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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
Commission File Number 1-7708
MARLTON TECHNOLOGIES, INC.
(Name of Registrant as specified in its charter)
New Jersey 22-1825970
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(State of incorporation) (IRS Employer Identification Number)
2828 Charter Road, Philadelphia, PA 19154
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 676-6900
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Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class: Name of each exchange:
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Common Stock, $.10 par value American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Exchange Act: NONE
Check whether the Registrant (1) 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 periods 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 ____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form and no disclosure will 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. ________
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 20, 2000 was $10,671,972. As of March 20, 2000, there were
7,326,765 shares of Common Stock, $.10 par value, of the Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The following materials contained in the
following documents are hereby incorporated by reference into this Form 10-K.
(i) Information from the Registrant's definitive proxy statement for the 2000
Annual Meeting of Shareholders, involving the election of directors, has been
incorporated by reference in Part III - Items 10, 11, 12 and 13.
Exhibit Index appears on Page 14
Page 1 of 153
PART I
ITEM 1. BUSINESS
BUSINESS DEVELOPMENT
Marlton Technologies, Inc. (the "Company") was incorporated as a New Jersey
corporation in 1966. The Company's business was related to computerized
electronic telecommunication systems until 1988 when it sold substantially all
of its operating assets.
On August 7, 1990, the Company acquired the business of Sparks Exhibits Corp.
("SEC") in Philadelphia, Pennsylvania. SEC custom designs and manufactures
sophisticated trade show exhibits, displays, architectural and museum interiors,
graphics and signage, provides trade show services, and designs and sells
portable/modular exhibits. During the fourth quarter of 1990, the Company
acquired the accounts and assets of the trade show exhibit division of a
competitor and also established a portable exhibits group. The Company
subsequently formed (i) Sparks Exhibits, Inc. ("Exhibits") during July 1991 in
the Atlanta, Georgia area, (ii) Sparks Exhibits, Ltd. ("Limited") during July
1992 in the San Diego, California area, and (iii) Sparks Exhibits Incorporated
("Incorporated") during December 1992 in the Orlando, Florida area, in each case
by acquiring the assets of trade show exhibit design and manufacturing
companies. During April 1996, the Company acquired the stock of Piper
Productions, Inc. ("Piper") in Orlando, Florida, and during December 1997 the
operations of Incorporated were combined into Piper. In addition to
Incorporated's trade show exhibit business, Piper produces business theater,
theme park attractions, themed interiors, theatrical scenery and special
effects. On December 31, 1997, the Company acquired DMS Store Fixtures Corp.
("DMS") in King of Prussia, Pennsylvania, which was subsequently relocated to
the Company's Philadelphia Pennsylvania location in March 2000. DMS supplies
custom made fixtures and displays to national retailers, department stores and
consumer products manufacturers. On April 1, 1998, the Company acquired a San
Francisco, California-based producer of exhibit properties for industrial and
corporate theater events and subsequently changed the name of the acquired
company to Sparks Productions Ltd. ("Productions"). In 1999, as part of its
nationwide branding and marketing strategy, the Company changed the business
names of all of its operating subsidiaries except DMS to Sparks Exhibits &
Environments (collectively "Sparks"). Currently, all of the Company's operating
revenues are derived from Sparks and DMS.
On February 1, 1998, the Company exchanged its 51% interest in a jointly-owned
subsidiary and paid cash to Abex Display Systems, Inc. ("Abex") for a 25%
interest in Abex, a portable/modular trade show exhibit manufacturer based in
Los Angeles, California. On August 1, 1998, the Company acquired a 20% equity
interest in Abex Europe, Ltd. ("AEL"), a United Kingdom corporation which
markets, assembles and distributes portable/modular exhibit products and
produces graphics. In October 1999, AEL went into receivership under UK law, and
a new UK corporation, Abex Display UK Ltd. ("Abex UK") was formed to purchase
AEL's assets and continue AEL's business. The Company owns 25% of Abex UK. In
February 1999, the Company acquired a 25% equity interest in an Amsterdam,
Netherlands area trade show exhibit design and manufacturing company, which
simultaneously changed its name to Sparks Europe, B.V. ("Sparks Europe").
The Company's investments in Abex, Abex UK and Sparks Europe are accounted for
using the equity method with the Company recognizing its pro-rata portion of
Abex, Abex UK and Sparks Europe operating results.
BUSINESS DESCRIPTION
Products and Services
The Company is engaged in the design, production and sale of exhibits and
environments for trade shows, museums, theme parks, themed interiors and
retailers. Clients include industry, government, entertainment and commercial
establishments. Graphics and exhibit designers develop and manage custom design
requirements from concept through final construction, employing sophisticated
computer-aided design software and hardware. In-house graphics facilities
provide a wide range of capabilities, and state of the art computerized design
and production of graphics. Electronics and audiovisual capabilities include
on-staff electronic specialists, consultants, and vendor relationships which
provide multi-media equipment and programs, interactive program production and
customized software and hardware applications. The Company provides full service
trade show exhibit services, including coordination, refurbishing, storage and
marketing literature distribution. Many clients are Fortune 1000 firms, who
2
typically contract for custom trade show exhibit projects costing in excess of
$200,000. Additionally, a majority of these clients store their trade show
exhibits at a Company facility, where ongoing refurbishing and coordination of
clients' trade show schedules are provided. The Company also represents domestic
clients who desire to exhibit at international trade shows. The Company designs
such exhibits, and through Sparks Europe or an international network of
independent exhibit manufacturers, arranges for the manufacture and delivery of
trade show exhibits to the desired trade show. The Company also designs and
manufactures trade show exhibits for a number of United States subsidiaries of
foreign corporations for use in domestic trade shows. The Company produces
sophisticated themed exhibits for educational and entertainment venues such as
museums, theme parks and theaters. Typically, the customer or its design firm
prepares the design for the Company to fabricate using carpentry, sculpture,
metal working and scenic artist skills. The Company is also engaged in the
business of supplying custom store fixtures, showcases and point of purchase
displays for retailers, having the expertise and capability to take a design
from concept to installation. Engineers and designers work with the customers to
develop the fixture design through computer aided design equipment. Engineering
drawings are then produced and provided to a third-party factory for production.
The Company utilizes various manufacturers with whom it has developed
long-standing business relationships for the production of its products. These
manufacturers work closely with an experienced project management team. Custom
store fixture opportunities includes outfitting new retail stores and remodeling
existing stores, including specialty apparel chains, "category killer" stores,
department stores, outlet stores, supermarkets, building supply stores and drug
stores. The Company made no significant disbursements during any of the last
three fiscal years for research and development activities.
Marketing and Distribution
Sales by the Company to domestic customers for both domestic and international
use are solicited through internal sales and marketing groups. Purchase of
sophisticated exhibits and environments usually involves a substantial dollar
commitment by the customer, and significant expertise is required to properly
meet the customer's needs. Sales personnel are required to be knowledgeable with
respect to the design and manufacturing of sophisticated exhibits and
environments and to comply with internal profitability requirements. Sales are
typically made directly to the end user of the product or service. In addition
to the sales personnel, senior officers devote substantial time and effort to
sales and marketing activities.
Manufacturing and Raw Materials
The Company designs, develops and manufactures custom trade show exhibits
utilizing an in-house staff of designers, carpenters, electricians and
warehousemen. Specialty items such as steel work and studio production are
subcontracted. The Company also subcontracts to Sparks Europe and others the
manufacture of exhibits for foreign trade shows. The Company coordinates
shipping, exhibit set-up and removal at the customer's trade show and, in most
cases, subsequently stores the exhibit for the customer. For scenic projects,
the Company employs scenic carpenters and metal workers to fabricate scenery
which is painted by skilled scenic artists. The Company utilizes a network of
manufacturers for the production of its store fixture and display products. Raw
materials for custom, scenic and portable exhibits, store fixtures and displays,
as well as subcontractors for specialty work, have historically been available
on commercially reasonable terms from various vendors. Portable exhibit
configurations, together with graphics and signage, are typically designed by
the Company for a client and are purchased from Abex or unrelated manufacturers
for resale. Graphics and signage may be produced internally or subcontracted.
Geographic distribution rights are typically granted by portable exhibit
manufacturers based on annual sales volume levels. The Company has obtained such
distribution rights from Abex, its primary source of portable exhibits.
Seasonality of Business
Trade shows traditionally occur regularly throughout the year with the exception
of the third quarter when business to business trade shows are historically at a
low point. Trade show activities in specific industries, such as health care and
telecommunications, tend to be a function of seasonal show schedules within
those industries. The custom store fixture business tends to be slower during
the fourth and first quarters due to retailers' desires not to install or plan
new fixtures during their traditionally busy year-end season. The Company seeks
new clients and sales people with client bases in different industries to reduce
the effects of the slower sales periods. Additionally, the Company offers other
products and services, such as sales of scenic and themed exhibits,
portable/modular exhibits, and permanent exhibits which tend to be less seasonal
in nature, and in certain cases, manufacturing can be spread over longer periods
of time.
3
Working Capital
The Company's working capital requirements are fulfilled by funds generated
through operations and revolving credit facilities. Working capital requirements
are generally not affected by project size requirements or accelerated delivery
for major trade show exhibit, scenic and themed exhibit customers due to general
policies of progress billing on larger jobs. However, custom store fixtures are
generally produced upon receipt of purchase orders from large retailers, but are
held in inventory and are not billed to the customer until delivery requisitions
are issued by the customer. The Company does not require continuous allotments
of raw materials from suppliers and does not generally provide extended payment
terms to customers.
