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, 1998
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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 March 29, 1999, 1,489,214 shares of Common Stock, $.005 par value, were
outstanding. The aggregate market value of the Common Stock held by non-
affiliates of the Registrant on that date was approximately $1,964,372.
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 42 pages Exhibits are indexed on page 18.
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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 was
50%-owned by Mr. Delbert W. Mullens, currently a Director of the Company and
50%-owned by Ms. Lula Mullens. The promissory note called for interest at
2% over the prime rate, with no principal payments required until
September, 1991. The Company extended the term of the note and payments
begin in April, 1994. Upon repayment of the promissory note, Wesley had
the right to purchase an additional 20% of the shares of NHF held by the
Company for $800,000 or the then current book value, whichever is greater.
Upon such purchase, the Company could require Mr. Mullens to purchase the
remaining shares for $1,800,000 or the then current book value, whichever
is greater.
The terms of the sale also provided for an annual commission contract
between NHF and the Company and between NHF and Wesley relating to sales in
excess of $35,000,000 annually. The Company received $150,000 each year
plus 3% on the difference between actual sales in excess of $35,000,000 but
less than $40,000,000 plus 2% on actual sales that exceed $40,000,000.
This commissions contract would be in effect for a period of not less than
fifteen (15) years. Also, for a minimum period of fifteen (15) years, the
Company and its subsidiaries would provide cleaning services on all
castings produced by NHF on an exclusive basis, so long as the Company
retained an ownership interest in NHF.
Pursuant to the sale, Mr. Mullens was elected to the Company's Board
of Directors. Conversely, the Company had representatives that account for
forty five percent (45%) of the Directors/Voters on the
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NHF Board of Directors. In addition, Mr. Mullens was restricted from
transferring his interest in NHF stock without the consent of the Company
and also he had a first right of refusal to purchase the balance of the NHF
common stock in the event the Company wishes to sell or transfer any of its
remaining NHF stock.
Pursuant to the agreement for the sale of NHF common stock, Mr.
Mullens had an option to purchase 33,334 shares of the Company's common
stock at $4.50 per share and an additional 33,334 shares at $7.50 per share
upon purchase of the first 33,334 shares. Mr. Mullens' shares subject to
option and the exercise price thereof were adjusted to reflect the reverse
stock splits described below.
Effective June 21, 1993, the Company initiated operations at Yale,
Michigan and relocated its corporate offices to that location. Yale
Industries provides specialized cleaning and testing of metal castings for
foundries and machine shops.
On January 12, 1994, pursuant to a vote at a Special Meeting of
Shareholders, the Company approved a one for five reverse split of the
outstanding shares of the Company and reduced the authorized shares of the
Company from 50,000,000 to 25,000,000. Unless otherwise indicated,
information in this Report reflects one for five reverse split of the
Company's Common Stock effective in January, 1994.
On February 1, 1995, the Company obtained forty percent (40%) interest
in Complete Engineering Development Services, Inc. (CEDS). Due to
disappointing results, the Board of Directors elected to divest its
interest in CEDS as of December 31, 1995.
In November 1995, the Company established a wholly-owned subsidiary,
Fort Atkinson Industries, which provides finishing services on castings
manufactured in the Iowa-Wisconsin area. Operations began on March 1,
1996.
In August 1996, the Company consolidated MCC with Yale Industries and
operates as one company.
On March 24, 1998, the Company sold its remaining 45% interest in New
Haven Foundry to Wesley Industries, Inc., which owned the other 55%. Terms
of the agreement included a purchase price of $2,200,000 with $1,500,000
paid at closing and the $700,000 balance, including interest, due in the
form of a promissory note payable in quarterly installments of $35,000.
The promissory note is secured by the shares of New Haven Foundry. In
addition, the Company entered into a new cleaning contract with New Haven
Foundry which includes a per piece price and a service fee of $2,800,000
paid in quarterly installments of $140,000 over five (5) years. The gain
on sale is reported on the consolidated income statement net of legal fees.
On November 13, 1998, following a vote at a Special Meeting of
Shareholders, the Company approved a one for three reverse split of the
outstanding shares of the Company. Unless otherwise indicated, information
in this report reflects the one for three reverse split of the Company's
Common Stock effective in November 1998.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. The Company's
activities are confined to the finishing and testing of castings for the
automotive and other industries, hence the Company has no other industry
segments other than as stated herein. See Financial Statements for
additional information concerning the Company's business.
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(c) NARRATIVE DESCRIPTION OF BUSINESS.
GENERAL
- -------
The Company engages in the business of performing finishing operations
on grey iron castings for the foundry industry.
Brown City doing business as Yale Industries, a Michigan corporation,
is engaged in the business of performing finishing operations for the
foundry industry. Such operations include the cleaning, grinding and
testing of castings prior to shipment to the end purchaser. Yale commenced
operations in June of 1987, and its facilities are currently located in
Yale, Michigan, approximately 30 miles from New Haven, Michigan where NHF's
facilities are located. NHF uses the services of Yale for approximately
80% of the castings and cylinder heads they manufacture for Chrysler
Corporation and others. The Company formed this subsidiary because a
separate company and facility provided NHF, and other foundries, certain
advantages over handling finishing functions in-house. Over the past
several years, automobile manufacturers have begun to require that
additional finishing work and water testing be done on castings prior to
shipment. These requirements have increased the amount of time and labor
spent on these services. Management has found that Yale, as a separate
company devoted to these activities, has been able to handle these
functions more cost effectively. In addition, since Yale is capable of
providing these services to other customers as well as NHF, Yale generates
additional revenues for the Company.
Fort Atkinson Industries is also engaged in the business of performing
finishing operations on castings for the foundry industry. The Company
believes there exists a significant potential for additional sales volume
for finishing operations from non-affiliated foundries and from NHF as it
continues to grow and diversify into the non-automotive industries.
(i) PRINCIPAL PRODUCTS PRODUCED AND SERVICE RENDERED AND
PRINCIPAL MARKETS. The principal service rendered by the Company is the
finishing, cleaning and testing of castings produced by NHF for the
automotive industry and other component manufacturers in the United States
and Canada.
(ii) STATUS OF NEW PRODUCTS OR INDUSTRY SEGMENTS. The Company
announced it began cleaning operations at Fort Atkinson in early 1996.
Except as to Fort Atkinson, there has been no public announcement of, and
no information otherwise has been made public about, a new product or
industry segment, which would require the investment of a material amount
of the Company's assets, or which otherwise is material.
(iii) SOURCES AND AVAILABILITY OF RAW MATERIALS. The Company as
a service orientated entity is not dependant on the availability of raw
materials, however, the Company is dependant on the availability of
qualified, trained manpower. The raw materials utilized by NHF are
supplied by domestic suppliers and there does not appear to be any shortage
of the three major raw materials used by NHF namely coke, scrap steel and
sand.
(iv) PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS.
The Company does not own any patents, trademarks, licenses, franchises, or
concessions.
(v) SEASONAL NATURE OF BUSINESS. The Company's business is not
seasonal in nature.
(vi) WORKING CAPITAL ITEMS. Practices and conditions with
respect to specific working capital items are not relevant to an
understanding of the Company's business. Working capital is required
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for inventories and accounts receivable, to meet rapid delivery
requirements, or to assure continuous allotments of goods from suppliers.
(vii) MAJOR CUSTOMERS. The following table sets forth
information concerning customers, or any group of customers under common
control, or customers which are affiliates of each other, to which sales
were made by the Company during the fiscal year ended December 31, 1998, in
an amount which equals 10% or more of the Company's revenue and the
Company's relationship to each:
RELATIONSHIP PERCENT
TO AMOUNT OF OF TOTAL
CUSTOMER COMPANY REVENUE REVENUE
-------- ------- ------- -------
New Haven Foundry, Inc. None $7,497,380 76.8%
The Company believes that if it should lose any of its present
customers, primarily NHF, such loss would have a material adverse effect on
the Company.
