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, 1996
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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 Employer Identification
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
-----------------
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
----- -----
At March 14, 1997, 4,593,637 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 $2,802,950.
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 49 pages Exhibits are indexed on page 20.
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PART I
ITEM 1. BUSINESS
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(a) GENERAL DEVELOPMENT OF BUSINESS. Margate Industries, Inc. (the
"Company"), was formed under the laws of the State of Delaware on April 4,
1984. The Company sold 4,000,000 Units, at $0.02 per Unit, for total
proceeds of $80,000 in a public offering which closed in May of 1985. Each
Unit consisted of one share of common stock of the Company and one Warrant
to purchase an additional share of common stock. The Warrants expired by
their terms unexercised.
On November 17, 1986, the Company issued 12,515,580 shares of its
$.001 par value common stock to the holders of 100% of the outstanding
common stock of New Haven Foundry, Inc., ("NHF") in a merger transaction in
which NHF became a wholly-owned subsidiary of the Company. The shares of
common stock issued to the shareholders of NHF represented approximately
70% of the Company's common stock outstanding after the completion of the
transaction. The shares of the Company's common stock issued to the
shareholders of NHF were registered under the Securities Act of 1933, as
amended, in a Registration Statement on Form S-4 (SEC File No. 33-5294),
which was initially filed on April 29, 1986 and declared effective on
October 8, 1987.
During 1987, the Company established a wholly-owned subsidiary,
Michigan Casting Corporation, ("MCC") which provides finishing services on
castings manufactured by NHF and other foundries.
In June of 1989, Brown City Casting Corporation ("BCCC"), a
wholly-owned subsidiary, commenced operations to provide finishing services
on castings produced by foundries in the Michigan area. In June, 1993, the
Company transferred its operations to Yale, Michigan and now conducts
business under the name of Yale Industries. BCCC ceased all operations in
Brown City, Michigan in June, 1993.
On July 19, 1990, the Company sold 55% of the common stock of NHF to
Wesley Industries, Inc., ("Wesley"), for $1,589,000 consisting of
$1,500,000 cash and an $89,000 five-year Promissory Note. Wesley is
50%-owned by Mr. Delbert W. Mullens, currently a Director of the Company and
50%-owned by Ms. Lula Mullens. The promissory note called for interest at
2% over the prime rate, with no principal payments required until
September, 1991. The Company extended the term of the note and payments
begin in April, 1994. Upon repayment of the promissory note, Wesley 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 $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
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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.
Effective June 21, 1993, the Company initiated operations at Yale,
Michigan and relocated its corporate offices to that location. Yale
Industries provides specialized cleaning and testing of metal castings for
foundries and machine shops.
On January 12, 1994, pursuant to a vote at a Special Meeting of
Shareholders, the Company approved a one for five reverse split of the
outstanding shares of the Company and reduced the authorized shares of the
Company from 50,000,000 to 25,000,000. Unless otherwise indicated,
information in this Report reflects one for five reverse split of the
Company's Common Stock effective in January, 1994.
On February 1, 1995, the Company obtained forty percent (40%) interest
in Complete Engineering Development Services, Inc. (CEDS). Due to
disappointing results, the Board of Directors elected to divest its
interest in CEDS as of December 31, 1995.
In November 1995, the Company established a wholly-owned subsidiary,
Fort Atkinson Industries, which provides finishing services on castings
manufactured in the Iowa-Wisconsin area. Operations began on March 1,
1996. Fort Atkinson employs approximately ninety (90) workers at this
site.
In August 1996, the Company consolidated MCC with Yale Industries and
operates as one company. The combined company employs approximately 160
employees.
(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.
(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.
Brown City doing business as Yale Industries, a Michigan corporation,
is engaged in the business of performing finishing operations for the
foundry industry. Such operations include the cleaning, grinding and
testing of castings prior to shipment to the end purchaser. Yale commenced
operations in June of 1987, and its facilities are currently located in
Yale, Michigan, approximately 30 miles from New Haven, Michigan where NHF's
facilities are located. NHF uses the services of Yale for approximately
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80% of the castings and cylinder heads they manufacture for Chrysler
Corporation and others. The Company formed this subsidiary because a
separate company and facility provided NHF, and other foundries, certain
advantages over handling finishing functions in-house. Over the past
several years, automobile manufacturers have begun to require that
additional finishing work and water testing be done on castings prior to
shipment. These requirements have increased the amount of time and labor
spent on these services. Management has found that Yale, as a separate
company devoted to these activities, has been able to handle these
functions more cost effectively. In addition, since Yale is capable of
providing these services to other customers as well as NHF, Yale generates
additional revenues for the Company.
Fort Atkinson Industries is also engaged in the business of performing
finishing operations on 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 90% 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.
(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.
(ii) STATUS OF NEW PRODUCTS OR INDUSTRY SEGMENTS. The Company
announced it would begin cleaning operations at Fort Atkinson in early
1996. Except as to Fort Atkinson, there has been no public announcement
of, and no information otherwise has been made public about, a new product
or industry segment, which would require the investment of a material
amount of the Company's assets, or which otherwise is material.
(iii) SOURCES AND AVAILABILITY OF RAW MATERIALS. The Company as
a service orientated entity is not dependant on the availability of raw
materials, however, the Company is dependant on the availability of
qualified, trained manpower. The raw materials utilized by NHF are
supplied by domestic suppliers and there does not appear to be any shortage
of the three major raw materials used by NHF namely coke, scrap steel and
sand.
(iv) PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS.
The Company does not own any patents, trademarks, licenses, franchises, or
concessions.
(v) SEASONAL NATURE OF BUSINESS. The Company's business is not
seasonal in nature.
(vi) WORKING CAPITAL ITEMS. Practices and conditions with
respect to specific working capital items are not relevant to an
understanding of the Company's business. Working capital is required for
inventories and accounts receivable, to meet rapid delivery requirements,
or to assure continuous allotments of goods from suppliers.
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(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, 1996, in
an amount which equals 10% or more of the Company's revenue and the
Company's relationship to each:
RELATIONSHIP PERCENT
TO AMOUNT OF OF TOTAL
CUSTOMER COMPANY SALES REVENUE
-------- ------- ------ -------
New Haven Foundry, Inc. Subsidiary $7,075,541 74.9%
The Company believes that if it should lose any of its present
customers, primarily NHF, such loss would have a material adverse effect on
the Company.
(viii) BACKLOG. Backlog is not relevant to an understanding of
the Company's business.
(ix) RENEGOTIATION OR TERMINATION OF GOVERNMENTAL CONTRACTS. No
portion of the Company's business is subject to renegotiation of profits or
termination of contracts or subcontracts at the election of the Government.
(x) COMPETITION. The Company's domestic competition is limited
primarily to cleaning operations and captive foundries of the automobile
industry. For the most part, these domestic foundries have older
facilities and are not a significant threat to the Company's competitive
position. Internationally, the Company faces competition from similar
operations located in Europe, South America and Mexico. The Company's most
serious threat of competition is from state-of-the-art operations located
in Mexico and Brazil. These companies in Brazil present a competitive
threat because they are subsidized by their respective governments, have
labor cost advantages, and modern facilities.
