Item 1. BUSINESS
General Magnaplate Corporation (the "Registrant") is principally engaged in applying, through various proprietary and other processes, coatings which cannot chip, peel or rub off and which increase the hardness, corrosion resistance, wear resistance and/or lubricity of metal parts produced by its customers.
The Registrant applies coatings to aluminum, steel, copper alloys, titanium, magnesium and other special alloys. Depending on the results sought, these coatings are more resistant to corrosion, more durable and have lower friction characteristics than the metals to which they are applied. The Registrant terms its coatings "Synergistic" because they apply several types of materials or metals to the base metal to form a composite coating which is then infused to become an integral part of the underlying metal. The composition and thickness of the coatings are controllable and thus can be varied according to the characteristics which the Registrant's customers need for the required end product. Because the coatings change the surface qualities of the base metal, they can permit the use, in some applications, of underlying metals which are less expensive, easier to shape or lighter than other metals or alloys with similar qualities.
The Registrant's names for its main proprietary processes are: TUFRAM for aluminum, NEDOX for most metals, MAGNAPLATE HMF for most metals, MAGNAPLATE HCR for aluminum, CANADIZE for titanium, MAGNADIZE for magnesium, LECTROFLUOR for all metals, HI-T-LUBE a specialized dry film lubrication coating, PLASMADIZE, a composite coating for extreme wear application for most metals, MAGNAGOLD, an enhanced titanium nitride PVD coating for various metals and ultra-hard alloy steels to increase surface hardness, GOLDENEDGE, an ultra-hard, ultra-thin TiN PVD coating for blades and all sharp-edged tools, MAGNAPLATE HTR, for superior high temperature release on all metals, MAGNAGLIDE, a coating developed for the exclusive use by Black & Decker for its irons, and Magnaplate CMPT, a robotically controlled toolface production process. Each proprietary process consists of a number of variations that can be employed to meet customer requirements. The Registrant has obtained trademark coverage for fourteen of these proprietary processes in the United States and on most of them in certain foreign countries. Coatings using these and other proprietary processes have represented approximately 95% of the Registrant's total operating revenues for the fiscal year ended June 30, 1998.
The Registrant handles each job on a "custom" basis, according to each customer's specifications. Items coated vary greatly in size and shape. Production runs vary from a few to thousands. Prices for coating services depend on the length of the production run, the complexity of the work and other factors associated with custom work. The Registrant's coatings are used in the machine tool, food processing, packaging, defense, aerospace, pharmaceutical, pulp and paper, oil service and electronics industries, as well as in other industries which use metal parts. Should United States Government expenditures for military equipment increase, the Registrant expects that there will be a greater demand for its coating services, although it cannot predict the effect of such an increase on its profits.
The Registrant is in one line of business, i.e., providing synergistic coatings and other related services to its customers' products. Hence there is no financial information about industry segments.
Financial information relating to foreign operations is as follows:
The company has invested net assets of $933,080 in its Ajax, Ontario operation as of June 30, 1998.
Foreign operations (principally Canada) constitutes 6.5%, 7.5% and 8.1% of total sales in the three years ending June 30, 1996, 1997 and 1998, respectively. Foreign operations constitute 1.7%, 3.5%, and 0% of pre-tax profits for the three years ended June 30, 1996, 1997 and 1998, respectively.
Marketing
The Registrant markets its metal coating services through a staff of twenty four technical market support personnel, including six independent representatives operating from its facilities in New Jersey, Texas, Wisconsin, California and Canada. New customers also come to the Registrant through advertising, trade shows, seminars, our web site and editorial coverage in numerous trade journals and referrals from the Registrant's customers.
The Registrant's marketing, operation, management and engineering staffs include persons who have training in metallurgy and other technical fields. The Registrant's objective is to work with customers and prospective customers in the early stages of the design and specification process, with a view toward obtaining production contracts for the coating of the items being designed. Coatings initially developed for one customer are, in some instances, sold by the Registrant to other customers.
For the fiscal year ended June 30, 1998, no one customer accounted for more than 10% of the total revenues of the Registrant.
Research and Development
The metal coatings industry is characterized by rapid technological changes requiring the Registrant to make continuing expenditures for development of new coatings and the improvement of existing coatings in order to meet customer needs.
During the fiscal year ended June 30, 1998, the Registrant spent an estimated $75,000 on unreimbursed research and development. Additional costs incurred were paid by customers requiring special coatings and treatments. All costs associated with the development of new processes and the maintenance and enhancement of existing processes are charged against income as incurred or borne by the customer in the form of contracts.
License Agreements
The Registrant has licensing agreements with the following overseas organizations: Ulvac Techno, Ltd. (Japan), YTTEC AB (Sweden), A.T. Poeton & Sons, Ltd. (United Kingdom), and MIFA Aluminum BV (Netherlands), and will continue seeking additional licensees. Since inception, several of these licensees have increased their processing capabilities by taking licenses for additional proprietary processes.
