-----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, MEucx+jHLl5fB/yiJ1qBifKxBZ0V85pIQ3qUZfHXt24o9/9kaBJMbw/oXLI3Yd+b mzdWEmHf8xfH8co0Ov5uLQ== 0000908834-02-000239.txt : 20020819 0000908834-02-000239.hdr.sgml : 20020819 20020819172458 ACCESSION NUMBER: 0000908834-02-000239 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020819 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13586 FILM NUMBER: 02743124 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-Q 1 mor_10q0802.txt FORM 10-Q 0802 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 June 30, 2002 THE MORGAN GROUP, INC. 2746 Old U. S. 20 West Elkhart, Indiana 46515-1168 (574) 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 July 31, 2002 was: Class A - 1,486,082 shares Class B - 2,200,000 shares The Morgan Group, Inc. INDEX PAGE NUMBER PART I FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 3 Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2002 and 2001 4 Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2002 and 2001 5 Notes to Consolidated Financial Statements as of June 30, 2002 6-13 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 14-20 PART II OTHER INFORMATION Item 1 Legal Proceedings 21 Item 4 Submission of Matters to Vote of Security Holders 22 Item 6 Exhibits and Reports on Form 8-K 22 SIGNATURES 23 CERTIFICATION 24
PART I FINANCIAL INFORMATION Item 1 - Financial Statements The Morgan Group, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars and shares in thousands, except per share amounts) June 30 December 31 2002 2001 ------- ----------- ASSETS (Unaudited) (Note 1) Current assets: Cash and cash equivalents $ 728 $ 1,017 Investments - restricted 2,642 2,624 Accounts receivable, net of allowances Of $336 in 2002 and $439 in 2001 7,002 6,322 Refundable taxes 57 591 Prepaid insurance 199 890 Other current assets 1,547 1,313 -------- -------- Total current assets 12,175 12,757 Property and equipment, net 3,075 3,385 Goodwill and non-compete agreements, net 1,895 6,256 Other assets 133 132 -------- -------- Total assets $ 17,278 $ 22,530 ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current debt (in default) $ 1,934 $580 Trade accounts payable 4,854 4,505 Accrued liabilities 2,076 2,500 Accrued claims payable 2,965 3,028 Refundable deposits 782 675 Current portion of long-term debt 165 169 -------- -------- Total current liabilities 12,776 11,457 Long-term debt, less current portion 13 13 Long-term accrued claims payable 3,836 4,078 Shareholders' equity: Common stock, $.015 par value Class A: Authorized shares - 7,500 Issued shares - 1,845 in 2002 and 1,607 in 2001 27 23 Class B: Authorized shares - 4,400 Issued and outstanding shares - 2,200 33 33 Additional paid-in capital 14,732 14,214 Retained deficit (10,956) (4,105) Less - treasury stock at cost (359 Class A shares) (3,183) (3,183) -------- -------- Total shareholders' equity 653 6,982 -------- -------- Total liabilities and shareholders' equity $ 17,278 22,530 ======== ========= See notes to consolidated financial statements
The Morgan Group, Inc. and Subsidiaries Consolidated Statements of Operations (Dollars and shares in thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended June 30 June 30 2002 2001 2002 2001 ---- ---- ---- ---- Operating revenues $18,042 $29,309 $34,350 $53,010 Costs and expenses: Operating costs 17,486 26,638 32,990 48,530 Selling, general and administration 2,479 2,023 4,625 4,080 Loss on impairment of assets 2,070 - 2,070 - Depreciation and amortization 86 250 172 477 ------- -------- ------- ------- 22,121 28,911 39,857 53,087 Operating income (loss) (4,079) 398 (5,507) (77) Interest expense, net 103 27 178 93 ------- ------- ------- ------- Income (loss) before income taxes and cumulative effect of change in accounting principle (4,182) 371 (5,685) (170) Income tax benefit (255) (1,125) (255) ------- ------- ------- ------- Income (loss) before cumulative effect of change in accounting principle (4,182) 626 (4,560) 85 Cumulative effect of change in accounting principle (Note 2) - (2,290) - ------- ------- ------- ------- Net income (loss) $(4,182) $ 626 $(6,850) $ 85 ======= ======== ======= ======== Basic income (loss) per share: Income (loss) before cumulative effect of change In accounting principle $ (1.18) $ 0.26 $ (1.30) $ 0.03 Cumulative effect of change in accounting principle - (0.65) - ------- ------- ------- ------- Net income (loss) per common share $ (1.18) $ 0.26 $ (1.95) $ 0.03 Weighted average shares outstanding 3,553 2,448 3,516 2,448 Diluted income (loss) per share: Income (loss) before cumulative effect of change In accounting principle $ (1.15) $ 0.26 $ (1.28) $ 0.03 Cumulative effect of change in accounting principle - (0.65) - ------- ------- ------- ------- Net income (loss) per common share $ (1.15) $ 0.26 $ (1.93) $ 0.03 ======= ======== ======= ======== See notes to consolidated financial statements
The Morgan Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited) Six Months Ended June 30 2002 2001 ------------ ------------ Operating activities: Net income (loss) $(6,850) $ 85 Adjustments to reconcile net income (loss) to net cash used in operating activities: Cumulative effect of change in accounting principle 2,290 - Depreciation and amortization 172 477 Loss on disposal of property and equipment 72 3 Impairment of assets 2,070 - Changes in operating assets and liabilities: Accounts receivable (680) - Refundable taxes 534 (203) Prepaid expenses and other current assets 457 (419) Other assets (1) 419 Trade accounts payable 349 1,403 Accrued liabilities (424) (518) Accrued claims payable (305) 11 Refundable deposits 107 (174) ------- ------- Net cash provided by (used in) operating activities (2,209) (942) Investing activities: Income from restricted investments (18) - Purchases of property and equipment (16) (89) Proceeds from sale of property and equipment 109 - Non-compete agreements (25) (45) ------- ------- Net cash provided by (used in) investing activities 50 (134) Financing activities: Net proceeds from credit facility 454 - Net proceeds from real estate loan 900 - Principal payments on long-term debt (4) (84) Issuance of common stock 520 ------- ------- - Net cash provided by (used in) financing activities 1,870 (84) ------- ------- Net decrease in cash and equivalents (289) (1,160) Cash and cash equivalents at beginning of period 1,017 2,092 ------- ------- Cash and cash equivalents at end of period $ 728 $ 932 ======= ======= See notes to consolidated financial statements.
