UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 1999
THE MORGAN GROUP, INC.
2746 Old U. S. 20 West
Elkhart, Indiana 46515-1168
(219) 295-2200
Delaware 1-13586 22-2902315
(State of (Commission File Number) (I.R.S. Employer
Incorporation) Identification Number)
The Company (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
The number of shares outstanding of each of the Company's classes of common
stock at July 30, 1999 was:
Class A - 1,246,907 shares
Class B - 1,200,000 shares
The Morgan Group, Inc.
INDEX
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 3
Consolidated Statements of
Operations for the Three and Six Month Periods
Ended June 30, 1999 and 1998 4
Consolidated Statements of
Cash Flows for the Six Month Periods Ended
June 30, 1999 and 1998 5
Notes to Consolidated Interim Financial 6 - 7
Statements as of June 30, 1999
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 11
PART II OTHER INFORMATION 12
Item 4 Submission of matters to a Vote of Security Holders 12
Item 6 Exhibits and Reports on Form 8-K 13
Signatures 14
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
The Morgan Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
June 30, December 31,
1999 1998
(Unaudited)
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 1,419 $ 1,490
Trade accounts receivable, less allowance for doubtful 13,563 12,188
accounts of $177 in 1999 and $208 in 1998
Accounts receivable, other 273 1,214
Prepaid expenses and other current assets 2,165 2,467
Deferred income taxes 1,230 1,230
-------- --------
Total current assets 18,650 18,589
-------- --------
Property and equipment, net 4,240 4,117
Intangible assets, net 7,713 8,030
Deferred income taxes 1,997 1,997
Other assets 840 654
-------- --------
Total assets $ 33,440 $ 33,387
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 4,807 $ 4,304
Accrued liabilities 4,823 3,566
Income taxes payable 63 878
Accrued claims payable 2,845 3,553
Refundable deposits 1,918 1,830
Current portion of long-term debt 641 652
-------- --------
Total current liabilities 15,097 14,783
-------- --------
Long-term debt, less current portion 644 828
Long-term accrued claims payable 5,274 4,555
Commitments and contingencies -- --
Shareholders' equity:
Common stock, $0.15 par value
Class A: Authorized shares - 7,500,000
Issued shares - 1,605,553 23 23
Class B: Authorized shares - 2,500,000
Issued and outstanding shares - 1,200,000 18 18
Additional paid-in capital 12,459 12,459
Retained earnings 3,116 2,898
-------- --------
Total capital and retained earnings 15,616 15,398
Less - treasury stock at cost 358,646 and
253,218 Class A shares (3,191) (2,177)
-------- --------
Total shareholders' equity 12,425 13,221
-------- --------
Total liabilities and shareholders' equity $ 33,440 $ 33,387
======== ========
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Operating revenues $ 40,270 $ 41,523 $ 75,595 $ 75,494
Costs and expenses:
Operating costs 36,876 37,123 68,879 68,778
Selling, general and administration 2,650 2,873 5,338 5,241
Depreciation and amortization 308 288 617 583
---------- ---------- ---------- ----------
39,834 40,284 74,834 74,602
Operating income 436 1,239 761 892
Interest expense, net 119 189 207 333
---------- ---------- ---------- ----------
Income before income taxes 317 1,050 554 559
Income tax expense 148 433 267 173
---------- ---------- ---------- ----------
Net income $ 169 $ 617 $ 287 $ 386
========== ========== ========== ==========
Net income per common share:
Basic $ 0.07 $ 0.23 $ 0.12 $ 0.15
========== ========== ========== ==========
Diluted $ 0.07 $ 0.23 $ 0.11 $ 0.15
========== ========== ========== ==========
Weighted average shares outstanding
Basic 2,447,532 2,637,421 2,492,820 2,636,821
========== ========== ========== ==========
Diluted 2,449,287 2,657,610 2,495,326 2,653,281
========== ========== ========== ==========
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
1999 1998
------- -------
Operating activities:
Net income $ 287 $ 386
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 617 583
Loss (gain) on disposal of property and equipment 28 (15)
Changes in operating assets and liabilities:
Trade accounts receivable (1,375) (2,728)
Other accounts receivable 941 (225)
Prepaid expenses and other current assets 302 (9)
Other assets (186) 601
Trade accounts payable 503 (146)
Accrued liabilities 1,257 1,723
Income taxes payable (815) 150
