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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD ___ TO ___.
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) (Zip Code)
(757) 564-1700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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.
Aggregate market value of voting stock of the Registrant held by
non-affiliates as of February 19, 1999: $26,805,508.
Number of shares of Common Stock outstanding as of February 19, 1999:
10,360,830 shares; 2,386 shares are held in treasury.
Documents incorporated by reference - None.
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. Business..................................................................
ITEM 2. Properties................................................................
ITEM 3. Legal Proceedings.........................................................
ITEM 4. Submission of Matters to a Vote of Security Holders.......................
PART II ....................................................................................
ITEM 5. Market for Morgan's Common Equity and Related Stockholder Matters.........
ITEM 6. Selected Financial Data...................................................
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk................
ITEM 8. Financial Statements and Supplementary Data...............................
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................
PART III....................................................................................
ITEM 10. Directors and Executive Officers of Morgan................................
ITEM 11. Executive Compensation....................................................
ITEM 12. Security Ownership of Certain Beneficial Owners and Management............
ITEM 13. Certain Relationships and Related Transactions............................
PART IV ....................................................................................
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........
PART I
ITEM 1. BUSINESS
THE COMPANY
Morgan Products Ltd. ("Morgan" or the "Company"), founded in 1855, is
one of the largest wholesale distributors of millwork and other specialty
building products in the United States, serving primarily the residential
construction market. Morgan offers its customers a full range of products that
are sold through 28 Company-operated distribution centers. Morgan sells its
distributed products primarily to lumber yards (which, in turn, supply the
end-user), directly to builders or other end-users and to home center chains and
other volume retailers. Morgan currently operates distribution centers in 19
states and primarily serves markets in the Northeast, Midwest and Southeast
regions of the United States.
After determining that Morgan had better opportunities for growth in
millwork distribution, Morgan sold its manufacturing operation ("Manufacturing")
on February 2, 1998. With the sale of Manufacturing, Morgan exited completely
from the wood stile and rail door manufacturing business. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Strategic Initiatives."
On February 19, 1999, Morgan purchased certain of the assets and assumed
certain of the liabilities of Adam Wholesalers, Inc. and certain of its
subsidiaries (collectively, "Adam") in their business of distributing windows,
doors and other millwork products, headquartered in Cincinnati, Ohio. Adam,
which had annual sales of approximately $345 million in 1998, operated 13
distribution centers in 11 states, primarily in the Midwest, Northeast and
Western regions of the United States. The purpose of the acquisition was to
create the critical mass necessary to enable Morgan to develop strategic
alliances with both its suppliers and its customers. Management believes that
the acquisition will enable Morgan to coordinate the actions required to take
costs out of the distribution channel and make it more efficient by combining
product and geographic synergies, best practices and technologies of Morgan and
Adam into one of the largest wholesale distributors of building products in the
United States. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Strategic Initiatives."
On March 10, 1999, Morgan entered into an Agreement of Merger with
Andersen Windows, Inc. ("Andersen Windows"), a subsidiary of Andersen
Corporation ("Andersen"), and its wholly-owned subsidiary, Andersen
Distribution, Inc. ("Andersen Sub"), pursuant to which Andersen Sub and Morgan
will be merged (the "Merger"), resulting in Morgan, as the surviving
corporation, becoming a wholly-owned subsidiary of Andersen Windows. The
consideration to be received by Morgan's stockholders in the Merger will be
$4.00 per share of Morgan common stock, subject to adjustment until the
effective date of closing, under certain limited circumstances. The Merger is
subject to, among other things, approval of the stockholders of Morgan and the
applicable regulatory agencies.
Morgan is headquartered in Williamsburg, Virginia. Management believes
that Morgan's business now and for all prior periods constitutes a single
industry segment.
BUSINESS
Morgan sells specialty building products, including Andersen window
systems, through 28 Company-operated distribution centers.
The following is a list of Company-operated distribution centers as of
February 20, 1999:
Baton Rouge, Louisiana
Birch Run, Michigan
Carlisle, Pennsylvania
Charlotte, North Carolina
Chattanooga, Tennessee
Cincinnati, Ohio
Dayton, Ohio
Decatur, Illinois
Denver, Colorado (2 Centers)
Gainesville, Virginia
Greenville, South Carolina
Harrisburg (Mechanicsburg), Pennsylvania
Indianapolis, Indiana
Kansas City (Shawnee), Kansas
Louisville, Kentucky
Lynchburg, Virginia
Kirkwood, New York
Nashville, Tennessee (2 centers)
Nitro, West Virginia
Phoenix, Arizona
St. Louis, Missouri
Toledo, Ohio
West Chicago, Illinois
West Columbia (Cayce), South Carolina
Wilmington (Newark), Delaware
Woodbury Heights, New Jersey
Morgan's distribution centers warehouse, assemble, and ship products to
customers, provide sales, service and marketing functions and maintain vehicles
to deliver products to customers who are generally within a 150 mile radius of
each center. The distribution centers are operated as stand-alone profit
centers. Major supplier purchasing negotiations are controlled centrally in
order to obtain the best prices for total volume purchased and to minimize
inventory levels.
Many of the products distributed by Morgan, including Andersen products,
are modified and assembled at Morgan's distribution centers before shipping.
Such products include pre-hung doors and door systems; bay and bow window
systems; and half-round, octagon, and specialty-shaped windows. Morgan's
assembly operations allow the builder, contractor or consumer to install
pre-assembled units at a lower cost than modifying and assembling component
parts at the job site. Morgan has also developed the capability to provide
complete job site installation for repair and remodeling projects.
STRATEGIC INITIATIVES
Morgan believes that it is well-positioned in the millwork industry to
continue to establish a leading distribution network through its ability to add
value to its products and services. Morgan intends to capitalize on the
well-known brand names for the quality products it distributes, its outstanding
reputation for customer service, its multi-channel distribution capabilities and
access to financial resources, which Morgan believes are substantial competitive
advantages. In recent years, however, Morgan was hurt by operational and
financial difficulties at Manufacturing relating to the consolidation of
manufacturing operations and the late delivery of the high-speed door assembly
line, rising raw materials prices, Morgan's customer base shifting its
requirements to a less profitable product mix, and poor financial results.
Since 1994, Morgan has adopted and continued to implement a
comprehensive strategic plan to respond aggressively to industry consolidation,
to restore profitability and to regain industry leadership. As part of this
plan, Morgan has initiated efforts designed to focus on its core business and
outperform the competition. Those efforts include reducing costs, expanding
focus on financial analysis, increasing market penetration through acquisitions
and so-called "greenfield distribution start-up operations," improving operating
performance at existing distribution centers and improving its information
management systems.
One major step in executing Morgan's strategic plan was the sale of
Manufacturing on February 2, 1998 to JELD-WEN, inc. ("JELD-WEN") Although
Manufacturing had made significant progress operationally by the middle of 1997,
the disappointing financial performance of the Manufacturing continued and
Morgan made the decision to divest. With the sale of Manufacturing, Morgan has
exited completely from the wood stile and rail door manufacturing business.
Morgan's management, who were devoting a significant amount of time and energy
to a business that was not a strategic fit with Morgan's long-term growth plans,
are now able to focus their efforts solely on Morgan's distribution operations.
An important part of Morgan's strategic plan is to expand its
distribution capabilities. Morgan believes that there is significant opportunity
for growth through acquisitions which capitalize on industry consolidation.
Morgan is focused on regions with high population growth. In addition, Morgan is
evaluating opportunities that may enable it to take costs out of the
distribution channel by consolidating acquisitions through Morgan's existing
facilities. Other opportunities for growth are in the further penetration of its
existing markets, the establishment of new Company-operated distributorships and
the addition of new product lines for distribution through Company-operated
distribution centers.
In implementing its plan to expand, in August 1996, Morgan acquired
substantially all of the business and assets of Tennessee Building Products,
Inc. ("TBP"), a regional millwork and specialty building products distributor
headquartered in Nashville, Tennessee. With the TBP acquisition, Morgan expanded
its operations to include Nashville and Chattanooga, Tennessee; Charlotte, North
Carolina; Greenville, South Carolina; and Huntsville, Alabama.
In April 1997, Morgan entered the Louisiana market in a joint effort
with Andersen to increase market share in the region. Morgan was awarded sole
distribution rights for Andersen's products in Louisiana, as well as in most
counties in Mississippi and some in Texas. This was a "greenfield" distribution
start-up operation, which allows Morgan to serve the Baton Rouge market on a
one-step basis (selling directly to the end-user) and serving the rest of the
region primarily through two-step operations (selling to lumberyard dealers who
in turn sell to the end-user).
In July 1997, Morgan acquired Wahlfeld Manufacturing Company
("Wahlfeld"), a distributor of millwork and other building products, located in
Peoria and Aurora, Illinois. Acquiring this two-step distributor enabled Morgan
to substantially reduce the basic cost structure of its business in this market
by consolidating inventories and operating functions into Morgan's existing
Illinois locations. The Wahlfeld acquisition also allowed Morgan to become the
sole distributor for the Andersen product lines in most of Illinois. In
addition, Morgan expanded its market area in the Carolinas by opening a sales
office and showroom in Pinehurst, North Carolina in October 1997. Although
Morgan had historically sold into this market, establishing a sales office and
showroom has enabled Morgan to better serve this growth area with high-end,
quality products.
In February 1999, Morgan completed its purchase of Adam. With the Adam
acquisition, Morgan expanded its operations in the Northeast, Mid-Atlantic,
Midwest, Colorado and Arizona markets. The Adam acquisition will allow Morgan to
combine Morgan's and Adam's product and geographic synergies, best practices and
technologies to become one of the largest wholesale distributors of building
products in the United States.
As the final major element of its strategic initiatives, Morgan is
committed to improving its management information systems. A new Company-wide
integrated management information system had been selected and was in the
process of being implemented as of December 31, 1998. As of December 31, 1998
Morgan had incurred a cost of approximately $4.7 million in connection with such
system, including $2.5 million in software and $2.2 million in hardware. With
the purchase of Adam, completed on February 19, 1999, Morgan decided to
terminate its implementation of the new management information system and,
instead, to merge the majority of Morgan's current operations into Adam's
existing management information system (the "Adam System"). After reviewing both
the Adam System and the proposed new system, management determined that the Adam
System would be better suited for Morgan's business and be less expensive to
implement. By implementing the better technological and strategic Adam System,
Morgan should be able to realize future cost savings by the reduction of capital
needed to convert only the ten Morgan distribution centers existing at the time
of the Adam acquisition instead of having to convert a total of twenty-two
locations to the proposed new system. Accordingly, the Company will take a
charge of approximately $2.5 million during the first quarter of 1999 relating
to the write-off of the costs incurred for the implementation of the proposed
Morgan system.
Management believes that the steps taken by the Company since the
inception of its strategic plan have successfully built a foundation for an
improved future. Morgan's decision to focus on the distribution business,
including its acquisition of Adam, has made Morgan one of the largest
distributors of millwork products in the United States. This has created
critical mass for Morgan which will enable Morgan to develop strategic alliances
with both its suppliers and its customers and to coordinate the actions required
to take costs out of the distribution channel and make it more efficient. The
Company intends to aggressively continue pursuing completion of the plan with
initiatives to complement, expand and advance the steps previously taken.
PRODUCTS
Morgan distributes a full range of millwork and other specialty building
products, including window, door and entrance systems, wood, steel and composite
doors, moldings, stair parts, mantels, shutters and screens, which are
distributed to dealers, contractors and builders in the residential construction
industry. Morgan's major millwork lines include Andersen premium window systems,
JELD-WEN, Woodgrain and Simpson wood stile and rail doors, ThermaTru steel and
composite doors and Premdor and JELD-WEN flush and molded doors.
Andersen products, which are sold under the "Andersen" trademark,
accounted for approximately 53.4%, 41.6% and 40.6% of Morgan's total sales in
1998, 1997 and 1996 of $383.2 million, $412.2 million and $373.3 million,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Andersen produces high-quality, premium-priced
windows and has been a technological leader in developing energy-efficient
window systems. Andersen has informed Morgan that it sells its products
exclusively through distributors such as Morgan. Morgan's agreement with
Andersen provides that Andersen can terminate Morgan's distributorship at any
time upon sixty (60) days notice. Morgan believes that such a termination
provision is Andersen's standard arrangement with its distributors.
An important part of Morgan's distribution process is the assembly and
alteration work that is done at the distribution centers to prepare products for
delivery to the customer and for efficient installation at the building site. At
these centers, window and door systems are assembled and modified according to
customer specifications.
MARKETS
Virtually all of the products distributed by Morgan are part of the
millwork (fabricated wood products) industry, which includes wood (including
vinyl-clad wood) windows, wood doors, moldings, stairways and mantels. In 1996,
based on information published by the United States Department of Commerce, the
estimated manufacturers' sales volume of wood windows totaled $2.7 billion,
estimated sales volume of wood doors totaled $3.4 billion and other millwork
(including moldings, stairways and mantels) totaled $4.3 billion (to date, 1997
data is unavailable). These products are sold into the improvement, maintenance
and repair markets and the new construction markets.
According to Department of Commerce data, overall sales in the
residential improvement, maintenance and repair markets grew from $46 billion in
1980 to an estimated $125.6 billion in 1998, representing an increase of 173%.
New construction single- and multi-family housing starts were cyclical over the
same period, with a high of approximately 1.8 million units in 1986 and a low of
slightly over 1.0 million units in 1991. The 1991 level was the lowest level of
overall housing starts since 1945. According to the National Association of Home
Builders, single-family housing starts were 1.3 million in 1998 and
single-family housing starts are expected to be approximately 1.2 million in
1999.
Morgan has established a presence in a number of regions of the United
States, including its primary markets - the Northeast, Mid-Atlantic, Midwest and
Southeast, Colorado and Arizona. As a result, Morgan's financial condition is
not tied to a single geographic region's economy or other characteristics. The
risks to Morgan posed by the cyclical nature of the new residential construction
market are somewhat offset by the less cyclical nature of the residential
improvement, maintenance and repair market.
SALES AND MARKETING
Morgan is involved in new residential construction, residential
improvement, maintenance and repair markets. Certain of Morgan's suppliers
advertise both to the trade and directly to the consumer through nationwide
print and other media. Morgan's marketing programs emphasize the strengthening
of customer relationships and providing exceptional customer service. Marketing
activities include cooperative advertising programs with key vendors, assisting
customers in designing sales programs directed toward the customers' buyers, and
customer training for selling and merchandising products. In 1997 in a
continuing effort to reduce overhead and administrative expenses, Morgan
consolidated its national accounts operations into its distribution business.
Morgan's national accounts staff serves Morgan's national home center chain
clients by training in-store personnel, assisting the customer in improving the
mix of products sold and directing in-store product placement, packaging and
merchandising.
As of December 31, 1998, Morgan employed approximately 138 salespersons
who sold directly to independent distributors, building supply dealers, builders
and remodelers, home improvement centers and factory home manufacturers. As of
February 20, 1999, after the acquisition of Adam, such number increased to 252
salespersons. Morgan's sales organization consists of customer service
representatives located at each distribution center and outside field personnel
serving the customer on-site. Each outside field representative reports to his
or her regional center manager. The majority of outside sales representatives
are compensated through a commission system in which pay is directly related to
sales performance. Morgan conducts ongoing educational training seminars for all
sales representatives.
BACKLOG
Morgan anticipates no appreciable backlog level in the future as
customer orders at Company-operated distribution centers are generally filled
within one to five days.
SEASONAL NATURE OF BUSINESS
The building products industry is seasonal, particularly in the
Northeast and Midwest regions of the United States, where inclement weather
during the winter months usually reduces the level of building activity in the
improvement, maintenance and repair markets and in the new construction markets.
Morgan's lowest sales traditionally occur during the first and fourth quarters.
Even though Morgan has no special working capital requirements, Morgan
traditionally maintains higher inventory levels during the second and third
quarters. The seasonal nature of Morgan's business does not appear to have been
affected by the sale of Manufacturing and management believes that the
acquisition of locations in the Western United States as part of the Adam
purchase will not affect the seasonality of Morgan's business in any material
respect. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Seasonal Nature of Business."
COMPETITION
Competition in the residential specialty building products market is
substantial, both from within the United States and from foreign manufacturers
and importers of building products. Morgan's distribution centers compete
principally with other distributors of window and door systems and other
manufacturers of specialty building products that sell directly to Morgan's
target customers. For example, Morgan may compete with up to three other
distributors of Andersen products in each territory in which Morgan distributes,
as well as manufacturers and distributors of premium wood window products that
compete with Andersen products. In some areas, the Company has sole distributor
rights to Andersen products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Strategic Initiatives." Morgan
believes that it competes in the distribution industry primarily on the basis of
the breadth of its product lines, the quality and speed of its service and the
quality and design of the products it sells. Morgan is also committed to
accommodating the purchase requirements of its customers by providing
value-added services that are tailored to address each customer's unique needs.
The wood stile and rail doors, composite exterior doors and the Andersen
window systems that Morgan distributes are positioned primarily in the upper
price band of their respective markets. In addition, Morgan's agreement with
Andersen restricts Morgan's ability to offer for sale the window systems of
other manufacturers through Morgan's distribution locations that carry Andersen
products. Morgan believes, therefore, that producers and distributors of lower
priced or lower cost products may enjoy a competitive advantage where price is
the consumer's primary concern and that Morgan may be competitively
disadvantaged in being restricted from offering its customers a more varied
product mix. However, Morgan believes that it has a leading position in premium
interior and exterior doors and wood windows in the market area surrounding most
of its distribution centers.
TRADEMARKS AND NAME
Morgan's name and the Morgan Doorman logo are registered trademarks.
Morgan uses its stylized "M" and its trademarks and trade names "Tennessee
Building Products, Inc.," "Titan Building Products, Inc.," "Windows, Doors &
More, Inc.," "Tennessee Kitchen and Bath," "Tennessee Glass Company," "Tennessee
Kitchen Center, Inc." and "Adam Wholesalers" in connection with Morgan's
distribution operations. Morgan considers its trademarks, trade names and logos
to be valuable to the conduct of its business.
Morgan has entered into a licensing arrangement in respect of its
trademarks in the Morgan name, the Morgan Doorman, its stylized "M" and the
logos related thereto with JELD-WEN for use in connection with the manufacture,
marketing, sale and distribution of wood stile and rail doors, patio and French
doors, door frames and related parts.
EMPLOYEES
As of December 31, 1998, Morgan employed 1,161 persons, of whom 1,145
were employed at Morgan's distribution centers, and 16 were employed at the
corporate headquarters. As of February 20, 1999, after the acquisition of Adam,
such number of total employees increased to approximately 2,041 employees. As of
February 20, 1999, approximately 608 of the total employees employed at Morgan's
distribution centers were covered by collective bargaining agreements with
various labor unions. Satisfactory relations have generally prevailed between
Morgan and its employees.
