UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission File Number 1-7708
MARLTON TECHNOLOGIES, INC.
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(Name of Registrant as specified in its charter)
Pennsylvania 22-1825970
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(State of incorporation) (IRS Employer Identification Number)
2828 Charter Road, Philadelphia, PA 19154
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 676-6900
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Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class: Name of each exchange:
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Common Stock, no par value American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Exchange Act: None
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Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter periods that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 Yes X No days.
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this Form 10-K and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Check whether the Registrant is an accelerated filer (as defined in Rule 12b-2
of the Act). Yes No X
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of the last business day of the Registrant's most recently
completed second fiscal quarter was $2,948,433. As of March 24, 2004 there were
12,844,696 shares of Common Stock, no par value, of the Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III Items
10, 11, 12, 13 and 14 are hereby incorporated by reference to the Registrant's
definitive proxy statement to be filed by April 29, 2004.
Exhibit Index appears on Page 16
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Page 1 of 42
PART I
ITEM 1. BUSINESS
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Business Development
Marlton Technologies, Inc. (the "Company") is engaged in the custom design,
production and sale of exhibits and environments for trade shows, museums, theme
parks, themed interiors, arenas, corporate lobbies and retail stores for clients
in industry, government, entertainment and commercial establishments. All of the
Company's operating subsidiaries do business under the name Sparks Exhibits &
Environments (collectively "Sparks"), except, DMS Store Fixtures ("DMS") which
supplies custom made fixtures and displays to national retailers, department
stores and consumer products manufacturers. Currently, all of the Company's
operating revenues are derived from Sparks and DMS.
In August 2003, the Company acquired the assets and specified liabilities of
Exhibit Crafts, Inc., a designer and builder of trade show exhibits, retail
displays and interior environments. As part of that transaction, the Company
also acquired a minority equity interest in International Expo Services, Inc., a
tradeshow freight and installation and dismantle services provider with
facilities in the Los Angeles area and in Las Vegas, which was affiliated with
Exhibit Crafts. Subsequently the Company consolidated its San Diego area Sparks
production operations into the Exhibit Crafts facility in the metropolitan Los
Angeles area.
Business Description
Products and Services
The Company's current business is the custom design, production and sale of
exhibits and environments for trade shows, museums, theme parks, themed
interiors, arenas, corporate lobbies and retail stores for clients in industry,
government, entertainment and commercial establishments. The Company manages
custom trade show projects from concept through final construction, employing
sophisticated graphics and exhibit designers and computer-aided design software
and hardware. In-house facilities provide a wide range of computerized design
and production of graphics. Electronics and audiovisual capabilities include
on-staff electronic specialists and vendor relationships which provide
multi-media equipment and programs, interactive program production and
customized applications. The Company provides full service trade show exhibit
services, including coordination, refurbishing, shipping, storage and marketing
literature distribution. Many clients are Fortune 1000 firms, who typically
contract for custom trade show exhibit projects costing in excess of $200,000.
Additionally, a majority of these clients store their trade show exhibits at a
Company facility, and the Company provides ongoing refurbishing and coordination
of clients' trade show schedules. The Company also represents domestic clients
who desire to exhibit at international trade shows. The Company designs such
exhibits, and through Sparks Europe or an international network of independent
exhibit manufacturers, arranges for the manufacture and delivery of trade show
exhibits to the desired trade show. The Company also designs and manufactures
trade show exhibits for a number of United States subsidiaries of foreign
corporations for use in domestic trade shows. In addition, the Company produces
sophisticated themed exhibits for educational and entertainment venues such as
museums and theme parks. Typically, the customer or its design firm prepares the
design which the Company fabricates using carpentry, sculpture, metal working
and scenic artist skills. The Company also supplies 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
third-party manufacturers with whom the Company has developed long-standing
business relationships for the production of its products. These manufacturers
work closely with an experienced Company project management team. Custom store
fixture opportunities include outfitting new retail stores and remodeling
existing stores, such as specialty apparel chains, department stores, specialty
electronics stores and outlet stores.
3
Marketing and Distribution
Sales by the Company to domestic customers for both domestic and international
use are solicited through internal sales and marketing groups. Purchase of
sophisticated exhibits and environments usually involves a substantial
expenditure by the customer, and significant expertise is required to properly
meet the customer's needs. Sales personnel are required to be knowledgeable with
respect to the design and manufacturing of sophisticated exhibits and
environments. Sales are typically made directly to the end user of the product
or service. In addition to sales personnel, senior officers devote substantial
attention to sales and marketing activities.
Manufacturing and Raw Materials
The Company designs and manufactures custom trade show exhibits utilizing an
in-house staff of designers, carpenters, electricians and warehouse employees.
Specialty items such as 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 store
fixture and display products, the Company subcontracts the manufacture and
installation, using a network of manufacturers. Raw materials for custom and
portable exhibits, store fixtures and displays, as well as subcontractors for
specialty work, have historically been available on commercially reasonable
terms from various vendors. Portable exhibit configurations, together with
graphics, are typically designed by the Company for a client and are purchased
from portable exhibit manufacturers for resale. Graphics 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 in certain geographic areas
from Abex Display Systems Inc., its primary source of portable exhibits. The
Company holds a 25% equity interest in Abex.
Seasonality of Business
Trade shows typically occur regularly throughout the year with the exception of
the third quarter when business to business trade shows are traditionally at a
low point. Trade show activities in specific industries, such as health care and
telecommunications, tend to be a function of seasonal show schedules within
those industries. The custom store fixture business tends to be slower during
the fourth and first quarters due to retailers' desires not to install or plan
new fixtures during their traditionally busy year-end season. The Company seeks
new clients and sales people with client bases in different industries to reduce
the effects of the slower sales periods. Additionally, the Company offers other
products and services, such as sales of scenic and themed exhibits,
portable/modular exhibits, and permanent exhibits which tend to be less seasonal
in nature, and in certain cases, manufacturing can be spread over longer periods
of time.
Working Capital
The Company's working capital requirements are fulfilled by funds generated
through operations and a revolving credit facility. Working capital requirements
are generally not affected by project size requirements or accelerated delivery
for major trade show exhibit, scenic and themed exhibit customers due to general
policies of progress billing on larger jobs. However, working capital
requirements are affected by the sale of custom store fixtures which are
generally produced upon receipt of purchase orders from large retailers, but are
held in inventory and are not billed to the customer until delivery.
Significant Customers
One customer, JCPenney, accounted for 15% of the Company's consolidated net
sales in 2003. The loss of this customer would have a material adverse effect on
the Company.
Backlog
The backlog of orders at December 31, 2003 and 2002 was approximately $19
million. Generally, backlog of orders are recognized as sales during the
subsequent six month period. The current backlog relates primarily to expected
2004 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, large retailers opening or refurbishing
stores, and longer term museum projects.
4
Competition
The Company competes with numerous other companies offering similar products and
providing similar services, on the basis of price, quality, performance,
financial resources, and client-support services. The custom trade show exhibit,
scenic and themed exhibit, permanent exhibit, retail store fixture and display,
and portable exhibits sales markets include a large number of national and
regional companies, some of which have substantially greater sales and resources
than the Company. In addition to its domestic manufacturing facilities, the
Company utilizes its national and international affiliations and relationships
to meet customers needs in other locales. Due to the lack of specific public
information, the Company's competitive position is difficult to ascertain.
Environmental Protection
The Company's compliance with federal, state and local provisions regulating
discharge of materials into the environment or otherwise relating to the
protection of the environment has not had, and is not expected to have, a
material adverse effect upon its capital expenditures, earnings or competitive
position.
Employees
The total number of persons employed by the Company is approximately 236 of
which approximately 234 are full-time employees. The Philadelphia, Pennsylvania
operations have a three-year labor contract expiring June 30, 2004, and a
three-year labor contract expiring December 31, 2004, covering an aggregate of
approximately 35 production and fulfillment employees. The Santa Fe Springs,
California operation has a two-year labor contract expiring August 31, 2005,
covering approximately 40 production workers.
Web Site Address
The Company's web site address is www.marltontechnologies.com.
ITEM 2. PROPERTIES
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The Company currently leases four primary facilities as follows:
Location Square Footage Purpose
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Philadelphia, PA 250,000 Office, showroom, warehouse & manufacturing
Santa Fe Springs, CA 91,000 Office, warehouse & manufacturing
Austell, GA 98,000 Office, warehouse & manufacturing
El Cajon, CA 84,000 Warehouse
The Company's subsidiaries also have sales, design and project management
offices in the Orlando, Florida, and San Francisco, California, metropolitan
areas. The Company's office, showroom, warehouse and manufacturing facilities
were all in good condition and adequate for 2003, based on normal five-day
operations, and are anticipated to be adequate for operations in 2004, including
any foreseeable internal growth.
The El Cajon, California facility was vacated in August 2003 in connection with
the Company's relocation and consolidation of its West Coast operations (see
Note 2 to the consolidated financial statements). The Company currently leases
109,000 square feet from its landlord but has subleased 25,000 square feet of
this facility to an unrelated entity for the remainder of the lease term. The
Company is working with the landlord to find tenants for the remaining 84,000
square feet. Currently a new tenant is under agreement to take 38,000 square
feet of this space.
The Santa Fe Springs, California facility consists of two buildings of 91,000
and 31,000 square feet which are jointly leased with International Expo
Services, Inc. ("IES"), an installation and dismantle company in which the
Company holds a minority equity interest. The Company occupies and pays rent on
the 91,000 square foot building, and IES occupies and pays rent on the 31,000
square foot building.
5
ITEM 3. LEGAL PROCEEDINGS
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The Company from time to time is a defendant and counterclaimant in various
lawsuits that arise out of, and are incidental to, the conduct of its business.
The resolution of pending legal matters should not have a material adverse
effect upon the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not applicable.