Accrued claims payable 11 29
Refundable deposits 88 59
------- -------
Net cash provided by operating activities 1,658 408
Investing activities:
Purchases of property and equipment (421) (358)
Proceeds from sale of property and equipment -- 93
Business acquisitions (30) --
------- -------
Net cash used in investing activities (451) (265)
Financing activities:
Net proceeds from note payable to bank -- 750
Principle payments on long-term debt (195) (657)
Treasury stock purchases (1,014) (64)
Proceeds from exercise of stock options -- 68
Common stock dividends paid (69) (82)
------- -------
Net cash (used in) provided by financing activities (1,278) 15
------- -------
Net (decrease) increase in cash and equivalents (71) 158
Cash and cash equivalents at beginning of period 1,490 380
------- -------
Cash and cash equivalents at end of period $ 1,419 $ 538
======= =======
The Morgan Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1999
Note 1.Basis of Presentation
The accompanying consolidated interim financial statements have been
prepared by The Morgan Group, Inc. and Subsidiaries (the "Company"),
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to
such rules and regulations. The consolidated interim financial
statements should be read in conjunction with the financial statements,
notes thereto and other information included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
Net income per common share ("EPS") is computed using the weighted
average number of common shares outstanding during the period. Since
each share of Class B common stock is freely convertible into one share
of Class A common stock, the total of the weighted average number of
shares for both classes of common stock is considered in the
computation of EPS.
The accompanying unaudited consolidated interim financial statements
reflect, in the opinion of management, all adjustments (consisting of
normal recurring items) necessary for a fair presentation, in all
material respects, of the financial position and results of operations
for the periods presented. The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions. Such estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.
The consolidated financial statements include the accounts of the
Company and its subsidiaries, Morgan Drive Away, Inc., TDI, Inc.,
Interstate Indemnity Company, and Morgan Finance, Inc., all of which
are wholly owned. Significant intercompany accounts and transactions
have been eliminated in consolidation.
Note 2. Segment Reporting
Description of Services
The Morgan Group, Inc. is the nation's largest service company managing
the delivery of manufactured homes, trucks, specialized vehicles, and
trailers in the United States. The Company provides outsourcing
transportation services principally through a national network of
independent owner operators. The Company dispatches its drivers from
approximately 108 offices in 32 states.
The Company operates in three business segments: Manufactured Housing,
Specialized Outsourcing Services, and Insurance and Finance. The
Manufactured Housing segment provides outsourced transportation and
logistical services to manufacturers of manufactured housing through a
network of terminals located in thirty one states. The Specialized
Outsourcing Services segment provides outsourced transportation
services primarily to manufacturers of recreational vehicles,
commercial trucks and trailers through a network of service centers in
eight states. The third segment, Insurance and Finance, provides
insurance and financing to the Company's drivers and independent
owner-operators. This segment also acts as a cost center whereby all
property damage and bodily injury and cargo costs are captured. The
Company's segments are strategic business units that offer different
services and are managed separately based on the differences in these
services.
Measurement of Segment Profit (Loss) and Segment Assets
The Company evaluates performance and allocates resources based on
several factors, of which the primary financial measure is business
segment operating income, defined as earnings before interest, taxes,
depreciation and amortization (EBITDA). Segment assets have not changed
significantly since December 31, 1998. The accounting policies of the
segments are the same as those described in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998. There are no
significant intersegment revenues.