ITEM 2. PROPERTIES
Morgan's principal executive offices are located at 469 McLaws Circle,
Williamsburg, Virginia 23185. Morgan does not own any real property. Morgan
leased the following facilities as of February 20, 1999:
Approximate Lease
Square Feet Expiring
Leased --------
------
Birch Run, Michigan........................................... 113,022 2005
Baton Rouge, Louisiana 22,600 2002(2)
Carlisle, Pennsylvania........................................ 200,000 2006(2)
Charlotte, North Carolina..................................... 115,010 2000
Chattanooga, Tennessee ....................................... 20,000 2006
Chesapeake, Virginia (showroom and sales office) ............. 30,000 1999
Cincinnati, Ohio (Adam's division office and warehouse) ...... 157,600 2002
Dayton, Ohio ................................................. 103,000 2003
Decatur, Illinois............................................. 93,000 2001(3)
Denver, Colorado.............................................. 45,000 2003
Denver, Colorado (Adam) ...................................... 103,000 2005
Greenville (Greer), South Carolina............................ 15,000 1999(3)
Harrisburg (Mechanicsburg), Pennsylvania (2 facilities):
Office.................................................... 15,569 1999(3)
Warehouse................................................. 134,906 2002(3)
Huntsville, Alabama (showroom)................................ 1,737 1999
Indianapolis, Indiana......................................... 126,000 2002
Kansas City, Kansas (2 facilities):...........................
Shawnee Warehouse......................................... 79,500 2000(3)
Renewal by Andersen Center................................ 2,860 1999
Kirkwood, New York............................................ 47,500 2010(1)(2)
Louisville, Kentucky.......................................... 86,400 2005
Lynchburg, Virginia .......................................... 60,000 2002
Nashville, Tennessee (2 facilities):
Glass facility and showroom............................... 26,000 2000
Warehouse and showroom.................................... 170,000 2011
Nitro, West Virginia.......................................... 84,000 1999
Oshkosh, Wisconsin (Former Manufacturing Division Office)..... 16,000 2000(4)
Pinehurst, North Carolina..................................... 25,000 2000(2)
Phoenix, Arizona.............................................. 37,000 2003
Scranton (Dunmore), Pennsylvania (showroom)................... 3,600 2001(2)
St. Louis, Missouri........................................... 103,000 2004
Toledo, Ohio.................................................. 132,000 2000
Washington, D.C. (Gainesville, Virginia)...................... 79,500 2006(3)
West Chicago, Illinois........................................ 100,925 2001(2)
West Columbia (Cayce), South Carolina......................... 89,480 2001(2)
Williamsburg, Virginia (Headquarters)......................... 6,909 2002
Wilmington (Newark), Delaware................................. 97,421 2000(2)
Woodbury Heights, New Jersey.................................. 221,000 2004
(1) Of the 47,500 square feet leased, 6,250 square feet have been sublet to a
third party.
(2) Optional renewal term of five years or less.
(3) Optional renewal term in excess of five years.
(4) Morgan no longer occupies this leased space and is seeking a sublessor.
Distribution center leases generally provide for fixed monthly rental
payments, plus the payment, in most cases, of real estate taxes, utilities,
liability insurance and maintenance. In a few locations, the leases contain
escalation clauses requiring the payment of additional rent according to certain
indices or in specified amounts. The termination dates of these leases vary
widely. See Note 7 of Notes to Consolidated Financial Statements.
Morgan believes that its distribution facilities are sufficient to serve
its needs in its existing markets.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Morgan is a
party or of which any of its property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders since the last
annual meeting held May 13, 1998.
PART II
ITEM 5. MARKET FOR MORGAN'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Common Stock of Morgan commenced trading on the New York Stock
Exchange on March 7, 1988 (NYSE symbol: MGN). As of February 19, 1999, there
were approximately 2,911 holders of record of such Common Stock. Morgan
currently does not pay cash dividends on its Common Stock. Any payment of future
dividends, and the amounts thereof, will be dependent upon Morgan's earnings,
financial instruments, cash flow, and other factors deemed relevant by the Board
of Directors. Morgan is restricted in its ability to pay dividends through
January 1, 2004 by its bank agreement.
The following table sets forth the high and low sale prices of Morgan's
Common Stock reported in the New York Stock Exchange Consolidated Transaction
Reporting System.
High Low
---- ----
1997:
First Quarter................... $9-5/8 $7
Second Quarter.................. 9 6-1/4
Third Quarter................... 8-11/16 6
Fourth Quarter.................. 6-15/16 6-7/8
1998:
First Quarter................... $5-7/8 $4-3/4
Second Quarter.................. 6-3/8 4-1/2
Third Quarter................... 4-7/8 2-1/16
Fourth Quarter.................. 3-1/2 2
On February 19, 1999, the closing price of the Common Stock was $2.625.
(b) Note: The number of shares of Morgan's Common Stock held by
non-affiliates shown on the cover of this Annual Report on Form 10-K was
calculated on the assumption that there were no affiliates other than officers
and directors of Morgan.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
Morgan for each of the five years ended December 31, 1994 through 1998. The
selected operating results and balance sheet data have been derived from
Morgan's audited financial statements. The information contained herein should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited consolidated financial
statement of Morgan for the three years ended December 31, 1998, and the notes
thereto included herein.
OPERATING RESULTS YEAR ENDED DECEMBER 31,
------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER 1998 1997 1996 1995 1994
SHARE DATA)
-------------------------------------------------------------
Net sales $383,151 $412,249 $373,345 $338,026 $ 358,357
-------------------------------------------------------------
Gross profit 54,582 58,340 55,428 47,463 52,398
Operating expenses(1)(2) 51,636 74,570 52,192 46,736 58,292
------------------------------------------------------------
Operating income (loss) 2,946 (16,230) 3,236 727 (5,894)
Other expense (2,049) (4,667) (3,265) (3,313) (3,307)
-------------------------------------------------------------
Income (loss) before 897 (20,897) (29) (2,586) (9,201)
income taxes
-------------------------------------------------------------
Net income (loss) $ 1,001 $(20,897) $ 298 $ (2,628) $ (9,401)
------------- ----------- ----------- ---------- --------
Basic earnings per common $ 0.10 $(2.03) $ 0.03 $ (0.30) $ (1.10)
share
-------------------------------------------------------------
Diluted earnings per $ 0.10 $(2.03) $ 0.03 $ (0.30) $ (1.10)
common share
-------------------------------------------------------------
Basic shares outstanding 10,359 10,280 8,830 8,644 8,549
Diluted shares outstanding 10,389 10,280 8,882 8,644 8,549
BALANCE SHEET DATA(3) At December 31,
--------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996 1995 1994
--------------------------------------------------------------------
Working capital $ 44,653 $ 77,324 $ 77,088 $ 58,674 $ 61,639
Total assets 92,463 128,776 142,116 109,515 113,308
Long-term debt, net of cash 19,982 53,156 47,413 30,439 27,050
Stockholders' equity 43,443 42,431 61,983 52,835 55,192
Long-term debt, net of cash to
total capitalization 31.5% 55.6% 43.3% 36.6 % 32.9 %
Return on stockholders' equity 2.3% (40.0)% 0.5% (4.9)% (15.7)%
(1) The year 1997 includes $12.4 million provision for the sale of
manufacturing operations.
(2) The years 1997, 1996, 1995 and 1994 include restructuring and
reorganization expenses of $5.8, $4.7, $.1 and $11.3 million,
respectively.
(3) The decrease in working capital, total assets and long-term debt (net of
cash) at December 31, 1998 was the result of the sale of Morgan
Manufacturing on February 2, 1998.
ITEM 7. 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 Annual
Report on Form 10-K 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 under the Securities Exchange Act
of 1934. Investors are cautioned that all forward looking statements involve
risks and uncertainties, including those detailed in Morgan's filings with the
Securities and Exchange Commission. There can be no assurance that actual
results will not differ from Morgan's expectations. Factors which could cause
materially different results include, among others, changes in relationships
with important suppliers and key customers; the pace of acquisitions and
competitive and general economic conditions, such as housing starts.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 VS. YEAR ENDED DECEMBER 31, 1997
Net sales for 1998 were $383.2 million, representing a 7.0% decrease
from 1997 sales of $412.2 million. The $29.0 million decrease in sales is
primarily attributable to a $65.3 million decrease in sales at Manufacturing as
a result of the sale of substantially all of the assets of Manufacturing at
February 2, 1998, offset by an increase in sales at Morgan's distribution
division ("Distribution") of $32.5 million and at TBP of $3.8 million.
Distribution's increases are primarily due to sales growth in the Mid-Atlantic
region, Decatur and Birch Run while sales gains at TBP are primarily due to a
contract awarded to Morgan with respect to providing glass and glass services
for the construction of the new Tennessee Titans Stadium in Nashville, Tennessee
(the "Stadium Project").
Gross profit decreased $3.8 million from 1997 to 1998. The decrease in
gross profit is primarily due to the sale of Manufacturing, competitive pricing
pressures in the Mid-Atlantic region and the consolidation of retailers and
wholesalers in the millwork industry, offset by gains at TBP which were
primarily due to the Stadium Project.
Operating expenses for 1998 were $51.6 million, or 13.5% of net sales,
compared to 1997 operating expenses (before the sale provision for Manufacturing
and restructuring and reorganization charges) of $56.3 million, or 13.7% of net
sales. The decrease is primarily due to the sale of Manufacturing.
Interest and other non-operating expenses in 1998 were $2.0 million, a
decrease of $2.6 million from 1997. The decrease in interest expense was
primarily due to the $29.4 million decrease in average long-term debt in 1998 as
compared to 1997, which was a result of the proceeds received from the sale of
Manufacturing.
The provision for income taxes in both 1997 and 1998 relates principally
to the recording of state taxes. The state tax provision in each of 1997 and
1998 was fully offset by the recognition of a tax benefit related to the
amendment of prior year federal returns. The provision for federal taxes in 1998
was further offset by the recognition of net operating loss carryback tax
benefits, which had not been previously recognized. There was no provision for
federal taxes in 1997 given Morgan's net operating loss position. See Note 10 to
Consolidated Financial Statements.
Morgan reported net income of $1.0 million or $0.10 per diluted share
for 1998 compared to net loss of $20.9 million or $2.03 per diluted share in
1997, on diluted shares outstanding of 10,389,112 and 10,280,484 respectively.
The $21.9 million increase is primarily due to the sale of Manufacturing, the
reduction of interest expense, and the elimination of reorganization charges.
YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996
Net sales for 1997 were $412.2 million, representing a 10.4% increase over
1996 sales of $373.3 million. The increase in sales is primarily attributable to
the acquisition of TBP in the third quarter of 1996 and a 5.6% improvement in
the sales of distributed products, which management believes is due to increased
marketing efforts with key suppliers and the acquisition of Wahlfeld in the
third quarter of 1997. External sales of manufactured products in 1997 decreased
14.3% from 1996. In 1997 sales of manufactured products continued to decline
from prior year periods due to the disruption caused by the consolidation of the
Lexington, North Carolina operations into the Oshkosh, Wisconsin facility and
the delay in the start-up of the high-speed door manufacturing line.
Gross profit increased $2.9 million from 1996 to 1997. The increase was
primarily the result of the aforementioned increase in sales and a volume
incentive reward from a supplier partnership program at Distribution.
Manufacturing experienced a $5.6 million decrease in gross profit due to the
aforementioned decline in sales volume and the increase in raw material costs
which were not passed on to the customer. The price for pine, which accounted
for 53% of the raw materials purchased by Manufacturing in 1997, increased an
average of 9.1% from 1996 while the price for fir, the second highest volume
specie, increased 3% on average over the prior year's prices.
Operating expenses for 1997, excluding $18.2 million in special charges
(see discussion that follows), were $56.3 million, or 13.7% of net sales,
compared to 1996 operating expenses, before special charges, of $47.5 million,
or 12.7% of net sales. The $8.8 million increase related primarily to the
acquisition of TBP. Additional increases were incurred at Distribution for sales
promotions related to the implementation of a new selling program to gain market
share, and relocation expenses for the hiring of qualified key personnel in
marketing, logistics and finance.
In the fourth quarter of 1997, Morgan recorded a non-recurring charge of
$12.4 million involving its sale of Manufacturing (the "Sale Provision"). The
Sale Provision included write-downs for the related assets to estimated fair
market value and costs of selling the business, including employee severance
costs, pension fees, lease obligations and legal costs (aggregating, $1.21 per
diluted share). In addition, in 1997 Morgan incurred restructuring charges of
$4.7 million to cover the incremental costs of consolidating the Lexington and
Oshkosh manufacturing facilities and a $1.1 million reorganization charge
related to changes in the executive management of Morgan (aggregating, $.57 per
diluted share). See "-Restructuring of Operations" below.
Interest and other non-operating expenses in 1997 were $4.7 million, an
increase of $1.4 million from 1996. As a result of an increase in average debt
of $19.8 million from 1996, interest expense increased $1.5 million in 1997. The
increase in average debt was primarily the result of the financing associated
with the acquisition of TBP and Wahlfeld.
The provision for income taxes in 1996 and 1997 relates principally to
the recording of state taxes. There was no provision for federal taxes in either
period given Morgan's net operating loss position. The state tax provisions for
both years were fully offset by the recognition of a tax benefit related to the
amendment of prior year federal returns. See Note 10 to Consolidated Financial
Statements.
Morgan reported a net loss of $20.9 million or $2.03 per diluted share
for 1997 compared to net income of $.3 million or $.03 per diluted share for
1996, on diluted shares outstanding of 10,280,484 and 8,881,648 respectively.
Excluding special charges, Morgan had a net loss of $2.7 million for 1997
compared to net income of $5.0 million for 1996. The $7.7 million decline in
income from 1996, before special charges, is primarily due to lower volume and
higher material costs at Manufacturing and a $1.5 million increase in interest
expense.
SIGNIFICANT BUSINESS TRENDS/UNCERTAINTIES
Management believes that single family housing starts have a significant
influence on Morgan's level of business activity. Currently available industry
data suggest that housing starts for single family dwellings increased 12.0% in
1998 from 1997. According to the National Association of Home Builders, not only
did 1998 produce 1.6 million single- and multi-family housing starts, the
highest level of overall housing starts in more than a decade, but also the
greatest number of single-family starts. In addition, the National Association
of Home Builders has indicated that, while it expects that the housing market in
1999 may not be quite as good as in 1998, it may still result in the second best
year for single-family housing starts in the 1990s. No assurances can be given,
however, that single family housing start levels will remain steady or increase,
or that single family housing starts will not decline.
Management also believes that Morgan's ability to continue to penetrate
the residential repair and remodeling markets, including through sales to home
center chains may have a significant influence on Morgan's level of business
activity. Management believes this market will continue to grow in importance to
Morgan. Management further believes that in certain areas of the United States,
sales by one step distributors directly to the end-user will over time replace
the two step distribution method of selling to the retail dealer, who then sells
to the end-user. Morgan 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.
STRATEGIC INITIATIVES
An important part of Morgan's strategic plan is to expand its
distribution capabilities, particularly in the Southeast and Southwest, or in
other areas, if attractive opportunities are presented. In August 1996, Morgan
acquired substantially all of the business and assets of TBP, a regional
millwork and specialty building products distributor and light manufacturer
headquartered in Nashville, Tennessee. With the TBP acquisition, Morgan expanded
its operations to include Nashville and Chattanooga, Tennessee; Charlotte, North
Carolina; Greenville, South Carolina; and Huntsville, Alabama. In July 1997,
Morgan acquired certain assets of Wahlfeld, a distributor of windows, doors, and
other millwork products headquartered in Peoria, Illinois. The Wahlfeld
acquisition allowed Morgan to become the sole distributor for the Andersen
Window product lines in most of Illinois. During 1997 and 1998, Morgan
consolidated Wahlfeld's operation into two of its existing facilities. In
February 1999, Morgan purchased Adam, a privately held two-step distributor of
windows, doors and other millwork products, headquartered in Cincinnati, Ohio.
With the Adam acquisition, Morgan has expanded its operations in the Northeast,
Mid-Atlantic, Midwest, Colorado and Arizona markets. These acquisitions have
allowed Morgan to combine product and geographic synergies, best practices and
technologies to become one of the largest wholesale distributors of building
products in the United States.
Morgan believes that its relationship with Andersen has improved in
recent years. In April 1997, Morgan entered the Louisiana market where it was
awarded sole distribution rights for Andersen's products. In 1997, Morgan was
also awarded sole distribution for Andersen's products in most counties in
Mississippi and some in Texas. See "--Recent Developments" below.
As the final major element of its strategic initiatives, Morgan is
committed to improving its management information systems. A new Company-wide
integrated management information system had been selected and was in the
process of being implemented as of December 31, 1998. As of December 31, 1998
Morgan had incurred a cost of approximately $4.7 million in connection with such
system, including $2.5 million in software and $2.2 million in hardware. With
the purchase of Adam, completed on February 19, 1999, Morgan decided to
terminate its implementation of the new management information system and,
instead, to merge the majority of Morgan's current operations into the Adam
System. After reviewing both the Adam System and the proposed new system,
management determined that the Adam System would be better suited for Morgan's
business and would be less expensive to implement. By implementing the better
technological and strategic Adam System, Morgan should be able to realize future
cost savings by the reduction of capital needed to convert only the ten Morgan
distribution centers existing at the time of the Adam acquisition instead of
having to convert a total of twenty-two locations to the proposed new system.
Accordingly, the Company will take a charge of approximately $2.5 million during
the first quarter of 1999 relating to the write-off of the costs incurred for
the implementation of the proposed new Morgan system.
LIQUIDITY AND CAPITAL RESOURCES
Morgan'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 to the extent it is necessary to carry
larger inventories and receivables during certain months of the year.
Working capital at December 31, 1998 was $44.7 million, with a ratio of
current assets to current liabilities of 2.8 to 1.0, while at December 31, 1997
working capital was $77.3 million with a ratio of current assets to current
liabilities of 3.7 to 1.0. The decrease in working capital of $32.6 million is
primarily due to the sale of Manufacturing and the subsequent repayment of debt.
Additionally, inventories decreased $6.2 million, accounts receivable increased
$2.4 million, accounts payable increased $3.6 million and other liabilities
decreased $5.8 million. The decline in inventory is primarily a result of
Morgan's continuing plan to reduce working capital and interest on long-term
debt, while the increase in accounts receivable is primarily due to the $6.0
million increase in December sales at Distribution and TBP. Current liabilities
decreased $3.6 million primarily due to the decrease in the liabilities related
to the December 31, 1997 Sale Provision. The decrease in other liabilities was
offset by a $3.6 million increase in accounts payable which was primarily due to
improved cash management practices as of December 31, 1998.
