<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 3, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD
FROM ___ TO ___
COMMISSION FILE NUMBER 0-13198
------------------------------
MORTON INDUSTRIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 38-0811650
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1021 W. BIRCHWOOD, MORTON, ILLINOIS 61550
(Address of principal executive offices)
(309) 266-7176
(Registrant's telephone number, including area code)
-----------
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 / /
<TABLE>
<CAPTION>
OUTSTANDING AS OF
AUGUST 10, 1999
-----------------
<S> <C>
Class A Common Stock, $.01 par value.......................... 4,145,351
Class B Common Stock, $.01 par value.......................... 200,000
</TABLE>
1
<PAGE>
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MORTON INDUSTRIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended July 3, 1999 and June 27, 1998
(Dollars In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 3, 1999 June 27, 1998 July 3, 1999 June 27, 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 60,071 $ 39,752 $ 99,430 $ 70,424
Cost of sales 53,704 33,022 87,407 58,978
---------- ---------- ---------- ----------
Gross profit 6,367 6,730 12,023 11,446
---------- ---------- ---------- ----------
Operating expenses
Selling expenses 1,671 1,209 2,996 1,976
Administrative expenses 5,074 3,407 8,556 5,802
---------- ---------- ---------- ----------
Total operating expenses 6,745 4,616 11,552 7,778
---------- ---------- ---------- ----------
Operating income (loss) (378) 2,114 471 3,668
---------- ---------- ---------- ----------
Other income (expense
Interest expense (1,967) (925) (3,549) (1,471)
Miscellaneous (14) 16 (7) 38
---------- ---------- ---------- ----------
Total other income (expense) (1,981) (909) (3,556) (1,433)
---------- ---------- ---------- ----------
Income (loss) before income taxes and cumulative
effect of accounting change (2,359) 1,205 (3,085) 2,235
Income taxes - 107 (46) 179
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of accounting
change (2,359) 1,098 (3,039) 2,056
Cumulative effect of accounting change - - (1,074) -
---------- ---------- ---------- ----------
Net income (loss) (2,359) 1,098 (4,113) 2,056
Dividends and accretion of discount
on preferred shares (331) - (331) -
---------- ---------- ---------- ----------
Net income (loss) available to common shareholders $ (2,690) $ 1,098 $ (4,444) $ 2,056
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings (loss) per common share
Basic ($0.66) $0.27 ($1.09) $0.51
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted ($0.66) $0.23 ($1.09) $0.44
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of common shares
Basic 4,067,573 4,001,944 4,067,573 4,001,944
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted 4,067,573 4,722,868 4,067,573 4,706,374
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
These condensed consolidated financial statements should be read only in
connection with the accompanying notes to condensed consolidated financial
statements.
2
<PAGE>
MORTON INDUSTRIAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
July 3, 1999 and December 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
July 3
1999 December 31
(Unaudited) 1998
---------------- ----------------
ASSETS
<S> <C> <C>
Current Assets
Cash $ 2,272 $ 1,125
Accounts, notes and other receivables, less allowance for
doubtful accounts of $664 in 1999 and $314 in 1998 34,465 15,890
Inventories 24,337 14,483
Prepaid expenses 2,600 1,263
Refundable income taxes 1,139 1,040
Deferred income taxes 1,900 1,900
---------------- ----------------
Total current assets 66,713 35,701
---------------- ----------------
Deferred income taxes 4,646 4,646
---------------- ----------------
Property, plant and equipment, net of accumulated depreciation 61,992 45,644
---------------- ----------------
Other, primarily goodwill, at amortized cost 12,717 13,132
---------------- ----------------
Tax escrow funds 1,639 1,605
---------------- ----------------
$147,707 $100,728
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to banks $ 24,242 $ 11,700
Current installments of long-term debt, obligations
under capital leases and covenants payable 9,671 5,311
Accounts payable 25,471 16,995
Other accrued expenses 12,464 4,137
---------------- ----------------
Total current liabilities 71,848 38,143
---------------- ----------------
Long-term debt, obligations under capital leases
and covenants payable, excluding current installments 65,937 53,281
---------------- ----------------
Other 2,917 2,436
---------------- ----------------
Total liabilities 140,702 93,860
---------------- ----------------
Redeemable preferred stock 4,581 -
---------------- ----------------
Stockholders' Equity
Class A common stock 39 39
Class B common stock 2 2
Additional paid-in capital 19,937 19,937
Retained earnings (deficit) (17,554) (13,110)
---------------- ----------------
Total stockholders' equity 2,424 6,868
---------------- ----------------
$147,707 $100,728
---------------- ----------------
---------------- ----------------
</TABLE>
These condensed consolidated financial statements should be read only in
connection with the accompanying notes to condensed consolidated financial
statements.
