SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1996 or ( )
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the transition period from ________ to ________ Commission File
Number 1-13586
THE MORGAN GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2902315
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
2746 Old U.S. 20 West
Elkhart, Indiana 46515-1168
Registrants telephone number include area code: (219) 295-2200
Securities Registered Pursuant to Section 12(b) of the Act:
Class A Common Stock, without par value
(Title of Class)
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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.
YES X NO ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ( X ) The aggregate market value of the issuer's voting stock held by
non-affiliates, as of March 27, 1997 was _______________. The number of shares
of the Registrant's Class A Common Stock $.015 par value and Class B Common
Stock $.015 par value, outstanding as of March 27 1997, was _________ shares,
and _______ shares, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders are
incorporated into Part III of this report.
Exhibit Index on Pages ________
Page 1 of Pages
Part I
Item 1. BUSINESS
Overview
The Morgan Group, Inc. (The Company) is the leading provider of
outsourcing transportation services to the manufactured housing, motor homes,
and commercial truck industries in the United States and through its wholly
owned subsidiary, Morgan Drive Away, Inc. (Morgan) has been operating since
1936. The Company provides outsourcing transportation services through a
national network of approximately 1,720 independent owner operators and
approximately 1,300 driveaway drivers. The Company dispatches its drivers from
115 offices located in 35 states. The Company's largest customers include
Fleetwood Enterprises, Inc., Oakwood Homes Corporation, Winnebago Industries,
Inc., Champion Enterprises, Cavalier Homes, Inc., Clayton Homes, Schult Homes,
Ryder Systems, and Skyline Corporation. The Company's services also include
transporting other products, including commercial vehicles and office trailers,
and providing certain insurance and financing services to its owner operators.
As further described below, the Company's strategy is to grow through
expansion in the niche businesses already being serviced with heavy emphasis on
driver outsourcing, along with pursuing acquisitions of niche transportation
carriers who are servicing their customer base with unique service and/or
equipment. In addition, the Company will look to expand insurance product
offerings to drivers through its subsidiary Interstate Indemnity Company
(Interstate) and to broaden its financing activities through Morgan Finance,
Inc. (Finance).
Morgan, the Company's principal subsidiary, was founded in 1936 in
Elkhart Indiana and incorporated in 1943. The Morgan Group, Inc. is a Delaware
corporation formed by Lynch Corporation in 1988 to acquire Morgan and
Interstate, a wholly owned captive insurance company. In 1994, the Company
formed Finance for the purpose of offering financing to owner operators. In
1995, the Company acquired the assets of Transfer Drivers, Inc. (TDI), a
Northern Indiana-based driver outsourcing company. TDI, with revenue in excess
of $8.5 million and more than 265 drivers, is a market leader in the fragmented
outsourcing service business focusing on relocation of rental equipment for
customers such as Ryder Systems, Budget Rentals, and Penske Leasing, and also
delivering new equipment from manufacturers including Utilimaster, Grumman
Olson, and Bluebird Bus.
On December 30, 1996, Morgan acquired the assets of Transit Homes of
America, Inc., a national outsourcing company of manufactured housing located in
Boise, Idaho. Transit, with revenue in excess of $25 million and 358 drivers,
provides outsourcing transportation services to Fleetwood Enterprises, Champion
Enterprises, Palm Harbor, Schult Homes, and Cavalier Homes.
The Company decided in the fourth quarter of 1996 to discontinue the
truckaway operation of the Specialized Transport Division. Truckaway is a line
of business that transported van conversions, tent campers, and other automotive
products on company-owned equipment. The equipment being held for sale includes
6
tractors, 74 drop deck trailers, 15 car carrier trailers, 22 tent camper
trailers, and 112 lowboy and miscellaneous trailers. In addition, there are 13
tractors and 9 tent camper trailers currently financed under operating leases.
As of December 31, 1996, there were approximately 110 independent contractors
and 19 company drivers assigned to the truckaway operation. The truckaway
operation had revenues of $12,900,000, $14,400,000, and $20,600,000 and
estimated losses of $1,800,000, $1,200,000, and estimated profits of $1,200,000
for the years ending December 31, 1996, 1995, and 1994, respectively.
The Company's principal office is located at 2746 Old U.S. 20 West,
Elkhart, Indiana 46514; the telephone number is (219) 295-2200.
Industry Information
The Company's business is substantially dependent upon the manufactured
housing industry which experienced its fifth successive year of growth in 1996.
The recent decision to discontinue the truckaway operation, which transported
van conversions and tent campers, has resulted in the Company being less
dependent on the recreational vehicle industry.
Manufactured Housing.
The largest portion of the Company's carrier revenues are derived from
transportation of manufactured housing, primarily new manufactured homes. Unit
shipments by the manufactured housing industry (considering double-wide homes as
two shipments) in the U.S. increased by approximately 9% to 553,000 in 1996 from
506,000 in 1995, after 12% and 21% increases in 1995 and 1994, respectively,
according to data from the Manufactured Housing Institute (MHI). A manufactured
home is an affordable housing alternative. The Company believes the manufactured
housing industry production should continue to grow along with the general
economy, especially while employment statistics and consumer confidence remain
strong. The Company believes that the principal economic consideration of the
typical manufactured home buyer is the monthly payment required to purchase a
manufactured home and that purchasers are generally less affected by incremental
increases in interest rates than those purchasers of site built homes. There is
no assurance, however, that manufactured housing production will continue to
increase.
Recreational Vehicles.
Recreational Vehicles (defined as travel trailers, motor homes, tent
campers, and truck and van conversions) declined 1% in 1996 to 376,000 from
380,000 shipments in 1995 after declines of 11% in 1995, and a 5% increase in
1996. This data is obtained from the Recreational Vehicle Industry Association
(RVIA). RVs are discretionary purchases, sales of which are cyclical and tied
closely with overall consumer confidence in the economy, and, in particular,
consumers expectations as to the availability and price of motor fuel. Consumer
interest rates remain relatively low which make RVs easier for purchasers to
finance. There is no assurance, however, that the current economic environment
will continue to support RV production.
Company Services
Based on industry shipment data available from the MHI and RVIA, and
the Company's knowledge of the industry and its principal competitors, the
Company believes that it is the largest transporter of both manufactured homes
and provider of driver outsourcing services to the motor home markets in the
United States. In addition to new manufactured housing and RVs, the Company
transports used manufactured homes, commercial vehicles, rental trucks, office
trailers, new and used semi-trailers and other miscellaneous commodities. The
Company provides its specialized transportation services as follows:
Manufactured Housing Group. The Manufactured Housing Group (Housing Group)
which includes Transamerican Carriers acquired in 1993 and Transit Homes
acquired in 1996, provides specialized transportation to companies which
produce new manufactured homes, modular homes, and office trailers. In
addition, the Housing Group transports used manufactured homes and offices
for individuals, businesses, and the U.S. Government. The Housing Group
ships product through approximately 1,300 independent owner operators who
drive compact semi-tractors, referred to as toters, used in manufactured
housing transportation to reduce combined vehicle length. Makers of
manufactured housing generally ship their products no more than a few
hundred miles from their production facilities. Therefore, to serve the
regional structure of this industry, the Company positions its dispatch
offices close to the production facilities it is serving. Approximately 28
of the Company's dispatch offices are located in such a manner to serve the
needs of a single manufactured housing producer. Most manufactured housing
units, when transported by a toter require a special permit prescribing the
time and manner of transport for over-dimensional loads. See
Business-Regulation. The Company obtains for its owner operators the
permits required for each shipment from each state through which the
shipment will pass.
Driver Outsourcing Group. The Driver Outsourcing Group (Outsourcing Group)
engages the services of approximately 1,300 drivers which are outsourced to
customers to drive motor homes (RVs), new commercial vehicles, and rental
units. The TDI acquisition, which occurred in May of 1995, added over 265
drivers to Morgans existing driver outsourcing base. In 1996, the
Outsourcing Group delivered approximately 58,000 units through the use of
these drivers.
Specialized Transport Group. In 1996, the Specialized Transport Division
moved a variety of specialized vehicles, including automobiles,
semi-trailers, military vehicles, travel trailers and other commodities by
utilizing specialized equipment. A decision was made in the fourth quarter
to discontinue the truckaway sector of the Specialized Transport Division,
which moved van conversions, automobiles, and tent campers by utilizing
company-owned trailers. Subsequent to the discontinuation of the truckaway
business, the Company will have 70 owner operators who own tractors and 185
pick-up truck owner operators assigned to Specialized Transport. These
independent owner operator dispatches are coordinated through ten offices.
Other Services. Other services provided include permit ordering services
principally for manufactured housing customers and, to a lesser degree,
installation services related to the set up of relocated manufactured
homes. The Company also currently provides physical damage insurance and
certain other insurance protection to the owners of equipment under lease
to the Company through a captive insurance subsidiary. Since the primary
risk for the most part
is then re-insured, the Company service is primarily that of a broker. In
addition, the Company provides financing and certain guarantees of equipment
loans through its finance subsidiary.
Selected Operating Information
The following tables set forth operating information with respect to the
aforementioned Company services for each of the five years ended December 31,
1996.
Years Ended December 31,
1992 1993 1994 1995 1996
Manufactured Housing Group:
Shipments 80,587 95,184 121,604 135,750 144,601
Revenues (in thousands) $ 32,324 $ 39,930 $ 53,520 $ 63,353 $ 72,616
Driver Outsourcing:
Shipments 23,636 30,978 32,060 49,885 58,368
Revenues (in thousands) $ 8,055 $ 13,416 $ 15,197 $ 19,842 $ 23,090
Specialized Transport:
Shipments 39,706 38,618 41,934 44,406 41,255
Revenues (in thousands) $ 24,016 $ 25,835 $ 28,246 $ 29,494 $ 26,169
Other service revenues $ 2,721 $ 3,612 $ 4,917 $ 9,614 $ 10,333
Total operating revenues
(in thousands) $ 67,116 $ 82,793 $101,880 $122,303 $132,208
Industry Participation.
The following tables set forth participation in the two principal markets the
Company operates in where industry information is available:
Manufactured Homes 1992 1993 1994 1995 1996
Industry production (1) 309,457 374,126 451,646 505,819 553,133
Shipments 60,381 76,188 98,181 114,890 121,136
Shares of units shipped 19.5% 20.4% 21.7% 22.7% 21.9%
Recreational Vehicles
Industry production (2) 369,200 406,300 426,100 380,300 376,400
Units moved (3 62,012 71,792 67,502 64,303 57,703
Shares of units shipped (3) 16.8% 17.7% 15.8% 16.9% 15.3%
(1) Based on reports of Manufactured Housing Institute (MHI). To calculate
shares of homes shipped, the company assumes two unit shipments for
each multi-section homes.
(2) Based on reports of Recreational Vehicle Industry Association (RVIA),
excluding van campers, truck campers, pick-up truck conversions, and
sport utility vehicle conversion. RVIA began reporting truck and sport
utility vehicle conversions in their industry shipment data in 1994.
(3) Shares of units shipped calculation includes travel trailers, two types
of motor homes, van conversions, and tent campers and truck conversions
in 1994, 1995, and 1996. The Company's shares of units shipped are
based on units moved compared to industry production rather than
shipments because certain RV shipments include more than one unit per
move.
Growth Strategy
The Company's strategy is to focus on the profitable core
transportation services (manufactured housing and driver outsourcing) so that
revenues and profitability can grow in its area of substantial market position.
