-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QNKKUITDXMdbNXQaHPl7y8kFo85wwusU8+03MJH9HEWK2X7e3Ao44ENt8s0qxw6h yDLOBnk7KMCXzE65h84hfQ== 0000908834-01-000092.txt : 20010409 0000908834-01-000092.hdr.sgml : 20010409 ACCESSION NUMBER: 0000908834-01-000092 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN GROUP INC CENTRAL INDEX KEY: 0000906609 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 222902315 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13586 FILM NUMBER: 1590286 BUSINESS ADDRESS: STREET 1: 2746 OLD U S 20 W STREET 2: PO BOX 1168 CITY: ELKHART STATE: IN ZIP: 46514 BUSINESS PHONE: 2192952200 10-K405 1 0001.txt FORM 10-K OF THE MORGAN GROUP, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2000 THE MORGAN GROUP, INC. 2746 Old U.S. 20 West Elkhart, Indiana 46514 (219)295-2200 Commission File Number 1-13586 Delaware 22-2902315 (State of Incorporation) (I.R.S. Employer Identification Number) Securities Registered Pursuant to Section 12(b) of the Act: American Stock Exchange Class A common stock, without par value 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 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 Registrant's 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. [ ] The aggregate market value of the issuer's voting stock held by non-affiliates, as of March 26, 2001 was $3,105,000. 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 26, 2001, was 1,248,157 shares, and 1,200,000 shares, respectively. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders are incorporated into Part III of this report. Part I Item 1. BUSINESS Overview The Morgan Group, Inc. (the "Company" or "Registrant") , a Delaware corporation, is the nation's largest publicly owned service company in managing the delivery of manufactured homes, commercial vehicles and specialized equipment in the United States, and through its wholly owned and principal subsidiary, Morgan Drive Away, Inc. ("Morgan"), has been operating since 1936. The Company is a subsidiary of Lynch Interactive Corporation, which formed the Company in 1988 to acquire Morgan and Interstate Indemnity Company ("Interstate"), an insurance subsidiary. The Company offers financing to independent owner-operators through Morgan Finance, Inc. ("Finance"). The Company provides services to the Driver Outsourcing industry through its subsidiary Transfer Drivers, Inc. ("TDI"). The Company primarily provides outsourcing transportation services through a national network of approximately 1,023 independent owner-operators and approximately 1,410 other drivers. The Company dispatches its drivers from 74 locations in 28 states. The Company's largest customers include Oakwood Homes Corporation, Fleetwood Enterprises, Inc., Champion Enterprises, Inc., Winnebago Industries, Inc., Cavalier Homes, Inc., Clayton Homes, Inc., Four Seasons Housing, Inc., Thor Industries, Inc., Holiday Rambler and Damon Corporation. The Company also provides certain insurance and financing services to the independent owner-operators through its insurance and finance subsidiaries, Interstate and Finance, respectively. As further described below, the Company's strategy is to grow through expansion in the niche businesses already being serviced, along with pursuing acquisitions or joint ventures in related industries. In addition, the Company will look to expand insurance product offerings to drivers and owner-operators through Interstate. The Company's principal office is located at 2746 Old U.S. 20 West, Elkhart, Indiana 46514-1168. Company Services The Company operates in these business segments: Manufactured Housing, Driver Outsourcing, Specialized Outsourcing Services, and Insurance and Finance. o Manufactured Housing Segment. The largest portion of the Company's operating revenues is derived from transportation of manufactured housing, primarily new manufactured homes, modular homes, and office trailers. A manufactured home is an affordable housing alternative. In addition, Manufactured Housing transports used manufactured homes and offices for individuals, businesses, and the U.S. Government. Based on industry shipment data available from the Manufactured Housing Institute ("MHI"), and the Company's knowledge of the industry and its principal competitors, the Company is the largest transporter of manufactured homes in the United States. Manufactured Housing ships products through approximately 749 independent owner-operators driving specially modified semi-tractors referred to as "toters," which are used to reduce combined vehicle length. The number of independent owner-operators decreased approximately 26% in 2000 principally due to the decrease in shipments. Makers of manufactured housing generally ship their products no more than a few hundred miles from their production facilities. Therefore, to serve the regional structure of this industry, the Company positions its dispatch offices close to the production facilities it is serving and are substantially dedicated to serving such facilities. The Company reduced its number of manufacturing housing dispatch offices in 2000 by 18 locations, primarily due to plant closure and internal consolidation. Most manufactured housing units, when transported, require a special permit prescribing the time and manner of transport for over-dimensional loads. See Item 1. Business - Forward-Looking Discussion. The Company obtains the permits required for each shipment from each state through which the shipment will pass. In 2000, for the second consecutive year, the manufactured housing industry experienced a decline in shipments and production. Industry production by the manufactured housing industry (considering double-wide homes as two shipments) in the U.S. decreased by approximately 26% to 426,000 in 2000 from 574,000 in 1999, after a 5% decrease in 1999 according to data from the MHI. The Manufactured Housing industry continues to suffer from the combined impact of tightened consumer credit standards, increased industry repossessions and excess inventory. The Company believes that affordable manufactured housing over the long-term should continue to grow along with the general economy, especially when employment statistics and consumer confidence remain strong. There is no assurance, however, that manufactured housing production will increase. o Driver Outsourcing Segment. The Driver Outsourcing segment provides outsourcing transportation services primarily to manufacturers of recreational vehicles, commercial trucks, and other specialized vehicles through a network of service centers in nine states. Driver outsourcing engages the services of approximately 1,410 drivers who are outsourced to customers to deliver the vehicles. In 2000, Driver outsourcing delivered approximately 36,900 units through the use of these drivers. While the number of deliveries decreased, operating revenue per unit delivered increased in 2000. o Specialized Outsourcing Services Segment. The Specialized Outsourcing Services segment consists of large trailer ("Towaway") delivery, travel and other small trailer ("Pick-up") delivery. The Towaway operation moved approximately 8,250 large trailers in 2000 compared to 14,600 large trailers in 1999, primarily the result of a shortage in independent owner-operator availability. As of December 31, 2000, Towaway had contracts with approximately 85 independent owner-operators who drive semi-tractors compared to 144 independent owner-operators in 1999. As of December 31, 2000, travel and other small trailers are delivered by 183 independent owner-operators utilizing pickup trucks compared to 161 independent owner-operators in 1999. o Insurance and Finance Segment. The Insurance and Finance segment provides insurance and financing to the Company's drivers and independent owner-operators. Interstate, the Company's insurance subsidiary, may accept a limited portion or all of the underwriting risk, retaining the appropriate proportion of the premiums. This segment administers the cargo, bodily injury and property damage insurance programs. Selected Operating and Industry Participation Information The following tables set forth operating information and industry participation with respect to the manufactured housing, driver outsourcing, and specialized outsourcing services segments for each of the five years ended December 31, 2000.
Years Ended December 31, Manufactured Housing - -------------------- Operating Information: 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- New home shipments 102,463 148,019 161,543 154,389 121,136 Other shipments 13,031 11,871 17,330 24,144 23,465 -------- -------- -------- -------- -------- Total shipments 115,494 159,890 178,873 178,533 144,601 Linehaul revenues (in thousands) (1) $62,526 $88,396 $94,158 $93,092 $72,616 Industry Participation: Industry production (2) 425,919 573,629 601,678 558,435 553,133 New home shipments 102,463 148,019 161,543 154,389 121,136 Shares of units produced 24.1% 25.8% 26.8% 27.6% 21.9% Driver Outsourcing - ------------------ Operating Information: Shipments 36,883 49,892 44,177 45,447 58,368 Linehaul revenues (in thousands) $21,336 $23,748 $19,979 $19,706 $23,090 Specialized Outsourcing Services - -------------------------------- Operating Information: Shipments 29,215 32,967 38,167 34,867 41,255 Linehaul revenues (in thousands) $15,304 $21,115 $23,015 $19,630 $26,169
(1) Linehaul revenue is derived by multiplying the miles of a given shipment by the stated mileage rate. (2) Based on reports of MHI. To calculate shares of new homes shipped, the Company assumes two unit shipments for each multi-section home. New home shipments decreased 31% during 2000 as compared to an overall industry production reduction of 26%. The Company believes it lost market share primarily because of lower pricing by its competitors. Additional financial information about the business segments is included in Management's Discussion and Analysis of Financial Conditions and Results of Operations and in Note 9 of the Notes to the Consolidated Financial Statements included in Item 8. Growth Strategy The Company's strategy is to focus on its core transportation services. The Company will also look for opportunities to capitalize and/or grow its market in Manufactured Housing and Driver Outsourcing through acquisitions, if suitable opportunities arise. To enhance its profitability, the Company is continuing the process of reducing its overhead costs. o Manufactured Housing. The Company believes it can take better advantage of its position in the manufactured housing industry and its relationship with manufacturers, retailers, and independent owner-operators, by expanding the services it offers within its specialized business. As the nation's largest service company managing the delivery of manufactured homes, Morgan will also pursue other national contracts with manufacturers. The Company will also continue to pursue opportunities to offer new services and consider acquisition opportunities. o Driver Outsourcing. The Company has focused its operations in two broad markets, recreational and commercial vehicles. Given the softness in the recreational vehicle industry, the Company is looking to expand its growth in the delivery of commercial vehicles, such as school buses, ambulances, dump trucks and shuttle buses. In addition, the Company has strengthened its sales and marketing staff. Morgan's growth strategy within this market includes expanding its market position in this highly fragmented delivery transportation market. The future growth rate of the Company's outsourcing business is dependent upon continuing to add major vehicle customers and expanding the Company's driver force. o Specialized Outsourcing Services. The Company believes it can grow its Towaway business by increasing the number of available drivers and through the use of transportation brokers. The Company has not been able to take full advantage of large trailer delivery opportunities because it did not have a sufficient number of towaway drivers or its drivers were not in the necessary locations. Additionally, the Company continues to develop other market opportunities for the Pick-up portion of this segment. o Acquisitions/Joint Ventures. The Company is continuously considering acquisition opportunities. The Company may consider acquiring regional or national firms that service the manufactured housing and/or the outsourcing industry as well as logistics, transportation, or related industries. The Company is continually reviewing potential acquisitions and joint venture opportunities and is engaged in negotiations from time to time. There can be no assurance that any future transactions will be effected. Forward-Looking Discussion In 2001, the Company could benefit from further reduction of overhead costs and an improvement of its safety record. While the Company remains optimistic over the long term, near term results could be affected by a number of internal and external economic conditions. This report contains a number of forward-looking statements, including those contained in the preceding paragraph and the discussion of growth strategy above. From time to time, the Company may make other oral or written forward-looking statements regarding its anticipated operating revenues, costs, expenses, earnings and matters affecting its condition and operations. Such forward-looking statements are subject to a number of material factors which could cause the statements or projections contained herein or therein to be materially inaccurate. Such factors include, without limitation, the following: o Dependence on Manufactured Housing. Shipments of manufactured housing have historically accounted for a substantial majority of the Company's operating revenues. Therefore, the Company's prospects are substantially dependent upon this industry, which is subject to broad production cycles. Currently, manufactured housing is experiencing an industry-wide decline in shipments, which is having an adverse impact on the Company's operating revenues and profitability. o Costs of Accident Claims and Insurance. Traffic accidents occur in the ordinary course of the Company's business. Claims arising from such accidents can be significant. Although the Company maintains liability and cargo insurance, the number and severity of the accidents involving the Company's independent owner-operators and drivers can have significant adverse effect on the profitability of the Company through premium increases and amounts of loss retained by the Company below deductible limits or above its total coverage. There can be no assurance that the Company can continue to maintain its present insurance coverage on acceptable terms nor that the cost of such coverage will not increase significantly. o Customer Contracts and Concentration. Historically, a majority of the Company's operating revenues have been derived under contracts with customers. Such contracts generally have one, two, or three year terms. There is no assurance that customers will agree to renew their contracts on acceptable terms or on terms as favorable as those currently in force. The Company's top ten customers have historically accounted for a majority of the Company's operating revenues. The loss of one or more of these significant customers could adversely affect the Company's results of operations. A number of the Company's major customers are experiencing financial difficulty as a result of the softness in the manufactured housing and recreational vehicle markets. o Competition for Qualified Drivers. Recruitment and retention of qualified drivers and independent owner-operators is highly competitive. The Company's contracts with independent owner-operators are terminable by either party on ten days' notice. There is no assurance that the Company's drivers will continue to maintain their contracts in force or that the Company will be able to recruit a sufficient number of new drivers on terms similar to those presently in force. The Company may not be able to engage a sufficient number of new drivers to meet customer shipment demands from time to time, resulting