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 September 30, 1997
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 No.) (IRS Employer
Incorporation) Identification No.)
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 November 6, 1997 was:
Class A - 1,439,010 shares
Class B - 1,200,000 shares
<PAGE>
The Morgan Group, Inc.
INDEX
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of
Operations for the Three and Nine Month Periods Ended
September 30, 1997 and 1996 4
Condensed Consolidated Statements of
Cash Flows for the Nine Month Periods Ended
September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial
Statements as of September 30, 1997 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 5 Other Events 10
Item 6 Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
PART I FINANCIAL INFORMATION
The Morgan Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands of dollars, except share amounts)
<TABLE>
<CAPTION>
Sept. 30 Dec. 31
1997 1996*
(unaudited)
ASSETS ---------- ----------
Current assets:
<S> <C> <C>
Cash and cash equivalents $1,020 $1,308
Trade accounts receivable, less allowance for doubtful
accounts of $106 in 1997 and $59 in 1996 16,285 11,312
Accounts receivable, other 526 274
Refundable taxes 54 584
Prepaid expenses and other current assets 3,175 3,445
---------- ----------
Total current assets $21,060 $16,923
Property and equipment, net 2,801 2,763
Assets held for sale 1,375 2,375
Intangible assets, net 8,864 8,911
Deferred income taxes 1,683 1,683
Other assets 654 411
---------- ---------
Total assets $36,437 $33,066
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $3,800 $1,250
Trade accounts payable 5,100 3,226
Accrued liabilities 3,840 4,808
Accrued claims payable 1,712 1,744
Refundable deposits 1,500 1,908
Current portion of long-term debt 1,562 1,892
--------- ---------
Total current liabilities 17,514 14,828
Long-term debt, less current portion 1,300 2,314
Long-term accrued claims payable 3,376 2,820
Commitments and contingencies - - - - - -
Shareholders' equity:
Common stock, $.015 par value
Class A: Authorized shares - 7,500,000 23 23
Issued shares 1,605,553 in 1997 and 1996
Class B: Authorized shares - 2,500,000 18 18
Issued shares 1,200,000 in 1997 and 1996
Additional paid-in capital 12,441 12,441
Retained earnings 3,677 2,126
--------- ---------
Total capital and retained earnings 16,159 14,608
Less - treasury stock, at cost; 1997 - 165,343 shares
and 1996 - 120,043 shares (1,408) (1,000)
- loan to officer for stock purchase (504) (504)
--------- ---------
Total shareholders' equity 14,247 13,104
--------- ---------
Total liabilities and shareholders' equity $36,437 $33,066
====== ======
</TABLE>
* The balance sheet at December 31, 1996, has been derived from
the audited financial statements at that date.
See notes to condensed consolidated financial statements.
<PAGE>
The Morgan Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------------------ --------------------------------
1997 1996 1997 1996
Operating revenues: ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Manufactured housing $25,447 $19,959 $70,721 $55,525
Driver outsourcing 5,116 5,849 15,177 17,978
Specialized transport 4,048 6,910 14,904 20,991
Other service revenues 3,679 2,587 10,335 8,015
--------- --------- --------- ---------
Total operating revenues 38,290 35,305 111,137 102,509
Costs and expenses:
Operating costs 34,490 32,063 100,768 93,826
Depreciation and amortization 309 353 906 1,095
Selling, general and administration 2,240 2,101 6,493 6,170
---------- --------- --------- ---------
Operating income 1,251 788 2,970 1,418
Interest expense, net 149 108 448 280
--------- -------- --------- ---------
Income before taxes 1,102 680 2,522 1,138
Income taxes 397 185 850 217
--------- -------- --------- ---------
Net income $705 $495 $1,672 $921
====== ====== ====== ======
Net income per share:
Primary $0.27 $0.18 $0.63 $0.34
====== ====== ====== ======
Fully diluted $0.27 $0.18 $0.63 $0.34
====== ====== ====== ======
Average number of common shares and common
stock equivalents 2,643,315 2,692,489 2,662,724 2,682,837
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
The Morgan Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Sept. 30,
------------------
1997 1996
------- -------
Operating activities:
<S> <C> <C>
Net income $ 1,672 $ 921
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 906 1,095
Debt amortization 27 24
Gain on disposal of property and equipment (67) --
------- -------
Changes in operating assets and liabilities:
Trade accounts receivable (4,973) (1,824)
Accounts receivable, other (252) 126
Trade accounts payable 1,874 (1,223)
Accrued liabilities (968) (326)
Accrued claims payable 524 546
Refundable deposits (408) 161
Other 773 (27)
------- -------
Net cash used in operating activities (892) (527)
Investing activities:
Purchases of property and equipment, net of disposals (562) (466)
Proceeds from disposal of property and equipment and assets
held for sale 1,141 --
Business acquisitions (409) --
Increase in other assets (243) (110)
------- -------
Net cash used in investing activities (73) (576)
Financing activities:
Notes payable to bank 2,550 2,500
Payments on other notes (1,344) (788)
Dividends on common stock (121) (131)
Treasury stock purchases, net of officer loan (408) (203)
------- -------
Net cash provided by financing activities 677 1,378
------- -------
Net increase (decrease) in cash and cash equivalents (288) 275
Cash and cash equivalents at beginning of period 1,308 2,851
------- -------
Cash and cash equivalents at end of period $ 1,020 $ 3,126
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
The Morgan Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 1997
Note 1. Basis of Presentation
The accompanying condensed consolidated interim financial statements
have been prepared by The Morgan Group, Inc. and Subsidiaries (the
"Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulation. 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,
1996.
