UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1999
THE MORGAN GROUP, INC.
2746 Old U.S. 20 West
Elkhart, Indiana 46514
(219)295-2200
Commission File Number 1-13586
Delaware 22-2902315
(State of Incorporation) (I.R.S. Employer Identification Number)
Securities Registered Pursuant to Section 12(b) of the Act:
American Stock Exchange
Class A common stock, without par value
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (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 and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 24, 2000 was $6,397,000. The number of shares of the Registrant's
Class A common stock $.015 par value and Class B common stock $.015 par value,
outstanding as of March 24, 2000, was 1,248,157 shares, and 1,200,000 shares,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders are
incorporated into Part III of this report.
<PAGE>
Part I
Item 1. BUSINESS
Overview
The Morgan Group, Inc. (the "Company" or "Registrant") , a Delaware corporation,
is the nation's largest publicly owned service company in managing the delivery
of manufactured homes, commercial vehicles and specialized equipment in the
United States, and through its wholly owned and principal subsidiary, Morgan
Drive Away, Inc. ("Morgan"), has been operating since 1936. The Company is a
subsidiary of Lynch Interactive Corporation, which formed the Company in 1988 to
acquire Morgan and Interstate Indemnity Company ("Interstate"), an insurance
subsidiary. The Company offers financing to independent owner-operators through
Morgan Finance, Inc. ("Finance"). The Company provides services to the Driver
Outsourcing industry through its subsidiary Transfer Drivers, Inc. ("TDI").
The Company primarily provides outsourcing transportation services through a
national network of approximately 1,320 independent owner-operators and
approximately 1,470 other drivers. The Company dispatches its drivers from 98
locations in 32 states. The Company's largest customers include Oakwood Homes
Corporation, Fleetwood Enterprises, Inc., Champion Enterprises, Inc., Winnebago
Industries, Inc., Cavalier Homes, Inc., Clayton Homes, Inc., Four Seasons
Housing, Inc., Thor Industries, Inc., Fairmont Homes, Inc. and Ryder System,
Inc.
The Company also provides certain insurance and financing services to the
independent owner-operators through its insurance and finance subsidiaries,
Interstate and Finance, respectively.
As further described below, the Company's strategy is to grow through expansion
in the niche businesses already being serviced, along with pursuing acquisitions
or joint ventures in related industries. In addition, the Company will look to
expand insurance product offerings to drivers and owner-operators through
Interstate.
The Company's principal office is located at 2746 Old U.S. 20 West, Elkhart,
Indiana 46514-1168.
<PAGE>
Company Services
The Company operates in these business segments: Manufactured Housing, Driver
Outsourcing, Specialized Outsourcing Services, and Insurance and Finance.
o Manufactured Housing Segment. The largest portion of the Company's
operating revenues is derived from transportation of manufactured
housing, primarily new manufactured homes, modular homes, and office
trailers. A manufactured home is an affordable housing alternative. In
addition, Manufactured Housing transports used manufactured homes and
offices for individuals, businesses, and the U.S. Government. Based on
industry shipment data available from the Manufactured Housing
Institute ("MHI"), and the Company's knowledge of the industry and its
principal competitors, the Company is the largest transporter of
manufactured homes in the United States. Manufactured Housing ships
products through approximately 1,015 independent owner-operators, some
of whom drive specially modified semi-tractors referred to as
"toters," which are used to reduce combined vehicle length. Makers of
manufactured housing generally ship their products no more than a few
hundred miles from their production facilities. Therefore, to serve
the regional structure of this industry, the Company positions its
dispatch offices close to the production facilities it is serving.
Approximately 35 of the Company's dispatch offices are located in such
a manner to serve the needs of a single plant of a manufactured
housing producer. Most manufactured housing units, when transported,
require a special permit prescribing the time and manner of transport
for over-dimensional loads. See "Business-Regulation." The Company
obtains the permits required for each shipment from each state through
which the shipment will pass.
During 1999, the manufactured housing industry experienced a decline
in shipments and production. Industry production by the manufactured
housing industry (considering double-wide homes as two shipments) in
the U.S. decreased by approximately 5% to 574,000 in 1999 from 602,000
in 1998, after an 8% increase in 1998 according to data from the MHI.
However, the Company believes that manufactured housing industry
production over the long-term should continue to grow along with the
general economy, especially when employment statistics and consumer
confidence remain strong. The Company believes that the principal
economic consideration of the typical manufactured home buyer is the
monthly payment required to purchase a manufactured home and that
purchasers are generally less affected by incremental increases in
interest rates than those purchasers of site built homes. There is no
assurance, however, that manufactured housing production will
increase.
o Driver Outsourcing Segment. The Driver Outsourcing segment provides
outsourcing transportation services primarily to manufacturers of
recreational vehicles, commercial trucks, and other specialized
vehicles through a network of service centers in nine states. Driver
outsourcing engages the services of approximately 1,470 drivers who
are outsourced to customers to deliver the vehicles. In 1999, Driver
outsourcing delivered approximately 49,900 units through the use of
these drivers.
o Specialized Outsourcing Services Segment. The Specialized Outsourcing
Services segment consists of large trailer ("Towaway") delivery,
travel and other small trailer ("Pick-up") delivery and presently
another specialized service called ("Decking"). The Towaway operation
moved approximately 14,600 trailers in 1999. Towaway contracts with
approximately 144 independent owner-operators who drive semi-tractors.