3
<PAGE>
MORTON INDUSTRIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For the Six Months Ended July 3, 1999 and June 27, 1998
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------------- -----------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 1,129 $ (5,113)
---------------- ----------------
Cash flows from investing activities
Capital expenditures (2,252) (4,115)
Increase in intangible assets (1,288) (587)
Carroll George Inc. acquisition - (5,568)
B&W Metal Fabricators, Inc. acquisition (3,758)
Mid-Central Plastics, Inc. acquisition (20,310)
SMP Steel Corporation acquisition (2,160)
Worthington Custom Plastics, Inc. acquisition, net of
estimated adjustment due seller (30,287) -
Cash received in merger with MLX Corp. - 16,241
Other (34) 574
---------------- ----------------
Net cash provided by (used in) investing activities (33,861) (19,683)
---------------- ----------------
Cash flows from financing activities
Net borrowings (repayments) under revolving credit facility 12,542 (2,154)
Cash received on exercised options - 358
Proceeds from issuance of long-term debt 24,000 55,000
Principal payments on long-term debt (6,984) (25,036)
Proceeds from issuance of preferred stock 4,250 -
Other 71 (210)
---------------- ----------------
Net cash provided by (used in) financing activities 33,879 27,958
---------------- ----------------
Net increase in cash 1,147 3,162
Cash at beginning of period 1,125 138
---------------- ----------------
Cash at end of period $ 2,272 $ 3,300
---------------- ----------------
---------------- ----------------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 1,824 $ 2,207
---------------- ----------------
---------------- ----------------
Income taxes $ - $ 238
---------------- ----------------
---------------- ----------------
</TABLE>
These condensed consolidated financial statements should be read only in
connection with the accompanying notes to condensed consolidated financial
statements.
4
<PAGE>
MORTON INDUSTRIAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JULY 3, 1999 AND JUNE 27, 1998
(UNAUDITED)
(1) Nature of Business. The Company, operating through its subsidiaries, is a
contract manufacturer and supplier of high-quality fabricated sheet metal and
plastic components and subassemblies for construction, agricultural, and
industrial equipment manufacturers located primarily in the Midwestern and
Southeastern United States.
(2) Interim Financial Data. The Condensed Consolidated Financial Statements
at July 3, 1999, and June 27, 1998, and for the three and the six months then
ended are unaudited and reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the financial position,
operating results, and cash flows for the interim periods indicated,
consisting of normal recurring accruals except for the non-recurring
cumulative effect of accounting change discussed below. The Company's fiscal
quarters end on a Saturday (nearest to a quarter end) except for the fourth
quarter which ends on December 31. For the quarter ended July 3, 1999, there
were 64 shipping days, compared to 59 shipping days in the quarter ended June
27, 1998. For the six months ended July 3, 1999, there were 129 shipping
days, compared to 125 shipping days for the six months ended June 27, 1998.
Results of operations for the interim periods are not necessarily indicative
of the results of operations for the full fiscal year. The condensed
consolidated financial statements should be read in connection with the
consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations of Morton Industrial Group, Inc. contained in the Company's Annual
Report on Form 10-K for the year ending December 31, 1998.
(3) Acquisitions. On March 30, 1998, the Company acquired all of the
outstanding shares of common stock of Carroll George Inc.
On April 8, 1998, the Company acquired all of the outstanding shares of
common stock of B&W Metal Fabricators, Inc.
On May 29, 1998, the Company acquired all of the outstanding shares of common
stock of Mid-Central Plastics, Inc.
