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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 5, 1997
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9843
MORGAN PRODUCTS LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1095650
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
469 McLaws Circle, Williamsburg, Virginia 23185
(Address of principal executive offices, including zip code)
(757) 564-1700
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
The number of shares outstanding of registrant's Common Stock, par value $.10
per share, at August 1, 1997 was 10,351,694 ; 2,386 shares are held in treasury.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MORGAN PRODUCTS LTD.
Consolidated Balance Sheets
($000 Except Shares Outstanding)
July 5, June 29, December 31,
1997 1996 1996
--------------- --------------- ------------------
(Unaudited) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,512 $ 2,105 $ 1,467
Accounts receivable, net 40,582 32,906 32,559
Inventories 69,765 52,924 73,683
Other current assets 1,378 804 632
------- ------- -------
Total current assets 113,237 88,739 108,341
------- ------- -------
OTHER ASSETS 11,020 4,211 10,638
PROPERTY, PLANT & EQUIPMENT, net 23,566 19,490 23,137
------- ------- -------
TOTAL ASSETS $147,823 $112,440 $142,116
------- ------- -------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 247 $ 221 $ 0
Current maturities of long-term debt 1,296 928 1,136
Accounts payable 15,138 16,060 19,449
Accrued compensation and employee benefits 4,373 6,231 6,219
Income tax payable 0 123 0
Other current liabilities 3,652 3,857 4,449
------- ------- -------
Total current liabilities 24,706 27,420 31,253
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LONG-TERM DEBT 63,720 32,057 48,880
STOCKHOLDERS' EQUITY:
Common Stock, $.10 par value, 10,351,508, 8,648,822, 1,035 865 1,015
and 10,149,816 shares outstanding, respectively
Paid-in capital 43,376 33,779 42,237
Retained earnings 15,066 18,632 18,927
------- ------- -------
59,477 53,276 62,179
Treasury stock, 2,386 shares, at cost (48) (48) (48)
Unamortized value of restricted stock (32) (265) (148)
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TOTAL STOCKHOLDERS' EQUITY 59,397 52,963 61,983
------- ------ -------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $147,823 $112,440 $142,116
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The accompanying notes are an integral part of the financial statements.
MORGAN PRODUCTS LTD.
Consolidated Income Statements
($000, except earnings per share amounts
and weighted average shares outstanding)
For the Three Months Ended For the Six Months Ended
------------------------------ ----------------------------
July 5 June 29, July 5, June 29,
1997 1996 1997 1996
-------------- -------------- -------------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales $ 106,801 $ 95,208 $ 202,606 $ 169,744
Cost of goods sold 91,759 80,829 170,140 144,867
------------ ---------- ----------- ----------
Gross profit 15,042 14,379 32,466 24,877
------------ ---------- ----------- ----------
Operating expenses:
Sales & marketing 10,364 8,553 20,999 16,641
General & administrative 3,065 3,634 6,959 6,071
Restructuring 2,203 881 4,713 881
Reorganization 17 0 1,117 0
------------ ---------- ----------- ----------
Total 15,649 13,068 33,788 23,593
------------ ---------- ----------- ----------
Operating income (loss) (607) 1,311 (1,322) 1,284
------------ ---------- ----------- ----------
Other income (expense):
Interest (1,335) (776) (2,571) (1,369)
Other 43 57 92 137
------------ ---------- ----------- ----------
Total (1,292) (719) (2,479) (1,232)
------------ ---------- ----------- ----------
Income (loss) before income taxes (1,899) 592 (3,801) 52
Provision for income taxes 30 30 60 49
------------ ---------- ----------- ----------
Net income (loss) $ (1,929) 562 $ (3,861) $ 3
============ ========== =========== ==========
Income (loss) per share $ (0.19) 0.06 $ (0.38) $ 0.00
============ ========== =========== ==========
Weighted average common and
common equivalent shares outstanding 10,267,367 8,697,176 10,208,501 8,684,274
============ ========== =========== ==========
The accompanying notes are an integral part of the financial statements.