(viii) BACKLOG. Backlog is not relevant to an understanding
of the Company's business.
(ix) RENEGOTIATION OR TERMINATION OF GOVERNMENTAL CONTRACTS. No
portion of the Company's business is subject to renegotiation of profits or
termination of contracts or subcontracts at the election of the Government.
(x) COMPETITION. The Company's domestic competition is limited
primarily to cleaning operations and captive foundries of the automobile
industry. For the most part, these domestic foundries have older
facilities and are not a significant threat to the Company's competitive
position. Internationally, the Company faces competition from similar
operations located in Europe, South America and Mexico. The Company's most
serious threat of competition is from state-of-the-art operations located
in Mexico and Brazil. These companies in Brazil present a competitive
threat because they are subsidized by their respective governments, have
labor cost advantages, and modern facilities.
(xi) RESEARCH AND DEVELOPMENT. The Company has not engaged and
does not currently engage in any research and development activities.
(xii) ENVIRONMENTAL PROTECTION. The Company is subject to
various federal, state, and local provisions regarding environmental
matters, the existence of which has not hindered nor adversely affected the
Company's business. Although the Company does not believe its business
operations presently impair environmental quality, compliance with federal,
state and local regulations which have been enacted or adopted regulating
the discharge of materials into the environment could have an adverse
effect upon the capital expenditures, earnings and competitive position of
the Company. Since inception, the Company has not made any material
capital expenditures for environmental control facilities and does not
expect to make any such expenditures during the current and following
fiscal years. However, the Company has agreed to administer the
expenditure of $253,000 which the city of Yale, Michigan received as a
community development block grant to perform an investigation to determine
the extent of contamination at the Yale plant site and to clean up soil
contamination left by previous owners and operators to a maximum of
$253,000. The Company estimates the costs of administering the grant to be
less than $50,000. As a result of its agreement to perform these
procedures, the city of Yale, Michigan would transfer the property to the
Company for use for casting, cleaning and foundry support operations within
two years subject to certain conditions set forth in Item 7 of this Report.
The Company
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has also received a hold harmless for any existing conditions at the
facility. The property was transferred to the Company in 1995.
(xiii) EMPLOYEES. As of December 31, 1998, the Company had
approximately 175 hourly employees and 22 salaried employees at Yale
Industries, Fort Atkinson Industries and Margate Industries. None of these
employees are presently represented by a union.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES. The Company has no operations in foreign countries and no
portion of its sales or revenues is derived from customers in foreign
countries except Yale had sales of approximately $0 in 1998, $0 in 1997 and
$19,133 in 1996 to Western Foundry, a Canadian company and $0 in 1998,
$41,000 in 1997 and $122,500 in 1996 to Ford of Canada.
ITEM 2. 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 $11,312.50 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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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
ADJUSTED FOR REVERSE
STOCK SPLIT ON 11/13/98
-----------------------
HIGH LOW
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Quarter ended March 31, 1998 $2.06 $1.13
Quarter ended July 30, 1998 $2.53 $1.50
Quarter ended September 30, 1998 $2.67 $1.31
Quarter ended December 31, 1998 $1.88 $1.25
Quarter ended March 31, 1997 $2.52 $1.89
Quarter ended June 30, 1997 $2.52 $2.16
Quarter ended September 30, 1997 $3.18 $2.07
Quarter ended December 31, 1997 $1.98 $1.23
Quarter ended March 31, 1996 $3.75 $2.64
Quarter ended June 30, 1996 $3.18 $2.34
Quarter ended September 30, 1996 $3.75 $2.73
Quarter ended December 31, 1996 $3.48 $1.32
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The approximate
number of holders of record or the Company's common stock at March 29, 1999
was 466.
(c) DIVIDENDS. The Company began paying quarterly dividends of
$.00625 per share in August of 1991. Subsequently in August, 1992 the
Board of Directors increased the dividend to $.0075 and in August, 1993,
the quarterly dividend was increased to $.01 per share. On November 15,
1993 the quarterly dividend was increased to $.0125. On February 15, 1995
the quarterly dividend was increased to $.0150. On September 21, 1995 the
quarterly dividend was suspended and will be decided at the Annual Meeting
in June of each year if, or when the Company will pay a dividend.
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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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1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Net sales $ 9,769 $10,472 $ 9,442 $ 9,311 $ 8,486
Net income (loss) $ 1,971 $ 149 $ (773) $(1,744) $ 1,445
Net income (loss)
per common share $ 1.30 $ 0.10 $ (0.51) $ (1.11) $ 0.93
Dividends declared
per common share $ 0 $ 0 $ 0 $0.0900 $0.1575
Total assets $ 7,562 $ 6,221 $ 6,195 $ 5,465 $ 7,328
Long-term debt $ 192 $ 412 $ 344 $ 184 $ 26
Stockholders' equity $ 5,716 $ 3,811 $ 3,662 $ 4,465 $ 6,392
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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:
1998 1997
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Working Capital $2,371,838 $ 783,440
Current Ratio 3.51 : 1 1.58 : 1
Quick Assets (Cash, Securities
and Receivables) $3,074,171 $1,975,062
Quick Ratio 3.25 : 1 1.47 : 1
As noted by the above computations, the current ratio has increased
from 1.58:1 to 3.51:1 and working capital has increased by $1,588,398 for
the period from December 31, 1997 to December 31, 1998. The quick ratio
has increased from 1.47:1 to 3.25:1. The largest single factor
contributing to the increase in working capital is the sale of NHF of
$2,075,212 of which $1,551,429 was received in cash in 1998.
Receivables decreased by $294,794 from December 31, 1997 to December
31, 1998. The decrease was due primarily to decreased sales volume and
increased collections.
The Company has a facility line of credit of $1,300,000, with monthly
interest payments at 1/2 below the prime rate. This line of credit is
collateralized by substantially all the assets of the Company. Borrowings
as of December 31, 1998 were $585,212.
The Company believes its cash flow from operations is sufficient to
fund its current level of operations.
The Company has in the past and will in the future seek qualified
acquisitions in similar and related industries for expansion opportunities
and larger market penetration. The Company currently has no agreement or
arrangement to acquire any other business entity.
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RESULTS OF OPERATIONS
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YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1998
- -------------------------------------------------------------
Sales decreased by $703,136 or 6.7% from December 31, 1997 to December
31, 1998. The Company's net income increased by $1,822,117 over the prior
year's income of $148,999. The decrease in sales for 1998 is mostly
attributable to a loss of a major customer at the Fort Atkinson Plant.
Cost of sales as a percentage of sales was 90.6% for the year ending
December 31, 1998 as compared to 87.5% for the year ending December 31,
1997. The major reasons for the increase was higher labor costs and the
effect of fixed costs which will not decrease with reduced sales.
Selling, general and administrative expenses decreased by $166,701
from 1997 to 1998. This was mainly due to reduced sales and cost
reductions.
Interest income (net of interest expense) for the year ending December
31, 1998 increased by $125,140 from 1997. This increase was a result of
increased interest income from notes receivable on the sale of NHF and a
decrease in interest expense from lower interest rates and use of operating
funds.
Related party services and sales commissions decreased from $18,098 in
1997 to $4,232 in 1998. This decrease was in sales volume from customers
from outside sales representatives.
