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, 1997
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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
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.005 PAR VALUE
-----------------------------
Title of Class
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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At February 27, 1998, 4,573,637 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 $1,444,632.
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 46 pages Exhibits are indexed on page 19.
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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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<PAGE>
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.
On March 24, 1998, the Company sold its 45% ownership in NHF to Wesley
Industries, Inc. Terms of the agreement were an initial payment of $1.5
million and an additional $3.5 million paid in quarterly installments.
(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
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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.
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<PAGE>
Brown City doing business as Yale Industries, a Michigan corporation,
is engaged in the business of performing finishing operations for the
foundry industry. Such operations include the cleaning, grinding and
testing of castings prior to shipment to the end purchaser. Yale commenced
operations in June of 1987, and its facilities are currently located in
Yale, Michigan, approximately 30 miles from New Haven, Michigan where NHF's
facilities are located. NHF uses the services of Yale for approximately
80% of the castings and cylinder heads they manufacture for Chrysler
Corporation and others. The Company formed this subsidiary because a
separate company and facility provided NHF, and other foundries, certain
advantages over handling finishing functions in-house. Over the past
several years, automobile manufacturers have begun to require that
additional finishing work and water testing be done on castings prior to
shipment. These requirements have increased the amount of time and labor
spent on these services. Management has found that Yale, as a separate
company devoted to these activities, has been able to handle these
functions more cost effectively. In addition, since Yale is capable of
providing these services to other customers as well as NHF, Yale generates
additional revenues for the Company.
Fort Atkinson Industries is also engaged in the business of performing
finishing operations on 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.
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<PAGE>
(vi) WORKING CAPITAL ITEMS. Practices and conditions with
respect to specific working capital items are not relevant to an
understanding of the Company's business. Working capital is required for
inventories and accounts receivable, to meet rapid delivery requirements,
or to assure continuous allotments of goods from suppliers.
(vii) MAJOR CUSTOMERS. The following table sets forth
information concerning customers, or any group of customers under common
control, or customers which are affiliates of each other, to which sales
were made by the Company during the fiscal year ended December 31, 1997, in
an amount which equals 10% or more of the Company's revenue and the
Company's relationship to each:
RELATIONSHIP PERCENT
TO AMOUNT OF OF TOTAL
CUSTOMER COMPANY REVENUE REVENUE
-------- ------- ------- -------
New Haven Foundry, Inc. Subsidiary $7,009,951 66.9%
John Deere None $1,777,000 17.0%
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,
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<PAGE>
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.
As more fully described in Note 16 of the Financial Statements, NHF,
the Company's 45% owned subsidiary, is reporting the following
contingencies in relation to environmental problems:
The Company was party to an action brought by PIRGIM and the United
States of America ("U.S."), which claimed that the Company discharged
potentially contaminated water into a stream which flowed to settling ponds
maintained by the Company, in violation of the Federal Clean Water Act. In
addition, the Company was also party to an action brought by the U.S. and
the Michigan Department of Environmental Quality ("MDEQ") that claimed that
the Company violated environmental laws pertaining to air and waste issues,
including used foundry sand on its property. During 1997, the Company
reached an agreement with the respective parties to settle the litigation
and obtained a finalized consent decree dated February 11, 1997. The
consent decree requires the Company to pay civil fines of $420,000 in four
annual installments commencing June 1998, plus accrued interest at a rate
determined by the U.S. Treasury, as well as incur costs associated with the
remediation of the Company's landfill by the year ended December 2000. As
of December 31, 1997, the Company has included the outstanding balance due
as part of the environmental reserves liability in the accompanying balance
sheets.
The Company has identified several options to remediate the landfill
sand, including on-site treatment or capping in place. Costs associated
with these alternatives are estimated at $2.1 to $2.5 million.
Accordingly, as of December 31, 1997, the Company has recorded $2.5 million
as an environmental reserve in the accompanying balance sheets. The
estimate of the range assumes that the 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, in the basis
of investigations performed to date by the Company and its environmental
consultants, the Company does not believe that any additional costs
associated with remedial action, in excess of the reserves already
provided, will ultimately have a materially adverse impact on the Company's
financial position or future results of operations.
(xiii) EMPLOYEES. As of December 31, 1997, the Company had
approximately 225 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 $0 in 1997, $19,133 in
1996 and $1,300 in 1995 to Western Foundry, a Canadian company and $0 in
1997, $122,500 in 1996 and $53,200 in 1995 to Ford of Canada.
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<PAGE>
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
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No response required.
