<PAGE>
- - - -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
Form 8-K/A
AMENDMENT TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): July 25, 1997
----------
MORGAN PRODUCTS LTD.
(Exact Name of Registrant as Specified in Charter)
Delaware 06-1095650
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
Commission File Number 1-9843
469 McLaws Circle, Williamsburg, Virginia 23185
(Address of Principal Executive Offices) (Zip Code)
(757) 564-1700
(Registrant's telephone number, including area code)
----------
- - - -------------------------------------------------------------------------------
<PAGE>
The undersigned registrant hereby amends the following items of its Current
Report on Form 8-K filed August 8, 1997.
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits
In accordance with Item 7 of the registrant's Current Report on Form 8-K
filed August 8, 1997, the registrant appends to the Form 8-K the following
financial statements and pro forma financial information:
(a) Financial Statements of Business Acquired.
The following financial statements of Wahlfeld Manufacturing Company
are attached hereto as Appendix A:
1. Report of Independent Accountants
2. Balance Sheets at December 31, 1996 and June 30, 1997 (unaudited)
3. Statements of Operations for the year ended December 31, 1996 and
for the six months ended June 30, 1996 and 1997 (unaudited)
4. Statements of Stockholders' Equity (Deficit) for the year ended
December 31, 1996 and the six months ended June 30, 1997
(unaudited)
5. Statements of Cash Flows for the year ended December 31, 1996 and
the six months ended June 30, 1996 and 19976 (unaudited)
6. Summary of Significant Accounting Policies
7. Notes to Financial Statements
(b) Pro Forma Financial Information.
The following combined pro forma financial information is attached
hereto as Appendix B:
1. Unaudited Pro Forma Combined Statement of Operations for the year
ended December 31, 1996
2. Unaudited Pro Forma Combined Statement of Operations for the six
months ended July 5, 1997
3. Unaudited Pro Forma Combined Balance Sheet at July 5, 1997
4. Notes to Unaudited Pro Forma Combined Financial Statements.
-2-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf by the undersigned
hereunto duly authorized.
MORAN PRODUCTS LTD.
By: /s/ Mitchell J. Lahr
----------------------------------
Mitchell J. Lahr
Vice President and Chief Financial
Officer
DATE: October 7, 1997
<PAGE>
Appendix A
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT.............................................. 1
FINANCIAL STATEMENTS
Balance Sheets......................................................... 2
Statements of Operations............................................... 4
Statements of Stockholders' Equity (Deficit)........................... 5
Statements of Cash Flows............................................... 6
Summary of Significant Accounting Policies............................. 7
Notes to Financial Statements.......................................... 9
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Wahlfeld Manufacturing Company
Peoria, Illinois
We have audited the accompanying balance sheet of Wahlfeld Manufacturing
Company as of December 31, 1996, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wahlfeld Manufacturing
Company as of December 31, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming Wahlfeld
Manufacturing Company will continue as a going concern. As discussed in Note 11
to the financial statements, Wahlfeld Manufacturing Company has suffered
recurring losses from operations that raise substantial doubt about its ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Clifton Gunderson L.L.C.
Peoria, Illinois
March 12, 1997
1
<PAGE>
WAHLFELD MANUFACTURING COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................................ $44,039 $ 130,773
Accounts receivable:
Trade, less allowance for doubtful accounts of
$128,244 at December 31, 1996 and $102,267
at June 30, 1997............................................. 1,690,960 1,701,989
Officers and employees......................................... 34,204 17,450
Insurance claim................................................ 25,620 --
Notes receivable from stockholders, current maturities........... 140,500 --
Inventories...................................................... 648,279 603,258
Prepaid expenses................................................. 27,039 52,769
------------ ------------
Total current assets......................................... 2,610,641 2,506,239
------------ ------------
------------ ------------
LONG-TERM RECEIVABLES
Notes receivable from shareholders,
less current maturities above.................................. 15,500 --
------------ ------------
PROPERTY AND EQUIPMENT
Land and land improvements....................................... 225,624 225,624
Buildings and improvements....................................... 2,583,674 2,583,674
Machinery and equipment.......................................... 726,822 726,822
Autos and trucks................................................. 290,319 269,056
Office furniture and equipment................................... 731,892 731,892
------------ ------------
Total, at cost............................................... 4,558,331 4,537,068
Less accumulated depreciation.................................... 3,268,573 3,341,429
------------ ------------
Total property and equipment................................. 1,289,758 1,195,639
------------ ------------
OTHER ASSETS
Security deposit................................................. 16,667 16,667
------------ ------------