Significant Customers
One customer accounted for 12% of consolidated net sales in 1999 and 13% of
accounts receivable at December 31, 1999. During 1998, a different customer
accounted for 16% of consolidated net sales. The loss of one or both of these
customers, or a significant reduction in one or both of these customers'
purchases, could have a material adverse effect on the Company's results of
operation. Although the Company has taken steps to diversify its customer base
during 1999, the Company expects its reliance on these two customers to continue
at least through 2000.
Backlog
Backlog of orders at December 31, 1999 and 1998 was approximately $30.8 million
and $27.0 million, respectively. Generally, backlog of orders are recognized as
sales during the subsequent six month period. The entire current backlog relates
to expected 2000 sales. The Company maintains a client base from which new
orders are continually generated, including refurbishing of existing trade show
exhibits stored in the Company's facilities. There are also a significant amount
of proposals outstanding with current and prospective clients.
Competition
The Company competes with other companies offering similar products and
providing similar services on the basis of price, quality, performance,
financial resources, and client-support services. The custom trade show exhibit,
scenic and themed exhibit, permanent exhibit, retail store fixture and display,
and portable exhibits sales markets include a large number of national and
regional companies, some of which have substantially greater sales and resources
than the Company. In addition to its Philadelphia, Atlanta, San Diego, San
Francisco and Orlando manufacturing facilities, the Company utilizes its
national and international affiliations and relationships to meet customers
needs in other geographic areas. Due to the lack of specific public information,
the Company's competitive position is difficult to ascertain.
Environmental Protection
The Company's compliance with federal, state and local provisions regulating
discharge of materials into the environment or otherwise relating to the
protection of the environment has not had, and is not expected to have, a
material effect upon its capital expenditures, earnings and competitive
position.
Employees
The total number of persons employed by the Company is approximately 375 of
which 370 are full-time employees. The Philadelphia, PA, operations have a
three-year labor contract expiring June 30, 2001 and a three year labor contract
expiring November 14, 2001, and the San Carlos, CA operations have a three year
labor contract expiring December 31, 2002.
4
ITEM 2. PROPERTIES
The Company currently leases five primary facilities as follows:
SQUARE
LOCATION FOOTAGE PURPOSE
-------- ------- -------
Philadelphia, PA 250,000 Office, showroom, warehouse & manufacturing
Austell, GA 81,000 Office, showroom, warehouse & manufacturing
El Cajon, CA 150,000 Office, showroom, warehouse & manufacturing
Orlando, FL 45,000 Office, warehouse & manufacturing
San Carlos, CA 42,000 Office, warehouse & manufacturing
--------
568,000
The Company's subsidiaries also have five sales offices of under 1,000 square
feet each. The Company's office, showroom, warehouse and manufacturing
facilities were all in good condition and adequate for 1999, based on normal
five-day operations, and are adequate for operations in 2000, including any
foreseeable internal growth. The Company does not anticipate significant
difficulty in acquiring additional space, if necessary.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is a defendant and counterclaimant in various
lawsuits that arise out of, and are incidental to, the conduct of its business.
The resolution of pending legal matters should not have a material effect upon
the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table shows the high and low sales prices of the Common Stock, par
value $.10 per share, of the Company on the American Stock Exchange:
1999 1998
---- ----
QUARTER HIGH LOW HIGH LOW
------- ---- --- ---- ---
1 5-1/8 3 7-5/8 4-3/4
2 5-1/4 3-5/8 7-5/16 6
3 4 2-1/16 6-5/8 2-3/4
4 3-3/16 1-1/2 5-1/2 3-5/8
No dividends were paid during the past two fiscal years. The Company currently
intends to employ all available funds in the business. Future dividend policy
will be determined in accordance with the financial requirements of the
business. However, the Company's bank loan agreement provides that the Company
may not pay dividends to its shareholders without the bank's prior consent.
Unless the bank's consent is obtained, this restriction will preclude the
Company from paying dividends.
As of March 20, 2000, there were 965 holders of record of the Company's Common
Stock.
In September 1999, 50,000 shares of Common Stock were sold to a manager of the
Company, at a price of $2.00 per share. In addition, during 1999, 3,575 shares
of Common Stock were issued to 3 employees at the price of $2.80 per share
pursuant to the exercise of stock options. There were 7,125 shares of Common
Stock awarded to eight managers of the Company during 1999. In February 1999,
70,160 shares were issued at a price of $ 3.25 per share to the 2 sellers of a
25% equity interest in Sparks Europe. No underwriter was employed in any of
these transactions. These sales were isolated transactions involving
sophisticated purchasers and employees, and were exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended, and were in conformity
with Rule 701 or Regulation D promulgated thereunder.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
For the year ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
TOTAL ASSETS $60,201,712 $62,022,260 $54,113,255 $22,190,615 $16,607,893
LONG-TERM OBLIGATIONS 11,157,613 11,744,495 12,243,312 457,440 991,894
OPERATIONS:
Net sales 94,583,824 91,134,034 48,715,828 38,315,600 27,671,763
Operating profit 4,435,696 5,314,926 2,273,976 1,345,863 739,023
Net income $1,722,167(1) $2,820,631 $2,003,316 $2,340,153(4) $1,252,814
BASIC NET INCOME PER
COMMON SHARE (2) $.24 $.40 $.42 $.52 $.32
DILUTED NET INCOME PER
COMMON SHARE (2) $.22(3) $.35(3) $.36(3) $.45(3) $.32(3)
CASH DIVIDENDS -0- -0- -0- -0- -0-
6
(1) Includes an impairment loss of $279,000 ($465,000 before income taxes) for
a write-down of the Company's investment in Abex Europe.
(2) Basic per common shares amounts are computed using the weighted average
number of common shares outstanding during the year. Diluted per common
share amounts are computed using the weighted average number of common
shares outstanding during the year and dilutive potential common shares.
Dilutive potential common shares consist of stock options and stock
warrants, calculated using the treasury stock method.
(3) Diluted net income per common share does not reflect elimination of
non-recurring items and the application of comparable income tax
provisions. See MD&A "Net Income" analysis.
(4) Includes a $708,000 gain from contractual amendments, net of income taxes.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
The Company's business is the custom design, production and sale of exhibits and
environments for trade shows, museums, theme parks, themed interiors and retail
stores for clients in industry, government, entertainment and commercial
establishments.
On August 7, 1990, the Company acquired the business of Sparks Exhibits Corp.
("Sparks") in Philadelphia, Pennsylvania. Sparks custom designs and manufactures
sophisticated trade show exhibits, displays, architectural and museum interiors,
graphics and signage, provides trade show services and designs and sells
portable exhibits. During the fourth quarter of 1990, the Company acquired the
accounts and assets of the trade exhibit division of a competitor and also
established a portable exhibits group. The Company subsequently formed (i)
Sparks Exhibits, Inc. ("Exhibits") during July 1991 in the Atlanta, Georgia
area, (ii) Sparks Exhibits, Ltd. ("Limited") during July 1992 in the San Diego,
California area, and (iii) Sparks Exhibits Incorporated ("Incorporated") during
December 1992 in the Orlando, Florida area, in each case by acquiring the assets
of trade show exhibit manufacturing companies.
During July 1993, the Company and Abex Display Systems, Inc. ("ADSI"), an
unaffiliated portable/modular trade show exhibit manufacturer based in Los
Angles, California, entered into an agreement to organize a new California
corporation, Expose Display System, Inc. ("EDSI"). The Company acquired 51% of
EDSI with ADSI acquiring the balance. EDSI granted to ADSI exclusive worldwide
distribution and marketing rights for Expose, a portable display product,
through December 2005. Effective February 1, 1998, the Company exchanged its 51%
majority interest in EDSI and paid approximately $180,000 in cash, for a 25%
interest in ADSI.
During April 1996, the Company acquired Piper Productions, Inc. ("Sparks
Florida") of Orlando, Florida which produces permanent displays, including
business theaters, theme park attractions, themed interiors, theatrical scenery
and special effects.
On December 31, 1997, the Company acquired DMS, which is engaged in the business
of supplying custom store fixtures, showcases and point of purchase displays for
retailers. DMS has expertise and capabilities to take a design from concept to
installation. DMS utilizes various unaffiliated manufacturers with whom it has
developed long-standing business relationships for the production of its
products. The retail fixture industry includes outfitting new retail stores and
remodeling existing stores, including specialty apparel chains, "category
killer" stores, department stores, outlet stores, supermarkets, building supply
stores and drug stores.
On April 1, 1998, the Company acquired Rusty Hinges, Inc. located in the San
Francisco, California area, which produces exhibit properties for industrial and
corporate theater events throughout the United States. The Company subsequently
changed the name of this business to Sparks Productions Ltd.
During February, 1999, the Company invested in a 25% interest in a
Netherlands-based organization focusing on exhibit fabrication, interior design,
event displays and graphics production, which subsequently changed its name to
Sparks Europe, B.V. ("Sparks Europe"). This investment should assist the Company
to expand its international presence.
Management's aggressive growth plan, since the August 1990 acquisition of Sparks
Exhibits Corp. ("Sparks"), has resulted in the dramatic expansion of the
Company's client base, the development of new businesses and areas of expertise
for expansion of its products and services, and the extension into major
geographic markets in the United States and internationally. Management believes
the acquisitions and the continuing development of new areas of expertise will
position the Company to increase its revenue base and move toward its goal of
becoming a leading exhibits and environments company through the continued
offering of expanded products and services to a larger customer network.
