10-Q 1 morg_10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended March 31, 2001 THE MORGAN GROUP, INC. 2746 Old U. S. 20 West Elkhart, Indiana 46515-1168 (219) 295-2200 Delaware 1-13586 22-2902315 (State of (Commission File Number) (IRS Employer Incorporation) Identification Number) The Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. The number of shares outstanding of each of the Company's classes of common stock at April 30, 2001 was: Class A - 1,248,157 shares Class B - 1,200,000 shares The Morgan Group, Inc. INDEX PAGE NUMBER PART I FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 3 Consolidated Statements of Operations for the Three Month Periods Ended March 31, 2001 and 2000 4 Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2001 and 2000 5 Notes to Consolidated Interim Financial Statements as of March 31, 2001 6 - 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 PART II OTHER INFORMATION Item 3 Defaults Upon Senior Securities 12 Item 5 Other Information 12 Item 6 Exhibits and Reports on Form 8-K 12 SIGNATURES 12 PART I FINANCIAL INFORMATION Item 1 - Financial Statements The Morgan Group, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands, except share amounts)
March 31 December 31 2001 2000 ---- ---- ASSETS (Note 1) (Unaudited) Current assets: Cash and cash equivalents $ 1,371 $ 2,092 Trade accounts receivable, less allowances of $173 in 2001 and $248 in 2000 7,826 7,748 Accounts receivable, other 127 133 Refundable taxes 503 499 Prepaid expenses and other current assets 1,199 1,147 Deferred income taxes 319 319 ------- ------- Total current assets 11,345 11,938 ------- ------- Property and equipment, net 3,677 3,688 Intangible assets, net 6,629 6,727 Deferred income taxes 282 282 Other assets 382 634 ------- ------- Total assets $22,315 $23,269 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 3,540 $ 2,373 Accrued liabilities 2,923 3,704 Accrued claims payable 3,304 3,224 Refundable deposits 1,092 1,357 Current portion of long-term debt and capital lease obligations 192 217 ------- ------- Total current liabilities 11,051 10,875 ------- ------- Long-term debt and capital lease obligations, less current portion 89 71 Long-term accrued claims payable 4,515 5,122 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 earnings (2,657) (2,116) -------- -------- Total capital and retained earnings 9,843 10,384 Less - treasury stock at cost (359,146 Class A shares) (3,183) (3,183) -------- -------- Total shareholders' equity 6,660 7,201 ------- ------- Total liabilities and shareholders' equity $22,315 $23,269 ======= =======
See notes to consolidated financial statements The Morgan Group, Inc. and Subsidiaries Consolidated Statements of Operations (Dollars in thousands, except share amounts) (Unaudited) Three Months Ended March 31, 2001 2000 ---- ---- Operating revenues $ 20,688 $ 28,386 Costs and expenses: Operating costs 18,879 26,632 Selling, general and administration 2,057 2,359 Depreciation and amortization 227 293 --------- --------- 20,878 28,765 Operating loss (475) (898) Interest expense, net 66 57 --------- --------- Loss before income taxes (541) (955) Income tax benefit -- (339) --------- ---------- Net loss $ (541) $ (616) ========== ========== Net loss per basic and diluted share $ ( 0.22) $ ( 0.25) ========= ========== Basic weighted average shares outstanding 2,448,157 2,453,260 ========= ========= See notes to consolidated financial statements. The Morgan Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited) Three Months Ended March 31, 2001 2000 ---------- ---------- Operating activities: Net loss $ (541) $ (616) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 227 293 Loss on disposal of property and equipment 3 22 Changes in operating assets and liabilities: Trade accounts receivable (78) (482) Other accounts receivable 6 205 Refundable taxes (4) -- Prepaid expenses and other current assets (52) (94) Other assets 252 118 Trade accounts payable 1,167 188 Accrued liabilities (781) (297) Income taxes payable -- (581) Accrued claims payable (526) 102 Refundable deposits (265) (341) --------- --------- Net cash used in operating activities (592) (1,483) Investing activities: Purchases of property and equipment (77) (77) Other (10) -- --------- -------- Net cash used in investing activities (122) (77) Financing activities: Principal payments on long-term debt (42) (87) Common stock dividends paid -- (37) -------- --------- Net cash used in financing activities (7) (124) --------- --------- Net decrease in cash and equivalents (721) (1,684) Cash and cash equivalents at beginning of period 2,092 3,847 -------- -------- Cash and cash equivalents at end of period $ 1,371 $ 2,163 ======== ======== See notes to consolidated financial statements. The Morgan Group, Inc. and Subsidiaries Notes to Consolidated Interim Financial Statements (Unaudited) March 31, 2001 Note 1.Basis of Presentation The accompanying consolidated interim financial statements have been prepared by The Morgan Group, Inc. and Subsidiaries (the "Company"), in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included for