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<PAGE>
PART II
ITEM 5. MARKET PRICE AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND
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RELATED STOCKHOLDER MATTERS
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(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
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HIGH LOW
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Quarter ended March 31, 1997 $0.84 $0.63
Quarter ended June 30, 1997 $0.84 $0.72
Quarter ended September 30, 1997 $1.06 $0.69
Quarter ended December 31, 1997 $0.66 $0.41
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
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The approximate
number of holders of record or the Company's common stock at February 27,
1998 was 466.
(c) DIVIDENDS. The Company began paying quarterly dividends of
$.00625 per share in August of 1991. Subsequently in August, 1992 the
Board of Directors increased the dividend to $.0075 and in August, 1993,
the quarterly dividend was increased to $.01 per share. On November 15,
1993 the quarterly dividend was increased to $.0125. On February 15, 1995
the quarterly dividend was increased to $.0150. On September 21, 1995 the
quarterly dividend was suspended and will be decided at the Annual Meeting
in June of each year if, or when the Company will pay a dividend.
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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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1997 1996 1995 1994 1993
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Net sales $10,472 $ 9,442 $ 9,311 $ 8,486 $ 8,183
Net income (loss) $ 149 $ (773) $(1,744) $ 1,445 $ 1,246
Net income (loss)
per common share $ 0.03 $ (0.17) $ (0.37) $ 0.31 $ 0.27
Dividends declared
per common share $ 0 $ 0 $0.0300 $0.0525 $0.0425
Total assets $ 6,221 $ 6,195 $ 5,465 $ 7,328 $ 6,162
Long-term debt $ 412 $ 344 $ 184 $ 26 $ -
Stockholders' equity $ 3,811 $ 3,662 $ 4,465 $ 6,392 $ 5,068
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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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:
1997 1996
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Working Capital $ 783,440 $ 396,626
Current Ratio 1.58 : 1 1.25 : 1
Quick Assets (Cash, Securities
and Receivables) $1,975,062 $1,588,659
Quick Ratio 1.47 : 1 .99 : 1
As noted by the above computations, the current ratio has increased
from 1.25:1 to 1.58:1 and working capital has increased by $386,814 for the
period from December 31, 1996 to December 31, 1997. The quick ratio has
increased from .99:1 to 1.47:1. The largest single factor contributing to
the increase in working capital is the increase in net income of $390,757
from 1996. (Loss in 1996 of $241,758 ($723,470 minus equity loss of
investee company of $53,712) plus increase in 1997 of $148,999).
Receivables increased by $277,667 from December 31, 1996 to December
31, 1997. 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, 1997 were $626,800.
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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<PAGE>
RESULTS OF OPERATIONS
- ---------------------
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
- -------------------------------------------------------------
Sales increased by $130,927 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, 1997 VS. YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------
Sales increased by $1,030,221 or 10.9% from December 31, 1996 to
December 31, 1997. The Company's net income increased by $922,469 over the
prior year's net loss of $773,470. The growth rate in sales for 1997 is
mostly attributable to increased activity at the New Facility at Fort
Atkinson which began operating in 1996.
Cost of sales as a percentage of sales was 87.5% for the year ending
December 31, 1997 as compared to 93.3% for the year ending December 31,
1997. The major reason for the decrease was increased efficiency in labor
costs.
Selling, general and administrative expenses increased by $54,851 from
1996 to 1997. This was mainly due to the above noted increase in sales, as
most of these costs are variable.
Interest expense (net of interest income and dividends) for the year
ending December 31, 1997 increased from $47,888 in 1996 to $105,143 in
1997. The increase is the result of interest expense to finance the Fort
Atkinson plant and use of operating funds.
Related party services and sales commissions increased from $6,316 in
1996 to $18,098 in 1997. The increase was in sales volume from customers
from outside sales representatives.
EFFECTS OF CHANGES IN PRICES
- ----------------------------
When possible, the Company attempts to adjust the selling prices of
its products in response to increases in its costs of labor, raw materials
and capital. However, the market served by the Company is competitive and
that competition may limit the allowance of price increases.
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During 1997, 1996 and 1995 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:
Position Served
Positions with as Director
Name Age All the Company of Company
---- --- --------------- ----------
Frederick G. Schriever 73 Chairman of the Board November 1987 to
and Director of the present
Company, MCC, and
Yale Industries
Delbert W. Mullens 53 Vice Chairman of the July 1990 to present
Board and Director of
the Company, MCC, and
Yale Industries
William H. Hopton 63 President and Director January 1986 to
of the Company, MCC, present
and Yale Industries
Frederick G. Berlet 69 Treasurer and Director November 1987 to
of the Company, MCC, present
and Yale Industries
David A. Widlak 49 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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<PAGE>
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. He
received a Bachelors Degree from Wayne State University in 1969 and a juris
doctorate Degree in Law from the University of Michigan in 1972. Mr.