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RESULTS OF OPERATIONS
1999 AS COMPARED WITH 1998
SALES
(in thousands)
% INCREASE
REVENUE SOURCES 1999 1998 (DECREASE)
- --------------- ---- ---- ----------
Trade show exhibits $47,265 $41,777 13%
Permanent/scenic displays 47,319 48,957 (3)
EDSI --- 400 (100)
------- ------- -----
Total revenues $94,584 $91,134 4%
======= ======= =====
Total net sales increased $3.5 million, or 4%, in 1999 as compared with 1998,
led by higher sales of trade show exhibits, which grew $5.5 million, or 13%. The
increase in sales of trade show exhibits was principally attributable to a full
year of sales for significant new clients secured near the end of 1998,
resulting from the Company's continuing initiatives focused on client expansion.
Net sales of permanent/scenic displays, comprised primarily of the DMS business
acquired at the end of 1997 and the Sparks Florida ("permanent displays")
business acquired in 1996, decreased $1.6 million, or 3%. This decrease was the
net result of lower sales for DMS, partially offset by higher sales for
permanent displays. Lower sales for DMS were due in large part to a decrease in
purchases by a large client, and higher sales for permanent displays were the
result of securing new clients during 1999. There were no sales in 1999 for EDSI
as a result of an exchange of EDSI in connection with the acquisition of a
minority interest in ADSI as of February 1, 1998.
OPERATING PROFITS
Operating profits decreased $0.9 million, or 16.5%, to $4.4 million in 1999 from
$5.3 million in 1998. This decrease was principally attributable to lower
operating profits generated by the permanent displays business as well as to
lower sales for DMS. The permanent displays operating profit decrease resulted,
in large part, to bids on large jobs that did not provide adequate profit
margins. Management has taken steps to improve the bidding and production
control process and believes that a recurrence of significant jobs providing
inadequate profit margins in the future is unlikely. Selling expenses decreased
to 9.8% of net sales in 1999 from 10.6% in 1998, while administrative and
general expenses increased to 8.1% of net sales in 1999 from 7.3% in 1998. The
decrease in selling expenses was due in large part to lower variable expenses
incurred by DMS and to lower sales commission rates incurred for certain new
clients for the trade show exhibit business. The increase in administrative and
general expenses was principally attributable to higher depreciation related to
investments in computer systems and to improvements in the Company's facilities
in the western United States.
OTHER INCOME (EXPENSE)
Interest income decreased to $136,896 in 1999 from $240,645 in 1998 due to lower
average cash balances, which was largely the result of reductions in accounts
payable and other accrued expenses. Interest expense increased $122,509 in 1999
primarily due to short-term borrowings from the Company's revolving credit
facility necessary to meet working capital requirements. A loss of $45,406 was
incurred in 1999 from investments in affiliates as compared with income of
$14,464 in 1998. A write-down of $465,106 was incurred in 1999, related to a
write-down of the Company's investment in Abex Europe, which went into
receivership on October 15, 1999.
INCOME TAXES
The provision for income taxes, as a percentage of net sales, increased to 41%
in 1999 as compared with 38% in 1998. This increase was principally attributable
to non-deductible goodwill amortization.
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NET INCOME
Net income decreased to $1.7 million ($.22 per diluted share) in 1999 from $2.8
million ($.35 per diluted share) in 1998. The decrease was principally
attributable to lower operating profit generated by the permanent displays
business, lower sales for DMS, the write-down of investment in the Abex Europe
affiliate and the higher income tax expense.
Backlog
The Company's manufacturing backlog of orders was approximately $30.8 million as
of December 31, 1999 as compared with $27 million as of December 31, 1998.
1998 AS COMPARED WITH 1997
NET SALES
(in thousands)
% INCREASE
REVENUE SOURCES 1998 1997 (DECREASE)
- --------------- ---- ---- ----------
Trade show exhibits $41,777 $32,659 28%
Permanent/scenic displays 48,957 11,329 332
EDSI 400 4,728 (92)
------- ------- -----
Total revenues $91,134 $48,716 87%
======= ======= =====
Total net sales for 1998, as compared with 1997, increased by 87%, to $91.1
million from $48.7 million. Approximately 74% of the overall sales increase
during 1998 was due to sales generated by the December 31, 1997-acquired DMS
business, which is included as part of permanent/scenic displays revenues. Trade
show exhibits generated $9.1 of the overall $42.4 million increase in total
sales for 1998 as compared with 1997, reflecting the Company's continuing
program of client expansion. Permanent/scenic displays, comprising DMS,
museum/productions, permanent displays and the April 1998-acquired Sparks
Productions Ltd., experienced a $37.6 million increase in 1998 sales as compared
with 1997 revenues. Exclusive of the sales generated by the December 31,
1997-acquired DMS, total sales for permanent/scenic displays increased during
1998 over 1997 revenues by 155%. This significant increase during 1998 was
predominately due to expanding the scope of services in permanent display
projects and the sales from Sparks Productions Ltd. Sales generated by EDSI
amounted to $4.7 million during 1997 as compared with only $0.4 million during
1998 due to the exchange of EDSI in connection with the acquisition of a
minority interest in ADSI as of February 1, 1998 (see Note 6 to the consolidated
financial statements). Sales and the related costs of operations generated by
EDSI, formerly a consolidated 51% owned subsidiary of the Company, were recorded
through January 31, 1998. Subsequent to the previously described exchange with
ADSI, the Company recorded its pro-rata equity interest in ADSI's net profits
using the equity method of accounting. Accordingly, sales and related costs from
EDSI's operations are not reflected in the Company's consolidated statement of
operations subsequent to January 31, 1998.
OPERATING PROFITS
Operating profits more than doubled to $5.3 million during 1998 from
approximately $2.3 million during 1997. The increase in 1998 operating profits
occurred despite a 4.6% decrease in the gross profit margin, as a percentage of
sales, during 1998 as compared with 1997. This decrease is predominantly due to
lower gross profit margins on sales generated by the December 31, 1997-acquired
DMS. Due to the additional sales from DMS during 1998, a larger percentage of
1998 total revenues were generated by permanent/scenic displays. In addition to
the lower gross profit margins relative to DMS, the Company experienced a lower
gross profit margin on a specific museum project during 1998. This project was
bid at a lower gross profit margin due to its large size and the competitive
environment surrounding the project. In an effort to expand its opportunities in
permanent display projects, the Company made investments in specialized
production and installation techniques on these particular projects, which
negatively impacted overall gross profit margins. While permanent/scenic
displays caused lower overall gross profit margins, the additional sales they
generated significantly contributed to the absorption of fixed overhead,
selling, and general and administrative costs. Accordingly, the 4.6% lower gross
profit margin percentage was more than offset
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by 5.8% lower selling and administrative and general costs, as a percentage of
sales, during 1998 as compared with 1997 selling and administrative and general
costs.
OTHER INCOME/(EXPENSE)
Other expenses, net, increased $1.1 million during 1998 as compared with 1997
primarily due to interest expense attributable to term debt associated with the
December 31, 1997 acquisition of DMS and the Company's utilization of its credit
facility from a bank during 1998. Interest income during 1998 was less than 1997
interest income due to less cash being available for investment during 1998 as
compared with 1997. Operating cash requirements for the December 31,
1997-acquired DMS and the Company's acquisition of property and equipment,
particularly with respect to the Company's new management information system,
also negatively impacted cash available for investment during 1998.
INCOME TAXES
The provision for income taxes, as a percentage of income before taxes,
increased to approximately 38% during 1998 as compared with 24% during 1997. The
1997 rate reflects a benefit from the release of valuation allowances based upon
the Company's expected ultimate realization of benefits from its business tax
credit carryforwards.
NET INCOME
Net income increased to $2,820,631 ($.35 per diluted share) during 1998 from
$2,003,316 ($.36 per diluted share) during 1997. This increase is attributed to
the higher sales levels and related operating profits generated during 1998.
Additionally, the tax provision during 1998, as a percentage of income before
income taxes, increased to 38% from the 24% tax provision rate in 1997.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, the Company's cash balance decreased $3.8 million as a result of
several factors, the most significant of which were reductions in accounts
payable and accrued expenses, significant capital expenditures and an increase
in inventories. Accounts payable and accrued expenses were reduced by $4.3
million to improve relations with valued suppliers and sub-contractors. Capital
expenditures of $2.8 million were incurred to improve the Company's computer
systems and to upgrade several facilities. Inventories were increased by $2.2
million to improve customer service for DMS and as a result of higher work in
process inventories related to both new and existing trade show exhibit clients
contracted for delivery in the first quarter of 2000. These reductions in cash
were partially offset by depreciation and amortization of $2.6 million and net
income of $ 1.7 million.
The Company borrowed $13.0 million and repaid $11.4 million under its revolving
credit facility during 1999 to finance its working capital needs. There were
borrowings of $1.6 million outstanding under the revolving credit facility and
$0.8 million under a short-term construction loan as temporary financing for a
facility expansion at December 31, 1999. The balance of a term loan incurred in
connection with the DMS acquisition was reduced by $1.9 million to $10.6 million
at December 31, 1999, in accordance with the term loan agreement. The Company
was in compliance with its bank covenants as of December 31, 1999.
The Company's current ratio at December 31, 1999 improved slightly to 1.6:1 as
compared with 1.5:1 at December 31, 1998, and the total liabilities to net worth
ratio improved to 1.03:1 at December 31, 1999 from 1.24:1 at December 31, 1998.
SUBSEQUENT EVENT
On January 21, 2000, the Company restructured its bank debt with an amended
revolving credit facility, providing for borrowing capacity up to $30 million.