in loss of operating revenues that might otherwise be available to the Company. o Independent Contractors, Labor Matters. From time to time, tax authorities have sought to assert that independent contractors in the transportation service industry are employees, rather than independent contractors. Under existing interpretations of federal and state tax laws, the Company maintains that its independent contractors are not employees. There can be no assurance that tax authorities will not challenge this position, or that such tax laws or interpretations thereof will not change. If the independent contractors were determined to be employees, such determination could materially increase the Company's tax and workers' compensation exposure. o Risks of Acquisitions and Expansions. The Company has sought and will continue to seek favorable acquisition opportunities. Its strategic plans may also include the initiation of new services or products, either directly or through acquisition, within its existing business lines or which complement its business. There is no assurance that the Company will be able to identify favorable acquisition opportunities in the future. There is no assurance that the Company's future acquisitions will be successfully integrated into its operations or that they will prove to be profitable for the Company. Such changes could have a material adverse effect on the Company. o Seasonality and General Economic Conditions. The Company's operations have historically been seasonal, with generally higher operating revenues generated in the second and third quarters than in the first and fourth quarters. A smaller percentage of the Company's operating revenues are generated in the winter months in areas where weather conditions limit highway use. The seasonality of the Company's business may cause a significant variation in its quarterly operating results. Additionally, the Company's operations are affected by fluctuations in interest rates and the availability of credit to purchasers of manufactured homes and recreational vehicles, general economic conditions, and the availability and price of motor fuels. o Availability of Credit Facilities. The Company requires significant credit facilities from independent financial institutions to support its working capital needs and to provide letters of credit required by its insurance arrangements. The availability and sufficiency of such credit facilities depends on the Company's financial condition and operating performance, which is affected by the other factors described herein, as well as the willingness of lenders to provide credit support in the transportation and manufacturing housing sector. Customers and Marketing The Company's customers requiring delivery of manufactured homes, recreational vehicles, commercial trucks, and specialized vehicles are located in various parts of the United States. The Company's largest manufactured housing customers include Oakwood Homes Corporation, Fleetwood Enterprises, Inc., Champion Enterprises, Inc., Cavalier Homes, Inc., Clayton Homes, Inc., Four Seasons Housing, Inc., Scotsman, and Commodore Corporation. The Company's largest Driver Outsourcing customers include Winnebago Industries, Inc., Thor Industries, Inc., Damon Corporation and Utilimaster. The Company's largest Specialized Outsourcing Services customers include Fleetwood Enterprises, Inc., Keystone RV and North American Van Lines, Inc. While most manufacturers rely solely on carriers such as the Company, other manufacturers operate their own equipment and may employ outside carriers on a limited basis. The Company's operating revenues are comprised primarily of linehaul revenues derived by multiplying the miles of a given shipment by the stated mileage rate. Operating revenues also include charges for permits, insurance, escorts and other items. A substantial portion of the Company's operating revenues are generated under one, two, or three-year contracts with producers of manufactured homes, recreational vehicles, and the other products. In these contracts, the manufacturers agree that a specific percentage (up to 100%) of their transportation service requirements from a particular location will be performed by the Company on the basis of a prescribed rate schedule, subject to certain adjustments to accommodate increases in the Company's transportation costs. Linehaul revenues generated under customer contracts in 2000, 1999 and 1998 were 69%, 71%, and 64% of total linehaul revenues, respectively. The Company's ten largest customers all have been served for at least three years and accounted for approximately 67%, 68% and 69% of its linehaul revenues in 2000, 1999 and 1998, respectively. Linehaul revenues under contract with Fleetwood Enterprises, Inc. ("Fleetwood"), accounted for over 15% of linehaul revenues in 2000. Linehaul revenues with Oakwood Homes Corporation ("Oakwood") accounted for over 20% of linehaul revenues in 2000. The Fleetwood Manufactured Housing contract is continuous except that it may be terminated upon thirty (30) day written notice by either party if the other party has repeatedly failed to perform, persistently disregarded applicable laws or regulations, or otherwise committed a substantial violation of the contract. The Oakwood manufactured housing contract is renewed annually. The Company has been servicing Fleetwood for over 25 years and Oakwood for over ten years. Most contracts provide for scheduled rate increases based upon regional fuel prices. These increases are generally passed on to the independent owner-operators who purchase fuel. The Company markets and sells its services through 74 locations in 28 states, concentrated where manufactured housing and recreational vehicle production facilities are located. Marketing support personnel are located both at the Company's Elkhart, Indiana headquarters and regionally. Dispatch offices are supervised by regional offices. The Company has 22 dispatch offices each devoted primarily to a single customer facility. This allows the dispatching agent and local personnel to focus on the needs of each individual customer while remaining supported by the Company's nationwide operating structure. Sales personnel at regional offices and at the corporate headquarters meet periodically with manufacturers to review production schedules, requirements and maintain contact with customers' shipping personnel. Senior Management maintains personal contact with corporate officers of the Company's largest customers. Regional and terminal personnel also develop relationships with manufactured home park owners, retailers, finance companies and others to promote the Company's shipments of used manufactured homes. The Company also participates in industry trade shows throughout the country and advertises in trade magazines, newspapers, and telephone directories. Independent Owner-Operators The shipment of product by Manufactured Housing and Specialized Outsourcing Services is conducted by contracting for the use of the equipment of independent owner-operators. Owner-operators are independent contractors who own toters, tractors or pick-up trucks, which they contract to, and operate for, the Company on a long-term basis. Independent owner-operators are not generally approved to transport commodities on their own in interstate or intrastate commerce. The Company, however, possesses such approvals and/or authorities (see Item 1. Business - Forward-Looking Discussion), and provides marketing, insurance, communication, administrative, and other support required for such transportation. The Company attracts independent owner-operators mainly through field recruiters, trade magazines, referrals, and truck stop brochures. Recruitment and retention of qualified drivers is highly competitive and there can be no assurance that the Company will be able to attract a sufficient number of qualified, independent owner-operators in the future. The contract between the Company and each owner-operator can be cancelled upon ten days' notice by either party. The weighted average length of service of the Company's current independent owner-operators is approximately 4.0 years in 2000 and 3.5 years in 1999. At December 31, 2000, 1,023 independent owner-operators were under contract to the Company, including 749 operating toters, 91 operating semi-tractors, and 183 operating pick-up trucks. In Manufactured Housing, independent owner-operators utilizing toter equipment tend to exclusively transport manufactured homes. Once modified from a semi-tractor, a toter has limited applications for hauling general freight. Toter drivers are, therefore, unlikely to be engaged by transport firms that do not specialize in manufactured housing. This gives the Company an advantage in retaining toter independent owner-operators. The average tenure with the Company of its toter independent owner-operators is 4.7 years in 2000 compared to 3.9 years in 1999. In Specialized Outsourcing Services, Morgan is competing with national carriers for the recruitment and retention of independent owner-operators who own semi-tractors. The average length of service of the Company's independent owner-operators is approximately 2.1 years in 2000, compared to 2.3 years in 1999. During 2000, the number of owner- operators providing services to Towaway declined, while the number of owner-operators driving pick-ups increased. Independent owner-operators are generally compensated for each trip on a per mile basis. Independent owner-operators are responsible for operating expenses, including fuel, maintenance, lodging, meals, and certain insurance coverages. The Company provides required permits, cargo and liability insurance (coverage while transporting goods for the Company), and communications, sales and administrative services. Independent owner-operators, except for owners of certain pick-up trucks, are required to possess a commercial drivers license and to meet and maintain compliance with requirements of the U.S. Department of Transportation and standards established by the Company. From time to time, tax authorities have sought to assert that independent owner-operators in the trucking industry are employees, rather than independent contractors. No such tax claims have been successfully made with respect to independent owner-operators of the Company. Under existing industry practice and interpretations of federal and state tax laws, as well as the Company's current method of operation, the Company believes that its independent owner-operators are not employees. Whether an owner-operator is an independent contractor or employee is, however, generally a fact-sensitive determination and the laws and their interpretations can vary from state to state. There can be no assurance that tax authorities will not successfully challenge this position, or that such tax laws or interpretations thereof will not change. If the independent owner-operators were determined to be employees, such determination could materially increase the Company's employment tax and workers' compensation exposure. Driver Outsourcing The Company utilizes both independent contractors and employees in its outsourcing operations. The Company outsources its over 1,410 drivers on a trip-by-trip basis for delivery to retailers and rental truck agencies, recreational and commercial vehicles, such as buses, tractors, and commercial vans. These individuals are recruited through driver recruiters, trade magazines, brochures, and referrals. Prospective drivers are required to possess at least a chauffeur's license and are encouraged to obtain a commercial driver's license. They must also meet and maintain compliance with requirements of the U.S. Department of Transportation and standards established by the Company. Outsourcing drivers are utilized as needed, depending on the Company's transportation volume and driver availability. Outsourcing drivers are paid on a per mile basis. The driver is responsible for most operating expenses, including fuel, return travel, lodging, and meals. The Company provides licenses, cargo and liability insurance, communications, sales, and administrative services. Agents and Employees The Company has approximately 83 terminal managers and assistant terminal managers who are involved directly with the management of equipment and drivers. Of these 83 staff, approximately 67 are full-time employees and the remainder are independent contractors who earn commissions. The terminal personnel are responsible for the Company's terminal operations including safety, customer relations, equipment assignment, and other matters. Because terminal personnel develop close relationships with the Company's customers and drivers, from time to time the Company has suffered a terminal personnel defection, following which the former staff has sought to exploit such relationships in competition with the Company. The Company does not expect that future defections, if any, would have a material affect on its operations. In addition to the terminal personnel, the Company employs approximately 190 full-time employees. The Company also has 5 full-time employee drivers in Manufactured Housing and 11 in Driver Outsourcing. 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. Risk Management, Safety and Insurance The risk of losses arising from traffic accidents is inherent in any transportation business. The Company carries personal injury and property damage insurance with a deductible of $250,000 per occurrence except for the period from April 1, 1998 to March 31, 1999, which had a deductible of $150,000. The Company has obtained, but has not activated a self-insurance authority for personal injury and property damage coverage of up to $1,000,000. The Company maintains cargo damage insurance with a deductible of $1,000,000 from April 1, 1999 to July 1, 2001, and $150,000 from April 1, 1998 to March 31, 1999, and $250,000 for prior periods. The insurance policy for the period of April 1, 1998 to March 31, 1999 included a stop-loss provision. The frequency and severity of claims under the Company's liability insurance affects the cost and potentially the availability of such insurance. If the Company is required to pay substantially greater insurance premiums, or incurs substantial losses above its insurance coverage or below its deductibles, its results could be materially adversely affected. The Company continues to review its insurance programs, self-insurance limits and excess policy provisions. The Company believes that its current insurance coverage is adequate to cover its liability risks. There can be no assurance that the Company can continue to maintain its present insurance coverage on acceptable terms. The following table sets forth information with respect to bodily injury, property damage, cargo claims, and automotive physical damage reserves for the years ended December 31, 2000, 1999, and 1998, respectively. Claims Reserve History Years Ended December 31, (in thousands) 2000 1999 1998 ---- ---- ---- Beginning Reserve Balance $8,418 $8,108 $5,323 Provision for Claims 7,518 8,633 7,698 Payments, net (7,590) (8,323) (4,913) ------- ------- ------- Ending Reserve Balance $8,346 $8,418 $8,108 ====== ====== ====== The Company has driver recognition programs emphasizing safety to enhance the Company's overall safety record. In addition to periodic recognition for safe operations, the Company has implemented safe driving bonus programs. These plans generally reward drivers on an escalating rate per mile based upon the claim-free miles driven. The Company utilizes a field safety organization which places a dedicated safety officer at most regional centers. These individuals work towards improving safety by analyzing claims, identifying opportunities to reduce claims costs, implementing preventative programs to reduce the number of incidents, and promoting the exchange of information to educate others. The Company has a Director of Safety and D.O.T. Compliance and six (6) field safety managers. Interstate makes available physical damage insurance coverage for the Company's