The Company will also look for opportunities to capitalize and/or grow its
strong market position in manufactured housing and driver outsourcing through
acquisitions if suitable opportunities arise. In addition, to enhance the
Company's profitability, it plans to reconstruct the corporate organization with
the purpose of giving higher focus to the two major operating groups and
reducing costs.
Manufactured Housing Growth. The Company believes it can take better
advantage of its position in the manufactured housing industry in its
relationship with manufacturers, retailers, dealers, and independent
owner operators, by expanding the service it offers within its
specialized business. The Company proposes to pursue opportunities to
offer new services, which may include financial, insurance, and to a
lessor degree, manufactured housing set up services. The recent
Morgan/Transit combination expands opportunities to increase revenues,
improve margins and further strengthen customer relationships. Morgan
and Transit now combined can serve the market better and operate more
efficiently. The acquisition of Transit could lead to additional
operating efficiencies and economies of scale from Morgan's ability to
apply information technology, administrative processes, driver and
staff training, safety and other programs across a larger operation.
These expanded capabilities should also enable the Company to make more
efficient use of our operating equipment. The Company may also pursue
the purchase of certain manufacturers' private transport fleets. In
such a case, the Company would typically purchase the customers'
tractors, sell the equipment to interested drivers, and then engage
these drivers as independent owner operators.
Driver Outsourcing. It is estimated that approximately 750,000 vehicles
are delivered each year through driveaway services, a delivery market
estimated at $500 million or more. The number of vehicles to be
outsourced are expected to increase substantially as companies
calculate the cost benefits in not maintaining their own driver corps,
paying salaries and benefits, running dispatch points, and maintaining
an equipment base. Unlike companies with drivers on their payroll,
Morgan's drivers are paid only when deliveries are made. Morgan's
growth strategy within this market is to expand its leading market
position in this highly fragmented delivery transportation market. The
future growth rate of the Company's driver outsourcing business, which
has a 36% average growth rate over the last five years, is dependent
upon continuing to add major vehicle manufacturer customers and
utilization of the Company's 1,300 driveaway drivers.
Reconstruct for Margin Improvement. In the fourth quarter of 1996, the
Company made a decision to exit the truckaway division which
transported van conversions, tent campers, and other automotive
products utilizing company-owned equipment. The decision to sell the
truckaway division was in
line with the Company's growth strategy to focus on profitable operations
where the Company has a dominant market position. The Company is in the
process of reconstructing its organization to change the emphasis from a
centralized operation to a profit driven divisional and field operation
focused on bottom line management. This reconstruction could lead to
reduced overhead, especially in centralized corporate operations,
management will continue to scrutinize every facet of operations as the
Company searches for ways to run the business with greater efficiency, both
to enhance management processes and customer relationships, and to reduce
or eliminate costs wherever possible.
Acquisitions. The Company is actively considering acquisition opportunities
within the manufactured housing and driver outsourcing lines of business.
Thus, the Company may consider acquiring regional or national firms which
service the manufactured housing and/or the driver outsourcing industry.
The Company is continuously reviewing potential acquisitions and is engaged
in negotiations from time to time. There can be no assurance that any
future acquisitions will be effected, or, if effected, can be successfully
integrated with the Company's business.
Expansion of Related Services. The Company believes it can take better
advantage of its position in the manufactured housing and RV industries,
and its relationships with manufacturers, retailers, dealers, and
independent owner operators, by expanding the services it offers within its
specialized business. The Company proposes to pursue opportunities to offer
new financial, insurance or other services.
The Company is currently offering financing opportunities to selected
existing and new owner operators, through Morgan Finance, a financial
subsidiary created in 1994 to support these activities. In 1995, Morgan
formed an alliance with a financial institution which is providing
financing to Morgan owner operators for tractor purchases, and in return,
Morgan has entered into a limited guarantee agreement. These equipment
financing programs are expected to solidify the Company's relationships
with independent owner operators, increase its fleet, and further expand
the Company's transportation capacity. The Company also offers insurance
services to independent owner operators.
The Company may begin offering new insurance products as a managing
general agent. The Company's insurance subsidiary may determine to accept a
limited portion of the underwriting risk, retaining an appropriate
proportion of the premiums.
The Company will carefully consider the feasibility of these and similar
opportunities over the next year. If the Company is successful in offering new
services such as these, it expects to enhance and diversify its revenues and may
reduce its vulnerability to broad production cycles in the industries it serves.
The Company cannot give any assurance that new services, if any, will be
profitable and such new services may result in operating losses.
Forward-Looking Discussion
In 1997, the Company could benefit from (i) the acquisition of Transit
Homes of America which consolidates our long-standing position as the absolute
leader in the delivery of outsourcing transportation services to the
manufactured housing industry, (ii) the closing of the Truckaway Division, which
cost the Company approximately $1,800,000 in 1996, (iii) reduction of overhead
through corporate restructuring, and (iv) improvement of our safety record.
Business expansion, including possible acquisitions, could augment operating
revenue gains. While the Company remains optimistic over the long term, near
term results could be affected by a number of internal and external economic
conditions.
This report contains a number of forward-looking statements, including
those contained in the preceding and growth stragey paragraph. From time to
time, the Company may make other oral or written forward-looking statements
regarding its anticipated sales, costs, expenses, earnings and matter affecting
its condition and operations. Such forward-looking statements are subject to a
number of material factors which could cause the statements or projections
contained therein to be materially inaccurate. Such factors include, without
limitation, the following:
Dependent on Manufactured Housing. Shipments of manufactured housing have
historically accounted for a substantial majority of the Company's
operating revenues. Therefore, the Company's prospects are substantially
dependent upon this industry which is subject to broad production cycles.
Shipments by the manufactured housing industry could decline in the future
relative to historical levels which could have adverse impact on the
Company's revenues.
Costs of Accident Claims and Insurance. Traffic accidents occur in the
ordinary course of the Company's business. Claims arising from such
accidents can be significant. Although the Company maintains liability
insurance and cargo damage insurance, the number and severity of the
accidents involving the Company's owner operators and drivers can have
significant adverse effect on the profitability of the Company through
premium increases and amounts of loss retained by the Company below
deductible limits or above its total coverage. There can be no assurance
that the Company can continue to maintain its present insurance coverage on
acceptable terms nor that the cost of such coverage will not increase
significantly.
Customer Contracts and Concentration. Historically, a majority of the
Company's revenues have been derived under contracts with customers. Such
contracts generally have one to three year terms. There is no assurance
that customers will agree to renew their contracts on acceptable terms or
on terms as favorable as these currently in force. The Company's top ten
customers have historically accounted for a majority of the Company's
revenues. The loss of one or more of these significant customers could
adversely affect the Company's results of operations.
Competition for Qualified Drivers. Recruitment and retention of qualified
drivers and owner operators is highly competitive. The Company's contracts
with owner operators are terminable by either party on ten days notice.
There is no assurance that the Company's drivers will continue to maintain
their contracts in force or that the Company will be able to recruit a
sufficient number of new drivers on terms similar to those presently in
force. The Company may not be able to engage a sufficient number of new
drivers to meet customer shipment demands from time to time, resulting in
loss of revenue that might otherwise be available to the Company.
Independent Contractors, Labor Matters. From time to time, tax authorities
have sought to assert that independent contractors in the transportation
service industry are employees, rather than independent contractors. Under
existing interpretations of federal and state tax laws, the Company
maintains that its independent contractors are not employees. There can be
no assurance that tax authorities will not challenge this position, or that
such tax laws or interpretations thereof will not change. If the
independent contractors were determined to be employees, such determination
could materially increase the Company's tax and workers compensation
exposure.
Risks of Acquisitions and Diversification. The Company has sought and will
continue to seek favorable acquisition opportunities. Its strategic plans
may also include the initiation of new services or products, either
directly or through acquisition, within its existing business lines or
which complement its business. There is no assurance that the Company will
be able to identify favorable acquisition opportunities in the future or as
to the terms of any such acquisition. There is no assurance that the
Company's recent or future acquisitions will be successfully integrated
into its operations or that they will prove to be profitable for the
Company. Similarly, there is no assurance that any new products or
services, individually or in the aggregate, could materially change the
Company's results of operations, financial condition and capital
requirements. Such changes could have a material adverse effect on the
Company.
Seasonality and General Economic Conditions. The Company's operations have
historically been seasonal, with generally higher revenues generated in the
second and third quarters than in the first and fourth quarters. A smaller
percentage of the Company's revenues are generated in the winter months in
areas where weather conditions limit highway use. The seasonality of the
Company's business may cause a significant variation in its quarterly
operating results. Additionally, the Company's operations are affected by
fluctuations in interest rates and the availability of credit to purchasers
of manufactured homes and motor homes, general economic conditions, and the
availability and price of motor fuels.
Regulation. The Company's insurance subsidiary is regulated by the Vermont
Department of Banking, Insurance and Securities. There can be no assurance
that changes in state or federal regulations will not adversely affect the
Company.
Customers and Marketing
The Company's customers for transport of new manufactured homes,
recreational vehicles, and commercial vehicles are located in various parts of
the United States. The Company's largest manufactured housing customers include
Fleetwood Enterprises, Inc., Oakwood Homes Corporation, Cavalier Homes, Inc.,
Skyline Corporation, Clayton Homes, Champion Enterprises, Inc., Patriot Homes,
and Schult Homes. The Company's largest driver outsourcing customers include
Fleetwood Enterprises, Winnebago Industries, Inc., Thor Industries, Holiday
Rambler, and Ryder Systems. The specialized transport division customers, after
the discontinuance of the truckaway operation, include Utility Trailer, Great
Dane, Strick Corporation, Hale Trailer, Fleetwood Enterprises, Thor Industries,
Skyline Corporation, and Coachmen Industries. While most manufacturers rely
solely on carriers such as the Company, other manufacturers operate their own
equipment and may employ outside carriers only for that portion of their needs.
A substantial portion of the Company's revenues are generated under one -
five year contracts with producers of manufactured homes, RVs, and other
products. In these contracts, the manufacturers agree that a specific percentage
(up to 100%) of their transportation service requirements from a particular
location will be performed by the Company on the basis of a prescribed rate
schedule, subject to certain adjustments to accommodate increases in the
Company's transportation costs. Revenues generated under customer contracts in
1994, 1995, and 1996 were 57%, 58%, and 62% of total revenues, respectively.
The Company's ten largest customers all have been served for at least three
years and account for approximately 68% of its revenues. Revenues under contract
with one such customer, Fleetwood Enterprises, Inc. (Fleetwood), accounted for
27%, 24%, and 20% of revenues in 1994, 1995, and 1996, respectively. The
Fleetwood RV contracts are re-negotiated on a regional basis when they expire
and the Fleetwood manufactured housing contracts are continuous until canceled.
The Company has been servicing Fleetwood for over 25 years.
The Company markets and sells its services through 11 regional offices and
127 dispatch offices located in 35 states, concentrated where manufactured
housing and RV production facilities are located. Marketing support personnel
are located both at the Company's Elkhart, Indiana headquarters and at regional
offices. Dispatch offices are supervised by regional offices.
