<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 June 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>
<S> <C>
New Jersey 22-1825970
- ------------------------------------------------------------------------------------------------------------
(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: 7,273,765
---------
Transitional Small Business Disclosure Form (check one):
Yes No X
---------------------- -------------------
<PAGE>
MARLTON TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
-------- ------------
<S> <C> <C>
Current:
Cash and cash equivalents $ 458,867 $ 4,620,079
Accounts receivable, net of allowance
of $621,000 and $635,000 respectively 18,165,822 16,511,804
Inventory 12,279,874 9,466,161
Prepaids and other current assets 2,460,442 2,324,679
Deferred income taxes 662,000 740,000
----------- -----------
Total current assets 34,027,005 33,662,723
Investment in affiliates 2,495,962 2,010,427
Deferred income taxes -- 43,000
Property and equipment, net of accumulated
depreciation of $4,465,686 and $3,995,801 4,918,942 3,779,367
Rental assets, net of accumulated depreciation
of $1,947,947 and $1,661,020, respectively 1,133,390 1,369,009
Goodwill, net of accumulated amortization of $1,967,079
and $1,580,519, respectively 20,235,367 20,621,855
Other assets, net of accumulated amortization
of $1,199,277 and $1,131,958, respectively 484,454 535,879
----------- -----------
Total assets $63,295,120 $62,022,260
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,170,781 $ 1,950,790
Accounts payable 7,127,955 7,153,619
Accrued expenses and other 10,545,369 13,528,076
----------- -----------
Total current liabilities 19,844,105 22,632,485
----------- -----------
Long term liabilities:
Long-term debt, net of current portion 13,817,536 10,926,995
Other long-term liabilities 683,480 817,500
----------- -----------
Total long-term liabilities 14,501,016 11,744,495
----------- -----------
Total liabilities 34,345,121 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: 7,278,765 and 7,200,905 issued, respectively 727,876 720,090
Additional paid-in capital 30,256,670 30,009,409
Accumulated (deficit) (1,922,870) (2,972,542)
----------- -----------
29,061,676 27,756,957
Less cost of 5,000 treasury shares (111,677) (111,677)
----------- -----------
Total stockholders' equity 28,949,999 27,645,280
----------- -----------
Total liabilities and stockholders' equity $63,295,120 $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 six months ended For the three months ended
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 49,817,203 $ 44,367,765 $ 24,026,222 $ 22,317,220
Cost of sales 39,506,375 33,321,971 19,276,041 16,750,271
------------ ------------ ------------ ------------
Gross profit 10,310,828 11,045,794 4,750,181 5,566,949
------------ ------------ ------------ ------------
Expenses:
Selling 4,610,542 5,029,674 2,349,486 2,567,578
Administrative and general 3,505,234 3,435,150 1,762,753 1,722,739
------------ ------------ ------------ ------------
8,115,776 8,464,824 4,112,239 4,290,317
------------ ------------ ------------ ------------
Operating profit 2,195,052 2,580,970 637,942 1,276,632
------------ ------------ ------------ ------------
Other income (expense):
Interest income 54,591 158,179 17,235 60,426
Interest (expense) (527,017) (466,754) (302,283) (232,803)
Loss from investments
in affiliates, net (1,770) (15,816) (35,668) (16,690)
Other income (expense) 27,816 4,696 35,686 10,579
------------ ------------ ------------ ------------
(446,380) (319,695) (285,030) (178,488)
------------ ------------ ------------ ------------
Income before provision for income taxes 1,748,672 2,261,275 352,912 1,098,144
Provision for income taxes 699,000 902,000 141,000 439,000
------------ ------------ ------------ ------------
Net income $ 1,049,672 $ 1,359,275 $ 211,912 $ 659,144
============ ============ ============ ============
Income per common share:
Basic $.15 $.19 $.03 $.09
Diluted $.13 $.17 $.03 $.08
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
MARLTON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Common Stock Additional Total
-------------------- Paid-in Accumulated Treasury Stockholders'
Shares Amount Capital Deficit Stock Equity
------ ------ ----------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 7,200,905 $720,090 $30,009,409 ($2,972,542) ($111,677) $27,645,280
Issuance of shares in Sparks Europe
acquisition 70,160 7,016 221,004 - - 228,020
Issuance of shares under compensation
arrangements 7,700 770 26,257 - - 27,027
Net income for the six months ended
June 30, 1999 - 1,049,672 - 1,049,672
--------- -------- ----------- ----------- --------- -----------
Balance, June 30, 1999 7,278,765 $727,876 $30,256,670 ($1,922,870) ($111,677) $28,949,999
========= ======== =========== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