The travel and other small trailers are delivered by 161 independent
owner-operators utilizing pickup trucks. The Company in 1997,
initiated the decking transportation and delivery service. Decking is
the delivery of two to four over-the-road highway tractors by means of
mounting one or more tractors on the rear of a preceding tractor. The
Company is currently evaluating the profit potential of these niche
businesses and their growth potential.
o Insurance and Finance Segment. The Insurance and Finance segment
provides insurance and financing to the Company's drivers and
independent owner-operators. Interstate, the Company's insurance
subsidiary, may accept a limited portion or all of the underwriting
risk, retaining the appropriate proportion of the premiums. This
segment administers the cargo, bodily injury and property damage
insurance programs.
Selected Operating and Industry Participation Information
The following tables set forth operating information and industry participation
with respect to the manufactured housing, driver outsourcing, and specialized
outsourcing services segments for each of the five years ended December 31,
1999.
<TABLE>
<CAPTION>
Years Ended December 31,
Manufactured Housing
- --------------------
Operating Information: 1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
New home shipments 114,890 121,136 154,389 161,543 148,019
Other shipments 20,860 23,465 24,144 17,330 11,871
--------- --------- --------- --------- ---------
Total shipments 135,750 144,601 178,533 178,873 159,890
Linehaul revenues (in thousands)(1) $ 63,353 $ 72,616 $ 93,092 $ 94,158 $ 88,396
Manufactured Housing
- --------------------
Industry Participation:
Industry production (2) 505,819 553,133 558,435 601,678 573,629
New home shipments 114,890 121,136 154,389 161,543 148,019
Shares of units produced 22.7% 21.9% 27.6% 26.8% 25.8%
Driver Outsourcing
- ------------------
Operating Information:
Shipments 49,885 58,368 45,447 44,177 49,892
Linehaul revenues (in thousands) $ 19,842 $ 23,090 $ 19,706 $ 19,979 $ 23,748
Specialized Outsourcing Services
- --------------------------------
Operating Information:
Shipments 44,406 41,255 34,867 38,167 32,967
Linehaul revenues (in thousands) $ 29,494 $ 26,169 $ 19,630 $ 23,015 $ 21,115
</TABLE>
(1) Linehaul revenue is derived by multiplying the miles of a given shipment by
the stated mileage rate.
(2) Based on reports of MHI. To calculate shares of new homes shipped, the
Company assumes two unit shipments for each multi-section home.
Additional financial information about the business segments is included in
Management's Discussion and Analysis of Financial Conditions and Results of
Operations and in Note 11 of the Notes to the Consolidated Financial Statements
included in Item 8.
Growth Strategy
The Company's strategy is to focus on the profitable core transportation
services of Manufactured Housing and Driver Outsourcing so that operating
revenues and profitability can grow in its area of dominant market position. The
Company will also look for opportunities to capitalize and/or grow its market in
Manufactured Housing and Driver Outsourcing through acquisitions if suitable
opportunities arise. To enhance its profitability, the Company is continuing the
process of reducing its overhead costs.
o Manufactured Housing. The Company believes it can take better
advantage of its position in the manufactured housing industry
and its relationship with manufacturers, retailers, and
independent owner-operators, by expanding the service it
offers within its specialized business. The Company will
continue to pursue opportunities to offer new services. The
Company may also pursue the purchase of certain manufacturers'
private transport fleets. In such a case, the Company would
typically purchase the customer's tractors, sell the equipment
to interested drivers, and then engage these drivers as
independent owner-operators. The Company will also consider
other acquisition opportunities.
o Driver Outsourcing. The Company believes it can capitalize on
the growing trend in the outsourcing of specialized vehicle
transportation and delivery by manufacturers. It is estimated
that approximately 750,000 vehicles are delivered each year
through driveaway services, a delivery market estimated at
$500 million or more. The number of vehicles to be outsourced
is expected to increase substantially as companies calculate
the cost benefits of not maintaining their own driver corps,
paying salaries and benefits, running dispatch points, and
maintaining an equipment base. Unlike companies with drivers
on their payroll, Morgan's drivers are paid only when
deliveries are made. Morgan's growth strategy within this
market is to expand its market position in this highly
fragmented delivery transportation market. The future growth
rate of the Company's outsourcing business is dependent upon
continuing to add major vehicle customers and expanding the
Company's driver force.
o Acquisitions/Joint Ventures. The Company is continuously
considering acquisition opportunities. The Company may
consider acquiring regional or national firms that service the
manufactured housing and/or the outsourcing industry as well
as logistics, transportation, or related industries. The
Company is continually reviewing potential acquisitions and
joint venture opportunities and is engaged in negotiations
from time to time. There can be no assurance that any future
transactions will be affected, or, if affected, can be
successfully integrated with the Company's business.
Forward-Looking Discussion
In 2000, the Company could benefit from further reduction of overhead costs and
an improvement of its safety records. While the Company remains optimistic over
the long term, near term results could be effected by a number of internal and
external economic conditions.