6
PART II
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ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The following table shows the high and low sales prices of the Common Stock on
the American Stock Exchange:
2003 2002
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Quarter High Low High Low
------- ---- --- ---- ---
1 $.30 $.18 $.58 $.36
2 .40 .29 .65 .44
3 .77 .40 .46 .20
4 .79 .42 .40 .12
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 loan agreement provides that the Company may
not pay dividends to its shareholders without the lender's prior written consent
and also provides restrictions on the ability of the Company's subsidiaries to
transfer funds to the Company in the form of dividends, loans or advances.
As of March 24, 2004 there were 966 holders of record of the Company's Common
Stock.
Equity Compensation Plan Information as of December 31, 2003
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Number of securities Weighted-average exercise Number of securities
to be issued upon price of outstanding remaining available
exercise of options, warrants and for future issuance
outstanding options, rights under compensation under equity
Plan category warrants and rights plans compensation plans
----------------------- --------------------------- -----------------------
Equity Compensation
plans approved by
security holders 1,759,578 (1) $0.61 373,758 (1)
Equity Compensation
plans not approved
by security holders 15,500 $2.13 735,000 (2)
Total 1,775,078 $0.63 1,108,758
1. The Company's 2001 Equity Incentive Plan provides for the issuance to
employees, directors and consultants of stock options or restricted shares for
up to an aggregate of 2,000,000 shares of Common Stock, 373,758 of which remain
available for future issuance. Any new director of the Company receives a stock
option award of 100,000 shares with an exercise price equal to the fair market
value on the date of grant, vesting 50% initially and 25% at each of the next
two Company annual meetings based on continued service as a director, and
expiring after a period of five years. Included in the number of securities to
be issued upon exercise are shares issued under the Company's 1990 Incentive
Plan and 1992 Directors' and Consultants' Stock Option Plan, under which plans
no more shares can be issued.
2. The Company's 2000 Equity Incentive Plan provides for the issuance to
employees, outside directors and consultants of stock options, stock
appreciation rights and/or stock units for up to an aggregate of 735,000 shares
of Common Stock, 735,000 of which remain available for future issuance. Other
options have been issued to employees as an incentive to accept employment with
the Company in an amount not in excess of 5% of the Company's outstanding shares
of Common Stock.
For additional information, see Note 15 to consolidated financial statements.
7
ITEM 6. SELECTED FINANCIAL DATA
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SELECTED FINANCIAL DATA
For the years ended December 31
(in thousands except per share amounts)
2003 2002 2001 2000 1999
---- ---- ---- ----- ----
TOTAL ASSETS $24,818 $25,609 $49,442 $63,508 $60,319
LONG-TERM OBLIGATIONS 5,146 4,000 6,635 16,376 11,157
WORKING CAPITAL 2,996 3,461 6,872 15,370 11,151
STOCKHOLDERS' EQUITY 7,140 9,342 (2)(3) 29,176 27,906 28,811
OPERATIONS:
Net sales 65,587 71,182 76,972 92,533 94,584
Operating profit (loss) (2,155) (1) (1,132) (115)(4) 60 3,053
Net income (loss) before change in
accounting principle (2,201) (1) (7,414)(2) $(1,136)(4) $(1,106) $809 (5)
Net income (loss) after change in
accounting principle (2,201) (1) (19,799)(3) $(1,136)(4) $(1,106) $809 (5)
BASIC NET INCOME (LOSS)
PER COMMON SHARE BEFORE CHANGE IN ACCOUNTING
PRINCIPLE (6) $(.17) $(.57) $(.14) $(.15) $.11
DILUTED NET INCOME (LOSS) PER COMMON SHARE
BEFORE CHANGE IN ACCOUNTING PRINCIPLE (7) $(.17) $(.57) $(.14) $(.15) $.10
BASIC NET INCOME (LOSS) PER COMMON SHARE
AFTER CHANGE IN ACCOUNTING PRINCIPLE (6) $(.17) $(1.52) $(.14) $(.15) $.11
DILUTED NET INCOME (LOSS) PER COMMON SHARE
AFTER CHANGE IN ACCOUNTING PRINCIPLE (7) $(.17) $(1.52) $(.14) $(.15) $.10
CASH DIVIDENDS -0- -0- -0- -0- -0-
----------- ----------- ---------- ---------- ------------
1. Includes a $1.1 million restructuring provision for facility relocation,
and a $0.3 million expense for a terminated merger transaction.
2. Includes a $1.2 million write-down in the Company's investment in an
affiliate, and $5.4 million for a valuation allowance for deferred income
taxes.
3. Includes a $12.4 million impairment loss (net of a $3.5 million income tax
benefit) for a change in accounting principle (adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets").
4. Includes an inventory provision of $0.7 million ($0.5 million after income
taxes) for a customer that filed for Chapter 11, and relocation costs and
operating losses of $0.6 million ($0.4 million after income taxes) for the
Company's Orlando, Florida manufacturing operations.
5. Includes an impairment loss of $465,000 ($279,000 after income taxes)
for a write-down of the Company's investment in Abex Europe.
6. Basic per common shares amounts are computed using the weighted average
number of common shares outstanding during the year.
7. 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.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company's business is the custom design, production and sale of exhibits and
environments for trade shows, museums, theme parks, themed interiors, arenas,
corporate lobbies and retail stores for clients in industry, government,
entertainment and commercial establishments.
Challenges of the past year included the relocation and consolidation of the
Company's West Coast operations and a terminated merger agreement discussed
below. In addition, on February 6, 2004 the Company replaced its credit facility
that would have expired on May 16, 2004 with a new facility expiring on February
6, 2007.
The trade show exhibit industry continues to be very competitive and several of
the Company's competitors have filed for Chapter 11. In addition, the Company's
customer base of primarily Fortune 1000 companies is expected to continue to
closely manage their trade show budgets. This budget management will put
pressure on sales and margins for trade show exhibits and related services. The
Company is negotiating better pricing and terms with its suppliers and pursuing
staff and cost reduction initiatives to mitigate the impact of this industry
trend.
RESULTS OF OPERATIONS
2003 as Compared With 2002
Net Sales
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(in thousands)
Revenue Sources 2003 2002
--------------- ---- ----
Trade show exhibits $40,457 $ 44,711
Permanent and scenic displays 25,130 26,471
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Total $65,587 $71,182
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Total net sales of $65.6 million for 2003 decreased $5.6 million, or 8%, from
total net sales for 2002. This decrease was comprised of a $4.3 million, or 10%,
decrease in sales of trade show exhibits and related services and a $1.3
million, or 5%, decrease in sales of permanent and scenic displays. Selling
prices were relatively constant in 2003 and 2002. Lower sales of trade show
exhibits and related services were primarily due to reductions in certain
customers' trade show marketing budgets, which led to cancelled and reduced
participation in trade shows that these customers attended in the past. The
sales decrease for permanent and scenic displays was principally attributable to
lower sales of store fixtures to national retail customers.
Gross Profit
------------
Gross profit, as a percentage of net sales, improved to 21.9% in 2003 from 19.9%
in 2002. This improvement was largely due to profit improvement initiatives
implemented in the second half of 2002, which were realized for the full year in
2003. Management continues to pursue cost reduction initiatives, including
operational improvements, supplier renegotiations and staff reductions to offset
the impact of lower sales volume.
Selling Expenses
----------------
Selling expenses were $8.5 million in 2003 and in 2002. As a percentage of net
sales, these expenses increased to 13% in 2003 from 11.9% in 2002. The
percentage increase was due, in large part, to the impact of lower sales volume
as compared with certain fixed selling expenses such as sales office and salary
expenses. Cost reduction initiatives implemented near the end of 2003 are
expected to reduce selling expenses in 2004.
9
Administrative and General Expenses
-----------------------------------
Administrative and general expenses of $6.9 million for 2003 increased 1.6% from
such expenses of $6.8 million for 2002. The Company and Redwood Acquisition
Corp. ("Redwood") entered into a merger agreement in February 2003 pursuant to
which all of the outstanding shares of common stock of the Company (other than
the shares held by approximately eight shareholders) would be converted into the
right to receive $0.30 per share. On June 19, 2003, the Company's Board of
Directors approved a termination proposal submitted by Redwood, which terminated
the proposed merger agreement with Redwood. Costs of approximately $250,000
incurred in connection with this proposed merger agreement were charged to
administrative and general expenses in the second and third quarters of 2003.
The increase in general and administrative expenses was primarily due to these
costs incurred in connection with this terminated merger transaction,
integration costs to consolidate the Company's West Coast operations and higher
insurance and telecommunications costs. During the fourth quarter of 2003,
management implemented executive compensation reductions, staff reductions and
further cost cutting initiatives in response to lower sales volume.
Restructuring and other Expense
-------------------------------
On August 1, 2003, a Company subsidiary acquired the assets of Exhibit Crafts,
Inc., a Los Angeles, CA area manufacturer of trade show exhibits and a 20%
interest in International Exposition Services, Inc., (IES), a trade show
shipping and installation provider. The initial purchase price was $694,000,
including the assumption of certain liabilities totaling $310,000. In addition,
the sellers received 20% of the subsidiary's common stock. The purchase price
approximated the fair value of the net assets acquired. In addition, the asset
purchase agreement provides for contingent aggregate payments of up to $750,000
based on operating performance in 2004, 2005 and 2006. The Company relocated its
San Diego area manufacturing facility to the newly acquired Los Angeles, CA area
facility during the third quarter of 2003. Costs incurred in connection with
this relocation and consolidation were approximately $1.1 million, which
included relocation and employee termination expenses and the Company recorded a
charge for a portion of the remaining lease obligation related to the vacated
San Diego area facility.
Operating Loss
--------------
The Company incurred an operating loss of $2.2 million in 2003 primarily due to
lower volume and the restructuring costs for the relocation and consolidation of
its West Coast operations.
Other Income (Expense)
---------------------
Interest expense decreased to $236,000 in 2003 from $382,000 in 2002 due in part
to lower borrowings and to lower interest rates.
