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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER 1-7708
MARLTON TECHNOLOGIES, INC.
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(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 22-1825970
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(State of Incorporation) (IRS Employer Identification Number)
2828 CHARTER ROAD, PHILADELPHIA, PA 19154
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(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 676-6900
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE:
--------------------------------- -------------------------------
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 10-K AND NO DISCLOSURE WILL BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. |_|
CHECK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12B-2
OF THE ACT). YES |_| NO |X|
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF THE LAST BUSINESS DAY OF THE REGISTRANT'S MOST RECENTLY
COMPLETED SECOND FISCAL QUARTER WAS $4,533,031. AS OF MARCH 15, 2005 THERE WERE
12,939,696 SHARES OF COMMON STOCK, NO PAR VALUE, OF THE REGISTRANT OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE: THE INFORMATION REQUIRED BY PART III ITEMS
10, 11, 12, 13 AND 14 ARE HEREBY INCORPORATED BY REFERENCE TO THE REGISTRANT'S
DEFINITIVE PROXY STATEMENT TO BE FILED BY MAY 2, 2005.
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PART I
ITEM 1. BUSINESS
BUSINESS DEVELOPMENT
Marlton Technologies, Inc. (the "Company") is engaged in the custom design,
production and sale of exhibits and environments for trade shows, museums, theme
parks, themed interiors, arenas, corporate lobbies and retail stores for clients
in industry, government, entertainment and commercial establishments. All of the
Company's majority-owned operating subsidiaries do business under the name
Sparks Exhibits & Environments (collectively "Sparks"), except DMS Store
Fixtures ("DMS") which supplies custom made fixtures and displays to national
retailers, department stores and consumer products manufacturers. Currently, all
of the Company's operating revenues are derived from Sparks and DMS.
On March 15, 2005, a subsidiary of the Company, Sparks Exhibits & Environments
Corp., purchased substantially all of the assets and assumed specified
liabilities of Showtime Enterprises, Inc. and its subsidiary, Showtime
Enterprises West, Inc. ("Showtime"). Showtime designs, markets and produces
trade show exhibits, point of purchase displays, museums and premium incentive
plans, and had sales of approximately $21 million in 2004. On January 12, 2005,
Showtime filed a Chapter 11 bankruptcy petition in the United States Court for
the District of New Jersey, and the acquisition was subsequently approved by
such court. The purchase price paid by the Sparks subsidiary pursuant to the
Agreement and related transactions consisted of (i) approximately $2.1 million
in cash, (ii) the assumption of approximately $580,000 of indebtedness payable
to the United States Small Business Administration, (iii) the assumption of
specified contractual obligations and (iv) additional consideration associated
with Showtime's senior subordinated debentures consisting of approximately $0.4
million in cash, $0.4 million in 6% notes due March 15, 2009, warrants to
acquire an aggregate of 600,000 shares of Common Stock exercisable through 2012
at a weighted average exercise price of $1.06 and one percent of annual sales
originating from Showtime customers and account executives from April 1, 2005
through March 31, 2009. The Company financed this acquisition by increasing its
revolving credit facility borrowing capacity and obtaining a new term loan in
March 2005. See Item 7, "Liquidity and Capital Resources," for additional
information.
BUSINESS DESCRIPTION
Products and Services
The Company's current business is the custom design, production and sale of
exhibits and environments for trade shows, museums, theme parks, themed
interiors, arenas, corporate lobbies and retail stores for clients in industry,
government, entertainment and commercial establishments. The Company manages
custom trade show projects from concept through final construction, employing
sophisticated graphics and exhibit designers and computer-aided design software
and hardware. In-house facilities provide a wide range of computerized design
and production of graphics. The Company provides full service trade show exhibit
services, including coordination, set up, dismantling, refurbishing, shipping,
storage and marketing literature distribution. The Company also maintains an
inventory of exhibits that it rents to customers. Many clients are Fortune 1000
firms, who typically contract for custom trade show exhibit projects costing in
excess of $200,000. Additionally, a majority of these clients store their trade
show exhibits at a Company facility, and the Company provides ongoing
refurbishing and coordination of clients' trade show schedules. The Company also
represents domestic clients who desire to exhibit at international trade shows.
The Company designs such exhibits, and through Sparks World-Wide Exhibits B.V.
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.
2
Marketing and Distribution
Sales by the Company to domestic customers for both domestic and international
use are solicited through internal sales and marketing groups. Purchase of
sophisticated exhibits and environments usually involves a substantial
expenditure by the customer, and significant expertise is required to properly
meet the customer's needs. Sales personnel are required to be knowledgeable with
respect to the design and manufacturing of sophisticated exhibits and
environments. Sales are typically made directly to the end user of the product
or service. In addition to sales personnel, senior officers devote substantial
attention to sales and marketing activities.
Manufacturing and Raw Materials
The Company designs and manufactures custom trade show exhibits utilizing an
in-house staff of designers, carpenters, electricians and warehouse employees.
Specialty items such as studio production are subcontracted. The Company also
subcontracts the manufacture of exhibits for foreign trade shows. The Company
coordinates shipping, exhibit set-up and removal at the customer's trade show
and, in most cases, subsequently stores the exhibit for the customer. For store
fixture and display products, the Company subcontracts the manufacture and
installation, using a network of manufacturers. Raw materials for custom and
portable exhibits, store fixtures and displays, as well as subcontractors for
specialty work, have historically been available on commercially reasonable
terms from various vendors. Portable exhibit configurations, together with
graphics, are typically designed by the Company for a client and are purchased
from portable exhibit manufacturers for resale. Graphics may be produced
internally or subcontracted.
Seasonality of Business
Trade shows typically occur regularly throughout the year with the exception of
the third quarter when business to business trade shows are traditionally at a
low point. Trade show activities in specific industries, such as health care and
telecommunications, tend to be a function of seasonal show schedules within
those industries. The custom store fixture business tends to be slower during
the fourth and first quarters due to retailers' desires not to install or plan
new fixtures during their traditionally busy year-end season. The Company seeks
new clients and sales people with client bases in different industries to reduce
the effects of the slower sales periods. Additionally, the Company offers other
products and services, such as sales of scenic and themed exhibits,
portable/modular exhibits, and permanent exhibits which tend to be less seasonal
in nature, and in certain cases, manufacturing can be spread over longer periods
of time.
Working Capital
The Company's working capital requirements are fulfilled by funds generated
through operations and a revolving credit facility. Working capital requirements
are generally not affected by project size requirements or accelerated delivery
for major trade show exhibit, scenic and themed exhibit customers due to general
policies of progress billing on larger jobs. However, working capital
requirements are affected by the sale of custom store fixtures which are
generally produced upon receipt of purchase orders from large retailers, but are
held in inventory and are not billed to the customer until delivery.
Significant Customers
One customer, J. C. Penney, accounted for 10% and 15% of the Company's
consolidated net sales in 2004 and 2003, respectively. The loss of this customer
would have a material adverse effect on the Company.
Backlog
The backlog of orders at December 31, 2004 and 2003 was approximately $23
million and $19 million, respectively. Generally, backlog of orders are
recognized as sales during the subsequent six month period. The 2004 backlog
relates primarily to expected 2005 sales. The Company maintains a client base
from which new orders are continually generated, including refurbishing of
existing trade show exhibits stored in the Company's facilities, large retailers
opening or refurbishing stores, and longer term museum projects.
3
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.
Environmental Protection
The Company's compliance with federal, state and local provisions regulating
discharge of materials into the environment or otherwise relating to the
protection of the environment has not had, and is not expected to have, a
material adverse effect upon its capital expenditures, earnings or competitive
position.
Employees
The Company has approximately 313 full-time employees. The Philadelphia,
Pennsylvania operations have a three-year labor contract expiring June 30, 2007,
and a three-year labor contract expiring December 31, 2007, covering an
aggregate of approximately 35 production and fulfillment employees. The Santa Fe
Springs, California operation has a two-year labor contract expiring August 31,
2005, covering approximately 40 production employees. Management believes that
its labor relations are satisfactory.
Web Site Address
The Company's web site address is www.marltontechnologies.com.
ITEM 2. PROPERTIES
The Company currently leases four primary facilities as follows:
Location Square Footage Purpose
-------- -------------- -------
Philadelphia, PA 250,000 Office, showroom, warehouse &
manufacturing
Santa Fe Springs, CA 91,000 Office, warehouse & manufacturing
Austell, GA 98,000 Office, warehouse & manufacturing
Las Vegas, NV 50,000 Office, warehouse & manufacturing
The Company's subsidiaries also have sales, design and project management
offices in the Orlando, Florida, and San Francisco, California, metropolitan
areas. The Company's office, showroom, warehouse and manufacturing facilities
were all in good condition and adequate for 2004 operations, and are anticipated
to be adequate for operations in 2005, including any foreseeable internal
growth.
The Santa Fe Springs, California facility consists of two buildings of 91,000
and 31,000 square feet which are jointly leased with International Expo
Services, Inc. ("IES"), an installation and dismantle company in which the
Company holds a minority equity interest. The Company occupies and pays rent on
the 91,000 square foot building, and IES occupies and pays rent on the 31,000
square foot building.
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.
4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
The following table shows the high and low sales prices of the Company's Common
Stock on the American Stock Exchange:
2004 2003
------------------------ ------------------------
QUARTER HIGH LOW HIGH LOW
------- ---- ---- ---- ----
1 $.67 $.45 $.30 $.18
2 .66 .45 .40 .29
3 .70 .53 .77 .40
4 .98 .58 .79 .42
No dividends were paid during the past two fiscal years. The Company currently
intends to employ all available funds in the business. Future dividend policy
will be determined in accordance with the financial requirements of the
business. However, the Company's loan agreement provides that the Company may
not pay dividends to its shareholders without the lender's prior written consent
and also provides restrictions on the ability of the Company's subsidiaries to
transfer funds to the Company in the form of dividends, loans or advances.