This report contains a number of forward-looking statements, including those
contained in the preceding paragraph and the discussion of growth strategy
above. From time to time, the Company may make other oral or written
forward-looking statements regarding its anticipated operating revenues, costs,
expenses, earnings and matters affecting its condition and operations. Such
forward-looking statements are subject to a number of material factors which
could cause the statements or projections contained herein or therein to be
materially inaccurate. Such factors include, without limitation, the following:
o Dependence on Manufactured Housing. Shipments of manufactured housing
have historically accounted for a substantial majority of the
Company's operating revenues. Therefore, the Company's prospects are
substantially dependent upon this industry which is subject to broad
production cycles. Currently, manufactured housing is experiencing an
industry-wide decline in shipments which is having an adverse impact
on the Company's operating revenues and profitability.
<PAGE>
o Costs of Accident Claims and Insurance. Traffic accidents occur in the
ordinary course of the Company's business. Claims arising from such
accidents can be significant. Although the Company maintains liability
and cargo insurance, the number and severity of the accidents
involving the Company's independent owner-operators and drivers can
have significant adverse effect on the profitability of the Company
through premium increases and amounts of loss retained by the Company
below deductible limits or above its total coverage. There can be no
assurance that the Company can continue to maintain its present
insurance coverage on acceptable terms nor that the cost of such
coverage will not increase significantly.
o Customer Contracts and Concentration. Historically, a majority of the
Company's operating revenues have been derived under contracts with
customers. Such contracts generally have one, two, or three year
terms. There is no assurance that customers will agree to renew their
contracts on acceptable terms or on terms as favorable as those
currently in force. The Company's top ten customers have historically
accounted for a majority of the Company's operating revenues. The loss
of one or more of these significant customers could adversely affect
the Company's results of operations.
o Competition for Qualified Drivers. Recruitment and retention of
qualified drivers and independent owner-operators is highly
competitive. The Company's contracts with independent owner-operators
are terminable by either party on ten days' notice. There is no
assurance that the Company's drivers will continue to maintain their
contracts in force or that the Company will be able to recruit a
sufficient number of new drivers on terms similar to those presently
in force. The Company may not be able to engage a sufficient number of
new drivers to meet customer shipment demands from time to time,
resulting in loss of operating revenues that might otherwise be
available to the Company.
o Independent Contractors, Labor Matters. From time to time, tax
authorities have sought to assert that independent contractors in the
transportation service industry are employees, rather than independent
contractors. Under existing interpretations of federal and state tax
laws, the Company maintains that its independent contractors are not
employees. There can be no assurance that tax authorities will not
challenge this position, or that such tax laws or interpretations
thereof will not change. If the independent contractors were
determined to be employees, such determination could materially
increase the Company's tax and workers' compensation exposure.
o Risks of Acquisitions. The Company has sought and will continue to
seek favorable acquisition opportunities. Its strategic plans may also
include the initiation of new services or products, either directly or
through acquisition, within its existing business lines or which
complement its business. There is no assurance that the Company will
be able to identify favorable acquisition opportunities in the future.
There is no assurance that the Company's future acquisitions will be
successfully integrated into its operations or that they will prove to
be profitable for the Company. Such changes could have a material
adverse effect on the Company.
o Seasonality and General Economic Conditions. The Company's operations
have historically been seasonal, with generally higher operating
revenues generated in the second and third quarters than in the first
and fourth quarters. A smaller percentage of the Company's operating
revenues are generated in the winter months in areas where weather
conditions limit highway use. The seasonality of the Company's
business may cause a significant variation in its quarterly operating
results. Additionally, the Company's operations are affected by
fluctuations in interest rates and the availability of credit to
purchasers of manufactured homes and motor homes, general economic
conditions, and the availability and price of motor fuels.
Customers and Marketing
The Company's customers requiring delivery of manufactured homes, recreational
vehicles, commercial trucks, and specialized vehicles are located in various
parts of the United States. The Company's largest manufactured housing customers
include Oakwood Homes Corporation, Fleetwood Enterprises, Inc., Champion
<PAGE>
Enterprises, Inc., Cavalier Homes, Inc., Clayton Homes, Inc., Four Seasons
Housing, Inc., Palm Harbor, and Skyline Corporation. The Company's largest
Driver Outsourcing customers include Winnebago Industries, Inc., Thor
Industries, Inc., Ryder System, Inc. and Fairmont Homes. The Company's largest
Specialized Outsourcing Services customers include Fleetwood Enterprises, Inc.,
North American Van Lines, Inc., and Xtra Lease, Inc. While most manufacturers
rely solely on carriers such as the Company, other manufacturers operate their
own equipment and may employ outside carriers on a limited basis.
The Company's operating revenues are comprised primarily of linehaul revenues
derived by multiplying the miles of a given shipment by the stated mileage rate.
Operating revenues also include charges for permits, insurance, escorts and
other items. A substantial portion of the Company's operating revenues is
generated under one, two, or three-year contracts with producers of manufactured
homes, recreational vehicles, and the other products. In these contracts, the
manufacturers agree that a specific percentage (up to 100%) of their
transportation service requirements from a particular location will be performed
by the Company on the basis of a prescribed rate schedule, subject to certain
adjustments to accommodate increases in the Company's transportation costs.
Linehaul revenues generated under customer contracts in 1997, 1998 and 1999 were
60%, 64%, and 71% of total linehaul revenues, respectively.
