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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, 1997
Commission File Number 1-7708
MARLTON TECHNOLOGIES, INC.
(Name of issuer as specified in its charter)
New Jersey 22-1825970
- ----------------------- ---------------------------------
(State of incorporation) (IRS Employer Identification No.)
2828 Charter Road, Suite 101, Philadelphia, Pa 19154
- ---------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (215) 676-6900
--------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class: Name of each exchange:
- -------------------- -----------------------
Common Stock, $.10 par value American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Exchange Act: None
Check whether the Issuer (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 Issuer 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-B contained in this form and no disclosure will be contained, to
the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. __
Issuer's revenues for its most recent fiscal year: $48,715,828
The aggregate market value of the voting stock held by non-affiliates of the
Issuer at March 25, 1998 was $23,691,580. As of March 25, 1998, there were
6,974,578 shares of Common Stock, $.10 par value, of the Issuer 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 Issuer's definitive proxy statement for the 1998 Annual
Meeting of Shareholders, involving the election of directors, has been
incorporated by reference in Part III - Items 10, 11, 12 and 13.
(ii) Information from the Issuer's Registration Statement on Form S-8, File No.
33-3647, has been incorporated by reference in Part IV - Item 14(a)(3)(a)(i).
(iii) Information from the Issuer's Supplement to Proxy Statement dated June 6,
1990 has been incorporated by reference in Part IV - Item 14(a)10(a).
Exhibit Index Appears on Page 20 Page 1 of 102
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
Marlton Technologies, Inc. (the "Issuer" or "Company") was incorporated as a New
Jersey corporation in 1966. The Issuer'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 Issuer 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 Issuer acquired the
accounts and assets of the trade show exhibit division of a competitor and also
established a portable exhibits group. The Issuer 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 August 1993, the rights
and related business assets to a panelized portable trade show exhibit owned by
Limited were transferred to a 51% Issuer -owned subsidiary, Expose Display
Systems , Inc. ("EDSI"), with the manufacturing and distribution facilities
moved to Los Angeles, California during March 1994. During April 1996, the
Issuer acquired the stock of Piper Productions, Inc. ("Piper") in Orlando,
Florida, and in December 1996 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 Issuer acquired DMS Store
Fixtures Corp. ("DMS") in King of Prussia, Pennsylvania. DMS supplies custom
made fixtures and displays to national retailers, department stores and consumer
products manufacturers. Currently all of the Issuer's operating revenues are
derived from Sparks, Exhibits, Limited , Incorporated (collectively, the "Sparks
Companies"), EDSI, Piper and DMS.
Business of Issuer
Products and Services:
The Sparks Companies custom design and manufacture sophisticated trade show
exhibits, displays, architectural and museum interiors, graphics and signage,
provide trade show services, and sell portable exhibits. EDSI produces and
distributes a line of panelized portable exhibits. Piper is a theatrical
construction company that specializes in the manufacture of scenery for live
shows, television, theme park attractions, themed interiors and themed trade
show exhibits. Clients include industry, government, museum, theme park
companies and commercial establishments. Graphics and industrial designers
develop and manage custom design requirements from concept through final
construction, employing sophisticated computer-aided
1
Business of Issuer, continued
design software and hardware. Complete graphics facilities provide full in-house
dark room capabilities, silk-screening, and state of the art computerized
design/graphics. Electronics and audiovisual capabilities include on-staff
electronic specialists, consultants, and vendor relationships which provide
multi-media equipment and programs, fiber-optic technology, laser disk video
interactive program production, video and computer games, simulators, and
customized software and hardware applications. The Sparks Companies are full
service exhibit houses, providing show service coordination, freight
coordination, refurbishing, storage and marketing literature distribution. Many
clients are Fortune 1000 firms, who typically contract for custom trade show
exhibit projects in excess of $100,000. Additionally, a majority of these
clients store their exhibits at a Sparks Company facility, where ongoing
refurbishing and coordination of clients' trade show schedules are provided. The
Sparks Companies also represent domestic clients who desire to exhibit at
international trade shows. The Sparks Companies design such exhibits, and,
through an international network of independent exhibit manufacturers, arrange
for the manufacture and delivery of trade show exhibits to the desired trade
show. The Sparks Companies also design and manufacture trade show exhibits for a
number of United States subsidiaries of foreign corporations, for use in
domestic trade shows. In 1992, Limited began to produce and distribute panelized
portable exhibits known as "Expose", through a network of predominantly U.S.
portable exhibit dealers, including the Sparks Companies and unaffiliated
dealers. Since August 1993, EDSI has assumed responsibility for this portable
exhibit production and distribution. DMS 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. Engineers and designers work with the customers to develop the
fixture design through computer aided design equipment and development of a
prototype, if necessary. Engineering drawings are then produced and provided to
a factory for production. DMS utilizes various manufacturers with whom it has
developed long standing business relationships for the production of its
products. These factories work closely with the DMS management team. 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.
Marketing and Distribution:
Sales by the Sparks Companies to domestic customers for both domestic and
foreign trade shows and sales by Piper and DMS to primarily domestic customers
are solicited through internal marketing groups. Purchase of sophisticated
exhibit and display products usually involves a substantial dollar commitment by
the customer as 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 exhibit and display products as
well as complying
2
Business of Issuer, continued
with internal profitability requirements. In addition to the sales personnel,
senior officers devote substantial time and effort to sales and marketing
activities. EDSI's panelized portable exhibits are marketed by EDSI's minority
shareholder, Abex Display Systems, Inc. ("ADSI"), to retail portable exhibit
dealers by direct solicitation, media advertising and participation in trade
shows for the portable exhibit industry.
Manufacturing and Raw Materials:
The Sparks Companies design, develop and manufacture 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 Sparks Companies also subcontract the manufacture of exhibits
for foreign trade shows. The Sparks Companies coordinate shipping, exhibit
set-up and removal at the customer's trade show and, in most cases, subsequently
store the exhibit for the customer. Piper's manufacturing comprises various
technical and artistic disciplines. Piper employs scenic carpenters and metal
workers to fabricate scenery which is painted by skilled scenic artists. DMS
utilizes manufacturers with whom it has developed long standing business
relationships from the early 1980's for the production of its products. Raw
materials for custom, scenic and portable exhibits, store fixtures and displays,
as well as subcontractor work, are readily available from various vendors.
Patents, trademarks and licenses are not important to operations. The
Philadelphia and King of Prussia, PA operations are the only unionized
facilities, with a three-year labor contract expiring June 30, 1998 in
Philadelphia, and a three year labor contract expiring November 14, 1998 in King
of Prussia, PA. Portable exhibit configurations, together with graphics and
signage, are typically designed by the Sparks Companies for a client. Portable
exhibits are produced by EDSI, in the case of Expose, or are purchased from
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 Sparks Companies have obtained such distribution rights from their primary
sources of portable exhibits, and other portable exhibit dealers have been
granted such distribution rights with regard to Expose. Amounts spent by EDSI
during each of the last three years on the development of new products,
including the required machinery, equipment and tooling to manufacture and
produce the products approximates $28,000, $325,000 and $144,000, during 1997,
1996 and 1995, respectively. Other than previously described, the Company made
no material disbursements during each of the last three fiscal years for
research and development activities.
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. The Sparks Companies' business has also been of a seasonal nature due
to the fact that trade show activities in specific industries, such as health
care and telecommunications, are a function of the seasonal show schedules in
such industries. DMS' business tends to be slower in the fourth and first
quarters due to retailers desires not to install or plan new fixtures during
their traditionally busy year end season. The Sparks Companies have embarked on
a program to seek new clients and sales people with client bases in different
industries to reduce the effects of the slower sales
3
Business of Issuer, continued
period. Additionally, the Issuer is now offering other products and services,
such as sales of scenic and themed exhibits, portable exhibits, and permanent
exhibits which are less seasonal in nature.
Working Capital:
The Sparks Companies', Piper's, EDSI's and DMS' working capital requirements are
fulfilled by funds generated through operations, bank term loans and revolving
credit facilities. Working capital requirements are generally not affected by
project size requirements or accelerated delivery for major customers due to
general policies of progress billing on larger jobs. Additionally, the Sparks
Companies, Piper, EDSI and DMS do not require continuous allotments of raw
materials from suppliers and other than DMS, do not generally provide extended
payment terms to customers other than lease and purchase arrangements with
credit-worthy customers, not exceeding terms of three years.
Significant Customers:
During 1997 and 1996, no individual customer accounted for at least 10% of
consolidated net sales. However, DMS annual sales have historically been
significantly reliant upon two customers for a major portion of their annual
revenues. The Company expects this situation to continue during 1998.
Backlog:
The Sparks Companies', Piper's and EDSI's backlog of orders at December 31,
1997, and 1996 was approximately $18,000,000 and $8,500,000, respectively. DMS's
backlog of orders at December 31, 1997 and 1996 was approximately $5,600,000 and
$7,400,000, respectively. The higher backlog level for DMS at December 31, 1996
was primarily due to an international order received but not delivered as of
that date. Generally, DMS's backlog of orders are recognized as sales during the
subsequent six month period. The entire current backlog relates to expected 1998
sales. The Sparks Companies, Piper, EDSI and DMS maintain a client base from
which new orders are continually generated, including refurbishing of existing
trade show exhibits stored in Sparks Companies' facilities. There are also a
significant amount of Sparks Companies, Piper and DMS proposals outstanding with
current and prospective clients. Sales for the Sparks Companies routinely occur
during the period immediately preceding customer trade shows.
Competition:
The Sparks Companies, Piper and DMS compete with other companies offering
similar products and providing similar services on the basis of price, quality,
4
Business of Issuer, continued
performance and client-support services. The custom trade show exhibit, scenic
and themed exhibit, permanent exhibit manufacturing market, retail store fixture
and display market and portable exhibits sales market include a large number of
national and regional companies, some of which have substantially greater sales
and resources than the Sparks Companies, Piper and DMS. In addition to their
Philadelphia, Atlanta, San Diego and Orlando manufacturing facilities, the
Sparks Companies and Piper utilize their national and international affiliations
and relationships to meet customers needs in other geographic areas. EDSI
competes primarily with other manufacturers of portable exhibits, some of which
have substantially greater operating histories, sales and resources than EDSI.