(xi) RESEARCH AND DEVELOPMENT. The Company has not engaged and
does not currently engage in any research and development activities.
(xii) ENVIRONMENTAL PROTECTION. The Company is subject to
various federal, state, and local provisions regarding environmental
matters, the existence of which has not hindered nor adversely affected the
Company's business. Although the Company does not believe its business
operations presently impair environmental quality, compliance with federal,
state and local regulations which have been enacted or adopted regulating
the discharge of materials into the environment could have an adverse
effect upon the capital expenditures, earnings and competitive position of
the Company. Since inception, the Company has not made any material
capital expenditures for environmental control facilities and does not
expect to make any such expenditures during the current and following
fiscal years. However, the Company has agreed to administer the
expenditure of $253,000 which the city of Yale, Michigan received as a
community development block grant to perform an investigation to determine
the extent of contamination at the Yale plant site and to clean up soil
contamination left by previous owners and operators to a maximum of
$253,000. The Company estimates the costs of administering the grant to be
less than $50,000. As a result of its agreement to perform these
procedures, the city of Yale, Michigan 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. The property was transferred to the Company in 1995.
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As more fully described in Note 11 of the Financial Statements, NHF,
the Company's 45% owned subsidiary, is reporting the following
contingencies in relation to environmental problems:
NHF is party to an action brought by PIRGIM and the United States of
America ("U.S.") which alleges that the Company discharged potentially
contaminated water into a stream which flows to settling ponds maintained
by NHF, 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 NHF 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 estimated at $2.1 to $2.5 million, and NHF has recorded a
reserve of $2.5 million. Of this amount, approximately $1.8 million was
provided in the current year and is included in selling, general and
administrative expenses in the accompanying statement of operations. The
estimate of the range assumes that no additional portions of the sand pile
will contain heavy metals which exceed environmental standards. Although
the ultimate outcome of this matter is not known at this time, on the basis
of investigations performed to date by NHF and its environmental
consultants, NHF does not believe that future costs associated with
remedial action, in excess of reserves provided, will ultimately have a
materially adverse impact on NHF's financial position or future results of
operations.
(xiii) EMPLOYEES. As of December 31, 1996, the Company had
approximately 250 hourly employees and 21 salaried employees at Yale
Industries, Fort Atkinson Industries and Margate Industries. None of these
employees are presently represented by a union. The Company also used
approximately 50 employees from employee leasing service companies.
(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 $19,133 1996, $1,300 in
1995 and $532,000 in 1994 to Western Foundry, a Canadian company and
$122,450 in 1996, $53,700 in 1995 and $968,000 in 1994 to Ford of Canada.
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ITEM 2. PROPERTIES
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Yale Industries' facilities, which consist of a plant and the
Company's corporate offices, are located in Yale, Michigan and are provided
by the city of Yale, Michigan in consideration of the Company administering
the expenditure of $253,000 for the investigation and cleanup at the plant
site. The Company believes its plant at Yale is suitable for its present
and future needs. The plant consists of approximately 70,000 square feet.
Fort Atkinson's facilities are located in Fort Atkinson, Wisconsin.
It leases facilities covering approximately 73,000 square feet. The
Company has leased this facility for a ten (10) year period beginning in
December 1995. Base rent is $11,212.50 per month. The Company believes
the plant is suitable for its present and future needs.
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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<PAGE>
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.
BID PRICE
--------------------
HIGH LOW
---- ---
Quarter ended March 31, 1996 $1.25 $0.88
Quarter ended June 30, 1996 $1.06 $0.78
Quarter ended September 30, 1996 $1.25 $0.91
Quarter ended December 31, 1996 $1.16 $0.44
Quarter ended March 31, 1995 $2.56 $1.75
Quarter ended July 30, 1995 $2.00 $1.38
Quarter ended September 30, 1995 $1.63 $1.06
Quarter ended December 31, 1995 $1.19 $0.75
Quarter ended March 31, 1994 $3.75 $2.38
Quarter ended June 30, 1994 $3.31 $2.88
Quarter ended September 30, 1994 $3.13 $2.38
Quarter ended December 31, 1994 $2.06 $1.63
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The approximate
number of holders of record or the Company's common stock at March 14, 1997
was 482.
(c) DIVIDENDS. The Company began paying quarterly dividends of
$.00625 per share in August of 1991. Subsequently in August, 1992 the
Board of Directors increased the dividend to $.0075 and in August, 1993,
the quarterly dividend was increased to $.01 per share. On November 15,
1993 the quarterly dividend was increased to $.0125. On February 15, 1995
the quarterly dividend was increased to $.0150. On September 21, 1995 the
quarterly dividend was suspended and will be decided at the Annual Meeting
in June of each year if, or when the Company will pay a dividend.
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The following table sets forth certain selected financial data with
respect to the Company.
(In Thousands, Except for Share Data)
Year Ended December 31
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1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Net sales $ 9,442 $ 9,311 $ 8,486 $ 8,183 $ 6,122
Net income (loss) $ (773) $(1,744) $ 1,552 $ 1,246 $ 1,682
Net income (loss) per
common share $ (0.17) $ (0.37) $ 0.33 $ 0.27 $ 0.37
Dividends declared per
common share $ 0 $0.0300 $0.0525 $0.0425 $0.0288
Total assets $ 6,195 $ 5,465 $ 7,328 $ 6,162 $ 5,119
Long-term debt $ 344 $ 184 $ 26 $ - $ 4
Stockholders' equity $ 3,662 $ 4,465 $ 6,338 $ 5,068 $ 4,002
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS INCLUDING CERTAIN
PREDICTIONS AND PROJECTIONS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934. SUCH
FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THIS SECTION AND UNDER "ITEM 1.
DESCRIPTION OF BUSINESS." ACTUAL EVENTS OR RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF VARIOUS FACTORS INCLUDING ECONOMIC, COMPETITIVE, GOVERNMENTAL AND
TECHNOLOGICAL FACTORS AFFECTING THE COMPANY'S PROPERTIES, OPERATIONS,
MARKETS, PRODUCTS, SERVICES AND PRICES.
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial condition
and results of operations during the periods included in the accompanying
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES:
- -------------------------------
The current and quick ratios, which provide an indication of the
Company's short-term assets in relation to its short-term obligations, for
the comparable periods are as follows:
1996 1995
-------- --------
Working Capital $ 396,626 $1,899,110
Current Ratio 1.25 : 1 4.62 : 1
Quick Assets (Cash, Securities
and Receivables) $1,588,659 $2,146,995
Quick Ratio .99 : 1 4.09 : 1
As noted by the above computations, the current ratio has decreased
from 4.62:1 to 1.25:1 and working capital has decreased by $1,502,484 for
the period from December 31, 1995 to December 31, 1996. The quick ratio
has decreased from 4.09:1 to .99:1. The largest single factor contributing
to the decrease in working capital is the investment in property, plant
and equipment of approximately $1,775,000.