The Morgan Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) Note 1. Basis of Presentation The accompanying unaudited consolidated 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, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. The consolidated financial statements should be read in conjunction with the consolidated financial statements, notes thereto and other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 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 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. Morgan Drive Away, Inc. has two subsidiaries, Transport Services Unlimited, Inc. and MDA Corp. Significant intercompany accounts and transactions have been eliminated in consolidation. Certain 2001 amounts have been reclassified to conform to the 2002 presentation. Note 2. Goodwill Impairment On January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). This Standard eliminates goodwill amortization and requires an evaluation of goodwill for impairment (at the reporting unit level) upon adoption of the Standard, as well as subsequent evaluations on an annual basis, and more frequently if circumstances indicate a possible impairment. This impairment test is comprised of two steps. The initial step is designed to identify potential goodwill impairment by comparing an estimate of the fair value of the applicable reporting unit to its carrying value, including goodwill. If the carrying value exceeds fair value, a second step is performed, which compares the implied fair value of the applicable reporting unit's goodwill with the carrying amount of that goodwill, to measure the amount of goodwill impairment, if any. The Company's reporting units under SFAS No. 142 are equivalent to its reportable segments as the Company does not maintain accurate, supportable and reliable financial data at lower operating levels within these segments that management relies upon in making operating decisions. The carrying amount of goodwill has been allocated to the Company's reporting units at December 31, 2001 as follows (in thousands): Manufactured housing $4,100 Vehicle delivery 1,850 Towaway 6 ------ $5,956 Upon adoption, the Company performed the transitional impairment test which resulted in an impairment of $1,806,000 in the manufactured housing reporting unit and $484,000 in the vehicle delivery reporting unit which is classified as a cumulative effect of a change in accounting principle for the three months ended March 31, 2002, as required by SFAS No. 142. Subsequent impairments, if any, would be classified as an operating expense. The Company's measurement of fair values was based on an evaluation of future discounted cash flows. This evaluation utilized the best information available in the circumstances, including reasonable and supportable assumptions and projections and was management's best estimate of projected future cash flows. The discount rate used was based on the estimated rate of return expected by an investor considering the perceived investment risk. Projected cash flows were determined based on a five-year period after which time cash flow was normalized and projected to grow at a constant rate. Management believes that five years is the appropriate period to forecast prior to normalizing cash flows based on the industry cycles of the Company's businesses and the Company's long-term strategies. The Company's business model and strategy for the future is not asset intensive and the Company has no plans to acquire significant transportation equipment, real estate or other business property. There can be no assurance at this time that the projections or any of the key assumptions will remain the same as business conditions may dictate significant changes in the estimated cash flows or other key assumptions. The Company will update the impairment analysis on at least an annual basis as required by SFAS No. 142 as long as material goodwill exists on the balance sheet. Note 3. Goodwill and Non-Compete Agreements The reconciliation of reported net income (loss) per share to adjusted net income (loss) per share for the periods ended June 30, 2002 and 2001 was as follows (in thousands, except per share data):
Three Months Ended Six Months Ended June 30 June 30 2002 2001 2002 2001 ---- ---- ---- ---- Reported net income (loss) $(4,182) $626 $(6,850) $85 Add back: Goodwill amortization - 124 - 255 ------- ----- ------- ----- Adjusted net income (loss) $(4,182) $750 $(6,850) $340 ======= ===== ======= ====== Basic income (loss) per share: Reported income (loss) per share $(1.18) $0.26 $(1.95) $0.03 Add back: Goodwill amortization - 0.05 - 0.11 ------- ----- ------- ----- Adjusted income (loss) per share $(1.18) $0.31 $(1.95) $0.14 ======= ===== ======= ====== Diluted income (loss) per share: Reported income (loss) per share $(1.15) $0.26 $(1.93) $0.03 Add back: Goodwill amortization - 0.05 - 0.11 ------- ----- ------- ----- Adjusted income (loss) per share $(1.15) $0.31 $(1.93) $0.14 ======= ===== ======= ======
