UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2000
THE MORGAN GROUP, INC.
2746 Old U.S. 20 West
Elkhart, Indiana 46514
(219)295-2200
Commission File Number 1-13586
Delaware 22-2902315
(State of Incorporation) (I.R.S. Employer Identification Number)
Securities Registered Pursuant to Section 12(b) of the Act:
American Stock Exchange
Class A common stock, without par value
Securities Registered Pursuant to Section 12(g) of the Act:
None
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 and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 26, 2001 was $3,105,000. The number of shares of the Registrant's
Class A common stock $.015 par value and Class B common stock $.015 par value,
outstanding as of March 26, 2001, was 1,248,157 shares, and 1,200,000 shares,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders are
incorporated into Part III of this report.
Part I
Item 1. BUSINESS
Overview
The Morgan Group, Inc. (the "Company" or "Registrant") , a Delaware corporation,
is the nation's largest publicly owned service company in managing the delivery
of manufactured homes, commercial vehicles and specialized equipment in the
United States, and through its wholly owned and principal subsidiary, Morgan
Drive Away, Inc. ("Morgan"), has been operating since 1936. The Company is a
subsidiary of Lynch Interactive Corporation, which formed the Company in 1988 to
acquire Morgan and Interstate Indemnity Company ("Interstate"), an insurance
subsidiary. The Company offers financing to independent owner-operators through
Morgan Finance, Inc. ("Finance"). The Company provides services to the Driver
Outsourcing industry through its subsidiary Transfer Drivers, Inc. ("TDI").
The Company primarily provides outsourcing transportation services through a
national network of approximately 1,023 independent owner-operators and
approximately 1,410 other drivers. The Company dispatches its drivers from 74
locations in 28 states. The Company's largest customers include Oakwood Homes
Corporation, Fleetwood Enterprises, Inc., Champion Enterprises, Inc., Winnebago
Industries, Inc., Cavalier Homes, Inc., Clayton Homes, Inc., Four Seasons
Housing, Inc., Thor Industries, Inc., Holiday Rambler and Damon Corporation.
The Company also provides certain insurance and financing services to the
independent owner-operators through its insurance and finance subsidiaries,
Interstate and Finance, respectively.
As further described below, the Company's strategy is to grow through expansion
in the niche businesses already being serviced, along with pursuing acquisitions
or joint ventures in related industries. In addition, the Company will look to
expand insurance product offerings to drivers and owner-operators through
Interstate.
The Company's principal office is located at 2746 Old U.S. 20 West, Elkhart,
Indiana 46514-1168.
Company Services
The Company operates in these business segments: Manufactured Housing, Driver
Outsourcing, Specialized Outsourcing Services, and Insurance and Finance.
o Manufactured Housing Segment. The largest portion of the Company's
operating revenues is derived from transportation of manufactured
housing, primarily new manufactured homes, modular homes, and office
trailers. A manufactured home is an affordable housing alternative. In
addition, Manufactured Housing transports used manufactured homes and
offices for individuals, businesses, and the U.S. Government. Based on
industry shipment data available from the Manufactured Housing
Institute ("MHI"), and the Company's knowledge of the industry and its
principal competitors, the Company is the largest transporter of
manufactured homes in the United States. Manufactured Housing ships
products through approximately 749 independent owner-operators driving
specially modified semi-tractors referred to as "toters," which are
used to reduce combined vehicle length. The number of independent
owner-operators decreased approximately 26% in 2000 principally due to
the decrease in shipments. Makers of manufactured housing generally
ship their products no more than a few hundred miles from their
production facilities. Therefore, to serve the regional structure of
this industry, the Company positions its dispatch offices close to the
production facilities it is serving and are substantially dedicated to
serving such facilities. The Company reduced its number of
manufacturing housing dispatch offices in 2000 by 18 locations,
primarily due to plant closure and internal consolidation. Most
manufactured housing units, when transported, require a special permit
prescribing the time and manner of transport for over-dimensional
loads. See Item 1. Business - Forward-Looking Discussion. The Company
obtains the permits required for each shipment from each state through
which the shipment will pass.
In 2000, for the second consecutive year, the manufactured housing
industry experienced a decline in shipments and production. Industry
production by the manufactured housing industry (considering
double-wide homes as two shipments) in the U.S. decreased by
approximately 26% to 426,000 in 2000 from 574,000 in 1999, after a 5%
decrease in 1999 according to data from the MHI. The Manufactured
Housing industry continues to suffer from the combined impact of
tightened consumer credit standards, increased industry repossessions
and excess inventory. The Company believes that affordable
manufactured housing over the long-term should continue to grow along
with the general economy, especially when employment statistics and
consumer confidence remain strong. There is no assurance, however,
that manufactured housing production will increase.
o Driver Outsourcing Segment. The Driver Outsourcing segment provides
outsourcing transportation services primarily to manufacturers of
recreational vehicles, commercial trucks, and other specialized
vehicles through a network of service centers in nine states. Driver
outsourcing engages the services of approximately 1,410 drivers who
are outsourced to customers to deliver the vehicles. In 2000, Driver
outsourcing delivered approximately 36,900 units through the use of
these drivers. While the number of deliveries decreased, operating
revenue per unit delivered increased in 2000.
o Specialized Outsourcing Services Segment. The Specialized Outsourcing
Services segment consists of large trailer ("Towaway") delivery,
travel and other small trailer ("Pick-up") delivery. The Towaway
operation moved approximately 8,250 large trailers in 2000 compared to
14,600 large trailers in 1999, primarily the result of a shortage in
independent owner-operator availability. As of December 31, 2000,
Towaway had contracts with approximately 85 independent
owner-operators who drive semi-tractors compared to 144 independent
owner-operators in 1999. As of December 31, 2000, travel and other
small trailers are delivered by 183 independent owner-operators
utilizing pickup trucks compared to 161 independent owner-operators in
1999.
o Insurance and Finance Segment. The Insurance and Finance segment
provides insurance and financing to the Company's drivers and
independent owner-operators. Interstate, the Company's insurance
subsidiary, may accept a limited portion or all of the underwriting
risk, retaining the appropriate proportion of the premiums. This
segment administers the cargo, bodily injury and property damage
insurance programs.
Selected Operating and Industry Participation Information
The following tables set forth operating information and industry participation
with respect to the manufactured housing, driver outsourcing, and specialized
outsourcing services segments for each of the five years ended December 31,
2000.
Years Ended December 31,
Manufactured Housing
- --------------------
Operating Information: 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
New home shipments 102,463 148,019 161,543 154,389 121,136
Other shipments 13,031 11,871 17,330 24,144 23,465
-------- -------- -------- -------- --------
Total shipments 115,494 159,890 178,873 178,533 144,601
Linehaul revenues (in thousands) (1) $62,526 $88,396 $94,158 $93,092 $72,616
Industry Participation:
Industry production (2) 425,919 573,629 601,678 558,435 553,133
New home shipments 102,463 148,019 161,543 154,389 121,136
Shares of units produced 24.1% 25.8% 26.8% 27.6% 21.9%
Driver Outsourcing
- ------------------
Operating Information:
Shipments 36,883 49,892 44,177 45,447 58,368
Linehaul revenues (in thousands) $21,336 $23,748 $19,979 $19,706 $23,090
Specialized Outsourcing Services
- --------------------------------
Operating Information:
Shipments 29,215 32,967 38,167 34,867 41,255
Linehaul revenues (in thousands) $15,304 $21,115 $23,015 $19,630 $26,169
(1) Linehaul revenue is derived by multiplying the miles of a given shipment by
the stated mileage rate.
(2) Based on reports of MHI. To calculate shares of new homes shipped, the
Company assumes two unit shipments for each multi-section home.
New home shipments decreased 31% during 2000 as compared to an overall industry
production reduction of 26%. The Company believes it lost market share primarily
because of lower pricing by its competitors.
Additional financial information about the business segments is included in
Management's Discussion and Analysis of Financial Conditions and Results of
Operations and in Note 9 of the Notes to the Consolidated Financial Statements
included in Item 8.
Growth Strategy
The Company's strategy is to focus on its core transportation services. The
Company will also look for opportunities to capitalize and/or grow its market in
Manufactured Housing and Driver Outsourcing through acquisitions, if suitable
opportunities arise. To enhance its profitability, the Company is continuing the
process of reducing its overhead costs.
o Manufactured Housing. The Company believes it can take better
advantage of its position in the manufactured housing industry and its
relationship with manufacturers, retailers, and independent
owner-operators, by expanding the services it offers within its
specialized business. As the nation's largest service company managing
the delivery of manufactured homes, Morgan will also pursue other
national contracts with manufacturers. The Company will also continue
to pursue opportunities to offer new services and consider acquisition
opportunities.
o Driver Outsourcing. The Company has focused its operations in two
broad markets, recreational and commercial vehicles. Given the
softness in the recreational vehicle industry, the Company is looking
to expand its growth in the delivery of commercial vehicles, such as
school buses, ambulances, dump trucks and shuttle buses. In addition,
the Company has strengthened its sales and marketing staff. Morgan's
growth strategy within this market includes expanding its market
position in this highly fragmented delivery transportation market. The
future growth rate of the Company's outsourcing business is dependent
upon continuing to add major vehicle customers and expanding the
Company's driver force.
o Specialized Outsourcing Services. The Company believes it can grow its
Towaway business by increasing the number of available drivers and
through the use of transportation brokers. The Company has not been
able to take full advantage of large trailer delivery opportunities
because it did not have a sufficient number of towaway drivers or its
drivers were not in the necessary locations. Additionally, the Company
continues to develop other market opportunities for the Pick-up
portion of this segment.
o Acquisitions/Joint Ventures. The Company is continuously considering
acquisition opportunities. The Company may consider acquiring regional
or national firms that service the manufactured housing and/or the
outsourcing industry as well as logistics, transportation, or related
industries. The Company is continually reviewing potential
acquisitions and joint venture opportunities and is engaged in
negotiations from time to time. There can be no assurance that any
future transactions will be effected.
Forward-Looking Discussion
In 2001, the Company could benefit from further reduction of overhead costs and
an improvement of its safety record. While the Company remains optimistic over
the long term, near term results could be affected by a number of internal and
external economic conditions.
