<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to_______
Commission file number 1-7708
MARLTON TECHNOLOGIES, INC.
---------------------------------------------------
(Exact name of issuer as specified in its charter)
New Jersey 22-1825970
---------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2828 Charter Road, Suite 101.
Philadelphia, PA 19154
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (215) 676-6900
--------------
Former name, former address and former fiscal year,
if changed since last report.
Check whether the issuer (1) has 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 period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
------------------- -----------------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by
court. Yes No
---------- -----------
APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares outstanding of
each of the issuer's classes of common equity as of the last practicable date:
7,195,405
Transitional Small Business Disclosure Form (check one):
Yes No X
----------- ------------
<PAGE>
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Current:
Cash and cash equivalents $ 1,767,180 $ 7,115,100
Accounts receivable, net of allowance
of $404,000 and $266,000, respectively 18,179,583 10,444,298
Inventory 8,654,642 10,073,491
Prepaids and other current assets 2,657,481 1,337,497
Deferred income taxes 752,000 965,000
------------ ------------
Total current assets 32,010,886 29,935,386
Investment in affiliates 2,020,138 25,000
Property and equipment, net of accumulated
depreciation and amortization of $4,077,720
and $3,976,745, respectively 3,332,778 2,268,994
Rental assets, net of accumulated amortization
of $1,735,903 and $1,348,279, respectively 1,288,806 901,651
Goodwill, net of accumulated amortization of $1,400,855
and $871,546, respectively 19,644,283 19,763,768
Deferred income taxes 273,870 616,870
Other assets, net of accumulated amortization of
$1,103,126 and $1,112,601, respectively 574,627 601,586
------------ ------------
Total assets $ 59,145,388 $ 54,113,255
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and credit
facility due to bank $ 4,461,646 $ 1,386,117
Accounts payable 7,246,358 4,294,971
Accrued expenses and other 9,133,559 12,235,351
------------ ------------
Total current liabilities 20,841,563 17,916,439
Long-term debt, net of current portion 11,443,355 12,243,312
------------ ------------
Total liabilities 32,284,918 30,159,751
------------ ------------
Stockholders' equity:
Preferred stock, $.10 par - shares authorized
10,000,000; no shares issued or outstanding -- --
Common stock, $.10 par - shares authorized
50,000,000; 7,195,405 and 6,889,444 issued, respectively 719,540 688,944
Additional paid-in capital 30,079,584 29,169,410
Accumulated deficit (3,826,977) (5,793,173)
------------ ------------
26,972,147 24,065,181
Less cost of 5,000 treasury shares 111,677 111,677
------------ ------------
Total stockholders' equity 26,860,470 23,953,504
------------ ------------
Total liabilities and stockholders' equity $ 59,145,388 $ 54,113,255
============ ============
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional Total
Shares Issued Paid-in Accumulated Treasury Shareholder's
Issued Amount Capital Deficit Amount Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 6,889,444 $ 688,944 $29,169,410 $(5,793,173) $ (111,677) $23,953,504
Additional shares issued:
Under compensation arrangements 263,570 26,357 665,070 -- -- 691,427
Acquisitions 42,391 4,239 245,104 -- -- 249,343
Net income for the nine month period -- -- -- 1,966,196 -- 1,966,196
----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 1998 7,195,405 $ 719,540 $30,079,584 $(3,826,977) $ (111,677) $26,860,470
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
-3-
<PAGE>
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended For the three months ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 68,725,833 $ 36,037,550 $ 24,358,068 $ 12,014,451
Cost of sales 52,714,575 25,793,688 19,392,604 8,584,539
------------ ------------ ------------ ------------
Gross profit 16,011,258 10,243,862 4,965,464 3,429,912
------------ ------------ ------------ ------------
Expenses:
Selling 7,324,773 5,789,634 2,295,099 2,060,880
Administrative and general 4,947,546 2,776,851 1,512,396 962,107
------------ ------------ ------------ ------------
12,272,319 8,566,485 3,807,495 3,022,987
------------ ------------ ------------ ------------
Operating profit 3,738,939 1,677,377 1,157,969 406,925
------------ ------------ ------------ ------------
Other income (expense):
Interest income 194,876 226,832 36,697 102,958
