10-Q 1 q601.txt JUNE 30, 2001 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 --------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ ------------------ Commission File Number 0-13817 MARGATE INDUSTRIES, INC. ------------------------ (Exact name of registrant as specified in its charter) Delaware 84-8963939 -------- ---------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 129 N. Main Street Yale, Michigan 48097 -------------------------------------- ----- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (810) 387-4300 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of June 30, 2001, the Company had 1,879,542 shares of its $.015 Par Value Common Stock outstanding. MARGATE INDUSTRIES, INC. FORM 10-Q INDEX ----- PART I: FINANCIAL STATEMENTS PAGE(S) ------ -------------------- ------- Item 1. Financial Information Consolidated Balance Sheets. . . . . . . . . . . . . . . . .3-4 Consolidated Income Statement. . . . . . . . . . . . . . . . .5 Consolidated Statements of Changes in Stockholders' Equity . . . . . . . . . . . . . . . . . . . .6 Consolidated Statements of Cash Flows. . . . . . . . . . . . .7 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 8 - 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . .12 - 14 PART II: OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . 15 ------- ----------------- 2 MARGATE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements. 3 MARGATE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)

See Notes to Consolidated Financial Statements 4 MARGATE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (unaudited)

See Notes to Consolidated Financial Statements 5 MARGATE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)

6 MARGATE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

See Notes to Consolidated Financial Statements 7 MARGATE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES The consolidated Balance Sheet as of June 30, 2001 and the related Consolidated Statements of Income, Changes in Stockholders' Equity, and Cash Flows for the six months ended June 30, 2001 and 2000 are unaudited. In the opinion of management, all adjustments consisting of solely recurring adjustments necessary for a fair presentation of such interim financial statements have been included. The results of operations for the six months ended June 30, 2001 and 2000 are not necessarily indicative of the results to be expected for the whole year. The notes to the financial statements are presented as permitted by Form 10-Q and do not contain certain information included in the Company's annual financial statements. Certain amounts in 2000 have been reclassified to conform with the 2001 financial statement presentation. NOTE 2 - DIVIDENDS On July 11, 2000, the Company announced a special cash dividend of $0.50 per share on all outstanding shares of common stock for those shareholders of record on July 24, 2000. The dividend was paid on August 25, 2000. NOTE 3 - STATEMENTS OF CASH FLOWS A reconciliation of net income to net cash flows provided by operating activities is as follows:

8 NOTE 4 - NOTES PAYABLE Notes payable consist of the following at June 30, 2001: Note payable Ft. Atkinson, due in monthly installments of $3,992, including interest at 4% through July 2003 102,849 Capital lease - Ft. Atkinson - due in monthly installments of $705 including interest at 17.9% through July 2001. 3,154 ----------- Total Notes Payable 106,003 Less current portion 47,755 ----------- $ 58,248 Maturities of notes payable obligations are as follows: Year ending June 30: 2002 $ 47,755 2003 46,419 2004 11,829 ----------- $ 106,003 =========== 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 6.75% at June 30, 2001. The line-of-credit is secured by all accounts receivable, inventories and equipment of the Company. The Company had no borrowings against the line as of June 30, 2001. 9 NOTE 5 - NOTES RECEIVABLE Notes receivable consist of the following at June 30, 2001: Wesley Industries Inc.- collateralized note receivable due in quarterly payments of $35,000 commencing June 1, 1998 including imputed interest at 6%, with a final payment of the remaining outstanding principal and imputed interest balance on March 1, 2003. $ 231,245 NHF - unsecured note receivable, due in monthly installments of $32,250 including interest at 8% through February 2002. $ 235,898 Officers - Unsecured notes receivable, due in quarterly payments of $ 3,000 commencing September 30, 2000 including imputed interest at 6%, through 2007 $ 107,677 ----------- $ 574,820 Less current portion $ 373,910 ----------- $ 200,910 =========== Maturities of notes receivable are as follows: Year ending June 30: 2002 $ 373,910 2003 120,503 2004 19,589 2005 20,797 2006 22,080 2007 17,941 ----------- $ 574,820 =========== 10 NOTE 6 - DEFERRED SERVICE FEES In April 2001, the cleaning contract with New Haven Foundry, Inc, a subsidiary of Wesley Industries, was revised to reflect payments beginning April 1, 2002 through January 1, 2005. The cleaning contract was extended one year after the last payment in 2005, in consideration of restructuring the payments. The quarterly Service Fee payments payable under paragraph C of the Cleaning Contract through and including the January 1, 2002 payment shall be deferred to The following payment dates: SERVICE FEE DEFERRED PAYMENT DATE PAYMENT DATE ------------ ------------ July 1, 2000 July 1, 2003 October 1, 2000 October 1, 2003 January 1, 2001 January 1, 2004 April 1, 2001 April 1, 2004 July 1, 2001 July 1, 2004 October 1, 2001 October 1, 2004 January 1, 2002 January 1, 2005 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- The following is management's discussion and analysis of certain significant factors which have affected the Company's financial condition and results of operations during the periods included in the accompanying consolidated financial statements for the six (6) months ended June 30, 2001. THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MARGATE CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27a OF THE SECURITIES ACT OF 1993 AND SECTION 21e OF THE SECURITIES EXCHANGE ACT OF 1934. MARGATE'S ACTUAL RESULTS AND TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, STRENGTH OF THE AUTOMOTIVE INDUSTRY, CHANGES IN AUTOMOBILE AND TRUCK PRODUCTION, STRONG COMPETITION, DEPENDENCE ON NHF AND ITS PRODUCTION LEVELS, ENVIRONMENTAL MATTERS, LABOR PROBLEMS, AND ABILITY TO DIVERSIFY AND FIND SUITABLE ACQUISITIONS. GENERAL Margate performs finishing, cleaning and testing operations on grey iron castings for the automotive industry. Margate currently conducts its operations through its two wholly owned subsidiaries, Brown City Casting Corporation, doing business under the name Yale Industries, and Fort Atkinson Industries. These subsidiaries perform cleaning, grinding and testing of castings prior to shipment to end purchasers. Our primary customer is the New Haven Foundry ("NHF"), which produces castings for the automotive industry and other component manufacturers in the United States and Canada. Mr. Delbert Mullins, a Director, is also a director and principal shareholder of Wesley Industries, Inc. which owns NHF. Our customers for which we perform finishing operations include Waupaca Foundry, Inc., Navistar International, Aarowcast, Inc., and Brillion. Margate has benefited in recent years from the increased finishing and testing requirements on automotive suppliers, leading many of those suppliers to move their finishing operations from in-house to outside providers, such as Margate. However, with the current slowdown in the economy some foundries, such as Waupaca and Brillion, have decreased total production and stopped outsourcing some of their cleaning operations. Also, because of the conversion of grey iron cylinder heads to aluminum NHF has drastically reduced its production. Because of continuing sales reductions at Fort Atkinson in Wisconsin we will cease operations effective August 31, 2001. RECENT DEVELOPMENTS On June 12, 2001, Margate entered into a letter of intent with USA Teleport, Inc. ("USA Teleport") wherein USA Teleport will merge with and into a wholly owned subsidiary of Margate (the "Merger"). It is management's belief that for Margate to remain a profitable enterprise, it must diversify and lessen its dependence on the automobile industry. As disclosed elsewhere, USA 12 Teleport provides for state of the art internet connections to Latin America. USA Teleport will be operated as a wholly-owned subsidiary of Margate. Upon the effective date of the Merger, existing USA Teleport shareholders will receive a total of 4,500,000 shares of Margate's common stock. The ownership of Margate's current shareholders will be increased to 4,500,000 shares so that the existing shareholders of Margate and USA Teleport will have equal ownership of Margate following the Merger. After the Merger, Margate's board of directors will include two