On June 1, 1998 the Company acquired substantially all of the assets of SMP
Steel Corporation.
On April 15, 1999 the company acquired four manufacturing facilities from
Worthington Custom Plastics, Inc.
All of the above acquisitions have been described in more detail in previous
SEC filings, including the Company's Annual Report on Form 10-K for the year
ending December 31, 1998, Form 8-K filed on April 29, 1999 and Form 8-K/A
filed on June 28, 1999.
The following unaudited proforma consolidated financial data for the six
months ended July 3, 1999, has been prepared by consolidating the statements
of income of the Company and the Non-Automotive Plastics Group of Worthington
Custom Plastics, Inc. for the period from January 1 through April 14, 1999.
<TABLE>
<CAPTION>
(dollars in thousands, except per share data)
<S> <C>
Proforma revenues $130,700
Proforma net (loss) available to common shareholders $( 5,600)
Proforma net (loss), per share, available to common shareholders -
basic and diluted $ (1.38)
</TABLE>
The above unaudited proforma consolidated financial data is based on
management's current estimate of the allocations of the purchase price
for the acquisition from Worthington Custom Plastics, Inc. The company
filed the financial statements of the Non-Automotive Plastics Group of
Worthington Custom Plastics, Inc., and additional proforma financial
information, with the Securities and Exchange Commission on Form 8-K/A
on June 28, 1999.
5
<PAGE>
(4) The Company's inventory, in thousands of dollars, as of July 3, 1999, and
December 31, 1998, is summarized as follows:
<TABLE>
<CAPTION>
July 3, December 31,
1999 1998
------ ------------
<S> <C> <C>
Raw materials, purchased parts and manufactured components $11,186 $ 7,161
Work-in-process 5,123 2,299
Finished goods 8,028 5,023
------- --------
Total $24,337 $14,483
------- --------
------- --------
</TABLE>
(5) Long-term debt and preferred stock. As indicated above, the Company
acquired four manufacturing facilities from Worthington Custom Plastics, Inc.
on April 15, 1999. Concurrently, the Company entered into a financing
agreement with General Electric Capital Corporation (GECC). This agreement
was filed as an exhibit to Form 8-K filed on April 29, 1999. The loan
agreement allows for an up to $24.0 million 4-1/2 year revolving credit
facility and an up to $26.0 million 4-1/2 year term loan facility, both at
variable interest rates based on LIBOR or the prime rate, at the Company's
option, plus variable margins. The Company also incurs a fee based upon a
certain percentage of the unused revolving credit facility. The term loan
facility amortizes quarterly throughout its term. The Company must also
prepay certain amounts from the sale of assets, the issuance of new equity
capital and from "excess cash flow", as defined.
As part of the financing for the Worthington acquisition, the Company
issued 10,000 shares of redeemable preferred stock. That preferred stock is
redeemable in April, 2004 at $1,000 per share plus any accrued dividends. The
8% preferred stock was valued at $4,250,000 at the time of the acquisition
from Worthington Custom Plastics, Inc. The discount is being accreted over a
five year period using the effective yield method.
On August 16, 1999, The Company and Harris Trust and Savings Bank, as
Agent, entered into a Second Amendment to the Credit Agreement dated May 29,
1998. The purpose of the agreement was to adjust certain terms and
conditions of the 1998 agreement. The maximum amount of borrowings available
under the secured revolving credit facility was reduced to a maximum of
$17,500,000 through September 29, 1999; $18,625,000 from September 30, 1999
through December 30, 1999; and $19,000,000 thereafter. The amount of
availability is calculated using a borrowing base of qualified accounts
receivable and inventory.
(6) In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities" which requires costs of start-up activities and organization
costs to be expensed as incurred. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998, with initial application reported as the
cumulative effect of a change in accounting principle. Accordingly, adoption
of the statement resulted in a cumulative effect charge of $1,074, net of
state income tax benefits, in the first six months of 1999.