Receivables increased by $105,991 from December 31, 1995 to December
31, 1996. The increase was due primarily to the increased sales volume.
The Company has a facility line of credit of $1,000,000, with monthly
interest payments at the prime rate. This line of credit is collateralized
by substantially all the assets of the Company. Borrowings as of December
31, 1996 were $585,000.
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
- ---------------------
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
- -------------------------------------------------------------
Sales increased by $130,967 or 1.4% from December 31, 1995 to December
31, 1996. The Company's net loss decreased by $970,441 over the prior
year's loss of $1,743,914. The growth rate in sales for 1996 is mostly
attributable to increased activity in the automobile industry.
Cost of sales as a percentage of sales was 93.3% for the year ending
December 31, 1996 as compared to 84.3% for the year ending December 31,
1995. The major reasons for the increase was higher labor costs (9.1%) and
the start up of a new operation at Fort Atkinson in Wisconsin.
Selling, general and administrative expenses decreased by $129,541
from 1995 to 1996. This was mainly due to reduced single business tax due
to losses in the last two (2) years.
Interest and dividend for the year ending December 31, 1996 decreased
by $88,199. This decrease was a result of increased interest expense to
finance the Fort Atkinson plant and use of operating funds.
Related party services and sales commissions decreased from $28,388 in
1995 to $6,316 in 1996. This decrease was in sales volume from customers
from outside sales representatives (Casting Sales, Inc.).
YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994
- -------------------------------------------------------------
Sales increased by $824,115 or 10.0% from December 31, 1994 to
December 31, 1995. The Company's net income decreased by $3,188,781 over
the prior year's net income of $1,444,770. The growth rate in sales for
1995 is mostly attributable to increased activity in the automobile
industry.
Cost of sales as a percentage of sales was 84.3% for the year ending
December 31, 1995 as compared to 79.5% for the year ending December 31,
1994. The major reasons for the increase was higher labor costs. The
higher labor costs are a result of inefficiencies by major customers due to
increased sales and the use of temporary employees due to low unemployment
rates.
Selling, general and administrative expenses increased by $169,978
from 1994 to 1995. This was mainly due to the above noted increase in
sales, as most of these costs are variable and increased costs in merger
and acquisition activities.
Interest and dividend income for the year ending December 31, 1995
decreased from $43,945 in 1994 to $40,311 in 1995.
Related party services and sales commissions decreased from $79,222 in
1994 to $23,388 in 1995. The decreases was in sales volume from customers
from outside sales representatives.
EFFECTS OF CHANGES IN PRICES
- ----------------------------
When possible, the Company attempts to adjust the selling prices of
its products in response to increases in its costs of labor, raw materials
and capital. However, the market served by the Company is competitive and
that competition may limit the allowance of price increases.
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During 1996, 1995 and 1994 there were no significant changes in
prices.
The Company had commitments for the purchase of, or the installation
of, fixed assets at the Yale Industries facility. The Company had agreed
to purchase $1.5 million in assets between July 1, 1993 and June 30, 1995.
This commitment had been met as of December 31, 1994. The Company had an
option to buy the facility for $1.00. The Company met its commitments and
exercised the option in 1995.
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.
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:
All Positions Position Served
with as Director
Name Age the Company of Company
---- --- ----------- ----------
Frederick G. Schriever 72 Chairman of the Board November 1987 to
and Director of the present
Company, MCC and
Yale Industries
Delbert W. Mullens 52 Vice Chairman of the July 1990 to present
Board and Director
of the Company, MCC,
and Yale Industries
William H. Hopton 62 President and Director January 1986 to
of the Company, MCC, present
and Yale Industries
Frederick G. Berlet 68 Treasurer and Director November 1987 to
of the Company, MCC, present
and Yale Industries
David A. Widlak 48 Secretary and Director November 1987 to
of the Company, MCC, 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
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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 Chairman of
Product-SDL Chemical, Inc. Mr. Mullens received a Bachelor of Science
Degree in Business Administration from Tennessee State University. Mr.
Mullens devotes as much time as is necessary to the business of the Company
and its subsidiaries.
WILLIAM H. HOPTON has been President of the Company since April of
1988, and a Director of the Company since January of 1986. Mr. Hopton also
served as the Company's vice President from January of 1986 to April of
1988. Since 1984, Mr. Hopton has been President of NHF. Effective
September 1, 1992, Mr. Hopton retired as President of NHF but will provide
consulting services to NHF as needed. Also, as of that date, he is
devoting his business time to the management of Margate Industries, Inc.
Mr. Hopton received a B.A. Degree in Business Administration from the
University of Detroit in 1964.
FREDERICK G. BERLET has been a Director of the Company since November
of 1987 and its Treasurer since April of 1988. He also serves as Director
of numerous Canadian and U.S. corporations and is President of S.W.O.
Managements Consultants Limited. He graduated with a Masters Degree in
Business Administration in 1953 from the University of Western Ontario.
Mr. Berlet devotes as much time as is necessary to the business of the
Company and its subsidiaries.
DAVID A. WIDLAK has been Secretary and a Director of the Company since
November of 1987. In February 1994 he was named Vice President 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
-13-
<PAGE>
such Act or any company registered as an investment company under the
Investment Company Act of 1940.
COMMITTEES, MEETINGS OF THE BOARD OF DIRECTORS. The Company has an
audit and compensation committee consisting of Frederick Berlet and David
Widlak, which consults with and reviews the reports of the Company's
independent auditors and the Company's internal financial staff. This
committee also makes recommendations to the Company's Board of Directors as
to compensation matters. The audit and compensation committee held one
meeting during the year. The Company's Board of Directors held four
regular meetings during the fiscal year ended December 31, 1996, 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, 1996,
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.
-14-
<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,
1996 and the prior two years to the Chief Executive Officer, the only
executive office whose total cash and non cash compensation exceeded
$100,000 prior to 1995. In 1995 David Widlak's, Vice President of Mergers
and Acquisitions, compensation exceeded $100,000.
<TABLE>
<CAPTION>
==========================================================================================================
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------
Long Term Compensation
------------------------------
Annual Compensation Awards Payouts
- -----------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Restricted LTIP Other
and Compen- Stock Options/ Pay- Compen-
Principal Salary Bonus sation Award(s) SARs outs sation
Position Year (1) ($) ($) ($)(2) ($) (#)(3) ($) ($)(4)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William H. Hopton 1996 $ 85,000 $ -0- $ 24,000 $ 8,257
President and CEO 1995 $ 82,500 $ 12,500 $ 27,000 $ 7,687
1994 $ 75,000 $ 18,000 $ 24,000 $ 8,342
David Widlak 1996 $ 80,000 $ -0- $ 24,000 $ 6,995
Vice President of 1995 $ 55,000 $ 8,300 $ 27,000 $ 10,490
Mergers &
Acquisitions
===========================================================================================================
</TABLE>
(1) Periods presented are for the year ended December 31.
(2) Represents Directors fees.
(3) Number of shares of Common Stock subject to options granted during the
year indicated.