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1997
- -------------------------------------------------------------
Sales increased by $1,030,221 or 10.9% from December 31, 1996 to
December 31, 1997. The Company's net income increased by $922,469 over the
prior year's net loss of $773,470. The growth rate in sales for 1997 is
mostly attributable to increased activity at the New Facility at Fort
Atkinson which began operating in 1996.
Cost of sales as a percentage of sales was 87.5% for the year ending
December 31, 1997 as compared to 93.3% for the year ending December 31,
1997. The major reason for the decrease was increased efficiency in labor
costs.
Selling, general and administrative expenses increased by $54,851 from
1996 to 1997. This was mainly due to the above noted increase in sales, as
most of these costs are variable.
Interest expense (net of interest income and dividends) for the year
ending December 31, 1997 increased from $47,888 in 1996 to $105,143 in
1997. The increase is the result of interest expense to finance the Fort
Atkinson plant and use of operating funds.
Related party services and sales commissions increased from $6,316 in
1996 to $18,098 in 1997. The increase was in sales volume from customers
from outside sales representatives.
EFFECTS OF CHANGES IN PRICES
- ----------------------------
When possible, the Company attempts to adjust the selling prices of
its products in response to increases in its costs of labor, raw materials
and capital. However, the market served by the Company is competitive and
that competition may limit the allowance of price increases.
During 1998, 1997 and 1996 there were no significant changes in prices.
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The Company had commitments for the purchase of, or the installation
of, fixed assets at the Yale Industries facility. The Company had agreed
to purchase $1.5 million in assets between July 1, 1993 and June 30, 1995.
This commitment had been met as of December 31, 1994. The Company had an
option to buy the facility for $1.00. The Company met its commitments and
exercised the option in 1995.
IMPACT OF THE YEAR 2000 ISSUE
- -----------------------------
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar
normal business activities. Based on an assessment of its computer
systems, the Company believes that it will not encounter significant
operational problems or be required to modify or replace significant
portions of its software so that its computer systems will properly utilize
dates beyond December 31, 1999. In particular, the Company has installed
current compliant software for its inventory and made inquiries of its
vendors to insure they are taking proper steps to insure 2000 compliance.
However, if problems are encountered and modifications and conversions are
not timely made, the Year 2000 problem may have an impact on the operations
of the Company.
ITEM 8. 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:
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Position Served
Positions with as Director
Name Age All the Company of Company
---- --- --------------- ----------
Frederick G. Schriever 74 Chairman of the Board November 1987 to present
and Director of the
Company, Ft. Atkinson,
and Yale Industries
Delbert W. Mullens 54 Vice Chairman of the July 1990 to present
Board and Director of
the Company, Ft. Atkinson,
and Yale Industries
William H. Hopton 64 President and Director January 1986 to present
of the Company, Ft.
Atkinson, and Yale Industries
Frederick G. Berlet 70 Treasurer and Director November 1987 to present
of the Company, Ft.
Atkinson, and Yale Industries
David A. Widlak 50 Vice President, Secretary November 1987 to present
and Director of the
Company, Ft. Atkinson,
and Yale Industries
BUSINESS EXPERIENCE OF DIRECTORS AND OFFICERS
- ---------------------------------------------
FREDERICK G. SCHRIEVER has been Chairman of the Company's Board of
Directors since November of 1987. He has been President of Casting Sales,
Inc. from 1972 to present. Casting Sales, Inc. acts as a manufacturer's
representative of foundries. Since 1955 to the present, Mr. Schriever has
also been President of Amber Tool and Engineering which holds real estate
and owns an interest in several companies and President of Trio Machine
Products Corp., a production machine shop. Since 1960 to the present, he
has also been President of J.P. Bell Co., a company specializing in machine
levelers, Vice President of Casting Industries, Inc. and Chairman of Snap
Fast, Inc. Mr. Schriever received a Bachelor of Science Degree in
chemistry in 1949 from the University of Michigan. Mr. Schriever devotes
as much time as necessary to the business of the Company and its
subsidiaries.
DELBERT W. MULLENS has been a Director since July of 1990 and
President of NHF since September 1, 1992. He has been the President,
Director, and principal shareholder of Flint Coatings of Flint, Michigan,
a company engaged in painting automotive parts for major car manufacturers
including General Motors Corporation. Mr. Mullens is also Chairman of
Product-SDL Chemical, Inc. Mr. Mullens received a Bachelor of Science
Degree in Business Administration from Tennessee State University. Mr.
Mullens devotes as much time as is necessary to the business of the Company
and its subsidiaries.
WILLIAM H. HOPTON has been President of the Company since April of
1988, and a Director of the Company since January of 1986. Mr. Hopton also
served as the Company's vice President from January of 1986 to April of
1988. Since 1984, Mr. Hopton has been President of NHF. Effective
September 1, 1992, Mr. Hopton retired as President of NHF but will provide
consulting services to NHF as needed. Also, as of that date, he is
devoting his business time to the management of Margate
-12-
<PAGE>
Industries, Inc. Mr. Hopton received a B.A. Degree in Business
Administration from the University of Detroit in 1964.
FREDERICK G. BERLET has been a Director of the Company since November
of 1987 and its Treasurer since April of 1988. He also serves as Director
of numerous Canadian and U.S. corporations and is President of S.W.O.
Managements Consultants Limited. He graduated with a Masters Degree in
Business Administration in 1953 from the University of Western Ontario.
Mr. Berlet devotes as much time as is necessary to the business of the
Company and its subsidiaries.
DAVID A. WIDLAK has been Secretary and a Director of the Company since
November of 1987. In February 1994 he was named Vice President. He
received a Bachelors Degree from Wayne State University in 1969 and a juris
doctorate Degree in Law from the University of Michigan in 1972. Mr.
Widlak devotes as much time as is necessary to the business of the Company
and its subsidiaries.
The Directors of the Company and its subsidiaries hold office for a
three year term until the annual meeting of the shareholders and until
their successors have been elected and qualified in the year in which their
term expires. The terms of one or two Directors expire each year.
The Officers of the Company and its subsidiaries are elected by the
respective Board of Directors at the first meeting after each annual
meeting of shareholders and hold office until the next annual meeting of
directors or their earlier resignation or removal.
The date of the next annual meeting of the Company will be determined
by the Company's Board of Directors in accordance with Delaware law.
No Director holds a directorship in any company with a class of
securities registered pursuant to Section 12 of the Securities Exchange Act
of 1934 or subject to the requirements of Section 15(d) of such Act or any
company registered as an investment company under the Investment Company
Act of 1940.
COMMITTEES, MEETINGS OF THE BOARD OF DIRECTORS. The Company has an
audit and compensation committee consisting of Frederick Schriever,
Frederick Berlet and David Widlak, which consults with and reviews the
reports of the Company's independent auditors and the Company's internal
financial staff. This committee also makes recommendations to the
Company's Board of Directors as to compensation matters. The audit and
compensation committee held one meeting during the year. The Company's
Board of Directors held four regular meetings and three special meetings
during the fiscal year ended December 31, 1998, at which time all of the
then Directors were present or consented in writing to the actions taken at
such meetings.
COMPLIANCE WITH SECURITIES EXCHANGE ACT REPORTING REQUIREMENTS. To
the Company's knowledge, during the fiscal year ended December 31, 1998,
the Company's Officers and Directors complied with all applicable Section
16(a) filing requirements. This statement is based solely on a review of
the copies of such reports furnished to the Company by its Officers and
Directors and their written representations that such reports accurately
reflect all reportable transactions.
-13-
<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,
1998 and the prior two years to the Chief Executive Officer, the only
executive office whose total cash and non cash compensation exceeded
$100,000 prior to 1995. In 1995 David Widlak's, Vice President of Mergers
and Acquisitions, compensation exceeded $100,000.
