FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9843
MORGAN PRODUCTS LTD.
(Exact name of registrant as specified in its charter)
- -------------------------------------------------------------------------------
DELAWARE
(State or other jurisdiction of 06-1095650
incorporation or organization) (I.R.S. Employer Identification No.)
- -------------------------------------------------------------------------------
469 McLaws Circle, Williamsburg, Virginia 23185
(Address of principal executive offices, including zip code)
(757) 564-1700
(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 ( )
The number of shares outstanding of registrant's Common Stock, par value $.10
per share, at November 16, 1998 was 10,360,017; 2,386 shares are held in
treasury.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MORGAN PRODUCTS LTD.
Consolidated Balance Sheets
(In thousands except shares outstanding)
<TABLE>
<CAPTION>
October 3, October 4, December 31,
1998 1997 1997
--------- ---------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 277 $ 419 $ 4,197
Accounts receivable, net 45,831 44,560 28,743
Inventories 36,800 66,678 40,533
Assets held for sale 0 0 32,285
Other current assets 857 1,486 558
--------- ---------- --------
83,765 113,143 106,316
--------- ---------- --------
Total current assets
PROPERTY, PLANT & EQUIPMENT, net 10,032 23,637 10,276
GOODWILL, net 6,496 6,016 6,632
OTHER ASSETS 4,791 5,747 5,552
--------- ---------- --------
TOTAL ASSETS $ 105,084 $148,543 $128,776
--------- ---------- --------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,203 $ 2,109 $ 1,213
Accounts payable 21,680 16,781 13,151
Accrued compensation and employee benefits 2,873 4,815 8,729
Other current liabilities 5,614 3,926 5,899
--------- ---------- --------
Total current liabilities 31,370 27,631 28,992
--------- ---------- --------
LONG-TERM DEBT 29,599 62,533 57,353
------ ------ ------
STOCKHOLDERS' EQUITY:
Common Stock, $.10 par value, 10,359,643,
10,357,099 and 10,357,808 shares
outstanding, respectively 1,036 1,036 1,036
Paid-in capital 43,422 43,408 43,413
Retained earnings (accumulated deficit) (295) 13,983 (1,970)
------ ------ ------
44,163 58,427 42,479
Treasury stock, 2,386 shares, at cost (48) (48) (48)
------ ------ ------
TOTAL STOCKHOLDERS' EQUITY 44,115 58,379 42,431
------- ------ ------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 105,084 $148,543 $128,776
------- ------ ------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN PRODUCTS LTD.
Consolidated Income Statements
(In thousands, except earnings per share amounts
and shares outstanding)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
October 3, October 4, October 3, October 4,
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 107,508 $ 111,656 $ 285,900 $ 314,262
Cost of goods sold 92,234 97,904 244,827 268,044
------------ ------------ ------------ ------------
Gross profit 15,274 13,752 41,073 46,218
------------ ------------ ------------ ------------
Operating expenses:
Sales & marketing 9,769 10,456 28,905 31,455
General & administrative 3,169 3,108 9,098 10,067
Restructuring & reorganization 0 0 0 5,830
------------ ------------ ------------ ------------
Total 12,938 13,564 38,003 47,352
------------ ------------ ------------ ------------
Operating income (loss) 2,336 188 3,070 (1,134)
------------ ------------ ------------ ------------
Other income (expense):
Interest (654) (1,341) (1,819) (3,912)
Other 126 100 290 192
------------ ------------ ------------ ------------
Total (528) (1,241) (1,529) (3,720)
------------ ------------ ------------ ------------
Income (loss) before income taxes 1,808 (1,053) 1,541 (4,854)
Provision for income taxes (194) 30 (134) 90
------------ ------------ ------------ ------------
Net income (loss) $ 2,002 $ (1,083) $ 1,675 $ (4,944)
============ ============ ============ ============
Basic earnings per common share $ 0.19 $ (0.10) $ 0.16 $ (0.48)
============ ============ ============ ============
Diluted earnings per common share $ 0.19 $ (0.10) $ 0.16 $ (0.48)
============ ============ ============ ============
Basic shares outstanding 10,359,441 10,353,933 10,358,790 10,255,932
============ ============ ============ ============
Diluted shares outstanding 10,359,441 10,353,933 10,358,790 10,255,932
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN PRODUCTS LTD.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
October 3, October 4,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH GENERATED (USED) BY OPERATING ACTIVITIES:
Net loss $ 1,675 $ (4,944)
Add (deduct) noncash items included in income:
Depreciation and amortization 1,569 3,174
Cash generated (used) by changes in components
of working capital, net of effects of
acquisition of business:
Accounts receivable (17,088) (10,368)