The Registrant receives periodic royalty payments under these agreements based on sales of products to which Registrant's coating technology is applied. The agreements also provide for two-way exchange of new and related technology developed by Registrant and licensees.
The Registrant has an exclusive worldwide licensing agreement with Household Products, Inc. (Black & Decker) in connection with irons using the MAGNAGLIDE process technology and name.
The contributions of the licensees amounted to 3% of the gross revenue of the Registrant and are expected to continue to rise.
Competition
The metal coatings industry is highly competitive. There are many companies which provide metal treatments which, to varying extents, are alternatives to the Registrant's processes. However, the Registrant believes that none of the Registrant's competitors utilize processes similar to the Registrant's proprietary processes. The Registrant believes that it competes primarily on the basis of its manufacturing expertise, its superior proven processes and coatings, and its reputation for problem solving, and that its pricing is a less significant competitive consideration than these factors.
Raw Materials
The Registrant's primary raw materials are chemicals, polymers and powdered or wire metals manufactured by large chemical and metal companies and are readily available. The Registrant blends these raw materials in its proprietary processes. The Registrant believes that sources of supply are adequate for its needs and that it is not substantially dependent upon any one supplier.
Protection of Proprietary Information
Several new patents have been filed on processes for surface treatments in the US and in key foreign nations. While management believes that its existing patents have had competitive merit, it does not believe that patent protection is essential to the ongoing operations of the Registrant due to the know-how it has developed over the past years.
The Registrant has acquired 17 United States trademarks and servicemarks, and 13 foreign trademarks and servicemarks. These trademarks and servicemarks cover 15 of the Registrant's processes in the United States and one or more of the Registrant's processes in Canada and the European Community. While management believes these trademarks and servicemarks have competitive merit, it does not believe that trademark and servicemark protection is essential to the ongoing operations of the Registrant.
Many processes cannot be patented due to cost and limited market potential. Also, the patenting process can be expensive and can result in public disclosure of proprietary information. Therefore, the Registrant's present approach is to treat its production processes as confidential and rely on internal non-disclosure safeguards, including written confidential disclosure agreements, particularly among its more technically trained personnel, and on trade secrets laws, as well as on restrictions incorporated in its license agreements for protection of what it regards as proprietary information about its coatings and processes. Notwithstanding these efforts, it may be possible for competitors to duplicate or copy the Registrant's processes.
Employees
At June 30, 1998, the Registrant had 138 employees, of whom 18 were employed in marketing and sales operations, 22 in administration and 98 in production and quality assurance.
The Registrant's employees in all of the Registrant's plants, New Jersey, California, Texas, Wisconsin and Canada are not represented by labor unions. Management believes that its relations with its employees are good.
Environmental, Safety and Health Matters
The Registrant believes it is currently in compliance with all federal, state and local environmental protection laws and federal and state occupational safety and health standards. Capital expenditures made by the Registrant for enhancement and improvement of environmental, health and safety systems represented approximately 5% of the Registrant's revenues, and the Registrant anticipates that such expenditures will not exceed that level for the foreseeable future to meet existing federal, state and local laws and standards. Changes in current laws and standards could require additional expenditures and adversely affect the Registrant's operations and profitability.
Item 2.
Item 2. PROPERTIES
The Registrant's corporate executive offices and a production facility are located in a modern, one story, high ceiling, steel and concrete structure, with an attached two story administrative and office area, located at 1331 U.S. Route 1, Linden, New Jersey. The Registrant owns this structure and the approximately 4 acres of land on which it is located. Total square footage within the structure is approximately 100,000 square feet. Approximately 30% of the premises is leased to an unrelated party. Title is unencumbered.
In November 1982, the Registrant, through its wholly-owned subsidiary, Candida Realty Texas, purchased a manufacturing facility, including executive offices, in Arlington, Texas (in the Dallas/Fort Worth area). This property consists of a modern, one story, cinder block and concrete structure, containing approximately 37,500 square feet of space located on approximately 2 acres of land. Title is unencumbered.
In 1989, the Registrant, through its wholly-owned subsidiary Candida Realty Texas, purchased a modern one story brick and concrete structure containing 30,401 square feet of office and manufacturing facility on 2.2 acres in Arlington, Texas, and which property is adjacent to the existing plant of the Registrant's Arlington operation. Title is unencumbered.
In 1980, the Registrant, through its wholly-owned subsidiary, Candida Realty California, purchased a production and office facility in Ventura, California, consisting of 4 modern, 1 story, concrete block and steel buildings, which contain a total of approximately 32,000 square feet of space located on approximately 2 acres of land. Title is unencumbered.
