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, 2002
THE MORGAN GROUP, INC.
2746 Old U. S. 20 West
Elkhart, Indiana 46515-1168
(574) 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, 2002 was:
Class A - 1,486,082 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
March 31, 2002 and December 31, 2001 3
Consolidated Statements of
Operations for the Three-Month Periods
Ended March 31, 2002 and 2001 4
Consolidated Statements of
Cash Flows for the Three-Month Periods
Ended March 31, 2002 and 2001 5
Notes to Consolidated Financial
Statements as of March 31, 2002 6 -13
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-17
PART II OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 6 Exhibits and Reports on Form 8-K 18
SIGNATURES 19
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
The Morgan Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars and shares in thousands, except per share amounts)
March 31 December 31
2002 2001
ASSETS (Unaudited) (Note 1)
Current assets:
Cash and cash equivalents $ 441 $1,017
Investments - restricted 2,633 2,624
Accounts receivable, net of allowances
of $266 in 2002 and $439 in 2001 6,381 6,322
Refundable taxes 1,716 591
Prepaid insurance 1,299 890
Other current assets 1,378 1,313
Total current assets 13,848 12,757
------- -------
Property and equipment, net 3,169 3,385
Goodwill, net 3,666 5,956
Non-compete agreements, net 312 300
Other assets 150 132
------- -------
Total assets $21,145 $22,530
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current debt (in default) $1,149 $580
Trade accounts payable 5,833 4,505
Accrued liabilities 2,123 2,500
Accrued claims payable 3,171 3,028
Refundable deposits 684 675
Current portion of long-term debt 166 169
------- -------
Total current liabilities 13,126 11,457
Long-term debt, less current portion 13 13
Long-term accrued claims payable 3,695 4,078
Shareholders' equity:
Common stock, $.015 par value
Class A: Authorized shares - 7,500
Issued shares - 1,607 23 23
Class B: Authorized shares - 4,400
Issued and outstanding shares - 2,200 33 33
Additional paid-in capital 14,211 14,214
Retained deficit (6,773) (4,105)
Less - treasury stock at cost (359 Class A shares) (3,183) (3,183)
------- -------
Total shareholders' equity 4,311 6,982
------- -------
Total liabilities and shareholders' equity $21,145 $22,530
======= =======
See notes to consolidated financial statements
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31
2002 2001
---- ----
Operating revenues $16,308 $23,701
Costs and expenses:
Operating costs 15,504 21,892
Selling, general and administration 2,146 2,057
Depreciation and amortization 86 227
------- -------
17,736 24,176
Operating loss (1,428) (475)
Interest expense, net 75 66
------- -------
Loss before income taxes and cumulative effect of
change in accounting principle (1,503) (541)
Income tax benefit (1,125) -
------- -------
Loss before cumulative effect of
change in accounting principle (378) (541)
Cumulative effect of change in accounting principle (See Note 2) (2,290) -
------- -------
Net loss $(2,668) $ (541)
Basic and diluted loss per share:
Loss before cumulative effect of change in accounting principle $ (0.11) $ (0.22)
Cumulative effect of change in accounting principle (0.66) -
------- -------
Net loss per common share $ (0.77) $ (0.22)
======= =======
Weighted average shares outstanding 3,448 2,448
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
2002 2001
------------- ------------
Operating activities:
Net loss $(2,668) $ (541)
Adjustments to reconcile net loss to net cash used in
operating activities:
Cumulative effect of change in accounting principle 2,290 -
Depreciation and amortization 86 227
Loss on disposal of property and equipment 45 3
Changes in operating assets and liabilities:
Accounts receivable (59) (72)
Refundable taxes (1,125) (4)
Prepaid expenses and other current assets (474) (52)
Other assets (18) 252
Trade accounts payable 1,328 1,167
Accrued liabilities (377) (781)
Accrued claims payable (240) (526)
Refundable deposits 9 (265)
------- -------
Net cash used in operating activities (1,203) (592)
Investing activities:
Income from restricted investments (9) -
Purchases of property and equipment (11) (77)
Proceeds from sale of property and equipment 109 -
Non-compete agreements (25) (45)
------- -------
Net cash provided by (used in) investing activities 64 (122)
Financing activities:
Net proceeds from credit facility 569 -
Principal payments on long-term debt (3) (7)
Issuance of common stock (3) -
------- -------
Net cash provided by (used in) financing activities 563 (7)
------- -------
Net decrease in cash and equivalents (576) (721)
Cash and cash equivalents at beginning of period 1,017 2,092
------- -------
Cash and cash equivalents at end of period $ 441 $ 1,371
======= =======
See notes to consolidated financial statements.