TOTAL ASSETS....................................................... $3,932,566 $3,718,545
------------ ------------
------------ ------------
</TABLE>
2
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable--trade........................................... $1,303,294 $ 1,082,915
Customer deposit.................................................. -- 90,576
Note payable...................................................... 1,644,873 2,476,330
Current maturities of obligations under capital leases............ 73,175 73,175
Accrued liabilities:
Salaries, wages, and vacations................................... 107,333 95,275
Property taxes................................................... 114,000 116,250
Interest......................................................... 28,578 22,302
Other............................................................ -- 5,301
------------ ------------
Total current liabilities...................................... 3,271,253 3,962,124
------------ ------------
LONG-TERM LIABILITIES
Security deposits................................................. 18,084 18,084
Notes payable to shareholders..................................... 196,500 196,500
Obligations under capital leases, less current maturities above... 76,664 40,433
------------ ------------
Total long-term liabilities.................................... 291,248 255,017
------------ ------------
Total liabilities.............................................. 3,562,501 4,217,141
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $100 par value; 4,000 shares authorized and issued,
of which 400 donated shares were held in treasury each year..... 400,000 400,000
Accumulated deficit............................................... (29,935) (898,596)
------------ ------------
Total stockholders' equity (deficit)............................... 370,065 (498,596)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........... $3,932,566 $3,718,545
------------ ------------
</TABLE>
These financial statments should be read only in connection with
the accompanying summary of significant accounting policies
and notes to financial statements.
3
<PAGE>
WAHLFELD MANUFACTURING COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------------
1996 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
NET SALES............................................................. $ 22,663,643 $ 8,538,990 $ 9,925,000
COST OF SALES......................................................... 18,181,269 7,084,547 8,101,341
------------- ------------ -------------
Gross profit...................................................... 4,482,374 1,454,443 1,823,659
------------- ------------ -------------
OPERATING EXPENSES
Warehouse........................................................... 1,340,986 655,538 647,893
Selling............................................................. 1,455,563 632,932 766,964
General and administrative.......................................... 1,514,109 760,530 756,347
Delivery............................................................ 657,912 270,157 301,293
------------- ------------ -------------
Total operating expenses.......................................... 4,968,570 2,319,157 2,472,497
------------- ------------ -------------
Loss from operations.............................................. (486,196) (864,714) (648,838)
OTHER INCOME (EXPENSE)
Interest expense.................................................... (284,764) (132,724) (138,527)
Interest income..................................................... 21,651 1,610 10,505
Rental income....................................................... 192,749 133,009 93,954
Rental expense...................................................... (41,778) (21,545) (20,640)
Gain on sale of equipment........................................... 10,773 1,310 8,165
Other............................................................... (6,743) 14,393 642
------------- ------------ -------------
------------- ------------ -------------
Loss before income taxes.......................................... (594,308) (868,661) (694,739)
PROVISION FOR INCOME TAXES............................................ 329,341 -- 329,341
------------- ------------ -------------
NET LOSS.............................................................. $ (923,649) $ (868,661) $ (1,024,080)
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
These financial statements should be read only in connection with
the accompanying summary significant accounting policies
and notes to financial statements.
4
<PAGE>
WAHLFELD MANUFACTURING COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK EARNINGS STOCKHOLDERS'
----------------------- (ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT) (DEFICIT)
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1995.......................................... 4,000 $ 400,000 $ 893,714 $ 1,293,714
Net loss...................................... -- -- (923,649) (923,649)
----- ---------- ------------ -------------
BALANCE, DECEMBER 31,
1996.......................................... 4,000 400,000 (29,935) 370,065
Net loss (unaudited).......................... -- -- (868,661) (868,661)
----- ---------- ------------- -------------
BALANCE, JUNE 30, 1997
(Unaudited)................................... 4,000 $ 400,000 $ (898,596) $ (498,596)
----- ---------- ------------- -------------
----- ---------- ------------- -------------
</TABLE>
These financial statements should be read only in connection with
the accompanying summary of significant accounting policies
and notes to financial statements.
