UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 2000
THE MORGAN GROUP, INC.
2746 Old U. S. 20 West
Elkhart, Indiana 46515-1168
(219) 295-2200
Delaware 1-13586 22-2902315
(State of (Commission File Number) (IRS Employer
Incorporation) Identification Number)
The Company (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.
The number of shares outstanding of each of the Company's classes of common
stock at April 30, 2000 was:
Class A - 1,248,157 shares
Class B - 1,200,000 shares
The Morgan Group, Inc.
INDEX
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 3
Consolidated Statements of
Operations for the Three Month Periods
Ended March 31, 2000 and 1999 4
Consolidated Statements of
Cash Flows for the Three Month Periods
Ended March 31, 2000 and 1999 5
Notes to Consolidated Interim Financial
Statements as of March 31, 2000 6- 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
Signatures
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
The Morgan Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
March 31 December 31
2000 1999
-------- --------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 2,163 $ 3,847
Trade accounts receivable, less allowances
of $333 in 2000 and $313 in 1999 10,612 10,130
Accounts receivable, other 108 313
Prepaid expenses and other current assets 2,054 1,960
Deferred income taxes 1,475 1,475
-------- --------
Total current assets 16,412 17,725
-------- --------
Property and equipment, net 4,248 4,309
Intangible assets, net 7,184 7,361
Deferred income taxes 2,172 2,172
Other assets 579 697
-------- --------
Total assets $ 30,595 $ 32,264
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 4,095 $ 3,907
Accrued liabilities 4,555 4,852
Income taxes payable (303) 278
Accrued claims payable 3,004 3,071
Refundable deposits 1,411 1,752
Current portion of long-term debt and capital lease obligations 639 676
-------- --------
Total current liabilities 13,401 14,536
-------- --------
Long-term debt and capital lease obligations, less current portion 239 289
Long-term accrued claims payable 5,516 5,347
Commitments and contingencies -- --
Shareholders' equity:
Common stock, $.015 par value
Class A: Authorized shares - 7,500,000
Issued shares - 1,607,303 23 23
Class B: Authorized shares - 2,500,000
Issued and outstanding shares - 1,200,000 18 18
Additional paid-in capital 12,459 12,459
Retained earnings 2,122 2,775
-------- --------
Total capital and retained earnings 14,622 15,275
Less - treasury stock at cost (359,146 Class A shares) (3,183) (3,183)
-------- --------
Total shareholders' equity 11,439 12,092
-------- --------
Total liabilities and shareholders' equity $ 30,595 $ 32,264
======== ========
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share amounts)
(Unaudited)
Three Months Ended
March 31,
2000 1999
----------- -----------
Operating revenues $ 27,867 $ 35,325
Costs and expenses:
Operating costs 26,113 32,003
Selling, general and administration 2,359 2,688
Depreciation and amortization 293 309
----------- -----------
29,101 35,000
Operating income (loss) (898) 325
Interest expense, net 57 88
----------- -----------
Income (loss) before income taxes (955) 237
Income tax expense (benefit) (339) 119
----------- -----------
Net income (loss) $ (616) $ 118
=========== ===========
Net income (loss) per basic and diluted share $ (0.25) $ 0.05
=========== ===========
Basic weighted average shares outstanding 2,453,260 2,539,861
=========== ===========
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
2000 1999
------- -------
Operating activities:
Net income (loss) $ (616) $ 118
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 293 341
Loss on disposal of property and equipment 22 1
Changes in operating assets and liabilities:
Trade accounts receivable (482) (1,833)
Other accounts receivable 205 741
Prepaid expenses and other current assets (94) 193
Other assets 118 (117)
Trade accounts payable 188 46
Accrued liabilities (297) 1,142
Income taxes payable (581) (868)
Accrued claims payable 102 282
Refundable deposits (341) (327)
------- -------
Net cash used in operating activities (1,483) (281)
Investing activities:
Purchases of property and equipment (77) (388)
Business Acquisitions -- (15)
------- -------
Net cash used in investing activities (77) (403)
Financing activities:
Net proceeds from note payable to bank -- 400
Principal payments on long-term debt (87) (123)
Treasury stock purchases -- (997)
Common stock dividends paid (37) (37)
------- -------
Net cash used in financing activities (124) (757)
------- -------
Net decrease in cash and equivalents (1,684) (1,441)
Cash and cash equivalents at beginning of period 3,847 1,490
------- -------
Cash and cash equivalents at end of period $ 2,163 $ 49
======= =======
The Morgan Group, Inc. and Subsidiaries
Notes to Consolidated Interim Financial Statements
(Unaudited)
March 31, 2000
Note 1.Basis of Presentation
The accompanying consolidated interim financial statements have been
prepared by The Morgan Group, Inc. and Subsidiaries (the "Company"),
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to
such rules and regulations. The consolidated interim financial
statements should be read in conjunction with the financial statements,
notes thereto and other information included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
Net income per common share ("EPS") is computed using the weighted
average number of common shares outstanding during the period. Since
each share of Class B common stock is freely convertible into one share
of Class A common stock, the total of the weighted average number of
shares for both classes of common stock is considered in the
computation of EPS.