In the fourth quarter of 2003, the Company recorded an impairment loss of
$259,000 related to the investment in its Sparks Europe affiliate.
Benefit From Income Taxes
-------------------------
In the third quarter of 2003, the Company recognized the benefit of an income
tax refund for $0.4 million related to a change in strategy whereby a net
operating loss was carried back to a prior year. In the fourth quarter of 2002,
the Company established a valuation allowance for deferred income tax assets. As
a result, the Company did not record an income tax benefit from the current
period pre-tax loss.
Backlog
-------
The backlog of orders at December 31, 2003 and 2002 was approximately $19
million. Generally, backlog of orders are recognized as sales during the
subsequent six month period. The current backlog relates primarily to expected
2004 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.
10
2002 As Compared With 2001
Net Sales
---------
(in thousands)
Revenue Sources 2002 2001
---- ----
Trade show exhibits $ 44,711 $ 49,992
Permanent and scenic displays 26,471 26,980
------ ------
Total $71,182 $ 76,972
====== ======
Total net sales of $71.2 million for 2002 decreased 8% from total net sales for
2001. Sales of trade show exhibits and related services decreased 10.6%
primarily due to the loss of two trade show exhibit clients and generally weak
economic conditions. Sales of permanent and scenic displays decreased 1.9%,
which was the net result of lower store fixtures sales partially offset by
higher permanent museum display sales.
Gross Profit
------------
Gross profit, as a percentage of net sales, decreased to 19.9% in 2002 as
compared with 22.2% in 2001. This decrease was principally attributable to lower
gross profit margins for store fixtures and to shifts in sales mix to lower
margin sales categories. The DMS store fixtures business had an unfavorable
impact on the Company's gross profit in 2002.
Selling Expenses
----------------
Selling expenses of $8.5 million decreased to 11.9% of net sales in 2002 from
$9.8 million, or 12.7% of net sales in 2001. This decrease was largely due to
higher permanent museum exhibit sales, which are subject to lower sales
commission expense, and to lower commission expense for store fixtures sales.
Administrative and General Expenses
-----------------------------------
Administrative and general expenses were reduced to $6.8 million in 2002 from
$7.4 million in 2001. This decrease was primarily due to the adoption of a new
accounting principle discussed below, which eliminated goodwill amortization in
2002. Goodwill amortization in 2001 was $0.8 million. In connection with the DMS
Store Fixtures acquisition, employment agreements were made with two
shareholders of the Company, which provided for guaranteed minimum annual
payments of approximately $0.5 million. These agreements were mutually
terminated in January 2001 eliminating the guaranteed minimum payments after
February 2, 2001, which reduced administrative and general expenses by
approximately $0.5 million in the first quarter of 2001.
Operating Loss
--------------
The Company reported an operating loss of $1.1 million for 2002 as compared with
an operating loss of $0.1 million for 2001. The increase in operating loss was
principally attributable to lower sales and the lower gross profit percentage in
2002.
The Company's DMS Store Fixtures business unit generated significantly lower
operating profit (loss) in 2002 as compared with 2001. Based on these results
and projections for 2003, an impairment loss of $176,000, included as a
component of the operating loss, was recognized for the net book value of
remaining long-term assets for this business unit.
Other Income (Expense)
---------------------
Interest expense decreased to $0.4 million in 2002 from $1.2 million in 2001 as
a result of lower borrowings and lower interest rates.
11
In the first quarter of 2002, management determined that the Company's
investment in a portable tradeshow exhibit manufacturer was not recoverable,
which resulted in an impairment loss of $1.2 million from investments in
affiliates. A loss of $0.3 million was recognized in 2001 for a write-down of
the Company's investment in its Sparks Europe affiliate.
Provision for (benefit from) income taxes
-----------------------------------------
The Company established a valuation allowance of $5.4 million for deferred
income tax assets in the fourth quarter of 2002, principally related to a
deferred income tax benefit in connection with the write off of goodwill
recorded in the first quarter of 2002.
The Company also established a valuation allowance for the income tax benefit
from the $1.2 million write down of investments in affiliates recorded in the
first quarter of 2002 because this capital loss is not expected to be offset by
capital gains within the required statutory period. The provision for income
taxes recorded in the first quarter of 2002 also included a valuation allowance
of $191,000 related to a 1999 capital loss incurred in connection with the
Company's investment in a United Kingdom affiliate.
Cumulative effect of change in accounting principle
---------------------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial of Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets" (SFAS 142), which supercedes APB No. 17 "Intangible Assets".
SFAS 142 requires that goodwill no longer be amortized to earnings, but instead
be reviewed for impairment. The Company adopted SFAS 142 effective January 1,
2002. This new accounting standard requires a two-step test for operating units
having unamortized goodwill balances. The first step requires a comparison of
the book value of the net assets to the fair value of the respective operating
unit. If the fair value is determined to be less than the book value, a second
step is required to determine the impairment. This second step includes
evaluation of other intangible assets, and any shortfall of the adjusted book
value below fair value determines the amount of the goodwill impairment.
Goodwill amortization expense was $0.8 million in 2001 and in 2000. The adoption
of SFAS 142 reduced goodwill by $15.9 million and net income by $12.4 million
(net of a $3.5 million income tax benefit) in the first quarter of 2002,
identified as a cumulative effect of a change in accounting principle. This
impairment charge related to goodwill recorded in connection with the December
31, 1997 acquisition of DMS Store Fixtures, L.P. This charge differs from the
previous accounting standard method, which was based on undiscounted cash flows,
because the new method is based on fair value measurement estimates as of the
measurement date.
Backlog
-------
The backlog of orders at December 31, 2002 and 2001 was approximately $19
million and $13 million, respectively. The backlog increase is principally
attributable to a higher level of open orders for permanent and scenic displays
and new customers. Generally, backlog of orders are recognized as sales during
the subsequent six month period. 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.
LIQUIDITY AND CAPITAL RESOURCES
On May 16, 2003, the Company amended its Revolving Credit and Security Agreement
(the "Facility") with its bank to change from and Earnings Before Interest,
Taxes, Depreciation and Amortization ("EBITDA") basis to an asset-based
arrangement. The Facility provided for borrowing of up to $8 million based on a
percentage of qualified accounts receivable and inventories. The Facility was
collateralized by all the Company's assets and had interest at rates based
primarily on the London Inter Bank Offering Rate (LIBOR) plus 3.25%. The
Facility included certain financial covenants requiring a minimum tangible net
worth and maintenance of certain financial ratios and restricted the Company's
ability to pay dividends. Borrowings under this Facility were $4.9 million at
December 31, 2003.
On February 6, 2004, the Company replaced the Facility with a new credit
facility provided by a commercial asset-based lender. The new credit facility,
which expires on February 6, 2007, provides for borrowing capacity of up to $12
12
million based on a percentage of eligible accounts receivable and inventories.
This new facility bears interest based on the 30-day dealer placed commercial
paper rate plus 4.50% (effective rate of 5.51% at February 6, 2004), restricts
the Company's ability to pay dividends, and includes certain financial covenants
(fixed charge coverage ratio and maximum capital expenditure amount of $1
million in 2004 and $1.25 million in 2005 and in 2006). The Company's borrowing
capacity was $7 million at March 4, 2004. Proceeds from this credit facility are
used primarily for working capital and other capital purposes.
The Company's working capital decreased to $3 million at December 31, 2003 from
$3.5 million at December 31, 2002, largely due to a $0.6 million decrease in
cash and cash equivalents. Available cash and proceeds of $0.9 million from the
Company's credit facility were used for the acquisition discussed ($0.4 million)
and for capital expenditures ($0.9).
The Company has lease commitments for certain facilities under non-cancelable
operating leases. Timing of future lease commitments as well as maturities of
long-term debt are as follows:
Payment due by period
---------------------
Less than 1-3 3-5 More than
Contractual Obligations Total 1 Year Years Years 5 Years
----------------------- ----- ------ ----- ----- --------
Long-Term Debt Obligations $ 5,235 $ 89 $5,146 $ -- $--
Capital Lease Obligations -- -- -- -- --
Operating Lease Obligations 8,237 2,267 4,910 1,060 --
Purchase Obligations -- -- -- -- --
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet Under GAAP -- -- -- -- --
------ ----- ----- ----- ----
Total $13,472 $2,356 $10,056 $1,060 $--
====== ===== ====== ===== ====
The Company jointly leases a 31,000 square foot facility with International Expo
Services, in which the Company holds a minority interest. The annual lease
commitment for this facility is $214,000 through September 22, 2007, which is
not included with the above future operating lease commitments.
The Company leases a facility from a partnership controlled by two shareholders
of the Company. This lease, which contains a renewal option on May 14, 2009 and
expires on May 14, 2019, requires minimum annual rent of $771,000 (included in
the table above) at a fixed rate for the first 10 years, and the Company is
responsible for taxes, insurance and other operating expenses.
OUTLOOK
The Company expects combined sales of trade show exhibits and of permanent and
scenic displays in 2004 to decrease from 2003 levels. The Company's trade show
exhibit client base of Fortune 1000 companies is expected to closely manage
their marketing budgets, which would inhibit the Company's trade show exhibit
sales and margins. The Company expects sales of store fixtures to increase in
2004 from 2003 levels. The Company continues to explore new sales opportunities
while pursuing operating efficiency improvements and cost reduction initiatives
to mitigate the impact of lower sales volume.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS 146"). Statement of Financial Accounting Standards
("SFAS") 146 addresses significant issues regarding the recognition,
measurement, and reporting of costs associated with exit and disposal
activities, including restructuring activities that are currently accounted for
pursuant to the guidance that the Emerging Issues Task Force ("EITF") has set
forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." Effective in the first quarter of 2003, the
Company adopted the provisions of SFAS 146. This new accounting principle had an
impact on the timing and recognition of costs associated with the Company's
relocation and consolidation of its West Coast operations (see Note 2).
