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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, 1998
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. __
The aggregate market value of the voting stock held by non-affiliates of the
Issuer at March 25, 1999 was $16,014,669. As of March 25, 1999, there were
7,269,990 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 eference into this Form 10-K.
(i) Information from the Issuer's definitive proxy statement for the 1999 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 56
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
Marlton Technologies, Inc. (the "Company") was incorporated as a New Jersey
corporation in 1966. The Company's business was related to computerized
electronic telecommunication systems until 1988, when it sold substantially all
of its operating assets.
On August 7, 1990, the Company acquired the business of Sparks Exhibits Corp.
("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/modular exhibits. During the fourth quarter of 1990, the Company
acquired the accounts and assets of the trade show exhibit division of a
competitor and also established a portable exhibits group. The Company
subsequently formed (i) Sparks Exhibits, Inc. ("Exhibits") during July 1991 in
the Atlanta, Georgia area, (ii) Sparks Exhibits, Ltd. ("Limited") during July
1992 in the San Diego, California area, and (iii) Sparks Exhibits Incorporated
("Incorporated") during December 1992 in the Orlando, Florida area, in each case
by acquiring the assets of trade show exhibit manufacturing companies. During
April 1996, the Company acquired the stock of Piper Productions, Inc. ("Piper")
in Orlando, Florida, and during December 1997 the operations of Incorporated
were combined into Piper. In addition to Incorporated's trade show exhibit
business, Piper produces business theater, theme park attractions, themed
interiors, theatrical scenery and special effects. On December 31, 1997, the
Company acquired DMS Store Fixtures Corp. ("DMS") in King of Prussia,
Pennsylvania. DMS supplies custom made fixtures and displays to national
retailers, department stores and consumer products manufacturers. On April 1,
1998, the Company acquired a San Francisco, California-based producer of exhibit
properties for industrial and corporate theater events and changed the name of
the acquired company to Sparks Scenic, Ltd. ("Scenic"). Currently, all of the
Company's operating revenues are derived from Sparks, Exhibits, Limited, Piper,
DMS and Scenic.
On February 1, 1998, the Company exchanged its 51% interest in a jointly-owned
subsidiary and paid cash to Abex Display Systems, Inc. ("ADSI") for a 25%
interest in ADSI, a portable/modular trade show exhibit manufacturer based in
Los Angeles, California. On August 1, 1998 the Company acquired a 20% equity
interest in Abex Europe, Ltd. ("AEL"), a United Kingdom corporation which
markets, assembles and distributes portable/modular exhibit products and
produces graphics. The Company's investment in both ADSI and AEL is accounted
for using the equity method with the Company recognizing its pro-rata portion of
ADSI and AEL's operating results.
1
Business Description
Products and Services:
The Company is engaged in the design, production and sale of exhibits and
environments for trade shows, museums, theme parks, themed interiors and
retailers. Clients include industry, government, entertainment and commercial
establishments. Graphics and industrial designers develop and manage custom
design requirements from concept through final construction, employing
sophisticated computer-aided 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, interactive
program production and customized software and hardware applications. The
Company provides full service trade show exhibit services, including
coordination, refurbishing, storage and marketing literature distribution. Many
clients are Fortune 1000 firms, who typically contract for custom trade show
exhibit projects in excess of $100,000. Additionally, a majority of these
clients store their trade show exhibits at a Company facility, where ongoing
refurbishing and coordination of clients' trade show schedules are provided. The
Company also represents domestic clients who desire to exhibit at international
trade shows. The Company designs such exhibits, and through an international
network of independent exhibit manufacturers, arranges for the manufacture and
delivery of trade show exhibits to the desired trade show. The Company produces
sophisticated themed exhibits for educational and entertainment venues such as
museums, theme parks and theaters. Typically, the customer, or its design firm,
prepare the design for the design for the Company to fabricate using carpentry,
sculpture, metal working and scenic artist skills. The Company also designs and
manufactures trade show exhibits for a number of United States subsidiaries of
foreign corporations for use in domestic trade shows. The Company is also
engaged in the business of supplying custom store fixtures, showcases and point
of purchase displays for retailers, having the expertise and capability to take
a design from concept to installation. Engineers and designers work with the
customers to develop the fixture design through computer aided design equipment.
Engineering drawings are then produced and provided to a third-party factory for
production. The Company utilizes various manufacturers with whom it has
developed long standing business relationships from the early 1980's for the
production of its products. These factories work closely with an experienced
project 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. The Company made no
significant disbursements during each of the last three fiscal years for
research and development activities.
2
Marketing and Distribution:
Sales by the Company to domestic customers for both domestic and international
use are solicited through internal marketing groups. Purchase of sophisticated
exhibits and environments 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 exhibits and environments as
well as complying with internal profitability requirements. In addition to the
sales personnel, senior officers devote substantial time and effort to sales and
marketing activities.
Manufacturing and Raw Materials:
The Company designs, develops and manufactures custom trade show exhibits
utilizing an in-house staff of designers, carpenters, electricians and
warehousemen. Specialty items such as steel work and studio production are
subcontracted. The Company also subcontracts the manufacture of exhibits for
foreign trade shows. The Company coordinates shipping, exhibit set-up and
removal at the customer's trade show and, in most cases, subsequently stores the
exhibit for the customer. For scenic projects, the Company employs scenic
carpenters and metal workers to fabricate scenery which is painted by skilled
scenic artists. The Company utilizes a network of manufacturers for the
production of its store fixture and display products. Raw materials for custom,
scenic and portable exhibits, store fixtures and displays, as well as
subcontractor work are readily available from various vendors. Portable exhibit
configurations, together with graphics and signage, are typically designed by
the Company for a client and are purchased from ADSI or unrelated manufacturers
for resale. Graphics and signage may be produced internally or subcontracted.
Geographic distribution rights are typically granted by portable exhibit
manufacturers based on annual sales volume levels. The Company has obtained such
distribution rights from its primary sources of portable exhibits.
Licenses and Rights:
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, 2001 in
Philadelphia, and a three year labor contract expiring November 14, 2001 in King
of Prussia, PA.
Seasonality of Business:
Trade shows traditionally occur regularly throughout the year with the exception
of the third quarter when business to business trade shows are historically at a
low point. Trade show activities in specific industries, such as health care and
telecommunications, tend to be a function of seasonal show schedules within
those industries. The custom store fixture business tends to be slower during
the fourth and first quarters due to retailers' desires not to install or plan
new fixtures during their traditionally busy year-end season. The Company seeks
new
3
clients and sales people with client bases in different industries to reduce the
effects of the slower sales periods. Additionally, the Company is now offering
other products and services, such as sales of scenic and themed exhibits,
portable/modular exhibits, and permanent exhibits which tend to be less seasonal
in nature.
Working Capital:
The Company's working capital requirements are fulfilled by funds generated
through operations and revolving credit facilities. Working capital requirements
are generally not affected by project size requirements or accelerated delivery
for major trade show exhibit, scenic and themed exhibit customers due to general
policies of progress billing on larger jobs. Additionally, the Company does not
require continuous allotments of raw materials from suppliers and does 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 1998, one individual customer accounted for 16% of consolidated net
sales. Custom store fixture annual sales have historically been significantly
reliant upon two customers for a major portion of their annual revenues. These
two customers, combined, accounted for 23% of 1998 revenues. No customers
exceeded 10% of consolidated net sales in 1997 or 1996. The loss of one or both
of such customers, or a significant reduction in one or both of these customers'
purchases, could have a material adverse effect on the Company's results of
operations. The Company expects this situation to continue in future periods.
Backlog:
Backlog of orders at December 31, 1998, and 1997 was approximately $27.0 million
and $23.6 million, respectively. Generally, backlog of orders are recognized as
sales during the subsequent six month period. The entire current backlog relates
to expected 1999 sales. The Company maintains a client base from which new
orders are continually generated, including refurbishing of existing trade show
exhibits stored in the Company's facilities. There are also a significant amount
of proposals outstanding with current and prospective clients.
Competition:
The Company competes with other companies offering similar products and
providing similar services on the basis of price, quality, performance 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 Company. In addition to its Philadelphia, Atlanta, San
Diego, San Francisco and Orlando manufacturing facilities, the Company utilizes
its national and international affiliations and relationships to meet customers
needs in other geographic areas. Due to the lack of specific public information,
the Company's competitive position is difficult to ascertain.
4
Environmental Protection:
The Company's compliance with federal, state and local provisions regulating
discharge of materials into the environment or otherwise relating to the
protection of the environment has not had, and is not expected to have, a
material effect upon its capital expenditures, earnings, and competitive
position.
Employees:
The total number of persons employed by the Company is approximately 375 of
which all are full-time employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases six 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, FL 45,000 Office, warehouse & manufacturing
San Carlos, CA 42,000 Office, warehouse & manufacturing
------
543,000
The Company's subsidiaries also have five sales offices of under 1,000 square
feet each. The Company's office, showroom, warehouse and manufacturing
facilities were all in good condition and adequate for 1998, based on normal
five-day operations, and are adequate for 1999 operations, including any
foreseeable internal growth. The Company does not anticipate any difficulty
in acquiring additional space, if necessary.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
5
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 Company on its principal market, the American Stock
Exchange:
1998 1997
---- ----
Quarter High Low High Low
------- ---- --- ---- ---
1 7-5/8 4-3/4 4-3/16 3-3/8
2 7-5/16 6 4-7/16 3-1/4
3 6-5/8 2-3/4 7-1/8 3-3/4
4 5-1/2 3-5/8 7-3/4 5-1/2
No dividends were paid during the past two fiscal years. The Company currently
intends to employ all available funds in the business. Future dividend policy
will be determined in accordance with the financial requirements of the
business. However, the Company's bank loan agreement provides that the Company
may not pay dividends to its shareholders without the bank's prior consent.