Widlak devotes as much time as is necessary to the business of the Company
and its subsidiaries.
The Directors of the Company and its subsidiaries hold office for a
three year term until the annual meeting of the shareholders and until
their successors have been elected and qualified in the year in which their
term expires. The terms of one or two Directors expire each year.
The Officers of the Company and its subsidiaries are elected by the
respective Board of Directors at the first meeting after each annual
meeting of shareholders and hold office until the next annual meeting of
directors or their earlier resignation or removal.
The date of the next annual meeting of the Company will be determined
by the Company's Board of Directors in accordance with Delaware law.
No Director holds a directorship in any company with a class of
securities registered pursuant to Section 12 of the Securities Exchange Act
of 1934 or subject to the requirements of Section 15(d) of such Act or any
company registered as an investment company under the Investment Company
Act of 1940.
-13-
<PAGE>
COMMITTEES, MEETINGS OF THE BOARD OF DIRECTORS. The Company has an
audit and compensation committee consisting of Frederick Schriever,
Frederick Berlet and David Widlak, which consults with and reviews the
reports of the Company's independent auditors and the Company's internal
financial staff. This committee also makes recommendations to the
Company's Board of Directors as to compensation matters. The audit and
compensation committee held one meeting during the year. The Company's
Board of Directors held four regular meetings during the fiscal year ended
December 31, 1997, 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, 1997,
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,
1997 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 1997 $ 87,500 $ -0- $ 24,000 $ 10,844
President and CEO 1996 $ 85,000 $ -0- $ 24,000 $ 8,257
1995 $ 82,500 $ 12,500 $ 27,000 $ 7,687
David Widlak 1997 $ 62,500 $ -0- $ 24,000 $ 9,084
Vice President of 1996 $ 60,000 $ -0- $ 24,000 $ 6,995
Mergers & 1995 $ 55,000 $ 8,300 $ 27,000 $ 10,490
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 $3,000 per meeting.
-15-
<PAGE>
OPTIONS GRANTED
The following table sets forth the options that have been granted to
the Chief Executive Officer and President listed in the Executive
Compensation Table during the Company's last fiscal year ended December 31,
1997.
Option/SAR Grants in Last Fiscal Year (1997)
--------------------------------------------
Individual Grants
- ---------------------------------------------------------------------------
(a) (b) (c) (d) (e)
% of Total
Options/ Options/SARs Exercise
SARs Granted to or Base
Granted Employees Price Expiration
Name (#) in Fiscal year ($/Share) Date
---- ------- -------------- -------- ----------
William H. Hopton N/A N/A N/A N/A
President and CEO
AGGREGATE OPTIONS EXERCISED IN 1997 AND OPTION VALUES AT DECEMBER 31, 1997
The following table sets forth certain information regarding options
to purchase shares of Common Stock exercised during the Company's 1997
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 1997 fiscal year by the Executive Officers of the Company named
in the Summary Compensation Table:
Aggregated Options Exercised in 1997
and Option Values at December 31, 1997
- --------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Shares 12/31/97 12/31/97
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized(1) Unexercisable Unexercisable
---- ----------- ----------- ------------- -------------
William H. Hopton None $0 -0- $0
President and CEO
- --------------------------------------------------------------------------
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLANS. 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.
-16-
<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 February 27, 1998, 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%
604 Maple Lane
Columbus, MI 48063
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.
-17-
<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) 225,416 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 106,059 shares held by William Hopton, individually, 30,000
shares held by his three children.
CHANGES IN CONTROL. The Company knows of no contractual arrangements,
including any pledge by any person of securities, which may at a subsequent
date result in a change in control of the Company.
ITEM 13. 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 1997 of $610,738 and accordingly, has a receivable in the
amount of $158,804 as of December 31, 1997. 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 1997 amounted to $6,399,213.
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.
-18-
<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, 1997 and 1996 . . . . .F-2
Consolidated Statements of Income, Years ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Equity For the Years
ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . .F-5
Consolidated Statements of Cash Flows, Years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . .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.