(4) Represents employer contributions for insurance, disability insurance,
pension and car allowance.
COMPENSATION OF DIRECTORS
The Directors receive $6,000 for each meeting they attend plus
expenses. The Chairman of the Board of Directors receives $7,000 per
meeting. Special Board Meetings are paid at $3,000 per meeting.
-15-
<PAGE>
OPTIONS GRANTED
The following table sets forth the options that have been granted to
the Chief Executive Officer and President listed in the Executive
Compensation Table during the Company's last fiscal year ended December 31,
1996.
Option/SAR Grants in Last Fiscal Year (1996)
--------------------------------------------
Individual Grants
- ----------------------------------------------------------------------------
(a) (b) (c) (d) (e)
% of Total
Options/ Options/SARs Exercise
SARs Granted to or Base
Granted Employees Price Expiration
Name (#) in Fiscal year ($/Share) Date
---- ------- -------------- -------- ----------
William H. Hopton N/A N/A N/A N/A
President and CEO
AGGREGATE OPTIONS EXERCISED IN 1995 AND OPTION VALUES AT DECEMBER 31, 1996
The following table sets forth certain information regarding options
to purchase shares of Common Stock exercised during the Company's 1996
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 1996 fiscal year by the Executive Officers of the Company named
in the Summary Compensation Table:
Aggregated Options Exercised in 1996
and Option Values at December 31, 1996
- ----------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
12/31/96 12/31/96
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized(1) Unexercisable Unexercisable(2)
---- ----------- ----------- ------------- ----------------
William H. Hopton 16,000 $3,000 0/16,000 $0/$960
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.
-16-
<PAGE>
(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 $.56 at December 31, 1996, and the option exercise price per share
multiplied by the number of shares subject to options.
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLANS. As of December 31,
1996, Mr. Hopton held options to purchase 16,000 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.
-17-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The
following table sets forth as of March 15, 1997, information with respect
to the ownership of the Company's $.005 par value common stock by each
person known by the Company to own beneficially more than 5% of the
outstanding common stock, and by each of its officers and directors and by
all officers and directors collectively as a group:
Amount and
Nature of
Name and Address of Beneficial Percent of
Beneficial Owner Ownership Class (1)
- ------------------- ---------- ---------
Paul L. Cosper 284,120 (2) 6.2%
P.O. Box 96050
Wixom, MI 48096
Charles H. Raches, Jr. 252,840 5.5%
6600 Tepee Ridge Road
Bozeman, MT 59715
Frederick G. and
Patricia W. Schriever 795,147 17.3%
64 Clairview
Grosse Pointe Shores,
MI 48236
Frederick G. Berlet 225,416 (3) 4.9%
S.W.O. Management Consultants, Ltd.
35 Parkwood Drive
Tillsonburg, Ontario
Canada N4G 2B7
David A. Widlak 100,000 2.2%
P.O. Box 482
Washington, MI 48094
Delbert W. Mullens 15,000 (4) 0.3%
2888 Bloomfield Crossings
Bloomfield Hills, MI 48013
William H. Hopton 136,059 (5) 3.0%
5448 North River Rd.
Marine City, MI 48039
All Officers and Directors 1,271,622 27.7%
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.
-18-
<PAGE>
(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) Mr. Berlet owns 40,000 shares directly and 185,416 shares are held in
a trust for Mr. Berlet's children. Mr. Berlet has no voting or
dispositive power over the trust and hence, discloses no beneficial
interest in those shares held in trust.
(4) Does not include 200,000 options to purchase common stock.
(5) Includes 80,060 shares held by William Hopton, individually, 40,000
shares held by his four children, and does not include 16,000 options
not exercised as of this date.
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 1996 of $688,706 and accordingly, has a receivable in the
amount of $124,865 as of December 31, 1996. Also, for a minimum period of
fifteen (15) years beginning in June 1990, the Company and its subsidiaries
will provide cleaning services on all castings produced by NHF on an
exclusive basis, provided the Company retains an ownership interest in NHF.
Consolidated net sales to NHF in 1996 amounted to $6,386,835.
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.
-19-
<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, 1996 and 1995. . . . . . .F-2
Consolidated Statements of Income, Years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Equity For the Years
ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . .F-5
Consolidated Statements of Cash Flows, Years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . .F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . .F-7
(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 filed an 8-K on a change of Auditors.
-20-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
________
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
________
DECEMBER 31, 1996
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
________
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
________
DECEMBER 31, 1996
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
- CONTENTS -
PAGE NUMBER
-----------
Independent Auditors' Report 1
Financial Statements:
Consolidated Balance Sheet 2
Consolidated Statement of Operations 3
Consolidated Statement of Changes in Stockholders' Equity 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 23
<PAGE>
Independent Auditors' Report
----------------------------
To the Board of Directors
Margate Industries, Inc. and Subsidiaries
Yale, Michigan
We have audited the accompanying consolidated balance sheets of MARGATE
INDUSTRIES, INC. AND SUBSIDIARIES as of December 31, 1996, 1995 and 1994,
and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit. We did not audit the financial statements of NEW HAVEN
FOUNDRY, the investment in which, as discussed in Note 1 to the financial
statements, is accounted for by the equity method of accounting. The
financial statements of NEW HAVEN FOUNDRY were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for NEW HAVEN FOUNDRY, is based solely on
the report of the other auditors. The consolidated financial statements of
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES as of December 31, 1994 were
audited by other auditors whose report dated March 22, 1995 expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MARGATE INDUSTRIES,
INC. AND SUBSIDIARIES at December 31, 1996, 1995 and 1994, and the results
of its operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ PERRIN, FORDREE & COMPANY, P.C.
- ------------------------------------
PERRIN, FORDREE & COMPANY, P.C.
Troy, Michigan
March 18, 1997
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
------
December 31,
-----------------------
1996 1995
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 2,086 $ 513,700
Marketable securities - 152,713
Accounts receivable:
Trade 595,603 505,849
Related parties 990,970 974,733
Note receivable - related party 22,250 17,800
Inventories 32,464 55,333
Prepaid expenses and other 84,133 78,879
Prepaid federal income tax 264,300 105,457
Deferred tax assets 14,300 19,000
---------- ----------
Total current assets 2,006,106 2,423,464
INVESTMENT IN NEW HAVEN FOUNDRY - 531,711
OTHER 59,135 48,419
NOTES RECEIVABLE FROM RELATED PARTY -
Less current portion 17,800 35,600
PROPERTY, PLANT AND EQUIPMENT - At cost,
net of accumulated depreciation and
amortization of $981,705 and $711,193 at
December 31, 1996 and 1995, respectively 4,112,295 2,607,593
---------- ----------
$6,195,336 $5,646,787
========== ==========
The accompanying notes are an integal part of the financial statements.