The Morgan Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2002 Note 1.Basis of Presentation
The accompanying unaudited consolidated 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, 2001 has been
derived from the audited consolidated financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete consolidated financial
statements. The consolidated financial statements should be read in
conjunction with the consolidated financial statements, notes thereto and
other information included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
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 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.
Morgan Drive Away, Inc. has two subsidiaries, Transport Services Unlimited,
Inc. and MDA Corp. Significant intercompany accounts and transactions have
been eliminated in consolidation.
Certain 2001 amounts have been reclassified to conform to the 2002
presentation.
Note 2.Goodwill Impairment
As of January 1, 2002, the Company adopted Statement of Financial
Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS No.
142). This Standard eliminates goodwill amortization and requires an
evaluation of goodwill for impairment (at the reporting unit level) upon
adoption of the Standard, as well as subsequent evaluations on an annual
basis, and more frequently if circumstances indicate a possible impairment.
This impairment test is comprised of two steps. The initial step is
designed to identify potential goodwill impairment by comparing an estimate
of the fair value of the applicable reporting unit to its carrying value,
including goodwill. If the carrying value exceeds fair value, a second step
is performed, which compares the implied fair value of the applicable
reporting unit's goodwill with the carrying amount of that goodwill, to
measure the amount of goodwill impairment, if any.
The Company's reporting units under SFAS No. 142 are equivalent to its
reportable segments as the Company does not maintain accurate, supportable
and reliable financial data at lower operating levels within these segments
that management relies upon in making operating decisions. The carrying
amount of goodwill has been allocated to the Company's reporting units at
December 31, 2001 as follows (in thousands):
Manufactured housing $4,100
Vehicle delivery 1,850
Towaway 6
------
$5,956
Upon adoption, the Company performed the transitional impairment test which
resulted in an impairment of $1,806,000 in the manufactured housing
reporting unit and $484,000 in the vehicle delivery reporting unit which is
classified as a cumulative effect of a change in accounting principle for
the three months ended March 31, 2002, as required by SFAS No. 142.
Subsequent impairments, if any, would be classified as an operating
expense.
The Company's measurement of fair values was based on an evaluation of
future discounted cash flows. This evaluation utilized the best information
available in the circumstances, including reasonable and supportable
assumptions and projections and was management's best estimate of projected
future cash flows.
The discount rate used was based on the estimated rate of return expected
by an investor considering the perceived investment risk. Projected cash
flows were determined based on a five-year period after which time cash
flow was normalized and projected to grow at a constant rate. Management
believes that five years is the appropriate period to forecast prior to
normalizing cash flows based on the industry cycles of the Company's
businesses and the Company's long-term strategies. 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.
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 impairment analysis on at least an annual basis
as required by SFAS No. 142 as long as material goodwill exists on the
balance sheet.
Note 3. Goodwill and Non-Compete Agreements
The reconciliation of reported net loss and loss per share to adjusted net
loss and loss per share for the three months ended March 31, 2002 and 2001
was as follows (in thousands, except per share data):
Three Months Ended
March 31,
2002 2001
Reported net loss $(2,668) $ (541)
Add back: Goodwill amortization - 131
------- ------
Adjusted net loss $(2,668) $ (410)
======= ======
Basic and diluted loss per share:
Reported loss per share $ (0.77) $(0.22)
Add back: Goodwill amortization - 0.05
------- ------
Adjusted loss per share $ (0.77) $(0.17)
======= ======
During the first quarter of 2002, the Company paid $25,000 for non-compete
agreements. Excluding goodwill, amortization expense of the non-compete
agreements was $13,000 and $11,000 for the first quarter of 2002 and 2001,
respectively. The annual estimated amortization expense for the non-compete
agreements for the five year period ending December 31, 2006, ranges from
$33,000 to $55,000 per year.
Note 4. Debt
Credit Facility
The $12.5 million, three-year Credit Facility is used for working capital
purposes and to post letters of credit for insurance contracts. As of March
31, 2002, the Company had outstanding borrowings of $649,000 and $7.0
million outstanding letters of credit on the Credit Facility. Credit
Facility 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.
On February 7, 2002, the Company obtained a temporary over-advance on its
credit availability on the Credit Facility of $1 million and provided the
lender a second mortgage on real estate in Elkhart, Indiana. On April 5,
2002 the Company repaid $500,000 of the over-advance. The remaining
$500,000 over-advance will be eliminated on May 31, 2002.
As of March 31, 2002, the Company was in violation of the following
covenants under the Credit Facility: minimum tangible net worth, maximum
funded debt and letters of credit to EBITDA and minimum fixed charge
coverage. The Company has not requested a waiver of these covenant
violations and the lender has continued to advance on the Credit Facility
in the normal course of business.