MORGAN PRODUCTS LTD.
Consolidated Statements of Cash Flows
( $ 000 ' s )
For the Six Months Ended
------------------------
July 5, June 29,
1997 1996
------------- -------------
(Unaudited) (Unaudited)
CASH GENERATED (USED) BY OPERATING ACTIVITIES:
Net income (loss) $ (3,861) $ 3
Add noncash items included in income:
Depreciation and amortization 2,108 1,842
Provision for doubtful accounts 71 57
(Gain) loss on sale of property, plant, & equipment 7 (17)
Provision for restructuring 0 881
Other 116 117
Cash (used) generated by changes in components of working capital, net of
effects of acquisition of business:
Accounts receivable (8,094) (12,162)
Inventories 3,918 431
Accounts payable (2,407) 4,939
Other working capital (3,389) 869
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NET CASH GENERATED (USED) BY OPERATING ACTIVITIES (11,531) (3,040)
--------- ------
CASH GENERATED (USED) BY INVESTING ACTIVITIES:
Acquisition of property, plant, & equipment (2,233) (1,518)
Acquisition of Tennessee Building Products (2,160) 0
Proceeds from disposal of property, plant, & equipment 4 4,127
Other (441) 715
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NET CASH GENERATED (USED) BY INVESTING ACTIVITIES (4,830) 3,324
--------- ------
CASH GENERATED (USED) BY FINANCING ACTIVITIES:
Net change in short-term debt 247 221
Proceeds from long-term debt 15,598 27
Repayments of long-term debt (598) (3,540)
Common stock issued for cash 1,159 8
Other 0 (30)
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NET CASH GENERATED BY FINANCING ACTIVITIES 16,406 (3,314)
--------- ------
NET DECREASE IN CASH AND CASH EQUIVALENTS 45 (3,030)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,467 5,135
--------- ------
End of period $ 1,512 $ 2,105
========== =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 2,852 $ 1,702
Income taxes 96 37
The accompanying notes are an integral part of the financial statements.
MORGAN PRODUCTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JULY 5, 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
DESCRIPTION OF BUSINESS - Morgan Products Ltd. (the "Company") manufactures and
distributes products (virtually all of which are considered to be millwork)
which are sold to the residential and light commercial building materials
industry and are used for both new construction and improvements, maintenance
and repairs. In view of the nature of its products and the method of
distribution, management believes that the Company's business constitutes a
single industry segment.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION - The
Financial Accounting Standards Board ("FASB") issued statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about operating segments in annual financial statements and interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 is
effective for fiscal years beginning after December 15, 1997 and requires
presentation of prior period financial statements for comparability purposes.
The Company is currently evaluating its required disclosures under SFAS No. 131
and expects to adopt this standard during the year ended December 31, 1998.
CONSOLIDATION - The consolidated financial statements include the accounts of
all business units of Morgan Products Ltd. All intercompany transactions,
profits and balances are eliminated.
BASIS OF PRESENTATION - The financial statements at July 5, 1997 and June 29,
1996, and for the three and six months then ended, are unaudited; however, in
the opinion of management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial position at these
dates and the results of operations and cash flows for these periods have been
included. The results for the three and six months ended July 5, 1997 are not
necessarily indicative of the results that may be expected for the full year or
any other interim period.
EARNINGS PER SHARE - The FASB has issued SFAS No.128, "Earnings per Share." SFAS
128 replaces primary EPS with basic EPS, which excludes dilution and requires
presentation of both basic and diluted EPS on the face of the income statement.
Diluted EPS is computed similarly to the current fully diluted EPS. SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, and requires restatement of all prior-period EPS data presented. The
adoption of this statement is not expected to materially affect either future or
prior-period EPS.