<TABLE>
<CAPTION>
==========================================================================================================
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------
Long Term Compensation
------------------------------
Annual Compensation Awards Payouts
- -----------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Restricted LTIP Other
and Compen- Stock Options/ Pay- Compen-
Principal Salary Bonus sation Award(s) SARs outs sation
Position Year (1) ($) ($) ($)(2) ($) (#)(3) ($) ($)(4)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William H. Hopton 1998 $ 90,000 $ -0- $ 30,000 $ 16,400
President and CEO 1997 $ 87,500 $ -0- $ 24,000 $ 15,800
1996 $ 85,000 $ -0- $ 24,000 $ 14,000
David Widlak 1998 $ 66,000 $ -0- $ 30,000 $ 14,500
Vice President 1997 $ 62,500 $ -0- $ 24,000 $ 12,300
1996 $ 60,000 $ -0- $ 24,000 $ 10,200
===========================================================================================================
</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 regular meeting they attend plus
expenses. The Chairman of the Board of Directors receives $7,000 per
meeting. Special meetings were paid at $3,000, but have been reduced
currently to $1,500.
-14-
<PAGE>
OPTIONS GRANTED
The following table sets forth the options that have been granted to
the Chief Executive Officer and President listed in the Executive
Compensation Table during the Company's last fiscal year ended December 31,
1998.
Option/SAR Grants in Last Fiscal Year (1998)
--------------------------------------------
Individual Grants
- ---------------------------------------------------------------------------
(a) (b) (c) (d) (e)
% of Total
Options/ Options/SARs Exercise
SARs Granted to or Base
Granted Employees Price Expiration
Name (#) in Fiscal year ($/Share) Date
---- ------- -------------- -------- ----------
William H. Hopton N/A N/A N/A N/A
President and CEO
AGGREGATE OPTIONS EXERCISED IN 1998 AND OPTION VALUES AT DECEMBER 31, 1998
The following table sets forth certain information regarding options
to purchase shares of Common Stock exercised during the Company's 1998
fiscal year and the number and value of exercisable and unexercisable
options to purchase shares of Common Stock held as of the end of the
Company's 1998 fiscal year by the Executive Officers of the Company named
in the Summary Compensation Table:
Aggregated Options Exercised in 1998
and Option Values at December 31, 1998
- --------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Shares 12/31/98 12/31/98
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized(1) Unexercisable Unexercisable
---- ----------- ----------- ------------- -------------
William H. Hopton None $0 -0- $0
President and CEO
- --------------------------------------------------------------------------
-15-
<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 29, 1999, information with respect
to the ownership of the Company's $.005 par value common stock by each
person known by the Company to own beneficially more than 5% of the
outstanding common stock, and by each of its officers and directors and by
all officers and directors collectively as a group:
Amount and
Nature of
Name and Address of Beneficial Percent of
Beneficial Owner Ownership Class (1)
- ------------------ ---------- ----------
Frederick G. and Patricia W. Schriever 266,549 17.9%
Frederick G. Berlet 0 (2) 0%
S.W.O. Management Consultants, Ltd.
David A. Widlak 64,766 4.3%
Delbert W. Mullens 6,966 0.5%
William H. Hopton 47,353 (3) 3.2%
All Officers and Directors 385,634 25.9%
of the Company & Subsidiaries
as a Group (5 Persons)
_______________
(1) Each person has sole voting and investment power with respect to the
shares shown except as noted.
(2) 75,139 shares are held in a trust for Mr. Berlet's children. Mr.
Berlet has no voting or dispositive power over the trust and hence,
discloses no beneficial interest in those shares held in trust.
(3) Includes 37,353 shares held by William Hopton, individually, 10,000
shares held by his three children.
CHANGES IN CONTROL. The Company knows of no contractual arrangements,
including any pledge by any person of securities, which may at a subsequent
date result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
None
-16-
<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, 1998 and 1997 . . . . .F-2
Consolidated Statements of Income, Years ended
December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Equity For the Years
ended December 31, 1998, 1997 and 1996. . . . . . . . . . . . . .F-5
Consolidated Statements of Cash Flows, Years ended
December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . . . .F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . .F-7
(a) (3) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
-17-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
________
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
________
DECEMBER 31, 1998
<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, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. We did not audit the
financial statements of NEW HAVEN FOUNDRY, the investment in which, as
discussed in Note 1 to the financial statements, is accounted for by the
equity method of accounting. The financial statements of NEW HAVEN FOUNDRY
were audited by other auditors whose report has been furnished to us, and
our opinion, insofar as it relates to the amounts included for NEW HAVEN
FOUNDRY, is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MARGATE INDUSTRIES,
INC. AND SUBSIDIARIES at December 31, 1998 and 1997 and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
PERRIN, FORDREE & COMPANY, P.C.
Troy, Michigan
February 10, 1999
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
------
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents: $ 1,504,725 $ 110,822
Accounts receivable:
Trade 1,569,446 378,301
Related parties - 1,485,939
Current maturities of notes receivable 108,571 -
Notes receivable - related party - 17,800
Inventories 43,000 41,991
Prepaid expenses and other 60,049 37,394
Prepaid federal income tax 21,700 41,000
Deferred tax assets 10,500 12,400
----------- -----------
Total current assets 3,317,991 2,125,647
PROPERTY, PLANT AND EQUIPMENT - At cost,
net of accumulated depreciation and
amortization of $1,631,533 and
$1,324,045 at December 31, 1998
and 1997, respectively 3,763,902 4,038,979
NOTES RECEIVABLE - net of current
maturities 440,000 -
OTHER 39,800 56,764
INVESTMENT IN NEW HAVEN FOUNDRY - -
----------- -----------
$ 7,561,693 $ 6,221,390
=========== ===========
The accompanying notes are an integral part of the financial statements.