independent owner-operators. Interstate also writes performance surety bonds for Morgan. The Company may also utilize its wholly-owned insurance subsidiary to secure business insurance for Morgan through re-insurance contracts. Competition All of the Company's activities are highly competitive. In addition to fleets operated by manufacturers, the Company competes with numerous small regional or local carriers and to a lesser extent with large national carriers. The Company's principal competitors in the Manufactured Housing and Specialized Outsourcing Services marketplaces are privately owned. No assurance can be given that the Company will be able to maintain its competitive position in the future. Competition among carriers is based on the rate charged for services, quality of service, financial strength, and insurance coverage. The availability of tractor equipment and the possession of appropriate registration approvals permitting shipments between points required by the customer may also be influential. Regulation The Company's interstate operations (Morgan and TDI) are now subject to regulation by the Federal Motor Carrier Safety Administration ("FMCSA") which is an agency of the United States Department of Transportation ("D.O.T."). This jurisdiction was transferred to the D.O.T. with the enactment of the Interstate Commerce Commission Termination Act. Effective January 1, 1995, the economic regulation of certain intrastate operations by various state agencies was preempted by federal law. The states continue to have jurisdiction primarily to insure that carriers providing intrastate transportation services maintain required insurance coverage, comply with applicable safety regulations, and conform to regulations governing size and weight of shipments on state highways. Most states have adopted the Federal Motor Carrier safety regulations and actively enforce them in conjunction with D.O.T. personnel. Motor carriers normally are required to obtain approval and/or authority from the FMCSA as well as various state agencies. Morgan is approved and/or holds authority to provide interstate and intrastate transportation services from, to, and between all points in the continental United States. The Company provides services to certain specific customers under contract and non-contract services to the shipping public pursuant to governing rates and charges maintained at its corporate and various dispatching offices. Transportation services provided pursuant to a written contract are designed to meet a customer's specific shipping needs. Federal regulations govern not only operating authority and registration, but also such matters as the content of agreements with independent owner-operators, required procedures for processing of cargo loss and damage claims, and financial reporting. The Company believes that it is in substantial compliance with all material regulations applicable to its operations. The D.O.T. regulates safety matters with respect to the interstate operations of the Company. Among other things, the D.O.T. regulates commercial driver qualifications and licensing; sets minimum levels of financial responsibility; requires carriers to enforce limitations on drivers' hours of service; prescribes parts, accessories and maintenance procedures for safe operation of commercial/motor vehicles; establishes health and safety standards for commercial motor vehicle operators; and utilizes audits, roadside inspections and other enforcement procedures to monitor compliance with all such regulations. The D.O.T. has established regulations which mandate random, periodic, pre-employment, post-accident and reasonable cause drug testing for commercial drivers and similar regulations for alcohol testing. The Company believes that it is in substantial compliance with all material D.O.T. requirements applicable to its operations. In Canada, provincial agencies grant both intraprovincial and extraprovincial authority; the latter permits transborder operations to and from the United States. The Company has obtained from Canadian provincial agencies all required extraprovincial authority to provide transborder transportation of manufactured homes and motor homes throughout most of Canada. Most manufactured homes, when being transported by a toter, exceed the maximum dimensions allowed on state highways without a special permit. The Company obtains these permits for its independent contractor owner-operators from each state which allows the Company to transport their manufactured homes on state highways. The states and Canadian provinces have special requirements for over-dimensional loads detailing permitted routes, timing required, signage, escorts, warning lights and similar matters. Most states and provinces also require operators to pay fuel taxes, comply with a variety of other state tax and/or registration requirements, and keep evidence of such compliance in their vehicles while in transit. The Company coordinates compliance with these requirements by its drivers and independent contractor owner-operators, and monitors their compliance with all applicable safety regulations. Interstate, the Company's insurance subsidiary, is an insurance company incorporated under Vermont law. It is required to report annually to the Vermont Department of Banking, Insurance, Securities, & Health Care Administration, and must submit to an examination by this Department on a triennial basis. Vermont regulations require Interstate to be audited annually and to have its loss reserves certified by an approved actuary. The Company believes Interstate is in substantial compliance with Vermont insurance regulations. Finance, the Company's finance subsidiary, is incorporated under Indiana law. Finance is subject to Indiana's Equal Credit Opportunity Laws and other state and federal laws relating generally to fair financing practices. Item 2. PROPERTIES The Company owns approximately 24 acres of land with improvements in Elkhart, Indiana. The improvements include a 23,000 square foot office building housing the Company's principal office and Manufactured Housing; a 7,000 square foot building housing Specialized Outsourcing Services; a 9,000 square foot building used for the Company's safety and driver service departments. Most of the Company's 74 locations are situated on leased property. The Company also owns and leases property for storage at various locations throughout the United States, usually in proximity to manufacturers of products moved by the Company. The property leases have term commitments of a minimum of thirty days and a maximum of three years, at monthly rentals ranging from $10 to $6,500. The following table summarizes the Company's owned real property. Property Property Approximate Location Description Acreage -------- ----------- ------- Elkhart, Indiana Corporate and Specialized Outsourcing Services 24 Wakarusa, Indiana Terminal and storage 4 Middlebury, Indiana Terminal and storage 13 Mocksville, North Carolina Terminal and storage 8 Edgerton, Ohio Terminal and storage 2 Woodburn, Oregon Storage 4 Woodburn, Oregon Region and storage 1 Montevideo, Minnesota Storage 3 The following property is owned and is being held for sale: Fort Worth, Texas Storage 6 Item 3. LEGAL PROCEEDINGS The Company and its subsidiaries are party to litigation in the ordinary course of business, generally involving liability claims in connection with traffic accidents incidental to its transport business. From time to time the Company may become party to litigation arising outside the ordinary course of business. The Company does not expect such pending suits to have a material adverse effect on the Company or its results of operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the American Stock Exchange under the symbol MG. As of March 20, 2001, the approximate number of shareholders' of record of the Company's Class A common stock was 125. This figure does not include shareholders with shares held under beneficial ownership in nominee name or within clearinghouse position of brokerage firms and banks. The Class B common stock is held of record by Brighton Communications Corporation, a subsidiary of Lynch Interactive Corporation. The Company in the third quarter 2000 reduced the dividend rate. The Company did not declare a dividend in the fourth quarter of 2000. The Company's ability to pay dividends is limited by covenants with its senior lenders. Market Price of Class A common stock: 2000 1999 Quarter Ended High Low High Low ---- --- ---- --- March 31 $8.50 $5.38 $9.13 $6.63 June 30 7.88 6.13 8.75 6.75 September 30 7.25 5.25 9.88 7.00 December 31 6.06 3.75 7.88 5.44 Dividends Declared: Class A Class B Cash Dividends Cash Dividends -------------- -------------- Quarter Ended 2000 1999 2000 1999 March 31 $0.02 $0.02 $0.01 $0.01 June 30 0.02 0.02 0.01 0.01 September 30 0.01 0.02 0.005 0.01 December 31 0.00 0.02 0.00 0.01 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
THE MORGAN GROUP, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS (Dollars in thousands, except share amounts) 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Operations Operating Revenues $108,024 $145,629 $150,454 $146,154 $132,208 Operating (Loss) Income (1) (2,038) 550 2,007 1,015 (3,263) Pre-tax (Loss) Income (1) (2,348) 212 1,462 296 (3,615) Net (Loss) Income (1) (4,799) 19 903 196 (2,070) Net (Loss) Income Per Share: Basic ($1.96) $0.01 $0.35 $0.07 ($0.77) Diluted ($1.96) 0.01 0.35 0.07 (0.77) Cash Dividends Declared: Class A 0.05 0.08 0.08 0.08 0.08 Class B 0.025 0.04 0.04 0.04 0.04 Financial Position Total Assets $23,269 $32,264 $33,387 $33,135 $33,066 Working Capital 1,063 3,189 3,806 1,613 1,635 Long-term Debt 288 965 1,480 2,513 4,206 Shareholders' Equity 7,201 12,092 13,221 12,724 13,104 Common Shares Outstanding at Year End 2,448,157 2,448,157 2,554,085 2,637,910 2,685,520 Basic Weighted Average Shares Outstanding 2,448,157 2,469,675 2,606,237 2,656,690 2,684,242
(1) Includes pre-tax special charges of $624,000 ($412,000 after-tax) and $3,500,000 ($2,100,000 after-tax) in 1997 and 1996, respectively. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ($ in thousands) Year 2000 Compared with 1999 Consolidated Results The year 2000 was characterized by the continued downturn in manufactured housing production, which began in 1999. Industrial production of new manufactured homes decreased approximately 26% in 2000. The Company was also affected by the decline in activity in other vehicle markets the Company serves, namely recreational vehicles and large trailers. As a result of these declines, Morgan revenues decreased more than 25% from 1999 levels. To combat this severe decline in revenues, the Company, in March 2000, instituted significant cost reduction initiatives in all areas with primary focus on staff reduction and consolidation of facilities. The effects of these initiatives were savings of $1.8 million in 2000. It is estimated that the effects of these initiatives will continue and will approximate savings of $3.2 million in 2001. In spite of these significant efforts, operating costs as a percentage of revenue were 102% for the year ended December 31, 2000, compared to 99% in the prior year, resulting in a loss from operations of $2.0 million. 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 data prepared in accordance with generally accepted accounting principles. The operating loss before interest, taxes, depreciation and amortization (EBITDA loss) was $971,000 in 2000, as compared to an EBITDA of $1.8 million in 1999. In the fourth quarter 2000, the Company recorded non-cash charges of $3.2 million relating to the valuation of deferred tax assets. Because the Company has a cumulative loss in its three most recent fiscal years and is in default on its Credit Facility (see "Liquidity and Capital Resources" and Note 3 of the Notes to Consolidated Financial Statement), Management believes that with the technical provisions of Statement of Financial Accounting Standard No. 109, it would be inconsistent to rely on future taxable income to support realization of the deferred tax assets. For additional information concerning the provision for income taxes as well as information regarding differences between effective tax rates and statutory rates, see Note 5 of the Notes to Consolidated Financial Statements. The net loss for 2000 was $4.8 million compared to net income of $19,000 in 1999. Segment Results The Company conducts its operations in four principal segments as discussed below. The following discussion sets forth certain information about the segment results. Manufactured Housing Manufactured Housing operating revenues are generated from providing transportation and logistical services to manufacturers of manufactured homes. Manufactured Housing operating revenues decreased 29% from 1999 to $70.6 million in 2000. The Manufactured Housing industry as a whole continued to decline in 2000, with industry shipments down by 26%. Management believes that demand for Manufactured Housing in the near term will continue to be slow. The Company is highly dependent upon the manufactured housing industry generally and on certain major customers within that industry. Some of the Company's customers are financially stressed by continued weakness in the industry. The Company's unit deliveries in Manufactured Housing declined by 31% in 2000, indicating a loss of market share due primarily to competitive pricing pressures. EBITDA decreased $4.5 million to $5.8 million due to the decrease in business. The decrease in business was partially offset by the Company's ability to contain its cost. The Company closed some terminals due to plant closures and consolidated terminals in other areas to serve the needs of more than one customer from a single location. The Company in Manufactured Housing is focusing on large national contracts. The Company in 2001 has obtained significant additional contracts with Fleetwood and Clayton Homes, Inc. Management will continue to pursue these efforts. Driver Outsourcing Driver Outsourcing provides outsourcing transportation services primarily to manufacturers of recreational vehicles, commercial trucks and other specialized vehicles. Driver Outsourcing operating revenues decreased 10% in 2000 to $20.9 million. The decrease was primarily the result of softness in the recreational vehicle market. However, Driver Outsourcing EBITDA increased $900,000 to $1.3 million from improved operating efficiencies, consolidations and other reductions in overhead costs. Specialized Outsourcing Services Specialized Outsourcing Services consists of delivering large trailers, travel and other small trailers. The Company discontinued a specialized transport service ("Decking") in 2000. Operating revenues decreased 28% to $15.3 million in 2000. This decrease was primarily caused by a reduction in available drivers and discontinuing the Decking deliveries. Specialized Outsourcing Services incurred an EBITDA loss of $140,000 in 2000 compared to an EBITDA of $469,000 in 1999. This loss was caused primarily by the reduction in the delivery of large trailers and Decking partially offset by improved operating efficiencies and overhead cost reductions. Insurance/Finance The Company's Insurance/Finance segment provides insurance and financing services to the Company's drivers and independent owner-operators. This segment also acts as a cost center whereby all bodily injury, property damage and cargo loss costs are captured. Insurance/Finance operating revenues decreased $1.0 million to $2.9 million in 2000 reflecting a decrease in owner-operator insurance premiums relating to the decline in the manufactured housing industry. However, Insurance/Finance EBITDA loss decreased $2.2 million to $6.8 million due to improved bodily injury, property damage and cargo loss claims experience. The deductible for personal injury and property damage is $250,000 per occurrence. The cargo deductible is $1,000,000, accordingly, the Company is essentially self-insured for cargo losses. As a part of continuing efforts to contain claims expense, the Company is