UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 1999
THE MORGAN GROUP, INC.
2746 Old U. S. 20 West
Elkhart, Indiana 46515-1168
(219) 295-2200
Delaware 1-13586 22-2902315
(State of (Commission File Number) (IRS Employer
Incorporation) Identification Number)
The Company (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
The number of shares outstanding of each of the Company's classes of common
stock at April 30, 1999 was:
Class A - 1,247,207 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
March 31, 1999 and December 31, 1998 3
Consolidated Statements of
Operations for the Three Month Periods
Ended March 31, 1999 and 1998 4
Consolidated Statements of
Cash Flows for the Three Month Periods
Ended March 31, 1999 and 1998 5
Notes to Consolidated Interim Financial
Statements as of March 31, 1999 6 - 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 13
PART II OTHER INFORMATION 14
Item 6 Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
The Morgan Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 49 $ 1,490
Trade accounts receivable, less allowance for doubtful
accounts of $218 in 1999 and $208 in 1998 14,021 12,188
Accounts receivable, other 473 1,214
Prepaid expenses and other current assets 2,242 2,467
Deferred income taxes 1,230 1,230
-------- --------
Total current assets 18,015 18,589
-------- --------
Property and equipment, net 4,366 4,117
Intangible assets, net 7,874 8,030
Deferred income taxes 1,997 1,997
Other assets 771 654
-------- --------
Total assets $ 33,023 $ 33,387
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 400 $ --
Trade accounts payable 4,350 4,304
Accrued liabilities 4,708 3,566
Income taxes payable 10 878
Accrued claims payable 3,614 3,553
Refundable deposits 1,503 1,830
Current portion of long-term debt 647 652
-------- --------
Total current liabilities 15,232 14,783
-------- --------
Long-term debt, less current portion 710 828
Long-term accrued claims payable 4,776 4,555
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 12,459
Retained earnings 2,979 2,898
-------- --------
Total capital and retained earnings 15,479 15,398
Less - treasury stock at cost (356,346 and
253,218 Class A shares) (3,174) (2,177)
-------- --------
Total shareholders' equity 12,305 13,221
-------- --------
Total liabilities and shareholders' equity $ 33,023 $ 33,387
======== ========
</TABLE>
<PAGE>
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
Operating revenues $ 35,325 $ 33,971
Costs and expenses:
Operating costs 32,003 31,655
Selling, general and administration 2,688 2,368
Depreciation and amortization 309 295
----------- -----------
35,000 34,318
Operating income (loss) 325 (347)
Interest expense, net 88 144
----------- -----------
Income (loss) before income taxes 237 (491)
Income tax expense (benefit) 119 (260)
----------- -----------
Net income (loss) $ 118 $ (231)
=========== ===========
Net income (loss) per basic and diluted share: $ 0.05 $ (0.09)
=========== ===========
Weighted average shares outstanding 2,538,611 2,636,214
=========== ===========
</TABLE>
<PAGE>
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------- -------
<S> <C> <C>
Operating activities:
Net income (loss) $ 118 $ (231)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 341 295
Loss (gain) on disposal of property and equipment 1 (13)
Changes in operating assets and liabilities:
Trade accounts receivable (1,833) (1,502)
Other accounts receivable 741 (119)
Refundable taxes -- (196)
Prepaid expenses and other current assets 193 (33)
Other assets (117) 415
Trade accounts payable 46 (266)
Accrued liabilities 1,142 1,754
Income taxes payable (868) (389)
Accrued claims payable 282 (154)
Refundable deposits (327) (291)
------- -------
Net cash used in operating activities (281) (730)
Investing activities:
Purchases of property and equipment (388) (247)
Proceeds from sale of property and equipment -- 20
Business acquisitions (15) --
------- -------
Net cash used in investing activities (403) (227)
Financing activities:
Net proceeds from note payable to bank 400 1,265
Principal payments on long-term debt (123) (477)
Treasury stock purchases (997) (32)
Common stock dividends paid (37) (42)
------- -------
Net cash (used in) provided by financing activities (757) 714
------- -------
Net decrease in cash and equivalents (1,441) (243)
Cash and cash equivalents at beginning of period 1,490 380
------- -------
Cash and cash equivalents at end of period $ 49 $ 137
======= =======
</TABLE>
<PAGE>
The Morgan Group, Inc. and Subsidiaries
Notes to Consolidated Interim Financial Statements
(Unaudited)
March 31, 1999
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, 1998.
Net income (loss) per common share ("EPS") is computed using the
weighted average number of common shares outstanding during the
period. Since each share of Class B common stock is freely
convertible into one share of Class A common stock, the total of the
weighted average number of common shares for both classes of common
stock is considered in the computation of EPS. The effect of dilutive
stock options is immaterial to the calculation of diluted EPS for the
periods presented.
