<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, 1999
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)
<TABLE>
<CAPTION>
New Jersey 22-1825970
<S> <C>
- ----------------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
2828 Charter Road, Suite 101 Philadelphia PA 19154
- ----------------------------------------------------------------------------------------------------------
(Address of principal executive offices) City State Zip
</TABLE>
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:
7,329,265
- ---------
Transitional Small Business Disclosure Form (check one):
Yes ___ No_X_
<PAGE>
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------------- ------------
<S> <C> <C>
Current:
Cash and cash equivalents $ 587,800 $ 4,620,079
Accounts receivable, net of allowance
of $685,000 and $635,000 respectively 17,488,257 16,511,804
Inventory 11,462,947 9,466,161
Prepaids and other current assets 2,073,614 2,324,679
Deferred income taxes 602,000 740,000
----------- -----------
Total current assets 32,214,618 33,662,723
Investment in affiliates 2,007,521 2,010,427
Deferred income taxes -- 43,000
Property and equipment, net of accumulated
depreciation of $4,869,457 and $3,995,801 4,889,309 3,779,367
Rental assets, net of accumulated depreciation
of $1,952,905 and $1,661,020, respectively 1,313,642 1,369,009
Goodwill, net of accumulated amortization of $2,147,991
and $1,580,519, respectively 20,054,455 20,621,855
Other assets, net of accumulated amortization
of $1,241,617 and $1,131,958, respectively 545,987 535,879
----------- -----------
Total assets $61,025,532 $62,022,260
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,255,841 $ 1,950,790
Accounts payable 7,326,756 7,153,619
Accrued expenses and other 7,105,802 13,528,076
----------- -----------
Total current liabilities 16,688,399 22,632,485
----------- -----------
Long term liabilities:
Longterm debt, net of current portion 14,353,211 10,926,995
Other long-term liabilities 616,550 817,500
----------- -----------
Total long-term liabilities 14,969,761 11,744,495
----------- -----------
Total liabilities 31,658,160 34,376,980
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par shares authorized
10,000,000; no shares issued or outstanding
Common stock, $10 par shares authorized
50,000,000: 7,329,265 and 7,200,905 issued, respectively 732,856 720,090
Additional paidin capital 30,352,745 30,009,409
Accumulated (deficit) (1,606,552) (2,972,542)
----------- -----------
Less cost of 5,000 treasury shares (111,677) (111,677)
----------- -----------
Total stockholders' equity 29,367,372 27,645,280
----------- -----------
Total liabilities and stockholders' equity $61,025,532 $62,022,260
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<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,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $71,738,588 $68,725,833 $21,921,385 $24,358,068
Cost of sales 56,250,284 52,714,575 16,743,909 19,392,604
----------- ----------- ----------- -----------
Gross profit 15,488,304 16,011,258 5,177,476 4,965,464
----------- ----------- ----------- -----------
Expenses:
Selling 6,797,924 7,324,773 2,187,382 2,295,099
Administrative and general 5,199,695 4,947,546 1,694,461 1,512,396
----------- ----------- ----------- -----------
11,997,619 12,272,319 3,881,843 3,807,495
----------- ----------- ----------- -----------
Operating profit 3,490,685 3,738,939 1,295,633 1,157,969
----------- ----------- ----------- -----------
Other income (expense):
Interest income 66,548 194,876 11,957 36,697
Interest (expense) (835,517) (752,062) (308,500) (285,308)
(Loss) from investments
in affiliates, net (28,668) (26,898)
Other income 47,048 90,442 19,232 101,563
Write down of investment in affiliate (465,106) (465,106)
----------- ----------- ----------- -----------
(1,215,695) (466,743) (769,315) (147,048)
----------- ----------- ----------- -----------
Income before provision for income taxes 2,274,990 3,272,196 526,318 1,010,921
Provision for income taxes 909,000 1,306,000 210,000 404,000
----------- ----------- ----------- -----------
Net income $ 1,365,990 $ 1,966,196 $ 316,318 $ 606,921
=========== =========== =========== ===========
Income per common share:
Basic $.19 $.27 $.04 $.08