-19-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
________
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
________
DECEMBER 31, 1997
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
________
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
________
DECEMBER 31, 1997
<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 - 22
<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, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. We did not audit the
financial statements of NEW HAVEN FOUNDRY, the investment in which, as
discussed in Note 1 to the financial statements, is accounted for by the
equity method of accounting. The financial statements of NEW HAVEN FOUNDRY
were audited by other auditors whose report has been furnished to us, and
our opinion, insofar as it relates to the amounts included for NEW HAVEN
FOUNDRY, is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MARGATE INDUSTRIES,
INC. AND SUBSIDIARIES at December 31, 1997 and 1996 and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
PERRIN, FORDREE & COMPANY, P.C.
Troy, Michigan
March 18, 1998
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
------
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 110,822 $ 2,086
Accounts receivable:
Trade 378,301 595,603
Related parties 1,485,939 990,970
Note receivable - related party 17,800 22,250
Inventories 41,991 32,464
Prepaid expenses and other 37,394 84,133
Prepaid federal income tax 41,000 264,300
Deferred tax assets 12,400 14,300
---------- ----------
Total current assets 2,125,647 2,006,106
OTHER 56,764 59,135
NOTES RECEIVABLE FROM RELATED PARTY - 17,800
INVESTMENT IN NEW HAVEN FOUNDRY - -
PROPERTY, PLANT AND EQUIPMENT - At cost,
net of accumulated depreciation and
amortization of $1,324,045 and
$981,705 at December 31, 1997 and
1996, respectively 4,038,979 4,112,295
---------- ----------
$6,221,390 $6,195,336
========== ==========
The accompanying notes are an integral part of the financial statements.
-2-
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
CURRENT LIABILITIES:
Notes payable $ 626,000 $ 582,000
Current portion of long term debt 213,832 462,914
Accounts payable 425,746 513,071
Accrued salaries and wages 63,924 42,000
Accrued workers' compensation 6,870 6,654
Other accrued liabilities 5,835 2,841
---------- ----------
Total current liabilities 1,342,207 1,609,480
DEFERRED TAX LIABILITIES 235,700 207,200
OTHER POSTRETIREMENT BENEFITS 419,856 371,957
NOTES PAYABLE - Long-term 412,160 344,231
CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Common stock - $.005 par value:
Authorized - 25,000,000 shares
Issued and outstanding -
4,573,637 at December 31, 1997
and 1996, respectively 22,868 22,868
Paid-in for common stock in excess
of par value 7,410,725 7,410,725
Accumulated deficit (3,622,126) (3,771,125)
---------- ----------
Total stockholders' equity 3,811,467 3,662,468
---------- ----------
$6,221,390 $6,195,336
========== ==========
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------ ------ ------
NET SALES (Including related
party sales and commissions
of $7,009,951, $7,075,541
and $6,763,353 in 1997, 1996
and 1995, respectively) $10,471,673 $9,441,452 $9,310,525
COST OF SALES 9,159,159 8,812,222 7,844,506
---------- ---------- ----------
GROSS PROFIT 1,312,514 629,230 1,466,019
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,002,274 947,423 1,076,964
RELATED PARTY SERVICES AND
SALES COMMISSIONS 18,098 6,316 23,388
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 292,142 (324,509) 365,667
DIVIDEND AND INTEREST INCOME
(EXPENSE) - NET (105,143) (47,888) 40,311
EQUITY LOSS OF INVESTEE
COMPANIES - (531,712) (2,055,133)
GAIN (LOSS) ON SALE OF MARKETABLE
SECURITIES - (41,721) 83,244
OTHER INCOME - Net - 7,360 -
---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 186,999 (938,470) (1,565,911)
PROVISION FOR FEDERAL INCOME
TAXES 38,000 (165,000) 178,000
---------- ---------- ----------
INCOME (LOSS) $ 148,999 $ (773,470) $(1,743,911)
========== ========== ==========
EARNINGS (LOSS) PER COMMON SHARE -
Primary $ .03 $ (.17) $ (.37)
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
-3-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<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,
1994 4,632,303 $ 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)
---------- ----------- ---------- ---------- ----------
Balance - December 31,
1996 4,573,637 22,868 7,410,725 (3,771,125) 3,662,468
Net income - - - 148,999 148,999
---------- ----------- ---------- ---------- ----------
Balance December 31,
1997 4,573,637 $ 22,868 $7,410,725 $(3,622,126) $3,811,467
========== =========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-4-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------ ------ ------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Cash received from customers $10,276,690 $9,335,461 $8,839,986