As of March 14, 2005, there were 967 holders of record of the Company's Common
Stock.
Equity Compensation Plan Information as of December 31, 2004
------------------------------------------------------------
Number of securities Weighted-average exercise Number of securities
to be issued upon price of outstanding remaining available
exercise of options, warrants and for future issuance
outstanding options, rights under under equity
Plan category warrants and rights compensation plans compensation plans
------------- ---------------------- ------------------------- --------------------
Equity Compensation
plans approved by
security holders (1) 2,009,578 $0.62 3,758
Equity Compensation
plans not approved
by security holders(2) 150,000 $0.51 585,000
--------- --------- ---------
Total 2,159,578 $0.61 588,758
========= ========= =========
(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, 3,758 of which
remain available for future issuance. Any new director of the Company
receives a stock option award of 100,000 shares with an exercise price
equal to the fair market value on the date of grant, vesting 50% initially
and 25% at each of the next two Company annual meetings based on continued
service as a director, and expiring after a period of five years. Included
in the number of securities to be issued upon exercise are 113,336 shares
issued under the Company's 1990 Incentive Plan and 1992 Directors' and
Consultants' Stock Option Plan, under which plans no more shares can be
issued.
(2) The Company's 2000 Equity Incentive Plan provides for the issuance to
employees, outside directors and consultants of stock options, stock
appreciation rights and/or stock units for up to an aggregate of 735,000
shares of Common Stock, 585,000 of which remain available for future
issuance. Other options may be issued to individuals 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.
On December 10, 2004, the Company issued 75,000 shares of its Common Stock to a
former director who exercised a stock option at a price of $.50 per share. This
issuance was not registered under the Securities Act pursuant to Section 4(2)
thereof as the shares were issued to an accredited investor in a transaction not
involving a public offering. On May 1, 2004, 20,000 shares of Common Stock were
issued to an employee as a bonus, without any payment. This transaction was
exempt from registration under the Securities Act since it did not involve a
sale of securities, nor did it involve a public offering under Section 4(2) of
the Securities Act.
5
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
For the years ended December 31
(In thousands except per share amounts)
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- ----------
TOTAL ASSETS $26,335 $24,818 $25,609 $49,442 $63,508
LONG-TERM OBLIGATIONS 5,070 5,146 4,000 6,635 16,376
WORKING CAPITAL 4,536 2,996 3,461 6,872 15,370
STOCKHOLDERS' EQUITY 7,864 7,140 (1) 9,342 (2)(3) 29,176 (4) 27,906
OPERATIONS:
Net sales 71,943 65,587 71,182 76,972 92,533
Operating income (loss) 1,115 (2,155) (1) (1,132) (115)(4) 60
Income (loss) before change in
accounting principle 677 (2,201) (1) (7,414) (2) $(1,136)(4) $(1,106)
Net income (loss) after change in
accounting principle 677 (2,201) (1) (19,799)(3) $(1,136)(4) $(1,106)
BASIC NET INCOME (LOSS)
PER COMMON SHARE BEFORE CHANGE IN ACCOUNTING
PRINCIPLE (5) $.05 $(.17) $(.57) $(.14) $(.15)
DILUTED NET INCOME (LOSS) PER
COMMON SHARE BEFORE CHANGE IN ACCOUNTING
PRINCIPLE (6) $.04 $(.17) $(.57) $(.14) $(.15)
BASIC NET INCOME (LOSS) PER COMMON SHARE
AFTER CHANGE IN ACCOUNTING PRINCIPLE (5) $.05 $(.17) $(1.52) $(.14) $(.15)
DILUTED NET INCOME (LOSS) PER COMMON SHARE
AFTER CHANGE IN ACCOUNTING PRINCIPLE (6) $.04 $(.17) $(1.52) $(.14) $(.15)
CASH DIVIDENDS -0- -0- -0- -0- -0-
----------- ----------- ----------- ----------- ----------
(1) Includes a $1.1 million restructuring provision for facility relocation,
and a $0.3 million expense for a terminated merger transaction.
(2) Includes a $1.2 million write-down in the Company's investment in an
affiliate, and $5.4 million for a valuation allowance for deferred income
taxes.
(3) Includes a $12.4 million impairment loss (net of a $3.5 million income tax
benefit) for a change in accounting principle (adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets").
(4) Includes an inventory provision of $0.7 million ($0.5 million after income
taxes) for a customer that filed for bankruptcy, and relocation costs and
operating losses of $0.6 million ($0.4 million after income taxes) for the
Company's Orlando, Florida manufacturing operations.
(5) 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.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company's business is the custom design, production and sale of exhibits and
environments for trade shows, museums, theme parks, themed interiors, arenas,
corporate lobbies and retail stores for clients in industry, government,
entertainment and commercial establishments.
Challenges of the past year included replacement of the Company's credit
facility that would have expired on May 16, 2004 with a new credit facility
expiring on February 6, 2008 as amended and replacement of sales from a
significant client lost at the end of 2003 with new clients obtained during
2004.
The trade show exhibit industry continues to be very competitive and several of
the Company's competitors have filed for bankruptcy. In addition, the Company's
customer base of primarily Fortune 1000 companies is expected to continue to
closely manage their trade show budgets. This budget management will put
pressure on sales and margins for trade show exhibits and related services. In
2004, the Company negotiated better pricing and terms with its suppliers and
implemented cost reduction initiatives to mitigate the impact of this industry
trend.
RECENT DEVELOPMENTS
On March 15, 2005, Sparks Exhibits & Environments Corp., a subsidiary of the
Company, acquired substantially all of the assets and assumed specified
liabilities of Showtime Enterprises, Inc. and its subsidiary, Showtime
Enterprises West, Inc. (collectively "Showtime"). Showtime designs, markets and
produces trade show exhibits, point of purchase displays, museums and premium
incentive plans. Showtime had sales of approximately $21 million in 2004, and on
January 12, 2005, had filed a Chapter 11 bankruptcy petition. The purchase price
paid by the Sparks subsidiary pursuant to the Agreement and related transactions
consisted of (i) approximately $2.1 million in cash, (ii) the assumption of
approximately $580,000 of indebtedness payable to the United States Small
Business Administration, (iii) the assumption of specified contractual
obligations and (iv) additional consideration associated with Showtime's senior
subordinated debentures consisting of approximately $0.4 million in cash, $0.4
million in 6% notes due March 15, 2009, warrants to acquire an aggregate of
600,000 shares of Common Stock exercisable through 2012 at a weighted average
exercise price of $1.06 and one percent of annual sales originating from
Showtime customers and account executives from April 1, 2005 through March 31,
2009. The Company financed this acquisition by increasing its revolving credit
facility borrowing capacity and obtaining a new term loan in March 2005.
RESULTS OF OPERATIONS
2004 AS COMPARED WITH 2003
NET SALES
(in thousands)
Revenue Sources 2004 2003
--------------- ------- -------
Trade show exhibits $44,763 $40,457
Permanent and scenic displays 27,180 25,130
------- -------
Total $71,943 65,587
======= =======
Total net sales of $71.9 million for 2004 increased $6.4 million, or 9.7%, from
total net sales for 2003. This increase was comprised of a $4.3 million, or
10.6%, increase in sales of trade show exhibits and related services and a $2.1
million, or 8.2%, increase in sales of permanent and scenic displays. Selling
prices were relatively constant in 2004 and 2003. These increases were
principally attributable to several new customers, which more than offset the
loss of a significant customer at the end of 2003.
GROSS PROFIT
Gross profit, as a percentage of net sales, decreased to 21.4% in 2004 from
21.9% in 2003. This decrease was largely due to changes in customer sales mix
and lower margins on new exhibit construction. Management continues to pursue
cost reduction initiatives, including operational improvements and supplier
renegotiations.
7
SELLING EXPENSES
Selling expenses were $7.8 million in 2004 as compared with $8.5 million in
2003. As a percentage of net sales, these expenses decreased to 10.8% in 2004
from 13% in 2003. The decrease was due, in large part, to cost reduction
initiatives implemented near the end of 2003 that significantly reduced selling
expenses in 2004.
ADMINISTRATIVE AND GENERAL EXPENSES
Administrative and general expenses of $6.5 million for 2004 decreased 5.3% from
such expenses of $6.9 million for 2003. Costs of approximately $250,000 incurred
in connection with a terminated merger agreement were charged to administrative
and general expenses in 2003. The decrease in general and administrative
expenses in 2004 was primarily due to these costs incurred in connection with
this 2003 terminated merger transaction, as well as cost reduction initiatives.
During the fourth quarter of 2003, management implemented executive compensation
reductions, staff reductions and further cost cutting initiatives, the benefits
of which were realized during 2004.
RESTRUCTURING AND OTHER EXPENSE
On August 1, 2003, a Company subsidiary acquired the assets of Exhibit Crafts,
Inc., a Los Angeles, CA area manufacturer of trade show exhibits and a 20%
interest in International Exposition Services, Inc. (IES), a trade show shipping
and installation provider. The initial purchase price was $694,000, including
the assumption of certain liabilities totaling $310,000. In addition, the
sellers received 20% of the subsidiary's common stock. The purchase price
approximated the fair value of the net assets acquired. In addition, the asset
purchase agreement provided for contingent aggregate payments of up to $750,000
based on operating performance in 2005, 2006 and 2007, including interest on the
then remaining future potential contingent payments. These contingent payments,
if any, and interest on the remaining future potential contingent payments will
be reflected as an increase in goodwill. Interest on the remaining future
potential contingent payments increased goodwill by $37,000 in 2004.