Diluted $.18 $.25 $.04 $.08
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
MARLTON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-in Accumulated
Shares Amount Capital Deficit
--------- -------- ------------ -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 7,200,905 $720,090 $30,009,409 ($2,972,542)
Issuance of shares in Sparks Europe acquisition 70,160 7,016 221,004 --
Issuance of shares under compensation arrangements 58,200 5,750 122,332 --
Net income for the nine months ended September 30, 1999 -- -- -- 1,365,990
--------- -------- ----------- ----------
Balance, September 30, 1999 7,329,265 $732,856 $30,352,745 ($1,606,552)
========= ======== =========== ==========
Total
Treasury Stockholders'
Stock Equity
---------- -------------
<S> <C> <C>
Balance, December 31, 1998 ($111,677) $27,645,280
Issuance of shares in Sparks Europe acquisition -- 228,020
Issuance of shares under compensation arrangements -- 128,082
Net income for the nine months ended September 30, 1999 -- 1,365,990
-------- -----------
Balance, September 30, 1999 ($111,677) $29,367,372
======== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
MARLTON TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended September 30,
1999 1998
----------- ----------
<S> <C> <C>
Cash flows provided by operating activities:
Net income for the period $ 1,365,990 $1,966,196
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 1,842,600 1,470,934
Write down of investment in affiliate 465,106
Decrease in deferred tax asset 138,000 556,000
Other items 184,669 (8,681)
Change in assets and liabilities (8,971,311) (8,512,264)
----------- ----------
Net cash (used in) operating activities (4,974,946) (4,527,815)
----------- ----------
Cash flows (expended through) investing activities:
Acquisition of Steele Productions (394,614)
Capital expenditures (2,220,116) (1,870,925)
Cash paid for minority investments (258,521) (679,646)
Other intangible assets acquired (119,767) (462,082)
----------- ----------
Net cash (expended through) investing activities: (2,598,404) (3,407,267)
----------- ----------
Cash flows provided by (expended through) financing activities:
Proceeds from issuance of common stock 100,000 691,427
Proceeds from revolving credit facility 16,900,000 7,288,000
Repayments against revolving credit facility (11,824,776) (4,606,000)
Principal payments on longterm debt (1,634,153) (786,265)
----------- ----------
Net cash provided by financing activities: 3,541,071 2,587,162
----------- ----------
(Decrease) in cash and cash equivalents (4,032,279) (5,347,920)
----------- ----------
Cash and cash equivalents beginning of period 4,620,079 7,115,100
Cash and cash equivalents end of period $ 587,800 $1,767,180
=========== ==========
Supplemental cash flow information:
Cash paid for interest $ 705,000 $ 498,615
Cash paid for income taxes $ 744,000 $ 435,925
Non-cash financing and investing activities:
Issuance of common stock in connection with acquisition $ 227,950 $ 249,343
Issuance of note in connection with acquisition -- $ 197,307
Conversion of EDSI note receivable and advances
as part of ADSI investment -- $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"). Investments in
affiliates, representing the Company's 20% or more but less than 50%
investments, are accounted for using the equity method. 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, 1999 and the results of operations and cash flows for the nine
month periods ended September 30, 1999 and 1998, respectively. The December 31,
1998 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, 1999 consolidated balance sheet.
Activity included in the consolidated statement of operations consists primarily
of the design, manufacture, sale and servicing of sophisticated custom and
portable/modular trade show exhibits and the manufacturing of museum interiors,
themed interiors, theme park attractions, staging, custom store fixtures and
point of purchase displays. Substantially all of the Company's net sales and
long-lived assets reside within the United States.
Acquisitions:
On February 19, 1999, the Company paid $258,451 and issued 70,160 shares of its
common stock for a 25% minority interest in Hans Uljee Explotatie en Beheer B.V.
