<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-13198
------------------------
MORTON INDUSTRIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
GEORGIA 38-0811650
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
</TABLE>
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
OCTOBER 16, 2000
-----------------
<S> <C>
Class A Common Stock, $.01 par value........................ 4,401,479
Class B Common Stock, $.01 par value........................ 200,000
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART 1--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MORTON INDUSTRIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Net sales................................... $ 67,575 $ 60,123 $ 212,556 $ 159,553
Cost of sales............................... 59,802 52,853 183,796 140,260
---------- ---------- ---------- ----------
Gross profit................................ 7,773 7,270 28,760 19,293
---------- ---------- ---------- ----------
Operating expenses
Selling expenses.......................... 1,724 1,598 4,875 4,594
Administrative expenses................... 4,189 4,336 14,803 12,892
---------- ---------- ---------- ----------
5,913 5,934 19,678 17,486
---------- ---------- ---------- ----------
Operating income (loss)................. 1,860 1,336 9,082 1,807
---------- ---------- ---------- ----------
Other income (expense)
Interest expense.......................... (2,688) (2,269) (8,009) (5,818)
Other..................................... 22 (15) 363 (22)
---------- ---------- ---------- ----------
Total other income (expense)............ (2,666) (2,284) (7,646) (5,840)
---------- ---------- ---------- ----------
Income (loss) before income taxes and
cumulative effect of accounting
change................................ (806) (948) 1,436 (4,033)
Income taxes................................ (320) -- 550 (46)
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of
accounting change......................... (486) (948) 886 (3,987)
Cumulative effect of accounting change...... -- -- -- (1,074)
---------- ---------- ---------- ----------
Net income (loss)........................... (486) (948) 886 (5,061)
Dividends and accretion of discount on
preferred shares.......................... (235) (399) (662) (730)
---------- ---------- ---------- ----------
Net income (loss) available to common
shareholders.............................. $ (721) $ (1,347) $ 224 $ (5,791)
========== ========== ========== ==========
Earnings (loss) per common share
Basic..................................... $ (0.16) $ (0.31) $ 0.05 $ (1.32)
========== ========== ========== ==========
Diluted................................... $ (0.16) $ (0.31) $ 0.05 $ (1.32)
========== ========== ========== ==========
Weighted average number of common shares
Basic..................................... 4,587,193 4,391,351 4,541,561 4,374,714
========== ========== ========== ==========
Diluted................................... 4,587,193 4,391,351 4,662,996 4,374,714
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
MORTON INDUSTRIAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30
2000 DECEMBER 31
(UNAUDITED) 1999
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash...................................................... $ -- $ --
Accounts, notes and other receivables, less allowance for
doubtful accounts of $563 in 2000 and $320 in 1999...... 33,931 28,347
Inventories............................................... 27,099 22,420
Prepaid expenses.......................................... 3,598 898
Refundable income taxes................................... 63 63
Deferred income taxes..................................... 1,320 1,320
-------- --------
Total current assets.................................... 66,011 53,048
-------- --------
Property, plant and equipment, net of accumulated
depreciation.............................................. 54,542 56,333
-------- --------
Other, primarily goodwill, at amortized cost................ 11,020 11,827
-------- --------
Deferred income taxes....................................... 4,073 4,646
-------- --------
$135,646 $125,854
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Outstanding checks in excess of bank balance.............. $ 4,990 $ 1,123
Current installments of long-term debt.................... 8,988 10,076
Accounts payable.......................................... 34,379 26,471
Accrued expenses.......................................... 5,291 5,569
-------- --------
Total current liabilities............................... 53,648 43,239
-------- --------
Long term debt, excluding current installments and notes
payable to banks.......................................... 78,485 80,880
-------- --------
Other....................................................... 302 312
-------- --------
Total liabilities....................................... 132,435 124,431
-------- --------
Redeemable preferred stock.................................. 6,041 5,379
-------- --------
Stockholders' Equity (Deficit)
Class A common stock...................................... 44 43
Class B common stock...................................... 2 2
Additional paid-in capital................................ 20,883 19,981
Retained deficit.......................................... (23,759) (23,982)
-------- --------
Total stockholders' equity (deficit).................... (2,830) (3,956)
-------- --------
$135,646 $125,854
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MORTON INDUSTRIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Net cash provided by operating activities................... $ 1,005 $ 1,666
------- -------
Cash flows from investing activities
Capital expenditures...................................... (4,987) (4,009)
Increase in intangible assets............................. (219) (1,308)
Proceeds from sales of business units..................... 2,915 --
Worthington Custom Plastics, Inc. acquisition, net of
estimated adjustment due seller......................... -- (30,287)
Other..................................................... -- (34)
------- -------
Net cash used in investing activities................. (2,291) (35,638)
------- -------
Cash flows from financing activities
Net borrowings (repayments) under revolving credit
facility................................................ 6,310 11,642
Cash received on exercised options........................ 39 45
Proceeds from issuance of preferred stock................. -- 4,250
Principal payments on long-term debt...................... (8,930) (8,435)
Proceeds from issuance of long-term debt.................. -- 26,000
Increase (decrease) in checks issued in excess of bank
balance................................................. 3,867 448
Other..................................................... -- 22
------- -------
Net cash provided by financing activities............. 1,286 33,972
------- -------
Net increase in cash........................................ -- --
Cash at beginning of period................................. -- --
------- -------
Cash at end of period....................................... $ -- $ --
======= =======
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest................................................ $ 7,501 $ 5,745
======= =======
Income taxes............................................ $ -- $ --
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
MORTON INDUSTRIAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2,
1999
(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 original equipment
manufacturers located primarily in the Midwestern and Southeastern
United States.