During the first six months of 2002, the Company paid $25,000 for non-compete agreements. Excluding goodwill, amortization expense of the non-compete agreements was $26,000 and $22,000 for the first six months of 2002 and 2001, respectively. The annual estimated amortization expense for the non-compete agreements for the five-year period ending December 31, 2006, ranges from $33,000 to $55,000 per year. Note 4. Debt Credit Facility The $12.5 million, three-year Credit Facility is used for working capital purposes and to post letters of credit for insurance contracts. As of June 30, 2002, the Company had outstanding borrowings of $534,000 and $7.0 million outstanding letters of credit on the Credit Facility. Credit Facility borrowings bear interest at a rate per annum equal to either Bank of New York Alternate Base Rate ("ABR") plus one-half percent or, at the option of Company, absent an event of default, the one month London Interbank Offered Rate ("LIBOR") as published in The Wall Street Journal, averaged monthly, plus three percent. Borrowings and posted letters of credit on the Credit Facility are limited to a borrowing base calculation that includes 85% of eligible receivables and 95% of eligible investments, and are subject to certain financial covenants including minimum tangible net worth, maximum funded debt, minimum fixed interest coverage and maximum capital expenditures. The facility is secured by accounts receivable, investments, inventory, equipment, general intangibles and a second mortgage on land and buildings in Elkhart, Indiana. The facility may be prepaid anytime with prepayment being subject to a .75% and .25% prepayment penalty during years 2 and 3, respectively. As of June 30, 2002, the Company was in violation of the following covenants under the Credit Facility: minimum tangible net worth, maximum funded debt and letters of credit to EBITDA and minimum fixed charge coverage. The Company has not requested a waiver of these covenant violations and the lender has continued to advance on the Credit Facility. At June 30, 2002, advances against the Credit Facility were greater than the formula borrowing base calculation by $1.4 million. The Company is seeking to obtain an agreement with the lender to continue to over advance on the Credit Facility by up to $1.5 million in exchange for security interests in all unsecured real estate and specified future cash payments. All advances under the Credit Facility would continue to be at the lender's sole discretion as a result of covenant violations and the agreement. The $1.5 million over advance would be reduced by $600,000 on September 30, 2002, $200,000 on October 31, 2002, $350,000 on November 30, 2002, and $350,000 on December 31, 2002 under the proposed agreement. The maximum amount of the Credit Facility would be reduced to $8.0 million and the facility would expire on December 31, 2002. The documentation has been prepared with the lender but has not been executed pending resolution of collateral issues. The Company cannot give assurance that an agreement will be executed. In the event an agreement is not reached, the lender may exercise its remedies under the Facility, including immediate demand of outstanding borrowings. The Company is cooperating with an investigation initiated by Morgan Group Holding Company, which owns 64.2% of the Company's common stock and 77.6% of the Company's voting stock, to determine facts associated with the origination, reporting and resolution of the over advance on the Credit Facility and any resulting financial statement consequences. Independent parties conducting the investigation will report their findings to Morgan Group Holding Company and the independent members of the Company's Board of Directors. The results of the inquiry and the resulting impact on the Company cannot be determined at this time. Mortgage Note Payable On April 5, 2002, the Company obtained a $1,400,000 mortgage secured by the Company's land and buildings in Elkhart, Indiana. Loan proceeds were used to retire the previous first mortgage of $500,000 and repay a $500,000 over-advance on the Credit Facility. The remaining proceeds were used for short-term working capital purposes to the extent they were not restricted. The mortgage is due April 5, 2003 and bears a blended interest rate of 13.5% on the first $1.25 million of principal and 8% on the remaining $150,000 of principal. The loan contains a minimum interest requirement of $101,000 and otherwise may be prepaid at any time with no penalties. The Company was delinquent in making an interest payment on this mortgage loan on August 1, 2002. The lender did not accept the subsequent late payment. On August 8, 2002, the lender declared the Company in default on the note and issued a demand letter for immediate payment of full principal and interest of $1.48 million. The Company cannot comply with the demand for payment and is currently seeking to negotiate a forbearance agreement with the lender. The resolution of this default and impact on the Company cannot be determined at this time. If a forbearance agreement cannot be obtained, the lender may exercise its remedies including foreclosure on the real estate. Long Term Debt Long-term debt consisted of the following (in thousands):
June 30 December 31 2002 2001 ---- ---- Promissory notes with imputed interest rates from 6.31% to 9.0%, principal and interest payments due from monthly to annually, through March 31, 2004 $178 $182 Less current portion 165 169 ---- ---- Long-term debt, net of current portion $ 13 $ 13 ==== ====