The Company's ten largest customers all have been served for at least three
years and accounted for approximately 66%, 69% and 68% of its linehaul revenues
in 1997, 1998 and 1999, respectively. Linehaul revenues under contract with
Fleetwood Enterprises, Inc. ("Fleetwood"), accounted for approximately $28.1
million, $26.0 million and $23.9 million of linehaul revenues in 1997, 1998 and
1999, respectively. Linehaul revenues with Oakwood Homes Corporation ("Oakwood")
accounted for approximately $21.6 million, $31.8 million and $28.8 million of
linehaul revenues in 1997, 1998 and 1999, respectively. The Fleetwood
Manufactured Housing contract is continuous unless cancelled by either party
with a thirty (30) day written notice. The Oakwood manufactured housing contract
is renewed annually. The Company has been servicing Fleetwood for over 25 years
and Oakwood for over ten years. Most contracts provide for scheduled rate
increases based upon the regional fuel prices. These increases are generally
past on to the independent owner/operators who purchase fuel.
The Company markets and sells its services through 98 locations in 32 states,
concentrated where manufactured housing and motor home production facilities are
located. Marketing support personnel are located both at the Company's Elkhart,
Indiana headquarters and regionally. Dispatch offices are supervised by regional
offices.
The Company has 35 dispatch offices each devoted primarily to a single customer
facility. This allows the dispatching agent and local personnel to focus on the
needs of each individual customer while remaining supported by the Company's
nationwide operating structure. Sales personnel at regional offices and at the
corporate headquarters meet periodically with manufacturers to review production
schedules, requirements and maintain contact with customers' shipping personnel.
Senior management maintains personal contact with corporate officers of the
Company's largest customers. Regional and terminal personnel also develop
relationships with manufactured home park owners, retailers, and others to
promote the Company's shipments of used manufactured homes. The Company also
participates in industry trade shows throughout the country and advertises in
trade magazines, newspapers, and telephone directories.
Independent Owner-Operators
The shipment of product by Manufactured Housing and a portion of Specialized
Outsourcing Services is conducted by contracting for the use of the equipment of
independent owner-operators.
Owner-operators are independent contractors who own toters, tractors or pick-up
trucks which they contract to, and operate for, the Company on a long-term
basis. Independent owner-operators are not generally approved to transport
commodities on their own in interstate or intrastate commerce. The Company,
however, possesses such approvals and/or authorities (see
"Business-Regulation"), and provides marketing, insurance, communication,
administrative, and other support required for such transportation.
The Company attracts independent owner-operators mainly through field
recruiters, trade magazines, referrals, and truck stop brochures. The Company
has in the past been able to attract new independent owner-operators primarily
because of its competitive compensation structure, its ability to provide loads
and its reputation in the industry. Recruitment and retention of qualified
drivers is highly competitive and there can be no assurance that the Company
will be able to attract a sufficient number of qualified, independent
owner-operators in the future.
<PAGE>
The contract between the Company and each owner operator can be canceled upon
ten day's notice by either party. The weighted average length of service of the
Company's current independent owner-operators is approximately 3.5 years in 1999
and 3.0 years in 1998. At December 31, 1999, 1,320 independent owner-operators
were under contract to the Company, including 1,015 operating toters, 144
operating semi-tractors, and 161 operating pick-up trucks.
In Manufactured Housing, independent owner-operators utilizing toter equipment
tend to exclusively transport manufactured housing, modular structures, or
office trailers. Once modified from a semi-tractor, a toter has limited
applications for hauling general freight. Toter drivers are, therefore, unlikely
to be engaged by transport firms that do not specialize in manufactured housing.
This gives the Company an advantage in retaining toter independent
owner-operators. The average tenure with the Company of its toter independent
owner-operators is 3.9 years in 1999 compared to 3.3 years in 1998.
In Specialized Outsourcing Services, Morgan is competing with national carriers
for the recruitment and retention of independent owner-operators who own
tractors. The average length of service of the Company's independent
owner-operators is approximately 2.3 years, compared to 2.1 years in 1998.
Independent owner-operators are generally compensated for each trip on a per
mile basis. Independent owner-operators are responsible for operating expenses,
including fuel, maintenance, lodging, meals, and certain insurance coverages.
The Company provides required permits, cargo and liability insurance (coverage
while transporting goods for the Company), and communications, sales and
administrative services. Independent owner-operators, except for owners of
certain pick-up trucks, are required to possess a commercial drivers license and
to meet and maintain compliance with requirements of the U.S. Department of
Transportation and standards established by the Company.
From time to time, tax authorities have sought to assert that independent
owner-operators in the trucking industry are employees, rather than independent
contractors. No such tax claims have been successfully made with respect to
independent owner-operators of the Company. Under existing industry practice and
interpretations of federal and state tax laws, as well as the Company's current
method of operation, the Company believes that its independent owner-operators
are not employees. Whether an owner operator is an independent contractor or
employee is, however, generally a fact-sensitive determination and the laws and
their interpretations can vary from state to state. There can be no assurance
that tax authorities will not successfully challenge this position, or that such
tax laws or interpretations thereof will not change. If the independent
owner-operators were determined to be employees, such determination could
materially increase the Company's employment tax and workers' compensation
exposure.
