FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
-----------------
Commission File Number 1-7708
MARLTON TECHNOLOGIES, INC.
--------------------------
(Name of Registrant as specified in its charter)
Pennsylvania 22-1825970
----------------------------------------- ----------------------
(State of incorporation) (IRS Employer
Identification Number)
2828 Charter Road, Philadelphia, PA 19154
----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 676-6900
--------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class: Name of each exchange:
--------------------------------- -------------------------------
Common Stock, no par value American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Exchange Act: None
----
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter periods that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. X
-----
Check whether the Registrant is an accelerated filer (as defined in Rule 12b-2
of the Act). Yes No X
--- ----
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 30, 2002 was $3,438,000. As of March 12, 2003 there were
12,845,096 shares of Common Stock, no par value, of the Registrant outstanding.
As of June 30, 2002 there were 12,988,499 shares of Common Stock, no par value,
of the Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information required by Items 10, 11,
12 and 13 are hereby incorporated by reference to the Registrant's definitive
proxy statement to be filed by April 30, 2003.
Exhibit Index appears on Page 16
-----
Page 1 of 47
-----
PART I
ITEM 1. BUSINESS
--------
Business Development
Marlton Technologies, Inc. (the "Company") was incorporated in 1966 as a New
Jersey corporation. The Company's business was related to computerized
electronic telecommunication systems until 1988 when it sold substantially all
of its operating assets. The Company's current business is the custom design,
production and sale of exhibits and environments for trade shows, museums, theme
parks, themed interiors, arenas, corporate lobbies and retail stores for clients
in industry, government, entertainment and commercial establishments.
In August 1990, the Company acquired the business of a Philadelphia,
Pennsylvania designer and manufacturer of custom trade show exhibits, museum
interiors and graphics, and provider of trade show services. In late 1990, the
Company acquired the trade show exhibit division of a competitor and also
established a portable exhibits group. The Company subsequently formed
subsidiaries (i) during July 1991 in the Atlanta, Georgia area, (ii) during July
1992 in the San Diego, California area, and (iii) during December 1992 in the
Orlando, Florida area, in each case by acquiring the assets of trade show
exhibit design and manufacturing companies. During April 1996, the Company
acquired an Orlando, Florida producer of business theater, theme park scenery,
themed interiors, theatrical scenery and special effects. In December 1997, the
Company acquired DMS Store Fixtures ("DMS") in King of Prussia, Pennsylvania,
which was relocated to the Company's Philadelphia, Pennsylvania location in
March 2000. DMS supplies custom made fixtures and displays to national
retailers, department stores and consumer products manufacturers. In April 1998,
the Company acquired a San Francisco, California area producer of exhibit
properties for industrial and corporate theater events. In 1999, as part of a
nationwide branding and marketing strategy, all of the Company's operating
subsidiaries except DMS began doing business under the name Sparks Exhibits &
Environments (collectively "Sparks"). Currently, all of the Company's operating
revenues are derived from Sparks and DMS.
In February 1998, the Company acquired a 25% interest in Abex Display Systems,
Inc. ("Abex"), a portable/modular trade show exhibit manufacturer based in Los
Angeles, California. In February 1999, the Company acquired a 25% equity
interest in an Amsterdam, Netherlands area trade show exhibit design and
manufacturing company, which simultaneously changed its name to Sparks Europe,
B.V. ("Sparks Europe").
In November 2001, the Company was merged into a Pennsylvania corporation to
change the Company's state of incorporation from New Jersey to Pennsylvania.
On February 21, 2003, the Company announced that it had entered into a merger
agreement with Redwood Acquisition Corp. ("Redwood"). Redwood is controlled by
four members of the Company's executive management, who are stockholders and
directors of the Company, and certain other of the Company's shareholders and
employees. If the merger is completed, shareholders of the Company, other than
the shareholders included in the Redwood group, will receive $.30 in cash for
each outstanding share of the Company's common stock. The members of the Redwood
group will own Marlton's business if the merger is completed. The completion of
the merger is subject to specified conditions, including the approval of the
Company's shareholders at a special meeting of shareholders following a
distribution of a proxy statement. Members of the Redwood group hold
approximately 50% of the Company's common stock.
Business Description
Products and Services
The Company is engaged in the custom design, production and sale of exhibits and
environments for trade shows, retail stores, theme parks, museums, arenas,
executive briefing centers and corporate events. Clients include industry,
government, entertainment and commercial establishments. The Company manages
custom trade show projects from concept through final construction, employing
sophisticated graphics and exhibit designers and computer-aided design software
and hardware. In-house facilities provide a wide range of computerized design
and production of graphics. Electronics and audiovisual capabilities include
on-staff electronic specialists and vendor relationships which provide
multi-media equipment and programs, interactive program production and
customized applications. The Company provides full service trade show exhibit
services, including coordination, refurbishing,
2
shipping, storage and marketing literature distribution. Many clients are
Fortune 1000 firms, who typically contract for custom trade show exhibit
projects costing in excess of $200,000. Additionally, a majority of these
clients store their trade show exhibits at a Company facility, where ongoing
refurbishing and coordination of clients' trade show schedules are provided. The
Company also represents domestic clients who desire to exhibit at international
trade shows. The Company designs such exhibits, and through Sparks Europe or an
international network of independent exhibit manufacturers, arranges for the
manufacture and delivery of trade show exhibits to the desired trade show. The
Company also designs and manufactures trade show exhibits for a number of United
States subsidiaries of foreign corporations for use in domestic trade shows. In
addition, the Company produces sophisticated themed exhibits for educational and
entertainment venues such as museums and theme parks. Typically, the customer or
its design firm prepares the design which the Company fabricates using
carpentry, sculpture, metal working and scenic artist skills. The Company also
supplies custom store fixtures, showcases and point of purchase displays for
retailers, having the expertise and capability to take a design from concept to
installation. Engineers and designers work with the customers to develop the
fixture design through computer aided design equipment. Engineering drawings are
then produced and provided to third-party manufacturers with whom the Company
has developed long-standing business relationships for the production of its
products. These manufacturers work closely with an experienced Company project
management team. Custom store fixture opportunities include outfitting new
retail stores and remodeling existing stores, such as specialty apparel chains,
department stores, specialty electronics stores and outlet stores. The Company
made no significant disbursements during any of the last three fiscal years for
research and development activities.
Marketing and Distribution
Sales by the Company to domestic customers for both domestic and international
use are solicited through internal sales and marketing groups. Purchase of
sophisticated exhibits and environments usually involves a substantial
expenditure by the customer, and significant expertise is required to properly
meet the customer's needs. Sales personnel are required to be knowledgeable with
respect to the design and manufacturing of sophisticated exhibits and
environments and to comply with internal profitability requirements. Sales are
typically made directly to the end user of the product or service. In addition
to the sales personnel, senior officers devote substantial attention to sales
and marketing activities.
Manufacturing and Raw Materials
The Company designs and manufactures custom trade show exhibits utilizing an
in-house staff of designers, carpenters, electricians and warehouse employees.
Specialty items such as studio production are subcontracted. The Company also
subcontracts to Sparks Europe and others the manufacture of exhibits for foreign
trade shows. The Company coordinates shipping, exhibit set-up and removal at the
customer's trade show and, in most cases, subsequently stores the exhibit for
the customer. For scenic projects, the Company employs scenic carpenters and
metal workers to fabricate scenery which is painted by skilled scenic artists.
The Company utilizes a network of manufacturers for the production of its store
fixture and display products. Raw materials for custom, scenic and portable
exhibits, store fixtures and displays, as well as subcontractors for specialty
work, have historically been available on commercially reasonable terms from
various vendors. Portable exhibit configurations, together with graphics, are
typically designed by the Company for a client and are purchased from Abex or
unrelated manufacturers for resale. Graphics may be produced internally or
subcontracted. Geographic distribution rights are typically granted by portable
exhibit manufacturers based on annual sales volume levels. The Company has
obtained such distribution rights in certain geographic areas from Abex, its
primary source of portable exhibits.
Seasonality of Business
Trade shows typically occur regularly throughout the year with the exception of
the third quarter when business to business trade shows are traditionally at a
low point. Trade show activities in specific industries, such as health care and
telecommunications, tend to be a function of seasonal show schedules within
those industries. The custom store fixture business tends to be slower during
the fourth and first quarters due to retailers' desires not to install or plan
new fixtures during their traditionally busy year-end season. The Company seeks
new clients and sales people with client bases in different industries to reduce
the effects of the slower sales periods. Additionally, the Company offers other
products and services, such as sales of scenic and themed exhibits,
portable/modular exhibits, and permanent exhibits which tend to be less seasonal
in nature, and in certain cases, manufacturing can be spread over longer periods
of time.
3
Working Capital
The Company's working capital requirements are fulfilled by funds generated
through operations and a revolving credit facility. Working capital requirements
are generally not affected by project size requirements or accelerated delivery
for major trade show exhibit, scenic and themed exhibit customers due to general
policies of progress billing on larger jobs. However, custom store fixtures are
generally produced upon receipt of purchase orders from large retailers, but are
held in inventory and are not billed to the customer until delivery. The Company
does not require continuous allotments of raw materials from suppliers and does
not generally provide extended payment terms to customers.
Significant Customers
One customer, J.C. Penney, accounted for 20% and 11% of the Company's
consolidated net sales in 2002 and 2001, respectively. The loss of this customer
would have a material adverse effect on the Company. No customer accounted for
over 10% of the Company's consolidated net sales in 2000.
Backlog
The backlog of orders at December 31, 2002 and 2001 was approximately $19
million and $13 million, respectively. The backlog increase is principally
attributable to a higher level of open orders for permanent and scenic displays
and for new customers. Generally, backlog of orders are recognized as sales
during the subsequent six month period. The current backlog relates primarily to
expected 2003 sales. The Company maintains a client base from which new orders
are continually generated, including refurbishing of existing trade show
exhibits stored in the Company's facilities.
Competition
The Company competes with numerous other companies offering similar products and
providing similar services on the basis of price, quality, performance,
financial resources, and client-support services. The custom trade show exhibit,
scenic and themed exhibit, permanent exhibit, retail store fixture and display,
and portable exhibits sales markets include a large number of national and
regional companies, some of which have substantially greater sales and resources
than the Company. In addition to its domestic manufacturing facilities, the
Company utilizes its national and international affiliations and relationships
to meet customers needs in other locales. Due to the lack of specific public
information, the Company's competitive position is difficult to ascertain.
Environmental Protection
The Company's compliance with federal, state and local provisions regulating
discharge of materials into the environment or otherwise relating to the
protection of the environment has not had, and is not expected to have, a
material adverse effect upon its capital expenditures, earnings and competitive
position.
Employees
The total number of persons employed by the Company is approximately 265 of
which approximately 260 are full-time employees. The Philadelphia, Pennsylvania,
operations have a three-year labor contract expiring June 30, 2004, and a
three-year labor contract expiring December 31, 2004, covering approximately 50
production and fulfillment employees.
Web Site Address
The Company's web site address is www.sparksonline.com.