This new facility, which matures on January 21, 2005, was used to refinance the
term loan and is intended to finance capital expenditures, permitted
acquisitions and other working capital requirements as needed. The new facility
is collateralized by all of the Company's assets and bears interest at rates
based on the LIBOR, adjusted for applicable spreads ranging from 1.25% to 2.5%.
The Company is subject to an annual commitment fee of 1/4% on the average
unused portion of the revolving credit facility. This new facility includes
certain financial covenants requiring a minimum net worth and maintenance of
certain financial ratios, and
11
restricts the Company's ability to pay dividends. Loan origination fees totaling
approximately $540,000, comprised of $440,000 of cash payments and issuance of
37,210 shares of the Company's common stock, will be amortized over five years.
OUTLOOK
The Company expects continued sales growth from trade show exhibits and improved
sales from permanent/scenic displays during 2000. The investment in Sparks
Europe in February 1999 was made to expand the Company's international presence
throughout the European markets during 2000 and beyond. The lower gross profit
margins experienced in 1999 are expected to improve in 2000 as management has
taken steps to improve the management talent in the Sparks Florida permanent
displays business, and has invested in new management talent in its western
region facilities. Management believes that the trade show exhibit client base
of Fortune 1000 companies will continue to tightly manage their marketing
budgets, which may impact the Company's trade show exhibit profit margins. The
Company has upgraded several facilities and continues to pursue operating
efficiency improvements to mitigate the impact of margin pressure from its
client base.
The Company converted its management information system at the beginning of 1999
and incurred inefficiencies as a result of the transition. This upgrade of both
hardware and software is expected to better position the Company to manage the
business and to meet the changing environment of information requirements of its
clients and suppliers during 2000 and beyond.
Management plans ongoing investment in human resources, particularly for new
sales executives and support staff to create long term growth opportunities, and
believes that these investments combined with the new debt capacity, which may
be used for acquisitions, will provide future opportunities for continued growth
and business expansion.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which will require that all derivative
financial instruments be recognized as either assets or liabilities in the
balance sheet. SFAS No. 133 will be effective no later than for the Company's
first quarter of 2001. The adoption of SFAS No. 133 is not expected to have a
material impact on the Company's consolidated results of operation, financial
position or cash flows.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995,
there are certain important factors that could cause the Company's actual
results to differ materially from those included in such forward-looking
statements. When used in this report, the words "intends," "believes,"
"anticipates" and similar words are used to identify these forward looking
statements. Some of the important factors which could cause actual results to
differ materially from those projected include, but are not limited to: the
Company's ability to continue to identify and complete strategic acquisitions to
enter new markets and expand existing business; continued availability of
financing to provide additional sources of funding for future acquisitions;
capital expenditure requirements and foreign investments; the effects of
competition on products, pricing, and, growth and acceptance of new product
lines through the Company's sales and marketing programs; changes in material
prices from suppliers; uncertainties regarding accidents or litigation which may
arise in the ordinary course of business; and the effects of, and changes in the
economy, monetary and fiscal policies, laws and regulations, inflation and
monetary fluctuations as well as fluctuations in interest rates, both on a
national and international basis.
YEAR 2000 DATE CONVERSIONS
The Company completed a major project of converting its computer systems to year
2000 compliant software during 1999. The Company expended approximately $1.3
million in 1999 and $1.7 million during 1998 and 1997 in connection with this
project. There were no significant disruptions to business operations during the
first quarter of 2000 related to the Company's computer systems.
12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Fluctuations in interest and foreign currency exchange rates do not
significantly affect the Companys' financial position and results of operations.
The Company's revolving credit facility bears a floating rate of interest, based
on LIBOR rates, plus an applicable spread.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, together with the report of the Company's independent
accountants thereon, are presented under Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
13
PART III
Items 10, 11, 12 and 13 have been omitted from this report, in accordance with
General Instruction G (3), since the Company will file with the Commission a
definitive proxy statement, involving the election of directors, pursuant to
Regulation 14A within 120 days after the close of its fiscal year. Accordingly,
relevant information contained in such definitive proxy statement is
incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBIT
PAGE
----
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Report of Independent Accountants 18
Consolidated Statements of Net Income for the years ended December 31, 1999,
1998 and 1997 19
Consolidated Balance Sheets, December 31, 1999 and 1998 20
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997 21
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997 22
Notes to Consolidated Financial Statements 23
(2) Acquisition Agreement for DMS Store Fixtures (Incorporated by
reference to Company Proxy Statement dated November 7, 1997, filed
with the Commission)
(3)(i)(a) Restated Certificate of Incorporation of the Company (Incorporated by
reference to Exhibit 4(a) to the Company Registration Statement on
Form S-8, File No. 33-3647, filed with the Commission)
(3)(i)(b) Certificate of Amendment to the Restated Certificate of
Incorporation of the Company filed on June 2, 1987
(Incorporated by reference to Exhibit 3(a)(ii) to the Company
Annual Report on Form 10-K for the year ended December 31,
1987, filed with the Commission)
(3)(i)(c) Certificate of Amendment to the Restated Certificate of
Incorporation of the Company filed on January 14, 1988
(Incorporated by reference to Exhibit 3(a)(iii) to the Company
Annual Report on Form 10-K for the year ended December 31,
1988, filed with the Commission)
(3)(i)(d) Certificate of Amendment to the Restated Certificate of
Incorporation of the Company filed on May 8, 1989 (Incorporated
by reference to Exhibit 3(a)(iv) to the Company Annual Report
on Form 10-K for the year ended December 31, 1989, filed with
the Commission)
(3)(i)(e) Certificate of Amendment to the Restated Certificate of
Incorporation of the Company filed on December 26, 1997
(Incorporated by reference to Company Proxy Statement dated
November 7, 1997, filed with the Commission)
14
3(b) Amended and Restated By-laws of the Company (Incorporated by
reference to Exhibit 3(b) to the Company Annual Report on Form
10-K for the year ended December 31, 1990, filed with the
Commission)
10(a) Agreement to Amend the International Distribution and Technology
Agreement with Tsubasa System Company, Ltd. dated January 22,
1997 (Incorporated by reference to Exhibit 10(a) to the Company
Annual Report on Form 10-K for the year ended December 31, 1996,
filed with the Commission)
10(b) Amended Agreement of Employment, dated December 11, 1992,
between the Company and Robert B. Ginsburg (Incorporated by
reference to Exhibit 10(b) to the Company Annual Report of Form
10-K for the year ended December 31, 1992 filed with the
Commission).
10(c) Amended Agreement of Employment, dated December 11, 1992,
between the Company and Alan I. Goldberg (Incorporated by
reference to Exhibit 10(b) to the Company's Annual Report of
Form 10-K for the year ended December 31, 1992 filed with the
Commission)
10(d) Option Agreement dated November 23, 1992 with Robert B. Ginsburg
(Incorporated by reference to Exhibit 10(d) to the Company's
Annual Report of Form 10-K for the year ended December 31, 1992
filed with the Commission)
10(e) Option Agreement dated November 23, 1992 with Alan I. Goldberg
(Incorporated by reference to Exhibit 10(d) to the Company's
Annual Report of Form 10-K for the year ended December 31, 1992
filed with the Commission)
10(f) Lease for Premises located at 2828 Charter Road, Philadelphia,
PA dated May 14, 1999 36
10(g) Amendment to Lease 2828 Charter Road, Philadelphia, PA dated 83
February 25, 2000
10(h) Lease for Premises located at 8125 Troon Circle, Austell, GA
30001 (Incorporated by reference to Exhibit 10(i) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993 filed with the Commission)
10(i) Lease for Premises located at 4560 36th Street, Orlando, FL
32811 (Incorporated by reference to Exhibit 10(i) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993 filed with the Commission)
10(j) Option Agreement dated May 23, 1997 with Robert B. Ginsburg
(Incorporated by reference to Exhibit 10(p) to the Company's
Annual Report on Form 10K for the year ended December 31, 1997
filed with the Commission)
10(k) Option Agreement dated May 23, 1997 with Alan I. Goldberg
(Incorporated by reference to Exhibit 10(q) to the Company's
Annual Report on Form 10K for the year ended December 31, 1997
filed with the Commission)
10(l) Employment Agreement dated November 24, 1999 with Stephen P. 85
Rolf
10(m) Employment Agreement dated December 31, 1997 with Lawrence W.
Schan (Incorporated by reference to Exhibit 10(s) to the
Company's Annual Report on Form 10K for the year ended December
31, 1997 filed with the Commission)
10(n) Employment Agreement dated December 31, 1997 with Ira Ingerman
(Incorporated by reference to Exhibit 10(t) to the Company's
Annual Report on Form 10K for the year ended December 31, 1997
filed with the Commission)
15
10(o) Employment Agreement dated December 31, 1997 with Stanley
Ginsburg (Incorporated by reference to Exhibit 10(u) to the
Company's Annual Report on Form 10K for the year ended December
31, 1997 filed with the Commission)
10(p) Option Agreement dated January 27, 1998 with Robert B. Ginsburg
(Incorporated by reference to Exhibit 10(v) to the Company's
Annual Report on Form 10K for the year ended December 31, 1998
filed with the Commission)
10(q) Option Agreement dated January 27, 1998 with Alan I. Goldberg
(Incorporated by reference to Exhibit 10(w) to the Company's
Annual Report on Form 10K for the year ended December 31, 1998
filed with the Commission)
10(r) Letter Agreement dated January 2, 1998 to Amended Employment
Agreement with Robert B. Ginsburg (Incorporated by reference to
Exhibit 7(1) to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 filed with the Commission)
10(s) Letter Agreement dated January 2, 1998 to Amended Employment
Agreement with Alan I. Goldberg (Incorporated by reference to
Exhibit 7(2) to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 filed with the Commission)
10(t) Lease Agreement dated June 29, 1998 between Gillespie Field
Partners, LLC and Sparks Exhibits, Ltd. (Incorporated by
reference to Exhibit 7(2) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 filed with the
Commission)
10(u) Option Agreements with Directors (Incorporated by reference to
Company Proxy Statement dated April 30, 1999, filed with the
Commission)
10(v) Revolving Credit Facility, First Union National Bank 90
21 Subsidiaries of the Company 152
23 Consent of PricewaterhouseCoopers LLP 153
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the last quarter of
the period covered by this report on Form 10-K
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MARLTON TECHNOLOGIES, INC.