On December 28, 1989, the Registrant acquired certain assets of Ra-Tech Inc., a Racine, Wisconsin based hard anodizing metal specialist. The operations were incorporated under the name of General Magnaplate Wisconsin, Inc., a wholly-owned subsidiary of Registrant. During the fiscal year ending June 30, 1991, the Registrant, through its wholly-owned subsidiary, Candida Realty Wisconsin, Inc., acquired 16,000 square feet of production and office space in a building located on over 2.5 acres, into which General Magnaplate Wisconsin, Inc. moved in October, 1991. During the fiscal year ended June 30, 1997 the registrant completed a 7,550 square foot expansion and renovation of this facility. Title is unencumbered.
On January 2, 1990 the Registrant acquired the operating assets of Dynasurf International, Inc., an Ontario, Canada based hard metal coatings specialist. The operations were incorporated under the name General Magnaplate Canada, Ltd., a wholly-owned subsidiary of Registrant. During the fiscal year ended June 30, 1998, the registrant acquired a modern 19,000 square foot facility located in Ajax, Ontario. The building's production area is a one story, high ceiling, steel and cinder block structure with an attached two story office area situated on approximately 3 acres. During the same fiscal year, the registrant completed a 2,000 square foot, one story steel and cinder block addition onto the existing structure. Title to this property is subject to an existing mortgage.
Item 3.
Item 3. LEGAL PROCEEDINGS
In April, 1991, a claim was served on the Canadian subsidiary, General Magnaplate Canada, Ltd., by Dynasurf International, Inc. for $170,000 representing the unpaid contract liability for the net assets acquired by the Canadian subsidiary from the sellers, Carrigan Industries, Ltd. and Dynasurf
International, Inc. on January 2, 1990. The subsidiary filed a counterclaim for environmental and other costs which result from the seller not resolving certain environmental issues warranted in the contract of purchase. Further, a shareholder of Dynasurf International, Inc. also filed a claim for breach of oral contract of employment for $119,000 which the Registrant denied in its related statement of defense. The Company reached an out of court agreement with the plaintiffs on September 9, 1996 wherein the plaintiffs were collectively paid the sum of $65,000 U.S. dollars in full settlement of their claim. Such settlement did not have an adverse effect on the Company's financial statements.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1998.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Market Information
The Registrant's Common Stock is traded in the over-the-counter market under the symbol GMCC, and is reported on the National Association of Security Dealers Automated Quotations System ("NASDAQ"). The following table sets forth the range of high and low sales price per share of the Registrant's Common Stock for the periods indicated, as reported by NASDAQ on the composite tape as provided by the National Quotation Bureau, Incorporated.
FISCAL PERIOD HIGH/LOW SALES PRICE ------------- --------------------
1998 High Low ---- ---- ---
1st Quarter* 4 3/8 2 15/16 2nd Quarter* 8 3 13/16 3rd Quarter 9 3/8 5 1/2 4th Quarter 7 7/8 4 3/4
1997* High Low ----- ---- ---
1st Quarter 3 3/16 2 5/8 2nd Quarter 3 5/8 2 7/8 3rd Quarter 3 1/2 3 1/16 4th Quarter 3 7/16 2 15/16
Holders
The approximate number of security holders of the Registrant's Common Stock as of June 30, 1998 was 548.
Dividends
The Registrant has paid cash dividends on its Common Stock since 1977. Payments for the past five fiscal years are as follows:
To Holders of Record as of Amount Date Paid the Close of Business On - ------ --------- ------------------------
$.05 March 13, 1998 February 27, 1998 .05* October 10, 1997 September 26, 1997 .03* March 14, 1997 February 28, 1997 .035* October 15, 1996 September 27, 1996 .025* March 8, 1996 February 23, 1996 .025* October 16, 1995 September 29, 1995 .025* March 1, 1995 February 20, 1995 .02* January 28, 1994 January 14, 1994 .04* June 15, 1993 June 4, 1993
* Adjusted to reflect forward 2 for 1 stock split on December 16, 1997.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data with respect to the Consolidated Statements of Income of the Company for the five years ended June 30, 1998 and the Consolidated Balance Sheets of the Registrant as of the end of such years. The selected financial data for the five years are derived from financial statements for such years and as of such dates as examined by Mauriello, Franklin & LoBrace, independent auditors, including the Consolidated Financial Statements for the three years ended June 30, 1998 and the Consolidated Balance Sheets, as of June 30, 1998 and 1997 included elsewhere herein, and such data are qualified by reference to such financial statements and notes thereto. Data has been adjusted, as necessary, to reflect forward 2 for 1 stock split on December 16, 1997.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Business Environment
General Magnaplate Corporation is principally engaged in applying, through various proprietary and other processes, synergistic coatings for metal parts produced by its customers. Rapid technological advances, typical of the coatings industry, compels General Magnaplate to improve existing coatings or develop new processes to meet our customers' changing needs.
Management believes that it competes primarily on the basis of manufacturing expertise, its superior proven proprietary processes and coatings, and its reputation for problem solving, and that its pricing is a less significant competitive consideration than these factors. Management believes that these factors are responsible for the company's continuing growth of marketshare as well as for its financial stability. Management expects that there will be a greater demand for its coating services although it cannot predict the impact on future earnings.