expanding its safety awareness as well as formal safety training efforts among both owner-operators and terminal personnel. Cargo claims as a percent of operating revenue decreased from 2.3% in 1999 to 1.9% in 2000. Similarly, bodily injury and property damage claims decreased from 3.6% to 3.3% of operating revenue. Management believes that the Company's focus on driver safety is having, and may continue to have, a favorable impact. During 2001, the Company's insurance programs are to be renewed. Based on current insurance market conditions, the Company expects significant increases in premium expense. The Company plans to pass increased premium expense to customers through increased rates. Year 1999 Compared with 1998 Consolidated Results During 1999, the Company experienced a decrease in the number of Manufactured Housing shipments and a continued increase in insurance and claims costs. The Company also experienced a reduction in operating revenues and profitability in the Specialized Outsourcing Services segment. Industrial shipment of new manufactured homes decreased approximately 4% in 1999. Morgan was more severely impacted as our largest customer experienced an approximate 21% decline in retail sales of new homes. As a result, the Company sustained an 8% decrease in shipments of new homes in 1999. Total operating revenues in 1999 decreased $4.9 million to $145.6 million from $150.5 million in 1998. Operating income before interest, taxes, depreciation and amortization (EBITDA) decreased from $3.2 million in 1998 to $1.8 million in 1999. Net interest expense decreased from $545,000 in 1998 to $338,000 in 1999 as a result of improved cash management which reduced the amount of borrowings from the credit facility. For information concerning the provision for income taxes as well as information regarding differences between effective tax rates and statutory rates, see Note 5 of the Notes to Consolidated Financial Statements. Accordingly, net income for 1999 was $19,000 compared to $903,000 in 1998. Segment Results Manufactured Housing Manufactured Housing operating revenues began decreasing in the second quarter; and ended the year at $99.5 million, or a 6% reduction from 1998. In spite of this reduction, EBITDA for 1999 ended at $10.3 million compared to $10.8 million for 1998 because of cost reduction measures instituted by Management that largely mitigated the revenue decline. Driver Outsourcing The Driver Outsourcing segment of the business demonstrated good growth in 1999. Operating revenues increased 18% to $23.4 million in 1999 while EBITDA increased by $301,000. However, high driver recruiting and other overhead costs continued to depress the profitability of this segment in 1999. Specialized Outsourcing Services Specialized Outsourcing Services operating revenues decreased 8% to $21.2 million in 1999. This decrease was primarily the result of changes in the customer base and a reduction in available drivers. Specialized Outsourcing Services EBITDA decreased $542,000 primarily on the lower volume and increased overhead costs associated with large trailer delivery. Insurance/Finance Insurance/Finance operating revenues decreased less than 3% in 1999, particularly in the latter months of the year reflecting a decrease in owner-operator insurance premiums relating to the slow-down in the manufactured housing industry. The Company in 1999 continued to be penalized by increasing claims costs. Claim costs in 1999, as a percent of operating revenue increased to 5.9% from 5.1% in 1998. Effective April 1, 1999, the deductible for personal injury and property damage increased to $250,000 per occurrence. Additionally, the cargo stop-loss insurance policy provision terminated and the deductible was increased to $1,000,000. Accordingly, the Company is essentially self-insured for cargo losses. Liquidity and Capital Resources Operating activities used $0.9 million of cash in 2000 compared to a $4.9 million cash generation in 1999. The 2000 net loss and reductions in working capital liabilities was partially offset by the deferred tax assets valuation reserve and by reductions in trade accounts receivable and other working capital assets. The Company has recorded an income tax receivable of $499,000 as of December 31, 2000 as it intends to file for tax refunds based on prior year payments. Trade accounts receivable decreased $2.4 million primarily due to the decline in operating revenue. Day's sales outstanding ("DSO") increased to 33 days at December 31, 2000 as compared to 28 days at December 31, 1999. The investment in property and equipment decreased in 2000 to $106,000 with expenditures for an optical scanning system and other new information systems. The 2001 capital expenditure plan approximates $650,000 but is dependent upon the Company achieving a higher operating revenue level. At December 31, 2000, the Company had a $7.7 million revolving credit facility ("Credit Facility"), with a $6.7 million letter of credit sub-limit. At December 31, 2000, the Company had no outstanding debt under its Credit Facility, and $6.6 million of letters of credit were outstanding under the Credit Facility. Letters of credit are required for self-insurance retention reserves and other corporate needs. The Credit Facility matured on January 28, 2001, at which time the Company had no outstanding debt and $6.6 million outstanding letters of credit. As a result of the Credit Facility not being renewed, the Company has a payment default and the financial institution has the right to demand cash to meet outstanding obligations under the letters of credit. The bank has discretion as to whether to make any loans or issue additional letters of credit for the Company. The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is actively seeking alternative financial institutions to replace the existing Credit Facility as well as seeking additional capital resources. Currently, negotiations are being held with several financial institutions regarding a replacement facility. In connection with these potential replacement facilities, the Company is anticipating raising equity capital up to $3.0 million. The Company has engaged in discussions with its principal shareholder, Lynch Interactive, regarding these matters. Based on preliminary discussions, Lynch Interactive has expressed interest in providing a portion of the capital support the Company will require, but no terms have been agreed upon. The Company expects to seek to raise the equity capital it will require from Lynch Interactive, other stockholders, or, if necessary, privately from other sources. The Company's ability to continue as a going concern is dependent upon its ability to successfully maintain its financing arrangements and to comply with the terms thereof. However, although no assurances can be given, management remains confident that the Company will be able to continue operating as a going concern. The Company's excess and primary insurance arrangements are to be renewed in 2001. While Management expects such arrangements to be renewed, the terms of such renewed arrangements are difficult to predict and may result in a significant increase in premium expense or the assumption of additional risks. The annual premium for the excess insurance arrangements is expected to increase by $500,000 to $600,000. Such renewed arrangements may also require the Company to increase letters of credit in respect to its first loss exposure under such arrangements. The terms of the present credit facility may not be sufficient to provide for such additional letters of credit, and depending on the Company's performance, the lender may not agree to expand the facility to provide such letters of credit. In that event, it is Management's current expectation that it would negotiate with its carriers to accept lower letter of credit requirements in exchange for higher premiums. Management plans to seek to pass through additional premium costs to customers. To the extent it is unable to do so, additional premium costs will increase working capital requirements and reduce profitability. Subject to the forgoing discussion, assuming the Company receives anticipated equity as described above, Management believes that internally generated funds together with such additional equity and resources available under the credit facility will be sufficient to provide for the Company's capital and liquidity requirements during 2001. The Company in 2000 declared Class A dividends of $.05 per share and Class B dividends of $.025 per share through the first three quarters. No dividends were declared in the fourth quarter. Payment of dividends is within the discretion of the board of directors. Payment of future dividends will be dependent upon, among other things, earnings, debt covenants, future growth plans, legal restrictions, and the financial condition of the Company. The Company had minimal exposure to interest rates as of December 31, 2000, as substantially all of its outstanding long-term debt bears fixed rates. The Credit Facility mentioned above bears variable interest rates based on either a Federal Funds rate or the Eurodollar rate. Accordingly, borrowings under the Credit Facility 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. Inflation Most of the Company's expenses are affected by inflation, which generally results in increased costs. During 2000, the effect of inflation on the Company's results of operation was minimal. The transportation industry is dependent upon the availability and cost of fuel. Although fuel costs are paid by the Company's owner-operators, increases in fuel prices may have significant adverse effects on the Company's operations for various reasons. Since fuel costs vary between regions, drivers may become more selective as to regions in which they will transport goods resulting in diminished driver availability. Also, the Company would experience adverse effects during the time period from when fuel costs begin to increase until the time when scheduled rate increases to customers are enacted. Increases in fuel prices may also affect the sale of recreational vehicles by making the purchase less attractive to consumers. A decrease in the sale of recreational vehicles would be accompanied by a decrease in the transportation of recreational vehicles and a decrease in the need for Driver Outsourcing services. 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 Information Forward-looking statements in this report, including, without limitation, statements relating to future events or the future financial performance of the Company appear in the preceding Management's Discussion and Analysis of Financial Condition and Results of Operations and in other written and oral statements made by or on behalf of the Company, including, without limitation, statements relating to the Company's goals, strategies, expectations, competitive environment, regulation and availability of resources. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties that could cause actual events and results to be materially different from those expressed or implied herein, including, but not limited to, the following: (1) dependence on the Manufactured Housing industry; (2) costs of accident claims and insurance; (3) customer contracts and concentration; (4) the competition for qualified drivers; (5) independent contractors and labor matters; (6) risks of acquisitions; (7) seasonality and general economic conditions; (8) availability and sufficiency of credit facilities; (9) potential inability to raise sufficient equity capital; and (10) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission. See Item 1. Business - Forward-Looking Discussion. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required by Item 7A of Form 10-K appears in Item 7 of this report under the heading "Liquidity and Capital Resources" and is incorporated herein by this reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Morgan Group, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands, except share amounts) December 31 2000 1999 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 2,092 $ 3,847 Trade accounts receivable, less allowances of $248 in 2000 and $313 in 1999 7,748 10,130 Accounts receivable, other 133 313 Refundable taxes 499 -- Prepaid expenses and other current assets 1,147 1,960 Deferred income taxes 319 1,475 ------- ------- Total current assets 11,938 17,725 ------- ------- Property and equipment, net 3,688 4,309 Intangible assets, net 6,727 7,361 Deferred income taxes 282 2,172 Other assets 634 697 ------- ------- Total assets $23,269 $32,264 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 2,373 $ 3,907 Accrued liabilities 3,704 4,852 Income taxes payable -- 278 Accrued claims payable 3,224 3,071 Refundable deposits 1,357 1,752 Current portion of long-term debt and capital lease obligations 217 676 ------- ------- Total current liabilities 10,875 14,536 ------- ------- Long-term debt and capital lease obligations, less current portion 71 289 Long-term accrued claims payable 5,122 5,347 Commitments and contingencies -- -- Shareholders' equity: Common stock, $.015 par value: Class A: Authorized shares - 7,500,000 Issued shares - 1,607,303 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 (deficit) earnings (2,116) 2,775 ------- ------- Total capital and retained earnings 10,384 15,275 Less - treasury stock at cost (359,146 Class A Shares in 2000 and 1999) (3,183) (3,183) ------- ------- Total shareholders' equity 7,201 12,092 ------- ------- Total liabilities and shareholders' equity $23,269 $32,264 ======= ======= See accompanying notes.
The Morgan Group, Inc. and Subsidiaries Consolidated Statements of Operations (Dollars in thousands, except share amounts) For the year ended December 31 2000 1999 1998 ---- ---- ---- Operating revenues $ 108,024 $ 145,629 $ 150,454 Costs and expenses: Operating costs 99,552 133,774 136,963 Selling, general and administration 9,443 10,090 10,254 Depreciation and amortization 1,067 1,215 1,230 --------- --------- --------- 110,062 145,079 148,447 --------- --------- --------- Operating (loss) income (2,038) 550 2,007 Interest expense, net 310 338 545 --------- --------- --------- (Loss) income before income taxes (2,348) 212 1,462 Income tax expense 2,451 193 559 ---------- --------- --------- Net (loss) income ($4,799) $ 19 $ 903 ========== ========= ========= Net (loss) income per basic and diluted share ($1.96) $ 0.01 $ 0.35 ========== ========= ========= Basic weighted average shares outstanding 2,448,157 2,469,675 2,606,237 ========= ========= =========
See accompanying notes.
The Morgan Group, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (Dollars in thousands, except per share amounts) Class A Class B Additional Retained Common Common Paid-in Officer Treasury (Deficit) Stock Stock Capital Loan Stock Earnings Total ----- ----- ------- ---- ----- -------- ----- Balance at December 31, 1997 $23 $ 18 $ 12,453 $ (504) $ (1,426) $ 2,160 $ 12,724 Net income -- -- -- -- -- 903 903 Purchase of treasury stock -- -- -- 504 (813) -- (309) Common stock dividends: Class A ($.08 per share) -- -- -- -- -- (117) (117) Class B ($.04 per share) -- -- -- -- -- (48) (48) Options exercised -- -- 6 -- 62 -- 68 ----- ------ -------- ------ -------- ------- -------- Balance at December 31, 1998 $23 $ 18 $ 12,459 $ -- $ (2,177) $ 2,898 $ 13,221 Net income -- -- -- -- -- 19 19 Purchase of treasury stock -- -- -- -- (1,006) -- (1,006) Common stock dividends: Class A ($.08 per share) -- -- -- -- -- (94) (94) Class B ($.04 per share) -- -- -- -- -- (48) (48) ----- ------ -------- ------ -------- ------- -------- Balance at December 31, 1999 $23 $ 18 $ 12,459 $ -- $ (3,183) $ 2,775 $ 12,092 Net loss -- -- -- -- -- (4,799) (4,799) Common stock dividends: Class A ($.05 per share) -- -- -- -- -- (62) (62) Class B ($.025 per share) -- -- -- -- -- (30) (30) ----- ------ -------- ------ -------- ------- -------- Balance at December 31, 2000 $23 $ 18 $ 12,459 $ -- $ (3,183) $(2,116) $ 7,201 ===== ====== ======== ====== ======== ======= ========
See accompanying notes.