(7) Earnings Per Share. The following reflects the reconciliation of the
numerators and denominators of the earnings per share and the earnings per
share assuming dilution computations:
<TABLE>
<CAPTION>
Three Months Ended July 3, 1999 Six Months Ended July 3, 1999
------------------------------- -----------------------------
(Loss) Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic income (loss) $(2,690,000) 4,067,573 $ (.66) $(4,444,000) 4,067,573 $ (1.09)
available to common
shareholders
Effect of dilutive securities, -- --
stock options
--------- ---------
Diluted income (loss) 4,067,573 $ (.66) 4,067,573 $ (1.09)
available to common --------- ----------
shareholders --------- ----------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 27, 1998 Six Months Ended June 27, 1998
-------------------------------- ------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic income (loss) per share $ 1,098,000 4,001,944 $.27 $2,056,000 4,001,944 $.51
Effect of dilutive securities, 720,924 704,430
stock options
--------- ---------
Diluted income (loss) per share 4,722,868 $.23 4,706,374 $.44
--------- ---------
--------- ---------
</TABLE>
The first six months, 1999 net (loss) includes a cumulative effect of accounting
change, net of state income tax benefit, of $(1,074). The following table
reflects the six months impact on basic (loss) per share of the cumulative
effect of accounting change:
<TABLE>
<S> <C>
(Loss) before cumulative effect of accounting change $ (.83)
Cumulative effect of accounting change (.26)
-----
Net (loss) $(1.09)
-----
-----
</TABLE>
(8) Segment Reporting. The Company has two reportable segments, contract metal
fabrication and contract plastic fabrication. The contract metal
fabrication segment provides full service fabrication of parts and
sub-assemblies for the construction, agricultural and industrial equipment
industry. The contract plastic fabrication segment provides full-service
vacuum formed and injected-molded parts and sub-assemblies for the
construction, agricultural and industrial equipment industry. Prior to
March 30, 1998, the Company operated in only one reportable segment,
contract metal fabrication. The following segment data is for the three and
six months ended July 3, 1999 and June 27, 1998:
<TABLE>
<CAPTION>
Contract Contract Total
Metal Plastic
Fabrication Fabrication
------------ ------------ --------
Three Months Ended July 3, 1999
<S> <C> <C>
Revenues from external customers................................................... $26,374 $33,697 $60,071
Segment operating income........................................................... 434 (812) (378)
Six Months Ended July 3, 1999
Revenues from external customers................................................... $53,306 $46,124 $99,430
Segment operating income........................................................... 1,527 (1,056) 471
Three Months Ended June 27, 1998
Revenues from external customers................................................... $29,410 $10,342 $39,752
Segment operating income........................................................... 1,659 455 2,114
Six Months Ended June 27, 1998
Revenues from external customers................................................... $60,082 $10,342 $70,424
Segment operating income........................................................... 3,213 455 3,668
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis describes changes in the Company's
financial condition since December 31, 1998. The analysis of results of
operations compares the three and six months ended July 3, 1999 and June 27,
1998.
RESULTS OF OPERATIONS
SECOND QUARTER, 1999 VERSUS SECOND QUARTER, 1998
Revenues for the second quarter, 1999 were $60.1 million compared to
$39.8 million for the second quarter of 1998, an increase of $20.3 million,
or 51.1%. As described in note 4 of Part I, the Company made acquisitions
during the second quarters of both 1998 and 1999 that have provided
incremental revenue during the second quarter, 1999, of approximately $28.6
million. A revenue reduction of approximately $8.3 million from the
facilities owned in the second quarter of both years is attributable
primarily to a reduced demand for agricultural components that began late in
1998. It is anticipated that this reduced demand will continue into the year
2000. This reduced demand has caused customers to shut down certain
manufacturing plants for extended periods during 1999, and it is anticipated
that these shutdowns will continue into the second half of 1999.
Sales to Deere & Company and Caterpillar Inc., were approximately 45% and
82% of the Company's revenues for the second quarters, 1999 and 1998,
respectively.