Due to the lack of specific public information, the Sparks Companies', Piper's,
EDSI's and DMS's competitive position is difficult to ascertain.
Environmental Protection:
The Sparks Companies', Piper's, EDSI's and DMS'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 their capital expenditures, earnings,
and competitive position.
Employees:
The total number of persons employed by the Issuer is approximately 310 of which
305 are full-time employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Issuer currently leases five primary facilities as follows:
Location Square Footage Purpose
Philadelphia, PA 235,000 Office, showroom, warehouse & manufacturing
Austell, GA 81,000 Office, showroom, warehouse & manufacturing
El Cajon, CA 80,000 Office, showroom, warehouse & manufacturing
King of Prussia, PA 60,000 Office and warehouse
Orlando, Florida 45,000 Office, warehouse & manufacturing
The Issuer's subsidiaries also have approximately five sales offices of under
1,000 square feet each. Additionally, EDSI operates in approximately 90,000
square feet of office, showroom, warehouse and manufacturing space within the
minority shareholder's North Hollywood, California facility.
5
ITEM 2. DESCRIPTION OF PROPERTY, continued
The Sparks Companies' and Piper's office, showroom, warehouse and
manufacturing facilities and DMS's office and warehouse facilities were all in
good condition and adequate for 1997, based on normal five-day operations, and
are adequate for 1998 operations, including any foreseeable internal growth. The
Issuer does not anticipate any difficulty in acquiring additional space, if
necessary.
ITEM 3 LEGAL PROCEEDINGS
The Issuer is not involved in any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following proposals were submitted and approved at a special meeting held on
December 12, 1997:
(i) To approve the acquisition of DMS Store Fixtures Corp.:
For: 2,929,453 Against: 57,934 Abstain: 4,484
(ii) Increase the number of authorized shares of Common Stock from
10,000,000 to 50,000,000 shares:
For: 3,333,698 Against: 355,007 Abstain: 7,134
(iii) To authorize 10,000,000 shares of undesignated preferred stock:
For: 3,510,091 Against: 374,194 Abstain: 20,534
PART II
ITEM 5 MARKET FOR 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 Issuer on its principal market, the American Stock
Exchange:
1997 1996
---- ----
Quarter High Low High Low
------- ---- --- ---- ---
1 4-3/16 3-3/8 2-1/2 1-1/4
2 4-7/16 3-1/4 3-1/2 1-5/8
3 7-1/8 3-3/4 5-1/4 2-5/8
4 7-3/4 5-1/2 4-11/16 3-7/16
6
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, continued
No dividends were paid during the past two fiscal years. The Issuer
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 Issuer's bank loan agreement provides that the Issuer may
not pay dividends to its shareholders without the bank's prior consent. Unless
waived, this restriction will preclude the Issuer from paying dividends.
As of March 24, 1998, there were 1,106 holders of record of the Issuer's common
stock.
In connection with the Issuer's December 31, 1997 acquisition of DMS,
the Issuer issued 2,000,000 unregistered shares of Common Stock to the sellers
of DMS, 100,000 unregistered warrants to purchase shares of Common Stock to Legg
Mason Wood Walker, Incorporated as a financial advisor fee, and 62,500
unregistered warrants to purchase shares of Common Stock to CoreStates Bank,
N.A. as a loan commitment fee. The warrants are exercisable for a period of four
years from issuance, at a price of $6.19 per share, the average closing price of
Common Stock on the American Stock Exchange for the twenty trading day period
prior to the acquisition. During January 1996, the Issuer issued 500,000
unregistered shares of its Common Stock to Tsubasa System Company, Ltd., the
Issuers joint venture shareholder in Sparks Japan, in connection with an
amendment to a distribution and licensing agreement affecting Sparks Japan. The
Issuer relied upon the exemption from registration under Section 4(2) of the
Securities Act of 1933, since all of those issuances were to a limited group of
sophisticated parties in a private, non-underwritten transaction.
7
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
As of or for the Year Ended December 31,
1997 1996 1995 1994 1993
TOTAL ASSETS $ 54,113,255 $ 22,190,615 $ 16,607,893 $ 16,144,711 $13,779,926
LONG-TERM OBLIGATIONS 12,243,312 457,440 991,894 691,676 1,055,311
OPERATIONS:
Net Sales 48,715,828 38,315,600 27,671,763 24,613,216 19,172,222
Operating Profit (Loss) 2,273,976 1,345,863 739,023 525,969 (192,626)
Income (Loss) before
cumulative effect of
accounting change
and extraordinary item 2,003,316 2,340,153(2) 1,252,814 486,794 (132,618)
Cumulative effect of
Accounting change -- -- -- -- 1,500,000 (3)
Extraordinary (loss) -- -- -- (96,000)(4)
Net Income $ 2,003,316 $ 2,340,153 $ 1,252,814 $ 486,794 $ 1,271,382
BASIC PER COMMON SHARE DATA (5)
Income (loss) from Operations $ .42 $ .52 $ .32 $ .13 ($ .03)
Accounting change -- -- -- -- .41
Extraordinary loss -- -- -- -- (.03)
Net Income $ .42 $ .52 $ .32 $ .13 $ .35
DILUTED PER COMMON SHARE DATA (5)
Income (loss) from Operations $ .36 $ .45 $ .32 $ .13 ($ .03)
Accounting change -- -- -- -- $ .39
Extraordinary loss -- -- -- -- ($ .03)
Net Income (loss) $ .36 $ .45 $ .32 $ .13 $ .33
Cash Dividends -- -- -- -- --
(1) Includes a $180,000 gain from insurance settlement, net of income taxes.
(2) Includes a $708,000 gain from contractual amendments, net of income taxes.
(3) Relates to the Company's January 1, 1993 adoption of the provisions of
SFAS No. 109 "Accounting for Income Taxes."
(4) Relates to the extinguishment of debt.
(5) During the fourth quarter of 1997, the Company adopted the provisions
of SFAS 128 and, as required, has restated all prior period per common
share data. 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 and are calculated using
the treasury stock method.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
General Overview
The Company's core business is the custom design, manufacture and sale of
sophisticated trade show exhibits, displays, signage and graphics for clients in
industry, government, consumer electronics, athletic goods, healthcare,
telecommunications and other specialized fields.
During March 1995, the Company and a Japan-based diversified manufacturing and
marketing company, Tsubasa System Company Ltd. ("Tsubasa") entered into an
agreement to organize a new Japanese corporation, Sparks Exhibits Japan ("SEJ"),
and grant exclusive Japan distribution rights to SEJ for the Company's portable
exhibits products and technology and to license the name and logo of "Sparks
Exhibits" in Japan. See Note 3 of the consolidated financial statements.
During April 1996, the Company acquired Piper Productions, Inc. ("Piper") of
Orlando, Florida which produces business theater, theme park attractions, themed
interiors, theatrical scenery and special effects. The acquisition of Piper
enhanced the Company's ability to pursue exhibit opportunities within Piper's
areas of expertise. See Note 2 of the consolidated financial statements.
On December 31, 1997, the Company, through a wholly-owned subsidiary ("DMS"),
acquired all of the partnership interests (the "Acquisition") in DMS Store
Fixtures, L.P. ("L.P.") held by L.P.'s three principals and three corporate
holders (the "Sellers", collectively). The aggregate consideration paid by the
Company was $14,500,000 in cash and 2.25 million unregistered shares of the
Company's common stock of which 250,000 shares are contingent upon DMS achieving
at least $12.5 million of cumulative pre-tax earnings through December 31, 2002.
The Acquisition was funded, in part, by a $13.5 million five year collateralized
term loan through a bank and is accounted for as a purchase. Accordingly, the
assets and liabilities of DMS were recorded at their estimated fair value as of
December 31, 1997 with the difference of approximately $17.0 million including
related acquisition costs recorded as goodwill and other assets. As part of the
Acquisition, the Company entered into five year employment agreements with each
of the three individual principals of L.P. commencing January 1, 1998.
Management's aggressive growth plan, since the August 1990 acquisition of Sparks
Exhibits Corp. ("Sparks"), and most recent acquisition of DMS, has resulted in
the dramatic expansion of the Company's client base, the development of new
business groups 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 the new
business groups will position the Company to increase its revenue base and move
toward its goal of becoming a leading dimensional marketing company through the
continued offering of expanded products and services to a larger customer
network.
9
RESULTS OF OPERATIONS
1997 As Compared with 1996
Sales
Revenues for 1997 of $48.7 million exceeded 1996 revenues of $38.3 million by
approximately 27%.
The $10.4 million revenue increase during 1997 over 1996 revenues was
attributable to sales increases from the reported business groups as follows:
1997 1996
---- ----
Trade show exhibits group $37,387,000 $30,939,000
Permanent and scenic
displays group 11,329,000 7,377,000
------------ -------------
Total revenues $48,716,000 $38,316,000
=========== ===========
The Trade show exhibits group experienced a 21% increase in its 1997 revenues
compared with 1996. The increase reflects the Company's continuing program of
client expansion which was experienced in all three custom trade show exhibit
manufacturing facilities - Philadelphia, Atlanta and San Diego. The Rental group
experienced higher 1997 revenues as compared with their 1996 revenues due to the
Company's investments in their marketing efforts. Expose' Display Systems, Inc.
("EDSI"), the Company's majority-owned joint venture, experienced 53% growth in
revenues during 1997 as compared with 1996 due to the increased acceptance of
EDSI's product lines by Abex Display Systems, Inc.'s ("ADSI") national
distribution network and the increasing impact of the 1996 introduction of
EDSI's LS (laminate system) into the marketplace. Sparks' Portable sales group,
a distributor of ADSI's products, experienced an expected 42% reduction in 1997
revenues as compared with 1996 revenues due to the closing of two stand-alone
portable exhibit sales distribution offices during the fourth quarter of 1996.
