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 September 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 October 29, 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 September 30,
1999 and December 31, 1998 3
Consolidated Statements of Operations for the
Three and Nine Month Periods Ended September 30,
1999 and 1998 4
Consolidated Statements of Cash Flows for the Nine
Month Periods Ended September 30, 1999 and 1998 5
Notes to Consolidated Interim Financial 6 - 7
Statements as of September 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 Exhibits and Reports on Form 8-K 12
Signatures 13
2
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
The Morgan Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
September 30, December 31,
1999 1998
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,083 $ 1,490
Trade accounts receivable, less allowance for doubtful 12,963 12,188
accounts of $218 in 1999 and $208 in 1998
Accounts receivable, other 179 1,214
Prepaid expenses and other current assets 2,352 2,467
Deferred income taxes 1,230 1,230
-------- --------
Total current assets 18,807 18,589
-------- --------
Property and equipment, net 4,198 4,117
Intangible assets, net 7,543 8,030
Deferred income taxes 1,997 1,997
Other assets 792 654
-------- --------
Total assets $ 33,337 $ 33,387
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 4,737 $ 4,304
Accrued liabilities 4,596 3,566
Income taxes payable 40 878
Accrued claims payable 3,220 3,553
Refundable deposits 1,912 1,830
Current portion of long-term debt 603 652
-------- --------
Total current liabilities 15,108 14,783
-------- --------
Long-term debt, less current portion 293 828
Long-term accrued claims payable 5,506 4,555
Commitments and contingencies -- --
Shareholders' equity:
Common stock, $0.015 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 3,113 2,898
-------- --------
Total capital and retained earnings 15,613 15,398
Less - treasury stock at cost 358,646 and
253,218 Class A shares (3,183) (2,177)
-------- --------
Total shareholders' equity 12,430 13,221
-------- --------
Total liabilities and shareholders' equity $ 33,337 $ 33,387
======== ========
3
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Operating revenues $ 37,312 $ 39,135 $ 112,907 $ 114,629
Costs and expenses:
Operating costs 34,326 35,560 103,205 104,338
Selling, general and administration 2,477 2,580 7,815 7,821
Depreciation and amortization 301 296 918 879
---------- ---------- ---------- ----------
37,104 38,436 111,938 113,038
Operating income 208 699 969 1,591
Interest expense, net 75 127 282 460
---------- ---------- ---------- ----------
Income before income taxes 133 572 687 1,131
Income tax expense 99 251 366 424
---------- ---------- ---------- ----------
Net income $ 34 $ 321 $ 321 $ 707
========== ========== ========== ==========
Net income per basic and diluted share $ 0.01 $ 0.12 $ 0.13 $ 0.27
========== ========== ========== ==========
Weighted average shares outstanding 2,446,907 2,598,545 2,477,348 2,623,922
========== ========== ========== ==========
4
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
1999 1998
------- -------
Operating activities:
Net income $ 321 $ 707
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 918 879
Loss on disposal of property and equipment 58 1
Changes in operating assets and liabilities:
Trade accounts receivable (775) (2,370)
Other accounts receivable 1,035 (237)
Prepaid expenses and other current assets 115 226
Other assets (138) 272
Trade accounts payable 433 1,502
Accrued liabilities 1,030 1,856
Accrued claims payable 618 570
Income taxes payable (838) 283
Refundable deposits 82 216
------- -------
Net cash provided by operating activities 2,859 3,905
Investing activities:
Purchases of property and equipment (538) (534)
Proceeds from sale of property and equipment 8 88
Business acquisitions (40) (159)
------- -------
Net cash used in investing activities (570) (605)
Financing activities:
Net proceeds from note payable to bank -- (2,250)
Principal payments on long-term debt (584) (1,061)
Proceeds from long-term debt -- 101
Treasury stock purchases (1,006) (290)
Proceeds from exercise of stock options -- 68
Common stock dividends paid (106) (122)
------- -------
Net cash used in financing activities (1,696) (3,554)
------- -------
Net increase (decrease) in cash and equivalents 593 (254)
Cash and cash equivalents at beginning of period 1,490 380
------- -------
Cash and cash equivalents at end of period $ 2,083 $ 126
======= =======
5
The Morgan Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 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 104 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.
