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 September 30, 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 October 31, 2001 was:
Class A - 1,248,157 shares
Class B - 2,200,000 shares
The Morgan Group, Inc.
INDEX
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of
September 30, 2001 and December 31, 2000 3
Consolidated Statements of
Operations for the Three and Nine Month Periods
Ended September 30, 2001 and 2000 4
Consolidated Statements of
Cash Flows for the Nine Month Periods
Ended September 30, 2001 and 2000 5
Notes to Consolidated Interim Financial
Statements as of September 30, 2001 6 - 11
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
PART II OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 19
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
The Morgan Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
September 30 December 31
2001 2000
---- ----
ASSETS (Unaudited) (Note 1)
Current assets:
Cash and cash equivalents $ 1,393 $ 2,092
Investments - restricted 2,623 --
Trade accounts receivable, less allowances
of $144 in 2001 and $254 in 2000 9,217 7,748
Accounts receivable, other 448 133
Refundable taxes 131 499
Prepaid insurance 2,896 97
Prepaid expenses and other current assets 1,382 1,050
Deferred income taxes 319 319
------- -------
Total current assets 18,409 11,938
------- -------
Property and equipment, net 3,477 3,688
Goodwill and other intangibles, net 6,376 6,727
Deferred income taxes 282 282
Other assets 170 634
------- -------
Total assets $28,714 $23,269
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 4,806 $ 2,373
Notes payable, banks 1,369 --
Accrued liabilities 4,489 3,704
Accrued claims payable 3,013 3,224
Refundable deposits 1,154 1,357
Current portion of long-term debt and capital lease obligations 147 217
------- -------
Total current liabilities 14,978 10,875
------- -------
Long-term debt and capital lease obligations, less current portion 16 71
Long-term accrued claims payable 4,821 5,122
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 - 4,400,000
Issued and outstanding shares - 2,200,000 33 18
Additional paid-in capital 14,318 12,459
Retained earnings (2,292) (2,116)
Less - treasury stock at cost (359,146 Class A shares) (3,183) (3,183)
------- -------
Total shareholders' equity 8,899 7,201
------- -------
Total liabilities and shareholders' equity $28,714 $23,269
======= =======
See notes to interim consolidated financial statements
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2001 2000 2001 2000
---- ---- ---- ----
Operating revenues $24,834 $28,629 $70,954 $87,447
Costs and expenses:
Operating costs 22,666 26,055 64,306 80,445
Selling, general and administration 2,127 2,160 6,207 6,792
Depreciation and amortization 210 236 688 817
------- ------- ------- -------
25,003 28,451 71,201 88,054
Operating (loss) income (169) 178 (247) (607)
Interest expense, net 90 77 182 210
------- ------- ------- -------
Income (loss) before income taxes (259) 101 (429) (817)
Income tax expense (benefit) -- 26 (255) (293)
------- ------- ------- -------
Net income (loss) $(259) $ 75 $(174) $(524)
======= ======= ======= =======
Net income (loss) per common share:
Basic $(0.08) $0.03 $(0.06) $(0.21)
======= ======= ======= =======
Diluted $(0.08) $0.03 $(0.06) $(0.21)
======= ======= ======= =======
Weighted average shares outstanding (thousands)
Basic 3,329 2,448 2,745 2,448
======= ======= ======= =======
Diluted 3,329 2,451 2,745 2,452
======= ======= ======= =======
Cash dividends declared per common share
Class A: $ -- $ 0.01 $ -- $ 0.05
======= ======= ======= =======
Class B: $ -- $ 0.005 $ -- $ 0.025
======= ======= ======= =======
See notes to interim consolidated financial statements
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30
2001 2000
----------- ----------
Operating activities:
Net income (loss) $ (174) $( 524)
Adjustments to reconcile net income (loss)
To net cash used in operating activities:
Depreciation and amortization 688 817
Loss on disposal of property and equipment 12 60
Changes in operating assets and liabilities:
Trade accounts receivable (1,469) (652)
Other accounts receivable (315) (13)
Refundable taxes 368 --
Prepaid insurance (2,799) --
Prepaid expenses and other current assets (332) 429
Other assets 464 229
Trade accounts payable 2,433 (285)
Accrued liabilities 785 (481)
Income taxes payable -- (565)
Accrued claims payable (512) (213)
Refundable deposits (203) (195)
------- -------
Net cash provided by (used in) operating activities (1,054) (1,393)
------- -------
Investing activities:
Purchase of restricted investments (2,623) --
Purchases of property and equipment (98) (118)
Other (7) 2
------- ------
Net cash provided by (used in) investing activities (2,728) (116)
------- -------
Financing activities:
Net proceeds from note payable to bank 1,369 --
Principal payments on long-term debt (160) (608)
Common stock dividends paid -- (92)
Proceeds from issuance of common stock 1,874 --
------ ------
Net cash provided by (used in) financing activities 3,083 (700)
------ -------
Net increase (decrease) in cash and equivalents (699) (2,209)
Cash & cash equivalents at beginning of period 2,092 3,847
------ ------
Cash and cash equivalents at end of period $1,393 $1,638
====== ======
See notes to interim consolidated financial statements.