The permanent and scenic displays group experienced a 54% increase in its 1997
revenues compared with 1996. The increase was due to a dramatic increase in
sales generated by Piper during the twelve months of 1997 as compared with
Piper's nine months of operations during 1996. Piper was acquired by the Company
on April 1, 1996. The Museum/Production group experienced a 17% decline in 1997
revenues as compared with 1996 revenues due, only, to the timing of sales. The
Museums/Production group currently has approximately $5.3 million of in-process
contracts. Revenues related to these contracts should be recognized
predominantly during 1998.
10
Operating Profits
The 27% increase in 1997 revenues as compared with 1996 revenues contributed to
a 69% increase in the Company's operating profits during the respective periods.
The Company maintained a relatively consistent gross profit level of 28.4% and
28.1% during the respective annual periods of 1997 and 1996. Selling, general
and administrative costs, as a percentage of sales, fell by approximately 0.8%
during 1997 as compared with 1996, also contributing to the higher operating
profits recorded during 1997.
Other Income (Expense)
Other income decreased from $1,344,000 during 1996 to $349,000 during 1997. This
significant decrease in other income during 1997 is attributable to the $1.2
million gain from the contract amendment recorded during 1996. Interest income
increased during 1997 as compared with 1996 due to additional interest and gains
from the sale of certain investments during 1997. Interest expense decreased
during 1997 due to the overall reduction of the Company's long-term debt
balances from 1996.
Income Taxes
The provision for income taxes, as a percentage of income before taxes,
increased to approximately 24% during 1997 as compared with 13% during 1996. The
higher 1997 rate as compared with the 1996 rate reflects a reduced benefit from
the release of valuation allowances based upon the Company's expected
realization of future benefits from its net operating loss and business tax
credit carryforwards.
Net Income
During 1997, net income decreased to $2,003,000 ($.36 per diluted share) as
compared with 1996 net income of $2,340,000 ($.45 per diluted share). The
decrease is attributable to the $1.2 million gain from the contractual amendment
which took place during 1996. Additionally, the tax provision during 1997, as a
percentage of income before income taxes, increased to 24% from the 13% tax
provision rate utilized during 1996, as more fully described in the "Income
Taxes" section of this MD&A. Exclusive of the effects of the different tax rates
used to provide for income taxes and the 1996 gain from the contractual
amendment, 1997 net income per diluted common share increased approximately 65%
as follows:
1997 1996
---- ----
Income before income taxes $2,623,000 $2,690,000
Gain from contract amendment -- (1,200,000)
---------- -----------
2,623,000 1,490,153
Tax rate, adjusted 40% 40%
---------- ------------
Tax provision, adjusted (1,049,000) (596,000)
---------- ------------
Net income, as adjusted $1,574,000 $ 894,000
---------- ----------
Diluted shares outstanding 5,640,000 5,246,000
Net income per diluted common share, adjusted $0.28 $0.17
===== =====
11
Backlog:
The Company's backlog of orders at December 31, 1997 was approximately $23.6
million as compared with approximately $8.5 million as of December 31, 1996.
Exclusive of the $5.6 million of DMS' backlog of orders at December 31, 1997,
the $9.5 million increase in backlog is attributable to new orders generated
through the Museums and International groups, EDSI and Piper and from
experienced account executives with established client bases in the Company's
core business - Custom trade show exhibits. The entire current backlog relates
to expected 1998 sales.
1996 As Compared with 1995
Sales
Revenues for 1996 of $38.3 million, represents a 38.5% increase over 1995
revenues of $27.7 million. The $10.6 million increase during 1996 over 1995
revenues was attributed to sales increases from the reported business groups as
follows:
1996 1995
---- ----
Trade show exhibits group $30,939,000 $24,856,000
Permanent and scenic displays group 7,377,000 2,816,000
----------- -----------
Total revenues $38,316,000 $27,672,000
=========== ===========
The Trade show exhibits group experienced a 25% increase in its 1996 revenues as
compared with its 1995 revenues due to higher sales generated by the Rental,
International and Expose' groups during 1996. Additionally, the Company's core
business - custom tradeshow exhibits, experienced a 17% increase in its 1996
revenues over 1995 revenues reflecting the Company's continued program of client
expansion. However, the increase was only experienced in the Philadelphia and
San Diego facilities where 1996 revenues exceeded those facilities' 1995
revenues by 35%. The Atlanta and Melbourne, Florida facilities experienced a
decline in their core business revenues during 1996 as compared with 1995
predominantly due to less work having been transferred into those facilities by
the Philadelphia location during 1996. Accordingly, management consolidated the
Melbourne, Florida facility into the Orlando-based Piper Productions facility
during January 1997. The Rental groups' 1996 increase was partially due to being
operational for the entire year as compared with four months of operations
during 1995. The International group experienced higher 1996 revenues as
compared with its 1995 revenues due to their start-up growth and the Company's
investments in their marketing since 1993. EDSI, the Company's majority-owned
joint venture, experienced 45% growth in revenues during 1996 as compared with
1995 due to the increased acceptance of EDSI's Expose' product line by ADSI's
national distribution network and the 1996 introduction of EDSI's Expose' LS
(laminate system) into the marketplace.
12
Sales, continued
The $4.6 million revenue increase experienced by the Permanent and scenic
displays group during 1996 as compared with 1995 revenues was primarily due to
the April 1996 acquisition of Piper Productions in Orlando, Florida. The Piper
operations generated approximately 75% of the 1996 revenues for the Permanent
and scenic displays group, the balance generated by the Museum sales group whose
sales were 41% higher during 1996 than its 1995 sales level.
Operating Profits
The Company recorded an 82% (approximately, $600,000) increase in operating
profits during 1996 as compared with 1995. The 1996 gross profit percentage
decreased marginally from a 1995 gross profit percentage of 2.1% to 28.1% during
1996. This decrease was primarily due to the higher 1996 sales from the
Permanent and scenic displays group which historically generate lower gross
margins than the Trade show exhibits group. The 1996 selling costs, $1.7 million
higher as compared with the same period during 1995, were attributed primarily
to sales commissions on the higher revenues and increased sales and marketing
costs in connection with the development of the Company's three-year strategic
marketing plan initiated in 1997. However, as a percentage of sales, selling
costs were approximately 0.5% lower during 1996 as compared with 1995. General
and administrative costs, as a percentage of sales, decreased approximately 1.3%
during 1996 as compared with 1995. The higher sales levels and related gross
profits more than offset the increased selling and general and administrative
costs, contributing to the $600,000 increase in 1996 operating profits as
compared with 1995 operating profits.
Operating profits related to the Expose' product during 1996 were consistent
with 1995 operating profits. While there was a 45% increase in 1996 revenues
over 1995 revenues, EDSI's operating profit margin decreased 2.1% in 1996 as
compared with 1995. Pursuant to the July 1993 agreement with ADSI, the minority
partner in EDSI, contractual cost allocations from ADSI to EDSI increased as
sales from the Expose' products became a larger percentage of ADSI's overall
sales to its distribution network. Accordingly, while EDSI sales increased, so
did the allocated fixed, selling and administrative costs; this had a direct
impact on EDSI's 1996 operating results. Additionally, EDSI incurred higher
expenses during 1996 in connection with the introduction of its newest product
line, Expose' LS.
During the fourth quarter of 1996, management closed the two stand-alone
Portable sales offices due to their consistently marginal returns and the fixed
costs associated with maintaining separate showrooms away from the Company's
manufacturing facilities.
13
Other Income (Expense):
Other income increased by approximately $1,368,000 during 1996 as compared with
1995. This increase is attributed to the $1,200,000 gain the Company recorded
during 1996 in connection with the contractual amendment more fully described in
Note 4 to the consolidated statements. Net interest income improved by $124,000
during 1996 as compared with 1995 due to larger cash reserves available for
investment. Other items generated a $46,000 positive swing during 1996 as
compared with 1995 other items.
Income Taxes:
The provision for income taxes, as a percentage of income before taxes,
increased to 13% during 1996. The provision incorporates federal, state and
local income taxes of approximately $350,000 as compared with an income tax
benefit of $538,000 during 1995. This increase was due to higher 1996 taxable
income and a smaller effective tax rate benefit resulting from the release of
valuation allowances.
Net Income:
During 1996, net income increased to $2,340,000 ($.45 per diluted share) as
compared with 1995 net income of $1,253,000 ($.32 per diluted share). The
dramatic increase, however, is partially attributable to the 1996 gain from the
contractual amendment of $1,200,000. Exclusive of the effects of this gain,
earnings per diluted share for 1996 increased 70%, or $.07 per share ($0.17
during 1996 as compared with $0.10 during 1995) as follows:
1996 1995
---- ----
Income before income taxes $2,690,000 $ 715,000
Gain from contract amendment (1,200,000) --
----------- ----------
1,490,000 715,000
Tax rate, adjusted 40% 43%
Tax provision,adjusted (596,000) (307,000)
----------- ----------
Net income, as adjusted $ 894,000 $ 408,000
=========== ==========
Diluted shares outstanding 5,246,000 3,936,000
Net income per diluted common share, adjusted $0.17 $0.10
====== =====
This increase included the dilutive effect of issuing 500,000 additional shares
of the Company's common stock during 1996 in connection with the contract
amendment (Note 4).