In 2003, the FASB issues FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("FIN 46") and its amendment FIN 46R. This interpretation
clarifies existing accounting principles related to the preparation of
13
consolidated financial statements when the equity investors in an entity do not
have the characteristics of a controlling financial interest or when the equity
at risk is not sufficient for the entity to finance its activities without
additional subordinated financial support. FIN 46R requires a company to
evaluate all existing arrangements to identify situations where a company has a
"variable interest" in a "variable interest entity" and further determine when
such variable interests require a company to consolidate the variable interest
entities' financial statement with its own. The Company adopted the provisions
of FIN 46 in connection with the lease agreement with a related partnership and
determined that there was no impact on its financial statements as a result of
the adoption of this new accounting principle.
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 addresses the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The Company
will continue to evaluate the impact of SFAS 150 on its financial statements.
CRITICAL ACCOUNTING POLICIES
Financial statement preparation in conformity with generally accepted accounting
principles requires management to make assumptions and estimates that affect the
reported amounts of assets and liabilities. One such estimate is possible losses
in connection with financing accounts receivable. Management estimates these
possible losses based on a review of the financial condition and payment history
of specific customers having significant accounts receivable balances, and
establishes a general reserve for the remaining accounts receivable based on
historical bad debt experience.
Revenues on trade show exhibit sales, themed interiors, custom store fixtures
and point of purchase displays are recognized using the completed contract
method. The Company's contracts are typically less than three months in
duration. As a result, the Company's revenue recognition would not differ
materially if another method were used. Progress billings are generally made
throughout the production process. Progress billings which are unpaid at the
balance sheet date are not recognized in the financial statements as accounts
receivable. Progress billings which have been collected on or before the balance
sheet date are classified as customer deposits and are included in accrued
expenses and other current liabilities.
Measurement of goodwill and other intangible asset impairment involves
assumptions and estimates by management on a quarterly basis. The adoption of
SFAS 142 requires estimates of fair values for certain operating units. These
estimates involve discounted cash flow forecasts to determine the fair value of
operating units having unamortized goodwill balances, and also considers the
Company's market capitalization.
The evaluation of deferred income tax assets also involves managements estimates
and judgment. Management considers several factors in this evaluation, including
trailing three year financial performance history and future forecasts of
operating income. A valuation allowance is established based on management's
estimates about the recoverability of deferred income tax assets.
Other significant accounting policies are also important to the understanding of
the Company's financial statements. These policies are discussed in Note 1 to
the consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. When used in this report, the
words "intends," "believes," "plans," "expects," "anticipates," "probable,"
"could" and similar words are used to identify these 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 enter new markets
and expand existing business; continued availability of financing to provide
additional sources of funding for capital expenditures, working capital and
investments; the effects of competition on products and pricing; growth and
acceptance of new product lines through the Company's sales and marketing
programs; changes in material and labor prices from suppliers; changes in
customers' financial condition; the Company's ability to attract and retain
competent employees; the Company's ability to add and retain customers; changes
in sales mix; the Company's ability to integrate and upgrade technology;
uncertainties regarding accidents or litigation which may arise; the financial
impact of facilities consolidations; uncertainties about the impact of the
threat of future terrorist attacks on business travel and related trade show
14
attendance; 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
---------------------------------------------------------
Fluctuations in interest, foreign currency exchange rates and commodity prices
do not significantly affect the Company's financial position and results of
operations. The Company's revolving credit facility, bears an interest rate
based on 30-day dealer placed commercial paper rate, plus 4.5%.
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 15 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
On November 17, 2003, the Company dismissed PricewaterhouseCoopers LLP ("PwC")
as its independent public accountants and appointed McGladrey and Pullen, LLP
("McGladrey") as its new independent public accountant. The decision to dismiss
PwC and to retain McGladrey was approved by the Company's Audit Committee and
Board of Directors on November 17, 2003.
The reports of PwC on the Company's financial statements for each of the years
ended December 31, 2002 and 2001 did not contain an adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles.
During the Company's two most recent fiscal years and through November 17, 2003
there were no disagreements with PwC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to PwC's satisfaction, would have caused PwC to
make reference to the subject matter of the disagreement in connection with its
reports.
During the Company's two most recent fiscal years and through November 17, 2003,
there have been no reportable events (as defined in Regulation S-K Item 304 (a)
(1) (v)).
The Company provided PwC with a copy of this disclosure and requested that PwC
review such disclosure and provide a letter addressed to the Securities and
Exchange Commission as specified by Item 304(a) (3) of Regulation S-K. Such
letter was filed as Exhibit 16.1 to the Company's Current Report on Form 8-K
dated November 17, 2003.
During the fiscal years ended December 31, 2002 and 2001, and the subsequent
interim period up to November 17, 2003, the Company did not consult with
McGladrey regarding (i) the application of accounting principles to a specified
transaction, either completed or proposed, (ii) the type of audit opinion that
might be rendered on the Company's financial statements, or (iii) any other
matters or reportable events set forth in Items 304 (a) (1) (iv) and (a) (1) (v)
of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
-----------------------
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities and Exchange Act of 1934, as amended). Based on
this evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective, except as discussed in the next paragraph below, in timely alerting
them to material information relating to the Company required to be included in
the Company's periodic filings with the Securities and Exchange Commission.
15
There was no change in the Company's internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange
Act of 1934, as amended) during the Company's most recently completed fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting. Subsequent to
the end of the quarter, management determined that the Company's internal
controls were insufficient to prevent the Company's Chief Executive Officer from
causing the Company, through adjustments to accounting records and otherwise, to
confer unauthorized benefits upon himself or upon his behalf. A report prepared
by an independent law firm retained by the audit committee (which report noted
that the Chief Executive Officer's conduct may have been illegal,) concluded
that the amounts involved were relatively minor. The level of benefits so
obtained did not exceed $60,000. All of such benefits have been repaid by the
Chief Executive Officer. The Company has taken a number of steps to improve the
control environment including requiring additional written approvals for (i)
increases in employee compensation, (ii) authorization of travel and (iii)
adjustments to accounting entries related to employee compensation.
PART III
Items 10, 11, 12, 13 and 14 have been omitted from this report, in accordance
with General Instruction G (3). Such information is incorporated by reference
from the Company's definitive proxy statement to be filed with the SEC by April
29, 2004.
16
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
Exhibit Page
(a) The following documents are filed as part of this report: ------------
(1) Financial Statements:
Report of Independent Accountants, McGladrey & Pullen, LLP. 21
-------------
Report of Independent Accountants, PricewaterhouseCoopers LLP. 22
-------------
Consolidated Statements of Operations for the years ended December 31, 2003,
2002 and 2001. 23
-------------
Consolidated Balance Sheets at December 31, 2003 and 2002. 24
-------------
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 2003, 2002 and 2001. 25
-------------
Consolidated Statements of Cash Flows for the years ended December 31, 2003,
2002 and 2001. 26
-------------
Notes to Consolidated Financial Statements. 27
-------------
(2) Financial Statements Schedule: Valuation and Qualifying Accounts and Reserves: 41
-------------
(3) Exhibits:
(2)(a) Agreement and Plan of Merger of the Company (Incorporated
by reference to the Company's Proxy Statement dated
September 27, 2001, filed with the Commission).
(3)(i) Articles of Incorporation of the Company (Incorporated by
reference to the Company's Proxy Statement dated September
27, 2001, filed with the Commission).
3(ii) Amended and Restated By-laws of the Company (Incorporated
by reference to Exhibit 3(ii)(a) of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002, filed with the Commission).
10(a) Amended and Restated Employment Agreement dated November
20, 2001 between the Company and Robert B. Ginsburg
(Incorporated by reference to the Company's September 27,
2001 Proxy Statement, filed with the Commission).*
10(b) Employment Agreement dated 11/20/01 between the Company and
Jeffrey K. Harrow (Incorporated by reference to the
Company's September 27, 2001 Proxy Statement, filed with
the Commission).*
10(c) Employment Agreement dated 11/20/01 between the Company and
Scott Tarte (Incorporated by reference to the Company's
September 27, 2001 Proxy Statement, filed with the
Commission).*
10(d) Form of Warrants issued by the Company to Jeffrey K.
Harrow, Scott Tarte, Robert B. Ginsburg and Alan I.
Goldberg on 11/20/01 (Incorporated by reference to the
Company's September 27, 2001 Proxy Statement, filed with
the Commission). Schedule of grants (Incorporated by
reference to Exhibit 10(f) to the Company's Annual Report
on Form 10-K for the year ended December 31, 2001, filed
with the Commission).
17
10(e) Stockholders' Agreement date 11/20/01 among Jeffrey K.
Harrow, Scott Tarte, Robert B. Ginsburg and the Company
(Incorporated by reference to the Company's September 27,
2001 Proxy Statement, filed with the Commission).
10(f) Registration Rights Agreement dated 11/20/01 among Jeffrey
K. Harrow, Scott Tarte, Robert B. Ginsburg, Alan I.
Goldberg and the Company (Incorporated by reference to the
Company's September 27, 2001 Proxy Statement, filed with
the Commission).
10(g) Amended Agreement of Employment, dated December 11, 1992, between the Company and
Alan I. Goldberg. * 43
-------------
10(h) 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 at:
www.sec.gov/cgi-bin/srch-edgar?test=Marlton+Technologies&first=1993&last=2004&mode=Simple).*
10(i) Letter Agreement dated 11/20/01 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, 2001, filed with the
Commission).*
10(j) Employment Agreement dated November 24, 1999 with Stephen
P. Rolf (Incorporated by reference to Exhibit 10(l) to the
Company Annual Report of Form 10-K for the year ended
December 31, 1999, filed with the Commission).*
10(k) Option Agreement dated January 10, 2000 with Stephen P.