MARLTON TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended June 30,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows provided by operating activities::
Net income for the period $ 1,049,672 $ 1,359,275
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 1,210,626 876,490
Decrease in deferred tax asset 121,000 452,000
Other items 27,893 --
Change in assets and liabilities (7,611,865) (5,991,957)
----------- -----------
Net cash (used in) operating activities (5,202,674) (3,304,192)
----------- -----------
Cash flows (expended through) investing activities:
Acquisition of Steele Productions -- (394,614)
Capital expenditures (1,660,775) (1,085,185)
Cash paid for minority investments (258,451) (179,646)
Other intangible assets acquired (15,894) (73,084)
----------- -----------
Net cash (expended through) investing activities: (1,935,120) (1,732,529)
----------- -----------
Cash flows provided by (expended through) financing activities:
Proceeds from issuance of common stock -- 593,109
Proceeds from revolving credit facility 10,862,000 --
Repayments against revolving credit facility (6,902,000) --
Principal payments on long-term debt (926,953) (381,661)
Other net payments (56,465) --
----------- -----------
Net cash provided by financing activities: 2,976,582 211,448
----------- -----------
Decrease in cash and cash equivalents (4,161,212) (4,825,273)
Cash and cash equivalents - beginning of period 4,620,079 7,115,100
----------- -----------
Cash and cash equivalents - end of period $ 458,867 $ 2,289,827
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 460,225 $ 238,615
=========== ===========
Cash paid for income taxes $ 642,847 $ 295,221
=========== ===========
Non-cash financing and investing activities:
Issuance of common stock in connection with acquisition $ 228,020 $ 249,343
=========== ===========
Issuance of note in connection with acquisition -- $ 197,307
=========== ===========
</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 June 30, 1999 and the results of operations and cash flows for the six month
periods ended June 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 June 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 six months of 1999, the Company included
$11,338 in income from investments in affiliates, representing its' 25% interest
in Sparks Europe's operating results from February 19, 1999 through June
30,1999.
Major Customers:
During the first six months of 1999, three individual customers accounted for
22% of consolidated net sales. The loss of one or all of these customers, or a
significant reduction in one or all of these customers' purchases, could have
had a material adverse effect on the Company's first six months of 1999
operating results. 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>
Six months ended Three months ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $1,050 $ 1,359 $ 212 $ 659
====== ======= ===== =====
Weighted average common
shares outstanding used to compute
basic net income per common share 7,231 7,100 7,231 7,161
Additional common shares to be issued
assuming exercised of stock options,
net of shares assumed reacquired 632 897 694 927
------ ------ ----- -----
Total shares used to compute diluted
net income per common share 7,863 7,997 7,925 8,088
====== ======= ===== =====
Basic net income per share $.15 $.19 $.03 $.09
====== ======= ===== =====
Diluted net income per share $.13 $.17 $.03 $.08
====== ======= ===== =====
</TABLE>
Options and warrants to purchase 597,000 shares of common stock at prices
ranging from $3.98 to $7.00 per share and 10,000 shares of common stock at
prices ranging from $6.88 per share to $7.00 per share, were outstanding at June
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:
June 30, 1999 December 31, 1998
------------- -----------------
Raw Materials $ 639,392 $ 404,961
Work In Process 6,568,361 6,330,634
Finished Goods 5,072,061 2,730,566
------------ -----------
$ 12,279,814 $ 9,466,161
============ ===========
3. INCOME TAXES:
The components of the provision for income taxes for the respective six month
periods ended June 30, were as follows:
1999 1998
---- ----
Currently payable
Federal $523,000 $300,000
State 55,000 150,000
-------- --------
578,000 450,000
Deferred:
Federal 121,000 452,000
-------- --------
$699,000 $902,000
======== ========
7
<PAGE>
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. REVOLVING CREDIT FACILITY:
Effective June 30, 1999, the Company replaced its' $6.5 million revolving credit
facility with a $9.0 million facility with the same lending institution., 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 should assist the
Company to expand its international presence and benefit ADSI, which is 25%
owned by the Company,
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.