-2-
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
December 31,
-----------------------
1996 1995
-------- --------
CURRENT LIABILITIES:
Notes payable $ 582,000 $ -
Current portion of long term debt 462,914 165,663
Accounts payable 513,071 182,246
Accrued salaries and wages 42,000 47,232
Accrued workers' compensation 6,654 108,260
Accrued single business tax - 1,000
Other accrued liabilities 2,841 19,953
---------- ----------
Total current liabilities 1,609,480 524,354
DEFERRED TAX LIABILITIES 207,200 141,000
OTHER POSTRETIREMENT BENEFITS 371,957 330,739
NOTE PAYABLE - Long-term 344,231 183,770
STOCKHOLDERS' EQUITY:
Common stock - $.005 par value:
Authorized - 25,000,000 shares
Issued and outstanding - 4,573,637
and 4,653,637 at December 31, 1996
and 1995, respectively 22,868 23,268
Paid-in for common stock in excess of
par value 7,410,725 7,499,980
Accumulated deficit (3,771,125) (3,056,324)
---------- ----------
Total stockholders' equity 3,662,468 4,466,924
---------- ----------
$6,195,336 $5,646,787
========== ==========
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------ ------ ------
NET SALES (Including related
party sales and commissions
of $7,075,541, $6,763,353 and
$5,660,167 in 1996, 1995 and
1994, respectively) $9,441,452 $9,310,525 $8,486,410
COST OF SALES 8,812,222 7,844,506 6,742,792
---------- ---------- ----------
GROSS PROFIT 629,230 1,466,019 1,743,618
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 947,423 1,076,964 906,986
RELATED PARTY SERVICES AND SALES
COMMISSIONS 6,316 23,388 79,222
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (324,509) 365,667 757,410
DIVIDEND AND INTEREST INCOME
(EXPENSE) - NET (47,888) 40,311 43,945
EQUITY INCOME (LOSS) OF INVESTEE
COMPANIES (531,712) (2,055,133) 858,313
GAIN (LOSS) ON SALE OF MARKETABLE
SECURITIES (41,721) 83,244 -
OTHER INCOME - Net 7,303 - 4,202
---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (938,527) (1,565,911) 1,663,870
PROVISION FOR FEDERAL INCOME TAXES (165,057) 178,000 219,000
---------- ---------- ----------
INCOME (LOSS) $ (773,470) $(1,743,911) $1,444,870
========== ========== ==========
EARNINGS (LOSS) PER COMMON SHARE -
Primary $ (.17) $ (.37) $ 0.31
========== ========== ==========
The accompanying notes are an integal part of the financial statements.
-3-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK PAID-IN FOR
-------------------- COMMON STOCK TOTAL STOCK-
NUMBER OF IN EXCESS OF ACCUMULATED HOLDERS'
SHARES AMOUNT PAR VALUE DEFICIT EQUITY
-------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance - December 31,
1993 4,632,303 $ 23,161 $7,359,039 $(2,314,337) $5,067,863
Stock options exercised 33,334 167 16,499 - 16,666
Tax benefit of options
exercised - - 160,758 - 160,758
Stock purchase (10,000) (50) (18,547) - (18,597)
Adjustment to fair value
of equity securities
available for sale - - - (35,413) (35,413)
Net income - - - 1,444,870 1,444,870
Cash dividends declared,
($.0525 per share) - - - (244,529) (244,529)
---------- ----------- ---------- ---------- ----------
Balance - December 31,
1994 4,655,637 23,278 7,517,749 (1,149,409) 6,391,618
Stock options exercised 20,000 100 9,900 - 10,000
Tax benefit of options
exercised - - 10,699 - 10,699
Stock purchase (22,000) (110) (38,368) - (38,478)
Adjustment to fair value
of equity securities
available for sale - - - (23,256) (23,256)
Net loss - - - (1,743,911) (1,743,911)
Cash dividends declared
($.03 per share) - - - (139,748) (139,748)
---------- ----------- ---------- ---------- ----------
Balance - December 31,
1995 4,653,637 23,268 7,499,980 (3,056,324) 4,466,924
Stock options exercised 20,000 100 9,900 - 10,000
Tax benefit of options
exercised - - 4,000 - 4,000
Stock purchase (100,000) (500) (103,155) - (103,655)
Prior year unrealized
losses on marketable
equity securities
realized - - - 58,669 58,669
Net loss - - - (773,470) (773,470)
---------- ---------- ---------- ---------- ----------
4,573,637 $ 22,868 $7,410,725 $(3,771,125) $3,662,468
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integal part of the financial statements.
-4-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------ ------ ------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Cash received from customers $9,335,461 $8,839,986 $8,730,519
Cash paid to suppliers
and employees (9,220,793) (8,635,588) (7,938,392)
Interest and dividends received 23,021 41,803 61,298
Interest paid (70,908) (1,492) (17,353)
Income taxes (paid) refunded 81,113 75,000 (324,242)
---------- ---------- ----------
Net cash from operating
activities 147,894 319,709 511,830
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of marketable securities - - (229,956)
Proceeds from sale of securities 169,661 373,142 289,095
Deposits made (10,716) - -
Proceeds from sale of assets 175,100 - -
Purchase of property, plant
and equipment (1,952,960) (578,911) (906,027)
----------- ---------- ----------
Net cash to investing
activities (1,618,915) (205,769) (846,888)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of
common stock 10,000 10,000 16,666
Purchase of treasury stock (103,655) (38,478) (18,597)
Proceeds from short term debt 582,000 - -
Proceeds from long term debt 692,000 - -
Principal payments under
long-term obligations (234,288) (23,771) (21,219)
Net proceeds from notes
receivable 13,350 17,800 217,800
Payment of dividends - (139,748) (232,603)
----------- ---------- ----------
Net cash to financing
activities 959,407 (174,197) (37,953)
----------- ---------- ----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (511,614) (60,257) (373,011)
CASH AND CASH EQUIVALENTS:
Balance - beginning of year 513,700 573,957 946,968
----------- ---------- ----------
Balance - end of year $ 2,086 $ 513,700 $ 573,957
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONS
-----------------------------------------------------------------------
FIXED ASSET ACQUIRED UNDER CAPITAL
LEASE OBLIGATION $ - $ - $ 67,466
=========== ========== ==========
The accompanying notes are an integal part of the financial statements.
-5-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
This summary of significant accounting policies of Margate
Industries, Inc. (the Company) is presented to assist in
understanding the Company's financial statements. The financial
statements and notes are representations of the Company's
management which is responsible for their integrity and
objectivity. These accounting policies conform to generally
accepted accounting principles and have been consistently applied
in the preparation of the financial statements.
BUSINESS ACTIVITY
-----------------
Margate Industries, Inc. is a holding company for subsidiaries
involved in the cleaning of small and medium-sized grey iron
castings that are sold primarily to the North American automobile
industry.
Export sales totaled approximately $141,600, $54,500 and $532,000
for the years ended December 31, 1996, 1995 and 1994,
respectively. Net sales to certain major customers that
represented 10% or more of the consolidated net sales are as
follows:
1996 1995 1994
------ ------ ------
Western Foundry, Ltd. $ - $ 1,300 $ 532,000
New Haven Foundry 6,386,835 6,057,933 5,065,000
Ford Motor Company - 53,200 968,000
PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Michigan Casting
Corporation (MCC), Brown City Castings Corporation d/b/a Yale
Industries (Yale), and Fort Atkinson Industries, Inc. (FAI). All
intercompany accounts and transactions have been eliminated in
the accompanying consolidated financial statements.