Rolf (Incorporated by reference to Exhibit 10(x) to the
Company Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000, filed with the Commission).*
10(l) Option Agreements with Outside Directors (Incorporated by
reference to Company Proxy Statement dated April 30, 1999,
filed with the Commission).*
10(m) Option Agreements dated August 7, 2000 with Outside
Directors (Incorporated by reference to Exhibit 10(x) to
the Company Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, filed with the Commission).*
10(n) Option Agreements dated March 1, 2002 with Outside
Directors (Incorporated by reference to Exhibit 10(e) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, filed with the Commission).*
10(o) 2000 Equity Incentive Plan (Incorporated by reference to
Exhibit 10(n) to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001, filed with the
Commission).*
10(p) 2001 Equity Incentive Plan (Incorporated by reference to
Exhibit 10(ee) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001, filed with
the Commission).*
10(q) Lease for Premises located at 2828 Charter Road,
Philadelphia, PA dated May 14, 1999 (Incorporated by
reference to Exhibit 10(f) to the Company Annual Report on
Form 10-K for the year ended December 31, 1999, filed with
the Commission).
10(r) Amendment to Lease 2828 Charter Road, Philadelphia, PA
dated February 25, 2000 (Incorporated by reference to
18
Exhibit 10(g) to the Company Annual Report on Form 10-K for
the year ended December 31, 1999, filed with the
Commission).
10(s) Lease for Premises located at 8125 Troon Circle, Austell, GA 30001. 49
-------------
10(t) Lease Agreement dated June 29, 1998 between Gillespie Field
Partners, LLC and Sparks Exhibits, Ltd. (Incorporated by
reference to Exhibit 7(2) to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998, filed
with the Commission at
www.sec.gov/cgi-bin/srch-edgar?test=Marlton+Technologies&first=1993&last=2004&mode=Simple).
10(u) Loan and Security Agreement dated as of February 6, 2004 with General Electric
Capital Corporation. 66
-------------
10(v) Option Agreement dated June 3, 2002 with Robert B. Ginsburg
(Incorporated by reference to Exhibit 10(cc) to the
Company`s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002, filed with the Commission).*
10(w) Option Agreement dated June 3, 2002 with Alan I. Goldberg
(Incorporated by reference to Exhibit 10(dd) to the
Company`s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002, filed with the Commission).*
10(x) Option Agreement dated October 23, 2002 with Washburn
Oberwager (Incorporated by reference to Exhibit 10ee) to
the Company`s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002, filed with the Commission).*
10(y) Fourth Amendment to Lease Agreement dated September 11,
2003 for premises located at 8125 Troon Circle, Austell, GA
30001 (Incorporated by reference to Exhibit 10(cc) to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, filed with the Commission).
10(z) Sublease Agreement with Bradco International for premises
located at 2025 Gillespie Way, El Cajon, CA 92020.
(Incorporated by reference to Exhibit 10(dd) to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, filed with the Commission).
10(aa) First Amendment to Lease Agreement dated October 31, 2003
for premises located at 2025 Gillespie Way, El Cajon, CA
92020 (Incorporated by reference to Exhibit 10 (ee) to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, filed with the Commission).
10(bb) Second Amendment to and Partial Termination of Lease Agreement dated January 1,
2004 for premises located at 2025 Gillespie Way, El Cajon, CA 92020 122
-------------
10(cc) Lease Agreement, First and Second Amendments for premises
located at Building J, 10232 Palm Drive, Santa Fe Springs,
CA 90670 (Incorporated by reference to Exhibit 10(ff) to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, filed with the Commission).
10(dd) Lease Agreement, First and Second Amendments for premises
located at Building G, Heritage Springs Business Park,
Santa Fe Springs (Incorporated by reference to Exhibit
10(gg) to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003, filed with the
Commission).
14 Code of Ethics 128
-------------
21 Subsidiaries of the Company 130
-------------
19
31(a) Rule 13a - 14(a) / 15(d) - 14(a) Certification, Chief Executive Officer 131
-------------
31(b) Rule 13a - 14(a) / 15(d) - 14(a) Certification, Chief Financial Officer 132
-------------
32 Section 1350 Certifications 133
-------------
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
One report on Form 8-K dated November 17, 2003 was filed by the Company
during the last quarter of the period covered by this report on Form 10-K,
reporting changes in the Company's certifying accountant.
20
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
------------------
Robert B. Ginsburg, President
By: /s/ Stephen P. Rolf
---------------
Stephen P. Rolf, Chief Financial Officer
Dated: April 14, 2004
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/ Jeffrey K. Harrow Chairman of the April 14, 2004
----------------- Board of Directors
Jeffrey K. Harrow
/s/ Scott J. Tarte Vice Chairman of the April 14, 2004
-------------- Board of Directors
Scott J. Tarte
/s/ A.J. Agarwal Director April 14, 2004
------------
A. J. Agarwal
/s/ Robert B. Ginsburg Director April 14, 2004
------------------
Robert B. Ginsburg
/s/ Alan I. Goldberg Director April 14, 2004
----------------
Alan I. Goldberg
/s/ Jerome Goodman Director April 14, 2004
--------------
Jerome Goodman
/s/ Wasburn Oberwager Director April 14, 2004
------------------
Washburn Oberwager
/s/ Richard Vague Director April 14, 2004
-------------
Richard Vague
21
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Marlton Technologies, Inc.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheet of Marlton
Technologies, Inc. and subsidiaries as of December 31, 2003 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. Our audit also included the financial statement
schedule for the year ended December 31, 2003 listed in the Index at Item 15.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the December 31, 2003 financial statements referred to above
present fairly, in all material respects, the financial position of Marlton
Technologies, Inc.and subsidiaries as of December 31, 2003 and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule for the year ended December
31, 2003, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ McGladrey & Pullen, LLP
Blue Bell, Pennsylvania
March 19, 2004
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
and Board of Directors of
Marlton Technologies, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page 16, present fairly, in all material
respects, the financial position of Marlton Technologies, Inc. and its
subsidiaries at December 31, 2002, and the results of their operations and their
cash flows for each of the two years ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, 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 our opinion.
As discussed in Note 4, the Company adopted a new financial accounting standard
during 2002.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 21, 2003
23
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
(in thousands except per share amounts)
2003 2002 2001
---- ---- ----
Net sales $65,587 $ 71,182 $ 76,972
Cost of sales 51,203 57,027 59,917
------ ------ ------
Gross profit 14,384 14,155 17,055
------ ------ ------
Selling expenses 8,518 8,491 9,761
Administrative and general expenses 6,907 6,796 7,409
Restructuring and other expenses 1,114 - -
------ ------ ------
16,539 15,287 17,170
------- ------ ------
Operating loss (2,155) (1,132) (115)
------- ------ ------
Other income (expense):
Interest and other income 21 42 134
Interest expense (236) (382) (1,220)
Loss from investment in affiliates (265) (1,156) (397)
------ ------ ------
(480) (1,496) (1,483)
Net loss before income taxes and change ----- ------ -----
in accounting principle (2,635) (2,628) (1,598)
Provision for (benefit from) income taxes (434) 4,786 (462)
----- ----- -----
Net loss before change in accounting principle (2,201) (7,414) (1,136)
Cumulative effect of change in accounting
principle, net of tax benefit - (12,385) -
Net loss after change in accounting principle $(2,201) $ (19,799) $ (1,136)
====== ====== =====
Net loss per common share before change
in accounting principle: Basic $ (0.17) $ (0.57) $ (0.14)
====== ====== ======
Diluted $ (0.17) $ (0.57) $ (0.14)
====== ====== ======
Net loss per common share after change
in accounting principle:
Basic $ (0.17) $ (1.52) $ (0.14)
====== ====== ======
Diluted $ (0.17) $ (1.52) $ (0.14)
====== ====== ======
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
23
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands except share and per share amounts)
ASSETS 2003 2002
---- ----
Current:
Cash and cash equivalents $ 241 $ 880
Accounts receivable, net of allowance of $415 and $309, respectively 7,824 8,083
Inventories 6,272 5,723
Prepaid and other current assets 1,191 1,042
------ ------
Total current assets 15,528 15,728
Investment in affiliates - 259
Property and equipment, net of accumulated depreciation 3,240 3,929
Rental assets, net of accumulated depreciation 2,789 2,535
Goodwill 2,714 2,714
Other assets, net of accumulated amortization of $1,603 and $1,349, respectively 388 211
Notes receivable 159 233
------ ------
Total assets $ 24,818 $ 25,609
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 89 $ 128
Accounts payable 6,363 4,509
Accrued expenses and other current liabilities 6,080 7,630
------ ------
Total current liabilities 12,532 12,267
Long-term liabilities:
Long-term debt, net of current portion 5,146 4,000
------ ------
Total liabilities 17,678 16,267
------ ------
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, $.10 par - shares authorized 10,000,000; no shares outstanding - -
Common stock, no par value - shares authorized 50,000,000; 12,844,696
outstanding at December 31, 2003; 12,845,096 outstanding
at December 31, 2002 - -
Stock warrants 742 742
Additional paid-in capital 32,951 32,951
Accumulated deficit (26,405) (24,204)
------ ------
7,288 9,489
Less cost of treasury shares;
148,803 shares at December 31, 2003 and 148,403 at December 31, 2002 (148) (147)
----- -----
Total stockholders' equity 7,140 9,342
------ ------
Total liabilities and stockholders' equity $ 24,818 $ 25,609
====== ======
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
24
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 2003, 2002 and 2001
(in thousands except share amounts)
Common Stock Additional
------------ Paid-in Stock
Shares Amount Capital Warrants
------ ------ ------- --------
Balance, December 31, 2000 7,423,429 $ 743 $ 30,544 $ -
Issuance of shares under compensation arrangements 265,070 26 108 -
Issuance of shares for investment transaction 5,300,000 530 1,000 -
Issuance of stock warrants - - - 742
Change from $.10 par value to no par value Common Stock - (1,299) 1,299 -
Net loss - - - -
---------- ------ ------ ----
Balance, December 31, 2001 12,988,499 - 32,951 742
Repurchase of common stock (143,403) - - -
Net loss - - - -
---------- ----- ------- -----
Balance, December 31, 2002 12,845,096 - 32,951 742
Repurchase of common stock (400) - - -
Net loss - - - -
----------- ----- ------- -----
Balance, December 31, 2003 12,844,696 $ - $ 32,951 $ 742
=========== ===== ======= =====
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
25 (CON'T)
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 2003, 2002 and 2001
(in thousands except share amounts)
Total
Accumulated Treasury Stockholders'
Deficit Stock Equity