The Morgan Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands) For the year ended December 31 2000 1999 1998 ---- ---- ---- Operating activities: Net (loss) income $(4,799) $ 19 $ 903 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 1,067 1,215 1,246 Deferred income taxes 3,046 (420) (713) Loss on disposal of property and equipment 292 101 20 Changes in operating assets and liabilities: Trade accounts receivable 2,382 2,058 1,174 Other accounts receivable 180 901 (1,088) Refundable taxes (499) -- -- Prepaid expenses and other current assets 813 507 139 Other assets 63 (43) 810 Trade accounts payable (1,534) (397) 207 Accrued liabilities (1,148) 1,286 (612) Income taxes payable (278) (600) 489 Accrued claims payable (72) 310 2,785 Refundable deposits (395) (78) 164 -------- ------- ------- Net cash (used in) provided by operating activities (882) 4,859 5,524 Investing activities: Purchases of property and equipment (106) (811) (585) Proceeds from sale of property and equipment 2 7 88 Business acquisitions -- (35) (228) -------- ------- ------- Net cash used in investing activities (104) (839) (725) Financing activities: Principle payments on long-term debt (677) (664) (3,418) Proceeds from long-term debt -- 149 135 Purchase of treasury stock, net of officer loan of $504 -- (1,006) (309) in 1998 Proceeds from exercise of stock options -- -- 68 Common stock dividends paid (92) (142) (165) -------- ------- ------- Net cash used in financing activities (769) (1,663) (3,689) -------- ------- ------- Net (decrease) increase in cash and cash equivalents (1,755) 2,357 1,110 Cash and cash equivalents at beginning of period 3,847 1,490 380 -------- ------- ------- Cash and cash equivalents at end of period $ 2,092 $3,847 $ 1,490 ======== ======= ========
Cash payments for interest were $379,000 in 2000, $406,000 in 1999 and $566,000 in 1998. See accompanying notes. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business The Morgan Group, Inc. ("Company"), through its wholly owned subsidiaries, Morgan Drive Away, Inc. ("Morgan") and TDI, Inc. ("TDI"), provides outsourced transportation and logistical services to the manufactured housing and recreational vehicle industries and is a leading provider of delivery services to the commercial truck and trailer industries in the United States. Lynch Interactive Corporation and its wholly owned subsidiaries ("Lynch Interactive") owns all of the 1,200,000 shares of the Company's Class B common stock and 161,100 shares of the Company's Class A common stock, which in the aggregate represents 70% of the combined voting power of the combined classes of the Company's common stock. The Company's other significant wholly owned subsidiaries are Interstate Indemnity Company ("Interstate") and Morgan Finance, Inc. ("Finance"), which provide insurance and financial services to its owner-operators. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires Management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Operating Revenues and Expense Recognition Operating revenues and related driver pay are recognized when movement of the product is completed. Other operating expenses are recognized when incurred. Cash Equivalents All highly liquid investments with maturity of three months or less when purchased are considered to be cash equivalents. Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of customer receivables. As discussed in Note 9, two customers represent 33% of total customer receivables. The remaining credit risk is generally diversified due to the large number of entities comprising the Company's remaining customer base and their dispersion across many different industries and geographic regions. As noted on the consolidated balance sheets, the Company maintains an allowance for doubtful accounts to cover estimated credit losses. Property and Equipment Property and equipment is stated at cost. Major additions and improvements are capitalized, while maintenance and repairs that do not improve or extend the lives of the respective assets are charged to expense as incurred. Depreciation is computed using the straight-line method over the following estimated useful lives: Buildings 25 years Transportation Equipment 3 to 5 years Office and Service Equipment 3 to 8 years Intangible Assets Intangible assets are comprised primarily of goodwill, which is stated at the excess of purchase price over net asset acquired, net of accumulated amortization of $4,181,000 and $3,547,000 at December 31, 2000 and 1999, respectively. Intangible assets are being amortized by the straight-line method over their estimated useful lives, which range from three to forty years. Impairment of Assets The Company periodically assesses the net realizable value of its long-lived assets, including intangibles, 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 and used, impairment is determined to exist if estimated undiscounted future cash flows are less than the 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. Insurance and Claim Reserves Claims and insurance accruals reflect the estimated ultimate cost of claims, including amounts for claims incurred but not reported, for cargo loss and damage, bodily injury and property damage, workers' compensation, long-term disability and group health not covered by insurance. These costs are charged to operating costs. Stock-Based Compensation Stock based compensation expense for the Company's employee stock option plan is recognized under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related interpretations. Consistent with APB 25, the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant; therefore, no compensation expense is recognized. Net Income (Loss) Per Common Share Net income (loss) 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 common shares for both classes of common stock is considered in the computation of EPS. Fair Values of Financial Instruments At December 31, 2000 and 1999, the carrying value of financial instruments such as cash and cash equivalents, trade and other receivables, trade payables and long-term debt approximate their fair values. Fair value is determined based on expected future cash flows, discounted at market interest rates, and other appropriate valuation methodologies. Comprehensive Income There were no items of comprehensive income for the years presented, as defined under SFAS No. 130, "Reporting Comprehensive Income". Accordingly, comprehensive income is equal to net income. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in fiscal years beginning after June 15, 2000. Under the statement, all derivatives will be required to be recognized on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Under the statement, any ineffective portion of a derivative's change in fair value must be immediately recognized in earnings. The Company has evaluated the effect of SFAS No. 133 and determined that the adoption of SFAS No. 133 will have no effect on the earnings and financial position of the Company. 2. PROPERTY AND EQUIPMENT The components of property and equipment are as follows (in thousands): December 31 2000 1999 ---- ---- Land $ 873 $ 873 Buildings 2,186 2,241 Transportation equipment 146 419 Office and service equipment 2,288 3,491 ----- ----- 5,493 7,024 Less accumulated depreciation 1,805 2,715 ----- ----- Property and equipment, net $3,688 $4,309 ====== ====== Depreciation expense was $433,000, $511,000 and $581,000 for 2000, 1999 and 1998, respectively. 3. INDEBTEDNESS At December 31, 2000, the Company had a $7.7 million revolving credit facility ("Credit Facility"), with a $6.7 million letter of credit sub-limit. The Credit Facility bears interest at the Company's option, on either the applicable Eurodollar Rate Margin or the applicable Base Rate Margin, all of which are adjusted over the term of the Credit Facility. Total borrowings and outstanding letters of credit are limited to qualified trade accounts receivable, qualified in-transit amounts, contractor loans, and qualified investments. The Credit Facility contains financial covenants, the most restrictive of which are a cash flow coverage ratio, interest expense coverage ratio, and minimum net income. At December 31, 2000, the Company had no outstanding debt under its Credit Facility, and $6.6 million of letters of credit were outstanding under the Credit Facility. Letters of credit are required for self-insurance retention reserves and other corporate needs. The Credit Facility matured on January 28, 2001, at which time the Company had no outstanding debt and $6.6 million outstanding letters of credit. The Company was in default of the financial covenants, resulting in the bank failing to renew the Credit Facility. As a result of the Credit Facility not being renewed, the Company has a payment default and the financial institution has the right to demand cash to meet outstanding obligations under the letters of credit. The bank has discretion as to whether to make any loans or issue additional letters of credit for the Company. The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is actively seeking alternative financial institutions to replace the existing Credit Facility as well as seeking additional capital resources. Currently, negotiations are being held with several financial institutions regarding a replacement facility. In connection with these potential replacement facilities, the Company is anticipating raising equity capital up to $3.0 million. The Company has engaged in discussions with its principal shareholder, Lynch Interactive, regarding these matters. Based on preliminary discussions, Lynch Interactive has expressed interest in providing a portion of the capital support the Company will require, but no terms have been agreed upon. The Company expects to seek to raise the equity capital it will require from Lynch Interactive, other stockholders, or, if necessary, privately from other sources. The Company's ability to continue as a going concern is dependent upon its ability to successfully maintain its financing arrangements and to comply with the terms thereof. However, although no assurances can be given, management remains confident that the Company will be able to continue operating as a going concern.
Long-term debt and capital lease obligations consisted of the following (in thousands): December 31 2000 1999 ---- ---- Promissory notes with imputed interest rates from 6.31% to 10.0%, principal and interest payments due from monthly to annually, through June 30, 2002 $242 $837 Term note and capital leases with imputed interest rates of 8.25% to 11.04% with principal and interest payments due monthly through April 26, 2002 46 128 ---- --- 288 965 Less current portion 217 676 --- --- Long-term debt and capital lease obligations, net $ 71 $289 ==== ====
Maturities on long-term debt are $217,000 in 2001 and $71,000 in 2002. 4. LEASES Future minimum annual operating lease payments as of December 31, 2000, are as follows (in thousands): Operating Leases ------ 2001 $ 641 2002 173 2003 60 2004 11 2005 1 ------ Total minimum lease payments $ 886 ====== Aggregate expense under operating leases approximated $1,672,000, $2,115,000, and $2,578,000 for 2000, 1999 and 1998, respectively. 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): For the Year Ended December 31 2000 1999 1998 ---- ---- ---- Current: State $ - $ 98 $ 201 Federal (595) 515 1,071 ------- ----- ------ (595) 613 1,272 Deferred: State 488 (67) (203) Federal 2,558 (353) (510) ------- ------ ------- 3,046 (420) (713) ------- ------ ------- $2,451 $ 193 $ 559 ======= ====== ======= Deferred tax assets (liabilities) are comprised of the following (in thousands): December 31 2000 1999 ---- ---- Deferred tax assets: Accrued insurance claims $3,323 $3,232 Special charges and accrued expenses 367 487 Depreciation 199 163 Other 84 125 ------ ------ 3,973 4,007 Deferred tax liabilities: Prepaid expenses (184) (360) ------- ------- (184) (360) ------- ------- $3,789 $3,647 Valuation allowance for deferred tax assets ($3,188) -- ------ ------ $ 601 $3,647 ====== ====== A reconciliation of the income tax provisions and the amounts computed by applying the statutory federal income tax rate to income before income taxes follows (in thousands): For the Year Ended December 31 2000 1999 1998 ---- ---- ---- Income tax provision (benefits) at federal statutory rate $(772) $ 72 $497 State income tax (benefit), net of federal tax benefit (44) 20 48 Changes in estimated state tax rates on beginning temporary differences -- -- (70) Change in Valuation Allowance 3,188 -- -- Permanent differences 79 101 84 ------- ---- -- $2,451 $193 $559 ======= ==== ==== Net cash payments for income taxes were $181,000, $1,205,000 and $810,000 in 2000, 1999 and 1998, respectively. In assessing the realization of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which the temporary differences become deductible. A valuation allowance of $3,188,000 was recorded in 2000 to reduce the deferred tax asset as the Company has experienced cumulative losses for financial reporting for the last three years. Management considered, in reaching the conclusion on the required valuation allowance, given the cumulative losses, combined with the current default on its Credit Facility, that it would be inconsistent with applicable accounting rules to rely on future taxable income to support full realization of the deferred tax assets. Accordingly, the remaining deferred tax assets of $601,000 relate to federal income tax carrybacks available to the Company. 6. SHAREHOLDERS' EQUITY The Company has two classes of common stock outstanding, Class A and Class B. Under the bylaws of the Company: (i) each share of Class A is entitled to one vote and each share of Class B is entitled to two votes; (ii) Class A shareholders are entitled to a dividend ranging from one to two times the dividend declared on Class B stock; (iii) any stock distributions will maintain the same relative percentages outstanding of Class A and Class B; (iv) any liquidation of the Company will be ratably made to Class A and Class B shareholders after satisfaction of the Company's other obligations; and (v) Class B stock is convertible into Class A stock at the discretion of the holder; Class A stock is not convertible into Class B stock. The Company's Board of Directors has approved the purchase of up to 250,000 shares of Class A Common Stock for its Treasury at various dates and market prices. During the year ended December 31, 2000, the Company did not repurchase any shares under this plan. As of December 31, 2000, 186,618 shares had been repurchased at prices between $6.875 and $11.375 per share for a total of $1,561,000 under this plan. In March 1999, the Company repurchased 102,528 shares of Class A stock in a Dutch Auction for $985,000, which includes $62,000 of fees and expenses associated with the transaction. In July 1998, the Company purchased 70,000 shares of Class A stock from a former officer for $637,000 under a special stock purchase approved by the Board of Directors. 7. STOCK OPTION PLAN AND BENEFIT PLAN The Company has an incentive 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 directors, officers, 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. 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 grantee's employment terminates prior to exercise for reasons other than retirement, death, or disability. Stock options vest over a four-year period pursuant to the terms of the plan, except for stock options granted to a non-employee director, which are immediately vested. Employees and non-employee directors have been granted non-qualified stock options to purchase 96,375 and 32,000 shares, respectively, of Class A common stock, net of cancellations and shares exercised. There are 63,250 options reserved for future issuance. In January 2000, the President and Chief Executive Officer entered into a special stock option plan and agreement with the Company which provides for the granting of options to purchase 120,000 shares of Class A Common Stock in three separate installments. The first installment is for 40,000 shares at an exercise price of $5.625, exercisable 6 months from the date of the agreement. The second installment is for 40,000 shares at an exercise price of $7.625, exercisable 18 months after the date of the agreement. The third installment is for 40,000 shares at an exercise price of $9.625, exercisable 30 months after the date of the agreement. The options granted under this stock option plan and agreement are not granted pursuant to the Incentive Stock Option Plan described above; but they are subject to the same general terms and conditions of the Incentive Stock Option Plan. A summary of the Company's stock option activity and related information follows:
Year Ended December 31 2000 1999 1998 ---- ---- ---- Weighted Weighted Weighted Average Average Average Options Exercise Options Exercise Options Exercise (000) Price (000) Price (000) Price ----- ----- ----- ----- ----- ----- Outstanding at beginning of year 181 $8.23 170 $8.28 167 $8.32 Granted 120 7.63 11 7.52 23 8.11 Exercised -- -- -- -- (7) 8.25 Canceled (53) 7.79 -- -- (13) 8.59 ---- ----- --- ----- ---- ---- Outstanding at end of year 128 $8.42 181 $8.23 170 $8.28 === ===== === ----- === ===== Exercisable at end of year 124 $8.41 149 $8.31 124 $8.42 === ===== === ===== === =====
Exercise prices for options outstanding as of December 31, 2000, ranged from $6.80 to $10.19. The weighted-average remaining contractual life of those options is 4.6 years. The weighted-average fair value of options granted during each year was immaterial. The following pro forma information regarding net income (loss) and net income (loss) per share is required when APB 25 accounting is elected, and was determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123, "Accounting for Stock-Based Compensation." The fair values for these options were estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: dividend yield of 0.1%; expected life of 10 years; expected volatility of .596 in 2000 and .316 in 1999 and .250 in 1998, and a risk-free interest rate of 6.5% in 2000 and 5.0% in 1999 and 6.0% in 1998. For purposes of pro forma disclosures, the estimated fair values of the options are amortized to expense over the option's vesting periods (in thousands except for per share information): 2000 1999 1998 ---- ---- ---- Net (loss) income: As reported ($4,799) $ 19 $ 903 Pro forma ($5,024) (24) 861 Diluted (loss) earnings per share: As reported ($1.96) $0.01 $0.35 Pro forma ($2.05) (0.01) 0.33 During the initial phase-in period, as required by SFAS No. 123, the pro forma amounts were determined based on stock options granted after the 1995 fiscal year only. Therefore, the pro forma amounts for compensation cost may not be indicative of the effects on pro forma net income and pro forma net income per share for future years. The Company has a 401(k) Savings Plan covering substantially all employees, which matches 25% of the employee contributions up to a designated amount. The Company's contributions to the Plan for 2000, 1999 and 1998 were $18,000, $23,000 and $29,000, respectively. 8. TRANSACTIONS WITH LYNCH INTERACTIVE CORPORATION The Company has paid Lynch Interactive Corporation ("Lynch Interactive") an annual service fee of $100,000 for executive, financial and accounting, planning, budgeting, tax, legal, and insurance services. Additionally, Lynch Interactive charges the Company for officers' and directors' liability insurance, which totaled $20,000 in 2000, and $16,000 in 1999 and 1998. The Company's Class A and Class B common stock owned by Lynch Interactive is pledged to secure a Lynch Interactive line of credit. 9. SEGMENT REPORTING Description of Services by Segment The Company operates in four business segments: manufactured housing, driver outsourcing, specialized outsourcing services, and insurance and finance. The manufactured housing segment primarily provides specialized transportation to companies which produce new manufactured homes and modular homes through a network of terminals located in twenty-eight states. The driver outsourcing segment provides outsourcing transportation primarily to manufacturers of recreational vehicles, commercial trucks, and other specialized vehicles through a network of service centers in six states. The specialized outsourcing services segment consists of a large trailer, travel and small trailer delivery and another Specialized Service "Decking" (discontinued in 2000). The last 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. The driver outsourcing segment and the specialized outsourcing services were reported as one segment titled "SOS" in 1998. The year of 1998 has been restated to show corresponding segment information. Measurement of Segment (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). The accounting policies of the segments are the same as those described in the summary of significant accounting policies (See Note 1). There are no significant intersegment revenues.