Long-term debt, net of cash, decreased to $20.0 million at December 31,
1998, from $53.2 million at December 31, 1997. Morgan's ratio of long-term debt,
net of cash, to total capitalization decreased from 55.6% at December 31, 1997
to 31.5% at December 31, 1998. The decrease in long-term debt, net of cash, of
$33.2 million is primarily attributable to the fact that Morgan used the
proceeds from the Manufacturing sale to reduce its revolving credit facility and
to repay the acquisition term loan under Morgan's credit facility then in
effect, as well as its continuing working capital management efforts.
Cash generated by operating activities totaled $5.6 million in 1998 as
compared to $4.1 million generated in 1997. The improvement is primarily due to
the $6.4 million improvement in cash generated from profits in 1998 over 1997 as
well as the additional $8.0 million generated from accounts payable which is
primarily a result of improved cash management practices. These improvements
were partially offset by the increased usage in 1998 of other working capital.
The increase in accounts receivable usage of $4.0 million was primarily due to a
$6.0 million increase in December sales at Distribution and TBP. The decrease in
inventory of $6.9 million was primarily due to the Company's inventory
management practices. Investing activities in 1998 generated $27.6 million,
compared to the corresponding period in 1997, when investing activities used
$10.2 million. Activities in 1998 primarily included $31.0 million in proceeds
from the sale of Manufacturing and $3.6 million used for asset acquisitions,
while 1997 activities consisted of $3.2 million used for asset acquisitions and
the final payment to purchase TBP of $2.2 million and payments to purchase
Wahlfeld of $5.0 million. Financing activities used $33.7 million through
December 31, 1998, with $33.8 million used to reduce long-term debt. Of the
reduction of long-term debt, $26.6 million was used to reduce the Company's
revolving line of credit, $4.8 million was used to retire the acquisition term
loan under the Company's credit facility then in effect, and $1.3 million was
used to retire the debt owed with respect to the real property owned by Morgan
and used by Manufacturing, and $1.0 million was used for principal payments
under capital lease obligations.
Prior to the Adam acquisition, the Company maintained a credit agreement
with a group of banks which provided for a revolving credit facility of up to
$65 million, including a sub-line of up to $30 million for permitted
acquisitions and a letter of credit facility of up to $5 million. As of December
31, 1998 Morgan had borrowings of $18.7 million under the revolving credit
facility and was in compliance with all covenants under the credit facility. On
February 19, 1999, in connection with the Adam acquisition, Morgan and its
banking group entered into an amendment to the credit facility. The amendment
provides for a revolving credit line of up to $100 million (including a letter
of credit facility of up to $5 million), a term loan of up to $10 million and a
bridge term loan of up to $10 million and extends the facility through January
1, 2004. The credit facility, as amended, continues to contain certain
covenants, including limitations on the acquisition and disposition of assets,
the payment of dividends and the prepayment of other indebtedness, and continues
to provide that applicable borrowings bear interest at either the bank's prime
rate plus a margin or LIBOR plus a margin based upon a pricing matrix. The
credit facility, as amended, also continues to require Morgan to maintain
certain earnings coverage, interest coverage and fixed coverage ratios; however,
the amendment of the credit facility altered such covenants. In addition, the
amendment added certain minimum earnings and minimum availability covenants.
RESTRUCTURING OF OPERATIONS
Beginning in 1994, Morgan adopted a comprehensive strategic plan to
restore profitability and regain leadership by providing customers with quality
products and optimum service at the best price/value relationship. Morgan has
taken a series of major initiatives to implement this plan and respond to
continuing challenges in the industry.
During the period of 1994 through 1997, Morgan incurred an aggregate of
$20.8 million in restructuring charges. Included in these restructuring charges
were the closing of the Springfield, Oregon; Lexington, North Carolina and Weed,
California plants; relocation of Morgan's corporate headquarters and the delayed
start-up of the new high-speed door manufacturing line. Additionally, Morgan
recorded a $1.1 million reorganization charge in 1997 in connection with the
termination of the employment of the Vice President and Chief Financial Officer
and Senior Vice President-Human Resources and Administration of Morgan. Such
provision covered severance and related payments to these former officers.
Although Manufacturing had made progress operationally, it was
determined in 1997 that Manufacturing was not a strategic fit with Morgan's
long-term growth plans. In December 1997, Morgan agreed to sell the operating
assets of Manufacturing to JELD-WEN, resulting in a charge to earnings in 1997
of $12.4 million with half the charge related to an asset write-down and half
related to the costs of selling the business including employee severance costs,
pension expenses, lease obligations and legal costs. The sale was completed in
February 1998.
YEAR 2000 ISSUES
The Year 2000 issue, common to most companies, concerns the inability of
information and noninformation systems to recognize and process date-sensitive
information after 1999 due to the use of only the last two digits to refer to a
year. This problem could affect both information systems (software and hardware)
and other equipment that relies on microprocessors.
A new Company-wide integrated management information system had been
selected and was in the process of being implemented as of December 31, 1998.
With the purchase of Adam, completed on February 19, 1999, Morgan decided to
terminate its implementation of the new management information system and,
instead, to merge all operations into the Adam System. After reviewing both the
Adam System and the proposed new system, management determined that the Adam
System would be better suited for Morgan's business and would be less expensive
to implement. Prior to the Adam acquisition, Adam's management had conducted an
evaluation of Adam's Year 2000 readiness. Management of Morgan has since
completed a Company-wide evaluation of the Year 2000 impact on all of Morgan's
computer systems (including the Adam System), applications and other
date-sensitive equipment. Systems and equipment that are not Year 2000 compliant
have been identified and remediation efforts are in process. Management
estimates that as of March 15, 1999 nearly 50 percent of remediation efforts for
all of Morgan's information systems were completed. Management has also begun
remediation for noninformation systems. All remediation efforts and testing of
systems and equipment are expected to be completed by August 31, 1999.
Morgan is in the process of monitoring the progress of material third
parties (vendors and suppliers) in their efforts to become Year 2000 compliant.
Those third parties include, but are not limited to: material vendors and
customers, financial institutions and utilities. Morgan has requested
confirmation from these material third parties of their Year 2000 plans.
Through December 31, 1998, Morgan has spent approximately $5.0 million
to address Year 2000 issues. Management believes that approximately $1.5 million
in additional costs will be incurred before remediation efforts are complete.
Funds for these costs are expected to be provided by the operating cash flows of
the company. The majority of the remediation efforts that remain to be completed
relate to conversion of Morgan's distribution centers to the Adam System and
employee and staff training costs.
Morgan could be faced with severe consequences if Year 2000 issues are
not identified and resolved in a timely manner by the Company and material third
parties. A worst-case scenario would result in the short-term inability of the
Company to process customer orders and to ship products to its customers due to
unresolved Year 2000 issues. This would result in lost revenues; however, the
amount of losses would be dependent on the length and nature of the disruption,
which cannot be predicted or estimated. In light of the possible consequences,
Morgan is devoting the resources management believes are needed to address Year
2000 issues in a timely manner. While management expects a successful resolution
of these issues, there can be no guarantee that material third parties, on which
Morgan relies, will address all Year 2000 issues on a timely basis or that their
failure to successfully address all issues would not have an adverse effect on
Morgan. Morgan is in the process of developing contingency plans in case
business interruptions do occur. Management expects these plans to be completed
by August 31, 1999.
SEASONAL NATURE OF BUSINESS
The building products industry is seasonal, particularly in the
Northeast and Midwest regions of the United States, where inclement weather
during the winter months usually reduces the level of building activity in both
the improvement, maintenance and repair market and the new construction market.
Morgan's lowest sales levels generally occur during the first and fourth
quarters. Since a high percentage of Morgan's overhead and expenses are
relatively fixed throughout the year, profit margins tend to be lower in
quarters with lower sales. Morgan believes that the seasonal effect on
operations has not been changed as a result of the sale of Manufacturing and
that the acquisition of locations in the Western United States as part of the
Adam purchase will not affect the seasonality of Morgan's business in any
material respect.
The table below sets forth Morgan's quarterly net sales for the years
ended December 31, 1998 and 1997:
1998 1997
------------------ ------------------ ------------------ ------------------
Net Sales % of Total Net Sales % of Total
------------------ ------------------ ------------------ ------------------
(millions) (millions)
First Quarter $80.2 20.9% $95.8 23.2%
Second Quarter 98.2 25.6% 106.8 25.9%
Third Quarter 107.5 28.1% 111.6 27.1%
Fourth Quarter 97.3 25.4% 98.0 23.8%
------------------ ------------------ ------------------ ------------------
Total Year $383.2 100.0% $412.2 100.0%
------------------ ------------------ ------------------ ------------------
See Note 14 of Notes to Consolidated Financial Statements for further
quarterly information.
RECENT DEVELOPMENTS
On March 10, 1999, Morgan entered into an Agreement of Merger with
Andersen Windows and its wholly-owned subsidiary, Andersen Sub, pursuant to
which Andersen Sub and Morgan will be merged, resulting in Morgan, as the
surviving corporation, becoming a wholly-owned subsidiary of Andersen Windows.
The consideration to be received by Morgan's stockholders in the Merger will be
$4.00 per share of Morgan common stock, subject to adjustment until the
effective date of closing, under certain limited circumstances. The Merger is
subject to, among other things, approval of the stockholders of Morgan and the
applicable regulatory agencies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company is exposed to changes in interest rates primarily as a
result of its long-term debt used to maintain liquidity and fund expansion
through acquisition. To mitigate the impact of fluctuations in variable interest
rates, the Company could, at its option, convert to fixed interest rates by
either refinancing variable rate debt with fixed rate debt or entering into
interest rate swaps.
The following table provides information about the Company's interest
rate risk at December 31, 1998 and February 28, 1999, which incorporates the
second amendment to its loan and security agreement with its lenders entered
into February 19, 1999.
Expected Maturity Date
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(thousands of dollars)
------------------------------------------------------------------------- ----------
Liabilities
December 31, 1998
Long-Term Debt:
Variable Rate $ - $ - $18,686 $ - $ - $ - $18,686 $18,686
Average Interest Rate -% -% 7.63% -% -% -% 7.63%
February 28, 1999
Long-Term Debt:
Variable Rate $ - $ 4,000 $ 4,000 $ 4,000 $ 4,000 $69,000 $85,000 $85,000
Average Interest Rate 7.95% 8.69% 8.47% 8.23% 7.96% 7.66% 8.18%
COMMODITY PRICE RISK
The Company is subject to exposure with respect to commodities because
its ability to recover increased costs through higher pricing may be limited by
the competitive environment in which Morgan operates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 below for a listing of financial statements and the
financial statement schedule included therein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF MORGAN
DIRECTORS OF MORGAN
Certain information regarding each director of Morgan as of December 31,
1998 is set forth below, including such individual's age and principal
occupation, a brief account of business experience during at least the last five
years, other directorships currently held and the year in which the individual
was first elected as a director of Morgan. The directors hold office until their
successors are elected and qualified or until their earlier removal or
resignation. Mr. Patrick J. McDonough, Jr., director of Morgan since November
1994, resigned his position as director in September 1998 for personal reasons.
FRANK J. HAWLEY, JR. age 71, has been Chairman of the Board of the
Company since December 1983. Since September 1986, he has been the managing
partner of Bedford Partners, the general partner of Saugatuck Capital Company
Limited Partnership II ("Saugatuck II"), a venture capital partnership. Since
October 1992, he has been the managing partner of Greyrock Partners Limited
Partnership, the general partner of Saugatuck Capital Company Limited
Partnership III ("Saugatuck III"), a venture capital partnership. Since
September 1982, he has been the President and principal stockholder of Saugatuck
Associates, Inc. and Saugatuck Associates II, Inc., each a risk capital
management firm which provides investment advice and assistance to Saugatuck II
and Saugatuck III. During the period from 1982 to 1996, Mr. Hawley was the
managing partner of the general partner of Saugatuck Capital Company Limited
Partnership, a venture capital partnership which was terminated in 1996.
JOHN S. CROWLEY, age 75, has served as a member of the Company's Board
of Directors since November 1986. Mr. Crowley has been a private investor since
1994. Previously he was a managing director of Saugatuck Associates from 1985 to
1994. From 1983 to 1987 he was the organizer and general partner of Round Hill
Associates, a private investment fund engaged in management buyouts, and the
President of Round Hill Associates Management Company. Mr. Crowley is also a
director of General Housewares Corp., a consumer goods company.
HOWARD G. HAAS, age 74, has served as a member of the Company's Board of
Directors since September 1987. Mr. Haas has been the Chairman of Howard G. Haas
& Associates, a consulting firm, since 1987. From 1967 to 1986 Mr. Haas was the
President and Chief Executive Officer of Sealy Incorporated; Mr. Haas is also a
member of the faculty of the Graduate School of Business at the University of
Chicago.
J. MICHAEL MARKS, age 50, has served as a member of the Company's Board
of Directors since May 1998. In April 1987, Mr. Marks founded Indian River
Consulting Group, a wholesale distribution business consulting company based in
Melbourne, Florida. From November 1981 to December 1986, Mr. Marks was the
Executive Vice President of Lex Electronics, a Stamford, Connecticut based
electronics distributor. Prior to November 1981, Mr. Marks served as Director of
Corporate Training and Development for Ducommon Inc., a Los Angeles, California
based industrial distribution company.
LARRY R. ROBINETTE, age 55, has served as a member of the Company's
Board of Directors since November 1994 and as the President and Chief Executive
Officer of the Company since September 1994. Mr. Robinette is the former
President and CEO of Anchor Hocking Packaging of Cincinnati, Ohio, a subsidiary
of CarnaudMetalbox. From 1980 to 1993, he held a series of executive assignments
at Newell Company, including operations vice presidencies in the EZ Painter
Division, Newell Window Furnishings and the Mirro Foley Division and the
presidency of Anchor Industrial Glass. Prior to that, he was employed at General
Motors.
EDWARD T. TOKAR, age 51, has served as a member of the Board of
Directors of the Company since November 1994. Since 1985, Mr. Tokar has served
as Vice President-Investments, AlliedSignal Inc., responsible for the overall
investment management of employee benefit asset funds worldwide. Mr. Tokar has
been employed at AlliedSignal since 1977 in various management positions. Mr.
Tokar has also been the Chief Executive Officer of Allied Capital Management LLC
since 1998, is a trustee of the Morgan Grenfell Investment Funds, an advisor to
various investment partnerships and a trustee of the College of William and
Mary.
FAMILY RELATIONSHIPS. To the best of the Company's knowledge and belief,
there is no family relationship between any of the Company's directors and
executive officers.
EXECUTIVE OFFICERS OF MORGAN
Certain information regarding each executive officer of Morgan as of
December 31, 1998 is set forth below, except that information concerning Mr.
Hawley and Mr. Robinette is set forth above under "Directors of Morgan." The
Board of Directors appoints Company officers and such appointments are effective
until resignation or earlier removal by the Board of Directors.
Mr. Mitchell J. Lahr, age 40, was appointed Vice President, Chief
Financial Officer and Secretary of Morgan in April 1997. From September 1994
until he joined Morgan, Mr. Lahr was Vice President and Chief Financial Officer
of Stella Foods Corp., a subsidiary of Specialty Foods Corporation. From
September 1992 to August 1994, Mr. Lahr was Vice President and Chief Financial
Officer of Anchor Hocking Packaging Company, a subsidiary of Carnaud Metalbox,
Inc. From 1980 to 1992 he served in various positions with General Electric
Company.
Mr. Darrell J. Olson, age 52, was appointed Vice President, Human
Resources of Morgan in April 1997. From September 1995 until he joined Morgan,
Mr. Olson was Vice President, Human Resources of Twin Disc Inc., a manufacturer
of highly engineered power transmission equipment. From February 1994 through
December 1994, Mr. Olson was the Vice President of Operations of the Intercraft
Division of Newell Company. From October 1983 through February 1994, Mr. Olson
served as Vice President, Human Resources of the Mirro Division of Newell
Company.
Mr. David A. Braun, age 41, was appointed Vice President of Morgan and
President of Morgan's Distribution unit on May 15, 1996. Mr. Braun had
previously been named General Manager of Morgan Distribution on February 5,
1996. From August of 1995 to February 4, 1996, Mr. Braun served as Vice
President and Controller of Morgan Distribution. Prior to that, Mr. Braun served
as Division Controller of RobertShaw Controls from 1994 to August of 1995. Mr.
Braun served as Senior Vice President of Lisa Frank, Inc. from 1993 to 1994 and
served as Vice President and Chief Financial Officer of HGP Industries, Inc.
from 1991 to 1993. From 1987 to 1991, Mr. Braun served as Vice President and
Controller of EZ Paintr, a division of Newell Company. From 1986 to 1987 he
served in various managerial positions at EZ Paintr.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and persons holding more than 10% of a registered class of
the Company's equity securities to file with the Securities and Exchange
Commission and the New York Stock Exchange initial reports of ownership, reports
of changes in ownership and annual reports of ownership of Common Stock and
other equity securities of the Company. Such directors, officers, and 10%
stockholders are also required to furnish the Company with copies of all such
filed reports.
Based solely upon a review of the copies of such reports furnished to
the Company, or representations that no reports were required, the Company
believes that all of its directors, executive officers and 10% shareholders
complied with all filing requirements under Section 16(a) in 1998, except that
Messrs. Robinette, Lahr, Braun and Olson did not file Annual Statements of
Beneficial Ownership of Securities on Form 5 ("Form 5") with respect to the
repricing of their options in November 1998 until March 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to all cash and
non-cash compensation of (i) Mr. Robinette, the Chief Executive Officer of the
Company, (ii) the other most highly compensated executive officers of the
Company who were serving as such as of December 31, 1998 , and (iii) Mr. Duane
A. Greenly, who served as Vice President of the Company and President-Morgan
Manufacturing from December 1996 through March 1998 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation (1) Long-Term Compensation
------------------------------------- ----------------------
Awards
Name & Principal Other Annual of Stock Long-Term All Other
Position Year Salary Bonus Compensation(2) Options Payouts Compensation (3)
- -------- ---- ------ ----- --------------- ------- ------- ----------------
Larry R. Robinette 1998 $400,010 - $ 31,989 (8) 295,000 - $ 12,000
President, Chief Executive 1997 $400,010 - $ 21,980 (9) - $1,098,942 (21) $ 19,192
Officer, and Director 1996 $365,580 $239,724 $ 15,192 (10) - - $ 16,451
Mitchell J. Lahr 1998 $225,000 - $ 17,132 (11) 100,000 - $ 10,125
Vice President - Finance 1997 $164,423 $112,500 (4) $199,277 (12) - - $ 4,932
and Administration, 1996 - - - - - -
Chief Financial Officer,
and Secretary
- -
Darrell J. Olson 1998 $140,000 - $ 11,517 (13) 75,000 - $ 5,732
Vice President - 1997 $ 99,615 $ 50,000 (5) $175,444 (14) - - $ 2,988
Human Resources 1996 - - - - - -
David A. Braun 1998 $200,000 - $148,449 (15) 100,000 - $ 6,661
Vice President and 1997 $200,000 $ 22,027 $ 5,853 (16) - - $ 13,989
President
- Morgan 1996 $170,382 $330,677 $ 2,914 (17) - - $ 9,073
Distribution
Duane A. Greenly 1998 $ 42,308 - $ 51,253 (18) - - $623,996
Vice President and 1997 $200,000 $100,000 (6) $ 15,328 (19) - - $ 5,820
President - Morgan 1996 $ 7,780 $ 77,411 (7) $ 44 (20) 90,000 - -
Manufacturing
(1) This includes amounts earned in the respective fiscal year, whether or not
deferred.