REPORTING COMPREHENSIVE INCOME - The FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which will require the Company to disclose, in financial
statement format, all non-owner changes in equity. Such changes include
cumulative foreign currency translation adjustments and certain minimum pension
liabilities. SFAS 130 is effective for fiscal years beginning after December 15,
1997 and requires presentation of prior period financial statements for
comparability purposes. The Company is currently evaluating its disclosures
under SFAS No. 131 and expects to adopt this standard during the year ended
December 31, 1998.
NOTE 2 - INVENTORIES
- --------------------
Inventories consisted of the following at (in thousands of dollars):
July 5, 1997 June 29, 1996 December 31, 1996
------------ ------------- -----------------
(unaudited) (unaudited)
Raw material $ 12,096 $ 8,756 $ 14,139
Work-in-process 9,196 7,222 9,899
Finished goods 48,473 36,946 49,645
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$ 69,765 $ 52,924 $ 73,683
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Inventories are valued at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) method.
NOTE 3 - PROVISION FOR RESTRUCTURING AND REORGANIZATION
- -------------------------------------------------------
In conjunction with the closing of two plants and to provide for other cost
reductions and consolidations within the Company an $11.3 million restructuring
charge was recorded in 1994. At such time, a multi-year plan involving necessary
management structure changes, a new management information system, and future
facility requirements was developed.
In the second quarter of 1996, the Company sold its Lexington, North Carolina
door manufacturing facility and consolidated it with the Company's Oshkosh,
Wisconsin door manufacturing facility. The Company recorded an additional
restructuring charge in the second quarter of 1996 of $881,000, of which
$356,000, related to the sale of the Lexington facility and the consolidation of
door manufacturing operations into the Oshkosh facility, and the balance of
which was used to cover incremental costs related to the Springfield and Weed
plant closings and the reorganization of the management structure at Morgan
Manufacturing. Additional aggregate restructuring expenses of $3.8 million were
recorded in the third and fourth quarters of 1996. These restructuring expenses,
which included Lexington operating costs after cessation of production and
incremental hiring, training, and relocation costs associated with the transfer
of Lexington production to Oshkosh were expensed as incurred.
In the first six months of 1997, the Company recorded an additional
restructuring charge of $4.7 million for excessive costs incurred as a
consequence of the consolidation of manufacturing operations and a delay in the
start-up of the new high-speed door assembly line. The equipment has been
installed and management believes that the line should be functioning at a
normal capacity by September 1997. At July 5, 1997, the restructuring reserve
balance was $.6 million as compared to $1.1 million at December 31, 1996.
Additionally, the Company recorded a $1.1 million reorganization charge in the
first quarter of 1997 in connection with the termination of the employment of
the Chief Financial Officer and Senior Vice President-Human Resources and
Administration of the Company. At July 5, 1997, the reorganization reserve
balance was $.4 million.
NOTE 4 - CREDIT AGREEMENT
- -------------------------
The Company maintains a credit agreement with a group of banks, which provides
for a revolving credit facility of up to $75 million through July 14, 2000,
including a letter of credit facility of up to $9 million. On July 25, 1997, the
Company and the bank group entered into an amendment, which altered the
restrictive covenants, increased the credit line to the current $75 million and
extended the line for an additional two years. The amendments have terms similar
to those previously in effect or more favorable to the Company. The amendment
also put into place an acquisition line of up to $15 million through July 14,
2000. The acquisition line consists of a term loan of up to $10 million and a
revolving credit facility of up to $5 million. At July 5, 1997, the Company had
borrowings of $55.9 million under the revolving credit facility. The credit
agreement requires the Company, among other things, to maintain minimum interest
coverage and fixed charge coverage ratios, minimum levels of tangible net worth
and a maximum leverage ratio.
NOTE 5 - SUBSEQUENT EVENTS
- --------------------------
On July 25, 1997, pursuant to an asset purchase agreement dated July 15, 1997,
the Company acquired certain assets of Wahlfeld Manufacturing Company
(`Wahlfeld") for approximately $4.6 million, subject to certain purchase price
adjustments. The Wahlfeld Acquisition, which was financed through borrowings on
the Company's revolving credit agreement, will be accounted for as a purchase.