Interest (expense) (752,062) (30,157) (285,308) (1,786)
Other income (expense) 90,442 (43,003) 101,563 (27,924)
------------ ------------ ------------ ------------
(466,743) 153,672 (147,048) 129,096
------------ ------------ ------------ ------------
Income before provision for income taxes 3,272,196 1,831,049 1,010,921 536,021
Provision for income taxes (Note 3) 1,306,000 724,000 404,000 214,000
------------ ------------ ------------ ------------
Net income $ 1,966,196 $ 1,107,049 $ 606,921 $ 322,021
============ ============ ============ ============
Income per common share (Note 4):
Basic $ .27 $ .23 $ .08 $ .07
Diluted $ .25 $ .19 $ .08 $ .06
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 1,966,196 $ 1,107,049
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 1,470,934 1,250,209
Decrease in deferred tax asset 556,000 399,000
Other operating items (8,681) (20,580)
Change in assets and liabilities; net of assets and liabilities
acquired from Steele Productions (8,512,264) 1,034,568
----------- -----------
Net cash provided by (used in) operating activities (4,527,815) 3,811,406
----------- -----------
Cash flows (expended through) investing activities:
Acquisition of Steele Productions (394,614) --
Capital expenditures (1,870,925) (913,213)
Minority investment in ADSI and Abex Europe (679,646) --
Other intangible assets (462,082) --
----------- -----------
Net cash (expended through) investing activities (3,407,267) (913,213)
----------- -----------
Cash flows provided by (expended through) financing activities:
Proceeds from bank, credit facility 7,288,000 --
Repayments to bank, credit facility (4,606,000) --
Issuance of common stock 691,427 399,344
Principal payments on long-term debt (786,265) (969,903)
----------- -----------
Net cash provided by (expended through) financing activities 2,587,162 (570,559)
----------- -----------
Increase (decrease) in cash and cash equivalents (5,347,920) 2,327,674
Cash and cash equivalents - beginning of period 7,115,100 3,300,010
----------- -----------
Cash and cash equivalents - end of period $ 1,767,180 $ 5,627,644
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 498,615 $ 30,157
=========== ===========
Cash paid for income taxes $ 435,925 $ 38,500
=========== ===========
Non-cash financing and investing activities:
Issuance of common stock in connection with Steele acquisition $ 249,343 --
Issuance of note in connection with Steele acquisiton $ 197,307 --
Conversion of EDSI note receivable and other advances as part of the
minority investment in ADSI ($1,343,317) --
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF ACCOUNTING POLICIES:
Basis of Presentation:
----------------------
The consolidated financial statements include the accounts of Marlton
Technologies, Inc., its wholly-owned subsidiaries and the effects of minority
investments in non-consolidated businesses (the "Company"). All intercompany
accounts and transactions have been eliminated. In the opinion of the Company's
management, all adjustments (primarily consisting of normal recurring accruals)
have been made which are necessary to present fairly the financial condition as
of September 30, 1998 and the results of operations and cash flows for the nine
month periods ended September 30, 1998 and 1997, respectively. The December 31,
1997 condensed balance sheet data was derived from audited financial statements
but does not includes all disclosures required by generally accepted accounting
principles and may include certain account reclassifications for comparative
purposes with the September 30, 1998 consolidated balance sheet.
Activity included in the consolidated statement of operations consists
primarily of the design, manufacture, sale and servicing of custom and portable
trade show exhibits and the manufacturing of museum exhibits, themed interiors,
theme park attractions, store fixtures and point of purchase displays.
Acquisitions:
-------------
Abex Europe Ltd.
On August 1, 1998 the Company paid $500,000 for a 20% equity interest
in Abex Europe, Ltd. ("Abex Europe"), a newly-formed United Kingdom corporation
organized to market, assemble and distribute portable/modular exhibit products
and graphics throughout the United Kingdom and Europe.
Academyexpo, ("Academy") a London-based distributor of portable/
modular exhibit products, contributed net assets of $1,225,000 for its 49%
interest in Abex Europe; Abex Display Systems, Inc. ("ADSI") contributed net
assets of $500,000 for its 20% equity interest in Abex Europe; and Abex Display
AG ("AG"), a Swiss-based distributor of portable/modular exhibit products,
contributed net assets of $275,000 for its 11% interest in Abex Europe.