4
ITEM 2. PROPERTIES
----------
The Company currently leases three primary facilities as follows:
Location Square Footage Purpose
-------- -------------- -------
Philadelphia, PA 250,000 Office, showroom, warehouse & manufacturing
El Cajon, CA 150,000 Office, showroom, warehouse & manufacturing
Austell, GA 81,000 Office, showroom, warehouse & manufacturing
--------
481,000
========
The Company's subsidiaries also have sales, design and project management
offices in the Orlando, Florida, San Francisco, California, Los Angeles,
California and Chicago, Illinois metropolitan areas. The Company's office,
showroom, warehouse and manufacturing facilities were all in good condition and
adequate for 2002, based on normal five-day operations, and are anticipated to
be adequate for operations in 2003, including any foreseeable internal growth.
The Company has subleased 25,000 square feet of its El Cajon, California
facility for the remainder of its lease term.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company from time to time is a defendant and counterclaimant in various
lawsuits that arise out of, and are incidental to, the conduct of its business.
The resolution of pending legal matters should not have a material adverse
effect upon the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
5
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The following table shows the high and low sales prices of the Common Stock, no
par value per share, of the Company on the American Stock Exchange:
2002 2001
---- ----
Quarter High Low High Low
------- ---- --- ---- ---
1 $.58 $.36 $.88 $.50
2 .65 .44 .60 .40
3 .46 .20 .65 .35
4 .40 .12 .54 .35
No dividends were paid during the past two fiscal years. The Company currently
intends to employ all available funds in the business. Future dividend policy
will be determined in accordance with the financial requirements of the
business. However, the Company's bank loan agreement provides that the Company
may not pay dividends to its shareholders without the bank's prior consent.
As of March 12, 2003, there were 969 holders of record of the Company's Common
Stock.
In November 2001, 5,300,000 shares of Common Stock and warrants to purchase
5,300,000 shares of Common Stock at an exercise price of $.50 per share were
issued for $2,650,000 to four individuals in a private investment transaction,
as described in the Company's September 27, 2001 Proxy Statement. On the date of
issuance, shares of the Company's Common Stock had a market value of $.40 per
share. In addition 265,070 shares were contributed in 2001 to the Company's
401(k) plan or awarded to employees and directors of the Company without receipt
of any proceeds by the Company. No underwriter was employed in any of these
transactions. The private investment was an isolated transaction involving
sophisticated parties and was exempt from registration under Section 4(2) and
Rule 506 of Regulation D promulgated thereunder. The sales to employees and
directors were exempt from registration under Section 4(2) or Rule 701 of the
Securities Act of 1933, as amended.
Equity Compensation Plan Information as of December 31, 2002
------------------------------------------------------------
Number of securities to Weighted-average exercise Number of securities
be issued upon exercise price of outstanding remaining available for
of outstanding options, options, warrants and rights future issuance under
Plan category warrants and rights under compensation plans equity compensation plans
------------- --------------------------- ----------------------------- ---------------------------
Equity Compensation
plans approved by
security holders 1,815,573 $0.76 373,758(1)
Equity Compensation
plans not approved
by security holders 276,272 $2.81 675,000(2)
--------- ----- ---------
Total 2,091,845 $1.03 1,048,758
========= ===== =========
1. The Company's 2001 Equity Incentive Plan provides for the issuance to
employees, directors and consultants of stock options or restricted shares for
up to an aggregate of 2,000,000 shares of Common Stock, 373,758 of which remain
available for future issuance.
2. The Company's 2000 Equity Incentive Plan provides for the issuance to
employees, outside directors and consultants of stock options, stock
appreciation rights and/or stock units for up to an aggregate of 735,000 shares
of Common Stock, 675,000 of which remain available for future issuance. Other
options have been issued to employees as an incentive to accept employment with
the Company in an amount not in excess of 5% of the Company's outstanding shares
of Common Stock.
For additional information, see Note 13 to consolidated financial statements.
6
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
SELECTED FINANCIAL DATA
For the years ended December 31
(in thousands except per share amounts)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
TOTAL ASSETS $25,609 $49,442 $63,508 $60,319 $62,022
LONG-TERM OBLIGATIONS 4,000 6,635 16,376 11,157 11,744
WORKING CAPITAL 3,461 6,872 15,370 11,151 11,030
STOCKHOLDERS' EQUITY 9,342 29,176 27,906 28,811 27,645
OPERATIONS:
Net sales 71,182 76,972 92,533 94,584 91,134
Operating profit (loss) (1,132) (115)(3) 60 3,053 5,315
Net income (loss) before change in
accounting principle (7,414)(1) $(1,136)(3) $(1,106) $809(4) $2,821
Net income (loss) after change in
accounting principle (19,799)(2) $(1,136)(3) $(1,106) $809(4) $2,821
BASIC NET INCOME (LOSS)
PER COMMON SHARE BEFORE
CHANGE IN ACCOUNTING PRINCIPLE (5) $(.57) $(.14) $(.15) $.11 $.40
DILUTED NET INCOME (LOSS) PER
COMMON SHARE BEFORE CHANGE IN
ACCOUNTING PRINCIPLE (6) $(.57) $(.14) $(.15) $.10 $.35
BASIC NET INCOME (LOSS) PER COMMON SHARE
AFTER CHANGE IN ACCOUNTING PRINCIPLE (5) $(1.52) $(.14) $(.15) $.11 $.40
DILUTED NET INCOME (LOSS) PER COMMON SHARE
AFTER CHANGE IN ACCOUNTING PRINCIPLE (6) $(1.52) $(.14) $(.15) $.10 $.35
CASH DIVIDENDS -0- -0- -0- -0- -0-
1. Includes a $1.2 million write-down in the Company's investment in an
affiliate, and $5.4 million for a valuation allowance for deferred income
taxes.
2. Includes a $12.4 million impairment loss (net of a $3.5 million income tax
benefit) for a change in accounting principle (adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets").
3. Includes an inventory provision of $0.7 million ($0.5 million after income
taxes) for a customer that filed for Chapter 11, and relocation costs and
operating losses of $0.6 million ($0.4 million after income taxes) for the
Company's Orlando, Florida manufacturing operations.
4. Includes an impairment loss of $465,000 ($279,000 after income taxes) for a
write-down of the Company's investment in Abex Europe.
5. Basic per common shares amounts are computed using the weighted average
number of common shares outstanding during the year.
6. Diluted per common share amounts are computed using the weighted average
number of common shares outstanding during the year and dilutive potential
common shares. Dilutive potential common shares consist of stock options
and stock warrants, calculated using the treasury stock method.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
GENERAL OVERVIEW
The Company's business is the custom design, production and sale of exhibits and
environments for trade shows, museums, theme parks, themed interiors, arenas,
corporate lobbies and retail stores for clients in industry, government,
entertainment and commercial establishments.
RESULTS OF OPERATIONS
2002 As Compared With 2001
Net Sales
---------
(in thousands)
Revenue Sources 2002 2001
--------------- ---- ----
Trade show exhibits $44,711 $ 49,992
Permanent and scenic displays 26,471 26,980
------- --------
Total $71,182 $ 76,972
======= ========
Total net sales of $71.2 million for 2002 decreased 8% from total net sales for
2001. Sales of trade show exhibits and related services decreased 11% primarily
due to the loss of two trade show exhibit clients and generally weak economic
conditions. Sales of permanent and scenic displays decreased 2%, which was the
net result of lower store fixtures sales partially offset by higher permanent
museum display sales.
Operating Profit
----------------
Gross profit, as a percentage of net sales, decreased to 19.9% in 2002 as
compared with 22.2% in 2001. This decrease was principally attributable to lower
gross profit margins for store fixtures and to shifts in sales mix to lower
margin sales categories. The DMS store fixtures business had an unfavorable
impact on the Company's gross profit in 2002. However, while there can be no
assurances, the decrease in gross profit margin is not expected to continue into
2003.
Selling expenses of $8.5 million decreased to 11.9% of net sales in 2002 from
$9.8 million, or 12.7% of net sales in 2001. This decrease was largely due to
higher permanent museum exhibit sales, which are subject to lower sales
commission expense, and to lower commission expense for store fixtures sales.
Administrative and general expenses were reduced to $6.8 million in 2002 from
$7.4 million in 2001. This decrease was primarily due to the adoption of a new
accounting principle discussed below, which eliminated goodwill amortization in
2002. Goodwill amortization in 2001 was $0.8 million.
The Company reported an operating loss of $1.1 million for 2002 as compared with
an operating loss of $0.1 million for 2001. The increase in operating loss was
principally attributable to lower sales and the lower gross profit percentage in
2002.
The Company's DMS Store Fixtures business unit generated significantly lower
operating profit (loss) in 2002 as compared with 2001. Based on these results
and projections for 2003, an impairment loss of $176,000, included as a
component of the operating loss, was recognized for the net book value of
remaining long-term assets for this business unit.
8
Other Income (Expense)
----------------------
Interest expense decreased to $0.4 million in 2002 from $1.2 million in 2001 as
a result of lower borrowings and lower interest rates.
In the first quarter of 2002, management determined that the Company's
investment in a portable tradeshow exhibit manufacturer was not recoverable,
which resulted in an impairment loss of $1.2 million from investments in
affiliates. A loss of $0.3 million was recognized in 2001 for a write-down of
the Company's investment in its Sparks Europe affiliate.
Provision for (benefit from) income taxes
-----------------------------------------
The Company established a valuation allowance of $5.4 million for deferred
income tax assets in the fourth quarter of 2002, principally related to a
deferred income tax benefit in connection with the write off of goodwill
recorded in the first quarter of 2002.
The Company also established a valuation allowance for the income tax benefit
from the $1.2 million write down of investments in affiliates recorded in the
first quarter of 2002 because this capital loss is not expected to be offset by
capital gains within the required statutory period. The provision for income
taxes recorded in the first quarter of 2002 also included a valuation allowance
of $191,000 related to a 1999 capital loss incurred in connection with the
Company's investment in a United Kingdom affiliate.
Cumulative effect of change in accounting principle
---------------------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial of Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets" (SFAS 142), which supercedes APB No. 17 "Intangible Assets".
SFAS 142 requires that goodwill no longer be amortized to earnings, but instead
be reviewed for impairment. The Company adopted SFAS 142 effective January 1,
2002. This new accounting standard requires a two-step test for operating units
having unamortized goodwill balances. The first step requires a comparison of
the book value of the net assets to the fair value of the respective operating
unit. If the fair value is determined to be less than the book value, a second
step is required to determine the impairment. This second step includes
evaluation of other intangible assets, and any shortfall of the adjusted book
value below fair value determines the amount of the goodwill impairment.
Goodwill amortization expense was $0.8 million in 2001 and in 2000. The adoption
of SFAS 142 reduced goodwill by $15.9 million and net income by $12.4 million
(net of a $3.5 million income tax benefit) in the first quarter of 2002,
identified as a cumulative effect of a change in accounting principle. This
impairment charge related to goodwill recorded in connection with the December
31, 1997 acquisition of DMS Store Fixtures, L.P. This charge differs from the
previous accounting standard method, which was based on undiscounted cash flows,
because the new method is based on fair value measurement estimates as of the
measurement date.