The Company's gross profits for the second quarter, 1999 decreased by
approximately $ .4 million, a decrease of 5.3%, versus the same three months
in 1998. The overall gross profit percentage declined from 16.9% for the
second quarter of 1998 to 10.6% for the second quarter of 1999. The
incremental gross profits from acquisitions were approximately $2.3 million,
and provided a gross margin percentage of approximately 8.2%. This margin is
expected to improve as cost savings from newly implemented plans are
realized. These plans included staff level adjustments, changes in sick pay
policies, changes in contributory health care coverage policies, and other
reductions in selling and administrative expenses. For the locations existing
in the second quarters of both year, a decline in gross profit of
approximately $2.7 million resulted primarily from the reduced demand for
agricultural components, some product mix changes and underutilized capacity.
The Company has reduced manpower in response to the reduced demand.
Selling and administrative expenses for the second quarter, 1999
amounted to $6.7 million, or 11.2% of net sales compared to $4.6 million, or
11.6% of net sales for the second quarter of 1998. The dollar increase is
related primarily to the acquired entities.
Interest expense for the second quarter, 1999 was $2.0 million, an
increase of $1.0 million compared to the second quarter of 1998. This
increase was due primarily to significantly higher average amounts of
outstanding debt related to the 1998 and 1999 acquisitions.
No state income tax benefit was provided on a pre-tax loss of $2.4
million. For the second quarter of 1998, income taxes of approximately $ .1
million were provided on pre-tax income of $1.2 million, for an effective tax
rate of approximately 8%. The additional net operating loss carryforward
created in the quarter has been offset by an increase in the existing
valuation allowance.
8
<PAGE>
FIRST SIX MONTHS 1999 VS. FIRST SIX MONTHS, 1998
Revenues for the first six months, 1999 were $99.4 million compared to $70.4
million for the first six months of 1998, an increase of $29.0 million, or
41.2%. As described in note 4 of Part I, the Company made acquisitions during
1998 and 1999 that have provided incremental revenue during the first six
months, 1999, of approximately $41.2 million. A revenue reduction of
approximately $12.2 million from the facilities owned in the first six months
of both years is attributable primarily to a reduced demand for agricultural
components that began late in 1998.
Sales to Deere & Company and Caterpillar Inc., were approximately 59%
and 87% of the Company's revenues for the first six months, 1999 and 1998,
respectively.
The Company's gross profits for the first six months, 1999 increased by
approximately $ .6 million versus the same six months in 1998, an increase of
5.1%. The overall gross profit percentage declined from 16.2% for the first
six months of 1999 to 12.1% for the first six months of 1999. The incremental
gross profits from acquisitions were approximately $3.5 million. For the
locations existing in the first six months of both years, a decline in gross
profit of approximately $2.9 million resulted primarily from the reduced
demand for agricultural components, some product mix changes and costs
associated with underutilized capacity.
Selling and administrative expenses for the first six months, 1999
amounted to $11.5 million, or 11.6% of net sales compared to $7.8 million, or
11.0% of net sales for the first six months of 1998. The increase in
administrative expenses is attributable to costs associated with the acquired
entities, and approximately $ .6 million of costs written-off during the
first quarter, 1999, consisting of costs associated with a suspended
high-yield financing and the discontinuance of negotiations for a proposed
acquisition.
Interest expense for the first six months, 1999 was $3.5 million, an
increase of $2.1 million compared to the first six months of 1998. This
increase was due primarily to significantly higher average amounts of
outstanding debt related to the 1998 and 1999 acquisitions.
The Company incurred a charge of $1,074, net of a state income tax
benefit, for the cumulative effect of adopting AICPA Statement of Position
98-5 related to start-up activities and organization costs.
A state income tax benefit of approximately $46 was provided on a
pre-tax loss of $3.1 million for the first six months of 1999. For the first
six months of 1998, income taxes of approximately $179 were provided on
pre-tax income of $2.2 million, for an effective tax rate of approximately
8%. The additional net operating loss carryforward created in the first six
months has been offset by an increase in the existing valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital at July 3, 1999 was $(5.1)
million compared to $(2.4) million at December 31, 1998, the Company's
preceding fiscal year end. This represents a decrease in working capital of
approximately $2.7 million. This change was due primarily to the net loss for
the first six months, attributable primarily to decreased sales in the
agricultural markets, and cash required for capital expenditures.