Wahlfeld, which had annual sales of approximately $22.7 million for the year
ended December 31, 1996, is a distributor of windows, doors, and other millwork
products to residential builders and other customers.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward Looking Statements
Various statements made within this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Quarterly
Report on Form 10-Q constitute "forward looking statements" for purposes of the
Securities and Exchange Commission's "safe harbor" provisions under the Private
Securities Litigation Reform Act of 1995 and Rule 3b-6 under the Securities
Exchange Act of 1934, as amended. Investors are cautioned that all forward
looking statements involve risks and uncertainties, including those detailed in
the Company's filings with the Securities and Exchange Commission. There can be
no assurance that actual results will not differ from the Company's
expectations. Factors which could cause materially different results include,
among others, the success of consolidation of manufacturing operations; changes
in relationships with important suppliers and key customers; the pace of
acquisitions; fluctuations in the price of raw materials; and competitive and
general economic conditions, such as housing starts.
Results of Operations
Three Months Ended July 5, 1997 vs.
Three Months Ended June 29, 1996
The Company's net sales for the second quarter of 1997 were $106.8 million,
representing a 12.2% increase over the same period in 1996, when sales were
$95.2 million. The increase is attributable to the acquisition of Tennessee
Building Products ("TBP") and a 3.9% quarter-over-quarter improvement in the
sales of distributed products, which management believes is primarily the result
of an increase in marketing efforts of the Company in partnership with key
suppliers. External sales of manufactured products for the second quarter of
1997 were lower compared to the same period in 1996 by 21.2% or $4.6 million
primarily as a consequence of the disruption caused by the consolidation of the
Lexington, North Carolina facility and the delay in start-up of the new
high-speed door assembly line.
For the second quarter of 1997, the Company reported net income before
restructuring and reorganization charges of $291,000 or $0.03 per share compared
to net income before restructuring and reorganization charges of $1.4 million or
$0.17 per share for the same period in 1996, on average shares outstanding of
10,267,367 and 8,697,176, respectively. Including restructuring charges of $2.2
million, the Company reported a net loss of $1.9 million or $0.19 per share. The
lower income, exclusive of the restructuring charges, was primarily the result
of lower volume of manufactured product, higher cost of raw material, and
interest costs.
The gross profit increase of $.7 million from the second quarter of 1996 to the
corresponding period of 1997 was primarily the result of the TBP acquisition
offset by Manufacturing losses, which were due to the restructuring of
manufacturing operations and the higher costs of raw materials.
Operating expenses for the second quarter of 1997, excluding the restructuring
charges, were $13.4 million or 12.6% of net sales, compared to 1996 second
quarter operating expenses of $12.2 million, or 12.8% of net sales.
The provision for income taxes in both second quarters 1997 and 1996 relates to
the recording of state taxes. The provisions for federal taxes in each period
are offset by the Company's net operating loss position.
Six Months Ended July 5, 1997 vs.
Six Months Ended June 29, 1996
The Company's net sales for the 1997 six-month period were $202.6 million,
representing a 19.4% increase over the same period in 1996, when sales were
$169.7 million. The increase is attributable to the acquisition of TBP and a
10.1%
year-to-date improvement in the sales of distributed products, which management
believes is primarily the result of an increase in marketing efforts of the
Company in partnership with key suppliers. External sales of manufactured
products for the 1997 six-month period were down from the same period in 1996 by
14.0% or $6 million primarily as a consequence of the disruption caused by the
consolidation of the Lexington, North Carolina operations into the Oshkosh,
Wisconsin facility and the delay in start-up of the new high-speed door assembly
line.
