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
of Incorporation or Organization) Identification Number)
2746 Old U.S. 20 West
Elkhart, Indiana 46515-1168
(Address of Principal Executive Offices) (Zip Code)
Registrants telephone number include area code: (219) 295-2200
Securities Registered Pursuant to Section 12(b) of the Act:
(Name of each exchange on
(Title of Class) which registered)
Class A Common Stock, without par value American Stock Exchange
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 $8,676,962. 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 1,482,020 shares, and 1,200,000
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.
The cover page of the Registrant's annual report, on Form 10-K for the year
ended December 31, 1996, is amended by this filing to include certain share
information inadvertently omitted from the cover page of the original filing
made on March 31, 1997. Additionally, Item 8 and Item 14 of the above referenced
Form 10-K, are restated deleting Schedule VIII and a reference to Schedule VIII,
respectively.
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
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:
Financial Statements Included in Item 8.
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
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 (page following signature page
of original filing)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
THE MORGAN GROUP, INC.
Date: April 2, 1997 BY: /s/ Richard B. DeBoer
-------------------------------------
Richard B. DeBoer, Vice President and
Chief Financial Officer