Backlog
-------
The backlog of orders at December 31, 2002 and 2001 was approximately $19
million and $13 million, respectively. The backlog increase is principally
attributable to a higher level of open orders for permanent and scenic displays
and new customers. Generally, backlog of orders are recognized as sales during
the subsequent six month period. The current backlog relates primarily to
expected 2003 sales. The Company maintains a client base from which new orders
are continually generated, including refurbishing of existing trade show
exhibits stored in the Company's facilities.
9
2001 As Compared With 2000
Net Sales
---------
(in thousands)
Revenue Sources 2001 2000
--------------- ---- ----
Trade show exhibits $ 49,992 $ 56,182
Permanent and scenic displays 26,980 36,351
-------- --------
Total $ 76,972 $ 92,533
======== ========
Total net sales decreased $15.6 million, or 17%, in 2001 from the total net
sales in 2000. The decrease was comprised of a $6.2 million, or 11%, decrease in
sales of trade show exhibits and a $9.4 million, or 26%, decrease in sales of
permanent and scenic displays. The decrease in sales of trade show exhibits was
principally attributable to the loss of a customer's international tradeshow
exhibit program and to reductions in many customers' trade show marketing
budgets in response to a slower economy. In addition, the events of September
11, 2001 led to many convention and trade show cancellations, which reduced
fourth quarter 2001 sales volume. The decrease in sales of permanent and scenic
displays was primarily due to lower sales of permanent themed displays
previously manufactured at the Company's Orlando, Florida operation. This
manufacturing operation was closed and consolidated with the Company's Atlanta,
Georgia production facility in the second quarter of 2001.
Operating Profit
----------------
Gross profit, as a percentage of net sales, of 22.2% in 2001 was essentially
unchanged from 22% in 2000. Management took several actions to reduce fixed
manufacturing overhead costs in 2001, which mitigated the impact of lower sales
volume. One such action was the consolidation of the Company's Southeastern
manufacturing operations.
Selling expense decreased $1.3 million to $9.8 million in 2001 from $11 million
in 2000 due in large part to lower sales commissions resulting from lower sales
volume. As a percentage of net sales, selling expenses increased to 12.7% in
2001 from 11.9% in 2000. This percentage increase was largely the result of
certain fixed selling expenses such as sales office facility expenses as
compared with the lower sales volume in 2001. The Company continued to invest in
sales office facilities in Orlando, Florida and in the San Francisco and Los
Angeles, California areas.
Administrative and general expenses were reduced by $1.8 million to $7.4 million
in 2001 as compared with $9.2 in 2000. This decrease was attributable to several
factors, including bad debt provision recorded in 2000, the mutual termination
of certain employment agreements in 2001, and staff and cost reduction
initiatives implemented by management in 2001.
The Company had an operating loss of $115,000 for 2001 as compared with an
operating profit of $60,000 for 2000. The 17% sales decrease, the closing of the
Orlando, Florida manufacturing operation and a $0.7 million inventory reserve
for a customer that filed for Chapter 11 reduced operating profit in 2001. A
$1.4 million bad debt provision and a $0.6 million inventory reserve reduced
operating profit in 2000.
Other Income (Expense)
----------------------
Interest expense decreased by $213,000 in 2001 as compared with 2000 as a result
of lower borrowings and lower interest rates.
A loss of $397,000 in 2001 from investments in affiliates was principally
attributable to losses recognized for the Company's investment in a portable
exhibit manufacturer.
Income Taxes
------------
The benefit from income taxes, as a percentage of pre-tax losses, was 29% in
2001 as compared with 19% in 2000. This increase was due in large part to
non-taxable income in 2001.
10
Backlog
-------
The Company's backlog of orders was approximately $13 million at December 31,
2001 as compared with $18 million at December 31, 2000. This decrease was
largely due to a lower level of open orders for permanent and scenic displays.
LIQUIDITY AND CAPITAL RESOURCES
On May 16, 2002, the Company amended its Revolving Credit and Security Agreement
(the "Facility") with its bank to change from an Earnings Before Interest,
Taxes, Depreciation and Amortization ("EBITDA") basis to an asset-based
arrangement. The Facility provides for borrowings based on a percentage of
qualified accounts receivable and a percentage of up to $6.7 million of
qualified inventories. The Facility is collateralized by all the Company's
assets and bears interest at rates based primarily on the London Inter Bank
Offering Rate (LIBOR) plus 3.25%. The Facility includes certain financial
covenants requiring a minimum tangible net worth and maintenance of certain
financial ratios and restricts the Company's ability to pay dividends.
Borrowings under this Facility were $4 million at December 31, 2002. The
Company's borrowing capacity under the Facility was $7.5 million at December 31,
2002.
The Company was not in compliance with the minimum tangible net worth covenant
of the Facility at December 31, 2002 primarily as a result of the valuation
allowance for deferred income taxes. To cure this non-compliance, the Facility
was amended on March 11, 2003 to reduce the minimum tangible net worth covenant
from $7.8 million to $6 million, commencing with the fiscal quarter ending
December 31, 2002. Based on the adjusted covenant requirement, it is probably
that the Company will meet its minimum tangible net worth and other covenants
during 2003. This amendment also reduced the maximum borrowing amount from $12
million to $8 million and changed the expiration date from January 1, 2004 to
May 16, 2004.
The company's working capital decreased to $3.5 million at December 31, 2002
from $6.9 million at December 31, 2001 primarily due to lower accounts
receivable for the Company's store fixtures business. The Company's DMS Store
Fixtures business had an unfavorable impact on cash flows and the results of
operations during 2002. Available cash and $3.7 million of cash generated from
operations was used to reduce long-term debt by $2.6 million, and for capital
expenditures of $1.3 million.
The Company has lease commitments for certain facilities under non-cancelable
operating leases. Timing of future lease commitments as well as maturities of
long-term debt are as follows:
(in thousands)
2003 2004 2005 2006 2007 After 2007
---- ---- ---- ---- ---- ----------
Lease commitments $2,130 $1,968 $1,916 $1,804 $1,027 $9,543
Debt maturities 128 4,000 -- -- -- --
The Company leases a facility from a partnership controlled by two shareholders
of the Company. This lease, which contains a renewal option on May 14, 2009 and
expires on May 14, 2019, requires minimum annual rent of $771,000 (included in
the table above) at a fixed rate for the first 10 years, and the Company is
responsible for taxes, insurance and other operating expenses.
In connection with the DMS Store Fixtures acquisition, employment agreements
were made with two shareholders of the Company, which provided for guaranteed
minimum annual payments of approximately $0.5 million. These agreements were
mutually terminated in January 2001 eliminating the guaranteed minimum payments
after February 2, 2001, which reduced administrative and general expenses by
approximately $0.5 million in the first quarter of 2001.
On November 20, 2001, the Company issued 5,300,000 shares of its common stock
and warrants expiring on November 19, 2011 to purchase 5,300,000 shares of its
common stock for an aggregate of $2,650,000. This transaction was approved by
the Company's shareholders at the Annual Meeting of Shareholders held on
November 7, 2001. Costs incurred in connection with this transaction were
$378,000.
11
On February 21, 2003, the Company announced that it had entered into a merger
agreement with Redwood Acquisition Corp. ("Redwood"). Redwood is controlled by
four members of the Company's executive management, who are stockholders and
directors of the Company, and certain other of the Company's shareholders and
employees. If the merger is completed, shareholders of the Company, other than
the shareholders included in the Redwood group, will receive $.30 in cash for
each outstanding share of the Company's common stock. The members of the Redwood
group will own Marlton's business if the merger is completed. The completion of
the merger is subject to specified conditions, including the approval of the
Company's shareholders at a special meeting of shareholders following a
distribution of a proxy statement. Members of the Redwood group hold
approximately 50% of the Company's common stock.
OUTLOOK
The Company expects sales and margins of trade show exhibits and sales of
permanent and scenic displays in 2003 to remain at approximately the same level
as in 2002. In view of current economic conditions, the Company's trade show
exhibit client base of Fortune 1000 companies is expected to closely manage
their marketing budgets, which would inhibit the Company's trade show exhibit
sales. The Company continues to explore new sales opportunities while pursuing
operating efficiency improvements and cost reduction initiatives to mitigate the
impact of flat sales volume.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 145 "Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
as of April 2002" ("SFAS 145"). SFAS 145 among other things, rescinds various
pronouncements regarding early extinguishment of debt. It allows extraordinary
accounting treatment for early extinguishment of debt only when the provisions
of Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", are
met. SFAS 145 provisions regarding early extinguishment of debt are generally
effective for fiscal years beginning after May 15, 2002. The adoption of SFAS
145 is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities" ("SFAS 146"). SFAS 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs associated with exit and
disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
(EITF) has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. The Company
believes this Statement will not materially affect the Company's financial
position, results of operations or cash flows.
In November 2002, the FASB issued Financial Accounting Standards Board
Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantors, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"). FIN 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation it
assumes under the guarantee. Guarantors will also be required to meet expanded
disclosure obligations. The initial recognition and measurement provisions of
FIN 45 are effective for guarantees issued or modified after December 31, 2002.
The disclosure requirements are effective for the Company's 2002 financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS No. 123" ("SFAS
148"). SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee and director
compensation. In addition, this statement amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. SFAS 148 is effective for
the Company's 2002 financial statements. The Company adopted the disclosure-only
provision of SFAS 123.
12
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The disclosure requirements of FIN 46 are effective
for financial statements issued after January 31, 2003. The initial recognition
provisions of FIN 46 are applicable immediately to new variable interests in
variable interest entities created after January 31, 2003. For a variable
interest in a variable interest entity created before February 1, 2003, the
initial recognition provisions of FIN 46 are to be implemented no later than the
beginning of the first interim or annual reporting period beginning after June
15, 2003. The Company will continue to evaluate the impact of FIN 46 on its
financial statements.
CRITICAL ACCOUNTING POLICIES
Financial statement preparation in conformity with generally accepted accounting
principles requires management to make assumptions and estimates that affect the
reported amounts of assets and liabilities. One such estimate is possible losses
in connection with financing accounts receivable. Management estimates these
possible losses based on a review of the financial condition and payment history
of specific customers having significant accounts receivable balances, and
establishes a general reserve for the remaining accounts receivable based on
historical bad debt experience.
Revenues on trade show exhibit sales, themed interiors, custom store fixtures
and point of purchase displays are recognized using the completed contract
method. The Company's contracts are typically less than three months in
duration. As a result, the Company's revenue recognition would not differ
materially if another method were used. Progress billings are generally made
throughout the production process. Progress billings which are unpaid at the
balance sheet date are not recognized in the financial statements as accounts
receivable. Progress billings which have been collected on or before the balance
sheet date are classified as customer deposits and are included in accrued
expenses and other current liabilities.
Measurement of goodwill and other intangible asset impairment involves
assumptions and estimates by management. The adoption of SFAS 142 requires
estimates of fair values for certain operating units. These estimates involve
discounted cash flow forecasts to determine the fair value of operating units
having unamortized goodwill balances.