The Company's investment in Abex Europe has been accounted for using
the equity method, recognizing its pro-rata portion of Abex Europe's operating
results as a component of Other income. There was no profit or loss recognized
by the Company for the two month period ended September 30, 1998, due to Abex
Europe's marginal operating results.
DMS Store Fixtures Corp.
On December 31, 1997, the Company, through its newly-formed,
wholly-owned subsidiary DMS Store Fixtures Corp. ("DMS"), acquired the assets
and liabilities of DMS Store Fixtures L.P. ("LP"), a supplier of custom store
fixtures and displays to national retailers, department stores and consumer
product manufacturers. The acquired assets and liabilities of LP were recorded
at their estimated fair value with the excess purchase price and related costs
of acquisition recorded as goodwill at December 31, 1997. During the first nine
months of 1998, the Company recognized as an additional charge to cost of sales,
approximately $300,000 of the inventory write-up to fair market value.
6
<PAGE>
DMS Store Fixtures Corp. (continued):
The following table summarizes the unaudited consolidated pro forma
information for the Company for the three and nine month periods ended September
30, 1997 assuming the acquisition occurred at the beginning of 1997, along with
the Company's actual results of operations for the three and nine month periods
ended September 30, 1998 (in thousands except per share data).
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL - September 30, 1998 PRO FORMA - September 30, 1997
--------------------------- ------------------------------
Three months ended Nine months ended Three months ended Nine months ended
<S> <C> <C> <C> <C>
Net sales $24,358 $68,726 $24,200 $61,666
Operating profit 1,158 3,739 1,637 3,829
Net income $ 607 $ 1,966 $ 951 $ 2,026
Weighted average
of common shares:
Basic 7,185 7,153 7,007 7,002
Diluted 8,036 8,016 8,089 7,946
Net income per
common shares:
Basic $ .08 $ .27 $ .14 $ .29
Diluted $ .08 $ .25 $ .12 $ .25
</TABLE>
The pro forma consolidated results of operations for the three and
nine month periods ended September 30, 1997 include adjustments to give effect
to amortization for goodwill, interest expense on acquisition debt and certain
other adjustments, together with related income tax effects. The unaudited pro
forma information is not necessarily indicative of the results of operations
which would have occurred had the purchase been made at the beginning of 1997.
Abex Display Systems, Inc. ("ADSI")
Effective February 1, 1998, the Company forgave approximately $1.12
million of EDSI's inter-company debt, exchanged its 51% majority interest in
Expose' Display Systems, Inc. ("EDSI"), and paid approximately $180,000 in cash,
for a 25% interest in ADSI. The Company's investment in ADSI has been accounted
for using the equity method. Accordingly, the Company did not consolidate EDSI's
revenues and expenses within its operating results subsequent to January 31,
1998. For the eight-months ended September 30, 1998, the Company included
$24,175 as a component of Other income, representing its pro-rata share of
ADSI's net income for that period.
Sparks Scenic Ltd.
On April 1, 1998, the Company acquired 100% of the stock of Rusty
Hinges, Inc. d/b/a Steele Productions ("Steele") located in the San Francisco,
California area. Steele produces exhibit properties for industrial and corporate
theater events throughout the United States.
The transaction, recorded utilizing the purchase method of accounting,
included a cash payment of approximately $395,000, a five year note of
approximating $197,000 payable in equal annual installments bearing interest at
6% per annum, and 42,391 shares of the Company's common stock. The excess cost
of the acquisition including related costs of the transaction over the net
assets acquired of approximately $192,000 is being amortized on a straight-line
basis over a period of 10 years commencing April 1998.
7
<PAGE>
Per Share Data
- - --------------
Basic net income per common share is calculated using the average
shares of common stock outstanding, while diluted net income per common share
reflects the potential dilution that could occur if stock options were
exercised. Prior periods have been restated in accordance with Statement of
Financial Accounting Standards (SFAS) 128 "Earnings Per Share." Restated
diluted net income per common share amounts do not differ materially from
previously reported primary net income per common share amounts.
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Recently Issued Accounting Standards
- - ------------------------------------
Effective January 1, 1998 the Company was required to adopt the
provisions of SFAS 130, "Reporting Comprehensive Income." SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in the financial statements. For the quarter and nine months ended September 30,
1998 the Company had no items of other comprehensive income.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement establishes standards for
reporting segment results based on the way management organizes segments within
the enterprise for making operating decisions and assessing performance. This
Statement is effective for financial statements for periods beginning after
December 15, 1997. This Statement need not be applied to interim financial
statements in the initial year of its application. The Company will adopt SFAS
No. 131 in the fourth quarter of 1998. Under the management approach described
in SFAS No. 131, the Company will report as one industry segment.