This report contains a number of forward-looking statements, including those
contained in the preceding paragraph and the discussion of growth strategy
above. From time to time, the Company may make other oral or written
forward-looking statements regarding its anticipated operating revenues, costs,
expenses, earnings and matters affecting its condition and operations. Such
forward-looking statements are subject to a number of material factors which
could cause the statements or projections contained herein or therein to be
materially inaccurate. Such factors include, without limitation, the following:
o Dependence on Manufactured Housing. Shipments of manufactured housing
have historically accounted for a substantial majority of the
Company's operating revenues. Therefore, the Company's prospects are
substantially dependent upon this industry, which is subject to broad
production cycles. Currently, manufactured housing is experiencing an
industry-wide decline in shipments, which is having an adverse impact
on the Company's operating revenues and profitability.
o Costs of Accident Claims and Insurance. Traffic accidents occur in the
ordinary course of the Company's business. Claims arising from such
accidents can be significant. Although the Company maintains liability
and cargo insurance, the number and severity of the accidents
involving the Company's independent owner-operators and drivers can
have significant adverse effect on the profitability of the Company
through premium increases and amounts of loss retained by the Company
below deductible limits or above its total coverage. There can be no
assurance that the Company can continue to maintain its present
insurance coverage on acceptable terms nor that the cost of such
coverage will not increase significantly.
o Customer Contracts and Concentration. Historically, a majority of the
Company's operating revenues have been derived under contracts with
customers. Such contracts generally have one, two, or three year
terms. There is no assurance that customers will agree to renew their
contracts on acceptable terms or on terms as favorable as those
currently in force. The Company's top ten customers have historically
accounted for a majority of the Company's operating revenues. The loss
of one or more of these significant customers could adversely affect
the Company's results of operations. A number of the Company's major
customers are experiencing financial difficulty as a result of the
softness in the manufactured housing and recreational vehicle markets.
o Competition for Qualified Drivers. Recruitment and retention of
qualified drivers and independent owner-operators is highly
competitive. The Company's contracts with independent owner-operators
are terminable by either party on ten days' notice. There is no
assurance that the Company's drivers will continue to maintain their
contracts in force or that the Company will be able to recruit a
sufficient number of new drivers on terms similar to those presently
in force. The Company may not be able to engage a sufficient number of
new drivers to meet customer shipment demands from time to time,
resulting in loss of operating revenues that might otherwise be
available to the Company.
o Independent Contractors, Labor Matters. From time to time, tax
authorities have sought to assert that independent contractors in the
transportation service industry are employees, rather than independent
contractors. Under existing interpretations of federal and state tax
laws, the Company maintains that its independent contractors are not
employees. There can be no assurance that tax authorities will not
challenge this position, or that such tax laws or interpretations
thereof will not change. If the independent contractors were
determined to be employees, such determination could materially
increase the Company's tax and workers' compensation exposure.
o Risks of Acquisitions and Expansions. The Company has sought and will
continue to seek favorable acquisition opportunities. Its strategic
plans may also include the initiation of new services or products,
either directly or through acquisition, within its existing business
lines or which complement its business. There is no assurance that the
Company will be able to identify favorable acquisition opportunities
in the future. There is no assurance that the Company's future
acquisitions will be successfully integrated into its operations or
that they will prove to be profitable for the Company. Such changes
could have a material adverse effect on the Company.
o Seasonality and General Economic Conditions. The Company's operations
have historically been seasonal, with generally higher operating
revenues generated in the second and third quarters than in the first
and fourth quarters. A smaller percentage of the Company's operating
revenues are generated in the winter months in areas where weather
conditions limit highway use. The seasonality of the Company's
business may cause a significant variation in its quarterly operating
results. Additionally, the Company's operations are affected by
fluctuations in interest rates and the availability of credit to
purchasers of manufactured homes and recreational vehicles, general
economic conditions, and the availability and price of motor fuels.
o Availability of Credit Facilities. The Company requires significant
credit facilities from independent financial institutions to support
its working capital needs and to provide letters of credit required by
its insurance arrangements. The availability and sufficiency of such
credit facilities depends on the Company's financial condition and
operating performance, which is affected by the other factors
described herein, as well as the willingness of lenders to provide
credit support in the transportation and manufacturing housing sector.
Customers and Marketing
The Company's customers requiring delivery of manufactured homes, recreational
vehicles, commercial trucks, and specialized vehicles are located in various
parts of the United States. The Company's largest manufactured housing customers
include Oakwood Homes Corporation, Fleetwood Enterprises, Inc., Champion
Enterprises, Inc., Cavalier Homes, Inc., Clayton Homes, Inc., Four Seasons
Housing, Inc., Scotsman, and Commodore Corporation. The Company's largest Driver
Outsourcing customers include Winnebago Industries, Inc., Thor Industries, Inc.,
Damon Corporation and Utilimaster. The Company's largest Specialized Outsourcing
Services customers include Fleetwood Enterprises, Inc., Keystone RV and North
American Van Lines, Inc. While most manufacturers rely solely on carriers such
as the Company, other manufacturers operate their own equipment and may employ
outside carriers on a limited basis.
The Company's operating revenues are comprised primarily of linehaul revenues
derived by multiplying the miles of a given shipment by the stated mileage rate.
Operating revenues also include charges for permits, insurance, escorts and
other items. A substantial portion of the Company's operating revenues are
generated under one, two, or three-year contracts with producers of manufactured
homes, recreational vehicles, and the other products. In these contracts, the
manufacturers agree that a specific percentage (up to 100%) of their
transportation service requirements from a particular location will be performed
by the Company on the basis of a prescribed rate schedule, subject to certain
adjustments to accommodate increases in the Company's transportation costs.
Linehaul revenues generated under customer contracts in 2000, 1999 and 1998 were
69%, 71%, and 64% of total linehaul revenues, respectively.
The Company's ten largest customers all have been served for at least three
years and accounted for approximately 67%, 68% and 69% of its linehaul revenues
in 2000, 1999 and 1998, respectively. Linehaul revenues under contract with
Fleetwood Enterprises, Inc. ("Fleetwood"), accounted for over 15% of linehaul
revenues in 2000. Linehaul revenues with Oakwood Homes Corporation ("Oakwood")
accounted for over 20% of linehaul revenues in 2000. The Fleetwood Manufactured
Housing contract is continuous except that it may be terminated upon thirty (30)
day written notice by either party if the other party has repeatedly failed to
perform, persistently disregarded applicable laws or regulations, or otherwise
committed a substantial violation of the contract. The Oakwood manufactured
housing contract is renewed annually. The Company has been servicing Fleetwood
for over 25 years and Oakwood for over ten years. Most contracts provide for
scheduled rate increases based upon regional fuel prices. These increases are
generally passed on to the independent owner-operators who purchase fuel.
The Company markets and sells its services through 74 locations in 28 states,
concentrated where manufactured housing and recreational vehicle production
facilities are located. Marketing support personnel are located both at the
Company's Elkhart, Indiana headquarters and regionally. Dispatch offices are
supervised by regional offices.
The Company has 22 dispatch offices each devoted primarily to a single customer
facility. This allows the dispatching agent and local personnel to focus on the
needs of each individual customer while remaining supported by the Company's
nationwide operating structure. Sales personnel at regional offices and at the
corporate headquarters meet periodically with manufacturers to review production
schedules, requirements and maintain contact with customers' shipping personnel.
Senior Management maintains personal contact with corporate officers of the
Company's largest customers. Regional and terminal personnel also develop
relationships with manufactured home park owners, retailers, finance companies
and others to promote the Company's shipments of used manufactured homes. The
Company also participates in industry trade shows throughout the country and
advertises in trade magazines, newspapers, and telephone directories.
Independent Owner-Operators
The shipment of product by Manufactured Housing and Specialized Outsourcing
Services is conducted by contracting for the use of the equipment of independent
owner-operators.
Owner-operators are independent contractors who own toters, tractors or pick-up
trucks, which they contract to, and operate for, the Company on a long-term
basis. Independent owner-operators are not generally approved to transport
commodities on their own in interstate or intrastate commerce. The Company,
however, possesses such approvals and/or authorities (see Item 1. Business -
Forward-Looking Discussion), and provides marketing, insurance, communication,
administrative, and other support required for such transportation.
The Company attracts independent owner-operators mainly through field
recruiters, trade magazines, referrals, and truck stop brochures. Recruitment
and retention of qualified drivers is highly competitive and there can be no
assurance that the Company will be able to attract a sufficient number of
qualified, independent owner-operators in the future.
The contract between the Company and each owner-operator can be cancelled upon
ten days' notice by either party. The weighted average length of service of the
Company's current independent owner-operators is approximately 4.0 years in 2000
and 3.5 years in 1999. At December 31, 2000, 1,023 independent owner-operators
were under contract to the Company, including 749 operating toters, 91 operating
semi-tractors, and 183 operating pick-up trucks.
In Manufactured Housing, independent owner-operators utilizing toter equipment
tend to exclusively transport manufactured homes. Once modified from a
semi-tractor, a toter has limited applications for hauling general freight.
Toter drivers are, therefore, unlikely to be engaged by transport firms that do
not specialize in manufactured housing. This gives the Company an advantage in
retaining toter independent owner-operators. The average tenure with the Company
of its toter independent owner-operators is 4.7 years in 2000 compared to 3.9
years in 1999.
In Specialized Outsourcing Services, Morgan is competing with national carriers
for the recruitment and retention of independent owner-operators who own
semi-tractors. The average length of service of the Company's independent
owner-operators is approximately 2.1 years in 2000, compared to 2.3 years in
1999. During 2000, the number of owner- operators providing services to Towaway
declined, while the number of owner-operators driving pick-ups increased.
Independent owner-operators are generally compensated for each trip on a per
mile basis. Independent owner-operators are responsible for operating expenses,
including fuel, maintenance, lodging, meals, and certain insurance coverages.
The Company provides required permits, cargo and liability insurance (coverage
while transporting goods for the Company), and communications, sales and
administrative services. Independent owner-operators, except for owners of
certain pick-up trucks, are required to possess a commercial drivers license and
to meet and maintain compliance with requirements of the U.S. Department of
Transportation and standards established by the Company.