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 areas of expertise will position the Company to
increase its revenue base and move toward its goal of becoming a leading
exhibits and environments company through the continued offering of expanded
products and services to a larger customer network.
9
<PAGE>
RESULTS OF OPERATIONS
Three months ended June 30, 1999 as compared with three months ended June 30,
1998
Sales
Three months ended
June 30,
(in thousands)
%increase
1999 1998 (decrease)
---- ---- ----------
Revenue sources
Trade show exhibits $13,040 $10,850 20.2%
Permanent/scenic displays 10,986 11,467 (4.2)%
------- ------- ------
Total revenues $24,026 $22,317 7.7%
======= ======= ======
Total Company revenues for the three-months ended June 30, 1999 as compared with
the same period during 1998, increased by approximately 8%, to $24.0 million
from $22.3 million. Trade show exhibits, which includes business theater
revenues from the San Francisco operation, generated a 20% increase in total
revenues for the second quarter of 1999 as compared with the second quarter of
1998 total revenues, reflecting the Company's ongoing program of client
expansion. Permanent/scenic displays comprised of point of purchase displays,
museum/productions sales and themed environments experienced a slight decrease
in second quarter 1999 revenues as compared with second quarter 1998 revenues.
This decrease is primarily due to a drop in museum/production sales during the
second quarter of 1999 as compared with their revenues from the related quarter
during 1998.
Operating Profits
Operating profits fell approximately 50% during the second quarter of 1999 to
$638,000 from $1,277,000 during the second quarter of 1998. The significant
decrease is primarily attributed to losses recognized on themed environment
projects in the Orlando, Florida facility. Poor execution in estimating and
manufacturing on certain significant projects negatively impacted that
facility's overall gross profit margins during the second quarter of 1999.
Additionally, gross profit margins, as a percentage of sales, relative to point
of purchase display products, dropped by approximately 20% during the second
quarter of 1999 when compared with related second quarter 1998 gross profit
margins, as a percentage of sales. This decrease is primarily due to increased
competitive pressures industry-wide and within DMS' existing client base. A
significant increase in trade show exhibits operating profits during the second
quarter of 1999 as compared with 1998 trade show exhibit operating profits was
insufficient to offset the combined negative impact from themed environment and
point of purchase displays on the Company's second quarter 1999 operating
profits.
The Company's selling and general/administrative costs, as a percentage of
sales, fell from 19.2% during the second quarter of 1998 to 17.1% during the
second quarter of 1999. Again, the positive impact of these reduced costs during
the second quarter of 1999 was not sufficient to offset the lower gross profits
from themed environment and point of purchase displays.
Other Income/(Expense)
Other (expense) increased from ($178,488) during the second quarter of 1998 to
($285,030) during the second quarter of 1999. Interest (expense) increased
during the second quarter of 1999 as compared with the second quarter of 1998
primarily due to the Company's utilization of the revolving credit facility
during the quarter.
10
<PAGE>
Income Taxes
The provision of income taxes, as a percentage of income before income taxes,
remained constant during the second quarter of 1999 and 1998, at approximately
40%.
Net Income
Net income decreased by two-thirds, to $211,912 ($.03 per diluted share), during
the second quarter of 1999 from $659,144 ($.08 per diluted share) during the
second quarter of 1998. This significant decrease is attributed to the lower
gross profit margins and related operating profits generated during the second
quarter of 1999, particularly as they relate to themed environment and point of
purchase displays.
Backlog
The Company's backlog of orders as of June 30, 1999 and June 30, 1998 was
approximately $22.0 million, and $25.0 million, respectively.
Six months ended June 30, 1999 as compared with six months ended June 30, 1998
Sales
Total Company revenues for the six months ended June 30, 1999 as compared with
the same period during 1998 increased by 12%, to $49.8 million from $44.4
million. Trade show exhibits sales increased during 1999 primarily due to
revenues generated by the Philadelphia and San Francisco facilities.