5
<PAGE>
<TABLE>
WAHLFELD MANUFACTURING COMPANY
STATEMENTS OF CASH FLOWS
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, --------------------------
1996 1997 1996
------------ ----------- -------------
<S> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................. $ (923,649) $ (868,661) $ (1,024,080)
Adjustments to reconcile net loss to net cash
provided by (used in)operating activities:
Provision for bad debts............................................ 68,709 28,161 40,686
Depreciation....................................................... 190,670 93,728 93,749
Gain on sale or disposal of equipment.............................. (1,966) (1,310) (8,165)
Deferred income taxes.............................................. 333,300 -- 333,300
Effects of changes in operating assets and liabilities:
Accounts receivable.............................................. (281,174) 3,184 (637,641)
Inventories...................................................... 701,933 45,021 430,046
Prepaid expenses................................................. (9,793) (25,730) (9,198)
Accounts payable - trade......................................... 149,247 (220,379) 204,710
Customer deposit................................................. -- 90,576 --
Accrued liabilities.............................................. (34,200) (10,783) (12,789)
Income taxes payable............................................. (3,959) -- (3,959)
------------ ----------- -------------
Net cash provided by (used in) operating
activities................................................... 189,118 (866,193) (593,341)
------------ ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Collections on notes receivable--shareholders........................ -- 156,000 --
Purchases of property and equipment.................................. (43,142) -- (7,304)
Proceeds from sale of equipment...................................... 34,975 1,701 20,250
------------ ----------- -------------
Net cash provided by (used in) investing
activities................................................... (8,167) 157,701 12,946
------------ ----------- -------------
------------ ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under revolving line-of-
credit agreement................................................... (162,694) 831,457 623,418
Net increase in security deposits.................................... 2,501 -- --
Principal payments on obligations under capital leases............... (77,842) (36,231) (38,384)
------------ ----------- -------------
Net cash provided by (used in) financing
activities................................................... (238,035) 795,226 585,034
------------ ----------- -------------
------------ ----------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (57,084) 86,734 4,639
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 101,123 44,039 101,123
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 44,039 $ 130,773 $ 105,762
------------ ----------- -------------
------------ ----------- -------------
</TABLE>
These financial statements should be read only in connection with
the accompanying summary of significant accounting policies
and notes to financial statements.
6
<PAGE>
WAHLFELD MANUFACTURING COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Wahlfeld Manufacturing Company was incorporated on April 20, 1893 in the
state of Illinois. The Company's principal business activity is the distribution
of millwork and other building materials, principally windows and doors. The
Company grants credit on sales of its millwork and other building materials,
which are sold primarily to retail stores and contractors located in the upper
Midwestern United States. The Company's fiscal year ends on December 31.
Significant accounting policies followed by the Company are presented below.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated on the basis of the last-in, first-out (LIFO) method
of valuation. This method was adopted as of January 1, 1969. If the first-in,
first-out (FIFO) method had been in use during 1996, inventories would have been
$1,671,469 higher than reported at December 31, 1996.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation expense is computed
using both straight-line and accelerated methods over the estimated useful lives
of the assets. When assets are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is recognized during that period. The cost of maintenance
and repairs is charged against income as incurred; significant renewals and
betterments are capitalized.
Depreciation expense for the year ended December 31, 1996 was $190,670.
The Company uses the same method of depreciation for tax and reporting
purposes except for depreciation expense with respect to property and equipment
acquired after December 31, 1980. Depreciation on items purchased after
December 31, 1980 is computed using prescribed statutory methods and lives for
tax purposes.
7
<PAGE>
WAHLFELD MANUFACTURING COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
Deferred income taxes are provided on temporary differences between
financial statement and income tax reporting. Temporary differences are
differences between the amounts of assets and liabilities reported for financial
statement purposes and their tax bases. Deferred tax liabilities are recognized
for temporary differences that will be taxable in future years' tax returns.
Deferred tax assets are recognized for temporary differences that will be
deductible in future years' tax returns and for operating loss and tax credit
carryforwards. Deferred tax assets are reduced by a valuation allowance if it is
deemed more likely than not that some or all of the deferred tax assets will not
be realized.
UNAUDITED INTERIM STATEMENTS
The interim financial information included herein is unaudited; however, the
information reflects all adjustments that are, in the opinion of management,
necessary to a fair presentation of the financial position, results of
operations, and cash flows for the interim periods.
This information is an integral part of the accompanying financial statements.
8
<PAGE>
WAHLFELD MANUFACTURING COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT CONCENTRATION OF CREDIT RISK
A majority of the Company's business activity is with customers located in
the upper Midwestern United States. The Company sells a substantial portion of
its products to two unrelated customers. During 1996, sales to these two
customers represented 31.0 percent of total gross sales. At December 31, 1996,
amounts due from these customers included in accounts receivable--trade
represent 30.4 percent of the balance.
