UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1998
THE MORGAN GROUP, INC.
2746 Old U. S. 20 West
Elkhart, Indiana 46515-1168
(219) 295-2200
Delaware 1-13586 22-2902315
(State of (Commission File Number) (I.R.S. Employer
Incorporation) Identification Number)
The Company (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
The number of shares outstanding of each of the Company's classes of common
stock at October 30, 1998 was:
Class A - 1,354,435 shares
Class B - 1,200,000 shares
<PAGE>
The Morgan Group, Inc.
INDEX
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Consolidated Statements of
Operations for the Three and Nine Month Periods
Ended September 30, 1998 and 1997 4
Consolidated Statements of
Cash Flows for the Nine Month Periods Ended
September 30, 1998 and 1997 5
Notes to Consolidated Interim Financial
Statements as of September 30, 1998 6 - 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 11
PART II OTHER INFORMATION 12
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
PART I FINANCIAL INFORMATION
The Morgan Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
ASSETS (unaudited)
-------- --------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 126 $ 380
Trade accounts receivable, less allowance for doubtful
accounts of $268 in 1998 and $183 in 1997 15,732 13,362
Accounts receivable, other 363 126
Refundable taxes -- 263
Prepaid expenses and other current assets 1,959 2,523
Deferred income taxes 1,122 1,095
-------- --------
Total current assets 19,302 17,749
-------- --------
Property and equipment, net 4,661 4,315
Intangible assets, net 8,168 8,451
Deferred income taxes 1,094 767
Other assets 865 1,464
-------- --------
Total assets $ 34,090 $ 32,746
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ -- $ 2,250
Trade accounts payable 5,281 3,410
Accrued liabilities 6,457 4,966
Income taxes payable 47 --
Accrued claims payable 2,166 2,175
Refundable deposits 1,882 1,666
Current portion of long-term debt 694 1,153
-------- --------
Total current liabilities 16,527 15,620
-------- --------
Long-term debt, less current portion 859 1,360
Long-term accrued claims payable 3,617 3,042
Commitments and contingencies -- --
Shareholders' equity:
Common stock, $.015 par value
Class A: Authorized shares - 7,500,000
Issued shares - 1,605,553 23 23
Class B: Authorized shares - 2,500,000
Issued and outstanding shares - 1,200,000 18 18
Additional paid-in capital 12,459 12,453
Retained earnings 2,745 2,160
-------- --------
Total capital and retained earnings 15,245 14,654
Less - treasury stock at cost (250,518 and
167,643 Class A shares) (2,158) (1,426)
Loan to officer for stock purchase -- (504)
-------- --------
Total shareholders' equity 13,087 12,724
-------- --------
Total liabilities and shareholders' equity $ 34,090 $ 32,746
======== ========
</TABLE>
<PAGE>
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
Operating revenues:
<S> <C> <C> <C> <C>
Manufactured housing $ 24,775 $ 25,447 $ 72,072 $ 70,721
Driver outsourcing 5,571 5,116 17,049 15,177
Specialized transport 5,621 4,048 15,643 14,904
Other service revenues 3,168 3,679 9,865 10,335
-------- -------- -------- --------
Total operating revenues 39,135 38,290 114,629 111,137
Costs and expenses:
Operating costs 35,560 34,490 104,338 100,768
Selling, general and administration 2,580 2,240 7,821 6,493
Depreciation and amortization 296 309 879 906
-------- -------- -------- --------
38,436 37,039 113,038 108,167
Operating income 699 1,251 1,591 2,970
Interest expense, net 127 149 460 448
-------- -------- -------- --------
Income before income taxes 572 1,102 1,131 2,522
Income tax expense 251 397 424 850
-------- -------- -------- --------
Net income $ 321 $ 705 $ 707 $ 1,672
======== ======== ======== ========
Net income per common share:
Basic:
Class A common stock $ 0.13 $ 0.27 $ 0.28 $ 0.64
======== ======== ======== ========
Class B common stock $ 0.12 $ 0.26 $ 0.25 $ 0.61
======== ======== ======== ========
Diluted:
Class A common stock $ 0.13 $ 0.27 $ 0.28 $ 0.64
======== ======== ======== ========
Class B common stock $ 0.12 $ 0.26 $ 0.25 $ 0.61
======== ======== ======== ========
</TABLE>
<PAGE>
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------- -------
Operating activities:
<S> <C> <C>
Net income $ 707 $ 1,672
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 879 906
Debt amortization 7 27
Loss (gain) on disposal of property and equipment 1 (67)
Deferred income taxes (354) --
Changes in operating assets and liabilities:
Trade accounts receivable (2,370) (4,973)
Other accounts receivable (237) (252)
Refundable taxes 263 530
Prepaid expenses and other current assets 557 243
Other assets 599 (243)
Trade accounts payable 1,871 1,874
Accrued liabilities 1,538 (968)
Accrued claims payable 228 524
Refundable deposits 216 (408)
------- -------
Net cash provided by (used in) operating activities 3,905 (1,135)
Investing activities:
Purchases of property and equipment (534) (562)
Proceeds from sale of property and equipment 190 1,141
Business acquisitions (160) (409)
------- -------
Net cash provided by (used in) investing activities (504) 170