Unless waived, this restriction will preclude the Company from paying dividends.
As of March 25, 1999, there were 971 holders of record of the Company's common
stock.
6
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
For the year ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
TOTAL ASSETS $62,022,260 $54,113,255 $22,190,615 $16,607,893 $16,144,711
LONG-TERM OBLIGATIONS 11,744,495 12,243,312 457,440 991,894 691,676
OPERATIONS:
Net sales 91,134,034 48,715,828 38,315,600 27,671,763 24,613,216
Operating profit 5,314,926 2,273,976 1,345,863 739,023 525,969
Net income $2,820,631 $2,003,316 $2,340,153 (2) $1,252,814 $486,794 (1)
BASIC NET INCOME PER
COMMON SHARE (3) $.40 $.42 $.52 $.32 $.13
DILUTED NET INCOME PER
COMMON SHARE (3) $.35 (4) $.36 (4) $.45 (4) $.32 $.13
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) Basic per common shares amount are computed using the weighted average
number of common shares outstanding during the year. Diluted per common
share amounts are computed using the weighted average number of common
shares outstanding during the year and dilutive potential common shares.
Dilutive potential common shares consist of stock options and stock
warrants, calculated using the treasury stock method.
(4) Diluted net income per common share does not reflect elimination of
non-recurring items and the application of comparable income tax
provisions. See MD&A "Net Income" analysis.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General Overview
The Company's business is the custom design, production and sale of exhibits and
environments for trade shows, museums, theme parks, themed interiors and
retailers stores for clients in industry, government, entertainment, and
commercial establishments.
On August 7, 1990, the Company acquired the business of Sparks Exhibits Corp.
("Sparks") in Philadelphia, Pennsylvania. Sparks custom designs and manufactures
sophisticated trade show exhibits, displays, architectural and museum interiors,
graphics and signage, provides trade show services and designs and sells
portable exhibits. During the fourth quarter of 1990, the Company acquired the
accounts and assets of the trade exhibit division of a competitor and also
established a portable exhibits group. The Company subsequently formed (i)
Sparks Exhibits, Inc. ("Exhibits") during July 1991 in the Atlanta, Georgia
area, (ii) Sparks Exhibits, Ltd. ("Limited") during July 1992 in the San Diego,
California area, and (iii) Sparks Exhibits Incorporated ("Incorporated") during
December 1992 in the Orlando, Florida area, in each case by acquiring the assets
of trade show exhibit manufacturing companies.
During July 1993, the Company and Abex Display Systems, Inc. ("ADSI"), an
unaffiliated portable/modular trade show exhibit manufacturer based in Los
Angles, California, entered into an agreement to organize a new California
corporation, Expose' Display System, Inc. ("EDSI"). The Company acquired 51% of
EDSI with ADSI acquiring the balance. EDSI granted to ADSI exclusive worldwide
distribution and marketing rights for "Expose", a portable display product,
through December 2005. Effective February 1, 1998, the Company exchanged its 51%
majority interest in EDSI and paid approximately $180,000 in cash, for a 25%
interest in ADSI.
During April 1996, the Company acquired Piper Productions, Inc. ("Piper") of
Orlando, Florida which produces business theater, theme park attraction, themed
interiors, theatrical scenery and special effects.
On December 31, 1997, the Company acquired DMS, which is engaged in the business
of supplying custom store fixtures, showcases and point of purchase display for
retailers. DMS has expertise and capabilities to take a design from concept to
installation. DMS utilizes various unaffiliated manufacturers with whom it has
developed long-standing business relationships for the production of its
products. The retail fixture industry includes outfitting new retail stores and
remodeling existing stores, including specialty apparel chains, "category
killer" stores, department stores, outlet stores, supermarkets, building supply
stores and drug stores.
On April 1, 1998, the Company acquired Rusty Hinges, Inc. d/b/a Steele
Productions ("Steele") located in the San Francisco, California area. Steele
produces exhibit properties for industrial and corporate theater events
throughout the United States. The Company subsequently changed the name of
Steele to Sparks Scenic, Ltd. ("Scenic").
8
During the third quarter of 1998, the Company completed a 20% equity investment
in Abex Europe, Ltd. ("Abex Europe"), a producer of customized graphics and an
assembler and distributor of ADSI products. This investment should assist the
Company to expand its international presence and benefit ADSI, which is 25%
owned by the Company,
Management's aggressive growth plan, since the August 1990 acquisition of Sparks
Exhibits Corp. ("Sparks"), has resulted in the dramatic expansion of the
Company's client base, the development of new businesses and areas of expertise
for expansion of its products and services, and the extension into major
geographic markets in the United States and internationally. Management believes
the acquisitions and the continuing development of new areas of expertise will
position the Company to increase its revenue base and move toward its goal of
becoming a leading exhibits and environments company through the continued
offering of expanded products and services to a larger customer network.
9
RESULTS OF OPERATIONS
1998 As Compared with 1997
Sales
(in thousands)
% increase
1998 1997 (decrease)
---- ---- ----------
Revenue sources
EDSI $ 400 $ 4,728 (92%)
Trade show exhibits 41,777 32,659 28%
Permanent/scenic displays 48,957 11,329 332%
-------- -------- ----
Total revenues $ 91,134 $ 48,716 87%
======== ======== ====
Total Company revenues for 1998, as compared with 1997, increased by 87%, to
$91.1 million from $48.7 million. Approximately 74% of the overall sales
increase during 1998 was due to revenues generated by the December 31,
1997-acquired DMS, which is included as part of permanent/scenic displays
revenues. Trade show exhibits generated $9.1 of the overall $42.4 million
increase in total revenues for 1998 as compared with 1997 total revenues,
reflecting the Company's continuing program of client expansion. Sales generated
by EDSI amounted to $4.7 million during 1997 as compared with only $.4 million
during 1998, due to the exchange of EDSI in connection with the acquisition of a
minority interest in ADSI as of February 1, 1998 (see Note 7 to the consolidated
financial statements). Permanent/scenic displays, comprising DMS, Museum/
productions, Piper and the April 1998-acquired Scenic, experienced a $37.6
million increase in 1998 revenues as compared with 1997 revenues. Exclusive of
the sales generated by the December 31, 1997-acquired DMS, total revenues for
permanent/scenic displays increased during 1998 over 1997 revenues by 155%. This
significant increase during 1998 was predominately due to Piper expanding its
scope of services in themed environment projects and the revenues from Scenic.
Sales and the related costs of operations generated by EDSI, formerly a
consolidated 51% owned subsidiary of the Company, were recorded through January
31, 1998. Subsequent to the previously described exchange with ADSI, the Company
recorded its pro-rata equity interest in ADSI's net profits using the equity
method of accounting. Accordingly, sales and related costs from EDSI's
operations are not reflected in the Company's consolidated statement of
operations subsequent to January 31, 1998.
Operating Profits
Operating profits more than doubled to $5,315,000 during 1998 from approximately
$2,274,000 during 1997. The increase in 1998 operating profits occurred despite
a 4.6% decrease in the gross profit margin, as a percentage of sales, during
1998 as compared with 1997. This decrease is predominantly due to lower gross
profit margins on sales generated by the December 31, 1997-acquired DMS. Due to
the additional sales from DMS during 1998, a larger percentage of 1998 total
revenues were generated by permanent/scenic displays. In addition to the lower
gross profit margins relative to DMS, the Company experienced a lower gross
profit margin on a specific museum project during 1998. This project was bid at
a lower gross profit margin due to
10
its large size and the competitive environment surrounding the project. Also
having a negative impact on the overall lower gross profit margin were the
completion of certain themed-environment projects by the Company's
Orlando-based, Piper. In an effort to expand its opportunities in
themed-environment projects, the Company made investments in specialized
production and installation techniques on these particular projects, which
negatively impacted overall gross profit margins. While permanent/scenic
displays contributed lower overall gross profit margins, the additional revenues
they generated significantly contributed to the absorption of fixed overhead,
selling, and general and administrative costs. Accordingly, the 4.6% lower gross
profit margin percentage was more than offset by 5.8% lower selling and
general/administrative costs, as a percentage of sales, during 1998 as compared
with 1997 selling and general/administrative costs.
Other Income/(Expense)
Other expenses, net, increased $1.1 million during 1998 as compared with 1997
primarily due to interest expense attributable to term debt associated with the
December 31, 1997 acquisition of DMS and the Company's utilization of its credit
facility from a bank during 1998. Interest income during 1998 was less than 1997
interest income due to less cash being available for investment during 1998 as
compared with 1997. Operating cash requirements for the December 31,
1997-acquired DMS and the Company's acquisition of property and equipment,
particularly with respect to the Company's new management information system,
also negatively impacted cash available for investment during 1998.
Income Taxes
The provision for income taxes, as a percentage of income before taxes,
increased to approximately 38% during 1998 as compared with 24% during 1997. The
1997 rate reflects a benefit from the release of valuation allowances based upon
the Company's expected ultimate realization of benefits from its business tax
credit carryforwards.