The Company has 34 dispatch offices devoted primarily to a single customer
facility. This allows the dispatching agent and local personnel to focus on the
needs of each individual customer while remaining supported by the Company's
nationwide operating structure. Sales personnel at regional offices and at the
corporate headquarters meet periodically with manufacturers to review production
schedules and requirements and maintain contact with customers shipping
personnel. Senior management maintains personal contact with corporate officers
of the Company's largest customers. Regional and terminal personnel also
develop relationships with manufactured home park owners, retail dealers,
military installation officials and others to promote the Company's shipments of
used manufactured homes. The Company also participates in industry trade shows
throughout the country and advertises in trade magazines, newspapers, and
telephone directories.
Independent Owner Operators
The shipment of product by both the Manufactured Housing Group and
Specialized Transport Group is conducted by contracting for the use of the
equipment of independent owner operators.
Owner operators are independent contractors who own toters, tractors or
pick-up trucks which they contract to, and operate for, the Company on a
long-term basis. Independent owner operators are not generally approved to
transport commodities on their own in interstate or intrastate commerce. The
Company, however, possess such approvals and/or authorities (see
Business-Regulation), and provides marketing, insurance, communication,
administrative, and other support required for such transportation.
The Company attracts owner operators mainly through driver referrals,
local newspaper advertising, trade magazines, and truck stop brochures. The
Company has in the past been able to attract new owner operators primarily
because of its competitive compensation structure, its ability to provide loads
and its reputation in the industry. Recruitment and retention of qualified
drivers is highly competitive and there can be no assurance that the Company
will be able to attract a sufficient number of qualified owner operators in the
future.
The contract between the Company and each owner operator can be canceled
upon ten days notice by either party. The average length of service of the
Company's current owner operators is approximately 3.2 years. At December 31,
1996, 1,720 owner operators were under contract to the Company, including 1,307
operating toters, 228 operating semi-tractors, and 185 operating pick-up trucks.
Upon completion of the sale or disposition of the truckaway line of business,
the number of semi-tractor owner operators is expected to reduce to
approximately 75.
In the Manufactured Housing Group, independent owner operators utilizing
toter equipment tend to exclusively transport manufactured housing, modular
structures, or office trailers. Once modified from a semi-tractor, a toter has
limited applications for hauling general freight. Toter drivers are, therefore,
unlikely to be engaged by transport firms that do not specialize in manufactured
housing. This gives the Company an advantage in retaining toter independent
owner operators and the average tenure with the Company of its toter independent
owner operators is 3.3 years, which is longer than the average tenure of its
other independent owner operators.
In the Specialized Transport Group, Morgan is competing with national
carriers for the recruitment and retention of independent owner operators who
own tractors. The average length of service of the Company's tractor owner
operators is approximately 2.7 years. Pick-up truck owner operators are
difficult to retain because of the seasonality of business does not guarantee
consistent loads. Accordingly, the average length of service among this group of
drivers is 3.0 years.
Independent owner operators are generally compensated for each trip on a
per mile basis. Owner operators are responsible for operating expenses,
including fuel, maintenance, lodging, meals, and certain insurance coverages.
The Company provides required operating licenses and permits, cargo and
liability insurance (coverage while transporting goods for the Company), and
communications, sales and administrative services. Independent owner operators,
except for owners of certain pick-up trucks, are required to possess a
commercial drivers license and to meet and maintain compliance with requirements
of the U.S. Department of Transportation and standards established by the
Company.
From time to time, tax authorities have sought to assert that
independent owner operators in the trucking industry are employees, rather than
independent contractors. No such tax claims have been successfully made with
respect to owner operators of the Company. Under existing industry practice and
interpretations of federal and state tax laws, as well as the Company's current
method of operation, the Company believes that its owner operators are not
employees. Whether an owner operator is an independent contractor or employee
is, however, generally a fact-sensitive determination and the laws and their
interpretations can vary from state to state. There can be no assurance that tax
authorities will not successfully challenge this position, or that such tax laws
or interpretations thereof will not change. If the owner operators were
determined to be employees, such determination could materially increase the
Company's employment tax and workers compensation exposure.
Driveaway Drivers
The Company outsources its over 1,300 driveaway drivers on a
trip-by-trip basis for delivery to retailers and rental truck agencies, certain
vehicles such as recreational vehicles, buses, tractors, rental trucks, and
commercial vans that are too large or the distance of the trip too short to
transport economically on a trailer. These individuals are recruited through
local newspaper advertising, trade magazines, brochures, and referrals.
Prospective drivers are required to possess at least a chauffeurs license and
are encouraged to obtain a commercial drivers license. They must also meet and
maintain compliance with requirements of the U.S. Department of Transportation
and standards established by the Company. Driveaway drivers are utilized as
needed, depending on the Company's transportation volume and driver
availability. Driveaway drivers are paid on a per mile basis. The driver is
responsible for most operating expenses, including fuel, return travel, lodging,
and meals. The Company provides licenses, cargo and liability insurance,
communications, sales, and administrative services. In addition to the 1,300
driveaway drivers, the Company employees 35 full time drivers using company
owned or leased tractors to deliver tent campers and manufactured homes. The
impending sale or disposition of the truckaway line of business will reduce the
full time drivers to 16 delivering manufactured homes.
Agents and Employees
The Company has 198 dispatchers and dispatch assistants who are involved
directly with the management of equipment and drivers. Of these 198 dispatchers,
approximately 164 are full-time employees, 12 are part-time employees and the
remainder are independent contractors who earn commissions. The dispatch
personnel are responsible for the Company's dispatch operations, including
safety, customer relations, equipment assignment, invoicing, and other matters.
Because dispatch personnel develop close relationships with the Company's
customers and drivers, from time to time the Company has suffered a dispatching
personnel defection, following which the former dispatcher has sought to exploit
such relationships in competition with the Company. The Company does not expect
that any future defection, if any, would have a material effect on its
operations. Excluding these dispatching personnel and drivers, the Company has
approximately 175 full-time employees and 35 full time employee drivers.
Seasonality
Shipments of manufactured homes tend to decline in the winter months in
areas where poor weather conditions inhibit transport. This usually reduces
revenues in the first and fourth quarters of the year. RV movements are
generally stronger in the spring, when dealers build stock in anticipation of
the summer vacation season, and late summer and early fall when new vehicle
models are introduced. The Company's revenues, therefore, tend to be stronger in
the second and third quarters.
Risk Management, Safety and Insurance
The risk of substantial losses arising from traffic accidents is
inherent in any transportation business. The Company carries insurance to cover
such losses up to $20 million per occurrence with a deductible of up to $250,000
per occurrence for personal injury and property damage. The Company maintains a
cargo damage insurance policy of $1,000,000 with a $250,000 deductible. The
frequency and severity of claims under the Company's liability insurance affects
the cost and potentially the availability of such insurance. If the Company is
required to pay substantially greater insurance premiums, or incurs substantial
losses above $20 million or below its $250,000 deductible, its results could be
materially adversely affected. The Company does have an aggregate stop loss
insurance policy for the period July 1, 1996 through June 30, 1997 whereby
personal injury, property damage, and workers compensation losses below its
$250,000 deductible cannot exceed $4,000,000 (could be adjusted up dependent on
revenues). The Company has been approved for self-insurance authority of up to
$1 million. There are no immediate plans to institute this self-insurance. The
granting of self-insurance would provide the Company alternatives if insurance
pricing levels do not meet the Company's expectations. There can be no assurance
that the Company can continue to maintain its present insurance coverage on
acceptable terms.
The following table sets forth information with respect to bodily
injury and property damage and cargo claims reserves for the years ended
December 31, 1994, 1995, and 1996, respectively.
Bodily Injury/Property Damage and Cargo
Claims Reserve History
Years Ended December 31,
(In Thousands)
1994 1995 1996
Beginning Reserve Balance $ 2,830 $ 3,326 $ 3,623
Provision for Claims 4,761 4,849 6,080
Payments, net (4,265) (4,552) (5.139)
Ending Reserve Balance $ 3,326 $ 3,623 $ 4,654
The Company has implemented and is enhancing driver screening and
training procedures to promote safe driver practices and enhance compliance with
Department of Transportation regulations. The Company's driver recognition
programs emphasize safety and provide for equipment maintenance, helping to
enhance the Company's overall safety record. In 1996, over 1,350 drivers were
honored and obtained recognition for accident free driving. In addition to
periodic recognition for safe operations and regulatory compliance, the Company
has implemented several award programs associated with particular customers.
These programs are intended to provide incentives for drivers to drive safely,
perform well and maintain their equipment. One such program provides certain
toter drivers with a credit for miles traveled while meeting standards for
safety and professional performance. The owner operator is entitled to use the
amount credited to obtain reimbursement from the Company for equipment
purchases, maintenance, or upgrade expenses. (This program paid out $315,000 in
1996 to owner operators). The Company has a Senior Vice President of Safety,
Director of Training, four Safety Directors, a Driver Trainer, and a Compliance
Manager dedicated to assist the operating groups in training and highway safety.
The Company has incentives for dispatchers based upon accident free miles. In
1996, over $100,000 was paid out under this program and it is expected that over
$100,000 will be paid in 1997 for 1996 performance.
Interstate, a wholly-owned insurance subsidiary of the Company, makes
available physical damage insurance coverage for the Company's owner operators.
Interstate also writes performance surety bonds for Morgan Drive Away, Inc. The
Company may also utilize its wholly-owned insurance subsidiary to secure
business insurance for Morgan through re-insurance contracts.
Interstate may begin offering new insurance products as a managing
general agent. Interstate may determine to accept a limited portion of the
underwriting risk, retaining an appropriate proportion of the premiums.
Competition
All of the Company's activities are highly competitive. In addition to
fleets operated by manufacturers, the Company competes with a large national
carrier and numerous small regional or local carriers. The Company's principal
competitors in the housing and driver outsourcing marketplaces are privately
owned. In the specialized transport market, the Company competes with large
national interstate carriers, many of whom have substantially greater resources
than the Company. No assurance can be given that the Company will be able to
maintain its competitive position in the future.
Competition among carriers is based on the rate charged for services,
quality of service, financial strength, insurance coverage and the geographic
scope of the carriers authority and operational structure. The availability of
tractor equipment and the possession of appropriate registration approvals
permitting shipments between points required by the customer may also be
influential.
Regulation
The Company's interstate operations (Morgan Drive Away, Inc. and TDI)
are subject to regulation by the Federal Highway Administration which is an
agency of the United States Department of Transportation (D.O.T.). Effective
August 26, 1994, essentially all motor common carriers were no longer required
to file individually determined rates, classifications, rules or practices with
the I.C.C. Effective January 1, 1995, the economic regulation of certain
intrastate operations by various state agencies was preempted by federal law.
The states will continue to have jurisdiction primarily to insure that carriers
providing intrastate transportation services maintain required insurance
coverage, comply with all applicable safety regulations, and conform to
regulations governing size and weight of shipments on state highways. Most
states have adopted D.O.T. safety regulations and actively enforce them in
conjunction with D.O.T. personnel.
The Company was regulated by the Interstate Commerce Commission (the
"ICC") until passage of the ICC Termination Act of 1995, which abolished the ICC
on December 31, 1995. The Surface Transportation Board, an independent entity
within the D.O.T., assumed many of the responsibilities of the ICC. The Company
is also regulated by various state agencies. These regulatory authorities have
broad powers, generally governing matters such as authority to engage in motor
carrier operations, rates, certain mergers, consolidations and acquisitions, and
periodic financial reporting. The trucking industry is subject to regulatory and
legislative changes that can affect the economics of the industry by requiring
changes in operating practices or influencing the demand for, and the costs of
providing services to, shippers. Morgan is approved and/or holds authority to
provide transportation services from, to, and between all points in the
continental United States.