The accompanying unaudited condensed 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 condensed consolidated financial statements include the accounts of
the Company and its subsidiaries, Morgan Drive Away, Inc. ("Morgan"),
TDI, Inc. ("TDI"), Interstate Indemnity Company ("Interstate"), MDA
Corporation ("MDA"), and Morgan Finance, Inc. ("Finance") all of which
are wholly owned. Significant intercompany accounts and transactions
have been eliminated in consolidation.
Note 2. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 128, Earnings Per Share, which is required to be
retroactively adopted on December 31, 1997, with all prior periods
being restated. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options will be
excluded. This statement will not change earnings per share as reported
for the quarter or nine months ended September 30, 1997.
In June 1997, the FASB issued Statement No. 130, Reporting
Comprehensive Income, which is effective beginning in 1998. Statement
No. 130 establishes standards for reporting and display of
comprehensive income and its components. Comparative periods are
required to be reclassified to reflect the provisions of the Statement.
The adoption of this Statement will not affect earnings as previously
reported.
In June 1997, the FASB also issued Statement No. 131, Disclosures About
Segments of an Enterprise and Related Information. This new Statement
requires disclosure of selected financial and descriptive information
for each operating segment based on management's internal
organizational decision-making structure. Additional information is
required on a company-wide basis for revenues by product or service,
revenues and identifiable assets by geographic location and information
about significant customers. The Company will begin presenting any
additional information as required by Statement No. 131 in its
financial statements for the year-ending December 31, 1998.
<PAGE>
Note 3. Special Charges
The sale of the truckaway operation and the related revenue equipment
was completed during the second quarter of 1997. The Company does not
anticipate any additional charges relating to exiting the truckaway
operations. The Company is still in the process of selling the real
estate properties that were written down to fair market value at the
end of 1996.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships of
operations data to revenue for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
------------------------------- ------------------------------
1997 1996 1997 1996
---- ---- ---- ----
Statement of Operations Data:
<S> <C> <C> <C> <C>
Operating revenue 100.0% 100.0% 100.0% 100.0%
Operating costs 90.1 90.8 90.7 91.5
Depreciation and amortization .8 1.0 .8 1.1
Selling, general and administration 5.8 6.0 5.8 6.0
-------- -------- -------- --------
Operating income 3.3 2.2 2.7 1.4
Net interest expense .4 .3 .4 .3
-------- -------- -------- --------
Income before income taxes 2.9 1.9 2.3 1.1
Income taxes 1.1 .5 .8 .2
-------- -------- -------- --------
Net income 1.8% 1.4% 1.5% .9%
===== ===== ===== =====
</TABLE>
OPERATING REVENUES:
Comparisons of the 1997 operating results, for both the third quarter and the
nine months ended September 30, 1997 were significantly impacted by the
acquisition of Transit Homes of America ("Transit") in December, 1996 and the
closing of the truckaway operation. Transit is a provider of outsourcing
services to the manufactured housing industry.