(2) This represents payments by the Company for moving expenses, excess group
life insurance, leased automobiles, tax gross-up on amounts included in
taxable compensation (other than salary and bonuses) and certain other
reimbursable fees and expenses to the extent required to be reported.
(3) This amount includes contributions by the Company under Section 401(k) of
the Code pursuant to the Profit Sharing Savings and Retirement Plan for
each of the named Executive Officers as follows: Mr. Robinette, $4,800,
$4,750 and $9,984 for 1998, 1997 and 1996, respectively; Mr. Lahr, $4,800
and $3,703 for 1998 and 1997 respectively; Mr. Olson $4,800 and $2,988 for
1998 and 1997, respectively; Mr. Braun, $4,800, $4,750 and $7,524 for 1998,
1997 and 1996, respectively; and Mr. Greenly, $3,928 and $4,750 for 1998
and 1997, respectively. This amount also includes amounts the Company
contributed to the Deferred Compensation Plan for each of the Named
Executive Officers as follows: Mr. Robinette, $7,200, $14,442 and $6,467
for 1998, 1997 and 1996, respectively; Mr. Lahr, $5,325 and $1,229 for 1998
and 1997, respectively; Mr. Olson, $4,932 and $-0- for 1998 and 1997,
respectively; Mr. Braun, $1,861, $9,239 and $1,549 for 1998, 1997 and 1996,
respectively and Mr. Greenly, $342 and $2,320 for 1998 and 1997,
respectively. In the case of Mr. Greenly, this amount for 1998 also
includes $619,726 paid to Mr. Greenly pursuant to the Executive Severance
Plan.
(4) This represents a deferred signing bonus paid to Mr. Lahr pursuant to his
employment agreement entered into on March 11, 1997.
(5) This represents a deferred signing bonus paid to Mr. Olson pursuant to his
employment agreement entered into on March 21, 1997.
(6) This represents a bonus paid to Mr. Greenly to partially compensate him for
the loss of bonuses which he was eligible to earn under his previous
employment arrangement with a former employer.
(7) This includes a $20,000 bonus paid to Mr. Greenly pursuant to his
employment agreement and a performance bonus which was earned in 1996 but
paid in 1997.
(8) Other Annual Compensation includes $31,989 of tax gross-up.
(9) Other Annual Compensation includes $21,980 of tax gross-up.
(10) Other Annual Compensation includes $15,192 of tax gross-up.
(11) Other Annual Compensation includes $17,132 of tax gross-up.
(12) Other Annual Compensation includes $119,712 of moving expenses paid on Mr.
Lahr's behalf and $58,328 of tax gross-up.
(13) Other Annual Compensation includes $11,517 of tax gross-up.
(14) Other Annual Compensation includes $128,629 of moving expenses paid on Mr.
Olson's behalf and $23,815 of tax gross-up.
(15) Other Annual Compensation includes $100,743 of moving expenses paid on Mr.
Braun's behalf and $36,613 of tax gross-up.
(16) Other Annual Compensation includes $5,853 of tax gross-up.
(17) Other Annual Compensation includes $2,914 of tax gross-up.
(18) Other Annual compensation includes $17,452 for moving expenses paid on Mr.
Greenly's behalf, and $17,387 of tax gross-up.
(19) Other Annual Compensation includes $15,328 of tax gross-up.
(20) Other Annual Compensation includes $44 of tax gross-up.
(21) Pursuant to Mr. Robinette's employment agreement entered into in 1994, the
Company granted 140,000 restricted shares of Common Stock with a 1994 fair
market value of $5.00 per share to a trust for the benefit of Mr.
Robinette. Such trust was created to partially compensate Mr. Robinette for
the loss of certain future retirement benefits that occurred when Mr.
Robinette joined the Company. The trust sold all such shares during the
time period February 14, 1997 to July 29, 1997 for an average price per
share of approximately $7.85, for an aggregate cash value of $1,098,942.
OPTION GRANTS IN FISCAL 1998
The following table sets forth certain information concerning individual
grants of options to purchase Common Stock made by the Company during Fiscal
1998 to each of the Named Executive Officers.
% of Total
Number of Options/SARs Alternative to
Shares Granted to 5% and 10%
Underlying Employees Appreciation
Options/SARs in Fiscal Year Exercise Price Grant Date
Name Granted (1) $/Share (2) Expiration Date Present Value (3)
---- ------- --- ----------- --------------- ----------------
Larry Robinette 30,000 (4) 4.6% $3.00 11/02/08 $ 75,600
20,000 (4) 3.1% 3.00 11/02/08 50,400
25,000 (4) 3.8% 3.00 11/02/08 63,000
100,000 (5) 15.3% 3.00 11/02/08 252,000
120,000 (5) 18.4% 3.00 11/02/08 302,400
Mitchell J. Lahr 100,000 (6) 15.3% 3.00 11/02/08 252,000
David A. Braun 40,000 (4) 6.1% 3.00 11/02/08 100,800
35,000 (4) 5.4% 3.00 11/02/08 88,200
25,000 (5) 3.8% 3.00 11/02/08 63,000
Darrel J. Olson 25,000 (4) 3.8% 3.00 11/02/08 63,000
50,000 (6) 7.7% 3.00 11/02/08 126,000
Duane A. Greenly 0 N/A N/A N/A N/A
(1) The total number of options granted to employees in 1998 was 652,000.
Options to purchase 5,000 shares were granted on May 13, 1998; options to
purchase 647,000 were granted on November 2, 1998 in connection with a plan
implemented on November 2, 1998 to grant new options with a lower exercise
price in exchange for the voluntary surrender of previously granted
options.
(2) All exercise prices of options granted on November 2, 1998 were at 120% of
fair market value on the date of grant. The exercise price of the options
granted on May 13, 1998 were at fair market value on the date of grant. All
such options granted on May 13, 1998 were subsequently voluntarily
surrendered for new options granted on November 2, 1998.
(3) The estimated grant date present values reflected in the above table are
determined using the Black-Scholes model. The material assumptions and
adjustments incorporated in the Black-Scholes model in estimating the
values of the options reflected in the above table include:
* Exercise prices on the options are greater than or equal to the fair
market value of the underlying stock on the dates of the grant.
* The option term of ten years.
* Interest rates that represent the interest rate on a U.S. Treasury
security on the dates of grant with maturity dates corresponding to
those of the option terms.
* Volatilities calculated using daily stock prices for the one-year period
prior to the grant dates.
* Dividends at the rate of $0.00 per share representing the annualized
dividends paid with respect to a share of Common Stock at the dates of
grant. The Company does not pay a dividend with respect to Common Stock.
* Reductions to reflect the probability of forfeiture due to termination
prior to vesting and the probability of a shortened option term due to
termination of employment prior to the option expiration date.
(4) These options represent the grant of new options under the Company's
Incentive Stock Option Plan on November 2, 1998 with a lower exercise price
in exchange for the voluntary surrender of previously granted options. All
repriced options were granted subject to the same terms and conditions as
the previously granted options to which they correspond, except that the
term and vesting schedule of the repriced options begin anew at November 2,
1998 (but are for the same period and vest at the same rate as the
previously granted options) and that no newly granted option shall be
exercisable until November 2, 2000 (except under limited circumstances,
including a change in control of the Company) (as defined in the
applicable plan or agreement).
(5) These options represent the grant of new options under the Company's
Incentive Compensation Plan on November 2, 1998 with a lower exercise price
in exchange for the voluntary surrender of previously granted options. All
repriced options were granted subject to the same terms and conditions as
the previously granted options to which they correspond, except that the
term and vesting schedule of the repriced options begin anew at November 2,
1998 (but are for the same period and vest at the same rate as the
previously granted options) and that no newly granted option shall be
exercisable until November 2, 2000 (except under limited circumstances,
including a change in control of the Company) (as defined in the
applicable plan or agreement).
(6) These options represent the grant of new options under an option agreement
between the Named Executive Officer and the Company on November 2, 1998,
with a lower exercise price in exchange for the voluntary surrender of
previously granted options. All repriced options were granted subject to
the same terms and conditions as the previously granted options to which
they correspond, except that the term and vesting schedule of the repriced
options begin anew at November 2, 1998 (but are for the same period and
vest at the same rate as the previously granted options) and that no newly
granted option shall be exercisable until November 2, 2000 (except under
limited circumstances, including a change in control of the Company)
(as defined in the applicable plan or agreement).
The following table summarizes the aggregated option exercises by the
Named Executive Officers in Fiscal 1998 and the year-end values of unexercised
options.
AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL 1998 YEAR-END OPTION VALUE
Total Number of Shares
Underlying Unexercised Value of Unexercised in
Options Held at the Money Options Held at
Fiscal Year-End Fiscal Year-End (1) (2)
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Larry R. Robinette 0 295,000 $0 $1,032,500
Mitchell J. Lahr 0 100,000 $0 $ 350,000
David A. Braun 0 100,000 $0 $ 350,000
Darrell J. Olson 0 75,000 $0 $ 262,500
Duane A. Greenly 81,771 0 $0 $ 0
(1) Total value of options based on the Common Stock's closing price on the New
York Stock Exchange of $3.50 as of December 31, 1998.
(2) Options to become exercisable upon a change in control (as defined in the
applicable governing documents).
COMPENSATION OF DIRECTORS
All directors receive reimbursement for all expenses incurred in
connection with attendance at board meetings and all directors, other than
Messrs. Hawley and Robinette, receive a fee of $1,500 per meeting of the board,
$1,500 per committee meeting and a retainer of $3,000 per quarter.
In addition, each individual serving on the Board of Directors who is
not an employee of the Company or a beneficial owner (within the meaning of Rule
13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of more than 20% of the issued and outstanding Common Stock (a
"Non-employee Director") is automatically granted an option to purchase 1,000
shares of Common Stock upon such person's election and each re-election to the
Board of Directors. During 1998, five incumbent Non-employee Directors (Messrs.
Crowley, Haas, Marks, McDonough and Tokar) each received a grant of options for
the purchase of 1,000 shares of Common Stock pursuant to the Morgan Products
Ltd. 1992 Non-employee Director Stock Option Plan (the "Director Plan"). Such
options granted to Mr. McDonough were cancelled upon his resignation from the
Board in September 1998.
Each grant under the Director Plan permits the holder to purchase from
the Company 1,000 shares of Common Stock at the fair market value of such shares
on the date the option was granted. Such options vest beginning one year from
the date of grant in equal amounts over the next three years. In the event that
a person granted options under the Director Plan ceases to be a director for any
reason other than death or disability or in connection with a Change of Control
(as defined in the Director Plan), each option not vested as of the effective
date of termination as a director shall, to the extent not so vested, be
forfeited and revert back to the Company.
EMPLOYMENT AGREEMENTS
Effective as of January 1, 1998, the Company and Mr. Robinette entered
into an employment agreement that superceded the employment agreement between
the Company and Mr. Robinette dated September 6, 1994. Pursuant to such
agreement, Mr. Robinette continues to be employed as President and Chief
Executive Officer of the Company and receives a salary of $400,000 per year.
Under the terms of the agreement, Mr. Robinette is furnished with the use of a
Company automobile, participation in group health, term life insurance and other
employee benefit plans available to other executive personnel. He is eligible
for four weeks paid vacation in each calendar year. Mr. Robinette will also be
entitled to receive a bonus at the end of each calendar year of equal to 70% of
his annual base salary if the Company meets its annual budget for such year
under the Company's bonus plan; however, if the Company exceeds its annual
budget and meets certain other targets under the bonus plan, Mr. Robinette will
be entitled to receive a bonus of up to a maximum of 105% of his base salary.
Mr. Robinette is also able to participate in the Company's Profit Sharing and
Savings Retirement Plan, Long Term Incentive Plan and the Deferred Compensation
Plan.
On March 11, 1997, the Company and Mr. Lahr entered into an employment
agreement. Pursuant to the agreement, Mr. Lahr receives an annual base salary of
$225,000 and a deferred signing bonus of $112,500 for 1997 which was paid in
1998. Under the terms of the agreement, Mr. Lahr is furnished with the use of a
Company automobile and is eligible to participate in group health, term life
insurance and other employee benefit plans available to other executive
personnel. He is eligible for four weeks paid vacation in each calendar year. He
is also eligible to participate in the Company's bonus plan. Pursuant to his
employment agreement, Mr. Lahr was awarded an option to purchase 100,000 shares
of Common Stock at an exercise price of $6.625 that was equal to the fair market
value on the date of grant.
On March 21, 1997, the Company and Mr. Olson entered into an employment
agreement. Pursuant to the agreement, Mr. Olson receives an annual base salary
of $140,000 and a deferred signing bonus of $50,000 for 1997 which was paid in
1998. Under the terms of the agreement, Mr. Olson is furnished with the use of a
Company automobile and is eligible to participate in group health, term life
insurance and other employee benefit plans available to other executive
personnel. He is eligible for four weeks paid vacation in each calendar year. He
is also eligible to participate in the Company's bonus plan. Pursuant to his
employment agreement, Mr. Olson was awarded stock options representing the right
to purchase 50,000 shares of Common Stock at an exercise price of $6.625 that
was equal to the fair market value on the date of grant.
On November 23, 1996, the Company and Mr. Greenly entered into an
employment agreement. Pursuant to the agreement, Mr. Greenly received an annual
base salary of $200,000. Under the terms of the agreement, Mr. Greenly was
furnished with the use of a Company automobile and permitted to participate in
group health, term life insurance and other employee benefit plans available to
other executive personnel. He was eligible for four weeks paid vacation in each
calendar year. He was also eligible to participate in the Company's bonus plan.
In addition, Mr. Greenly received a signing bonus of $20,000 in 1996. Pursuant
to his employment agreement, Mr. Greenly was awarded stock options representing
the right to purchase 90,000 shares of Common Stock at an exercise price of
$7.00 that was equal to the fair market value on the date of grant. In
connection with the sale of substantially all of the assets of the manufacturing
business of the Company, Mr. Greenly's employment with the Company terminated
effective March 13, 1998. In connection with such sale Mr. Greenly received
certain cash payments and the continuation of certain benefits for a limited
period of time after termination of employment. See "Summary Compensation Table"
above. Also in connection with such sale, the Company and Mr. Greenly entered
into an amendment to Mr. Greenly's option agreement whereby his options that
were vested as of the date of termination did not expire upon termination, but
continued in effect until March 2, 1999. All of such options expired on March 2,
1999 without having been exercised.
SEVERANCE PLANS
The Company has adopted a Chief Executive Officer Severance Plan (the
"CEO Plan") for Mr. Robinette and an Executive Severance Plan (the "Executive
Plan") for Messrs. Lahr, Braun and Olson. The CEO Plan provides for severance
benefits in the event a participant's employment is involuntarily terminated for
any reason other than cause, or where a participant voluntarily terminates for
certain prescribed reasons outlined in the CEO Plan. Under the CEO Plan, if the
participant's employment is terminated, the participant will receive severance
pay equal to two times (a) the sum of the participant's base salary and (b) the
greater of (i) the average annual bonus earned in the three fiscal years prior
to the date of the termination and (ii) the target annual bonus established for
the year in which the effective date of termination occurs. Upon a qualifying
termination of employment, the participant will also receive a pro rata targeted
annual bonus for the year of termination. Under the CEO Plan, a participant
whose employment is terminated under the CEO Plan's provisions is also eligible
to receive certain of those fringe benefits he had received prior to his
termination until the participant and his spouse reach the age of 70 or become
eligible for Medicare, whichever is earlier. If, during the six months prior to
or within a year following a Change in Control (as defined in the CEO Plan), the
participant's employment is terminated under certain circumstances, he will be
paid a severance benefit equal to three times the sum of (a) his annual base
salary and (b) the greater of (i) the average annual bonus earned in the three
fiscal years prior to the date of the termination and (ii) the target annual
bonus established for the year in which the participant's effective date of
termination occurs. Also, upon such a termination of employment in connection
with a Change in Control, the participant will receive a pro rata targeted
annual bonus for the year of termination. Further, the participant would be
entitled to receive any unused or accrued vacation pay, and would be eligible to
receive certain of those fringe benefits he had received prior to his
termination until the participant and his spouse attain age 70 or become
entitled to Medicare, whichever is earlier. In the event that the severance
benefits under the CEO Plan exceed the "golden parachute" excise tax limit set
forth in Section 280G of the Internal Revenue Code, the participant is entitled
to receive an additional cash gross-up payment so that the net amount retained
by the participant after the imposition of such excise tax is equal to the
amount of severance benefits due him under the CEO Plan.
The Executive Plan provides for severance benefits in the event a
participant's employment is involuntarily terminated for any reason other than
cause, or where a participant voluntarily terminates for certain prescribed
reasons outlined in the Executive Plan. If the participant's employment is
terminated, the participant will receive severance pay equal to one times the
sum of (a) the participant's base salary and (b) the greater of (i) the average
annual bonus earned in the three fiscal years prior to the date of the
termination and (ii) the target annual bonus established for the year in which
the participant's effective date of termination occurs. Upon a qualifying
termination of employment the participant will also receive a pro rata targeted
annual bonus for the annual year of termination. A participant whose employment
is terminated in accordance with the terms of the Executive Plan is also
eligible to receive those fringe benefits he had received prior to his
termination for one full year. If, during the six months prior to or within a
year following a Change in Control (as defined in the Executive Plan), the
participant's employment is terminated, under certain circumstances, the
participant would be paid a severance benefit equal to two times the sum of (a)
his annual base salary and (b) the greater of (i) the average annual bonus
earned in the three fiscal years prior to the date of the termination and (ii)
the target annual bonus established for the year in which the effective date of
termination occurs. Also, upon such a termination of employment in connection
with a Change in Control, the participant will receive a pro rata targeted
annual bonus for the year of termination. Further, the participant would receive
any unused or accrued vacation pay, and would be eligible to receive certain of
those fringe benefits he had received prior to his termination for a period of
twenty-four months. In order to avoid the imposition of excise taxes,
participants' benefits are capped at the "golden parachute" excise tax limit set
forth in Section 280G of the Internal Revenue Code (unless removing the cap
results in a greater after-tax benefit to the participant).