Inventories 3,733 8,933
Accounts payable 8,529 (764)
Other working capital (4,704) (3,008)
-------- --------
NET CASH USED BY OPERATING ACTIVITIES (6,286) (6,977)
-------- --------
CASH GENERATED (USED) BY INVESTING ACTIVITIES:
Purchase of property, plant, & equipment (982) (2,769)
Acquisition of Tennessee Building Products 0 (2,182)
Acquisition of Wahlfeld Manufacturing Company 0 (4,757)
Proceeds from disposal of property, plant, &
equipment 44 152
Proceeds from sale of manufacturing operations 31,706 0
Acquisition of other assets, net (647) (333)
-------- --------
NET CASH GENERATED (USED) BY INVESTING ACTIVITIES 30,121 (9,889)
-------- --------
CASH GENERATED (USED) BY FINANCING ACTIVITIES:
Proceeds from long-term debt 0 15,553
Repayments of long-term debt (27,877) (1,026)
Common stock issued for cash 9 1,192
Other 113 99
-------- --------
NET CASH GENERATED (USED) BY FINANCING ACTIVITIES (27,755) 15,818
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,920) (1,048)
CASH AND CASH EQUIVALENTS:
Beginning of period 4,197 1,467
-------- --------
End of period $ 277 $ 419
-------- --------
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during the period for:
Interest $ 2,430 $ 4,224
Income taxes (152) 121
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN PRODUCTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED OCTOBER 3, 1998
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Morgan Products Ltd. ("Morgan") distributes products
(virtually all considered to be millwork) to the residential and light
commercial building materials industry for new construction and improvements,
maintenance and repairs. As further discussed in Note 2, Morgan sold
substantially all of the operating assets of Morgan Manufacturing
("Manufacturing") on February 2, 1998.
CONSOLIDATION - The consolidated financial statements include the accounts of
all business units of Morgan. All intercompany transactions, profits and
balances are eliminated.
BASIS OF PRESENTATION - The financial statements at October 3, 1998 and October
4, 1997, and for the three and nine months then ended, are unaudited; however,
in the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial position
at these dates and the results of operations and cash flows for these periods
have been included. The results for the three and nine months ended October 3,
1998 are not necessarily indicative of the results that may be expected for the
full year or any other interim period.
RECLASSIFICATION - Certain amounts in the financial statements of the prior
periods have been reclassified to conform with the classifications used in the
current period.
<PAGE>
EARNINGS PER SHARE - During the fourth quarter of 1997, Morgan adopted Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" and
retroactively restated prior period earnings per share. SFAS No. 128 required
Morgan to report both basic earnings per share, which is based on the
weighted-average number of common share outstanding, and diluted earnings per
share, which is based on all dilutive potential common shares outstanding (in
thousands, except for per share amount):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- --------------------------
Net Per Net Per
Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount
--------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
October 3, 1998
Basic earnings per share
of common stock $ 2,002 10,359 $ 0.19 $ 1,675 10,359 $ 0.16
Effect of dilutive stock
options - - - - - -
--------------------------- --------------------------
Diluted earnings per share
of common stock $ 2,002 10,359 $ 0.19 $ 1,675 10,359 $ 0.16
=========================== ==========================
October 4, 1997
Basic earnings per share
of common stock $ (1,083) 10,354 $ (0.10) $(4,944) 10,256 $ (0.48)
Effect of dilutive stock
options - - - - - -
--------------------------- --------------------------
Diluted earnings per share
of common stock $ (1,083) 10,354 $ (0.10) $(4,944) 10,256 $ (0.48)
=========================== ==========================
</TABLE>
<PAGE>
NOTE 2 - SALE OF MANUFACTURING OPERATIONS
In December 1997, Morgan reached an agreement in principle to sell the
operating assets of Manufacturing in Oshkosh, Wisconsin to JELD-WEN, inc. for
$38.5 million, subject to certain post-closing adjustments. Based on the terms
of the sale, Morgan recorded a pre-tax charge in the fourth quarter of 1997
amounting to $12.4 million including $6.8 million to adjust the carrying value
of Morgan Manufacturing's assets to their estimated fair market value and a
provision for anticipated closing costs of $5.6 million. On February 2, 1998,
Morgan completed the sale. All proceeds were used to retire the acquisition term
loan and to reduce the revolving credit facility.