Operating revenues for the third quarter of 1997 increased from $35.3 million in
1996, to $38.3 million in 1997, an increase of 8%. This increase was primarily
in manufactured housing revenues, which increased from $20.0 million for the
third quarter of 1996 to $25.4 million for the same period in 1997. Manufactured
housing revenue is generated from arranging delivery services for new
manufactured homes, modular homes and office trailers. Transit contributed
approximately 19% of third quarter 1997 manufactured housing revenue. Driver
outsourcing revenues in the third quarter of 1997 were lower than the third
quarter of 1996, due to softness in certain recreational and commercial vehicle
markets, specifically the relocation of rental trucks. The decrease in
specialized transport revenues was the result of the sale of the truckaway
operation earlier in 1997. Specialized transport revenues consist of arranging
delivery services for van conversions, automobiles, semi-trailers, military
vehicles, and other commodities.
Year-to-date 1997 operating revenues were $111.1 million, also up 8% compared to
$102.5 million in the first nine months of 1996. The 8% increase in year-to-date
1997 operating revenue results from the effects of the Transit purchase on
manufactured housing revenue, partially offset by the now-closed truckaway
operation. Transit contributed approximately 20% of the Company's manufactured
housing revenue for the first nine months of 1997. The number of manufactured
homes produced for the first nine months of 1997 was relatively flat when
compared to the same period of the prior year, thereby hampering the Company's
growth in this segment. Driver outsourcing and Specialized revenues for the nine
month period ended September 30, 1997, reflected decreases over the same period
of the prior year. The decline in driver outsourcing revenues was related to
softness in certain recreational and commercial vehicle markets. The decline in
the specialized transport revenues was primarily due to the sale of the
truckaway operation.
<PAGE>
Operating costs as a percent of revenue decreased from 90.8% in the third
quarter of 1996 to 90.1% in the third quarter of 1997. This improvement in
operating ratio was the result of reduced accident frequency, the closing of the
truckaway operation, and the focus on more profitable operations. These
improvements were partially offset by lower margins from driver outsourcing.
Year-to-date operating costs as a percentage of revenue decreased from 91.5% to
90.7%, primarily due to the closing of the truckaway operation.
Operating income increased from $788,000 in the third quarter of 1996 to
$1,251,000 in the third quarter of 1997. Year-to-date operating income increased
from $1,418,000 in 1996 to $2,970,000 in 1997. Operating income increased in the
third quarter of 1997 primarily due to manufactured housing. This increase in
operating income has been partially offset by poor profit performance from the
Company's driver outsourcing subsidiary where profits for the quarter were down
compared to 1996.
Year-to-date operating income increased due to the stronger performance from
manufactured housing, plus the closing of the truckaway operation whose
operating loss was over $650,000 during the first nine months of 1996. This
increase in the Company's year-to-date operating income has been partially
offset by the decline of operating income from the Company's driver outsourcing
subsidiary.
The effective tax rate during the third quarter of 1997 was 36% compared to 27%
during the third quarter of 1996. Year to date, the effective tax rate vwas 34%
versus 19% during the first nine months of 1996. The lower tax rate in 1996
reflects the fact that the 1996 income before taxes had a higher portion of
earnings generated by Interstate Indemnity, the Company's captive insurance
company which has a lower tax rate.
Net income was $705,000 in the third quarter of 1997, or $0.27 per common share,
compared to net income of $495,000, or $0.18 per common share, in the third
quarter of 1996. Year-to-date net income of $1,672,000, or $0.63 per common
share was up over 80% compared to 1996 nine months earnings of $921,000, or
$0.34 per common share.
Shipments of manufactured housing tend to decline in the winter months in areas
where poor weather conditions inhibit transport. This may reduce operating
revenues in the first and fourth quarters of the year. Recreational vehicle
movements are generally stronger in the spring when dealers build stock in
anticipation of the summer vacation season and early fall when new vehicle
models are introduced. The Company's operating revenues, therefore, are
generally stronger in the second and third quarters of the year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased from $1.3 million as of December 31, 1996 to
$1.0 million as of September 30, 1997, while debt levels increased $1.2 million.