The Company reported year-to-date net income before restructuring and
reorganization charges of $2.0 million or $0.19 per share compared to net income
before restructuring and reorganization charges of $884,000 or $0.10 per share
for the same period in 1996, on average shares outstanding of 10,208,501 and
8,684,274, respectively. Including restructuring and reorganization charges of
$5.8 million, the Company reported a year-to-date net loss of $3.9 million or
$0.38 per share versus net income of $3,000 or $0.0 per share for the same
period in 1996. The increase in income, exclusive of the restructuring and
reorganization charges, was primarily the result of the acquisition of TBP, the
higher sales volume of distributed products, and a volume incentive reward from
a supplier partnership program.
The gross profit increase of $7.6 million from the first half of 1996 to the
corresponding period of 1997 was primarily the result of the TBP acquisition and
the sales volume gains in distributed products. Manufacturing losses, which were
due to the restructuring of manufacturing operations and the rising costs of raw
materials, offset these gains.
Operating expenses for the first six months of 1997, excluding the restructuring
and reorganization charges, were $28.0 million or 13.8% of net sales, compared
to the similar period in 1996 with operating expenses of $22.7 million, or 13.4%
of net sales. The increases in operating expenses were primarily related to the
TBP acquisition.
Year-to-date interest expense was $1.2 million higher. This Increase is due to
average debt rising from $36 million in the first six months of 1996 to $61.5
million in the similar period in 1997 which was needed to maintain higher
working capital levels due to operating inefficiencies in manufacturing and the
TBP acquisition.
The provision for income taxes in both years relates to the recording of state
taxes. The provisions for federal taxes in each period are offset by the
Company's net operating loss position
Significant Business Trends/Uncertainties
Management believes that housing starts have a significant influence on the
Company's level of business activity. "Housing Economics" reported that sales of
new homes for the first five months of 1997 were 9.4% above those for the same
period in 1996. No assurances can be given, however, that for 1997 there will be
any continued improvement in the level of housing starts, or that single family
housing starts will not decline in the future.
Management also believes that the Company's ability to continue to penetrate the
residential repair and remodeling markets through sales to home center chains
may have a significant influence on the Company's level of business activity.
Management believes this market will continue to grow in importance to the
Company. Management further believes that in certain areas of the United States,
sales by distributors directly to the end-user may over time replace, as the
primary channel of distribution, the distribution method of selling to the
retail dealer, who then sells to the end user. The Company intends to respond
aggressively to such changes in distribution methods, including, where
opportunities permit, through the acquisition of distribution businesses that
sell directly to the end-user.
In the past, raw material prices have fluctuated substantially for pine and fir
lumber. Fir prices reached a high in the first quarter of 1995 and remained
within 5% of that level until the fourth quarter of 1996. For the first six
months of 1997, average fir and oak prices were at their highest levels in a
year and increased from the fourth quarter of 1996 by 5.2% and 1.0%,
respectively. In the second quarter, pine prices did not experience their normal
historical decline as expected. Such increases in the price of raw materials
have resulted in reduced profit margins. As a result, the Company continues its
efforts to expand the utilization, where appropriate, of engineered materials in
wood door components and to switch to alternate wood species. In addition, the
Company has established new offshore sources of raw material. Management
believes that these actions, together with aggressive price increases where
competitive factors allow, will partially offset the impact of the high cost of
raw material.
In order to expand its capacity, meet anticipated demand and reduce its cost of
production, the Company has installed a new high-speed door assembly line at its
Oshkosh facility. Delivery and installation of the new line was completed during
the first quarter of 1997. The new high-speed door assembly line is operational;
however, the new line is not yet operating at normal capacity. Management
currently believes that the line should be functioning at a normal capacity by
September 1997. A performance shortfall could have a detrimental impact, both on
the short-term profitability of the Company and on its long-term ability to
service and retain key customers. Management believes that the efficient
operation of the new high-speed door assembly line is critical to reducing
lead-times to acceptable levels and satisfying customers.