(2) INTERIM FINANCIAL DATA.
The Condensed Consolidated Financial Statements at September 30, 2000, and
October 2, 1999, and for the three months and nine months then ended are
unaudited and reflect all adjustments, consisting of normal recurring accruals
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. 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 both
the quarters ended September 30, 2000, and October 2, 1999, there were
63 shipping days. For both the nine months ended September 30, 2000 and
October 2, 1999, there were 192 shipping days. 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 ended December 31, 1999.
Certain amounts presented in prior years' financial statements have been
reclassified to conform to the current year presentation.
(3) INVENTORIES
The Company's inventory, in thousands of dollars, as of September 30, 2000,
and December 31, 1999, is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
<S> <C> <C>
Raw materials, purchased parts and
Manufactured components.......................... $13,861 $ 8,646
Work-in-process.................................... 3,191 2,818
Finished goods..................................... 10,293 11,396
------- -------
27,345 22,860
Less allowance for obsolescence.................... (246) (440)
------- -------
$27,099 $22,420
======= =======
</TABLE>
(4) ACCOUNTING CHANGE
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 was 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 nine months of 1999.
5
<PAGE>
(5) 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>
QUARTER ENDED SEPTEMBER 30, 2000 QUARTER ENDED OCTOBER 2, 1999
--------------------------------------- ---------------------------------------
EARNINGS SHARES PER SHARE (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic income (loss)
available to common
shareholders.......... $(721,000) 4,587,193 $(.16) $(1,347,000) 4,391,351 $ (.31)
========= ===========
Effect of dilutive
securities, stock
options and
warrants.............. -- -- -- --
--------- ----- --------- ------
Diluted income (loss)
available to common
shareholders.......... 4,587,193 $(.16) 4,391,351 $ (.31)
========= ===== ========= ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000 NINE MONTHS ENDED OCTOBER 2, 1999
--------------------------------------- ---------------------------------------
EARNINGS SHARES PER SHARE (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic income (loss)
available to common
shareholders.......... $ 224,000 4,541,561 $ .05 $(5,791,000) 4,374,714 $(1.32)
========= ===========
Effect of dilutive
securities, stock
options and
warrants.............. 121,435 -- -- --
--------- ----- --------- ------
Diluted income (loss)
available to common
shareholders.......... 4,662,996 $ .05 4,374,714 $(1.32)
========= ===== ========= ======
</TABLE>
The first nine 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 nine month impact on basic (loss) per share of the cumulative
effect of accounting change:
<TABLE>
<S> <C>
(Loss) before cumulative effect of accounting change........ $(1.08)
Cumulative effect of accounting change...................... (.24)
------
Net (loss).................................................. $(1.32)
======
</TABLE>
(6) 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
6
<PAGE>
the construction, agricultural and industrial equipment industry. The following
segment data is for the quarters and nine months ended September 30, 2000 and
October 2, 1999:
<TABLE>
<CAPTION>
CONTRACT METAL CONTRACT PLASTIC
FABRICATION FABRICATION TOTAL
-------------- ---------------- --------
<S> <C> <C> <C>
QUARTER ENDED SEPTEMBER 30, 2000
Revenues from external customers....... $ 34,957 $32,618 $ 67,575
Segment operating income............... 1,141 719 1,860
QUARTER ENDED OCTOBER 2, 1999
Revenues from external customers....... $ 25,324 $34,799 $ 60,123
Segment operating income............... 1,034 302 1,336
</TABLE>
<TABLE>
<CAPTION>
CONTRACT METAL CONTRACT PLASTIC
FABRICATION FABRICATION TOTAL
-------------- ---------------- --------
<S> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues from external customers....... $117,649 $94,907 $212,556
Segment operating income............... 7,687 1,395 9,082
NINE MONTHS ENDED OCTOBER 2, 1999
Revenues from external customers....... $ 78,630 $80,923 $159,553
Segment operating income............... 2,561 (754) 1,807
</TABLE>
(7) WARRANTS ISSUED TO LENDERS
On September 20, 2000, the Company issued warrants to purchase an aggregate
number of shares of its Class A common stock equal to the greater of (a) 4.99%
of the total outstanding shares of Class A and Class B common stock, calculated
at the time of exercise, exclusive of certain shares issued as employee or
director compensation or pursuant to the warrants, or (b) 238,548 shares. The
238,548 warrants issued are exercisable at any time during the period from
September 28, 2000 through September 28, 2001, at an exercise price of $.01 per
share.