From time to time, tax authorities have sought to assert that independent
owner-operators in the trucking industry are employees, rather than independent
contractors. No such tax claims have been successfully made with respect to
independent owner-operators of the Company. Under existing industry practice and
interpretations of federal and state tax laws, as well as the Company's current
method of operation, the Company believes that its independent owner-operators
are not employees. Whether an owner-operator is an independent contractor or
employee is, however, generally a fact-sensitive determination and the laws and
their interpretations can vary from state to state. There can be no assurance
that tax authorities will not successfully challenge this position, or that such
tax laws or interpretations thereof will not change. If the independent
owner-operators were determined to be employees, such determination could
materially increase the Company's employment tax and workers' compensation
exposure.
Driver Outsourcing
The Company utilizes both independent contractors and employees in its
outsourcing operations. The Company outsources its over 1,410 drivers on a
trip-by-trip basis for delivery to retailers and rental truck agencies,
recreational and commercial vehicles, such as buses, tractors, and commercial
vans. These individuals are recruited through driver recruiters, trade
magazines, brochures, and referrals. Prospective drivers are required to possess
at least a chauffeur's license and are encouraged to obtain a commercial
driver's license. They must also meet and maintain compliance with requirements
of the U.S. Department of Transportation and standards established by the
Company. Outsourcing drivers are utilized as needed, depending on the Company's
transportation volume and driver availability. Outsourcing drivers are paid on a
per mile basis. The driver is responsible for most operating expenses, including
fuel, return travel, lodging, and meals. The Company provides licenses, cargo
and liability insurance, communications, sales, and administrative services.
Agents and Employees
The Company has approximately 83 terminal managers and assistant terminal
managers who are involved directly with the management of equipment and drivers.
Of these 83 staff, approximately 67 are full-time employees and the remainder
are independent contractors who earn commissions. The terminal personnel are
responsible for the Company's terminal operations including safety, customer
relations, equipment assignment, and other matters. Because terminal personnel
develop close relationships with the Company's customers and drivers, from time
to time the Company has suffered a terminal personnel defection, following which
the former staff has sought to exploit such relationships in competition with
the Company. The Company does not expect that future defections, if any, would
have a material affect on its operations. In addition to the terminal personnel,
the Company employs approximately 190 full-time employees. The Company also has
5 full-time employee drivers in Manufactured Housing and 11 in Driver
Outsourcing.
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.
Risk Management, Safety and Insurance
The risk of losses arising from traffic accidents is inherent in any
transportation business. The Company carries personal injury and property damage
insurance with a deductible of $250,000 per occurrence except for the period
from April 1, 1998 to March 31, 1999, which had a deductible of $150,000. The
Company has obtained, but has not activated a self-insurance authority for
personal injury and property damage coverage of up to $1,000,000. The Company
maintains cargo damage insurance with a deductible of $1,000,000 from April 1,
1999 to July 1, 2001, and $150,000 from April 1, 1998 to March 31, 1999, and
$250,000 for prior periods. The insurance policy for the period of April 1, 1998
to March 31, 1999 included a stop-loss provision. The frequency and severity of
claims under the Company's liability insurance affects the cost and potentially
the availability of such insurance. If the Company is required to pay
substantially greater insurance premiums, or incurs substantial losses above its
insurance coverage or below its deductibles, its results could be materially
adversely affected. The Company continues to review its insurance programs,
self-insurance limits and excess policy provisions. The Company believes that
its current insurance coverage is adequate to cover its liability risks. There
can be no assurance that the Company can continue to maintain its present
insurance coverage on acceptable terms.
The following table sets forth information with respect to bodily injury,
property damage, cargo claims, and automotive physical damage reserves for the
years ended December 31, 2000, 1999, and 1998, respectively.
Claims Reserve History
Years Ended December 31,
(in thousands)
2000 1999 1998
---- ---- ----
Beginning Reserve Balance $8,418 $8,108 $5,323
Provision for Claims 7,518 8,633 7,698
Payments, net (7,590) (8,323) (4,913)
------- ------- -------
Ending Reserve Balance $8,346 $8,418 $8,108
====== ====== ======
The Company has driver recognition programs emphasizing safety to enhance the
Company's overall safety record. In addition to periodic recognition for safe
operations, the Company has implemented safe driving bonus programs. These plans
generally reward drivers on an escalating rate per mile based upon the
claim-free miles driven. The Company utilizes a field safety organization which
places a dedicated safety officer at most regional centers. These individuals
work towards improving safety by analyzing claims, identifying opportunities to
reduce claims costs, implementing preventative programs to reduce the number of
incidents, and promoting the exchange of information to educate others. The
Company has a Director of Safety and D.O.T. Compliance and six (6) field safety
managers.
Interstate makes available physical damage insurance coverage for the Company's
independent owner-operators. Interstate also writes performance surety bonds for
Morgan. The Company may also utilize its wholly-owned insurance subsidiary to
secure business insurance for Morgan through re-insurance contracts.
Competition
All of the Company's activities are highly competitive. In addition to fleets
operated by manufacturers, the Company competes with numerous small regional or
local carriers and to a lesser extent with large national carriers. The
Company's principal competitors in the Manufactured Housing and Specialized
Outsourcing Services marketplaces are privately owned. No assurance can be given
that the Company will be able to maintain its competitive position in the
future.
Competition among carriers is based on the rate charged for services, quality of
service, financial strength, and insurance coverage. The availability of tractor
equipment and the possession of appropriate registration approvals permitting
shipments between points required by the customer may also be influential.
Regulation
The Company's interstate operations (Morgan and TDI) are now subject to
regulation by the Federal Motor Carrier Safety Administration ("FMCSA") which is
an agency of the United States Department of Transportation ("D.O.T."). This
jurisdiction was transferred to the D.O.T. with the enactment of the Interstate
Commerce Commission Termination Act. Effective January 1, 1995, the economic
regulation of certain intrastate operations by various state agencies was
preempted by federal law. The states continue to have jurisdiction primarily to
insure that carriers providing intrastate transportation services maintain
required insurance coverage, comply with applicable safety regulations, and
conform to regulations governing size and weight of shipments on state highways.
Most states have adopted the Federal Motor Carrier safety regulations and
actively enforce them in conjunction with D.O.T. personnel.
Motor carriers normally are required to obtain approval and/or authority from
the FMCSA as well as various state agencies. Morgan is approved and/or holds
authority to provide interstate and intrastate transportation services from, to,
and between all points in the continental United States.
The Company provides services to certain specific customers under contract and
non-contract services to the shipping public pursuant to governing rates and
charges maintained at its corporate and various dispatching offices.
Transportation services provided pursuant to a written contract are designed to
meet a customer's specific shipping needs.
Federal regulations govern not only operating authority and registration, but
also such matters as the content of agreements with independent owner-operators,
required procedures for processing of cargo loss and damage claims, and
financial reporting. The Company believes that it is in substantial compliance
with all material regulations applicable to its operations.
The D.O.T. regulates safety matters with respect to the interstate operations of
the Company. Among other things, the D.O.T. regulates commercial driver
qualifications and licensing; sets minimum levels of financial responsibility;
requires carriers to enforce limitations on drivers' hours of service;
prescribes parts, accessories and maintenance procedures for safe operation of
commercial/motor vehicles; establishes health and safety standards for
commercial motor vehicle operators; and utilizes audits, roadside inspections
and other enforcement procedures to monitor compliance with all such
regulations. The D.O.T. has established regulations which mandate random,
periodic, pre-employment, post-accident and reasonable cause drug testing for
commercial drivers and similar regulations for alcohol testing. The Company
believes that it is in substantial compliance with all material D.O.T.
requirements applicable to its operations.
In Canada, provincial agencies grant both intraprovincial and extraprovincial
authority; the latter permits transborder operations to and from the United
States. The Company has obtained from Canadian provincial agencies all required
extraprovincial authority to provide transborder transportation of manufactured
homes and motor homes throughout most of Canada.
Most manufactured homes, when being transported by a toter, exceed the maximum
dimensions allowed on state highways without a special permit. The Company
obtains these permits for its independent contractor owner-operators from each
state which allows the Company to transport their manufactured homes on state
highways. The states and Canadian provinces have special requirements for
over-dimensional loads detailing permitted routes, timing required, signage,
escorts, warning lights and similar matters.
Most states and provinces also require operators to pay fuel taxes, comply with
a variety of other state tax and/or registration requirements, and keep evidence
of such compliance in their vehicles while in transit. The Company coordinates
compliance with these requirements by its drivers and independent contractor
owner-operators, and monitors their compliance with all applicable safety
regulations.
Interstate, the Company's insurance subsidiary, is an insurance company
incorporated under Vermont law. It is required to report annually to the Vermont
Department of Banking, Insurance, Securities, & Health Care Administration, and
must submit to an examination by this Department on a triennial basis. Vermont
regulations require Interstate to be audited annually and to have its loss
reserves certified by an approved actuary. The Company believes Interstate is in
substantial compliance with Vermont insurance regulations.
Finance, the Company's finance subsidiary, is incorporated under Indiana law.
Finance is subject to Indiana's Equal Credit Opportunity Laws and other state
and federal laws relating generally to fair financing practices.
Item 2. PROPERTIES
The Company owns approximately 24 acres of land with improvements in Elkhart,
Indiana. The improvements include a 23,000 square foot office building housing
the Company's principal office and Manufactured Housing; a 7,000 square foot
building housing Specialized Outsourcing Services; a 9,000 square foot building
used for the Company's safety and driver service departments. Most of the
Company's 74 locations are situated on leased property. The Company also owns
and leases property for storage at various locations throughout the United
States, usually in proximity to manufacturers of products moved by the Company.
The property leases have term commitments of a minimum of thirty days and a
maximum of three years, at monthly rentals ranging from $10 to $6,500. The
following table summarizes the Company's owned real property.
Property Property Approximate
Location Description Acreage
-------- ----------- -------
Elkhart, Indiana Corporate and
Specialized Outsourcing Services 24
Wakarusa, Indiana Terminal and storage 4
Middlebury, Indiana Terminal and storage 13
Mocksville, North Carolina Terminal and storage 8
Edgerton, Ohio Terminal and storage 2
Woodburn, Oregon Storage 4
Woodburn, Oregon Region and storage 1
Montevideo, Minnesota Storage 3
The following property is owned
and is being held for sale:
Fort Worth, Texas Storage 6
Item 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are party to litigation in the ordinary course
of business, generally involving liability claims in connection with traffic
accidents incidental to its transport business. From time to time the Company
may become party to litigation arising outside the ordinary course of business.