In exchange for the severance benefit provided under the CEO Plan and
the Executive Plan, as the case may be, the covered executive, for a period of
twenty-four calendar months after termination is subject to non-disclosure,
non-competition and no-raid agreements. The CEO Plan and the Executive Plan
supersede any previous severance agreements between the Company and its
executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Hawley, Marks
and Haas. Mr. Hawley is an officer of the Company and may be considered an
employee of the Company. In 1998, the Company paid Mr. Hawley a chairman's fee
of $100,000 which he is entitled to receive annually. No other executive officer
of the Company served as: (i) a member of the compensation committee (or other
board committee performing equivalent functions or, in the absence of any such
committee, the entire board of directors) of another entity, one of whose
executive officers served on the compensation committee of the Board of
Directors of the Company; (ii) a director of another entity, one of whose
executive officers served on the Board of Directors of the Company; or (iii) a
member of the compensation committee (or other board committee performing
equivalent functions or, in the absence of any such committee, the entire board
of directors) of another entity, one of whose executive officers served as a
director of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 19, 1999 the number of shares
of Common Stock owned beneficially, to the knowledge of the Company, by each
beneficial owner of more than 5% of the Common Stock, by each director, by each
Named Executive Officer, and by all executive officers and directors of the
Company as a group. Unless otherwise indicated in a footnote, each person listed
in the table possesses sole voting and investment power with respect to the
shares indicated.
NAME AND ADDRESS OF NUMBER PERCENTAGE OF
BENEFICIAL OWNER OF SHARES COMMON STOCK
-------------------- --------- -------------
Heartland Advisors, Inc. 2,059,900 (1) 19.9
790 North Milwaukee Street
Milwaukee, WI 53202
The Parnassus Fund 1,000,000 9.7
One Market
Steuart Tower - Suite #1600
San Francisco, CA 94105
Franklin Resources, Inc. 749,800 (2) 7.2
Franklin Advisory Services, Inc.
901 Mariners Island Blvd, 6th Floor
San Mateo, CA 94404
James J. Cramer 725,500 (3) 7.0
J.J. Cramer & Co.
100 Wall Street
New York, NY 10005
Dimensional Fund Advisors Inc. 719,900 (4) 7.0
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Frank J. Hawley, Jr. 125,122 1.2
Howard G. Haas 9,500 (5) *
Larry R. Robinette 8,800 *
John S. Crowley 5,000 (6) *
Edward T. Tokar 4,000 (7) *
Darrell J. Olson 5,000 *
Mitchell J. Lahr 2,000 *
All Directors and Executive Officers 159,822 (8) 1.5
as a group
(9 persons)
* Number equals less than one percent (1%) of outstanding shares of Common
Stock.
(1) Based on information filed with the Securities and Exchange Commission,
Heartland Advisors, Inc. has sole voting power with respect to 1,167,900
shares and dispositive power with respect to 2,059,000 shares.
(2) Based on information filed with the Securities and Exchange Commission,
Franklin Advisory Services, Inc. has sole voting power with respect to
220,000 shares and sole dispositive power with respect to 749,800 shares
(3) Based on information filed with the Securities and Exchange Commission,
J.J. Cramer & Co. has sole voting power with respect to 725,500 shares
and sole dispositive power with respect to 725,500 shares.
(4) Based on information filed with the Securities and Exchange Commission,
Dimensional Fund Advisors Inc. has sole voting power with respect to
719,900 shares and sole dispositive power with respect to 719,900
shares.
(5) This amount includes 5,000 shares of Common Stock as to which Mr. Haas
has options to purchase which were granted pursuant to the Director Plan
and which are currently exercisable or exercisable within 60 days, as
well as 4,500 shares owned individually.
(6) This amount consists of 5,000 shares of Common Stock as to which Mr.
Crowley has options to purchase which were granted pursuant to the
Director Plan and which are currently exercisable or exercisable within
60 days.
(7) This amount represents 2,000 shares of Common Stock as to which Mr. Tokar
has options to purchase which were granted pursuant to the Director Plan
and which are currently exercisable or exercisable within 60 days, as well
as 2,000 shares owned individually.
(8) This amount represents the aggregate amount of 159,822 shares of Common
Stock as to which all executive officers and directors as a group have
options to purchase and which are currently exercisable or exercisable
within 60 days, as well as shares owned or beneficially owned
individually.
On March 10, 1999, Morgan entered into an Agreement of Merger with
Andersen Windows and its wholly-owned subsidiary, Andersen Sub, pursuant to
which Andersen Sub and Morgan will be merged, resulting in Morgan, as the
surviving corporation, becoming a wholly-owned subsidiary of Andersen Windows.
The consideration to be received by Morgan's stockholders in the Merger will be
$4.00 per share of Morgan common stock, subject to adjustment until the
effective date of closing, under certain limited circumstances. The Merger is
subject to, among other things, approval of the stockholders of Morgan and the
applicable regulatory agencies.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the third quarter of 1998, the Company engaged Indian River
Consulting Corporation ("Indian River") to assist the Company in evaluating the
Adam acquisition, including the development of strategies to be used in
integrating the Company's and Adam's systems and employee forces. Mr. J. Michael
Marks, a member of the Company's board of directors, is the sole owner of Indian
River. There is no agreement governing the engagement of Indian River by the
Company, which is done on a purchase order basis. In 1998, the Company paid
Indian River approximately $36,000 for its services and, in 1999, as of March
15, 1999, the Company has paid approximately $82,000 in charges for such
services rendered by Indian River. The Company believes that all such
transactions with Indian River have been conducted on an arm's-length basis. See
also "Executive Compensation--Compensation Committee Interlocks and Insider
Participation."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial statements and financial statement schedule
of Morgan are included in this Report:
PAGE
-----
1. FINANCIAL STATEMENTS:
Report of Independent Accountants..........................................
Consolidated Income Statements for the years ended December 31, 1998, 1997
and 1996...................................................................
Consolidated Balance Sheets at December 31, 1998 and 1997..................
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996..............................................................
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1998, 1997 and 1996....................................................
Notes to Consolidated Financial Statements.................................
2. FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts for the years ended December
31, 1998, 1997 and 1996....................................................
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Morgan's Restated Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to Morgan's Annual
Report on Form 10-K for the Fiscal Year ended December 31, 1987
(Commission File No. 0-13911)).
3.2 By-laws of Morgan, as amended (incorporated by reference to
Exhibit 3.2 to Morgan's Annual Report on Form 10-K for the Fiscal
Year ended December 31, 1987 (Commission File No. 0-13911)).
10.1 Amended and Restated Loan and Security Agreement among Morgan,
the lender parties thereto and Fleet Capital Corporation as agent
for the lenders, dated as of February 3, 1998 (incorporated by
reference to Exhibit 99 to Morgan's Current on Form 8-K filed
February 17, 1998 (Commission File No. 1-9843)).
10.2 First Amendment to Amended and Restated Loan and Security
Agreement, dated April 20, 1998, among Morgan, the lender parties
thereto and Fleet Capital Corporation as agent for the lenders,
dated as of February 3, 1998. (incorporated by reference to
Exhibit 10.1 to Morgan's Quarterly Report on Form 10-Q for the
First Quarter of the Fiscal Year ended December 31, 1998
(Commission File No.1-9843)).
10.3 Second Amendment to the Amended and Restated Loan and Security
Agreement dated as of February 22, 1999 by and among Morgan
Products Ltd., the Lenders party thereto and Fleet Capital
Corporation, as agent for the Lenders. (incorporated by reference
to Exhibit 99 to Morgan's Current Report on Form 8-K dated
February 19, 1999 (Commission File No. 1-9843)).
+ 10.4 Mortgage and Security Agreement with Assignment of Rents, dated
as of December 1, 1991, from Morgan to Harris Trust and Savings
Bank (incorporated by reference to Exhibit 10.18 to Morgan's
Annual Report on Form 10-K for the Fiscal Year ended December 31,
1991 (Commission File No. 1-9843)).
+ 10.5 Employment Agreement between Morgan and Larry R. Robinette dated
as of January 1, 1998 (incorporated by reference to Exhibit 10.5
to Morgan's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1997 (Commission File No. 1-9843)).
+ 10.6 Morgan Products Ltd. Executive Severance Plan dated October 1997
(incorporated by reference to Exhibit 10.6 to Morgan's Annual
Report on Form 10-K for the Fiscal Year ended December 31, 1997
(Commission File No. 1-9843)).
+ 10.7 Amended 1994 Executive Performance Incentive Plan (incorporated
by reference to Exhibit 10.14 of Morgan's Annual Report on Form
10-K for the Fiscal Year ended December 31, 1994 (Commission File
No. 1-9843)).
+ 10.8 Morgan Products Ltd. 1992 Non-employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.19 of Morgan's Annual
Report on Form 10-K for the Fiscal Year ended December 31, 1992
(Commission File No. 1-9843)).
+ 10.9 Morgan's 1985 Incentive Stock Option Plan (incorporated by
reference to Exhibit 10.19 of Morgan's Annual Report on Form 10-K
for the Fiscal Year ended December 31, 1994 (Commission File No.
1-9843)).
10.10 Morgan's 1988 Stock Purchase Plan (incorporated by reference to
the Appendix to the Prospectus contained in Post-Effective
Amendment No. 1 to Morgan's Registration Statement on Form S-8
(Registration No. 33-23882)).
+ 10.11 Morgan Products Ltd. Chief Executive Officer Severance Plan dated
October 1997 (incorporated by reference to Exhibit 10.11 to
Morgan's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1997 (Commission File No. 1-9843)).
+ 10.12 Amendments dated May 17, 1995 to Morgan's 1985 Incentive Stock
Option Plan (incorporated by reference to Exhibit 10.18 of
Morgan's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1995 (Commission File No. 1-9843)).
+ 10.13 Amendments dated December 20, 1995 to the Morgan Products Ltd.
Deferred Compensation Plan (incorporated by reference to Exhibit
10.19 of Morgan's Annual Report on Form 10-K for the Fiscal Year
ended December 31, 1995 (Commission File No. 1-9843)).
10.14 Agreement between Morgan Distribution, Mechanicsburg,
Pennsylvania and the United Steelworkers of America, AFL-CIO-CLC,
Local 7415, dated February 18, 1995 (incorporated by reference to
Exhibit 10.20 of Morgan's Annual Report on Form 10-K for the
Fiscal Year ended December 31, 1995 (Commission File No.
1-9843)).
10.15 Agreement between Morgan Distribution, Shawnee, Kansas, and
Building Material, Excavating, Heavy Haulers, Drivers, Helpers
and Warehousemen, Local No. 541, Kansas City, Missouri,
affiliated with the International Brotherhood of Teamsters, dated
April 1, 1995 (incorporated by reference to Exhibit 10.21 of
Morgan's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1995 (Commission File No. 1-9843)).
10.16 Agreement between Morgan Products Ltd., Decatur, Illinois, and
the International Brotherhood of Teamsters, AFL-CIO, Local 279,
dated July 15, 1995 (incorporated by reference to Exhibit 10.24
of Morgan's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1995 (Commission File No. 1-9843)).
10.17 Agreement between Morgan Distribution, Birch Run, Michigan, and
the International Brotherhood of Teamsters, Local 486, dated
November 4, 1995 (incorporated by reference to Exhibit 10.25 of
Morgan's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1995 (Commission File No. 1-9843)).
+ 10.18 Form of Indemnification Agreement, dated November 3, 1994,
between Morgan and e Larry R. Robinette and Edward T. Tokar
(incorporated by reference to Exhibit 10.26 of Morgan's Annual
Report on Form 10-K for the Fiscal Year ended December 31, 1995
(Commission File No. 1-9843))
10.19 Lease for office space in Williamsburg, Virginia, between Morgan
and Jim Griffith Builder, Inc. dated March 2, 1995 and amended
October 3, 1995 (incorporated by reference to Exhibit 10.28 of
Morgan's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1995 (Commission File No. 1-9843)).
10.20 Office lease for Morgan Manufacturing Division Office in Oshkosh,
Wisconsin, dated October 13, 1995 (incorporated by reference to
Exhibit 10.30 of Morgan's Annual Report on Form 10-K for the
Fiscal Year ended December 31, 1995 (Commission File No.
1-9843)).
10.21 Letter Agreement, dated December 1994, between each of Morgan's
eleven distribution centers and Andersen Windows, Inc.
(incorporated by reference to Exhibit 10.31 of Morgan's Annual
Report on Form 10-K for the Fiscal Year ended December 31, 1995
(Commission File No. 1-9843)).
10.22 Purchase agreement with JELD-WEN, inc. for the Lexington, North
Carolina door manufacturing facility (incorporated by reference
to Exhibit 10.1 of Morgan's Quarterly Report on Form 10-Q for the
Second Quarter of the Fiscal Year ended December 31, 1996
(Commission File No. 1-9843)).
10.23 Agreement between Local 705, International Brotherhood of
Teamsters, Chauffeurs, Warehousemen and Helpers of America,
AFL-CIO, and Morgan Distribution at West Chicago, Illinois, dated
January 13, 1996 (incorporated by reference to Exhibit 10.2 of
Morgan's Quarterly Report on Form 10-Q for the Second Quarter of
the Fiscal Year ended December 31, 1996 (Commission File No.
1-9843)).
10.24 Asset Purchase Agreement dated as of July 22, 1996 by and among
Morgan Products Ltd.; Tennessee Building Products, Inc.; Titan
Building Products, Inc.; James Fishel; and James Schulman
(incorporated by reference to Exhibit 10.3 of Morgan's Quarterly
Report on Form 10-Q/A-1 for the Second Quarter of the Fiscal Year
ended December 31, 1996 (Commission File No. 1-9843)).
10.25 Agreement between United Paperworkers International Union, Region
IX, AFL-CIO, Local No. 7828, Decatur, Illinois dated January 2,
1996 (incorporated by reference to Exhibit 6 of Exhibit 6 of
Morgan's Current Report on Current Report on Form 8-K filed
September 26 1996 (Commission File No. 1-9843)).
+ 10.26 Non-Competition Agreement by and among Morgan; Tennessee Building
Products, Inc.; Titan Building Products, Inc.; James Fishel;
James Schulman and John Whipple dated August 30, 1996
(incorporated by reference to Exhibit 7 of Morgan's Current
Report on Form 8-K filed September 26 1996 (Commission File No.
1-9843)).
10.27 Lease Agreement by and between Titan Building Products, Inc. and
Sunbelt Properties for property located at 37-A Freedom Court,
Greer, South Carolina, dated February 15, 1995 (incorporated by
reference to Exhibit 8 of Morgan's Current Report on Form 8-K
filed September 26, 1996 (Commission File No.
1-9843)).
10.28 Lease Agreement by and between Titan Building Products, Inc. and
SCI NC Limited Partnership for property located at 1407-A
Westinghouse Blvd., Charlotte, North Carolina, dated February 15,
1995 (incorporated by reference to Exhibit 9 of Morgan's Current
Report on Form 8-K filed September 26 1996 (Commission File No.
1-9843)).
10.29 Lease Agreement by and between Morgan and F&S Properties for
property located at Foster and Glenrose Avenue, Nashville,
Tennessee, dated August 30, 1996 (incorporated by reference to
Exhibit 10 of Morgan's Current Report on Form 8-K filed September
26 1996 (Commission File No. 1-9843)).
10.30 Lease Agreement by and between Morgan and F&S Properties for
property located at 651 Thompson Lane, Nashville, Tennessee,
dated August 30, 1996 (incorporated by reference to Exhibit 11 of
Morgan's Current Report on Form 8-K filed September 26 1996
(Commission File No. 1-9843)).
10.31 Lease Agreement by and between Morgan and F&S Properties for
property located at 2131 Polymer Drive, Chattanooga, Tennessee,
dated August 30, 1996 (incorporated by reference to Exhibit 12 of
Morgan's Current Report on Form 8-K filed September 26 1996
(Commission File No. 1-9843)).
10.32 Agreement between Morgan Distribution, Scranton, Pennsylvania and
Teamsters Local Union 229, affiliated with the International
Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of
America, dated January 27, 1996 (incorporated by reference to
Exhibit 10.49 to Morgan's Annual Report on Form 10-K for the
Fiscal Year ended December 31, 1996 (Commission File No.
1-9843)).
+ 10.33 Amendment to Morgan's 1985 Incentive Stock Option Plan approved
by the Board of Directors on September 30, 1996 (incorporated by
reference to Exhibit 10.50 to Morgan's Annual Report on Form 10-K
for the Fiscal Year ended December 31, 1996 (Commission File No.
1-9843)).
10.34 Amendment #3, dated April 26, 1996, to exercise Morgan's option
to extend through 2001, its lease of office and warehouse in West
Chicago, Illinois (incorporated by reference to Exhibit 10.52 to
Morgan's Annual Report on Form 10-K for the Fiscal Year ended
December 31, 1996 (Commission File No. 1-9843)).
10.35 Amendment #2, dated August 12, 1996, to exercise Morgan's option
to extend through 2001, its lease of warehousing in West
Columbia, South Carolina (incorporated by reference to Exhibit
10.53 to Morgan's Annual Report on Form 10-K for the Fiscal Year
ended December 31, 1996 (Commission File No. 1-9843)).
+ 10.36 Employment agreement between Morgan and Mitchell J. Lahr dated
March 11, 1997 (incorporated by reference to Exhibit 10.1 to
Morgan's Quarterly Report on Form 10-Q for the Second Quarter of
the Fiscal Year ended December 31, 1997 (Commission File No.
1-9843)).
+ 10.37 Employment agreement between Morgan and Darrell J. Olson dated
March 21, 1997 (incorporated by reference to Exhibit 10.2 to
Morgan's Quarterly Report on Form 10-Q for the Second Quarter of
the Fiscal Year ended December 31, 1997 (Commission File No.
1-9843)).
+ 10.38 Form of Indemnification Agreement, dated April 7, 1997, between
Morgan and Mitchell J. Lahr (incorporated by reference to Exhibit
10.3 to Morgan's Quarterly Report on Form 10-Q for the Second
Quarter of the Fiscal Year ended December 31, 1997 (Commission
File No. 1-9843)).
+ 10.39 Form of Indemnification Agreement, dated April 14, 1997, between
Morgan and Darrell J. Olson (incorporated by reference to Exhibit
10.4 to Morgan's Quarterly Report on Form 10-Q for the Second
Quarter of the Fiscal Year ended December 31, 1997 (Commission
File No. 1-9843)).