Permanent/scenic displays experienced an 11% increase in revenues for the six
month period ended June 30, 1999 as compared with the same period during 1998.
However, museums/productions revenues, a part of Permanent/scenic displays, were
lower on a six month comparative basis from 1999 to 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.
Six months ended June 30,
(in thousands)
Revenue sources 1999 1998 % Increase
---- ---- ----------
EDSI --- $ 400 ---
Trade show exhibits $27,309 23,672 15%
Permanent/scenic displays 22,508 20,296 11%
------- ------- ----
Total revenues $49,817 $44,368 12%
======= ======= ====
Operating Profits
Operating profits were down by 15%, on a six month comparative basis, from $2.58
million at June 30, 1998 to $2.19 million at June 30, 1999. This decrease in
1999 operating profits occurred due to a 4.2% 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 drop in gross profit margins, as a percentage of sales, in
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. 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. Gross profit
margins, as a percentage of sales, generated by Trade show exhibits during the
first six months of 1999 are similar to those generated during the same period
during 1998. Selling and general/administrative costs, as a percentage of sales,
fell from 19.1% during the first six months of 1998 to 16.3% during the first
six months of 1999. This reduction, however, was not enough to offset the 4.2%
lower gross profit margins recorded during the first six months of 1999 as
compared with the first six months of 1998.
11
<PAGE>
Other Income/(Expense)
Other (expenses) increased to ($446,000) during the first six months of 1999 as
compared with ($320,000) during the first six months of 1998 predominantly due
to interest expense attributable to the $13.5 million term debt associated with
the December 31, 1997 acquisition of the DMS business and the Company's
utilization of its revolving credit facility during the second quarter of 1999.
Income Taxes
The provision for income taxes, as a percentage of income before income taxes,
remained constant, at 40% for the first six months of 1999 and 1998.
Net Income
Net income decreased to $1,049,672 ($.13 per diluted share) during the first six
months of 1999 from $1,359,275 ($.17 per diluted share) during the first six
months of 1998. This decrease is attributed to the lower gross profit margins
and the related lower operating profits generated during the first six months of
1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company reduced its June 30, 1999 cash balanced by $4.2 million when
compared with December 31, 1998 balances and borrowed $4.0 million against its
revolving credit facility as of June 30, 1999. This $8.2 million utilization of
cash and credit, coupled with $2.3 million from six month net earnings plus
depreciation and amortization, was used in the following areas of the business:
(a) to support $2.8 million of higher inventory balances, particularly with
respect to point of purchase displays, (b) to support $1.7 million of higher
trade receivables due to higher sales levels and a slower billing-collection
turnaround time primarily due to the Company's implementation of its new
information system, (c) to support payments to valued suppliers and
sub-contractors, evidenced by a $3.0 million decrease in trade payables and
accruals, (d) to provide the $800,000 of capital needed for investment in the
new San Diego facility and the necessary renovations to the San Francisco
facility and an additional $800,000 of capital needed for investments in systems
and equipment, (e) to provide the capital for approximately $1.0 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
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 June 30, 1999, current ratio improved to 1.7:1 from the December 31, 1998
current ratio of approximately 1.5:1. Additionally, the Company's debt to
worth ratio improved to 1.19:1 from 1.24:1, on the respective balance sheet
dates of June 30, 1999 and December 31, 1998.
12
<PAGE>
OUTLOOK
The Company expects continued sales growth from Trade show exhibits and
Permanent/scenic displays during the balance of 1999. However, the growth in
revenues during 1999 is not expected to translate into higher operating profits
when compared with 1998 operating profits. The Company expects lower gross
profit margins, as a percentage of sales, during 1999 than were recorded during
previous years due to the lower margins expected from the Orlando facility and
DMS.
The Company expects DMS' 1999 sales to fall approximately 6% below its 1998
sales levels. In response to this situation, the Company hired an experienced
point of purchase displays sales manager to increase DMS' sales efforts and to
achieve annual revenue growth approximating 10% to 15%. The impact of lower DMS
sales during 1999 and the expected higher costs associated with diversifying its
customer base will negatively impact the Company's overall 1999 operating
profits when compared with the Company's overall 1998 operating profits.