The accompanying unaudited consolidated interim financial statements
reflect, in the opinion of management, all adjustments (consisting of
normal recurring items) necessary for a fair presentation, in all
material respects, of the financial position and results of
operations for the periods presented. The preparation of financial
statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. The results of operations for the
interim periods are not necessarily indicative of the results for the
entire year.
The consolidated financial statements include the accounts of the
Company and its subsidiaries, Morgan Drive Away, Inc., TDI, Inc.,
Interstate Indemnity Company, and Morgan Finance, Inc., all of which
are wholly owned. Significant inter-company accounts and transactions
have been eliminated in consolidation.
Note 2. Segment Reporting
The Company has adopted FASB Statement No. 131 "Disclosure about
Segments of a Business Enterprise and Related Information".
Description of Services
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 105 offices in 32 states.
The Company operates in three business segments: Manufactured
Housing, Specialized Outsourcing Services, and Insurance and Finance.
The Manufactured Housing segment provides outsourced transportation
and logistical services to manufacturers of manufactured housing
through a network of terminals located in thirty one states. The
Specialized Outsourcing Services segment provides outsourced
transportation services primarily to manufacturers of recreational
vehicles, commercial trucks and trailers through a network of service
centers in eight states. The third segment, Insurance and Finance,
provides insurance and financing to the Company's drivers and
independent owner-operators. This segment also acts as a cost center
whereby all property damage and bodily injury and cargo costs are
captured. The Company's segments are strategic business units that
offer different services and are managed separately based on the
differences in these services.
Measurement of Segment Profit (Loss) and Segment Assets
The Company evaluates performance and allocates resources based on
several factors, of which the primary financial measure is business
segment operating income, defined as earnings before interest, taxes,
depreciation and amortization (EBITDA). Segment assets have not
changed significantly since December 31, 1998. The accounting
policies of the segments are the same as those described in the
Company's Annual Report on Form 10-K for the year ended December 31,
1998. There are no significant intersegment revenues.
<PAGE>
The following table presents the financial information for the
Company's reportable segments for the three month periods ended March
31, (in thousands):
1999 1998
-------- --------
Operating revenues
Manufactured Housing $ 23,868 $ 23,950
Specialized Outsourcing Services 11,032 9,642
Insurance and Finance 1,028 1,020
All Other 52 --
-------- --------
35,980 34,612
Total intersegment insurance revenues (655) (641)
-------- --------
Total operating revenues $ 35,325 $ 33,971
======== ========
Segment profit (loss) - EBITDA
Manufactured Housing $ 2,649 $ 2,231
Specialized Outsourcing Services 204 172
Insurance and Finance (2,030) (2,293)
All Other (189) (162)
-------- --------
634 (52)
Depreciation and amortization (309) (295)
Interest expense (88) (144)
-------- --------
Income (loss) before taxes $ 237 $ (491)
======== ========
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Consolidated Results
Operating revenues were a first-quarter record, increasing 3.8 percent to $35.3
million from 1998's $34.0 million. While traditionally the first quarter is
seasonally the Company's slowest, operating revenues for Specialized Outsourcing
Services rose 14.4 percent to $11.0 million compared with last year's first
quarter, contributing to the overall increase in revenues.
Operating earnings before interest, taxes, depreciation and amortization
("EBITDA") were $634,000 for the quarter, compared with a loss of $52,000 for
the corresponding period last year. Profitability improvements are the result of
better service pricing, claims cost reductions and a reduction in the Company's
operating cost structure.
Because of the existence of significant non-cash expenses, such as depreciation
of fixed assets and amortization of intangible assets, the Company believes that
EBITDA contributes to a better understanding of the Company's ability to satisfy
its obligations and to utilize cash for other purposes. EBITDA should not be
considered in isolation from or as a substitute for operating income, cash flow
from operating activities, and other consolidated income or cash flow statement
data prepared in accordance with generally accepted accounting principles.
Partially offsetting the reduction in operating costs was an increase in
selling, general and administrative expense of $320,000 primarily increased
communication, salaries, related employee benefit costs, and increased health
care costs. Net interest expense decreased $56,000 or 39.9% in the first quarter
of 1999 compared to the same period of the prior year as a result of improved
cash flow that allowed the Company to reduce the amount of debt outstanding
under its credit facility.
Net income improved to $118,000 or $0.05 per share, versus a loss of $231,000,
or $0.09 per share, for the same period of the prior year.
Segment Results
The following discussion sets forth certain information about the segment
results for the quarters ended March 31, 1999 and 1998.
Manufactured Housing
Manufactured Housing operating revenues are generated from providing
transportation and logistical services to manufacturers of manufactured homes.
Manufactured Housing operating revenues were $82,000 less in the first quarter
of 1999 compared to the first quarter of a year ago. Lower quarter to quarter
volume was offset by better service pricing. Manufactured Housing EBITDA
increased $418,000, primarily due to a reduction in overhead costs resulting
from force reductions and field office consolidations or eliminations.