The following table presents the financial information for the
Company's reportable segments for the three and six month periods ended
June 30, (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Operating revenues
Manufactured Housing $ 27,648 $ 29,394 $ 51,516 $ 53,344
Specialized Outsourcing Services 12,214 11,742 23,246 21,384
Insurance and Finance 1,032 1,040 2,060 2,060
All Other 20 9 72 9
-------- -------- -------- --------
40,914 42,185 76,894 76,797
Total intersegment insurance revenues (644) (662) (1,299) (1,303)
-------- -------- -------- --------
Total operating revenues $ 40,270 $ 41,523 $ 75,595 $ 75,494
======== ======== ======== ========
Segment profit (loss) - EBITDA
Manufactured Housing $ 3,108 $ 2,977 $ 5,757 $ 5,208
Specialized Outsourcing Services 210 412 414 584
Insurance and Finance (2,376) (1,754) (4,406) (4,047)
All Other (198) (108) (387) (270)
-------- -------- -------- --------
744 1,527 1,378 1,475
Depreciation and amortization (308) (288) (617) (583)
Interest expense (119) (189) (207) (333)
-------- -------- -------- --------
Income (loss) before taxes $ 317 $ 1,050 $ 554 $ 559
======== ======== ======== ========
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
For the Quarter Ended June 30, 1999
Consolidated Results
Operating revenues for the second quarter decreased three percent to $40.3
million from $41.5 million for the year-ago quarter, principally as a result of
revenue declines in the Manufactured Housing business segment. Partially
offsetting this decline were higher operating revenues in the Specialized
Outsourcing Services business segment.
Operating earnings before interest, taxes, depreciation and amortization
("EBITDA") were $744,000 for the quarter, compared to $1.5 million for the
corresponding period last year. Second quarter 1999 was adversely affected by
increased losses in the Insurance/Finance business segment, the weakening
Manufactured Housing market and increased costs in Specialized Outsourcing
Services.
Because of the existence of significant non-cash expenses, such as depreciation
of fixed assets and amortization of intangible assets, the Company believes that
EBITDA contributes to a better understanding of the Company's ability to satisfy
its obligations and to utilize cash for other purposes. EBITDA should not be
considered in isolation from or as a substitute for operating income, cash flow
from operating activities, and other consolidated income or cash flow statement
data prepared in accordance with generally accepted accounting principles.
Net interest expense decreased $70,000 in the second quarter of 1999 compared to
the year-ago quarter as a result of improved cash flow and decreases in the
average debt outstanding. Net income for the second quarter of 1999 was $169,000
or $0.07 per basic and diluted share, compared to $617,000 or $0.23 per basic
and diluted share.
Segment Results
The following discussion sets forth certain information about the segment
results for the quarters ended June 30, 1999 and 1998.
Manufactured Housing
Manufactured Housing operating revenues are generated from providing
transportation and logistical services to manufacturers of manufactured homes.
Manufactured Housing operating revenues were $1.7 million less in the second
quarter of 1999 compared to the second quarter of a year ago. Shipments
decreased eight percent in the historically strongest quarter of the year
reflecting a weakening demand in the retail sales of manufactured homes.
Manufactured Housing EBITDA increased $131,000, primarily due to a reduction in
overhead costs offsetting the lower volume.
Specialized Outsourcing Services
Specialized Outsourcing Services operating revenues increased $472,000 in the
second quarter of 1999 to $12.2 million. This increase was primarily in driver
outsourcing services. Specialized Outsourcing Services EBITDA decreased to
$210,000 primarily due to inefficiencies in utilizing the driver base and
increased overhead costs including salary severance expenses.
Insurance/Finance
Insurance/Finance operating revenues quarter to quarter were unchanged at $1.0
million. The Insurance/Finance EBITDA loss increased $622,000, primarily due to
higher bodily injury, property damage and cargo loss reserve requirements.
RESULTS OF OPERATIONS
For the First Six Months Ended June 30, 1999
For the first six months of 1999, operating revenues increased to $75.6 million
from $75.5 million for the same period last year. The increase in operating
revenues was in Specialized Outsourcing Services ($1.9 million), while
Manufactured Housing revenues decreased ($1.8 million).
EBITDA decreased $97,000 to $1.4 million for the six month period of 1999
compared to the year ago period. This decrease was caused by the increased
losses in the Insurance/Finance business segment and increased costs in
Specialized Outsourcing Services. The loss of gross margin in the Manufactured
Housing business segment from lower operating revenues was offset by the
reduction in overhead costs.
Net interest expense decreased $126,000 or thirty-eight percent compared to the
year ago period for the reasons previously noted.
The Company's effective tax rate for the three and six month's periods ended
June 30, 1999 was higher than the statutory rate primarily due to the effects on
pre-tax income of certain non-deductible items.
Net income decreased to $287,000 or $0.11 per diluted share compared to $386,000
or $0.15 per diluted share.
Segment Results
The following discussion sets forth certain information about the segment
results for the six months ended June 30, 1999 and 1998.