Driver Outsourcing
The Company utilizes both independent contractors and employees in its
outsourcing operations. The Company outsources its over 1,470 drivers on a
trip-by-trip basis for delivery to retailers and rental truck agencies,
recreational and commercial vehicles, such as buses, tractors, and commercial
vans. These individuals are recruited through driver recruiters, trade
magazines, brochures, and referrals. Prospective drivers are required to possess
at least a chauffeur's license and are encouraged to obtain a commercial
driver's license. They must also meet and maintain compliance with requirements
of the U.S. Department of Transportation and standards established by the
Company. Outsourcing drivers are utilized as needed, depending on the Company's
transportation volume and driver availability. Outsourcing drivers are paid on a
per mile basis. The driver is responsible for most operating expenses, including
fuel, return travel, lodging, and meals. The Company provides licenses, cargo
and liability insurance, communications, sales, and administrative services.
Agents and Employees
The Company has approximately 91 terminal managers and assistant terminal
managers who are involved directly with the management of equipment and drivers.
Of these 91 staff, approximately 73 are full-time employees and the remainder
are independent contractors who earn commissions. The terminal personnel are
responsible for the Company's terminal operations including safety, customer
relations, equipment assignment, and other matters. Because terminal personnel
develop close relationships with the Company's customers and drivers, from time
to time the Company has suffered a terminal personnel defection, following which
the former staff has sought to exploit such relationships in competition with
<PAGE>
the Company. The Company does not expect that future defections, if any, would
have a material affect on its operations. In addition to the terminal personnel,
the Company employs approximately 225 full-time employees. The Company also has
11 full-time employee drivers in Manufactured housing and 11 in Driver
Outsourcing.
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.
Risk Management, Safety and Insurance
The risk of substantial losses arising from traffic accidents is inherent in any
transportation business. The Company carries insurance with a deductible of
$250,000 per occurrence except for the period from April 1, 1998 through March
31, 1999 when the deductible was $150,000 for personal injury and property
damage. The Company has been approved but has not activated a self-insurance
authority for personal injury and property damage coverage of up to $1 million.
For the period April 1, 1997 to March 31, 1998 the Company carried cargo
insurance with a $250,000 deductible. The deductible was $150,000 for the period
April 1, 1998 to March 31, 1999. Effective April 1, 1999, the Company is
self-insured for up to $1 million of cargo coverage. The Company's cargo
insurance policy for the year ended March 31, 1999 included a stop-loss
provision. The frequency and severity of claims under the Company's liability
insurance affects the cost and potentially the availability of such insurance.
If the Company is required to pay substantially greater insurance premiums, or
incurs substantial losses above its insurance coverage or below its deductibles,
its results could be materially adversely affected. The Company continues to
review its insurance programs, self-insurance limits and excess policy
provisions. The Company believes that its current insurance coverage is adequate
to cover its liability risks. There can be no assurance that the Company can
continue to maintain its present insurance coverage on acceptable terms.
The following table sets forth information with respect to bodily injury,
property damage, cargo claims, and automotive physical damage reserves for the
years ended December 31, 1997, 1998, and 1999, respectively.
Claims Reserve History
Years Ended December 31,
(in thousands)
1997 1998 1999
------- ------- -------
Beginning Reserve Balance $ 4,660 $ 5,323 $ 8,108
Provision for Claims 7,204 7,698 8,633
Payments, net (6,541) (4,913) (8,323)
------- ------- -------
Ending Reserve Balance $ 5,323 $ 8,108 $ 8,418
======= ======= =======
The Company has driver recognition programs emphasizing safety to enhance the
Company's overall safety record. In addition to periodic recognition for safe
operations, the Company has implemented safe driving bonus programs. These plans
generally reward drivers on an escalating rate per mile based upon the
claim-free miles driven. The Company utilizes a field safety organization which
places a dedicated safety officer at each regional center. These individuals
work towards improving safety by analyzing claims, identifying opportunities to
reduce claims costs, implementing preventative programs to reduce the number of
incidents, and promoting the exchange of information to educate others. The
Company has a Senior Vice President of Safety, a Director of Safety and D.O.T.
Compliance, seven (7) field safety managers, and a Director - Risk Management.
Interstate makes available physical damage insurance coverage for the Company's
independent owner-operators. Interstate also writes performance surety bonds for
Morgan. The Company may also utilize its wholly-owned insurance subsidiary to
secure business insurance for Morgan through re-insurance contracts.
Competition
All of the Company's activities are highly competitive. In addition to fleets
operated by manufacturers, the Company competes with large national carriers,
many of whom have substantially greater resources than the Company and numerous
small regional or local carriers. The Company's principal competitors in the
Manufactured Housing and Specialized Outsourcing Services marketplaces are
privately owned. No assurance can be given that the Company will be able to
maintain its competitive position in the future.
Competition among carriers is based on the rate charged for services, quality of
service, financial strength, and insurance coverage. The availability of tractor
equipment and the possession of appropriate registration approvals permitting
shipments between points required by the customer may also be influential.
Regulation
The Company's interstate operations (Morgan and TDI) are now subject to
regulation by the Federal Highway Administration ("FHWA") which is an agency of
the United States Department of Transportation ("D.O.T."). This jurisdiction was
transferred to the D.O.T. with the enactment of the Interstate Commerce
Commission Termination Act. Effective January 1, 1995, the economic regulation
of certain intrastate operations by various state agencies was preempted by
federal law. The states continue to have jurisdiction primarily to insure that
carriers providing intrastate transportation services maintain required
insurance coverage, comply with applicable safety regulations, and conform to
regulations governing size and weight of shipments on state highways. Most
states have adopted the D.O.T. safety regulations and actively enforce them in
conjunction with D.O.T. personnel.