An important part of the Company's strategic plan is to expand its distribution
capabilities, particularly in the Southeast and Southwest, as well as other
areas, if attractive opportunities are presented. In August 1996, the Company
acquired substantially all of the business and assets of Tennessee Building
Products, a regional millwork and specialty building products distributor and
light manufacturer headquartered in Nashville, Tennessee. With the TBP
acquisition, the Company expanded its operations to include Nashville and
Chattanooga, Tennessee; Charlotte, North Carolina; Greenville, South Carolina;
and Huntsville, Alabama. On July 25, 1997 the Company acquired certain assets of
Wahlfeld Manufacturing Company ("Wahlfeld"). Wahlfeld, which had annual sales of
approximately $22.7 million for the year ended December 31, 1996, is a
distributor of windows, doors, and other millwork products. The Company plans to
consolidate Wahlfeld's operations into the Company's existing facilities in West
Chicago and Decatur, Illinois.
Recently, Andersen Corporation ("Andersen") determined to market and to sell its
FibrexO replacement window systems through retail stores which are aimed at the
replacement window buyer. These retail stores, called Renewal by AndersenO
stores, will be devoted exclusively to the promotion and sale of FibrexO window
systems, with the stores being established in various areas of the country and
principally owned and operated by independent distributors. Andersen has entered
into an agreement with the Company to open one of the first such stores in
Overland Park, Kansas. Such store is owned and operated by the Company. FibrexO
is a proprietary material developed by Andersen that is made of a composite of
wood fibers and vinyl and is considered to be superior in certain
characteristics to pure vinyl core window systems. In the event that the Kansas
location is successful, the Company and Andersen may consider establishing
additional stores.
As the final major element of its strategic initiatives, the Company is
committed to improving its management information systems. A new Company-wide
integrated management information system has been selected and is in the process
of implementation. The Company has approved a total capital expenditure of $3.4
million for the new management information system project, which will be
financed through a combination of capital leases and borrowings under the
Company's revolving line of credit. Upon completion of this project, the Company
will have achieved significant progress in meeting its goal of being the
industry leader in customer-friendly order processing and fulfillment systems.
Liquidity and Capital Resources
The Company's working capital requirements are related to its sales level,
which, because of its dependency on housing starts and the repair and remodeling
market, are seasonal and, to a degree, weather dependent. This seasonality
affects the need for working capital inasmuch as it is necessary to carry larger
inventories and receivables during certain months of the year.
Working capital at July 5, 1997 was $88.5 million, with a ratio of current
assets to current liabilities of 4.6 to 1.0, while at December 31, 1996 working
capital was $77.1 million with a ratio of current assets to current liabilities
of 3.5 to 1.0. The increase in working capital reflects seasonality, with
accounts receivable increasing $8.0 million. Accounts payable and other working
capital decreased in the first half of 1997 by an aggregate $5.8 million,
primarily as a consequence of the payment of accrued bonuses and commissions and
a large decrease in the amount of checks issued and outstanding. Increases in
working capital were offset by a $3.9 million decrease in inventories.
Long-term debt, net of cash, increased to $62.2 million at July 5, 1997, from
$47.4 million at December 31, 1996. The Company's ratio of long-term debt, net
of cash, to total capitalization increased from 43.3% at December 31, 1996 to
51.2% at July 5, 1997. The $14.8 million increase is attributable to the
aforementioned $9.9 million change in working capital, a final payment of $2.2
million related to the acquisition of TBP, and $2.2 million of capital spending.
Cash used by operating activities totaled $11.5 million for the six months ended
July 5, 1997, as compared to a $3.0 million cash generation for the six months
ended June 29, 1996. The difference between periods is due to lower operating
results and higher working capital as discussed above. Investing activities in
the first six months of 1997 used $4.8 million, compared to the corresponding
period in 1996, when investing activities generated $3.3 million. 1997
activities included $2.2 million expended to acquire new equipment, the final
payment for the purchase of TBP of $2.2 million and $.4 million used in other
investing activities, while 1996 activities consisted of $1.5 million used for
asset acquisitions, $4.1 million generated by asset disposals, $.9 million
provided by the surrender of life insurance policies, and $.2 million used in
other investing activities. Financing activities generated $16.4 million through
July 5, 1997, with $14.7 million provided by net increases in the revolving line
of credit, $1.2 million generated by stock option being exercised by former
employees and $.2 million by short-term financing. During the same period in
1996, financing activities used $3.3 million to repay debt. The $19.7 million
difference in the financing requirements for the six months ended July 5, 1997
and the comparable period in 1996 reflects the need to finance the $11.5 million
cash used by operating activities and the aforementioned investing activities.