-2-
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
CURRENT LIABILITIES:
Line-of-credit $ 585,212 $ 626,000
Current portion of long term notes
payable 61,710 213,832
Accounts payable 212,306 425,746
Accrued salaries and wages 67,233 63,924
Accrued workers' compensation 4,651 6,870
Other accrued liabilities 15,041 5,835
----------- -----------
Total current liabilities 946,153 1,342,207
DEFERRED TAX LIABILITIES 255,500 235,700
OTHER POSTRETIREMENT BENEFITS 452,075 419,856
NOTES PAYABLE - Long-term 191,599 412,160
CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Common stock - $.015 par value:
Authorized - 25,000,000 shares
Issued and outstanding -
1,489,214 and 1,524,546
at December 31, 1998 and
1997, respectively 22,338 22,868
Paid-in for common stock in excess of
par value 7,345,038 7,410,725
Accumulated deficit (1,651,010) (3,622,126)
----------- -----------
Total stockholders' equity 5,716,366 3,811,467
----------- -----------
$ 7,561.693 $ 6,221,390
=========== ===========
-2-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------ ------ ------
NET SALES (Including related party
sales and commissions of
$1,889,000, $7,010,000 and
$7,076,000 in 1998, 1997 and
1996, respectively) $ 9,768,537 $10,471,673 $ 9,441,452
COST OF SALES 8,851,386 9,159,159 8,812,222
----------- ----------- -----------
GROSS PROFIT 917,151 1,312,514 629,230
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 835,573 1,002,274 947,423
RELATED PARTY SERVICES AND
SALES COMMISSIONS 4,232 18,098 6,316
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 77,346 292,142 (324,509)
DIVIDEND AND INTEREST INCOME
(EXPENSE) - NET 19,997 (105,143) (47,888)
EQUITY LOSS OF INVESTEE COMPANIES - - (531,712)
LOSS ON SALE OF MARKETABLE
SECURITIES - - (41,721)
LOSS ON ABANDONMENT OF LEASEHOLD
IMPROVEMENTS (143,214) - -
OTHER INCOME - Net 15,773 - 7,360
----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (30,098) 186,999 (938,470)
PROVISION FOR FEDERAL
INCOME TAXES 10,000 38,000 (165,000)
----------- ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (20,098) 148,999 (773,470)
EXTRAORDINARY ITEM - gain on
sale of equity investee
(net of applicable income
tax expense of $84,000) 1,991,214 - -
----------- ----------- -----------
NET INCOME (LOSS) $ 1,971,116 $ 148,999 $ (773,470)
=========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
CONTINUING OPERATIONS $ (.01) $ .10 $ (.51)
EXTRAORDINARY ITEM 1.31 - -
----------- ----------- -----------
NET INCOME $ 1.30 $ .10 $ (.51)
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
-3-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK PAID-IN FOR
-------------------- COMMON STOCK TOTAL
NUMBER OF IN EXCESS OF ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAR VALUE DEFICIT EQUITY
-------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance - December 31,
1995 1,551,212 $ 23,268 $7,499,980 $(3,056,324) $4,466,924
Stock options exercised 6,667 100 9,900 - 10,000
Tax benefit of options
exercised - - 4,000 - 4,000
Stock purchase (33,333) (500) (103,155) - (103,655)
Prior year unrealized
losses on marketable
equity - - - 58,669 58,669
Net loss - - - (773,470) (773,470)
---------- --------- ---------- ----------- ----------
Balance - December 31,
1996 1,524,546 22,868 7,410,725 (3,771,125) 3,662,468
Net income - - - 148,999 148,999
---------- --------- ---------- ----------- ----------
Balance December 31,
1997 1,524,546 22,868 7,410,725 (3,622,126) 3,811,467
Stock purchase (35,332) (530) (65,687) - (66,217)
Net income - - - 1,971,116 1,971,116
---------- --------- ---------- ----------- ----------
Balance - December 31,
1998 1,489,214 $ 22,338 $7,345,038 $(1,651,010) $5,716,366
========== ========= ========== ========== ==========
</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, 1998, 1997 AND 1996
1998 1997 1996
------ ------ ------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Cash received from customers $10,079,104 $10,276,690 $ 9,335,461
Cash paid to suppliers and
employees (9,526,810) (9,896,955) (9,220,793)
Interest and dividends
received 79,322 2,491 23,021
Interest paid (67,896) (107,804) (70,908)
Income taxes refunded (paid) (33,000) 215,870 81,113
----------- ----------- -----------
Net cash from operating
activities 530,720 490,292 147,894
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of equity
investment 1,475,214 - -
Proceeds from sale of
securities - - 169,661
Deposits (made) refunded 16,964 2,371 (10,716)
Proceeds from sale of assets - - 175,100
Purchase of property, plant
and equipment (192,624) (246,250) (1,952,960)
----------- ----------- -----------
Net cash from (to)
investing activities 1,299,554 (243,879) (1,618,915)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of
common stock - - 10,000
Purchase of treasury stock (66,217) - (103,655)
Proceeds from line-of-
credit -net (40,788) 44,000 582,000
Proceeds from long-term debt - - 692,000
Principal payments under
long-term obligations (398,596) (203,927) (234,288)
Proceeds from notes receivable 69,230 22,250 13,350
----------- ----------- -----------
Net cash from (to)
financing activities (436,371) (137,677) 959,407
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,393,903 108,736 (511,614)
CASH AND CASH EQUIVALENTS:
Balance - beginning of year 110,822 2,086 513,700
----------- ----------- -----------
Balance - end of year $ 1,504,725 $ 110,822 $ 2,086
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONS
-----------------------------------------------------------------------
EQUIPMENT ACQUIRED UNDER CAPITAL
LEASE OBLIGATION $ 25,913 $ 22,774 $ -
=========== =========== ===========
NOTE RECEIVABLE ACQUIRED FROM
SALE OF INVESTEE $ 600,000 $ - $ -
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
-5-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
This summary of significant accounting policies of Margate
Industries, Inc. (the Company) is presented to assist in
understanding the Company's financial statements. The financial
statements and notes are representations of the Company's
management which is responsible for their integrity and
objectivity. These accounting policies conform to generally
accepted accounting principles and have been consistently applied
in the preparation of the financial statements.
BUSINESS ACTIVITY
-----------------
Margate Industries, Inc. is a holding company for subsidiaries
involved in the cleaning of small and medium-sized grey iron
castings that are sold primarily to the North American automobile
industry.
Export sales totaled approximately $-0-, $41,000 and $142,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
Net sales to major customers that represented 10% or more of the
consolidated net sales are as follows:
1998 1997 1996
------ ------ ------
New Haven Foundry $6,933,000 $6,480,000 $6,387,000
John Deere - 1,777,000 1,313,000
PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Michigan Casting
Corporation (MCC), Brown City Castings Corporation d/b/a Yale
Industries (Yale), and Fort Atkinson Industries, Inc. (FAI). All
intercompany accounts and transactions have been eliminated in
the accompanying consolidated financial statements.
In November 1995, the Company established a wholly-owned
subsidiary, Fort Atkinson Industries, Inc., which provides
finishing services on castings manufactured in the Iowa-Wisconsin
area. Operations began on March 1, 1996.
Effective July 1996, Michigan Castings Corporation combined its
operations and assets with Yale Industries. Due to this
combination, Michigan Castings Corporation abandoned its
leasehold improvements upon expiration of its building lease,
which resulted in a $143,214 loss for 1998.
-6-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED:
PRINCIPLES OF CONSOLIDATION - CONTINUED
---------------------------------------
The Company follows the equity method of accounting for its 45%
investment in New Haven Foundry (NHF). The carrying value of the
Company's investment reflects its underlying equity in the net
assets of NHF. The investment in NHF was sold in 1998, refer to
Note 16.
CASH EQUIVALENTS
---------------
The Company considers all highly liquid investments purchased
with an original maturity date of three months or less to be cash
equivalents.
INVENTORIES
-----------
Inventories, consisting primarily of grinding wheels, are stated
at the lower of cost or market , determined by the first-in,
first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment are recorded at cost. Costs of
maintenance and repairs are charged to expense when incurred.
Depreciation and amortization of plant and equipment is recorded
using the straight-line method over the estimated useful lives of
the assets. Depreciation and amortization expense totaled
$350,399, $342,340 and $280,460 in 1998, 1997 and 1996,
respectively. Estimated useful lives of assets in the various
classes of property, plant and equipment are as follows:
Buildings and improvements 40 years
Machinery and equipment 12 years
Furniture and fixtures 12 years
Automobiles 5 years
REVENUE RECOGNITION
-------------------
Revenues derived from the cleaning of castings are recognized as
services are provided.
Sales commissions are recognized as revenue when earned.
-7-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED:
NET INCOME PER SHARE OF COMMON STOCK
------------------------------------
Net income per share of common stock is computed based on the
weighted average number of shares of common stock outstanding
during each year, plus the shares that would be outstanding
assuming exercise of dilutive stock options and warrants. In
November 1998, the Company announced a reverse stock split,
effectively reducing the number of shares outstanding by one-third
and increasing the par value from $0.005 to $.015 per share
of common stock. The weighted average number of shares, total
shares outstanding and earnings per share have been adjusted for
1998, 1997 and 1996 to reflect the effects of the reverse split.
The total weighted average number of shares of common stock and
common stock equivalents were 1,514,342, 1,524,546 and 1,526,176
for the years ended December 31, 1998, 1997 and 1996,
respectively.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
NOTE 2 - RELATED PARTY TRANSACTIONS:
The Company provides cleaning services to NHF for products
manufactured by that Company. Pursuant to the July 1990
agreement for the sale of NHF common stock, the Company provides
exclusive cleaning services on all castings produced by NHF for
a minimum period of 15 years, provided the Company maintains an
ownership interest in NHF.