11
Net Income
Net income increased to $2,820,631 ($.35 per diluted share) during 1998 from
$2,003,316 ($.36 per diluted share) during 1997. This increase is attributed to
the higher sales levels and related operating profits generated during 1998.
Additionally, the tax provision during 1998, as a percentage of income before
income taxes, increased to 38% from the 24% tax provision rate in 1997, 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, 1998 net
income per diluted common share increased approximately 20% as follows:
1998 1997
---- ----
Income before income taxes $4,550,000 $2,623,000
Tax rate, adjusted 40% 40%
----------- -----------
Tax (provision), adjusted (1,820,000) (1,049,000)
----------- -----------
Net income, as adjusted $2,730,000 $1,574,000
========== ==========
Diluted shares outstanding 8,140,000 5,640,000
Net income per diluted common share, adjusted $0.34 $0.28
===== =====
Backlog
The Company's manufacturing backlog of orders as of December 31, 1998 was
approximately $27.0 million as compared with $23.6 million as of December 31,
1997.
12
1997 As Compared with 1996
Sales
(in thousands)
%
1997 1996 increase
---- ---- --------
Revenue sources
EDSI $4,728 $3,095 53%
Trade show exhibits 32,659 27,844 17%
Permanent/scenic displays 11,329 7,377 54%
------- ------- ---
Total revenues $48,716 $38,316 27%
======= ======= ===
Total Company revenues for 1997, as compared with 1996, increased by 27% to
$48.7 million from $38.3 million. Approximately thirty-eight percent of the
overall sales increase during 1997 was due to revenues generated by
permanent/scenic displays. Trade show exhibits generated forty-six percent of
the overall $10.4 million increase in revenues during 1997, as compared with the
same period during 1996. EDSI generated 16% of the overall $10.4 million sales
increase during 1997 as compared with 1996 revenues.
Trade show exhibit revenues were higher during 1997 as compared with 1996
revenues reflecting the Company's program of client expansion, experienced in
all three custom trade show exhibit manufacturing facilities--Philadelphia,
Atlanta and San Diego.
EDSI experienced 53% growth in revenues during 1997 as compared with its 1996
revenues due to the increased acceptance of EDSI's product lines by ADSI's
national distribution network.
Permanent/scenic displays experienced a 54% increase in its 1997 revenues
compared with 1996. The increase was due to the increase in sales generated by
Piper during the twelve months of 1997 as compared with Piper's nine months of
operations during 1996. The Museum/production group, included as part of
permanent/scenic displays, experienced a 17% decline in its 1997 revenues as
compared with its 1996 revenues due only to the timing of sales.
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 1997. 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.
13
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 higher available cash
balances 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
recorded 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 1,490,000
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
=========== ==========
14
LIQUIDITY AND CAPITAL RESOURCES
During 1998, the Company's cash balance decreased by approximately $2.3 million.
This decrease was primarily due to the increase in trade receivables as a result
of the higher sales levels achieved during 1998 and the increase in prepaid
expenses and other current assets which increased primarily due to advances made
by DMS to its suppliers for product and equipment during 1998. Accounts payable
and accrued expenses at December 31, 1998 increased by approximately $4.3
million when compared with December 31, 1997 levels.
On February 1, 1998 the Company invested approximately $180,000 in cash and
exchanged its 51% majority interest in EDSI to obtain a 25% minority interest in
ADSI. On April 1, 1998, the Company acquired 100% of the stock of Steele for a
cash payment of approximately $395,000, with the balance paid in Company common
stock and a note to the seller of Steele. The Company invested $500,000 on
August 1, 1998 to acquire a 20% equity interest in Abex Europe.
The Company expended approximately $2.75 million (exclusive of assets acquired
in the Steele acquisition) during 1998 for capital assets, including $1.3
million for MIS hardware and software, $525,000 for rental assets, $150,000 for
leasehold improvements, $375,000 for computer-aided design equipment and
telecommunications systems and $400,000 for other machinery and office
equipment.
The Company borrowed and repaid $2.68 million against its $6.5 million revolving
credit facility during 1998 to support the higher levels of trade receivables.
The Company expects to utilize the credit facility during 1999 to continue
supporting the higher levels of inventory and trade receivables expected with
higher sales levels. The first three principal payments totaling $1,012,500 and
requisite interest payments against the Company's term loan were made during
1998 in accordance with the terms and conditions of its lending agreement. The
Company was in compliance with its lending institution covenants as of December
31, 1998.
The December 31, 1998, current ratio remained relatively consistent at 1.5 : 1
with the December 31, 1997 current ratio of 1.7 : 1. Additionally, the Company's
debt to worth ratio remained relatively constant, at 1.24 : 1 to 1.26 : 1, on
the respective balance sheet dates of December 31, 1998 and December 31, 1997.
15
OUTLOOK
Sales volume of $91.1 million contributed greatly to the higher operating
profits achieved by the Company during 1998. The Company expects continued sales
growth from trade show exhibits and permanent/scenic displays during 1999. The
August 1, 1998 investment in Abex Europe was made to expand the Company's
international presence as well as to provide Abex Display Systems, the Company's
25% minority-owned affiliate, an opportunity to more effectively market the Abex
products throughout the United Kingdom and European markets during 1999 and
beyond.
The planned expansion of the Company's Western Region has created the need for a
significantly larger facility in the San Diego area. Accordingly, the Company
has entered into a lease, effective the second quarter of 1999, for a new sales,
production and storage facility in that area. The April 1, 1998 acquisition of
Sparks Scenic Ltd. provides the Company with a presence in the San
Francisco/Silicon Valley region of California as well as an additional support
facility. The Company acquired expertise in the techniques of producing
industrial and corporate theater events with its acquisition, which may be
advantageously utilized in trade show exhibits. The Company expects to continue
making additional investments in facilities, systems and personnel during 1999
within the Western Region. These expected investments may reduce the Company's
short-term operating profits during 1999 as management continues to build the
infrastructure necessary to expand its market share for trade show exhibits and
permanent/scenic display opportunities.
The lower gross profit margins experienced in 1998 will continue during 1999 as
sales increase from permanent/ scenic displays and store fixtures, whose
historic margins are less than trade show exhibit margins. Additionally, DMS
incurred additional costs in its effort to diversify its customer base during
1998. DMS's gross profit margins, as a percentage of sales, have been lower on
sales to new customers during 1998 due to the increasingly competitive nature of
the store fixture and display marketplace. This trend is expected to continue
during 1999. The Company's trade show exhibit client base of Fortune 1000
companies, as well as its Pacific Rim clients, continue to tightly manage their
marketing budgets, which may negatively impact the Company's historic custom
trade show exhibit margins. However, the expected higher revenues and gross
profit dollars from both trade show exhibits and permanent/scenic displays
should continue to enhance the Company's 1999 operating profits by generating
more consistent operating efficiencies within all facilities.
The Company switched to its new management information system during January
1999. As expected, the Company has experienced certain inefficiencies and
transitional problems with respect to integrating the new system during the
first quarter of 1999. However, management believes these expected transitional
issues will be significantly resolved during the second quarter of 1999.
Replacement of the existing management information system hardware and software
with state-of-the-art technology was necessary to position the organization to
effectively meet the changing environment of information processing among its
clients and suppliers as well as year 2000 issues.
16
Management is not fully-satisfied with the Company's overall performance during
1998 and realizes certain areas require additional attention and resources
during 1999. As the Western Region develops, the Company will continue to seek
additional account executives and invest in appropriate sales support and
infrastructure to create long-term growth opportunities. The Atlanta operation
has not generated significant new sales volume opportunities due to the
Company's inability to attract and retain experienced account executives.
However, the Atlanta operation continues to profitably produce custom exhibit
work transferred from other facilities. Management continues to review the most
effective utilization of this facility. Management is also focused on securing
additional museum projects for 1999 and 2000 production. However, to date, these
efforts have not brought the expected sales results. Museum-related volume is
critical in maintaining manufacturing efficiencies throughout all of the
Company's production facilities. Similarly, management will continue to monitor
the gross profit margins generated by the Orlando facility as it continues its
expansion into specialized themed-environment projects and expected sales volume
increases. Management is also monitoring DMS' client expansion program which
negatively impacted 1998 gross profit margins and overall operating results when
compared with DMS' 1997 pre-acquisition margins and related results of
operations. While short-term investments in new clients are necessary to reduce
DMS' reliance upon any one or two customers, management continues to seek
lower-cost production methods from suppliers and sub-contractors, yielding
higher profitability margins to the Company.
Management is committed to growing the Company internally, while aggressively
seeking acquisition possibilities that meet synergistic and financial-structure
requirements. By following this strategy, the Company hopes to achieve its
objective of increasing shareholder value.
YEAR 2000 DATE CONVERSIONS
Readiness:
The Company is completing a major project of implementing "off-the-shelf"
software on its business systems including a sales and marketing database,
inventory and purchasing, finance and control, project management and costing,
human resources and payroll, and fixed assets. All vendor supplied code is Year
2000 compliant. Management believes that this implementation will not have a
material effect on customers or significant disruption of business operations.
Costs:
Year 2000 issues are part of the Company's overall management information system
project, including hardware and Year 2000 compliant software. During 1997 and
1998, the Company has expended approximately $1.7 million for new hardware,
software, consulting and system implementation, relative to its new management
information system.