------------ --------- -------------
Balance, December 31, 2000 $ (3,269) $ (112) $ 27,906
Issuance of shares under compensation arrangements - - 134
Issuance of shares for investment transaction - - 1,530
Issuance of stock warrants - - 742
Change from $.10 par value to no par value Common Stock - - -
Net loss (1,136) - (1,136)
--------- ----- ------
Balance, December 31, 2001 (4,405) (112) 29,176
Repurchase of common stock - (35) (35)
Net loss (19,799) - (19,799)
--------- ----- -------
Balance, December 31, 2002 (24,204) (147) 9,342
Repurchase of common stock - (1) (1)
Net loss (2,201) - (2,201)
--------- ----- ------
Balance, December 31, 2003 $ (26,405) $ (148) $ 7,140
========= ====== ======
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
25
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31,
(in thousands)
2003 2002 2001
---- ---- ----
Cash flows provided from operating activities:
Net loss $ (2,201) $ (19,799) $ (1,136)
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization 2,088 2,185 2,646
Impairment loss from investments in affiliates 259 1,156 397
Net changes in deferred taxes - 4,766 (562)
Cumulative effect of change in accounting principle - 12,385 -
Property and equipment asset impairment - 175 -
Non-cash compensation and other operating items (54) - 89
Losses from asset disposals 238 - -
Change in assets and liabilities:
Decrease in accounts receivable, net 355 2,563 9,374
(Increase) decrease in inventories (219) 875 2,320
(Increase) decrease in prepaid and other assets (122) 205 1,748
(Increase) decrease in notes and other receivables (183) 544 94
Increase in accounts payable, accrued expenses and other (189) (1,368) (5,663)
------ ----- -----
Net cash provided by (used in) operating activities (28) 3,687 9,307
------ ----- -----
Cash flows from investing activities:
Guaranteed payments to sellers - - (18)
Acquisition of business, net of cash acquired (384) - -
Capital expenditures (914) (1,269) (1,653)
----- ----- -----
Net cash used for investing activities (1,298) (1,269) (1,671)
----- ----- -----
Cash flows from financing activities:
Proceeds from (payments for) revolving credit facility, net 947 (2,500) (9,500)
Proceeds from issuance of stock, net of related costs - - 2,272
Payments for loan origination fees (108) (105) (60)
Payments for notes payable, sellers - (33) (54)
Proceeds from (payments for) promissory note, net (128) (98) 190
Payments for acquisition obligation (3) - -
Payments for leasehold improvement obligation (20) - -
Repurchase of common stock (1) (35) -
------ ----- -----
Net cash provided by (used in) financing activities 687 (2,771) (7,152)
------ ----- -----
Increase (decrease) in cash and cash equivalents (639) (353) 484
Cash and cash equivalents - beginning of year 880 1,233 749
----- ----- -----
Cash and cash equivalents - end of year $ 241 $ 880 $ 1,233
===== ===== =====
The accompanying notes to the consolidated financial
statements are an integral part of these financial statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
------------------------------
Basis of Presentation
The consolidated financial statements include the accounts of Marlton
Technologies, Inc., its wholly and majority 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 are eliminated.
Activity included in the consolidated statements of operations consists
primarily of the custom design, production and sale of exhibits and environments
for trade shows, museums, theme parks, themed interiors, arenas, corporate
lobbies and retail stores for clients in industry, government, entertainment and
commercial establishments.
The Company operates in one segment.
Cash Equivalents
The Company considers all investments with an initial maturity of three months
or less to be cash equivalents. Temporary cash investments comprise principally
short-term government funds. At various times throughout the year, the Company
maintains cash balances at banking institutions in excess of FDIC limits.
Account Receivable
Accounts receivable are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
quarterly basis. Management estimates these possible losses based on a review of
the financial condition and payment history of specific customers having
significant accounts receivable balances, and establishes a general reserve for
the remaining accounts receivable based on historical bad debt experience.
Accounts receivable are written off when deemed uncollectible. Recoveries of
accounts receivables previously written off are recorded when received. A trade
receivable is considered to be past due if any portion of the receivable balance
is outstanding for more than 90 days. Interest is not charged on trade
receivables that are considered past due.
Inventories
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
for rental assets is recorded on a straight-line basis over seven years.
Prior to January 1, 2002 the excess of cost over the fair value of net assets
acquired (goodwill) was amortized on a straight-line basis over periods ranging
from 5 to 30 years. After January 1, 2002, no amortization is recorded for these
assets.
Included in other assets are loan origination fees, which are amortized on a
straight-line basis over the term of the related debt agreement.
The Company's policy is to record an impairment loss against long-lived assets,
including investment in affiliates, property and equipment, goodwill and other
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. For the fourth quarter of 2003, the Company recorded an impairment loss
of $259,000 related to the investment in its Sparks Europe affiliate. During
2002, the Company recorded an impairment loss of $176,000 associated with the
property and equipment of its DMS subsidiary.
Revenue Recognition
Revenues on trade show exhibit sales, themed interiors, custom store fixtures
and point of purchase displays are recognized using the completed contract
method. The Company's contracts are typically less than three months in
duration. As a result, the Company's revenue recognition would not differ
materially if another method were used. Progress billings are generally made
throughout the production process. Progress billings which are unpaid at the
balance sheet date are not recognized in the financial statements as accounts
receivable. Progress billings which have been collected on or before the balance
sheet date are classified as customer deposits and are included in accrued
expenses and other current liabilities. Billings for shipping and handling are
recorded as revenue and the related costs are included in the cost of sales.
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 reporting 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. A valuation allowance is
established based on the future recoverability of deferred tax assets.
Use of Estimates
The preparation of financial statements 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
quality financial 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.
One customer, JCPenney, accounted for 15%, 20% and 11% of the Company's
consolidated net sales in 2003, 2002, and 2001, respectively. The loss of this
customer could have a material adverse effect on the Company.
Stock-Based Compensation
Compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant above the amount
an employee must pay to acquire the stock granted under the option.
The Company 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:
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share amounts)
Year ended December 31,
2003 2002 2001
---- ---- ----
Net loss As reported $(2,201) $(19,799) $(1,136)
Deduct: Total stock-based employee ----- ------ -----
compensation expense determined under fair
value based method, net of tax (67) (290) (16)
----- ------ -----
Pro forma $(2,268) $(20,089) $(1,152)
Diluted income (loss) ===== ====== =====
per common share As reported $(.17) $(1.52) $(.14)
Pro forma ===== ====== =====
$(.18) $(1.55) $(.14)
===== ====== =====
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 2002 and 2001 include the following:
Assumption 2002 2001
---------- ---- ----
Dividend yield 0.0% 0.0%
Risk-free rate 4.0% 5.0%
Expected life 3-5 years 3-5 years
Expected volatility 62% 65%
Fair Value $.18 $.05
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, 2003 and 2002.
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 and warrants having
exercise prices below market prices were exercised.
Recently Issued Accounting Standards
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS 146"). Statement of Financial Accounting Standards
("SFAS") 146 addresses significant issues regarding the recognition,
measurement, and reporting of costs associated with exit and disposal
activities, including restructuring activities that are currently accounted for
pursuant to the guidance that the Emerging Issues Task Force ("EITF") has set
forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." Effective in the first quarter of 2003, the
Company adopted the provisions of SFAS 146. This new accounting principle had an
impact on the timing and recognition of costs associated with the Company's
relocation and consolidation of its West Coast operations (see Note 2).
In 2003, the FASB issues FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("FIN 46") and its amendment FIN 46R. This interpretation
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
clarifies existing accounting principles related to the preparation of
consolidated financial statements when the equity investors in an entity do not
have the characteristics of a controlling financial interest or when the equity
at risk is not sufficient for the entity to finance its activities without
additional subordinated financial support. FIN 46R requires a company to
evaluate all existing arrangements to identify situations where a company has a
"variable interest" in a "variable interest entity" and further determine when
such variable interests require a company to consolidate the variable interest
entities' financial statement with its own. The Company adopted the provisions
of FIN 46 in connection with the lease agreement with a related partnership and
determined that there was no impact on its financial statements as a result of
the adoption of this new accounting principle.
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 addresses the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The Company
will continue to evaluate the impact of SFAS 150 on its financial statements.
2. ACQUISITION AND RESTRUCTURING COSTS
-----------------------------------
On August 1, 2003, a Company subsidiary acquired the assets of Exhibit Crafts,
Inc., a Los Angeles, CA area manufacturer of trade show exhibits and a 20%
interest in International Exposition Services, Inc., (IES), a trade show
shipping and installation provider. The initial purchase price was $694,000,
including the assumption of certain liabilities totaling $310,000. In addition,
the sellers received 20% of the Company subsidiary's common stock. The purchase
price approximated the fair value of the net assets acquired. In addition, the
asset purchase agreement provides for contingent payments of up to $750,000
based on operating performance in 2004, 2005 and 2006. The Company relocated its
San Diego area manufacturing facility to the newly acquired Los Angeles, CA area
facility during the third quarter of 2003. Costs incurred in connection with
this relocation and consolidation were approximately $1.1 million, which
included relocation and employee termination expenses and the Company recorded a
charge for a portion of the remaining lease obligation related to the vacated
San Diego area facility.