2. INVENTORY:
Inventory, as of the respective dates, consists of the following:
September 30, 1998 December 31, 1997
Raw materials $ 475,379 $ 819,273
Work in process 5,045,486 6,763,508
Finished goods 3,133,777 2,490,710
----------- -----------
$ 8,654,642 $10,073,491
=========== ===========
3. INCOME TAXES:
The components of the provision for income taxes for the respective nine
month periods ended September 30, were as follows:
1998 1997
---- ----
Currently payable :
Federal $ 500,000 $145,000
State 250,000 180,000
----------- --------
750,000 325,000
Deferred: 556,000 399,000
----------- --------
Federal $ 1,306,000 $724,000
=========== ========
4. NET INCOME PER COMMON SHARE:
Income per share amounts have been restated in accordance with SFAS
128, "Earnings Per Share." This restatement did not result in a material change
between diluted per common share amounts and previously reported primary per
common share amounts.
8
<PAGE>
The following table sets forth the computation of basic and diluted net
income per common share (in thousands except per share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $ 607 $ 322 $1,966 $1,107
====== ====== ====== ======
Weighted average common shares
outstanding used to compute basic net
income per common share 7,195 4,757 7,208 4,752
Additional common shares to be issued
assuming exercise of stock options, net of
shares assumed reacquired 851 1,082 817 944
------ ------ ------ ------
Total shares used to compute diluted net
income per common share 8,046 5,839 8,025 5,696
====== ====== ====== ======
Basic net income per share $ .08 $ .07 $ .27 $ .23
====== ====== ====== ======
Diluted net income per share $ .08 $ .06 $ .25 $ 19
====== ====== ====== ======
</TABLE>
Options to purchase 265,833 shares of common stock at prices ranging from $5.00
per share to $7.00 per share were outstanding at September 30, 1998, but were
not included in the computation of diluted income per common share because the
option exercise price was greater than the average market price of the common
shares during the first nine months of 1998.
9
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL OVERVIEW
- - ----------------
The Company's businesses include the custom design, manufacture and sale of
sophisticated trade show exhibits, displays, signage and graphics for clients in
industry, government, consumer electronics, athletic goods, healthcare,
telecommunications and other specialized fields. Through its wholly-owned
subsidiary, Piper Productions, Inc. ("Piper") of Orlando, Florida, the Company
produces business theater, theme park attractions, themed interiors, theatrical
scenery and special effects.
The Company, through DMS Store Fixtures Corp., acquired the business of DMS
Store Fixtures L.P. on December 31, 1997, a supplier of custom-made store
fixtures and displays to national retailers, department stores and consumer
product manufacturers. During 1997, DMS generated over $30 million of revenues
from a well-established customer base for which cross-marketing opportunities
exist to other business groups of the Company.
The Company expanded its business opportunities in corporate and industrial
theater events through the April 1, 1998 acquisition of Steele Productions
("Steele"), renamed Sparks Scenic Ltd. ("Scenic"), in the San Francisco Bay
area. (See Note 1 of the consolidated financial statements.)
During the third quarter of 1998, the Company expanded its scope of influence in
the United Kingdom and European marketplaces through a 20% equity investment in
Abex Europe Ltd. ("Abex Europe"), a producer of customized graphics and an
assembler and distributor of Abex Display Systems, Inc. ("ADSI") products. This
investment should assist the Company to expand its international presence and
benefit ADSI, which is 25% owned by the Company, through increased sales of ADSI
products internationally.
Management's aggressive growth plan from the August 1990 acquisition of Sparks
Exhibits Corp. ("Sparks"), the December 31, 1997 acquisition of the business of
DMS, the April 1, 1998 acquisition of Steele and the August 1998 investment in
Abex Europe has resulted in the dramatic expansion of the Company's client base,
the development of new business groups for expansion of its products and
services, and the extension into major geographic markets, both in the United
States and internationally. Management believes the acquisitions and the
continuing development of the new business groups should position the Company to
increase its revenue base and move toward its goal of becoming a leading
dimensional marketing company through the continued offering of expanded
products and services to a larger customer network.
