of long-term debt 204,978 462,914
Accounts payable 387,556 513,071
Accrued salaries and wages 53,234 42,000
Accrued workers' compensation 9,650 6,654
Accrued single business tax 5,582 0
Accrued federal income tax 122,570 0
Other accrued liabilities 6,131 2,841
---------- ----------
Total Current Liabilities 1,643,701 1,609,480
DEFERRED TAX LIABILITY 207,200 207,200
OTHER POSTRETIREMENT BENEFITS 371,957 371,957
NOTES PAYABLE 501,132 344,231
STOCKHOLDERS' EQUITY
Common stock, $.005 par value per
share; 25,000,000 shares authorized,
4,573,637 and 4,573,637 shares issued
and outstanding at June 30, 1997 and
December 31, 1996, respectively 22,868 22,868
Paid in for common stock in excess
of par value 7,410,725 7,410,725
Accumulated deficit (3,452,939) (3,771,125)
---------- ----------
Total Stockholders' Equity 3,980,654 3,662,468
Total Liabilities and
Stockholders' Equity $6,704,644 $6,195,336
========== ==========
See Notes to Consolidated Financial Statements
-4-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
-----------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
NET SALES (including related
party sales and commissions
of $3,927,285, and
$3,746,486 during the
six months ended June
30, 1997 and 1996,
respectively) $3,010,330 $2,218,308 $6,147,171 $4,673,008
COST OF SALES 2,528,606 1,888,443 5,099,464 3,953,598
---------- ---------- ---------- ----------
Gross profit 481,724 329,865 1,047,707 719,410
GENERAL AND ADMINISTRATIVE
EXPENSES 231,928 215,573 488,060 425,729
RELATED PARTY SERVICES AND
SALES COMMISSIONS 10,808 0 10,808 1,471
---------- ---------- ---------- ----------
Income from operations 238,988 114,292 548,839 292,210
INTEREST AND DIVIDEND INCOME 789 5,179 1,665 16,328
INTEREST EXPENSE 31,938 12,868 61,318 26,475
---------- ---------- ---------- ----------
Net income before income
taxes and equity in
income of investee
companies 207,839 106,603 489,186 282,063
PROVISION FOR FEDERAL
INCOME TAXES 75,000 36,000 171,000 95,000
---------- ---------- ---------- ----------
Income before equity in
income (loss) of
investee companies 132,839 70,603 318,186 187,063
EQUITY IN INCOME (LOSS) OF
INVESTEE COMPANIES 0 79,000 0 15,000
---------- ---------- ---------- ----------
Net income $ 132,839 $ 149,603 $ 318,186 $ 202,063
========== ========== ========== ==========
EARNINGS PER COMMON SHARE:
Primary $ 0.029 $ 0.033 $ 0.070 $ 0.044
Fully diluted $ 0.029 $ 0.032 $ 0.069 $ 0.043
See Notes to Consolidated Financial Statements.
-5-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
COMMON STOCK PAID IN FOR
---------------- COMMON STOCK
NUMBER OF IN EXCESS OF ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAR VALUE DEFICIT EQUITY
-------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1997 4,573,637 $ 22,868 $7,410,725 $(3,771,125) $3,662,468
Net income -- -- -- 318,186 318,186
---------- ---------- ---------- ---------- ----------
Balance - June 30, 1997 4,573,637 $ 22,868 $7,410,725 $(3,452,939) $3,980,654
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
COMMON STOCK PAID IN FOR
---------------- COMMON STOCK
NUMBER OF IN EXCESS OF ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAR VALUE DEFICIT EQUITY
-------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1996 4,653,637 $ 23,268 $7,499,980 $(3,056,324) $4,466,924
Repurchase of common
stock (100,000) (500) (103,156) -- (103,656)
Net income -- -- -- 202,063 202,063
---------- ---------- ---------- ---------- ----------
Balance - June 30, 1996 4,553,637 $ 22,768 $7,396,824 $(2,854,261) $4,565,331
========== ========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
-6-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------
(Unaudited)
Six Months Ended
June 30,
1997 1996
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
OPERATING ACTIVITIES $ (5,664) $ 498,030
INVESTING ACTIVITIES:
Proceeds from sale of securities -- 12,500
Purchase of plant and equipment (171,455) (991,423)
---------- ----------
Net cash used in investing activities (171,455) (978,923)
FINANCING ACTIVITIES:
Net proceeds from short term loan 272,000 --
Purchase of common stock -- (103,656)
Principal payments under long-term
obligations (101,035) (133,590)
Proceeds from long-term obligations -- 400,000
Proceeds from notes receivable 8,900 --
---------- ----------
Net cash provided by (used in)
financing activities 179,865 162,754
---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,746 (318,139)
CASH AND CASH EQUIVALENTS - Beginning 2,086 513,700
---------- ----------
CASH AND CASH EQUIVALENTS - Ending $ 4,832 $ 195,561
========== ==========
See Notes to Consolidated Financial Statements.