The Company provides services to certain specific customers under
contract and non-contract services to the shipping public pursuant to governing
rates and charges maintained at its corporate and various dispatching offices.
Transportation services provided pursuant to a written contract are designed to
meet a customers specific shipping needs or by dedicating equipment exclusively
to a given customer for the movement of a series of shipments during a specified
period of time.
Federal regulations govern not only operating authority and
registration, but also such matters as the content of agreements with owner
operators, required procedures for processing of cargo loss and damage claims,
and financial reporting. The Company believes that it is in substantial
compliance with all material regulations applicable to its operations.
The D.O.T. regulates safety matters with respect to the interstate
operations of the Company. Among other things, the D.O.T. regulates commercial
driver qualifications and licensing, sets minimum levels of carrier liability
insurance; requires carriers to enforce limitations on drivers hours of service;
prescribes parts, accessories and maintenance procedures for safe operation of
freight vehicles; establishes noise emission and employee health and safety
standards for commercial motor vehicle operators; and utilizes audits, roadside
inspections and other enforcement procedures to monitor compliance with all such
regulations. Recently, the D.O.T. has established regulations which mandate
random, periodic, pre-employment, post-accident and reasonable cause drug
testing for commercial drivers. The D.O.T. has also established similar
regulations for alcohol testing. The Company believes that it is in substantial
compliance with all material D.O.T. requirements applicable to its operations.
In Canada, provincial agencies grant both intraprovincial and
extraprovincial authority; the latter permits transborder operations to and from
the United States. The Company has obtained from Canadian provincial agencies
all required extraprovincial authority to provide transborder transportation of
manufactured homes and RVs throughout most of Canada.
Most manufactured homes, when being transported by a toter, exceed the
maximum dimensions allowed on state highways without a special permit. The
Company obtains these permits for its owner operators from each state which
allows the Company to transport their manufactured homes on state highways. The
states and Canadian provinces have special requirements for over-dimensional
loads detailing permitted routes, timing required, signage, escorts, warning
lights and similar matters.
Most states and provinces also require operators to pay fuel taxes,
comply with a variety of other tax and/or registration requirements, and keep
evidence of such compliance in their vehicles while in transit. The Company
coordinates compliance with these requirements by its drivers and owner
operators, and monitors their compliance with all applicable safety regulations.
Interstate, the Company's insurance subsidiary, is a captive insurance
company incorporated under Vermont law. It is required to report annually to the
Vermont Department of Banking Insurance & Securities and must submit to an
examination by this Department on a triennial basis. Vermont regulations require
Interstate Indemnity to be audited annually and to have its loss reserves
certified by an approved actuary. The Company believes Interstate is in
substantial compliance with Vermont insurance regulations.
Morgan Finance, Inc., the Company's finance subsidiary, is incorporated
under Indiana law. Morgan Finance is subject to Indianas Equal Credit
Opportunity Laws and other state and federal laws relating generally to fair
financing practices.
Item 2. PROPERTIES
The Company owns approximately 24 acres of land with improvements in
Elkhart, Indiana. The improvements include a 23,000 square foot office building
used as the Company's principal office, a 7,000 square foot leased building
containing additional offices leased to one of the Company's customers, a 9,000
square foot building used for the Company's safety and driver service
departments and also for storage, and an 8,000 square foot building used as a
garage to service company-owned vehicles. Most of the Company's 8 regional and
108 dispatch offices are situated on leased property. The Company also owns and
leases property for parking and storage of equipment at various locations
throughout the United States, usually in proximity to manufacturers of products
moved by the Company. The property leases have term commitments of a minimum of
thirty days and a maximum of three years, at monthly rentals ranging from $100
to $8,950. The Elkhart facility is currently mortgaged to one of the Company's
lenders. The following table summarizes the Company's owned real property.
Property Location Property Description Approximate Acreage
- ----------------- -------------------- -------------------
Elkhart, Indiana Corporate and region 24
Wakarusa, Indiana Terminal and storage 4
Middlebury, Indiana Terminal and storage 13
Mocksville, North Carolina Terminal and storage 8
Edgerton, Ohio Terminal and storage 2
Woodburn, Oregon Storage 4
Woodburn, Oregon Region and storage 1
Fort Worth, Texas Region and storage 6
Waco, Texas Storage 4
Ocala, Florida Terminal and storage 4
Montevideo, Minnesota Terminal and storage 3
Item 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are party to litigation in the
ordinary course of business, generally involving liability claims in connection
with traffic accidents incidental to its transport business. From time to time
the Company may become party to litigation arising outside the ordinary course
of business. The Company does not expect such pending suits to have a material
adverse effect on the Company or its results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In February of 1996, the Company adopted a Special Employee Stock
Purchase Plan (Plan) under which Morgan Drive Away's President and Chief
Executive Officer purchased 70,000 shares of Class A Common stock from treasury
stock at the then current market value price of $560,000. Under the terms of the
Plan, $56,000 was delivered to the Company and a promissory note was executed in
the amount of $504,000 bearing an interest rate of five (5%) percent per annum
due in 2003. The Plan allows for repayment of the note using shares at $8.00 per
share. The Company has the right to repurchase, at $8.00 per share, 56,000
shares during the first year of the agreement and 28,000 during the second year.
Such issuance was exempt from Registration under Section 4(2) of the Securities
Act of 1983, as amended.
Price Range of Common Stock
The Company's Common Stock is traded on the American Stock Exchange under the
symbol MG.
1996 1995
---------------------------------
Quarter Ended High Low High Low
March 31 $9.38 $7.56 $9.25 $7.00
June 30 9.75 8.00 9.00 7.87
September 30 9.19 7.25 10.62 7.69
December 31 7.75 7.13 9.62 7.69
As of March 25, 1997, the approximate number of shareholders of record of the
Company's Class A Common Stock was 174. These figures do not include
shareholders with shares held under beneficial ownership in nominee name or
within clearinghouse position of brokerage firms and banks. The Class B Common
Stock is held of record by Lynch Corporation.
Dividend Information
Class A Class B
Cash Dividends Cash Dividends
- --------------------------------------------------------------------------------
Quarter Ended 1996 1995 1996 1995
- --------------------------------------------------------------------------------
March 31 .02 .02 .01 .01
June 30 .02 .02 .01 .01
September 30 .02 .02 .01 .01
December 31 .02 .02 .01 .01
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share amounts)
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
Operations
Operating Revenues $ 132,208 $ 122,303 $ 101,880 $ 82,793 $ 67,116
Operating Income (Loss) (3,263)(1) 3,371 3,435 2,267 1,774
Pre-tax Income (Loss) (3,615) 3,284 3,367 1,714 709
Net Income (Loss) before
Extraordinary Item (2,070) 2,269 2,212 1,595 275
Net Income (Loss) (2,070) 2,269 2,212 1,595 645
Per Share
Primary Net Income (Loss) $ (.77) $ .80 $ .75 $ .71 $ .40
Fully Diluted Net Income (Loss) (.77) .80 .73 .67 .37
Cash Dividends Declared
Class A Common Stock .08 .08 .08 .02 ---
Class B Common Stock .04 .04 .04 .01 ---
Financial Position
Total Assets $ 33,066 $ 30,795 $ 28,978 $ 24,399 $ 15,605
Working Capital 2,095 8,293 11,045 9,600 2,771
Long-term Debt 4,206 3,275 1,925 2,347 4,917
Redeemable Preferred Stock --- --- 3,104 3,089 3,801
Common Shareholders Equity 13,104 15,578 12,980 11,170 339
Common Shares Outstanding at Year-end 2,685,520 2,649,554 2,566,665 2,566,665 1,333,333
Average Common Shares or
Equivalents Outstanding During the Year 2,684,242 2,557,516 2,626,926 1,970,343 1,466,665
Other Information
Company Unit Moves
New Manufactured Homes 121,136 114,821 98,181 76,188 60,381
Driver Outsourcing 58,368 49,885 32,060 30,978 23,636
(1) Operating Loss in 1996 is after special charges of $3,500,000.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ANALYSIS OF OPERATIONS AND FINANCIAL CONDITIONS
Year 1996 Compared to 1995
Operating revenues rose by 8% to $132,208,000 in 1996 from $122,303,000 in 1995.
Prior to giving effect to the TDI acquisition, which, closed on May 22, 1995,
comparable operating revenues increased 5.5%. Morgan's manufactured housing
outsourcing operating revenues increased 15% out-pacingthe 1996 national
production growth of 9%. The growth in manufactured housing was partially offset
by an 11% decline in the Company's Specialized Transport Division. The Company's
Specialized Transport Division was impacted by weakened demand which drove down
the Company's utilization of equipment and rates. The truckaway operation of the
Specialized Transport Division will be sold in 1997. The truckaway operation
transports automotive products on company-owned trailers for van conversion,
tent camper and automotive customers. The acquisition of Transit Homes of
America, Inc. on December 30, 1996 should more than offset the lost operating
revenues from the closing of the truckaway line of business.
During 1996, the Company reported an operating loss, after special charges,
of $3,263,000 and a net loss of $2,070,000 ($.77 loss per share). In 1995, the
Company reported operating income of $3,371,000 and net income of $2,269,000
($.80 income per share). The special charge for 1996 amounted to $3,500,000
before taxes ($2,100,000 after tax or $.78 per share) and resulted from the sale
of the truckaway operation and the write-down of four properties, two of which
are associated with the creating of the truckaway operation. The carrying value
of assets being held for sale was reduced in accordance with SFAS No. 121.
While the truckaway operation generated approximately 10% of the Company's
1996 total revenue, the operating loss from this operation was approximately
$1,800,000 in 1996. Thus management expects the withdrawal from these
unprofitable activities should have a positive impact on the results of
operations in 1997 (see Note 16, Consolidated Financial Statements). During
1996, the Company also initiated a plan to dispose of certain land and
buildings, two of which are associated with the exiting of the truckaway
operation, that were recorded on the books at values higher than fair market
value.
Excluding the special charges of $3,500,000, operating income declined from
$3,371,000 in 1995 to $237,000 in 1996. The decline in operating income in 1996
was attributed to (i) weakened freight demand in the Specialized Transport
Division, (ii) increases of $1,250,000 in claims costs especially in the driver
outsourcing and specialized transport divisions, and (iii) an increase in
operating costs specifically to build infrastructure and to invest in the
operating structure.
The investment in operating costs included, but were not limited to,
dispatch personnel, regional personnel, and driver retention programs. Selling,
general and administrative costs increased from $7,260,000 in 1995 to $8,235,000
in 1996. Investments in 1996 were made in automation of dispatch facilities and
personnel. In addition, the Company had a full year of selling, general and
administrative expenses for the TDI organization.
Net interest expense increased from $87,000 to $352,000 primarily due to
increases in debt related to the TDI acquisition and reduced cash on hand during
the year. The Company expects interest expenses will increase slightly during
1997 as interest charges will be incurred on the Transit acquisition debt added
in late 1996.
In 1996, the income tax benefit of $1,545,000, including federal and state
tax benefits, resulted in an effective tax benefit of 42.7% compared to an
effective tax rate of 30.9% in 1995. The Company anticipates a decrease in the
1997 effective tax rate to approximately 34%.