complete financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated interim financial statements should be read in conjunction with the financial statements, notes thereto and other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Net income per common share ("EPS") is computed using the weighted average number of common shares outstanding during the period. Since each share of Class B common stock is freely convertible into one share of Class A common stock, the total of the weighted average number of shares for both classes of common stock is considered in the computation of EPS. The accompanying unaudited consolidated interim financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair presentation, in all material respects, of the financial position and results of operations for the periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. The consolidated financial statements include the accounts of the Company and its subsidiaries, Morgan Drive Away, Inc., TDI, Inc., Interstate Indemnity Company, and Morgan Finance, Inc., all of which are wholly owned. Significant intercompany accounts and transactions have been eliminated in consolidation. Certain 2000 amounts have been reclassified to conform to the 2001 presentation. Note 2.Indebtnedness The prior 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. Note 3.Income Taxes 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 $189,000 was recorded in 2001 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 relate to federal income tax carry backs available to the Company. Note 4.Segment Reporting Description of Services by Segment The Company operates in five 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 large trailer, travel and small trailer delivery. 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, bodily injury and cargo costs are captured. The Company's segments are strategic business units that offer different services and are managed separately based on the differences in these services. Measurement of Segment (Loss) 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 Company's Annual Report on Form 10-K. The following table presents the financial information for the Company's reportable segments for the three months ended March 31, (in thousands): 2001 2000 ---- ---- Operating revenues Manufactured Housing $11,361 $18,206 Driver Outsourcing 4,532 5,611 Specialized Outsourcing Services 4,135 3,757 Insurance and Finance 660 815 All Other -- (3) ------- -------- Total operating revenues $20,688 $28,386 ======= ======= Segment profit (loss) - EBITDA Manufactured Housing $ 494 $ 1,742 Driver Outsourcing 314 469 Specialized Outsourcing Services 43 (143) Insurance and Finance (733) (2,261) All Other (366) (412) -------- -------- (248) (605) Depreciation and amortization (227) (293) Interest expense (66) (57) -------- -------- Loss before taxes $ (541) $ (955) ======== ======== Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Consolidated Results Revenues for the first quarter decreased by $7.7 million or 27% to $20.7 million from $28.4 million in the first quarter of 2000. The revenue decrease was related primarily to a decline of $6.8 million, or 38%, in the first quarter for the Company's manufactured housing division. Shipments for the manufactured housing industry nationwide were down 42% in January and February of 2001 according to the Manufactured Housing Institute. (March shipment data was not available). The industry continues to experience a two-year cyclical slump created by consumer credit issues and excess inventory. Morgan Group's loss before interest, taxes, depreciation and amortization (EBITDA) was $248,000 for the quarter compared with a loss of $605,000 in 2000. The improvements, on lower volume, reflect the Company's cost-reduction efforts of the past 12 months. Pre-tax income for the quarter was a loss of $541,000 compared with a loss of $955,000 in 2000 - also a significant improvement. Driver pay as a percent of revenue in the first quarter of 2001 remained consistent with the first quarter of 2000. Accident and claim costs showed significant improvement in the quarter compared to the prior year. Liability claims declined by 43% compared to the prior year and cargo claims decreased by 64%. 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 were $6.8 million or 38% less in the first quarter of 2001 compared to the first quarter of a year ago, reflecting the continued softness in the manufactured housing industry. Manufactured Housing EBITDA decreased primarily due to the lower quarter-to-quarter shipment volume. Driver Outsourcing Driver Outsourcing provides outsourcing transportation services primarily to manufacturers of recreational vehicles, commercial trucks and other specialized vehicles. Operating revenues of $4.5 million decreased $1.1 million in the first quarter of 2001 compared to the first quarter of 2000, reflecting the softness in the motor homes. EBITDA for this segment also decreased by $155,000 to $314,000 in the first quarter of 2001 primarily due to lower quarter-to-quarter volume and increased overhead costs. Specialized Outsourcing Services Specialized Outsourcing Services consists of delivering large trailers, travel and other small trailers. Operating revenues increased by $378,000 in the first quarter of 2001 to $4.1 million. This increase was in the delivery of large trailers. Specialized Outsourcing Services recorded a profit in the first quarter 2001 at the EBITDA level of $43,000 compared to a loss of $143,000 in the first quarter of 2000. This increase is primarily due to the volume increases. 