The Company relocated its San Diego area manufacturing facility to the newly
acquired Los Angeles, CA area facility during the third quarter of 2003. Costs
recorded in 2003 in connection with this relocation and consolidation were
approximately $1.1 million, which included relocation and employee termination
expenses. The Company also recorded a charge for a portion of the remaining
lease obligation related to the vacated San Diego area facility.
OPERATING INCOME (LOSS)
The Company generated operating income of $1.1 million in 2004 as compared with
a $2.2 million operating loss in 2003, primarily due to higher sales and lower
selling, administrative and general expenses in 2004 and the absence of
restructuring costs for the relocation and consolidation of the Company's West
Coast operations recorded in 2003.
OTHER INCOME (EXPENSE)
Interest expense increased to $510,000 in 2004 from $236,000 in 2003 due to
higher borrowings and to higher interest rates under the Company's new revolving
credit facility.
BENEFIT FROM INCOME TAXES
The Company is currently using operating loss carry forwards to offset its
taxable income. As a result, the Company did not record an income tax provision
for its 2004 pre-tax income. In 2003, the Company recognized the benefit of an
income tax refund for $0.4 million related to a change in strategy whereby a net
operating loss was carried back to a prior year. The Company currently has a
full valuation allowance against its operating loss carry forwards.
BACKLOG
The backlog of orders at December 31, 2004 and 2003 was approximately $23
million and $19 million, respectively. This increase was largely due to new
customers. Generally, backlog of orders are recognized as sales during the
subsequent six month period. The 2004 backlog relates primarily to expected 2005
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.
8
2003 AS COMPARED WITH 2002
NET SALES
(In thousands)
Revenue Sources 2003 2002
----------------------------- ------- -------
Trade show exhibits $40,457 $44,711
Permanent and scenic displays 25,130 26,471
------- -------
Total $65,587 $71,182
======= =======
Total net sales of $65.6 million for 2003 decreased 7.9% from total net sales
for 2002. Sales of trade show exhibits and related services decreased 9.5%
primarily due to the loss of two trade show exhibit clients and generally weak
economic conditions. Sales of permanent and scenic displays decreased 5.1%,
which was the net result of lower store fixtures sales partially offset by
higher permanent museum display sales.
GROSS PROFIT
Gross profit, as a percentage of net sales, increased to 21.9% in 2003 as
compared with 19.9% in 2002. This increase was largely due to profit improvement
initiatives implemented in the second half of 2002, which were realized for the
full year in 2003.
SELLING EXPENSES
Selling expenses were $8.5 million in 2003 and 2002. As a percentage of net
sales, these expenses increased to 13% in 2003 from 11.9% in 2002. The
percentage increase was due, in part, to the impact of lower sales volume as
compared with certain fixed selling expenses such as sales office and salary
expenses.
ADMINISTRATIVE AND GENERAL EXPENSES
Administrative and general expenses of $6.9 million for 2003 increased 1.6% from
such expenses of $6.8 million for 2002. Costs of approximately $250,000 incurred
in connection with a terminated merger agreement were charged to administrative
and general expenses in the second and third quarters of 2003. The increase in
general and administrative expenses was primarily due to these costs incurred in
connection with a terminated merger transaction, integration costs to
consolidate the Company's West Coast operations and higher insurance and
telecommunications costs. During the fourth quarter of 2003, management
implemented executive compensation reductions, staff reductions and further cost
cutting initiatives in response to lower sales volume.
OPERATING LOSS
The Company incurred an operating loss of $2.2 million in 2003 primarily due to
lower sales volume and the restructuring costs for the relocation and
consolidation of its West Coast operations described above under the discussion
of 2004 as compared with 2003.
OTHER INCOME (EXPENSE)
Interest expense decreased to $236,000 in 2003 from $382,000 in 2002 due in part
to lower borrowings and to lower interest rates.
In the fourth quarter of 2003, the Company recorded an impairment loss of
$265,000 related to its investment in an affiliate. 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 its investment in affiliates.
9
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.
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 supersedes 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. 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, 2003 and 2002 was approximately $19
million. Generally, backlog of orders are recognized as sales during the
subsequent six month period.
LIQUIDITY AND CAPITAL RESOURCES
On February 6, 2004, the Company replaced its revolving credit and security
agreement with a new credit facility provided by a commercial asset-based
lender. The new credit facility originally expired on February 6, 2007 and
provided for maximum borrowing capacity of up to $12 million based on a
percentage of eligible accounts receivable and inventories. This facility bore
interest based on the 30-day dealer placed commercial paper rate plus a
formula-determined spread of 4.5% in 2004 (total effective rate of 7.0% at
February 28, 2005), restricts the Company's ability to pay dividends, and
includes certain financial covenants (fixed charge coverage ratio and maximum
capital expenditure amount). Based on the Company's performance in 2004, the
formula-determined spread was reduced to 3.5% effective March 22, 2005 resulting
in a total effective rate of 6% at such date. Proceeds from this credit facility
are used primarily for working capital and other capital expenditure purposes.
The Company expects its capital expenditures to be approximately $1 million in
2005.
As of March 21, 2005, the Company amended its credit facility to increase the
maximum borrowing capacity from $12 million to $15 million, to increase the caps
on certain inventories and to extend the term by one year to February 6, 2008.
The Company also obtained a one-year term loan for $1 million bearing interest
at the commercial paper rate plus 3.75% and monthly principal payments of
$25,000 starting on April 1, 2005 with the remaining balance of $700,000 due on
March 21, 2006. The Company had borrowings of approximately $9 million and
borrowing capacity of approximately $12 million at March 21, 2005. This credit
facility amendment and term loan were obtained to finance the Showtime
acquisition discussed in "Recent Developments."
The Company's working capital increased to $4.5 million at December 31, 2004
from $3.0 million at December 31, 2003, largely due to a $2.3 million increase
in accounts receivable. Net cash of $1.1 million provided by operating
activities was used primarily for capital expenditures for property and
equipment and rental assets. The increase in accounts receivable was principally
attributable to sales in the fourth quarter to new customers and to slower
payment schedules for certain of the Company's significant Fortune 1000
customers.
10
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations and the
effect such obligations are expected to have on its liquidity and cash flows in
future periods.
Payment due by period
--------------------------------------------------------
Less than 1-3 3-5 More than 5
Contractual Obligations Total 1 Year Years Years Years
----------------------- ------- --------- ------- ------- -----------
Long-Term Debt Obligations $ 5,057 $ 46 $ 34 $ 4,977 $ --
Capital Lease Obligations 96 38 58 -- --
Operating Lease Obligations 7,427 2,100 4,601 726 --
Purchase Obligations -- -- -- -- --
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet Under GAAP -- -- -- -- --
------- ------- ------- ------- -----
Total $12,580 $ 2,184 $ 4,693 $ 5,703 $ --
======= ======= ======= ======= =====
The Company jointly leases a 31,000 square foot facility with International Expo
Services, in which the Company holds a minority interest. The annual lease
commitment for this facility is $214,000 through September 22, 2007, which is
not included with the above future operating lease commitments.
The Company leases a facility from a partnership controlled by two shareholders
of the Company. This lease, which expires on May 14, 2019, contains an option
for the Company to terminate after May 14, 2009 subject to the landlord's
ability to re-rent the premises. The minimum annual rent is $771,000 through May
14, 2009 and is reset thereafter (not included in the table above). The Company
is also responsible for taxes, insurance and other operating expenses for this
facility.
OUTLOOK
The Company expects sales of trade show exhibits and related services to
increase in 2005 due to the Showtime acquisition and anticipates that sales of
store fixtures will be essentially unchanged in 2005 as compared with 2004.
Planned profit improvements for the Company's base businesses in 2005 are
expected to be offset by relocation and transition costs anticipated to
integrate the Showtime business with the Company's existing businesses.
Subsequent to this relocation and transition, the Company expects profit
improvements in 2006.
The Company wrote off accounts receivable and inventories in 2001 as a result of
K-Mart, a DMS Store Fixtures customer, filing for bankruptcy. The Company
currently has an unrecorded contingent gain in connection with the subsequent
settlement from its bankruptcy claim in the form of K-Mart common stock. The
Company expects to receive the majority of this common stock during 2005 and
will recognize any gain based on the market value at the time such common stock
is received and subsequently sold. Based on the current market value of this
common stock, the contingent gain is more than $600,000.
The Company acquired a past-due accounts receivable from mPhase Technologies,
Inc ("mPhase") in connection with the 2003 acquisition of Exhibit Crafts, Inc.
In March 2005, the Company settled the claim with this customer for
approximately 213,000 shares of mPhase common stock. Based on the current market
value of this common stock, the Company has a contingent gain of approximately
$90,000. Any gain will be recognized when the stock is received and subsequently
sold.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Exit or
Disposal Activities" ("FASB Statement FAS 146"). FAS 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs associated
with exit and disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance that the Emerging Issues Task
Force ("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." Effective in the first
quarter of 2003, the Company adopted the provisions of SFAS 146. This new
accounting principle had an impact on the timing and recognition of costs
associated with the Company's relocation and consolidation of its West Coast
operations, and is expected to have an impact on the timing and recognition of
costs associated with the Showtime acquisition and subsequent integration.
11
In December 2004, FASB issued FASB Statement No. 123 (revised 2004), Share-Based
Payment ("FAS123(R)" or the "Statement"). FAS 123(R) requires that the
compensation cost relating to share-based payment transactions, including grants
of employee stock options, be recognized in financial statements. That cost will
be measured based on the fair value of the equity or liability instruments
issued. FAS 123(R) covers a wide range of share-based compensation arrangements
including stock options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. FAS 123(R) is a
replacement of FASB Statement No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and its related interpretive guidance.