Pursuant to the sale of the Company's equity interest in NHF on
March 24, 1998 a new cleaning contract superceded and replaced
the 1990 casting cleaning agreement. This new agreement grants
the Company the exclusive right to clean all production castings
produced by NHF for a minimum period of seven years commencing
March 24, 1998. In the event of the Management and Option
Agreement, as described in Note 16, being extended beyond its
six year term, the term of this agreement shall extend for one
year beyond the termination date of the Management and Option
Agreement. This contract may be terminated upon the exercise of
NHF's option to purchase the Yale Industries, Inc. facility in
accordance with the terms of the Management and Option Agreement.
Additionally, this contract may be terminated in the event that
the operations of the Yale facility are no longer being managed
by the Operations Manager as noted in the Management and Option
Agreement.
-8-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 2 - RELATED PARTY TRANSACTIONS - CONTINUED:
The terms of the 1990 sale also provided for a commission
contract between NHF and the Company. The Company will receive
a minimum of $150,000 per year, plus 3% of actual sales in excess
of $35,000,000 but less than $40,000,000, plus an additional 2%
on the actual sales that exceed $40,000,000. This commission
contract is in effect for a period of not less than 15 years.
Pursuant to the sale of the Company's equity interest in NHF on
March 24, 1998, a new service fee contract superceded and
replaced the 1990 commission agreement. The Company will receive
quarterly service fee payments of $140,000 beginning on April 1,
1998, until January 1, 2003, for a total of $2,800,000 from NHF.
The Company earned commissions and service fees from NHF
amounting to $564,807, $610,378 and $688,706 in 1998, 1997 and
1996, respectively.
Any unpaid balances of the aforementioned amounts are included in
the related party balances on the accompanying balance sheet.
The Company also has a note receivable from a related party
(Refer to Note 4).
-9-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 3 - INVESTMENT IN UNCONSOLIDATED COMPANY:
As described in Note 1, the Company accounts for its 45%
investment in NHF using the equity method. As described in the
Sale of New Haven Foundry, effective March 24, 1998 the Company
sold its 45% investment in NHF. As such, the financial
information from NHF for 1998 is not presented in these financial
statements. Summarized financial information of NHF is as
follows as of December 31:
1998 1997 1996
------ ------ ------
ASSETS:
Current assets $ - $15,231,417 $14,085,521
Net property, plant
and equipment - 11,553,272 12,282,716
Other assets - 392,000 392,000
----------- ----------- -----------
Total assets $ - $27,176,689 $26,760,237
=========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Current liabilities $ - $18,632,594 $17,407,355
Noncurrent liabilities - 9,717,867 10,325,990
Stockholders' equity - (1,173,772) (973,108)
----------- ----------- -----------
Total liabilities
and stockholders'
equity $ - $27,176,689 $26,760,237
=========== =========== ===========
1998 1997 1996
------ ------ ------
NET SALES $ - $56,687,793 $62,700,025
OPERATING EXPENSES - 56,740,457 64,529,422
----------- ----------- -----------
LOSS BEFORE INCOME TAXES - (52,664) (1,829,397)
INCOME TAXES (BENEFIT) - 148,000 327,000
----------- ----------- -----------
NET LOSS $ - $ (200,664) $(2,156,397)
=========== =========== ===========
-10-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 3 - INVESTMENT IN UNCONSOLIDATED COMPANY - CONTINUED:
NHF implemented Statement of Financial Accounting Standards No.
106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS (SFAS 106) in the first quarter of 1993. The estimated
liability as of the adoption date was $10.4 million, based on
available actuarial valuations. NHF elected to amortize the
transition obligation over 20 years. The annual expense for
future postretirement employee benefits will include the annual
amortization of this liability, future years' service cost and
interest expense. The adoption of this statement had a
significant impact on the Company's equity in the income of NHF.
The Company accounts for its investment in NHF using the equity
method. During 1996, NHF generated a net loss resulting in a
negative equity position. Accordingly, the investment in NHF has
been written down to zero.
NOTE 4 - NOTES RECEIVABLE:
Notes receivable - consisted of the following at December 31:
1998 1997
---------- ----------
Wesley Industries, Inc. -
uncollateralized note receivable
from related party, due in monthly
installments of $4,450 per quarter
through January 31, 1999, plus
interest at the prime rate
established by the National
Bank of Detroit. $ - $ 17,800
Wesley Industries, Inc. -
collateralized note receivable,
as a result of the sale of 45%
of New Haven Foundry (refer to
Note 16), non-interest bearing,
due in monthly installments of
$35,000 of principal payments
through March 2003. (Net of
discount at an effective
interest rate of 6.0%). 548,571 -
Less current portion 108,571 17,800
----------- -----------
$ 440,000 $ -
=========== ===========
-11-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are summarized as follows as of
December 31:
1998 1997
---------- ----------
Building and improvements $1,706,681 $1,800,000
Machinery and equipment 3,472,698 3,371,498
Automotive equipment 77,297 77,297
Furniture and fixtures 138,759 114,229
---------- ----------
Total cost 5,395,435 5,363,024
Less accumulated depreciation
and amortization 1,631,533 1,324,045
---------- ----------
Net property, plant and
equipment $3,763,902 $4,038,979
========== ==========
The Company received Community Development Block Grant (CDBG)
funds through the City of Yale totaling $387,035 and land with a
value of $25,000. These grants have been recorded as a credit in
the property accounts and will be amortized into income over the
life of the assets acquired.
NOTE 6 - NOTES PAYABLE:
Notes payable consist of the following at December 31:
1998 1997
---------- ----------
Note payable - bank, due in
monthly principal installments of
$7,583, plus interest at prime in
payment of loan guarantee for
investment in CEDS,
uncollateralized, maturing
January 1999. $ 7,583 $ 98,583
Mortgage payable - bank, due
in monthly installments of
$8,300, including interest at
9% through December, 2000. The
loan is collateralized by
substantially all Company assets. - 260,678
Note payable, due in monthly
installments of $3,992, including
interest at 4% through July 2003. 206,863 245,647
-12-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 6 - NOTES PAYABLE - CONTINUED:
Capital lease, due in monthly
installments of $705, including
interest at 17.9% through July 2001. 16,479 21,084
Capital lease, due in monthly
installments of $402, including
interest at 9%, through May 1, 2001. 10,198 -
Capital lease, due in monthly
installments of $426, including
interest at 9%, through August 2001. 12,186 -
---------- ----------
253,309 625,992
Less current portion 61,710 213,832
---------- ----------
$ 191,599 $ 412,160
========== ==========
Maturities of notes payable obligations are as follows:
Year ending December 31:
1999 $ 61,710
2000 57,617
2001 53,212
2002 45,501
2003 35,269
----------
$ 253,309
==========
The Company maintains a bank line-of-credit of $1,300,000 for
working capital requirements. The applicable interest rate is at
1/2% below the prime lending rate, currently 7.25% at December
31, 1998. The line-of-credit is secured by all accounts
receivable, inventories and equipment of the Company.
Additionally, certain required financial ratios must be
maintained. The Company had borrowings against the line of
$585,212 and $626,000 at December 31, 1998 and 1997,
respectively.