The Morgan Group, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
(Unaudited)
September 30, 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. Impairment of Long-Lived Assets and Recent Accounting Pronouncements
As disclosed in the accounting policy note in the audited financial
statements for the year ended December 31, 2000, periodic assessment of
the net realizable value of its long-lived assets, including
intangibles, and evaluation of such assets for impairment are made
whenever events or changes in circumstances indicate the carrying amount
of the assets may not be recoverable. Impairment is determined to exist
if estimated undiscounted future cash flows are less than the carrying
amount of the intangible asset.
Significant negative indicators currently exist for the Company,
including, but not limited to, significant revenue declines of 26% in
fiscal 2000 and 13% in year-to-date 2001, operating and cash flow losses
in those periods and the loss of a significant customer as of October 1,
2001. As a result, management deemed it appropriate to obtain an
independent valuation of the Company's intangible assets to determine if
impairment existed as of September 30, 2001. This valuation was done for
the current accounting pronouncement relating to goodwill as prescribed
by Statements of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of (Statement 121) under which the Company has adopted an
accounting policy to utilize an undiscounted cash flow approach to
estimate any potential impairment.
Additionally in July 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards, No. 141, Business
Combination (Statement 141), and No. 142, Goodwill and Other Intangible
Assets (Statement 142). These Statements change the accounting for
business combinations, goodwill, and intangible assets. Statement 142
requires a discounted cash flow approach to estimate potential
impairment of intangible assets.
Under Statement 142, goodwill and indefinite lived intangible assets are
no longer amortized but are reviewed for impairment annually or more
frequently if impairment indicators arise. Separable intangible assets
that are deemed to have definite lives will continue to be amortized
over their useful lives. The amortization provisions of Statement 142
apply to both goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, companies are required to adopt Statement 142 in their
fiscal year beginning after December 15, 2001. Because of the different
transition dates for goodwill and intangible assets acquired on or
before June 30, 2001 and those acquired after that date, pre-existing
goodwill and intangibles will be amortized during this transition period
until adoption. New goodwill and indefinite lived intangible assets
acquired after June 30, 2001 will be recorded in accordance with the
Statement 142 requirements.
The Company is required to, and will, adopt Statements 141 and 142 in
the third quarter of 2001 except with respect to the provisions of
Statement 142 relating to goodwill and intangibles acquired prior to
July 1, 2001. Statements 141 and 142 will be adopted in the first
quarter of 2002 for those assets.
Key assumptions utilized in the independent valuation are discussed in
the following paragraphs.
In accordance with the requirements of Statement 142, the Company has
identified two reporting units, manufactured housing and drive away,
that contain material intangible assets that are subject to impairment
analysis. The Company does not maintain or have access to accurate,
supportable and reliable financial data at lower operating levels within
these segments which management relies upon in making its operating
decisions. The forecasts, valuations and impairment analyses for
Statement 142 were made at these two reporting unit levels.
Another key assumption is the time frame for which the Company has
estimated its cash flows for the projections. The valuation is based on
cash flow projected over a five-year period after which time cash flow
is normalized and projected to grow at a constant rate. Management
believes that five years is the appropriate period to forecast prior to
normalized cash flows based on the current industry cycle in
manufactured housing and the Company's long term market strategy.