These warrants were issued pursuant to a provision of the third amendment to
a credit agreement with Harris Trust and Savings Bank which provided that if the
credit facility was not retired by September 20, 2000, the Company would issue
the warrants.
This transaction was accounted for as a discount of long-term debt and an
increase to additional paid-in capital of approximately $0.9 million. The
discount is being amortized over the terms of the loans at Harris Trust and
Savings Bank.
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, 1999. The analysis of results of
operations compares the quarters and nine months ended September 30, 2000 and
October 2, 1999.
RESULTS OF OPERATIONS
THIRD QUARTER, 2000 VERSUS THIRD QUARTER, 1999
Our net revenues for the third quarter, 2000 were $67.6 million compared to
$60.1 million for the third quarter of 1999, an increase of $7.5 million, or
12.4% The revenue increase results primarily from new projects for our sheet
metal fabricated components used in construction and industrial equipment. Also,
the agricultural markets are slowly starting to stabilize. The demand for our
plastics components was slightly lower from quarter to quarter.
7
<PAGE>
Our sales to Deere & Company and Caterpillar Inc., were approximately 52%
and 40% of our revenues for the third quarters, 2000 and 1999, respectively.
Our gross profits for the third quarter, 2000 increased by approximately
$0.5 million, an increase of 6.9%, versus the same three months in 1999. The
overall gross profit percentage decreased from 12.1% for the third quarter of
1999 to 11.5% for the third quarter of 2000. The decrease in gross profit
dollars and percentage resulted primarily from start-up costs associated with
introducing new projects into production.
Our selling and administrative expenses for the third quarter, 2000 amounted
to $5.9 million, or 8.8% of net sales compared to the same $5.9 million, or 9.9%
of net sales for the third quarter of 1999. The reduced percentage was largely
the result of the increase in net revenue.
Our interest expense for the third quarter, 2000 was $2.7 million, an
increase of $0.4 million compared to the third quarter of 1999. This increase
was due primarily to higher rates of interest incurred in 2000 compared to 1999.
For the third quarter of 2000, we recognized a $0.3 million income tax
benefit on a pre-tax loss of $0.8 million. The effective rate was approximately
40%. For the third quarter of 1999, we recognized no income benefit on a pre-tax
loss of $0.9 million. Our additional net operating loss carry forward created in
the third quarter of 1999 was offset by an increase in the valuation allowance
with no impact on the net deferred tax assets.
FIRST NINE MONTHS, 2000 VERSUS FIRST NINE MONTHS, 1999
Our net revenues for the first nine months, 2000 were $212.6 million
compared to $159.6 million for the first nine months of 1999, an increase of
$53.0 million, or 33.2%. We concluded an acquisition during the second quarter
of 1999 that has provided incremental revenue during the first nine months of
2000 of approximately $17.4 million. A revenue increase of approximately
$35.6 million from the facilities owned in the first nine months of both years
resulted primarily from a seasonal demand and new projects during the first six
months for our sheet metal fabricated components used in construction and
industrial equipment. Some of our major customers are shifting their demand more
toward the first six months of the calendar year.