The following unaudited pro forma results of operations assume that the
sale occurred as of January 1, 1997 (in thousands except per share amounts):
Three Months Ended Nine Months Ended
October 4, October 4,
1997 1997
------------- -------------
Net sales $ 96,040 $ 262,261
Net income (loss) 1,158 2,316
Basic earnings per common share 0.11 0.23
Diluted earnings per common share 0.11 0.22
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the sale of Manufacturing been
consummated as of January 1, 1997, nor is it necessarily indicative of future
operating results.
NOTE 3 - INVENTORIES
Inventories consisted of the following at (in thousands of dollars):
October 3, 1998 October 4, 1997 December 31, 1997
--------------- --------------- -----------------
(unaudited) (unaudited)
Raw material $ 1,801 $10,937 $ 2,016
Work-in-process 0 8,671 0
Finished goods 34,999 47,070 38,517
------- ------- -------
$36,800 $66,678 $40,533
======= ======= =======
Inventories are valued at the lower of cost or market. Cost is determined on the
first-in, first-out (FIFO) method.
<PAGE>
NOTE 4 - RESTRUCTURING AND REORGANIZATION
In the first nine months of 1997, Morgan recorded a restructuring charge
of $4.7 million for excessive costs incurred as a consequence of the
consolidation of manufacturing operations and the delayed start-up of the new
high-speed door manufacturing line. Additionally, Morgan recorded a $1.1 million
reorganization charge in connection with the termination of the employment of
the Chief Financial Officer and Senior Vice President-Human Resources and
Administration of Morgan.
NOTE 5 - CREDIT AGREEMENT
On February 3, 1998, in connection with the sale of Manufacturing, Morgan
and their bank group entered into an amended and restated loan and security
credit agreement which provides for a revolving credit facility of up to $65
million, including a sub-line of up to $30 million for permitted acquisitions,
and a letter of credit facility of up to $5 million. Borrowings under the
facility bear interest at either the bank's prime rate plus a margin or LIBOR
plus a margin based upon a pricing matrix and expires on February 1, 2001. The
facility contains certain covenants, including limitations on the acquisition
and disposition of assets, the payment of dividends, and the prepayment of other
indebtedness. In addition, Morgan is required to maintain earnings coverage,
interest coverage and fixed charge coverage ratios. On April 20, 1998, Morgan
and the bank group entered into an amendment altering the restrictive covenants
under the agreement. The amendment has terms similar to those previously in
effect or more favorable to Morgan. At October 3, 1998, Morgan had borrowings of
$24.4 million under the revolving credit facility.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward Looking Statements
Various statements made within this Management's Discussion and Analysis
of Financial Condition and Results of Operations and elsewhere in this Quarterly
Report on Form 10-Q constitute "forward looking statements" for purposes of the
Securities and Exchange Commission's "safe harbor" provisions under the Private
Securities Litigation Reform Act of 1995 and under the Securities Exchange Act
of 1934. Investors are cautioned that all forward looking statements involve
risks and uncertainties, including those detailed in Morgan's filings with the
Securities and Exchange Commission. There can be no assurance that actual
results will not differ from Morgan's expectations. Factors which could cause
materially different results include, among others, changes in relationships
with important suppliers and key customers; the pace of acquisitions;
fluctuations in the price of raw materials; and competitive and general economic
conditions, such as housing starts.
Results of Operations
Three Months Ended October 3, 1998 vs.