By: /s/ ROBERT B. GINSBURG
---------------------------
President
By: /s/ STEPHEN P. ROLF
---------------------------
Chief Financial Officer
Dated: March 30, 2000
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 Company and in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ FRED COHEN Chairman of the March 30, 2000
- ---------------------------- Board of Directors
(Fred Cohen)
/s/ ROBERT B. GINSBURG Director March 30, 2000
- ----------------------------
(Robert B. Ginsburg)
/s/ ALAN I. GOLDBERG Director March 30, 2000
- ----------------------------
(Alan I. Goldberg)
/s/ WILLIAM F. HAMILTON Director March 30, 2000
- ----------------------------
(William F. Hamilton)
/s/ JEFFREY HARROW Director March 30, 2000
- ----------------------------
(Jeffrey Harrow)
/s/ SEYMOUR HERNES Director March 30, 2000
- ----------------------------
(Seymour Hernes)
17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
and Board of Directors of
Marlton Technologies, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 14, present fairly, in all material
respects, the financial position of Marlton Technologies, Inc. and its
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 30, 2000
18
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
For the years ended December 31,
1999 1998 1997
---- ---- ----
Net sales $94,583,824 $91,134,034 $48,715,828
Cost of sales 73,242,070 69,458,547 34,876,590
------------ ------------ ------------
Gross profit 21,341,754 21,675,487 13,839,238
------------ ------------ ------------
Selling expenses 9,262,672 9,681,448 7,830,492
Administrative and general expenses 7,643,386 6,679,113 3,734,770
------------ ------------ ------------
16,906,058 16,360,561 11,565,262
------------ ------------ ------------
Operating profit 4,435,696 5,314,926 2,273,976
------------ ------------ ------------
Other income (expense):
Interest income 136,896 240,645 380,892
Interest expense (1,142,913) (1,020,404) (31,552)
Income (loss) from investment in affiliates, net (45,406) 14,464 --
Write-down of investment in affiliate (465,106) -- --
------------ ------------ ------------
(1,516,529) (765,295) 349,340
Income before income taxes 2,919,167 4,549,631 2,623,316
Provision for income taxes 1,197,000 1,729,000 620,000
------------ ------------ ------------
Net income $1,722,167 $2,820,631 $2,003,316
============ ============ ============
Net income per common share:
Basic $.24 $.40 $.42
============ ============ ============
Diluted $.22 $.35 $.36
============ ============ ============
See notes to consolidated financial statements.
19
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1999 1998
------ ---- ----
Current:
Cash and cash equivalents $835,884 $4,620,079
Accounts receivable, net of allowance
of $410,000 and $414,000, respectively 16,231,653 16,511,804
Inventory 11,655,114 9,466,161
Prepaid and other current assets 2,320,629 2,324,679
Deferred income taxes 341,000 740,000
------------ ------------
Total current assets 31,384,280 33,662,723
Investment in affiliates 2,057,496 2,010,427
Deferred income taxes -- 43,000
Property and equipment, net of accumulated depreciation 5,011,331 3,779,367
Rental assets, net of accumulated depreciation 1,369,661 1,369,009
Goodwill, net of accumulated amortization of $2,343,474
and $1,580,591, respectively 19,858,972 20,621,855
Other assets, net of accumulated amortization
of $1,267,609 and $1,131,958, respectively 519,972 535,879
------------ ------------
Total assets $60,201,712 $62,022,260
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $2,912,545 $1,950,790
Accounts payable 7,079,584 7,153,619
Accrued expenses and other 9,328,101 13,528,076
------------ ------------
Total current liabilities 19,320,230 22,632,485
------------ ------------
Long-term liabilities:
Long-term debt, net of current portion 10,448,113 10,926,995
Other long-term liabilities 550,500 817,500
Deferred income taxes 159,000 --
------------ ------------
Total long-term liabilities 11,157,613 11,744,495
------------ ------------
Total liabilities 30,477,843 34,376,980
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par - shares authorized
10,000,000; no shares issued or outstanding
Common stock, $.10 par - shares authorized
50,000,000; 7,331,765 and 7,200,905 issued, respectively 733,177 720,090
Additional paid-in capital 30,352,744 30,009,409
Accumulated deficit (1,250,375) (2,972,542)
------------ ------------
29,835,546 27,756,957
Less cost of 5,000 treasury shares (111,677) (111,677)
------------ ------------
Total stockholders' equity 29,723,869 27,645,280
------------ ------------
Total liabilities and stockholders' equity $60,201,712 $62,022,260
============ ============
See notes to consolidated financial statements.
20
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
For the years ended December 31, 1999, 1998, and 1997
COMMON STOCK Additional Total
---------------------- Paid-in Accumulated Treasury Stockholders'
Shares Amount Capital Deficit Stock Equity
------ ------ ------- ------- ----- ------
Balance, December 31, 1996 4,534,592 $453,459 $21,030,881 ($7,796,489) ($111,677) $13,576,174
Issuance of shares and warrants
for DMS acquisition 2,000,000 200,000 7,483,750 -- -- 7,683,750
Issuance of shares in exchange
for convertible notes 206,456 20,646 263,231 -- -- 283,877
Issuance of shares under
compensation arrangements 148,396 14,839 391,548 -- -- 406,387
Net income -- -- -- 2,003,316 -- 2,003,316
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 6,889,444 688,944 29,169,410 (5,793,173) (111,677) 23,953,504
Issuance of shares for
Steel acquisition 42,391 4,239 245,104 -- -- 249,343
Issuance of shares under
compensation arrangements 269,070 26,907 594,895 -- -- 621,802
Net income -- -- -- 2,820,631 -- 2,820,631
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 7,200,905 720,090 30,009,409 (2,972,542) (111,677) 27,645,280
Issuance of shares for Sparks
Europe acquisition 70,160 7,017 221,004 -- -- 228,021
Issuance of shares under
compensation arrangements 60,700 6,070 122,331 -- -- 128,401
Net income -- -- -- 1,722,167 -- 1,722,167
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 7,331,765 $733,177 $30,352,744 ($1,250,375) ($111,677) $29,723,869
=========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements.
21
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31,
1999 1998 1997
---- ---- ----
Cash flows provided from operating activities:
Net income $ 1,722,167 $ 2,820,631 $ 2,003,316
Adjustments to reconcile net income to cash provided by
operating activities:
Equity in loss of affiliates 45,406 (14,464) -
Depreciation and amortization 2,596,794 2,036,281 1,569,287
Deferred taxes 601,000 798,870 396,000
Write down of investment in affiliate 465,106 - -
Change in assets and liabilities, net of effects of acquisitions:
(Increase) decrease in accounts receivable, net 280,151 (6,868,967) (2,681,217)
(Increase) in inventory (2,188,953) (47,272) (3,215,232)
(Increase) decrease in prepaid and other assets (15,719) (1,092,127) (326,714)
Increase (decrease) in accounts payable, accrued
expenses and other (4,274,010) 4,461,672 7,119,839
Other operating items, net 18,392 247,400 78,845
---------------- --------------- -----------------
Net cash provided by (used in) operating activities (749,666) 2,342,024 4,944,124
---------------- --------------- -----------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (366,976) (681,293) (12,970,740)
Cash paid for investment in affiliates (414,451) (679,646) -
Capital expenditures (2,845,986) (2,758,095) (1,306,630)
Disposal of capital assets - - 46,767
Other - (57,177) -
---------------- --------------- -----------------
Net cash used for investing activities (3,627,413) (4,176,211) (14,230,603)
---------------- --------------- -----------------
Cash flows from financing activities:
Debt proceeds, net 2,422,685 51,885 13,500,000
Principal payments on long-term debt (1,856,608) (1,096,049) (678,052)
Payments against notes payable, sellers (83,203) (20,000) (20,000)
Proceeds from exercised stock options and stock purchases 110,010 403,330 299,621
---------------- --------------- -----------------
Net cash provided by (used in) financing activities 592,884 (660,834) 13,101,569
---------------- --------------- -----------------
Increase (decrease) in cash and cash equivalents (3,784,195) (2,495,021) 3,815,090
Cash and cash equivalents - beginning of year 4,620,079 7,115,100 3,300,010
---------------- --------------- -----------------
Cash and cash equivalents - end of year $ 835,884 $ 4,620,079 $ 7,115,100
================ ============== ==============
See notes to consolidated financial statements.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Marlton
Technologies, Inc., its wholly-owned subsidiaries and the effects of minority
investments in non-consolidated businesses (the "Company"). Investments in
affiliates, representing the Company's 20% or more but less than 50%
investments, are accounted for using the equity method. All inter-company
accounts and transactions have been eliminated.
Activity included in the consolidated statements of operations consists
primarily of the design, manufacture, sale and servicing of sophisticated custom
and portable/modular trade show exhibits and the manufacturing of museum
interiors, themed interiors, theme park attractions, staging, and custom store
fixture and point of purchase displays.