The effect of the Statement will be to require entities to measure the cost of
employee services received in exchange for stock options based on the grant-date
fair value of the award, and to recognize the cost over the period the employee
is required to provide services for the award. FAS 123(R) permits entities to
use any option-pricing model that meets the fair value objective in the
Statement.
The Company will be required to apply FAS 123(R) as of the beginning of its
first interim period that begins after June 15, 2005, which will be its quarter
ending September 30, 2005.
FAS 123(R) allows two methods for determining the effects of the transition: the
modified prospective transition method and the modified retrospective method of
transition. Under the modified prospective transition method, an entity would
use the fair value based accounting method for all employee awards granted,
modified, or settled after the effective date. As of the effective date,
compensation cost related to the non-vested portion of awards outstanding as of
that date would be based on the grant-date fair value of those awards as
calculated under the original provisions of Statement No. 123; that is, an
entity would not re-measure the grant-date fair value estimate of the unvested
portion of awards granted prior to the effective date of FAS 123(R). An entity
will have the further option to either apply the Statement to only the quarters
in the period of adoption and subsequent periods, or apply the Statement to all
quarters in the fiscal year of adoption. Under the modified retrospective method
of transition, an entity would revise its previously issued financial statements
to recognize employee compensation cost for prior periods presented in
accordance with the original provisions of Statement No. 123.
Although it has not yet completed its study of the transition methods, the
Company believes it will elect the modified prospective transition method. Under
this method, the Company estimates that the adoption of FAS 123(R) will require
the Company to record approximately $15,000 of stock compensation expense in
2005 related to employee options issued and outstanding at December 31, 2004.
Additional stock options granted in March 2005 in connection with the Showtime
acquisition are expected to have an impact of approximately $130,000 on stock
compensation expense in each year from 2005 through 2009. Any further impact of
this Statement on the Company in fiscal 2005 and beyond will depend upon various
factors including future compensation strategy. The pro forma compensation costs
are calculated using the Black-Scholes option pricing model and may not be
indicative of amounts which should be expected in future years.
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.
12
Measurement of goodwill and other intangible asset impairment involves
assumptions and estimates by management on a quarterly basis. The adoption of
SFAS 142 requires estimates of fair values for certain operating units. These
estimates involve discounted cash flow forecasts to determine the fair value of
operating units having unamortized goodwill balances, and also consider the
Company's market capitalization.
The evaluation of deferred income tax assets also involves management's
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 relocate and integrate the Showtime
business without significant loss of its customer base and within the cost
budget; 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; uncertainties
about the impact of 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Fluctuations in interest rates, foreign currency exchange rates and commodity
prices do not significantly affect the Company's financial position and results
of operations. The Company's revolving credit facility bears an interest rate
based on 30-day dealer placed commercial paper rate, plus a formula amount based
on the Company's fixed charge ratio, which resulted in 4.5% for 2004. The total
interest rate at February 28, 2005 was 7%. Based on the Company's performance in
2004, this rate was reduced to 6% at March 21, 2005.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, together with the report of the Company's independent
accountants thereon, are presented under Item 15 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 17, 2003, the Company dismissed PricewaterhouseCoopers LLP ("PwC")
as its independent registered public accounting firm and appointed McGladrey and
Pullen, LLP ("McGladrey") as its new independent public accountant. The decision
to dismiss PwC and to retain McGladrey was approved by the Company's Audit
Committee and Board of Directors on November 17, 2003.
The report of PwC on the Company's financial statements for the year ended
December 31, 2002 did not contain an adverse opinion or disclaimer of opinion,
nor was it qualified or modified as to uncertainty, audit scope or accounting
principles.
13
During the Company's 2002 fiscal year and through November 17, 2003 there were
no disagreements with PwC on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to PwC's satisfaction, would have caused PwC to
make reference to the subject matter of the disagreement in connection with its
reports.
During the Company's 2002 fiscal year and through November 17, 2003, there were
no reportable events (as defined in Regulation S-K Item 304 (a) (1) (v)).
During the fiscal year ended December 31, 2002, and the subsequent interim
period up to November 17, 2003, the Company did not consult with McGladrey
regarding (i) the application of accounting principles to a specified
transaction, either completed or proposed, (ii) the type of audit opinion that
might be rendered on the Company's financial statements, or (iii) any other
matters or reportable events set forth in Items 304 (a) (1) (iv) and (a) (1) (v)
of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities and Exchange Act of 1934, as amended). Based on
this evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective, in timely alerting them to material information relating to the
Company required to be included in the Company's periodic filings with the
Securities and Exchange Commission.
There was no change in the Company's internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange
Act of 1934, as amended) during the Company's most recently completed fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
Items 10, 11, 12, 13 and 14 have been omitted from this report, in accordance
with General Instruction G (3). Such information is incorporated by reference
from the Company's definitive proxy statement to be filed with the SEC by May 2,
2005.
14
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm, McGladrey &
Pullen, LLP.
Report of Independent Registered Public Accounting Firm,
PricewaterhouseCoopers LLP.
Consolidated Statements of Operations for the years ended December
31, 2004, 2003 and 2002.
Consolidated Balance Sheets at December 31, 2004 and 2003.
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2004, 2003 and 2002.
Consolidated Statements of Cash Flows for the years ended December
31, 2004, 2003 and 2002.
Notes to Consolidated Financial Statements.
(2) Financial Statements Schedule: Valuation and Qualifying Accounts and
Reserves
(3) Exhibits:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
2.1 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).
2.2 Asset Purchase Agreement made as of January 11, 2005, by and
among Showtime Enterprises, Inc., Showtime Enterprises West,
Inc., and Sparks Exhibits & Environments Corp.
2.3 Order entered March 4, 2005 in the United States Bankruptcy
Court for the District of New Jersey in Showtime
Enterprises, Inc. and Showtime Enterprises West, Inc. (Case
Nos. 05-11089 and 05-11090).
3.1 Articles of Incorporation of the Company (Incorporated by
reference to the Company's Proxy Statement dated September
27, 2001, filed with the Commission).
3.2 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).
4.1 Warrants issued to Argosy Investment Partners II, L.P. to
acquire shares of Marlton common stock at an exercise price
of $0.98 per share.
4.2 Warrants issued to Argosy Investment Partners II, L.P. to
acquire shares of Marlton common stock at an exercise price
of $1.48 per share.
4.3 Warrants issued to Alliance Mezzanine Investors, L.P. to
acquire shares of Marlton common stock at an exercise price
of $0.98 per share.
15
4.4 Warrants issued to Alliance Mezzanine Investors,L.P. to
acquire shares of Marlton common stock at an exercise price
of $1.48 per share.
10.1 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).*
10.2 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).*
10.3 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).*
10.4 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).
10.5 Stockholders' Agreement dated 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).*
10.6 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).
10.7 Amended Agreement of Employment, dated December 11, 1992,
between the Company and Alan I. Goldberg. (Incorporated by
reference to Exhibit 10(g) to the Company's Annual Report on
Form 10-K for the year ended December 31, 2003, filed with
the Commission).*
10.8 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).*
10.9 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).*
10.10 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).*
10.11 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).*
10.12 Option Agreements with Outside Directors (Incorporated by
reference to Company Proxy Statement dated April 30, 1999,
filed with the Commission).*
16
10.13 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).*
10.14 Option Agreements dated March 1, 2002 with Outside Directors
(Incorporated by reference to Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the year ended December 31,
2001, filed with the Commission).*
10.15 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).*
10.16 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).*
10.17 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).
10.18 Amendment to Lease 2828 Charter Road, Philadelphia, PA dated
February 25, 2000 (Incorporated by reference to Exhibit
10(g) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, filed with the Commission).
10.19 Lease for Premises located at 8125 Troon Circle, Austell, GA
30001 (Incorporated by reference to Exhibit 10(s) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2003, filed with the Commission).
10.20 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).
10.21 Loan and Security Agreement dated as of February 6, 2004
with General Electric Capital Corporation. (Incorporated by
reference to Exhibit 10(u)) to the Company's Annual Report
on Form 10-KK for the year ended December 31, 2003, filed
with the Commission).
10.22 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).*
10.23 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).*
10.24 Option Agreement dated October 23, 2002 with Washburn
Oberwager (Incorporated by reference to Exhibit 10ee) to the
Company`s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002, filed with the Commission).*
10.25 Fourth Amendment to Lease Agreement dated September 11, 2003
for premises located at 8125 Troon Circle, Austell, GA 30001
(Incorporated by reference to Exhibit 10(cc) to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, filed with the Commission).
17
10.26 First Amendment to Lease Agreement dated October 31, 2003
for premises located at 2025 Gillespie Way, El Cajon, CA
92020 (Incorporated by reference to Exhibit 10 (ee) to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, filed with the Commission).
10.27 Second Amendment to and Partial Termination of Lease
Agreement dated January 1, 2004 for Premises located at 2025
Gillespie Way, El Cajon, CA 92020 (Incorporated by reference
to Exhibit 10(bb) to the Company's Annual Report on Form
10-K for the year ended December 31, 2003, filed with the
Commission).
10.28 Lease Agreement, First and Second Amendments for Premises
located at Building J, 10232 Palm Drive, Santa Fe Springs,
CA 90670 (Incorporated by reference to Exhibit 10(ff) to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, filed with the Commission).
10.29 Lease Agreement, First and Second Amendments for Premises
located at Building G, Heritage Springs Business Park, Santa
Fe Springs (Incorporated by reference to Exhibit 10(gg) to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, filed with the Commission).