New Mortgage
On April 5, 2002, the Company obtained a new $1,400,000 mortgage secured by
the Company's land and buildings in Elkhart, Indiana. Loan proceeds were
used to retire the previous first mortgage of $500,000 and repay a $500,000
over-advance on the Credit Facility. The remaining proceeds will be used
for short-term working capital purposes to the extent they are not
restricted. The mortgage is for a one-year period due April 5, 2003 and
bears a blended interest rate of 13.5% on the first $1.25 million of
principal and 8% on the remaining $150,000 of principal. The loan contains
a minimum interest requirement of $101,000 and otherwise may be prepaid at
any time with no penalties.
Long Term Debt
Long-term debt consisted of the following (in thousands):
March 31 December 31
2002 2001
Promissory notes with imputed interest
rates from 6.31% to 10.0%, principal
and interest payments due from monthly
to annually, through March 31, 2004 $178 $178
Term notes 1 4
---- ----
179 182
Less current portion 166 169
---- ----
Long-term debt, net of current portion $ 13 $ 13
==== ====
Insurance Premium Financing
In 2001, the Company utilized a third party to finance its insurance
premiums. In conjunction with this financing arrangement, the Company
borrowed $2,210,000 and prepaid its annual premiums to its insurance
underwriter. The terms of the financing allow for the financier to have a
first security interest in unearned premiums. The financing was for a
nine-month period at an interest rate of 5.84% with the final payment due
on April 2, 2002. At March 31, 2002, the net transaction is recorded as
prepaid insurance in the current assets section of the balance sheet as
follows (in thousands):
Unamortized prepaid premiums $1,474
Amount due under financing
arrangement (175)
------
Net prepaid insurance $1,299
======
Note 5. 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 March 31, 2002, 51% of the
open trade accounts receivable was with five customers of which over 96%
was within 60 days of invoice. In total, 93% of the open trade receivables
are also within 60 days of invoice.
Note 6. Operating Costs and Accruals
Components of operating costs are as follows (in thousands):
March 31
2002 2001
---- ----
Purchased transportation costs $12,167 $17,296
Operating supplies and expenses 1,439 2,394
Claims 236 698
Insurance 1,221 710
Operating taxes and licenses 441 794
------- -------
$15,504 $21,892
======= =======
Material components of accrued liabilities are as follows (in thousands):
March 31 December 31
2002 2001
---- ----
Government fees $ 217 $ 283
Workers' compensation 589 405
Customer incentives 295 150
Other accrued liabilities 1,022 1,662
------ ------
$2,123 $2,500
====== ======
Government fees represent amounts due for fuel taxes, permits and use taxes
related to linehaul transportation costs.
Workers' compensation represents estimated amounts due claimants related to
unsettled claims for injuries incurred by Company employee-drivers. These
claim amounts due are established by the Company's insurance carrier and
reviewed by management on a monthly basis.
Customer incentives represent volume discounts earned by certain customers.
The customer incentives earned are computed and recorded monthly based upon
linehaul revenue for each respective customer. The incentives are generally
paid quarterly and are recorded as a contra-revenue account in the
Consolidated Statements of Operations.
Other accrued liabilities consists of various accruals for professional
services, group health insurance, payroll and payroll taxes, real estate
taxes and other items, which individually are less than 5% of total current
liabilities.
Note 7.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 to Morgan Group Holdings
Lynch Interactive Corporation, the majority stockholder of the Company,
spun off its investment in the Company to Lynch Interactive stockholders on
January 24, 2002, forming a new holding company, Morgan Group Holding Co.
("Holdings").
Issuance of Non-transferable Warrants
On December 12, 2001, the Company issued non-transferable warrants to
purchase shares of common stock to the holders of our Class A and Class B
common stock. Each warrant entitles the holder to purchase one share of
their same class of common stock at an exercise price of $9.00 per share
through the expiration date of December 12, 2006. The Class A warrants
provide that the exercise price will be reduced to $6.00 per share during a
Reduction Period of at least 30 days during the five-year exercise period.
On February 19, 2002, the Board of Directors agreed to set the exercise
price reduction period on the Class A warrants to begin on February 26,
2002 and to extend for 63 days, expiring on April 30, 2002 (the "Reduction
Period"). The Board of Directors agreed to reduce the exercise price of the
warrants to $2.25 per share, instead of $6.00 per share, during the
Reduction Period. The Board of Directors reduced the exercise price to
$2.25 to give warrant holders the opportunity to purchase shares at a price
in the range of recent trading prices of the Class A common stock. All
other terms regarding the warrants, including the expiration date of the
warrants, remain the same. As of the close of the temporary Reduction
Period on April 30, 2002, the Company received $535,331 with the exercise
of 237,925 warrants at $2.25 each. Unexercised warrants remain outstanding
and exercisable at $9.00 each.