The Company does not expect such pending suits to have a material adverse effect
on the Company or its results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the American Stock Exchange under the
symbol MG. As of March 20, 2001, the approximate number of shareholders' of
record of the Company's Class A common stock was 125. This figure does not
include shareholders with shares held under beneficial ownership in nominee name
or within clearinghouse position of brokerage firms and banks. The Class B
common stock is held of record by Brighton Communications Corporation, a
subsidiary of Lynch Interactive Corporation. The Company in the third quarter
2000 reduced the dividend rate. The Company did not declare a dividend in the
fourth quarter of 2000. The Company's ability to pay dividends is limited by
covenants with its senior lenders.
Market Price of Class A common stock:
2000 1999
Quarter Ended High Low High Low
---- --- ---- ---
March 31 $8.50 $5.38 $9.13 $6.63
June 30 7.88 6.13 8.75 6.75
September 30 7.25 5.25 9.88 7.00
December 31 6.06 3.75 7.88 5.44
Dividends Declared:
Class A Class B
Cash Dividends Cash Dividends
-------------- --------------
Quarter Ended 2000 1999 2000 1999
March 31 $0.02 $0.02 $0.01 $0.01
June 30 0.02 0.02 0.01 0.01
September 30 0.01 0.02 0.005 0.01
December 31 0.00 0.02 0.00 0.01
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
THE MORGAN GROUP, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS
(Dollars in thousands, except share amounts)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Operations
Operating Revenues $108,024 $145,629 $150,454 $146,154 $132,208
Operating (Loss) Income (1) (2,038) 550 2,007 1,015 (3,263)
Pre-tax (Loss) Income (1) (2,348) 212 1,462 296 (3,615)
Net (Loss) Income (1) (4,799) 19 903 196 (2,070)
Net (Loss) Income Per Share:
Basic ($1.96) $0.01 $0.35 $0.07 ($0.77)
Diluted ($1.96) 0.01 0.35 0.07 (0.77)
Cash Dividends Declared:
Class A 0.05 0.08 0.08 0.08 0.08
Class B 0.025 0.04 0.04 0.04 0.04
Financial Position
Total Assets $23,269 $32,264 $33,387 $33,135 $33,066
Working Capital 1,063 3,189 3,806 1,613 1,635
Long-term Debt 288 965 1,480 2,513 4,206
Shareholders' Equity 7,201 12,092 13,221 12,724 13,104
Common Shares Outstanding at Year End
2,448,157 2,448,157 2,554,085 2,637,910 2,685,520
Basic Weighted Average Shares
Outstanding 2,448,157 2,469,675 2,606,237 2,656,690 2,684,242
(1) Includes pre-tax special charges of $624,000 ($412,000 after-tax) and
$3,500,000 ($2,100,000 after-tax) in 1997 and 1996, respectively.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ($ in thousands)
Year 2000 Compared with 1999
Consolidated Results
The year 2000 was characterized by the continued downturn in manufactured
housing production, which began in 1999. Industrial production of new
manufactured homes decreased approximately 26% in 2000. The Company was also
affected by the decline in activity in other vehicle markets the Company serves,
namely recreational vehicles and large trailers. As a result of these declines,
Morgan revenues decreased more than 25% from 1999 levels.
To combat this severe decline in revenues, the Company, in March 2000,
instituted significant cost reduction initiatives in all areas with primary
focus on staff reduction and consolidation of facilities. The effects of these
initiatives were savings of $1.8 million in 2000. It is estimated that the
effects of these initiatives will continue and will approximate savings of $3.2
million in 2001. In spite of these significant efforts, operating costs as a
percentage of revenue were 102% for the year ended December 31, 2000, compared
to 99% in the prior year, resulting in a loss from operations of $2.0 million.
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. The
operating loss before interest, taxes, depreciation and amortization (EBITDA
loss) was $971,000 in 2000, as compared to an EBITDA of $1.8 million in 1999.
In the fourth quarter 2000, the Company recorded non-cash charges of $3.2
million relating to the valuation of deferred tax assets. Because the Company
has a cumulative loss in its three most recent fiscal years and is in default on
its Credit Facility (see "Liquidity and Capital Resources" and Note 3 of the
Notes to Consolidated Financial Statement), Management believes that with the
technical provisions of Statement of Financial Accounting Standard No. 109, it
would be inconsistent to rely on future taxable income to support realization of
the deferred tax assets. For additional information concerning the provision for
income taxes as well as information regarding differences between effective tax
rates and statutory rates, see Note 5 of the Notes to Consolidated Financial
Statements.
The net loss for 2000 was $4.8 million compared to net income of $19,000 in
1999.
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 decreased 29% from 1999 to $70.6 million
in 2000.
The Manufactured Housing industry as a whole continued to decline in 2000, with
industry shipments down by 26%. Management believes that demand for Manufactured
Housing in the near term will continue to be slow. The Company is highly
dependent upon the manufactured housing industry generally and on certain major
customers within that industry. Some of the Company's customers are financially
stressed by continued weakness in the industry. The Company's unit deliveries in
Manufactured Housing declined by 31% in 2000, indicating a loss of market share
due primarily to competitive pricing pressures.
EBITDA decreased $4.5 million to $5.8 million due to the decrease in business.
The decrease in business was partially offset by the Company's ability to
contain its cost. The Company closed some terminals due to plant closures and
consolidated terminals in other areas to serve the needs of more than one
customer from a single location.
The Company in Manufactured Housing is focusing on large national contracts. The
Company in 2001 has obtained significant additional contracts with Fleetwood and
Clayton Homes, Inc. Management will continue to pursue these efforts.
Driver Outsourcing
Driver Outsourcing provides outsourcing transportation services primarily to
manufacturers of recreational vehicles, commercial trucks and other specialized
vehicles. Driver Outsourcing operating revenues decreased 10% in 2000 to $20.9
million. The decrease was primarily the result of softness in the recreational
vehicle market. However, Driver Outsourcing EBITDA increased $900,000 to $1.3
million from improved operating efficiencies, consolidations and other
reductions in overhead costs.
Specialized Outsourcing Services
Specialized Outsourcing Services consists of delivering large trailers, travel
and other small trailers. The Company discontinued a specialized transport
service ("Decking") in 2000. Operating revenues decreased 28% to $15.3 million
in 2000. This decrease was primarily caused by a reduction in available drivers
and discontinuing the Decking deliveries. Specialized Outsourcing Services
incurred an EBITDA loss of $140,000 in 2000 compared to an EBITDA of $469,000 in
1999. This loss was caused primarily by the reduction in the delivery of large
trailers and Decking partially offset by improved operating efficiencies and
overhead cost reductions.
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 $1.0 million to $2.9 million in
2000 reflecting a decrease in owner-operator insurance premiums relating to the
decline in the manufactured housing industry. However, Insurance/Finance EBITDA
loss decreased $2.2 million to $6.8 million due to improved bodily injury,
property damage and cargo loss claims experience. The deductible for personal
injury and property damage is $250,000 per occurrence. The cargo deductible is
$1,000,000, accordingly, the Company is essentially self-insured for cargo
losses.
As a part of continuing efforts to contain claims expense, the Company is
expanding its safety awareness as well as formal safety training efforts among
both owner-operators and terminal personnel. Cargo claims as a percent of
operating revenue decreased from 2.3% in 1999 to 1.9% in 2000. Similarly, bodily
injury and property damage claims decreased from 3.6% to 3.3% of operating
revenue. Management believes that the Company's focus on driver safety is
having, and may continue to have, a favorable impact.
During 2001, the Company's insurance programs are to be renewed. Based on
current insurance market conditions, the Company expects significant increases
in premium expense. The Company plans to pass increased premium expense to
customers through increased rates.
Year 1999 Compared with 1998
Consolidated Results
During 1999, the Company experienced a decrease in the number of Manufactured
Housing shipments and a continued increase in insurance and claims costs. The
Company also experienced a reduction in operating revenues and profitability in
the Specialized Outsourcing Services segment.
Industrial shipment of new manufactured homes decreased approximately 4% in
1999. Morgan was more severely impacted as our largest customer experienced an
approximate 21% decline in retail sales of new homes. As a result, the Company
sustained an 8% decrease in shipments of new homes in 1999.
Total operating revenues in 1999 decreased $4.9 million to $145.6 million from
$150.5 million in 1998. Operating income before interest, taxes, depreciation
and amortization (EBITDA) decreased from $3.2 million in 1998 to $1.8 million in
1999.
Net interest expense decreased from $545,000 in 1998 to $338,000 in 1999 as a
result of improved cash management which reduced the amount of borrowings from
the credit facility.
For information concerning the provision for income taxes as well as information
regarding differences between effective tax rates and statutory rates, see Note
5 of the Notes to Consolidated Financial Statements.
Accordingly, net income for 1999 was $19,000 compared to $903,000 in 1998.
Segment Results
Manufactured Housing
Manufactured Housing operating revenues began decreasing in the second quarter;
and ended the year at $99.5 million, or a 6% reduction from 1998. In spite of
this reduction, EBITDA for 1999 ended at $10.3 million compared to $10.8 million
for 1998 because of cost reduction measures instituted by Management that
largely mitigated the revenue decline.
Driver Outsourcing
The Driver Outsourcing segment of the business demonstrated good growth in 1999.
Operating revenues increased 18% to $23.4 million in 1999 while EBITDA increased
by $301,000. However, high driver recruiting and other overhead costs continued
to depress the profitability of this segment in 1999.
Specialized Outsourcing Services
Specialized Outsourcing Services operating revenues decreased 8% to $21.2
million in 1999. This decrease was primarily the result of changes in the
customer base and a reduction in available drivers. Specialized Outsourcing
Services EBITDA decreased $542,000 primarily on the lower volume and increased
overhead costs associated with large trailer delivery.
Insurance/Finance
Insurance/Finance operating revenues decreased less than 3% in 1999,
particularly in the latter months of the year reflecting a decrease in
owner-operator insurance premiums relating to the slow-down in the manufactured
housing industry.
The Company in 1999 continued to be penalized by increasing claims costs. Claim
costs in 1999, as a percent of operating revenue increased to 5.9% from 5.1% in
1998. Effective April 1, 1999, the deductible for personal injury and property
damage increased to $250,000 per occurrence. Additionally, the cargo stop-loss
insurance policy provision terminated and the deductible was increased to
$1,000,000. Accordingly, the Company is essentially self-insured for cargo
losses.