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 $155,000 in the first quarter of 2001 to $660,000 primarily reflecting a decrease in owner-operator insurance premiums relating to the slow-down in the manufactured housing industry. The Company also experienced a significant decrease in bodily injury, property damage and cargo related claims in the first quarter of 2001 primarily relating to the delivery of manufactured homes. As a result of the above factors the loss at the EBITDA level for this segment decreased in the first quarter of 2001 by $1.5 million to $733,000. LIQUIDITY AND CAPITAL RESOURCES The prior 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 were 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 facility and currently has received several commitment letters. Each of the commitment letters is conditioned upon satisfactory completion of due diligence procedures as well as the Company meeting various financial covenants and requirements prior to closing. In connection with the replacement of the credit facility, the Board of the Company's principal shareholder has approved a $2.0 million equity investment in the Company. The investment by Lynch Interactive Corp. would increase its ownership in the Company from 55.6% to 68.5%. The Board of Directors of Morgan approved the issuance of 1,000,000 additional Class 'B' shares to Lynch Interactive at a Board meeting on May 9, 2001. The issuance of additional shares of Class 'B' stock and related matters will be subject to approval of Morgan shareholders. The Morgan board also authorized management to further develop plans to provide an opportunity for other shareholders to acquire additional equity investment in the Company. 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. Impact of Seasonality Shipments of manufactured homes tend to decline in the winter months in areas where poor weather conditions inhibit transport. This usually reduces operating revenues in the first and fourth quarters of the year. The Company's operating revenues, therefore, tend to be stronger in the second and third quarters. FORWARD LOOKING DISCUSSION This report contains a number of forward-looking statements. From time to time, the Company may make other oral or written forward-looking statements regarding its anticipated operating revenues, costs and expenses, earnings and other matters affecting its operations and condition. Such forward-looking statements are subject to a number of material factors which could cause the statements or projections contained therein to be materially inaccurate. Such factors include, without limitation, the risk of declining production in the manufactured housing industry; the risk of losses or insurance premium increases from traffic accidents; the risk of loss of major customers; risks that the Company will not be able to attract and maintain adequate capital resources; risks of competition in the recruitment and retention of qualified drivers in the transportation industry generally; risks of acquisitions or expansion into new business lines that may not be profitable; risks of changes in regulation and seasonality of the Company's business. Such factors are discussed in greater detail in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. PART II - OTHER INFORMATION Item 3 - Defaults Upon Senior Securities The Company is currently in default on financial covenants of its credit facility which matured on January 28, 2001 and was not renewed. See Note 2 to the Consolidated Financial Statements for additional information. Item 5 - Other Information Due to the Company's capital planning which may require that certain items be submitted to a vote of the stockholders, the Company anticipates that its annual meeting will be held this year more than 30 days after the anniversary of last year's meeting. The date for the annual meeting has not yet been set. The time for submission of stockholder proposals for inclusion in the proxy statement has lapsed. If a stockholder wishes to present a proposal at the annual meeting without including the proposal in the proxy materials, the proxies designated by the Board of Directors for that meeting may vote in their discretion on any proposal any shares for which they have been appointed proxies without mention of such matter in the proxy statement or on the proxy card for the meeting. Item 6 - Exhibits and Reports on Form 8-K (a) Report on Form 8-K: No reports on Form 8-K were filed during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE MORGAN GROUP, INC. BY: /s/ Gary J. Klusman -------------------- Chief Financial Officer DATE: May 15, 2001