-6-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED:
PRINCIPLES OF CONSOLIDATION - CONTINUED
---------------------------------------
In November 1995, the Company established a wholly-owned
subsidiary, Fort Atkinson Industries, Inc., which provides
finishing services on castings manufactured in the Iowa-Wisconsin
area. Operations began on March 1, 1996.
The Company follows the equity method of accounting for its 45%
investment in New Haven Foundry (NHF) and it 40% interest in
Complete Engineering Development Services, Inc. (CEDS). The
carrying value of the Company's investment reflects its
underlying equity in the net assets of NHF and CEDS.
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.
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
$280,460, $211,599 and $157,548 in 1996, 1995 and 1994,
respectively. Estimated useful lives of assets in the various
classes of property, plant and equipment are as follows:
Buildings and improvements 40 years
Machinery and equipment 12 years
Furniture and fixtures 12 years
Automobiles 5 years
-7-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED:
REVENUE RECOGNITION
-------------------
Revenues derived from the cleaning of castings 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 4,578,528, 4,658,206 and 4,677,652
for the years ended December 31, 1996, 1995 and 1994,
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 stockholder 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.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
-8-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 2 - RELATED PARTY TRANSACTIONS:
The Company provides cleaning services to NHF for products
manufactured by that Company. Pursuant to the July 1990
agreement for the sale of NHF common stock, the Company provides
exclusive cleaning services on all castings produced by NHF for
a minimum period of 15 years, provided the Company maintains an
ownership interest in NHF.
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 $688,706,
$705,420 and $607,149 in 1996, 1995 and 1994, respectively.
During 1996, 1995 and 1994, the Company earned interest income of
$-0-, $2,116 and $2,125, 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 on 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. The 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 collateral for the
funding waivers. Accordingly, the Company is contingently liable
for the following contributions, including interest, to be made
by NHF.
ANNUAL
YEARS CONTRIBUTION
----- ------------
1997 $191,878
1998 126,209
1999 and 2000 60,422
The Company also has a note receivable from a related party (see
Note 5).
-9-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 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:
1996 1995 1994
------ ------ ------
ASSETS:
Current assets $14,085,521 $13,626,618 $12,613,943
Net property, plant
and equipment 12,282,716 11,982,268 8,886,886
Other assets 392,000 392,363 1,201,933
---------- ---------- ----------
Total assets $26,760,237 $26,001,249 $22,702,762
========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Current liabilities $17,407,355 $18,214,820 $12,624,715
Noncurrent liabilities 10,325,990 6,603,140 4,940,482
Stockholders' equity (973,108) 1,183,289 5,137,565
---------- ---------- ----------
Total liabilities
and stockholders'
equity $26,760,237 $26,001,249 $22,702,762
========== ========== ==========
1996 1995 1994
------ ------ ------
NET SALES $62,700,025 $60,035,860 $55,816,957
OPERATING EXPENSES 64,529,422 65,303,136 52,656,595
---------- ---------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES (1,829,397) (5,267,276) 3,160,362
INCOME TAXES (BENEFIT) 327,000 (1,313,000) 1,253,000
---------- ---------- ----------
NET INCOME $(2,156,397) $(3,954,276) $1,907,362
========== ========== ==========
-10-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 3 - INVESTMENT IN UNCONSOLIDATED COMPANY - CONTINUED:
NHF implemented Statement of Financial Accounting Standards No.
106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS (SFAS 106) in the first quarter of 1993. The estimated
liability as of the adoption date was $10.4 million, based on
available actuarial valuations. NHF elected to amortize the
transition obligation over 20 years. The annual expense for
future postretirement employee benefits will include the annual
amortization of this liability, future years' service cost and
interest expense. The adoption of this statement had a
significant impact on the Company's equity in the income of NHF.
The Company accounts for its investment in NHF using the equity
method. During 1996, NHF generated a net loss resulting in a
negative equity position. Accordingly, the investment in NHF has
been written down to zero.
In connection with Wesley Industries' purchase of 55% of NHF (in
1990), a stockholder 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 stockholder purchase all
of the NHF shares held by Margate for an amount equal to the
greater of $1,800,000 or book value.
As described in Note 1, the Company accounts for its 40%
investment in CEDS, acquired January 1995, using the equity
method. During 1995, CEDS became insolvent and terminated
operations. Therefore, at December 31, 1995, no financial
information is presented and the investment in CEDS has been
written down to net realizable value, $-0-.
NOTE 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 was 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 stockholders' equity. At January 1, 1995, the
Company classified its securities as available-for-sale. At
December 31, 1996, the Company recognized the previously recorded
unrealized loss of $58,669 when it sold those assets. At
December 31, 1995, the fair market value of the marketable
securities as shown on the balance sheet aggregated $152,713 with
a corresponding unrealized loss of $23,256 included in
stockholders' equity. At December 31, 1994, investments in
equity securities were valued at lower of aggregate cost or
market and totaled $465,867.
-11-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 4 - MARKETABLE SECURITIES - CONTINUED::
Proceeds from the sale of marketable equity securities in 1996
aggregated $169,661. The sale resulted in realized losses of
$41,721. For purposes of calculating the realized loss on sale
of securities, cost of the securities is determined by use of the
specific identification method.
NOTE 5 - NOTE RECEIVABLE - RELATED PARTY:
Note receivable - related party consisted of the following at
December 31:
1996 1995
-------- --------
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. This note is
unsecured. $ 40,050 $ 53,400
Less current portion 22,250 17,800
---------- ----------
$ 17,800 $ 35,600
========== ==========
The prime rate at December 31, 1996, was 8.25%.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are summarized as follows as of
December 31:
1996 1995
-------- --------
Building and improvements $1,657,007 $ 691,687
Machinery and equipment 3,253,651 2,487,765
Automotive equipment 77,297 43,327
Furniture and fixtures 106,045 96,007
---------- ----------
Total cost 5,094,000 3,318,786
Less accumulated depreciation and
amortization 981,705 711,193
---------- ----------
Net property, plant and
equipment $4,112,295 $2,607,593
========== ==========
-12-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT - CONTINUED:
The Company received Community Development Block Grant (CDBG)
funds through the City of Yale totaling $387,035 and land with a
value of $25,000. These grants have been recorded as a credit in
the property accounts and will be amortized into income over the
life of the assets acquired.