Liquidity and Capital Resources
Operating activities used $0.9 million of cash in 2000 compared to a $4.9
million cash generation in 1999. The 2000 net loss and reductions in working
capital liabilities was partially offset by the deferred tax assets valuation
reserve and by reductions in trade accounts receivable and other working capital
assets. The Company has recorded an income tax receivable of $499,000 as of
December 31, 2000 as it intends to file for tax refunds based on prior year
payments. Trade accounts receivable decreased $2.4 million primarily due to the
decline in operating revenue. Day's sales outstanding ("DSO") increased to 33
days at December 31, 2000 as compared to 28 days at December 31, 1999.
The investment in property and equipment decreased in 2000 to $106,000 with
expenditures for an optical scanning system and other new information systems.
The 2001 capital expenditure plan approximates $650,000 but is dependent upon
the Company achieving a higher operating revenue level.
At December 31, 2000, the Company had a $7.7 million revolving credit facility
("Credit Facility"), with a $6.7 million letter of credit sub-limit. At December
31, 2000, the Company had no outstanding debt under its Credit Facility, and
$6.6 million of letters of credit were outstanding under the Credit Facility.
Letters of credit are required for self-insurance retention reserves and other
corporate needs.
The Credit Facility matured on January 28, 2001, at which time the Company had
no outstanding debt and $6.6 million outstanding letters of credit. As a result
of the Credit Facility not being renewed, the Company has a payment default and
the financial institution has the right to demand cash to meet outstanding
obligations under the letters of credit. The bank has discretion as to whether
to make any loans or issue additional letters of credit for the Company.
The financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company is actively seeking alternative
financial institutions to replace the existing Credit Facility as well as
seeking additional capital resources. Currently, negotiations are being held
with several financial institutions regarding a replacement facility. In
connection with these potential replacement facilities, the Company is
anticipating raising equity capital up to $3.0 million. The Company has engaged
in discussions with its principal shareholder, Lynch Interactive, regarding
these matters. Based on preliminary discussions, Lynch Interactive has expressed
interest in providing a portion of the capital support the Company will require,
but no terms have been agreed upon. The Company expects to seek to raise the
equity capital it will require from Lynch Interactive, other stockholders, or,
if necessary, privately from other sources. The Company's ability to continue as
a going concern is dependent upon its ability to successfully maintain its
financing arrangements and to comply with the terms thereof. However, although
no assurances can be given, management remains confident that the Company will
be able to continue operating as a going concern.
The Company's excess and primary insurance arrangements are to be renewed in
2001. While Management expects such arrangements to be renewed, the terms of
such renewed arrangements are difficult to predict and may result in a
significant increase in premium expense or the assumption of additional risks.
The annual premium for the excess insurance arrangements is expected to increase
by $500,000 to $600,000. Such renewed arrangements may also require the Company
to increase letters of credit in respect to its first loss exposure under such
arrangements. The terms of the present credit facility may not be sufficient to
provide for such additional letters of credit, and depending on the Company's
performance, the lender may not agree to expand the facility to provide such
letters of credit. In that event, it is Management's current expectation that it
would negotiate with its carriers to accept lower letter of credit requirements
in exchange for higher premiums. Management plans to seek to pass through
additional premium costs to customers. To the extent it is unable to do so,
additional premium costs will increase working capital requirements and reduce
profitability.
Subject to the forgoing discussion, assuming the Company receives anticipated
equity as described above, Management believes that internally generated funds
together with such additional equity and resources available under the credit
facility will be sufficient to provide for the Company's capital and liquidity
requirements during 2001.
The Company in 2000 declared Class A dividends of $.05 per share and Class B
dividends of $.025 per share through the first three quarters. No dividends were
declared in the fourth quarter. Payment of dividends is within the discretion of
the board of directors. Payment of future dividends will be dependent upon,
among other things, earnings, debt covenants, future growth plans, legal
restrictions, and the financial condition of the Company.
The Company had minimal exposure to interest rates as of December 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.
Inflation
Most of the Company's expenses are affected by inflation, which generally
results in increased costs. During 2000, the effect of inflation on the
Company's results of operation was minimal.
The transportation industry is dependent upon the availability and cost of fuel.
Although fuel costs are paid by the Company's owner-operators, increases in fuel
prices may have significant adverse effects on the Company's operations for
various reasons. Since fuel costs vary between regions, drivers may become more
selective as to regions in which they will transport goods resulting in
diminished driver availability. Also, the Company would experience adverse
effects during the time period from when fuel costs begin to increase until the
time when scheduled rate increases to customers are enacted. Increases in fuel
prices may also affect the sale of recreational vehicles by making the purchase
less attractive to consumers. A decrease in the sale of recreational vehicles
would be accompanied by a decrease in the transportation of recreational
vehicles and a decrease in the need for Driver Outsourcing services.
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 Information
Forward-looking statements in this report, including, without limitation,
statements relating to future events or the future financial performance of the
Company appear in the preceding Management's Discussion and Analysis of
Financial Condition and Results of Operations and in other written and oral
statements made by or on behalf of the Company, including, without limitation,
statements relating to the Company's goals, strategies, expectations,
competitive environment, regulation and availability of resources. Such
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that such forward-looking statements involve risks and uncertainties that could
cause actual events and results to be materially different from those expressed
or implied herein, including, but not limited to, the following: (1) dependence
on the Manufactured Housing industry; (2) costs of accident claims and
insurance; (3) customer contracts and concentration; (4) the competition for
qualified drivers; (5) independent contractors and labor matters; (6) risks of
acquisitions; (7) seasonality and general economic conditions; (8) availability
and sufficiency of credit facilities; (9) potential inability to raise
sufficient equity capital; and (10) other risks and uncertainties indicated from
time to time in the Company's filings with the Securities and Exchange
Commission. See Item 1. Business - Forward-Looking Discussion.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 7A of Form 10-K appears in Item 7 of this
report under the heading "Liquidity and Capital Resources" and is incorporated
herein by this reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Morgan Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
December 31
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 2,092 $ 3,847
Trade accounts receivable, less allowances
of $248 in 2000 and $313 in 1999 7,748 10,130
Accounts receivable, other 133 313
Refundable taxes 499 --
Prepaid expenses and other current assets 1,147 1,960
Deferred income taxes 319 1,475
------- -------
Total current assets 11,938 17,725
------- -------
Property and equipment, net 3,688 4,309
Intangible assets, net 6,727 7,361
Deferred income taxes 282 2,172
Other assets 634 697
------- -------
Total assets $23,269 $32,264
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,373 $ 3,907
Accrued liabilities 3,704 4,852
Income taxes payable -- 278
Accrued claims payable 3,224 3,071
Refundable deposits 1,357 1,752
Current portion of long-term debt and capital
lease obligations 217 676
------- -------
Total current liabilities 10,875 14,536
------- -------
Long-term debt and capital lease obligations, less
current portion 71 289
Long-term accrued claims payable 5,122 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 (deficit) earnings (2,116) 2,775
------- -------
Total capital and retained earnings 10,384 15,275
Less - treasury stock at cost (359,146 Class A
Shares in 2000 and 1999) (3,183) (3,183)
------- -------
Total shareholders' equity 7,201 12,092
------- -------
Total liabilities and shareholders' equity $23,269 $32,264
======= =======
See accompanying notes.
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share amounts)
For the year ended December 31
2000 1999 1998
---- ---- ----
Operating revenues $ 108,024 $ 145,629 $ 150,454
Costs and expenses:
Operating costs 99,552 133,774 136,963
Selling, general and administration 9,443 10,090 10,254
Depreciation and amortization 1,067 1,215 1,230
--------- --------- ---------
110,062 145,079 148,447
--------- --------- ---------
Operating (loss) income (2,038) 550 2,007
Interest expense, net 310 338 545
--------- --------- ---------
(Loss) income before income taxes (2,348) 212 1,462
Income tax expense 2,451 193 559
---------- --------- ---------
Net (loss) income ($4,799) $ 19 $ 903
========== ========= =========
Net (loss) income per basic and diluted share ($1.96) $ 0.01 $ 0.35
========== ========= =========
Basic weighted average shares outstanding 2,448,157 2,469,675 2,606,237
========= ========= =========
See accompanying notes.
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(Dollars in thousands, except per share amounts)
Class A Class B Additional Retained
Common Common Paid-in Officer Treasury (Deficit)
Stock Stock Capital Loan Stock Earnings Total
----- ----- ------- ---- ----- -------- -----
Balance at December 31, 1997 $23 $ 18 $ 12,453 $ (504) $ (1,426) $ 2,160 $ 12,724
Net income -- -- -- -- -- 903 903
Purchase of treasury stock -- -- -- 504 (813) -- (309)
Common stock dividends:
Class A ($.08 per share) -- -- -- -- -- (117) (117)
Class B ($.04 per share) -- -- -- -- -- (48) (48)
Options exercised -- -- 6 -- 62 -- 68
----- ------ -------- ------ -------- ------- --------
Balance at December 31, 1998 $23 $ 18 $ 12,459 $ -- $ (2,177) $ 2,898 $ 13,221
Net income -- -- -- -- -- 19 19
Purchase of treasury stock -- -- -- -- (1,006) -- (1,006)
Common stock dividends:
Class A ($.08 per share) -- -- -- -- -- (94) (94)
Class B ($.04 per share) -- -- -- -- -- (48) (48)
----- ------ -------- ------ -------- ------- --------
Balance at December 31, 1999 $23 $ 18 $ 12,459 $ -- $ (3,183) $ 2,775 $ 12,092
Net loss -- -- -- -- -- (4,799) (4,799)
Common stock dividends:
Class A ($.05 per share) -- -- -- -- -- (62) (62)
Class B ($.025 per share) -- -- -- -- -- (30) (30)
----- ------ -------- ------ -------- ------- --------
Balance at December 31, 2000 $23 $ 18 $ 12,459 $ -- $ (3,183) $(2,116) $ 7,201
===== ====== ======== ====== ======== ======= ========
See accompanying notes.