The Company has two separate credit facilities. The first facility is
with Harris Trust and Savings Bank (Harris), and serves the company's
operations other than the operations recently acquired from Worthington
Custom Plastics, Inc. (Worthington). The second facility, with General
Electric Capital Corporation (GECC), serves the operations acquired from
Worthington. These facilities are separate and provide financing for the
named operations.
9
<PAGE>
On May 28, 1998, the Company entered into a credit agreement with
Harris, as Agent. The credit agreement is a $90 million facility with the
following components: (i) a $35 million secured revolving credit facility
with a $10 million sub limit for letters of credit; (ii) a $25 million
secured term loan that matures 5 years from the date of the credit agreement
closing; and (iii) a $30 million secured term loan that matures 7 years from
the date of the credit agreement closing. Both term loans are fully amortized
over their respective terms with quarterly payments. The interest rates on
the loans, at the Company's option, are (i) Harris Rate (which is the greater
of the prime rate or the Federal Funds Rate plus .5%) or (ii) the reserve
adjusted LIBOR margin, fixed for 30, 60, 90 or 180 day period, plus an
interest rate margin that is determined by the Company's cash flow leverage
ratio. The proceeds under the facility have been used to refinance the then
existing indebtedness, to finance the acquisitions, and general corporate
purposes. As of July 3, 1999, the Company had additional availability of
approximately $1.5 million under this revolving credit facility.
On March 26, 1999, the Company and Harris Trust and Savings Bank, as
Agent, entered into a First Amendment to the Credit Agreement dated May 29,
1998. The purpose of the amendment was to adjust certain terms and conditions
of the 1998 agreement, effective January 1, 1999, including a reduction in
the secured revolving credit facility from $35,000,000 to a maximum of
$21,000,000.
On April 15, 1999, the Company retired $4.25 million of the Harris Trust
and Savings Bank term debt in connection with the financing of the Worthington
facilities acquisition.
At July 3, 1999, in connection with the Harris financing, the Company
had two fixed interest rate swap agreements with a commercial bank (the
"counter party"). The first agreement has a notional principal amount of
$11.0 million and a termination date of May 31, 2003. The second agreement
has a notional principal amount of $14.8 million and a termination date of
June 30, 2003. The notional principal amount declines over the term of both
agreements based upon a defined amortization schedule. The counter party has
the unilateral right to cancel both agreements as of June 30, 2001.
As described in Part I, Note (5) above, on August 16, 1999, the Company
and Harris Trust and Savings Bank entered into a Second Amendment to the
Credit Agreement dated May 29, 1998. As of the amendment date, $17,500,000
was available under the secured revolving credit facility. The Company's
actual borrowings at that date were $16,000,000.
The separate financing arrangements for the operations of the four
manufacturing facilities acquired from Worthington Custom Plastics, Inc. are
described above in Part I, Note (5) above.
As of July 3, 1999, the Company had additional availability of $12.3
million, for the acquired operations, under the GECC credit facility. It is
anticipated that the agreement with GECC will provide the necessary long-term
and revolving financing, and along with cash flows from operations, will provide
the necessary levels of liquidity to operate the newly acquired operations.
The Company incurred $2.2 million of capital expenditures during the
first six months, 1999, primarily for purchases of manufacturing equipment.
The Company currently anticipates making approximately $3.0 million of
capital expenditures during the remaining half of calendar year 1999. These
expenditures will be funded from the cash flow provided by operations and
funds available under the Company's line-of-credit facilities. Planned
expenditures include the purchase of fabrication equipment, including
presses, pressbrakes and other new equipment. The Company expects to
re-evaluate its capital expenditure budget from time-to-time to respond to
changes in sales levels, and the needs of its operating subsidiaries.
As previously indicated, the Company's sources of funds for the
businesses it acquired from Worthington Custom Plastics, Inc. will be the cash
flows from operations and the GECC line of credit discussed above.