3. TERMINATED MERGER AGREEMENT:
----------------------------
The Company and Redwood Acquisition Corp.("Redwood") entered into a merger
agreement in February 2003 pursuant to which all of the outstanding shares of
common stock of the Company (other than the shares held by approximately eight
shareholders) would be converted into the right to receive $0.30 per share. On
June 19, 2003, the Company's Board of Directors approved a termination proposal
submitted by Redwood, which terminated the proposed merger agreement with
Redwood. Costs of approximately $250,000 incurred in connection with this
proposed merger agreement were charged to administrative and general expenses in
the second and third quarters of 2003.
4. ACCOUNTING CHANGE (ADOPTION OF SFAS NO. 142)
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), which
eliminates amortization of these assets and requires annual testing for
impairment. The Company's reporting units for purposes of applying the
provisions of SFAS 142 are the DMS Store Fixtures business ("DMS") and the
Sparks Exhibits & Environments businesses ("Sparks"). SFAS 142 requires a
comparison of the reporting unit's fair value, which is determined based on
discounted cash flows, to its carrying value to determine potential impairment.
If the fair value is less than the carrying value, an impairment loss is
recognized.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reconciles net income and net income per share for 2002 and
-------------------------------------------------------------------------------
2001 adjusted for SFAS 142
--------------------------
December 31,
------------
2003 2002 2001
---- ---- ----
(in thousands except per share amounts)
Net loss before change in accounting principle $(2,201) $(7,414) $(1,136)
Add back: goodwill amortization, net of tax of $272 -- -- 559
------ ------- -------
Adjusted net loss before change in accounting principle $(2,201) $(7,414) $ (577)
====== ======= =======
Cumulative effect of change in accounting principle, net of tax of $3,500 -- (12,385) --
------ ------- -------
Adjusted net loss $(2,201) $(19,799) $ (577)
====== ======= =======
Net income per share:
Basic net loss per share before change in accounting principle $(.17) $(.57) $(.14)
Add back: goodwill amortization, net of tax -- -- .07
------ ------- ------
Adjusted basic net loss per share before accounting change $(.17) $(.57) $(.07)
Cumulative effect of change in accounting principle, net of tax -- (.95) --
------ ------- ------
Adjusted basic net loss per share $(.17) $(1.52) $(.07)
====== ======= ======
Diluted net loss per share before change in accounting principle $(.17) $(.57) $(.14)
Add back: goodwill amortization, net of tax -- -- .07
Adjusted diluted net loss per share before accounting change ----- ------- ------
$(.17) $(.57) $(.07)
Cumulative effect of accounting change, net of tax -- (.95) --
----- ------- ------
Adjusted diluted net loss per share $(.17) $(1.52) $(.07)
===== ======= ======
Changes in the carrying amount of goodwill for the impairment recognized in 2002
are as follows:
DMS Sparks Total
--- ------ -----
Balance at December 31, 2001 $ 15,885 $ 2,714 $8,599
Goodwill impairment in 2002 (15,885) -- (15,885)
------ ------ ------
Balance at December 31, 2002 -- $ 2,714 $2,714
====== ====== ======
Goodwill impairment in 2003 -- -- --
------ ------ ------
Balance at December 31, 2003 -- $ 2,714 $2,714
====== ====== ======
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
per common share:
(in thousands except per share data)
2003 2002 2001
---- ---- ----
Net loss before change in accounting principle $(2,201) $(7,414) $(1,136)
====== ====== ======
Net loss after change in accounting principle $(2,201) $(19,799) $(1,236)
====== ====== ======
Weighted average common
shares outstanding used to compute
basic net income per common share 12,845 12,984 8,167
Additional common shares to be issued
assuming exercise of stock options,
net of shares assumed reacquired - - 220
Total shares used to compute diluted
net income per common share 12,845 12,984 8,387
====== ====== =====
Basic net loss per share before change in
accounting principle $(.17) $(.57) $(.14)
Diluted net loss per share before change in ====== ====== ======
accounting principle $(.17) $(.57) $(.14)
====== ====== ======
Basic net loss per share after change in
accounting principle $(.17) $(1.52) $(.14)
Diluted net loss per share after change in ====== ===== ======
accounting principle $(.17) $(1.52) $(.14)
====== ===== ======
Options and warrants to purchase 7,175,000, 7,492,000, and 667,000 shares of
common stock at prices ranging from $.50 per share to $6.25 per share were
outstanding at December 31, 2003, 2002 and 2001, respectively, but were not
included in the computation of diluted income per common share because the
options' and warrants' exercise price was equal to or greater than the average
market price of the common shares.
6. STATEMENTS OF CASH FLOWS INFORMATION
Cash paid for interest in 2003, 2002, and 2001 was $250,000, $314,000 and
$1,250,000, respectively.
Cash paid for income taxes in 2002 and 2001 was $5,000 and $29,000,
respectively.
During 2001, the Company issued 265,070 shares of its common stock having a
market value of $134,000 to certain employees and directors for stock awards and
the Company's 401(k) plan contributions.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INVENTORIES, NET
Inventories at December 31 consist of the following:
(in thousands)
------------
2003 2002
---- ----
Raw materials $ 467 $ 373
Work in process 3,579 4,400
Finished goods 2,226 950
----- -----
$ 6,272 $5,723
===== =====
8. INVESTMENT IN AFFILIATES
------------------------
The Company recognized an impairment loss of $259,000 in the fourth quarter of
2003 related to its investment in Sparks Europe.
The Company recognized an impairment loss of approximately $1.2 million in the
first quarter of 2002 related to its investment in Abex Display Systems Inc.
9. PROPERTY AND EQUIPMENT
----------------------
Property and equipment at December 31 consist of the following:
(in thousands)
------------
2003 2002
---- ----
Manufacturing equipment and vehicles $2,017 $1,964
Office equipment and data processing 8,357 7,409
Leasehold improvements 2,578 3,017
Showroom exhibits, construction in progress and other 394 707
------ ------
$13,346 $13,097
Less accumulated depreciation and amortization 10,106 9,168
------ ------
$ 3,240 $3,929
====== ======
Rental assets at December 31 consist of the following:
Rental assets $6,461 $5,735
Less accumulated depreciation 3,672 3,200
------ -----
$2,789 $2,535
====== =====
10. ACCRUED EXPENSES AND OTHER
--------------------------
Accrued expenses and other at December 31, consist of the following:
(in thousands)
------------
2003 2002
---- ----
Customer deposits $2,955 $3,530
Accrued compensation 934 1,232
Accrued payroll, sales and business taxes 134 807
Accrued insurance costs -- 150
Accrued contractual costs 116 291
Accrued restructuring expenses 402 --
Other 1,539 1,620
----- -----
$6,080 $7,630
===== =====
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. DEBT OBLIGATIONS AND SUBSEQUENT EVENT
On May 16, 2002, the Company amended its Revolving Credit and Security Agreement
(the "Facility") to change from an EBITDA basis to an asset-based arrangement.
The amended Facility provided for borrowings based on a percentage of qualified
accounts receivable and a percentage of up to $6.7 million of qualified
inventories. The Facility was collateralized by all the Company's assets and had
interest at rates based primarily on the London Inter Bank Offering Rate (LIBOR)
plus 3.25%. The Facility included certain financial covenants requiring a
minimum tangible net worth and maintenance of certain financial ratios and
restricted the Company's ability to pay dividends. Borrowings under this
Facility were $4.9 million at December 31, 2003. The Company's borrowing
capacity under the Facility was $8 million at December 31, 2003. The interest
rates charged during 2003 ranged from 4.28% to 4.63%. The Company had a letter
of credit in the amount of $160,000 outstanding at December 31, 2003, which was
collateralized by a cash escrow account on January 26, 2004 in connection with
the credit facility replacement described below.
On February 6, 2004, the Company replaced the Facility with a new credit
facility provided by a commercial asset-based lender. The new credit facility,
which expires on February 6, 2007, provides for borrowing capacity of up to $12
million based on a percentage of eligible accounts receivable and inventories.
This new facility bears interest based on the 30-day dealer placed commercial
paper rate plus 4.50% (effective rate of 5.51% at February 6, 2004), restricts
the Company's ability to pay dividends, and includes certain financial covenants
(fixed charge coverage ratio and maximum capital expenditure amount).
The Company's debt obligations at December 31, consist of the following:
(in thousands)
------------
2003 2002
---- ----
Revolving credit facility $4,947 $4,000
Promissory Notes -- 128
Acquisition agreement obligation 126 --
Acquired leasehold improvement obligation 162 --
----- -----
$5,235 $4,128
Less current portion 89 128
----- -----
$5,146 $4,000
===== =====
Aggregate future long-term debt maturities are as follows:
(in thousands)
------------
Years ending December 31, Amount
------------------------ ------
2004 $ 89
2005 89
2006 5,025
2007 32
12. RELATED PARTY TRANSACTIONS
--------------------------
The Company leases a facility from a partnership controlled by two shareholders
of the Company. This lease, which contains a renewal option on May 14, 2009 and
expires on May 14, 2019, requires minimum annual rent of $771,000 at a fixed
rate for the first 10 years, and the Company is responsible for taxes, insurance
and other operating expenses.
In connection with the DMS Store Fixtures acquisition, employment agreements
were made with two shareholders of the Company, which provided for guaranteed
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
minimum annual payments of approximately $0.5 million. These agreements were
mutually terminated in January 2001 eliminating the guaranteed minimum payments
after February 2, 2001, which reduced administrative and general expenses by
approximately $0.5 million in the first quarter of 2001.
13. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company operates in leased office, warehouse and production facilities.
Lease terms range from monthly commitments up to 17 years with options to renew
at varying times. Certain lease agreements require the Company to pay utilities,
taxes, insurance and maintenance.