("Uljee"), a Netherlands-based organization focusing on exhibit fabrication,
interior design, event displays and graphics production, with annual sales
approximating $8.0 million during 1998. Subsequent to the Company's 25%
investment, Uljee changed its' name to Sparks Europe, B.V. ("Sparks Europe").
Should Uljee attain defined cumulative net income levels the Company will be
required to pay an additional amount in Eurodollars and/or its' common stock, at
the Company's option. During the first nine months of 1999, the Company included
$1,693 in income from investments in affiliates, representing its' 25% interest
in Sparks Europe's operating results from February 19, 1999 through September
30,1999.
Major Customers:
During the first nine months of 1999, no individual customer accounted for more
than 10% of consolidated net sales. The Company does not anticipate that any
customer will individually account for greater than 10% of consolidated net
sales, on a calendar year basis, during 1999.
6
<PAGE>
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Per Share Data:
The following table sets forth the computation of basic and diluted net income
per common share (in thousands except for per share data):
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30 September 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $1,366 $ 1,966 $ 316 $ 607
====== ======= ===== =====
Weighted average common
shares outstanding used to compute
basic net income per common share 7,231 7,208 7,231 7,195
Additional common shares to be issued
assuming exercised of stock options,
net of shares assumed reacquired 571 817 427 851
--- --- --- ---
Total shares used to compute diluted
net income per common share 7,802 8,025 7,658 8,046
===== ===== ===== =====
Basic net income per share $.19 $.27 $.04 $.08
==== ==== ==== ====
Diluted net income per share $.18 $.25 $.04 $.08
==== ==== ==== ====
</TABLE>
Options and warrants to purchase 670,000 shares of common stock at prices
ranging from $3.88 to $7.00 per share and 266,000 shares of common stock at
prices ranging from $5.00 per share to $7.00 per share, were outstanding at
September 30, 1999 and 1998, respectively. These options and warrants were not
included in the computation of diluted income per common share because the
options' and warrants' exercise prices were greater than the average market
price of the common shares.
2. INVENTORY:
Inventory, as of the respective dates, consists of the following:
September 30, 1999 December 31, 1998
------------------ -----------------
Raw Materials $ 447,430 $ 404,961
Work In Process 7,127,798 6,330,634
Finished Goods 3,795,674 2,730,566
------------ ----------
$11,370,902 $9,466,161
============ ==========
3. INVESTMENT IN AFFILIATES:
At September 30, 1999, the Company's investments in affiliates consisted of a
25% interest in Abex Display Systems Inc. (ADSI), Los Angeles, California, a 20%
interest in Abex Europe, Ltd. (Abex Europe) located in London, and a 25%
interest in Sparks Europe located in the Netherlands.
During the third quarter of 1999, the Company recognized an impairment loss of
approximately $465,000 related to its investment in Abex Europe. Abex Europe
went into receivership on October 15, 1999, subsequently reorganized and is
operating under a new name, Abex UK. The Company holds a 20% ownership in Abex
UK. While the reorganization has allowed Abex UK to recently achieve marginal
profitability, its future viability is uncertain and the Company has determined
that a decline in value, deemed to be other than temporary, has occurred,
requiring a write-down of its' investment.
7
<PAGE>
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INCOME TAXES:
The components of the provision for income taxes for the respective nine month
periods ended September 30 were as follows:
1999 1998
-------- ----------
Currently payable
Federal $700,000 $ 500,000
State 71,000 250,000
-------- ----------
771,000 750,000
Deferred:
Federal 138,000 556,000
-------- ----------
$909,000 $1,306,000
======== ==========
5. REVOLVING CREDIT FACILITY:
The Company replaced its' $6.5 million revolving credit facility with a $9.0
million facility, with the same lending institution, during the second quarter
of 1999. As part of the amendment, the Company and bank modified financial
convenants which are less restrictive to the Company, particularly with respect
to the amount of debt the Company may undertake. The cost of borrowed funds from
the amended revolving credit facility are similar to the costs of capital with
respect to the $6.5 million facility.