The Company also purchases a substantial portion of its inventory from two
unrelated vendors. During 1996, purchases from these vendors represented 78.0
percent of cost of sales. At December 31, 1996, amounts payable to these vendors
included in accounts payable--trade represent 63.7 percent of the balance.
NOTE 2--NOTES RECEIVABLE FROM AND PAYABLE TO SHAREHOLDERS
The note receivable from shareholder is unsecured and noninterest bearing.
Of the $156,000, $140,500 is reflected as a current asset based upon expected
collections during 1997.
The Company has the following notes payable to shareholders:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
----------
<S> <C>
Unsecured note bearing interest at 2.50 percent above
prime at December 31, 1996. The note matures on January 1, 1998. $ 78,500
Three unsecured notes for $34,000 each bearing interest
at 2.25 percent above prime at December 31, 1996. The
notes mature on June 15, 1998, July 28, 2000, and
December 18, 2004, respectively. 102,000
Unsecured note for $16,000 bearing interest at 2.25
percent above prime at December 31, 1996. The note
matures on April 20, 2003. 16,000
-----------
Total notes payable to shareholders 196,500
Less current portion --
Long-term portion $ 196,500
===========
</TABLE>
All notes payable to shareholders are subordinate to the Company's
indebtedness to Marine Midland Bank.
9
<PAGE>
NOTE 3--INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Inventories--FIFO............................................... $ 2,319,748
Excess of FIFO cost over LIFO inventory values................. (1,671,469)
-----------
Total inventories............................................... $ 648,279
-----------
-----------
</TABLE>
The liquidation of LIFO inventory had a net effect of reducing cost of sales
by approximately $855,000 more than cost of sales would have been if the
inventory were reinstated under the Company's normal pricing convention.
NOTE 4--NOTE PAYABLE
Note payable is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
The note payable is a revolving line of credit with
Marine Midland Bank in the amount of $3,400,000 at
December 31, 1996. The line of credit bears interest at
2.50 percent above the prime index rate at December 31,
1996. The prime index rate was 8.25 percent at December 31,
1996. The line of credit matures June 30, 1997.
Outstanding borrowings on the line of credit at
December 31 are: $ 1,644,873
============
</TABLE>
The Company's established revolving line of credit with Marine Midland Bank
of Chicago, Illinois is secured by substantially all the Company's business
assets including receivables, inventories and real estate, and is personally
guaranteed by two shareholders of the Company.
The loan agreement with Marine Midland Bank contains various covenants
pertaining to maintenance of a minimum tangible net worth plus subordinated
debt, minimum current ratio, minimum cash flow coverage, and minimum tangible
net worth to total liabilities ratio. The loan agreement also contains covenants
limiting the amount of annual capital expenditures and new annual lease/rental
commitments, officers/shareholders annual compensation, loans/ advances to
officers/employees, and acquisitions of additional debt used for capital
expenditures. At December 31, 1996, the Company was not in compliance with the
loan covenant requirements. Under the terms of the loan agreement, the bank may
call the loan if the Company is in violation of any covenants. A letter of
approval was received from Marine Midland Bank waiving the loan covenant
requirements that were not in compliance for fiscal year 1996. The loan
agreement restricts payment of dividends.
10
<PAGE>
NOTE 5--OBLIGATIONS UNDER CAPITAL LEASES
The Company is the lessee of various equipment under capital leases expiring
in various years through January 2001. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The assets are depreciated over the
lower of their related lease terms or their estimated productive lives.
Depreciation of assets under capital leases is included in depreciation expense
for 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Total present value of minimum lease payments................ $ 149,839
Less current portion.......................................... 73,175
------------
Long-term portion............................................. $ 76,664
------------
------------
</TABLE>
Following is a summary of property held under capital leases:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Machinery and equipment........................................ $ 63,041
Autos and trucks............................................... 72,642
Office furniture and equipment................................. 199,913
------------
Total, at cost............................................ 335,596
Less accumulated depreciation.................................. (137,479)
------------
Total.......................................................... $ 198,117
------------
------------
</TABLE>
NOTE 6--INCOME TAXES
No net deferred tax asset is included in the accompanying balance sheet at
December 31, 1996. During 1996, the Company reduced its net deferred tax assets
to zero reflecting the uncertainty of future operations resulting in taxable
income which would allow the Company to utilize its net operating losses.