Cash paid to suppliers and
employees (9,896,955) (9,220,793) (8,635,588)
Interest and dividends received 2,491 23,021 41,803
Interest paid (107,804) (70,908) (1,492)
Income taxes refunded 215,870 81,113 75,000
---------- ---------- ----------
Net cash from operating
activities 490,292 147,894 319,709
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of
securities - 169,661 373,142
Deposits (made) refunded 2,371 (10,716) -
Proceeds from sale of assets - 175,100 -
Purchase of property, plant
and equipment (246,250) (1,952,960) (578,911)
---------- ---------- ----------
Net cash to investing
activities (243,879) (1,618,915) (205,769)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of
common stock - 10,000 10,000
Purchase of treasury stock - (103,655) (38,478)
Proceeds from short term debt 44,000 582,000 -
Proceeds from long term debt - 692,000 -
Principal payments under
long-term obligations (203,927) (234,288) (23,771)
Proceeds from notes receivable 22,250 13,350 17,800
Payment of dividends - - (139,748)
---------- ---------- ----------
Net cash from (to)
financing activities (137,677) 959,407 (174,197)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 108,736 (511,614) (60,257)
CASH AND CASH EQUIVALENTS:
Balance - beginning of year 2,086 513,700 573,957
---------- ---------- ----------
Balance - end of year $ 110,822 $ 2,086 $ 513,700
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONS
-----------------------------------------------------------------------
EQUIPMENT ACQUIRED UNDER CAPITAL
LEASE OBLIGATION $ 22,774 $ - $ -
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
-5-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 $41,381, $141,600 and $54,500
for the years ended December 31, 1997, 1996 and 1995,
respectively. Net sales to major customers that represented 10%
or more of the consolidated net sales are as follows:
1997 1996 1995
------ ------ ------
New Haven Foundry $6,479,702 $6,386,835 $6,057,933
John Deere 1,777,000 1,313,000 669,000
PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Michigan Casting
Corporation (MCC), Brown City Castings Corporation d/b/a Yale
Industries (Yale), and Fort Atkinson Industries, Inc. (FAI). All
intercompany accounts and transactions have been eliminated in
the accompanying consolidated financial statements.
In November 1995, the Company established a wholly-owned
subsidiary, Fort Atkinson Industries, Inc., which provides
finishing services on castings manufactured in the Iowa-Wisconsin
area. Operations began on March 1, 1996.
-6-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED:
PRINCIPLES OF CONSOLIDATION - CONTINUED
---------------------------------------
The Company follows the equity method of accounting for its 45%
investment in New Haven Foundry (NHF) 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
$342,340, $280,460 and $211,599 in 1997, 1996 and 1995,
respectively. Estimated useful lives of assets in the various
classes of property, plant and equipment are as follows:
Buildings and improvements 40 years
Machinery and equipment 12 years
Furniture and fixtures 12 years
Automobiles 5 years
REVENUE RECOGNITION
-------------------
Revenues derived from the cleaning of castings are recognized as
services are provided.
Sales commissions are recognized as revenue when earned.
-7-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED:
NET INCOME PER SHARE OF COMMON STOCK
------------------------------------
Net income per share of common stock is computed based on the
weighted average number of shares of common stock outstanding
during each year, plus the shares that would be outstanding
assuming exercise of dilutive stock options and warrants. The
total weighted average number of shares of common stock and
common stock equivalents was 4,573,637, 4,578,528 and 4,658,206
for the years ended December 31, 1997, 1996 and 1995,
respectively.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
NOTE 2 - RELATED PARTY TRANSACTIONS:
The Company provides cleaning services to NHF for products
manufactured by that Company. Pursuant to the July 1990
agreement for the sale of NHF common stock, the Company provides
exclusive cleaning services on all castings produced by NHF for
a minimum period of 15 years, provided the Company maintains an
ownership interest in NHF.
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 $610,738,
$688,706 and $705,420 in 1997, 1996 and 1995, respectively.
Any unpaid balances of the aforementioned amounts are included in
the related party balances on the accompanying balance sheet.
The Company also has a note receivable from a related party (see
Note 5).