directors from the current board of directors of the Company, two directors from the current board of directors of USA Teleport and three independent directors. The parties agreed to allow access to each other's principals, attorneys, accountants and other advisors for customary due diligence in connection with the negotiation of a definitive merger agreement. Either party has the ability to terminate the letter of intent upon written notice to the other party and the letter of intent will terminate automatically upon the execution of a definitive merger agreement, or, in the event a definitive merger agreement has been entered as of August 31, 2001. USA Teleport, a Miami-based telecommunications service provider, offers point-to-point Internet connections, compressed voice, data and wireless Internet solutions via satellite and fiber. Founded in 1997 by a group of Latin American telecommunications specialists, USA Teleport owns and operates ten earth stations in Florida, Argentina, Brazil, Peru, Paraguay and Venezuela. The earth stations receive and transmit voice, data and Internet connectivity throughout the Americas. In April 2001, Margate revised the cleaning contract with NHF. NHF is an affiliate by virtue of Mr. Delbert Mullins being a Director of Margate and a director and principal owner of NHF. The restructured contract was in consideration for payment of all amounts past due from NHF on the quarterly payments under the agreement and payment on a past due note and receivable. The cleaning contract was revised with payments being in April 1, 2002 through January 1, 2005 and extended one year after the last payment in 2005. The effect of the restructuring of the cleaning contract is to reduce quarterly cash flows until April 2002. LIQUIDITY AND CAPITAL RESOURCES: Cash balances totaled $1,759,805 at June 30, 2001 compared to $1,099,083 at December 31, 2000. The increase in cash for the period is to be contrasted to a reduction in the accounts receivable of $468,000 due to the lump sum payment of amounts due by NHF and deferred service fees. During the period ended June 30, 2001, long-term debt decreased to $58,248 reflecting current payments during the period. Total assets decreased $303,153 at June 30, 2001, reflecting payment of taxes and depreciation charges. Total current liabilities likewise decreased reflecting the payment of taxes due. Margate assesses its liquidity in terms of overall ability to generate sufficient cash to support business needs and to fund growth. We rely primarily upon cash flow from operations and our line of credit to finance our operations. 13 We have a facility line of credit of $1,300,000 for working capital requirements, with monthly interest payments at 1/2 below the prime rate currently 6.75% at June 30, 2001. This line of credit is collateralized by substantially all the assets of Margate including accounts receivable, inventories and equipment. The Company has no borrowing against this line as of June 30, 2001. We believe our cash flow from operations is sufficient to fund our current level of operations and our acquisition of USA Teleport. RESULTS OF OPERATIONS The Company is reporting year-to-date pre-tax profit on operations of $39,439 for the six months ended June 30, 2001 as compared to a profit of $688,274 for the same period in 2000 and a loss of $20,290 compared to a profit of $355,051 for the three months ended June 30, 2001 as compared to June 30, 2000. Net sales for the period ended June 30, 2001 were approximately $3,873,766; which represents a decrease of 32.0% from 2000 sales through June 30, 2000 of $5,697,596. Management believes the decrease is directly attributable to the general economic slowdown in the automotive industry and the conversion of grey iron cylinder heads to aluminum. The cost of sales for the six months ended June 30, 2001 as a percentage of sales was 91.7% as compared to 78.8% for the same period in 2000. The major reason for the increase was the decrease in sales by 32.0% over the same period last year. Selling, General & Administrative Expenses for the six months ended June 30, 2001 as a percentage of sales was 12.6% as compared to 8.9% for the same period in 2000. Basically the Company's SG&A are fixed. For the six month period ended June 30, 2001 SG&A costs were $486,842 compared to $505,204 for the same period ended June 30, 2000. EFFECTS OF CHANGES IN PRICES When possible, Margate attempts to adjust the selling prices of its services in response to increases in its costs of labor, raw materials and capital. However, the market served by Margate is highly competitive and that competition has limited our ability to increase overall prices. During 2000, 1999 and 1998 there were no significant changes in prices, however Margate has been successful in lowering its overall labor costs. 14 PART II Item 1. Legal Proceedings ----------------- The Company is not engaged in any material pending legal proceeding to which the Company is a party or to which any of its property is subject. Item 2. Changes in Securities --------------------- None Item 3. Defaults Upon Senior Securities ------------------------------- None Item 4. Submission of Matters to a Vote of Securities Holders ----------------------------------------------------- None Item 5. Other Information ----------------- None Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) The following exhibits required by Item 601 of Regulation S-B are filed herewith: Exhibit No. Description ----------- ----------- None (b) A report on Form 8-K was filed on June 20, 2001 reporting the letter of intent with Margate and USA Teleport under Item 5. 15 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. MARGATE INDUSTRIES, INC. By: /s/ William H. Hopton --------------------------------- William H. Hopton Date: August 7, 2001 16

MARGATE INDUSTRIES INC 10-Q