The following table presents the financial information for the Company's reportable segments for the years ended December 31 (in thousands): 2000 1999 1998 ---- ---- ---- Operating revenues Manufactured Housing $ 70,631 $ 99,491 $ 106,145 Driver Outsourcing 20,939 23,351 19,710 Specialized Outsourcing Services 15,260 21,172 23,064 Insurance and Finance 2,933 3,958 4,072 All Other (3) 148 48 -------- -------- --------- 109,760 148,120 153,039 Total intersegment insurance revenues (1,736) (2,491) (2,585) -------- -------- --------- Total operating revenues $108,024 $145,629 $ 150,454 ======== ======== ========= Segment (loss) profit - EBITDA Manufactured Housing $ 5,784 $ 10,265 $ 10,836 Driver Outsourcing 1,324 416 115 Specialized Outsourcing Services (140) 469 1,011 Insurance and Finance (6,765) (9,058) (8,358) All Other (1,174) (327) (367) -------- -------- --------- (971) 1,765 3,237 Depreciation and amortization (1,067) (1,215) (1,230) Interest expense (310) (338) (545) -------- -------- --------- (Loss) income before taxes $( 2,348) $ 212 $ 1,462 ======== ======== ========= Identifiable assets Manufactured Housing $ 11,255 $ 16,956 $ 18,764 Driver Outsourcing 4,561 5,438 6,055 Specialized Outsourcing Services 2,078 2,724 3,015 Insurance and Finance 1,433 1,801 1,864 All Other 3,942 5,345 3,689 -------- -------- --------- Total $ 23,269 $ 32,264 $ 33,387 ======== ======== =========
A majority of the Company's accounts receivable are due from companies in the manufactured housing, recreational vehicle, and commercial truck and trailer industries located throughout the United States. Services provided to Oakwood Homes Corporation accounted for approximately $22.5 million, $28.8 million and $31.8 million of revenues in 2000, 1999 and 1998, respectively. The Company's gross accounts receivables from Oakwood were 23% and 16% of total receivables at December 31, 2000 and 1999, respectively. In addition, Fleetwood Enterprises, Inc., accounted for approximately $16.9 million, $23.9 million and $26.0 million, of revenues in 2000, 1999 and 1998, respectively. The Company's gross accounts receivables from Fleetwood were 10% and 17% of total receivables at December 31, 2000 and 1999, respectively. 10. OPERATING COSTS AND EXPENSES (in thousands) 2000 1999 1998 ---- ---- ---- Purchased transportation costs $75,411 $ 101,046 $103,820 Operating supplies and expenses 10,826 13,559 14,092 Claims 5,658 8,633 7,698 Insurance 2,733 3,178 3,375 Operating taxes and licenses 4,924 7,358 7,978 ------- --------- -------- $99,552 $ 133,774 $136,963 ======= ========= ======== 11. COMMITMENTS AND CONTINGENCIES The Company is involved in various legal proceedings and claims that have arisen in the normal course of business for which the Company maintains liability insurance covering amounts in excess of its self-insured retention. Management believes that adequate reserves have been established on its self-insured claims and that their ultimate resolution will not have a material adverse effect on the consolidated financial position, liquidity, or operating results of the Company. The Company leases certain land, buildings, computer equipment, computer software, and motor equipment under non-cancelable operating leases that expire in various years through 2005. Several land and building leases contain monthly renewal options. 12. QUARTERLY RESULTS OF OPERATIONS (Unaudited) The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2000 and 1999 (in thousands, except share data):
Three Months Ended March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- 2000 - ---- Operating revenues $27,867 $29,961 $28,164 $ 22,032 Operating income (loss) (898) 113 178 (1,431) Net income (loss) (616) 17 75 (4,275) Net income (loss) per basic and diluted share ($ 0.25) $ 0.01 $ 0.03 ($1.75) 1999 - ---- Operating revenues $35,325 $40,270 $37,312 $ 32,722 Operating income (loss) 325 436 208 (419) Net income (loss) 118 169 34 (302) Net income (loss) per basic and diluted share $ 0.05 $ 0.07 $ 0.01 ($ 0.12)
Report of Independent Auditors The Board of Directors and Shareholders The Morgan Group, Inc. We have audited the accompanying consolidated balance sheets of The Morgan Group, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule of The Morgan Group, Inc. and subsidiaries listed in Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 audits provide 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 as of December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 3, the Company, incurred operating losses during the year ended December 31, 2000, and was not in compliance with its credit facility, which expired on January 28, 2001. Under the terms of the expired credit facility, the bank has the right to demand cash to meet outstanding obligations of the letters of credits. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters, including raising additional equity and replacing the expired credit facility, are more fully described in Note 3. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP Greensboro, North Carolina February 9, 2001 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to the section entitled "Proposal One - Election of Directors" of the Company's Proxy Statement for its 2001 Annual Meeting of Stockholders expected to be filed with the Commission on or about May 12, 2001 (the "2001 Proxy Statement"). Item 11. EXECUTIVE COMPENSATION The information required by this item with respect to executive compensation is incorporated by reference to the section entitled "Management Remuneration" of the 2001 Proxy Statement. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the sections entitled "Voting Securities and Principal Holders Thereof" and entitled "Proposal One - Election of Directors" of the 2001 Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the section entitled "Certain Transactions with Related Persons" of the 2001 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following consolidated financial statements are included in Item 8: Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Auditors (a)(2) Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the instructions or are inapplicable and, therefore, have been omitted. (a)(3) Exhibits Filed. The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index. Included in those exhibits are Management contracts and compensatory plans and arrangements which are identified as Exhibits 10.1 through 10.10. (b) Reports on Form 8-K Registrant filed no reports on Form 8-K during the quarter ending December 31, 2000. (c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index.
