UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 2001
THE MORGAN GROUP, INC.
2746 Old U. S. 20 West
Elkhart, Indiana 46515-1168
(219) 295-2200
Delaware 1-13586 22-2902315
(State of (Commission File Number) (IRS Employer
Incorporation) Identification Number)
The Company (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
The number of shares outstanding of each of the Company's classes of common
stock at April 30, 2001 was:
Class A - 1,248,157 shares
Class B - 1,200,000 shares
The Morgan Group, Inc.
INDEX
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of
March 31, 2001 and December 31, 2000 3
Consolidated Statements of
Operations for the Three Month Periods
Ended March 31, 2001 and 2000 4
Consolidated Statements of
Cash Flows for the Three Month Periods
Ended March 31, 2001 and 2000 5
Notes to Consolidated Interim Financial
Statements as of March 31, 2001 6 - 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
PART II OTHER INFORMATION
Item 3 Defaults Upon Senior Securities 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 12
SIGNATURES 12
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
The Morgan Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
March 31 December 31
2001 2000
---- ----
ASSETS (Note 1)
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,371 $ 2,092
Trade accounts receivable, less allowances
of $173 in 2001 and $248 in 2000 7,826 7,748
Accounts receivable, other 127 133
Refundable taxes 503 499
Prepaid expenses and other current assets 1,199 1,147
Deferred income taxes 319 319
------- -------
Total current assets 11,345 11,938
------- -------
Property and equipment, net 3,677 3,688
Intangible assets, net 6,629 6,727
Deferred income taxes 282 282
Other assets 382 634
------- -------
Total assets $22,315 $23,269
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 3,540 $ 2,373
Accrued liabilities 2,923 3,704
Accrued claims payable 3,304 3,224
Refundable deposits 1,092 1,357
Current portion of long-term debt and capital lease obligations 192 217
------- -------
Total current liabilities 11,051 10,875
------- -------
Long-term debt and capital lease obligations, less current portion 89 71
Long-term accrued claims payable 4,515 5,122
Commitments and contingencies -- --
Shareholders' equity:
Common stock, $.015 par value
Class A: Authorized shares - 7,500,000
Issued shares - 1,607,303 23 23
Class B: Authorized shares - 2,500,000
Issued and outstanding shares - 1,200,000 18 18
Additional paid-in capital 12,459 12,459
Retained earnings (2,657) (2,116)
-------- --------
Total capital and retained earnings 9,843 10,384
Less - treasury stock at cost (359,146 Class A shares) (3,183) (3,183)
-------- --------
Total shareholders' equity 6,660 7,201
------- -------
Total liabilities and shareholders' equity $22,315 $23,269
======= =======
See notes to consolidated financial statements
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share amounts)
(Unaudited)
Three Months Ended
March 31,
2001 2000
---- ----
Operating revenues $ 20,688 $ 28,386
Costs and expenses:
Operating costs 18,879 26,632
Selling, general and administration 2,057 2,359
Depreciation and amortization 227 293
--------- ---------
20,878 28,765
Operating loss (475) (898)
Interest expense, net 66 57
--------- ---------
Loss before income taxes (541) (955)
Income tax benefit -- (339)
--------- ----------
Net loss $ (541) $ (616)
========== ==========
Net loss per basic and diluted share $ ( 0.22) $ ( 0.25)
========= ==========
Basic weighted average shares outstanding 2,448,157 2,453,260
========= =========
See notes to consolidated financial statements.
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
2001 2000
---------- ----------
Operating activities:
Net loss $ (541) $ (616)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 227 293
Loss on disposal of property and equipment 3 22
Changes in operating assets and liabilities:
Trade accounts receivable (78) (482)
Other accounts receivable 6 205
Refundable taxes (4) --
Prepaid expenses and other current assets (52) (94)
Other assets 252 118
Trade accounts payable 1,167 188
Accrued liabilities (781) (297)
Income taxes payable -- (581)
Accrued claims payable (526) 102
Refundable deposits (265) (341)
--------- ---------
Net cash used in operating activities (592) (1,483)
Investing activities:
Purchases of property and equipment (77) (77)
Other (10) --
--------- --------
Net cash used in investing activities (122) (77)
Financing activities:
Principal payments on long-term debt (42) (87)
Common stock dividends paid -- (37)
-------- ---------
Net cash used in financing activities (7) (124)
--------- ---------
Net decrease in cash and equivalents (721) (1,684)
Cash and cash equivalents at beginning of period 2,092 3,847
-------- --------
Cash and cash equivalents at end of period $ 1,371 $ 2,163
======== ========
See notes to consolidated financial statements.