Note 8.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 was recorded in 2001 to reduce the net deferred tax assets to
zero 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 asset. As of March 31, 2002, the Company had no net deferred tax assets
recorded.
As of December 31, 2001, the Company recorded an income tax refund due of
$591,000. During the first quarter, 2002, as a result of new tax law, the
Company qualified for a five year carry back of its net operating losses
versus a previously allowed two year carry back. The impact of this tax law
change resulted in a $1,047,000 increase in the income tax refund recorded
during the first quarter. The total income tax refund is $1,638,000.
Note 9.Segment Reporting
Description of Services by Segment
The Company operates in five business segments: Manufactured Housing,
Vehicle Delivery, Pickup, Towaway, 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 Vehicle
Delivery 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 Pickup and Towaway segments consist 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. 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 Income (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-month periods ended March 31, (in
thousands):
Three Months Ended
March 31,
2002 2001
-------- --------
Operating revenues:
Manufactured Housing $ 7,717 $14,372
Vehicle Delivery 4,638 4,532
Pickup 2,267 1,818
Towaway 1,271 2,319
Insurance and Finance 415 660
------- --------
Total operating revenues $ 16,308 $23,701
======= ========
Segment income (loss) - EBITDA:
Manufactured Housing $ (930) $(422)
Vehicle Delivery (270) (169)
Pickup (139) (49)
Towaway (103) (48)
Insurance and Finance 100 440
-------- ------
(1,342) (248)
Depreciation and amortization (86) (227)
Interest expense (75) (66)
Loss before income taxes and
cumulative effect of change
in accounting principle $(1,503) $ (541)
======= =======
Note 10. 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.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
For the Quarter Ended March 31, 2002
Consolidated Results
Revenues for the first quarter 2002 were down 31 percent to $16.3 million versus
the $23.7 million reported in the year-ago quarter. The Company reported revenue
improvements of 25 percent in the pickup division and 2 percent in the vehicle
delivery division. These increases were offset by a 46 % decline in revenue from
the manufactured housing division and 45 percent in the towaway division.
The Company renewed its liability and workers compensation insurance on July 1,
2001 resulting in increased expense primarily driven by insurance market
conditions. The liability insurance market for trucking companies has been
negatively impacted by increased loss ratios, higher credit risks and a decrease
in available capacity in the excess reinsurance market. The Company is
attempting to recover as much of this increase as possible in the form of
apportioned insurance charges to customers.
Operating costs were 95.1% of total revenues for the quarter compared to 92.4%
in prior year. Selling, general and administrative expenses were 13.2% of
revenue compared to 8.7% of revenue in the first quarter of 2001.
The reduced revenue and increased insurance expense resulted in an operating
loss of $1.4 million in the current period compared to operating loss of
$475,000 in 2001.
Segment Results
The following discussion sets forth certain information about segment results.
Manufactured Housing
Revenues for the manufactured housing division decreased by $6.7 million or 46%
in the first quarter compared to the prior year. This decrease in revenue is
driven by a continued industry recession and the loss of the Company's largest
customer, Oakwood Homes Corporation (NYSE: OH) effective October 1, 2001.
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. Competition with the parties named in the lawsuit has
resulted in decreased revenues and operating margin for the Company's
manufactured housing division.
Vehicle Delivery
Operating revenues for the vehicle delivery division in the quarter increased by
$106,000 or 2% from prior year as a result of an increase in demand for
recreational vehicles. Revenues in this division are anticipated to increase
driven by stronger customer outlook and production of recreational vehicles.
Pickup
The pickup division, which utilizes independent contractors with dual-axle
pick-up trucks to move travel trailers and boats, reported 25% revenue growth
compared to prior year. The increase was attributable to an increase in demand
for new recreational vehicles and an increase in the size of Company fleet.
Towaway
Operating revenues for the towaway division that leases independent contractors
with Class 8 tractors decreased 45% compared to the prior year. The decease was
the result of a 48% decrease in the Company's fleet size of trucks from 113 to
59.
Insurance and Finance
Our Insurance and Finance segment provides insurance and financing services to
our drivers and independent owner-operators. Insurance and Finance operating
revenues decreased $245,000 or 37% in the first quarter of 2002 as a result of
decreases in the number of drivers and independent owner-operators.