Financing activities:
Net proceeds from (repayment of) note payable to bank (2,250) 2,550
Principle payments on long-term debt (1,061) (1,344)
Proceeds from exercise of options 68 --
Treasury stock purchases, net of officer loan (290) (408)
Common stock dividends paid (122) (121)
------- -------
Net cash provided by (used in) financing activities (3,655) 677
------- -------
Net increase (decrease) in cash and equivalents (254) (288)
Cash and cash equivalents at beginning of period 380 1,308
------- -------
Cash and cash equivalents at end of period $ 126 $ 1,020
======= =======
</TABLE>
<PAGE>
The Morgan Group, Inc. and Subsidiaries
Notes to Consolidated Interim Financial Statements
(Unaudited)
September 30, 1998
Note 1. Basis of Presentation
The accompanying consolidated interim financial statements have been
prepared by The Morgan Group, Inc. and Subsidiaries (the "Company"),
without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The consolidated
interim financial statements should be read in conjunction with the
financial statements, notes thereto and other information included in
the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
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, MDA Corporation, and Morgan Finance,
Inc., all of which are wholly owned. Significant inter-company
accounts and transactions have been eliminated in consolidation.
Note 2. Special Employee Stock Purchase Plan
In February of 1996, the Company adopted a Special Employee Stock
Purchase Plan ("Plan") under which Morgan Drive Away's President and
Chief Executive Officer purchased 70,000 shares of Class A common
stock from treasury stock at the then current market value price of
$560,000. Under the terms of the Plan, $56,000 was delivered to the
Company and a promissory note was executed in the amount of $504,000.
This officer terminated his employment and the Plan on July 17, 1998.
The Company purchased his 70,000 shares of Class A Common stock for
$637,000.
<PAGE>
Note 3. Net Income Per Common Share
Net income available to each class of common stock is determined by
adding together the amount of applicable dividends declared and the
amount of undistributed earnings allocated. Undistributed earnings
are allocated to each class of common stock equally per share.
Net income applicable to common stocks is the same for the basic and
diluted EPS computations for all periods presented. The following
table reconciles basic and diluted earnings per share (dollars in
thousands, except share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allocation of net income to common stocks:
Class A stock:
Dividends $ 28 $ 29 $ 86 $ 85
Allocation of undistributed earnings 151 363 317 854
---------- ---------- ---------- ----------
Net income applicable to Class A stock -
basic and diluted $ 179 $ 392 $ 403 $ 939
---------- ---------- ---------- ----------
Class B stock:
Dividends 12 12 36 36
Allocation of undistributed earnings 130 301 268 697
---------- ---------- ---------- ----------
Net income applicable to Class B stock -
basic and diluted $ 142 $ 313 $ 304 $ 733
---------- ---------- ---------- ----------
Net income $ 321 $ 705 $ 707 $ 1,672
========== ========== ========== ==========
Weighted average shares outstanding:
Class A stock:
Basic 1,398,548 1,443,315 1,423,923 1,468,715
Dilutive effect of stock options 3,967 11,938 11,221 5,178
---------- ---------- ---------- ----------
Diluted 1,402,515 1,455,253 1,435,144 1,473,893
========== ========== ========== ==========
Class B stock-basic and diluted 1,200,000 1,200,000 1,200,000 1,200,000
========== ========== ========== ==========
Class A basic EPS $ 0.13 $ 0.27 $ 0.28 $ 0.64
========== ========== ========== ==========
Class B basic EPS $ 0.12 $ 0.26 $ 0.25 $ 0.61
========== ========== ========== ==========
Class A diluted EPS $ 0.13 $ 0.27 $ 0.28 $ 0.64
========== ========== ========== ==========
Class B diluted EPS $ 0.12 $ 0.26 $ 0.25 $ 0.61
========== ========== ========== ==========
</TABLE>
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Morgan Group, Inc. is the nation's largest service company managing the
delivery of manufactured homes, trucks, specialized vehicles, and trailers in
the United States. Morgan provides outsourcing transportation services
principally through a national network of independent owner operators. The
Company dispatches its drivers from approximately 106 offices in 32 states. The
Company's services also include providing certain insurance and financing
services to its owner operators. The Manufactured housing group provides
specialized transportation to companies which produce new manufactured homes,
modular homes, and office trailers. In addition, the Manufactured housing group
transports used manufactured homes and offices. The Driver outsourcing group
provides drivers to customers to deliver commercial trucks and recreational
vehicles. The Specialized transport group moves a variety of specialized
vehicles, including semi-trailers, military vehicles, travel trailers and other
commodities by utilizing specialized equipment.