11
<PAGE>
NOTE 6--INCOME TAXES (CONTINUED)
The sources of deferred tax assets and liabilities and the tax effect of
each are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 49,700
Inventory reserve........................................... 13,550
Capitalized inventory costs................................. 17,975
Nondeductible accrued vacations............................. 16,575
Net operating loss carryforwards............................ 778,675
Contribution carryforwards.................................. 5,850
Alternative minimum tax credit carryforwards................ 725
State replacement and income tax credits.................... 3,950
------------
887,000
Valuation allowance for deferred tax assets................ (881,250)
------------
Total deferred tax assets................................ 5,750
Deferred tax liabilities:
Tax over financial statement depreciation.................. (5,750)
------------
Net deferred tax assets..................................... $ --
------------
------------
</TABLE>
At December 31, 1996, the Company has carryforwards available to offset
future years' taxable income and income taxes as follows:
<TABLE>
<CAPTION>
AMOUNT EXPIRATION
------------ --------------
<S> <C> <C>
Federal net operating loss carryforwards........... $ 2,009,036 2008 to 2011
Contribution carryforwards......................... 15,118 1997 to 2001
Alternative minimum tax credits.................... 725 None
State net operating loss carryforwards............. 2,010,584 2008 to 2011
State replacement tax credits...................... 2,850 1997 to 2001
State income tax credits........................... 3,125 1997 to 2001
</TABLE>
The Company's provision for income taxes differs from the tax that would
result from applying statutory federal tax rates to the loss before income taxes
primarily because of the change in valuation allowance ($551,450 in 1996).
12
<PAGE>
NOTE 6--INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Current credit for income taxes............................ $ (3,959)
Deferred provision for income taxes........................ 333,300
------------
Total provision for income taxes........................... $ 329,341
------------
------------
</TABLE>
NOTE 7--EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) pension and profit sharing plan available to
all full time employees over 21 years of age. The pension plan calls for
voluntary contributions from the employees of 1 to 10 percent of their salary.
The Company will match the employee's pension contribution for the first 6
percent contributed by the employee up to a maximum of $400. Contributions to
the profit sharing plan are at the discretion of the Board of Directors. The
Company's matching pension plan contributions for the year ended December 31,
1996 were $24,270. No profit sharing contribution was made during 1996.
NOTE 8--LONG-TERM DEBT--FUTURE COMMITMENTS
The following is a schedule of principal payments required to retire future
commitments of long-term debt for each of the years subsequent to December 31,
1996:
<TABLE>
<CAPTION>
NOTES PAYABLE
OBLIGATIONS UNDER TO
CAPITAL LEASES SHAREHOLDERS
----------------- --------------
<S> <C> <C>
1997.................................... $ 93,629 $ --
1998.................................... 73,388 112,500
1999.................................... 21,319 --
2000.................................... 4,448 34,000
2001.................................... 371 --
Later................................... -- 50,000
-------------- -------------
Total minimum payments.................. 193,155 196,500
Less amount representing interest....... (43,316) --
-------------- -------------
Present value of minimum payments....... $ 149,839 $ 196,500
-------------- --------------
-------------- --------------
</TABLE>
13
<PAGE>
NOTE 9--LEASE COMMITMENTS
The Company leases a warehouse in Aurora, Illinois under a noncancelable
operating lease which expires on December 31, 2002. This lease requires fixed
monthly payments ranging from $18,750 during 1997 to $21,750 during 2002.
The Company leases various vehicles and equipment under noncancelable
operating leases which expire in various months from January 1997 through
December 2002. These leases require aggregate total fixed monthly payments
ranging from $8,411 to $15,894 during the fiscal year ending December 31, 1997.
Future minimum lease payments required under all noncancelable operating
leases having terms in excess of one year are as follows at December 31, 1996:
<TABLE>
<S> <C>
1997................................................. $ 363,315
1998................................................. 290,246
1999................................................. 279,438
2000................................................. 270,624
2001................................................. 274,309
Later years.......................................... 272,364
----------
Total............................................... $1,750,296
----------
----------
</TABLE>
The total annual future lease payments on the Aurora warehouse have not been
reduced by the fixed annual noncancelable sublease payments. These annual
sublease payments range from $127,670 during 1997 to $143,943 during 2002.
Total rental expense for the year ended December 31, 1996 was $441,422.
The Company leases space in its Peoria warehouse to two tenants under
noncancelable lease agreements which expire December 31, 1997 and August 31,
1999, respectively. These lease agreements will provide monthly lease receipts
of $4,996 and $2,479, respectively, throughout the term of the lease.