Three Months Ended October 4, 1997
Morgan's net sales for the third quarter of 1998 were $107.5 million,
representing a 3.8% decrease from the same period in 1997, when sales were
$111.7 million. The $4.2 million decrease in sales is primarily attributable to
a $15.6 million decrease in sales at Manufacturing as a result of the sale of
substantially all of the assets of Manufacturing at February 2, 1998. The
disposal of Manufacturing was offset by an increase in sales at Morgan
Distribution ("Distribution") of $9.5 million and Tennessee Building Products,
("TBP") of $2.0 million. Distribution's increases are primarily due to the
addition of the Baton Rouge distribution center and sales growth principally in
the Mid-Atlantic region while sales gains at TBP are primarily due to the
Tennessee Oilers Stadium project at Tennessee Glass.
The gross profit increase for the third quarter of 1998 of $1.5 million
from the third quarter of 1997 is due primarily to the sale of Manufacturing and
the aforementioned sales gains at Distribution and TBP.
Operating expenses for the third quarter of 1998 were $12.9 million, or
12.0% of net sales compared to operating expenses in the third quarter of 1997
of $13.6 million, or 12.2% of net sales. The decrease is primarily due to the
sale of Manufacturing.
The provision for income taxes in each of the third quarters of 1998 and
1997 relates to the recording of state income taxes, offset in 1998 by the
recognition of net operating loss carryback tax benefits, which had not been
previously recognized.
For the third quarter of 1998, Morgan reported a net income of $2.0
million or $0.19 per share compared to a net loss of $1.1 million or ($0.10) per
share for the same period in 1997, on diluted shares outstanding of 10,359,441
and 10,353,933, respectively. The $3.1 million increase in net income is
primarily a result of a $0.7 million decrease in interest expense, the sale of
Manufacturing and the aforementioned sales gains at Distribution and TBP. The
decrease in interest expense was primarily due to the $31.3 million decrease in
average long-term debt in the 1998 third quarter as compared to the same period
in 1997, which was a result of the proceeds received from the sale of
Manufacturing at February 2, 1998 as well as improved inventory management
practices.
<PAGE>
Nine Months Ended October 3, 1998 vs.
Nine Months Ended October 4, 1997
Morgan's net sales for the first nine months of 1998 were $285.9 million,
representing a 9.0% decrease from the same period in 1997, when sales were
$314.3 million. The $28.4 million decrease in sales is primarily attributable to
a $52.0 million decrease in sales at Manufacturing as a result of the sale of
substantially all of the assets of Manufacturing at February 2, 1998. The
disposal of Manufacturing was offset by an increase in sales at Distribution of
$21.5 million, as a result of the addition of the Baton Rouge distribution
center, the acquisition of Wahlfeld Manufacturing Company ("Wahlfeld") and sales
growth in the Mid-Atlantic region.
The gross profit decline for the first nine months of 1998 of $5.1 million
from the same period in 1997 is due primarily to the sale of Manufacturing and a
shift to lower margin direct business and market price pressure at Distribution.
In addition, in the first quarter of 1997 Morgan received a volume incentive
reward from a supplier partnership program, which was not received in the first
quarter of 1998.
Operating expenses for the first nine months of 1998 were $38.0 million,
or 13.3% of net sales compared to operating expenses in the same period in 1997
of $47.4 million, or 15.1% of net sales. The decrease is primarily due to the
elimination of restructuring and reorganization charges incurred in the prior
year and the sale of Manufacturing.
The provision for income taxes in each of the third quarters of 1998 and
1997 relates to the recording of state income taxes, offset in 1998 by the
recognition of net operating loss carryback tax benefits, which had not been
previously recognized.
For the first nine months of 1998, Morgan reported net income of $1.7
million or $0.16 per share compared to a net loss of $4.9 million or ($0.48) per
share for the same period in 1997, on diluted shares outstanding of 10,358,790
and 10,255,932, respectively. The $6.6 million improvement in net income is
primarily a result of a $2.1 million decrease in interest expense, the
elimination of restructuring and reorganization charges and sales gains at
Distribution and TBP offset by the elimination of a volume incentive reward from
a supplier partnership program. The decrease in interest expense was primarily
due to the $29.6 million decrease in average long-term debt in the first nine
months of 1998 from the same period in 1997 which was a result of the proceeds
received from the sale of Manufacturing as well as improved inventory management
practices.