10.40 Lease, dated March 7, 1997, between Morgan and BR/NO LA.
Properties, LLC for warehousing for a five year term in Baton
Rouge, Louisiana (incorporated by reference to Exhibit 10.7 to
Morgan's Quarterly Report on Form 10-Q for the Second Quarter of
the Fiscal Year ended December 31, 1997 (Commission File No.
1-9843)).
10.41 Asset Purchase Agreement dated as of July 15, 1997 by and among
Morgan Products Ltd., Wahlfeld Manufacturing Company and Ted
Wahlfeld and John Wahlfeld, as amended on July 18, 1997 and July
25, 1997 (incorporated by reference to Exhibit 1 to Morgan's
Current Report on Form 8-K dated August 8, 1997 (Commission File
No. 1-9843)).
10.42 Asset Purchase Agreement dated as of February 2, 1998 by
JELD-WEN, inc. and Morgan Products Ltd. (incorporated by
reference to Exhibit 2 to Morgan's Current Report on Form 8-K
dated February 17, 1998 (Commission File No. 1-9843)).
10.43 Supply Agreement, dated February 2, 1998, between JELD-WEN, inc.
and Morgan (incorporated by reference to Exhibit 10.4 to Morgan's
Quarterly Report on Form 10-Q for the First Quarter of the Fiscal
Year ended December 31, 1998 (Commission File No. 1-9843)).
10.44 Lease Agreement between Morgan and Security Capital Industrial
Trust for property located at Denver Business Center #1, 11101-A
East 53rd Avenue, Denver, Colorado, dated April 15, 1997
(incorporated by reference to Exhibit 10.53 to Morgan's Annual
Report on Form 10-K for the Fiscal Year ended December 31, 1997
(Commission File No. 1-9843)).
10.45 Asset Purchase Agreement dated December 22, 1998 by and among
Morgan Products Ltd., Adam Wholesalers, Inc. and certain
subsidiaries of Adam Wholesalers, Inc. (incorporated by reference
to Exhibit 2 to Morgan's Current Report on Form 8-K dated
February 19, 1999 (Commission File No. 1-9843)).
* 10.46 Lease by and between Adam Wholesalers, Inc. and Adam Wholesalers,
Inc. a/k/a Adam Wholesalers Corporate dated September 1, 1992 as
modified by that Assignment and Assumption and Modification of
Lease Agreement by and among Morgan, Adam Wholesalers, Inc. and
Adam Wholesalers, Corporate dated February 19, 1999.
* 10.47 Lease by and between Thurner Hatfield & Thurner and Adam
Wholesalers of Toledo, Inc. a/k/a/ Adam Wholesalers, Toledo dated
January 1, 1990 as modified by that Assignment and Assumption and
Modification of Lease Agreement by and among Morgan, Thurner
Hatfield & Thurner and Adam Wholesalers of Toledo, Inc. dated
February 19, 1999.
* 10.48 Lease by and between Adam Wholesalers, Inc. and Adam Wholesalers
of Dayton, Inc. a/k/a Adam Wholesalers, Dayton dated April 1,
1993 as modified by that Assignment and Assumption and
Modification of Lease Agreement by and among Morgan, Adam
Wholesalers, Inc. and Adam Wholesalers of Dayton, Inc. dated
February 19, 1999.
* 10.49 Lease by and between Adam Wholesalers, Inc. and Adam Wholesalers
of Cincinnati, Inc. a/k/a Adam Wholesalers, Cincinnati dated
September 1, 1992 as modified by that Assignment and Assumption
and Modification of Lease Agreement by and among Morgan, Adam
Wholesalers, Inc. and Adam Wholesalers of Cincinnati, Inc. dated
February 19, 1999.
* 10.50 Lease by and between Adam Wholesalers, Inc. and Adam Wholesalers
of Woodbury Heights, Inc. a/k/a Adam Wholesalers, Woodbury dated
October 1, 1994 as modified by that Assignment and Assumption and
Modification of Lease Agreement by and among Morgan, Adam
Wholesalers, Inc. and Adam Wholesalers of Woodbury Heights, Inc.
dated February 19, 1999.
* 10.51 Lease by and between Adam Wholesalers, Inc. and Adam Wholesalers
of Denver, Inc. a/k/a Adam Wholesalers, Denver dated January 1,
1995 as modified by that Assignment and Assumption and
Modification of Lease Agreement by and among Morgan, Adam
Wholesalers, Inc. and Adam Wholesalers of Denver, Inc. dated
February 19, 1999.
* 10.52 Lease by and between Adam Wholesalers, Inc. and Adam Wholesalers
of Indianapolis, Inc. dated May 13, 1992 as modified by that
Assignment and Assumption and Modification of Lease Agreement by
and among Morgan, Adam Wholesalers, Inc. and Adam Wholesalers of
Indianapolis, Inc. dated February 19, 1999.
* 10.53 Lease by and between Adam Wholesalers, Inc. and Adam Wholesalers
of Virginia, Inc. a/k/a Adam Wholesalers, Virginia dated August
1, 1992 as modified by that Assignment and Assumption and
Modification of Lease Agreement by and among Morgan, Adam
Wholesalers, Inc. and Adam Wholesalers of Virginia, Inc. dated
February 19, 1999.
* 10.54 Lease by and between Adam Wholesalers, Inc. and Adam Wholesalers
of St. Louis, Inc. dated May 1, 1994 as modified by that
Assignment and Assumption and Modification of Lease Agreement by
and among Morgan, Adam Wholesalers, Inc. and Adam Wholesalers of
St. Louis, Inc. dated February 19, 1999.
* 10.55 Lease by and between Adam Wholesalers, Inc. and Adam Wholesalers
of Phoenix, Inc. a/k/a Adam Wholesalers, Phoenix dated January 1,
1993 as modified by that Assignment and Assumption and
Modification of Lease Agreement by and among Morgan, Adam
Wholesalers, Inc. and Adam Wholesalers of Phoenix, Inc. dated
February 19, 1999.
* 10.56 Lease by and between Adam Wholesalers, Inc. and Adam Wholesalers
of Nitro, Inc. dated January 1, 1995 as modified by that
Assignment and Assumption and Modification of Lease Agreement by
and among Morgan, Adam Wholesalers, Inc. and Adam Wholesalers of
Nitro, Inc. dated February 19, 1999.
* 10.57 Lease by and between Pine Acre Investments, Inc. and Adam
Wholesalers of Carlisle, Inc. dated August 1, 1991.
* 10.58 Lease by and between C-S-K Louisville and Allied Sash and Door,
Inc., as amended, dated April 1, 1990.
* 10.59 Lease by and between Mamco Millworks of New York, Inc. a/k/a/
Adam Wholesalers of Kirkwood, Inc., as modified, dated September
9, 1985.
* 10.60 Amendment to Supply Agreement dated October 5, 1998 between
Morgan and JELD-WEN, inc.
* 23.1 Financial Data Schedule
* 27.1 Consent of PricewaterhouseCoopers LLP.
--------------------------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K:
The Company filed no current reports on Form 8-K with the
Securities Exchange Commission during the last quarter of the period covered by
this Annual Report on Form 10-K for the year ended December 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Morgan has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MORGAN PRODUCTS LTD.
By /s/ Mitchell J. Lahr
--------------------------------
Mitchell J. Lahr
Vice President, Chief Financial
Officer and Secretary
MARCH 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Morgan
and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Frank J. Hawley, Jr. Chairman of the Board March 30, 1999
- ----------------------------------------- and Director
Frank J. Hawley, Jr.
/s/ Larry R. Robinette President, Chief Executive March 30, 1999
- ----------------------------------------- Officer and Director
Larry R. Robinette (Principal Executive Officer)
/s/ Mitchell J. Lahr Vice President, Chief March 30, 1999
- ----------------------------------------- Financial Officer and
Mitchell J. Lahr Secretary
(Principal Financial Officer
and Principal Accounting
Officer)
/s/ John S. Crowley Director March 30, 1999
- -----------------------------------------
John S. Crowley
/s/ Howard G. Haas Director March 30, 1999
- -----------------------------------------
Howard G. Haas
/s/ J. Michael Marks Director March 30, 1999
- -----------------------------------------
J. Michael Marks
/s/ Edward T. Tokar Director March 30, 1999
- -----------------------------------------
Edward T. Tokar
CONSOLIDATED FINANCIAL STATEMENTS
MORGAN PRODUCTS LTD.
CONTENTS
Report of Independent Accountants..........................................
Consolidated Income Statements for the years ended December 31, 1998, 1997
and 1996................................................................
Consolidated Balance Sheets at December 31, 1998 and 1997..................
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996..............................................................
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1998, 1997 and 1996....................................................
Notes to Consolidated Financial Statements.................................
Schedule II - Valuation and Qualifying Accounts for the years ended December
31, 1998, 1997 and 1996 ...................................................
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Morgan Products Ltd.
In our opinion, the consolidated financial statements listed in the index
appearing under 14(a)(1) present fairly, in all material respects, the financial
position of Morgan Products Ltd. at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion the financial statement schedule listed
in the index appearing under 14(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 audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
February 2, 1999, except for Note 6, as to which the date is February 19, 1999
and Note 13, as to which the date is March 10, 1999
MORGAN PRODUCTS LTD.
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share data)
Year Ended December 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
Net sales................................................... $383,151 $412,249 $373,345
Cost of goods sold.......................................... 328,569 353,909 317,917
---------------------------------------
Gross profit............................................ 54,582 58,340 55,428
---------------------------------------
Operating expenses:
Sales and marketing..................................... 38,843 41,377 35,687
General and administrative.............................. 12,793 14,947 11,793
Loss on sale of manufacturing ..........................
operations (Note 2).................................. - 12,416 -
Restructuring and reorganization (Note 3) .............. - 5,830 4,712
---------------------------------------
51,636 74,570 52,192
---------------------------------------
Operating income (loss)..................................... 2,946 (16,230) 3,236
---------------------------------------
Other income (expense):
Interest, net........................................... (2,427) (4,999) (3,485)
Other................................................... 378 332 220
---------------------------------------
(2,049) (4,667) (3,265)
---------------------------------------
Income (loss) before income taxes........................... 897 (20,897) (29)
Benefit for income taxes.................................... (104) - (327)
---------------------------------------
Net income (loss)........................................... $ 1,001 $(20,897) $ 298
---------------------------------------
Basic earnings per common share............................. $ 0.10 $ (2.03) $ 0.03
---------------------------------------
Diluted earnings per common share........................... $ 0.10 $ (2.03) $ 0.03
---------------------------------------
The accompanying notes are an integral part of the financial statements.
MORGAN PRODUCTS LTD.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares outstanding)
December 31,
------------------------
ASSETS 1998 1997
------------------------
CURRENT ASSETS
Cash and cash equivalents .......................... $ 3,650 $ 4,197
Accounts receivable (less allowances of $750 in 1998
and $921 in 1997) ............................... 31,594 28,743
Inventories (Note 4) ............................... 34,290 40,533
Assets held for sale (Note 2) ...................... -- 32,285
Other current assets ............................... 507 558
------------------------
Total current assets ........................... 70,041 106,316
------------------------
PROPERTY, PLANT AND EQUIPMENT, net (Note 5) ............ 8,274 9,354
GOODWILL, NET (Note 1) ................................. 6,222 6,562
OTHER ASSETS (Note 1) .................................. 7,926 6,544
------------------------
TOTAL ASSETS ....................................... $ 92,463 $ 128,776
------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 6) ...... $ 1,196 $ 1,213
Accounts payable ................................... 16,725 13,151
Accrued compensation and employee benefits ......... 3,299 8,729
Accrued customer rebates ........................... 2,361 707
Other current liabilities .......................... 1,807 5,192
------------------------
Total current liabilities ...................... 25,388 28,992
------------------------
LONG-TERM DEBT (Note 6) ................................ 23,632 57,353
------------------------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY (Note 8):
Common stock, $.10 par value, 10,360,540 and
10,357,808 shares outstanding, respectively ..... 1,036 1,036
Paid-in capital .................................... 43,424 43,413
Accumulated deficit ................................ (969) (1,970)
------------------------
43,491 42,479
Treasury stock, 2,386 shares, at cost .............. (48) (48)
------------------------
Total stockholders' equity ..................... 43,443 42,431
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $ 92,463 $ 128,776
------------------------
The accompanying notes are an integral part of the financial statements.
MORGAN PRODUCTS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-------------------------------------
1998 1997 1996
-------------------------------------
CASH GENERATED (USED) BY OPERATING ACTIVITIES:
Net income (loss) ................................. $ 1,001 $(20,897) $ 298
Add (deduct) noncash items included in income:
Depreciation and amortization ................. 2,157 4,170 3,571
Provision for doubtful accounts ............... 10 248 139
Loss on sale of manufacturing operations ...... -- 12,416 --
Provision for restructuring and reorganization -- 732 881
(Gain) loss on sale of property, plant
and equipment ................................. (55) (125) 58
Other ......................................... -- 148 234
Cash generated (used) by changes in components of
working capital, net of effects of acquisition
of businesses:
Accounts receivable ........................... (2,436) 1,605 (5,081)
Inventories ................................... 6,243 13,097 (12,747)
Accounts payable .............................. 3,574 (4,394) 6,450
Other working capital ......................... (4,914) (2,886) (1,706)
-------------------------------------
NET CASH GENERATED (USED) BY OPERATING ACTIVITIES ..... 5,580 4,114 (7,903)
-------------------------------------
CASH GENERATED (USED) BY INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ...... (957) (2,319) (3,912)
Acquisition of Tennessee Building Products, Inc. .. -- (2,197) (15,680)
Acquisition of Wahlfeld Manufacturing Company ..... -- (4,959) --
Proceeds from disposal of property, plant
and equipment .................................... 230 184 4,654
Proceeds from sale of manufacturing operations .... 30,957 -- --
Proceeds from surrender of life insurance policies -- -- 925
Acquisition of other assets, net .................. (2,630) (876) (1,598)
-------------------------------------
NET CASH GENERATED (USED) BY INVESTING ACTIVITIES ..... 27,600 (10,167) (15,611)
-------------------------------------
CASH GENERATED (USED) BY FINANCING ACTIVITIES:
Proceeds from long-term debt ...................... -- 9,131 13,018
Repayments of long-term debt ...................... (33,738) (1,545) (1,788)
Common stock issued for cash ...................... 11 1,197 8,616
-------------------------------------
NET CASH GENERATED (USED) BY FINANCING ACTIVITIES ..... (33,727) 8,783 19,846
-------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .. (547) 2,730 (3,668)
CASH AND CASH EQUIVALENTS:
Beginning of period ............................... 4,197 1,467 5,135
-------------------------------------
End of period ..................................... $ 3,650 $ 4,197 $ 1,467
-------------------------------------
CASH PAID (RECEIVED) DURING THE YEAR FOR:
Interest .......................................... $ 2,791 $ 5,245 $ 3,789
Income taxes ...................................... (147) (16) (192)
NON-CASH INVESTING ACTIVITIES:
Assets acquired under capital lease ............... $ -- $ 967 $ 1,505
The accompanying notes are an integral part of the financial statements.
MORGAN PRODUCTS LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
RETAINED UNEARNED
EARNINGS COMPENSATION-
COMMON PAID-IN (ACCUMULATED TREASURY RESTRICTED
STOCK CAPITAL DEFICIT) STOCK STOCK
----------------------------------------------------------------------
Balance at December 31, 1995 ... $ 865 $ 33,771 $ 18,629 $ (48) $ (382)
Net income ..................... -- -- 298 -- --
Public offering of stock ....... 150 8,452 -- -- --
Amortization of unearned
compensation .................. -- -- -- -- 234
Exercise of options ............ -- 14 -- -- --
----------------------------------------------------------------------
Balance at December 31, 1996 ... 1,015 42,237 18,927 (48) (148)
Net loss ....................... -- -- (20,897) -- --
Amortization of unearned
compensation .................. -- -- -- -- 148
Exercise of options ............ 21 1,176 -- -- --
----------------------------------------------------------------------
Balance at December 31, 1997.... 1,036 43,413 (1,970) (48) --
NET INCOME ..................... -- -- 1,001 -- --
EXERCISE OF OPTIONS ............ -- 11 -- -- --
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 ... $ 1,036 $ 43,424 $ (969) $ (48) $ --
----------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
MORGAN PRODUCTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Morgan Products Ltd. ("Morgan" or the
"Company") distributes products (virtually all considered to be millwork) to the
residential and light commercial building materials industry for new
construction and improvements, maintenance and repairs. As further discussed in
Note 2 to Consolidated Financial Statements, Morgan sold substantially all of
the operating assets of Morgan Manufacturing ("Manufacturing") on February 2,
1998.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of all business units of Morgan Products Ltd. All
intercompany transactions, profits and balances are eliminated.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Actual amounts could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Cash and cash equivalents,
accounts receivable, accounts payable, and accrued expenses are reflected in the
financial statements at fair value because of the short-term maturity of those
instruments. The fair value of the Company's long-term debt is discussed in Note
6 to Consolidated Financial Statements.
INVENTORIES - Inventories are valued at the lower of cost or market.
Cost is determined on the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated
at cost and depreciated on a straight line basis over the estimated useful lives
of the assets, which generally range from 35 years for buildings, 10 to 20 years
for building and improvements, and 5 to 10 years for machinery and equipment.
Expenditures which substantially increase value or extend useful life are
capitalized. Expenditures for maintenance and repairs are charged against income
as incurred.
INTANGIBLES - Goodwill, which represents the excess of the fair market
value over the net tangible and identified intangible assets acquired, is being
amortized on a straight-line basis over 25 years. Accumulated amortization of
goodwill at December 31, 1998 and 1997 was $.5 million and $.3 million,
respectively. Other intangible assets included in other assets include computer
software, covenants not to compete, and deferred debt issue costs. Intangible
assets are being amortized over their respective estimated useful lives from 3
to 5 years. Accumulated amortization of other intangibles at December 31, 1998
and 1997 was $.6 million and $.5 million, respectively.
LONG-LIVED ASSETS - Long-lived assets to be held and used are reviewed
for impairment whenever events or changes in circumstances indicate that the
related carrying amount may not be recoverable. Recoverability of these assets
is determined by comparing the forecasted undiscounted net cash flows of the
asset to the carrying amount, including associated intangible assets.
Measurement of any impairment loss would be based on discounted operating cash
flows.
REVENUE RECOGNITION - The Company recognizes revenue at the time
products are shipped to customers or as services are performed.
ADVERTISING AND PROMOTIONS - All costs associated with advertising and
promoting products are expensed as incurred. Advertising and promotions expense,
including expense of customer rebates, was $2.6 million in 1998, $2.9 million in
1997, and $2.5 million in 1996.