14
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company increased its cash reserves by $2,285,830,
exclusive of the $1,529,260 of cash transferred to the Company as part of the
December 31,1997 acquisition of DMS. As a result of the record sales levels
achieved during 1997 and the increased backlog of orders not yet delivered as of
December 31, 1997, the Company increased its accounts receivable and inventory
balances by approximately $5.9 million, exclusive of the $ 4.9 million of
DMS-acquired trade receivables and inventory. This increase, however, was offset
by a $7.1 million increase in accounts payable and accrued expenses, net of $1.9
million of DMS-acquired accounts payable and accrued expenses. This increase in
accounts payable and accrued expenses, exclusive of the DMS-related current
liabilities, primarily relates to the $5.4 million increase in customer deposits
collected against contracts not completed as of December 31, 1997 as compared
with customer deposit balances as of December 31, 1996. Other current assets,
exclusive of $558,000 acquired as part of the DMS acquisition, increased
approximately $327,000 predominantly due to increases in prepaid expense
balances as of December 31, 1997 as compared with December 31, 1996 balances.
The Company spent approximately $1.3 million for capital assets during
1997, net of $161,000 of property and equipment acquired in the DMS acquisition.
These expenditures included $391,000 for machinery, equipment, leasehold
improvements, furniture, fixtures and other office equipment. Additionally, the
Company invested approximately $400,000 for revenue-producing rental property
and equipment and approximately $100,000 to upgrade its Computerized Assisted
Design ("CAD") equipment. The Company is currently installing a new management
information system ("MIS") to replace its existing computerized business system
during 1998. As part of that investment, the Company expended approximately
$400,000 during 1997 for hardware systems, consulting, site preparation and
training toward the installation of new technology.
During 1997, the Company did not borrow against its revolving credit facility to
support the higher trade receivables and inventory levels, as well as the
capital investments it required during the year. Additionally during 1997, the
Company repaid approximately $623,000 of bank term debt and $75,000 of
scheduled principal payments to various sellers of businesses acquired by the
Company prior to 1997. During 1997, the Sellers of Sparks exchanged $283,877 of
convertible term notes into 206,456 shares of the Company's common stock (see
Note 2).
The December 31, 1997 acquisition of DMS (see Note 2) by the Company
significantly impacted the balance sheet ratios from a historically-comparative
perspective. The addition of approximately $17.0 million of intangible assets
(goodwill and other assets) and $13.5 million of new term debt related to the
Acquisition greatly increased the Company's leverage ratio of debt to net worth
as well as the current ratio (current assets/current liabilities). Accordingly,
comparative information to December 31, 1996 ratios are not meaningful and is,
therefore, not presented in this discussion. As of December 31, 1997, the
Company maintained a current ratio of 1.7 to 1.0 and a debt to net worth ratio
of 1.26 to 1.00. The Company was in compliance with all lending institution
covenants (see Note 10) as of December 31, 1997 and no amounts were outstanding
on the $6.5 million revolving credit facility.
15
OUTLOOK
The record sales volume of $48.7 million greatly contributed to the higher
operating profits the Company experienced during 1997. The Company expects
continued sales growth from its Tradeshow exhibits group and Permanent and
scenic displays group during 1998. Sales growth is expected in all four of the
Company's manufacturing facilities in Philadelphia, Atlanta, San Diego and
Orlando. The expected continuing expansion of the Company's Western region has
created the need for a significantly larger facility in San Diego county.
Accordingly, the Company is currently negotiating a lease for another sales and
production facility, within the San Diego area, to be used as a low-cost
producer of tradeshow and permanent exhibitry, in addition to being a major
storage facility for client exhibit properties.
The Company's historic overall gross profit percentages may be difficult to
maintain in light of the expected increase in 1998 sales volume from the Museum
and production group, the Rental group and Piper, whose historic margins fall
below traditional custom exhibit margins. Additionally, the Company's core
business client base of Fortune 1000 companies, as well as Pacific Rim clients,
are more tightly managing their marketing budgets which could negatively impact
the Company's historic custom exhibit margins. The expected higher revenues and
gross profit dollars from the Trade show exhibits group and the Permanent and
scenic displays group should enhance the Company's 1998 operating profits by
aiding the Philadelphia, Atlanta, San Diego and Orlando facilities to generate
more consistent operating efficiencies.
The Company and ADSI are negotiating the exchange of the Company's 51% majority
interest in EDSI, forgiveness of $1.1 million of inter-company debt plus
approximately $200,000 of cash, for a 25% interest in ADSI. Should this
transaction be completed, the Company's investment in ADSI will be accounted for
using the equity method, with the Company no longer consolidating EDSI's
revenues and expenses within its operating results. The Company will only
recognize its pro-rata portion, 25%, of ADSI's operating results within its
statement of operations.
The Company is continuing its project of replacing existing management
information systems hardware and software with state-of-the-art technology
positioning the organization to effectively meet the changing environment of
information processing among its clients and suppliers as well as year 2000
issues. Additionally, the new technology should increase operating efficiencies
between the Company's four regional manufacturing facilities as information is
processed and managed more seamlessly. The Company now maintains a formal
Management Information System ("MIS") Department staffed with two experienced
professionals who are responsible to guide the Company in its acquisition and
utilization of new hardware and software technology. The Company believes this
necessary investment in technology, approximating $1.1 million during 1997 and
1998, will assist it in minimizing the need for additional administrative
personnel as its sales growth continues.
Again, management is encouraged by the Company's overall performance during 1997
and realizes certain areas will continue to require additional attention and
resources during 1998. While the Company's West Coast operation continues to
build upon its progress from 1996 and 1997, the Company will seek additional
account executives for the Western region to enhance the possibility of positive
trends in sales and operating profits during 1998 and beyond. Conversely, the
Atlanta operation continues to perform below expectations. While management
16
OUTLOOK, continued
remains encouraged by the contributions of the Rental group in the Atlanta
facility during 1997, the Company's core custom exhibits group continues to
suffer from an insufficient Atlanta client base to support the fixed costs of
that operation, becoming increasingly dependent upon the transfer of custom
exhibit work from the Philadelphia, San Diego and Orlando facilities. The
Company will continue its search for experienced sales executives with an
existing base of custom exhibit clients to contribute the additional sales
volume which will assist in stabilizing the Atlanta operation.
Sparks Japan did not significantly impact 1997 operating margins through the
limited production by EDSI of certain exhibit products for Sparks Japan clients.
However, portable / modular exhibit sales in the Japan marketplace remain
relatively new, requiring significant time and effort to introduce these
products to Japanese exhibitors who have traditionally built and scrapped their
exhibits for each trade show. Portable / modular exhibits, successfully marketed
in the United States, can provide the Japanese exhibitor a large assortment of
design capabilities while simultaneously offering reconfigurability and
reusability for their future trade shows. Additionally, these exhibits provide
the Japanese exhibitor an alternative to the environmentally-unfriendly practice
of exhibit disposal. Any increase in Sparks Japan sales volume should benefit
the sales volume of EDSI and ADSI since Sparks Japan features the Expose' and
Exposure (ADSI's proprietary exhibit product) product lines in most of its sales
efforts.
The December 31, 1997 acquisition of DMS (see Note 2) has significantly impacted
the Company's balance sheet as of the acquisition date and will significantly
impact the Company's future results of operations. The acquisition of DMS will
further expand the Company's range of exhibit and display products, contributing
toward its objective of becoming a world-class leader in dimensional marketing
services. The competency and experience of the DMS management group should
provide the Company a firm base to expand the DMS business within an extremely
fragmented industry without needing significant additions to its management
structure. DMS' operating history of over 50 years and their long-term customer
relationships (one of DMS' two largest customers has purchased product from DMS
for over 40 years) should contribute to the Company a relatively consistent
stream of revenues, cash flow and profitability, which should translate into
higher shareholder value.
By meeting the challenges outlined above, maintaining the highest standards for
product quality and customer service, and, aggressively seeking acquisition
possibilities within industries that meet management's financial and synergistic
requirements, the Company will be positioned to take advantage of future
opportunities.
17
YEAR 2000 DATE CONVERSIONS
The Company's management information system department is currently replacing
its computer systems and applications necessary to position the Company to meet
the changing environment of information processing including meeting year 2000
date conversion with no material effect on customers or disruption to business
operations. These actions are necessary to ensure that the systems and
applications will recognize and process the year 2000 and beyond. Major areas of
potential business impact have been identified and conversion efforts are
underway. It is expected that the total cost of compliance over the cost of
normal software and hardware upgrades/replacements will not be material to the
Company's results of operations.
NEW ACCOUNTING STANDARDS
Effective January 1, 1998 the Company will adopt the provisions of Statement of
Financial Accounting Standards ("SFAS") 130, "Reporting Comprehensive Income".
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components in the financial statements. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company is in the process of determining its preferred format. The adoption
of SFAS 130 will not have a material impact on the Company's consolidated
results of operations, financial position or cash flows.
The Company will adopt the provisions of SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information" effective with the financial
statements for the year ended December 31, 1998. SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Financial statement disclosures for prior periods are required to be restated.
The Company is in the process of evaluating the disclosure requirements. The
adoption of SFAS 131 will not have a material impact on the Company's
consolidated results of operations, 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. 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; satisfying any
potential year 2000 issues with no material adverse effect on operations; the
effects of competition on products and pricing, 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
18
FORWARD-LOOKING STATEMENTS, continued
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.
ITEM 8. FINANCIAL STATEMENTS
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
19
PART III
Items 10, 11, 12 and 13 have been omitted from this report, since the Issuer
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 1997 fiscal year. Accordingly, relevant information contained in
such definitive proxy statement is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
Exhibit
Page
--------
(a) The following documents are filed as part of this report:
(1) Financial Statements and Financial Statement Schedule:
(i) Financial Statements:
Report of Independent Accountants 26
Consolidated Statements of Income for the years
ended December 31, 1997, 1996 and 1995 27
Consolidated Balance Sheets, December 31, 1997 and 1996 28
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995 29
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 30
Notes to Consolidated Financial Statements 31
(ii) Financial Statements Schedule:
Schedule II - Valuation and Qualifying Accounts 51a
(2) Acquisition Agreement for DMS Store Fixtures.
(Incorporated by reference to Issuer's Proxy Statement
dated December 12, 1997 filed with the Commission.)
20
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K,
continued
(3)(i)(a) Restated Certificate of Incorporation of the Issuer.