The Company operates in one segment.
CASH EQUIVALENTS
The Company considers all investments with an initial maturity of three months
or less at the time of their purchase to be cash equivalents. Temporary cash
investments comprise principally short-term government funds. At various time
throughout the year the Company may maintain cash balances in excess of FDIC
limits.
INVENTORY
Inventories are stated at the lower of cost (first-in, first-out) or market and
include materials, labor and manufacturing overhead costs.
LONG-LIVED ASSETS
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the respective assets,
ranging primarily from 3 to 10 years. Assets and accumulated depreciation
accounts are reduced for the sale or other disposition of property, and the
resulting gain or loss is included in income. Rental assets, which include
manufactured and purchased exhibit components, are stated at cost. Depreciation
is recorded on a usage basis, primarily over 3 years.
The excess of cost over the fair value of net assets acquired (goodwill) is
amortized on a straight-line basis over periods ranging from 5 to 30 years.
Customer lists, which are recorded at cost, are amortized on a straight-line
basis over their estimated useful lives of 5 to 15 years and are included as
components of other assets. Also included in other assets are debt issue costs
and deposits relating to certain facility leases.
The Company's policy is to record an impairment loss against long-lived assets,
including property and equipment, goodwill and other intangibles, in the period
when it is determined that the carrying amount of such assets may not be
recoverable. This determination includes evaluation of factors such as current
market value, future asset utilization, business climate and future undiscounted
cash flows expected to result from the use of the net assets.
REVENUE RECOGNITION
Revenues on trade show exhibit sales, themed interiors, sets and custom store
fixtures and point of purchase displays are recognized using the completed
contract method. Revenues on permanent exhibit installations which are generally
six months or longer in duration, are recognized on the percentage of completion
method. Progress billings are generally made throughout the production process.
Progress billings which are unpaid at the balance sheet date are not recognized
in the financial statements as accounts receivable. Progress billings which have
been collected on or before the balance sheet date are classified as customer
deposits and are included in accrued expenses and other.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based upon the future
tax consequences of events that have been included in the financial statements
or tax returns. Deferred tax assets and liabilities are calculated based on the
difference between the financial and tax bases of assets and liabilities using
the currently enacted tax rates in effect during the years in which the
differences are expected to reverse.
23
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 the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results may differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company places its cash and temporary cash investments with high
credit quality institutions. The Company's accounts receivable are primarily
with customers throughout the United States. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires
progress payments which mitigate its loss exposure.
Substantially all of the Company's net sales and long-lived assets reside within
the United States. One customer accounted for 12% of consolidated net sales in
1999 and 13% of accounts receivable at December 31, 1999. During 1998, a
different customer accounted for 16% of consolidated net sales. The loss of one
or both of these customers, or a significant reduction in one or both of these
customers' purchases, could have a material adverse effect on the Company's
results of operation. Although the Company has taken steps to diversify its
customer base during 1999, the Company expects this condition to continue at
least through 2000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist of cash and cash equivalents and long-term debt.
The recorded values of cash and cash equivalents approximate their fair value
due to the short maturity of these instruments. The fair value of long-term debt
is estimated based on current interest rates offered to the Company for similar
remaining maturities. The recorded value of these financial instruments
approximate their fair value at December 31, 1999 and 1998.
PER SHARE DATA
Basic net income per common share is calculated using the average shares of
common stock outstanding, while diluted net income per common share reflects the
potential dilution that could occur if stock options were exercised.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted the provisions of SFAS 130,
"Reporting Comprehensive Income," which establishes a standard for reporting and
display of comprehensive income and its components in the financial statements.
No items of other comprehensive income existed during December 31, 1999, 1998 or
1997.
2. ACQUISITIONS
SPARKS PRODUCTIONS LTD.
On April 1, 1998, the Company acquired 100% of the stock of Rusty Hinges, Inc.
d/b/a Steele Productions ("Steele") located in the San Francisco, California
area. Steele produces exhibit properties for industrial and corporate theater
events throughout the United States. Subsequent to the acquisition, the Company
changed the name to Sparks Productions Ltd.
The transaction included a cash payment of approximately $395,000, a five year
note approximating $197,000 payable in annual installments bearing interest at
7.25% per annum, and 42,391 shares of the Company's common stock valued at
24
approximately $250,000. The excess cost of the acquisition, including related
costs of the transaction, over the net assets acquired of approximately $190,000
is being amortized on a straight-line basis over 10 years.
DMS STORES FIXTURES LLC
On December 31, 1997, the Company acquired the assets and liabilities of DMS
Store Fixtures, L.P. ("DMS"), a supplier of custom made store fixtures and
displays to national retailers, department stores and consumer product
manufacturers. Total consideration paid was $14.5 million in cash, $7.5 million
in the Company's common stock, and additional accrued consideration of $1.3
million to be paid in annual installment of $270,000 payable annually through
2002. The Company incurred fees of approximately $875,000 as part of the
acquisition, including approximately $214,000 for the value of 162,500 warrants
for the Company's common stock, issued to the Company's financial advisor and
lending institution. The value of the warrants issued to the lending
institution, approximating $82,000, is included as a component of other assets,
and is being amortized on a straight line basis over five years. The excess
cost, including related costs of the transaction over the net assets acquired,
of approximately $18.3 million, is being amortized on a straight-line basis over
30 years.
The following table summarizes the unaudited consolidated pro forma information
assuming the DMS acquisition had occurred at the beginning of 1997. The pro
forma effects of the Steele acquisition are not material and, accordingly, have
been excluded from the pro forma presentation.
1997
----
Net sales $79,796,000
Operating income 4,059,000
Net income $ 2,816,000
Weighted average of common shares:
Basic 6,759,000
Diluted 7,634,000
Net income per common share:
Basic $.42
Diluted $.37
Pro forma net income presented for 1997 includes a pre-tax charge of $792,000
against operating income for the value of stock compensation paid to certain DMS
employees. Exclusive of the after-tax effect of this non-recurring item during
1997, pro forma net income for the respective period was $3,418,000 ($.45 per
diluted common share).
The pro forma consolidated results of operations include adjustments to give
effect to amortization of goodwill, interest expense on acquisition debt and
certain other adjustments, together with related income tax effects. The
unaudited pro forma information is not necessarily indicative of the results of
operations that would have occurred had the purchase been made at the beginning
of the period presented or the future results of the combined operations.
25
3. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
per common share (in thousands except per share data):
1999 1998 1997
---- ---- ----
Net income $1,722 $2,821 $2,003
====== ====== ======
Weighted average common
shares outstanding used to compute
basic net income per common share 7,280 7,139 4,765
Additional common shares to be issued
assuming exercised of stock options,
net of shares assumed reacquired 511 1,001 875
Total shares used to compute diluted
net income per common share 7,791 8,140 5,640
====== ====== ======
Basic net income per share $.24 $.40 $.42
====== ====== ======
Diluted net income per share $.22 $.35 $.36
====== ====== ======
Options and warrants to purchase 655,000, 308,000 and 190,000 shares of common
stock at prices ranging from $3.38 per share to $7.00 per share were outstanding
at December 31, 1999, 1998 and 1997, respectively, but were not included in the
computation of diluted income per common share because the options' and
warrants' exercise price was greater than the average market price of the common
shares.
4. STATEMENTS OF CASH FLOWS INFORMATION
Cash paid for interest in 1999, 1998 and 1997 amounted to $1,001,000, $770,000
and $28,000, respectively.
Cash paid for income taxes in 1999, 1998 and 1997 amounted to $1,020,000,
$735,925, and $61,000, respectively.
Cash paid for the December 31, 1997 acquisition of DMS was calculated as follow:
Current assets $ 5,410,816
Property and equipment 160,642
Goodwill and other intangibles 16,990,432
Liabilities assumed or created (1,907,400)
Common stock issued (7,683,750)
----------
Cash paid, net of cash acquired $12,970,740
===========
During 1999, the following non-cash transactions took place:
* On February 19, 1999 the Company issued 70,160 shares of its common
stock having a market value of $3.25 per share in connection with a
25% investment in Sparks Europe (See Note 6 of the consolidated
financial statements).
* The Company issued 57,125 shares of its common stock to certain
employees for a stock sale and awards.
During 1998, the following non-cash transactions took place:
* The Company issued 42,391 shares of its common stock and a five year
note amounting to $197,307 bearing interest at 6% per annum, payable
in five installments commencing April 1, 1999 in connection with the
acquisition of Steele.
26
* The Company recorded approximately $1,090,000 of additional accrued
consideration in connection with the acquisition of DMS.
* The Company issued 29,270 shares of its common stock to certain
employees and the Company's 401(k) plan for shares, stock awards and
defined contributions under the Company's employment benefit plan.
* In addition to cash of $179,646, the Company transferred its 51%
majority interest in EDSI, with a book value of approximately
$1,330,000, in exchange for a 25% minority interest in ADSI. (See Note
6 to the consolidated financial statements)
During 1997, the following non-cash investing and financing transactions took
place:
* The Company issued 2,250,000 shares of its common stock and 162,500
warrants in connection with the acquisition of DMS.
* The Company issued 27,166 of its common stock to certain directors,
employees and the Company's 401(k) plan for director fees, stock
awards and defined contributions under the Company's employment
benefit plan.
* The Company exchanged three, two-year convertible notes to the sellers
of Sparks amounting to $283,877 for 206,456 shares of the Company's
common stock.