Our sales to Deere & Company and Caterpillar Inc., were approximately 55%
and 52% of the Company's revenues for the first nine months, 2000 and 1999,
respectively.
Our gross profits for the first nine months, 2000 increased by approximately
$9.5 million, an increase of 49%, versus the same nine months in 1999. The
overall gross profit percentage increased from 12.1% for the first nine months
of 1999 to 13.5% for the first nine months of 2000. The favorable gross profit
increase resulted primarily from the volume increase, partially offset by
increased overtime and outsourcing costs that resulted from our customers
shifting their demand into the first six months of the year.
Our selling and administrative expenses for the nine months, 2000 amounted
to $19.7 million, or 9.3% of net sales compared to $17.5 million, or 11.0% of
net sales for the first nine months of 1999. The increase is due primarily to
the additional 3 1/2 months of operations related to the April, 1999 Worthington
acquisition. The reduced percentage was largely the result of the increase in
net revenue.
Our interest expense for the first nine months, 2000 was $8.0 million, an
increase of $2.2 million compared to the first nine months of 1999. This
increase was due primarily to higher average amounts of outstanding debt in the
second quarter as a result of the April, 1999 Worthington acquisition and higher
interest rates.
For the first nine months of 2000, we provided for $0.6 million of income
taxes on pre-tax income of $1.4 million. The effective tax rate was
approximately 38.4%. For the first nine months of 1999, we recognized no income
tax benefit on a pre-tax loss of $4.0 million. Our additional net operating loss
carry
8
<PAGE>
forward created in the first nine months of 1999 was offset by an increase in
the valuation allowance with no impact on the net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Our consolidated working capital at September 30, 2000 was $12.4 million
compared to $9.8 million at December 31, 1999, an increase in working capital of
approximately $2.6 million.
We have 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 acquired from Worthington Custom Plastics, Inc. (Worthington).
The second facility, with General Electric Capital Corporation (GECC), serves
the operations acquired from Worthington during the second quarter, 1999. These
facilities are separate and provide financing for the named operations. The two
credit facilities are separately secured by the assets of the operations they
support.
On May, 28, 1998, we entered into a credit agreement with Harris, as Agent.
The credit agreement, as amended, provides a credit facility with the following
components: (i) a $19 million secured revolving credit facility; (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 fully
amortize over their respective terms with quarterly payments. The interest rates
on the loans vary from 1% to 3.75% above the lender's prime rate. We used the
proceeds under the facility to refinance the then existing indebtedness, to
finance the 1998 acquisitions, and for general corporate purposes. As described
in Part II, Item 2, warrants were issued on September 20, 2000 in connection
with the Harris credit agreement.
The amount of revolving credit availability is calculated using a borrowing
base of qualified accounts receivable and inventory. As of September 30, 2000,
we had additional availability of approximately $4.0 million under the Harris
facility. We are paying this lender a fee of .125% per month based upon the
amount of the revolving credit commitment and the balance of the term loans.
In connection with the Harris financing, we have two fixed interest rate
swap agreements with a commercial bank (the "counter party"). The first
agreement has a notional principal amount of $9.4 million and a termination date
of May 31, 2003. The second agreement has a notional principal amount of
$14.6 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 Item 3 below, these agreements
are for the purpose of limiting the effects of interest rate increases on half
of the Company's floating rate term debt.
Our sources of funds to meet near term liquidity requirements for the
businesses not acquired from Worthington will be the cash flows from operations,
the Harris line of credit, and management of working capital to reflect current
levels of operations. We believe that these sources will be adequate through the
end of the current fiscal year and beyond.
Our separate financing arrangements for the operations acquired from
Worthington are described below.
On April 15, 1999, we entered into a financing agreement with GECC. The
agreement contains a 4 1/2 year secured revolving credit facility with maximum
availability of $24 million and a $26 million secured term loan with a 4 1/2
year term. The amount of availability is based upon a borrowing base of
qualified accounts receivable and inventory. Both of the facilities bear
interest at variable interest rates based on the prime rate, plus variable
margins. We also incur a fee based upon a certain percentage of the unused
revolving credit facility. The term loan facility amortizes quarterly throughout
its term. We must also prepay certain amounts from the sale of assets, the
issuance of new equity capital and from "excess cash flow", as defined in the
agreement.
9
<PAGE>
As of September 30, 2000, we had additional availability of $1.6 million,
under the GECC credit facility. We believe that the agreement with GECC will
provide the necessary term and revolving financing, and along with cash flows
from operations, will provide the necessary levels of liquidity for the
operations acquired from Worthington through the end of the current fiscal year
and beyond.