Motor carriers normally are required to obtain approval and/or authority from
the FHWA as well as various state agencies. Morgan is approved and/or holds
authority to provide interstate and intrastate transportation services from, to,
and between all points in the continental United States.
The Company provides services to certain specific customers under contract and
non-contract services to the shipping public pursuant to governing rates and
charges maintained at its corporate and various dispatching offices.
Transportation services provided pursuant to a written contract are designed to
meet a customer's specific shipping needs.
Federal regulations govern not only operating authority and registration, but
also such matters as the content of agreements with independent owner-operators,
required procedures for processing of cargo loss and damage claims, and
financial reporting. The Company believes that it is in substantial compliance
with all material regulations applicable to its operations.
The D.O.T. regulates safety matters with respect to the interstate operations of
the Company. Among other things, the D.O.T. regulates commercial driver
qualifications and licensing; sets minimum levels of financial responsibility;
requires carriers to enforce limitations on drivers' hours of service;
prescribes parts, accessories and maintenance procedures for safe operation of
commercial/motor vehicles; establishes health and safety standards for
commercial motor vehicle operators; and utilizes audits, roadside inspections
and other enforcement procedures to monitor compliance with all such
regulations. The D.O.T. has established regulations which mandate random,
periodic, pre-employment, post-accident and reasonable cause drug testing for
commercial drivers and similar regulations for alcohol testing. The Company
believes that it is in substantial compliance with all material D.O.T.
requirements applicable to its operations.
In Canada, provincial agencies grant both intraprovincial and extraprovincial
authority; the latter permits transborder operations to and from the United
States. The Company has obtained from Canadian provincial agencies all required
extraprovincial authority to provide transborder transportation of manufactured
homes and motor homes throughout most of Canada.
Most manufactured homes, when being transported by a toter, exceed the maximum
dimensions allowed on state highways without a special permit. The Company
obtains these permits for its independent contractor owner-operators from each
state which allows the Company to transport their manufactured homes on state
highways. The states and Canadian provinces have special requirements for
over-dimensional loads detailing permitted routes, timing required, signage,
escorts, warning lights and similar matters.
Most states and provinces also require operators to pay fuel taxes, comply with
a variety of other state tax and/or registration requirements, and keep evidence
of such compliance in their vehicles while in transit. The Company coordinates
compliance with these requirements by its drivers and independent contractor
owner-operators, and monitors their compliance with all applicable safety
regulations.
Interstate, the Company's insurance subsidiary, is a captive insurance company
incorporated under Vermont law. It is required to report annually to the Vermont
Department of Banking, Insurance, Securities, & Health Care Administration, and
must submit to an examination by this Department on a triennial basis. Vermont
regulations require Interstate to be audited annually and to have its loss
reserves certified by an approved actuary. The Company believes Interstate is in
substantial compliance with Vermont insurance regulations.
Finance, the Company's finance subsidiary, is incorporated under Indiana law.
Finance is subject to Indiana's Equal Credit Opportunity Laws and other state
and federal laws relating generally to fair financing practices.
<PAGE>
Item 2. PROPERTIES
The Company owns approximately 24 acres of land with improvements in Elkhart,
Indiana. The improvements include a 23,000 square foot office building housing
the Company's principal office and Manufactured Housing; a 7,000 square foot
building housing Specialized Outsourcing Services; a 9,000 square foot building
used for the Company's safety and driver service departments. The driver
training and licensing operation was discontinued during 1999. Most of the
Company's 103 locations are situated on leased property. The Company also owns
and leases property for parking and storage of equipment at various locations
throughout the United States, usually in proximity to manufacturers of products
moved by the Company. The property leases have term commitments of a minimum of
thirty days and a maximum of three years, at monthly rentals ranging from $25 to
$6,500. The following table summarizes the Company's owned real property.
Property Property Approximate
Location Description Acreage
Elkhart, Indiana Corporate and
Specialized Outsourcing Services 24
Wakarusa, Indiana Terminal and storage 4
Middlebury, Indiana Terminal and storage 13
Mocksville, North Carolina Terminal and storage 8
Edgerton, Ohio Terminal and storage 2
Woodburn, Oregon Storage 4
Woodburn, Oregon Region and storage 1
Montevideo, Minnesota Terminal and storage 3
The following property is
owned and is being held for sale:
Fort Worth, Texas Region and storage 6
Item 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are party to litigation in the ordinary course
of business, generally involving liability claims in connection with traffic
accidents incidental to its transport business. From time to time the Company
may become party to litigation arising outside the ordinary course of business.
The Company does not expect such pending suits to have a material adverse effect
on the Company or its results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the American Stock Exchange under the
symbol MG. As of March 24, 2000, the approximate number of shareholders of
record of the Company's Class A common stock was 126. This figure does not
include shareholders with shares held under beneficial ownership in nominee name
or within clearinghouse position of brokerage firms and banks. The Class B
common stock is held of record by Brighton Communications Corporation, a
subsidiary of Lynch Interactive Corporation.