17
Risk and Contingency Plans:
Failure to complete implementation of the new management information system by
the end of 1999 would represent the worst case Year 2000 scenario for the
Company. At the present time, the Company believes that the implementation
efforts will be completed as scheduled. Accordingly, the risks of material
adverse consequences to the Company's results of operations, liquidity, or
financial condition, as a result of its Year 2000 readiness, should be
mitigated.
In the event that feasible manual procedures cannot be implemented in the case
of a Year 2000 related failure, appropriate contingency plans will be developed.
Forward Looking Statements:
The foregoing Year 2000 discussion includes forward-looking statements of the
Company's efforts and management's expectations relating to Year 2000 readiness.
The Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith could be adversely affected by the
availability and cost of remediation in addition to vendors and customers
abilities to install or modify IT and non-IT systems.
The cost of the Year 2000 project and the dates by which the Company plans to
complete the Year 2000 modifications are based on management's best estimates.
There can be no guarantee that these estimates will be achieved and actual
results could differ materially.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which will require that all derivative
financial instruments be recognized as either assets or liabilities in the
balance sheet. SFAS No. 133 will be effective no later than for the Company's
first quarter of 2000. The Company is evaluating the effects of this new
statement and when to implement the new requirements. However, management
currently believes the adoption of SFAS 133 will not have a material impact on
the Company's consolidated results of operation, financial position or cash
flows.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995,
there are certain important factors that could cause the Company's actual
results to differ materially from those included in such forward-looking
statements. 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, pricing, and, growth and acceptance of new
product lines through the Company's sales
18
and marketing programs; changes in material prices from suppliers; uncertainties
regarding accidents or litigation which may arise in the ordinary course of
business; and the effects of, and changes in the economy, monetary and fiscal
policies, laws and regulations, inflation and monetary fluctuations as well as
fluctuations in interest rates, both on a national and international basis.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk:
Fluctuations in interest and foreign currency exchange rates do not
significantly affect the Companys' financial position and results of operations.
The existing bank term debt bears a fixed rate of interest, 6.15%, plus an
applicable spread from 75 to 100 basis points, dependent upon the Company's
capitalization ratio, measured on a quarterly basis. The Company's revolving
credit facility bears a floating rate of interest, based on LIBOR rates, plus an
applicable spread similar to the term debt requirements. The Company utilized
approximately, $2.7 million of its $6.5 million revolving credit facility during
1998. The Company holds a 20% equity interest in a United Kingdom based
trade-show exhibit Company. Accordingly, the Company's financial positions and
results of operations will not be significantly affected should foreign exchange
rates fluctuate.
Environmental:
The Company believes it is in compliance with federal, state and local
provisions regulating discharge of materials into the environment or otherwise
relating to protection of the environment. The Company has not been identified
by federal or state authorities as a potentially responsible party for
environmental clean-ups at any of its sites.
Litigation:
The Company is a defendant and counterclaimant in various lawsuits that arise
out of, and are incidental to, the conduct of its business. These suits concern
labor-related matters. While it is not feasible to predict the outcome of all
pending suits and claims, the ultimate resolution of these matters should not
have a material effect upon the financial position of the Company. (See Note 12
to the consolidated financial statements.)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, together with the report of the Company's independent
accountants thereon, are presented under Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
19
PART III
Items 10, 11, 12 and 13 have been omitted from this report, in accordance with
General Instruction E, since the Company will file with the Commission a
definitive proxy statement, involving the election of directors, pursuant to
Regulation 14A within 120 days after the close of its 1998 fiscal year.
Accordingly, relevant information contained in such definitive proxy statement
is incorporated herein by reference.
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Exhibit
Page
(a) The following documents are filed as part of this report:
(1) Financial Statements and Financial Statement Schedule:
(i) Financial Statements:
Report of Independent Accountants 26
-------
Consolidated Statements of Income for the years
ended December 31, 1998, 1997 and 1996 27
-------
Consolidated Balance Sheets, December 31, 1998 and 1997 28
-------
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998 1997 and 1996 29
-------
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 30
-------
Notes to Consolidated Financial Statements 31
(ii) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 50
-------
(2) Acquisition Agreement for DMS Store Fixtures (Incorporated by reference
to Company Proxy Statement dated November 7, 1997 filed with the
Commission)
(3)(i)(a) Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 4(a) to the Company
Registration Statement on Form S-8, File No. 33-3647, filed
with the Commission)
20
(3)(i)(b) Certificate of Amendment to the Restated Certificate of
Incorporation of the Company filed on June 2, 1987
(Incorporated by reference to Exhibit 3(a)(ii) to the Company
Annual Report on Form 10-K for the year ended December 31,
1987, filed with the Commission)
(3)(i)(c) Certificate of Amendment to the Restated Certificate of
Incorporation of the Company filed on January 14, 1988
(Incorporated by reference to Exhibit 3(a)(iii) to the Company
Annual Report on Form 10-K for the year ended December 31,
1988, filed with the Commission)
(3)(i)(d) Certificate of Amendment to the Restated Certificate of
Incorporation of the Company filed on May 8, 1989
(Incorporated by reference to Exhibit 3(a)(iv) to the Company
Annual Report on Form 10-K for the year ended December 31,
1989, filed with the Commission)
(3)(i)(e) Certificate of Amendment to the Restated Certificate of
Incorporation of the Company filed on December 26, 1997
(Incorporated by reference to Company Proxy Statement dated
November 7, 1997, filed with the Commission)
3(b)Amended and Restated By-laws of the Company (Incorporated by reference
to Exhibit 3(b) to the Company Annual Report on Form 10-K for
the year ended December 31, 1990, filed with the Commission)
10(a) Agreement to Amend the International Distribution and
Technology Agreement with Tsubasa System Company, Ltd. dated
January 22, 1997 (Incorporated by reference to Exhibit 10(a)
to the Company Annual Report on Form 10-K for the year ended
December 31, 1996, filed with the Commission)
10(b) Amended Agreement of Employment, dated December 11, 1992,
between the Company and Robert B. Ginsburg (Incorporated by
reference to Exhibit 10(b) to the Company Annual Report of
Form 10-K for the year ended December 31, 1992 filed with the
Commission).
10(c) Amended Agreement of Employment, dated December 11, 1992,
between the Company and Alan I. Goldberg (Incorporated by
reference to Exhibit 10(b) to the Company's Annual Report of
Form 10-K for the year ended December 31, 1992 filed with the
Commission)
10(d) Option Agreement dated November 23, 1992 with Robert B.
Ginsburg (Incorporated by reference to Exhibit 10(d) to the
Company's Annual Report of Form 10-K for the year ended
December 31, 1992 filed with the Commission)
21
10(e) Option Agreement dated November 23, 1992 with Alan I. Goldberg
(Incorporated by reference to Exhibit 10(d) to the Company's
Annual Report of Form 10-K for the year ended December 31,
1992 filed with the Commission)
10(f) Employment and Option Agreements dated as of January 1, 1994
between the Company and Edmond D. Costantini, Jr.
(Incorporated by reference to Item 6(a) of the Company'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
Company'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
Company, Donald Sparks, Stanley Ginsburg and Ira Ingerman
(Incorporated by reference to Exhibit 6(a)) to the Company's
Quarterly Report of Form 10-QSB for the quarter ended
September 30, 1996 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
Company'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(i) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993 filed with the Commission)
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 Company'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 Company's Annual Report on Form 10-K
for the year ended December 31, 1995 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 Company's Annual Report on Form 10-K for
the year ended December 31, 1995 filed with the Commission)
22
10(n) Letter Amendment dated January 2, 1997 to Amended Employment
Agreement with Alan I. Goldberg (Incorporated by reference to
Exhibit 10(n) to the Company's Annual Report on Form 10K for
the year ended December 31, 1997 filed with the Commission)
10(o) Letter Amendment dated January 2, 1997 to Amended Employment
Agreement with Robert B. Ginsburg (Incorporated by reference
to Exhibit 10(o) to the Company's Annual Report on Form 10K
for the year ended December 31, 1997 filed with the
Commission)
10(p) Option Agreement dated May 23, 1997 with Robert B. Ginsburg
(Incorporated by reference to Exhibit 10(p) to the Company's
Annual Report on Form 10K for the year ended December 31, 1997
filed with the Commission)
10(q) Option Agreement dated May 23, 1997 with Alan I. Goldberg
(Incorporated by reference to Exhibit 10(q) to the Company's
Annual Report on Form 10K for the year ended December 31, 1997
filed with the Commission)
10(r) Amendment to Employment Agreement dated January 1, 1997 with
E. D. Costantini, Jr. (Incorporated by reference to Exhibit
10(r) to the Company's Annual Report on Form 10K for the year
ended December 31, 1997 filed with the Commission)
10(s) Employment Agreement dated December 31, 1997 with
Lawrence W. Schan (Incorporated by reference to Exhibit 10(s)
to the Company's Annual Report on Form 10K for the year ended
December 31, 1997 filed with the Commission)
10(t) Employment Agreement dated December 31, 1997 with
Ira Ingerman (Incorporated by reference to Exhibit 10(t) to
the Company's Annual Report on Form 10K for the year ended
December 31, 1997 filed with the Commission)
10(u) Employment Agreement dated December 31, 1997 with
Stanley Ginsburg (Incorporated by reference to Exhibit 10(u)
to the Company's Annual Report on Form 10K for the year ended
December 31, 1997 filed with the Commission)
10(v) Option Agreement dated January 27, 1998 with Robert B.