The evaluation of deferred income tax assets also involves managements estimates
and judgment. Management considers several factors in this evaluation, including
trailing three year financial performance history and future forecasts of
operating income. A valuation allowance is established based on management's
estimates about the recoverability of deferred income tax assets.
Other significant accounting policies are also important to the understanding of
the Company's financial statements. These policies are discussed in Note 1 to
the consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. When used in this report, the
words "intends," "believes," "plans," "expects," "anticipates," "probable,"
"could" and similar words are used to identify these forward looking statements.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, there are certain important factors that could
cause the Company's actual results to differ materially from those included in
such forward-looking statements. Some of the important factors which could cause
actual results to differ materially from those projected include, but are not
limited to: the Company's ability to continue to identify and enter new markets
and expand existing business; continued availability of financing to provide
additional sources of funding for capital expenditures, working capital and
investments; the effects of competition on products and pricing; growth and
acceptance of new product lines through the Company's sales and marketing
programs; changes in material and labor prices from suppliers; changes in
customers' financial condition; the Company's ability to attract and retain
competent employees; the Company's ability to add and retain customers; changes
in sales mix; the Company's ability to integrate and upgrade technology;
uncertainties regarding accidents or litigation which may arise; the financial
impact of facilities consolidations; uncertainties about the impact of the war
in Iraq and the threat of future terrorist attacks on business travel and
related trade show attendance; and the effects of, and changes in the economy,
monetary and fiscal policies, laws and regulations, inflation and monetary
fluctuations as well as fluctuations in interest rates, both on a national and
international basis.
13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
Fluctuations in interest and foreign currency exchange rates do not
significantly affect the Company's financial position and results of operations.
The Company's revolving credit facility bears a floating rate of interest, based
on LIBOR rates plus 3.25%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements, together with the report of the Company's independent
accountants thereon, are presented under Item 15 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
------------------------------------------------
Not applicable.
14
PART III
Items 10, 11, 12 and 13 have been omitted from this report, in accordance with
General Instruction G (3). Such information is incorporated by reference from
the Company's definitive proxy statement to be filed with the SEC by April 30,
2003.
ITEM 14. CONTROLS AND PROCEDURES
-----------------------
(a) Evaluation of disclosure controls and procedures
The Company established a Disclosure Committee chaired by the
Company's Chief Financial Officer and comprised of managers
representing the Company's major areas, including financial
reporting and control, sales, operations and information
technology. This Committee carried out an evaluation of the
effectiveness and operation of the Company's disclosure controls
and procedures, and established ongoing procedures to monitor and
evaluate these controls and procedures in the future. Based upon
that evaluation, within the 90 days prior to the date of this
report, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures
are effective in alerting them on a timely basis to material
information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic
SEC filings.
(b) Changes in internal controls
There were no significant changes in the Company's internal
controls or in other factors that would significantly affect
these controls subsequent to the date of their evaluation.
15
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
Exhibit Page
------------
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Report of Independent Accountants. 23
-------------
Consolidated Statements of Operations for the years ended December 31, 2002,
2001 and 2000. 24
-------------
Consolidated Balance Sheets, December 31, 2002 and 2001. 25
-------------
Consolidated Statements of Changes in Stockholders Equity for the years ended
December 31, 2002, 2001 and 2000. 26
-------------
Consolidated Statements of Cash Flows for the years ended December 31, 2002,
2001 and 2000. 27
-------------
Notes to Consolidated Financial Statements. 28
-------------
(2) Financial Statements Schedule: Valuation and Qualifying Accounts and Reserves: 41
-------------
(3) Exhibits:
(2)(a) Agreement and Plan of Merger By and Between Redwood
Acquisition Corp. and the Company dated as of February 20,
2003 (Incorporated by reference to the Company's February
26, 2003 Preliminary Proxy Statement, filed with the
Commission).
(2)(b) Agreement and Plan of Merger of the Company (Incorporated
by reference to the Company's Proxy Statement dated
September 27, 2001, filed with the Commission).
(3)(i) Articles of Incorporation of the Company (Incorporated by
reference to the Company's Proxy Statement dated September
27, 2001, filed with the Commission).
3(ii) Amended and Restated By-laws of the Company (Incorporated
by reference to Exhibit 3(ii)(a) of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002, filed with the Commission).
10(a) Amended and Restated Employment Agreement dated November
20, 2001 between the Company and Robert B. Ginsburg
(Incorporated by reference to the Company's September 27,
2001 Proxy Statement, filed with the Commission).*
10(b) Employment Agreement dated 11/20/01 between the Company and
Jeffrey K. Harrow (Incorporated by reference to the
Company's September 27, 2001 Proxy Statement, filed with
the Commission).*
10(c) Employment Agreement dated 11/20/01 between the Company and
Scott Tarte (Incorporated by reference to the Company's
September 27, 2001 Proxy Statement, filed with the
Commission).*
10(d) Subscription Agreement dated 8/23/01 among Scott Tarte,
Jeffrey K. Harrow and the Company (Incorporated by
reference to the Company's September 27, 2001 Proxy
Statement, filed with the Commission).
16
10(e) Subscription Agreement dated 8/23/01 among Robert B.
Ginsburg, Alan I. Goldberg and the Company (Incorporated by
reference to the Company's September 27, 2001 Proxy
Statement, filed with the Commission).
10(f) Form of Warrants issued by the Company to Jeffrey K.
Harrow, Scott Tarte, Robert B. Ginsburg and Alan I.
Goldberg on 11/20/01 (Incorporated by reference to the
Company's September 27, 2001 Proxy Statement, filed with
the Commission). Schedule of grants (Incorporated by
reference to Exhibit 10(f) to the Company's Annual Report
on Form 10-K for the year ended December 31, 2001, filed
with the Commission).
10(g) Stockholders' Agreement date 11/20/01 among Jeffrey K.
Harrow, Scott Tarte, Robert B. Ginsburg and the Company
(Incorporated by reference to the Company's September 27,
2001 Proxy Statement, filed with the Commission).
10(h) Registration Rights Agreement dated 11/20/01 among Jeffrey
K. Harrow, Scott Tarte, Robert B. Ginsburg, Alan I.
Goldberg and the Company (Incorporated by reference to the
Company's September 27, 2001 Proxy Statement, filed with
the Commission).
10(i) Amended Agreement of Employment, dated December 11, 1992,
between the Company and Alan I. Goldberg (Incorporated by
reference to Exhibit 10(b) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992, filed
with the Commission).*
10(j) Letter Agreement dated January 2, 1998 to Amended
Employment Agreement with Alan I. Goldberg (Incorporated by
reference to Exhibit 7(2) to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998, filed
with the Commission).*
10(k) Letter Agreement dated 11/20/01 to Amended Employment
Agreement with Alan I. Goldberg. (Incorporated by reference
to Exhibit 10(k) to the Company's Annual Report on Form
10-K for the year ended December 31, 2001, filed with the
Commission).*
10(l) Employment Agreement dated November 24, 1999 with Stephen
P. Rolf (Incorporated by reference to Exhibit 10(l) to the
Company Annual Report of Form 10-K for the year ended
December 31, 1999, filed with the Commission).*
10(m) Option Agreement dated January 10, 2000 with Stephen P.
Rolf (Incorporated by reference to Exhibit 10(x) to the
Company Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000, filed with the Commission).*
10(n) Option Cancellation Agreement dated November 20, 2001 among
Robert B. Ginsburg, Alan I. Goldberg and the Company
(Incorporated by reference to Exhibit 10(n) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001, filed with the Commission).*
10(o) Option Agreements with Outside Directors (Incorporated by
reference to Company Proxy Statement dated April 30, 1999,
filed with the Commission).*
10(p) Option Agreements dated August 7, 2000 with Outside
Directors (Incorporated by reference to Exhibit 10(x) to
the Company Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, filed with the Commission).*
10(q) Option Agreements dated March 1, 2002 with Outside
Directors (Incorporated by reference to Exhibit 10(e) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, filed with the Commission).*
17
10(r) 2000 Equity Incentive Plan (Incorporated by reference to
Exhibit 10(n) to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001, filed with the
Commission).*
10(s) 2001 Equity Incentive Plan (Incorporated by reference to
Exhibit 10(ee) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001, filed with
the Commission).*
10(t) Lease for Premises located at 2828 Charter Road,
Philadelphia, PA dated May 14, 1999 (Incorporated by
reference to Exhibit 10(f) to the Company Annual Report on
Form 10-K for the year ended December 31, 1999, filed with
the Commission).
10(u) Amendment to Lease 2828 Charter Road, Philadelphia, PA
dated February 25, 2000 (Incorporated by reference to
Exhibit 10(g) to the Company Annual Report on Form 10-K for
the year ended December 31, 1999, filed with the
Commission).
10(v) Lease for Premises located at 8125 Troon Circle, Austell,
GA 30001 (Incorporated by reference to Exhibit 10(i) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, filed with the Commission).
10(w) Lease Agreement dated June 29, 1998 between Gillespie Field
Partners, LLC and Sparks Exhibits, Ltd. (Incorporated by
reference to Exhibit 7(2) to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998, filed
with the Commission).
10(x) Second Amended and Restated Revolving Credit and Security
Agreement dated as of May 16, 2002 with Wachovia Bank, NA,
(Incorporated by reference to Exhibit 10(bb) to the
Company`s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002, filed with the Commission).
10(y) Amendment to Second Amended and Restated Revolving Credit
and Security Agreement dated March 11, 2003 with
Wachovia Bank, NA 42
-------------
10(z) Option Agreement dated June 3, 2002 with Robert B. Ginsburg
(Incorporated by reference to Exhibit 10(cc) to the
Company`s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002, filed with the Commission).*
10(aa) Option Agreement dated June 3, 2002 with Alan I. Goldberg
(Incorporated by reference to Exhibit 10(dd) to the
Company`s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002, filed with the Commission).*
10(bb) Option Agreement dated October 23, 2002 with Washburn
Oberwager (Incorporated by reference to Exhibit 10ee) to
the Company`s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002, filed with the Commission).*
21 Subsidiaries of the Company (Incorporated by reference to
Exhibit 21 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, filed with the Commission).
23 Consent of PricewaterhouseCoopers LLP. 47
-------------
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Company during the last quarter of
the period covered by this report on Form 10-K.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MARLTON TECHNOLOGIES, INC.
By: /s/ Robert B. Ginsburg
--------------------------------
Robert B. Ginsburg, President
By: /s/ Stephen P. Rolf
----------------------------------------
Stephen P. Rolf, Chief Financial Officer
Dated: March 28, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Signature Title Date
/s/ Jeffrey K. Harrow Chairman of the March 28, 2003
--------------------- Board of Directors
Jeffrey K. Harrow
/s/ Scott J. Tarte Vice Chairman of the March 28, 2003
------------------ Board of Directors
Scott J. Tarte
/s/ A. J. Agarwal Director March 28, 2003
-----------------
A. J. Agarwal
/s/ Robert B. Ginsburg Director March 28, 2003
----------------------
Robert B. Ginsburg
/s/ Alan I. Goldberg Director March 28, 2003
--------------------
Alan I. Goldberg
/s/ Jerome Goodman Director March 28, 2003
------------------
Jerome Goodman
/s/ Washburn Oberwager Director March 28, 2003
----------------------
Washburn Oberwager
/s/ Richard Vague Director March 28, 2003
-----------------
Richard Vague
19
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Marlton Technologies, Inc. (the
"Company") on Form 10-K for the period ending December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), Robert
B. Ginsburg, Chief Executive Officer of the Company, and Stephen P. Rolf, Chief
Financial Officer of the Company, each certify, pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, based on their
knowledge:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of
operations of the Company.