The Company is projecting, and the valuation analysis assumes, net
earnings in all periods from 2002 to 2006. For the valuation, we
projected average net earnings in the periods from 2002 to 2006 of
$799,000 for the manufactured housing unit and $230,000 for the drive
away unit. Management believes the projected period and earnings are
appropriate for the valuation based on historical operating results, the
current state of the manufactured housing industry, the Company's
business model and long-term market strategy.
The valuation uses a discount rate of 15.5% based on the estimated rate
of return expected by an investor considering the perceived investment
risk. The discount rate reflects a risk-free rate of return and industry
adjusted equity premium, a premium for small size and the industry's
level of leverage. The capitalization rate of 8.4 was derived from the
discount rate and the long-term growth rate.
The projections also assume future capital expenditures of $170,000 to
$280,000 per year for each of the forecasted years 2002 through 2006.
Actual capital expenditures incurred in the previous five years were
significantly higher than these projections. The Company's business
model and strategy for the future is not asset intensive and the Company
has no plans to acquire significant transportation equipment, real
estate or other business property. Capital expenditures for the first
nine months of 2001 have been approximately $100,000. Management
believes that future capital expenditures used in the projections are
appropriate to carry out the Company's strategic plan.
The independent valuation based upon the Company's estimated future cash
flow concluded that currently there is no impairment of the Company's
intangible assets under Statement 121 as of September 30, 2001. However,
there is a projected impairment under Statement 142 of approximately
$300,000 to $500,000 for intangible assets in the drive away division
and approximately $25,000 to $100,000 for intangible assets in the
manufactured housing division. These intangible asset impairments will
be required to be recorded on January 1, 2002, when Statement 142 is
adopted for those assets.
The Company will be required to perform an updated analysis under
Statement 142 as of January 1, 2002. There can be no assurance at this
time that the projections or any of the key assumptions will remain the
same as business conditions may dictate significant changes in the
estimated cash flows or other key assumptions. The Company will update
the analysis of intangible asset impairment on at least an annual basis
as required by Statement 142 as long as material goodwill exists on the
balance sheet.
Note 3. Notes Payable, Banks
Credit Facility
On July 27, 2001, the Company obtained a new three-year $12.5 million
Credit Facility.
The Credit Facility will be used for working capital purposes and to
post letters of credit for insurance contracts. As of September 30,
2001, the Company had outstanding borrowings of $869,000 and $7.6
million outstanding letters of credit. Borrowings bear interest at a
rate per annum equal to either Bank of New York Alternate Base Rate
("ABR") plus one-half percent or, at the option of Company, absent an
event of default, the one month London Interbank Offered Rate ("LIBOR")
as published in The Wall Street Journal, averaged monthly, plus three
percent. Borrowings and posted letters of credit on the Credit Facility
are limited to a borrowing base calculation that includes 85% of
eligible receivables and 95% of eligible investments, and are subject to
certain financial covenants including minimum tangible net worth,
maximum funded debt, minimum fixed interest coverage and maximum capital
expenditures. The facility is secured by accounts receivable,
investments, inventory, equipment and general intangibles. The facility
may be prepaid anytime with prepayment being subject to a 3%, .75% and
.25% prepayment penalty during year 1, 2 and 3, respectively.
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. The bank
decided not to renew the prior Credit Facility; and, as a result, the
Company had a payment default.
Real Estate Loan
On July 31, 2001, the Company closed on a new real estate mortgage for
$500,000 that is secured by the Company's land and buildings in Elkhart,
Indiana. The loan will be used for short-term working capital purposes.
The mortgage bears interest at prime rate plus 0.75%, and is for a
six-month term with outstanding principal due on February 1, 2002. The
loan may be prepaid at any time with no penalties, and is subject to the
same covenants as the Credit Facility. The Company's application for
additional capacity under this facility is under consideration.
Note 4. Credit Risk
With the downturn in the national economy, management is continually
reviewing credit worthiness of its customers and taking appropriate
steps to ensure the quality of the receivables. As of September 30,
2001, 35% of the open trade accounts receivable was with five customers
of which over 97% was within 60 days of invoice. In total, 96% of the
open trade receivables are also within 60 days of invoice.