Ginsburg 51
-------
10(w) Option Agreement dated January 27, 1998 with Alan I. Goldberg
53
-------
23
10(x) Letter Agreement dated January 2, 1998 to Amended Employment
Agreement with Robert B. Ginsburg (Incorporated by reference
to Exhibit 7(1) to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998 filed with the
Commission)
10(y) Letter Agreement dated January 2, 1998 to Amended Employment
Agreement with Alan I. Goldberg (Incorporated by reference to
Exhibit 7(2) to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998 filed with the
Commission)
10(z) Lease Agreement dated March 1984 between Ingerman-Ginsburg
Partnership and Diversified Marketing Sales, Inc. and
Amendments (Incorporated by reference to Exhibit 7(1) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 filed with the Commission)
10(A) Lease Agreement dated June 29, 1998 between Gillespie Field
Partners, LLC and Sparks Exhibits, Ltd. (Incorporated by
reference to Exhibit 7(2) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 filed with the
Commission)
21 Subsidiaries of the Company 55
-------
23 Consent of PricewaterhouseCoopers LLP 56
-------
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the year ended
December 31, 1998.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MARLTON TECHNOLOGIES, INC.
By: /s/ Robert B. Ginsburg
--------------------------------
President
By: /s/ E.D. Costantini, Jr.
--------------------------------
Chief Financial Officer
Dated: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Fred Cohen Chairman of the March 30, 1999
- ------------------------- Board of Directors
(Fred Cohen)
/s/ Seymour Hernes Director March 30, 1999
- -------------------------
(Seymour Hernes)
/s/ Robert B. Ginsburg Director March 30, 1999
- -------------------------
(Robert B. Ginsburg)
/s/ Alan I. Goldberg Director March 30, 1999
- -------------------------
(Alan I. Goldberg)
/s/ William F. Hamilton Director March 30, 1999
- -------------------------
(William F. Hamilton)
/s/ Jeffrey Harrow Director March 30, 1999
- -------------------------
(Jeffrey Harrow)
25
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders
and Board of Directors of
Marlton Technologies, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) 1(i) on page 20, present fairly, in all material
respects, the financial position of Marlton Technologies, Inc. and subsidiaries
at December 31, 1998 and 1997 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the index appearing under
Item 14 (a), 1(ii) on page 20, presents fairly, in all material respects, the
information set forth therein, when read in conjunction with the related
consolidated financial statements. 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, based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania 19103
March 26, 1999
26
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
for the years ended December 31,
1998 1997 1996
------------ ------------ ------------
Net sales $ 91,134,034 $ 48,715,828 $ 38,315,600
Cost of sales 69,458,547 34,876,590 27,550,933
------------ ------------ ------------
Gross profit 21,675,487 13,839,238 10,764,667
------------ ------------ ------------
Expenses:
Selling 9,681,448 7,830,492 6,416,695
Administrative and general 6,679,113 3,734,770 3,002,109
------------ ------------ ------------
16,360,561 11,565,262 9,418,804
------------ ------------ ------------
Operating profit 5,314,926 2,273,976 1,345,863
------------ ------------ ------------
Other income (expense):
Interest income 242,064 353,510 209,913
Interest (expense) (1,020,404) (31,552) (120,266)
Income from investment in affiliates, net 14,464 -- --
Other, net (1,419) 27,382 54,643
Gain from contract amendment -- -- 1,200,000
------------ ------------ ------------
(765,295) 349,340 1,344,290
Income before income taxes 4,549,631 2,623,316 2,690,153
Provision for income taxes 1,729,000 620,000 350,000
------------ ------------ ------------
Net income $ 2,820,631 $ 2,003,316 $ 2,340,153
============ ============ ============
Net income per common share :
Basic $ .40 $ .42 $ .52
============ ============ ============
Diluted $ .35 $ .36 $ .45
============ ============ ============
See notes to consolidated financial statements.
27
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1998 1997
------------ ------------
Current:
Cash and cash equivalents $ 4,620,079 $ 7,115,100
Accounts receivable, net of allowance
of $635,000 and $533,000, respectively 16,511,804 10,444,298
Inventory 9,466,161 10,073,491
Prepaids and other current assets 2,324,679 1,337,497
Deferred income taxes 740,000 965,000
------------ ------------
Total current assets 33,662,723 29,935,386
Investment in affiliates 2,010,427 25,000
Deferred income taxes 43,000 616,870
Property and equipment, net of accumulated
depreciation 3,779,367 2,268,994
Rental assets, net of accumulated depreciation
of $1,661,020 and $1,348,279, respectively 1,369,009 901,651
Goodwill, net of accumulated amortization of $1,580,591
and $871,546, respectively 20,621,855 19,763,768
Other assets, net of accumulated amortization
of $1,131,958 and $1,112,601, respectively 535,879 601,586
------------ ------------
Total assets $ 62,022,260 $ 54,113,255
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,950,790 $ 1,386,117
Accounts payable 7,153,619 4,294,971
Accrued expenses and other 13,528,076 12,235,351
------------ ------------
Total current liabilities 22,632,485 17,916,439
------------ ------------
Long term liabilities:
Long-term debt, net of current portion 10,926,995 12,243,312
Other long-term liabilities 817,500 --
------------ ------------
Total long-term liabilities 11,744,495 12,243,312
------------ ------------
Total liabilities 34,376,980 30,159,751
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par - shares authorized
10,000,000;no shares issued or outstanding
Common stock, $10 par - shares authorized
50,000,000: 7,200,905 and 6,889,444 issued, respectively 720,090 688,944
Additional paid-in capital 30,009,409 29,169,410
Accumulated deficit (2,972,542) (5,793,173)
------------ ------------
27,756,957 24,065,181
Less cost of 5,000 treasury shares (111,677) (111,677)
------------ ------------
Total stockholders' equity 27,645,280 23,953,504
------------ ------------
Total liabilities and stockholders' equity $ 62,022,260 $ 54,113,255
============ ============
See notes to consolidated financial statement
28
Marlton Technologies, Inc.
Consolidated Statement of Changes in Stockholders Equity
For the years ended December 31, 1998, 1997, and 1996
Common Stock Additional Total
------------------ Paid-in Accumulated Treasury Stockholders'
Shares Amount Capital Deficit Stock Equity
------ ------ ------- ------- ----- ------
Balance, December 31, 1995 3,937,534 $ 393,754 $20,171,051 $(10,136,642) $(111,677) $ 10,316,486
Issuance of shares under contract amendment 500,000 50,000 700,000 - - 750,000
Isuance of shares under compensation arrangements 97,058 9,705 159,830 - - 169,535
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 and warrants in DMS acquisiton 2,000,000 200,000 7,483,750 - - 7,683,750
Issuance of shares in exchange for convertible notes 206,456 20,646 263,231 - - 283,877
Issuance of shares under compensation arrangement 148,396 14,839 391,548 - - 406,387
Net income - - - 2,003,316 - 2,003,316
-------------------------------------------------------------------------------
Balance, December 31, 1997 6,889,444 688,944 29,169,410 (5,793,173) (111,677) 23,953,504
Issuance of shares in Steel acquisiton 42,391 4,239 245,104 - - 249,343
Issuance of shares under compensation arrangements 269,070 26,907 594,895 - - 621,802
Net income - - - 2,820,631 - 2,820,631
-------------------------------------------------------------------------------
Balance, December 31, 1998 7,200,905 $720,090 $30,009,409 ($2,972,542) ($111,677) $27,645,280
===============================================================================
See notes to consolidated financial statements.
29
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31,
1998 1997 1996
------------ ------------ ------------
Cash flows provided (expended) through operating activities:
Net income $ 2,820,631 $ 2,003,316 $ 2,340,153
Adjustments to reconcile net income to cash provided
(expended) through operating activities:
Equity in income of affiliates 14,464 -- --
Depreciation and amortization 2,036,281 1,569,287 1,637,424
Decrease in deferred taxes 798,870 396,000 171,130
Other operating items 218,472 78,845 49,002
Change in assets and liabilities, net of effects of acquisitions:
(Increase) in accounts receivable, net (6,868,967) (2,681,217) (595,200)
(Increase) in inventory (47,272) (3,215,232) (1,296,444)
(Increase) decrease in prepaids and other assets (1,092,127) (326,714) 160,579
Increase in accounts payable and accrued expenses and other 4,461,672 7,119,839 1,011,321
------------ ------------ ------------
Net cash provided through operating activities 2,342,024 4,944,124 3,477,965
------------ ------------ ------------
Cash flows provided (expended) through investing activities:
Acquisition of businesses, net of cash acquired (681,293) (12,970,740) (75,000)
Cash paid for investment in affiliates (679,646) -- --
Capital expenditures (2,758,095) (1,306,630) (1,557,899)
Disposal of capital assets -- 46,767 76,253
Other (57,177) -- 115,000
------------ ------------ ------------
Net cash (expended) through investing activities (4,176,211) (14,230,603) (1,441,646)
------------ ------------ ------------
Cash flows provided (expended) through financing activities:
Proceeds from issuance of long-term debt 51,885 13,500,000 21,367
Principal payments on long-term debt (1,096,049) (678,052) (658,482)
Payments against notes payable, Sellers (20,000) (20,000) --
Proceeds from stock issuance -- -- 750,000
Proceeds from exercised stock options 403,330 299,621 122,200
------------ ------------ ------------
Net cash provided (expended) through financing activities (660,834) 13,101,569 235,085
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (2,495,021) 3,815,090 2,271,404
Cash and cash equivalents - beginning of year 7,115,100 3,300,010 1,028,606
------------ ------------ ------------
Cash and cash equivalents - end of year $ 4,620,079 $ 7,115,100 $ 3,300,010
============ ============ ============
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 the
effects of minority investments in non-consolidated businesses (the
"Company"). Investments in affiliates, representing the Company's 20%
or more but less than 50% investments, are accounted for using the
equity method. All inter-company accounts and transactions have been
eliminated.