NOTE 10--CASH FLOW DISCLOSURES
Supplemental disclosures for the statements of cash flows are listed below
for the year ended December 31.
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Cash paid during the year for:
Interest expense........................................... $ 277,333
Income taxes............................................... --
</TABLE>
14
<PAGE>
NOTE 10--CASH FLOW DISCLOSURES (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Noncash investing and financing activities not reflected on the statements
of cash flows include the acquisition of property and equipment financed by
related capital lease obligations. Purchases of property and equipment, as
reflected on the statements of cash flows, consist of the following elements:
<TABLE>
<CAPTION>
1996
--------------
<S> <C>
Total cost of property and equipment acquired $ 61,084
Capital lease obligations incurred to finance
equipment acquisitions 17,942
---------------
Cash payments for purchases of property and equipment $ 43,142
===============
</TABLE>
NOTE 11--GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate the continuance of
the Company as a going concern. The Company has sustained substantial operating
losses five out of the last six years. Wahlfeld Manufacturing Company's pretax
loss for the year ended December 31, 1996 was $594,308. These factors indicate
that the Company may be unable to continue in existence. The financial
statements do not include adjustments relating to the recoverability and
classification of recorded asset amounts and classification of liabilities that
might be necessary should the Company be unable to continue in existence.
NOTE 12--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and cash
equivalents, trade receivables and payables, and short-term notes payable. There
are no significant differences between the carrying value and fair value of any
of these financial instruments.
NOTE 13--SALE OF BUSINESS (UNAUDITED)
On July 25, 1997, pursuant to an asset purchase agreement dated July 15,
1997, the Company sold certain assets to Morgan Products, Ltd. for approximately
$4.6 million, subject to certain purchase price adjustments.
This information is an integral part of the accompanying financial statements.
15
<PAGE>
Appendix B
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following sets forth the Unaudited Pro Forma Combined Statement of
Operations and the Unaudited Pro Forma Combined Balance Sheet for Morgan
Products Ltd. (the "Company"), in each case giving effect to the acquisition
of Wahlfeld Manufacturing Company ("Wahlfeld Acquisition") described in Note 1
hereto as if such acquisition had been consummated as of January 1, 1996 (in
the case of the Unaudited Pro Forma Combined Statements of Operations) and on
July 5, 1997 (in the case of the Unaudited Pro Forma Combined Balance Sheet).
The Unaudited Pro Forma Combined Financial Statements of the Company do not
purport to present the financial position or results of operations of the
Company had the acquisition assumed herein occurred on the dates indicated,
nor are they necessarily indicative of the results of operations which may be
expected to occur in the future.
The Wahlfeld Acquisition will be accounted for by the Company as a purchase
whereby the basis of accounting for Wahlfeld's assets will be based upon their
fair values at the date of the Wahlfeld Acquisition. Pro forma adjustments,
including the preliminary purchase price allocation resulting from the Wahlfeld
Acquisition as described in Note 1 of the Notes to the Unaudited Pro Forma
Combined Financial Statements, represent the Company's initial determination of
these adjustments and are based upon preliminary information, assumptions and
operating decisions which the Company considers reasonable under the
circumstances. Final amounts may differ from those set forth herein.
