SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 4, 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 July 21, 1998 was 10,359,113; 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>
July 4, July 5, December 31,
1998 1997 1997
- ---------------------------------------------------------------------------------
(Unaudited)(Unaudited)
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 318 $ 1,512 $ 4,197
Accounts receivable, net 39,335 40,582 28,743
Inventories 35,251 69,765 40,533
Assets held for sale 0 0 32,285
Other current assets 967 1,378 558
- ---------------------------------------------------------------------------------
Total current assets 75,871 113,237 106,316
- ---------------------------------------------------------------------------------
PROPERTY, PLANT & EQUIPMENT, net 9,910 23,566 10,276
GOODWILL, net 6,587 5,252 6,632
OTHER ASSETS 4,543 5,768 5,552
- ---------------------------------------------------------------------------------
TOTAL ASSETS $ 96,911 $147,823 $128,776
- ---------------------------------------------------------------------------------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt 1,272 1,543 1,213
Accounts payable 13,697 15,138 13,151
Accrued compensation and employee benefits 3,054 4,373 8,729
Other current liabilities 4,281 3,652 5,899
- ---------------------------------------------------------------------------------
Total current liabilities 22,304 24,706 28,992
- ---------------------------------------------------------------------------------
LONG-TERM DEBT 32,496 63,720 57,353
- ---------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common Stock, $.10 par value, 10,359,113,
10,351,508, and 10,357,808 shares
outstanding, respectively 1,036 1,035 1,036
Paid-in capital 43,420 43,376 43,413
Retained earnings (accumulated deficit) (2,297) 15,066 (1,970)
- ---------------------------------------------------------------------------------
42,159 59,477 42,479
Treasury stock, 2,386 shares, at cost (48) (48) (48)
Unearned compensation-restricted stock 0 (32) 0
- ---------------------------------------------------------------------------------
42,111 59,397 42,431
TOTAL STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' $ 96,911 $147,823 $128,776
EQUITY
=================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<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 Six Months Ended
-------------------------- --------------------------
July 4, July 5, July 4, July 5,
1998 1997 1998 1997
------- ------- ------- -------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C>
Net sales $ 98,238 $ 106,801 $178,392 $202,606
Cost of goods sold 83,966 91,759 152,593 170,140
---------- --------- ---------- -------
Gross profit 14,272 15,042 25,799 32,466
---------- --------- ---------- -------
Operating expenses:
Sales & marketing 9,477 10,364 19,136 20,999
General & administrative 2,980 3,065 5,929 6,959
Restructuring & reorganization 0 2,220 0 5,830
---------- --------- ---------- -------
Total 12,457 15,649 25,065 33,788
---------- --------- ---------- -------
Operating income (loss) 1,815 (607) 734 (1,322)
---------- --------- ---------- -------
Other income (expense):
Interest (611) (1,335) (1,165) (2,571)
Other 77 43 164 92
---------- --------- ---------- --------
Total (534) (1,292) (1,001) (2,479)
---------- --------- ---------- --------
Income (loss) before
income taxes 1,281 (1,899) (267) (3,801)
Provision for income taxes 30 30 60 60
---------- --------- ---------- --------
Net income (loss) $ 1,251 $ (1,929) $ (327) $ (3,861)
========== ========= ========== ========
Basic earnings per common share $ 0.12 $ (0.19) $ (0.03) $ (0.38)
========== ========= ========== ========
Diluted earnings per
common share $ 0.12 $ (0.19) $ (0.03) $ (0.38)
========== ========= ========== ========
Basic shares outstanding 10,358,835 10,267,367 10,358,469 10,208,501
========== ========== ========== ==========
Diluted shares outstanding 10,372,182 10,267,367 10,358,469 10,208,501
========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
MORGAN PRODUCTS LTD.