Activity included in the consolidated statements of operations
consists primarily of the design, manufacture, sale and servicing of
sophisticated custom and portable/modular trade show exhibits and the
manufacturing of museum interiors, themed interiors, theme park
attractions, staging, and custom store fixture and point of purchase
displays.
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 time 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 and include materials, labor and manufacturing
overhead costs.
Long-Lived Assets:
Property and equipment are stated at cost. Depreciation is
provided on the straight-line method over the estimated useful lives of
the respective assets ranging primarily from 3 to 10 years. Assets and
accumulated depreciation accounts are reduced for the sale or other
disposition of property and the resulting gain or loss is included in
income. Rental assets, which include manufactured and purchased exhibit
components, are stated at cost. Depreciation is recorded on a usage
basis, primarily over 1 to 3 years.
The excess of cost over the fair value of net assets acquired
(goodwill) is amortized on a straight-line basis over periods ranging
from 5 to 30 years. Customer lists, which are recorded at cost, are
amortized on a straight-line basis over their estimated useful lives of
5 to 15 years and are included as components of "Other assets". Also
included in Other assets are debt issue costs and deposits relating to
certain facility leases.
31
NOTES TO FINANCIAL STATEMENTS
--------------------
The Company's policy is to record an impairment loss against
long-lived assets, including property and equipment, goodwill and other
intangibles, in the period when it is determined that the carrying
amount of such assets may not be recoverable. This determination
includes evaluation of factors such as current market value, future
asset utilization, business climate and future undiscounted cash flows
expected to result from the use of the net assets.
Revenue Recognition:
Revenues on trade show exhibit sales, themed interiors, sets
and custom store fixtures and point of purchase displays are recognized
using the completed contract method. Revenues on permanent exhibit
installations which are generally six months or longer in duration, are
recognized on the percentage of completion method. Progress billings
are generally made throughout the production process. Progress billings
which are unpaid at the balance sheet date are not recognized in the
financial statements as accounts receivable. Progress billings which
have been collected on or before the balance sheet date are classified
as customer deposits and are included as components of Accrued expenses
and other.
Income Taxes:
The Company recognizes deferred tax assets and liabilities
based upon the future tax consequences of events that have been
included in the financial statements or tax returns. Deferred tax
assets and liabilities are calculated based on the difference between
the financial and tax bases of assets and liabilities using the
currently enacted tax rates in effect during the years in which the
differences are expected to reverse.
Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results may
differ from those estimates.
Concentration of Credit Risk:
The Company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. The Company places its cash
and temporary cash investments with high credit quality institutions.
The Company's accounts receivable are primarily with customers
throughout the United States. The Company performs ongoing credit
evaluations of its customers' financial condition and generally
requires progress payments which mitigate its loss exposure.
32
NOTES TO FINANCIAL STATEMENTS
--------------------
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, 1998 and 1997.
Per Share Data:
Basic net income per common share is calculated using the
average shares of common stock outstanding, while diluted net income
per common share reflects the potential dilution that could occur if
stock options were exercised.
Recently Issued Accounting Standards:
Effective January 1, 1998, the Company adopted the provisions
of SFAS 130 "Reporting Comprehensive Income," which establishes a
standard for reporting and display of comprehensive income and its
components in the financial statements. No items of other comprehensive
income existed during December 31, 1998, 1997 or 1996. No format
changes were made to the consolidated statements of net income or the
consolidated statement of stockholders' equity.
Effective January 1, 1998, the Company adopted the provisions,
of SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information," which established 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. The Company functions in one segment.
Substantially all of the Company's net sales and long-lived
assets reside within the United States. During 1998, one individual
customer accounted for 16% of consolidated net sales. This customer and
another, combined, accounted for 23% of 1998 revenues. The loss of one
or both of these customers, or a significant reduction in one or both
of these customers' purchases, could have a material adverse effect on
the Company's results of operation. The Company expects this condition
to continue.
33
NOTES TO FINANCIAL STATEMENTS
--------------------
2. Acquisitions:
Sparks Scenic Ltd.
On April 1, 1998, the Company acquired 100% of the stock of
Rusty Hinges, Inc. d/b/a Steele Productions ("Steele") located in the
San Francisco, California area. Steele produces exhibit properties for
industrial and corporate theater events throughout the United States.
Subsequent to the acquisition, the Company changed the name to Sparks
Scenic, Ltd. ("Scenic").
The transaction, included a cash payment of approximately
$395,000, a five year note approximating $197,000 payable in annual
installments bearing interest at 6% per annum, and 42,391 shares of the
Company's common stock valued at approximately $250,000. The excess cost
of the acquisition, including related costs of the transaction over the
net assets acquired of approximately $192,000, is being amortized on a
straight-line basis over a period of 10 years commencing April 1998.
DMS Stores Fixtures, Inc.
On December 31, 1997, the Company acquired the assets and
liabilities of DMS Store Fixtures, L.P. ("DMS"), a supplier of custom
made store fixtures and displays to national retailers, department
stores and consumer product manufacturers. Total consideration paid was
$14.5 million in cash, $7.5 million in the Company's common stock, and
additional accrued consideration of approximately $270,000 payable
annually through 2002. The Company incurred fees of approximately
$875,000 as part of the acquisition, including approximately $214,000
for the value of 162,500 warrants for the Company's common stock,
issued to the Company's financial advisor and lending institution. The
value of the warrants issued to the lending institution, approximating
$82,000, is included as a component of Other assets and is being
amortized on a straight line basis over five years.
The excess cost, including related costs of the transaction
over the net assets acquired, of approximately $18.3 million, is being
amortized on a straight-line basis over a period of 30 years.
34
NOTES TO FINANCIAL STATEMENTS
--------------------
The following table summarizes the unaudited consolidated pro
forma information assuming the DMS acquisition had occurred at the
beginning of each of the following periods. The pro forma effects of
the Piper and Steele acquisitions are not material and, accordingly,
have been excluded from the pro forma presentation.
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 DMS being acquired by the
Company, it charged $792,000 against its 1997 earnings for the value of
stock compensation paid to certain DMS 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 approximated $200,000. Up to $200,000 in
additional consideration is payable should Piper achieve defined sales
levels through 2001.
All of the acquisitions have been accounted for as purchases
with the operating results included in the consolidated statement of
income from the dates of acquisition.
35
NOTES TO FINANCIAL STATEMENTS
--------------------
3. Net Income per Common Share:
The following table sets forth the computation of basic and diluted net
income per common share (in thousands):
1998 1997 1996
---- ---- ----
Net income $2,821 $2,003 $2,340
====== ====== ======
Weighted average common
shares outstanding used to compute
basic net income per common share 7,139 4,765 4,480
Additional common shares to be issued
assuming exercised of stock options,
net of shares assumed reacquired 1,001 875 766
Total shares used to compute diluted
net income per common share 8,140 5,640 5,246
===== ===== =====
Basic net income per share $.40 $.42 $.52
==== ==== ====
Diluted net income per share $.35 $.36 $.45
==== ==== ====
Options and warrants to purchase 308,000 and 190,000 shares of
common stock at prices ranging from $5.00 per share to $7.00 per share
were outstanding at December 31,1998 and 1997, respectively, but were
not included in the computation of diluted income per common share
because the options' and warrants' exercise price was greater than the
average market price of the common shares.
4. 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/modular exhibits
in Japan. Sparks Japan was capitalized with $250,000, 90% by Tsubasa.
The remaining 10% owned by the Company has been fully reserved as of
December 31, 1998. In an amendment to that agreement during January
1996, the Company agreed to eliminate certain future Royalty payments
from Sparks Japan and issued 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 technical, operational and marketing support to
the operation. The agreement also required the funds received by the
Company to be used only for its operating activities and to acquire
companies, products and services within the exhibit industry, unless
prior written approval was obtained from Tsubasa.
36
NOTES TO FINANCIAL STATEMENTS
--------------------
A gain of $1,200,000 was recognized during 1996 representing
the consideration received less amounts allocated to the 500,000 shares
of common stock issued, the value of a "put option" and the incremental
direct costs expected to be incurred with respect to complying with
certain requirements of the agreement. The put option expired on
December 31, 1998. Included in Accrued expenses and other at December
31, 1998, 1997 and 1996 are accrued contractual costs of $75,000,
$467,409 and $713,299, respectively.
5. Cash Flows Information:
Cash paid for interest in 1998, 1997 and 1996 amounted to
$770,328, $28,053 and $121,049 respectively.
Cash paid for income taxes in 1998, 1997 and 1996 amounted to
$735,925, $61,170 and $30,398 respectively.