Schedule II The Morgan Group Inc. and Subsidiaries Valuation and Qualifying Accounts Allowance for Doubtful Accounts ------------------------------- Additions Amounts Beginning Charged to Costs Written Off Ending Description Balance and Expenses Net of Recoveries Balance ----------- ------- ------------ ----------------- ------- Year ended December 31, 2000 $313,000 $249,000 $314,000 $248,000 Year ended December 31, 1999 $208,000 $415,000 $310,000 $313,000 Year ended December 31, 1998 $183,000 $301,000 $276,000 $208,000 Morgan Finance, Inc. Allowance for Loans Receivable ------------------------------ Year ended December 31, 2000 $ 50,000 $211,000 $ 96,000 $165,000 Year ended December 31, 1999 $ 40,000 $ 60,000 $ 50,000 $ 50,000 Year ended December 31, 1998 $ 80,000 $156,000 $196,000 $ 40,000 Allowance for Receivable from Independent Contractors ----------------------------------------------------- Year ended December 31, 2000 $ 81,000 $246,000 $250,000 $ 77,000 Year ended December 31, 1999 $ 82,000 $300,000 $301,000 $ 81,000 Year ended December 31, 1998 $ 41,000 $341,000 $300,000 $ 82,000
EXHIBIT INDEX Exhibit No. Description Page - ----------- ----------- ---- 3.1 Registrant's Restated Certificate of Incorporation, as amended, is incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1999, filed on August 13, 1999. 3.2 Registrant's Code of By-Laws, as restated and amended, is incorporated by reference to Exhibit 3.2 of the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 4.1 Form of Class A Stock Certificate is incorporated by reference to Exhibit 3.3 of the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 4.2 Fourth Article - "Common Stock" of the Registrant's Certificate of Incorporation, is incorporated by reference to the Registrant's Certificate of Incorporation, as amended, filed as Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1999, filed on August 13, 1999. 4.3 Article II - "Meeting of Stockholders," Article VI - "Certificate for Shares" and Article VII - "General Provisions" of the Registrant's Code of By-Laws, incorporated by reference to the Registrant's Code of By-Laws, as amended, filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 4.4 Revolving Credit and Term Loan Agreement, dated January 28, 1999, among the Registrant and Subsidiaries and Bank Boston, N.A., is incorporated by reference to Exhibit 4(1) to the Registrant's Current Report on Form 8-K filed February 12, 1999. 4.5 Guaranty, dated January 28, 1999, among the Registrant and Subsidiaries and BankBoston, N.A. is incorporated by reference to Exhibit 4(2) to the Registrant's Current Report on Form 8-K filed February 12, 1999. 4.6 Security Agreement, dated January 28, 1999, among the Registrant and Subsidiaries and BankBoston, N.A. is incorporated by reference to Exhibit 4(3) to the Registrant's Current Report on Form 8-K filed February 12, 1999. 4.7 Stock Pledge Agreement, dated January 28, 1999, among the Registrant and Subsidiaries and BankBoston, N.A. is incorporated by reference to Exhibit 4(4) to the Registrant's Current Report on Form 8-K filed February 12, 1999. 4.8 Revolving Credit Note, dated January 28, 1999, among the Registrant and Subsidiaries and BankBoston, N.A. is incorporated by reference to Exhibit 4(5) to the Registrant's Current Report on Form 8-K filed February 12, 1999. 4.9 Amendment Agreement No. 1 to that Certain Revolving Credit Agreement and Term Loan Agreement among the Registrant and its Subsidiaries and BankBoston dated as of March 31, 2000 is filed herewith. 4.10 Amendment Agreement No. 2 to that Certain Revolving Credit Agreement and Term Loan Agreement among the Registrant and its Subsidiaries and BankBoston dated as of November 10, 2000 is filed herewith. 10.1 The Morgan Group, Inc. Incentive Stock Plan is incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.2 First Amendment to the Morgan Group, Inc. Incentive Stock Plan is incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1997, filed November 14, 1997. 10.3 Memorandum to Charles Baum and Philip Ringo from Lynch Corporation, dated December 8, 1992, respecting Bonus Pool, is incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.4 Term Life Policy from Northwestern Mutual Life Insurance Company insuring Paul D. Borghesani, dated August 1, 1991, is incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.5 Long Term Disability Insurance Policy from Northwestern Mutual Life Insurance Company, dated March 1, 1990, is incorporated by reference to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.6 Long Term Disability Insurance Policy from CNA Insurance Companies, effective January 1, 1998 is incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, filed March 31, 1998. 10.7 The Morgan Group, Inc. Employee Stock Purchase Plan, as amended, is incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, filed on March 30, 1995. 10.8 Consulting Agreement between Morgan Drive Away, Inc. and Paul D. Borghesani, effective as of April 1, 1996, is incorporated by reference to Exhibit 10.19 the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed on April 1, 1996. 10.9 Employment Agreement, dated January 12, 2000 between Registrant and Anthony T. Castor, III is incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999. 10.10 Non-Qualified Stock Option Plan and Agreement, dated January 11, 2000, between Registrant and Anthony T. Castor, III is incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999. 10.11 Management Agreement between Skandia International and Risk Management (Vermont), Inc. and Interstate Indemnity Company, dated December 15, 1992, is incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.12 Agreement for the Allocation of Income Tax Liability between Lynch Corporation and its Consolidated Subsidiaries, including the Registrant (formerly Lynch Services Corporation), dated December 13, 1988, as amended, is incorporated by reference to Exhibit 10.13 the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.13 Certain Services Agreement, dated January 1, 1995, between Lynch Corporation and the Registrant is incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, filed on March 30, 1995. 21 Subsidiaries of the Registrant is incorporated by reference to Exhibit 21 to the Registrant Form 10-K for the year ended December 31, 1998 23 Consent of Ernst & Young LLP 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, 2001 By: /s/ Anthony T. Castor, III ------------------------------------- Anthony T. Castor, III President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 2nd day of April, 2001. 1) Director, President and Chief Executive Officer: By: /s/ Anthony T. Castor, III -------------------------- Anthony T. Castor, III 2) Chief Financial Officer and Chief Accounting Officer By: /s/ Dennis R. Duerksen ----------------------- Dennis R. Duerksen 3) A Majority of the Board of Directors: /s/ Charles C. Baum Director -------------------- Charles C. Baum /s/ Richard B. Black Director -------------------- Richard B. Black /s/ Richard L. Haydon Director --------------------- Richard L. Haydon /s/ Robert S. Prather, Jr. Director --------------------------- Robert S. Prather, Jr. EX-4.9 2 0002.txt AMENDMENT AGREEMENT NO. 1 AMENDMENT AGREEMENT NO. 1 to that certain REVOLVING CREDIT AND TERM LOAN AGREEMENT dated as of January 28, 1999 This AMENDMENT NO. 1 (the "Amendment"), dated as March 31, 2000, among Morgan Drive Away, Inc., TDI, Inc. and Morgan Finance, Inc. (collectively, the "Borrowers"), The Morgan Group, Inc. (the "Parent", and together with the Borrowers, the "Obligors"), Fleet National Bank (formerly known as BankBoston, N.A.), and Fleet National Bank (formerly known as BankBoston, N.A.), as agent for the Banks (the "Agent"). WHEREAS, the Obligors, the Banks and the Agent are parties to that certain Revolving Credit and Term Loan Agreement, dated as of January 28, 1999, as amended (as so amended, the "Credit Agreement"); and WHEREAS, the Obligors have requested that the Banks and Agent agree, and the Banks and the Agent have agreed, on the terms and subject to the conditions set forth herein, to amend certain provisions of the Credit Agreement; NOW THEREFORE, the parties hereto hereby agree as follows: ss.1. Defined Terms. Capitalized terms which are used herein without definition and which are defined in the Credit Agreement shall have the same meanings herein as in the Credit Agreement. ss.2. Amendment of Credit Agreement. The Credit Agreement shall be amended as follows: (a) The definition of "Applicable Overadvance Amount" in ss.1.1 of the Credit Agreement is hereby amended by inserting the following new sentence at the end thereof: "Notwithstanding the foregoing, at all times from and after March 31, 2000, the Applicable Overadvance Amount shall be equal to $0." (b) The definition of "Consolidated EBITDA" shall be amended by inserting at the end of such definition immediately preceding the period, the following clause: "plus, in the case of expense, and minus, in the case of income, (g) noncash income or expense for such period in respect of compensatory stock options." (c) The definition of "Pricing Table" in ss.1.1 of the Credit Agreement is hereby amended by deleting said definition in its entirety and substituting therefor the following new definition: "Pricing Table. For each period commencing on an Adjustment Date through the date immediately preceding the next Adjustment Date (each a "Rate Adjustment Period"), the applicable margin shall be the applicable percentage set forth below with respect to the Obligors' Leverage Ratio, as determined at the end of the fiscal quarter of the Obligors and their Subsidiaries ending immediately prior to the applicable Rate Adjustment Period:
Level Leverage Ratio Applicable Applicable Base Commitment Eurodollar Rate Rate Margin Fee Margin - ---------------------------------------------------------------------------------------------------- I Greater than or equal to 2.250% 0.750% 0.625% 3.00 to 1.00 II Less than 3.00 to 1.00 and 2.000% 0.500% 0.625% greater than or equal to 2.25 to 1.00 III Less than 2.25 to 1.00 and 1.750% 0.250% 0.500% greater than or equal to 1.50 to 1.00 IV Less than 1.50 to 1.00 and 1.500% 0.250% 0.500% greater than or equal to 1.00 to 1.00 V Less than 1.00 to 1.00 1.250% 0.250% 0.500%
Notwithstanding the foregoing, (a) for the period commencing on the Closing Date through the end of the month in which the quarterly compliance certificate for the fiscal quarter ending March 31, 1999 is delivered pursuant to ss.9.4(d) hereof, the applicable margin for Loans shall be that percentage corresponding to Level II in the table above, and (b) if the Obligors fail to deliver any Compliance Certificate pursuant to ss.9.4(d) hereof, then for the period commencing on the first day of the month immediately following the date such Compliance Certificate was due through the date immediately preceding the Adjustment Date that occurs immediately following the date on which such Compliance Certificate is delivered, the applicable margin for Loans shall be that percentage corresponding to Level I in the table above." (d) The following new definition shall be inserted in Section 1 in appropriate alphabetical sequence: "Reference Period. A period of twelve consecutive calendar months ending on the relevant date of calculation, or such smaller number of months as shall have elapsed from April 1, 2000 to such date." (e) Section 9.4(d) of the Credit Agreement is hereby amended by inserting after the words "referred to in subsections (a) and (b) above", the words "and, for each calendar month ending during the period of June 30, 2000 through December 31, 2000, within fifteen (15) days after the end of each calendar month". (f) Section 10.4 of the Credit Agreement is hereby amended by (i) replacing the number "200,000" with the number "$120,000" in subclause (b)(i), and (ii) by deleting subclauses (b)(ii) and (b)(iii) in their entirety. (g) Section 11.2 of the Credit Agreement is amended by deleting said Section 11.2 in its entirety and substituting therefor the following new Section 11.2: "11.2. Cash Flow Coverage Ratio. (a) The Obligors and their Subsidiaries will not permit, as at the end of any calendar quarter of the Obligors ending during any period described in the table set forth below, the ratio of (1) Consolidated EBITDA for the period of twelve consecutive calendar months then ending to (2) the sum of (A) Consolidated Total Interest Expense for such period plus (B) scheduled principal payments with respect to Consolidated Funded Debt (including capitalization lease payments) due and payable during such period to be less than the ratio set forth opposite such period in such table: Fiscal Period Ratio ---------------------------------------------------------- Closing Date - 6/30/99 1.20:1.00 7/1/99 - 12/31/99 1.50:1.00 provided, that, scheduled principal payments with respect to consolidated Funded Debt shall be deemed to include an amount equal to twenty percent (20%) of the sum of (A) outstanding Revolving Credit Loans plus (B) Unpaid Reimbursement Obligations as at the end of such fiscal month. (b) The Obligors and their Subsidiaries will not permit, as at the end of any calendar month of the Obligors commencing with the calendar month ended April 30, 2000, the ratio of (a) Consolidated EBITDA for the Reference Period then ending to (b) the sum of (1) Consolidated Total Interest Expense for such period plus (2) scheduled principal payments with respect to Consolidated Funded Debt (including capitalized lease payments) due and payable during such period to be less than 1.50:1.00; provided, that, scheduled principal payments with respect to Consolidated Funded Debt shall be deemed to include an amount equal to twenty percent 20% of the result of (X) the sum of (A) outstanding Revolving Credit Loans plus (B) Unpaid Reimbursement Obligations as at the end of such fiscal quarter times (Y) a fraction equal to (C) the number of months in such Reference Period divided by (D) 12." (h) Section 11.3 of the Credit Agreement is hereby amended by deleting said Section 11.3 in its entirety and substituting therefor the following new Section 11.3: "11.3. Interest Coverage Ratio. (a) The Obligors and their Subsidiaries will not permit, as at the end of any fiscal quarter of the Obligors ending during any period described in the table set forth below, the ratio of (a) Consolidated EBITDA for four consecutive fiscal quarters then ending to (b) Consolidated Total Interest Expense for such period to be less than the ratio set forth opposite such period in such table: Fiscal Period Ratio ----------------------------------------------------------- Closing Date - 6/30/99 3.00:1.00 7/1/99 - 12/31/99 4.00:1.00 (b) The Obligors and their Subsidiaries will not permit, as at the end of any calendar month the Obligors commencing with the fiscal quarter ending April 30, 2000, the ratio of (a) Consolidated EBITDA for the Reference Period then ending to (b) Consolidated Total Interest Expense for such period to be less than 4.00:1.00." (i) Section 11 of the Credit Agreement is hereby amended by inserting the following new ss.11.6: "ss.11.6. Minimum Net Income. The Obligors will not permit, for any fiscal quarter commencing with the fiscal quarter ending June 30, 2000, Consolidated Net Income to be less than $1.00 for such fiscal quarter." ss.3. Representations and Warranties. The Obligors hereby jointly and severally represent and warrant to the Banks as follows: (a) The execution and delivery by the Obligors of this Amendment and all other instruments and agreements required to be executed and delivered by the Obligors in connection with the transactions contemplated hereby or referred to herein (collectively, the "Amendment Documents"), and the performance by the Obligors of their obligations and agreements under the Amendment Documents and the Credit Agreement as amended hereby, are within the corporate authority of the each of the Obligors, have been authorized by all necessary corporate proceedings on behalf of each of such Persons, and do not and will not contravene any provision of law or any of such Persons' charter, other incorporation papers, by-laws or any stock provision or any amendment thereof or of any indenture, agreement, instrument or undertaking binding upon any of such Persons. (b) The Amendment Documents and the Credit Agreement as amended hereby constitute legal, valid and binding obligations of the Obligors, enforceable in accordance with their respective terms, except as limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting generally the enforcement of creditors' rights. (c) No approval or consent of, or filing with, any governmental agency or authority is required to make valid and legally binding the execution, delivery or performance by the Obligors of the Amendment Documents or the Credit Agreement as amended hereby, or the consummation by the Obligors of the transactions among the parties contemplated hereby and thereby or referred to