Consolidated Statements of Cash Flows
(In thousands)
For the Six Months Ended
-------------------------
July 4, July 5,
1998 1997
-------------------------
(Unaudited) (Unaudited)
CASH GENERATED (USED) BY OPERATING ACTIVITIES:
Net loss $ (327) $ (3,861)
Add (deduct) noncash items included in income:
Depreciation and amortization 1,050 2,108
Cash generated (used) by changes in components
of working capital, net of effects of
acquisition of business:
Accounts receivable (10,592) (8,023)
Inventories 5,282 3,918
Accounts payable 546 (2,407)
Other working capital (5,923) (3,266)
------- -------
NET CASH GENERATED (USED) BY OPERATING ACTIVITIES (9,964) (11,531)
------ ------
CASH GENERATED (USED) BY INVESTING ACTIVITIES:
Purchase of property, plant, & equipment (458) (2,674)
Acquisition of Tennessee Building Products 0 (2,160)
Proceeds from disposal of property, plant, &
equipment 0 4
Proceeds from sale of manufacturing operations 31,706 0
Acquisition of other assets, net (372) 0
------ -------
NET CASH GENERATED (USED) BY INVESTING ACTIVITIES 30,876 (4,830)
------ -------
CASH GENERATED (USED) BY FINANCING ACTIVITIES:
Proceeds from long-term debt 0 15,845
Repayments of long-term debt (24,851) (598)
Common stock issued for cash 7 1,159
Other 53 0
------ ------
NET CASH GENERATED (USED) BY FINANCING ACTIVITIES (24,791) 16,406
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (3,879) 45
CASH AND CASH EQUIVALENTS:
Beginning of period 4,197 1,467
------- ---------
End of period $ 318 $ 1,512
======= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during the period for:
Interest $ 1,758 $ 2,852
Income taxes (172) 96
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
MORGAN PRODUCTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JULY 4, 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, formerly an
unincorporated division of Morgan ("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 July 4, 1998 and July 5,
1997, and for the three and six 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 six months ended July 4, 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.
5
<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 periods 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 shares outstanding, and diluted earnings per
share, which is based on all dilutive potential common shares outstanding.
Earnings per share data for the periods ending July 5, 1997 have been
recalculated to reflect the provisions of SFAS 128 (in thousands, except for per
share amount):
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- ---------------------------
Net Per Net Per
Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount
------ ------ ------ ------- ------ ------
<S> <C>
July 4, 1998
Basic earnings per share
of common stock $ 1,251 10,359 $ 0.12 $ (327) 10,358 $(0.03)
Effect of dilutive stock
options -- 13 -- -- - --
---------------------------------------------------------
Diluted earnings per share
of common stock $ 1,251 10,372 $ 0.12 $ (327) 10,358 $(0.03)
=========================================================
July 5, 1997
Basic earnings per share
of common stock $(1,929) 10,267 $(0.19) $(3,861) 10,209 $(0.38)
Effect of dilutive stock
options -- -- -- -- -- --
---------------------------------------------------------
Diluted earnings per share
of common stock $(1,929) 10,267 $(0.19) $(3,861) 10,209 $(0.38)
=========================================================
</TABLE>
6
<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 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 Six Months Ended
------------------ ----------------
July 5, July 5,
1997 1997
------- -------
Net sales $89,698 $166,221
Net income (loss) 1,172 1,231
Basic earnings per common share 0.11 0.11
Diluted earnings per common share 0.11 0.12
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):
July 4, 1998 July 5, 1997 December 31, 1997
------------ ------------ -----------------
(unaudited) (unaudited)
Raw material $ 1,939 $12,096 $ 2,016
Work-in-process 0 9,196 0
Finished goods 33,312 48,473 38,517
-------- ------- --------
Totals $35,251 $69,765 $40,533
======= ======= =======
Inventories are valued at the lower of cost or market. Cost is determined on the
first-in, first-out (FIFO) method.
7
<PAGE>
NOTE 4 - RESTRUCTURING AND REORGANIZATION
In the first six months of 1997, Morgan recorded an aggregate
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. These expenses were
charged to operations as incurred. 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 an additional 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 July 4, 1998, Morgan
had borrowings of $27.0 million outstanding under the revolving credit facility.
8
<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 July 4, 1998 vs.
Three Months Ended July 5, 1997
Morgan's net sales for the second quarter of 1998 were $98.2 million,
representing a 8.1% decrease from the same period in 1997, when sales were
$106.8 million. The $8.6 million decrease in sales is primarily attributable to
a $17.1 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 $8.0 million, as a result of the addition of
the Baton Rouge distribution center, the acquisition of Wahlfeld Manufacturing
Company ("Wahlfeld") and sales growth principally in the Mid-Atlantic region.
The gross profit decline for the second quarter of 1998 of $.8 million
from the second quarter of 1997 is due primarily to the sale of Manufacturing.