Cash was used during the first nine months primarily due to finance receivable
growth of $5.0 million associated with strong third quarter revenues and an
increase in days sales outstanding. Also, accrued liabilities decreased
principally due to closing the truckaway operation. Further effects on cash
included decreases in refundable deposits as the Company eliminated driveaway
drivers, the acquisition of additional manufactured housing and driver
outsourcing businesses, and treasury stock purchases. Partially offsetting these
and other uses of cash was an increase in accounts payable and cash generated
from the sale of the assets held for sale. As of September 30, 1997, the Company
had $1,020,000 in cash. The Company, as of October 31, 1997, has $2,194,000 of
unused credit under a revolving credit agreement. The Company expects that
current cash flow from operations and revolving credit agreement will be
adequate to fund the Company's existing operations for the foreseeable future.
FORWARD LOOKING DISCUSSION
The Company's operating performance improved during the first nine months of
1997. Operating margins should continue to improve in 1997 in comparison to
1996, as the Company should continue to receive the benefit of the closing of
the truckaway operation. In addition, the Company has reduced accident frequency
through the first nine months of the year. The acquisition of Transit which
generated approximately $15.1 million of additional revenues during the first
nine months, should more than offset the lost operating revenues from the sale
of the truckaway operation for the remainder of 1997. The matters discussed in
this paragraph and the adequacy of available capital resources are
forward-looking statements that are subject to important factors that involve
risk and uncertainties. Potential risks and uncertainties include, without
limitation, continued competitive pressures in the market place, the effect of
overall economic conditions, the cost of accident claims and the ability to
recruit qualified drivers to service the business. These factors may cause
actual results to differ materially from what the Company has projected.
<PAGE>
PART II - OTHER INFORMATION
Item 5 - Other Events
On October 31, 1997, Richard B. DeBoer resigned as Chief Financial
Officer of the Company to pursue other interests.
Dennis R. Duerksen has been employed as Chief Accounting Officer and
will be appointed Chief Financial Officer at the next regularly
scheduled meeting of the Board of Directors in December, 1997.
Item 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
Exhibit 10.1 First Amendment to The Morgan Group, Inc.
Incentive Stock Plan
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter
for which the report is filed.
<PAGE>
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/ Terence L. Russell
------------------------------
Terence L. Russell
Vice President
By: /s/ Dennis R. Duerksen
------------------------------
Dennis R. Duerksen
Chief Accounting Officer
Date: November 14, 1997
EXHIBIT - 10.1
FIRST AMENDMENT TO
THE MORGAN GROUP, INC.
INCENTIVE STOCK PLAN
AUGUST 18, 1997
Pursuant to Section 12 of The Morgan Group, Inc. Incentive Stock Plan (the
"Plan"), The Morgan Group, Inc. (the "Company") hereby amends the Plan,
effective as of August 21, 1997, as follows:
A. Section 3 of the Plan is hereby amended to delete the fourth
sentence thereof and to add, in lieu thereof, the following:
"Outside Directors (other than persons who were previously employees of
the Corporation or any of its Subsidiaries) first elected to the Board
of Directors at or after the 1994 annual meeting of the stockholders
but prior to or at the 1997 annual meeting of the stockholders will be
granted options to purchase 8,000 shares of Class A Common Stock upon
their initial election to the Board of Directors at an exercise option
price equal to 80% of the fair market value of the Class A Common Stock
subject to the option on the date of grant, or on the next preceding
trading date if such date was not a trading date. Outside Directors
(other than persons who were previously employees of the Corporation or
any of its Subsidiaries) first elected to the Board of Directors after
the 1997 annual meeting of the stockholders may be granted options to
purchase up to 8,000 shares of Class A Common Stock, with an exercise
price of not less than 80% of the fair market value of Class A Common
Stock subject to the option on the date of grant, consistent with the
terms hereof, if and to the extent determined by action of the Board of
Directors."
B. Section 5(b) of the Plan is hereby amended by adding the
following provision to the end of the sentence thereof:
"; provided, that options awarded to Outside Directors first elected to
the Board of Directors after the 1997 annual meeting of stockholders
shall have the term or terms determined by action of the Board of
Directors."
This First Amendment to The Morgan Group, Inc. Incentive Stock Plan was
approved by the Board of Directors of the Company at a meeting on September 23,
1997. Pursuant to such authorization, the following officer of the Company has
executed this Amendment this 18th day of August, 1997, but this Amendment shall
be retroactively effective as of August 21, 1997.
THE MORGAN GROUP, INC.
By: /s/ Charles C. Baum
----------------------------------
Charles C. Baum
Its: Chairman and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000906609
<NAME> The Morgan Group, Inc.
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<PERIOD-START> JUL-1-1997
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</TABLE>