Financial Condition Liquidity and Capital Resources Three Years Ended 1998
In the three-year period ended June 30, 1998, $7,685,638 net cash was provided by operating activities of which $3,816,083 net cash was used in investing activities and $2,937,514 net cash was used in financing activities, resulting in a increase in cash and cash equivalents of $932,041.
The net cash provided by operating activities was principally from: net income of $4,655,932; depreciation and amortization of $1,849,970; accrued deferred compensation of $469,387; primarily reduced by the increase in accounts receivable of $123,909 and a decrease in Marketable Securities of $1,083,182.
The net cash used in investing activities was principally from: additions to property, plant and equipment of $2,761,732; note receivable net of installment collections of $505,721; and net additions to cash surrender value-life insurance of $319,670.
The net cash used in financing activities was principally from: the acquisition of treasury stock of $2,097,277; dividends paid of $1,100,585; and the payment of bank debt of $177,544.
Working capital of $5,547,405 at June 30, 1998 increased by $188,945 or 3.5% during the three-year period and the working capital ratio increased to 7.0 to 1 from 5.5 to 1 at June 30, 1995.
All references to stock give effect to the December 16, 1997 two for one forward stock split as if same had occurred prior. Stockholders' equity per share at June 30, 1998 increased 27% to $2.51 per share compared with $1.97 per share at June 30, 1995.
Management believes that internal cash flow and/or income from marketable securities are expected to be sufficient to provide the capital resources necessary to support future operating needs and does not anticipate any material expenditures that will have a significant impact on future cash flows.
Results of Operations Fiscal 1998 vs. 1997 vs. 1996
Total revenue for 1998 of $11,720,331 represented an increase of $266,673 or 2.3% over 1997, while total revenue for 1997 was $11,453,658, an increase of $676,586 or 6.3% over 1996.
The respective increases in total revenue for 1998 over 1997 were from: sales of $299,070 or 2.8%; investment and other income of $47,335 or 10.2%; and a decrease in royalty and licensee income of $79,732 or 18.8%.
The respective net increase in total revenue for 1997 over 1996 was from: sales of $555,451 or 5.5%; royalty and license income of $128,662 or 43.7%; and a slight decrease in investment and other income of $7,527 or 1.6%.
Sales for 1998, 1997 and 1996 were $10,863,372, $10,564,302 and $10,008,851, respectively, representing approximately 93%, 92% and 93% of total revenue in each respective year. During the current fiscal year we have increased property, plant and equipment by $1,653,940 with a national plant expansion and modernization program, as well as the addition of Plasmadize areas to all of our locations in preparation for significant increases in sales and production in the upcoming fiscal year.
Royalty and license income was $343,581 in 1998, $423,313 in 1997, and $294,651 in 1996. The decrease in current year royalties is directly attributed to the decrease in royalties from our Japanese licensee and the impact the turmoil in the Asian market is having on their business. Royalties from our other licensees continue to increase.
Total costs and expenses for 1998 of $9,487,921 represented an increase of $567,970 or 6.4% over 1997, while total costs and expenses for 1997 of $8,919,951 was an increase of $492,408 or 5.8% over 1996. As a percentage of total revenue, total costs and expenses were 80.9% in 1998, 77.9% in 1997 and 78.2% in 1996. The increase in total cost and expenses as a percentage of total revenue when compared to 1997, is primarily due to upgrades of production equipment at all of our facilities resulting in higher depreciation expense, increased production personal to accommodate greater sales volume, the associated costs of moving the Canadian facility to its new location and the write off of old production and computer equipment.
The reduction of .3% in total costs and expenses as a percentage of total revenue in 1997 when compared to 1996, is primarily due to increased sales and stabilized costs.
As the result of the above, income before corporate income taxes was $2,232,410 or 19.0% of total revenue in 1998, representing a decrease of $301,297 or 11.9% over 1997, while income before corporate income taxes was $2,533,707 or 22.1% of total revenue in 1997, an increase of $184,178 or 7.8% over 1996.
Corporate income taxes and the effective tax rate were $757,450 and 33.9%, respectively, in 1998, $839,020 and 33.1% in 1997 and $863,244 and 36.7% in 1996.
Net income in 1998 of $1,474,960 or 12.6% of total revenue, represented a decrease of $219,727 or 12.3% over 1997. Net income in 1997 of $1,694,687 or 14.8% of total revenue, represented an increase of $208,402 or 14.0% when compared to 1996. The decrease in the current year is attributable to greater expenses and depreciation as a result of the expansion and equipment purchases to accommodate our planned growth for the future, and a higher effective corporate income tax rate versus 1997. The increase in 1997 compared with 1996 was primarily due to greater revenues, and a lower effective corporate income tax rate versus 1996.