herein. (d) The representations and warranties contained in ss.8 of the Credit Agreement were correct at and as of the date made. Except to the extent that the facts upon which such representations and warranties were based have changed in the ordinary course of business (which changes, either singly or in the aggregate, have not been materially adverse), such representations and warranties also are correct at and as of the date hereof. (e) The Obligors have performed and complied in all material respects with all terms and conditions herein required to be performed or complied with by them prior to or at the time hereof, and as of the date hereof, after giving effect to the provisions hereof, there exists not Default or Event of Default or condition which, with either or both the giving of notice or the lapse of time, would result in a Default or an Event of Default upon the execution and delivery of the Amendment Documents or otherwise. ss.4. Conditions to Effectiveness. This Amendment shall become effective as of the date hereof upon satisfaction of each of the conditions precedent set forth in thisss.4: (a) Delivery. The Obligors, the Banks and the Agent shall have executed and delivered this Amendment. (b) Amendment Fee. The Obligors shall have paid an amendment fee in the amount of $25,000 to the Agent for the benefit of the Banks. (c) Proceedings and Documents. All proceedings in connection with the transactions contemplated by this Amendment and all documents incident thereto shall be reasonably satisfactory in substance and form to the Agent, and the Agent shall have received copies of all final documents relating to the Leaseback Transaction, and all information and such counterpart originals or certified or other copies of such documents as the Agent may reasonably request. ss.5. Miscellaneous Provisions. (a) Except as otherwise expressly provided by this Amendment, all of the terms, conditions and provisions of the Credit Agreement shall remain the same. It is declared and agreed by each of the parties hereto that the Credit Agreement, as amended hereby, shall continue in full force and effect, and that this Amendment and the Credit Agreement shall be read and construed as one instrument. (b) This Amendment is intended to take effect as an agreement under seal and shall be construed according to and governed by the laws of the Commonwealth of Massachusetts. (c) This Amendment may be executed in any number of counterparts, but all such counterparts shall together constitute but one instrument. In making proof of this Amendment it shall not be necessary to produce or account for more than one counterpart signed by each party hereto by and against which enforcement hereof is sought. (d) The Obligors hereby agree to pay to the Agent, on demand by the Agent, all reasonable out-of-pocket costs and expenses incurred or sustained by the Agent in connection with the preparation of this Amendment (including reasonable legal fees and expenses). IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above. MORGAN DRIVE AWAY, INC. By: /s/ Dennis Duerksen ----------------------------------- Title: Vice President TDI, INC. By: /s/ Dennis Duerksen ----------------------------------- Title: Vice President MORGAN FINANCE, INC. By: /s/ Dennis Duerksen ----------------------------------- Title: Vice President THE MORGAN GROUP, INC. By: /s/ Dennis Duerksen ----------------------------------- Title: Vice President FLEET NATIONAL BANK (formerly known as BankBoston, N.A.), individually and as Agent By: /s/ Katherine Brand ----------------------------------- Katherine Brand Title: Vice President EX-4.10 3 0003.txt AMENDMENT AGREEMENT NO. 2 AMENDMENT AGREEMENT NO. 2 to that certain REVOLVING CREDIT AND TERM LOAN AGREEMENT dated as of January 28, 1999 This AMENDMENT NO. 2 (the "Amendment"), dated as November 10, 2000, among Morgan Drive Away, Inc., TDI, Inc. and Morgan Finance, Inc. (collectively, the "Borrowers"), The Morgan Group, Inc. (the "Parent", and together with the Borrowers, the "Obligors"), Fleet National Bank (formerly known as BankBoston, N.A.), and Fleet National Bank (formerly known as BankBoston, N.A.), as agent for the Banks (the "Agent"). WHEREAS, the Obligors, the Banks and the Agent are parties to that certain Revolving Credit and Term Loan Agreement, dated as of January 28, 1999, as amended (as so amended, the "Credit Agreement"); and WHEREAS, the Obligors have requested that the Banks and Agent agree, and the Banks and the Agent have agreed, on the terms and subject to the conditions set forth herein, to amend certain provisions of the Credit Agreement. NOW THEREFORE, the parties hereto hereby agree as follows: ss.1. Defined Terms. Capitalized terms which are used herein without definition and which are defined in the Credit Agreement shall have the same meanings herein as in the Credit Agreement. ss.2. Amendment of Credit Agreement. The Credit Agreement shall be amended as follows: (a) The definitions of "Applicable Base Rate Margin", "Applicable Commitment Fee", "Applicable Eurodollar Rate Margin", "Pricing Table", Term Loan", "Term Note", "Term Note Record" and "Term Out Date" contained in ss.1.1 of the Credit Agreement are hereby deleted in their entirety. (b) The definition of " Base Rate Loan" contained in ss.1.1 of the Credit Agreement is hereby amended by the words "and all or any portion of the Term Loan" contained herein. (c) The definition of "Drawdown Date" in ss.1.1 of the Credit Agreement is hereby amended by (i) deleting the words "the Term Out Date," following the words "is to be made," and (ii) deleting the words "or all or any portion of the Term Loan is converted or continued in accordance with ss.4.5(b)" at the end thereof. (d) The definition of "Loans" contained in ss.1.1 of the Credit Agreement is hereby amended by deleting the words "and the Term Loan" at the end thereof. (e) The Definition of "Maturity Date" contained in ss.1.1 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "Maturity Date. January 28, 2001." (f) The definition of "Notes" contained in ss.1.1 of the Credit Agreement is hereby amended by deleting the words "Term Notes and the" contained herein. (g) The definition of "Type" contained in ss.1.1 of the Credit Agreement is hereby amended by deleting the words "or all or any portion of the Term Loan" contained herein. (h) Section 2.1 of the Credit Agreement is hereby amended by deleting the words "Term Out Date" following the words "up to but not including the" and replacing them with the words "Maturity Date". (i) Section 2.2 of the Credit Agreement is hereby amended (i) deleting the words "the Applicable Commitment Fee" following the words "a commitment fee equal to" and replacing them with the words "one percent (1.0%) per annum, and (ii) by deleting the words "Term Out Date" in each place where they occur and replacing them with the words "Maturity Date". (j) Section 2.5 of the Credit Agreement is hereby amended by (i) deleting the words "(ii) the Applicable Base Rate Margin" following the words "equal to the sum of (i) the Base Rate plus" and replacing them with the words "(ii) one and one-quarter of one percent (1.25%) per annum", and (ii) deleting the words "(ii) the Applicable Eurodollar Rate Margin" following the words "equal to the sum of (i) the Eurodollar Rate plus" and replacing them with the words "(ii) two and three- quarters of one percent (2.75%) per annum". (k) Section 2.9 of the Credit Agreement is hereby amended by deleting said Section 2.9 in its entirety and replacing it with the following: "2.9. Intentionally Omitted." (l) Section 3.1 of the Credit Agreement is hereby amended by deleting the words "Term Out Date" in each place where they occur and replacing them with the words "Maturity Date". (m) Section 4 of the Credit Agreement is hereby amended by deleting said Section 4 in its entirety and replacing it with the following: "4. INTENTIONALLY OMITTED." (n) Section 5.1.1 of the Credit Agreement is hereby amended by deleting the amount of "$12,000,000" contained therein and replacing it with the amount of "$6,700,000". (o) Section 5.1.3 of the Credit Agreement is hereby amended by deleting the words "Term Out Date" contained therein and replacing them with the words "Maturity Date". (p) Section 6.3 of the Credit Agreement is hereby amended by deleting the words "Term Out Date" contained in the last sentence thereof and replacing them with the words "Maturity Date". (q) Section 6.5 of the Credit Agreement is hereby amended by deleting the words "and the Term Note Records" contained in the third sentence thereof in their entirety. (r) Section 10.4 of the Credit Agreement is hereby amended by deleting said Section 10.4 in its entirety and replacing it with the following: "10.4. Distributions. None of the Parent, the Borrowers nor any of their Subsidiaries will make any Distributions, except that so long as no Default or Event of Default shall have occurred and be continuing and none would result therefrom, any of the Borrowers and their Subsidiaries may make Distributions to the Parent or to another Borrower." (s) Section 11.6 of the Credit Agreement is hereby amended by deleting said Section 11.6 in its entirety and replacing it with the following: "11.6. Minimum Income. The Obligors will not permit Consolidated Net Income, commencing with the calendar month ending June 30, 2000, to be less than (i) $1.00 for any calendar month ending on or prior to September 30, 2000, (ii) ($300,000) for the calendar month ended October 31, 2000, and (iii) $1.00 for any calendar month thereafter." (t) Section 27 of the Credit Agreement is hereby amended by deleting the words "the Term Out Date and" contained in the second sentence thereof in their entirety. (u) In connection with the reduction of the Total Commitment to $7,700,000 Schedule 1 to the Credit Agreement is hereby deleted in its entirety and replaced with the Schedule 1 attached hereto. ss.3. Limited Waiver. The Obligors have informed the Agent and the Banks that the Obligors have failed to comply with the covenant set forth in Sections 11.2(b) of the Credit Agreement for the period ending September 30, 2000, and have requested that the Agent and each of the Banks waive such non-compliance. Upon the effectiveness of this Amendment, the Agent and each of the Banks hereby waive compliance with the provisions of Section 11.2(b) of the Credit Agreement solely for the period ended September 30, 2000. The waiver given herein is limited strictly to its terms and shall apply only to the specific provisions described herein. The waiver contained herein shall not extend to or affect any other obligations of the Obligors or their Subsidiaries contained in the Credit Agreement or any other Loan Documents and shall not impair or prejudice any rights consequent thereon. Nothing contained in this waiver shall be construed to imply a willingness on the part of the Agent and the Banks to grant any similar or other future waivers of any of the terms and conditions of the Credit Agreement or the other Loan Documents. ss.4. Representations and Warranties. The Obligors hereby jointly and severally represent and warrant to the Banks as follows: (a) The execution and delivery by the Obligors of this Amendment and all other instruments and agreements required to be executed and delivered by the Obligors in connection with the transactions contemplated hereby or referred to herein (collectively, the "Amendment Documents"), and the performance by the Obligors of their obligations and agreements under the Amendment Documents and the Credit Agreement as amended hereby, are within the corporate authority of each of the Obligors, have been authorized by all necessary corporate proceedings on behalf of each of such Persons, and do not and will not contravene any provision of law or any of such Persons' charter, other incorporation papers, by-laws or any stock provision or any amendment thereof or of any indenture, agreement, instrument or undertaking binding upon any of such Persons. (b) The Amendment Documents and the Credit Agreement as amended hereby constitute legal, valid and binding obligations of the Obligors, enforceable in accordance with their respective terms, except as limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting generally the enforcement of creditors' rights. (c) No approval or consent of, or filing with, any governmental agency or authority is required to make valid and legally binding the execution, delivery or performance by the Obligors of the Amendment Documents or the Credit Agreement as amended hereby, or the consummation by the Obligors of the transactions among the parties contemplated hereby and thereby or referred to herein. (d) The representations and warranties contained in ss.8 of the Credit Agreement were correct at and as of the date made. Except to the extent that the facts upon which such representations and warranties were based have changed in the ordinary course of business (which changes, either singly or in the aggregate, have not been materially adverse), such representations and warranties also are correct at and as of the date hereof. (e) The Obligors have performed and complied in all material respect with all terms and conditions herein required to be performed or complied with by them prior to or at the time hereof, and as of the date hereof, after giving effect to the provisions hereof, there exists no Default or Event of Default or condition which, with either or both the giving of notice or the lapse of time, would result in a Default or an Event of Default upon the execution and delivery of the Amendment Documents or otherwise. ss.5. Conditions to Effectiveness. This Amendment shall become effective as of the date hereof upon satisfaction of each of the conditions precedent set forth in thisss.5: (a) Delivery. The Obligors, the Banks and the Agent shall have executed and delivered this Amendment. (b) Amendment Fee. The Obligors shall have paid an amendment fee in the amount of [$11,550] to the Agent for the benefit of the Banks. (c) Proceedings and Documents. All proceedings in connection with the transactions contemplated by this Amendment and all documents incident thereto shall be reasonably satisfactory in substance and form to the Agent, and the Agent shall have received copies of all final documents relating to the Leaseback Transaction, and all information and such counterpart originals or certified or other copies of such documents as the Agent may reasonably request. ss.6. Miscellaneous Provisions. (a) Except as otherwise expressly provided by this Amendment, all of the terms, conditions and provisions of the Credit Agreement shall remain the same. It is declared and agreed by each of the parties hereto that the Credit Agreement, as amended hereby, shall continue in full force and effect, and that this Amendment and the Credit Agreement shall be read and construed as one instrument. (b) This Amendment is intended to take effect as an agreement under seal and shall be construed according to and governed by the laws of the Commonwealth of Massachusetts. (c) This Amendment may be executed in any number of counterparts, but all such counterparts shall together constitute but one instrument. In making proof of this Amendment it shall not be necessary to produce or account for more than one counterpart signed by each party hereto by and against which enforcement hereof is sought. (d) The Obligors hereby agree to pay to the Agent, on demand by the Agent, all reasonable out-of pocket costs and expenses incurred or sustained by the Agent in connection with the preparation of this Amendment (including reasonable legal fees and expenses). IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above. MORGAN DRIVE AWAY, INC. By: /s/ Dennis R. Duerksen ----------------------------------- Title: Vice President TDI, INC. By: /s/ Dennis R. Duerksen ----------------------------------- Title: Vice President MORGAN FINANCE, INC. By: /s/ Dennis R. Duerksen ----------------------------------- Title: Vice President THE MORGAN GROUP, INC. By: /s/ Dennis R. Duerksen ----------------------------------- Title: Vice President FLEET NATIONAL BANK (formerly known as BankBoston, N.A.), individually and as Agent By:__________________________ Title: Schedule 1 ---------- Bank Commitment Amount Commitment Percentage - ---- ----------------- --------------------- Fleet National Bank $7,700,000 100% TOTAL: $7,700,000 100% EX-23 4 0004.txt CONSENT OF ERNST & YOUNG LLP Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-72996) pertaining to The Morgan Group, Inc. Incentive Stock Plan and in the Registration Statement (Form S-8 No. 33-72998) pertaining to The Morgan Group, Inc. 401(k) Profit Sharing Plan of our report dated February 9, 2001, with respect to the consolidated financial statements and schedules of The Morgan Group, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2000. /s/ Ernst & Young LLP Greensboro, North Carolina March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----