5. INVENTORY
Inventories at December 31 consist of the following:
1999 1998
---- ----
Raw materials $ 481,882 $ 404,961
Work in process 7,612,068 6,330,634
Finished goods 3,561,164 2,730,566
--------- ---------
$11,655,114 $9,466,161
=========== ==========
6. INVESTMENT IN AFFILIATES
On February 19, 1999, the Company paid $258,451 and issued 70,160 shares of its
common stock having a market value of $3.25 per share for a 25% minority
interest in Hans Uljee Explotatie en Beheer B.V. ("Uljee"), a Netherlands-based
organization focusing on exhibit fabrication, interior design, event displays
and graphics production. The excess cost over the 25% equity acquired was
$362,000 which is being amortized on a straight-line basis over 10 years.
Subsequent to the Company's 25% investment, Uljee changed its name to Sparks
Europe, B.V. ("Sparks Europe"). Should Sparks Europe attain defined cumulative
net income levels the Company will be required to pay an additional amount in
Eurodollars and/or its common stock, at the Company's option. During 1999,
income from investments in affiliates comprise the Company's 25% interest in
Sparks Europe's operating results from February 19, 1999 through December 31,
1999.
On February 1, 1998, the Company exchanged its 51% majority interest in Expose
Display Systems, Inc. ("EDSI") and paid approximately $180,000 in cash for a 25%
equity interest in Abex Display Systems Inc. ("ADSI"), a portable/modular trade
show exhibit manufacturer in Los Angeles, California. On August 1, 1998, the
Company paid $500,000 in cash for a 20% interest in Abex Europe, Ltd. ("Abex
Europe"), a newly-formed United Kingdom corporation, headquartered in London,
organized to market, assemble and distribute portable/modular exhibit products
and graphics throughout the United Kingdom and Europe. In October 1999, Abex
Europe went into receivership under UK law, and a new UK corporation, Abex
Display UK Ltd. ("Abex UK") was formed to purchase Abex Europe's assets and
continue Abex Europe's business. During the third quarter of 1999, the Company
recognized an impairment loss of approximately $465,000 related to its
investment in Abex Europe. The Company made an additional investment of $156,000
in the fourth quarter of 1999 to acquire a 25% ownership in Abex UK.
27
The table below contains summarized unaudited 1999 financial information with
respect to the Sparks Europe and ADSI unconsolidated affiliates.
CONDENSED STATEMENT OF NET INCOME:
(in thousands)
Net sale $20,973
Gross profit 6,585
Net income 122
CONDENSED BALANCE SHEETS:
Current assets $6,547
Non-current assets 5,800
-------
$12,347
=======
Current liabilities $4,712
Non-current liabilities 4,816
Shareholder's equity 2,819
-------
$12,347
=======
7. PROPERTY AND EQUIPMENT
1999 1998
---- ----
Property and equipment at December 31
consist of the following:
Manufacturing equipment and vehicles $ 1,733,765 $ 1,467,955
Office equipment and data processing 5,468,488 4,170,862
Leasehold improvements 2,507,263 1,540,231
Showroom exhibits and other 616,602 596,120
----------- ----------
$10,326,118 $7,775,168
Less accumulated depreciation and amortization 5,314,787 3,995,801
----------- ----------
$ 5,011,331 $3,779,367
=========== ==========
Rental assets at December 31
consist of the following:
Rental assets $ 3,312,149 $3,030,029
Less accumulated depreciation 1,942,488 1,661,020
----------- ----------
$ 1,369,661 $1,369,009
=========== ==========
During 1997, the Company began a multi-year project to install a computer system
to support its information processing and access needs. Direct internal and
external costs, subsequent to the preliminary stage of this project, are being
capitalized as property and equipment. Capitalized costs will be amortized over
the estimated useful lives of the related assets, ranging from three to five
years, beginning when each site installation or module is complete and ready for
its intended use. Depreciation and amortization of property and equipment,
including software, was $1,613,000, $1,219,000 and $1,339,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
8. INTANGIBLE ASSETS
Amortization expense related to goodwill and other intangible assets was
approximately $984,000, $817,000 and $230,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
28
9. ACCRUED EXPENSES AND OTHER
Accrued expenses and other at December 31, consist of the following:
1999 1998
---- ----
Customer deposits $5,289,182 $ 6,677,913
Accrued compensation 1,902,719 2,893,119
Accrued payroll, sales and business taxes 281,630 840,062
Accrued insurance costs 147,239 800,135
Accrued contractual costs 220,547 75,000
Accrued interest 49,240 250,076
Other 1,437,544 1,991,771
---------- -----------
$9,328,101 $13,528,076
========== ===========
10. DEBT OBLIGATIONS
The Company, in connection with the December 31, 1997 acquisition of DMS,
entered into a $13.5 million five-year term loan and a $6.5 million five-year
revolving credit facility with a lending institution, both collateralized by all
of the Company's assets. The availability on the revolving credit facility was
increased in 1999 to $9.0 million. Borrowings under the term loan are fixed at
6.15% per annum plus an applicable spread. The revolving credit facility bears
interest at rates equal to adjusted LIBOR plus applicable spreads ranging from
75 to 100 basis points. The applicable spreads are dependent upon the Company's
debt to capitalization ratio, measured on a quarterly basis. The interest rates
charged during 1999 were 7.15% for the term loan and a range of 5.94% to 6.88%
for the revolving credit facility. A final term loan payment is due during 2002
provided the Company has not fully repaid the term loan due to
contractually-required prepayments equal to 50% of its defined excess cash flow.
Both the term loan and revolving credit facility include among other things,
certain financial covenants requiring the maintenance of certain minimum
financial ratios and restricts the Company's ability to pay dividends. The
outstanding balance under the revolving credit facility at December 31, 1999 was
$1,627,224. No amounts under this credit facility were outstanding as of
December 31, 1998. The Company is subject to an annual commitment fee
of 25 basis points on the average annual unused portion of the revolving credit
facility.
The Company obtained a $1.0 million credit facility in September 1999 to fund
the construction of an office expansion. (See Note 11 to the consolidated
financial statements). The interest rate on this credit facility was LIBOR plus
200 basis points and was repaid in February 2000.
29
The Company's debt obligations at December 31, consist of the following:
1999 1998
---- ----
Term loan payable, interest payable quarterly at
adjusted LIBOR plus spreads ranging from 75 to 100
basis points, principal in equal quarterly
payments from April 1, 2000 based on minimum
annual installments of $2.025 million,
$3.0375 million and a final payment of $5.56875 million $10,631,250 $12,487,500
Revolving credit facility 1,627,224 ---
Construction loan 795,461 ---
Seller note payable, interest payable
annually at 6%, principal payable in
annual installments of $20,000 through April, 2001 40,000 60,000
Seller note payable, interest payable
annually at 7.25%, principal payable on
April 1, 1999 totaling $63,203 and four
equal annual installments of $33,526 thereafter 134,104 197,307
Other 132,619 132,978
----------- -----------
13,360,658 12,877,785
Less current portion 2,912,545 1,950,790
----------- -----------
$10,448,113 $10,926,995
=========== ===========
Aggregate long-term debt maturities for the next five years are as follows:
YEARS ENDED DECEMBER 31, AMOUNT
------------------------ ------
2000 $ 2,912,545
2001 3,185,087
2002 7,229,500
2003 33,526
2004 -0-
-----------
$13,360,658
===========
11. RELATED PARTY TRANSACTIONS
The Company leases two facilities from partnerships controlled by two
shareholders of the Company. One lease, which expires on May 14, 2019, requires
minimum annual rent of $771,000 for the first 10 years, and the Company is
responsible for taxes, insurance and other operating expenses. This annual rent
is comparable to the amount charged by the previous lessor. There were advances
of $826,000 made to one of the partnerships at December 31, 1999 included in
prepaid and other current assets made in connection with a construction loan for
a facility expansion. These advances were repaid in February 2000.
The second lease for a separate facility expires on April 1, 2000. The previous
expiration date for this lease was May 1, 2001, which was changed, without
penalty, to April 1, 2000 as a result of management's decision to relocate and
consolidate its DMS operation. The annual rent for this facility is $180,000,
and the Company is responsible for taxes, insurance and other operating
expenses.
30
In connection with the DMS acquisition, employment agreements were made with two
shareholders of the Company, which provide for guaranteed minimum payments of
approximately $270,000 included in other accrued liabilities and $550,500 in
other long-term liabilities.
12. COMMITMENTS AND CONTINGENCIES
The Company operates in leased office and warehouse facilities. Lease terms
range from monthly commitments up to 240 months with options to renew at varying
times. Certain lease agreements require the Company to pay supplemental costs of
utilities, taxes, insurance and maintenance.
As of December 31, 1999, future minimum lease commitments under non-cancelable
operating leases are as follows:
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- ------
2000 $ 2,520,000
2001 2,016,000
2002 1,973,000
2003 1,976,000
2004 1,975,000
2005 and thereafter 12,832,000
-----------
Total minimum lease
commitments $23,292,000
===========
Rental expense, exclusive of supplemental costs, was approximately $2,564,000,
$1,840,000 and $1,405,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
The Company is engaged in legal proceedings in the normal course of business.
The Company believes that any unfavorable outcome from these suits not covered
by insurance would not have a material adverse effect on the financial
statements of the Company.
13 WARRANTS AND STOCK OPTIONS
WARRANTS
On October 12, 1999, the Company issued warrants to purchase 100,000 shares of
common stock at an exercise price of $2.50 per share to the Company's financial
adviser in connection with a debt restructuring project. These warrants are
exercisable on or before October 12, 2004.