LIQUIDITY AND CAPITAL RESOURCES
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 incurred operating losses and
negative operating cash flows during the past two years and the first quarter
2002. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The Company is actively seeking amendments to the
existing Credit Facility as well as seeking additional capital resources.
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 as a going concern.
The $12.5 million, three-year Credit Facility is used for working capital
purposes and to post letters of credit for insurance contracts. As of March 31,
2002, the Company had outstanding borrowing of $649,000 and $7.0 million
outstanding letters of credit on the Credit Facility. Credit Facility 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.
On February 7, 2002, the Company obtained a temporary over-advance on its credit
availability on the Credit Facility of $1 million and provided the lender a
second mortgage on real estate in Elkhart, Indiana. On April 5, 2002 the Company
repaid $500,000 of the over-advance. The remaining $500,000 over-advance will be
eliminated on May 31, 2002. The Company intends to use proceeds from the
exercise of the warrants of $535,000 and income tax refund of $1,638,000 million
to repay this advance.
As of March 31, 2002, the Company was in violation of the following covenants
under the Credit Facility: minimum tangible net worth, maximum funded debt and
letters of credit to EBITDA and minimum fixed charge coverage. The Company has
not requested a waiver of these covenant violations and the lender has continued
to advance on the Credit Facility in the normal course of business.
On April 5, 2002, the Company obtained a new $1,400,000 mortgage secured by the
Company's land and buildings in Elkhart, Indiana. Loan proceeds were used to
retire the previous first mortgage of $500,000 and repay a $500,000 over-advance
on the Credit Facility. The remaining proceeds will be used for short-term
working capital purposes to the extent they are not restricted. The mortgage is
for a one-year period due April 5, 2003 and bears a blended interest rate of
13.5% on the first $1.25 million of principal and 8% on the remaining $150,000
of principal. The loan contains a minimum interest requirement of $101,000 and
otherwise may be prepaid at any time with no penalties.
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 is attempting to
recover as much of this increase as possible from customers in the form of
apportioned insurance charges. The net impact on the Company's operating results
for the next 12 months cannot be determined at this time.
As of December 31, 2001, the Company recorded an income tax refund due of
$591,000. During the first quarter, 2002, as a result of new tax law, the
Company qualified for a five year carry back of its net operating losses versus
a previously allowed two year carry back. The impact of this tax law change
resulted in a $1,047,000 increase in the income tax refund recorded during the
first quarter. The total income tax refund of $1,638,000 million was received in
May, 2002.
On February 19, 2002, the Board of Directors agreed to set the exercise price
reduction period on the Class A warrants to begin on February 26, 2002 and to
extend for 63 days, expiring on April 30, 2002 (the "Reduction Period"). The
Board of Directors agreed to reduce the exercise price of the warrants to $2.25
per share, instead of $6.00 per share, during the Reduction Period. The Board of
Directors reduced the exercise price to $2.25 to give warrant holders the
opportunity to purchase shares at a price in the range of recent trading prices
of the Class A common stock. All other terms regarding the warrants, including
the expiration date of the warrants, remain the same. As of the close of the
temporary Reduction Period on April 30, 2002, the Company received $535,331 with
the exercise of 237,925 warrants at $2.25 each. Unexercised warrants remain
outstanding and exercisable at $9.00 each.
Company accounts receivable provides much of the collateral base for the credit
facility, which supports outstanding letters of credit and provides borrowing
capacity for working capital. The impact of decreased revenues and accounts
receivable have, therefore, reduced the borrowing capacity and liquidity to
minimal levels. Management aggressively pursued financing options allowing the
Company to meet its liquidity requirements during this slow period until
accounts receivable recover to stronger levels. Management is working with its
lenders to obtain additional financing.
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. In addition, the cash and letter of credit requirements for the
Company's insurance renewal on July 1, 2002, are unknown at this time.
At this time, the Company's ability to successfully cover its financial
obligations is uncertain; however, management believes that internally generated
funds together with the recent equity infusion, income tax refund and resources
available under the credit and mortgage facilities will increase the likelihood
that the Company will be able to meet its capital and liquidity requirements
through year-end.
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, 2001.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
No New Developments.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Employment Letter Agreement between Morgan Drive Away, Inc. and
Michael J. Archual dated January 16, 2001
10.2 Employment Letter Agreement between Morgan Drive Away, Inc. and Gary
J. Klusman dated February 23, 2001
(b) Report on Form 8-K:
Registrant filed a Report on Form 8-K on February 26, 2002, to report
action of its board of directors to temporarily reduce the exercise price
of Class A Warrants.
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
-------------------------------
Gary J. Klusman
Chief Financial Officer
DATE: May 15, 2002