NOTE 7 - NOTES PAYABLE:
Notes payable consist of the following at December 31:
1996 1995
-------- --------
Note payable - bank, due in monthly
principal installments of $7,583,
plus interest at prime in payment
of loan guarantee for investment
in CEDS, uncollateralized, maturing
December 1998. $189,583 $323,000
Mortgage payable - bank, due in
monthly installments of $8,300
including interest at 9% through
December, 2000. The loan is
collateralized by substantially
all Company assets. 332,879 -
Note payable, due in monthly
installments of $3,992 including
interest at 4% through July, 2003. 282,913 -
Capital lease - related party, due
in monthly installments of $2,102,
including interest at 3.7%,
maturing February 1997. 1,770 26,433
---------- ----------
807,145 349,433
Less current portion 462,914 165,663
---------- ----------
$344,231 $183,770
========== ==========
-13-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 7 - NOTES PAYABLE - CONTINUED:
Maturities of notes payable obligations are as follows:
Year ending December 31:
1997 $ 462,914
1998 129,784
1999 47,948
2000 42,009
2001 43,720
Thereafter 80,770
----------
$ 807,145
==========
The Company maintains a bank line-of-credit of $1,000,000 for
working capital requirements. The applicable interest rate is at
the prime lending rate, currently 8.25% at December 31, 1996.
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 not
in compliance with all covenant requirements as of December 31,
1996. Accordingly, all loans outstanding to this lender have
been reclassified as current debt. The Company had borrowings
against the line of $582,000 and $0 at December 31, 1996 and
1995, respectively.
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values of the Company's financial instruments,
none of which are held for trading purposes, are as follows at
December 31, 1996 and 1995:
1996 1995
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
ASSETS
------
Cash and cash
equivalents $ 2,086 $ 2,086 $ 513,700 $ 513,700
Marketable
securities - - 152,713 152,713
Notes
receivable 40,050 40,050 53,400 53,400
---------- ---------- ---------- ----------
$ 42,136 $ 42,136 $ 719,813 $ 719,813
========== ========== ========== ==========
LIABILITIES
-----------
Notes payable $ 582,000 $ 582,000 $ - $ -
Long-term debt 807,145 N/A 349,433 N/A
Post-retirement
benefits 371,957 371,957 330,739 330,739
---------- ---------- ---------- ----------
$1,761,102 $ 953,957 $ 680,172 $ 330,739
========== ========== ========== ==========
-14-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED:
The carrying values of cash and equivalents approximate fair
values. The fair values of marketable securities are estimated
based on quoted market prices. The notes receivable due from a
related party bear interest at the prime rate and payments are
received when due. Therefore, the carrying value approximates
fair value.
The notes payable bear interest at prime rate which is deemed to
approximate fair value. It is currently not practicable to
estimate the fair value of the long-term debt obligations.
Because these note agreements contain unique terms, conditions,
covenants and restrictions which were negotiated at arm's-length
with the Company's lenders, there is no readily determinable
similar instrument on which to base an estimate of fair value.
Accordingly, no adjustment to fair value has been determined.
The postretirement benefits obligation has been determined by an
outside actuary based on the actuarial present value of the
expected benefits' liability.
NOTE 9 - CAPITAL LOSS:
Margate Industries, Inc. (the Company) acquired 40% of the stock
of Complete Engineering Development Services, Inc. (CEDS) in
January 1995. Under the provisions of the agreement, the Company
became a guarantor of CEDS' line-of-credit agreement. On
December 21, 1995, CEDS defaulted on the line-of-credit and
demand payment was made by the lender. The Company, as
guarantor, negotiated a term note agreement with the bank for
$273,000 along with a required payment of $50,000 which relieved
them of all principal and interest due under the line-of-credit
agreement. As a result, the Company incurred a capital loss of
approximately $275,000 of which $83,000 was utilized for federal
tax purposes in 1995. The remaining unused capital loss of
$192,000 is available for carryforward and expires in 2000.
NOTE 10 - 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.
-15-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 10 - INCOME TAXES - CONTINUED:
At December 31, components of deferred income taxes include the
following:
1996 1995
-------- --------
Current deferred taxes -
gross assets $ 14,300 $ 19,000
---------- ----------
Current deferred tax -
assets 14,300 19,000
---------- ----------
Noncurrent deferred taxes:
Gross assets 163,100 178,000
Gross liabilities (305,300) (254,000)
---------- ----------
(142,200) (76,000)
Valuation allowance (65,000) (65,000)
---------- ----------
Net noncurrent deferred
tax - assets (liabilities) (207,200) (141,000)
---------- ----------
Total deferred tax -
assets (liabilities) $ (192,900) $ (122,000)
========== ==========
The 1995 acquisition of CEDS, as discussed in Note 8, resulted in
a federal tax capital loss to Margate. Due to the uncertainty of
the future realization, a valuation allowance was established for
this deferred asset in 1995. This loss carryforward expires in
2010.
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.
1996 1995 1994
------ ------ ------
Depreciation and
amortization $(333,600) $(254,000) $(186,000)
Capital loss carryforward 65,000 65,000 -
Other postretirement
benefits 126,400 113,000 98,000
Workers' compensation
expense - 3,000 17,000
Vacation expense 14,300 16,000 17,000
---------- ---------- ----------
Total $ (127,900) $ (57,000) $ (54,000)
========== ========== ==========
-16-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 10 - INCOME TAXES - CONTINUED:
The components of the provision for income taxes are as follows
for the years ended December 31:
1996 1995 1994
------ ------ ------
Current tax expense
(benefit) $(264,300) $ 110,000 $ 170,000
Deferred tax expense
(benefit) 99,243 68,000 49,000
Operating and capital
loss carryforwards - (65,000) -
Adjustment to valuation
allowance - 65,000 -
---------- ---------- ----------
Provision for income
taxes $(165,057) $ 178,000 $ 219,000
========== ========== ===========
A reconciliation of the statutory tax rate to the effective tax
rates recorded as follows:
1996 1995 1994
---- ---- ----
Statutory rate (34)% (34)% 34%
(Earnings) losses of unconsolidated
subsidiaries 19 45 (17)
Deferred income related to CDBG
proceeds - - (1)
Recognition of previously deferred gain - - -
Other (3) - (3)
----- ----- -----
Effective rate (18)% 11% 13%
===== ===== =====
NOTE 11 - DIVIDENDS PAYABLE:
As of December 31, 1996, there were no dividends declared or
payable to stockholders.