/s/ Robert B. Ginsburg /s/ Stephen P. Rolf
----------------------- -------------------
Robert B. Ginsburg Stephen P. Rolf
Chief Executive Officer Chief Financial Officer
March 28, 2003 March 28, 2003
20
CERTIFICATION OF CHIEF EXECUTIVE OFFICER TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(1) I, Robert B. Ginsburg, certify that I have reviewed this annual
report on Form 10-K of Marlton Technologies, Inc.;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
(4) The registrants' other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
March 28, 2003
--------------
/s/ Robert B. Ginsburg
-------------------------------
Robert B. Ginsburg
Chief Executive Officer
21
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(1) I, Stephen P. Rolf, certify that I have reviewed this annual
report on Form 10-K of Marlton Technologies, Inc.;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
(4) The registrants' other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
March 28, 2003
--------------
/s/ Stephen P. Rolf
----------------------------
Stephen P. Rolf
Chief Financial Officer
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
and Board of Directors of
Marlton Technologies, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page 16, present fairly, in all material
respects, the financial position of Marlton Technologies, Inc. and its
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(a)(2) presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2, the Company adopted a new financial accounting standard
during 2002.
/s/ PricewaterhouseCoopers LLP
------------------------------
Philadelphia, Pennsylvania
March 21, 2003
23
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
(in thousands except per share amounts)
2002 2001 2000
-------- -------- --------
Net sales $ 71,182 $ 76,972 $ 92,533
Cost of sales 57,027 59,917 72,208
-------- -------- --------
Gross profit 14,155 17,055 20,325
-------- -------- --------
Selling expenses 8,491 9,761 11,048
Administrative and general expenses 6,796 7,409 9,217
-------- -------- --------
15,287 17,170 20,265
-------- -------- --------
Operating profit (loss) (1,132) (115) 60
-------- -------- --------
Other income (expense):
Interest and other income 42 134 91
Interest expense (382) (1,220) (1,433)
Loss from investment in affiliates (1,156) (397) (91)
-------- -------- --------
(1,496) (1,483) (1,433)
Net loss before income taxes and change
-------- -------- --------
in accounting principle (2,628) (1,598) (1,373)
Provision for (benefit from) income taxes 4,786 (462) (267)
-------- -------- --------
Net loss before change in accounting principle (7,414) (1,136) (1,106)
Cumulative effect of change in accounting
principle, net of tax benefit (12,385) - -
-------- -------- --------
Net loss after change in accounting principle $(19,799) $ (1,136) $ (1,106)
======== ======== ========
Net loss per common share before change
in accounting principle:
Basic $ (0.57) $ (0.14) $ (0.15)
======== ======== ========
Diluted $ (0.57) $ (0.14) $ (0.15)
======== ======== ========
Net loss per common share after change
in accounting principle:
Basic $ (1.52) $ (0.14) $ (0.15)
======== ======== ========
Diluted $ (1.52) $ (0.14) $ (0.15)
======== ======== ========
See notes to consolidated financial statements.
24
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands except share and per share amounts)
ASSETS 2002 2001
-------- --------
Current:
Cash and cash equivalents $ 880 $ 1,233
Accounts receivable, net of allowance of $309 and $502, respectively 8,083 10,646
Inventories 5,723 6,598
Prepaid and other current assets 1,042 1,247
Deferred income taxes - 779
-------- --------
Total current assets 15,728 20,503
Investment in affiliates 259 1,415
Deferred income taxes - 487
Property and equipment, net of accumulated depreciation 3,929 4,847
Rental assets, net of accumulated depreciation 2,535 2,422
Goodwill, net of accumulated amortization of $4,183 at December 31, 2001 2,714 18,599
Other assets, net of accumulated amortization of $1,349 and $1,063, respectively 211 392
Notes receivable 233 777
-------- --------
Total assets $ 25,609 $ 49,442
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 128 $ 124
Accounts payable 4,509 3,879
Accrued expenses and other current liabilities 7,630 9,628
-------- --------
Total current liabilities 12,267 13,631
Long-term liabilities:
Long-term debt, net of current portion 4,000 6,635
-------- --------
Total liabilities 16,267 20,266
-------- --------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.10 par - shares authorized
10,000,000; no shares issued or outstanding - -
Common stock, no par value - shares authorized 50,000,000; 12,850,096 issued
and outstanding at December 31, 2002; 12,993,499 issued and outstanding
at December 31, 2001 - -
Stock warrants 742 742
Additional paid-in capital 32,951 32,951
Accumulated deficit (24,204) (4,405)
-------- --------
9,489 29,288
Less cost of 148,403 treasury shares (147) (112)
-------- --------
Total stockholders' equity 9,342 29,176
-------- --------
Total liabilities and stockholders' equity $ 25,609 $ 49,442
======== ========
See notes to consolidated financial statements.
25
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 2002, 2001 and 2000
(in thousands except share amounts)
Common Stock Additional
----------------------------- Paid-in Stock
Shares Amount Capital Warrants
--------------- ---------- ------------ -----------
Balance, December 31, 1999 7,331,765 $ 733 $ 30,353 $ -
Issuance of shares for debt restructuring 37,210 4 96 -
Issuance of shares under compensation arrangements 59,454 6 95 -
Net loss - - - -
--------------- ---------- ------------ -----------
Balance, December 31, 2000 7,428,429 743 30,544 -
Issuance of shares under compensation arrangements 265,070 26 108 -
Issuance of shares for investment transaction 5,300,000 530 1,000 -
Issuance of stock warrants - - - 742
Change from $.10 par value to no par value Common Stock - (1,299) 1,299 -
Net loss - - - -
--------------- ---------- ------------ -----------
Balance, December 31, 2001 12,993,499 - 32,951 742
Repurchase of common stock (143,403) - - -
Net loss - - - -
--------------- ---------- ------------ -----------
Balance, December 31, 2002 12,850,096 $ - $ 32,951 $ 742
=============== ========== ============ ===========
Total
Accumulated Treasury Stockholders'
Deficit Stock Equity
--------------- ----------- --------------
Balance, December 31, 1999 $ (2,163) $ (112) $ 28,811
Issuance of shares for debt restructuring - - 100
Issuance of shares under compensation arrangements - - 101
Net loss (1,106) - (1,106)
--------------- ----------- --------------
Balance, December 31, 2000 (3,269) (112) 27,906
Issuance of shares under compensation arrangements - - 134
Issuance of shares for investment transaction - - 1,530
Issuance of stock warrants - - 742
Change from $.10 par value to no par value Common Stock - - -
Net loss (1,136) - (1,136)
--------------- ----------- --------------
Balance, December 31, 2001 (4,405) (112) 29,176
Repurchase of common stock - (35) (35)
Net loss (19,799) - (19,799)
--------------- ----------- --------------
Balance, December 31, 2002 $ (24,204) $ (147) $ 9,342
=============== =========== ==============
See notes to consolidated financial statements.
26
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31,
(in thousands)
2002 2001 2000
-------- -------- --------
Cash flows provided from operating activities:
Net loss $(19,799) $ (1,136) $ (1,106)
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 2,185 2,646 2,724
Equity in loss of affiliates 1,156 397 91
Net changes in deferred taxes 4,766 (562) (203)
Cumulative effect of change in accounting principle 12,385 - -
Property and equipment asset impairment 175 - -
Non-cash compensation and other operating items - 89 32
Change in assets and liabilities:
(Increase) decrease in accounts receivable, net 2,563 9,374 (4,505)
Decrease in inventories 875 2,320 2,384
(Increase) decrease in prepaid and other assets 205 1,748 (523)
(Increase) decrease in notes receivable 544 94 (154)
Increase (decrease) in accounts payable, accrued
expenses and other (1,368) (5,663) 1,732
-------- -------- --------
Net cash provided by (used in) operating activities 3,687 9,307 472
Cash flows from investing activities:
Guaranteed payments to sellers - (18) (261)
Capital expenditures (1,269) (1,653) (2,629)
-------- -------- --------
Net cash used for investing activities (1,269) (1,671) (2,890)
Cash flows from financing activities:
Proceeds from (payments for) revolving credit facility, net (2,500) (9,500) 14,373
Proceeds from issuance of stock, net of related costs - 2,272 -
Repayment of term and construction loans, net - - (11,557)
Payments for loan origination fees (105) (60) (432)
Payments for notes payable, sellers (33) (54) (53)
Proceeds from (payments for) promissory note, net (98) 190 -
Repurchase of common stock (35) - -
-------- -------- --------
Net cash provided by (used in) financing activities (2,771) (7,152) 2,331
Increase (decrease) in cash and cash equivalents (353) 484 (87)
Cash and cash equivalents - beginning of year 1,233 749 836
-------- -------- --------
Cash and cash equivalents - end of year $ 880 $ 1,233 $ 749
======== ======== ========
See notes to consolidated financial statements.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
------------------------------
Basis of Presentation
The consolidated financial statements include the accounts of Marlton
Technologies, Inc., its wholly-owned subsidiaries and the effects of minority
investments in non-consolidated businesses (the "Company"). Investments in
affiliates, representing the Company's 20% or more but less than 50% investments
are accounted for using the equity method. All inter-company accounts and
transactions are eliminated.
Activity included in the consolidated statements of operations consists
primarily of the custom design, production and sale of exhibits and environments
for trade shows, museums, theme parks, themed interiors, arenas, corporate
lobbies and retail stores for clients in industry, government, entertainment and
commercial establishments. Certain prior year amounts have been reclassified for
comparative purposes.
The Company operates in one segment.
Cash Equivalents
The Company considers all investments with an initial maturity of three months
or less to be cash equivalents. Temporary cash investments comprise principally
short-term government funds. At various times throughout the year the Company
maintains cash balances at banking institutions in excess of FDIC limits.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
include materials, labor and manufacturing overhead costs.
Long-Lived Assets
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the respective assets,
ranging primarily from 3 to 10 years. Assets and accumulated depreciation
accounts are reduced for the sale or other disposition of property, and the
resulting gain or loss is included in income. Rental assets, which include
manufactured and purchased exhibit components, are stated at cost. Depreciation
for rental assets is recorded on a straight-line basis over seven years.
Prior to January 1, 2002 the excess of cost over the fair value of net assets
acquired (goodwill) was amortized on a straight-line basis over periods ranging
from 5 to 30 years. After January 1, 2002, no amortization is recorded for these
assets (see Note 2).
Included in other assets are loan origination fees, which are amortized on a
straight-line basis over the term of the related debt agreement.