Cash paid for the December 31, 1997 acquisition of DMS and the
April 1, 1998 acquisition of Steele was calculated as follow:
Steele DMS
------ ---
Current assets $313,252 $5,410,816
Property and equipment 730,118 160,642
Goodwill and other intangibles 230,473 16,990,432
Liabilities assumed or created (629,886) (1,907,400)
Common stock issued (249,343) (7,683,750)
--------- -----------
Cash paid, net of cash acquired $394,614 $12,970,740
======== ===========
During 1998 the following non-cash investing and
financing transactions took place:
o The Company issued 42,391 shares of its common stock and a five year
note amounting to $197,307 bearing interest at 6% per annum, payable in
five installments commencing April 1, 1999 in connection with the
acquisition of "Steele"
o The Company recorded approximately $1,090,000 of additional accrued
consideration in connection with the acquisition of DMS.
o The Company issued 29,270 of its common stock to certain, employees and
the Company's 401(k) plan for shares, stock awards and defined
contributions under the Company's employment benefit plan.
o In addition to cash of $179,646, the Company transferred its 51%
majority interest in EDSI, with a book value of approximately
$1,330,000, in exchange for a 25% minority interest in ADSI. (Note 7 of
the consolidated financial statements)
37
During 1997 the following non-cash investing and financing transactions
took place:
o The Company issued 2,250,000 shares of its common stock and 162,500
warrants in connection with the acquisition of DMS.
o The Company issued 27,166 of its common stock to certain directors,
employees and the Company's 401(k) plan for director fees, stock awards
and defined contributions under the Company's employment benefit plan.
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 undCompany's employment benefit
plan.
6. Inventory:
Inventories at December 31, consist of the following:
1998 1997
---- ----
Raw materials $ 404,961 $ 819,273
Work in process 6,330,634 6,763,508
Finished goods 2,730,566 2,490,710
---------- -----------
$9,466,161 $10,073,491
========== ===========
7. Investment in affiliates:
On February 1, 1998, the Company exchanged its 51% majority
interest in Expose' Display Systems, Inc. ("EDSI") and paid approximately
$180,000 in cash for a 25% equity interest in Abex Display Systems Inc.
("ADSI"), a portable/modular trade show exhibit manufacturer in Los
Angeles, California. On August 1, 1998, the Company paid $500,000 in cash
for a 20% interest in Abex Europe, Ltd. ("Abex Europe"), a newly-formed
United Kingdom corporation, headquartered in London, organized to market,
assemble and distribute portable/modular exhibit products and graphics
throughout the United Kingdom and Europe.
38
NOTES TO FINANCIAL STATEMENTS
--------------------
The table below contains summarized unaudited financial information with
respect to the two unconsolidated affiliates. The operations of ADSI and Abex
Europe are included in the table from the respective dates the Company acquired
their interest during 1998:
Condensed Statement of Net Income:
(000's omitted)
Net sales $14,929
Gross profit 5,492
Net income $ 260
Condensed Balance Sheets:
Current assets $6,911
Non-current assets 5,026
-------
$11,937
=======
Current liabilities $3,350
Non-current liabilities 4,289
Shareholder's equity 4,298
-------
$11,937
=======
8. Property and Equipment:
1998 1997
---- ----
Property and equipment at December 31, consist of the following:
Manufacturing equipment and vehicles $1,467,955 $1,510,901
Office equipment and data processing 4,170,862 2,685,036
Leasehold improvements 1,540,231 1,406,548
Showroom exhibits and other 596,120 643,254
---------- ----------
7,775,168 6,245,739
Less accumulated depreciation
and amortization 3,995,801 3,976,745
---------- ----------
$3,779,367 $2,268,994
========== ==========
Rental assets at December 31, consist of the following:
Rental assets $3,030,029 $2,249,930
Less accumulated depreciation 1,661,020 1,348,279
---------- ----------
$1,369,009 $ 901,651
========== ==========
During 1997, the Company began a multi-year project to install a
computer system to support its information processing and access needs.
Direct internal and external costs, subsequent to the preliminary stage of
this project, are being capitalized as property and equipment. Capitalized
costs will be amortized over the estimated useful lives of the related
assets, from three
39
NOTES TO FINANCIAL STATEMENTS
--------------------
to five years, beginning when each site installation or module is complete
and ready for its intended use. The Company expects completion of each site
installation during the first six months of 1999. Depreciation and
amortization of property and equipment, including software, was $1,219,000,
$1,339,000 and $1,123,000 for the years ended December 31, 1998, 1997 and
1996 respectively.
9. Intangible Assets:
Amortization expense related to goodwill and other intangible
assets was approximately $817,000, $230,000, and $514,000 for the years
ended December 31, 1998, 1997, and 1996, respectively.
10. Accrued Expenses and Other:
Accrued expenses and other at December 31, consist of the
following:
1998 1997
---- ----
Accrued compensation $2,893,119 $ 2,423,390
Customer deposits 6,677,913 6,596,745
Accrued payroll, sales and business taxes 840,062 268,462
Accrued insurance costs 800,135 508,202
Accrued contractual costs (See Note 4) 75,000 467,409
Accrued interest 250,076 --
Other 1,991,771 1,971,143
----------- -----------
$13,528,076 $12,235,351
=========== ===========
11. Debt Obligations:
Notes Payable:
The Company, in connection with the December 31, 1997 acquisition of
DMS, entered into a $13.5 million five-year term loan and a $6.5 million
five-year revolving credit facility with a lending institution, both
collateralized by all of the Company's assets. Borrowings under the term loan
are fixed at 6.15% per annum plus an applicable spread. The revolving credit
facility bears interest at rates equal to adjusted LIBOR plus applicable spreads
ranging from 75 to 100 basis points. The applicable spreads are dependent upon
the Company's debt to capitalization ratio, measured on a quarterly basis. The
interest rates charged during 1998 were 7.15% for the term loan and a range of
5.94% to 6.88% for the revolving credit facility. A final term loan payment is
due during 2002 provided the Company has not fully repaid the term loan due to
contractually-required prepayments equal to 50% of its defined excess cash flow.
Both the term loan and revolving credit facility include among other
things, certain financial covenants requiring the maintenance of certain minimum
financial ratios and restricts the Company's
40
NOTES TO FINANCIAL STATEMENTS
--------------------
ability to pay dividends. No amounts under the revolving credit facility were
outstanding as of December 31, 1998 and 1997. The Company is subject to an
annual commitment fee of 25 basis points on the average annual unused portion of
the revolving credit facility, payable in arrears, commencing January 1999. The
1998 commitment fee, paid during January 1999, amounted to $8,204.
1998 1997
---- ----
Term loan payable, bank, 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 $12,487,500 $13,500,000
Seller note payable, interest payable
annually at 6%, principal payable in annual
installments of $20,000 through April, 2001 60,000 80,000
Seller note payable, interest payable
quarterly at 6%, principal payable on April
1,1999 totaling $69,461 and four equal
annual installments of $31,961 thereafter 197,307 --
Other 132,978 49,429
----------- -----------
12,877,785 13,629,429
Less current portion 1,950,790 1,386,117
----------- -----------
$10,926,995 $12,243,312
=========== ===========
Aggregate long-term debt maturities for the next five years are as
follows:
Years ended December 31, Amount
----------------------- ------
1999 $ 1,950,790
2000 2,140,911
2001 3,153,411
2002 5,600,711
2003 31,962
------------
$ 12,877,785
============
41
NOTES TO FINANCIAL STATEMENTS
--------------------
12. Commitments and Contingencies:
The Company operates in leased office and warehouse
facilities. Lease terms range from monthly commitments up to
eighty-four 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, 1998, future minimum lease commitments
under non-cancelable operating leases are as follows:
Year ended December 31, Amount
----------------------- ------
1999 $1,838,000
2000 1,881,000
2001 1,716,000
2002 1,664,000
2003 1,479,000
2004 and thereafter 2,564,000
-----------
Total minimum lease commitments $11,142,000
===========
Rental expense, exclusive of supplemental costs, was
approximately $1,840,000, $1,405,000 and $1,382,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
The Company is engaged in legal proceedings in the normal
course of business. The Company believes that any unfavorable outcome
from these suits not covered by insurance would not have a material
adverse effect on the financial statements of the Company.
13. Warrants and Stock Options:
Warrants
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 DMS acquisition. These warrants are exercisable on or before December 31,
2001.
42
NOTES TO FINANCIAL STATEMENTS
--------------------
Stock Options
The Company has qualified and nonqualified stock option plans.
In August 1990, the Company adopted the 1990 Incentive Plan which
provides for the granting of Incentive Stock Options ("ISO") and a 1990
Nonstatutory Option Plan which provides for the grantings of Nonstatutory
options ("NSO") (collectively, "the 1990 Plans"). Under the 1990 Plans 1,450,000
shares of Common Stock are authorized for issuance under options that may be
granted to employees. Options are exercisable at a price not less than the
market value of the shares at the date of grant in the case of ISO's, and 85% of
the market value of the shares in the case of NSO's.
In April 1984, the Company adopted the 1984 Incentive Stock Option Plan
("1984 Plan"). The plan provides for the granting of Incentive Stock Options to
key salaried employees to purchase a maximum of 100,000 common shares at prices
not less than the market value of the shares on the date the options are
granted.
The Company maintains a Nonqualified Stock Option Plan ("NSOP") which
provides for the granting of options primarily to employees, directors and
others to purchase, for a period of five years, a maximum of 65,900 common
shares at prices and terms determined by a committee appointed by the Board of
Directors. Options are granted at a price not less than 85% of the market value
of the shares at the date of the grant.
The Directors' and Consultants' Stock Option Plan provides for the
granting of options to purchase up to 73,600 common shares to directors and
consultants who are neither principal stockholders, nor receive salary
compensation. Prices are determined as in the Nonqualified Stock Option Plan.