In December 1997, the Company issued warrants to purchase 100,000 and 62,500
shares of common stock at an exercise price of $6.19 per share to another
financial advisor and a lending institution, respectively, as part of the DMS
acquisition. These warrants are exercisable on or before December 31, 2001.
STOCK OPTIONS
The Company has qualified and nonqualified stock option plans.
In August 1990, the Company adopted the 1990 Incentive Plan which provides for
the granting of Incentive Stock Options ("ISO") and a 1990 Nonstatutory Option
Plan which provides for the grantings of Nonstatutory options ("NSO")
(collectively, "the 1990 Plans"). Under the 1990 Plans, 1,450,000 shares of
Common Stock are authorized for issuance under options that may be granted to
employees. Options are exercisable at a price not less than the market value of
the shares at the date of grant in the case of ISO's, and 85% of the market
value of the shares in the case of NSO's.
In April 1984, the Company adopted the 1984 Incentive Stock Option Plan ("1984
Plan"). The plan provides for the granting of Incentive Stock Options to key
salaried employees to purchase a maximum of 100,000 common shares at prices not
less than the market value of the shares on the date the options are granted.
The Company maintains a Nonqualified Stock Option Plan ("NSOP") which provides
for the granting of options primarily to employees, directors and others to
purchase, for a period of five years, a maximum of 65,900 common shares at
prices and
31
terms determined by a committee appointed by the Board of Directors. Options are
granted at a price not less than 85% of the market value of the shares at the
date of the grant.
The Directors' and Consultants' Stock Option Plan provides for the granting of
options to purchase up to 73,600 common shares to directors and consultants who
are neither principal stockholders, nor receive salary compensation. Prices are
determined as in the Nonqualified Stock Option Plan.
The 1992 Director Stock Plan ("1992 Plan) was amended in June 1998 to eliminate
non-discretionary annual stock awards, to provide stock awards or options as
determined by the Board and to increase the authorized shares to a total of
250,000.
The following is a summary of option and warrant transactions and exercise
prices:
WEIGHTED
SHARES PRICE PER SHARE AVERAGE
------ --------------- -------
Outstanding at December 31, 1996 1,481,122 $1.60 to $2.88 $2.08
=========
Granted 172,419 $3.75 to $7.00 $4.02
Expired (98,427) $2.13 to $3.00 $2.96
Exercised (121,230) $1.60 to $2.60 $1.89
----------
Outstanding at December 31, 1997 1,433,884 $1.60 to $7.00 $2.27
=========
Granted 475,828 $2.08 to $6.88 $5.47
Expired (13,700) $2.60 to $6.00 $4.15
Exercised (239,800) $1.60 to $4.00 $1.98
---------
Outstanding at December 31, 1998 1,656,212 $1.60 to $7.00 $3.10
=========
Granted 195,575 $2.00 to $4.13 $2.77
Expired (156,990) $2.00 to $6.00 $3.92
Exercised (3,575) $2.80 to $2.80 $2.80
---------
Outstanding at December 31, 1999 1,691,222 $1.60 to $7.00 $3.10
=========
32
The following table summarized information concerning outstanding and
exercisable options and warrants as of December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED AVERAGE
NUMBER OF NUMBER OF
RANGE OF OPTIONS REMAINING OPTIONS WEIGHTED
EXERCISE AND LIFE EXERCISE AND AVERAGE
PRICES AWARDS (YEARS) PRICE AWARDS EXERCISE PRICE
------ ------ ------- ----- ------ --------------
1990 Plans $1.60 to $2.00 687,200 1.73 $1.80 687,200 $1.80
$3.38 to $4.88 199,000 7.05 $4.50 126,631 $4.29
-------------- --------- ---- ----- --------- -----
Plan Totals $1.60 to $4.88 886,200 2.93 $2.41 813,831 $2.19
-------------- --------- ---- ----- --------- -----
1984 Plan $2.00 to $3.38 60,000 1.00 $2.63 60,000 $2.63
NSOP $2.00 to $2.00 7,300 1.25 $2.00 7,300 $2.00
-------------- --------- ---- ----- --------- -----
1992 Plan $2.00 to $2.88 85,995 1.17 $2.31 85,995 $2.31
$3.57 to $6.25 70,000 3.09 $5.10 70,000 $5.10
-------------- --------- ---- ----- --------- -----
Plan Totals $2.00 to $6.25 155,995 2.03 $3.56 155,995 $3.56
-------------- --------- ---- ----- --------- -----
Other $2.00 to $3.50 150,900 1.82 $2.26 109,400 $2.27
$3.88 to $7.00 430,827 3.10 $4.74 423,327 $4.70
-------------- --------- ---- ----- --------- -----
Total Other $2.00 to $7.00 581,727 2.77 $4.10 532,727 $4.20
-------------- --------- ---- ----- --------- -----
Grand Total $1.60 to $7.00 1,691,222 2.71 $3.10 1,569,853 $3.03
============== ========= ==== ===== ========= =====
The following is a summary of stock options exercisable at December 31, 1999,
1998 and 1997, and their respective weighted-average share prices:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- --------------
Options exercisable December 31, 1999 1,569,853 $3.03
Options exercisable December 31, 1998 1,396,217 $3.00
Options exercisable December 31, 1997 1,250,384 $2.18
The Company has adopted the disclosure - only provisions of SFAS No. 123,
"Accounting for Stock-based Compensation." The Company will continue to apply
the provisions of Accounting Principles Board Opinion 25 in accounting for its
stock option plans. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS No. 123, net income and diluted income per common share would have been
reduced to the pro forma amount as follows:
Year ended December 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
Net income
As reported $1,722,167 $2,820,631 $2,003,316
Pro forma 1,445,430 2,486,549 1,747,569
Diluted income per common share
As reported $.24 $.35 $.36
Pro forma $.18 $.31 $.31
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model. Assumptions used to calculate the fair
value of option grants in 1999, 1998 and 1997 include the following:
33
ASSUMPTION 1999 1998 1997
- ---------- ---- ---- ----
Dividend yield 0.0% 0.0% 0.0%
Risk-free rate 5.6% 5.4% 6.0%
Expected life 2-3 years 3-4 years 3-4 years
Expected volatility 60% 68% 68%
Fair Value $1.13 $2.90 $2.07
14. EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution savings plan under Section 401(k)
of the Internal Revenue Code which provides retirement benefits to certain
employees of the Company and its wholly-owned subsidiaries who meet certain age
and length of service requirements. The Company's contribution to the Plan is
determined by management. Charges to income with respect to this Plan were
approximately $105,000, $98,000 and $55,000 in 1999, 1998 and 1997,
respectively.
15. INCOME TAXES
The components of the provision for income taxes were as follows:
1999 1998 1997
---- ---- ----
Current:
Federal $ 496,000 $ 833,000 $ 99,000
State 100,000 97,130 125,000
Deferred:
Federal 574,000 801,000 375,000
State 27,000 (2,130) 21,000
---------- ---------- --------
$1,197,000 $1,729,000 $620,000
========== ========== ========
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
1999 1998 1997
---- ---- ----
Federal statutory rate 34% 34% 34%
State income tax, net of
federal income tax effect 3 2 4
Non-deductible expenses 4 3 3
Valuation allowance - - (13)
Other, net - (1) (4)
--- --- ---
41% 38% 24%
=== === ===
34
The net deferred tax asset at December 31, 1999 and 1998 consist of the
following:
1999 1998
---- ----
Accounts receivables $142,000 $229,000
Inventories 84,000 --
Property and equipment 82,000 352,000
Accrued expenses and compensation 115,000 355,000
Goodwill and intangibles (439,000) (220,000)
0ther, net 198,000 67,000
-------- --------
$182,000 $783,000
======== ========
During the fourth quarter of 1997, as a result of the acquisition of DMS, the
Company reassessed its ability to utilize its general business credit
carryforwards which were to expire primarily in 1998. Based on this
reassessment, a benefit of approximately $350,000 was recognized related to
release of valuation allowance in 1997. Approximately $1,056,000 and $450,000 of
gross deferred tax asset and valuation allowance related to general business
credits were written off in 1998 and 1997, respectively.
16. SUBSEQUENT EVENT
On January 21, 2000, the Company restructured its bank debt with an amended
revolving credit facility, providing for borrowing capacity up to $30 million.
This new facility which matures on January 21, 2005, was used to refinance the
term loan and is intended to finance capital expenditures, permitted
acquisitions and other working capital requirements as needed. The new facility
is collateralized by all of the Company's assets and bears interest at rates
based on the LIBOR adjusted for applicable spreads ranging from 1.25% to 2.5%.
The Company is subject to an annual commitment fee of 1/4 % on the average
unused portion of the revolving credit facility. This new facility includes
certain financial covenants requiring a minimum net worth and maintenance of
certain financial ratios, and restricts the Company's ability to pay dividends.
Loan origination fees totaling approximately $540,000, comprised of $440,000 of
cash payments and issuance of 37,210 shares of the Company's common stock, will
be amortized over five years.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized unaudited quarterly financial data for the years ended December 31,
1999 and 1998 are:
(in thousands)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
1999
----
Net sales $25,791 $24,027 $21,921 $22,845
Gross profit 5,561 4,750 5,177 5,854
Net income 838 212 316 356
Basic net income per
common share .12 .03 .04 .05
Diluted net income
per common share .11 .03 .04 .04
1998
----
Net sales $22,051 $22,317 $24,358 $22,408
Gross profit 5,479 5,567 4,965 5,664
Net income 700 659 607 854
Basic net income per
common share .10 .09 .08 .12
Diluted net income
per common share .09 .08 .08 .11
35