16
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MORGAN WAHLFELD ADJUSTMENTS COMBINED
---------- ------------ ----------------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $ 373,345 $ 22,664 $ -- $ 396,009
Cost of goods sold.......................... 317,917 18,181 883 (2) 336,981
---------- ------------ ------ ---------
Gross profit................................ 55,428 4,483 (883) 59,028
---------- ------------ ------ ---------
Operating expenses:
Sales and marketing......................... 35,687 3,455 0 39,142
General and administrative.................. 11,793 1,514 35 (3) 13,342
Provision for restructuring................. 4,712 0 0 4,712
---------- ------------ ------ ---------
52,192 4,969 35 57,196
---------- ------------ ------ ---------
Operating income (loss)..................... 3,236 (486) (918) 1,832
---------- ------------ ------ ---------
Other (expense) income:
Interest.................................... (3,485) (263) (128) (4) (3,876)
Other....................................... 220 155 (151) (5) 224
---------- ------------ ------ ---------
(3,265) (108) (279) (3,652)
---------- ------------ ------ ---------
Income (loss) before income taxes........... (29) (594) (1,197) (1,820)
Provision (benefit) for income taxes........ (327) 329 (329) (6) (327)
---------- ------------ ------ ---------
Net income (loss)........................... $ 298 $ (923) $ (868) $ (1,493)
---------- ------------ ------ ---------
---------- ------------ ------ ---------
Income (loss) per share..................... $ 0.03 $ (0.17)
---------- ---------
---------- ---------
Weighted average common shares and common
equivalent shares outstanding............. 8,830 8,830
---------- ---------
---------- ---------
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements
17
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JULY 5, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MORGAN WAHLFELD ADJUSTMENTS COMBINED
---------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $ 202,606 $ 8,539 $ -- $ 211,145
Cost of goods sold.......................... 170,140 7,085 116 (2) 177,341
---------- ------ ------- ---------
Gross profit................................ 32,466 1,454 (116) 33,804
---------- ------ ------- ---------
Operating expenses:
Sales and marketing......................... 20,999 1,559 0 22,558
General and administrative.................. 6,959 760 17 (3) 7,736
Provision for restructuring................. 4,713 0 0 4,713
Provision for reorganization................ 1,117 0 0 1,117
---------- ------ ------- ---------
33,788 2,319 17 36,124
---------- ------ ------- ---------
Operating income (loss)..................... (1,322) (865) (133) (2,320)
---------- ------ ------- ---------
Other (expense) income:
Interest.................................... (2,571) (131) (65) (4) (2,767)
Other....................................... 92 127 (111) (5) 108
---------- ------ ------- ---------
(2,479) (4) (176) (2,659)
---------- ------ ------- ---------
Income (loss) before income taxes........... (3,801) (869) (309) (4,979)
Provision (benefit) for income taxes........ 60 0 0 60
---------- ------ ------- ---------
Net income (loss)........................... $ (3,861) $ (869) $ (309) $ (5,039)
---------- ------ ------- ---------
---------- ------ ------- ---------
Income (loss) per share..................... $ (0.38) $ (0.49)
---------- ---------
---------- ---------
Weighted average common shares and common
equivalent shares outstanding............. 10,209 10,209
---------- ---------
---------- ---------
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements
18
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JULY 5, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MORGAN WAHLFELD ADJUSTMENTS COMBINED
---------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................... $ 1,512 $ 131 $ (131) (1) $ 1,512
Accounts receivable, net..................... 40,582 1,719 0 42,301
Inventories.................................. 69,765 603 1,555 (1) 71,923
Other current assets......................... 1,378 53 (53) (1) 1,378
---------- ------ ------- -------------
Total current assets......................... 113,237 2,506 1,371 117,114
---------- ------ ------- -------------
PROPERTY, PLANT & EQUIPMENT, net............. 23,566 1,196 (918) (1) 23,844
OTHER ASSETS................................. 11,020 17 574 (7) 11,611
---------- ------ ------- -------------
TOTAL ASSETS................................. $ 147,823 $ 3,719 $ 1,027 $ 152,569
---------- ------ ------- -------------
---------- ------ ------- -------------
LIABILITIES & STOCKHOLDERS' EQUITY
Short-term debt.............................. $ 247 $ 2,476 $ (2,476) (1) $ 247
Current maturities of long-term debt......... 1,296 73 (73) (1) 1,296
Accounts payable............................. 15,138 1,083 (1,083) (1) 15,138
Other current liabilities.................... 8,025 330 (330) (1) 8,025
---------- ------ ------- -------------
Total current liabilities.................... 24,706 3,962 (3,962) 24,706
---------- ------ ------- -------------
LONG-TERM DEBT............................... 63,720 255 4,491 (8) 68,466
STOCKHOLDERS' EQUITY
Common stock................................. 1,035 400 (400) 1,035
Paid-in capital.............................. 43,376 0 0 43,376
Retained earnings............................ 15,066 (898) 898 15,066
---------- ------ ------- -------------
59,477 (498) 498 59,477
Treasury stock............................... (48) 0 0 (48)
Unamoritzed value of restricted stock........ (32) 0 0 (32)
---------- ------ ------- -------------
TOTAL STOCKHOLDERS' EQUITY................... 59,397 (498) 498 (1) 59,397
---------- ------ ------- -------------
---------- ------ ------- -------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY..... $ 147,823 $ 3,719 $ 1,027 $ 152,569
---------- ------ ------- -------------
---------- ------ ------- -------------
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements
19
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. The Company's Unaudited Pro Forma Combined Financial Statements assume the
Wahlfeld Acquisition occurred (1) as of January 1, 1996 for purposes of the
Unaudited Pro Forma Combined Statements of Operations and (2) on July 5,
1997 for purposes of the Unaudited Pro Forma Combined Balance Sheet.