10.30 Option Agreement dated May 13, 2004 with Stephen P. Rolf
(Incorporated by reference to Exhibit 10(c) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June
30, 2004, filed with the Commission).*
10.31 Fifth Amendment to Lease Agreement dated April 27, 2004 for
the Premises located at 8125 Troon Circle, Austell, GA
Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2004
10.32 Lease dated November 17, 1998 by and between Sunset & Valley
Distribution Center Joint Venture (the "Joint Venture") and
Showtime Enterprises West, Inc. ("Showtime West"), as
amended by and together with, the first amendment thereto
dated June 22, 1999, the second amendment thereto dated
March 31, 2000, by and between The Northwestern Mutual Life
Insurance Company ("Northwestern"), Sunset and Valley View
Partners ("Partners") and Showtime West the third amendment
thereto dated March 27, 2003 by and between Northwestern,
Partners and Showtime West and the fourth amendment thereto
dated February 29, 2004 by and between Northwestern,
Partners and Showtime West.
10.33 Employment Agreement dated March 15, 2005 by and between
Sparks Exhibits & Environments Corp. and David S. Sudjian *
10.34 Employment Agreement dated March 15, 2005 by and between
Sparks Exhibits & Environments Corp. and Harold Jensen.*
10.35 Royalty Agreement dated March 15, 2005 by and among Sparks
Exhibits & Environments Corp., Argosy Investment Partners
II, LP and Alliance Mezzanine Investors, L. P.
10.36 Stock Option Agreement dated as of March 15, 2005 by Marlton
Technologies, Inc and David S. Sudjian with respect to the
grant of 500,000 shares of Marlton common stock.*
18
10.37 Stock Option Agreement dated as of March 15, 2005 by Marlton
Technologies, Inc and Harold Jensen with respect to the
grant of 500,000 shares of Marlton common stock.*
10.38 Letter agreement dated March 15, 2005 by and among Sparks
Exhibits & Environments Corp., David S. Sudjian and Harold
Jensen.
10.39 First Amendment to Loan and Security Agreement with General
Electric Capital Corporation (Incorporated by reference to
Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2004, filed with the
Commission).
10.40 Consent and Second Amendment to Loan and Security Agreement
dated as of March 15, 2005 by and among General Electric
Capital Corporation, Sparks Exhibits & Environments Corp.,
Sparks Exhibits & Environments, Ltd., Sparks Exhibits &
Environments, Inc. and DMS Store Fixtures LLC.
10.41 Term Note issued by Sparks Exhibits & Environments Corp. in
favor of General Electric Capital Corporation .
10.42 Note dated April 23, 2002 in favor of the United States
Business Administration (the "SBA Note").
10.43 Promissory Note made by Sparks Exhibits & Environments Corp.
in face amount of $257,144 in favor of Argosy Investment
Partners II, L.P.
10.44 Promissory Note made by Sparks Exhibits & Environments Corp.
in face amount of $142,856 in favor of Alliance Mezzanine
Investors, L.P.
10.45 Agreement for Assumption of Indebtedness dated December 14,
2004 by and among the U.S. Small Business Administration,
Showtime Enterprises, Inc. and Sparks Exhibits &
Environments Corp.
10.46 Unconditional Guarantee issued by Marlton Technologies, Inc.
in favor of the U.S. Small Business Administration with
respect to the SBA Note.
10.47 Option Agreement with Jeffrey Harrow dated December 20,
2004*
10.48 Option Agreement with Scott Tarte, dated December 20, 2004*
10.49 Agreement dated March 15, 2005 by and between Sparks
Exhibits & Environments Corp., Argosy Investment Partners
II, L.P. and Alliance Mezzanine Investors, L.P.
14 Code of Ethics (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31,
2003, filed with the Commission)
21 Subsidiaries of the Company (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2003, filed with the Commission)
31.1 Rule 13a - 14(a) / 15(d) - 14(a) Certification, Chief
Executive Officer
31.2 Rule 13a - 14(a) / 15(d) - 14(a) Certification, Chief
Financial Officer
32 Section 1350 Certifications
* Management contract or compensatory plan or arrangement.
19
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
-----------------------------------------------
President
By: /s/ Stephen P. Rolf
-----------------------------------------------
Chief Financial Officer
Dated: March 29, 2005
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 29, 2005
--------------------- Board of Directors
(Jeffrey K. Harrow)
/s/ Scott J. Tarte Vice Chairman of the March 29, 2005
--------------------- Board of Directors
(Scott J. Tarte)
/s/ A. J. Agarwal Director March 29, 2005
---------------------
(A. J. Agarwal)
Director March 29, 2005
---------------------
(Washburn Oberwager)
/s/ Richard Vague Director March 29, 2005
---------------------
(Richard Vague)
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Marlton Technologies, Inc.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of Marlton
Technologies, Inc. and subsidiaries as of December 31, 2004 and 2003 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended. Our audit also included the financial
statement schedule for the year ended December 31, 2004 listed in the Index at
Item 15. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Marlton
Technologies, Inc. and subsidiaries as of December 31, 2004 and 2003 and the
results of their operations and their cash flows for the years then ended in
conformity with U. S. generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ McGladrey & Pullen, LLP
-----------------------------
Blue Bell, Pennsylvania
March 21, 2005
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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), present fairly, in all material respects, the
results of operations and cash flows of Marlton Technologies, Inc. (the
"Company") for the year 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 and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audit. We conducted our audit of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provided a reasonable basis for our opinion.
As discussed in Note 4, the Company adopted a new financial accounting standard
during 2002.
/s/ PricewaterhouseCoopers LLP
------------------------------
Philadelphia, Pennsylvania
March 21, 2003
22
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
(in thousands except per share amounts)
2004 2003 2002
-------- -------- --------
Net sales $ 71,943 $ 65,587 $ 71,182
Cost of sales 56,524 51,203 57,027
-------- -------- --------
Gross profit 15,419 14,384 14,155
-------- -------- --------
Selling expenses 7,760 8,518 8,491
Administrative and general expenses 6,544 6,907 6,796
Restructuring and other expenses -- 1,114 --
-------- -------- --------
14,304 16,539 15,287
-------- -------- --------
Operating income (loss) 1,115 (2,155) (1,132)
-------- -------- --------
Other income (expense):
Interest and other income -- 21 42
Interest expense (510) (236) (382)
Income (loss) from investment in affiliates 72 (265) (1,156)
-------- -------- --------
(438) (480) (1,496)
-------- -------- --------
Income (loss) before income taxes and change in
accounting principle 677 (2,635) (2,628)
Provision for (benefit from) income taxes -- (434) 4,786
-------- -------- --------
Income (loss) before change in accounting principle 677 (2,201) (7,414)
Cumulative effect of change in accounting
principle, net of tax benefit -- -- (12,385)
-------- -------- --------
Net income (loss) after change in
accounting principle $ 677 $ (2,201) $(19,799)
======== ======== ========
Net income (loss) per common share before change
in accounting principle:
Basic $ 0.05 $ (0.17) $ (0.57)
======== ======== ========
Diluted $ 0.04 $ (0.17) $ (0.57)
======== ======== ========
Net income (loss) per common share after change
in accounting principle:
Basic $ 0.05 $ (0.17) $ (1.52)
======== ======== ========
Diluted $ 0.04 $ (0.17) $ (1.52)
======== ======== ========
23
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands except share and per share amounts)
ASSETS 2004 2003
-------- --------
Current assets:
Cash and cash equivalents $ 311 $ 241
Accounts receivable, net of allowance of $444 and $415, respectively 10,157 7,824
Inventories 7,069 6,272
Prepaid and other current assets 400 1,191
-------- --------
Total current assets 17,937 15,528
Property and equipment, net of accumulated depreciation 2,469 3,240
Rental assets, net of accumulated depreciation 2,875 2,789
Goodwill 2,750 2,714
Other assets, net of accumulated amortization of $1,781 and $1,603, respectively 126 388
Notes receivable 178 159
-------- --------
Total assets $ 26,335 $ 24,818
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 83 $ 89
Accounts payable 5,596 6,363
Accrued expenses and other current liabilities 7,722 6,080
-------- --------
Total current liabilities 13,401 12,532
Long-term liabilities:
Long-term debt, net of current portion 5,070 5,146
-------- --------
Total liabilities 18,471 17,678
======== ========
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, $.10 par - shares authorized 10,000,000; no shares outstanding -- --
Common stock, no par value - shares authorized 50,000,000; 12,939,696
outstanding at December 31, 2004; 12,844,696 outstanding
at December 31, 2003 -- --
Stock warrants 742 742
Additional paid-in capital 32,998 32,951
Accumulated deficit (25,728) (26,405)
-------- --------
8,012 7,288
Less cost of treasury shares;
148,803 shares at December 31, 2004 and 2003 (148) (148)
-------- --------
Total stockholders' equity 7,864 7,140
-------- --------
Total liabilities and stockholders' equity $ 26,335 $ 24,818
======== ========
The accompanying notes to the consolidated financial statements are
an integral part of these financial statements.
24
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 2004, 2003 and 2002
(in thousands except share amounts)
Common Stock Additional Total
--------------------- Paid-in Stock Accumulated Treasury Stockholders'
Shares Amount Capital Warrants Deficit Stock Equity
----------- ------ ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 12,988,499 $ -- $ 32,951 $ 742 $ (4,405) $ (112) $ 29,176
Repurchase of common stock (143,403) -- -- -- -- (35) (35)
Net loss -- -- -- -- (19,799) -- (19,799)
----------- ------ ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 12,845,096 -- 32,951 742 (24,204) (147) 9,342
Repurchase of common stock (400) -- -- -- -- (1) (1)
Net loss -- -- -- -- (2,201) -- (2,201)
----------- ------ ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2003 12,844,696 -- 32,951 742 (26,405) (148) 7,140
Shares issued under
compensation arrangements 95,000 -- 47 -- -- -- 47
Net income -- -- -- -- 677 -- 677
----------- ------ ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2004 12,939,696 $ -- $ 32,998 $ 742 $ (25,728) $ (148) $ 7,864
=========== ====== =========== =========== =========== =========== ===========
The accompanying notes to the consolidated financial statements are
an integral part of these financial statements.