-8-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
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:
1997 1996 1995
------ ------ ------
ASSETS:
Current assets $15,231,417 $14,085,521 $13,626,618
Net property, plant
and equipment 11,553,272 12,282,716 11,982,268
Other assets 392,000 392,000 392,363
----------- ----------- -----------
Total assets $27,176,689 $26,760,237 $26,001,249
=========== =========== ===========
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Current liabilities $18,632,594 $17,407,355 $18,214,820
Noncurrent liabilities 9,717,867 10,325,990 6,603,140
Stockholders' equity (1,173,772) (973,108) 1,183,289
----------- ----------- -----------
Total liabilities
and stockholders'
equity $27,176,689 $26,760,237 $26,001,249
=========== =========== ===========
1997 1996 1995
------ ------ ------
NET SALES $56,687,793 $62,700,025 $60,035,860
OPERATING EXPENSES 56,740,457 64,529,422 65,303,136
----------- ----------- -----------
LOSS BEFORE INCOME
TAXES (52,664) (1,829,397) (5,267,276)
INCOME TAXES (BENEFIT) 148,000 327,000 (1,313,000)
----------- ----------- -----------
NET LOSS $ (200,664) $(2,156,397) $(3,954,276)
=========== =========== ===========
-9-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
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, no financial information is presented and
the investment in CEDS was written down to net realizable value,
$-0- in 1995.
NOTE 4 - MARKETABLE SECURITIES:
The Company accounts for its investments under Statement of
Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES (SFAS 115). 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.
-10-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
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:
1997 1996
---------- ----------
Wesley Industries, Inc. -
principal payable $4,450 per
quarter through January 31,
1999, plus interest at the
prime rate established by
National Bank of Detroit.
This note is unsecured. $ 17,800 $ 40,050
Less current portion 17,800 22,250
---------- ----------
$ - $ 17,800
========== ==========
The prime rate at December 31, 1997, was 8.5%.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are summarized as follows as of
December 31:
1997 1996
---------- ----------
Building and improvements $1,800,000 $1,657,007
Machinery and equipment 3,371,498 3,253,651
Automotive equipment 77,297 77,297
Furniture and fixtures 114,229 106,045
---------- ----------
Total cost 5,363,024 5,094,000
Less accumulated depreciation
and amortization 1,324,045 981,705
---------- ----------
Net property, plant
and equipment $4,038,979 $4,112,295
========== ==========
-11-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
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:
1997 1996
---------- ----------
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. $ 98,583 $ 189,583
Mortgage payable - bank, due
in monthly installments of
$8,300 including interest at
9% through December, 2000.
The loan is collateralized by
substantially all Company assets. 260,678 332,879
Note payable, due in monthly
installments of $3,992 including
interest at 4% through
July, 2003. 245,647 282,913
Capital lease, due in monthly
installments of $705 including
interest at 17.9% through
July 2001. 21,084 -
Capital lease - related party,
due in monthly installments
of $2,102, including interest
at 3.7%, maturing February 1997. - 1,770
---------- ----------
625,992 807,145
Less current portion 213,832 462,914
---------- ----------
$ 412,160 $ 344,231
========== ==========
-12-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
NOTE 7 - NOTES PAYABLE - CONTINUED:
Maturities of notes payable obligations are as follows:
Year ending December 31:
1998 $ 213,832
1999 140,345
2000 142,917
2001 48,128
2002 45,501
Thereafter 35,269
----------
$ 625,992
==========
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 8.5% at December 31, 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 had
borrowings against the line of $626,000 and $582,000 at December
31, 1997 and 1996, 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, 1997 and 1996:
1997 1996
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
ASSETS
------
Cash and cash
equivalents $ 110,822 $ 110,822 $ 2,086 $ 2,086
Notes
receivable 17,800 17,800 40,050 40,050
---------- ---------- ---------- ----------
$ 128,622 $ 128,622 $ 42,136 $ 42,136
========== ========== ========== ==========
LIABILITIES
-----------
Notes payable $ 626,000 $ 626,000 $ 582,000 $ 582,000
Long-term debt 625,992 N/A 807,145 N/A
Post-retirement
benefits 419,856 419,856 371,957 371,957
---------- ---------- ---------- ----------
$1,671,848 $1,045,856 $1,761,102 $ 953,957
========== ========== ========== ==========
-13-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
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.
-14-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
NOTE 10 - INCOME TAXES - CONTINUED:
At December 31, components of deferred income taxes include the
following:
1997 1996
---------- ----------
Current deferred taxes -
gross assets $ 12,400 $ 14,300
---------- ----------
Current deferred tax -
assets 12,400 14,300
---------- ----------
Noncurrent deferred taxes:
Gross assets 142,700 163,100
Gross liabilities (378,400) (305,300)
---------- ----------
(235,700) (142,200)
Valuation allowance - (65,000)
---------- ----------
Net noncurrent deferred
tax - assets (liabilities) (235,700) (207,200)
---------- ----------
Total deferred tax -
assets (liabilities) $ (223,300) $(192,900)
========== ==========
The 1995 acquisition of CEDS resulted in a federal tax capital
loss to Margate. Due to the uncertainty of the future
realization, a valuation allowance was established for this
deferred asset in 1995. This loss carryforward expires in 2010.