The Company maintains a credit agreement with a group of banks, which provides
for a revolving credit facility of up to $75 million through July 14, 2000,
including a letter of credit facility of up to $9 million. On July 25, 1997, the
Company and the bank group entered into an amendment, which altered the
restrictive covenants, increased the credit line to the current $75 million and
extended the line for an additional two years. The covenant alterations are
generally favorable to the Company. The amendment also put into place an
acquisition line of up to $15 million through July 14, 2000. The acquisition
line consists of a term loan of up to $ 10 million and a revolving credit
facility of up to $5 million. At July 5, 1997, the Company had borrowings of
$55.9 million under the revolving credit facility. The credit agreement requires
the Company, among other things, to maintain minimum interest coverage and fixed
charge coverage ratios, minimum levels of tangible net worth and a maximum
leverage ratio. The Company is in compliance with the financial covenants under
the credit agreement.
The Company believes that it may require additional financing to pursue
attractive acquisition candidates, depending upon the size of the acquisitions.
Restructuring of Operations
Since 1994 the Company has adopted a comprehensive strategic plan to restore
profitability and regain industry leadership by providing customers with quality
products and optimum service at the best price/value relationship. The Company
has taken a series of major initiatives to implement this plan and respond to
continuing challenges in the industry. At Morgan Manufacturing, the Company has
consolidated all of its door manufacturing operations into its Oshkosh facility
and has committed approximately $6 million in capital expenditures for a new
high-speed door assembly line. In addition, management is committed to
controlling manufacturing costs, achieving a substantial savings through
innovative raw material purchasing and manufacturing practices, and developing a
more customer-focused business approach. The Company believes that its
relationship with Andersen has improved in recent years. At Morgan Distribution,
the Company has strengthened its business through a broad series of operating
initiatives and plans to achieve additional growth both through its existing
operations and by acquisition, as opportunities permit. Primarily as the result
of the implementation of its strategic plan, the Company has incurred
substantial restructuring charges. In 1994 and 1995, the Company incurred $11.3
million and $51,000 in restructuring charges, respectively, to cover the costs
of closing the Company's Springfield, Oregon door and Weed, California veneer
plants, the downsizing of Morgan Manufacturing, Company-wide management
structure changes (including terminations and the elimination of certain
positions), the restructuring of the Morgan Distribution operations, the
relocation of the Company's corporate headquarters, and other cost reduction and
consolidation actions.
In the second quarter of 1996, the Company sold its Lexington, North Carolina
door manufacturing facility. The entire line of doors previously manufactured in
Lexington was shifted to the Company's Oshkosh, Wisconsin door manufacturing
facility. The Company recorded restructuring charges in 1996 of $4.7 million,
primarily related to the sale of the Lexington and the consolidation of door
manufacturing operations into the Oshkosh facility.
Management believes that with the installation and start-up of the new
high-speed door assembly line at the Oshkosh facility, which occurred in the
first quarter of 1997, lead time increases experienced due to increased
production requirements and related inefficiencies encountered during the
consolidation process may be reversed and, in fact, may be reduced by up to two
weeks. The new high-speed door assembly line is not yet operating at normal
capacity; however, management believes that the line should be functioning at a
normal capacity by September 1997. When the new high-speed door assembly line is
fully operational, management believes that the Oshkosh facility will be
operating at approximately 70% of capacity, based upon current production
levels. It is believed that the consolidation of all door manufacturing
facilities at a single facility will offer the Company significant cost savings
as well as provide customers with the advantage of purchasing the full range of
solid wood door products and wood species from a single manufacturing facility.