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General Overview
The Company's business is the custom design, production and sale of exhibits and
environments for trade shows, museums, theme parks, themed interiors and retail
stores for clients in industry, government, entertainment, and commercial
establishments.
On August 7, 1990, the Company acquired the business of Sparks Exhibits Corp.
("Sparks") in Philadelphia, Pennsylvania, which custom designs and manufactures
sophisticated trade show exhibits, displays, architectural and museum interiors,
graphics and signage, provides trade show services and designs and sells
portable exhibits. The Company subsequently formed (i) Sparks Exhibits, Inc.
("Exhibits") during July 1991 in the Atlanta, Georgia area, (ii) Sparks
Exhibits, Ltd. ("Limited") during July 1992 in the San Diego, California area,
and (iii) Sparks Exhibits Incorporated ("Incorporated") during December 1992 in
the Orlando, Florida area, in each case by acquiring the assets of trade show
exhibit manufacturing companies.
During July 1993, the Company and Abex Display Systems, Inc. ("ADSI"), an
unaffiliated portable/modular trade show exhibit manufacturer based in Los
Angles, California, entered into an agreement to organize a new California
corporation, Expose' Display System, Inc. ("EDSI"). The Company acquired 51% of
EDSI with ADSI acquiring the balance. Effective February 1, 1998, the Company
exchanged its 51% majority interest in EDSI plus cash for a 25% interest in
ADSI.
During April 1996, the Company acquired Piper Productions, Inc. ("Piper") of
Orlando, Florida which produces business theater, theme park attraction, themed
interiors, theatrical scenery and special effects.
On December 31, 1997, the Company acquired DMS, which is engaged in the business
of supplying custom store fixtures, showcases and point of purchase display for
retailers. DMS utilizes various unaffiliated manufacturers with whom it has
developed long-standing business relationships for the production of its
products. The retail fixture industry includes outfitting new retail stores and
remodeling existing stores, including specialty apparel chains, "category
killer" stores, department stores, outlet stores, supermarkets, building supply
stores and drug stores.
On April 1, 1998, the Company acquired Rusty Hinges, Inc. d/b/a Steele
Productions ("Steele") located in the San Francisco, California area. Steele
produces exhibit properties for industrial and corporate theater events
throughout the United States. The Company subsequently changed the name of
Steele to Sparks Scenic, Ltd. ("Scenic").
During the third quarter of 1998, the Company completed a 20% equity investment
in Abex Europe, Ltd. ("Abex Europe"), a producer of customized graphics and an
assembler and distributor of ADSI products. This investment was made to assist
the Company in expanding its international presence and to benefit ADSI, which
is 25% owned by the Company. The Company wrote down this investment during the
third quarter of 1999 due the October 15, 1999 placement of the Company into
receivership under UK laws. The Company has subsequently been reorganized and is
operating under a new name, Abex U.K., with the Company retaining a 20% interest
in the new operation. See note 3 to the consolidated financial statements.
During the first quarter of 1999, the Company acquired a 25% minority interest
in a Netherlands-based exhibit design and manufacturing company which,
subsequent to the Company's minority investment, changed its name to Sparks
Europe, B. V. ("Sparks Europe").
As part of a major marketing and branding effort during the first quarter of
1999, the Company changed its Sparks and Piper operating companies names to
"Sparks Exhibits & Environments". This branding effort is important to
clarifying the Company's focus and source of business growth...trade show
exhibits for domestic and international clients and creating themed environments
for theaters, museums, theme parks, visitor centers and retail establishments.
9
<PAGE>
Management's aggressive growth plan, since the August 1990 acquisition of
Sparks, has resulted in the dramatic expansion of the Company's client base, the
development of new businesses and areas of expertise for expansion of its
products and services, and the extension into major geographic markets in the
United States and internationally. Management believes the acquisitions and the
continuing development of new expertise for expansion of its products and
services, and the extension into major geographic markets in the United States
and internationally. Management believes the acquisitions and the continuing
development of new areas of expertise will position the Company to increase its
revenue base and move toward its goal of becoming a leading exhibits and
environments company through the continued offering of expanded products and
services to a larger customer network.