Manufactured Housing
Manufactured Housing operating revenues were $1.8 million less in the first half
of 1999 compared to the prior year period. This decrease occurred primarily in
the second quarter. Manufactured Housing EBITDA increased $549,000, primarily
due to the reduction in overhead costs resulting from force reductions and field
office consolidations or eliminations.
Specialized Outsourcing Services
Specialized Outsourcing Services operating revenues increased $1.9 million in
the first half of 1999 to $23.2 million. This increase was primarily in driver
outsourcing services and large trailer delivery services. However, Specialized
Outsourcing Services EBITDA decreased to $414,000 primarily due to the causes
previously noted.
Insurance/Finance
Insurance/Finance operating revenues period to period were unchanged at $2.1
million. Insurance/Finance EBITDA loss increased $359,000, primarily due to the
higher bodily injury, property damage and cargo loss reserve requirements.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities generated $1.7 million of cash in the first six months of
1999. Operations in the first six months of 1998 generated $408,000 of cash.
Increases in trade accounts payable, accrued liabilities and reductions in other
accounts receivable, prepaid expenses and other current assets more than offset
the seasonal increase in trade accounts receivable and income tax payments.
Trade accounts receivable days sales outstanding (DSO) decreased from 28 days at
December 31, 1998 to 26 days at June 30, 1999. Other accounts receivable
decreased primarily due to the collection of amounts due from the primary
insurance provider.
The Company concluded a tender offer on March 19, 1999, whereby it acquired
102,528 shares for its treasury at $9.00 per share. The Company, given its
businesses, assets and prospects, believes that purchasing its Class A stock is
an attractive investment that will benefit the Company and its remaining
shareholders and is consistent with its long-term goals of maximizing
shareholder return and with its recent purchases of outstanding shares.
On January 28, 1999, the Company entered into a new $20.0 million revolving
credit facility ("New Credit Facility") with the Transportation Division of
BankBoston. This New Credit Facility is for two years, subject to renewal, and
better sized to the Company's requirements.
The Company had no borrowings from the new credit facility at June 30, 1999 and
borrowing availability of $5.6 million.
The Company had minimal exposure to interest rates as of June 30, 1999 as
substantially all of its outstanding long-term debt bears fixed rates. The New
Credit Facility will bear variable interest rates based on either a Federal
Funds rate or the Eurodollar rate. Accordingly, future borrowings under the New
Credit Facility will have exposure to changes in interest rates. Under its
current policies, the Company does not use interest rate derivative instruments
to manage exposure to interest rate changes. Also, the Company currently is not
using any fuel hedging instruments.
It is the management's opinion that the Company's foreseeable cash requirement
will be met through a combination of internally generated funds and the credit
available from the New Credit Facility.
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure its operations will not be adversely
affected by Year 2000 software failures. The Company has a program in place
designed to bring the systems into Year 2000 compliance in time to minimize any
significant detrimental effects on operations. In addition, executive management
regularly monitors the status of the Company's Year 2000 remediation plans.
The Company converted to Year 2000 compliant financial software in February,
1999. The Company has completed software program modifications to Year 2000
compliant order entry, truck dispatch, customer billing and driver pay modules.
Testing is scheduled to be completed by August 31, 1999. Other software
remediation/replacement is likewise proceeding as planned.
Accordingly, Morgan presently believes that its Year 2000 compliance program
will essentially be completed on a timely basis, posing no significant internal
operational problems. Management, at this time, sees no need for a contingency
plan for internal Year 2000 software issues. However, if program modifications
are not satisfactorily tested and implemented by September 7, 1999, Morgan will
develop an appropriate comprehensive contingency plan.
The Company also faces risk to the extent that services and systems purchased by
the Company and others with whom the Company transacts business do not comply
with Year 2000 requirements. As part of the Year 2000 compliance program,
significant service providers, vendors, customers and governmental entities that
are believed to be critical to business operations after January 1, 2000 have
been identified and steps are being undertaken in an attempt to reasonably
determine their stage of Year 2000 readiness.