Effective October 1, 2001, the Company will no longer be the primary
carrier for its largest customer, Oakwood Homes Corporation. The Company
has reduced the Oakwood open accounts receivable from $1,776,000 as of
December 31, 2000, to $792,000 and $579,000 as of September 30, 2001,
and October 31, 2001, respectively. At this time, Company management
believes the receivable is fully collectible.
Note 5. Stockholders' Equity
Capital Infusion
On July 12, 2001, the Company received a $2 million capital infusion
from its majority stockholder Lynch Interactive Corporation. The Company
issued one million new Class B shares of common stock in exchange for
the $2 million cash investment, thereby increasing Lynch's ownership
position in the Company from 55.6% to 68.5%. Proceeds from the
transaction are invested in U.S. Treasury backed instruments and are
pledged as collateral for the Credit Facility.
Lynch Spin Off
On August 17, 2001, Lynch Interactive Corporation, the majority
stockholder of the Company, announced plans to spin off its investment
in the Company to Lynch Interactive stockholders. The proposed spin off
of the Company will allow Lynch Interactive stockholders to continue to
own the Company through a new entity instead of through Lynch
Interactive.
Note 6. 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 $3.2 million was recorded in
2000 to reduce the deferred tax assets, 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, 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 7. 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 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) Income
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 and nine-month periods ended September
30, (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------ ------------
Operating revenues
Manufactured Housing $13,947 $18,730 $ 39,411 $56,931
Driver Outsourcing 4,532 5,152 13,759 16,584
Specialized Outsourcing Services 5,728 4,023 15,831 11,662
Insurance and Finance 627 724 1,953 2,273
All Other - - - (3)
------- ------- ------- --------
Total operating revenues $24,834 $28,629 $70,954 $87,447
======= ======= ======= =======
Segment profit - EBITDA
Manufactured Housing $ 1,146 $ 1,716 $ 3,266 $ 5,354
Driver Outsourcing 283 194 1,003 1,100
Specialized Outsourcing Services 400 82 747 (37)
Insurance and Finance (1,879) (1,471) (4,012) (5,435)
All Other 91 (107) (563) (772)
------- -------- -------- --------
41 414 441 210
Depreciation and amortization (210) (236) (688) (817)
Interest expense (90) (77) (182) (210)
-------- -------- -------- --------
(Loss) income before taxes $ (259) $ 101 $ (429) $ (817)
======== ======= ======== ========
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
For the Quarter Ended September 30, 2001
Consolidated Results
For third-quarter 2001, revenues were down 13 percent to $24.8 million versus
the $28.6 million reported in the year-ago quarter. The Company reported revenue
improvements of 51 percent in the towaway division and 26 percent in the pickup
division. These increases were offset by a 27 percent decline in revenue from
the manufactured housing division.
Revenues for September were negatively impacted for all four divisions by the
September 11 terrorist attacks. Shippers experienced work slowdowns and demand
fell as some customers cancelled orders. In addition, continued weakness in the
manufactured housing sector resulted in reduced revenues in the manufactured
housing division, although the industry continues to make progress since hitting
bottom in February 2001.
To offset the lower revenue, the Company has implemented cost-cutting programs
designed to match company expenses with reduced revenue levels. In the Company's
business model, 86% of expenses are variable on a load-by-load basis, 11% of
expenses are variable within a 60-day period, and only 3% are fixed in the long
term. The Company has continued to eliminate or reduce costs to maximize
operating profit on overall lower revenues.
The Company renewed its liability and workers compensation insurance on July 1,
2001 resulting in increased expense. The liability insurance market for trucking
companies has been negatively impacted by increased loss ratios, higher credit
risk and a decrease in available capacity in the excess reinsurance market. The
Company will attempt to recover much of the increased insurance cost in the form
of apportioned insurance charges (AIC) to customers.
Operating costs were 91.3% of total revenues for the quarter compared to 91.0%
in prior year. Selling, general and administrative expenses were 8.6% of revenue
compared to 7.5% of revenue in the third quarter of 2000.
The reduced revenue and increased insurance expense resulted in an operating
loss of $169,000 in the third quarter compared to operating income of $178,000
in 2000.