Year 1995 Compared to 1994
Operating revenues rose by 20% to $122,303,000 in 1995 from $101,880,000 in
1994. Prior to giving effect to the TDI acquisition, which closed on May 22,
1995, comparable operating revenues increased 14.9%. Morgan benefited from
growth of its primary market, manufactured housing, where national production
was up 12% compared to 1994, and from seven months of revenue from the TDI
acquisition. The 1995 growth in sales was partially stunted by an industry-wide
decline in recreational vehicle production of 11%.
Operating income declined from $3,435,000 in 1994 to $3,371,000 in 1995.
The decline in operating income at Morgan Drive Away, Inc. of approximately
$500,000 was partially offset by operating income from TDI, Inc. of $350,000 and
increased profits from the Company's wholly-owned insurance company, Interstate
Indemnity. The decrease in Morgan Drive Away, Inc.'s operating income in 1995
was attributed to a slow-down in certain segments of the recreational vehicle
market which affected margins, and an increase in operating costs including, but
not limited to, increased fuel taxes, road taxes, recruiting costs, driver
retention, and safety programs. The Company's continued emphasis on safety
produced over $650,000 of claim cost savings calculated as a percentage of
revenue during the year. These savings were offset to some degree by higher
trucking liability premiums, in part due to one major claim which was resolved
during the year.
Selling, general and administrative expenses increased from $6,290,000 in
1994 to $7,260,000 in 1995. The higher general and administrative costs were
attributed to investment in personnel, increased lease costs for the automation
of dispatch facilities, and TDI, Inc. general and administrative costs of
$330,000.
Net interest expense increased from $68,000 to $87,000 primarily due to an
increase in debt related to the TDI acquisition.
The 1995 income tax provision of $1,015,000, including federal and state
taxes, resulted in an effective tax rate of 30.9% compared to 34.3% in 1994.
Net income increased from $2,212,000 in 1994 to $2,269,000 in 1995. As a
result of the earnings growth and the buy back of shares of Class A Common
stock, fully diluted earnings per share reached $.80 in 1995, up from $.73 per
share in 1994.
Liquidity and Capital Resources
Cash generated from operations decreased to $217,000 in 1996 from
$2,503,000 in 1995. The net loss during 1996 of $2,070,000 was in large part due
to the non-cash special charge net of tax of $2,100,000 (special charge of
$3,500,000 net of deferred tax effect of $1,400,000). The sale of the truckaway
operation along with the related operating equipment, land and buildings, and
collection of outstanding truckaway receivables, all net of cost, and related
tax benefits will produce additional cash estimated to be in excess of
$3,000,000. The increase in prepaid expenses in 1996 stems from an increase in
prepaid drivers pay. The decline in other accrued liabilities in 1996 is related
to decreases in accrued wages, fuel taxes, operating permits, and tax
liabilities. The accounts payable decline during 1996 is a result of reduced
cash overdrafts.
Cash used in investing activities decreased from $2,945,000 in 1995 to
$1,581,000 in 1996. In 1996, the Company invested $686,000 in net capital
expenditures and had initial acquisition payments to Transit of $895,000. This
compares to $1,927,000 of net capital expenditures in 1995 and initial
acquisition payments on TDI of $1,018,000. In 1996, approximately $200,000 of
the Company's capital expenditures were spent on Company-owned equipment in the
truckaway division. The decision to close the truckaway division will reduce
future needs for capital expenditures for Company-owned trailers.
Net cash used in financing activities decreased from $3,401,000 in 1995 to
$179,000 in 1996. In 1995, the Company bought over 156,000 shares of Class A
Common stock for $1,274,000. In addition, the Company expended $1,300,000 in
cash related to early redemption of preferred stock. During 1996, the Company
bought over 34,000 shares of Class A Common stock for $286,000.
Outstanding borrowings under the revolver increased to $1,250,000 at
December 31, 1996, as compared to no borrowings under the revolver as of
December 31, 1995. The Company has total borrowing facility available of
$10,000,000, of which there was $5,842,000 outstanding as of December 31, 1996.
The Company paid to the previous owner of Transit $895,000 on December 30,
1996, which was the closing date of the acquisition. In addition, $1,987,000 was
financed through a note due on January 2, 1997 of $697,000 and a five year note
for $1,300,000 (present value of $1,158,000) which requires annual payments of
$475,000, $375,000, $175,000, $175,000 and $100,000 in 1997, 1998, 1999, 2000,
and 2001, respectively.
It is the current policy of the Company to pay annual Class A Common stock
dividends totaling $.08 per share per year and Class B Common stock dividends
totaling $.04 per share. Payment of any future dividends will be dependent,
among other things, upon earnings, capital requirements, financing agreement
covenants, terms of other outstanding securities, future growth plans, legal
restrictions, and the financial condition of the Company.
Impact of Seasonality
Shipments of manufactured homes tend to decline in the winter months in areas
where poor weather conditions inhibit sales and transport. This usually reduces
revenues in the first and fourth quarters of the year. RV movements are
generally strong in the spring, when dealers build stock in anticipation of the
summer vacation season, and late summer and early fall when new vehicle models
are introduced. The Company's revenues, therefore, tend to be stronger in the
second and third quarters.
Impact of Inflation
Inflation can be expected to have an impact on the Company's operating costs.
While the effect of inflation has been moderate since 1990, a prolonged period
of inflation would adversely affect the Company's results unless rates charged
to customers could be increased accordingly.
Forward-Looking Discussion
In 1997, the Company could benefit from (i) the acquisition of Transit Homes of
America which consolidates Morgan's long-standing position as the leader in the
delivery of outsourcing transportation services to the manufactured housing
industry, (ii) the closing of the Truckaway Division, which cost the Company
approximately $1,800,000 in 1996, (iii) reduction of overhead through corporate
restructuring, and (iv) improvement of our safety record. Business expansion,
including possible acquisitions, could augment operating revenue gains. While
the Company remains optimistic over the long term, near term results could be
affected by a number of internal and external economic conditions.
This report contains a number of forward-looking statements, including
those contained in the preceding paragraph. From time to time, the Company may
make other oral or written forward-looking statements regarding its anticipated
sales, costs, expenses, earnings and matters affecting its condition and
operations. Such forward-looking statements are subject to a number of material
factors which could cause the statements or projections contained therein to be
materially inaccurate. Such factors include, without limitation, the risk of
declining production in the manufactured housing industry; the risk of losses or
insurance premium increases from traffic accidents; the risk of loss of major
customers; risks of competition in the recruitment and retention of qualified
drivers and 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 1996
under Part I, Item 1, Business.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Morgan Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31
- ----------------------------------------------------------------------------------------------------
1996 1995
Assets
Current assets:
Cash and cash equivalents $ 1,308 $ 2,851
Trade accounts receivable, less allowance for doubtful
accounts of $59,000 in 1996 and $102,000 in 1995 11,312 11,285
Accounts receivable, other 274 514
Refundable taxes 584 ---
Prepaid expenses and other current assets 3,445 2,875
Deferred income taxes --- 586
- ----------------------------------------------------------------------------------------------------
Total current assets 16,923 18,111
Property and equipment, net 2,763 6,902
Assets held for sale 2,375 --
Intangible assets, net 8,911 5,285
Deferred income taxes 1,683 --
Other assets 411 497
- ----------------------------------------------------------------------------------------------------
Total assets $ 33,066 $ 30,795
====================================================================================================
Liabilities and shareholders' equity
Current liabilities:
Note payable to bank $1,250 $ --
Trade accounts payable 3,226 3,845
Accrued liabilities 4,808 2,245
Accrued claims payable 1,744 1,337
Refundable deposits 1,908 1,607
Current portion of long-term debt 1,892 784
- ----------------------------------------------------------------------------------------------------
Total current liabilities 14,828 9,818
Long-term debt, less current portion 2,314 2,491
Deferred income taxes -- 622
Long term accrued claims payable 2,820 2,286
Commitments and contingencies --- ---
Shareholders' equity
Common stock, $.015 par value
Class A:
Authorized shares 7,500,000; 23 23
Issued and outstanding shares 1,485,520 and 1,449,554
Class B:
Authorized shares 2,500,000; 18 18
Issued and outstanding shares 1,200,000
Additional paid-in capital 12,441 12,441
Retained earnings 2,126 4,370
- ----------------------------------------------------------------------------------------------------
Total capital and retained earnings 14,608 16,852
Less treasury stock, 120,043 and 156,009 shares, at cost (1,000) (1,274)
loan to officer for stock purchase (504) --
- ----------------------------------------------------------------------------------------------------
Total shareholders' equity 13,104 15,578
- ----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 33,066 $ 30,795
====================================================================================================
See accompanying notes
The Morgan Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
December 31
1996 1995 1994
- ------------------------------------------------------------------------------------------------------
Operating revenues:
Manufactured housing $ 72,616 $ 63,353 $ 53,520
Specialized transport 26,169 29,494 28,246
Driver outsourcing 23,090 19,842 15,197
Other service revenue 10,333 9,614 4,917
- ------------------------------------------------------------------------------------------------------
Total operating revenues: 132,208 122,303 101,880
Cost and expenses:
Operating costs 122,238 110,408 91,241
Special charges 3,500 --- ---
Selling, general and administration 8,235 7,260 6,290
Depreciation and amortization 1,498 1,264 914
- ------------------------------------------------------------------------------------------------------
Total costs and expenses 135,471 118,932 98,445
- ------------------------------------------------------------------------------------------------------
Operating (loss) income (3,263) 3,371 3,435
Interest expense, net 352 87 68
- ------------------------------------------------------------------------------------------------------
(Loss) income before taxes (3,615) 3,284 3,367
Total income tax (benefit) expense
Current 268 859 1,031
Deferred (1,813) 156 124
- ------------------------------------------------------------------------------------------------------
Total income tax (benefit) expense (1,545) 1,015 1,155
- ------------------------------------------------------------------------------------------------------
Net (loss) income (2,070) 2,269 2,212
Less preferred dividend -- 221 244
- ------------------------------------------------------------------------------------------------------
Net (loss) income applicable to Common stock $ (2,070) $ 2,048 $ 1,968
======================================================================================================
Net (loss) income per share:
Primary $ (0.77) $ 0.80 $ 0.75
======================================================================================================
Fully diluted $ (0.77) $ 0.80 $ 0.73
======================================================================================================
Average number of common shares and common stock equivalents 2,684,242 2,557,516 2,626,926
======================================================================================================
See accompanying notes
The Morgan Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
December 31
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $(2,070) $ 2,269 $ 2,212
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 1,101 901 630
Amortization 396 363 284
Deferred income taxes (1,719) 156 124
Special charges 3,500 -- --
Imputed non-cash interest on acquisition debt 101 112 71
Amortization of debt issuance costs 36 40 40
Gain (loss) on sale of equipment 37 (19) 8
Changes in operating assets and liabilities:
Accounts receivable 213 (1,835) (1,976)
Refundable taxes (584) -- --
Prepaid expenses and other current assets (891) (372) (939)
Other assets 86 (44) 9
Accounts payable (779) 45 1,324
Accrued liabilities 86 433 806
Accrued claims payable 341 297 496
Refundable deposits 363 157 409
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 217 2,503 3,498
Investing Activities
Purchases of property and equipment (780) (1,955) (1,433)
Proceeds from disposal of property and equipment 94 28 183
Acquisition of businesses (895) (1,018) --
- ------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,581) (2,945) (1,250)
Financing Activities
Net proceeds from (payments on)
bank and seller-financed
notes and credit lines $ 225 (626) (493)
Conversion of warrants -- 297 --
Purchase of treasury stock (286) (1,274) --
Proceeds from sale of treasury stock 56 -- --
Redemption of Series A preferred stock -- (1,300) --
Common stock dividends paid (174) (161) (158)
Redeemable preferred stock dividends paid -- (337) (229)
- ------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (179) (3,401) (880)
- ------------------------------------------------------------------------------------------------------------
Net increase in (decrease in) cash and cash equivalents (1,543) (3,843) 1,368
Cash and cash equivalents at beginning of year 2,851 6,694 5,326
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,308 $ 2,851 $ 6,694
============================================================================================================
See accompanying notes
The Morgan Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK, COMMON STOCK,
AND OTHER SHAREHOLDERS EQUITY
(Dollars in thousands, except per share amounts)
Redeemable
Series A Class A Class B Additional
Preferred Common Common Paid-in Officer Treasury Retained
Stock Stock Stock Capital Loan Stock Earnings
Balance December 31, 1993 $ 3,089 $ 20 $ 18 $ 10,459 $--- $--- $ 673
Net income --- --- --- --- --- --- 2,212
Redeemable Preferred
Stock dividends:
Accrued 244 --- --- --- --- --- (244)
Paid (229) --- --- --- --- --- ---
Common stock dividends:
Class A ($.08 per share) --- --- --- --- --- --- (110)
Class B ($.04 per share) --- --- --- --- --- --- (48)
-------------------------------------------------------------------------------
Balance, December 31, 1994 3,104 20 18 10,459 --- --- 2,483
Net income --- --- --- --- --- --- 2,269
Redeemable Preferred
Stock dividends:
Accrued 221 --- --- --- --- --- (221)
Paid (337) --- --- --- --- --- ---
Redemption of Series A
Preferred Stock (2,988) 2 --- 1,686 --- --- ---
Conversion of Warrants,
including tax benefit --- 1 --- 296 --- --- ---
Purchase of Treasury Stock --- --- --- --- --- (1,274) ---
Common stock dividends:
Class A ($.08 per share) --- --- --- --- --- --- (113)
Class B ($.04 per share) --- --- --- --- --- --- (48)
-------------------------------------------------------------------------------
Balance, December 31, 1995 --- 23 18 12,441 --- (1,274) 4,370
Net (loss) --- --- --- --- --- --- (2,070)
Sale of Treasury Stock, net --- --- --- --- (504) 274 ---
Common stock dividends:
Class A ($.08 per share) --- --- --- --- --- --- (126)
Class B ($.04 per share) --- --- --- --- --- --- (48)
-------------------------------------------------------------------------------
Balance, December 31, 1996 $ 0 $ 23 $ 18 $ 12,441 $ (504) $ (1,000) $ 2,126
===============================================================================
See accompanying notes
NOTES TO CONSOLIDATED STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
The Morgan Group, Inc. (Company), formerly Lynch Services Corporation, was
incorporated in 1988 for the purpose of acquiring Morgan Drive Away, Inc.