In the first six months of 1997, the Company recorded an additional
restructuring charge of $4.7 million for excessive costs incurred as a
consequence of the consolidation of manufacturing operations and the delayed
start-up of the new high-speed door assembly line. The Company does not
currently expect to incur any additional restructuring charges for the remainder
of 1997. At July 5, 1997, the restructuring reserve balance was $.6 million as
compared to $1.1 million at December 31, 1996, primarily due to costs incurred
in connection with severance and other employee benefit related payments.
Additionally, the Company recorded a $1.1 million reorganization charge in the
first quarter of 1997 in connection with the termination of the employment of
the Chief Financial Officer and Senior Vice President-Human Resources and
Administration of the Company. Such provision is to cover severance and related
payments to such officers. At July 5, 1997, the reorganization reserve balance
was $.4 million.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the Company's Annual Meeting of Stockholders on May 14, 1997, a vote was
taken for the election of directors for a one-year term. All directors were
re-elected by the following common stock vote:
For Withhold Authority
--- ------------------
F.J. Hawley, Jr. 8,777,069 136,495
L.R. Robinette 8,777,168 136,396
J.S. Crowley 8,775,766 137,798
H.G. Haas 8,775,767 137,797
W.R. Holland 8,770,968 142,596
E.T. Tokar 8,777,168 136,396
P.J. McDonough, Jr. 8,777,170 136,394
The second item on the ballot was the ratification of the selection of Price
Waterhouse LLP as independent accountants for the Company for the 1997 fiscal
year. The ratification passed by a common stock vote as follows: For --
8,830,368; Against -- 68,070; Abstain -- 15,126.
The third item on the ballot was the ratification of the 1997 Incentive
Compensation Plan. The ratification passed by a common stock vote as follows:
For -- 7,080,872; Against -- 1,809,065; Abstain -- 23,627.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment agreement between the Company and Mitchell J. Lahr
dated March 11, 1997.
10.2 Employment agreement between the Company and Darrell J. Olson
dated March 21, 1997.
10.3 Form of Indemnification Agreement, dated April 7, 1997, between
the Company and Mitchell J. Lahr.
10.4 Form of Indemnification Agreement, dated April 14, 1997, between
the Company and Darrell J. Olson.
10.5 Employment termination agreement between the Company and Dennis C.
Hood dated March 31, 1997.
10.6 Employment termination agreement between the Company and Douglas
H. MacMillan dated March 31, 1997.
10.7 Lease, dated May 7, 1997, between the Company and BR/NO LA.
Properties, LLC for warehousing for a five year term in Baton
Rouge, Louisiana.
27 Financial Data Schedule
(b) A Current Report on Form 8-K was filed by the Company on August 8, 1997
with respect to the acquisition by the Company of certain assets of
Wahlfeld Manufacturing Company.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MORGAN PRODUCTS LTD.
Date: August 19, 1997 By: /s/ Mitchell J. Lahr
-----------------------
Mitchell J. Lahr
Vice President, Secretary and
Chief Financial Officer
(For the Registrant and as
Principal Financial Officer)
INDEX OF EXHIBITS
10.1 Employment agreement between the Company and Mitchell J. Lahr
dated March 11, 1997.
10.2 Employment agreement between the Company and Darrell J. Olson
dated March 21, 1997.
10.3 Form of Indemnification Agreement, dated April 7, 1997, between
the Company and Mitchell J. Lahr.
10.4 Form of Indemnification Agreement, dated April 14, 1997, between
the Company and Darrell J. Olson.
10.5 Employment termination agreement between the Company and Dennis C.
Hood dated March 31, 1997.
10.6 Employment termination agreement between the Company and Douglas
H. MacMillan dated March 31, 1997.
10.7 Lease, dated May 7, 1997, between the Company and BR/NO LA.
Properties, LLC for warehousing for a five year term in Baton
Rouge, Louisiana.
27 Financial Data Schedule
Exhibit 10
05/14/97-1