6
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 nine month periods
ended September 30, (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Operating revenues
Manufactured Housing $ 25,768 $ 27,600 $ 77,284 $ 80,944
Specialized Outsourcing Services 11,196 11,081 34,442 32,465
Insurance and Finance 974 994 3,034 3,054
All Other (14) 104 58 113
--------- --------- --------- ---------
37,924 39,779 114,818 116,576
Total intersegment insurance revenues (612) (644) (1,911) (1,947)
--------- --------- --------- ---------
Total operating revenues $ 37,312 $ 39,135 $ 112,907 $ 114,629
========= ========= ========= =========
Segment profit (loss) - EBITDA
Manufactured Housing $ 3,147 $ 2,693 $ 8,904 $ 7,901
Specialized Outsourcing Services 338 347 752 931
Insurance and Finance (2,732) (2,066) (7,138) (6,113)
All Other (244) 21 (631) (249)
--------- --------- --------- ---------
509 995 1,887 2,470
Depreciation and amortization (301) (296) (918) (879)
Interest expense (75) (127) (282) (460)
--------- --------- --------- ---------
Income (loss) before taxes $ 133 $ 572 $ 687 $ 1,131
========= ========= ========= =========
7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
For the Quarter Ended September 30, 1999
Consolidated Results
Operating revenues for the third quarter decreased five percent to $37.3 million
from $39.1 million for the year-ago quarter, principally as a result of revenue
declines in the Manufactured Housing business segment.
Operating earnings before interest, taxes, depreciation and amortization
("EBITDA") were $509,000 for the quarter, compared to $995,000 for the
corresponding period last year. Third 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 $52,000 in the third 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 third quarter of 1999 was $34,000
or $0.01 per basic and diluted share, compared to $321,000 or $0.12 per basic
and diluted share.
Segment Results
The following discussion sets forth certain information about the segment
results for the quarters ended September 30, 1999 and 1998.
Manufactured Housing
Manufactured Housing operating revenues are primarily generated from providing
transportation and logistical services to manufacturers of manufactured homes.
Manufactured Housing operating revenues were $1.8 million less in the third
quarter of 1999 compared to the third quarter of a year ago. Shipments decreased
eight percent in the quarter reflecting a weakening demand in the retail sales
of manufactured homes and resulting in lower shipments by some of the Company's
major customers. These events have also in part resulted in a decrease in the
Company's market share measured as the percent of new home shipments. The
Company's current anticipation is that this market weakness will continue for
the foreseeable future perhaps with the market improving in the second half of
2000. See "Forward Looking Discussion" below.
The Company in response to these trends reduced the number of trucking
terminals, other overhead expenses and continues to reduce the cost of doing
business. Consequently, Manufactured Housing EBITDA increased $454,000 in the
third quarter of 1999 compared to the third quarter of a year ago. Reduced
Manufactured Housing terminal and other overhead expenses and reduced allocation
of Selling, General and Administration expenses were partially offset by the
lower gross margin.
Specialized Outsourcing Services
Specialized Outsourcing Services operating revenues increased $115,000 in the
third quarter of 1999 to $11.2 million. This increase was in driver outsourcing
services partially offset by decreases in trailer deliveries. Specialized
Outsourcing Services EBITDA was $338,000 compared to $347,000 for the comparable
period a year ago.
Insurance/Finance
Insurance/Finance operating revenues quarter to quarter were unchanged at $1.0
million. The Insurance/Finance EBITDA loss increased $666,000, primarily due to
higher cargo loss reserve requirements. Bodily injury and property damage loss
reserves also increased compared to the prior year quarter.