RESULTS OF OPERATIONS
- - ---------------------
Three months ended September 30, 1998 as compared with three months
ended September 30, 1997
Sales
- - -----
Total Company revenues for the three months ended September 30, 1998 as
compared with the same period during 1997 more than doubled, to $24.4 million
from $12.0 million. Approximately eighty percent of the overall sales increase
during the third quarter of 1998, as compared with the third quarter of 1997,
was due to revenues generated by the December 31, 1997 acquisition of DMS Store
Fixtures Corp., which is included as a component of the Permanent and scenic
displays revenue source. Sales generated by EDSI during the three month period
ended September 30, 1997 approximated $1.1 million. Due to the February 1, 1998
acquisition of a 25% interest in ADSI (see Note 1 to the consolidated financial
statements), EDSI sales volume is not included as a component of the Company's
reported revenues during the three month period ended September 30, 1998.
10
<PAGE>
Three months ended September 30,
(in thousands)
Revenue sources 1998 1997 % increase
--------------- ---- ---- ----------
EDSI - 1,105 -
8,759 8,385 4%
Permanent and scenic displays
15,599 2,524 518%
-------- -------- ----
Total revenues $ 24,358 $ 12,014 103%
-------- -------- ----
Trade show exhibits experienced a 4 percent sales increase during the
third quarter of 1998 as compared with the related quarter during 1997,
historically the slowest quarter of the year for trade show exhibit businesses.
Permanent and scenic displays, comprised of DMS, Museum/productions,
Piper and newly-acquired Steele, experienced as $13.1 million increase in third
quarter 1998 revenues as compared with third quarter 1997 revenues. Exclusive of
the sales generated by the December 31, 1997-acquired DMS, the remaining revenue
sources doubled their third quarter 1998 sales as compared with their sales
during the third quarter of 1997. This significant increase was predominately
due to Piper expanding its scope of services in themed environment projects
during the third quarter of 1998. Museum/productions increase during the third
quarter of 1998 reflects their participation into the larger permanent exhibit
marketplace, providing significant manufacturing work during the
historically-slower trade show exhibit period of July, August and September.
Sales and the related costs of operations generated by EDSI, formerly a
consolidated 51% owned subsidiary of the Company, were recorded through January
31, 1998. Subsequent to that exchange, the Company recorded its pro-rata equity
interest in ADSI's net profits or losses using the equity method of accounting.
Accordingly, sales and related cost are no longer recorded from EDSI's
operations in the Company's consolidated statement of operations. (See Note 1 to
the consolidated financial statements.)
Operating Profits
- - -----------------
Operating profits almost tripled, from approximately $407,000 to
$1,158,000 for the comparative third quarters of 1997 and 1998, respectively.
This increase in 1998 operating profits occurred despite a significant 8.3%
decrease in the gross profit margin, as a percentage of sales, during the third
quarter of 1998 as compared with the third quarter of 1997. This decrease is
predominantly due to lower gross profit margins on sales generated by the
December 31, 1997 acquired DMS business, whose gross profit margins, as a
percentage of sales, are similar to Museum/productions, Piper and the April 1,
1998 acquired Steele. Historically, third quarter revenues are lower from
trade-show related clients due to the seasonality of the trade-show schedule.
Accordingly, a larger percentage of third quarter revenues were generated by
Permanent and scenic displays. Additionally, the Company experienced a lower
gross profit margin on a specific museum project during the third quarter of
1998 which was bid at a lower gross profit margin due to its large size and the
competitive environment surrounding the project. Also having a negative impact
on the gross profit margin achieved in Permanent and scenic displays, as a
percentage of sales, was the completion of certain themed-environment projects
during the third quarter of 1998 by the Company's Orlando-based, Piper. In an
effort to expand its opportunities in themed-environment projects, Piper made
investments in specialized production and installation techniques on these
particular projects, which negatively impacted their gross profit margins.
Accordingly, the higher sales generated by newly-acquired Permanent and scenic
display companies (DMS & Steele) and lower margins achieved on certain Piper &
Museum/production projects, in combination, negatively impacted the Company's
overall gross profit margins, as a percentage of sales, during the third quarter
of 1998 as compared with the third quarter of 1997. While Permanent and scenic
displays achieved lower gross profit margins, the revenues they generated
significantly contributed to the absorption of fixed overhead, selling, and
general and administrative costs. Accordingly, the lower gross profit margin
percentage was more than offset by 9.5% lower selling and general/administrative
costs, as a percentage of sales, during the third quarter of 1998 as compared
with the third quarter of 1997.