2 Insurance Premium Financing In July 2002, the Company utilized a third party to finance its insurance premiums. In conjunction with this financing arrangement, the Company borrowed $5.0 million and prepaid its annual premiums to its insurance underwriter. The terms of the financing allow for the financier to have a first security interest in unearned premiums. The financing was for a nine-month period at an interest rate of 6.0% with the final payment due on April 1, 2003. This transaction was not recorded in the June 30, 2002 financial statements. Note 5. Credit Risk With the downturn in the national economy, management is continually reviewing credit worthiness of its customers and taking appropriate steps to ensure the quality of the receivables. As of June 30, 2002, 47% of the open trade accounts receivable was with six customers of which over 98% was within 60 days of invoice. In total, 95% of the open trade receivables are also within 60 days of invoice. Note 6. Operating Costs and Accruals Components of operating costs are as follows (in thousands): Six Months Ended June 30 2002 2001 ---- ---- Purchased transportation costs $25,838 $38,579 Operating supplies and expenses 2,970 4,805 Claims 696 1,657 Insurance 2,366 1,560 Operating taxes and licenses 1,120 1,929 ------- ------- $32,990 $48,530 ======= ======= Material components of accrued liabilities are as follows (in thousands): June 30 December 31 2002 2001 ---- ---- Government fees $ 211 $ 283 Workers' compensation 549 405 Customer incentives 287 150 Real estate taxes 104 107 Other accrued liabilities 925 1,555 ------ ------ $2,076 $2,500 ====== ====== Government fees represent amounts due for fuel taxes, permits and use taxes related to linehaul transportation costs. Workers' compensation represents estimated amounts due claimants related to unsettled claims for injuries incurred by Company employee-drivers. These claim amounts due are established by the Company's insurance carrier and reviewed by management on a monthly basis. Customer incentives represent volume discounts earned by certain customers. The customer incentives earned are computed and recorded monthly based upon linehaul revenue for each respective customer. The incentives are generally paid quarterly and are recorded as a contra-revenue account in the Consolidated Statements of Operations. Other accrued liabilities consist of various accruals for professional services, group health insurance, payroll and payroll taxes, and other items, which individually are less than 5% of total current liabilities. Note 7. Stockholders' Equity Lynch Spin Off to Morgan Group Holdings Lynch Interactive Corporation, previously the majority stockholder of the Company, spun off its investment in the Company to Lynch Interactive stockholders on January 24, 2002, by forming a new holding company, Morgan Group Holding Co. ("Holdings"), transferring its Company investment to Holdings and distributing shares of Holdings to its stockholders. Issuance of Non-transferable Warrants On December 12, 2001, the Company issued non-transferable warrants to purchase shares of common stock to the holders of Class A and Class B common stock. Each warrant entitles the holder to purchase one share of their same class of common stock at an exercise price of $9.00 per share through the expiration date of December 12, 2006. The Class A warrants provided that the exercise price would be reduced to $6.00 per share during a Reduction Period of at least 30 days during the five-year exercise period. On February 19, 2002, the Board of Directors agreed to set the exercise price reduction period on the Class A warrants to begin on February 26, 2002 and to extend for 63 days, expiring on April 30, 2002 (the "Reduction Period"). The Board of Directors agreed to reduce the exercise price of the warrants to $2.25 per share, instead of $6.00 per share, during the Reduction Period. The Board of Directors reduced the exercise price to $2.25 to give warrant holders the opportunity to purchase shares at a price in the range of recent trading prices of the Class A common stock. All other terms regarding the warrants, including the expiration date of the warrants, remain the same. As of the close of the temporary Reduction Period on April 30, 2002, the Company received $535,331 with the exercise of 237,925 warrants at $2.25 each. Unexercised warrants remain outstanding and exercisable at $9.00 each. Note 8. 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 was recorded in 2001 to reduce the net deferred tax assets to zero 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, that it would be inconsistent with applicable accounting rules to rely on future taxable income to support full realization of the deferred tax asset. As of June 30, 2002, the Company had no net deferred tax assets recorded. As of December 31, 2001, the Company recorded an income tax refund receivable of $591,000. During the first quarter, 2002, as a result of a new tax law, the Company qualified for a five year carry back of its net operating losses versus a previously allowed two year carry back. The impact of this tax law change resulted in a $1,047,000 increase in the income tax refund receivable recorded during the first quarter. The total income tax refund of $1,638,000 was received in May 2002. Note 9. Segment Reporting Description of Services by Segment The Company operates in five business segments: Manufactured Housing, Vehicle Delivery, Pickup, Towaway, and Insurance and Finance. The Manufactured Housing segment primarily provides specialized transportation to companies which produce manufactured homes and modular homes through a network of terminals located in seventeen states. The Vehicle Delivery segment provides outsourcing transportation primarily to manufacturers of recreational vehicles, commercial trucks, and other specialized vehicles through a network of service centers in four states. The Pickup and Towaway segments consist 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. 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 Income (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-month and six-month periods ended June 30, (in thousands):