25
MARLTON TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31,
(in thousands)
2004 2003 2002
-------- -------- --------
Cash flows provided from operating activities:
Net income (loss) $ 677 $ (2,201) $(19,799)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 1,869 2,088 2,185
Impairment loss from investments in affiliates -- 259 1,156
Net changes in deferred taxes -- -- 4,766
Cumulative effect of change in accounting principle -- -- 12,385
Property and equipment asset impairment -- -- 175
Other non-cash operating items 30 (54) --
Losses from asset disposals -- 238 --
Change in assets and liabilities:
(Increase) decrease in accounts receivable, net (2,333) 355 2,563
(Increase) decrease in inventories (797) (219) 875
(Increase) decrease in prepaid and other assets 791 (122) 205
(Increase) decrease in notes and other receivables (19) (183) 544
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities 875 (189) (1,368)
-------- -------- --------
Net cash provided by (used in) operating
activities 1,093 (28) 3,687
-------- -------- --------
Cash flows from investing activities:
Investment in affiliate (16) -- --
Proceeds from acquisition receivable 214 -- --
Acquisition of business, net of cash acquired (37) (384) --
Capital expenditures (911) (914) (1,269)
-------- -------- --------
Net cash used in investing activities (750) (1,298) (1,269)
-------- -------- --------
Cash flows from financing activities:
Proceeds from (payments for) revolving credit facility, net 30 947 (2,500)
Proceeds from exercised stock options 38 -- --
Payments for loan origination fees (133) (108) (105)
Payments for acquisition obligations, net (126) (3) --
Payments for leasehold improvement obligation (82) (20) --
Repurchase of common stock -- (1) (35)
Payments for promissory note -- (128) (98)
Payments for notes payable, sellers -- -- (33)
-------- -------- --------
Net cash provided by (used in) financing
activities (273) 687 (2,771)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 70 (639) (353)
Cash and cash equivalents - beginning of year 241 880 1,233
-------- -------- --------
Cash and cash equivalents - end of year $ 311 $ 241 $ 880
======== ======== ========
The accompanying notes to the consolidated financial statements are
an integral part of these financial statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Marlton
Technologies, Inc., its wholly and majority owned subsidiaries and the effects
of minority investments in non-consolidated businesses (the "Company").
Investments in affiliates, representing the Company's 20% or more but less than
50% investments are accounted for using the equity method. All inter-company
accounts and transactions are eliminated.
Activity included in the consolidated statements of operations consists
primarily of the custom design, production and sale of exhibits and environments
for trade shows, museums, theme parks, themed interiors, arenas, corporate
lobbies and retail stores for clients in industry, government, entertainment and
commercial establishments.
The Company operates in one segment and utilizes consolidated operating results
for management and resource allocation purposes.
CASH EQUIVALENTS
The Company considers all investments with an initial maturity of three months
or less to be cash equivalents. Temporary cash investments comprise principally
short-term government funds. At various times throughout the year, the Company
maintains cash balances at banking institutions in excess of FDIC limits.
ACCOUNT RECEIVABLE
Accounts receivable are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
quarterly basis. Management estimates these possible losses based on a review of
the financial condition and payment history of specific customers having
significant accounts receivable balances, and establishes a general reserve for
the remaining accounts receivable based on historical bad debt experience.
Accounts receivable are written off when deemed uncollectible. Recoveries of
accounts receivables previously written off are recorded when received. A trade
receivable is considered to be past due if any portion of the receivable balance
is outstanding for more than 90 days. Interest is not charged on trade
receivables that are considered past due.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
include materials, labor and manufacturing overhead costs.
LONG-LIVED ASSETS
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the respective assets,
ranging primarily from 3 to 10 years. Assets and accumulated depreciation
accounts are reduced for the sale or other disposition of property, and the
resulting gain or loss is included in income. Rental assets, which include
manufactured and purchased exhibit components, are stated at cost. Depreciation
for rental assets is recorded on a straight-line basis over seven years.
Prior to January 1, 2002 the excess of cost over the fair value of net assets
acquired (goodwill) was amortized on a straight-line basis over periods ranging
from 5 to 30 years. After January 1, 2002, no amortization is recorded for these
assets.
Included in other assets are loan origination fees, which are amortized on the
interest method 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
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
value, future asset utilization, business climate and future undiscounted cash
flows expected to result from the use of the net assets. For the fourth quarter
of 2003, the Company recorded an impairment loss of $259,000 related to the
investment in its Sparks Europe affiliate. During 2002, the Company recorded an
impairment loss of $176,000 associated with the property and equipment of its
DMS Store Fixtures subsidiary.
REVENUE RECOGNITION
Revenues on trade show exhibit sales, themed interiors, custom store fixtures
and point of purchase displays are recognized using the completed contract
method. The Company's contracts are typically less than three months in
duration. As a result, the Company's revenue recognition would not differ
materially if another method were used. Progress billings are generally made
throughout the production process. Progress billings which are unpaid at the
balance sheet date are not recognized in the financial statements as accounts
receivable. Progress billings which have been collected on or before the balance
sheet date are classified as customer deposits and are included in accrued
expenses and other current liabilities. Billings for shipping and handling are
recorded as revenue and the related costs are included in the cost of sales.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based upon the future
tax consequences of events that have been included in the financial statements
or tax returns. Deferred tax assets and liabilities are calculated based on the
difference between the financial reporting and tax bases of assets and
liabilities using the currently enacted tax rates in effect during the years in
which the differences are expected to reverse. A valuation allowance is
established based on the future recoverability of deferred tax assets.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results may differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company places its cash and temporary cash investments with high
quality financial institutions. The Company's trade 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 10%, 15% and 20% of the Company's
consolidated net sales in 2004, 2003, and 2002, respectively. The loss of this
customer could have a material adverse effect on the Company.
STOCK-BASED COMPENSATION
Compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant above the amount
an employee must pay to acquire the stock granted under the option.
The Company adopted the disclosure - only provisions of SFAS 123, "Accounting
for Stock-Based Compensation" and applied 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
on the following page:
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share amounts)
Year ended December 31,
---------------------------------
2004 2003 2002
------- -------- ----------
Net income (loss) As reported $ 677 $ (2,201) $ (19,799)
------- -------- ----------
Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of tax (150) (67) (290)
------- -------- ----------
Pro forma $ 527 $ (2,268) $ (20,089)
======= ======== ==========
Diluted income (loss)
per common share As reported $ .04 $ (.17) $ (1.52)
======= ======== ==========
Pro forma $ .03 $ (.18) $ (1.55)
======= ======== ==========
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 2004, 2003 and 2002 include the following:
Assumption 2004 2003 2002
---------- ---- ---- ----
Dividend yield 0.0% 0.0% 0.0%
Risk-free rate 1.5% 1.5% 4.0%
Expected life 4-5 years 3-5 years 3-5 years
Expected volatility 306% 62% 62%
Fair Value $.36 $.18 $.18
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
approximated their fair value at December 31, 2004 and 2003.
PER SHARE DATA
Basic net income per common share is calculated using the average shares of
common stock outstanding, while diluted net income per common share reflects the
potential dilution that could occur if stock options and warrants having
exercise prices below market prices were exercised.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Exit or
Disposal Activities" ("FASB Statement FAS 146"). FAS 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs associated
with exit and disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance that the Emerging Issues Task
Force ("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." Effective in the first
quarter of 2003, the Company adopted the provisions of SFAS 146. This new
accounting principle had an impact on the timing and recognition of costs
associated with the Company's relocation and consolidation of its West Coast
operations, and is expected to have an impact on the timing and recognition of
costs associated with the Showtime acquisition and subsequent integration.
In December 2004, FASB issued FASB Statement No. 123 (revised 2004), Share-Based
Payment ("FAS123(R)" or the "Statement"). FAS 123(R) requires that the
compensation cost relating to share-based payment transactions, including grants
of employee stock options, be recognized in financial statements. That cost will
be measured based
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on the fair value of the equity or liability instruments issued. FAS 123(R)
covers a wide range of share-based compensation arrangements including stock
options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. FAS 123(R) is a replacement of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
interpretive guidance.
The effect of the Statement will be to require entities to measure the cost of
employee services received in exchange for stock options based on the grant-date
fair value of the award, and to recognize the cost over the period the employee
is required to provide services for the award. FAS 123(R) permits entities to
use any option-pricing model that meets the fair value objective in the
Statement.
The Company will be required to apply FAS 123(R) as of the beginning of its
first interim period that begins after June 15, 2005, which will be its quarter
ending September 30, 2005.
FAS 123(R) allows two methods for determining the effects of the transition: the
modified prospective transition method and the modified retrospective method of
transition. Under the modified prospective transition method, an entity would
use the fair value based accounting method for all employee awards granted,
modified, or settled after the effective date. As of the effective date,
compensation cost related to the non-vested portion of awards outstanding as of
that date would be based on the grant-date fair value of those awards as
calculated under the original provisions of Statement No. 123; that is, an
entity would not remeasure the grant-date fair value estimate of the unvested
portion of awards granted prior to the effective date of FAS 123(R). An entity
will have the further option to either apply the Statement to only the quarters
in the period of adoption and subsequent periods, or apply the Statement to all
quarters in the fiscal year of adoption. Under the modified retrospective method
of transition, an entity would revise its previously issued financial statements
to recognize employee compensation cost for prior periods presented in
accordance with the original provisions of Statement No. 123.