The 1992 Director Stock Plan, as amended through June 1998, ("1992
Plan"), with a total of 250,000 authorized shares, was amended in June 1998 to
eliminate non-discretionary annual stock awards, to provide stock awards or
options as determined by the Board and to increase the authorized shares to a
total of 250,000.
43
NOTES TO FINANCIAL STATEMENTS
--------------------
The following is a summary of option transactions and exercise prices:
Price Weighted
Shares Per Share Average
------ --------- -------
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 $3.75 to $7.00 $4.02
Expired ( 98,427) $2.13 to $3.00 $2.96
Exercised ( 121,230) $1.60 to $2.60 $1.89
----------
Outstanding at December 31, 1997 1,433,884 $1.60 to $7.00 $2.27
==========
Granted 475,828 $2.08 to $6.88 $5.47
Expired ( 13,700) $2.60 to $6.00 $4.15
Exercised (239,800) $1.60 to $4.00 $1.98
---------
Outstanding at December 31, 1998 1,656,212
=========
44
NOTES TO FINANCIAL STATEMENTS
--------------------
The following table summarized information concerning outstanding and
exercisable options as of December 31, 1998:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average
---------------------------- Number of Weighted
Range of Exercise Number of Options Remaining Options Average
Prices And Awards Life (Years) Exercise Price and Awards Exercise
------ ---------- ------------ -------------- ---------- --------
Price
1990 Plans $1.60 to $2.00 687,200 2.73 $1.80 687,200 $1.80
$3.38 to $4.88 219,000 7.18 $4.64 80,000 $4.22
-------------- ------- ---- ----- ------ -----
Plan Totals $1.60 to $4.88 906,200 3.81 $2.49 767,200 $2.06
-------------- ------- ---- ----- ------- -----
1984 Plan $2.00 to $3.38 20,000 2.01 $3.88 20,000 $3.88
$6.00 to $6.00 20,000 2.01 $6.00 20,000 $6.00
-------------- ------ ---- ----- ------ -----
Plan Totals $2.00 to $6.00 40,000 2.01 $4.94 40,000 $4.94
-------------- ------ ---- ----- ------ -----
NSOP $2.00 to $3.28 15,165 1.62 $2.44 15,165 $2.44
-------------- ------ ---- ----- ------ -----
1992 Plan $2.00 to $2.88 85,995 2.06 $2.31 80,000 $2.33
$3.57 to $6.25 70,000 4.09 $5.10 30,000 $3.57
-------------- ------ ---- ----- ------ -----
Plan Totals $2.00 to $6.25 155,995 2.97 $3.56 110,000 $2.67
-------------- ------- ---- ----- ------- -----
Other $2.00 to $3.50 225,600 2.49 $2.26 158,100 $2.27
$3.88 to $7.00 313,252 3.28 $5.67 305,752 $5.66
-------------- ------- ---- ----- ------- -----
Total Other $2.00 to $7.00 538,852 2.95 $4.24 463,852 $4.50
-------------- ------- ---- ----- ------- -----
Grand Total $1.60 to $7.00 1,656,212 3.38 $3.22 1,396,217 $3.00
============== ========= ==== ===== ========= =====
The following is a summary of stock options exercisable at December 31,
1998, 1997 and 1996 and their respective weighted-average share prices:
Weighted Average
Number of Shares Exercise Price
Options exercisable December 31, 1998 1,396,217 $3.00
Options exercisable December 31, 1997 1,250,384 $2.18
Options exercisable December 31, 1996 1,130,296 $2.00
45
NOTES TO FINANCIAL STATEMENTS
--------------------
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 amount
as follows:
Year ended December 31,
1998 1997 1996
---- ---- ----
Net income As reported $2,820,631 $2,003,316 $2,340,153
Pro forma 2,486,549 1,747,569 2,235,544
Diluted income per
common share As reported $.35 $.36 $.45
Pro forma $.31 $.31 $.41
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 1998, 1997 and
1996 include the following:
Assumption 1998 1997 1996
---------- ---- ---- ----
Dividend yield 0.0 % 0.0% 0.0%
Risk-free rate 5.4% 6.0% 6.2%
Expected life 3-4 years 3-4 years 4-5 years
Expected volatility 68% 68% 74%
Fair Value $2.90 $2.07 $1.42
14. Employee Benefit Plans:
The Company maintains a defined contribution savings plan under Section
401(k) of the Internal Revenue Code which provides retirement benefits to
certain employees of the Company and its wholly-owned subsidiaries who meet
certain age and length of service requirements. The Company's contribution to
the Plan is determined by management. Charges to income, as determined by the
market value of Company stock when contributed, with respect to this Plan were
approximately $98,000, $55,000 and $50,000 in 1998, 1997 and 1996, respectively.
46
NOTES TO FINANCIAL STATEMENTS
--------------------
15. Income Taxes:
The components of the provision for income taxes were as
follows:
1998 1997 1996
---- ---- ----
Current:
Federal $833,000 $ 99,000 $87,000
State 97,130 125,000 91,000
Deferred:
Federal 801,000 375,000 172,000
State (2,130) 21,000 --
---------- -------- --------
$1,729,000 $620,000 $350,000
========== ======== ========
A reconciliation of the federal statutory rate to the
Company's effective tax rate is as follows:
1998 1997 1996
---- ---- ----
Federal statutory rate 34% 34% 34%
State income tax, net of federal
income tax effect 2 4 3
Non-deductible expenses 3 3 3
Valuation allowance - (13) (33)
Other, net (1) (4) 6
---- ---- ----
38% 24% 13%
==== ==== ====
The net deferred tax asset at December 31, 1998 and 1997 consist of the
following:
1998 1997
---- ----
Accounts receivables $ 229,000 $ 96,000
Property and equipment 352,000 249,000
Accrued expenses and compensation 355,000 387,000
Goodwill and intangibles (220,000) 32,000
Net operating loss carryforward -- 287,000
General business credits -- 1,406,000
Alternative minimum tax credits -- 190,000
Other, net 67,000 (9,000)
--------- -----------
783,000 2,638,000
Valuation allowance -- (1,056,000)
--------- -----------
Net deferred tax asset $783,000 $1,582,000
========= ===========
47
NOTES TO FINANCIAL STATEMENTS
--------------------
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 in 1997.
Approximately $1,056,000 and $450,000 of gross deferred tax asset and
valuation allowance related to general business credits were written
off in 1998 and 1997, respectively.
16. Year 2000 Issues:
The most reasonably likely worst case Y2K scenario would be the
failure of either the Company or a third party to correct a material
Y2K problem that would cause an interruption in, or failure of, normal
business activities or operations. In the event that the worst case
scenario occurs, the impact on the Company's financial position or
results of operations cannot be estimated. While the Company believes
that all internal IT and non-IT systems will be converted prior to
January 1, 2000, the Company has not addressed contingency plans which
would be implemented in the event of a Y2K failure. However, the
Company would develop manual procedures and processes for critical
transactions. To the extent that the Company experiences a Y2K failure
related to a third party's lack of readiness, alternate sources of
supply will be identified. At this time, the Company has not identified
a Y2K problem that it believes cannot be remedied prior to it having a
material impact on operations. The Company will continue to assess the
readiness of its own systems and, if a problem is identified that
cannot be fixed in the appropriate time period, a specific plan to
address that issue will be developed.
17. Subsequent Event:
During the first quarter of 1999 the Company paid approximately
$258,000 and issued approximately 70,200 shares of its common stock for
a 25% minority interest in Uljee Group, a Netherlands-based
organization focusing on exhibit fabrication, interior design, event
displays and graphic production with annual sales approximating $10.0
million during 1998. Should Uljee Group attain defined cumulative net
earnings through 2001, the Company will be required to pay an
additional $500,000, in cash and/or its' common stock, at the Company's
option.
48
NOTES TO FINANCIAL STATEMENTS
--------------------
18. Quarterly Financial Information (Unaudited):
Summarized unaudited quarterly financial data for the years
ended December 31, 1998, 1997 and 1996 are:
(in thousands)
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
1998
Net sales $22,051 $22,317 $24,358 $22,408
Gross profit 5,479 5,567 4,965 5,664
Net income 700 659 607 854
Basic net income per
common share (2) .10 .09 .08 .12
Diluted net income
per common share (2) .09 .08 .08 .11
1997
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 .07 .07 .06 .15
per common share (2)
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 .22 .05 .03 .16
per common share (2)
(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.
49
SCHEDULE II
MARLTON TECHNOLOGIES, INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1998, 1997, and 1996
(000'S OMITTED)
Additions Additions
charged charged
(deductions (deductions
Balance at credited) credited) Balance at
beginning of to costs and to other end of
year expenses accounts (b) Deductions year
-------------- -------------- -------------- ------------ --------------
Description
Year ended December 31, 1998
Allowance for doubtful accounts $533 $155 - $ (53)(a) $635
Deferred income tax valuation allowance $1,056 $(1,056) -
Year ended December 31, 199
Allowance for doubtful accounts $181 $150 $267(c) $ (65)(a) $533
Deferred income tax valuation allowance $1,856 $(350) $(450) $1,056
Year ended December 31, 1996
Allowance for doubtful accounts $132 $51 $ (2)(a) $181
Deferred income tax valuation allowance $2,735 $(879) $1,856
(a) Write-off of uncollectible receivables, net of recoveries
(b) Write off of valuation allowance and related gross deferred tax asset
(c) Acquired in connection with DMS acquisition
See notes to consolidated financial statements
50