RESULTS OF OPERATIONS
Three months ended September 30, 1999 as compared with three months ended
September 30, 1998
Sales
Three months ended
September 30,
(in thousands)
1999 1998 % (decrease)
---- ---- ------------
Revenue sources
Trade show exhibits $8,252 $9,233 (11)%
Permanent/scenic displays 13,669 15,125 (10)%
------- ------ -----
Total revenues $21,921 $24,358 (10)%
======= ======= =====
Total Company revenues for the three months ended September 30, 1999, as
compared with the same period during 1998, decreased by approximately 10%, to
$21.9 million from $24.4 million. Trade show exhibits, which includes business
theater revenues from the San Francisco operation, experienced an 11% decrease
in total revenues during the third quarter of 1999 as compared with third
quarter 1998 total revenues due to the Company's loss of certain trade-show
clients who had exhibited during the third quarter. Permanent/scenic displays,
comprised of point of purchase displays, museum/productions sales and themed
environments experienced a 10% decrease in third quarter 1999 revenues as
compared with third quarter 1998 revenues. This decrease is due primarily to
lower store fixture sales during the third quarter 1999 as compared with the
related quarter during 1998.
Operating Profits
Despite the 10% loss of sales volume during the third quarter of 1999, as
compared with the third quarter of 1998, the Company's operating profits
increased by 12%, to $1,296,000 from $1,158,000 during the respective quarters
of 1999 and 1998. This increase is attributed to higher gross profit margins
achieved by Trade Shows and Permanent/Scenic revenue groups during third quarter
1999 as compared with third quarter 1998.
The Company's selling and general/administrative costs, as a percentage of
sales, increased from 15.6% during the third quarter of 1998 to 17.7% during the
third quarter of 1999. This percentage increase is primarily due to the lower
sales volume achieved during the third quarter of 1999.
Other Income/(Expense)
Other (expense) increased from ($147,000) during the third quarter of 1998 to
($769,000) during the third quarter of 1999. This increase is predominately
attributable to the $465,106 write-down of the Company's investment in Abex
Europe, Ltd. during the third quarter of 1999. Interest (expense) increased from
($285,000) during the third quarter of 1998 to ($309,000) during the third
quarter of 1999 due to the Company's higher utilization of the revolving credit
facility during the third quarter of 1999.
10
<PAGE>
Income Taxes
The provision of income taxes, as a percentage of income before income taxes,
remained constant during the third quarters of 1999 and 1998, at approximately
40%.
Net Income
Net income decreased to $316,000 ($.04 per diluted share) during the third
quarter of 1999 from $607,000 ($.08 per diluted share) during the third quarter
of 1998. This decrease is attributed to the write-down of the Company's
investment in Abex Europe, Ltd. during the third quarter of 1999. Exclusive of
the impact of the $465,106 write-down, the Company's net income would have been
$595,000 ( $.08 per diluted share) as compared with 1998 third quarter net
income of $607,000 ($.08 per diluted share)
Backlog
The Company's backlog of orders as of September 30, 1999 and September 30, 1998
was approximately $24.0 million, and $23.0 million, respectively. The majority
of the September 30, 1999 backlog will be converted into sales during the fourth
quarter of 1998 and first quarter of 2000.
Nine months ended September 30, 1999 as compared with nine months ended
September 30, 1998
Sales
Total Company revenues for the nine months ended September 30, 1999 as compared
with the same period during 1998 increased by 4.4%, to $71.7 million from $68.7
million. Trade show exhibits sales increased by 6% during 1999 primarily due to
additional revenues generated by the Philadelphia and San Francisco facilities.
Permanent/scenic displays experienced a 4% increase in revenues for the nine
month period ended September 30, 1999 as compared with the same period during
1998. Sales generated by EDSI approximated $400,000 during the first quarter of
1998 as compared with no recorded revenues during the first quarter of 1999, due
to the exchange of the Company's investment in EDSI in connection with the
Company's acquisition of a minority interest in ADSI as of February 1, 1998.