Earnings per share in 1998, 1997 and 1996 were $.30, $.33, and $.27, respectively. In the current year, 15,000 shares of GMCC stock were purchased and placed in treasury, 4,000 of these shares were subsequently issued as employee compensation and the remaining 11,000 shares are still being held in the treasury. During the same three-year period 629,232 shares of treasury stock were canceled and retired, resulting in weighted average shares outstanding of 4,913,635, 5,089,124 and 5,435,916 in 1998, 1997 and 1996, respectively.
As detailed in Note 10 to the Consolidated Financial Statement the previous legal matter has been resolved. No new legal matters are expected.
During the current fiscal year General Magnaplate Canada, Ltd. purchased and moved into a newer more modern facility located in Ajax, Ont. which will allow for increased production capabilities and further expansion of the Canadian Market.
After examining the year 2000 computer issues, management has determined that it will not have a material impact on its business, operations, or its financial position.
No other significant financial matters are expected in the future which will have a material adverse impact on earnings.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The accompanying Consolidated Financial Statements and related Schedules of the Registrant and its wholly-owned subsidiaries have been filed with the Securities and Exchange Commission and are incorporated herein by reference.
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable and have therefore been omitted.
Item 9.
Item 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change of accountants nor any disagreements.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting of the Shareholders to be held on November 4, 1998, to be filed pursuant to Section 14 of the Securities and Exchange Act of 1934 within 120 days after the end of the Registrant's 1998 fiscal year.
Item 11.
Item 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting of the Shareholders to be held on November 4, 1998, to be filed pursuant to Section 14 of the Securities and Exchange Act of 1934 within 120 days after the end of the Registrant's 1998 fiscal year.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting of the Shareholders to be held on November 4, 1998, to be filed pursuant to Section 14 of the Securities and Exchange Act of 1934 within 120 days after the end of the Registrant's 1998 fiscal year.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting of the Shareholders to be held on November 4, 1998, to be filed pursuant to Section 14 of the Securities and Exchange Act of 1934 within 120 days after the end of the Registrant's 1998 fiscal year.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report.
(1) Financial Statements: The following Consolidated Financial Statements of General Magnaplate Corporation and Report of Independent Auditors are incorporated by reference:
Consolidated Balance Sheet - June 30, 1998 and 1997
Consolidated Statement of Income - Fiscal Years Ended June 30, 1998, 1997 and 1996
Consolidated Statement of Shareholders' Equity - Three-Year Period Ended June 30, 1998
Consolidated Statement of Cash Flows - Fiscal Years Ended June 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Auditors
Consent of Independent Auditors
(2) Financial Statement Schedules: The following financial statement schedule of General Magnaplate Corporation for the fiscal years ended June 30, 1998, 1997 and 1996 is filed as part of this report and should be read in conjunction with the Consolidated Financial Statements of General Magnaplate Corporation.
Schedule VIII Valuation and Qualifying Accounts
(3) Exhibits: The Exhibits listed below are immediately following the financial statement schedule and are filed as part of, or incorporated by reference into, this Report.
Exhibit No. Description
1 List of Subsidiaries
(b) Reports on Form 8-K: No reports were filed by the Company during the period ended June 30, 1998.
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.
GENERAL MAGNAPLATE CORPORATION (Registrant)
By: /s/Charles P. Covino -------------------- Charles P. Covino Chairman, Board of Directors (Chief Executive Officer and Principal Financial Officer)
September 24, 1998 ------------------ (Date)
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.
/s/Candida C. Aversenti ----------------------- Candida C. Aversenti President and Director
September 24, 1998 ------------------ (Date)
/s/Edward A. Partenope, Jr. --------------------------- Edward A. Partenope, Jr. Director
September 24, 1998 ------------------ (Date)
/s/Susan E. Neri ---------------- Susan E. Neri Assistant Vice President and Principal Accounting Officer
September 24, 1998 ------------------ (Date)
/s/Edmund V. Aversenti, Jr. --------------------------- Edmund V. Aversenti, Jr. Vice President, Secretary and Director
September 24, 1998 ------------------ (Date)
MAURIELLO, FRANKLIN & LOBRACE A Professional Corporation CERTIFIED PUBLIC ACCOUNTANTS
GENERAL MAGNAPLATE CORPORATION AND WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 1998, 1997, AND 1996
GENERAL MAGNAPLATE CORPORATION AND WHOLLY-OWNED SUBSIDIARIES
PAGE ----
Independent Auditors' Report 1
Consolidated Financial Statements: Consolidated Balance Sheets 2-3 Consolidated Statements of Stockholders' Equity 4 Consolidated Statements of Income 5 Consolidated Statements of Cash Flows 6-7 Notes to Consolidated Financial Statements 8-16
Independent Auditors' Report on Supplementary Data 17 Supplementary Data 18
MAURIELLO, FRANKLIN & LOBRACE A Professional Corporation CERTIFIED PUBLIC ACCOUNTANTS
45 Springfield Avenue, Springfield, New Jersey 07081 Telephone (973) 379-5400 Fax (973) 379-3696
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of General Magnaplate Corporation:
We have audited the accompanying consolidated balance sheets of General Magnaplate Corporation and Wholly-Owned Subsidiaries as of June 30, 1998 and June 30, 1997 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 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 audits.