11
<PAGE>
Other Income/(Expense)
- - ----------------------
Other expenses increased $276,000 during the third quarter of 1998 as
compared with third quarter 1997 due to the interest expense attributed to the
$13.5 million term debt associated with the December 31, 1997 acquisition of the
DMS business, and interest expense attributable to the Company's third quarter
1998 utilization of its credit facility from a bank.
Income Taxes
- - ------------
The provision for income taxes, as a percentage of income before income
taxes, remained consistent, at 40%, for the third quarter of 1998 and 1997.
Net Income
Net income increased to $606,921 ($.08 per diluted share) during the
third quarter of 1998 from $322,021 ($.06 per diluted share) during the third
quarter of 1997, an 88% increase. This increase is attributed to the higher
sales levels and related operating profits generated during the third quarter of
1998.
BACKLOG
- - -------
The Company's manufacturing backlog of orders as of September 30, 1998
was approximately $23.0 million as compared with $15.0 million as of September
30, 1997. Of the $8.0 million backlog increase, the majority is attritributable
to DMS which was acquired in December 31, 1997.
Nine months ended September 30, 1998 as compared with nine month ended September
30, 1997
Sales
- - -----
Total Company revenues for the nine months ended September 30, 1998, as
compared with the same period during 1997, increased by 91% to $68.7 million
from $36.0 million. Approximately seventy percent of the overall sales increase
during 1998 was due to revenues generated by the December 31, 1997 acquired of
DMS which is included as part of the Permanent and scenic displays. Trade show
exhibits generated the remainder of the overall $32.7 million increase in
revenues for the nine month period ended September 30, 1998 as compared with the
same period during 1997. Sales generated by EDSI amounted to $3.6 million during
the nine month period ended September 30, 1997 as compared with only $.4 million
during the same periods in 1998, due to the Company's acquisition of a minority
interest in ADSI as of February 1, 1998 (see Note 1 of the consolidated
financial statements).
Nine months ended September 30,
(in thousands)
% increase
Revenue sources 1998 1997 (decrease)
------- ------- ----------
EDSI $ 400 $ 3,618 (89%)
Trade show exhibits 32,471 25,008 30%
Permanent and scenic displays 35,895 7,412 385%
------- ------- -----
Total revenues $68,726 $36,038 91%
======= ======= =====
12
<PAGE>
Trade show exhibits experienced a $7.4 million sales increase during
the first nine months of 1998 as compared with the related period during 1997.
This 30% increase in Trade show exhibits sales reflects the Company's continuing
program of client expansion.
Permanent and scenic displays, comprised of DMS, Museum/productions,
Piper and Steele, experienced a $28.5 million increase in the first nine months
of 1998 revenues as compared with the first nine months of 1997 revenues.
Exclusive of the sales generated by the December 31, 1997 acquired DMS,
Museum/production, Piper and Steele experienced revenue increases of $6.5
million during the first nine months of 1998 as compared with the same period
during 1997. This combined 13% increase was primarily due to a large museum
project and Piper's continuing expansion into themed-environment projects.
Operating Profits
- - -----------------
Operating profits increased approximately 125% from approximately $1.68
million to $3.74 million for the comparative first nine months of 1997 and 1998,
respectively. This increase in 1998 operating profits occurred despite a 5.1%
decrease in the gross profit margin, as a percentage of sales, during the first
nine months of 1998 as compared with the gross profit margin achieved during the
first nine months of 1997. This expected decrease is predominantly due to the
lower gross profit margins on sales generated by the newly-acquired DMS and
Steele, whose gross margins are similar to Museum/productions and Piper, which
historically achieve lower gross profit margins, as a percentage of sales, than
those historically achieved by Trade show exhibits. However, the revenues
generated by Permanent and scenic displays provides operating efficiencies in
all of the Company's manufacturing facilities, as well as absorbing fixed
overhead, selling, and general and administrative costs. The lower gross profit
margin percentage, recorded by the Company during the first nine month of 1998,
was more than offset by a 5.9% reduction in selling and general/administrative
costs, as a percentage of sales, during the first nine months of 1998 when
compared with the first nine months of 1997.