EARNINGS PER SHARE - Basic earnings per share is computed by dividing
net income available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per common share
amounts are based upon the weighted average number of common and common
equivalent shares outstanding during the year. Common equivalent shares are
excluded from the computation in periods in which they have an anti-dilutive
effect. A reconciliation of the income and shares used in the computations of
basic and diluted earnings per common share follows (in thousands, except per
share data):
Income Per Share
(loss) Shares Amount
1998
Basic earnings per share of common stock..... $ 1,001 10,359 $ 0.10
Effect of dilutive stock options............. - 30 -
----------------------------------------------
Diluted earnings per share of common stock... $ 1,001 10,389 $ 0.10
----------------------------------------------
1997
Basic earnings per share of common stock..... $(20,897) 10,280 $ (2.03)
Effect of dilutive stock options............. - - -
----------------------------------------------
Diluted earnings per share of common stock... $(20,897) 10,280 $ (2.03)
----------------------------------------------
1996
Basic earnings per share of common stock..... $ 298 8,830 $ 0.03
Effect of dilutive stock options............. - 52 -
----------------------------------------------
Diluted earnings per share of common stock... $ 298 8,882 $ 0.03
----------------------------------------------
Options to purchase 725,000 and 831,000 shares of common stock were
outstanding during 1998 and 1996, but were not included in the computation of
diluted shares because the options' exercise price was greater than the average
market price of the common shares.
Options to purchase 875,000 shares of common stock were outstanding
during 1997, but were not included in the computation of diluted shares because
the effect of including such options would have been anti-dilutive to the net
loss.
STATEMENT OF CASH FLOWS - The Company considers all investments with a
maturity of 91 days or less at the time of purchase to be cash equivalents.
RECLASSIFICATIONS - Certain reclassifications have been made within the
financial statements for the year ended December 31, 1997 to conform to
classifications adopted for the year ended December 31, 1998.
NOTE 2 - ACQUISITIONS AND DISPOSITION
In August 1996, Morgan purchased certain assets and assumed certain
liabilities of Tennessee Building Products, Inc. and its subsidiary
(collectively, "TBP"), a distributor of windows, doors, kitchen cabinets, and
other millwork and glass products for residential buildings for $17.9 million,
including $.4 million in acquisition costs. This acquisition has been accounted
for as a purchase and the results of the operations of TBP have been included in
Morgan's consolidated financial statements since the date of acquisition. The
excess of the aggregate purchase price over the fair value of net assets
acquired was recognized as goodwill and is being amortized over 25 years.
In the third quarter of 1997, Morgan acquired substantially all of the
assets of Wahlfeld Manufacturing Company ("Wahlfeld") for $5.0 million. Morgan
consolidated Wahlfeld's operations into two existing facilities. Pro forma
results would not materially change the results of operations as presented in
the financial statements.
In the third quarter of 1997, Morgan recorded a loss of $12.4 million
relating to the sale of the operating assets of Morgan Manufacturing in Oshkosh,
Wisconsin to JELD-WEN, inc. In 1998, Morgan completed that sale for $31.0
million in cash proceeds. Morgan used the proceeds from the sale to reduce its
debt.
The unaudited pro forma information below presents results of operations
as if the acquisition of TBP and the sale of Morgan Manufacturing had occurred
at January 1, 1996 (in thousands, except per share amounts):
Year Ended December 31,
-----------------------
1997 1996
---- ----
Net sales $346,963 $331,115
Net income 1,413 4,718
Basic earning per common share 0.14 0.53
Diluted earnings per common share 0.14 0.53
The unaudited pro forma information is not necessarily indicative of the
results of operations of the combined company had these events occurred at the
beginning of the years presented, nor is it necessarily indicative of future
operating results.
NOTE 3 - RESTRUCTURING AND REORGANIZATION
Beginning in 1994, Morgan adopted a comprehensive strategic plan to
restore profitability and regain leadership by providing customers with quality
products and optimum service at the best price/value relationship. Morgan has
taken a series of major initiatives to implement this plan and respond to
continuing challenges in the industry.
During the period of 1994 through 1997, Morgan incurred an aggregate of
$20.8 million in restructuring charges. Included in these restructuring charges
were the closing of the Springfield, Oregon, Lexington, North Carolina and Weed,
California plants and the consolidation of its door manufacturing operations.
Additionally, Morgan recorded a $1.1 million reorganization charge in 1997 in
connection with the termination of the employment of the Vice President and
Chief Financial Officer and Senior Vice President-Human Resources and
Administration of Morgan. Such provision covered severance and related payments
to these former officers.
Although Manufacturing had made progress operationally, it was
determined in 1997 that Manufacturing was not a strategic fit with Morgan's
long-term growth plans. In December 1997, Morgan reached an agreement to sell
the operating assets of Manufacturing to JELD-WEN, inc. The sale resulted in a
charge to earnings in 1997 of $12.4 million with half the charge related to an
asset write-down and half related to the costs of selling the business,
including employee severance costs, pension expenses, lease obligations and
legal costs.
The following summarizes the activity related to the restructuring and
reorganization reserves (in millions):
Reserve at Reserve at
December 31, Utilized Provision/ December 31,
1995 Cash Noncash Reallocation 1996
----------------------------------------------------------------
Employee benefits (1)........ $ 1.4 $ (1.3) $ - $ .5 $ .6
Inventory (2)................ 1.8 (.3) (1.5) .1 .1
Fixed assets................. .4 - (.4) .3 .3
Holding and other costs (3).. .2 - (.1) - .1
Total reserve................ $ 3.8 $ (1.6) $ (2.0) $ .9 $ 1.1
Reserve at Reserve at
December 31, Utilized Provision/ December 31,
1996 Cash Noncash Reallocation 1997
----------------------------------------------------------------
Employee benefits (1)........ $ .6 $ (.9) $ - $ 1.1 $ .8
Inventory (2)................ .1 - - - .1
Fixed assets................. .3 - - - .3
Holding and other costs (3).. .1 - - - .1
Total reserve................ $ 1.1 $ (.9) $ - $ 1.1 $ 1.3
Reserve at Reserve at
December 31, Utilized Provision/ December 31,
1997 Cash Noncash Reallocation 1998
----------------------------------------------------------------
Employee benefits (1)........ $ .8 $ (.9) $ - $ .1 $ -
Inventory (2)................ .1 - (.1) - -
Fixed assets................. .3 - (.3) - -
Holding and other costs (3).. .1 - (.1) - -
Total reserve................ $ 1.3 $ (.9) $ (.5) $ .1 $ -
(1)Costs associated with severance, outplacement and future workers
compensation claims due to the closing of the Springfield and Lexington
facilities, downsizing at Manufacturing and Distribution division offices,
and the restructuring of the Corporate Headquarters.
(2)Primarily costs associated with inventory that could not be utilized or
costs of reworking inventory for use in other facilities due to the closing
of the Springfield, Weed veneer and Lexington facilities.
(3)Costs associated with continuing utility and property taxes due to the
closing of the Springfield, Weed veneer, and other facilities.
NOTE 4 - INVENTORIES
Inventories consisted of the following (in thousands):
December 31,
-----------------------------
1998 1997
-----------------------------
Raw materials............................. $ 1,490 $ 2,016
Finished goods............................ 32,800 38,517
-----------------------------
Total inventories..................... $ 34,290 $ 40,533
-----------------------------
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
December 31,
-------------------------
1998 1997
-------------------------
Land and improvements ....................... $ 903 $ 903
Buildings and improvements .................. 5,231 4,898
Machinery and equipment ..................... 10,930 10,851
Capitalized building and equipment leases ... 6,512 6,513
Less accumulated depreciation ............... (15,346) (13,905)
Construction in progress .................... 44 94
-------------------------
Total property, plant and equipment ..... $ 8,274 $ 9,354
-------------------------
At December 31, 1998 and 1997, accumulated amortization relating to
capitalized building and equipment leases was approximately $5.2 million and
$4.3 million, respectively.
NOTE 6 - LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
December 31,
-------------- -------------
1998 1997
----------------------------
Revolving credit facilities.......................... $18,686 $45,309
Acquisition term loan................................ - 4,767
Industrial revenue bonds............................. - 1,300
Obligations under capital leases (Note 7) ........... 4,036 4,566
Obligations under financing leases (Note 7) ......... 1,557 2,016
Other................................................ 549 608
-------------- -------------
24,828 58,566
Less current maturities.............................. (1,196) (1,213)
-------------- -------------
Total long-term debt............................ $23,632 $57,353
-------------- -------------
On February 3, 1998, in connection with the sale of Manufacturing,
Morgan and their bank group entered into an amended and restated loan and
security credit agreement, which provided for a revolving credit facility of up
to $65 million, including a sub-line of up to $30 million for permitted
acquisitions, and a letter of credit facility of up to $5 million. The amendment
also modified certain definitions and restrictive covenants and extended the
agreement to February 1, 2001. This credit agreement is collateralized by
certain accounts receivable, inventories, equipment, real estate, and general
intangibles of the Company. Available borrowings under the facility bear
interest at either the bank's prime rate plus a margin or LIBOR plus a margin
based upon a pricing matrix. Interest on outstanding borrowings currently
accrues at the bank's prime rate of interest (7.75% at December 31, 1998) or
LIBOR plus one and one-half percent (6.75% at December 31, 1998). The Company
also pays an annual commitment fee of .5% on the average unused portion of the
revolving credit facility. At December 31, 1998, the weighted average interest
rate on the outstanding revolving credit facilities was 7.63%. Morgan had
utilized $.3 million of its $5 million letter of credit facility as of December
31, 1998.
The facility contains certain covenants, including limitations on the
acquisition and disposition of assets, the payment of dividends, and the
prepayment of other indebtedness. In addition, Morgan is required to maintain
earnings coverage, interest coverage and fixed charge coverage ratios. Morgan
was in compliance with all covenants of the amended credit agreement at December
31, 1998.
On February 19, 1999, in connection with the Adam acquisition (see Note
13 to Consolidated Financial Statements), Morgan and its banking group entered
into an amendment of the credit agreement. The amendment, which expires on
January 1, 2004, provides for a revolving credit line of up to $100 million
(including a letter of credit facility of up to $5 million), a term loan of up
to $10 million and a bridge term loan of up to $10 million. This credit
agreement is collateralized by certain accounts receivable, inventories,
equipment, real estate, and general intangibles of the Company. Borrowings under
the revolving credit line and term loan bear interest at either the bank's prime
rate plus a margin or LIBOR plus a margin based upon a pricing matrix. Interest
on outstanding borrowings under the revolving credit line currently accrues at
the bank's prime rate of interest plus three quarters percent (8.50% at December
31, 1998) or LIBOR plus two and one-half percent (7.75% at December 31, 1998) at
the Company's option. Interest on outstanding borrowings under the term loan
currently accrues at the bank's prime rate of interest plus one and one-quarter
percent (9.00% at December 31, 1998) or LIBOR plus three percent (8.25% at
December 31, 1998) at the Company's option. Borrowings under the bridge term
loan bear interest in increasing quarterly increments from LIBOR plus four
percent (9.25% at December 31, 1998) in the first quarter of 1999 to eighteen
percent at January 1, 2000. The credit facility contains certain covenants,
including limitations on the acquisition and disposition of assets, the payment
of dividends and the prepayment of other indebtedness. The credit facility also
requires Morgan to maintain certain earnings coverage, interest coverage and
fixed coverage ratios. In addition, the amendment added certain minimum earnings
and minimum availability covenants.
During 1991, the Company entered into a sale-leaseback transaction
which, based upon the applicable terms, is accounted for as a financing lease.
The term of the agreement is 15 years beginning on December 30, 1991 and
expiring on December 29, 2006 with an interest rate of 9.73% annually.
Future annual maturities of the Company's long-term debt as of December
31, 1998, which reflect the terms of the amended and restated credit agreement,
are presented below (in thousands):
1999................................................................ $ 1,196
2000................................................................ 1,194
2001................................................................ 1,497
2002................................................................ 584
2003................................................................ 547
Later years......................................................... 19,810
--------
Future annual maturities of long-term debt...................... $24,828
--------
The Company estimates that the fair value of the revolving credit
facilities approximates their carrying value since interest rates vary with
market conditions. The carrying value of other long-term debt approximates their
fair value as the rates approximate current rates offered to the Company for
debt with similar maturities.
NOTE 7 - LEASE OBLIGATIONS
Certain leased equipment and distribution facilities have been
capitalized by Morgan. Morgan also leases facilities, equipment and vehicles
under noncancelable agreements which are operating leases.
Future minimum lease payments required under long-term leases in effect
at December 31, 1998 are as follows (in thousands):
Capital Operating Total
--------------------------------------
1999.................................... $ 1,664 $ 3,596 $ 5,260
2000.................................... 1,664 3,078 4,742
2001.................................... 1,412 2,133 3,545
2002.................................... 858 1,435 2,293
2003.................................... 782 664 1,446
Later years............................. 1,320 3,492 4,812
--------------------------------------
Total minimum lease payments............ 7,700 $14,398 $22,098
-----------------------
Less imputed interest............... (2,107)
---------
Present value of net minimum
lease payments................... $ 5,593
---------
For 1998, 1997, and 1996, rental expense, including usage charges on the
long-haul fleet, was $6.8 million, $7.4 million, and $6.7 million respectively.
NOTE 8 - STOCKHOLDERS' EQUITY
COMMON STOCK - The number of authorized shares of Common Stock is
20,000,000 shares.
PREFERRED STOCK - The number of authorized shares of Preferred Stock is
5,000,000 shares.
STOCK OFFERING - In November 1996, the Company and a significant
shareholder completed an underwritten primary and secondary public offering of
1.5 million shares and 1.9 million shares, respectively, of its Common Stock at
a public offering price of $6.50 per share. The Company's net proceeds of
approximately $8.6 million were used to reduce amounts outstanding under the
Company's revolving credit facilities.
STOCK OPTION PLANS - In June 1985, the Company adopted an Incentive
Stock Option Plan (the "Stock Option Plan") which, as amended, provides for (I)
the issuance of incentive stock options at a purchase price approximating the
fair market value at the date of grant and (II) the issuance of non-qualified
options at a price determined by the Compensation Committee, a committee of the
Board of Directors, which cannot be less than 85% of the market price at the
date of grant. The stockholders have ratified amendments to Morgan's Stock
Option Plan that increase from 500,000 to 900,000 the number of shares of Common
Stock reserved for issuance under the plan. The options become exercisable
immediately or in two, three, four, or five installments from the date of grant,
and all of the options granted expire no more than ten years from the date of
grant.
In October 1998, the Board of Directors approved an option repricing
program (the "Repricing Program") under which all employees of the Company who
held options to purchase Common Stock under the Stock Option Plan were granted
the opportunity to exchange such options for Repriced Stock Option Plan options.
Under the Repricing Program, which was implemented on November 2, 1998, the
options outstanding under the old Stock Option Plan were cancelled and new
options were issued at a price equal to or greater than the greater of 110% of
the closing price of the Common Stock of the Company on the New York Stock
Exchange on November 2, 1998 or $3.00 per share regardless of whether such
options were vested or unvested. The Repriced Stock Option Plan options are
subject to all other terms and conditions to which the old stock options were
subject, except that the terms and vesting schedule of the Repriced Plan options
began on November 2, 1998 and will be for the same period and vest at the same
rate as the corresponding old stock options. In addition, no Repriced Option
will be exercisable prior to November 2, 2000 (the "Blackout Period"), provided,
however, the Blackout Period will not apply to employees who terminate
employment during the Blackout Period in accordance with the Company's
retirement policies, upon a change in control or if the Company meets certain
financial targets as outlined in the individual option agreements.
Following is a summary of activity in the Stock Option Plan for 1996,
1997, and 1998:
Shares Weighted
Subject Average
to Option Option Price
------------------------------
Outstanding, January 1, 1996................. 688,500 $ 5.476
Granted.................................. 92,500 6.375
Canceled................................. (45,000) 5.861
------------------------------
Outstanding, December 31, 1996............... 736,000 $ 5.566
Granted.................................. 60,000 6.875
Exercised................................ (205,667) 5.747
Canceled................................. (24,333) 5.876
------------------------------
Outstanding, December 31, 1997............... 566,000 $ 5.626
Granted.................................. 247,000 3.000
Canceled................................. (551,000) 5.623
------------------------------
OUTSTANDING, DECEMBER 31, 1998............... 262,000 $ 3.157
------------------------------
EXERCISABLE, DECEMBER 31, 1998............... 15,000 $ 5.750
------------------------------
The exercise price for options outstanding at December 31, 1998 ranges
from $3.00 to $5.75 per share. The weighted-average remaining contractual life
of these options approximates 9.62 years.
In May 1992, the stockholders approved the adoption of a Non-employee
Director Stock Option Plan (the "Director Plan"). The Director Plan provides for
the automatic grant of non-qualified stock options to purchase 1,000 shares of
Common Stock at a purchase price equal to the fair market value at the date of
grant upon a non-employee Director's election or re-election to the Board of
Directors. An aggregate of 50,000 shares of Common Stock is available for grant
under the Director Plan. The options granted become exercisable in three annual
installments from the date of grant, and all of the options granted expire ten
years from the date of grant.
Following is a summary of activity in the Non-employee Director Stock
Option Plan for 1996, 1997, and 1998:
Shares Weighted
Subject Average
to Option Option Price
------------------------------
Outstanding, January 1, 1996................... 16,000 $ 7.195
Granted.................................... 7,000 6.000
Canceled................................... (3,334) 6.300
------------------------------
Outstanding, December 31, 1996................. 19,666 $ 6.922
Granted.................................... 5,000 8.250
Canceled................................... (666) 7.938
------------------------------
Outstanding, December 31, 1997................. 24,000 $ 7.203
Granted.................................... 5,000 5.750
Canceled................................... (8,000) 7.203
------------------------------
OUTSTANDING, DECEMBER 31, 1998................. 21,000 $ 6.893
------------------------------
EXERCISABLE, DECEMBER 31, 1998................. 14,000 $ 7.089
------------------------------
The exercise prices for options outstanding at December 31, 1998 range
from $5.75 to $9.125 per share. The weighted-average remaining contractual life
of these options approximates 6.87 years.
On August 19, 1994, Morgan issued 140,000 restricted shares of Common
Stock to the Chief Executive Officer. These shares were awarded to a trust of
which the Chief Executive Officer is the beneficiary, subject to certain
restrictions, vesting and forfeiture provisions. The restrictions limit the sale
or transfer of shares during the restricted period. The trust will immediately
vest in the shares of Common Stock upon death, disability, or termination of the
Chief Executive Officer as described in the plan. The value of the Common Stock
totaling $700,000 was recorded at the date of award as a separate component of
stockholders' equity and was amortized to expense over the three-year vesting
period.