The Morgan Group, Inc. and Subsidiaries
Notes to Consolidated Interim Financial Statements
(Unaudited)
March 31, 2001
Note 1.Basis of Presentation
The accompanying consolidated interim financial statements have been
prepared by The Morgan Group, Inc. and Subsidiaries (the "Company"), in
accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included for complete financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
such rules and regulations. The balance sheet at December 31, 2000 has been
derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The consolidated
interim financial statements should be read in conjunction with the
financial statements, notes thereto and other information included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Net income per common share ("EPS") is computed using the weighted average
number of common shares outstanding during the period. Since each share of
Class B common stock is freely convertible into one share of Class A common
stock, the total of the weighted average number of shares for both classes
of common stock is considered in the computation of EPS.
The accompanying unaudited consolidated interim financial statements
reflect, in the opinion of management, all adjustments (consisting of
normal recurring items) necessary for a fair presentation, in all material
respects, of the financial position and results of operations for the
periods presented. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions. Such estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The results of operations
for the interim periods are not necessarily indicative of the results for
the entire year.
The consolidated financial statements include the accounts of the Company
and its subsidiaries, Morgan Drive Away, Inc., TDI, Inc., Interstate
Indemnity Company, and Morgan Finance, Inc., all of which are wholly owned.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
Certain 2000 amounts have been reclassified to conform to the 2001
presentation.
Note 2.Indebtnedness
The prior 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.
Note 3.Income Taxes
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 $189,000 was recorded in 2001 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 relate to federal income tax carry backs
available to the Company.
Note 4.Segment Reporting
Description of Services by Segment
The Company operates in five 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 large
trailer, travel and small trailer delivery. 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, 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.
Measurement of Segment (Loss)
The Company evaluates performance and allocates resources based on several
factors, of which the primary financial measure is business segment
operating income, defined as earnings before interest, taxes, depreciation
and amortization (EBITDA). The accounting policies of the segments are the
same as those described in the Company's Annual Report on Form 10-K.
The following table presents the financial information for the Company's
reportable segments for the three months ended March 31, (in thousands):
2001 2000
---- ----
Operating revenues
Manufactured Housing $11,361 $18,206
Driver Outsourcing 4,532 5,611
Specialized Outsourcing Services 4,135 3,757
Insurance and Finance 660 815
All Other -- (3)
------- --------
Total operating revenues $20,688 $28,386
======= =======
Segment profit (loss) - EBITDA
Manufactured Housing $ 494 $ 1,742
Driver Outsourcing 314 469
Specialized Outsourcing Services 43 (143)
Insurance and Finance (733) (2,261)
All Other (366) (412)
-------- --------
(248) (605)
Depreciation and amortization (227) (293)
Interest expense (66) (57)
-------- --------
Loss before taxes $ (541) $ (955)
======== ========
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Consolidated Results
Revenues for the first quarter decreased by $7.7 million or 27% to $20.7 million
from $28.4 million in the first quarter of 2000. The revenue decrease was
related primarily to a decline of $6.8 million, or 38%, in the first quarter for
the Company's manufactured housing division.
Shipments for the manufactured housing industry nationwide were down 42% in
January and February of 2001 according to the Manufactured Housing Institute.
(March shipment data was not available). The industry continues to experience a
two-year cyclical slump created by consumer credit issues and excess inventory.
Morgan Group's loss before interest, taxes, depreciation and amortization
(EBITDA) was $248,000 for the quarter compared with a loss of $605,000 in 2000.
The improvements, on lower volume, reflect the Company's cost-reduction efforts
of the past 12 months. Pre-tax income for the quarter was a loss of $541,000
compared with a loss of $955,000 in 2000 - also a significant improvement.
Driver pay as a percent of revenue in the first quarter of 2001 remained
consistent with the first quarter of 2000. Accident and claim costs showed
significant improvement in the quarter compared to the prior year. Liability
claims declined by 43% compared to the prior year and cargo claims decreased by
64%.
Segment Results
The Company conducts its operations in four principal segments as discussed
below. The following discussion sets forth certain information about the segment
results.
Manufactured Housing
Manufactured Housing operating revenues are generated from providing
transportation and logistical services to manufacturers of manufactured homes.
Manufactured Housing operating revenues were $6.8 million or 38% less in the
first quarter of 2001 compared to the first quarter of a year ago, reflecting
the continued softness in the manufactured housing industry. Manufactured
Housing EBITDA decreased primarily due to the lower quarter-to-quarter shipment
volume.