Other Income/(Expense)
- - ----------------------
Other expenses increased $620,000 during the first nine months of 1998
as compared with the first nine months of 1997 due to interest expense
attributable to the $13.5 million term debt associated with the December 31,
1997 acquisition of DMS and the Company's third quarter 1998 utilization of its
credit facility from a bank.
Income Taxes
- - ------------
The provision of income taxes as a percentage of income before income
taxes, remained relatively consistent for the first nine months of 1998 and
1997, at 40% and 39.5% respectively.
Net Income
- - ----------
Net income increased to $1,966,196 ($.25 per diluted share) during the
first nine months of 1998 from $1,107,049 ($.19 per diluted share) during the
first nine months of 1997, a 78% increase. This increase is attributed to the
higher sales levels and related operating profits generated during the first
nine months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
During the initial nine months of 1998, the Company's cash reserves
decreased by approximately $5.3 million. This decrease was primarily due to the
net increase in inventory and trade receivables as a result of the higher sales
levels achieved during the first nine months of 1998 and the increase in prepaid
expenses and other current assets, primarily due to advances made by DMS to its
suppliers for product and equipment during the first nine months of 1998.
Accounts payable and accrued expenses at September 30, 1998 remained relatively
consistent with December 31, 1997 levels.
13
<PAGE>
On February 1, 1998 the Company invested approximately $180,000 in
cash, forgave approximately $1.1 million of inter-company debt from EDSI and
exchanged its 51% majority interest in EDSI to obtain a 25% minority interest in
ADSI. On April 1, 1998, the Company acquired 100% of the stock of Steele for
approximately $841,000 in cash, Company stock and a note to the seller of
Steele. The Company invested $500,000 on August 1, 1998 to acquire a 20% equity
interest in Abex Europe. (See note 1 to the consolidated financial statements.)
The Company expended approximately $1,871,000 (exclusive of assets
acquired in the Steele acquisition) during the first nine months of 1998 for
capital assets, including approximately $1,050,000 for MIS hardware and software
$325,000 for rental assets, $125,000 for leasehold improvements, $100,000 for
computer-aided design equipment and approximately $271,000 for other machinery
and equipment.
The Company borrowed $2.68 million against its $6.5 million revolving
credit facility during the third quarter of 1998 to support the higher levels of
trade receivables during that period. The Company expects to utilize the credit
facility during the balance of 1998 to continue supporting the higher levels of
inventory and trade receivables expected with the higher sales levels. The first
two principal and interest payments against the Company's term loan related to
the acquisition of DMS were paid on April 1, 1998 and July 1, 1998 in accordance
with the terms and conditions of its lending agreement. The Company was in
compliance with its lending institution covenants as of September 30, 1998.
The September 30, 1998, current ratio remained relatively consistent at
1.5 : 1 with the December 31, 1997 current ratio of 1.7 : 1. Additionally, the
Company's debt to worth ratio improved from 1.25 : 1 to 1.20 : 1 on the
respective balance sheet dates of December 31, 1997 and September 30, 1998.
OUTLOOK
- - -------
Sales volume of $68.7 million during the first nine months of 1998
contributed greatly to the higher operating profits achieved by the Company
during that period. The Company expects continued sales growth from Trade show
exhibits and Permanent and scenic displays during the balance of 1998. The
August 1, 1998 investment in Abex Europe was made to expand the Company's
international presence as well as to provide ADSI, the Company's 25%
minority-owned affiliate, with an opportunity to more effectively market the
Abex products throughout the United Kingdom and European markets during 1999 and
beyond.
The planned expansion of the Company's Western region has created the
need for a significantly larger facility in the San Diego area. Accordingly, the
Company has entered into a lease for the second quarter of 1999 for a new sales,
production and storage facility, within the San Diego area. The April 1, 1998
acquisition of Sparks Scenic Ltd. provides the Company with a presence in the
San Francisco/Silicon Valley region of California as well as an additional
manufacturing facility. Management hopes this acquisition will expand the
Company's client base in that region and provide cross-marketing opportunities
to the existing client base. Additionally, the Company acquired expertise in the
techniques of producing industrial and corporate theater events, which may be
advantageously utilized in trade show exhibits.