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
For the year ended December 31
2000 1999 1998
---- ---- ----
Operating activities:
Net (loss) income $(4,799) $ 19 $ 903
Adjustments to reconcile net (loss) income to net cash (used in) provided
by operating activities:
Depreciation and amortization 1,067 1,215 1,246
Deferred income taxes 3,046 (420) (713)
Loss on disposal of property and equipment 292 101 20
Changes in operating assets and liabilities:
Trade accounts receivable 2,382 2,058 1,174
Other accounts receivable 180 901 (1,088)
Refundable taxes (499) -- --
Prepaid expenses and other current assets 813 507 139
Other assets 63 (43) 810
Trade accounts payable (1,534) (397) 207
Accrued liabilities (1,148) 1,286 (612)
Income taxes payable (278) (600) 489
Accrued claims payable (72) 310 2,785
Refundable deposits (395) (78) 164
-------- ------- -------
Net cash (used in) provided by operating activities (882) 4,859 5,524
Investing activities:
Purchases of property and equipment (106) (811) (585)
Proceeds from sale of property and equipment 2 7 88
Business acquisitions -- (35) (228)
-------- ------- -------
Net cash used in investing activities (104) (839) (725)
Financing activities:
Principle payments on long-term debt (677) (664) (3,418)
Proceeds from long-term debt -- 149 135
Purchase of treasury stock, net of officer loan of $504 -- (1,006) (309)
in 1998
Proceeds from exercise of stock options -- -- 68
Common stock dividends paid (92) (142) (165)
-------- ------- -------
Net cash used in financing activities (769) (1,663) (3,689)
-------- ------- -------
Net (decrease) increase in cash and cash equivalents (1,755) 2,357 1,110
Cash and cash equivalents at beginning of period 3,847 1,490 380
-------- ------- -------
Cash and cash equivalents at end of period $ 2,092 $3,847 $ 1,490
======== ======= ========
Cash payments for interest were $379,000 in 2000, $406,000 in 1999 and $566,000
in 1998.
See accompanying notes.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Morgan Group, Inc. ("Company"), through its wholly owned subsidiaries,
Morgan Drive Away, Inc. ("Morgan") and TDI, Inc. ("TDI"), provides outsourced
transportation and logistical services to the manufactured housing and
recreational vehicle industries and is a leading provider of delivery services
to the commercial truck and trailer industries in the United States. Lynch
Interactive Corporation and its wholly owned subsidiaries ("Lynch Interactive")
owns all of the 1,200,000 shares of the Company's Class B common stock and
161,100 shares of the Company's Class A common stock, which in the aggregate
represents 70% of the combined voting power of the combined classes of the
Company's common stock.
The Company's other significant wholly owned subsidiaries are Interstate
Indemnity Company ("Interstate") and Morgan Finance, Inc. ("Finance"), which
provide insurance and financial services to its owner-operators.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires Management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could materially differ from those estimates.
Operating Revenues and Expense Recognition
Operating revenues and related driver pay are recognized when movement of the
product is completed. Other operating expenses are recognized when incurred.
Cash Equivalents
All highly liquid investments with maturity of three months or less when
purchased are considered to be cash equivalents.
Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of customer receivables. As discussed in Note 9,
two customers represent 33% of total customer receivables. The remaining credit
risk is generally diversified due to the large number of entities comprising the
Company's remaining customer base and their dispersion across many different
industries and geographic regions. As noted on the consolidated balance sheets,
the Company maintains an allowance for doubtful accounts to cover estimated
credit losses.
Property and Equipment
Property and equipment is stated at cost. Major additions and improvements are
capitalized, while maintenance and repairs that do not improve or extend the
lives of the respective assets are charged to expense as incurred. Depreciation
is computed using the straight-line method over the following estimated useful
lives:
Buildings 25 years
Transportation Equipment 3 to 5 years
Office and Service Equipment 3 to 8 years
Intangible Assets
Intangible assets are comprised primarily of goodwill, which is stated at the
excess of purchase price over net asset acquired, net of accumulated
amortization of $4,181,000 and $3,547,000 at December 31, 2000 and 1999,
respectively. Intangible assets are being amortized by the straight-line method
over their estimated useful lives, which range from three to forty years.
Impairment of Assets
The Company periodically assesses the net realizable value of its long-lived
assets, including intangibles, and evaluates such assets for impairment whenever
events or changes in circumstances indicate the carrying amount of an asset may
not be recoverable. For assets to be held and used, impairment is determined to
exist if estimated undiscounted future cash flows are less than the carrying
amount. For assets to be disposed of, impairment is determined to exist if the
estimated net realizable value is less than the carrying amount.
Insurance and Claim Reserves
Claims and insurance accruals reflect the estimated ultimate cost of claims,
including amounts for claims incurred but not reported, for cargo loss and
damage, bodily injury and property damage, workers' compensation, long-term
disability and group health not covered by insurance. These costs are charged to
operating costs.
Stock-Based Compensation
Stock based compensation expense for the Company's employee stock option plan is
recognized under the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations. Consistent with APB 25, the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant; therefore, no compensation expense is recognized.
Net Income (Loss) Per Common Share
Net income (loss) 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 common shares for both
classes of common stock is considered in the computation of EPS.
Fair Values of Financial Instruments
At December 31, 2000 and 1999, the carrying value of financial instruments such
as cash and cash equivalents, trade and other receivables, trade payables and
long-term debt approximate their fair values. Fair value is determined based on
expected future cash flows, discounted at market interest rates, and other
appropriate valuation methodologies.
Comprehensive Income
There were no items of comprehensive income for the years presented, as defined
under SFAS No. 130, "Reporting Comprehensive Income". Accordingly, comprehensive
income is equal to net income.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in fiscal
years beginning after June 15, 2000. Under the statement, all derivatives will
be required to be recognized on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. Under the statement, any ineffective portion of a derivative's change
in fair value must be immediately recognized in earnings. The Company has
evaluated the effect of SFAS No. 133 and determined that the adoption of SFAS
No. 133 will have no effect on the earnings and financial position of the
Company.
2. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
December 31
2000 1999
---- ----
Land $ 873 $ 873
Buildings 2,186 2,241
Transportation equipment 146 419
Office and service equipment 2,288 3,491
----- -----
5,493 7,024
Less accumulated depreciation 1,805 2,715
----- -----
Property and equipment, net $3,688 $4,309
====== ======
Depreciation expense was $433,000, $511,000 and $581,000 for 2000, 1999 and
1998, respectively.
3. INDEBTEDNESS
At December 31, 2000, the Company had a $7.7 million revolving credit facility
("Credit Facility"), with a $6.7 million letter of credit sub-limit. The Credit
Facility bears interest at the Company's option, on either the applicable
Eurodollar Rate Margin or the applicable Base Rate Margin, all of which are
adjusted over the term of the Credit Facility. Total borrowings and outstanding
letters of credit are limited to qualified trade accounts receivable, qualified
in-transit amounts, contractor loans, and qualified investments. The Credit
Facility contains financial covenants, the most restrictive of which are a cash
flow coverage ratio, interest expense coverage ratio, and minimum net income. At
December 31, 2000, the Company had no outstanding debt under its Credit
Facility, and $6.6 million of letters of credit were outstanding under the
Credit Facility. Letters of credit are required for self-insurance retention
reserves and other corporate needs.
The Credit Facility matured on January 28, 2001, at which time the Company had
no outstanding debt and $6.6 million outstanding letters of credit. The Company
was in default of the financial covenants, resulting in the bank failing to
renew the Credit Facility. As a result of the Credit Facility not being renewed,
the Company has a payment default and the financial institution has the right to
demand cash to meet outstanding obligations under the letters of credit. The
bank has discretion as to whether to make any loans or issue additional letters
of credit for the Company.
The financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company is actively seeking alternative
financial institutions to replace the existing Credit Facility as well as
seeking additional capital resources. Currently, negotiations are being held
with several financial institutions regarding a replacement facility. In
connection with these potential replacement facilities, the Company is
anticipating raising equity capital up to $3.0 million. The Company has engaged
in discussions with its principal shareholder, Lynch Interactive, regarding
these matters. Based on preliminary discussions, Lynch Interactive has expressed
interest in providing a portion of the capital support the Company will require,
but no terms have been agreed upon. The Company expects to seek to raise the
equity capital it will require from Lynch Interactive, other stockholders, or,
if necessary, privately from other sources. The Company's ability to continue as
a going concern is dependent upon its ability to successfully maintain its
financing arrangements and to comply with the terms thereof. However, although
no assurances can be given, management remains confident that the Company will
be able to continue operating as a going concern.
Long-term debt and capital lease obligations consisted of the following (in
thousands):
December 31
2000 1999
---- ----
Promissory notes with imputed interest rates from 6.31% to 10.0%, principal
and interest payments due from monthly to annually, through June 30, 2002 $242 $837
Term note and capital leases with imputed interest rates of 8.25% to 11.04%
with principal and interest payments due monthly through April 26, 2002 46 128
---- ---
288 965
Less current portion 217 676
--- ---
Long-term debt and capital lease obligations, net $ 71 $289
==== ====
Maturities on long-term debt are $217,000 in 2001 and $71,000 in 2002.
4. LEASES
Future minimum annual operating lease payments as of December 31, 2000, are as
follows (in thousands):
Operating
Leases
------
2001 $ 641
2002 173
2003 60
2004 11
2005 1
------
Total minimum lease payments $ 886
======
Aggregate expense under operating leases approximated $1,672,000, $2,115,000,
and $2,578,000 for 2000, 1999 and 1998, respectively.
5. INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
The income tax provisions (benefits) are summarized as follows (in thousands):
For the Year Ended December 31
2000 1999 1998
---- ---- ----
Current:
State $ - $ 98 $ 201
Federal (595) 515 1,071
------- ----- ------
(595) 613 1,272
Deferred:
State 488 (67) (203)
Federal 2,558 (353) (510)
------- ------ -------
3,046 (420) (713)
------- ------ -------
$2,451 $ 193 $ 559
======= ====== =======
Deferred tax assets (liabilities) are comprised of the following (in thousands):
December 31
2000 1999
---- ----
Deferred tax assets:
Accrued insurance claims $3,323 $3,232
Special charges and accrued expenses 367 487
Depreciation 199 163
Other 84 125
------ ------
3,973 4,007
Deferred tax liabilities:
Prepaid expenses (184) (360)
------- -------
(184) (360)
------- -------
$3,789 $3,647
Valuation allowance for deferred tax assets ($3,188) --
------ ------
$ 601 $3,647
====== ======
A reconciliation of the income tax provisions and the amounts computed by
applying the statutory federal income tax rate to income before income taxes
follows (in thousands):
For the Year Ended December 31
2000 1999 1998
---- ---- ----
Income tax provision (benefits) at
federal statutory rate $(772) $ 72 $497
State income tax (benefit), net of
federal tax benefit (44) 20 48
Changes in estimated
state tax rates on
beginning temporary differences -- -- (70)
Change in Valuation Allowance 3,188 -- --
Permanent differences 79 101 84
------- ---- --
$2,451 $193 $559
======= ==== ====
Net cash payments for income taxes were $181,000, $1,205,000 and $810,000 in
2000, 1999 and 1998, respectively.