Three Months Ended Six Months Ended June 30 June 30 2002 2001 2002 2001 ---- ---- ---- ---- Operating revenues: Manufactured housing $ 8,521 $17,972 $16,238 $32,344 Vehicle delivery 5,114 4,695 9,752 9,227 Pickup 2,621 2,291 4,888 4,109 Towaway 1,403 3,686 2,674 6,005 Insurance and finance 383 665 798 1,325 -------- ------- ------- ------- Total operating revenues $ 18,042 $29,309 $34,350 $53,010 ======== ======= ======= ======= Segment income (loss) - EBITDA: Manufactured housing $ (3,045) $ 587 $(3,975) $ 165 Vehicle delivery (599) (195) (869) (364) Pickup (24) 157 (163) 108 Towaway (113) 25 (216) (23) Insurance and finance (212) 74 (112) 514 -------- ------- ------- ------- (3,993) 648 (5,335) 400 Depreciation and amortization 86 250 172 477 Interest expense 103 27 178 93 -------- ------- ------- ------- Income (loss) before income taxes and cumulative effect of change in accounting principle $ (4,182) $ 371 $(5,685) $ (170) ======== ======= ======= =======
Note 10. 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. Note 11. Subsequent Events In August 2002, the Company decided to exit the business of providing transportation services to the manufactured housing industry. On August 14, 2002 the Company sold the manufactured housing transportation division of the company to Bennett Truck Transport, L.L.C., ("Bennett") a privately held company headquartered in McDonough, Georgia. The assets included in the sale are substantially all personal property, customer lists, driver files, and certain vehicles and vehicle finance contracts. The sale excludes real property, computer and copier equipment, and personal property at the Company's headquarters in Elkhart, Indiana. In addition, this transaction resulted in the settlement of certain litigation originally brought by Morgan against Bennett and certain former Morgan employees. The agreement calls for Bennett to pay the Company $1,050,000 in installments over 75 days. As a result of the sale of the manufactured housing division, the Company has recorded an impairment of assets in the accompanying financial statements to record the expected loss on the sale of this division as calculated in the below table. The impairment of assets is recorded on the balance sheet as a reduction of goodwill. Sale proceeds $ 1,050,000 Net book value of assets sold (550,000) Net book value of goodwill (2,570,000) ----------- Net gain / (loss) on disposal ($2,070,000) ============ Note 12. Review by Independent Accountant The accompanying Form 10-Q for the period ended June 30, 2002 has not been reviewed by the Company's independent accountants. On May 14, 2002 the Company named a new independent accountant. The transition from the previous accountant to the successor accountant has not been completed to permit the successor accountant to complete a review of the financial statements contained in this Form 10-Q for the period ended June 30, 2002 because the prior accountant has not made certain work papers available to the successor accountant. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS For the Quarter Ended June 30, 2002 Consolidated Results Revenues for the second quarter 2002 were down 38% to $18.0 million versus $29.3 million reported in the year-ago quarter. The Company reported revenue improvements of 14% in the pickup division and 9% in the vehicle delivery division. These increases were offset by a 53% decline in revenue from the manufactured housing division and 62% in the towaway division. The Company renewed its liability and workers compensation insurance on July 1, 2002 resulting in increased expense primarily driven by insurance market conditions. The liability insurance market for trucking companies has been negatively impacted by increased loss ratios, higher credit risks and a decrease in available capacity in the excess reinsurance market. The Company is attempting to recover as much of this increase as possible in the form of apportioned insurance charges to customers. Operating costs were 96.9% of total revenues for the quarter compared to 90.9% in prior year. Insurance premiums increased from 2.6% in 2001 to 6.5% of operating revenues in 2002 due to increased premium rates. Selling, general and administrative expenses were 13.7% of revenue compared to 6.9% of revenue in the second quarter of 2001. The Company recorded a $2.0 million impairment on assets in conjunction with the sale of a division in August 2002. The reduced revenue and increased insurance expense and impairment of assets charge resulted in an operating loss of $4.1 million in the current period compared to operating income of $398,000 in 2001. Segment Results The following discussion sets forth certain information about segment results. Manufactured Housing Revenues for the manufactured housing division decreased by $9.4 million or 53% in the second quarter compared to the prior year. This decrease in revenue is driven by a continued industry recession and the loss of the Company's largest customer, Oakwood Homes Corporation (NYSE: OH) effective October 1, 2001. Revenues from Oakwood declined by $3.7 million in the second quarter of 2002 as compared to 2001. Industry shipments of manufactured homes declined by 10% in the second quarter of 2002 according to the Manufactured Housing Institute. Effective August 14, 2002, the Company disposed of its manufactured housing division. See Part II, Item 1 below for a description of this transaction. After August 14, 2002, the revenue and expenses from this division will no longer be reflected in the statements of operations. For the quarter, the manufactured housing division EBITDA loss of $4.0 million includes an asset impairment charge of $2.1 million associated with the sale of the division in August, 2002. Vehicle Delivery Operating revenues for the vehicle