Specialized Outsourcing Services
Specialized Outsourcing Services operating revenues increased in the first
quarter of 1999 to $11.0 million. This increase was primarily in driver
outsourcing services and large trailer delivery services. Specialized
Outsourcing Services EBITDA increased to $204,000 primarily due to the increased
business volume.
Insurance/Finance
The Company's Insurance/Finance segment provides insurance and financing
services to the Company's drivers and independent owner-operators. This segment
also acts as a cost center whereby all bodily injury, property damage and cargo
loss costs are captured.
Insurance/Finance operating revenues quarter to quarter were unchanged at $1.0
million. Insurance/Finance EBITDA improved $263,000, primarily due to lower
claims cost for the first Quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's businesses are seasonal, particularly the shipment of manufactured
homes which decline in the winter months in areas where poor weather conditions
inhibit transport.
Operating activities used $281,000 of cash in the first quarter of 1999
primarily to finance trade accounts receivable growth associated with the March
increase in operating revenues.
Operations in the first quarter of 1998 used $730,000 of cash. In 1999, cash was
also required to pay federal and state prior year and estimated tax liabilities.
These uses of cash were partially offset by collection of amounts due from the
primary insurance provider. Trade accounts receivable days sales outstanding
(DSO) decreased from 28 days at December 31, 1998 to 23 days at March 31, 1999.
The Company commenced a tender offer on February 22, 1999, at which time it
announced its intention to purchase shares of its Class A common stock at a
price range not greater than $10.00 nor less than $8.50 per share. The Company
concluded the tender offer on March 19, 1999, whereby it acquired 102,528 shares
for its treasury at $9.00 per share. The Company, given its businesses, assets
and prospects, believes that purchasing its Class A stock is an attractive
investment that will benefit the Company and its remaining shareholders and is
consistent with its long-term goals of maximizing shareholder return and with
its recent purchases of outstanding shares.
On January 28, 1999, the Company entered into a new $20.0 million revolving
credit facility ("New Credit Facility") with the Transportation Division of
BankBoston. This New Credit Facility is for two years, subject to renewal, and
better sized to the Company's requirements.
The Company had borrowings of $400,000 at March 31, 1999 and borrowing
availability of $3,331,000.
The Company had minimal exposure to interest rates as of March 31, 1999 as
substantially all of its outstanding long-term debt bears fixed rates. The New
Credit Facility will bear variable interest rates based on either a Federal
Funds rate or the Eurodollar rate. Accordingly, future borrowings under the New
Credit Facility will have exposure to changes in interest rates. Under its
current policies, the Company does not use interest rate derivative instruments
to manage exposure to interest rate changes. Also, the Company currently is not
using any fuel hedging instruments.
It is the management's opinion that the Company's foreseeable cash requirement
will be met through a combination of internally generated funds and the credit
available from the New Credit Facility.
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. The Company's goal is to have its 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 completed an assessment of Year 2000 issues in 1998. The first two
phases of the compliance plan have been completed with installation and
conversion to a mainframe computer that provides adequate computing power to
complete application software conversion and remediation and conversion of
financial applications by the end of the first quarter of 1999.
The third phase of the Year 2000 compliance program involves the 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 2000 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 March 31, 1999 was $130,000. Costs to be
incurred in the remainder of 1999 to fix Year 2000 problems are estimated at
approximately $305,000. 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.
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 Company believes today that the most likely worst case scenario will involve
temporary disruptions in payments from customers and temporary disruptions in
the delivery of services and products to the Company. The Company would expect
that if these events were to occur, increased expense would result and adversely
affect the Company's cash flow.
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.
Impact of Seasonality
Shipments of manufactured homes tend to decline in the winter months in areas
where poor weather conditions inhibit transport. This usually reduces operating
revenues in the first and fourth quarters of the year. The Company's operating
revenues, therefore, tend to be stronger in the second and third quarters.
FORWARD LOOKING DISCUSSION
This report contains a number of forward-looking statements. From time to time,
the Company may make other oral or written forward-looking statements regarding
its anticipated operating revenues, costs and expenses, earnings and other
matters affecting its operations and condition. Such forward-looking statements
are subject to a number of material factors which could cause the statements or
projections contained therein to be materially inaccurate. Such factors include,
without limitation, the risk of declining production in the manufactured housing
industry; the risk of losses or insurance premium increases from traffic
accidents; the risk of loss of major customers; risks 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, 1998 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 Three Month Period Ended
March 31, 1999
Exhibit 27.2 - Restated Financial Data Schedule for Three Month
Period Ended March 31, 1998
(b) Report on Form 8-K:
Report filed on February 12, 1999 announcing the closing of a new $20
million Revolving Credit and Term Loan Agreement with BankBoston,
N.A.
<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: May 13, 1999
<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 MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<NAME> The Morgan Group, Inc.
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<EPS-PRIMARY> .05
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<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 MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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