In assessing the realization of deferred tax assets, Management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the period in
which the temporary differences become deductible. A valuation allowance of
$3,188,000 was recorded in 2000 to reduce the deferred tax asset as the Company
has experienced cumulative losses for financial reporting for the last three
years. Management considered, in reaching the conclusion on the required
valuation allowance, given the cumulative losses, combined with the current
default on its Credit Facility, that it would be inconsistent with applicable
accounting rules to rely on future taxable income to support full realization of
the deferred tax assets. Accordingly, the remaining deferred tax assets of
$601,000 relate to federal income tax carrybacks available to the Company.
6. SHAREHOLDERS' EQUITY
The Company has two classes of common stock outstanding, Class A and Class B.
Under the bylaws of the Company: (i) each share of Class A is entitled to one
vote and each share of Class B is entitled to two votes; (ii) Class A
shareholders are entitled to a dividend ranging from one to two times the
dividend declared on Class B stock; (iii) any stock distributions will maintain
the same relative percentages outstanding of Class A and Class B; (iv) any
liquidation of the Company will be ratably made to Class A and Class B
shareholders after satisfaction of the Company's other obligations; and (v)
Class B stock is convertible into Class A stock at the discretion of the holder;
Class A stock is not convertible into Class B stock.
The Company's Board of Directors has approved the purchase of up to 250,000
shares of Class A Common Stock for its Treasury at various dates and market
prices. During the year ended December 31, 2000, the Company did not repurchase
any shares under this plan. As of December 31, 2000, 186,618 shares had been
repurchased at prices between $6.875 and $11.375 per share for a total of
$1,561,000 under this plan.
In March 1999, the Company repurchased 102,528 shares of Class A stock in a
Dutch Auction for $985,000, which includes $62,000 of fees and expenses
associated with the transaction.
In July 1998, the Company purchased 70,000 shares of Class A stock from a former
officer for $637,000 under a special stock purchase approved by the Board of
Directors.
7. STOCK OPTION PLAN AND BENEFIT PLAN
The Company has an incentive stock option plan which provides for the granting
of incentive or non-qualified stock options to purchase up to 200,000 shares of
Class A common stock to directors, officers, and other key employees. No options
may be granted under this plan for less than the fair market value of the common
stock at the date of the grant. Although the exercise period is determined when
options are actually granted, an option shall not be exercised later than ten
years and one day after it is granted. Stock options granted will terminate if
the grantee's employment terminates prior to exercise for reasons other than
retirement, death, or disability. Stock options vest over a four-year period
pursuant to the terms of the plan, except for stock options granted to a
non-employee director, which are immediately vested. Employees and non-employee
directors have been granted non-qualified stock options to purchase 96,375 and
32,000 shares, respectively, of Class A common stock, net of cancellations and
shares exercised. There are 63,250 options reserved for future issuance.
In January 2000, the President and Chief Executive Officer entered into a
special stock option plan and agreement with the Company which provides for the
granting of options to purchase 120,000 shares of Class A Common Stock in three
separate installments. The first installment is for 40,000 shares at an exercise
price of $5.625, exercisable 6 months from the date of the agreement. The second
installment is for 40,000 shares at an exercise price of $7.625, exercisable 18
months after the date of the agreement. The third installment is for 40,000
shares at an exercise price of $9.625, exercisable 30 months after the date of
the agreement. The options granted under this stock option plan and agreement
are not granted pursuant to the Incentive Stock Option Plan described above; but
they are subject to the same general terms and conditions of the Incentive Stock
Option Plan.
A summary of the Company's stock option activity and related information
follows:
Year Ended December 31
2000 1999 1998
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
----- ----- ----- ----- ----- -----
Outstanding at beginning of year 181 $8.23 170 $8.28 167 $8.32
Granted 120 7.63 11 7.52 23 8.11
Exercised -- -- -- -- (7) 8.25
Canceled (53) 7.79 -- -- (13) 8.59
---- ----- --- ----- ---- ----
Outstanding at end of year 128 $8.42 181 $8.23 170 $8.28
=== ===== === ----- === =====
Exercisable at end of year 124 $8.41 149 $8.31 124 $8.42
=== ===== === ===== === =====
Exercise prices for options outstanding as of December 31, 2000, ranged from
$6.80 to $10.19. The weighted-average remaining contractual life of those
options is 4.6 years. The weighted-average fair value of options granted during
each year was immaterial.
The following pro forma information regarding net income (loss) and net income
(loss) per share is required when APB 25 accounting is elected, and was
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123, "Accounting for Stock-Based
Compensation." The fair values for these options were estimated at the date of
grant using a Black-Scholes option pricing model with the following assumptions:
dividend yield of 0.1%; expected life of 10 years; expected volatility of .596
in 2000 and .316 in 1999 and .250 in 1998, and a risk-free interest rate of 6.5%
in 2000 and 5.0% in 1999 and 6.0% in 1998. For purposes of pro forma
disclosures, the estimated fair values of the options are amortized to expense
over the option's vesting periods (in thousands except for per share
information):
2000 1999 1998
---- ---- ----
Net (loss) income:
As reported ($4,799) $ 19 $ 903
Pro forma ($5,024) (24) 861
Diluted (loss) earnings per share:
As reported ($1.96) $0.01 $0.35
Pro forma ($2.05) (0.01) 0.33
During the initial phase-in period, as required by SFAS No. 123, the pro forma
amounts were determined based on stock options granted after the 1995 fiscal
year only. Therefore, the pro forma amounts for compensation cost may not be
indicative of the effects on pro forma net income and pro forma net income per
share for future years.
The Company has a 401(k) Savings Plan covering substantially all employees,
which matches 25% of the employee contributions up to a designated amount. The
Company's contributions to the Plan for 2000, 1999 and 1998 were $18,000,
$23,000 and $29,000, respectively.
8. TRANSACTIONS WITH LYNCH INTERACTIVE CORPORATION
The Company has paid Lynch Interactive Corporation ("Lynch Interactive") an
annual service fee of $100,000 for executive, financial and accounting,
planning, budgeting, tax, legal, and insurance services. Additionally, Lynch
Interactive charges the Company for officers' and directors' liability
insurance, which totaled $20,000 in 2000, and $16,000 in 1999 and 1998.
The Company's Class A and Class B common stock owned by Lynch Interactive is
pledged to secure a Lynch Interactive line of credit.
9. 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 twenty-eight 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 six states. The specialized outsourcing services
segment consists of a large trailer, travel and small trailer delivery and
another Specialized Service "Decking" (discontinued in 2000). The last 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 "SOS" in 1998. The year of 1998 has been restated
to show corresponding segment information.
Measurement of Segment (Loss) and Segment Assets
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 summary of significant accounting policies (See Note 1).
There are no significant intersegment revenues.
The following table presents the financial information for the Company's
reportable segments for the years ended December 31 (in thousands):
2000 1999 1998
---- ---- ----
Operating revenues
Manufactured Housing $ 70,631 $ 99,491 $ 106,145
Driver Outsourcing 20,939 23,351 19,710
Specialized Outsourcing Services 15,260 21,172 23,064
Insurance and Finance 2,933 3,958 4,072
All Other (3) 148 48
-------- -------- ---------
109,760 148,120 153,039
Total intersegment insurance revenues (1,736) (2,491) (2,585)
-------- -------- ---------
Total operating revenues $108,024 $145,629 $ 150,454
======== ======== =========
Segment (loss) profit - EBITDA
Manufactured Housing $ 5,784 $ 10,265 $ 10,836
Driver Outsourcing 1,324 416 115
Specialized Outsourcing Services (140) 469 1,011
Insurance and Finance (6,765) (9,058) (8,358)
All Other (1,174) (327) (367)
-------- -------- ---------
(971) 1,765 3,237
Depreciation and amortization (1,067) (1,215) (1,230)
Interest expense (310) (338) (545)
-------- -------- ---------
(Loss) income before taxes $( 2,348) $ 212 $ 1,462
======== ======== =========
Identifiable assets
Manufactured Housing $ 11,255 $ 16,956 $ 18,764
Driver Outsourcing 4,561 5,438 6,055
Specialized Outsourcing Services 2,078 2,724 3,015
Insurance and Finance 1,433 1,801 1,864
All Other 3,942 5,345 3,689
-------- -------- ---------
Total $ 23,269 $ 32,264 $ 33,387
======== ======== =========
A majority of the Company's accounts receivable are due from companies in the
manufactured housing, recreational vehicle, and commercial truck and trailer
industries located throughout the United States. Services provided to Oakwood
Homes Corporation accounted for approximately $22.5 million, $28.8 million and
$31.8 million of revenues in 2000, 1999 and 1998, respectively. The Company's
gross accounts receivables from Oakwood were 23% and 16% of total receivables at
December 31, 2000 and 1999, respectively. In addition, Fleetwood Enterprises,
Inc., accounted for approximately $16.9 million, $23.9 million and $26.0
million, of revenues in 2000, 1999 and 1998, respectively. The Company's gross
accounts receivables from Fleetwood were 10% and 17% of total receivables at
December 31, 2000 and 1999, respectively.
10. OPERATING COSTS AND EXPENSES (in thousands)
2000 1999 1998
---- ---- ----
Purchased transportation costs $75,411 $ 101,046 $103,820
Operating supplies and expenses 10,826 13,559 14,092
Claims 5,658 8,633 7,698
Insurance 2,733 3,178 3,375
Operating taxes and licenses 4,924 7,358 7,978
------- --------- --------
$99,552 $ 133,774 $136,963
======= ========= ========
11. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings and claims that have arisen
in the normal course of business for which the Company maintains liability
insurance covering amounts in excess of its self-insured retention. Management
believes that adequate reserves have been established on its self-insured claims
and that their ultimate resolution will not have a material adverse effect on
the consolidated financial position, liquidity, or operating results of the
Company.