(Morgan), and Interstate Indemnity Company (Interstate). In 1994 the Company
formed Morgan Finance, Inc. (Finance), in 1995 acquired the assets of Transfer
Drivers, Inc. (TDI), and on December 30, 1996, purchased the assets of Transit
Homes of America, Inc. (Transit). Lynch Corporation (Lynch) owns all of the
1,200,000 shares of the Company's Class B Common stock and 150,000 shares of the
Company's Class A Common stock, which in the aggregate represent 66% of the
combined voting power of both classes of the Company's Common stock.
The Company is the nation's leader in arranging for transportation services for
the manufactured housing and motor home industries and is building a strong
market presence in providing outsourcing services for a wide range of vehicle
manufacturers and fleet users. The Company provides outsourcing transportation
services through a national network of drivers. A majority of the Company's
accounts receivable are due from companies in the manufactured housing, motor
home, and commercial truck industries located throughout the United States.
While the Company does not consider its business to be dependent upon any one
customer, services provided to Fleetwood Enterprises, Inc. accounted for
approximately 20%, 24%, and 27% of operating revenues in 1996, 1995, and 1994,
and 12% and 17% of gross accounts receivables at December 31, 1996 and 1995,
respectively.
The Company's services also include delivering other products, including
office trailers, and providing certain insurance and financing services to its
owner operators through Interstate and Finance. Revenues, operating profits, or
identified assets of these subsidiaries do not account for over 10% of the
Company's revenues, operating profits, or identifiable assets, and accordingly,
no segment information is required.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, Morgan, Interstate, TDI, and Finance, all of which are wholly
owned. Significant intercompany accounts and transactions have been eliminated
in consolidation.
Recognition of Revenues
Operating revenues and related estimated costs of movements are recognized when
movement of the manufactured housing, recreational vehicles, or other products
is completed.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the property and
equipment.
Impairment of Assets
The Company periodically assesses the net realizable value of its long-lived
assets and evaluates such assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
For assets to be held, impairment is determined to exist if estimated
undiscounted future cash flows are less than carrying amount. For assets to be
disposed of, impairment is determined to exist if the estimated net realizable
value is less than the carrying amount. As discussed in Note 16, the Company
recognized an adjustment during 1996 for write-downs of assets to be disposed
of.
Stock-Based Compensation
The Company accounts for stock-based compensation under Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees." Because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. Pro forma information regarding net income and earnings per share as
if the Company had accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method, which is required by Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," is immaterial.
Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Intangible Assets
Intangible assets, including goodwill, are being amortized by the straight-line
method over their estimated useful lives.
The Company continually evaluates the performance of acquired companies by using
the undiscounted cash flow method to identify whether events and circumstances
have occurred that indicate the value of recorded goodwill may be impaired.
Insurance and Claim Reserves
The Company maintains liability insurance coverage of up to $20,000,000 per
occurrence, with a deductible of $250,000 per occurrence for personal injury and
property damage. The Company currently maintains cargo damage insurance of
$1,000,000 per occurrence with a deductible of $250,000. The Company carries
statutory insurance limits on workers compensation with a deductible of
$250,000. Claims and insurance accruals reflect the estimated cost of claims for
cargo loss and damage, bodily injury and property damage not covered by
insurance. The Company accrues its self-insurance liability using a case reserve
method based upon claims incurred and estimates of unasserted and unsettled
claims, and no portion of these reserves have been discounted.
Net Income Per Common Share
In 1995, primary net income per common share has been computed by dividing net
income, after reduction for (the now retired) Series A Redeemable Preferred
Stock dividends, by the average number of shares outstanding during each year,
as adjusted for stock splits. For periods prior to 1995, fully diluted net
income per common share includes the dilutive effect of the warrants issued in
1992 as computed by application of the treasury stock method. In 1995 net income
per common share reflects the conversion of the warrants into shares of Class A
Common stock. Because each share of the Company's Class B Common stock is freely
convertible into one share of Class A Common stock, the total of the average
number of common shares and Common stock equivalents outstanding for both
classes of Common stock are considered in the computation of income per share.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect (i) the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
(ii) the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclsssifications
Certain amounts in the financial statements have been reclassified to conform to
the 1996 presentation. Such reclassifications had no effect on total assets or
net income.
2. Property and Equipment
Property and equipment consisted of the following:
Estimated December 31
Useful Life 1996 1995
- -----------------------------------------------------------------------
(Years) (In thousands)
Land -- $ 487 $ 1,263
Buildings 25 524 2,368
Transportation equipment 3 to 5 1,470 5,022
Office and service equipment 5 to 8 3,145 3,058
- -----------------------------------------------------------------------
5,626 11,711
Less accumulated depreciation 2,863 4,809
- -----------------------------------------------------------------------
Property and equipment, net $ 2,763 $ 6,902
=======================================================================
3. Intangible Assets
The components of intangible assets and their estimated useful lives are as
follows:
Estimated December 31
Useful Life 1996 1995
- -----------------------------------------------------------------------
(Years) (In thousands)
Contractor network 3 $1,210 $1,210
Trained work force 3 to 12 1,030 1,030
Covenants not to compete 5 to 15 1,152 1,152
Trade name and goodwill--original 40 1,660 1,660
Trade name and goodwill--purchased 20 6,828 2,806
Other 3 to 5 800 800
- -----------------------------------------------------------------------
12,680 8,658
Less accumulated amortization 3,769 3,373
- -----------------------------------------------------------------------
Intangible assets, net $8,911 $5,285
=======================================================================
4. Indebtedness
On March 27, 1997, the Company entered into a credit facility with a bank. The
credit facility, which replaced a similar facility with the same bank, provides
financing for working capital needs, equipment leasing, letters of credit, and
general corporate needs. The Company pays a fee of .125% on the unused line of
credit facilities, and may fix interest rates over the short term LIBOR plus 150
basis points. All letters of credit expire at various dates throughout 1997. The
Company has total available credit facilities of $10,000,000 of which there are
available borrowings of $4,158,000 as of December 31, 1996. In addition, the
Company has available borrowing of $400,000 under its mortgage debt agreements.
The key provisions of the credit arrangements are summarized in the following
table:
Key Provisions Credit Interest
of Credit Expiration Arrangements Rate Interest
Arrangements Dates Outstanding Basis Rate
- ------------------------------------------------------------------------------------------------------
Working capital line of credit 4-30-99 $1,250,000 Prime 8.25%
Lease line of credit 4-30-99 833,000 Various 6.27% to 7.48%
Letter of credit facility 4-30-99 3,418,000 Fixed 1.00%
Term note 7-31-00 341,000 Fixed 8.25%
- ------------------------------------------------------------------------------------------------------
Bank borrowing
(non-mortgage) 5,842,000
Revolving real
estate note 10-1-98 330,000 Prime +.75% 9.00%
- ------------------------------------------------------------------------------------------------------
Total bank credit arrangements $6,172,000
======================================================================================================
The lines of credit, notes, and letters of credit are collateralized by the
assets of Interstate, Morgan, Finance, and TDI, and the accounts receivable,
inventory, and motor equipment of Morgan and TDI. The revolving real estate note
is collateralized by approximately 24 acres of property and structures in
Elkhart, Indiana. The Company's Class B Common stock has been collateralized to
secure a Lynch Corporation line of credit.
As of December 31, 1996, long-term debt consisted of the following:
December 31
1996 1995
- --------------------------------------------------------------------------------
(In thousands)
Real estate note with principal and interest
payable monthly through October 1, 1998 $ 330 $ 690
Promissory note with imputed interest at 8%,
principal and interest payments due
monthly through September 1, 1998 270 426
Promissory note with imputed interest at 7%,
principal and interest payments due
annually through October 31, 2001 256 295
Promissory note with imputed interest at 7.81%,
principal and interest payments due annually
through August 11, 2000 1,154 1,414
Term note with principal and interest payable
monthly through July 31, 2000 341 450
Promissory note with imputed interest at 6.31%,
principal and interest payments due
quarterly through December 31, 2001 1,158 ---
Promissory note principal due on January 2, 1997 697 ---
- --------------------------------------------------------------------------------
4,206 3,275
Less current portion 1,892 784
- --------------------------------------------------------------------------------
Long-term debt, net $2,314 $2,491
================================================================================
Maturities on long-term debt for the five succeeding years are as follows
(in thousands):
1997 $1,892
1998 977
1999 686
2000 448
2001 153
Thereafter 50
------------------------------------------
$4,206
==========================================
The Company, pursuant to a loan agreement with a bank, has agreed to comply
with certain covenants including minimum net worth, maximum ratio of funded debt
to net worth, minimum of interest ratio coverage, and incurrence of additional
debt.