As discussed above, customer plant shutdowns have reduced the Company's
sales of agricultural equipment components, which has resulted in reduced cash
receipts by the Company's other businesses. The Company is monitoring its
liquidity for those businesses and believes that it will have adequate
liquidity. Sources of funds to meet its near term liquidity requirements for
those businesses will be the cash flows from operations, the Harris line of
credit, and management of working capital to reflect current levels of
operations. In addition, the Company has reduced its liquidity requirements
through reductions in its work force and by obtaining extended payment terms
from vendors.
The Company has initiated a plan to consolidate its capital structure
to better reflect its current business organization, and expects to engage an
investment banker for assistance in implementing the plan. Actions may include
the issuance of subordinated debt, the issuance of preferred stock, and the
consolidation of the Company's two senior credit facilities.
YEAR 2000 READINESS
We rely upon computer hardware and software to maintain financial and
business records. All of the subsidiaries use computer and related technology
in the manufacturing processes, including embedded microprocessor technology.
All hardware, software and embedded technologies are susceptible to the Year
2000 issues. Unresolved Year 2000 issues could make it difficult and costly
for the Company and its subsidiaries to conduct business.
10
<PAGE>
We have dedicated our Information Services staff to addressing various Year
2000 issues. In 1998 and 1999 we used these personnel as well as outside
consultants to conduct assessments of our technology and recommend steps to
attain Year 2000 readiness. These steps include establishing project
milestones, testing and certifying all micro-controllers, and upgrading or
replacing business system hardware, software and telephone equipment. Through
June 30, 1999, we have expended approximately $200,000 in the Year 2000
readiness effort. Our core business unit systems, which include order entry,
inventory management, purchasing, payroll, invoicing, accounts payable,
accounts receivable and general ledger have been upgraded, tested and
verified to be Year 2000 ready. We believe that our continuing efforts will
achieve an acceptable level of Year 2000 readiness no later than October 31,
1999 for the remaining systems and embedded technologies not critical to the
business. Certain minor remedial efforts may extend into 2000, but we do not
believe that these efforts will adversely affect our ability to conduct
business in 2000. We believe that our additional Year 2000 expenditures will
be approximately $130,000, with the more significant costs relating to
upgrading embedded microprocessor technology. We do not believe that the
total costs of Year 2000 readiness will be material to the Company's
financial position or results of operations.
We are surveying our customers' and suppliers' Year 2000 readiness. Based on
responses received to date, there is no indication that our major customers and
suppliers will not be Year 2000 ready by the end of 1999. Our major customers
are large international corporations, and we are aware of their aggressive
efforts to become Year 2000 ready. We may choose from a broad range of suppliers
of our basic raw materials and we believe that if one supplier proves not to be
Year 2000 ready, there will be others who are. If, however, these major
customers and suppliers do not become Year 2000 ready, or if other third parties
such as public utilities or financial institutions that serve us fail to achieve
readiness, we could experience material and adverse financial results.
Since we believe that we will be Year 2000 ready, and that our major customers
and suppliers will also be Year 2000 ready, we have not developed contingency
plans. If our beliefs prove incorrect or it otherwise becomes evident that
contingency plans are advisable, we will develop the appropriate plans.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June, 1998, the Financial Accounting Standards Board issued Statement
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The
Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. The Company does not anticipate that the
adoption of this Statement will have a significant effect on its results of
operations or financial position. In June, 1999, the Financial Accounting
Standards Board issued Statement No. 137 amending the effective date of
Statement No. 133 to January 1, 2001.
FORWARD LOOKING STATEMENTS
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995. This Form 10-Q contains forward looking statements (within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934), including, but not limited to, statements
related to the Company's beliefs, expectations or intentions. These
statements involve risk and uncertainties that may cause the Company's actual
results to differ significantly from those expected, suggested or projected.
Factors that could contribute to such differences include, but are not
limited to, competition with other fabricators, the risks associated with the
Company's acquisition strategy, including unanticipated problems,
difficulties in integrating acquired businesses, diversion of management's
attention from daily operations, possible increased interest costs, and
possible adverse effects on earnings resulting from increased goodwill
amortization, introduction of new technologies that require significant
capital expenditures and general economic and business conditions.