(Incorporated by reference to Exhibit 4(a) to the Issuer's
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 Issuer filed on June 2, 1987.
(Incorporated by reference to Exhibit 3(a)(ii) to the
Issuer's 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 Issuer filed on January 14, 1988.
(Incorporated by reference to Exhibit 3(a)(iii) to the
Issuer's Annual Report on Form 10-K for the year ended
December 31, 1988, filed with the Commission.)
(3)(i)(e) Certificate of Amendment to the Restated Certificate of
Incorporation of the Issuer filed on March 31, 1997.
(Incorporated by reference to Issuer's Proxy Statement
dated December 12, 1997 filed with the Commission.)
(3)(i)(d) Certificate of Amendment to the Restated Certificate of
Incorporation of the Issuer filed on May 8, 1989.
(Incorporated by reference to Exhibit 3(a)(iv) to the
Issuer's Annual Report on Form 10-K for the year ended
December 31, 1989, filed with the Commission.)
3(b) Amended and Restated By-laws of the Issuer. (Incorporated
by reference to Exhibit 3(b) to the Issuer's 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, 1996. (Incorporated by reference to
Exhibit 10(a) to the Issuer's Annual Report on Form 10-K
for the year ended December 31, 1995, filed with the
Commission).
10(b) Amended Agreement of Employment, dated December 11, 1992,
between the Issuer and Robert B. Ginsburg. (Incorporated
by reference to Exhibit 10(b) to the Issuer's Annual
Report of Form 10-K for the year ended December 31, 1992
filed with the Commission).
21
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K,
continued
10(c) Amended Agreement of Employment, dated December 11. 1992,
between the Issuer and Alan I. Goldberg. (Incorporated by
reference to Exhibit 10(b) to the Issuer'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 Issuer'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 Issuer's Annual Report of Form 10-K for the year ended
December 31, 1992 filed with the Commission.)
10(f) Employment and Option Agreements dated as of January 1,
1994 between the Issuer and Edmond D. Costantini, Jr.
(Incorporated by reference to Item 6(a) of the Issuer's
Quarterly Report of Form 10-QSB for the quarter ended
September 30, 1996 filed with the Commission.)
10(g) Lease for Premises located at 2828 Charter Road,
Philadelphia, PA. (Incorporated by reference to Exhibit
10(g) to the Issuer's Annual Report of Form 10-K for the
year ended December 31, 1992 filed with the Commission.)
10(h) Letter Agreement dated August 7, 1995 by and among the
Issuer, Donald Sparks, Stanley Ginsburg and Ira Ingerman.
(Incorporated by reference to Exhibit 6(a)) to the
Issuer's Quarterly Report of Form 10-QSB for the quarter
ended September 30, 1995 filed with the Commission.)
10(i) Lease for Premises located at 8125 Troon Circle, Austell,
GA 30001 (Incorporated by reference to Exhibit 10(i) to
the Issuer's Annual Report on Form 10-K for the year ended
December 31, 1993 filed with the Commission).
10(j) Lease for Premises located at 4560 36th Street, Orlando,
FL 32811 (Incorporated by reference to Exhibit 10(j) to
the Issuer's Annual Report on Form 10-K for the year ended
December 31, 1996 filed with the Commission).
22
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K,
continued
10(k) Leases for Premises 1919 Friendship Drive, El Cajon,
CA 92020 and 8787 Olive Lane, Santee, CA (Incorporated
by reference to Exhibit 10(k) to the Issuer's Annual
Report on Form 10-K for the year ended
December 31, 1996 filed with the Commission).
10(l) Letter Amendment dated January 22, 1996 to Amended
Employment Agreement with Robert B. Ginsburg (Incorporated
by reference to Exhibit 10(j) to the Issuer's Annual
Report on Form 10-K for the year ended December 31, 1993
filed with the Commission).
10(m) Letter Amendment dated January 22, 1996 to Amended
Employment Agreement with Alan I. Goldberg (Incorporated
by reference to Exhibit 10(k) to the Issuer's Annual
Report on Form 10-K for the year ended December 31, 1993
filed with the Commission).
10(n) Letter Amendment dated January 2, 1997 to Amended
Employment Agreement with Alan I. Goldberg 52
10(o) Letter Agreement dated January 2, 1997 to Amended
Employment Agreement with Robert B. Ginsburg 53
10(p) Option Agreement dated May 23, 1997 with
Robert B. Ginsburg 54
10(q) Option Agreement dated May 23, 1997 with
Alan I. Goldberg 56
10(r) Amendment to Employment Agreement dated January 1, 1997
with E. D. Costantini, Jr. 58
10(s) Employment Agreement dated December 31, 1997 with
Lawrence W. Schan 61
10(t) Employment Agreement dated December 31, 1997 with
Ira Ingerman 72
10(u) Employment Agreement dated December 31, 1997 with
Stanley Ginsburg 83
23
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K,
continued
21 Subsidiaries of the Issuer 94
23 Consent of Coopers & Lybrand L.L.P. 95
27 Financial Data Schedule for the year ended December 31, 1997 95a
27.1 Restated Financial Data Schedule for the quarter ended
March 31, 1997 96
27.2 Restated Financial Data Schedule for the quarter ended
June 30, 1997 97
27.3 Restated Financial Data Schedule for the quarter ended
September 30, 1997 98
27.4 Restated Financial Data Schedule for the quarter ended
December 31, 1996 99
27.5 Restated Financial Data Schedule for the quarter ended
March 31, 1996 100
27.6 Restated Financial Data Schedule for the quarter ended
June 30, 1996 101
27.7 Restated Financial Data Schedule for the quarter ended
September 30, 1996 102
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Issuer during the quarter
ended December 31, 1997.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Issuer 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/ E. D. Costantini, Jr.
Chief Financial Officer
Dated: March 27, 1998
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 Issuer and in
the capacities and on the dates indicated.
Signature Title Date
/s/ Fred Cohen Chairman of the March 27, 1998
- ----------------------------- Board of Directors
(Fred Cohen)
/s/ Seymour Hernes Director March 27, 1998
- -----------------------------
(Seymour Hernes)
/s/ Robert B. Ginsburg Director March 27, 1998
- -----------------------------
(Robert B. Ginsburg)
/s/ Alan I.Goldberg Director March 27, 1998
- -----------------------------
(Alan I. Goldberg)
/s/ William F. Hamilton Director March 27, 1998
- -----------------------------
(William F. Hamilton)
25
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
and Shareholders
Marlton Technologies, Inc.:
We have audited the consolidated financial statements and the financial
statement schedule of Marlton Technologies, Inc. and Subsidiaries as listed in
Item 14(a)(1)(i) and (a)(1)(ii) on page 20 of this Form 10-K. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Marlton
Technologies, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 19, 1998
26
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31,
1997 1996 1995
----------------- ------------------ -------------------
Net sales $ 48,715,828 $ 38,315,600 $ 27,671,763
Cost of sales 34,876,590 27,550,933 19,693,655
----------------- ------------------ -------------------
Gross profit 13,839,238 10,764,667 7,978,108
----------------- ------------------ -------------------
Expenses:
Selling 7,830,492 6,416,695 4,732,884
Administrative and general 3,734,770 3,002,109 2,506,201
----------------- ------------------ -------------------
11,565,262 9,418,804 7,239,085
----------------- ------------------ -------------------
Operating profit 2,273,976 1,345,863 739,023
----------------- ------------------ -------------------
Other income (expense):
Interest income 353,510 209,913 109,446
Interest expense (31,552) (120,266) (142,860)
Gain from contract amendment - 1,200,000 -
Other, net 27,382 54,643 9,205
----------------- ------------------ -------------------
349,340 1,344,290 (24,209)
----------------- ------------------ -------------------
Income before income taxes 2,623,316 2,690,153 714,814
Provision (benefit) for income taxes 620,000 350,000 (538,000)
----------------- ------------------ -------------------
Net income $2,003,316 $2,340,153 $1,252,814
Net income per common share:
Basic $ .42 $ .52 $ .32
Diluted $ .36 $ .45 $ .32
See notes to consolidated financial statements
27
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1997 1996
----------------------- -----------------------
Current:
Cash and cash equivalents $ 7,115,100 $ 3,300,010
Accounts receivable, net of allowance
of $266,000 and $181,000, respectively 10,444,298 5,424,080
Inventory 10,073,491 4,344,297
Prepaids and other current assets 1,337,497 452,930
Deferred income taxes 965,000 419,000
----------------------- -----------------------
Total current assets 29,935,386 13,940,317
Property and equipment, net of accumulated
depreciation and amortization 2,268,994 2,062,072
Rental assets, net of accumulated depreciation
of $1,348,279 and $825,134, respectively 901,651 1,013,361
Goodwill, net of accumulated amortization of $871,546
and $734,456, respectively 19,763,768 2,962,638
Deferred income taxes 616,870 1,558,870
Other assets, net of accumulated amortization
of $1,112,601 and $1,019,855, respectively 626,586 653,357
----------------------- -----------------------
Total assets $ 54,113,255 $ 22,190,615
======================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,386,117 $ 653,918
Accounts payable 4,294,971 2,586,572
Accrued expenses and other 12,235,351 4,916,511
----------------------- -----------------------
Total current liabilities 17,916,439 8,157,001
Long-term debt, net of current portion 12,243,312 457,440
----------------------- -----------------------
Total liabilities 30,159,751 8,614,441
----------------------- -----------------------
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; 6,889,444 and 4,534,592 issued, respectively 688,944 453,459
Additional paid-in capital 29,169,410 21,030,881
Accumulated deficit ( 5,793,173) ( 7,796,489)
----------------------- -----------------------
24,065,181 13,687,851
Less cost of 5,000 treasury shares 111,677 111,677
----------------------- -----------------------
Total stockholders' equity 23,953,504 13,576,174
----------------------- -----------------------
Total liabilities and stockholders' equity $ 54,113,255 $ 22,190,615
======================= =======================
See notes to consolidated financial statements.