Significant Business Trends/Uncertainties
Management believes that single family housing starts and residential
remodeling expenditures have a significant influence on Morgan's level of
business activity. According to the National Association of Home Builders,
"1998 is shaping up to be an excellent year for housing, with single-family
starts projected to hit 1.25 million, the highest annual level in 20 years." No
assurances can be given, however, that housing start levels will remain steady,
or that single family housing starts will not decline.
Management also believes that Morgan's ability to continue to penetrate
the residential repair and remodeling markets through sales to home center
chains may have a significant influence on Morgan's level of business activity.
Management believes this market will continue to grow in importance to Morgan.
Management further believes that in certain areas of the United States, sales by
distributors directly to the end-user may over time replace, as the primary
channel of distribution, the distribution method of selling to the retail
dealer, who then sells to the end-user. Morgan intends to respond aggressively
to such changes in distribution methods, including, where opportunities permit,
through the acquisition of distribution businesses that sell directly to the
end-user. There is no assurance, however, that Morgan will be presented with any
such opportunity or that, if such an opportunity was presented, Morgan would
complete such an acquisition.
<PAGE>
Strategic Initiatives
An important part of Morgan's strategic plan is to expand its distribution
capabilities, particularly in the Southeast and Southwest, or in other areas, if
attractive opportunities are presented. There is no assurance, however, that
Morgan will be presented with any such opportunity or that, if such an
opportunity was presented. In August 1996, Morgan acquired substantially all of
the business and assets of Tennessee Building Products, ("TBP"), a regional
millwork and specialty building products distributor and light manufacturer
headquartered in Nashville, Tennessee. With the TBP acquisition, Morgan expanded
its operations to include Nashville and Chattanooga, Tennessee; Charlotte, North
Carolina; Greenville, South Carolina; and Huntsville, Alabama. In July 1997,
Morgan acquired certain assets of Wahlfeld, a distributor of windows, doors, and
other millwork products headquartered in Peoria, Illinois. Morgan consolidated
Wahlfeld's operation into two of its existing facilities.
With the February 2, 1998 sale of Manufacturing, Morgan's debt was reduced
by half. Morgan entered into a new credit facility with its bank group which
includes a $30.0 million revolving credit sub-line for permitted acquisitions.
This additional capital will provide funding for the strategic plan described
above.
Morgan believes that its relationship with Andersen has improved in recent
years. In April 1997, Morgan entered the Louisiana market where it was awarded
sole distribution rights for Andersen's products. In 1997, Morgan was also
awarded sole distribution for Andersen's products in most counties in
Mississippi and some in Texas.
As the final major element of its strategic initiatives, Morgan is
committed to improving its management information systems. A new Company-wide
integrated management information system has been selected and is being
implemented. As of October 3, 1998 Morgan has capitalized costs of approximately
$3.5 million for the management information system which has been financed
through a combination of capital leases and borrowings under Morgan's revolving
line of credit. Upon completion of this project, Morgan will have achieved
significant progress in meeting its goal of being the industry leader in
customer-friendly order processing and fulfillment systems. Management believes
that the final implementation of the project will be completed in 1999.
<PAGE>
Year 2000 Issues
The Year 2000 issue, common to most companies, concerns the inability of
information and noninformation systems to recognize and process date-sensitive
information after 1999 due to the use of only the last two digits to refer to a
year. This problem could affect both information systems (software and hardware)
and other equipment that relies on microprocessors. Management has completed a
company-wide evaluation of this impact on its computer systems, applications and
other date-sensitive equipment. Systems and equipment that are not Year 2000
compliant have been identified and remediation efforts are in process.
Management estimates that nearly 50 percent of remediation efforts for
information systems were completed as of October 3, 1998. Management has begun
remediation for noninformation systems. All remediation efforts and testing of
systems and equipment are expected to be completed by August 31, 1999.
Morgan is also in the process of monitoring the progress of material third
parties (vendors and suppliers) in their efforts to become Year 2000 compliant.