Cash payments for interest were $381,000 in 1996, $278,000 in 1995, and
$202,000 in 1994.
5. Income Taxes
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
The income tax provisions (benefits) are summarized as follows (in
thousands):
1996 1995 1994
- --------------------------------------------------------------------------------
Current:
State $ 28 $ 180 $ 219
Federal 240 679 812
- --------------------------------------------------------------------------------
268 859 1,031
Deferred:
State (267) --- ---
Federal (1,546) 156 124
- --------------------------------------------------------------------------------
(1,813) 156 124
- --------------------------------------------------------------------------------
$(1,545) $ 1,015 $ 1,155
================================================================================
Deferred tax assets and (liabilities) are comprised of the following at
December 31:
1996 1995
- --------------------------------------------------------------------
(In thousands)
Deferred tax assets:
Accrued insurance claims $ 1,595 $ 1,016
Special charges 1,260 --
Minimum tax carryforward 96 --
- --------------------------------------------------------------------
2,951 1,016
Deferred tax liabilities:
Depreciation (709) (507)
Prepaid expenses (482) (465)
Other (77) (80)
- --------------------------------------------------------------------
(1,268) (1,052)
- --------------------------------------------------------------------
$ 1,683 $ (36)
====================================================================
A reconciliation of the income tax provisions and the amount computed by
applying the statutory federal income tax rate to income before income taxes
follows:
1996 1995 1994
- --------------------------------------------------------------------------------
(In thousands)
Income tax provision (benefit) at
federal statutory rate $(1,229) $ 1,117 $ 1,145
Increases (decreases):
State income tax, net of
federal tax benefit (155) 118 144
Reduction attributable to special
election by captive insurance company (216) (223) (202)
Other 55 3 68
- --------------------------------------------------------------------------------
$(1,545) $ 1,015 $ 1,155
================================================================================
Cash payments for income taxes were $934,000 in 1996, $736,000 in 1995, and
$685,000 in 1994.
6. Redeemable Preferred Stock
The Company redeemed the Series A Redeemable Preferred Stock in a transaction
approved by a special meeting of the Board of Directors on November 22, 1995.
The transaction involved the redemption of the 1,493,942 preferred shares owned
by Lynch Corporation in exchange for $1,300,000 in cash and 150,000 shares of
Class A Common stock. The consideration received in exchange for the shares of
Class A Common stock exceeded the book value at the date of the exchange by
$450,000. The resulting premium was recorded as an increase to the paid-in
capital account in the Company's shareholders equity.
On December 7, 1994, June 22, 1995, and November 22, 1995, the Board of
Directors declared a Series A Redeemable Preferred Stock cash dividend pursuant
to its terms. Accordingly, $120,498, $118,533, and $97,577 of cash dividends
were paid to Lynch during 1995.
7. Stock Warrants
In November 1992, the Company granted an officer warrants to purchase 133,333
shares of Class A Common stock at an option price of $.75 per share. The
warrants were exercisable over a three year vesting period beginning in August,
1993. In June 1995, the officer exercised the warrants to purchase 88,888 shares
of Class A Common stock at an option price of $.75 per share. This exercise
represented two thirds of the total outstanding warrants. The final third of the
warrants, representing 44,445 shares, were canceled.
The Company accepted 22,660 shares of stock from the officer to satisfy the
federal income tax withholding resulting from the warrant exercise. The stock
price on the warrant exercise date was $8.375 per share.
8. Stock Option Plan
On June 4, 1993, the Board of Directors approved the adoption of a stock option
plan which provides for the granting of incentive or non-qualified stock options
to purchase up to 200,000 shares of Class A Common stock to officers, including
members of the Board of Directors, and other key employees. No options may be
granted under this plan for less than the fair market value of the Common stock
at the date of the grant, except for certain non-employee directors. Three
non-employee directors were granted non-qualified stock options to purchase a
total of 24,000 shares of Class A Common stock at prices ranging from $6.80 to
$9.00 per shares. Although the exercise period is determined when options are
actually granted, an option shall not be exercised later than ten years and one
day after it is granted. Stock options granted will terminate if the grantees
employment terminates prior to exercise for reasons other than retirement,
death, or disability.
Employees have been granted non-qualified stock options to purchase 175,500
shares of Class A Common stock, net of cancellations and exercises, at prices
ranging from $7.38 to $8.75 per share. Stock options vest over a four year
period pursuant to the terms of the plan. As of December 31, 1996, there were
88,375 options to purchase shares granted to employees and non-employee
directors which were exercisable based upon the vesting terms, and 4,000 shares
had option prices less than the December 31, 1996 closing price of $7.50. The
following table summarizes activity under the option plan:
Shares Option Price
- --------------------------------------------------------------------------------
Outstanding at December 31, 1993 152,000 $8.75 - $9.00
Grants 16,500 $6.80 - $7.75
Exercises ---
Cancellations (8,000)
- --------------------------------------------------------------------------------
Outstanding at December 31, 1994 160,500
Grants 15,000 $7.88 - $8.38
Exercises (1,250)
Cancellations (35,250)
- --------------------------------------------------------------------------------
Outstanding at December 31, 1995 139,000
Grants 48,500 $7.38 - $8.69
Exercises ---
Cancellations (12,000)
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 175,500
9. Special Employee Stock Purchase Plan
In February of 1996, the Company adopted a Special Employee Stock Purchase Plan
(Plan) under which Morgan Drive Away's President and Chief Executive Officer
purchased 70,000 shares of Class A Common stock from treasury stock at the then
current market value price of $560,000. Under the terms of the Plan, $56,000 was
delivered to the Company and a promissory note was executed in the amount of
$504,000 bearing an interest rate of five (5%) percent per annum due in 2003.
The Plan allows for repayment of the note using shares at $8.00 per share. The
Company has the right to repurchase, at $8.00 per share, 56,000 shares during
the first year of the agreement and 28,000 during the second year.
10. Benefit Plans
In 1994, the Company adopted a 401(k) Savings Plan which matches 25% of employee
contributions up to a designated amount. The Company's contribution to the Plan
was $27,000 in 1996, $23,000 in 1995, and $19,000 in 1994.
The Company has established a non-qualified Compensation Plan applicable to
highly compensated employees. The Plan provides tax deferred savings for
executives unfavorably impacted by IRS restrictions. The rate of return is
predicated on rates available from life insurance products. For the years ended
December 31, 1996 and 1995, $12,000 and $10,000 were recognized as premium
expense under this Plan.
11. Transactions with Lynch
Lynch provides certain services to the Company which include executive,
financial and accounting, planning, budgeting, tax, legal, and insurance
services. As discussed in Note 6, the Redeemable Preferred Stock owned by Lynch
Corporation was redeemed during 1995 at a discount. The Company incurred service
fees of $100,000 in 1996, $100,000 in 1995, and $0 in 1994.
12. Leases
The Company leases certain buildings and equipment under non-cancelable
operating leases that expire in various years through 2001. Rental expenses were
$830,000 in 1996, $727,000 in 1995, and $564,000 in 1994. Equipment leases
totaled $1,259,000 in 1996, $1,077,000 in 1995, and 641,000 in 1994.
Future payments under non-cancelable operating leases with initial terms of
one year or more consisted of the following at December 31, 1996 (in thousands):
1997 $1,518
1998 990
1999 268
2000 163
2001 65
-------------------------------------------
Total lease payments $3,004
===========================================
13. Treasury Stock
On March 9, 1995, June 22, 1995, and July 31, 1996, the Company's Board of
Directors approved the purchase of up to 150,000 shares of Class A Common stock
for its Treasury at dates and market prices determined by the Company's
Chairman. As of December 31, 1996, 101,155 shares had been repurchased at prices
between $7.25 and $9.625 per share for a total of $843,215. In addition to these
purchases, the 22,660 shares tendered to the Company as a result of the exercise
of warrants (see Footnote 7) were placed in the Treasury at a value of $189,778.
On December 15, 1995, the Company's Board of Directors approved the repurchase
of 66,228 shares from a prior officer of the Company at a market price of $8.00
per share totaling $529,824. In addition, in February of 1996, Morgan Drive
Away's President and Chief Executive Officer purchased 70,000 shares of stock
from Treasury stock at the then current market value of $560,000.
14. Acquisitions
Effective May 22, 1995, the Company purchased the assets of TDI, a market leader
in the fragmented outsourcing services business for a total purchase price of
$2,725,000. The acquisition was financed through a payment of $1,000,000 on May
11, 1995, with the balance of $1,725,000 financed with the seller over five
years with the payments beginning August 10, 1996. The present value of the
acquisition was $2,462,000, $75,000 of which related to the operating assets
purchased and $2,387,000 to the purchase of intangible assets. In addition, the
Company entered into a consulting agreement with two of the principals of the
seller, pursuant to which the principals agreed to provide consulting services
to the Company for sixty-three months for consideration totaling $202,500,
payable over the consulting period. The book value of the promissory note in
this transaction was $1,154,000 at December 31, 1996.
Effective December 30, 1996, the Company purchased the assets of Transit Homes
of America, Inc., a provider of outsourcing transportation services to the
manufactured housing industry. The aggregate purchase price was $4,372,000 which
includes the cost of the acquisition and certain limited liabilities assumed as
part of the acquisition. The acquisition was financed through available cash
resources and issuance of a promissory note. In addition, the Company entered
into an employment agreement with the seller which provides for incentive
payments up to $400,000, $300,000, and $200,000 in years 1997, 1998, and 1999,
respectively, and $100,000 in each of the years 2000 and 2001. The incentive
payments are based upon achieving certain profit levels in the Company's
Manufactured Housing Group and will be treated as compensation expense if
earned. The excess purchase price over assets acquired was approximately
$3,988,000 and is being amortized over twenty years. In connection with the
acquisition, liabilities assumed were as follows:
Fair value of assets acquired $ 350,000
Goodwill acquired 4,022,000
Cash paid December 30, 1996 (895,000)
Note issued due January 2, 1997 (697,000)
Note issued at acquisition date (1,158,000)
------------------------------------------------------
Liabilities assumed $ 1,622,000
======================================================
The following unaudited pro forma condensed combined results of operations
of Transit and the Company have been prepared as if the acquisition of Transit
had occurred at the beginning of 1995. The following table incorporates the
special charges of $3,500,000 ($2,100,000 after tax or $.78 per share) related
to exiting the truckaway operation and write down of properties in accordance
with SFAS No. 121 (See Note 16):
Pro Forma Years Ended
Dec. 31 Dec. 31
1996 1995
- ------------------------------------------------------------------
(Dollars in thousands
except per share data)
Net Sales $162,000 $154,000
Operating income (loss) (2,510) 3,600
Net income (loss) (1,625) 2,200
Net income (loss) per share (.61) .77
The pro forma consolidated results do not purport to be indicative of
results that would have occurred had the acquisition been in effect for the
periods presented, nor do they purport to be indicative of the results that will
be obtained in the future.
15. Contingencies
The Company has general liabilities claims pending, incurred 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.