The accompanying unaudited consolidated interim financial statements
reflect, in the opinion of management, all adjustments (consisting of
normal recurring items) necessary for a fair presentation, in all
material respects, of the financial position and results of operations
for the periods presented. The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions. Such estimates and
assumptions affect the reported amounts of assets and liabilities, the
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. The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.
The consolidated financial statements include the accounts of the
Company and its subsidiaries, Morgan Drive Away, Inc., TDI, Inc.,
Interstate Indemnity Company, and Morgan Finance, Inc., all of which
are wholly owned. Significant intercompany accounts and transactions
have been eliminated in consolidation.
Note 2. Indebtedness
The Company has a $20,000,000 revolving credit facility ("Credit
Facility") which expires February 28, 2001, and is subject to renewal
annually, thereafter. The Credit Facility contains financial covenants,
the most restrictive of which are a debt service to cash flow coverage
ratio and an interest expense coverage ratio. The Company projected it
was probable that a violation of one or more of the financial covenants
would occur at each of the measurement dates during 2000. The Company
and the bank, on March 30, 2000, agreed to modify the affected
covenants. The Company was in compliance at March 31, 2000. This
amendment limits the payment of dividends to $120,000 annually,
prohibits the acquisition of Company's common stock, and limits
borrowings and letters of credit to the borrowing base. This amendment
provides for the payment of up front fees of $25,000, an increase of
twenty-five basis points in the interest rate and an increase of twelve
and one half basis points in the commitment fee.
Note 3.Segment Reporting
Description of Services by Segment
The Company operates in four business segments: manufactured housing,
driver outsourcing, specialized outsourcing services, and insurance and
finance. The manufactured housing segment primarily provides
specialized transportation to companies which produce new manufactured
homes and modular homes through a network of terminals located in
thirty-one states. The driver outsourcing segment provides outsourcing
transportation primarily to manufacturers of recreational vehicles,
commercial trucks, and other specialized vehicles through a network of
service centers in nine states. The specialized outsourcing services
segment consists of a large trailer, travel and small trailer delivery
and another Specialized Service "Decking". The fourth segment,
insurance and finance, provides insurance and financing to the
Company's drivers and independent owner-operators. This segment also
acts as a cost center whereby all property damage and bodily injury and
cargo costs are captured. The Company's segments are strategic business
units that offer different services and are managed separately based on
the differences in these services.
The driver outsourcing segment and the specialized outsourcing services
were reported as one segment titled "Specialized Outsourcing Services"
in the prior year. The prior year period has been restated to show the
corresponding segment information for the first quarter of 1999.
Measurement of Segment (Loss)
The Company evaluates performance and allocates resources based on
several factors, of which the primary financial measure is business
segment operating income, defined as earnings before interest, taxes,
depreciation and amortization (EBITDA). The accounting policies of the
segments are the same as those described in the Company's Annual Report
on Form 10-K for the year ended December 31, 1999. Except for insurance
premiums, there are no significant intersegment revenues.