Segment Results
The following discussion sets forth certain information about segment results.
Manufactured Housing
Revenues for the manufactured housing division decreased by $4.8 million or 27%
in the third quarter compared to prior year.
The manufactured housing market continues to rebound slowly from a severe
two-year slump. Shipments of manufactured homes in July and August of 2001 were
down 17% compared to the prior year. This compares to year-over-year declines of
41% in the first quarter and 29% in the second quarter of 2001 compared to 2000.
Effective October 1, 2001, the Company is no longer the primary carrier for
Oakwood Homes Corporation (NYSE: OH). In past years, Oakwood was the Company's
largest customer, generating revenues in excess of $25 million for the Company's
manufactured housing division. A weakened market for manufactured homes and
reductions in capacity at Oakwood had reduced the Company's revenue stream from
Oakwood to a $12 million annualized base. The Company will continue as the
primary backup carrier for Oakwood. Revenues for September manufactured housing
were negatively impacted by a loss of drivers that primarily hauled Oakwood
homes.
Management is currently implementing marketing and sales programs directed at
successfully replacing the Oakwood revenue. The Company has obtained significant
new contracts with New Flyer Industries, Monaco Coach, Union Pacific, Wabash
Trailers and others that in the aggregate are expected to generate annual
revenue offsetting the Oakwood decline.
In September the Company filed a lawsuit alleging that one of its former senior
officers had conspired with a competitor to misappropriate the Company's
drivers, employees, customers and trade secrets both during that officer's
employment with the Company and after she left the Company. The court issued a
preliminary injunction in favor of the Company on September 28, 2001. In
addition the company is seeking monetary damages as well as a permanent
injunction against unfair competition and unlawful interference with the
Company's contracts. See Part II, Item 1 "Legal Proceedings."
Driver Outsourcing
Operating revenues for the driver outsourcing division in the quarter decreased
by $0.6 million or 12% from prior year as a result of reduced demand for
recreational vehicles.
The driver outsourcing division has acquired several new contracts that will
increase revenue beginning in October 2001.
Specialized Outsourcing Services
Operating revenues for the specialized outsourcing division increased by $1.7
million or 42% compared to the prior year third quarter. Revenues of the
Company's towaway division that leases independent contractors with Class 8
tractors grew by 51% compared to the prior year. The towaway division has 113
owner-operators leased on and continues to grow its brokerage function which
contracts customer loads to other carriers. The pickup division, which utilizes
independent contractors with dual-axle pick-up trucks to move travel trailers
and boats, reported 26% revenue growth compared to prior year despite the down
market in recreational vehicles.
Insurance and Finance
Our Insurance and Finance segment provides insurance and financing services to
our drivers and independent owner-operators. This segment also acts as a cost
center because the Company accounts for all bodily injury, property damage and
cargo loss costs under this segment. Insurance and Finance operating revenues
decreased $97,000 or 13% in the third quarter of 2001 as a result of decreases
in the number of drivers and independent owner-operators.
For the Nine Months Ended September 30, 2001
Consolidated Results
Revenues for the first nine months of 2001 decreased by $16.5 million or 19%
compared to 2000. The decrease is primarily related to the previously discussed
weak market for shipments of new manufactured homes.
As a result of comprehensive cost reduction initiatives, the Company was able to
reduce the operating loss to $247,00 from $607,000 in the first nine months of
2000.
Segment Results
The following discussion sets forth certain information about our segment
results.
Manufactured Housing
Manufactured housing revenues declined by $17.5 million or 31% for the nine
months ended September 30, 2001 compared to 2000. According to the Manufactured
Housing Institute, shipments of new manufactured homes from January through
August of 2001 decreased by 33% compared to the same period in 2000.
Driver Outsourcing
Operating revenues for the first nine months of 2001 declined by 17% or $2.8
million compared to 2000. This decline is primarily a result of weak demand for
recreational vehicles in 2001 compared to 2000. In addition, the general demand
for commercial trucks, buses, step-out vans, trams and other specialized
equipment declined in step with the slowdown in the national economy.