On August 4, 1995, Finance entered into a Commercial Paper Purchase
Agreement with a lender whereby the lender has provided an equipment financing
facility for Morgans independent contractors. Under the Agreement, Finance has a
limited guarantee of twenty five percent (25%) of the original amount financed
on each loan purchased. As of December 31, 1996, the lender had extended
$238,000 of financing and Finance had limited guarantees outstanding of $59,500.
16. Special Charges
In the fourth quarter of 1996, the Company recorded special charges of
$2,675,000 ($1,605,000 after tax or $.60 per share) associated with exiting the
truckaway operation. The special charges comprise principally of the anticipated
loss on sales of revenue equipment, projected losses through April 30, 1997, and
write-downs of accounts receivable and other assets.
In addition, the Company is in the process of selling four properties, two
of which are associated with the exiting of the truckaway operation. The Company
has recognized an adjustment to the extent the carrying value of the affected
assets (which was $2,200,000 as of December 31, 1996), exceeds the estimated
realizable value (which was estimated at $1,375,000 as of December 31, 1996).
Accordingly, an adjustment of $825,000 ($495,000 net of taxes or $.18 per share)
is included as special charges. The truckaway operation had revenues of $12.9
million and $14.4 million, and operating losses of approximately $1.8 million
and $1.2 million for the years ended December 31, 1996, and 1995, respectively.
In addition, truckaway had revenues of $20.6 million and operating income of
$1.2 million in 1994.
17. Operating Costs and Expenses (in thousands)
1996 1995 1994
- --------------------------------------------------------------------------------
Purchased transportation costs $ 92,037 $ 84,314 $ 70,137
Operating taxes and licenses 6,460 6,052 4,269
Insurance 3,502 4,000 3,064
Claims 6,080 4,797 4,761
Dispatch costs 7,676 6,637 5,896
Regional costs 2,948 2,492 2,141
Repairs and maintenance 918 770 799
TDI, Inc. 1,356 823 --
Other 1,261 523 174
- --------------------------------------------------------------------------------
$122,238 $110,408 $ 91,241
================================================================================
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 1996, and 1995 (in thousands, except per share
data):
1996--Three Months Ended
- --------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------
Operating revenues $30,506 $36,698 $35,305 $29,699
Operating income (loss) (48) 678 788 (4,681)
Net income (loss) 9 417 495 (2,991)
Earnings (loss) per share
Primary --- .15 .18 (1.11)
Fully diluted $ --- $.15 $.18 $ (1.11)
1995--Three Months Ended
- --------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------
Operating revenues $26,803 $31,554 $33,251 $30,695
Operating income (loss) 737 1,242 1,103 289
Net income 463 764 814 228
Earnings per share
Primary .15 .27 .29 .07
Fully diluted $ .15 $ .27 $ .29 $ .07
In the fourth quarter of 1996, the Company recorded special charges of
$3,500,000 ($2,100,000 after taxes or $.78 per share) related to exiting the
truckaway operation and a write down of properties in accordance with SFAS No.
121. In addition, in the fourth quarter, the Company recorded $750,000 ($.17 per
share) of increased insurance reserves and insurance costs primarily related to
1996 accidents.
In the fourth quarter of 1995, the Company recorded $300,000 ($0.08 per
share) of insurance costs after beng notified of a significant jury award
against the Company. This charge reflects the uninsured portion of the award.
Report of Independent Auditors
Board of Directors
The Morgan Group, Inc.
We have audited the accompanying consolidated balance sheet of The Morgan Group,
Inc. and subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, changes in redeemable preferred stock, common stock
and other shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Morgan Group,
Inc. and subsidiaries at December 31, 1996, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Greensboro, North Carolina
March 27, 1997
The Board of Directors, The Morgan Group, Inc.
We have audited the accompanying balance sheets of The Morgan Group, Inc. (A
Delaware Corporation) and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, changes in redeemable preferred
stock, Common stock and other shareholders equity and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Morgan Group, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of its operations
and cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
February 5, 1996
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
THE MORGAN GROUP, INC.
Col. A Col. B Col. C Col. D Col. E
Additions
Description Balance at Charges to Costs Charges to Other Deductions- Balance at End
Beginning of Period and Expenses Accounts-Describe Describe (1) of Period
Year ended December 31,
1996
Allowance for doubtbul $102,000 $244,000 $287,000 $59,000
account
Year ended December 31,
1995
Allowance for doubtbul $171,000 $184,000 $253,000 $102,000
account
Year ended December 31,
1994
Allowance for doubtbul $137,000 $106,000 $72,000 $171,000
account
(1) Uncollectible accounts written-off, net of recoveries.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
No information is required to be reported in this Form 10-K.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to directors is
incorporated by reference to pages 2 through 5 of the Company's Proxy Statement
for the 1997 Annual Meeting of Shareholders expected to be filed with the
Commission on or about April 12, 1997 (the 1997 Proxy Statement).
Item 11. EXECUTIVE COMPENSATION
The information required by this item with respect to executive
compensation is incorporated by reference to pages 6 through 12 of the 1997
Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
pages 1 through 4 of the 1997 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information under Certain Transactions with Related Persons on page 12 of
the 1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a) List the following documents filed as part of the report:
Included in Item 8.
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Change in
Redeemable Preferred Stock, Common Stock
and Other Shareholders Equity
Notes to Consolidated Financial Statements
Reports of Independent Auditors
Schedule VIII
b) Reports on Form 8-K
Registrant filed no reports on Form 8-K
during the quarter ending
December 31, 1996.
c) The exhibits filed herewith or incorporated
by reference herein are set forth on the
Exhibit Index on page E-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
THE MORGAN GROUP, INC.
Date: March 28, 1997 BY: /s/ Charles C. Baum
-------------------------------------
Charles C. Baum, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 28th day of March, 1997.
1) Principal Executive Officer:
By:/s/ Charles C. Baum Chairman, Chief Executive Officer
------------------------------
Charles C. Baum
2) Principal Financial Officer:
By: /s/ Richard B. Deboer Chief Financial Officer and
----------------------------- Treasurer
Richard B. DeBoer
A Majority of the Board of Directors:
/s/ Charles C. Baum Director
------------------------------
Charles C. Baum
/s/ Bradley J. Bell Director
------------------------------
Bradley J. Bell
/s/ Richard B. Black Director
------------------------------
Richard B. Black
/s/ Frank E. Grzelecki Director
------------------------------
Frank E. Grzelecki
/s/ Todd L. Parchman Director
------------------------------
Todd L. Parchman
EXHIBIT INDEX
Exhibit No. Description Page
3.1 Registrant's Restated Certificate of Incorporation, as
amended. *
3.2 Registrant's Code of By-Laws, as restated and amended. *
3.3 Form of Class A Common Stock Certificate. *
4.1 Fourth Articles - "Common Stock" of the Registrant's *
Certificate of Incorporation, incorporated by reference to
the Registrant's Certificate of Incorporation, as amended,
filed hereunder as Exhibit 3.1.
4.2 Article II - "Meeting of Stockholders," Article VI - *
"Certificate for Shares" and Article VII - "General
Provisions" of the Registrant's Code of By-Laws, incorporated
by reference to the Registrant's Code of By-Laws, as amended,
filed hereunder as Exhibit 3.2.
4.4 Loan Agreements dated September 13, 1994 between The Morgan ***
Group and Subsidiaries and Society National Bank.
4.5(a) Revolving Credit Facility Agreement effective March 27, 1997
among Morgan Drive Away Inc., TDI, Inc., Interstate Indemnity
Company and KeyBank National Association.
4.5(b) Master Revolving Note dated March 27, 1997 by Morgan
Drive Away, Inc., TDI, Inc. and Interstate Indemnity Company
to KeyBank National Association.
4.5(c) Security Agreement effective as of March 27, 1997 between
Morgan Drive Away, Inc. and KeyBank National Association.
4.5(d) Absolute, Unconditional and Continuing Guaranty effective as
of March 27, 1997 by the Morgan Group, Inc. to KeyBank
National Association.
10.1 The Morgan Group, Inc. Incentive Stock Plan. *
10.2 Memorandum to Charles Baum and Philip Ringo from Lynch *
Corporation, dated December 8, 1992, respecting Bonus Pool.
10.3 Employment Agreement between Morgan Drive Away, Inc. and Paul *
D. Borghesani dated July 26, 1988.
10.4 Term Life Policy from Northwestern Mutual Life Insurance *
Company insuring Paul D. Borghesani dated August 1, 1991.
10.5 Long Term Disability Insurance Policy from Northwestern Mutual *
Life Insurance Company dated March 1, 1990.
10.6 Letter Agreement from Philip J. Ringo to The Morgan Group,
Inc., (formerly * Lynch Services Corporation), dated August 3,
1993.
10.7 Warrants to Purchase Class A Common Stock of The Morgan Group,
Inc. * (formerly Lynch Services Corporation), dated November
10, 1992, issued to Philip J. Ringo, and amended June 7, 1993.
10.10 Asset Purchase Agreement, dated May 21, 1993, between The
Morgan Group, Inc., Transamerican Carriers, Inc., Ruby and
Billy Davis and Morgan Drive Away, Inc.
10.12 Management Agreement between Skandia International and Risk *
Management (Vermont), Inc. and Interstate Indemnity Company
dated December 15, 1992.
10.13 Agreement for the Allocation of Income Tax Liability between *
Lynch Corporation and its Consolidated Subsidiaries,
Including The Morgan Group, Inc. (formerly Lynch Services
Corporation), dated December 13, 1988, as amended.
10.16 The Morgan Group, Inc. Employee Stock Purchase Plan as
amended. ****
Exhibit No. Description Page
----------- ----------- ----
10.17 MCI Corporate Service Agreement dated December 12, 1994 ****
between MCI Telecommunications Corporation and Morgan
Drive Away, Inc.
10.8 Certain Services Agreement dated January 1, 1995 between Lynch ****
Corporation and The Morgan Group, Inc.
10.9 Consulting Agreement between Morgan Drive Away, Inc. and Paul ******
D. Borghesani effective as of April 1, 1996.
10.20 Employment Agreement between Morgan Drive Away, Inc. and
Terence L. Russell ******
10.21 Stock Purchase Agreement between Morgan Drive Away, Inc. and ******
Terence L. Russell
10.22 Asset Purchase Agreement for Transfer Drivers Inc. and List of
Schedules ******
10.21 Asset Purchase Agreement between Registrant and Transit Homes *******
of America, Inc. as of November 19, 1996, as amended
as of December 30, 1996.
10.24 Amendment to Asset Purchase Agreement between Registrant and
Transit, Inc. as of December 29, 1996. *******
11 Statement Re: Computations of Per Share Earnings
16.1 Letter Re: Change in Accountants *****
21 Subsidiaries of the Registrant *
23.1 Consent of Ernst & Young LLP ******
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedule
* Incorporated by reference to the corresponding Exhibit to
Registrant's registration statement on Form S-1, Reg. No.
33-641-22.
** Incorporated by reference to Registrant's Form 8-K/A filed
March 29, 1984.
*** Incorporated by reference to Registrant's Form 10-Q filed
November 15, 1994.
**** Incorporated by reference to Registrant's Form 10-K filed
March 30, 1995.
***** Incorporated by reference to Registrant's Form 8-K filed March
19, 1996.
****** Incorporated by reference to Registrant's Form 10-K filed on
April 1, 1996.
******* Incorporated by reference to Registrant's Form 8-K filed
January 14, 1997.