Driver Outsourcing
Driver Outsourcing provides outsourcing transportation services primarily to
manufacturers of recreational vehicles, commercial trucks and other specialized
vehicles. Operating revenues of $4.5 million decreased $1.1 million in the first
quarter of 2001 compared to the first quarter of 2000, reflecting the softness
in the motor homes. EBITDA for this segment also decreased by $155,000 to
$314,000 in the first quarter of 2001 primarily due to lower quarter-to-quarter
volume and increased overhead costs.
Specialized Outsourcing Services
Specialized Outsourcing Services consists of delivering large trailers, travel
and other small trailers. Operating revenues increased by $378,000 in the first
quarter of 2001 to $4.1 million. This increase was in the delivery of large
trailers. Specialized Outsourcing Services recorded a profit in the first
quarter 2001 at the EBITDA level of $43,000 compared to a loss of $143,000 in
the first quarter of 2000. This increase is primarily due to the volume
increases.
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 $155,000
in the first quarter of 2001 to $660,000 primarily reflecting a decrease in
owner-operator insurance premiums relating to the slow-down in the manufactured
housing industry.
The Company also experienced a significant decrease in bodily injury, property
damage and cargo related claims in the first quarter of 2001 primarily relating
to the delivery of manufactured homes. As a result of the above factors the loss
at the EBITDA level for this segment decreased in the first quarter of 2001 by
$1.5 million to $733,000.
LIQUIDITY AND CAPITAL RESOURCES
The prior 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 were 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 facility and currently has
received several commitment letters. Each of the commitment letters is
conditioned upon satisfactory completion of due diligence procedures as well as
the Company meeting various financial covenants and requirements prior to
closing.
In connection with the replacement of the credit facility, the Board of the
Company's principal shareholder has approved a $2.0 million equity investment in
the Company. The investment by Lynch Interactive Corp. would increase its
ownership in the Company from 55.6% to 68.5%. The Board of Directors of Morgan
approved the issuance of 1,000,000 additional Class 'B' shares to Lynch
Interactive at a Board meeting on May 9, 2001. The issuance of additional shares
of Class 'B' stock and related matters will be subject to approval of Morgan
shareholders. The Morgan board also authorized management to further develop
plans to provide an opportunity for other shareholders to acquire additional
equity investment in the Company.
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.
Impact of Seasonality
Shipments of manufactured homes tend to decline in the winter months in areas
where poor weather conditions inhibit transport. This usually reduces operating
revenues in the first and fourth quarters of the year. The Company's operating
revenues, therefore, tend to be stronger in the second and third quarters.
FORWARD LOOKING DISCUSSION
This report contains a number of forward-looking statements. From time to time,
the Company may make other oral or written forward-looking statements regarding
its anticipated operating revenues, costs and expenses, earnings and other
matters affecting its operations and condition. Such forward-looking statements
are subject to a number of material factors which could cause the statements or
projections contained therein to be materially inaccurate. Such factors include,
without limitation, the risk of declining production in the manufactured housing
industry; the risk of losses or insurance premium increases from traffic
accidents; the risk of loss of major customers; risks that the Company will not
be able to attract and maintain adequate capital resources; risks of competition
in the recruitment and retention of qualified drivers in the transportation
industry generally; risks of acquisitions or expansion into new business lines
that may not be profitable; risks of changes in regulation and seasonality of
the Company's business. Such factors are discussed in greater detail in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
PART II - OTHER INFORMATION
Item 3 - Defaults Upon Senior Securities
The Company is currently in default on financial covenants of its credit
facility which matured on January 28, 2001 and was not renewed. See Note 2 to
the Consolidated Financial Statements for additional information.
Item 5 - Other Information
Due to the Company's capital planning which may require that certain items be
submitted to a vote of the stockholders, the Company anticipates that its annual
meeting will be held this year more than 30 days after the anniversary of last
year's meeting. The date for the annual meeting has not yet been set.
The time for submission of stockholder proposals for inclusion in the proxy
statement has lapsed. If a stockholder wishes to present a proposal at the
annual meeting without including the proposal in the proxy materials, the
proxies designated by the Board of Directors for that meeting may vote in their
discretion on any proposal any shares for which they have been appointed proxies
without mention of such matter in the proxy statement or on the proxy card for
the meeting.
Item 6 - Exhibits and Reports on Form 8-K
(a) Report on Form 8-K:
No reports on Form 8-K were filed during the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MORGAN GROUP, INC.
BY: /s/ Gary J. Klusman
--------------------
Chief Financial Officer
DATE: May 15, 2001