We conducted our audits 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 statement. 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and Wholly-Owned Subsidiaries at June 30, 1998 and June 30, 1997 and the results of their operations and cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles.
/s/ Mauriello, Franklin & LoBrace ----------------------------- Mauriello, Franklin & LoBrace
August 10, 1998
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL MAGNAPLATE CORPORATION AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of General Magnaplate Corporation and its wholly-owned subsidiaries; accordingly all intercompany transactions and balances have been eliminated in consolidation.
Nature of Business
The Company is in one line of business. It provides synergistic coatings and other related services to commercial customers' products from five plants located in the United States and Canada. Included in the Company's consolidated balance sheet at June 30, 1998 are $1,336,000 of net assets of the Canadian operation.
Marketable Securities
All marketable securities are considered trading securities and are valued at fair market value in accordance with SFAS No. 115. Realized and unrealized gains and losses are reported in current period income. Net unrealized holding gains (losses) on trading securities of $29,183, $31,915, and $(378) were reported for the years 1998, 1997, and 1996, respectively. Market value exceeded cost by $60,719 and $31,915 at June 30, 1998 and 1997 respectively.
Inventories
Inventories consist principally of industrial supplies and plating solutions which are valued at the lower of FIFO cost or market and are included in Cost of Sales.
Depreciation and Amortization
Property, plant and equipment are stated at cost and depreciation is provided principally on a straight line basis using estimated service lives of 3-5 years for transportation equipment, 5-10 years for factory machinery and office equipment, and 10-39 years for buildings and building improvements. Expenditures for renewals and betterments are capitalized. Items of identifiable property which are sold, retired, or otherwise disposed of are removed from the asset accounts, and any gains or losses thereon are reflected in income.
Patents and trademarks are amortized on a straight line basis over periods not exceeding 10 years.
GENERAL MAGNAPLATE CORPORATION AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies (Continued)
Corporate Income Taxes
Taxes are provided based on income reported for financial statement purposes, including deferred taxes which are principally provided due to temporary differences between financial and tax reporting of certain revenue and expense items.
Company Earnings Per Share
Earnings per share of common stock have been computed based on the weighted average number of shares outstanding during the reporting periods.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Foreign Currency Translation Adjustment
Assets and liabilities of the subsidiary operating in Canada are translated into U.S. dollars using the exchange rate in effect at the balance sheet date. Results of operations are translated using the average exchange rate prevailing throughout the period. The effects of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are included as part of the Foreign Currency Translation Adjustment component of shareholders' equity, while gains and losses resulting from foreign currency transactions are generally included in income.
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 and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 1997 consolidated financial statements have been reclassified to conform with the 1998 presentation.
GENERAL MAGNAPLATE CORPORATION AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2--Property, Plant and Equipment
Property, plant and equipment are as follows:
Note 3--Other Assets
Other assets are as follows:
Note 4--Long-Term Debt
The Company is indebted to Business Development Bank of Canada for $457,925 borrowed March 31, 1998 and payable in equal monthly principal installments of $2,571 together with interest of 7.6% per annum commencing June 23, 1998 with the final payment due April 23, 2013. The note is secured by a first mortgage on real estate owned in Ajax, Ontario.
Current maturities of the debt for the five years ended June 30, 2003 are as follows: 1999 - $29,841; 2000 - $29,841; 2001 - $29,841; 2002 - $29,841; and 2003 - $29,841.
GENERAL MAGNAPLATE CORPORATION AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5--Corporate Income Taxes
Components of corporate income tax expense are as follows:
A reconciliation of the provision for income taxes compared with the amounts at the U.S. statutory tax is as follows:
GENERAL MAGNAPLATE CORPORATION AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5--Corporate Income Taxes (Continued)
The Canadian subsidiary has available unused tax benefits in the form of operating loss carryforwards of approximately U.S. $80,000 to reduce future Canadian taxable income. These carryforwards principally expire in 2002 and 2003. A deferred tax asset of $38,000 has been provided subject to a 100% valuation allowance since it is not likely that the loss carryforwards will be utilized prior to their expiration.
Components of deferred tax assets (liabilities) are as follows:
Note 6--Accrued Liabilities
Accrued liabilities are as follows:
GENERAL MAGNAPLATE CORPORATION AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7--Employee Benefits
The Company maintains a 401(k) savings plan which covers all full time U.S. employees. The Company matches 50% of voluntary pre-tax employee participant contributions up to 4% of compensation as well as providing discretionary contributions based on compensation for all employees. Employer discretionary contributions, which are forfeited due to employee termination prior to the full seven year vesting period, revert back to the Company. There were no significant changes in the plan in the current year. Total expense under the plan was $45,356 in 1998, $39,791 in 1997 and $24,677 in 1996.