As part of the financing for the Worthington acquisition, we issued 10,000
shares of redeemable preferred stock, which we must redeem in April, 2004 at
$1,000 per share plus any dividends accrued since April 15, 1999. The $10
million face value preferred stock was recorded at its fair value of
$4.25 million. We are accreting the discount over a five year period using the
effective yield method. Dividends are payable in kind at the rate of 8% per
annum. We believe that certain provisions of the agreement with Worthington
preclude the payment of dividends, and no dividends have been accrued in 2000.
Overall, our increases in accounts receivable and inventories of
approximately $10.3 million were more than offset by increases of $11.8 million
in accounts payable and other current liabilities.
We are reviewing various methods of adjusting the Company's capital
structure to better reflect its current business organization. Actions may
include the issuance of subordinated debt, the issuance of preferred stock and
the consolidation of our two senior credit facilities.
We incurred $5.0 million of capital expenditures during the first nine
months of 2000, primarily for purchases of manufacturing equipment. We estimate
that our capital expenditures in 2000 will total approximately $6.5 million, of
which $2.5 million will be for additional production equipment and the remaining
$4.0 million will be for normal replacement of equipment.
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 statements containing the words "anticipates,"
"believes," "intends," "estimates," "expects," "projects" and similar words. The
forward looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results to be materially different from
any future results expressed or implied by such forward looking statements. Such
factors include, among others, the following: the loss of certain significant
customers; the cyclicality of our construction and agricultural sales; risks
associated with our acquisition strategy; general economic and business
conditions, both nationally and in the markets in which we operate or will
operate; competition; and other factors referenced in the Company's reports and
registration statements filed with the Securities and Exchange Commission. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on such forward looking statements. The forward looking statements
contained herein speak only of the Company's expectation as of the date of this
annual report. We disclaim any obligations to update any such factors or
publicly announce the result of any revisions to any of the forward looking
statements contained herein to reflect future events or developments.
10
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE 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 2 above, for term loans and revolving credit
facilities. 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, a
LIBOR-equivalent interest rate component of the interest rate is limited to
5.875% on half of the Company's $37.9 million of term loans.
The Company does not enter into derivative transactions for speculative
purposes.
PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On September 20, 2000, the Company issued warrants to purchase an aggregate
number of shares of its Class A common stock equal to the greater of (a) 4.99%
of the total outstanding shares of Class A and Class B common stock, calculated
at the time of exercise, exclusive of certain shares issued as employee or
director compensation or pursuant to the warrants, or (b) 238,548 shares. The
238,548 warrants issued are exercisable at any time during the period from
September 28, 2000 through September 28, 2001, at an exercise price of $.01 per
share.
These warrants were issued pursuant to a provision of the third amendment to
a credit agreement with Harris Trust and Savings Bank which provided that if the
credit facility was not retired by September 20, 2000, the Company would issue
the warrants.
ITEM 5. OTHER INFORMATION
Effective October 20, 2000, the Company's common stock began trading on the
Nasdaq SmallCap Market under the symbol MGRPC. The prior symbol was MGRP. The
Company failed to meet Nasdaq's minimum net income requirement of $500,000 as of
December 31, 1999, but was granted a temporary exception from the standard. The
exception will expire on April 2, 2001, subject to several interim steps. In the
event that the Company is deemed to have met the terms of the exception, it
shall continue to be listed on the Nasdaq SmallCap Market. The Company believes
that it can meet these conditions, however, there can be no assurance that it
will do so. Failure to meet the conditions at any time over the course of the
exception would result in delisting from the Nasdaq SmallCap Market. If at some
future date the Company's securities should cease to be listed on the Nasdaq
SmallCap Market, the Company may continue to be listed on the OTC-Bulletin
Board.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<C> <S>
11. The computation can be determined from this report.
27. Financial data schedule.
99.1 Press release dated October 19, 2000
99.2 Press release dated October 20, 2000
</TABLE>
(B) Reports on Form 8-K.
Form 8-K filed on October 6, 2000 related to the issuance of warrants.
11
<PAGE>
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>
MORTON INDUSTRIAL GROUP, INC.
By: /s/ THOMAS D. LAUERMAN
--------------------------------------------
Thomas D. Lauerman
VICE PRESIDENT OF FINANCE
</TABLE>
Dated: November 8, 2000
12