delivery division in the quarter increased by $420,000 or 9% from prior year as a result of an increase in demand for new recreational vehicles. Revenues in this division are anticipated to increase driven by stronger customer outlook and production of recreational vehicles. Pickup The pickup division, which utilizes independent contractors with dual-axle pick-up trucks to move travel trailers and boats, reported 14% revenue growth compared to the prior year. The increase was attributable to an increase in demand for new recreational vehicles and an increase in the size of the Company's fleet. Towaway Operating revenues for the towaway division that leases independent contractors with Class 8 tractors decreased 62% compared to the prior year. The decrease was the result of a 48% decrease in the Company's fleet size of trucks from 113 to 59. Insurance and Finance Our Insurance and Finance segment provides insurance and financing services to our drivers and independent owner-operators. Insurance and Finance operating revenues decreased $284,000 or 43% in the second quarter of 2002 as a result of decreases in the number of drivers and independent owner-operators. For the Six Months Ended June 30, 2002 Consolidated Results Revenues for the first six months of 2002 decreased $18.7 million or 35% compared to 2001. The Company reported revenue improvements of 19% in the pickup division and a 6.0% in the vehicle delivery division. The revenue improvements were offset by a 50% decline in revenue from the manufactured housing division and 56% in the towaway division. Operating costs were 96.0% of total revenues for the six months ended June 30, 2002 compared to 91.5% for the prior year. Insurance premiums increased from 2.7% in 2001 to 7.1% of operating revenues in 2002 due to increased premium rates. Selling, general and administrative expenses were 13.5% of revenue compared to 7.7% of revenue for the prior year. Manufactured Housing Revenues for the manufactured housing division declined by $16.1 million or 50% for the first six months of 2002 as compared to the prior year. The decrease in revenue is the result of a continued industry recession and the loss of the Company's largest customer, Oakwood Homes Corporation effective October 1, 2001. Revenues from Oakwood declined by $7.4 million in the first six months of 2002 as compared to 2001. Industry shipments of manufactured homes declined by 5% in the first six months of 2002 according to the Manufactured Housing Institute. Effective August 14, 2002, the Company disposed of its manufactured housing division. See Part II, Item 1 below for a description of this transaction. After August 14, 2002, the revenue and expenses from this division will no longer be reflected in the statements of operations. For the six months ended June 30, 2002 , the manufactured housing division EBITDA loss of $4.0 million includes an asset impairment charge of $2.1 million associated with the sale of the division in August, 2002. Vehicle Delivery Operating revenues in the vehicle delivery division for the first six months of 2002 increased $525,000 or 6% compared to 2001. This increase is primarily a result of increased demand for recreational vehicles in 2002 as compared to 2001. Pickup Operating revenues in the pickup division increased 19% during the first six months of 2002 to $4.8 million. The increase was attributable to an increase in demand for new recreational vehicles and an increase in the size of the Company's fleet. Towaway Operating revenues for the towaway division for the first six months of 2002 decreased to $2.7 million from $6.0 million in 2001. The 56% decrease was the result of a decrease in the size of the Company's fleet. Insurance and Finance Insurance and finance operating revenues for the first six months of 2002 decreased $527,000 or 66% compared to 2001. The decrease was the result of a decrease in the number of drivers and independent owner operators utilizing the insurance services. LIQUIDITY AND CAPITAL RESOURCES 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 incurred operating losses and negative operating cash flows during the past two years and the first two quarters of 2002. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company is actively seeking additional capital resources. 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. In the event that the Company cannot maintain its borrowing capacity under the Credit Facility or meet other cash flow obligations, the Company will be required to consider its options including potentially discontinuing operations or voluntary insolvency proceedings. Effective July 1, 2002, the Company renewed its primary liability insurance, workers compensation, cargo, and property insurance. Acquisition of liability insurance in the trucking industry has become increasingly more difficult and expensive over the past two years. As a result, the Company's insurance premiums have increased significantly in each of the insurance periods beginning July 1, 2001 and 2002. The Company is attempting to recover as much of this increase as possible from customers in the form of apportioned insurance charges. The net impact on the Company's operating results for the next 12 months cannot be determined at this time. The Company had a $600,000 premium finance payment due on August 19, 2002, which the Company was not able to pay. The finance company intends to initiate cancellation of the Company's current insurance program which will take 10 to 30 days. Based on the Company's sale of its manufactured housing division on August 14, 2002, the Company is seeking new liability and workers compensation insurance programs. The Company plans to reduce the total cost of the program as the Company will be running significantly fewer miles and overall accident risk will