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)
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Statement of operations data:
Operating revenues 100.0% 100.0% 100.0% 100.0%
Operating costs 90.9 90.1 91.0 90.7
Selling, general and administration 6.6 5.8 6.8 5.8
Depreciation and amortization .7 .8 .8 .8
------ ------ ------ ------
Operating income 1.8 3.3 1.4 2.7
Interest expense, net .4 .4 .4 .4
------ ------ ------ ------
Income before income taxes 1.4 2.9 1.0 2.3
Income tax expense .6 1.1 .4 .8
------ ------ ------ ------
Net income .8% 1.8% .6% 1.5%
====== ====== ====== ======
</TABLE>
Operating revenues for the third quarter increased from $38.3 million in 1997 to
$39.1 million in 1998. This increase was in the Specialized transport and Driver
outsourcing operating revenues which increased 38.9% and 8.9%, respectively.
Manufactured housing operating revenues decreased 2.6%.
The increase in Specialized transport is primarily due to the reconstruction of
this business segment, an increase in the driver force, improved driver
utilization, and some price increases. The increase in Driver outsourcing is
principally due to the growth in delivery of Class Eight vehicles. The decrease
in Manufactured housing operating revenues was the net result of the loss of
accounts principally in the south and southwest which, in the quarter, was
greater than the growth of contract business.
Operating costs as a percent of operating revenues increased from 90.1% in the
third quarter of 1997 to 90.9% in the third quarter of 1998. This was
principally due to higher bodily injury and cargo claims expense in 1998,
compared to 1997. The Company in 1998 is benefiting from lower Manufactured
housing fixed costs which have been partially offset by increased dispatch and
regional costs in Specialized transport and Driver outsourcing.
Selling, general and administration expenses increased from 5.8% of operating
revenues in the third quarter of 1997 to 6.6% in the third quarter of 1998,
primarily due to increased salaries and health care expenses.
Operating income was 1.8% of operating revenues in the third quarter of 1998
compared to 3.3% in 1997. Net income was 0.8% of operating revenues in the third
quarter of 1998 compared to 1.8% in 1997.
Operating revenues for the nine months ended September 30, increased from $111.1
million in 1997 to $114.6 million in 1998. The first nine months of 1997
included $3.3 million of revenues from the discontinued truckaway operation.
The increases were 1.9% in Manufactured housing, 12.3% in Driver outsourcing,
and 34.8% in Specialized transport after giving effect to the discontinuance of
the truckaway operation. The increases in Driver outsourcing and Specialized
transport primarily are due to the reasons stated in the third quarter analysis.
Operating costs for the first nine months as a percent of operating revenue
increased from 90.7% in 1997 to 91.0% of operating revenues. The adverse bodily
injury and cargo claim expense in the first and third quarters of 1998 offset
the benefits previously discussed, and lower fixed costs due to the
discontinuance of the truckaway operation.
Selling, general and administration expenses for the first nine months increased
from 5.8% of operating revenue in 1997 to 6.8% in 1998, primarily due to
increased salaries, health care expense, information systems costs, and bad debt
expense.
Operating income was 1.4% of operating revenues for the first nine months of
1998 compared to operating income of 2.7% in 1997. Net income was 0.6% of
operating revenues in 1998 compared to 1.5% in 1997.