-13-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values of the Company's financial instruments,
none of which are held for trading purposes, are as follows at
December 31, 1998 and 1997:
1998 1997
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
ASSETS
------
Cash and cash
equivalents $1,504,725 $1,504,725 $ 110,822 $ 110,822
Notes
receivable 548,571 548,571 17,800 17,800
---------- ---------- ---------- ----------
$2,053,296 $2,053,296 $ 128,622 $ 128,622
========== ========== ========== ==========
LIABILITIES
-----------
Notes payable $ 585,212 $ 585,212 $ 626,000 $ 626,000
Long-term debt 253,309 N/A 625,992 N/A
Post-retirement
benefits 452,075 452,075 419,856 419,856
---------- ---------- ---------- ----------
$1,290,596 $1,037,287 $1,671,848 $1,045,856
========== ========== ========== ==========
The carrying values of cash and equivalents approximate fair
values. The notes receivable in 1997 are due from a related
party and bear interest at the prime rate and payments are
received when due. The notes receivable in 1998 are discounted
at an imputed rate that approximates an interest rate between
independent parties. Therefore, the carrying values of these
notes approximate fair value.
The notes payable bear interest at prime rate which is deemed to
be approximate fair value. It is currently not practicable to
estimate the fair value of the long-term debt obligations.
Because these note agreements contain unique terms, conditions,
covenants and restrictions which were negotiated at arm's-length
with the Company's lenders, there is no readily determinable
similar instrument on which to base an estimate of fair value.
Accordingly, no adjustment to fair value has been determined.
The postretirement benefits obligation has been determined by an
outside actuary based on the actuarial present value of the
expected benefits' liability.
-14-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 8 - CAPITAL LOSS:
Margate Industries, Inc. (the Company) acquired 40% of the stock
of Complete Engineering Development Services, Inc. (CEDS) in
January 1995. Under the provisions of the agreement, the Company
became a guarantor of CEDS' line-of-credit agreement. On
December 21, 1995, CEDS defaulted on the line-of-credit and
demand payment was made by the lender. The Company, as
guarantor, negotiated a term note agreement with the bank for
$273,000 along with a required payment of $50,000 which relieved
them of all principal and interest due under the line-of-credit
agreement. As a result, the Company incurred a capital loss of
approximately $275,000 of which $83,000 and $181,000 were
utilized for federal tax purposes in 1995 and 1998, respectively.
The remaining unused capital loss of $11,000 is available for
carryforward and expires in 2000.
NOTE 9 - INCOME TAXES:
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, ACCOUNTING
FOR INCOME TAXES, which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences
of events included in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to reverse.
1998 1997
---------- ----------
Current deferred taxes:
Gross assets $ 15,800 $ 12,400
Gross liabilities 5,300 -
---------- ----------
Current deferred tax -
assets 10,500 12,400
---------- ----------
Noncurrent deferred taxes:
Gross assets 169,900 142,700
Gross liabilities (425,400) (378,400)
---------- ----------
(255,500) (235,700)
Valuation allowance - -
---------- ----------
Net noncurrent deferred
tax - assets (liabilities) (255,500) (235,700)
---------- ----------
Total deferred tax -
assets (liabilities) $ (245,000) $ (223,300)
========== ==========
-15-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 9 - INCOME TAXES - CONTINUED:
The 1995 acquisition of CEDS resulted in a federal tax capital
loss to Margate. Due to the uncertainty of the future
realization, a valuation allowance was established for this
deferred asset in 1995. This loss carryforward expires in 2000.
In 1997, due to the expected sale of the Company's investment in
New Haven Foundry , which was expected to generate a capital
gain, the valuation allowance was reversed.
Deferred income taxes, included in the accompanying balance
sheets, result from temporary differences related to the
following items which are treated differently for financial
reporting and tax reporting purposes.
1998 1997 1996
------ ------ ------
Depreciation and
amortization $(403,900) $(378,400) $(333,600)
Capital and operating loss
carryforward 16,200 - 65,000
Other postretirement benefits 153,700 142,700 126,400
Workers' compensation expense (26,800) - -
Vacation expense 15,800 12,400 14,300
--------- --------- ---------
Total $(245,000) $(223,300) $(127,900)
========= ========= =========
The components of the provision for income taxes are as follows
for the years ended December 31:
1998 1997 1996
------ ------ ------
Current tax expense
(benefit) $ 68,500 $ 72,600 $(264,300)
Deferred tax expense 21,700 30,400 99,300
Capital and operating loss
carryforwards (16,200) - -
Adjustment to valuation
allowance - (65,000) -
--------- --------- ---------
Provision for income taxes $ 74,000 $ 38,000 $(165,000)
========= ========= =========
A reconciliation of the statutory tax rate to the effective tax
rates recorded as follows:
1998 1997 1996
------ ------ ------
Statutory rate 34% 34% (34)%
(Earnings) losses of unconsolidated
subsidiaries - - 19
Recognition of capital and operating
loss carryforward (30) - -
Adjustment to valuation allowance - (12) -
Other - (2) (3)
----- ----- -----
Effective rate 4% 20% (18)%
===== ===== =====
-16-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 10 - CASH FLOWS:
A reconciliation of net income (loss) to net cash flows from
operating activities is as follows for the years ended December 31:
1998 1997 1996
------ ------ ------
Net income (loss) $1,971,116 $ 148,999 $ (773,470)
Adjustments to reconcile
net income (loss) to
net cash from operating
activities:
Depreciation and
amortization 350,399 342,340 280,460
Loss on sale of
marketable securities - - 41,721
(Gain) loss on sale
of property, plant
and equipment 143,214 - (7,302)
Gain on sale of equity
investee (2,075,214) - -
Equity in loss of
investee companies - - 531,711
Deferred income tax
provision 21,700 30,400 (43,000)
Tax benefit of stock
options exercised - - 4,000
Changes in assets and
liabilities which
(increase) decrease
cash flows:
Accounts receivable:
Trade (1,191,145) 217,302 (89,754)
Related parties 1,485,939 (494,969) (16,237)
Inventories (1,009) (9,527) 22,869
Interest receivable (8,571) - -
Prepaid expenses and
other (14,084) 46,739 (5,254)
Accounts payable (213,440) (87,325) 330,825
Accrued income tax 19,300 223,300 (44,943)
Accrued workers'
compensation (2,219) 216 (101,606)
Accrued salaries and
wages 3,309 21,924 (5,232)
Accrued single business
tax 630 1,100 (1,000)
Other accrued liabilities 8,576 1,894 (17,112)
Accrued pension and
retiree health benefits 32,219 47,899 41,218
---------- ---------- ----------
Net cash from operating
activities $ 530,720 $ 490,292 $ 147,894
========== ========== ==========
-17-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 11 - STOCK OPTIONS:
The following table sets forth stock options granted, exercised and
canceled during the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ ------------------
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 66,666 $ 6.00 73,333 $ 5.58 80,000 $ 5.25
Stock options granted - - - - - -
Stock options exercised - - - - (6,667) 1.50
Stock options canceled (66,666) - (6,667) - - -
------- ------ -------- ------ ------- ------
Stock options outstanding
at the end of the year - $ - 66,666 $ 6.00 73,333 $ 5.58
======= ====== ======== ====== ======= ======
</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 33,333
shares at a price of $4.50 and 33,333 shares at a price of $7.50. The
options are exercisable at any time, provided that the owner of Wesley
Industries holds a minimum 55% ownership interest in NHF and the
Company also holds an ownership interest in NHF.
Pursuant to the sale of the Company's interest in NHF on March 24,
1998, the remaining 66,666 stock options were no longer exercisable as
the Company no longer maintained an ownership interest in NHF.
-18-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 11 - STOCK OPTIONS - CONTINUED:
The Financial Accounting Standards Board issued Statement No. 123
"Accounting for Stock Based Compensation" which is effective in 1996.