In 1997, due to the expected sale of the Company's investment in
New Haven Foundry (Note 18), which will generate a capital gain,
the valuation allowance was reversed.
Deferred income taxes, included in the accompanying balance
sheets, result from temporary differences related to the
following items which are treated differently for financial
reporting and tax reporting purposes.
1997 1996 1995
------ ------ ------
Depreciation and
amortization $ (378,400) $ (333,600) $ (254,000)
Capital loss
carryforward - 65,000 65,000
Other postretirement
benefits 142,700 126,400 113,000
Workers' compensation
expense - - 3,000
Vacation expense 12,400 14,300 16,000
---------- ---------- ----------
Total $ (223,300) $ (127,900) $ (57,000)
========== ========== ==========
-15-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
NOTE 10 - INCOME TAXES - CONTINUED:
The components of the provision for income taxes are as follows
for the years ended December 31:
1997 1996 1995
------ ------ ------
Current tax expense
(benefit) $ 72,600 $ (264,300) $ 110,000
Deferred tax expense 30,400 99,300 68,000
Capital loss carryforwards - - (65,000)
Adjustment to valuation
allowance (65,000) - 65,000
---------- ---------- ----------
Provision for income taxes $ 38,000 $ (165,000) $ 178,000
========== ========== ==========
A reconciliation of the statutory tax rate to the effective tax
rates recorded as follows:
1997 1996 1995
---- ---- ----
Statutory rate 34 % (34)% (34)%
(Earnings) losses of unconsolidated
subsidiaries - 19 45
Adjustment to valuation allowance (12) - -
Other (2) (3) -
----- ----- -----
Effective rate 20 % (18)% 11 %
===== ===== =====
NOTE 11 - DIVIDENDS PAYABLE:
As of December 31, 1997, there were no dividends declared or
payable to stockholders.
-16-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
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:
1997 1996 1995
------ ------ ------
Net income (loss) $ 148,999 $ (773,470) $(1,743,911)
Adjustments to reconcile
net income (loss) to
net cash from operating
activities:
Depreciation and
amortization 342,340 280,460 211,599
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
Deferred income tax
provision 30,400 (43,000) 68,000
Tax benefit of stock
options exercised - 4,000 10,699
Changes in assets and
liabilities:
(Increase) decrease in
accounts receivable:
Trade 217,302 (89,754) (197,212)
Related parties (494,969) (16,237) (322,776)
(Increase) decrease in
inventories (9,527) 22,869 49,239
(Increase) decrease in
prepaid expenses and
other 46,739 (5,254) 335,280
Increase (decrease) in
accounts payable (87,325) 330,825 (143,339)
Increase (decrease) in
accrued income tax 223,300 (44,943) -
Increase (decrease) in
accrued workers'
compensation 216 (101,606) 59,260
Increase (decrease) in
accrued salaries and
wages 21,924 (5,232) (6,122)
Increase (decrease) in
accrued single
business tax 1,100 (1,000) (6,000)
Increase (decrease) in
other accrued
liabilities 1,894 (17,112) (57,479)
Increase in accrued
pension and retiree
health benefits 47,899 41,218 42,715
---------- ---------- ----------
Net cash from operating
activities $ 490,292 $ 147,894 $ 319,709
========== ========== ==========
-17-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
NOTE 13 - STOCK OPTIONS:
The following table sets forth stock options granted, exercised
and canceled during the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------ ------------------
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 220,000 $ 1.86 240,000 $ 1.75 260,000 $ 1.65
Stock options granted - - - - - -
Stock options exercised - - (20,000) .50 (20,000) .50
Stock options canceled (20,000) - - - - -
-------- ------- -------- ------- -------- -------
Stock options outstanding
at the end of the year 200,000 $ 2.00 220,000 $ 1.86 240,000 $ 1.75
======== ======= ======== ======= ======== =======
</TABLE>
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.
-18-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
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 method of accounting under FASB 123. The Company will
continue using the current method of accounting. Since the
Company granted no options in 1995, 1996 and 1997 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:
1998 $ 246,301
1999 148,853
2000 139,760
2001 135,750
2002 135,750
Thereafter 407,250
----------
$1,213,664
==========
Rental expense for these leases in 1997, 1996 and 1995, was
approximately $271,000, $264,000 and $109,000, 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.