As seen during the third quarter of 1998, the Company's historic gross
profit percentages will be lower during the fourth quarter of 1998. The lower
margins will primarily result from the expected increase in 1998 sales from
Permanent and scenic displays, whose historic margins are less than trade show
exhibit margins. Permanent and scenic displays is anticipating lower gross
profit margins due to lower margins bid on a major museum project and
investments in specialized production and installation techniques with respect
to themed-environment projects now being completed by Piper. Additionally, DMS
made current investments in diversifying its customer base to include a major
national retail chainstore. As part of that investment, DMS gross profit
margins, as a percentage of sales, will be lower for sales to that particular
customer during 1998 and into 1999, negatively impacting historic gross profit
margins, as a percentage of sales. Additionally, the Company's trade show
exhibit client base of Fortune 1000 companies, as well as its Pacific Rim
clients, are tightly managing their marketing budgets which could negatively
impact the Company's historic custom exhibit margins. However, the expected
higher revenues and gross profit dollars from both Trade show exhibits and
Permanent and scenic displays should continue to enhance the Company's 1998
operating profits by generating more consistent operating efficiencies at all
facilities.
14
<PAGE>
The Company is continuing its project of replacing existing management
information systems hardware and software with state-of-the-art technology,
positioning the organization to effectively meet the changing environment of
information processing among its clients and suppliers as well as year 2000
issues. The Company believes this necessary investment in technology will assist
it in minimizing the need for additional administrative personnel as its sales
growth continues. The Company plans to implement the new business system as of
January 1, 1999, subsequent to fourth quarter 1998 testing and training.
Management is not satisfied with the Company's overall performance
during the first nine months of 1998 and realizes certain areas require
additional attention and resources during the balance of 1998 and into 1999. As
the Western Region develops, the Company will continue to seek additional
account executives and invest in appropriate sales support and infrastructure to
create long-term growth opportunities in that region. The Atlanta operation has
not generated significant new sales volume opportunities due to the Company's
inability to attract and retain experienced account executives. However, the
Atlanta operation continues to profitably produce custom exhibit work
transferred from other facilities. Management will continue to review the most
effective utilization of this facility. Management is also focused on securing
additional museum projects for 1999 and year 2000 production. This sales volume
is critical in maintaining manufacturing efficiencies throughout all Company's
production facilities. Similarly, management will continue to monitor the gross
profit margins generated by Piper as they continue their expansion into
specialized themed-environment projects. Management is also monitoring DMS'
client expansion program which, to date, has negatively impacted its 1998 gross
profit margins and overall operating results when compared with DMS' 1997
margins and related results of operations. While short-term investments in new
clients are necessary to reduce DMS' reliance upon any one or two customers,
management will also try to reduce costs from suppliers and sub-contractors,
yielding higher profitability margins to the Company.
Management is committed to growing the Company's internally, while
aggressively seeking acquisition possibilities that meet synergistic and
financial-structure requirements. By following this strategy, the Company hopes
to achieve its objective of increasing shareholder value.
FORWARD-LOOKING STATEMENTS
- - --------------------------
This report contains forward-looking statements. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, there are certain important factors that could cause the Company's actual
results to differ materially from those included in such forward-looking
statements. Some of the important factors which could cause actual results to
differ materially from those projected include, but are not limited to: the
Company's ability to continue to identify and complete strategic acquisitions to
enter new markets and expand existing business; continued availability of
financing to provide additional sources of funding for future acquisitions,
capital expenditure requirements and foreign investments; satisfying any
potential year 2000 issues with no material adverse effect on operations; the
effects of competition on products and pricing, growth and acceptance of new
product lines through the company's sales and marketing programs; changes in
material prices from suppliers; uncertainties regarding accidents or litigation
which may arise in the ordinary course of business; and the effects of, and
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.
15
<PAGE>
PART II. OTHER INFORMATION
- - --------------------------
SIGNATURE
---------
In accordance with the requirements of the Securities Exchange Act of
1993, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARLTON TECHNOLOGIES, INC.
/s/ E. D. Costantini, Jr. /s/ Robert B. Ginsburg
- - ------------------------- ----------------------
Edmond D. Costantini, Jr. Robert B. Ginsburg
Chief Financial Officer President and Chief Executive Officer
Dated: November 6, 1998
16
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