Market Price of Class A common stock:
1999 1998
Quarter Ended High Low High Low
March 31 $ 9.13 $ 6.63 $ 10.25 $ 8.75
June 30 8.75 6.75 11.63 9.50
September 30 9.88 7.00 10.19 6.50
December 31 7.88 5.44 7.75 6.88
Dividends Declared:
Class A Class B
Cash Dividends Cash Dividends
Quarter Ended 1999 1998 1999 1998
March 31 $ .02 $ .02 $ .01 $ .01
June 30 .02 .02 .01 .01
September 30 .02 .02 .01 .01
December 31 .02 .02 .01 .01
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
THE MORGAN GROUP, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(Dollars in thousands, except share amounts) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Operations
<S> <C> <C> <C> <C> <C>
Operating Revenues $145,629 $150,454 $146,154 $132,208 $122,303
Operating Income (Loss) (1) 550 2,007 1,015 (3,263) 3,371
Pre-tax Income (Loss) (1) 212 1,462 296 (3,615) 3,284
Net Income (Loss) (1) 19 903 196 (2,070) 2,269
Net Income (Loss) Per Share:
Basic $0.01 $0.35 $0.07 ($0.77) $0.80
Diluted 0.01 0.35 0.07 (0.77) 0.73
Cash Dividends Declared:
Class A .08 0.08 0.08 0.08 0.08
Class B .04 0.04 0.04 0.04 0.04
Financial Position
Total Assets $32,264 $33,387 $33,135 $33,066 $30,795
Working Capital 3,189 3,806 1,613 1,635 8,293
Long-term Debt 965 1,480 2,513 4,206 3,275
Shareholders' Equity 12,092 13,221 12,724 13,104 15,578
Common Shares Outstanding at Year
End 2,448,157 2,554,085 2,637,910 2,685,520 2,649,554
Basic Weighted Average Shares
Outstanding 2,469,675 2,606,237 2,656,690 2,684,242 2,582,548
</TABLE>
(1) Includes pre-tax special charges of $624,000 ($412,000 after-tax) and
$3,500,000 ($2,100,000 after-tax) in 1997 and 1996, respectively.
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Year 1999 Compared with 1998
Consolidated Results
During 1999, the Company experienced a decrease in the number of Manufactured
Housing shipments and a continued increase in insurance and claims costs. The
Company also experienced a reduction in operating revenues and profitability in
the Specialized Outsourcing Services segment.
Industrial shipment of new manufactured homes decreased approximately 4% in
1999. Morgan was more severely impacted as our largest customer experienced an
approximate 21% decline in retail sales of new homes. As a result, the Company
sustained an 8% decrease in shipments of new homes in 1999. The Company believes
that this depressed level of unit shipments in Manufactured Housing will
continue through the first half of 2000 and possibly moderating in the second
half of the year. Consequently, the Company may experience continued decreases
in profitability for the first quarter of 2000.
The Company in March 2000 instituted staff reduction and other cost savings
initiatives. It is currently estimated that the cost savings of these
initiatives will approximate $2.4 million annually. The impact of the cost
savings for 2000 is expected to approximate $1.8 million, net of severance
costs.
Total operating revenues in 1999 decreased $4.9 million to $145.6 million from
$150.5 million in 1998. Operating income before interest, taxes, depreciation
and amortization (EBITDA) decreased from $3.2 million in 1998 to $1.8 million in
1999.
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 data
prepared in accordance with generally accepted accounting principles.
Net interest expense decreased from $545,000 in 1998 to $338,000 in 1999 as a
result of improved cash management which reduced the amount of borrowings from
the credit facility.
For information concerning the provision for income taxes as well as information
regarding differences between effective tax rates and statutory rates, see Note
5 of the Notes to Consolidated Financial Statements.
Accordingly, net income for 1999 was $19,000 compared to $903,000 in 1998.
Segment Results
The Company conducts its operations in four principal segments as discussed
below. The following discussion sets forth certain information about the segment
results.
Manufactured Housing
Manufactured Housing operating revenues are generated from providing
transportation and logistical services to manufacturers of manufactured homes.
Manufactured Housing operating revenues began decreasing in the second quarter;
and ended the year at $99.5 million, or a 6% reduction from 1998. In spite of
this reduction, EBITDA for 1999 ended at $10.3 million compared to $10.8 million
for 1998 because of cost reduction measures instituted by management that
largely mitigated the revenue decline.
<PAGE>
Driver Outsourcing
Driver Outsourcing provides outsourcing transportation services primarily to
manufacturers of recreational vehicles, commercial trucks and other specialized
vehicles. This segment of the business demonstrated good growth in 1999.
Operating revenues increased 18% to $23.4 million in 1999 while EBITDA increased
by $301,000. However, high driver recruiting and other overhead costs continue
to depress the profitability of this segment. Management is planning additional
programs to reduce overhead costs and to focus their marketing efforts toward
higher volume customers. Higher volume accounts should provide further
opportunities to consolidate operations and increase productivity.
Specialized Outsourcing Services
Specialized Outsourcing Services consists of large trailers, travel and other
small trailers and another specialized transport service ("Decking"). Operating
revenues decreased 8% to $21.2 million in 1999. This decrease was primarily the
result of changes in the customer base and a reduction in available drivers.
Specialized Outsourcing Services EBITDA decreased $542,000 primarily on the
lower volume and increased overhead costs associated with large trailer
delivery.
Insurance/Finance
The Company's Insurance/Finance segment provides insurance and financing
services to the Company's drivers and independent owner-operators. This segment
also acts as a cost center whereby all bodily injury, property damage and cargo
loss costs are captured.