As previously discussed, the Company absorbed significant losses on certain
themed environment projects during the second quarter of 1999 due to poor
management of the estimating and manufacturing processes for those projects.
Accordingly, the Company replaced the Orlando-based manager with a seasoned
manager experienced in estimating and production techniques. However, the
Company anticipates gross profit margins on themed environments projects to fall
below the historical gross profit margins achieved, as a percentage of sales,
through the first quarter of the year 2000.
The planned expansion of the Company's Western Region created the need for a
significantly larger facility in the San Diego area. As previously indicated,
the Company moved into a new sales, production and storage facility in the San
Diego area during June 1999. Simultaneously, the Company invested in a larger
San Francisco facility as well as in additional personnel support for that
facility. The Company expects to continue making additional investments in
facilities, systems and personnel during 1999 within the Western Region. These
expected investments may negatively impact the Company's operating profits
during the balance of 1999 as compared with 1998 operating profits as management
continues to build the Western Region infrastructure necessary to expand its
market share in trade show exhibits and permanent/scenic displays.
As was the case during 1998, the Atlanta facility continues to produce exhibit
work transferred from other facilities but has not generated new sales
opportunities due to the inability to attract and retain experienced sales
people in that region.
The Company's trade show exhibit client base of Fortune 1000 companies, as well
as its Pacific Rim clients, continue to tightly manage their marketing budgets,
which may negatively impact the Company's historic custom trade show exhibit
margins.
Museum/productions sales volume during 1999 is expected to significantly exceed
1998 sales volume primarily due to successful cross-selling with existing trade
show exhibit clients. Additionally, museum/productions sales staff has extended
a significant amount of proposals which, if awarded, should positively impact
year 2000 revenues.
The Company's minority investments in Abex Display System's Inc. and Abex
Europe, Ltd. are not expected to generate returns on the Company's investment
through the balance of 1999 primarily due to sluggish sales of portable/modular
displays in both the United States and European markets. Similarly, Sparks
Europe, another minority investment made by the Company during February 1999, is
not expected to generate any significant return during the balance of 1999.
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The Company began using its new management information system during January
1999. As expected, the Company experienced inefficiencies and transitional
problems with respect to integrating the new system during the first six months
of 1999, including extended billing-collection turnaround time and the need for
additional temporary staff to assist in data processing. The billing slowdown
has negatively impacted 1999 cash flow, resulting in the Company's need to use
its' revolving credit facility. This situation is expected to continue through
the balance of 1999. Management believes many of the expected transitional
problems will be eliminated during the last six months of 1999. Replacement of
the existing management information system hardware and software with
state-of-the-art technology was necessary to position the organization to
effectively meet the changing environment of information processing among its
clients and suppliers as well as year 2000 issues. As part of the system
integration, management is re-engineering Company processes and procedures,
which has created additional inefficiencies, as employees learn the new
procedures and modify their operations methods.
Management is committed to growing the Company working capital financiang
requrements internally, while aggressively seeking acquisition possibilities
that meet synergistic and financial-structure requirements. By following this
strategy, the Company hopes to achieve its objective of increasing shareholder
value.
Year 2000 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
developer's 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
$1.3 million for hardware, software, and implementation of the new management
system during 1998. The Company expects to invest an additional $700,000 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.
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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 2001 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 $5.2 million of its $9.0 million revolving credit facility during the
first six months of 1999. The Company holds a 20% equity interest in a United
Kingdom based trade-show exhibit Company. Accordingly, the Company's financial
positions and results of operations will not be significantly affected should
foreign exchange rates fluctuate.
Environmental
The Company believes it is in compliance with federal, state and local
provisions regulating discharge of materials into the environment or otherwise
relating to protection of the environment. The Company has not been identified
by federal or state authorities as a potentially responsible party for
environmental clean-ups at any of its sites.
Litigation
The Company is a defendant and counterclaimant in various lawsuits that arise
out of, and are incidental to, the conduct of its business. These suits concern
labor-related matters. While it is not feasible to predict the outcome of all
pending suits and claims, the ultimate resolution of these matters should not
have a material effect upon the financial position of the Company.
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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 August 14, 1999
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