-7-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated Balance Sheet as of June 30, 1997 and the
related Consolidated Statements of Operations, Changes in
Stockholders' Equity, and Cash Flows for the six months ended
June 30, 1997 and 1996 are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of
such financial statements have been included. The results of
operations for the six months ended June 30, 1997 and 1996 are
not necessarily indicative of the results to be expected for the
whole year.
The notes to the financial statements are presented as permitted
by Form 10-Q and do not contain certain information included in
the Company's annual financial statements.
NOTE 2 - INVESTMENT IN UNCONSOLIDATED COMPANY
The Company accounts for its 45% investment in New Haven Foundry
("NHF") using the equity method. Summarized financial
information of NHF is as follows: (No recognition of Income to
Margate will be recorded until NHF achieves positive
Stockholders' Equity.)
NHF
---
June 30, December 31,
1997 1996
---------- ----------
Assets
Current assets $17,254,170 $14,085,521
Property, plant and equipment, net
of accumulated depreciation 11,932,440 12,282,716
Other assets 0 392,000
---------- ----------
Total Assets $29,186,610 $26,760,237
========== ==========
Liabilities and Stockholders' Equity
Current liabilities $21,012,218 $17,407,355
Non-current liabilities 9,133,631 10,325,990
Stockholders' equity (959,239) (973,108)
---------- ----------
Total Liabilities and Stockholders'
Equity $29,186,610 $26,760,237
========== ==========
NHF
---
Six Months Ended
June 30,
1997 1996
---------- ----------
Net Sales $30,668,000 $31,943,000
Operating expenses 30,419,000 31,650,000
---------- ----------
Income (loss)
before income taxes 249,000 293,000
Income taxes 235,000 260,000
---------- ----------
Net income (loss) $ 14,000 $ 33,000
========== ==========
Net income (loss) per
share of common stock $ 0.21 $ 0.50
========== ==========
-8-
<PAGE>
NOTE 3 - DIVIDENDS
The Company paid dividends for the first two quarters of 1995,
but suspended dividends thereafter.
NOTE 4 - STATEMENTS OF CASH FLOWS
A reconciliation of net income to net cash flows provided by
operating activities is as follows:
Six Months Ended
June 30,
(unaudited)
1997 1996
---------- ----------
Net income $ 318,186 $ 202,063
Adjustments to reconcile net income to
net cash from operating activities:
Equity in (income) loss
of investee companies -- (15,000)
Depreciation and amortization 164,000 120,800
Changes in assets and liabilities:
Accounts receivable
- Trade (386,498) 176,113
- Related parties (245,896) 34,866
Inventories (59,000) (13,270)
Prepaid expenses (96,184) 6,262
Prepaid Federal tax 264,300 95,000
Other assets 15,271 --
Accounts payable (125,515) (22,330)
Accrued workers' compensation 2,996 (104,131)
Accrued single business tax 5,582 (1,000)
Accrued salaries and wages 11,234 31,941
Accrued income tax 122,570 --
Other liabilities 3,290 (13,284)
---------- ----------
Net cash provided (used) by
operating activities $ (5,664) $ 498,030
========== ==========
NOTE 5 - EARNINGS PER SHARE
The weighted average number of shares used to compute the net
income per shares was 4,593,637 and 4,689,928 fully diluted for
the six month periods ended June 30, 1997 and June 30, 1996,
respectively.
NOTE 6 - CONTINGENT LIABILITY
NHF has received authorization from the Internal Revenue Service
to defer funding requirements for its pension plans for the years
1981 through 1984 and 1986. The deferred obligations are being
funded over a 15 year period. The Pension Benefit Guaranty
Corporation had required that the Company guarantee the deferred
obligations and has second and third liens on all Company assets
as collateral for the funding waivers. Accordingly, the Company
is contingently liable for the following contributions, including
interest, to be made by NHF in future years against the deferred
portion of the pension obligation.
Years Annual Contribution
----- -------------------
1997 191,878
1998 126,209
1999 and 2000 60,422
-9-
<PAGE>
NOTE 7 - ENVIRONMENTAL MATTERS
NHF, the Company's 45%-owned equity investee, is party to an
action brought by PIRGIM and the United States of America
("U.S.") which alleges that NHF discharged potentially
contaminated water into a stream which flows to settling ponds
they maintain, in violation of the Federal Clean Water Act. NHF
estimates that a civil penalty approximating $500,000 will be
incurred by NHF to settle the litigation and the Company has
provided reserves for this amount.