Although it has not yet completed its study of the transition methods, the
Company believes it will elect the modified prospective transition method. Under
this method, the Company estimates that the adoption of FAS 123(R) will require
the Company to record approximately $15,000 of stock compensation expense in
2005 related to employee options issued and outstanding at December 31, 2004.
Additional stock options granted in March 2005 in connection with the Showtime
acquisition are expected to have an impact of approximately $130,000 on stock
compensation expense in each year from 2005 through 2009. Any further impact of
this Statement on the Company in fiscal 2005 and beyond will depend upon various
factors including future compensation strategy. The pro forma compensation costs
are calculated using the Black-Scholes option pricing model and may not be
indicative of amounts which should be expected in future years.
2. ACQUISITIONS AND RESTRUCTURING COSTS
On August 1, 2003, a Company subsidiary acquired the assets of Exhibit Crafts,
Inc., a Los Angeles, CA area manufacturer of trade show exhibits and a 20%
interest in International Exposition Services, Inc., (IES), a trade show
shipping and installation provider. The initial purchase price was $694,000,
including the assumption of certain liabilities totaling $310,000. In addition,
the sellers received 20% of the Company subsidiary's common stock. The purchase
price approximated the fair value of the net assets acquired. In addition, the
asset purchase agreement provides for contingent payments of up to $750,000
based on operating performance in 2005, 2006 and 2007, including interest on the
then remaining future potential contingent payments. These contingent payments,
if any, and interest on the remaining future potential contingent payments will
be reflected as an increase in goodwill. Interest on the remaining future
potential contingent payments increased goodwill by $37,000 in 2004.
The Company relocated its San Diego area manufacturing facility to the newly
acquired Los Angeles, CA area facility during the third quarter of 2003. Costs
recorded in the third quarter of 2003 in connection with this relocation and
consolidation were approximately $1.1 million, which included relocation and
employee termination expenses and the Company recorded a charge for a portion of
the remaining lease obligation related to the vacated San Diego area facility.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 15, 2005, Sparks Exhibits & Environments Corp., a subsidiary of the
Company, acquired substantially all of the assets and assumed specified
liabilities of Showtime Enterprises, Inc. and its subsidiary, Showtime
Enterprises West, Inc. (collectively "Showtime"). Showtime designs, markets and
produces trade show exhibits, point of purchase displays, museums and premium
incentive plans. Showtime had sales of approximately $21 million in 2004. On
January 12, 2005, Showtime filed a Chapter 11 bankruptcy petition in the United
States Court for the District of New Jersey, and the acquisition was
subsequently approved by such court. The purchase price paid by the Sparks
subsidiary pursuant to the Agreement and related transactions consisted of (i)
approximately $2.1 million in cash, (ii) the assumption of approximately
$580,000 of indebtedness payable to the United States Small Business
Administration, (iii) the assumption of specified contractual obligations and
(iv) additional consideration associated with Showtime's senior subordinated
debentures consisting of approximately $0.4 million in cash, $0.4 million in 6%
notes due March 15, 2009, warrants to acquire an aggregate of 600,000 shares of
Common Stock exercisable through 2012 at a weighted average exercise price of
$1.06 and one percent of annual sales originating from Showtime customers and
account executives from April 1, 2005 through March 31, 2009. The Company
financed this acquisition by increasing its revolving credit facility borrowing
capacity and obtaining a new term loan in March 2005. Audited financial
statements for Showtime and pro-forma combined financial statements for the
Company and Showtime will, if required, be filed in May 2005 by amending the
Company's current report on Form 8-K filed with the SEC on March 21, 2005.
3. TERMINATED MERGER AGREEMENT
The Company and Redwood Acquisition Corp. ("Redwood") entered into a merger
agreement in February 2003 pursuant to which all of the outstanding shares of
common stock of the Company (other than the shares held by approximately eight
shareholders) would be converted into the right to receive $0.30 per share. On
June 19, 2003, the Company's Board of Directors approved a termination proposal
submitted by Redwood, which terminated the proposed merger agreement. Costs of
approximately $250,000 incurred in connection with this proposed merger were
charged to administrative and general expenses in the second quarter of 2003.
4. ACCOUNTING CHANGE (ADOPTION OF SFAS NO. 142)
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 supersedes 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. 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.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
per common share:
(in thousands except per share data)
2004 2003 2002
------- ------- --------
Net income (loss) before change in accounting principle $ 677 $(2,201) $ (7,414)
======= ======= ========
Net income (loss) after change in accounting principle $ 677 $(2,201) $(19,799)
======= ======= ========
Weighted average common
shares outstanding used to compute
basic net income per common share 12,863 12,845 12,984
Additional common shares to be issued
assuming exercise of stock options,
net of shares assumed reacquired 2,844 -- --
Total shares used to compute diluted
net income per common share 15,707 12,845 12,984
======= ======= ========
Basic net income (loss) per share before change in
accounting principle $ .05 $ (.17) $ (.57)
======= ======= ========
Diluted net income (loss) per share before change in
accounting principle $ .04 $ (.17) $ (.57)
======= ======= ========
Basic net income (loss) per share after change in
accounting principle $ .05 $ (.17) $ (1.52)
======= ======= ========
Diluted net income (loss) per share after change in
accounting principle $ .04 $ (.17) $ (1.52)
======= ======= ========
Options and warrants to purchase 113,000, 7,175,000 and 7,492,000 shares of
common stock at prices ranging from $.50 per share to $6.25 per share were
outstanding at December 31, 2004, 2003 and 2002, respectively, but were not
included in the computation of diluted income per common share because the
options' and warrants' exercise price was equal to or greater than the market
price of the common shares.
6. STATEMENTS OF CASH FLOWS INFORMATION
Capital additions of $96,000 were financed in 2004 with capital lease
obligations.
Cash paid for interest in 2004, 2003, and 2002 was $544,000, $250,000 and
$314,000, respectively.
Cash paid for income taxes in 2002 was $5,000.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INVENTORIES, NET
Inventories at December 31 consisted of the following:
(in thousands)
2004 2003
------ ------
Raw materials $ 440 $ 467
Work in process 3,231 3,579
Finished goods 3,398 2,226
------ ------
$7,069 $6,272
====== ======
8. INVESTMENT IN AFFILIATES
The Company recognized an impairment loss of $259,000 in the fourth quarter of
2003 related to its investment in Sparks Europe.
The Company recognized an impairment loss of approximately $1.2 million in the
first quarter of 2002 related to its investment in Abex Display Systems Inc.
9. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consisted of the following:
(in thousands)
2004 2003
------- -------
Manufacturing equipment and vehicles $ 2,040 $ 2,017
Office equipment and data processing 8,219 8,357
Leasehold improvements 2,609 2,578
Showroom exhibits, construction in progress and other 393 394
------- -------
$13,261 $13,346
Less accumulated depreciation and amortization 10,792 10,106
------- -------
$ 2,469 $ 3,240
======= =======
Rental assets at December 31 consist of the following:
Rental assets $ 7,114 $ 6,461
Less accumulated depreciation 4,239 3,672
------- -------
$ 2,875 $ 2,789
======= =======
10. ACCRUED EXPENSES AND OTHER
Accrued expenses and other at December 31 consisted of the following:
(in thousands)
2004 2003
------ ------
Customer deposits $3,045 $2,955
Accrued compensation 1,473 934
Accrued payroll, sales and business taxes 262 134
Accrued contractual costs 292 116
Accrued restructuring expenses -- 402
Other 2,650 1,539
------ ------
$7,722 $6,080
====== ======
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. DEBT OBLIGATIONS AND SUBSEQUENT EVENT
On February 6, 2004, the Company replaced its revolving credit and security
agreement with a new credit facility provided by a commercial asset-based
lender. The new credit facility originally expired on February 6, 2007 and
provided for maximum borrowing capacity of up to $12 million based on a
percentage of eligible accounts receivable and inventories. This facility bears
interest based on the 30-day dealer placed commercial paper rate plus a
formula-determined spread of 4.5% in 2004 (total effective rate of 7.0% at
February 28, 2005), restricts the Company's ability to pay dividends, and
includes certain financial covenants (fixed charge coverage ratio and maximum
capital expenditure amount). Based on the Company's performance in 2004, the
formula-determined spread was reduced to 3.5% effective March 22, 2005 resulting
in a total effective rate of 6% at such date. Proceeds from this credit facility
are used primarily for working capital and other capital purposes.
As of March 21, 2005, the Company amended its credit facility to increase the
maximum borrowing capacity from $12 million to $15 million, to increase the caps
on certain inventories and to extend the term by one year to February 6, 2008.
The Company also obtained a one-year term loan for $1 million bearing interest
at the commercial paper rate plus 3.75% and monthly principal payments of
$25,000 starting on April 1, 2005 with the remaining balance of $700,000 due on
March 21, 2006. The Company had borrowings of approximately $9 million and
borrowing capacity of approximately $12 million at March 21, 2005. This credit
facility amendment and term loan were obtained to finance the Showtime
acquisition.