Under the terms of the Asset Purchase Agreement, certain assets of Wahlfeld
were excluded and certain liabilities were not assumed. Accordingly, the
pro forma adjustments reflect decreases in cash ($131), other current
assets ($53), property, plant and equipment ($918), other assets ($17),
short term debt ($2,476), accounts payable ($1,083), other current
liabilities ($330), long term debt ($328), along with a corresponding
increase to Wahlfeld stockholders' equity ($3,098).
The Wahlfeld Acquisition was financed through borrowings of $4,596 under the
Company's existing credit facility less a purchase price adjustment related
to the change in purchased assets and assumed liabilities from the
pre-closing schedules to the closing schedules, estimated to be $80.
The excess of cost over fair value of net assets acquired resulting from the
preliminary purchase price allocation is assumed to be as follows:
Pro forma purchase price --
Fixed amount stated in Asset Purchase Agreement.................... $ 4,596
Variable amount related to assumed purchase price adjustment....... (80)
Acquisition costs.................................................. 150
-------
Total pro forma purchase price................................ 4,666
-------
Pro forma historical net book value of assets acquired--
Book value per historical financial statements..................... (498)
Net liabilities excluded as described above........................ 3,098
-------
Total pro forma historical net book value of assets acquired.... 2,600
-------
Excess of purchase price over net book value of assets acquired.... 2,066
Allocated to:
Inventories..................................................... (1,555)
Intangible assets............................................... (50)
-------
Remaining excess of cost over fair value of
net assets acquired (goodwill)........................... $ 461
-------
-------
The foregoing preliminary purchase price allocation is based on available
information and certain assumptions the Company considers reasonable. The
preliminary purchase price allocation included an allocation to intangible
assets for the noncompetition agreement. The final purchase price
allocation will be based upon a determination of the fair value of the net
assets acquired at the date of the Wahlfeld Acquisition. The final purchase
price allocation may differ from the preliminary allocation.
2. The Company has elected the FIFO inventory method for the costing of
inventory; as such the LIFO effect on cost of goods sold of $883 and $116
for the year ended December 31, 1996 and the six months ended July 5, 1997,
respectively, was eliminated.
20
<PAGE>
3. The pro forma adjustment to reflect the effect of the preliminary purchase
price allocation on general and administrative expense assumes:
Year Ended Six Months Ended
December 31, 1996 July 5, 1997
----------------- ----------------
General and administrative expenses --
Amortization of amounts allocated
to intangible assets over three years $ 17 $ 8
Amortization of goodwill over 25 years 18 9
----------------- ----------------
$ 35 $ 17
----------------- ----------------
----------------- ----------------
4. The pro forma adjustment to interest expense assumes:
Year Ended Six Months Ended
December 31, 1996 July 5, 1997
----------------- ----------------
Eliminate interest incurred on
Walhfeld debt excluded in the Asset
Purchase Agreement (263) (131)
Additional interest expense related to
$4,666 of additional borrowings under
the Company's credit facility 391 196
----------------- ----------------
$ 128 $ 65
----------------- ----------------
----------------- ----------------
Interest expense is calculated assuming a rate of 8.39% at the date of the
Wahlfeld Acquisition. A 1/8 percent increase (or decrease) in such rate
would increase (or decrease) annual interest expense by $6.
5. Eliminate rental income and expense for excluded assets in the Asset
Purchase Agreement of $151 and $111 for the year ended December 31, 1996
and the six months ended July 5, 1997, respectively.
6. The provision for income taxes recorded for the year ended December 31, 1996
of $328 primarily relates to the establishment of a valuation allowance
against deferred tax assets. As the Company did not assume the related
assets, no valuation allowance would be required. Due to the uncertainty of
future taxable income, no tax benefit is recorded for the pre-tax losses
for the six months ended July 5, 1997.
7. The pro forma adjustment to other assets assumes:
Eliminate excluded assets in the Asset Purchase Agree $ (17)
Record certain intangible assets 50
Record purchase price adjustment 80
Record goodwill related to the Wahlfeld Acquisition 461
--------
$ 574
--------
--------
8. The pro forma adjustment to long-term debt assumes:
Record net additional borrowings under
the Company's credit facility:
Eliminate excluded liabilities in
the Asset Purchase Agreement $ (255)
Cash purchase price to seller 4,596
Acquisition costs 150
--------
$ 4,491
--------
--------
21