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.
Nine months ended September
30,
(in thousands)
Revenue sources 1999 1998 % increase
- --------------- ---- ---- ----------
EDSI --- $ 400 ---
Trade show exhibits $35,561 33,580 6%
Permanent/scenic displays 36,177 34,746 4%
------- ------- --
Total revenues $71,738 $68,726 4%
======= ======= ==
11
<PAGE>
Operating Profits
Operating profits were down by 6%, on a nine month comparative basis, from $3.74
million at September 30, 1998 to $3.49 million at September 30, 1999. This
decrease in 1999 operating profits occurred due to a 1.7% reduction in the
Company's gross profit margin, as a percentage of sales. This decrease is
attributed, primarily, to losses absorbed by the Company on themed environment
projects during the second quarter of 1999 in the Orlando, Florida facility.
Additionally, the Company experienced a 1.0% drop in gross profit margins, as a
percentage of sales, on its point of purchase display products. This decrease is
partially attributed to DMS' client diversification program as well as more
intense competition for existing and new client business. While the combination
of diversification and competition has negatively impacted the historical gross
profit margins, as a percentage of sales, in point of purchase display products,
the investments made by the Company in its' client diversification program has
resulted in additional orders from new customers to be fulfilled during the year
2000. Gross profit margins, as a percentage of sales, generated by Trade show
exhibits during the first nine months of 1999 are approximately 1% higher than
those generated during the same period during 1998. Selling and
general/administrative costs, as a percentage of sales, fell from 17.9% during
the first nine months of 1998 to 16.7% during the first nine months of 1999.
This reduction of selling, general and administrative costs, however, fell short
of fully offsetting the lower gross profit margins recorded during the first
nine months of 1999 as compared with the first nine months of 1998.
Other Income/(Expense)
Other (expense) increased from ($467,000) during the first nine months of 1998
to ($1,215,000) during the first nine months of 1999. This increase is
predominately attributable to the $465,106 write-down of the Company's
investment in Abex Europe, Ltd. during the third quarter of 1999. Interest
(expense), net of interest income, increased from ($558,000) during the first
nine months of 1998 to ($769,000) during the first nine months of 1999 due to
the Company's increased utilization of its' revolving credit facility during
1999.
Income Taxes
The provision for income taxes, as a percentage of income before income taxes,
remained constant, at 40% for the first nine months of 1999 and 1998.
Net Income
Net income for the respective nine month periods ended September 30, 1998 and
1999 decreased from $1,966,000 ($.25 per diluted share) to $1,366,000 ($.18 per
diluted share) due to lower gross profits achieved during the first nine months
of 1999 from the Permanent/scenic revenue group. Additionally, the negative
impact from the third quarter 1999 write-down of the Company's minority
investment in Abex Europe, Ltd. of $465,106, and, higher interest expense
related to the Company's increased utilization of the revolving credit facility
during 1999, also contributed to this decrease.
Exclusive of the impact from the third quarter of 1999 write-down of the
Company's minority investment in Abex Europe, Ltd., the Company's net income for
the nine months ended September 30, 1999 would have been $1,644,000 ($.21 per
diluted share) as compared with net income of $1,966,000 ($.25 per diluted
share) for the nine month period ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company reduced its September 30, 1999 cash balances by $4.1 million when
compared with December 31, 1998 balances and borrowed $5.1 million against its
revolving credit facility as of September 30, 1999. This $9.2 million
utilization of cash and credit, coupled with $4.0 million from nine month net
earnings and non-cash expenses, was used in the following areas of the business:
(a) to support $2.0 million of higher inventory balances, particularly with
respect to point of purchase displays, (b) to support $1.0 million of higher
trade receivables due to higher annual sales levels (c) to support payments to
valued suppliers and sub-contractors, evidenced by a $1.1 million decrease in
trade payables and cash-related accruals, exclusive of a $3.5 million decrease
in customer deposits and $600,000 decrease in non-cash related accruals, (d) to
provide $800,000 of capital needed for investment in the new San Diego facility
and renovations to the San Francisco facility, and an additional $1.4 million of
capital needed for investments in systems, equipment, and rental assets (e) to
provide the capital for approximately $1.6 million of debt repayments against
the $13.5 million term debt associated with the December 31, 1997 acquisition of
DMS as well as scheduled principal payments to the sellers of the Orlando and
San Francisco operations, and, (f) approximately $300,000 of cash used to
acquire a minority interest in the Netherlands-based exhibit operation
12
<PAGE>
Due to the Company's need for additional cash to meet the higher levels of
accounts receivable and inventory related to the DMS operation, as well as cash
needed for additional investment in systems and facilities, the revolving credit
facility was expanded from $6.5 million to $9.0 million on June 30, 1999. This
facility should meet the Company's working capital financing requirements
through the balance of 1999.