11
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to interest rate changes primarily as a result of
its line of credit and long-term debt used for maintaining liquidity, funding
capital expenditures, and expanding our operations. The Company's interest
rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flow and to lower overall borrowing costs. To
achieve its objectives, the Company has entered into two separate financing
agreements, as described more fully in Item II above, for term loans and
revolving credit facilities. Interest is based on either LIBOR or the
lendors' prime rates plus an applicable margin, which will vary depending on
certain financial ratios achieved by the Company. The Company has also
entered into two interest rate swap agreements, as required by its Harris
financing arrangements, to limit the effect of increases in the interest
rates on half of its floating rate term debt. Under the swap agreements,
which expire May 31, 2003 to June 30, 2003, the LIBOR interest rate component
of the interest rate is limited to 5.875% on half of the Company's $47.2
million term loans.
The Company does not enter into interest rate transactions for speculative
purposes.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On April 15, 1999, the Company issued 10,000 unregistered shares of non-par
value Series 1999A preferred stock. This preferred stock was issued as a part of
the consideration for the manufacturing facilities acquired from Worthington
Custom Plastics, Inc. and was valued at $4,250.
The dividend rate of the Series 1999A preferred stock is 8%, cumulative,
payable either in cash or additional shares of the same series.
The preferred stock shall be redeemed five years from the date of issuance
at $1,000 per share. The related discount is being accreted over a five year
period using the effective yield method.
The shares of preferred stock were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Morton Industrial Group, Inc., held its Annual Meeting on June 8, 1999 to:
1. Elect five directors to serve for one year terms until the Annual
Meeting of Shareholders in 2000.
2. To approve an amendment to the Company's Articles of
Incorporation to fix the maximum number of votes per share of the
Company's Class B common stock at ten.
3. Consider and act upon a proposal to ratify the selection of KPMG,
LLP as independent auditors of the Company for 1999.
The results of the shareholders' votes on each of these matters appear in
the following tables.
<TABLE>
<CAPTION>
Election of Directors:
- ---------------------- For Against Abstained Total
--- ------- --------- -----
<S> <C> <C> <C> <C>
William D. Morton 3,436,748 957 ------ 3,437,705
Fred W. Broling 3,436,748 957 ------ 3,437,705
Alfred R. Glancy III 3,436,728 977 ------ 3,437,705
Mark W. Mealy 3,436,744 961 ------ 3,437,705
Willem de Vogel 3,436,563 1,142 ------ 3,437,705
</TABLE>
12
<PAGE>
Approval of an Amendment to the Company's Articles of Incorporation:
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
For Against Abstained Total
--- ------- --------- -----
<S> <C> <C> <C> <C>
3,305,124 130,105 2,476 3,437,705
</TABLE>
Ratification of Selection of Independent Auditor:
- -------------------------------------------------
<TABLE>
<CAPTION>
For Against Abstained Total
--- ------- --------- -----
<S> <C> <C> <C> <C>
KMPG LLP 3,429,931 1,483 6,291 3,437,705
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
2. None.
3. None.
10. None.
11. The computation can be determined from this report. 15. None.
18. None.
19. None.
22. None.
23. None.
24. None.
27. Financial data schedule.
(B) Reports on Form 8-K and Form 8-K/A
1. Filed Form 8-K on April 29, 1999, announcing the acquisition of four
manufacturing facilities from Worthington Custom Plastics, Inc. and a
financing agreement with General Electric Capital Corporation.
2. Filed Form 8-K/A on June, 28 1999 containing the financial statements
of the Non-Automotive Group of Worthington Custom Plastics, Inc. and
Unaudited Proforma Condensed Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
Dated: August 17, 1999 MORTON INDUSTRIAL GROUP, INC.
By: /s/ Thomas D. Lauerman
-------------------------
Thomas D. Lauerman
VICE PRESIDENT OF FINANCE
</TABLE>
13
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-04-1999
<PERIOD-END> JUL-03-1999
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<SECURITIES> 0
<RECEIVABLES> 35,129
<ALLOWANCES> (664)
<INVENTORY> 24,337
<CURRENT-ASSETS> 66,713
<PP&E> 92,750
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<CURRENT-LIABILITIES> 71,848
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0
4,581
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