The Statement provides a fair value method of accounting for stock
based compensation plans rather than the intrinsic value method
contained in APB Opinion No. 25 which the Company currently uses. The
new Statement does not require an entity to adopt the new method but,
provides the option to either continue with the current method of
accounting under APB 25 or adopt the fair value method of accounting
under FASB 123. The Company will continue using the current method of
accounting. Since the Company granted no options in 1996, 1997 and
1998 there would be no effect on adopting the fair value accounting
under FASB 123 to the Company's financial statements.
NOTE 12 - LEASE COMMITMENTS:
MCC leased its building under an operating lease agreement which
expired in September 1998. FAI also leases its building under an
operating lease agreement that expires in December, 2005. These
leases require the Company to pay all maintenance and insurance
expenses. The Company also leases certain vehicles under two or three
year agreements.
Minimum payments under these leases are as follows:
1999 $165,480
2000 141,845
2001 135,750
2002 135,750
2003 135,750
Thereafter 271,500
--------
$986,075
========
Rental expense for these leases in 1998, 1997 and 1996, was
approximately $257,800, $271,000 and $264,000, respectively.
NOTE 13 - OTHER POSTRETIREMENT BENEFITS:
The Company sponsors certain health-care and life insurance
benefits for all retired employees. In December 1990, the
Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 106 on ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (SFAS 106). The new
standard requires that the expected cost of these benefits be
charged to expense during the years that the employees render
service.
-19-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 13 - OTHER POSTRETIREMENT BENEFITS - CONTINUED:
The following table sets forth the Plan's funded status
reconciled with the amount shown in the Company's consolidated
balance sheet at December 31:
1998 1997
---------- ----------
Accumulated postretirement benefit
obligation:
Fully-eligible active plan
participants $133,499 $100,227
Other active plan participants 175,596 250,154
-------- --------
$309,095 $350,381
======== ========
Unrecognized net loss from past
experience different from that
assumed and from changes in
assumptions $ 39,202 $ 69,475
Unrecognized prior service costs
from plan amendment 103,778 -
Accrued postretirement benefit
obligation 309,095 350,381
-------- --------
Accrued postretirement benefit cost $452,075 $419,856
======== ========
The Company's postretirement healthcare and life insurance plan
is not funded as the Company funds benefits on a pay-as-you-go
basis.
Net periodic postretirement benefit costs included the following
components:
1998 1997
---------- ----------
Service cost - benefits attributed
to service during the period $ 19,159 $ 27,808
Interest cost on accumulated other
postretirement benefit
obligation 19,366 21,941
Amortization of net losses (844) (1,850)
Amortization of prior service costs (5,462) -
-------- --------
Net periodic other postretirement
benefit cost $ 32,219 $ 47,899
======== ========
-20-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 13 - OTHER POSTRETIREMENT BENEFITS - CONTINUED:
For measurement purposes, a 7.18% and 7.25% annual rate of
increase in the per capita cost of covered healthcare benefits
was assumed for 1998 and 1997, respectively, the rate was
assumed to decrease to 5.25% over seven and eight years,
respectively, and remain at that level thereafter. The
healthcare cost trend rate assumption has a significant effect on
the amounts reported. To illustrate, increasing the assumed
healthcare cost trend rate by 1 percentage point in each year
would increase the accumulated postretirement benefit obligation
as of December 31, 1998 and 1997, by $77,155 and $93,853,
respectively, and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the
years then ended by $11,366 and $5,722, respectively.
The discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% as of December 31,
1998 and 1997.
NOTE 14 - CONTINGENCIES:
The Company has developed preliminary plans to address the
possible exposures related to the impact on its computer systems
of the Year 2000. Key financial information and operational
systems have been assessed and detailed plans have been developed
to address systems modifications required by December 31, 1999.
The financial impact of making the required systems changes is
not expected to be material to the company's financial position,
results of operations or cash flows.
NOTE 15 - EMPLOYEE BENEFIT PLANS:
The Company maintains a 401(k) plan covering all employees that
satisfy the Plan's eligibility requirements. The Company is
required to match 25% (maximum 2%) of each employee's
contribution, not to exceed 8% of the participant's compensation.
Employer's contribution for the years ended December 31, 1998,
1997 and 1996, was $17,055, $27,134 and $22,539, respectively.
Margate maintains a Defined Contribution Plan covering
substantially all employees that satisfy the Plan's eligibility
requirements. Under the provisions of the Plan, Margate is
required to make an annual contribution of 5% of each
participant's eligible compensation. Plan contributions for the
years ended December 31, 1998, 1997 and 1996, were $28,522,
$20,718, and $21,712, respectively.
During 1995, MCC adopted a Cafeteria Plan under Section 125 of
the Internal Revenue Code which allows employees that participate
to pay for their portion of health benefits with before tax
dollars. The Plan covers all employees that meet the
requirements of coverage under MCC's group health benefit plan.
-21-
<PAGE>
MARGATE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998
NOTE 16 - GAIN ON SALE OF NEW HAVEN FOUNDRY:
On March 24, 1998, the Company sold its 45% ownership interest in
New Haven Foundry to Wesley Industries, Inc. who owns the
remaining 55% interest. The sales price totaled $2,100,000 of
which $1,500,000 was received in cash and a $600,000 note
receivable, payable over five years. Legal fees relating to this
transaction amounted to $24,786, which resulted in a $2,075,214
gain on sale as the equity interest in NHF was written down to
zero in 1996.
As noted under related party transactions (Note 2), this sale
resulted in a new casting cleaning and service fee agreement.
Additionally, there is also a Management and Option Agreement
("Agreement") entered into between Yale Industries, Inc., Margate
Industries, Inc., New Haven Foundry and Wesley Industries, Inc .
as a result of this sale. This agreement established an
Operations Manager responsible for the production operations at
Yale and reports to NHF. This agreement also granted Wesley the
right to purchase 100% of the stock of Yale or substantially all
of the assets related to the Yale business, at Wesley's option,
at any time within six years of this agreement. The purchase
price under this option shall be Yale's earnings before interest
and taxes (EBIT) as defined in the agreement for the 12 month
period recently ended, multiplied by five, and in no event shall
the purchase price under the option be less than $4,000,000 or
more than $5,000,000 in cash, plus in the event of an asset
purchase, the assumption of liabilities of Yale.
-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 29, 1999 By: /s/ William H. Hopton
---------------------------------
William H. Hopton
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Frederick G. Schriever Chairman of the Board March 29, 1999
- -------------------------- and Director
Frederick G. Schriever
/s/ Delbert W. Mullens Vice Chairman and Director March 29, 1999
- --------------------------
Delbert W. Mullens
/s/ William H. Hopton President, Chief Financial March 29, 1999
- -------------------------- Officer and Director
William H. Hopton
/s/ David A. Widlak Secretary and Director March 29, 1999
- --------------------------
David A. Widlak
/s/ Frederick G. Berlet Treasurer and Director March 29, 1999
- --------------------------
Frederick G. Berlet
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,505
<SECURITIES> 0
<RECEIVABLES> 1,678
<ALLOWANCES> 0
<INVENTORY> 43
<CURRENT-ASSETS> 3,318
<PP&E> 5,395
<DEPRECIATION> 1,632
<TOTAL-ASSETS> 7,562
<CURRENT-LIABILITIES> 946
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 5,694
<TOTAL-LIABILITY-AND-EQUITY> 7,562
<SALES> 9,769
<TOTAL-REVENUES> 9,804
<CGS> 8,851
<TOTAL-COSTS> 4
<OTHER-EXPENSES> 143
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (30)
<INCOME-TAX> (10)
<INCOME-CONTINUING> (20)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,991
<CHANGES> 0
<NET-INCOME> 1,971
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.30
</TABLE>