28
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
For the years ended December 31, 1997, 1996 and 1995
Additional Total
Paid-in Accumulated Treasury Shareholders'
Shares Amount Capital Deficit Stock Equity
------------ ------------ --------------- ---------------- -------------- ------------
Balance, December 31, 1994 3,900,225 $390,023 $20,137,473 $(11,389,456) $(111,677) $9,026,363
Issuance of shares under compensation
arrangements 37,309 3,731 33,578 - - 37,309
Net income - - - 1,252,814 - 1,252,814
------------ ------------ --------------- ---------------- -------------- ------------
Balance, December 31, 1995 3,937,534 393,754 20,171,051 (10,136,642) (111,677) 10,316,486
Issuance of shares under compensation
arrangements 97,058 9,705 159,830 - - 169,535
Issuance of shares under contract
amendment 500,000 50,000 700,000 - - 750,000
Net income - - - 2,340,153 - 2,340,153
------------ ------------ --------------- ---------------- -------------- ------------
Balance, December 31, 1996 4,534,592 453,459 21,030,881 (7,796,489) (111,677) 13,576,174
Issuance of shares under compensation
arrangements 148,396 14,839 391,548 - - 406,387
Issuance of shares in exchange for
convertible notes 206,456 20,646 263,231 - - 283,877
Issuance of shares and warrants for
acquisition 2,000,000 200,000 7,483,750 - - 7,683,750
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
============ ============ =============== ================ ============== ============
See notes to consolidated financial statements
29
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31,
1997 1996 1995
--------------- ------------------ ---------------------
Cash flows provided (expended) through operating activities:
Net income $ 2,003,316 $ 2,340,153 $ 1,252,814
Adjustments to reconcile net income to cash provided
through operating activities:
Depreciation and amortization 1,569,287 1,637,424 1,110,712
(Increase) decrease in deferred taxes 396,000 171,130 (604,000)
Other operating items 78,845 49,002 44,256
Change in assets and liabilities, net of effects of acquisitions:
(Increase) in accounts receivable, net (2,681,217) (595,200) (258,662)
(Increase) in inventory (3,215,232) (1,296,444) (147,228)
(Increase) decrease in prepaids and other assets (326,714) 160,579 175,408
Increase (decrease) in accounts payable and
accrued expenses and other 7,119,839 1,011,321 (817,924)
--------------- ------------------ ---------------------
Net cash provided through operating activities 4,944,124 3,477,965 755,379
--------------- ------------------ ---------------------
Cash flows provided (expended) through investing activities:
Acquisition of business, net of cash acquired (12,970,740) (75,000) -
Investment in EDSI, minority partner - 115,000 -
Capital expenditures (1,306,630) (1,557,899) (890,265)
Disposal of capital assets 46,767 76,253 -
Acquisition of intangible assets - - (50,095)
--------------- ------------------ ---------------------
Net cash (expended) through investing activities (14,230,603) (1,441,646) (940,360)
--------------- ------------------ ---------------------
Cash flows provided (expended) through financing activities:
Proceeds from issuance of long-term debt 13,500,000 21,367 583,523
Principal payments on long-term debt (678,052) (658,482) (510,493)
Payments against notes payable, Sellers (20,000) - (328,618)
Proceeds from stock issuance - 750,000 -
Proceeds from exercised stock options 299,621 122,200 -
--------------- ------------------ ---------------------
Net cash provided (expended) through financing activities 13,101,569 235,085 (255,586)
--------------- ------------------ ---------------------
Increase (decrease) in cash and cash equivalents 3,815,090 2,271,404 (440,569)
Cash and cash equivalents - beginning of year 3,300,010 1,028,606 1,469,175
--------------- ------------------ ---------------------
Cash and cash equivalents - end of year $ 7,115,100 $ 3,300,010 $ 1,028,606
=============== ================== =====================
See notes to consolidated financial statements.
30
NOTES TO 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 majority
owned subsidiary (the "Company"). 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 trade show exhibits and museum
interiors and the manufacturing of panelized portable exhibits, themed
interiors, theme park attractions, staging and sets.
On December 31, 1997, the Company acquired the assets and
liabilities of DMS Store Fixtures, L.P. ("LP") through its
newly-formed, wholly-owned subsidiary DMS Store Fixtures Corp. ("DMS"),
a supplier of custom store fixtures and displays to national retailers,
department stores and consumer product manufacturers. Accordingly, no
activity from the operations of DMS are included in the results of
operations of the Company for any periods presented. However, the
acquired assets and liabilities of DMS are recorded at their estimated
fair value with the excess purchase price and related costs of
acquisition recorded as goodwill at December 31, 1997 (see Note 2).
Cash and Cash Equivalents:
For purposes of the statements of cash flows, 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 times throughout the year the Company maintained cash balances
in excess of FDIC limits.
Inventory:
Inventories are stated at the lower of cost (first-in,
first-out) or market.
Property and Equipment:
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.
31
1. Summary of Accounting Policies, continued:
Rental Assets:
Rental assets, which include manufactured and purchased
exhibit components, are stated at cost. Depreciation is recorded on a
usage basis, primarily over 1 to 3 years.
Long-Lived Assets
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.
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, deposits relating to
certain facility leases and the long-term portion of certain prepaid
expenses.
Revenue Recognition:
Revenues on trade show exhibit sales and themed interiors and
sets 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 as
components of Accrued expenses and other.
32
1. Summary of Accounting Policies, continued:
Income Taxes
The Company recognizes deferred tax assets and liabilities
based upon the expected 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.
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 with customers throughout the
United States and international. The Company performs ongoing credit evaluations
of its customers' financial condition and generally requires progress payments
which mitigate its loss exposure.
Two major retailers comprise the majority of DMS' customer base. While
DMS is affected by the well-being of the retail industry and its major
customers, management does not believe significant credit risks exist with
respect to its trade receivables.
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, 1997 and 1996.
33
1. Summary of Accounting Policies, continued
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. Prior periods have been restated in
accordance with Statement of Financial Accounting Standards (SFAS) 128
"Earnings Per Share.". Restated diluted net income per common share
amounts do not differ materially from previously reported primary net
income per common share amounts.
Recently Issued Accounting Standards
Effective January 1, 1998 the Company will adopt the
provisions of SFAS 130, "Reporting Comprehensive Income." SFAS 130
establishes standards for reporting and display of comprehensive income
and its components in the financial statements. Reclassification of
financial statements for earlier periods provided for comparative
purposes is required. The Company is in the process of determining its
preferred format. The adoption of SFAS 130 will not have a material
impact on the Company's consolidated results of operations, financial
position or cash flows.
The Company will adopt the provisions of SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information"
effective with the financial statements for the year ended December 31,
1998. SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. Financial statement disclosures for prior periods are
required to be restated. The Company is in the process of evaluating
the disclosure requirement. The adoption of SFAS 131 will not have a
material impact on the Company's consolidated results of operations,
financial position or cash flows.
34
2. Acquisitions:
DMS Stores Fixtures, Inc.:
On December 31, 1997, the Company acquired the assets and liabilities
of LP, a supplier of custom made store fixtures and displays to
national retailers, department stores and consumer product
manufacturers. Total consideration paid by the Company for LP, was
$13.5 million in cash and an additional $1.0 million of cash held in
escrow until the December 31, 1997 guaranteed net worth of $5.5 million
in LP was verified and released by Company management during February
1998. Additionally, the Company issued 2 million unregistered shares of
its common stock, with an additional 250,000 shares contingent upon DMS
achieving at least $12.5 million in cumulative pre-tax earnings through
December 31, 2002. As part of this acquisition, the Company entered
into five year employment agreements with the three principals of LP,
one of which, is the father of the Company's Chief Executive Officer
providing minimum annual base salaries ranging from $125,000 to
$250,000. One individual is eligible to receive an annual bonus up to a
maximum of $250,000 per year during the term of his five year
employment agreement based on the after-bonus, pre-tax earnings of DMS.
The Company will maintain key man life insurance of $2.0 million on one
of the individuals and a $2.0 million "second-to-die" policy on the
remaining two individuals. The Company incurred fees of approximately
$860,000 as part of the Acquisition, including approximately $214,000
for the value of 162,500 warrants for the Company's common stock which
were 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
will be amortized on a straight line basis over the term of the
Company's loan agreement, five years, commencing January 1, 1998.
The acquisition has been accounted for using the purchase
method of accounting. The excess cost, including related costs of the
transaction, over the net assets acquired, amounting to approximately
$16.9 million on a preliminarily allocated basis, will be amortized on
a straight-line basis over a period of 30 years commencing January
1998.
The following table summarizes the unaudited consolidated pro
forma information assuming the acquisition occurred at the beginning of
each of the following periods. The pro forma effect of the Piper
acquisition is not material and, accordingly, has been excluded from
the pro forma presentation.
35
2. Acquisitions, continued:
1997 1996
---- ----
Net sales $79,796,000 $68,440,000
Operating income 4,059,000 3,527,000
Net income $ 2,816,000 $ 3,529,000
Weighted average of common shares:
Basic 6,759,000 6,480,000
Diluted 7,634,000 7,246,000
Net income per common share:
Basic $.42 $.54
Diluted $.37 $.49
Pro forma net income presented for 1997 and 1996 include two
significant non-recurring items. Prior to LP being acquired by the
Company, it charged $792,000 against its 1997 earnings for the value of
stock compensation paid to certain LP employees. During 1996, the
Company recorded a $1.2 million gain from a contractual amendment.
Exclusive of the after-tax effect of these two significant
non-recurring items during 1997 and 1996, pro forma net income for the
respective period was $3,418,000 ($.45 per diluted common share) and
$2,484,000 ($.34 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 periods
presented or the future results of the combined operations.