The Company's debt obligations at December 31 consisted of the following:
(In thousands)
2004 2003
------ ------
Revolving credit facility $4,977 $4,947
Capital lease obligations 96 --
Acquisition agreement obligation -- 162
Acquired leasehold improvement obligation 80 126
------ ------
$5,153 $5,235
Less current portion 83 89
------ ------
$5,070 $5,146
====== ======
Aggregate future long-term debt maturities are as follows:
(In thousands)
Years ending December 31, Amount
------------------------- ------
2005 $ 83
2006 75
2007 18
2008 4,977
12. RELATED PARTY TRANSACTIONS
The Company leases a facility from a partnership controlled by two shareholders
of the Company. This lease, which expires on May 14, 2019, contains an option
for the Company to terminate after 10 years (May 14, 2009) subject to the
landlord's ability to relet the premises. The minimum annual rent is $771,000
through May 14, 2009 and is reset thereafter (not included in the following
table). The Company is also responsible for taxes, insurance and other operating
expenses for this facility.
The Company jointly leases a 31,000 square foot facility with International Expo
Services ("IES"), in which the Company holds a minority interest. The annual
lease commitment for this facility is $214,000 through September 22, 2007. The
Company also jointly services certain customer jobs with IES.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMITMENTS AND CONTINGENCIES
The Company operates in leased office, warehouse and production facilities.
Lease terms range from monthly commitments up to 17 years with options to renew
at varying times. Certain lease agreements require the Company to pay utilities,
taxes, insurance and maintenance.
As of December 31, 2004, future minimum lease commitments under non-cancelable
operating leases are as follows:
(In thousands)
Years ending December 31, Amount
------------------------- ------
2005 $2,100
2006 2,043
2007 1,498
2008 1,060
2009 636
2010 and thereafter 90
------
Total minimum lease commitments $7,427
======
The Company jointly leases a 31,000 square foot facility with International Expo
Services, Inc. ("IES"), in which the Company holds a minority interest. The
annual lease commitment for this facility is $214,000 through September 22,
2007, which is not included with the above future lease commitments. Payments in
connection with this lease are made by IES.
Rental expense, exclusive of supplemental costs, was approximately $2,438,000,
$2,372,000, and $2,138,000 for 2004, 2003 and 2002, respectively.
The Company is engaged in legal proceedings in the normal course of business.
The Company believes that any unfavorable outcome from these suits not covered
by insurance would not have a material adverse effect on the financial
statements of the Company.
14. 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.
STOCK OPTIONS
In 1990, the Company adopted the 1990 Incentive Plan which provides for the
granting of Incentive Stock Options ("ISO") and a 1990 Non-statutory Option Plan
which provides for the granting of Non-statutory 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.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1992, the Company adopted the 1992 Directors' and Consultants' Stock Option
Plan (the "1992 Plan") which provides for the granting of options to purchase up
to 50,000 common shares to directors and consultants who are neither principal
stockholders, nor receive salary compensation. Prices are determined as in the
1990 Plan. The 1992 Plan was amended in June 1998 to eliminate non-discretionary
annual stock awards, to provide stock awards or options as determined by the
Board and to increase the authorized shares to a total of 250,000.
In 2000, the Company adopted the 2000 Equity Incentive Plan (the "2000 Plan")
which provides for the granting of up to 735,000 Common Stock options, stock
appreciation rights, stock units and restricted shares to employees, outside
directors and consultants. Prices are determined as in the 1990 Plan. Terms of
other securities are determined by a committee of the Board of Directors.
In 2001, the Company adopted the 2001 Equity Incentive Plan (the "2001 Plan")
which provides for the granting of up to 2,000,000 Common Stock options and
restricted shares to employees, outside directors and consultants. Options are
exercisable at a price not less than the market value of the shares at the date
of grant in the case of ISO's. Terms of other securities are determined by a
committee of the Board of Directors.
Options may be granted to employees outside of the foregoing plans as an
incentive to accept employment with the Company. The amount of options so
granted cannot exceed 5% of the Company's outstanding shares of Common Stock.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of stock option transactions and exercise prices:
Weighted
Shares Price Per Share Average
--------- -------------- -----
Outstanding at December 31, 2001 666,522 $2.00 to $6.25 $3.13
=========
Granted 1,676,242 $.50 $ .50
Expired or cancelled (250,919) $2.13 to $4.00 3.05
Exercised -- -- --
---------
Outstanding at December 31, 2002 2,091,845 $.50 to $6.25 $1.03
=========
Granted -- -- --
Expired or cancelled (316,767) $.50 to $6.25 $3.30
Exercised -- -- --
---------
Outstanding at December 31, 2003 1,775,078 $.50 to $2.13 $ .63
=========
Granted 520,000 $.32 to $.75 $ .62
Expired or cancelled (60,500) $.50 to $2.13 $1.41
Exercised (75,000) $.50 $ .50
---------
Outstanding at December 31, 2004 2,159,578 $.32 to $2.00 $ .61
=========
The following table summarizes information concerning outstanding and
exercisable stock options as of December 31, 2004:
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 40,000 .53 $2.00 40,000 $2.00
1992 Plan $2.00 73,336 .47 $2.00 73,336 $2.00
2000 Plan $.32 to $.60 150,000 3.93 $ .51 75,000 $ .41
2001 Plan $.50 to $.75 1,896,242 5.76 $ .53 1,856,242 $ .53
--------- ----------
Grand Total $.32 to $2.00 2,159,578 5.36 $ .61 2,044.578 $ .61
============= ========= ==== ===== ========== =====
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of stock options exercisable at December 31, 2004,
2003 and 2002, and their respective weighted-average share prices:
Weighted Average
Number of Shares Exercise Price
---------------- ----------------
Options exercisable December 31, 2004 2,159,578 $0.61
Options exercisable December 31, 2003 1,750,078 $0.63
Options exercisable December 31, 2002 1,913,520 $1.07
15. EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution savings plan under Section 401(k)
of the Internal Revenue Code which provides retirement benefits to certain
employees of the Company and its wholly-owned subsidiaries who meet certain age
and length of service requirements. The Company's contribution to the Plan is
determined by management. There were no charges to income with respect to this
Plan in 2004, 2003 or 2002.
16. INCOME TAXES
The components of the provision for (benefit from) income taxes were as follows:
(in thousands)
2004 2003 2002
------- ------- -------
Current:
Federal -- $ (434) $--
State -- -- --
Deferred:
Federal -- -- 4,552
State -- -- 234
------- ------- -------
-- $ (434) $ 4,786
======= ======= =======
The Company is currently using operating loss carry forwards to offset its
taxable income. As a result, the Company did not record an income tax provision
for its 2004 pre-tax income.
A reconciliation of federal statutory income taxes to the Company's effective
income tax expense is as follows:
2004 2003 2002
------- ------- -------
Federal statutory rate $ 230 $ (896) $ (894)
State income tax, net of federal
income tax effect 20 234 234
Non-deductible expenses 16 120 28
Valuation allowance (172) 510 5,384
Fully reserved net operating loss utilization -- (434) --
Other, net (94) 32 34
------- ------- -------
-- $ (434) $ 4,786
======= =======
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net deferred tax asset at December 31, 2004 and 2003 consisted of the
following:
(in thousands)
2004 2003
------- -------
Accounts receivables $ 164 $ 153
Inventories 191 140
Property and equipment 14 11
Accrued expenses and compensation 209 43
Goodwill and intangibles 2,473 2,675
Operating loss and credit carry forward 3,032 2,234
Other, net 924 924
Valuation allowance (7,007) (6,180)
------- -------
-- --
======= =======
During the years ended 2004 and 2003, the valuation allowance increased by
$827,000 and decreased by $840,000, respectively. The Company has a valuation
allowance of $7 million to fully reserve for its deferred tax assets as of
December 31, 2004. This allowance was based on an evaluation of several factors,
including prior years' actual operating results and projected operating results.
The Company has available approximately $4.6 million of net operating loss carry
forwards, which begin to expire in 2016.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized unaudited quarterly financial data for the years ended December 31,
2004 and 2003 are:
(In thousands except per share amounts)
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
2004
Net sales $ 18,549 $ 20,556 $ 16,796 $ 16,042
Gross profit 4,739 4,255 3,334 3,091
Net income (loss) 905 507 (185) (550)
Basic net income (loss)
per common share .07 .04 (.01) (.04)
Diluted net income (loss)
per common share .07 .04 (.01) (.04)
2003
Net sales $ 17,456 $ 19,864 $ 12,626 $ 15,641
Gross profit 4,402 4,607 2,226 3,149
Net income (loss)* 416 295 (1,916) (996)
Basic net income (loss)
per common share .03 .02 (.15) (.08)
Diluted net income (loss)
per common share .03 .02 (.15) (.08)
o The second quarter of 2003 includes a $0.3 million expense from a
terminated merger agreement. The third quarter of 2003 includes a $1.1
million restructuring provision for facility relocation. The fourth
quarter of 2003 includes an impairment write down of $0.3 million in the
Company's investment in an affiliate.
39
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, 2004
Allowances deducted from
Assets to which they apply:
Trade accounts receivable $ 415 $ 146 -- $ 117 $ 444
Inventory obsolescence 86 8 -- 52 42
Deferred tax assets 6,180 827 -- -- 7,007
For the Year Ended December 31, 2003
Allowances deducted from
Assets to which they apply:
Trade accounts receivable $ 309 $ 327 -- $ 221 $ 415
Inventory obsolescence 597 157 -- 668 86
Deferred tax assets 7,020 -- -- 840 6,180
For the Year Ended December 31, 2002
Allowances deducted from
Assets to which they apply:
Trade accounts receivable $ 502 $ 317 -- $ 510 $ 309
Inventory obsolescence 1,121 361 -- 885 597
Deferred tax assets 313 *6,707 -- -- 7,020
* In the fourth quarter 2002, the Company established a valuation allowance
of $7 million to fully reserve for its deferred tax assets as of December
31, 2002. This allowance was based on an evaluation of several factors,
including prior years' actual operating results and projected operating
results.
40