Operating expenses for the second quarter of 1998 were $12.5 million, or
12.7% of net sales compared to operating expenses in the second quarter of 1997
of $15.6 million, or 14.7% 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 second quarters of 1998 and
1997 relates to the recording of state taxes. The provision for federal taxes in
1998 was offset by Morgan's net operating loss position. No federal tax benefit
was recognized in 1997 given Morgan's net operating loss position.
For the second quarter of 1998, Morgan reported a net income of $1.3
million or $0.12 per share compared to a net loss of $1.9 million or ($0.19) per
share for the same period in 1997, on diluted shares outstanding of 10,372,182
and 10,267,367, respectively. The $3.2 million increase in net income is
primarily a result of a $0.7 million decrease in interest expense and the
elimination of restructuring charges. The decrease in interest expense was
primarily due to the $32.9 million decrease in average long-term debt in the
1998 second 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.
9
<PAGE>
Six Months Ended July 4, 1998 vs.
Six Months Ended July 5, 1997
Morgan's net sales for the first six months of 1998 were $178.4 million,
representing a 12.0% decrease from the same period in 1997, when sales were
$202.6 million. The $24.2 million decrease in sales is primarily attributable to
a $36.4 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
$12.0 million, as a result of the addition of the Baton Rouge distribution
center, the acquisition of Wahlfeld and sales growth in the Mid-Atlantic region.
The gross profit decline for the first six months of 1998 of $6.7 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 repeated in the first
quarter of 1998.
Operating expenses for the first six months of 1998 were $25.1 million, or
14.1% of net sales compared to operating expenses in the same period in 1997 of
$33.8 million, or 16.7% 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 the first six months of 1998 and 1997
relates to the recording of state taxes. There was no provision for federal
taxes in either period given Morgan's net operating loss position.
For the first six months of 1998, Morgan reported a net loss of $0.3
million or $0.03 per share compared to a net loss of $3.9 million or $0.38 per
share for the same period in 1997, on diluted shares outstanding of 10,358,469
and 10,208,501, respectively. The $3.6 million improvement in net income is
primarily a result of a $1.4 million decrease in interest expense and the
elimination of restructuring and reorganization charges offset by the
elimination of a volume incentive reward from a supplier partnership program.
The decrease in interest expense was primarily due to the $29.0 million decrease
in average long-term debt in the first half 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 US Housing Markets, a leading journal in the
housing industry, the number of single family housing starts for the period
January 1998 through May 1998 is 8% higher than the number of single family
starts for the period January 1997 through May 1997, and such increase has been
distributed relatively evenly across all regions of the US. In addition,
according to Cahners Economics, also a leading journal in the housing industry,
"remodeling expenditures are expected to gain 2.6% in 1998 and reach $121.5
billion." Although the level of single family housing has been at a relatively
steady high rate for the last few years, no assurance can be given 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.
10
<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, Morgan would complete such an acquisition. 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.
In 1996, Andersen Corporation ("Andersen") determined to sell its Fibrex
window systems through Renewal by Andersen retail stores. Fibrex is a
proprietary material developed by Andersen that is made of a composite of wood
fibers and vinyl and is considered to be superior in certain characteristics to
pure vinyl core window systems. The Renewal by Andersen store (which is aimed at
the replacement window buyer) is devoted exclusively to the promotion and sale
of such systems, with the stores being established in various areas throughout
the country and principally owned and operated by independent distributors.
Morgan opened one of the first such stores in Overland Park, Kansas which has
performed at lower than expected levels. As of July 4, 1998, Morgan has not
opened any additional Renewal by Anderson retail stores.
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 July 4, 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. Morgan does not expect to incur significant additional costs to
complete the implementation of its management information system. 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.
11
<PAGE>
Year 2000 Issues
Morgan has investigated the extent to which its computer operations are
subject to Year 2000 issues. Morgan has assessed the measures it believes will
be necessary to avoid any material disruption to its operations relating to Year
2000 complications in Morgan's computers. Morgan is currently implementing a
Company-wide integrated management information system that is Year 2000
compatible. Management believes that the cost to Morgan of the necessary
modifications and upgrades to Morgan's computer systems, not including the costs
of implementing the new management information system, which are being
capitalized, will not be material.