The September 30, 1999, current ratio improved to 1.9:1 from the December 31,
1998 current ratio of approximately 1.5:1. Additionally, the Company's debt to
worth ratio improved to 1.08:1 from 1.24: 1, on the respective balance sheet
dates of September 30, 1999 and December 31, 1998.
OUTLOOK
The Company expects fourth quarter 1999 sales, supported by higher expected
Trade Show exhibit revenues, to exceed fourth quarter 1998 sales. The
significantly lower gross profit margins experienced in the themed environment
revenue group during the second quarter of 1999 have been addressed and the
Company does not anticipate a recurrence of that poor performance during the
fourth quarter of 1999. While fourth quarter 1999 revenues from store displays
expect to fall below 1998 fourth quarter revenues, the Company is encouraged by
recent orders from new customers as part of the client diversification program
begun in 1999. Fourth quarter 1999 sales volume from museums/productions should
significantly exceed fourth quarter 1998 generated by that sales group. This
sales group, to date, has not been awarded significant museum contracts for
which it recently had competed.
The Company will continue to invest resources into the Western Region in an
effort to increase market share in both trade show exhibits and Permanent/scenic
displays. During the fourth quarter of 1999, the Company's Atlanta and
Philadelphia trade show groups were individually awarded two separate,
significant trade show exhibit programs from Fortune 1000 clients which should
contribute to the sales growth during the year 2000.
The Company's minority investments in Abex Display Systems, Inc., the Los
Angeles based portable/modular display company, continues to operate at marginal
levels. This performance is expected to continue during the balance of 1999. As
discussed in note 3 to the consolidated financial statements, Abex Europe, Ltd.
went into receivership on October 15, 1999 and has been reorganized under a new
name, Abex UK. While the Company retains a 20% interest in this new company, it
does not expect to see any significant impact over the next twelve months from
this investment. The Company's 25% minority investment in Sparks Europe has
shown only marginal results during the first nine months of 1999 and no
significant impact is expected during the fourth quarter of 1999.
The implementation of the new management information system is continuing
throughout the Company. As part of that implementation, the Company has
re-defined certain business processes which are being used at each location
during the fourth quarter of 1999. These processes have been developed to
standardize and streamline the method of operation and procedures within each
of the Company's facilities.
Management is committed to growing the Company internally, while aggressively
seeking acquisition possibilities that meet synergistic and financial-structure
requirements. By following this strategy, the Company hopes to achieve its
objective of increasing shareholder value.
13
<PAGE>
Year 2000 Readiness Disclosures:
The following statements include "Year 2000 Information and Readiness
Disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998. During January 1999, the Company switched to its new
management information system, which is year 2000 compliant, based on the
software applications and business programs acquired and installed during 1998.