The following table presents the financial information for the
Company's reportable segments for the three months ended March 31,
(in thousands):
2000 1999
-------- --------
Operating revenues
Manufactured Housing $ 18,206 $ 23,868
Driver Outsourcing 5,611 5,718
Specialized Outsourcing Services 3,757 5,314
Insurance and Finance 815 1,028
All Other (3) 52
-------- --------
28,386 35,980
Total intersegment insurance revenues (519) (655)
-------- --------
Total operating revenues $ 27,867 $ 35,325
======== ========
Segment profit (loss) - EBITDA
Manufactured Housing $ 1,742 $ 2,649
Driver Outsourcing 469 88
Specialized Outsourcing Services (143) 116
Insurance and Finance (2,261) (2,030)
All Other (412) (189)
-------- --------
(605) 634
Depreciation and amortization (293) (309)
Interest expense (57) (88)
-------- --------
Income (loss) before taxes $ (955) $ 237
======== ========
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Consolidated Results
During the first quarter of 2000 the Company continued to experience shipment
and profit declines in its manufactured housing and specialized outsourcing
business segments. Consolidated operating revenues decreased 21.1 percent to
$27,867,000 million from 1999's first quarter record of $35,325,000. This
decrease is primarily the result of a sharp industry-wide decline in shipments
of manufactured homes. Additionally, operating revenues decreased significantly
in the specialized outsourcing business segment.
The manufactured housing industry continues to be hampered by tighter credit and
high customer inventory levels, which directly impacts production and sales
volume of the Company's customers. The largest portion of the Company's
operating revenues is derived from the transportation of manufactured homes. The
Company believes that the depressed level of shipments in manufactured housing
will continue through the first half of 2000 and possibly moderating in the
second half of the year.
The Company in March 2000 instituted staff reduction and other cost savings
initiatives. It is currently estimated that the cost savings of these
initiatives will approximate $2,400,000 annually. The impact of the cost savings
for 2000 is expected to approximate $1,800,000, net of severance costs. The
Company continues to review incremental marketing initiatives and continuously
is reviewing staffing levels and expenditures to reduce its overhead structure.
Operating loss before interest, taxes, depreciation and amortization ("EBITDA")
was $605,000 for the quarter, compared with a profit of $634,000 for the
corresponding period last year.
Because of the existence of significant non-cash expenses, such as depreciation
of fixed assets and amortization of intangible assets, the Company believes that
EBITDA contributes to a better understanding of the Company's ability to satisfy
its obligations and to utilize cash for other purposes. EBITDA should not be
considered in isolation from or as a substitute for operating income, cash flow
from operating activities, and other consolidated income or cash flow data
prepared in accordance with generally accepted accounting principles.
Net interest expense decreased from $88,000 in the first quarter of 1999 to
$57,000 in 2000 as a result of improved cash management which reduced the amount
of borrowings from the credit facility.
Accordingly, the net loss for the first quarter of 2000 was $616,000 or $0.25
per share, compared to net income of $118,000 or $0.05 per share, for the same
period of the prior year.
Segment Results
The Company conducts its operations in four principal segments as discussed
below. The following discussion sets forth certain information about the segment
results.
Manufactured Housing
Manufactured Housing operating revenues are generated from providing
transportation and logistical services to manufacturers of manufactured homes.
Manufactured Housing operating revenues were $5,662,000 or 23.7 percent less in
the first quarter of 2000 compared to the first quarter of a year ago,
reflecting the continued softness in the manufactured housing industry.
Manufactured Housing EBITDA decreased primarily due to the lower
quarter-to-quarter shipment volume. The Company has reduced manufactured housing
overhead costs from the first quarter of 1999 to the first quarter of 2000 by
approximately 20.0 percent. EBITDA decreased $907,000 to $1,742,000.
Driver Outsourcing
Driver outsourcing provides outsourcing transportation services primarily to
manufacturers of recreational vehicles, commercial trucks and other specialized
vehicles. Operating revenues of $5,611,000 decreased $107,000 in the first
quarter of 2000 compared to the first quarter of 1999. However, EBITDA increased
to $469,000 in the first quarter of 2000 primarily due to reductions in
transportation and overhead costs.
Specialized Outsourcing Services
Specialized Outsourcing Services consists of delivering large trailers, travel
and other small trailers and another specialized transport service ("Decking").