In May 1997, the Company adopted the 1997 Incentive Compensation Plan,
which authorized an additional 250,000 shares of Common Stock to be issued
through the Incentive Compensation Plan. In conjunction with the Repricing
Program, certain executives of the Company were granted options under the
Incentive Compensation Plan. Following is a summary of activity for the
Incentive Compensation Plan for 1998:
Weighted
Shares Subject Average Option
to Option Price
----------------- ----------------
Outstanding, January 1, 1997........... - $ -
Granted............................ 245,000 3.00
Canceled........................... - -
----------------- ----------------
Outstanding, December 31, 1998......... 245,000 $ 3.00
----------------- ----------------
Exercisable, December 31, 1998......... - $ -
----------------- ----------------
The exercise price for options outstanding at December 31, 1998 is $3.00
per share. The weighted average contractual life of these options approximates
9.84 years.
In addition, Morgan grants options, outside of the Stock Option Plan, to
certain employees as part of their employment agreements. The options granted
generally become exercisable in three annual installments from the date of
grant, and all of the options granted expire ten years from the date of grant.
Following is a summary of activity for options granted outside the Stock
Option Plan for 1996, 1997 and 1998:
Shares Weighted
Subject Average
to Option Option Price
------------------------------
Outstanding, January 1, 1996 .................. - $ -
Granted.................................... 195,000 7.231
Canceled................................... (67,500) 7.500
------------------------------
Outstanding, December 31, 1996................. 127,500 $ 7.088
Granted.................................... 180,000 6.733
Canceled................................... (22,500) 7.500
------------------------------
Outstanding, December 31, 1997................. 285,000 $ 6.831
Granted.................................... 160,000 3.086
Canceled................................... (178,229) 6.628
------------------------------
Outstanding, December 31, 1998................. 266,771 $ 4.720
------------------------------
Exercisable, December 31, 1998................. 111,771 $ 7.106
------------------------------
The exercise price for options outstanding at December 31, 1998 range
from $3.000 to $8.375 per share. The weighted average contractual life of these
options approximates 9.06 years.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Accordingly, no compensation cost has been
recognized for the stock option plans or out-of-plan grants. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, net earnings would have been reduced to the
pro forma amounts indicated below (in thousands, except per share data):
Year Ended December 31,
-----------------------------------
1998 1997 1996
-----------------------------------
Net earnings - as reported................ $ 1,001 $ (20,897) $298
Net earnings - pro forma.................. 616 (21,844) (141)
Basic earnings per share - as reported.... .10 (2.03) .03
Diluted earnings per share - as reported.. .10 (2.03) .03
Basic earnings per share - pro forma...... .06 (2.12) (.02)
Diluted earnings per share - pro forma.... .06 (2.12) (.02)
The effects of applying SFAS No. 123 in this pro forma disclosure are
not necessarily indicative of future amounts because transition rules require
pro forma disclosure only for awards granted after January 1, 1995.
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes model with the following weighted-average
assumptions used for grants in 1998, 1997, and 1996:
Year Ended December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
Expected stock price volatility...... 39.14% 40.50% 43.70%
Risk-free interest rate.............. 4.79% 6.65% 6.35%
Expected life of options............. 6.96 Years 6.69 years 6.78 years
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company has a profit sharing and 401(k) savings plan for all
salaried employees who have met the plans eligibility requirements. Morgan
matches 50% of participant contributions to the savings plan, with Company
contributions limited to 3% of the participant's compensation. At the discretion
of the Board of Directors, Morgan may make an additional contribution, which has
been targeted at 3% of each participant's compensation.
A separate 401(k) savings plan is in place for employees of the
Tennessee Building Products Division who have met the plan's eligibility
requirements. Morgan matches 50% of participant contributions to the savings
plan, with Company contributions limited to 3% of the participant's
compensation.
Profit sharing costs and the Company's matching contributions to the
401(k) savings plans charged to operations were $.6 million, $.1 million, and
$.9 million for 1998, 1997, and 1996, respectively.
Morgan has a pension plan which covers certain of its hourly employees.
This plan generally provides a stated benefit amount for each year of service.
The components of net periodic pension expense are as follows (in
thousands):
Year Ended December 31,
------------------------------------
1998 1997 1996
-------------------------------------
Service cost................................... $ 47 $ 201 $ 183
Interest cost on projected benefit obligation.. 1,151 1,109 1,077
Actual return on assets........................ (1,708) (2,235) (926)
Net amortization and deferral.................. 537 1,168 (96)
-------------------------------------
Net periodic pension expense................... $ 27 $ 243 $ 238
-------------------------------------
The following provides a reconciliation of benefit obligations, plan
assets and funded status of the plans (in thousands):
December 31,
------------- -------------
1998 1997
------------- -------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligations at the beginning of year................ $16,141 $14,571
Service cost................................................ 47 201
Interest cost............................................... 1,151 1,109
Actuarial valuation......................................... 1,032 1,366
Benefits paid............................................... (1,300) (1,106)
------------- -------------
Benefit obligation at end of year........................... $17,171 $16,183
------------- -------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $16,183 $14,614
Actual return on pan assets................................. 1,708 2,235
Employer contribution....................................... 580 440
Benefits paid............................................... (1,300) (1,106)
------------- -------------
Fair value of plan assets at end of year.................... $17,171 $16,183
------------- -------------
Funded status................................................... $ 100 $ 42
Unrecognized actuarial loss..................................... 3,436 3,037
Unrecognized transition obligation.............................. (259) (326)
Unrecognized prior service cost................................. 37 1,001
------------- -------------
Prepaid benefit cost............................................ $ 3,314 $ 3,754
------------- -------------
The projected benefit obligations were determined using assumed discount
rates of 6.75% at December 31, 1998 and 7.10% at December 31, 1997. The expected
long-term rate of return on plan assets was 7.60% and 8.25% at December 31, 1998
and 1997, respectively. Prepaid benefit cost is included in other assets in the
accompanying balance sheets.
Plan assets consist of equity and fixed income securities and insurance
annuity contracts. It is the policy of Morgan to fund at least the minimum
required amount in accordance with the requirements of the Employee Retirement
Income Security Act of 1974.
For the hourly employees not covered by company pension or profit
sharing plans, Morgan makes contributions to multi-employer pension plans based
on compensable hours worked in accordance with union contracts. Pension expense
related to these contributions was $.1 million for each of 1998, 1997, and 1996.
Under certain conditions, principally withdrawal from such plans, Morgan may
have further obligations for pensions with respect to such employees, but the
amount thereof, if any, cannot be determined at the present time.
NOTE 10 - INCOME TAXES
The components of the income tax provision (benefit) consisted of the
following (in thousands):
Year Ended December 31,
-----------------------------------
1998 1997 1996
------------------------------------
Current:
Federal................................. $(224) $(100) $ (444)
State................................... 120 100 117
------------------------------------
Income tax benefit.......................... $(104) $ - $ (327)
------------------------------------
The income tax provision (benefit) differed from the amounts computed by
applying the U.S. Federal income tax rate of 34% to pre-tax income (loss) as a
result of the following (in thousands):
Year Ended December 31,
------------------------------------
1998 1997 1996
------------------------------------
Provision (benefit ) for income taxes at
U.S. Federal income tax rate............ $ 305 $(7,105) $ (10)
Non-utilization (utilization) of
operating loss carryforward................. (616) 7,041 (483)
State income taxes, net of Federal benefit.. 60 66 77
Non-deductible items........................ 88 (36) 91
Other....................................... 59 34 (2)
------------------------------------
Income tax benefit...................... $ (104) $ - $ (327)
------------------------------------
The tax effects of temporary differences and carryforwards which give
rise to deferred tax assets and liabilities consisted of the following (in
thousands):
December 31,
------------------------
1998 1997
------------------------
Gross deferred tax assets:
Operating loss carryforwards.......................... $12,951 $ 8,967
Accrued expenses and reserves......................... 1,256 5,911
Post-retirement benefits.............................. 160 140
Other................................................. 36 46
------------------------
14,403 15,064
Valuation allowance................................... (12,964) (13,580)
------------------------
1,439 1,484
------------------------
Gross deferred tax liabilities:
Depreciation and amortization......................... (558) (501)
Pensions.............................................. (881) (983)
------------------------
(1,439) (1,484)
------------------------
Net deferred tax asset ................................... $ - $ -
------------------------
The valuation allowance primarily reflects operating loss carryforwards
for which utilization is uncertain.
As of December 31, 1998, Morgan has unused operating loss carryforwards
for tax purposes of approximately $38.1 million, which expire in years 2002
through 2018. No benefit for the remaining operating loss carryforwards has been
recognized in the consolidated financial statements. Should an ownership change
occur, as defined under Section 382 of the Internal Revenue Code, Morgan's
ability to utilize the operating loss carryforwards would be restricted.
NOTE 11 - RELATED PARTIES
As of December 31, 1995, Saugatuck Capital Company Limited Partnership
("Saugatuck") in the aggregate, beneficially owned approximately 24% of Morgan's
Common Stock. During 1996, Morgan paid Saugatuck $115,000 for services rendered,
pursuant to a consulting and management assistance agreement. Saugatuck sold 1.9
million of its 2.0 million shares concurrently with the November 13, 1996
primary stock issued by Morgan. The remaining 100,000 were distributed by
Saugatuck to its partners in 1996. Morgan's consulting and management assistance
agreement with Saugatuck was terminated upon the sale of the shares.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Andersen Corporation ("Andersen"), whose products accounted for 53% of
1998 net sales, distributes its products only through independent distributors
such as Morgan. Morgan and its predecessors have distributed Andersen products
for over 40 years; however, Morgan's agreement with Andersen provides that
Andersen can terminate any of Morgan's distributorships at any time upon a
60-day notice. A termination or significant modification of the distribution
relationship with Andersen could have a material adverse effect on revenues and
earnings.
The Company has employment agreements and arrangements with its
executive officers and certain management personnel. The agreements provide for
severance payments under certain circumstances and provide the employees with
certain additional rights after a change of control of the Company occurs. As of
December 31, 1998, if all of the employees under contract were to be terminated
by the Company without good cause, the Company's liability would be
approximately $2.4 million ($3.8 million following a change of control).
NOTE 13 - SUBSEQUENT EVENTS
On February 19, 1999, Morgan acquired certain assets and assumed certain
liabilities of Adam Wholesalers, Inc. and certain of its subsidiaries ("Adam"),
for approximately $55.2 million in cash. Adam is a privately-held distributor of
windows, doors and other millwork products, headquartered in Cincinnati, Ohio,
with 13 distribution facilities in 11 states primarily in the Midwest, Northeast
and Western regions of the United States. The acquisition was funded by an
amendment to the Amended and Restated Loan and Security Agreement as further
discussed in Note 6 to Consolidated Financial Statements. The acquisition will
be accounted for under the purchase method of accounting with the purchase price
allocated to the assets acquired and liabilities assumed based upon their
estimated fair market values, with any excess purchase price assigned to
goodwill and other intangible assets amortized over 25 years.
As a result of the acquisition of Adam on February 19, 1999, the Company
determined that the Adam's management information system was a better strategic
fit for the combined businesses. Accordingly, the Company will take a charge of
approximately $2.5 million during the first quarter of 1999 relating to the
write-off of the costs incurred for the implementation of the proposed new
Morgan system. The pro forma disclosure does not include this charge due to its
non-recurring nature.
The following unaudited pro forma consolidated results of operations for
the year ended December 31, 1998 is presented as if the acquisition occurred as
of January 1, 1998. These results do not purport to be indicative of what would
have occurred had the acquisition actually been made as of such dates or of
results which may occur in the future. (All amounts are in thousands, except per
share data):
Year Ended December 31,
----------------------
1998
----
Net sales $740,107
Net income 1,318
Earnings per basic share 0.13
Earnings per diluted share 0.13
On March 10, 1999, Morgan entered into an Agreement of Merger with
Andersen Windows and its wholly-owned subsidiary, Andersen Sub, pursuant to
which Andersen Sub and Morgan will be merged, resulting in Morgan, as the
surviving corporation, becoming a wholly-owned subsidiary of Andersen Windows.
The consideration to be received by Morgan's stockholders in the Merger will be
$4.00 per share of Morgan common stock, subject to adjustment until the
effective date of closing, under certain limited circumstances. The Merger is
subject to, among other things, approval of the stockholders of Morgan and the
applicable regulatory agencies.
NOTE 14 - INTERIM FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for 1998 and 1997 is presented below
(in thousands, except per share data):
1st Quarter 2nd Quarter
--------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------
Net sales ....................... $ 80,154 $ 95,805 $ 98,238 $ 106,801
Gross profit .................... 11,527 17,424 14,272 15,042
Net income (loss) ............... (1,578) (1,932) 1,251 (1,929)
Diluted earnings (loss) per share $ (.15) $ (.19) $ .12 $ (.19)
3rd Quarter 4th Quarter
--------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------
Net sales ....................... $ 107,508 $ 111,656 $ 97,251 $ 97,987
Gross profit .................... 15,274 13,752 13,509 12,122
Net income (loss) ............... 2,002 (1,083) (674) (15,953)
Diluted earnings (loss) per share $ .19 $ (.10) $ (.06) $ (1.55)
MORGAN PRODUCTS LTD.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Accounts Receivable
Allowance for doubtful accounts consisted of the following (in
thousands):
1998 1997 1996
---- ---- ----
Balance at beginning of period $921 $ 1,622 $722
Provision charged to expense 10 248 139
Write-offs (227) (530) (254)
Addition related to Tennessee Building Products - - 901
Acquisition
Recoveries/Other 46 (419) 114
---- ----- -----
Balance at end of period $750 $921 $1,622
===== ===== =====
Deferred Tax Asset
Valuation reserve consisted of the following (in thousands):
1998 1997 1996
---- ---- ----
Balance at beginning of period $13,580 $ 6,850 $ 6,779
Additions to (utilization of) valuation reserve (616) 6,730 71
------- ------ ------
Balance at end of period $12,964 $13,580 $ 6,850
======= ====== =======
EXHIBIT INDEX
(including exhibits not incorporated by reference - see Item 14
for incorporated exhibits)
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
------- ------------ --------
* 10.46 Lease by and between Adam Wholesalers, Inc. and Adam
Wholesalers, Inc. a/k/a Adam Wholesalers, Corporate dated
September 1, 1992 as modified by that Assignment and
Assumption and Modification of Lease Agreement by and among
Morgan, Adam Wholesalers, Inc. and Adam Wholesalers, Corporate
dated February 19, 1999.
* 10.47 Lease by and between Thurner Hatfield & Thurner and Adam
Wholesalers of Toledo, Inc. a/k/a/ Adam Wholesalers, Toledo dated
January 1, 1990 as modified by that Assignment and Assumption and
Modification of Lease Agreement by and among Morgan, Thurner
Hatfield & Thurner and Adam Wholesalers of Toledo, Inc. dated
February 19, 1999.
* 10.48 Lease by and between Adam Wholesalers, Inc. and Adam
Wholesalers of Dayton, Inc. a/k/a Adam Wholesalers, Dayton
dated April 1, 1993 as modified by that Assignment and
Assumption and Modification of Lease Agreement by and among
Morgan, Adam Wholesalers, Inc. and Adam Wholesalers of Dayton,
Inc. dated February 19, 1999.
* 10.49 Lease by and between Adam Wholesalers, Inc. and Adam
Wholesalers of Cincinnati, Inc. a/k/a Adam Wholesalers,
Cincinnati dated September 1, 1992 as modified by that
Assignment and Assumption and Modification of Lease Agreement
by and among Morgan, Adam Wholesalers, Inc. and Adam
Wholesalers of Cincinnati, Inc. dated February 19, 1999.
* 10.50 Lease by and between Adam Wholesalers, Inc. and Adam
Wholesalers of Woodbury Heights, Inc. a/k/a Adam Wholesalers,
Woodbury dated October 1, 1994 as modified by that Assignment
and Assumption and Modification of Lease Agreement by and
among Morgan, Adam Wholesalers, Inc. and Adam Wholesalers of
Woodbury Heights, Inc. dated February 19, 1999.
* 10.51 Lease by and between Adam Wholesalers, Inc. and Adam
Wholesalers of Denver, Inc. a/k/a Adam Wholesalers, Denver
dated January 1, 1995 as modified by that Assignment and
Assumption and Modification of Lease Agreement by and among
Morgan, Adam Wholesalers, Inc. and Adam Wholesalers of Denver,
Inc. dated February 19, 1999.
* 10.52 Lease by and between Adam Wholesalers, Inc. and Adam
Wholesalers of Indianapolis, Inc. dated May 13, 1992 as
modified by that Assignment and Assumption and Modification of
Lease Agreement by and among Morgan, Adam Wholesalers, Inc.
and Adam Wholesalers of Indianapolis, Inc. dated February 19,
1999.
* 10.53 Lease by and between Adam Wholesalers, Inc. and Adam
Wholesalers of Virginia, Inc. a/k/a Adam Wholesalers, Virginia
dated August 1, 1992 as modified by that Assignment and
Assumption and Modification of Lease Agreement by and among
Morgan, Adam Wholesalers, Inc. and Adam Wholesalers of
Virginia, Inc. dated February 19, 1999.
* 10.54 Lease by and between Adam Wholesalers, Inc. and Adam
Wholesalers of St. Louis, Inc. dated May 1, 1994 as modified
by that Assignment and Assumption and Modification of Lease
Agreement by and among Morgan, Adam Wholesalers, Inc. and Adam
Wholesalers of St. Louis, Inc. dated February 19, 1999.
* 10.55 Lease by and between Adam Wholesalers, Inc. and Adam
Wholesalers of Phoenix, Inc. a/k/a Adam Wholesalers, Phoenix
dated January 1, 1993 as modified by that Assignment and
Assumption and Modification of Lease Agreement by and among
Morgan, Adam Wholesalers, Inc. and Adam Wholesalers of
Phoenix, Inc. dated February 19, 1999.
* 10.56 Lease by and between Adam Wholesalers, Inc. and Adam
Wholesalers of Nitro, Inc. dated January 1, 1995 as modified
by that Assignment and Assumption and Modification of Lease
Agreement by and among Morgan, Adam Wholesalers, Inc. and Adam
Wholesalers of Nitro, Inc. dated February 19, 1999.
* 10.57 Lease by and between Pine Acre Investments, Inc. and Adam
Wholesalers of Carlisle, Inc. dated August 1, 1991.
* 10.58 Lease by and between C-S-K Louisville and Allied Sash and Door,
Inc., as amended, dated April 1, 1990.
* 10.59 Lease by and between Mamco Millworks of New York, Inc. a/k/a/
Adam Wholesalers of Kirkwood, Inc., as modified, dated
September 9, 1985.
* 10.60 Amendment to Supply Agreement dated October 5, 1998 between
Morgan and JELD-WEN, inc.
* 23.1 Consent of PricewaterhouseCoopers LLP.
* 27.1 Financial Data Schedule
--------------------------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.