As of December 31, 2003, future minimum lease commitments under non-cancelable
operating leases are as follows:
(in thousands)
------------
Years ending December 31, Amount
------------------------- ------
2004 $2,267
2005 1,955
2006 1,679
2007 1,276
2008 771
2009 and thereafter 289
-----
Total minimum lease commitments $8,237
=====
The Company jointly leases a 31,000 square foot facility with International Expo
Services ("IES"), in which the Company holds a minority interest. The annual
lease commitment for this facility is $214,000 through September 22, 2007, which
is not included with the above future lease commitments. Payments in connection
with this lease are made by IES.
Rental expense, exclusive of supplemental costs, was approximately $2,372,000
$2,138,000, and $2,135,000 for the years ended December 31, 2003, 2002 and 2001,
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.
14. INVESTMENT TRANSACTION
----------------------
On November 20, 2001, the Company issued 5,300,000 shares of its common stock
and warrants expiring on November 19, 2011 to purchase 5,300,000 shares of its
common stock for an aggregate of $2,650,000. This transaction was approved by
the Company's shareholders at the Annual Meeting of Shareholders held on
November 7, 2001. Costs incurred in connection with this transaction were
$378,000.
15. WARRANTS AND STOCK OPTIONS
--------------------------
Warrants
On November 20, 2001, the Company issued warrants expiring on November 19, 2011
to purchase an aggregate of 5,300,000 shares of common stock at an exercise
price of $.50 per share in connection with an investment transaction approved by
the Company's shareholders at the Annual Meeting of Shareholders held on
November 7, 2001. The fair value of these warrants using the Black-Scholes
pricing model was $742,000, which was recorded as a component of stockholders
equity.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 12, 1999, the Company issued warrants to purchase 100,000 shares of
common stock at an exercise price of $2.50 per share to the Company's financial
adviser in connection with a debt restructuring project. These warrants are
exercisable on or before October 12, 2004.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
In 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 1992, the Company adopted the 1992 Directors' and Consultants' Stock Option
Plan (the "1992 Plan") which provides for the granting of options to purchase up
to 50,000 common shares to directors and consultants who are neither principal
stockholders, nor receive salary compensation. Prices are determined as in the
1990 Plan. The 1992 Plan was amended in June 1998 to eliminate non-discretionary
annual stock awards, to provide stock awards or options as determined by the
Board and to increase the authorized shares to a total of 250,000.
In 2000, the Company adopted the 2000 Equity Incentive Plan (the "2000 Plan")
which provides for the granting of up to 735,000 Common Stock options, stock
appreciation rights, stock units and restricted shares to employees, outside
directors and consultants. Prices are determined as in the 1990 Plan. Terms of
other securities are determined by a committee of the Board of Directors.
In 2001, the Company adopted the 2001 Equity Incentive Plan (the "2001 Plan")
which provides for the granting of up to 2,000,000 Common Stock options and
restricted shares to employees, outside directors and consultants. 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. Terms of other securities are determined by a
committee of the Board of Directors.
Options have been granted to employees outside of the foregoing plans as an
incentive to accept employment with the Company, and the amount of options so
granted does not exceed of 5% of the Company's outstanding shares of Common
stock.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of stock option transactions and exercise prices:
Shares Price Per Share Weighted Average
------ ---------------- ----------------
Outstanding at December 31, 2000 1,740,022 $1.60 to $6.25 $3.03
Granted 75,000 $2.00 $2.00
Expired or cancelled (1,148,500) $1.60 to 6.00 $2.94
Exercised -- -- --
Outstanding at December 31, 2001 666,522 $2.00 to $6.25 $3.13
Granted 1,676,242 $.50 $.50
Expired or cancelled (250,919) $2.13 to $4.00 3.05
Exercised -- -- --
----------
Outstanding at December 31, 2002 2,091,845 $ .50 to $6.25 $1.03
Granted -- -- --
Expired or cancelled (316,767) $ .50 to $6.25 $3.30
Exercised -- -- --
Outstanding at December 31, 2003 1,775,078 $ .50 to $2.13 $ .63
The following table summarizes information concerning outstanding and
exercisable stock options as of December 31, 2003:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average
----------------
Number of Number of Weighted
Range of Exercise Options Remaining Options Average
Prices And Awards Life (Years) Exercise Price and Awards Exercise Price
------ ---------- ------------ -------------- ---------- --------------
1990 Plans $2.00 60,000 2.03 $2.00 60,000 $2.00
1992 Plan $2.00 73,336 1.47 $2.00 73,336 $2.00
2000 Plan -- -- -- -- -- --
2001 Plan $ .50 1,626,242 6.76 $.50 1,601,242 $.50
Other $2.13 15,500 .30 $2.13 15,500 $2.13
---- ------ ---- ---- ------ ----
Grand Total $.50 to $2.13 1,775,078 6.33 $.63 1,750,078 $.63
============ ========= ==== ==== ========= ====
38
The following is a summary of stock options exercisable at December 31, 2003,
2002 and 2001, and their respective weighted-average share prices:
Weighted Average
Number of Shares Exercise Price
---------------- ----------------
Options exercisable December 31, 2003 1,750,078 $0.63
Options exercisable December 31, 2002 1,913,520 $1.07
Options exercisable December 31, 2001 558,197 $2.72
16. 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. There were no charges to income with respect to this
Plan in 2003, 2002 or 2001.
17. INCOME TAXES
------------
The components of the provision for (benefit from) income taxes were as follows:
(in thousands)
2003 2002 2001
---- ---- ----
Current:
Federal $(434) $ -- $100
State -- -- --
Deferred:
Federal -- (604)
4,552
State -- 234 42
----- ----- ----
$(434) $ 4,786 $(462)
===== ===== ====
A reconciliation of federal statutory income taxes to the Company's effective
income tax expense is as follows:
2003 2002 2001
---- ---- ----
Federal statutory rate $(896) $ (894) $(543)
State income tax, net of federal
income tax effect 234 234 48
Non-deductible expenses 120 28 192
Non-taxable income -- -- (192)
Valuation allowance 510 5,384 --
Fully reserved net operating loss utilization (434) -- --
Other, net 32 34 33
---- ----- ---
$(434) $4,786 $(462)
=== ===== ===
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net deferred tax asset at December 31, 2003 and 2002 consist of the
following:
(in thousands)
------------
2003 2002
---- ----
Accounts receivables $ 153 $ 120
Inventories 140 395
Property and equipment 11 15
Accrued expenses and compensation 43 40
Goodwill and intangibles 2,675 2,971
Operating loss and credit carryforward 2,234 2,650
Other, net 924 829
Valuation allowance (6,180) (7,020)
----- -----
===== =====
In the fourth quarter 2002, the Company established a valuation allowance of $7
million to fully reserve for its deferred tax assets as of December 31, 2002.
This allowance was based on an evaluation of several factors, including prior
years' actual operating results and projected operating results. The net change
in the valuation allowance for deferred tax assets was a decrease of $840,000
during 2003. The decrease relates to the utilization of prior year net operating
losses, which were carried back during 2003. The Company has available
approximately $5.6 million of net operating loss carry forwards, which begin to
expire in 2016.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized unaudited quarterly financial data for the years ended December 31,
2003 and 2002 are:
(in thousands except per share amounts)
-------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2003
----
Net sales $17,456 $19,864 $12,626 $15,641
Gross profit 4,402 4,607 2,226 3,149
Net income (loss)* 416 295 (1,916) (996)
Basic net income (loss)
per common share .03 .02 (.15) (.08)
Diluted net income (loss)
per common share .03 .02 (.15) (.08)
2002
----
Net sales $16,795 $21,419 $15,204 $17,764
Gross profit 4,164 4,329 2,628 3,034
Net income (loss)** (13,668) 45 (465) (5,711)
Basic net income (loss)
per common share (1.05) -- (.04) (.44)
Diluted net income (loss)
per common share (1.00) -- (.04) (.44)
* The first quarter of 2003 includes a $0.3 million expense from a terminated
merger agreement. The third quarter of 2003 includes a $1.1 million
restructuring provision for facility relocation. The fourth quarter of 2003
includes an impairment write down of $0.3 million in the Company's investment in
an affiliate.
**The first quarter of 2002 includes $1.2 million for a write-down in the
Company's investment in an affiliate, and a $12.4 million impairment loss (net
of a $3.5 million income tax benefit) for a change in accounting principle
(adoption of SFAS No. 142, "Goodwill and Other Intangible Assets"). The fourth
quarter of 2002 includes an income tax valuation allowance of $5.4 million.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARLTON TECHNOLOGIES, INC.
FINANCIAL STATEMENT SCHEDULE
SCHEDULE (2) VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
-----------------------------------------------------------
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Additions
Description Balance at Charged to Charged to other Deductions - Balance at end
beginning of costs and accounts Write-Offs of period
period expenses
For the Year Ended December 31, 2003
------------------------------------
Allowances deducted from Assets to which they apply:
Trade accounts receivable $ 309 $ 327 -- $ 221 $ 415
Inventory obsolescence 597 157 -- 668 86
Deferred tax assets 7,020 -- -- 840 6,180
For the Year Ended December 31, 2002
------------------------------------
Allowances deducted from Assets to which they apply:
Trade accounts receivable $ 502 $ 317 -- $ 510 $ 309
Inventory obsolescence 1,121 361 -- 885 597
Deferred tax assets 313 *6,707 -- -- 7,020
* In the fourth quarter 2002, the Company established a valuation allowance of
$7 million to fully reserve for its deferred tax assets as of December 31, 2002.
This allowance was based on an evaluation of several factors, including prior
years' actual operating results and projected operating results.
For the Year Ended December 31, 2001
------------------------------------
Allowances deducted from Assets to which they apply:
Trade accounts receivable $ 836 $ 442 --- $ 776 $ 502
Inventory obsolescence 1,214 853 --- 946 1,121
Deferred tax assets --- 313 --- --- 313
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Schedule 2.1
------------
Revolving Credit Commitments
----------------------------
GE Capital Corporation $12,000,000
Total $12,000,000
43