Specialized Outsourcing Services
Operating revenues in specialized outsourcing services increased 36% or $4.2
million during the first nine months of 2001 compared to 2000. The towaway
division has expanded revenues by 43% by adding to the number of owner-operators
leased on to the Company and by expanding its brokerage operation. The pickup
division has grown by 27% by recruiting new employees, business and drivers
throughout the year.
LIQUIDITY AND CAPITAL RESOURCES
On July 12, 2001, the Company completed a previously announced $2 million
capital infusion from its majority stockholder Lynch Interactive Corporation.
Morgan issued one million new Class B shares of common stock in exchange for a
$2 million cash investment, thereby increasing Lynch's ownership position in the
Company from 55.6% to 68.5%. The proceeds from the transaction are invested in
U.S. Treasury backed instruments and are pledged as collateral for the Credit
Facility.
On July 27, 2001, the Company obtained a new three-year $12.5 million Credit
Facility. The Credit Facility replaces the Company's previous credit line that
had expired on January 28, 2001 and was not renewed.
The Credit Facility will be used for working capital purposes and to post
letters of credit for insurance contracts. As of September 30, 2001, the Company
had outstanding borrowing of $869,000 and $7.6 million outstanding letters of
credit. Borrowings will bear interest at a rate per annum equal to either Bank
of New York Alternate Base Rate ("ABR") plus one-half percent or, at the option
of Company, absent an event of default, the one month London Interbank Offered
Rate ("LIBOR") as published in The Wall Street Journal, averaged monthly, plus
three percent. Borrowings and posted letters of credit on the Credit Facility
are limited to a borrowing base calculation that includes 85% of eligible
receivables and 95% of eligible investments, and are subject to certain
financial covenants including minimum tangible net worth, maximum funded debt,
minimum fixed interest coverage and maximum capital expenditures. The facility
is secured by accounts receivable, investments, inventory, equipment and general
intangibles. The facility may be prepaid anytime with prepayment being subject
to a 3%, .75% and .25% prepayment penalty during year 1, 2 and 3, respectively.
The prior Credit Facility matured on January 28, 2001, at which time the Company
had no outstanding debt and $6.6 million of outstanding letters of credit. The
Company was in default of the financial covenants. The bank decided not to renew
the prior Credit Facility; and, as a result, the Company had a payment default.
On July 31, 2001, the Company closed on a new real estate mortgage for $500,000
that is secured by the Company's land and buildings in Elkhart, Indiana. The
loan will be used for short-term working capital purposes. The mortgage bears
interest at prime rate plus 0.75%, and is for a six-month term with outstanding
principal due on February 1, 2002. The loan may be prepaid at any time with no
penalties, and is subject to the same covenants as the Credit Facility. The
Company's application for additional capacity under this facility is under
consideration.
In addition, in the August 2001 the Company received an income tax refund of
$664,000 from filing a federal net operating loss carry-back return for the 2000
tax year.
Effective July 1, 2001, the Company renewed its primary liability insurance,
workers compensation, cargo, and property insurance. Acquisition of liability
insurance in the trucking industry has become increasingly more difficult and
expensive over the past year. As a result, the Company's insurance premiums
effective July 1, 2001 increased significantly. The Company will recover much of
this increase from customers in the form of apportioned insurance charges (AIC).
The net impact on the Company's operating results for the next 12 months cannot
be determined at this time.
The Company has posted increased letters of credit to the insurance carriers
through the new credit facility as collateral for the payment of claim
reimbursements. Management believes the combination of the above financial
transactions will be adequate to allow the Company to post all required letters
of credit for insurance contracts.
On August 17, 2001, Lynch Interactive Corporation, the majority stockholder of
the Company, announced plans to spin off its investment in the Company to Lynch
Interactive stockholders. The proposed spin off of the Company will allow Lynch
Interactive stockholders to continue to own the Company through a new entity
instead of through Lynch Interactive.
Our 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. Our ability to continue as a going concern is
dependent upon our ability to successfully maintain our financing arrangements
and to comply with the terms thereof.
Management believes that internally generated funds together with the recent
equity infusion and resources available under the replacement credit and
mortgage facilities will be sufficient to provide the Company's capital and
liquidity requirements for the next 12 months.