The Company's policy is to record an impairment loss against long-lived assets,
including investment in affiliates, property and equipment, goodwill and other
intangibles, in the period when it is determined that the carrying amount of
such assets may not be recoverable. This determination includes evaluation of
factors such as current market value, future asset utilization, business climate
and future undiscounted cash flows expected to result from the use of the net
assets. During 2002, the Company recorded an impairment loss of $176,000
associated with the property and equipment of the DMS Store Fixtures unit.
Revenue Recognition
Revenues on trade show exhibit sales, themed interiors, custom store fixtures
and point of purchase displays are recognized using the completed contract
method. The Company's contracts are typically less than three months in
duration. As a result, the Company's revenue recognition would not differ
materially if another method were used. Progress billings are generally made
throughout the production process. Progress billings which are unpaid at the
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
balance sheet date are not recognized in the financial statements as accounts
receivable. Progress billings which have been collected on or before the balance
sheet date are classified as customer deposits and are included in accrued
expenses and other current liabilities. Billings for shipping and handling are
recorded as revenue and the related costs are included in the cost of sales.
Income Taxes
The Company recognizes deferred tax assets and liabilities based upon the future
tax consequences of events that have been included in the financial statements
or tax returns. Deferred tax assets and liabilities are calculated based on the
difference between the financial reporting and tax bases of assets and
liabilities using the currently enacted tax rates in effect during the years in
which the differences are expected to reverse. A valuation allowance is
established based on the future recoverability of deferred tax assets.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results may differ from those estimates.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company places its cash and temporary cash investments with high
quality financial institutions. The Company's accounts receivable are primarily
with customers throughout the United States. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires
progress payments which mitigate its loss exposure.
One customer, J.C. Penney, accounted for 20% and 11% of the Company's
consolidated net sales in 2002 and 2001, respectively. The loss of this customer
could have a material adverse effect on the Company. No customer accounted for
over 10% of the Company's consolidated net sales in 2000.
Stock-Based Compensation
Compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant above the amount
an employee must pay to acquire the stock granted under the option. The Company
adopted the disclosure-only provisions of SFAS 123, which are illustrated in
Note 13.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents and long-term debt.
The recorded values of cash and cash equivalents approximate their fair value
due to the short maturity of these instruments. The fair value of long-term debt
is estimated based on current interest rates offered to the Company for similar
remaining maturities. The recorded value of these financial instruments
approximate their fair value at December 31, 2002 and 2001.
Per Share Data
Basic net income per common share is calculated using the average shares of
common stock outstanding, while diluted net income per common share reflects the
potential dilution that could occur if stock options and warrants having
exercise prices below market prices were exercised.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Standards
In May 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 145 "Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
as of April 2002" ("SFAS 145"). SFAS 145 among other things, rescinds various
pronouncements regarding early extinguishment of debt. It allows extraordinary
accounting treatment for early extinguishment of debt only when the provisions
of Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", are
met. SFAS 145 provisions regarding early extinguishment of debt are generally
effective for fiscal years beginning after May 15, 2002. The adoption of SFAS
145 is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities" ("SFAS 146"). SFAS 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs associated with exit and
disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
(EITF) has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. The Company
believes this Statement will not materially affect the Company's financial
position, results of operations or cash flows.
In November 2002, the FASB issued Financial Accounting Standards Board
Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantors, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"). FIN 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation it
assumes under the guarantee. Guarantors will also be required to meet expanded
disclosure obligations. The initial recognition and measurement provisions of
FIN 45 are effective for guarantees issued or modified after December 31, 2002.
The disclosure requirements are effective for the Company's 2002 financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS No. 123" ("SFAS
148"). SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee and director
compensation. In addition, this statement amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. SFAS 148 is effective for
the Company's 2002 financial statements. The Company adopted the disclosure-only
provision of SFAS 123.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The disclosure requirements of FIN 46 are effective
for financial statements issued after January 31, 2003. The initial recognition
provisions of FIN 46 are applicable immediately to new variable interests in
variable interest entities created after January 31, 2003. For a variable
interest in a variable interest entity created before February 1, 2003, the
initial recognition provisions of FIN 46 are to be implemented no later than the
beginning of the first interim or annual reporting period beginning after June
15, 2003. The Company will continue to evaluate the impact of FIN 46 on its
financial statements.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING CHANGE (ADOPTION OF SFAS NO. 142)
--------------------------------------------
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), which
eliminates amortization of these assets and requires annual testing for
impairment. The Company's reporting units for purposes of applying the
provisions of SFAS 142 are the DMS Store Fixtures business ("DMS") and the
Sparks Exhibits & Environments businesses ("Sparks"). SFAS 142 requires a
comparison of the reporting unit's fair value, which is determined based on
discounted cash flows, to its carrying value to determine potential impairment.
If the fair value is less than the carrying value, an impairment loss is
recognized.
The following table reconciles net income and net income per share for 2002 and
2001 adjusted for SFAS 142:
December 31,
-----------------------------------------------
2002 2001 2000
--------- ------ -------
(in thousands except per share amounts)
Net loss before change in accounting principle $(7,414) $(1,136) $(1,106)
Add back: goodwill amortization, net of tax of $272 -- 559 559
Adjusted net loss before change in accounting principle $(7,414) $ (577) $ (547)
Cumulative effect of change in accounting principle, net of tax of $3,500 (12,385) -- --
--------- ------- -------
Adjusted net loss $(19,799) $ (577) $ (547)
========= ======= =======
Net income per share:
Basic net loss per share before change in accounting principle $(.57) $(.14) $(.15)
Add back: goodwill amortization, net of tax -- .07 .08
--------- ------- -------
Adjusted basic net loss per share before accounting change $(.57) $(.07) $(.07)
Cumulative effect of change in accounting principle, net of tax (.95) -- --
--------- ------- -------
Adjusted basic net loss per share $(1.52) $(.07) $(.07)
========= ======= ======
Diluted net loss per share before change in accounting principle $(.57) $(.14) $(.15)
Add back: goodwill amortization, net of tax -- .07 .08
--------- ------- -------
Adjusted diluted net loss per share before accounting change $(.57) $(.07) $(.07)
Cumulative effect of accounting change, net of tax (.95) -- --
--------- ------- -------
Adjusted diluted net loss per share $(1.52) $(.07) $(.07)
========= ======= =======
Changes in the carrying amount of goodwill for the impairment recognized in 2002
are as follows:
DMS Sparks Total
------- ------- -------
Balance at December 31, 2001 $15,885 $ 2,714 $18,599
Goodwill impairment in the first quarter 2002 (15,885) -- (15,885)
------- ------- -------
Balance at December 31, 2002 -- $ 2,714 $ 2,714
======= ======= =======
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. NET INCOME PER COMMON SHARE
---------------------------
The following table sets forth the computation of basic and diluted net income
per common share:
(in thousands except per share data)
------------------------------------
2002 2001 2000
--------- ------- ---------
Net loss before change in accounting principle $ (7,414) $(1,136) $(1,106)
======== ======= =======
Net loss after change in accounting principle $(19,799) $(1,236) $(1,106)
======== ======= =======
Weighted average common
shares outstanding used to compute
basic net income per common share 12,984 8,167 7,381
Additional common shares to be issued
assuming exercise of stock options,
net of shares assumed reacquired -- 220 --
Total shares used to compute diluted
net income per common share 12,984 8,387 7,381
====== ===== =====
Basic net loss per share before change in
accounting principle $(.57) $(.14) $(.15)
===== ===== =====
Diluted net loss per share before change in
accounting principle $(.57) $(.14) $(.15)
===== ===== =====
Basic net loss per share after change in
accounting principle $(1.52) $(.14) $(.15)
====== ===== =====
Diluted net loss per share after change in
accounting principle $(1.52) $(.14) $(.15)
====== ===== =====
Options and warrants to purchase 7,492,000, 667,000 and 2,100,000 shares of
common stock at prices ranging from $.50 per share to $6.25 per share were
outstanding at December 31, 2002, 2001 and 2000, respectively, but were not
included in the computation of diluted income per common share because the
options' and warrants' exercise price was greater than the average market price
of the common shares.
4. STATEMENTS OF CASH FLOWS INFORMATION
------------------------------------
Cash paid for interest in 2002, 2001 and 2000 amounted to $314,000, $1,250,000
and $1,604,000, respectively.
Cash paid for income taxes in 2002, 2001 and 2000 amounted to $5,000, $29,000
and $788,000, respectively.
During 2001, the following non-cash transactions took place:
o The Company issued 265,070 shares of its common stock having a market value
of $134,000 to certain employees and directors for stock awards and the
Company's 401(k) plan contributions.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2000, the following non-cash transactions took place:
o In January 2000, the Company issued 37,210 shares of its common stock
having a market value of $100,000 in connection with its debt
restructuring.
o The Company issued 59,454 shares of its common stock having a market value
of $101,000 to certain employees under compensation arrangements.
5. INVENTORIES, NET
----------------
Inventories at December 31 consist of the following:
(in thousands)
--------------
2002 2001
---- ----
Raw materials $ 373 $ 395
Work in process 4,400 3,636
Finished goods 950 2,567
------ -------
$5,723 $ 6,598
====== =======
The decrease in finished goods inventories was principally attributable to lower
store fixtures inventories as a result of lower sales volume.
6. INVESTMENT IN AFFILIATES
------------------------
On February 19, 1999, the Company paid $258,451 and issued 70,160 shares of its
common stock having a market value of $3.25 per share 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. The excess cost over the 25% equity acquired was
$362,000. Subsequent to the Company's 25% investment, Uljee changed its name to
Sparks Europe, B.V. ("Sparks Europe"). Should Sparks Europe 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.
On February 1, 1998, the Company exchanged its 51% majority interest in Expose
Display Systems, Inc. ("EDSI") and paid approximately $180,000 in cash for a 25%
equity interest in Abex Display Systems Inc. ("Abex"), a portable/modular trade
show exhibit manufacturer in Los Angeles, California. The Company recognized an
impairment loss of approximately $1.2 million in the first quarter of 2002
related to its investment in Abex.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PROPERTY AND EQUIPMENT
----------------------
Property and equipment at December 31 consist of the following:
(in thousands)
--------------
2002 2001
------- -------
Manufacturing equipment and vehicles $ 1,964 $ 1,988
Office equipment and data processing 7,239 7,290
Leasehold improvements 3,017 3,080
Showroom exhibits, construction in progress and other 877 465
------- -------
$13,097 $12,823
Less accumulated depreciation and amortization 9,168 7,976
------- -------
$ 3,929 $ 4,847
======= =======
Rental assets at December 31 consist of the following:
Rental assets $5,735 $5,187
Less accumulated depreciation 3,200 2,765
------ ------
$2,535 $2,422
====== ======
8. ACCRUED EXPENSES AND OTHER
Accrued expenses and other at December 31, consist of the following:
(in thousands)
--------------
2002 2001
------ ------
Customer deposits $3,530 $5,423
Accrued compensation 1,232 1,889
Accrued payroll, sales and business taxes 807 623
Accrued insurance costs 150 127
Accrued contractual costs 291 213
Other 1,620 1,353
------ ------
$7,630 $9,628
====== ======
9. DEBT OBLIGATIONS
----------------
On January 21, 2000, the Company restructured its bank debt with a Revolving
Credit and Security Agreement (the "Facility"), providing for borrowing capacity
based on a multiple of Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA"). On May 16, 2002, the Company amended the Facility to
change from an EBITDA basis to an asset-based arrangement. The amended Facility
provides for borrowings based on a percentage of qualified accounts receivable
and a percentage of up to $6.7 million of qualified inventories. The Facility is
collateralized by all the Company's assets and bears interest at rates based
primarily on the London Inter Bank Offering Rate (LIBOR) plus 3.25%. The
Facility includes certain financial covenants requiring a minimum tangible net
worth and maintenance of certain financial ratios and restricts the Company's
ability to pay dividends. Borrowings under this Facility were $4 million at
December 31, 2002. The Company's borrowing capacity under the Facility was $7.5
million at December 31, 2002. Loan origination fees totaling $532,000, comprised
of $432,000 of cash payments and issuance of 37,210 shares of the Company's
common stock, will be amortized over the term of the Facility. The interest
rates charged during 2002 ranged from 4.01% to 5.09%. Promissory Notes consist
primarily of capitalized leases expiring in 2003.