Those third parties include, but are not limited to: material vendors and
customers, financial institutions and utilities. Morgan has requested
confirmation from these material third parties of their Year 2000 plans.
Through October 3, 1998, Morgan has spent approximately $4.0 million to
address Year 2000 issues. Total costs to address Year 2000 issues are currently
estimated not to exceed $4.5 million and consist primarily of costs for the
remediation of internal systems. Funds for these costs are expected to be
provided by the operating cash flows of the company. The majority of the
internal system remediation efforts relate to employee staff costs and,
therefore, are not incremental costs.
Morgan could be faced with severe consequences if Year 2000 issues are not
identified and resolved in a timely manner by the company and material third
parties. A worst-case scenario would result in the short-term inability of the
company to process customer orders and to ship products to its customers due to
unresolved Year 2000 issues. This would result in lost revenues; however, the
amount would be dependent on the length and nature of the disruption, which
cannot be predicted or estimated. In light of the possible consequences, Morgan
is devoting the resources needed to address Year 2000 issues in a timely manner.
While management expects a successful resolution of these issues, there can be
no guarantee that material third parties, on which Morgan relies, will address
all Year 2000 issues on a timely basis or that their failure to successfully
address all issues would not have an adverse effect on Morgan.
Morgan is in the process of developing contingency plans in case business
interruptions do occur. Management expects these plans to be completed by August
31, 1999.
Liquidity and Capital Resources
Morgan's working capital requirements are related to its sales level,
which, because of its dependency on housing starts and the repair and remodeling
market, are seasonal and, to a degree, weather dependent. This seasonality
affects the need for working capital inasmuch as it is necessary to carry larger
inventories and receivables during certain months of the year.
Working capital at October 3, 1998 was $52.4 million, with a ratio of
current assets to current liabilities of 2.7 to 1.0, while at December 31, 1997
working capital was $77.3 million with a ratio of current assets to current
liabilities of 3.7 to 1.0. The decrease in working capital of $24.9 million is
primarily due to the sale of Manufacturing and the subsequent repayment of debt.
In addition, inventories decreased $3.7 million which is a continuation of
Morgan's company-wide plan to reduce working capital and interest on long-term
debt, current liabilities increased $2.5 million which was primarily due to an
increase in the amount of checks issued and outstanding offset by an increase in
accounts receivable of $17.1 million due to seasonality.
Long-term debt, net of cash, decreased to $29.3 million at October 3,
1998, from $53.2 million at December 31, 1997. Morgan's ratio of long-term debt,
net of cash, to total capitalization decreased from 55.6% at December 31, 1997
to 39.9% at October 3, 1998. The decrease in long-term debt, net of cash, of
$23.9 million is primarily attributable to the fact that Morgan used the
proceeds from the Manufacturing sale to reduce its revolving credit facility and
to repay the acquisition term loan.
<PAGE>
Cash used by operating activities totaled $6.3 million for the nine months
ended October 3, 1998, as compared to $7.0 million used for the nine months
ended October 4, 1997. The decrease in cash used by operating activities was
primarily due to Morgan's $6.6 million net income improvement as well as the
additional $9.3 generated from accounts payable which is a result of improved
cash management practices. These improvements were partially offset by increased
cash disbursements of $2.6 million from other working capital related to the
sale of Manufacturing. The accounts receivable usage increase of $6.7 million
was primarily due to a 10.0% increase in September sales at Distribution. The
inventory usage increase of $5.2 million was due to the $5.7 million of
inventory generated by Manufacturing operations at October 4, 1997. Investing
activities in the first nine months of 1998 generated $30.1 million, compared to
the corresponding period in 1997, when investing activities used $9.9 million.
Activities in 1998 primarily included $31.7 million in proceeds from the sale of
Manufacturing and $1.6 million used for asset acquisitions, while 1997
activities consisted of $3.1 million used for asset acquisitions and $2.2
million for the final payment to purchase TBP and payments to purchase Wahlfeld
of $4.8 million. Financing activities used $27.8 million through October 3,
1998, with $27.9 million used to reduce long-term debt. Of the reduction of
long-term debt, $20.9 million was used to reduce the revolving line of credit,
$4.8 million was used to retire the acquisition term loan, $1.3 million was used
to retire the Industrial Revenue Bond, and $.9 million was used for principal
payments under capital lease obligations. The $43.6 million difference in the
financing requirements from the first nine months of 1998 and the comparable
period in 1997 is primarily due to the restructuring and subsequent sale of
Manufacturing in 1998.