Piper Productions, Inc.:
The Company acquired 100% of the stock of Piper Productions,
Inc. ("Piper") of Orlando, Florida, effective April 1, 1996. Total
consideration paid for Piper, including related expenses, approximated
$200,000. The Company made a cash payment of $50,000 at closing, and
issued a $100,000 note bearing interest at 6% payable in 5 equal annual
installments which commenced on April 1, 1997. Up to $200,000 in
36
2. Acquisitions, continued:
additional consideration is payable should Piper achieve defined sales
levels through 2001.
The acquisition was accounted for as a purchase with the
operating results of Piper included in the consolidated statement of
income from the acquisition date. Accordingly, the acquired assets and
liabilities have been recorded at their estimated fair values at the
date of acquisition.
Sparks Exhibits Corp.:
In August, 1990, the Company acquired Arrow Exhibits, Inc.
("Arrow") and transferred the operations to its newly formed
subsidiary, Sparks Exhibits Corp. ("Sparks").
The Agreement provided for certain additional consideration to
be paid to the Sellers based on defined operating results of Sparks
through December 31, 1994. During 1995 the Company paid $478,618 as
additional consideration. The final cumulative contingent earn-out
obligation to the Sellers of $333,972 payable in August 7, 1995 was
satisfied by a cash payment of $50,095 and issuance of three two-year
notes totaling $283,877 bearing interest at 8%, payable quarterly and
convertible to the Company 's common stock at $1.375 per share. The
Sellers converted their two-year notes into the Company's common stock
during January 1997. All additional consideration paid to the Sellers
has been recorded as goodwill.
Expose Display Systems, Inc.:
During July 1993, the Company and Abex Display Systems, Inc.
("ADSI"), entered into an agreement to organize a new California
corporation, Expose Display Systems, 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 contingent
upon ADSI meeting defined sales levels.
EDSI sales, net of inter-company revenues, for 1997, 1996 and
1995 approximated $4.7 million, $3.1 million and $2.1 million,
respectively. As of December 31, 1997 and 1996 $253,000 and $120,000,
respectively, was owed to ADSI by EDSI.
37
3. Net Income per Common Share:
Income per share amounts have been restated in accordance with SFAS
128, "Earnings Per Share." This restatement did not result in a
material change between diluted per common share amounts and previously
reported primary per common share amounts.
The following table sets forth the computation of basic and diluted net
income per common share (in thousands):
1997 1996 1995
---- ---- ----
Net income $2,003 $2,340 $1,253
====== ====== ======
Weighted average common
shares outstanding used to compute
basic net income per common share 4,765 4,480 3,930
Additional common shares to be issued
assuming exercise of stock options,
net of shares assumed reacquired 875 766 6
----- ------- ------
Total shares used to compute
diluted net income per common share 5,640 5,246 3,936
===== ======= ======
Basic net income per share $.42 $.52 $.32
==== ==== ====
Diluted net income per share $.36 $.45 $.32
==== ==== ====
Options and warrants to purchase 190,000 shares of common stock at prices
ranging from $5.00 per share to $7.00 per share were outstanding at December 31,
1997, but were not included in the computation of diluted income per common
share because the option's and warrant's exercise price was greater than the
average market price of the common shares.
4. Gain on Japan Transaction:
The Company and Tsubasa System Company, Ltd. ("Tsubasa") a diversified
manufacturing and marketing company entered into a distribution and license
agreement during 1995 and jointly formed a Japanese corporation, Sparks Japan,
to market portable exhibits in Japan. Sparks Japan was capitalized with
$250,000, 90% owned by Tsubasa and 10% owned by the Company. In an amendment to
that agreement during January 1996, the Company agreed to eliminate certain
future payments from Sparks Japan and to issue to Tsubasa 500,000 unregistered
shares of the Company's common stock in exchange for $3,000,000 and a commitment
from the Company to provide requisite technical, operational and marketing
support
38
4. Gain on Japan Transaction, continued:
to the operation. The agreement also requires that the funds received by the
Company are to be used only for its operating activities and to acquire
companies, products and services within the exhibit industry, unless prior
approval is obtained from Tsubasa.
In the event that Sparks Japan does not achieve certain sales levels by
December 31, 1998 and the Company's common stock is trading at less than $3.00
per share at that time, if requested by Tsubasa, the Company is required to, at
its option, either repurchase the Tsubasa shares at $3.00 per share or make a
cash payment per share to Tsubasa equal to the difference between the December
31, 1998 trading price and $3.00.
A gain of $1,000,000 was recognized in 1996 representing the
consideration received less amounts allocated to the 500,000 shares of common
stock issued, the "put option" and the incremental direct costs expected to be
incurred by the Company with respect to complying with certain requirements of
the agreement. During the fourth quarter of 1996, management re-evaluated the
put option and expected direct costs, resulting in a $200,000 increase to the
recorded gain during 1996. Included in Accrued expenses and other at December
31, 1997 and 1996 are accrued contractual costs of $467,409 and $713,299,
respectively.
5. Cash Flows Information:
Cash paid for interest in 1997, 1996 and 1995 amounted to $28,053, $121,049, and
$140,206, respectively.
Cash paid for income taxes in 1997, 1996 and 1995 amounted to $61,170, $30,398
and $9,509, respectively.
Cash paid for the acquisition of LP was calculated as follows:
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 1997 the following non-cash investing and financing
transactions took place:
o The Company issued 2,000,000 shares of its common stock and 162,500
warrants in connection with the acquisition of LP.
39
5. Cash Flows Information, continued:
o The Company issued 27,166 shares 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
o 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.
During 1996 the following non-cash investing and financing transactions took
place:
o The Company issued to the Piper seller a $100,000 note bearing interest at
6% and payable in five equal, annual installments commencing April 1, 1997.
o The Company issued 35,958 shares 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.
o During 1995 the following non-cash investing and financing transactions
took place:
o The Company issued to three Sellers, two-year notes amounting to $283,877
and bearing interest at 8% and payable quarterly in lieu of the final
payment for additional consideration in connection with the a 1990
acquisition.
6. Inventory:
Inventory at December 31, 1997 and 1996 consists of the following:
1997 1996
---- ----
Raw materials $ 819,273 $ 775,805
Work in process 6,763,508 3,568,492
Finished goods 2,490,710 -
----------- -----------
$10,073,491 $ 4,344,297
=========== ===========
40
7. Property and Equipment and Rental Assets:
Property and equipment at December 31, 1997 and 1996 consists of the following:
1997 1996
---- ----
Manufacturing equipment and vehicles $1,510,901 $ 1,352,095
Office equipment and data processing 2,685,036 1,990,537
Leasehold improvements 1,406,548 1,265,030
Showroom exhibits and other 643,254 582,764
---------- ------------
6,245,739 5,190,426
Less accumulated depreciation
and amortization 3,976,745 3,128,354
--------- ---------
$2,268,994 $2,062,072
========== ==========
1997 1996
---- ----
Rental assets at December 31, 1997 and
1996 consists of the following:
Rental assets $2,249,930 $1,838,495
Less accumulated depreciation 1,348,279 825,134
----------- ----------
$ 901,651 $1,013,361
=========== ==========
Depreciation expense was approximately $1,339,000, $1,123,000 and $799,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
8. Intangible Assets:
Amortization expense related to goodwill and other intangible assets
was approximately $230,000, $514,000 and $312,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
41
9. Accrued Expenses and Other:
Accrued expenses and other at December 31, 1997 and 1996 consist of the
following:
1997 1996
---- ----
Accrued compensation $ 2,423,390 $1,298,682
Customer deposits 6,596,745 1,176,745
Accrued payroll, sales and business taxes 268,462 433,876
Accrued insurance costs 508,202 302,270
Accrued acquisition costs 513,207 --
Accrued contractual costs (See Note 4) 467,409 713,299
Other 1,457,936 991,639
----------- ----------
$12,235,351 $4,916,511
=========== ==========
10. Debt Obligations:
Notes Payable:
The Company, in connection with the December 31, 1997 acquisition of
LP, 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. Borrowings under the term loan
and revolving credit facility bear 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. A final payment is due during 2002 provided the Company
has not fully repaid the term loan due to contractually-required prepayments
equal to 50% of defined excess cash flow, applied in the inverse order of the
installments' due date.
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. No
amounts under the revolving credit facility were outstanding as of December 31,
1997. The Company is subject to an annual commitment fee of 75 basis points on
the average annual unused portion of the revolving credit facility, payable in
arrears, commencing January, 1999.
42
10. Debt Obligations, continued
Long-term debt at December 31, 1997 and 1996 consists of the following:
1997 1996
---- ----
Term loans payable, banks:
Interest payable quarterly at adjusted LIBOR
plus spreads ranging from 75 to 100 basis
points, principal in equal quarterly payments
commencing April 1, 1998 based on minimum
annual installments of $1.350 million, $2.025
million, $2.025 million, $3.375 million and a
final payment up to $4.725 million $13,500,000 --
Interest payable monthly at rates ranging
from 6.85% to 8.6%, principal paid during 1997 -- $623,334
Seller Notes payable, converted into 206,456 shares of
common stock during January 1997 -- 283,877
Seller Note payable, interest payable
annually at 6%, principal payable in annual
installments of $20,000 through April, 2001 80,000 100,000
Other 49,429 104,147
----------- -----------
13,629,429 1,111,358
Less current portion 1,386,117 653,918
----------- -----------
$12,243,312 $ 457,440
=========== ===========
Aggregate long-term debt maturities for the next five years are as follows:
Years ended December 31, Amount
------------------------ ------
1998 $ 1,386,117
1999 2,057,480
2000 2,058,813
2001 3,402,034
2002 4,724,985
-----------
$13,629,429
===========
43
11. Commitments and Contingencies:
The Company operates in leased office and warehouse facilities. Lease
terms range from monthly commitments up to 81 months with options to renew at
varying times. Certain lease agreements require the Company to pay supplemental
costs of utilities, taxes, insurance and maintenance.
The Company leases its DMS facility from a partnership controlled by
two shareholders of the Company. The lease expires May 2001. The annual rent is
$180,000. In addition, the Company is responsible for taxes, insurance and other
operating expenses.