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. Our 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 1 - Legal Proceedings
On September 26, 2001, the Company filed suit in a federal court in Georgia
against one of its former senior officers, a competitor and certain of its
affiliates, alleging that the parties had secretly conspired to misappropriate
drivers, employees, customers and trade secrets of the Company through unlawful
means at a time when the senior officer was still a senior officer of the
Company. The lawsuit further alleges that, while on the Company's payroll, the
senior officer and some of her subordinates worked with the competitor, using
false information, to convince drivers under contract with the Company to leave
and work for the competitor instead. It is also alleged that the senior officer
and others working on behalf of the competitor sent more than 20 faxes
(including some from the Company's own facilities) encouraging retail dealers
under false pretenses to instruct manufacturers to have their homes shipped by
the competitor rather than the Company in interference with those manufacturers'
written agreements with the Company. The lawsuit further alleges that the senior
officer and others acting for the competitor improperly removed trade secret
information and files from two offices of the Company, including confidential
pricing data that the competitor allegedly is using to unfairly compete with the
Company's price structure.
At a hearing on September 28, 2001, the competitor and the senior officer denied
many of the allegations and any wrongdoing. Despite their denials, the federal
court issued a preliminary injunction against the competitor and the senior
officer, under which the court invalidated contracts between the competitor and
the drivers the competitor had recruited from the Company. Those drivers were
freed from their contracts with the competitor and given 10 days to choose among
the Company, the competitor and another carrier based on full disclosure of
information. The court also invalidated the letters from retail dealers to
manufacturers that the competitor and the senior officer allegedly instigated,
and confirmed that retail dealers should not be improperly induced to use an
alternate carrier. The competitor and the senior officer also have been
prohibited by the court from keeping or using any confidential information and
files allegedly taken from the Company.
Since the issuance of the preliminary injunction, the Company has been very
successful in its efforts to bring these employees, drivers and customers back
to the Company. Our Southeast region has recovered admirably from the initial
departures and is posting solid improvements each week. The alleged illegal
actions described above obviously negatively impacted the manufactured housing
business in the third quarter.
In addition to the preliminary injunction issued by the court on September 28,
the Company is also seeking monetary damages from the competitor and the senior
officer, as well as a permanent injunction against unfair competition and
unlawful interference with the Company's contracts. Over the competitor's
objection, the court ruled on September 28 that the parties could take immediate
discovery in the case on these remaining issues.
The competitor has filed certain counterclaims against the Company which the
Company plans to defend vigorously.
Item 4 - Submission of Matters to a Vote of Security Holders
On July 12, 2001, the Company held its Annual Meeting of Stockholders,
the results of which follow:
Report of proxies received and shares voted July 12, 2001
Total Voted % of Total
----- ----- ----------
Number of shares of Class A 1,248,157 1,055,162 85%
common stock
Number of shares of Class B
common stock 1,200,000 1,200,000 100%
1. Election of directors elected by
all shareholders (1-year term), shares
of Class B common stock are entitled
to two votes
Against or
For Withheld Abstained Non-Votes
--- ---------- --------- ---------
Charles C. Baum 3,455,162 - 0 - - 0 - 192,995
Richard B. Black 3,455,162 - 0 - - 0 - 192,995
Anthony T. Castor, III 3,455,162 - 0 - - 0 - 192,995
Richard L. Haydon 3,455,162 - 0 - - 0 - 192,995
Election of director by holders of
Class A common stock (1-year term)
Robert S. Prather, Jr. 1,055,162 - 0 - - 0 - 192,995
2. Issuance of additional Class B
Common Stock--1,000,000 shares 3,455,162 - 0 - - 0 - 192,995
3. Amendment of Certificate of 3,455,162 - 0 - - 0 - 192,995
Incorporation to allow the
transfer of the Class B shares to a
commonly controlled entity without
conversion to Class A and to
increase authorized Class B to 4,400,000 shares.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 Amendment to Revolving Credit and Security Agreement for
Credit Facility dated as of November 8, 2001
4.2 Letter of Credit Financing Supplement to Revolving Credit
Agreement, dated July 27, 2001
(b) Report on Form 8-K:
No reports on Form 8-K were filed during the quarter for which this
report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MORGAN GROUP, INC.
BY: /s/ Gary J. Klusman
Chief Financial Officer
DATE: November 13, 2001