The Company was not in compliance with the minimum tangible net worth covenant
of the Facility at December 31, 2002 primarily as a result of a valuation
allowance for deferred income taxes. To cure this non-compliance, the Facility
was amended on March 11, 2003 to reduce the minimum tangible net worth covenant
requirement from $7.8 million to $6 million at December 31, 2002. Additionally,
the minimum tangible net worth covenant requirement
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
remains consistent at $6 million for 2003. Based on the adjusted covenant
requirements, it is probable that the Company will meet its minimum tangible net
worth and other debt covenants during 2003. This amendment also reduced the
maximum borrowing amount from $12 million to $8 million and changed the
expiration date from January 1, 2004 to May 16, 2004.
The Company's debt obligations at December 31, consist of the following:
(in thousands)
--------------
2002 2001
---- ----
Revolving credit facility $4,000 $6,500
Promissory Notes 128 259
------ ------
$4,128 $6,759
Less current portion 128 124
------ ------
$4,000 $6,635
====== ======
Aggregate future long-term debt maturities are as follows:
Years ended December 31, Amount
------------------------ ------
2003 $ 128
2004 4,000
------
$4,128
======
10. RELATED PARTY TRANSACTIONS
--------------------------
The Company leases a facility from a partnership controlled by two shareholders
of the Company. This lease, which contains a renewal option on May 14, 2009 and
expires on May 14, 2019, requires minimum annual rent of $771,000 at a fixed
rate for the first 10 years, and the Company is responsible for taxes, insurance
and other operating expenses.
In connection with the DMS Store Fixtures acquisition, employment agreements
were made with two shareholders of the Company, which provided for guaranteed
minimum annual payments of approximately $0.5 million. These agreements were
mutually terminated in January 2001 eliminating the guaranteed minimum payments
after February 2, 2001, which reduced administrative and general expenses by
approximately $0.5 million in the first quarter of 2001.
11. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company operates in leased office, warehouse and production facilities.
Lease terms range from monthly commitments up to 17 years with options to renew
at varying times. Certain lease agreements require the Company to pay utilities,
taxes, insurance and maintenance.
As of December 31, 2002, future minimum lease commitments under non-cancelable
operating leases are as follows:
(in thousands)
--------------
Year ended December 31, Amount
----------------------- ------
2003 $ 2,130
2004 1,968
2005 1,916
2006 1,804
2007 1,027
2008 and thereafter 9,543
-------
Total minimum lease commitments $18,388
=======
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rental expense, exclusive of supplemental costs, was approximately $2,138,000,
$2,135,000 and $3,153,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
The Company is engaged in legal proceedings in the normal course of business.
The Company believes that any unfavorable outcome from these suits not covered
by insurance would not have a material adverse effect on the financial
statements of the Company.
The Company does not have any significant commitments or guarantees as of
December 31, 2002 that are not already disclosed.
12. INVESTMENT TRANSACTION
----------------------
On November 20, 2001, the Company issued 5,300,000 shares of its common stock
and warrants expiring on November 19, 2011 to purchase 5,300,000 shares of its
common stock for an aggregate of $2,650,000. This transaction was approved by
the Company's shareholders at the Annual Meeting of Shareholders held on
November 7, 2001. Costs incurred in connection with this transaction were
$378,000.
13. WARRANTS AND STOCK OPTIONS
--------------------------
Warrants
On November 20, 2001, the Company issued warrants expiring on November 19, 2011
to purchase an aggregate of 5,300,000 shares of common stock at an exercise
price of $.50 per share in connection with an investment transaction approved by
the Company's shareholders at the Annual Meeting of Shareholders held on
November 7, 2001. The fair value of these warrants using the Black-Scholes
pricing model was $742,000, which was recorded as a component of stockholders
equity.
On October 12, 1999, the Company issued warrants to purchase 100,000 shares of
common stock at an exercise price of $2.50 per share to the Company's financial
adviser in connection with a debt restructuring project. These warrants are
exercisable on or before October 12, 2004.
Stock Options
In 1990, the Company adopted the 1990 Incentive Plan which provides for the
granting of Incentive Stock Options ("ISO") and a 1990 Nonstatutory Option Plan
which provides for the grantings of Nonstatutory options ("NSO") (collectively,
"the 1990 Plans"). Under the 1990 Plans, 1,450,000 shares of Common Stock are
authorized for issuance under options that may be granted to employees. Options
are exercisable at a price not less than the market value of the shares at the
date of grant in the case of ISO's, and 85% of the market value of the shares in
the case of NSO's.
In 1992, the Company adopted the 1992 Directors' and Consultants' Stock Option
Plan (the "1992 Plan") which provides for the granting of options to purchase up
to 73,600 common shares to directors and consultants who are neither principal
stockholders, nor receive salary compensation. Prices are determined as in the
1990 Plan. The 1992 Plan was amended in June 1998 to eliminate non-discretionary
annual stock awards, to provide stock awards or options as determined by the
Board and to increase the authorized shares to a total of 250,000.
In 2000, the Company adopted the 2000 Equity Incentive Plan (the "2000 Plan")
which provides for the granting of up to 735,000 Common Stock options, stock
appreciation rights, stock units and restricted shares to employees, outside
directors and consultants. Prices are determined as in the 1990 Plan. Terms of
other securities are determined by a committee of the Board of Directors.
In 2001, the Company adopted the 2001 Equity Incentive Plan (the "2001 Plan")
which provides for the granting of up to 2,000,000 Common Stock options and
restricted shares to employees, outside directors and consultants.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options are exercisable at a price not less than the market value of the shares
at the date of grant in the case of ISO's. Terms of other securities are
determined by a committee of the Board of Directors.
Options have been granted to employees outside of the foregoing plans as an
incentive to accept employment with the Company, and the amount of options so
granted does not exceed of 5% of the company's outstanding shares of Common
stock.
The following is a summary of stock option transactions and exercise prices:
Shares Price Per Share Weighted Average
------ --------------- ----------------
Outstanding at December 31, 1999 1,691,222 $1.60 to $7.00 $3.10
==========
Granted 656,064 $1.60 to $4.00 $2.22
Expired (607,264) $1.60 to $7.00 $2.28
Exercised -- -- --
----------
Outstanding at December 31, 2000 1,740,022 $1.60 to $6.25 $3.03
==========
Granted 75,000 $2.00 $2.00
Expired or cancelled (1,148,500) $1.60 to 6.00 $2.94
Exercised -- -- --
----------
Outstanding at December 31, 2001 666,522 $2.00 to $6.25 $3.13
==========
Granted 1,676,242 $.50 $.50
Expired or cancelled (250,919) $2.13 to $4.00 3.05
Exercised -- -- --
----------
Outstanding at December 31, 2002 2,091,845 $.50 to $6.25 $1.03
==========
The following table summarizes information concerning outstanding and
exercisable stock options as of December 31, 2002:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average
Number of ---------------- Number of Weighted
Range of Exercise Options Remaining Options Average
Prices And Awards Life (Years) Exercise Price and Awards Exercise Price
------ ---------- ------------ -------------- ----------- --------------
1990 Plans $2.00 to $4.13 70,000 2.74 $2.30 70,000 $2.30
1992 Plan $2.00 to $6.25 119,331 1.74 $3.43 99,339 $3.72
2000 Plan $2.00 60,000 3.04 $2.00 60,000 $2.00
2001 Plan $.50 1,626,242 7.76 $.50 1,501,242 $.50
Other $.50 to $6.00 216,272 1.36 $3.03 182,939 $3.49
------------- --------- ---- ----- --------- -----
Grand Total $.50 to $6.25 2,091,845 6.45 $1.03 1,913,520 $1.07
============= ========= ==== ===== ========= =====
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of stock options exercisable at December 31, 2002,
2001 and 2000, and their respective weighted-average share prices:
Weighted Average
Number of Shares Exercise Price
----------------- --------------
Options exercisable December 31, 2002 1,913,520 $1.07
Options exercisable December 31, 2001 558,197 $2.72
Options exercisable December 31, 2000 1,257,597 $3.24
The Company adopted the disclosure - only provisions of SFAS 123, "Accounting
for Stock-Based Compensation." The Company will continue to apply the provisions
of Accounting Principles Board Opinion 25 in accounting for its stock option
plans. If the Company had elected to recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by SFAS 123, net
income and diluted income per common share would have been reduced to the pro
forma amount as follows:
(in thousands except per share amounts)
---------------------------------------
Year ended December 31,
-----------------------------------
2002 2001 2000
---- ---- ----
Net loss As reported $(19,799) $(1,136) $(1,106)
-------- ------- -------
Deduct: Total stock-based employee
compensation expense determined under
fair value based method, net of tax (290) (16) (252)
--------- ------- -------
Pro forma $(20,089) $(1,152) $(1,358)
======== ======= =======
Diluted income (loss)
per common share As reported $(1.52) $(.14) $(.15)
======= ======= =======
Pro forma $(1.55) $(.14) $(.18)
======= ======= =======
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model. Assumptions used to calculate the fair
value of option grants in 2002, 2001 and 2000 include the following:
Assumption 2002 2001 2000
---------- ---- ---- ----
Dividend yield 0.0% 0.0% 0.0%
Risk-free rate 4.0% 5.0% 6.0%
Expected life 3-5 years 3-5 years 3-5 years
Expected volatility 62% 65% 71%
Fair Value $.18 $.05 $1.02
14. EMPLOYEE BENEFIT PLANS
----------------------
The Company maintains a defined contribution savings plan under Section 401(k)
of the Internal Revenue Code which provides retirement benefits to certain
employees of the Company and its wholly-owned subsidiaries who meet certain age
and length of service requirements. The Company's contribution to the Plan is
determined by management. Charges to income with respect to this Plan were
$64,000 in 2000. There were no charges in 2002 or 2001 with respect to this
Plan.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES
------------
The components of the provision for (benefit from) income taxes were as follows:
(in thousands)
2002 2001 2000
------ ----- -----
Current:
Federal $ - $ 100 $ (90)
State - - 26
Deferred:
Federal 4,552 (604) (187)
State 234 42 (16)
------ ----- -----
$4,786 $(462) $(267)
====== ===== =====
A reconciliation of federal statutory income taxes to the Company's effective
income tax expense is as follows:
2002 2001 2000
---- ---- ----
Federal statutory rate $(894) $(543) $(487)
State income tax, net of federal
income tax effect 234 48 14
Non-deductible expenses 28 192 201
Non-taxable income -- (192) --
Valuation allowance 5,384 --
Other, net 34 33 5
------ ----- -----
$4,786 $(462) $(267)
====== ===== =====
The net deferred tax asset at December 31, 2002 and 2001 consist of the
following:
(in thousands)
--------------
2002 2001
------- -------
Accounts receivables $ 120 $ 193
Inventories 395 477
Property and equipment 15 (34)
Accrued expenses and compensation 40 108
Goodwill and intangibles 2,971 (912)
Operating loss and credit carryforward 2,650 1,411
Other, net 829 336
Valuation allowance (7,020) (313)
------- -------
-- $ 1,266
======= =======
In the fourth quarter 2002, the Company established a valuation allowance of $7
million to fully reserve for its deferred tax assets as of December 31, 2002.