Operating revenues decreased by $1,557,000 in the first quarter of 2000 to
$3,757,000. This decrease was in the delivery of large trailers and also from
the Decking operations. Specialized Outsourcing Services recorded a loss in the
first quarter 2000 at the EBITDA level of $143,000 compared to a profit of
$116,000 in the first quarter of 1999. This decrease is primarily due to the
volume decreases. The Company is currently evaluating the profit potential of
these niche businesses and their growth potential.
Insurance/Finance
The Company's Insurance/Finance segment provides insurance and financing
services to the Company's drivers and independent owner-operators. This segment
also acts as a cost center whereby all bodily injury, property damage and cargo
loss costs are captured. Insurance/Finance operating revenues decreased $213,000
in the first quarter of 2000 to $815,000 primarily reflecting a decrease in
owner-operator insurance premiums relating to the slow-down in the manufactured
housing industry.
The Company also experienced an increase in cargo related claims in the first
quarter of 2000 primarily relating to the delivery of manufactured homes. As a
result of the above factors the loss at the EBITDA level increased in the first
quarter of 2000 to $2,261,000.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities used $1,483,000 of cash in the first quarter of 2000
primarily to fund the net loss, the seasonal increase in trade accounts
receivable and pay prior year federal and state tax liabilities.
Operating activities in the first quarter of 1999 used $281,000 of cash
primarily to finance a more robust increase in trade accounts receivable
partially offset by an increase in accrued liabilities.
Trade accounts receivable days sales outstanding (DSO) decreased from 28 days at
December 31, 1999 to 26 days at March 31, 2000. The Company had no outstanding
borrowing under its revolving credit facility ("Credit Facility") at March 31,
2000.
The Company's $20,000,000 Credit Facility contains financial covenants, the most
restrictive of which are a debt service to cash flow coverage ratio and an
interest expense coverage ratio. The Company projected it was probable that a
violation of one or more of the financial covenants would occur at each of the
measurement dates during 2000. Accordingly, the Company and the bank, on March
30, 2000, agreed to modify the affected covenants. This amendment among other
restrictions will limit the payment of dividends to $120,000 annually ($142,000
was declared in 1999). The Company was in compliance at March 31, 2000 and
believes, based on its current financial projections, that it will maintain
compliance with the amended financial covenants and that the Credit Facility
should be adequate to meet the Company's short-term liquidity needs.
The Company had minimal exposure to interest rates as of March 31, 2000, as
substantially all of its outstanding long-term debt bears fixed rates. The
Credit Facility mentioned above bears variable interest rates based on either a
Federal Funds rate or the Eurodollar rate. Accordingly, borrowings under the
Credit Facility have exposure to changes in interest rates. Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes. Also, the Company currently, is not
using any fuel hedging instruments.
Impact of Seasonality
Shipments of manufactured homes tend to decline in the winter months in areas
where poor weather conditions inhibit transport. This usually reduces operating
revenues in the first and fourth quarters of the year. The Company's operating
revenues, therefore, tend to be stronger in the second and third quarters.
FORWARD LOOKING DISCUSSION
This report contains a number of forward-looking statements. From time to time,
the Company may make other oral or written forward-looking statements regarding
its anticipated operating revenues, costs and expenses, earnings and other
matters affecting its operations and condition. Such forward-looking statements
are subject to a number of material factors which could cause the statements or
projections contained therein to be materially inaccurate. Such factors include,
without limitation, the risk of declining production in the manufactured housing
industry; the risk of losses or insurance premium increases from traffic
accidents; the risk of loss of major customers; risks of competition in the
recruitment and retention of qualified drivers in the transportation industry
generally; risks of acquisitions or expansion into new business lines that may
not be profitable; risks of changes in regulation and seasonality of the
Company's business. Such factors are discussed in greater detail in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
Exhibit 27 - Financial Data Schedule for
Three Month Period Ended March 31, 2000
(b) Report on Form 8-K:
No reports on Form 8-K were filed during the quarter for
which this report is filed.
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.
THE MORGAN GROUP, INC.
BY: /s/ Dennis R. Duerksen
---------------------------
Dennis R. Duerksen
Chief Financial Officer
DATE: May 11, 2000