All software packages are standard "off the shelf" business systems whose
developers have determined them to be Y2K compliant. Management is relying upon
the software developers (e.g. Microsoft, Solomon, ADP, etc.) programming
adjustments to meet all necessary Y2K issues. The Company expended approximately
$1.7 million for hardware, software, and implementation of the new management
system during 1998 and the first nine months of 1999. The Company expects to
invest an additional $400,000 for completion of the MIS project, including new
or upgraded hardware for Company personnel, modification of certain software
packages to the latest release version and additional implementation and
training costs. The Company has not formally assessed and evaluated the state of
readiness of its customers and suppliers. Certain customers/vendors have
requested information from the Company regarding its Y2K readiness.
Additionally, some suppliers have confirmed to the Company their internal Y2K
readiness.
The most reasonably likely worst case Y2K scenario would be the failure of
either the Company or a third party to correct a material Y2K problem that would
cause an interruption in, or failure of, normal business activities or
operations. In the event that the worst case scenario occurs, the impact on the
Company's financial position or results of operations cannot be estimated. While
the Company believes that all internal IT and non-IT systems will be converted
prior to January 1, 2000, the Company has not addressed contingency plans which
would be implemented in the event of a Y2K failure. However, the Company would
develop manual procedures and processes for critical transactions. To the extent
that the Company experiences a Y2K failure related to a third party's lack of
readiness, alternate sources of supply will be identified. At this time, the
Company has not identified a Y2K problem that it believes cannot be remedied
prior to it having a material impact on operations. The Company will continue to
assess the readiness of its own systems and, if a problem is identified that
cannot be fixed in the appropriate time period, a specific plan to address that
issue will be developed.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which will require that all derivative
financial instruments be recognized as either assets or liabilities in the
balance sheet. SFAS No. 133 will be effective no later than for the Company's
first quarter of 2001. The Company is evaluating the effects of this new
statement and when to implement the new requirements. However, management
currently believes the adoption of SFAS 133 will not have a material impact on
the Company's consolidated results of operation, financial position or cash
flows.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995,
there are certain important factors that could cause the Company's actual
results to differ materially from those included in such forward-looking
statements. Some of the important factors which could cause actual results to
differ materially from those projected include, but are not limited to: the
Company's ability to continue to identify and complete strategic acquisitions to
enter new markets and expand existing business; continued availability of
financing to provide additional sources of funding for future acquisitions;
capital expenditure requirements and foreign investments; satisfying any
potential year 2000 issues with no material adverse effect on operations; the
effects of competition on products, pricing, and, growth and acceptance of new
product lines through the Company's sales 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
Fluctuations in interest and foreign currency exchange rates do not
significantly affect the Companys' financial position and results of operations.
The existing bank term debt bears a fixed rate of interest, 6.15%, plus an
applicable spread from 75 to 100 basis points, dependent upon the Company's
capitalization ratio, measured on a quarterly basis. The Company's revolving
credit facility bears a floating rate of interest, based on LIBOR rates, plus an
applicable spread, similar to the term debt requirements. The Company utilized
up to $7.0 million of its $9.0 million revolving credit facility during the
first nine months of 1999. The Company retains a 20% equity interest in a United
Kingdom based trade-show exhibit Company, Abex UK. Accordingly, the Company's
financial positions and results of operations will not be significantly affected
should foreign exchange rates fluctuate.
14
<PAGE>
Environmental
The Company believes it is in compliance with federal, state and local
provisions regulating discharge of materials into the environment or otherwise
relating to protection of the environment. The Company has not been identified
by federal or state authorities as a potentially responsible party for
environmental clean-ups at any of its sites.
Litigation
The Company is a defendant and counterclaimant in various lawsuits that arise
out of, and are incidental to, the conduct of its business. These suits concern
labor-related matters. While it is not feasible to predict the outcome of all
pending suits and claims, the ultimate resolution of these matters should not
have a material effect upon the financial position of the Company.
PART II. OTHER INFORMATION
Responses to Items one through six are omitted since these items are either
inapplicable or response thereto would be negative.
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/ Edmond D. Costantini, Jr. /s/ Robert B. Ginsburg
- ----------------------------- ------------------------------
Edmond D. Costantini, Jr. Robert B. Ginsburg
Chief Financial Officer President and Chief Executive
Officer
Dated September 15, 1999
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