-19-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
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:
1997 1996
---------- ----------
Accumulated postretirement
benefit obligation:
Fully-eligible active
plan participants $ 100,227 $ 129,457
Other active plan
participants 250,154 203,645
---------- ----------
$ 350,381 $ 333,102
========== ==========
Unrecognized net loss from
past experience different
from that assumed and from
changes in assumptions $ 69,475 $ 38,855
Accrued postretirement
benefit obligation 350,381 333,102
---------- ----------
Accrued postretirement
benefit cost $ 419,856 $ 371,957
========== ==========
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:
1997 1996
---------- ----------
Service cost - benefits
attributed to service
during the period $ 27,808 $ 20,494
Interest cost on accumulated
other postretirement
benefit obligation 21,941 21,207
Amortization of net losses (1,850) (483)
---------- ----------
Net periodic other
postretirement benefit cost $ 47,899 $ 41,218
========== ==========
-20-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
NOTE 15 - OTHER POSTRETIREMENT BENEFITS - CONTINUED:
For measurement purposes, a 7.25% annual rate of increase in the
per capita cost of covered healthcare benefits was assumed for
1997 and 1996; the rate was assumed to decrease to 5.25% over
eight 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, 1997 and 1996, by $93,853 and $86,869,
respectively, and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the
years then ended by $5,722 and $5,404, respectively.
The discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% as of December 31,
1997 and 1996.
NOTE 16 - CONTINGENCIES:
NHF, the Company's 45%-owned equity investee, was party to an
action brought by PIRGIM and the United States of America
("U.S."), which claimed that NHF discharged potentially
contaminated water into a stream which flowed to settling ponds
maintained by NHF, in violation of the Federal Clean Water Act.
In addition, NHF was also party to an action brought by the U.S.
and the Michigan Department of Environmental Quality (MDEQ) that
claimed that the Company violated environmental laws pertaining
to air and waste issues, including used foundry sand on its
property. During 1997, NHF reached an agreement with the
respective parties to settle the litigation and obtained a
finalized consent decree dated February 11, 1997. The consent
decree requires NHF to pay civil fines of $420,000 in four annual
installments commencing June 1998, plus accrued interest at a
rate determined by the U.S. Treasury, as well as incur costs
associated with the remediation of NHF's landfill by the year
ended December 2000. As of December 31, 1997, NHF has included
the outstanding balance due as part of the environmental reserves
liability in their balance sheets.
NHF has identified several options to remediate the landfill
sand, including on-site treatment or capping in place. Costs
associated with these alternatives are estimated at $2.1 to $2.5
million. Accordingly, as of December 31, 1997, NHF has recorded
$2.5 million as an environmental reserve in their balance sheets.
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 any additional costs associated with the
remedial action, in excess of the reserves already provided, will
ultimately have a materially adverse impact on NHF's financial
position or future results of operations.
-21-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
NOTE 16 - CONTINGENCIES - CONTINUED:
The Company has developed preliminary plans to address the
possible exposures related to the impact on its computer systems
of the Year 2000. Key financial information and operational
systems have been assessed and detailed plans have been developed
to address systems modifications required by December 31, 1999.
The financial impact of making the required systems changes is
not expected to be material to the company's financial position,
results of operations or cash flows.
NOTE 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, 1997, 1996 and
1995, was $27,134, $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, 1997, 1996 and 1995, were $20,718,
$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.
NOTE 18 - SUBSEQUENT EVENT:
In March 1998, the Company agreed to sell its 45% ownership
interest in New Haven Foundry to Wesley Industries, Inc., who
owns the remaining 55% interest. The sales price totaled $2.2
million, of which, $1.5 million will be received in cash and the
remaining $700,000 in a note payable over five years. Since the
Company's investment in NHF was written down to zero in 1996,
the gain on the sale will be $2.2 million.
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MARGATE INDUSTRIES, INC.
Dated: March 30, 1998 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 30, 1998
- -------------------------- and Director
Frederick G. Schriever
/s/ Delbert W. Mullens Vice Chairman and Director March 30, 1998
- --------------------------
Delbert W. Mullens
/s/ William H. Hopton President, Chief Financial March 30, 1998
- -------------------------- Officer and Director
William H. Hopton
/s/ David A. Widlak Secretary and Director March 30, 1998
- --------------------------
David A. Widlak
/s/ Frederick G. Berlet Treasurer and Director March 30, 1998
- --------------------------
Frederick G. Berlet
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