Morgan has not conducted a detailed investigation of the Year 2000
readiness of its material suppliers. It is uncertain whether such suppliers will
be prepared fully for Year 2000 issues. Based on inquiries it has received from
many of its largest customers, management believes such customers are assessing
their Year 2000 issues. There can be no assurances, however, that none of
Morgan's customers or suppliers will have a Year 2000 issue that adversely
affects Morgan.
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 July 4, 1998 was $53.6 million, with a ratio of current
assets to current liabilities of 3.4 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 $23.7 million is primarily due
to the sale of Manufacturing and the subsequent repayment of debt. In addition,
inventories decreased $5.3 million which is a continuation of Morgan's
company-wide plan to reduce working capital and interest on long-term debt
offset by an increase in accounts receivable of $10.6 million due to
seasonality.
Long-term debt, net of cash, decreased to $32.2 million at July 4, 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
43.3% at July 4, 1998. The decrease in long-term debt, net of cash, of $21.0
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.
12
<PAGE>
Cash used by operating activities totaled $10.0 million for the six months
ended July 4, 1998, as compared to $11.5 million used for the six months ended
July 5, 1997. The decreased cash usage was primarily due to Morgan's $3.5 net
income improvement as well as the additional $1.4 million generated from
inventory. 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 $2.6 million was
primarily due to a 9.0% increase in June sales at Distribution which was
primarily offset by a $2.9 million improvement in accounts payable. Investing
activities in the first six months of 1998 generated $30.9 million, compared to
the corresponding period in 1997, when investing activities used $4.8 million.
Activities in 1998 included $31.7 million in proceeds from the sale of
Manufacturing and $.8 million used for asset acquisitions, while 1997 activities
consisted of $2.7 million used for asset acquisitions and $2.2 for the final
payment to purchase TBP. Financing activities used $24.8 million through July 4,
1998, with $25.0 million used to reduce long-term debt. Of the reduction of
long-term debt, $18.4 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 to the city of Oshkosh, Wisconsion, and
$.5 was used for principal payments under capital lease obligations. The $41.2
million difference in the financing requirements from the first six 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 an
additional 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 July 4, 1998, Morgan had borrowings of
$27.0 million outstanding 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 half
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.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At Morgan's Annual Meeting of Stockholders on May 13, 1998, a vote was taken for
the election of directors for a one-year term. All directors standing for
re-election were elected and J. Michael Marks was elected by the following
common stock vote:
For Withheld Authority
--------- ------------------
F.J. Hawley, Jr. 9,269,176 140,835
L.R. Robinette 9,322,074 87,937
J.S. Crowley 9,313,776 96,235
H.G. Haas 9,313,836 96,175
E.T. Tokar 9,193,779 216,232
P.J. McDonough, Jr. 9,322,514 87,497
J. Michael Marks 9,322,719 87,292
The second item on the ballot was the ratification of the selection of Price
Waterhouse LLP as independent accountants for Morgan for the 1998 fiscal year.
The ratification passed by a common stock vote as follows:
For--9,385,837; Against--16,260; Abstain--7,914.
14
<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 July 4,
1998.
15
<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: August 14, 1998 By: /s/ Mitchell J. Lahr
________________________
Mitchell J. Lahr
Vice President, Secretary and
Chief Financial Officer
(For the Registrant and as
Principal Finance Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
MORGAN PRODUCTS FORM 10-Q AS OF JULY 4, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUL-04-1998
<CASH> 318
<SECURITIES> 0
<RECEIVABLES> 39,888
<ALLOWANCES> 553
<INVENTORY> 35,251
<CURRENT-ASSETS> 75,871
<PP&E> 24,639
<DEPRECIATION> 14,729
<TOTAL-ASSETS> 96,911
<CURRENT-LIABILITIES> 22,304
<BONDS> 32,496
0
0
<COMMON> 44,408
<OTHER-SE> (2,297)
<TOTAL-LIABILITY-AND-EQUITY> 96,911
<SALES> 178,392
<TOTAL-REVENUES> 178,392
<CGS> 152,593
<TOTAL-COSTS> 177,658
<OTHER-EXPENSES> (164)
<LOSS-PROVISION> 34
<INTEREST-EXPENSE> 1,165
<INCOME-PRETAX> (267)
<INCOME-TAX> 60
<INCOME-CONTINUING> (327)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (327)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