NHF is party to an action brought by the U.S. and is also
currently negotiating with the Michigan Department of
Environmental Quality ("MDEQ") regarding alleged violations of
environmental laws pertaining to air and waste issues, including
used foundry sand on its property. NHF is negotiating a consent
decree with these agencies which encompasses most of these
alleged violations and is also working with the MDEQ to resolve
any remaining alleged violations.
NHF has identified several options to remediate the sand
including on-site treatment or capping in place. Costs
associated with these alternatives are currently estimated to
range from $2,100,000 to $2,500,000, and NHF has recorded a
reserve of $2,500,000, of which $1,800,000 was provided in the
current year. The estimate of the range assumes that no
additional portions of the sand pile will contain heavy metals
exceeding environmental standards. Although the ultimate outcome
of this matter is not known at this time, on the basis of
investigations performed to date by the Company and its
environmental consultants, NHF does not believe that future costs
associated with remedial action in excess of reserves provided
with ultimately have a materially adverse impact on the Company's
financial position or future results of operations.
NOTE 8 - NOTES PAYABLE
Notes payable consist of the following at June 30, 1997:
Note payable bank, due in monthly
principle installments of $7,583,
plus interest at prime in payment
of loan guarantee for investment
in CEDS, uncollateralized, maturing
December 31, 1998. $144,083
Note payable Ft. Atkinson, due in
monthly installments of $3,992,
including interest at 4% through
July 2003. 264,466
Note payable bank, due in
monthly installments of $8,300,
including interest at 9% maturing
January 2000. The note is
collateralized by the general
assets of the Company. 297,561
--------
706,110
Less current portion 204,978
--------
501,132
========
-10-
<PAGE>
Maturities of notes payable obligations are as follows:
Year ended June 30:
1998: $204,978
1999: 175,737
2000: 132,059
2001: 89,834
Thereafter 103,502
--------
$706,110
========
The Company maintains a bank line of credit of $1,300,000 for
working capital requirements. The applicable interest rate is at
the prime lending rate, currently 8.5% at June 30, 1997. The
line of credit is secured by all accounts receivable, inventories
and equipment of the Company. Additionally, certain required
financial ratios must be maintained. The Company is in
compliance with all covenant requirements as of June 30, 1997.
The Company has borrowings against the line of $854,000 and $0 at
June 30, 1997 and 1996, respectively.
NOTE 9 - OTHER MATTERS
In February and March 1996, the Company repurchased 30,000 and
20,000 shares, respectively, of its common stock in the open
market. The shares have been returned to treasury.
-11-
<PAGE>
ITEM 2. 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 operation during the periods included in the accompanying
consolidated financial statements for the six (6) months ended June 30,
1997.
LIQUIDITY & CAPITAL RESOURCES
- -----------------------------
The Company has a consolidated line of credit of $1,300,000 with
monthly interest payments at the prime rate with the National Bank of
Detroit. The line is collateralized by substantially all assets.
Borrowings as of June 30, 1997 was $854,000.
RESULTS OF OPERATIONS
- ---------------------
The Company is reporting year-to-date pre-tax profit on operations of
$489,186 for the six months ended June 30, 1997 as compared to a $282,063
for the same period in 1996. Net sales, year-to-date, as of June 30, 1997
were approximately $6,147,171; which represents an increase of 31.5% from
1996 sales through June 30, 1996 of $4,673,008. The Company has recognized
equity in the loss of its investee company, NHF of $0 for the six months
ended June 30, 1997 compared to a profit of $15,000 for the same period in
1996.
The cost of sales for the six months ended June 30, 1997 as a
percentage of sales was 83.0% as compared to 84.6% for the same period in
1996.
Selling, General and Administrative for the six months ended June 30,
1997 as a percentage of sales was 7.9% as compared to 9.1% for the same
period in 1996.
Management anticipates comparable results for the next three (3)
months of the year.
-12-
<PAGE>
PART II
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Securities Holders
-----------------------------------------------------
An Annual Meeting of Shareholders was held on June 30, 1997
for the election of Directors.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
-13-
<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.
By: /s/ William H. Hopton
---------------------------
William H Hopton
Date: July 28, 1997
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5
<SECURITIES> 0
<RECEIVABLES> 2,219
<ALLOWANCES> 0
<INVENTORY> 91
<CURRENT-ASSETS> 2,532
<PP&E> 5,265
<DEPRECIATION> 1,146
<TOTAL-ASSETS> 6,705
<CURRENT-LIABILITIES> 1,644
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 3,958
<TOTAL-LIABILITY-AND-EQUITY> 6,705
<SALES> 6,147
<TOTAL-REVENUES> 6,149
<CGS> 5,099
<TOTAL-COSTS> 11
<OTHER-EXPENSES> 488
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61
<INCOME-PRETAX> 489
<INCOME-TAX> 171
<INCOME-CONTINUING> 318
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 318
<EPS-PRIMARY> 0.070
<EPS-DILUTED> 0.069
</TABLE>