Pursuant to employment contracts and letter agreements with officers and key employees, the Company maintains non-qualified incentive compensation plans which are based on the realization of sales, pre-tax income and royalty income. Total expense under these plans was $520,465 in 1998, $594,397 in 1997 and $511,233 in 1996.
The Company is obligated to provide a non-qualified retirement pension to its chief executive officer. Such obligation provides a monthly benefit of $7,100 and is payable for a period of fifteen years to the officer, or to his wife in the event of his death. The Company is accruing the present value of its obligation over the active term of employment of the officer. The Company is also accruing and funding deferred compensation contracts with two other officers based on 10% of annual compensation. Total expense under these three obligations was $152,216 in 1998, $149,340 in 1997 and $167,487 in 1996.
Note 8--Related Party Transactions
The Company engaged in the following related party transactions: Year Ended June 30, --------------------------------- 1998 1997 1996 ------- ------- -------
Was charged computer consulting services by an outside director of the Company; $56,369 $52,686 $42,586
Accrued interest income on an installment note receivable of $235,000 due from a limited partnership controlled by a stockholder of the Company and secured by a deed of trust on the Texas real estate. The note bears interest of 6.83% per annum collectible annually for three years. Thereafter the note shall be collected in (5) equal annual principal installments of $47,000 plus interest of 6.83% per annum commencing July 1, 1999 with the final amount due July 1, 2003. The partnership prepaid a principal payment of $40,000 on June 30, 1998; $16,050 $16,050 $16,050
GENERAL MAGNAPLATE CORPORATION AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8--Related Party Transactions (Continued) Year Ended June 30, --------------------------------- 1998 1997 1996 ------- ------- ------- Charged interest income on a mortgage note receivable of $550,000 from its chief executive officer on December 16, 1996. The note is being repaid in (34) equal monthly installments of $3,814 which includes interest of 6.16% per annum commencing February 1, 1997 with the final balloon payment of $512,124 due December 16, 1999. The receivable balance at June 30, 1998 was $505,721 and is secured by a real estate first mortgage. $32,707 $14,066 $ -0-
Note 9--Fair Value of Financial Instruments
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable, and Accrued Liabilities--The carrying amount approximates fair value because of the short maturity of these instruments.
Marketable Securities--The carrying amount approximates fair value because such securities are valued based on market quotes.
Notes Receivable - Related Parties--The carrying amount approximates fair value because of similar rates on issues offered to the Corporation under some or similar provisions.
Accrued Deferred Compensation and Long-Term Debt--The carrying amount approximates fair value because such liability is being valued based on current market values.
Note 10--Commitments and Contingencies
Litigation
In April, 1991, a claim was served on the Canadian subsidiary, General Magnaplate Canada, Ltd., by Dynasurf International, Inc. for $170,000 representing the unpaid contract liability for the net assets acquired by the Canadian subsidiary from the sellers, Carrigan Industries, Ltd. and Dynasurf International, Inc. on January 2, 1990. Further, a shareholder of Dynasurf International, Inc. also filed a claim for breach of oral contract of employment for $119,000. The Subsidiary filed a counterclaim for environmental and other costs incurred which resulted from the seller not resolving certain environmental issues warranted in the contract of purchase.
The Company reached an out of court agreement with the plaintiffs on September 9, 1996 wherein the plaintiffs were collectively paid the sum of $65,000 in full settlement of their claim. Such settlement did not have an adverse effect on the Company's financial statements.
GENERAL MAGNAPLATE CORPORATION AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10--Commitments and Contingencies (Continued)
Concentrations of Credit Risk
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of its cash, marketable securities and trade receivables.
The Company's cash and marketable securities are in high-quality securities placed with a wide array of institutions with high credit and investment ratings. This investment policy limits the Company's exposure to concentrations of credit risk.
The trade receivable balances, reflecting the Company's diversified sources of revenue, are dispersed across many different geographic areas. As a consequence, concentrations of credit risk are limited. The Company routinely assesses the financial strength of its customers and generally does not require collateral to support its credit sales.
Lease Commitment
The Company leases warehouse space in its New Jersey facility to a tenant under an operating lease expiring December 31, 1999. Minimum future rentals to be received on the lease as of June 30, 1998 are as follows: 1998-99 - - $118,443; and 1999-00 - $60,844.
Note 11--Advertising
The Company expenses the cost of advertising as incurred, except for direct-response advertising comprised of magazine ads and sales brochures which are capitalized and amortized over their expected period of future benefit.
Advertising materials of $-0- and $48,401 were reported as assets at June 30, 1998 and 1997 respectively. Advertising expense was reported as of $332,000, $335,000, and $334,000 for 1998, 1997, and 1996, respectively.