External and internal costs specifically associated with modifying internal use
software for Year 2000 compliance are expensed as incurred. The total amount
expended on the project through June 30, 1999 was $141,500. Costs to be incurred
in the remainder of 1999 to fix Year 2000 problems are estimated at
approximately $262,000. These estimated costs do not include normal ongoing
costs for computer hardware and software that would be replaced even without the
presence of the Year 2000 issue. The Company does not expect the costs relating
to Year 2000 remediation to have a material effect on its results of operations
or financial condition.
Based on the progress the Company has made in addressing its Year 2000 issues
and the Company's plan and timeline to complete its compliance program, the
Company does not foresee significant risks associated with its Year 2000
compliance at this time.
The Company believes today that the most likely worst case scenario will involve
temporary disruptions in payments from customers and temporary disruptions in
the delivery of services and products to the Company. The Company would expect
that if these events were to occur, increased expense would result and adversely
affect the Company's cash flow.
The estimates and conclusions herein contain forward-looking statements and are
based on management's best estimates of future events. However, there can be no
assurance that the Company will timely identify and remediate all significant
Year 2000 problems, that remedial efforts will not involve significant time and
expense, or that such problems will not have a material adverse effect on the
Company's business, results of operations or financial position.
Impact of Seasonality
Shipments of manufactured homes tend to decline in the winter months in areas
where poor weather conditions inhibit transport. This usually reduces operating
revenues in the first and fourth quarters of the year. The Company's operating
revenues, therefore, tend to be stronger in the second and third quarters.
FORWARD LOOKING DISCUSSION
This report contains a number of forward-looking statements regarding Year 2000
compliance and the impact of seasonality on the shipment of manufactured homes.
From time to time, the Company may make other oral or written forward-looking
statements regarding its anticipated operating revenues, costs and expenses,
earnings and other matters affecting its operations and condition. Such
forward-looking statements are subject to a number of material factors which
could cause the statements or projections contained therein to be materially
inaccurate. Such factors include, without limitation, the risk of declining
production in the manufactured housing industry; the risk of losses or insurance
premium increases from traffic accidents; the risk of loss of major customers;
risks of competition in the recruitment and retention of qualified drivers in
the transportation industry generally; risks of acquisitions or expansion into
new business lines that may not be profitable; risks of changes in regulation
and seasonality of the Company's business. Such factors are discussed in greater
detail in the Company's Annual Report on Form 10-K for the year ended December
31, 1998 under Part I, Item 1, Business 7.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The information called for by this item is provided under the caption
"Liquidity and Capital Resources" under Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On June 17, 1999, the Company held its Annual Meeting of Shareholders,
the results of which follow:
Report of proxies received and shares voted June 17, 1999
Total Voted % of Total
--------- --------- ------------
Number of shares of Class A 1,249,207 1,212,106 97%
common stock
Number of shares of Class B
common stock 1,200,000 1,200,000 100%
1. Election of directors elected by
all shareholders (1-year term), shares
of Class B common stock are entitled
to two votes
Against or
For Withheld Abstained Non-Votes
--------- ---------- --------- ---------
Charles C. Baum 3,600,600 11,506 - 0 - 37,101
Richard B. Black 3,600,600 11,506 - 0 - 37,101
Frank E. Grzelecki 3,600,600 11,506 - 0 - 37,101
Bradley J. Bell 3,600,600 11,506 - 0 - 37,101
2. Election of director by holders of
Class A common stock (1-year term)
Robert S. Prather, Jr. 1,200,600 11,506 - 0 - 37,101
3. Amendment to Certificate of
Incorporation to allow the transfer
of shares of Class B common stock in
certain limited situations without
such shares converting to shares of
Class A common stock
Against or
For Withheld Abstained Non-Votes
--------- ---------- --------- ---------
Class A common stock 715,744 34,337 115 499,011
Class A and Class B common stock
voting together as a single class 1,915,744 34,337 115 499,011
Item 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
Exhibit 3.1 - Restated and Amended Certificate of Incorporation,
as Amended
Exhibit 27.1 - Financial Data Schedule for Six Month
Period Ended June 30, 1999
Exhibit 27.2 - Restated Financial Data Schedule for Six Month
Period Ended June 30, 1998
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MORGAN GROUP, INC.
BY: /s/ Dennis R. Duerksen
--------------------------------
Dennis R. Duerksen
Chief Financial Officer and
Chief Accounting Officer
Date: August 13, 1999