As of December 31, 1997, future minimum lease commitments under
non-cancelable operating leases are as follows:
Year ended December 31,
-----------------------
1998 $1,652,000
1999 1,473,000
2000 1,303,000
2001 831,000
2002 791,000
2003 and thereafter 1,088,000
----------
Total minimum lease commitments $7,138,000
==========
Rental expense, exclusive of supplemental costs was approximately
$1,405,000, $1,382,000 and $1,111,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
Pursuant to their employment contracts, two officers may obtain shares
of common stock at $1.60 per share based on a formula related to certain prior
deferred compensation and accrued bonuses. As of December 31, 1997, there were
360,042 shares reserved for these arrangements.
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.
44
12. Warrants and Stock Options:
Warrants
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 the Company's financial advisor and lending institution,
respectively, as part of the LP 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 ("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 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 ("DCSOP")
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 (as amended through July
1996)("1992 Plan"), with a total of 200,000 authorized shares, was
amended in December 1994 to provide that in addition to stock awards,
stock options may be granted to Directors at a price not less than
market value on the date of the grant.
45
12. Warrants and Stock Options, continued
The following is a summary of option transactions and exercise
prices:
Price Weighted
Shares Per Share Average
------ --------- -------
Outstanding at
December 31, 1994 1,173,245 $1.60 to $4.00 $2.02
=========
Granted 90,000 $2.00 2.00
Expired (57,783) $2.60 to $4.00 2.90
-----------
Outstanding at
December 31, 1995 1,205,462 $1.60 to $2.75 1.98
==========
Granted 339,300 $2.00 to $2.88 2.42
Expired (2,540) $2.00 2.00
Exercised (61,100) $2.00 2.00
----------
Outstanding at
December 31, 1996 1,481,122 $1.60 to $2.88 2.08
=========
Granted 172,419 $3.57 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
=========
46
12. Warrants and Stock Options, continued
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1997:
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------
Weighted Average
Number ---------------- Number Weighted
Range of Exercise of Options Remaining of Options Average
Prices and Awards Life (Years) Exercise Price and Awards Exercise Price
----------------- ---------- ------------ -------------- ---------- --------------
1990 Plans $1.60 to $2.00 854,720 3.46 $1.81 854,720 $1.81
$3.38 to $3.38 40,000 9.33 3.88 -- --
-------------- -------- ---- ------ ------- -----
Plan Totals $1.60 to $3.38 894,720 3.72 $1.88 854,720 $1.81
-------------- ------- ---- ----- ------- -----
1984 Plan $2.00 to $3.88 47,780 1.69 $2.79 47,780 $2.79
$6.00 to $6.00 20,000 3.01 6.00 20,000 6.00
-------------- -------- ---- ------ -------- -----
Plan Totals $2.00 to $6.00 67,780 2.08 $3.74 67,780 $3.74
-------------- -------- ---- ----- -------- -----
NSOP $2.00 to $3.28 15,165 2.62 $2.44 15,165 $2.44
-------------- -------- ---- ----- -------- -----
DCSOP $2.45 to $2.45 19,000 0.46 $2.45 19,000 $2.45
-------------- -------- ---- ----- -------- -----
1992 Plan $2.49 to $3.50 80,000 2.87 $2.33 80,000 $2.33
$4.45 to $4.45 30,000 4.45 3.57 -- --
-------------- -------- ---- ------ -------- -----
Plan Totals $2.49 to $4.45 110,000 3.30 $2.67 80,000 $2.33
-------------- ------- ---- ----- -------- -----
Other $2.00 to $3.50 234,800 3.44 $2.26 128,800 $2.22
$3.88 to $7.00 92,419 3.81 $4.51 84,919 $4.38
-------------- -------- ---- ----- -------- -----
Total Other $2.00 to $7.00 327,219 3.51 $2.89 213,719 $3.08
-------------- -------- ---- ----- -------- -----
Grand Total $1.60 to $7.00 1,433,844 3.52 $2.27 1,250,384 $2.18
============= ========= ==== ===== ========= =====
The following is a summary of stock options exercisable at December 31,
1997, 1996 and 1995, and their respective weighted-average share
prices:
Weighted Average
Number of Shares Exercise Price
---------------- --------------
Options exercisable December 31, 1997 1,250,384 $2.18
Options exercisable December 31, 1996 1,130,296 $2.00
Options exercisable December 31, 1995 909,513 $1.94
47
12. Warrants and Stock Options, continued
The Company has adopted the disclosure -only provisions of
SFAS 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 123, net income and diluted
income per common share would have been reduced to the pro forma
amounts as follows:
Year ended December 31,
1997 1996 1995
---- ---- ----
Net Income As reported $2,003,316 $2,340,153 $1,252,814
Pro Forma 1,747,569 2,235,544 1,224,500
Diluted Income Per
Common Share As reported $.36 $.45 $.32
Pro Forma $.31 $.41 $.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 1997, 1996 and
1995 include the following:
Assumption 1997 1996 1995
---------- ---- ---- ----
Dividend yield 0.0% 0.0% 0.0%
Risk-free rate 6.0% 6.2% 7.2%
Expected life 3-4 yrs. 4-5 yrs. 5 yrs.
Expected volatility 68% 74% 79%
Fair Value $2.07 $1.42 $0.69
48
13. 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, as determined by the market value of
Company stock when contributed, with respect to this Plan were
approximately $55,000, $50,000 and $32,000 in 1997, 1996 and 1995,
respectively.
14. Income Taxes:
The components of the provision (benefit) for income taxes
were as follows:
1997 1996 1995
---- ---- ----
Current:
Federal $ 99,000 $ 87,000 $ 27,000
State 125,000 91,000 39,000
Deferred:
Federal 375,000 172,000 (590,000)
State 21,000 - (14,000)
------ -------- -----------
$620,000 $350,000 $(538,000)
======== ======== ==========
A reconciliation of the federal statutory rate to the
Company's effective tax rate is as follows:
1997 1996 1995
---- ---- ----
Federal statutory rate 34% 34% 34%
State income tax, net of Federal
income tax effect 4 3 2
Non-deductible expenses 3 3 7
Valuation allowance (13) (33) (114)
Other, net (4) 6 (4)
---- ------- -----
24% 13% (75%)
=== === =====
49
14. Income Taxes, continued
The net deferred tax asset at December 31, 1997 and 1996
comprises the following:
1997 1996
---- ----
Net operating loss carryforwards $ 287,000 $1,441,000
General business credits 1,406,000 1,856,000
Alternative minimum tax credits 190,000 120,000
Property and equipment 249,000 228,000
Accrued expenses and compensation 387,000 200,000
Other, net 119,000 (11,000)
---------- -----------
2,638,000 3,834,000
Valuation allowances (1,056,000) (1,856,000)
---------- ------------
Net deferred tax asset $1,582,000 $1,978,000
========== ===========
The decrease in the valuation allowance in 1996 resulted from the
release of valuation allowance based on the re-evaluation of the
realizability of future benefits of net operating loss carryforwards.
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 expire primarily in 1998. Based on this
reassessment, a benefit of approximately $350,000 was recognized
related to release of valuation allowance and approximately $450,000 of
gross deferred tax asset and valuation allowance were written off.
Realization of the net deferred tax asset is dependent upon generating
sufficient taxable income prior to expiration of the net operating loss
carryfowards (NOL's) and general business credits. Although realization
is not assured, management believes it is more likely than not that the
recorded net deferred tax asset will be realized.
As of December 31, 1997, the Company had federal NOL's of
approximately $843,000, expiring through 2008 and general business
carryforwards of approximately $1,406,000 which expire primarily in
1998.
50
15. Quarterly Financial Information (Unaudited)
Summarized unaudited quarterly financial data for
the years ended December 31, 1997 and 1996 are:
1997 March 31 June 30 September 30 December 31
---- -------- ------- ------------ --------------
Net Sales 11,838 12,185 12,014 12,678
Gross Profit 3,517 3,297 3,430 3,595
Net Income 402 383 322 896 (1)
Basic Net Income Per
Common Share (2) .09 .08 .07 .19
Diluted Net Income
Per Common Share (2) .07 .07 .06 .15
1996
Net Sales 8,578 10,288 10,243 9,207
Gross Profit 2,529 2,906 2,762 2,568
Net Income 1,014 (3) 280 164 882 (1)(4)
Basic Net Income Per
Common Share (2) .23 .06 .04 .19
Diluted Net Income
Per Common Share (2) .22 .05 .03 .16
(1) Fourth quarter results include the release of valuation
allowances based on the reevaluation of the realizability of
net operating loss carryforward and general business credits.
(2) During the fourth quarter of 1997, the Company adopted the
provisions of SFAS 128 and, as required, has restated all prior
period per common share data.
(3) Includes a pre-tax gain of $1,000 from a contract amendment.
See Note 4 of the consolidated financial statements.
(4) Includes a pre-tax gain of $200 from a contract amendment.
See Note 4 of the consolidated financial statements.
51
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1997, 1996 and 1995
(Thousands of Dollars)
Additions Additions
charged charged
(deductions (deductions
Balance at credited) credited) Balance at
beginning of to costs and to other Deductions end of
year expenses accounts (b) (a) year
------------------ ---------------- ----------------- ------------ ---------------
Description
Year ended December 31, 1997:
Allowance for doubtful accounts $181 $150 $267 $(65) $533
Deferred income tax valuation allowance $1,856 $(350) $(450) $1,056
Year ended December 31, 1996:
Allowance for doubtful accounts $132 $51 $(2) $181
Deferred income tax valuation allowance $2,735 $(879) $1,856
Year ended December 31, 1995:
Allowance for doubtful accounts $86 $80 $(34) $132
Deferred income tax valuation allowance $3,669 $(934) $2,735
(a) Write-off of uncollectible receivables, net of recoveries
(b) Acquired in connection with DMS acquisition
See notes to consolidated financial statements
51a