GENERAL MAGNAPLATE CORPORATION AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12--Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for the years ended June 30, 1998 and 1997 is as follows:
Year Ended June 30, 1997:
MAURIELLO, FRANKLIN & LoBRACE A Professional Corporation Certified Public Accountants
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY DATA
Our audits of the financial statements of General Magnaplate Corporation and Wholly-Owned Subsidiaries for the years ended June 30, 1998, 1997, and 1996 were intended primarily for the purpose of formulating an opinion on the basic financial statements taken as a whole. The supplementary data presented on page 18 has been taken primarily from accounting and other records of the company and is not, in our opinion, necessary for fair presentation of its financial position, results of operations, or cash flows. Such information has not been subjected to tests and other auditing procedures sufficient to enable us to express an opinion as to the fairness of all the details included therein and, accordingly, we do not express an opinion on the supplementary information.
/s/ Mauriello, Franklin & LoBrace ----------------------------- Mauriello, Franklin & LoBrace
August 10, 1998
GENERAL MAGNAPLATE CORPORATION AND WHOLLY-OWNED SUBSIDIARIES
Schedule VIII--Valuation and Qualifying Accounts
(A) Write-offs, net of recoveries
MAURIELLO, FRANKLIN & LoBRACE A Professional Corporation 45 Springfield Avenue, Springfield, NJ 07081 Certified Public Accountants (973) 379-5400, FAX (973) 379-3696
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K) of General Magnaplate Corporation and Wholly-Owned Subsidiaries of our report dated August 10, 1998, included in the 1997 Annual Report to Shareholders of General Magnaplate Corporation and Wholly-Owned Subsidiaries.
Our audits also included the financial statement schedule of General Magnaplate Corporation and Wholly-Owned Subsidiaries listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ MAURIELLO, FRANKLIN, & LoBRACE, P.C. ------------------------------------ MAURIELLO, FRANKLIN, & LoBRACE, P.C.
Springfield, New Jersey August 11, 1998
EXHIBIT 1
SUBSIDIARIES OF GENERAL MAGNAPLATE CORPORATION
General Magnaplate Texas, Inc. 801 Avenue G East Arlington, Texas 76011
General Magnaplate California 2707 Palma Drive Ventura, California 93003
General Magnaplate Wisconsin, Inc. 2924 Rapids Drive Racine, Wisconsin 53404
General Magnaplate Canada, Ltd. 72 Orchard Road Ajax, Ontario Canada L1S 6L1
GMIC, Corp. 1331 U.S. Route 1 Linden, New Jersey 07036
Theoretical Research Institute 1331 U.S. Route 1 Linden, New Jersey 07036
Tufram, Inc. 1331 U.S. Route 1 Linden, New Jersey 07036
Candida Realty Co., Inc. 1331 U.S. Route 1 Linden, New Jersey 07036
Candida Realty of Texas, Inc. 1331 U.S. Route 1 Linden, New Jersey 07036
Candida Realty California 1331 U.S. Route 1 Linden, New Jersey 07036
Candida Realty Wisconsin, Inc. 1331 U.S. Route 1 Linden, New Jersey 07036
EXHIBIT 2 [GRAPHIC COMPANY LOGO] magnaplate news
Dedicated to the Future Needs of Mankind Through Surface Enhancement - -----------------------------
1331 U.S. Route #1 Linden, New Jersey 07036 908.862.6200 FOR IMMEDIATE RELEASE Fax: 908.862.6110 Linden, New Jersey August 27, 1998 http://www.magnaplate.com e-mail:info@magnaplate.com NASDAQ - GMCC
GENERAL MAGNAPLATE REPORTS EARNINGS AND ANNOUNCES DIVIDEND YEAR-END 1998
General Magnaplate Corporation, the world's leader in surface enhancement coatings and treatments that increase performance and durability of all metal and/or plastic, for a wide spectrum of products, announces a dividend of $0.05 per share to stockholders of record September 25, 1998, and payable October 9, 1998. Expansion of all five US plants, plus the recent completion of a new four-times larger Canadian plant during this fiscal year, will enable processing of large composite mold tools on-site. Specific target industries are aircraft and transportation, where lighter materials impact fuel and payload profitability, for those modes of transportation. More details later.
Condensed Statement of Income - Years Ended June 30
1998 1997 ----------- -----------
Gross Revenue $11,720,331 $11,453,658 Income Before Taxes 2,232,410 2,533,707 Net Income 1,474,960 1,694,687 Net Income Per Share $0.30 $0.33 Average Shares Outstanding 4,913,635 5,089,124
Condensed Statement of Income - Three Months Ended June 30
1998 1997 ----------- -----------
Gross Revenue $ 2,969,741 $ 3,184,736 Income Before Taxes 606,672 909,158 Net Income 451,922 659,238 Net Income Per Share $0.09 $0.13 Average Shares Outstanding 4,912,080 4,932,024