decrease. The manufactured housing division has historically generated the vast majority of the Company's liability claims. The remaining three divisions have experienced less claim cost per mile over the past six years. The Company's ability to obtain an affordable liability and workers compensation insurance program before the existing program expires is uncertain. In the event the Company does not have liability and worker's compensation insurance, the Company would be forced to cease operations. The $12.5 million, three-year Credit Facility is used for working capital purposes and to post letters of credit for insurance contracts. As of June 30, 2002, the Company had outstanding borrowing of $534,000 and $7.0 million outstanding letters of credit on the Credit Facility. Credit Facility borrowings bear interest at a rate per annum equal to either Bank of New York Alternate Base Rate ("ABR") plus one-half percent or, at the option of Company, absent an event of default, the one month London Interbank Offered Rate ("LIBOR") as published in The Wall Street Journal, averaged monthly, plus three percent. Borrowings and posted letters of credit on the Credit Facility are limited to a borrowing base calculation that includes 85% of eligible receivables and 95% of eligible investments, and are subject to certain financial covenants including minimum tangible net worth, maximum funded debt, minimum fixed interest coverage and maximum capital expenditures. The facility is secured by accounts receivable, investments, inventory, equipment and general intangibles. The facility may be prepaid anytime with prepayment being subject to a 3%, .75% and ..25% prepayment penalty during year 1, 2 and 3, respectively. On February 7, 2002, the Company obtained a temporary over-advance on its credit availability on the Credit Facility of $1 million and provided the lender a second mortgage on real estate in Elkhart, Indiana. On April 5, 2002 the Company repaid $500,000 of the over-advance. The remaining $500,000 over-advance was eliminated on May 31, 2002. The Company used the proceeds from the exercise of the warrants of $535,000 and income tax refund of $1,638,000 million to repay this advance. As of March 31, 2002 and June 30, 2002, the Company was in violation of the following covenants under the Credit Facility: minimum tangible net worth, maximum funded debt and letters of credit to EBITDA and minimum fixed charge coverage. The Company has not requested a waiver of these covenant violations and the lender has continued to advance on the Credit Facility. At June 30, 2002, advances against the Credit Facility were greater than the formula borrowing base calculation by $1.4 million. The Company is seeking to obtain an agreement with the lender to continue to over advance on the Credit Facility by up to $1.5 million in exchange for security interests in all unsecured real estate and specified future cash payments. All advances under the Credit Facility would continue to be at the lender's sole discretion as a result of covenant violations and the agreement. The $1.5 million over advance would be reduced by $600,000 on September 30, 2002, $200,000 on October 31, 2002, $350,000 on November 30, 2002, and $350,000 on December 31, 2002 under the proposed agreement. The maximum amount of the Credit Facility would be reduced to $8.0 million and the facility would expire on December 31, 2002. The documentation has been prepared with the lender but has not been executed pending resolution of collateral issues. The Company cannot give assurance that an agreement will be executed. In the event an agreement is not reached, the lender may exercise its remedies under the Facility, including immediate demand of outstanding borrowings. The Company's Board of Directors has requested an inquiry to determine the facts associated with the origination, reporting and resolution of the over advance on the credit facility. Independent parties conducting the inquiry will report their findings to the Board. The results of the inquiry and the resulting impact on the Company cannot be determined at this time. On April 5, 2002, the Company obtained a new $1,400,000 mortgage secured by the Company's land and buildings in Elkhart, Indiana. Loan proceeds were used to retire the previous first mortgage of $500,000 and repay a $500,000 over-advance on the Credit Facility. The remaining proceeds were used for short-term working capital purposes to the extent they were not restricted. The mortgage is for a one-year period due April 5, 2003 and bears a blended interest rate of 13.5% on the first $1.25 million of principal and 8% on the remaining $150,000 of principal. The loan contains a minimum interest requirement of $101,000 and otherwise may be prepaid at any time with no penalties. The Company was delinquent in making an interest payment on this mortgage loan on August 1, 2002. The lender did not accept the subsequent late payment. On August 8, 2002, the lender declared the Company in default on the note and issued a demand letter for immediate payment of full principle and interest of $1.48 million. The Company cannot comply with the demand for payment and is currently seeking to negotiate a forbearance agreement with the lender. The resolution of this default and impact on the Company cannot be determined at this time. If a forbearance agreement cannot be obtained, the lender may exercise its remedies including foreclosure on the real estate. As of December 31, 2001, the Company recorded an income tax refund due of $591,000. During the first quarter, 2002, as a result of a new tax law, the Company qualified for a five year carry back of its net operating losses versus a previously allowed two year carry back. The impact of this tax law change resulted in a $1,047,000 increase in the income