On February 3, 1998, in connection with the sale of Manufacturing, Morgan
and its bank group entered into an amended and restated loan and security credit
agreement which provides for a revolving credit facility of up to $65 million,
including a sub-line of up to $30 million for permitted acquisitions, and a
letter of credit facility of up to $5 million. Borrowings under the facility
bear interest at either the bank's prime rate plus a margin or LIBOR plus a
margin based upon a pricing matrix and expires on February 1, 2001. The facility
contains certain covenants, including limitations on the acquisition and
disposition of assets, the payment of dividends, and the prepayment of other
indebtedness. In addition, Morgan is required to maintain earnings coverage,
interest coverage and fixed charge coverage ratios. On April 20, 1998, Morgan
and the bank group entered into an amendment altering the restrictive covenants
under the agreement. The amendment has terms similar to those previously in
effect or more favorable to Morgan. At October 3, 1998, Morgan had borrowings of
$24.4 million under the revolving credit facility.
Restructuring of Operations
Since 1994, Morgan has adopted a comprehensive strategic plan to restore
profitability and regain leadership by providing customers with quality products
and optimum service at the best price/value relationship. Morgan has taken a
series of major initiatives to implement this plan and respond to continuing
challenges in the industry.
During the period of 1994 through 1996, Morgan incurred an aggregate of
$16.1 million in restructuring charges. Included in these restructuring charges
were the closing of the Springfield, Oregon and the Weed, California plants,
relocation of Morgan's corporate headquarters and the consolidation of its door
manufacturing operations.
In 1997, Morgan recorded additional restructuring charges of $4.7 million
for excessive costs incurred as a consequence of the consolidation of
manufacturing operations and the delayed start-up of the new high-speed door
manufacturing line. Additionally, Morgan recorded a $1.1 million reorganization
charge in 1997 in connection with the termination of the employment of the Vice
President and Chief Financial Officer and Senior Vice President-Human Resources
and Administration of Morgan. Such provision is to cover severance and related
payments to these former officers.
Although Manufacturing had made progress operationally in the first nine
months of 1997, Morgan determined that Manufacturing was not a strategic fit
with its long-term growth plans. In December 1997, Morgan reached an agreement
in principle to sell the operating assets of Manufacturing to JELD-WEN, inc. The
sale was completed on February 2, 1998. The sale resulted in a charge to
earnings in 1997 of $12.4 million with half the charge related to an asset
write-down and half related to the costs of selling the business including
employee severance costs, pension expenses, lease obligations and legal costs.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) No reports on form 8-K were filed by Morgan during the quarter ended
October 3, 1998.
<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.
MORGAN PRODUCTS LTD.
Date: November 16, 1998 By:
------------------------------
Mitchell J. Lahr
Vice President, Secretary and
Chief Financial Officer
(For the Registrant and as
Principal Finance Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MORGAN
PRODUCTS FORM 10-Q AS OF OCTOBER 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q FILINGS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> OCT-3-1998
<CASH> 277
<SECURITIES> 0
<RECEIVABLES> 46,289
<ALLOWANCES> 458
<INVENTORY> 36,800
<CURRENT-ASSETS> 83,765
<PP&E> 25,079
<DEPRECIATION> 15,047
<TOTAL-ASSETS> 105,084
<CURRENT-LIABILITIES> 31,370
<BONDS> 29,599
0
0
<COMMON> 44,410
<OTHER-SE> (295)
<TOTAL-LIABILITY-AND-EQUITY> 105,084
<SALES> 285,900
<TOTAL-REVENUES> 285,900
<CGS> 244,827
<TOTAL-COSTS> 282,830
<OTHER-EXPENSES> (290)
<LOSS-PROVISION> 41
<INTEREST-EXPENSE> 1,819
<INCOME-PRETAX> 1,541
<INCOME-TAX> (134)
<INCOME-CONTINUING> 1,675
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,675
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