The Company leases certain land, buildings, computer equipment, computer
software, and motor equipment under non-cancelable operating leases that expire
in various years through 2005. Several land and building leases contain monthly
renewal options.
12. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 2000 and 1999 (in thousands, except share data):
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
2000
- ----
Operating revenues $27,867 $29,961 $28,164 $ 22,032
Operating income (loss) (898) 113 178 (1,431)
Net income (loss) (616) 17 75 (4,275)
Net income (loss) per basic and diluted share ($ 0.25) $ 0.01 $ 0.03 ($1.75)
1999
- ----
Operating revenues $35,325 $40,270 $37,312 $ 32,722
Operating income (loss) 325 436 208 (419)
Net income (loss) 118 169 34 (302)
Net income (loss) per basic and diluted share $ 0.05 $ 0.07 $ 0.01 ($ 0.12)
Report of Independent Auditors
The Board of Directors and Shareholders
The Morgan Group, Inc.
We have audited the accompanying consolidated balance sheets of The Morgan
Group, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule of The Morgan Group, Inc.
and subsidiaries listed in Item 14(a). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Morgan Group,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 3, the
Company, incurred operating losses during the year ended December 31, 2000, and
was not in compliance with its credit facility, which expired on January 28,
2001. Under the terms of the expired credit facility, the bank has the right to
demand cash to meet outstanding obligations of the letters of credits. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters, including raising
additional equity and replacing the expired credit facility, are more fully
described in Note 3. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
Greensboro, North Carolina
February 9, 2001
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
section entitled "Proposal One - Election of Directors" of the Company's Proxy
Statement for its 2001 Annual Meeting of Stockholders expected to be filed with
the Commission on or about May 12, 2001 (the "2001 Proxy Statement").
Item 11. EXECUTIVE COMPENSATION
The information required by this item with respect to executive compensation is
incorporated by reference to the section entitled "Management Remuneration" of
the 2001 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference to the
sections entitled "Voting Securities and Principal Holders Thereof" and entitled
"Proposal One - Election of Directors" of the 2001 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
section entitled "Certain Transactions with Related Persons" of the 2001 Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements are included in
Item 8:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
(a)(2) Financial Statement Schedules Schedule II - Valuation and Qualifying
Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the instructions or are inapplicable and,
therefore, have been omitted.
(a)(3) Exhibits Filed.
The exhibits filed herewith or incorporated by reference herein
are set forth on the Exhibit Index. Included in those exhibits
are Management contracts and compensatory plans and arrangements
which are identified as Exhibits 10.1 through 10.10.
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the quarter ending
December 31, 2000.
(c) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index.
Schedule II
The Morgan Group Inc. and Subsidiaries
Valuation and Qualifying Accounts
Allowance for Doubtful Accounts
-------------------------------
Additions Amounts
Beginning Charged to Costs Written Off Ending
Description Balance and Expenses Net of Recoveries Balance
----------- ------- ------------ ----------------- -------
Year ended December 31, 2000 $313,000 $249,000 $314,000 $248,000
Year ended December 31, 1999 $208,000 $415,000 $310,000 $313,000
Year ended December 31, 1998 $183,000 $301,000 $276,000 $208,000
Morgan Finance, Inc.
Allowance for Loans Receivable
------------------------------
Year ended December 31, 2000 $ 50,000 $211,000 $ 96,000 $165,000
Year ended December 31, 1999 $ 40,000 $ 60,000 $ 50,000 $ 50,000
Year ended December 31, 1998 $ 80,000 $156,000 $196,000 $ 40,000
Allowance for Receivable from Independent Contractors
-----------------------------------------------------
Year ended December 31, 2000 $ 81,000 $246,000 $250,000 $ 77,000
Year ended December 31, 1999 $ 82,000 $300,000 $301,000 $ 81,000
Year ended December 31, 1998 $ 41,000 $341,000 $300,000 $ 82,000
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
3.1 Registrant's Restated Certificate of Incorporation, as
amended, is incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 1999, filed on August 13, 1999.
3.2 Registrant's Code of By-Laws, as restated and amended, is
incorporated by reference to Exhibit 3.2 of the Registrant's
Registration Statement on Form S-1, File No. 33-641-22,
effective July 22, 1993.
4.1 Form of Class A Stock Certificate is incorporated by
reference to Exhibit 3.3 of the Registrant's Registration
Statement on Form S-1, File No. 33-641-22, effective July
22, 1993.
4.2 Fourth Article - "Common Stock" of the Registrant's
Certificate of Incorporation, is incorporated by reference
to the Registrant's Certificate of Incorporation, as
amended, filed as Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1999,
filed on August 13, 1999.
4.3 Article II - "Meeting of Stockholders," Article VI -
"Certificate for Shares" and Article VII - "General
Provisions" of the Registrant's Code of By-Laws,
incorporated by reference to the Registrant's Code of
By-Laws, as amended, filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1, File No.
33-641-22, effective July 22, 1993.
4.4 Revolving Credit and Term Loan Agreement, dated January 28,
1999, among the Registrant and Subsidiaries and Bank Boston,
N.A., is incorporated by reference to Exhibit 4(1) to the
Registrant's Current Report on Form 8-K filed February 12,
1999.
4.5 Guaranty, dated January 28, 1999, among the Registrant and
Subsidiaries and BankBoston, N.A. is incorporated by
reference to Exhibit 4(2) to the Registrant's Current Report
on Form 8-K filed February 12, 1999.
4.6 Security Agreement, dated January 28, 1999, among the
Registrant and Subsidiaries and BankBoston, N.A. is
incorporated by reference to Exhibit 4(3) to the
Registrant's Current Report on Form 8-K filed February 12,
1999.
4.7 Stock Pledge Agreement, dated January 28, 1999, among the
Registrant and Subsidiaries and BankBoston, N.A. is
incorporated by reference to Exhibit 4(4) to the
Registrant's Current Report on Form 8-K filed February 12,
1999.
4.8 Revolving Credit Note, dated January 28, 1999, among the
Registrant and Subsidiaries and BankBoston, N.A. is
incorporated by reference to Exhibit 4(5) to the
Registrant's Current Report on Form 8-K filed February 12,
1999.
4.9 Amendment Agreement No. 1 to that Certain Revolving Credit
Agreement and Term Loan Agreement among the Registrant and
its Subsidiaries and BankBoston dated as of March 31, 2000
is filed herewith.
4.10 Amendment Agreement No. 2 to that Certain Revolving Credit
Agreement and Term Loan Agreement among the Registrant and
its Subsidiaries and BankBoston dated as of November 10,
2000 is filed herewith.
10.1 The Morgan Group, Inc. Incentive Stock Plan is incorporated
by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1, File No. 33-641-22,
effective July 22, 1993.
10.2 First Amendment to the Morgan Group, Inc. Incentive Stock
Plan is incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 1997, filed November 14, 1997.
10.3 Memorandum to Charles Baum and Philip Ringo from Lynch
Corporation, dated December 8, 1992, respecting Bonus Pool,
is incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1, File No.
33-641-22, effective July 22, 1993.
10.4 Term Life Policy from Northwestern Mutual Life Insurance
Company insuring Paul D. Borghesani, dated August 1, 1991,
is incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1, File No.
33-641-22, effective July 22, 1993.
10.5 Long Term Disability Insurance Policy from Northwestern
Mutual Life Insurance Company, dated March 1, 1990, is
incorporated by reference to the Registrant's Registration
Statement on Form S-1, File No. 33-641-22, effective July
22, 1993.
10.6 Long Term Disability Insurance Policy from CNA Insurance
Companies, effective January 1, 1998 is incorporated by
reference to Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1997, filed
March 31, 1998.
10.7 The Morgan Group, Inc. Employee Stock Purchase Plan, as
amended, is incorporated by reference to Exhibit 10.16 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994, filed on March 30, 1995.
10.8 Consulting Agreement between Morgan Drive Away, Inc. and
Paul D. Borghesani, effective as of April 1, 1996, is
incorporated by reference to Exhibit 10.19 the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995, filed on April 1, 1996.
10.9 Employment Agreement, dated January 12, 2000 between
Registrant and Anthony T. Castor, III is incorporated by
reference to Exhibit 10.9 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1999.
10.10 Non-Qualified Stock Option Plan and Agreement, dated January
11, 2000, between Registrant and Anthony T. Castor, III is
incorporated by reference to Exhibit 10.10 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999.
10.11 Management Agreement between Skandia International and Risk
Management (Vermont), Inc. and Interstate Indemnity Company,
dated December 15, 1992, is incorporated by reference to
Exhibit 10.12 to the Registrant's Registration Statement on
Form S-1, File No. 33-641-22, effective July 22, 1993.
10.12 Agreement for the Allocation of Income Tax Liability between
Lynch Corporation and its Consolidated Subsidiaries,
including the Registrant (formerly Lynch Services
Corporation), dated December 13, 1988, as amended, is
incorporated by reference to Exhibit 10.13 the Registrant's
Registration Statement on Form S-1, File No. 33-641-22,
effective July 22, 1993.
10.13 Certain Services Agreement, dated January 1, 1995, between
Lynch Corporation and the Registrant is incorporated by
reference to Exhibit 10.18 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1994, filed on
March 30, 1995.
21 Subsidiaries of the Registrant is incorporated by reference
to Exhibit 21 to the Registrant Form 10-K for the year ended
December 31, 1998
23 Consent of Ernst & Young LLP
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
THE MORGAN GROUP, INC.
Date: April 2, 2001 By: /s/ Anthony T. Castor, III
-------------------------------------
Anthony T. Castor, III
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 2nd day of April,
2001.
1) Director, President and Chief Executive Officer:
By: /s/ Anthony T. Castor, III
--------------------------
Anthony T. Castor, III
2) Chief Financial Officer and
Chief Accounting Officer
By: /s/ Dennis R. Duerksen
-----------------------
Dennis R. Duerksen
3) A Majority of the Board of Directors:
/s/ Charles C. Baum Director
--------------------
Charles C. Baum
/s/ Richard B. Black Director
--------------------
Richard B. Black
/s/ Richard L. Haydon Director
---------------------
Richard L. Haydon
/s/ Robert S. Prather, Jr. Director
---------------------------
Robert S. Prather, Jr.