tax refund recorded during the first quarter. The total income tax refund of $1,638,000 million was received in May 2002. On February 19, 2002, the Board of Directors agreed to set the exercise price reduction period on the Class A warrants to begin on February 26, 2002 and to extend for 63 days, expiring on April 30, 2002 (the "Reduction Period"). The Board of Directors agreed to reduce the exercise price of the warrants to $2.25 per share, instead of $6.00 per share, during the Reduction Period. The Board of Directors reduced the exercise price to $2.25 to give warrant holders the opportunity to purchase shares at a price in the range of recent trading prices of the Class A common stock. All other terms regarding the warrants, including the expiration date of the warrants, remain the same. As of the close of the temporary Reduction Period on April 30, 2002, the Company received $535,331 with the exercise of 237,925 warrants at $2.25 each. Unexercised warrants remain outstanding and exercisable at $9.00 each. Company accounts receivable provide much of the collateral base for the credit facility, which supports outstanding letters of credit and provides borrowing capacity for working capital. The impact of decreased revenues and accounts receivable have, therefore, reduced the borrowing capacity and liquidity to minimal levels. Management continues to aggressively pursue financing options allowing the Company to meet its liquidity requirements during this slow period until accounts receivable recover to stronger levels. Management is working with its lenders to maintain existing credit arrangements and to obtain additional financing. In addition, management will continue to consider strategic alternatives, potentially including sales of assets. 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. 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. Our 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, including statements regarding the prospective adequacy of the Company's liquidity and capital resources in the near term. 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, 2001. PART II - OTHER INFORMATION Item 1 - Legal Proceedings In August 2002, The Morgan Group, Inc. (the "Company"), a Delaware corporation, decided to exit the business of providing transportation services to the manufactured housing industry. On August 14, 2002 the Company sold the manufactured housing transportation division of the Company to Bennett Truck Transport, L.L.C. ("Bennett"), a privately held company headquartered in McDonough, Georgia. The decision to sell the manufactured housing division to Bennett was approved by the Company's Board of Directors on August 14, 2002. The assets included in the sale include substantially all personal property at the Company's manufactured housing terminals. The sale excludes real property, computer and copier equipment, and personal property at the Company's headquarters in Elkhart, Indiana. The assets sold also include customer lists, driver files, and certain specific vehicles and vehicle finance contracts. In addition, this transaction resulted in the settlement of certain litigation originally brought by Morgan against Bennett and certain former Morgan employees. Bennett is to pay the Company the sum of $1,050,000 in installments ranging from the closing date to approximately 75 days subsequent to closing. The sale price was determined by a negotiated amount between the Company and Bennett. Item 4 - Submission of Matters to Vote of Security Holders On June 20, 2002, the Company held its Annual Meeting of Stockholders, the results of which follow: Report of proxies received and shares voted June 20, 2002
Total Voted % of Total ----- ----- ---------- Number of shares of Class A common stock 1,486,082 1,204,787 81% Number of shares of Class B common stock 2,200,000 2,200,000 100%
1. Election of directors elected by all shareholders (1-year term), shares of Class B common stock are entitled to two votes
Against or For Withheld Abstained Non-Votes --- -------- --------- --------- Charles C. Baum 5,602,027 2,760 - 0 - 281,295 Richard B. Black 5,602,027 2,760 - 0 - 281,295 Anthony T. Castor, III 5,602,027 2,760 - 0 - 281,295 Robert E. Dolan 5,602,027 2,760 - 0 - 281,295 John Fikre 5,600,927 3,860 - 0 - 281,295 Richard L. Haydon 5,602,027 2,760 - 0 - 281,295 Election of director by holders of Class A common stock (1-year term) Robert S. Prather, Jr. 5,602,027 2,760 - 0 - 281,295
Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Report on Form 8-K: Registrant filed a Report on Form 8-K on May 20, 2002, to report action of its board of directors naming a new certifying accountant. Registrant filed an amendment to such report on May 31, 2002. Registrant filed a Report on Form 8-K on August 19, 2002, to report action of its board of directors selling their manufactured housing division on August 14, 2002. 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 ---------------------------------- Gary J. Klusman Chief Financial Officer DATE: August 19, 2002 CERTIFICATION By signing below, each of the undersigned officers hereby certifies pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his or her knowledge, (i) this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, except as noted in Note 11 under Part I, Item 1 and (ii) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of The Morgan Group, Inc. Signed this 19th day of August, 2002. /s/ Gary J. Klusman /s/ Anthony T. Castor, III ---------------------------- ------------------------- Gary J. Klusman Anthony T. Castor, III --------------- ---------------------- (Typed Name) (Typed Name) Chief Financial Officer President and Chief Executive Officer ---------------------- ------------------------------------- (Title) (Title) -----END PRIVACY-ENHANCED MESSAGE-----