8
RESULTS OF OPERATIONS
For the First Nine Months Ended September 30, 1999
For the first nine months of 1999, operating revenues decreased to $112.9
million from $114.6 million for the comparable period a year ago. Operating
revenues in Specialized Outsourcing Services increased ($2.0 million), while
Manufactured Housing revenues decreased ($3.7 million).
EBITDA decreased $583,000 to $1.9 million for the nine month period of 1999
compared to the year ago period. An improved Manufactured Housing EBITDA was
offset by increased losses in the Insurance and Finance business segment.
Net interest expense decreased $178,000 or thirty-nine percent compared to the
year ago period for the reasons noted in the third quarter review.
The Company's effective tax rate for the three and nine month's periods ended
September 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 $321,000 or $0.13 per diluted share compared to $707,000
or $0.27 per diluted share.
Segment Results
The following discussion sets forth certain information about the segment
results for the nine months ended September 30, 1999 and 1998.
Manufactured Housing
Manufactured Housing operating revenues were $3.7 million less in the first nine
months of 1999 compared to the prior year period. This decrease occurred in the
second and third quarters. Manufactured Housing EBITDA increased $1.0 million,
primarily due to reductions in overhead costs.
Specialized Outsourcing Services
Specialized Outsourcing Services operating revenues increased $2.0 million in
the first nine months of 1999 to $34.4 million. This increase was primarily in
driver outsourcing services and large trailer delivery services. However,
Specialized Outsourcing Services EBITDA decreased to $752,000 primarily due to
increased overhead costs.
Insurance/Finance
Insurance/Finance operating revenues period to period were unchanged at $3.0
million. Insurance/Finance EBITDA loss increased $1.0 million due to the higher
bodily injury, property damage and cargo loss reserve requirements.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities generated $2.9 million of cash in the first nine months of
1999.
Increases in trade accounts payable, accrued claims payable, accrued liabilities
and reductions in other accounts receivable, more than offset the increase in
trade accounts receivable and income tax payments. Other accounts receivable
decreased primarily due to the collection of amounts due from the primary
insurance provider.
The Company concluded a "Dutch Auction" self-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.
9
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 September 30, 1999
and borrowing availability of $5.8 million based on eligible accounts and an
additional $5.0 million of excess short-term borrowing availability.
The Company had minimal exposure to interest rates on its borrowings as of
September 30, 1999 as substantially all of its outstanding long-term debt bears
fixed rates. The New Credit Facility bears 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 requirements
for the ensuing twelve months will be met through a combination of internally
generated funds and the credit available from the New Credit Facility.
YEAR 2000 COMPLIANCE
The Company completed its program to bring all computer hardware and software
systems into Year 2000 compliance in September, 1999.
The Company does face 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 was $336,000. These 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.
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 most likely worst case scenario that the Company could experience would
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, or that such problems will not have a material adverse
effect on the Company's business, results of operations or financial position.
10
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
and the current weakness of the manufactured housing market. 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.
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.
11
PART II - OTHER INFORMATION
Item 5. Other Information.
Lynch Corporation transferred all shares of The Morgan Group, Inc. which it
owned, representing the voting power to elect a majority of the corporation's
directors, to Brighton Communications Corporation, a wholly owned subsidiary of
Lynch Interactive Corporation. Both Brighton Communications and Lynch
Interactive were wholly owned subsidiaries of Lynch Corporation until September
1, 1999, when Lynch transferred all of the stock of Lynch Interactive to its
shareholders. The Morgan Group does not consider the spin-off of Lynch
Interactive Corporation by Lynch Corporation to constitute a change of control
of the company. Lynch Interactive Corporation is traded on the American Stock
Exchange.
Item 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
Exhibit 27.1 - Financial Data Schedule for Nine Month Period
Ended September 30, 1999
Exhibit 27.2 - Restated Financial Data Schedule for Nine Month
Period Ended September 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.
12
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: November 12, 1999