This allowance was based on an evaluation of several factors, including prior
years' actual operating results and projected operating results.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
-------------------------------------------
Summarized unaudited quarterly financial data for the years ended December 31,
2002 and 2001 are:
(in thousands except per share amounts)
---------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
2002
----
Net sales $16,795 $21,419 $15,204 $17,764
Gross profit 4,164 4,329 2,628 3,034
Net income (loss)* (13,668) 45 (465) (5,711)
Basic net income (loss)
per common share (1.05) -- (.04) (.44)
Diluted net income (loss)
per common share (1.00) -- (.04) (.44)
2001
----
Net sales $20,877 $22,150 $17,072 $16,873
Gross profit 5,149 5,172 3,951 2,783
Net income (loss) 384 104 (256) (1,368)
Basic net income (loss)
per common share ** .05 .01 (.03) (.14)
Diluted net income (loss)
per common share ** .05 .01 (.03) (.14)
* The first quarter of 2002 includes $1.2 million for a write-down in the
Company's investment in an affiliate, and a $12.4 million impairment loss
(net of a $3.5 million income tax benefit) for a change in accounting
principle (adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets"). The fourth quarter of 2002 includes an income tax valuation
allowance of $5.4 million.
** Net income per common share amounts for each quarter are computed
independently. The total of the quarterly per common share amounts differ
from the full year amount primarily as a result of the weighted average
impact of 5,300,000 additional shares issued in November of 2001 in
connection with an investment transaction.
17. SUBSEQUENT EVENT
----------------
On February 21, 2003, the Company announced that it had entered into a merger
agreement with Redwood Acquisition Corp. ("Redwood"). Redwood is controlled by
four members of the Company's executive management, who are stockholders and
directors of the Company, and certain other of the Company's shareholders and
employees. If the merger is completed, shareholders of the Company, other than
the shareholders included in the Redwood group, will receive $.30 in cash for
each outstanding share of the Company's common stock. The members of the Redwood
group will own Marlton's business if the merger is completed. The completion of
the merger is subject to specified conditions, including the approval of the
Company's shareholders at a special meeting of shareholders following a
distribution of a proxy statement. Members of the Redwood group hold
approximately 50% of the Company's common stock.
40
MARLTON TECHNOLOGIES, INC.
FINANCIAL STATEMENT SCHEDULE
SCHEDULE (2) VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
-----------------------------------------------------------
(in thousands)
---------------------- ------------------- ------------------------------------ -------------------- -----------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Additions
--------------------- ------------------- ----------------- ------------------ -------------------- -----------------
Description Balance at Charged to Charged to other Deductions - Balance at end
beginning of costs and accounts Write-Offs of period
period expenses
---------------------- ------------------- ----------------- ------------------ -------------------- -----------------
For the Year Ended December 31, 2002
------------------------------------
Allowances deducted from Assets to which they apply:
Trade accounts receivable $ 502 $ 317 --- $ 510 $ 309
Inventory obsolescence 1,121 361 --- 885 597
Deferred tax assets 313 *6,707 --- --- 7,020
* In the fourth quarter 2002, the Company established a valuation allowance of
$7 million to fully reserve for its deferred tax assets as of December 31,
2002. This allowance was based on an evaluation of several factors, including
prior years' actual operating results and projected operating results.
For the Year Ended December 31, 2001
------------------------------------
Allowances deducted from Assets to which they apply:
Trade accounts receivable 836 442 --- 776 502
Inventory obsolescence 1,214 853 --- 946 1,121
Deferred tax assets --- 313 --- --- 313
For the Year Ended December 31, 2000
------------------------------------
Allowances deducted from Assets to which they apply:
Trade accounts receivable 410 804 --- 378 836
Inventory obsolescence 190 1,254 --- 230 1,214
41
AMENDMENT TO SECOND AMENDED AND RESTATED
REVOLVING CREDIT AND SECURITY AGREEMENT
AMENDMENT dated as of March 11, 2003, by and among MARLTON
TECHNOLOGIES, INC., a Pennsylvania corporation, successor to Marlton
Technologies, Inc., a New Jersey corporation ("Marlton"), and certain
subsidiaries executing this Amendment as Borrowers (together with Marlton,
collectively, the "Borrowers") and WACHOVIA BANK, NATIONAL ASSOCIATION formerly
known as FIRST UNION NATIONAL BANK, a national banking association, as Bank (the
"Bank") and as Agent (the "Agent").
WHEREAS, the Borrowers, the Agent and the Banks entered into a certain
Second Amended and Restated Revolving Credit and Security Agreement dated as of
May 16, 2002 (as amended on the date hereof and hereafter, the "Credit
Agreement"); capitalized terms not otherwise defined herein having the meanings
set forth in the Credit Agreement; and
WHEREAS, the parties wish to amend certain provisions of the Credit
Agreement;
NOW THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto, intending to be legally bound, hereby agree as
follows, effective on the date first above written.
1. Definitions. Section 1.1 shall be amended to add the following:
(a) "Maturity Date" means the earlier of the date the Loans are
accelerated pursuant to Section 7.2 or May 16, 2004.
(b) "Revolving Credit Commitment" means $8,000,000, as such amount
may be reduced pursuant to Section 2.1 (C) hereof.
2. Minimum Net Worth. Section 6.24 shall be amended to read in full as
follows:
SECTION 6.24 Minimum Tangible Net Worth. MTI will maintain
at the end of each fiscal quarter, commencing with the
fiscal quarter ending December 31, 2002, consolidated
Tangible Net Worth in an amount not less than $6,000,000.
Such Minimum Tangible Net Worth shall increase from time
to time as follows: (A) on March 31, 2004, by 50% of MTI's
cumulative consolidated net income for the fiscal year
ending December 31, 2003; (B) by an amount equal to 100%
of the net proceeds of each equity offering of MTI upon
receipt thereof; and (C) by an amount equal to 100% of the
net proceeds of the issuance of Subordinated Debt by MTI
upon receipt thereof. For purposes of determining the
required minimum as aforesaid (a) cumulative consolidated
net income shall include consolidated net income for
entire fiscal years only and shall be determined by
reference to the financial statements delivered under
Section 6.1, (b) a consolidated net loss during any period
shall be deemed to be consolidated net income in the
amount of zero, and (c) MTI will be permitted to exclude
up to a maximum of $1,000,000 in the aggregate of new cash
equity contributions under clause (B) above.
3. Schedule 2.1 "Revolving Credit Commitments" shall be replaced in its
entirety by the new Schedule 2.1 attached to this Amendment, and the
principal amount of the Revolving Credit Note shall be reduced to
$8,000,000.
42
4. Representations and Covenants. The Borrowers hereby represent,
warrant and certify that, assuming the effectiveness of Paragraph 7
of this Amendment: (a) all representations and warranties contained
in the Credit Agreement, including without limitation the schedules
thereto (updated as attached hereto), are true, correct and complete
on and as of the date hereof, (b) all covenants and agreements made
in the Credit Agreement have been complied with and fulfilled, (c)
no Default or Event of Default is in existence on the date hereof,
and (d) this Amendment has been duly authorized, executed and
delivered by each Borrower and is the legal, valid and binding
obligation of each of the Borrowers, enforceable in accordance with
its terms.
5. Ratification. Other than as specifically set forth herein, the
Borrowers hereby ratify and confirm the Credit Agreement and all
instruments and agreements relating thereto, and confirm that (a)
all of the foregoing remain in full force and effect, (b) each of
the foregoing is enforceable against the Borrowers in accordance
with its terms, and (c) Borrowers have no defenses to its
obligations or claims relative to the Credit Agreement.
6. Miscellaneous. Article IX of the Credit Agreement is incorporated
herein by reference and shall apply to this Amendment. Execution of
this Amendment shall not constitute an agreement by the Agent or any
Bank to execute any other amendment, waiver or modification of the
Credit Agreement. References to the Credit Agreement in any document
relating thereto shall be deemed to include this Amendment. This
Amendment may be executed in counterparts.
7. Effectiveness. This Amendment shall be effective when the parties
have each received a fully executed copy of this Amendment.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
43
IN WITNESS WHEREOF, Borrowers, the Agent and the Banks have caused this
Amendment to be duly executed and delivered as of the date and year first above
written.
MARLTON TECHNOLOGIES, INC., a Pennsylvania corporation,
successor to Marlton Technologies, Inc., a New Jersey corporation
By: /s/ Robert B. Ginsburg
Name: Robert B. Ginsburg
Title: Chief Executive Officer
SPARKS EXHIBITS & ENVIRONMENTS CORP. (formerly Sparks Exhibits
Corp.), a Pennsylvania corporation
SPARKS EXHIBITS & ENVIRONMENTS, INC. (formerly Sparks Exhibits,
Inc.), a Georgia corporation
SPARKS EXHIBITS HOLDING CORPORATION, a Delaware corporation
SPARKS EXHIBITS & ENVIRONMENTS, LTD. (formerly Sparks Exhibits,
Ltd.), a California corporation
SPARKS EXHIBITS & ENVIRONMENTS INCORPORATED (formerly Piper
Productions, Inc.), a Florida corporation
SPARKS EXHIBITS & ENVIRONMENTS COMPANY,
an Illinois corporation
By: /s/ Robert B. Ginsburg
----------------------
Name: Robert B. Ginsburg
Title: Chief Financial Officer
44
DMS STORE FIXTURES LLC (formerly DMS Store Fixtures Corp.), a
Pennsylvania limited liability company
By: Sparks Exhibits & Environment Corp.,
its sole Member
By: /s/ Robert B. Ginsburg
----------------------
Name: Robert B. Ginsburg
Title: Chief Financial Officer
WACHOVIA BANK, NATIONAL ASSOCIATION,
formerly known as First Union
National Bank, (for itself and as
Agent)
By: /s/ Stephanie Micua
--------------------
Name: Stephanie Micua
Title: Vice President
45
Schedule 2.1
------------
Revolving Credit Commitments
----------------------------
Wachovia Bank $8,000,000
Total $8,000,000
46