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. Recreational vehicles and
travel trailer movements are generally stronger in the spring, when dealers
build stock in anticipation of the summer vacation season, and late summer and
early fall when new vehicle models are introduced. The Company's operating
revenues, therefore, tend to be stronger in the second and third quarters.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased from $380,000 as of December 31, 1997 to
$126,000 as of September 30, 1998, while debt levels decreased $3,210,000. The
Company has generated net cash of $3,903,000 from operations in the first nine
months of 1998, compared to $1,135,000 net cash used in the first nine months of
1997. This improvement in cash management has been due to accelerated trade
accounts receivable collections and more stringent treasury management. Trade
accounts payable and
<PAGE>
accrued liabilities increased $3.4 million during the first nine months of 1998.
Cash was used during the first nine months of 1998 to finance trade accounts
receivable growth of $2.4 million associated with record operating revenues.
Trade accounts receivable days sales outstanding decreased from 37 days at
December 31, 1997 to 32 days at September 30, 1998.
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure its operations will not be adversely
affected by Year 2000 software failures and has established a project team to
address the Year 2000 issue. The Company has a program in place designed to
bring the systems into Year 2000 compliance in time to minimize any significant
detrimental effects on operations. Our goal is to have our remediated and
replaced systems operational by July, 1999 to allow time for testing and
verification. In addition, executive management regularly monitors the status of
the Company's Year 2000 remediation plans.
The Company has completed the assessment of Year 2000 issues. The first phase of
the compliance plan has been completed with installation and conversion to a
mainframe computer. This computer provides adequate computing power to complete
application software conversion and remediation. Financial applications should
be Year 2000 compliant by the first quarter of 1999.
The third phase of the Year 2000 compliance program involves the actual
remediation and replacement of operating systems. Rather than remediate, a
significant portion of the operating software is being replaced by compliant
purchased software. Implementation is scheduled to be completed by July, 1999.
The Company is using both internal and external resources to complete this
phase. Systems ranked highest in priority are scheduled first for remediation or
replacement, with final testing and certification for Year 2000 readiness
completed by September, 1999.
The Company also faces risk to the extent that services and systems purchased by
the Company and others with whom the Company transacts business do not comply
with Year 2000 requirements. As part of the Year 200 compliance program,
significant service providers, vendors, customers and governmental entities that
are believed to be critical to business operations after January 1, 2000 have
been identified and steps are being undertaken in an attempt to reasonably
determine their stage of Year 2000 readiness.
External and internal costs specifically associated with modifying internal use
software for Year 2000 compliance are expensed as incurred. The total amount
expended on the project through September 30, 1998 was $63,000. Costs to be
incurred in the remainder of 1998 and 1999 to fix Year 2000 problems are
estimated at approximately $330,000. These estimated costs do not include normal
ongoing costs for computer hardware and software that would be replaced even
without the presence of the Year 2000 issue. The Company does not expect the
costs relating to Year 2000 remediation to have a material effect on its results
of operations or financial condition.
Based on the progress the Company has made in addressing its Year 2000 issues
and the Company's plan and timeline to complete its compliance program, the
Company does not foresee significant risks associated with its Year 2000
compliance at this time. As the Company's plan is to address its significant
Year 2000 issues prior to being affected by them, it has not developed a
comprehensive contingency plan.
<PAGE>
However, if the Company identifies significant risks related to its Year 2000
compliance or its progress deviates from the anticipated timeline, the Company
will develop contingency plans as deemed necessary at that time.
The estimates and conclusions herein contain forward-looking statements and are
based on management's best estimates of future events. However, there can be no
assurance that the Company will timely identify and remediate all significant
Year 2000 problems, that remedial efforts will not involve significant time and
expense, or that such problems will not have a material adverse effect on the
Company's business, results of operations or financial position.
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 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 1997 under Part I, Item 1, Business 7.
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
Exhibit 27(1) - Financial Data Schedule for Nine Month Period Ended
September 30, 1998
Exhibit 27(2) - Restated Financial Data Schedule for Nine Month
Period Ended September 30, 1997
(b) Reports on Form 8-K:
Report filed on July 29, 1998 announcing the appointment of Edward
Charleston as President and Chief Executive Officer of Morgan Drive
Away, Inc.
<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/ Dennis R. Duerksen
Dennis R. Duerksen
Chief Financial Officer
Date: November 13, 1998
<TABLE> <S> <C>
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