-17-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 12 - CASH FLOWS:
A reconciliation of net income (loss) to net cash flows from
operating activities is as follows for the years ended December
31:
1996 1995 1994
------ ------ ------
Net income (loss) $ (773,470) $(1,743,911) $1,444,870
Adjustments to reconcile net
income (loss) to net cash
from operating activities:
Depreciation and
amortization 280,460 211,599 157,548
Gain (loss) on sale of
marketable securities 41,721 (83,244) -
Gain on sale of property,
plant and equipment (7,302) - -
Equity in (income) loss
of investee companies 531,711 2,103,000 (858,313)
Deferred income tax
provision (43,000) 68,000 49,000
Tax benefit of stock
options exercised 4,000 10,699 160,758
Changes in assets and liabilities:
(Increase) decrease in
accounts receivable:
Trade (89,754) (197,212) 142,643
Related parties (16,237) (322,776) 101,466
(Increase) decrease in
inventories 22,869 49,239 (59,107)
(Increase) decrease in
prepaid expenses and other (5,254) 335,280 (464,973)
Increase (decrease) in
accounts payable 330,825 (143,339) 99,992
Increase (decrease) in
accrued income tax (44,943) - (351,000)
Increase (decrease) in
accrued workers'
compensation (101,606) 59,260 14,420
Increase (decrease) in
accrued salaries and wages (5,232) (6,122) (25,318)
Increase (decrease) in
accrued single business tax (1,000) (6,000) 1,500
Increase (decrease) in other
accrued liabilities (17,112) (57,479) (67,653)
Increase in accrued pension
and retiree health
benefits 41,218 42,715 25,997
Increase in deferred taxes - - 140,000
---------- ---------- ---------
Net cash from operating
activities $ 147,894 $ 319,709 $ 511,830
========== ========== ==========
-18-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 13 - STOCK OPTIONS:
The following table sets forth stock options granted, exercised
and canceled during the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------ ------------------
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 240,000 $ .6875 260,000 $ .50 333,334 $ 1.45
Stock options granted - - - - - -
Stock options exercised (20,000) .50 (20,000) .50 (33,334) .50
Stock options canceled - - - - (40,000) -
-------- -------- --------
Stock options outstanding
at the end of the year 220,000 240,000 260,000
======== ======== ========
</TABLE>
Outstanding employee options of 20,000 shares of stock are
exercisable through 1997 at a price of $.50 per share.
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.
-19-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 13 - STOCK OPTIONS - CONTINUED:
The Financial Accounting Standards Board issued Statement No. 123
"Accounting for Stock Based Compensation" which is effective in
1996. The Statement provides a fair value method of accounting
for stock based compensation plans rather than the intrinsic
value method contained in APB Opinion No. 25 which the Company
currently uses. The new Statement does not require an entity to
adopt the new method but, provides the option to either continue
with the current method of accounting under APB 25 or adopt the
fair value mehtod of accounting under FASB 123. The Company will
continue using the current method of accounting. Since the
Company granted no options in 1995 and 1996 there would be no
effect on adopting the fair value accounting under FASB 123 to
the Company's financial statements.
NOTE 14 - LEASE COMMITMENTS:
MCC leases its building under an operating lease agreement which
expires in September 1998. FAI also leases its building under an
operating lease agreement that expires in December, 2005. These
leases require the Company to pay all maintenance and insurance
expenses. The Company also leases certain vehicles under two or
three year agreements.
Minimum payments under these leases are as follows:
1997 $276,200
1998 229,719
1999 135,750
2000 135,750
2001 135,750
Thereafter 543,000
Rental expense for these leases in 1996, 1995 and 1994, was
approximately $264,000, $109,000 and $103,000, respectively.
NOTE 15 - OTHER POSTRETIREMENT BENEFITS:
The Company sponsors certain health-care and life insurance
benefits for all retired employees. In December 1990, the
Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 106 on ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (SFAS 106). The new
standard requires that the expected cost of these benefits be
charged to expense during the years that the employees render
service.
-20-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 15 - OTHER POSTRETIREMENT BENEFITS - CONTINUED:
The following table sets forth the Plan's funded status
reconciled with the amount shown in the Company's
consolidated balance sheet at December 31:
1996 1995
-------- --------
Accumulated postretirement benefit
obligation:
Fully-eligible active plan
participants $129,457 $ 85,114
Other active plan participants 203,645 229,892
-------- --------
$333,102 $315,006
======== ========
1996 1995
-------- --------
Unrecognized net loss from past
experience different from that
assumed and from changes in
assumptions $ 38,855 $ 15,733
Accrued postretirement benefit
obligation 333,102 315,006
-------- --------
Accrued postretirement benefit cost $371,957 $330,739
======== ========
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:
1996 1995
-------- --------
Service cost - benefits attributed
to service during the period $ 20,494 $ 21,623
Interest cost on accumulated other
postretirement benefit obligation 21,207 21,061
Amortization of net losses (483) -
Recognition of transition obligation - 31
-------- --------
Net periodic other postretirement
benefit cost $ 41,218 $ 42,715
======== ========
-21-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 15 - OTHER POSTRETIREMENT BENEFITS - CONTINUED:
For measurement purposes, an 8% annual rate of increase in the
per capita cost of covered healthcare benefits was assumed for
1996 and 1995; the rate was assumed to decrease to 6% over ten
years 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,
1996 and 1995, by $86,869 and $87,687, respectively, and the
aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the years then ended by
$5,404 and $13,259, respectively.
The discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% as of December 31,
1996 and 1995.
NOTE 16 - CONTINGENCIES:
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
will ultimately have a materially adverse impact on the Company's
financial position or future results of operations.
-22-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
NOTE 17 - EMPLOYEE BENEFIT PLANS:
The Company maintains a 401(k) plan covering all employees that
satisfy the Plan's eligibility requirements. The Company is
required to match 25% of each employee's contribution, not to
exceed 8% of the participant's compensation. Employer's
contribution for the years ended December 31, 1996 and 1995, was
$ 22,539 and $23,264, respectively.
Margate maintains a Defined Contribution Plan covering
substantially all employees that satisfy the Plan's eligibility
requirements. Under the provisions of the Plan, Margate is
required to make an annual contribution of 5% of each
participant's eligible compensation. Plan contributions for the
years ended December 31, 1996 and 1995, were $21,712 and $22,386,
respectively.
During 1995, MCC adopted a Cafeteria Plan under Section 125 of
the Internal Revenue Code which allows employees that participate
to pay for their portion of health benefits with before tax
dollars. The Plan covers all employees that meet the
requirements of coverage under MCC's group health benefit plan.
-23-
<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 27, 1997 By: /s/ William H. Hopton
--------------------------------
William H. Hopton
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Frederick G. Schriever Chairman of the Board March 27, 1997
- --------------------------- and Director
Frederick G. Schriever
/s/ Delbert W. Mullens Vice Chairman and March 27, 1997
- --------------------------- Director
Delbert W. Mullens
/s/ William H. Hopton President, Chief March 27, 1997
- --------------------------- Financial Officer
William H. Hopton and Director
/s/ David A. Widlak Secretary and Director March 27, 1997
- ---------------------------
David A. Widlak
/s/ Frederick G. Berlet Treasurer and Director March 27, 1997
- ---------------------------
Frederick G. Berlet
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2
<SECURITIES> 0
<RECEIVABLES> 1,587
<ALLOWANCES> 0
<INVENTORY> 32
<CURRENT-ASSETS> 2,006
<PP&E> 5,094
<DEPRECIATION> 982
<TOTAL-ASSETS> 6,195
<CURRENT-LIABILITIES> 1,609
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 3,640
<TOTAL-LIABILITY-AND-EQUITY> 6,195
<SALES> 9,441
<TOTAL-REVENUES> 8,827
<CGS> 8,812
<TOTAL-COSTS> 6
<OTHER-EXPENSES> 947
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71
<INCOME-PRETAX> (938)
<INCOME-TAX> (165)
<INCOME-CONTINUING> (773)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (773)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
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