Insurance/Finance operating revenues decreased less than 3% in 1999,
particularly in the latter months of the year reflecting a decrease in
owner-operator insurance premiums relating to the slow-down in the manufactured
housing industry.
The Company in 1999 continued to be penalized by increasing claims costs. Claim
costs in 1999, as a percent of operating revenue increased to 5.9% from 5.1% in
1998. Effective April 1, 1999, the deductible for personal injury and property
damage increased to $250,000 per occurrence. Additionally, the cargo stop-loss
insurance policy provision terminated and the deductible was increased to
$1,000,000. Accordingly, the Company is essentially self-insured for cargo
losses. The Company continues to review its insurance programs, self-insurance
limits and excess policy provisions. The Company believes that its current
insurance coverage is adequate to cover its liability risks.
Year 1998 Compared with 1997
Consolidated Results
Net income for 1998 was $903,000 compared with $196,000 for 1997. The results
for 1997 included a special charge of $412,000 after-tax.
In 1998 total operating revenues increased to $150.5 million from $146.2
million. 1997 operating revenues included $3.3 million from a discontinued line
of business. Excluding the discontinued line of business, total operating
revenues from continued operations increased 5% in 1998.
EBITDA increased from $2.1 million in 1997 to $3.2 million in 1998. EBITDA for
1997 is after special charges of $624,000.
Net interest expense decreased from $719,000 in 1997 to $545,000 in 1998 as a
result of improved cash flows that allowed the Company to reduce the amount of
debt outstanding under its credit facilities.
<PAGE>
Segment Results
Manufactured Housing
Manufactured housing operating revenue increased $762,000 to $106.1 million in
1998. This increase was primarily with contract and other large manufactured
housing customers that the Company services. Partially offsetting this growth
was the loss of accounts in the second half of the year primarily in the South.
Manufactured housing EBITDA increased $2.1 million, or 24%, primarily due to a
reduction in overhead costs resulting from force reductions and field office
consolidations or eliminations.
Driver Outsourcing
Driver Outsourcing 1998 EBITDA improved $162,000 on a modest increase in
operating revenues primarily due to improved operating costs.
Specialized Outsourcing Services
Specialized outsourcing services operating revenues increased $3,352,000 to
$23.1 million in 1998. The large trailer delivery service operating revenues
grew 32% in 1998 to $20.8 million. This growth was primarily due to improved
owner-operator utilization and an approximate 50% increase in independent
owner-operators. Additionally, Decking operating revenues grew to $2.3 million
in 1998. Partially offsetting this growth was a decrease in operating revenues
from the delivery of travel and other small trailers. Specialized Outsourcing
Services EBITDA decreased $281,000 primarily due to increased recruiting,
dispatch, and other administrative costs.
Insurance/Finance
Claim costs in 1998, as a percent of operating revenue, increased to 5.1% from
4.9% in 1997. This negative trend offsets the benefits of lower insurance
expense and the transfer of more losses to the insurers in 1998.
The increase in claims costs was primarily responsible for the increased loss of
the Insurance/Finance segment.
Liquidity and Capital Resources
Operating activities generated $4.9 million of cash in 1999 compared to $5.5
million in 1998. Net income plus depreciation and amortization along with
decreases in trade accounts receivable, other accounts receivable, prepaid
expenses, other current assets, and an increase in other accrued liabilities was
partially offset by a decrease in trade accounts payable and income taxes
payable. Trade accounts receivable decreased $2.1 million primarily due to the
decline in operating revenue. Days sales outstanding ("DSO") remained at 28 days
at December 31, 1999 as compared to December 31, 1998. The decrease in other
accounts receivable is primarily collection of refund amounts due from the
Company's primary insurance provider.
The investment in property and equipment increased in 1999 with expenditures for
an optical scanning system and other new information systems. The 2000 capital
expenditure plan approximates $500,000 but is dependent upon the Company
achieving a higher operating revenue level.
Net cash used in financing activities decreased to $1.7 million in 1999. The
Company on March 19, 1999 concluded a tender offer whereby it acquired 102,528
shares at $9.00 a share of its Class A common stock at a total cost of $985,000.
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 the shareholder return and with its previous purchases of
outstanding shares. Cash was also used for payments on term and promissory
notes, dividends and the purchase of company stock.
The Company entered into a $20.0 million revolving credit facility ("Credit
Facility") on January 28, 1999 with the Transportation Division of BankBoston,
N.A. The term of the Credit Facility is for two years, subject to annual renewal
thereafter. The Credit Facility also provides for excess short-term borrowings
<PAGE>
of up to $5.0 million based on a leverage test. The Company had no outstanding
loans, but had $8.1 million of letters of credit outstanding under its credit
facility at December 31, 1999. The total amount available for borrowing under
the credit facility was $3.1 million at December 31, 1999.
The Credit Facility contains financial covenants, the most restrictive of which
are a debt service to cash flow coverage ratio and an interest expense coverage
ratio. The Company projected it was probable that a violation of one or more of
the financial covenants would occur at each of the measurement dates during
2000. The Company and the bank, on March 30, 2000, agreed to modify the affected
covenants. This amendment will limit the payment of dividends to $120,000
annually ($142,000 was declared in 1999), prohibits the acquisition of Company's
common stock, and limits borrowings and letters of credit to the Borrowing Base.
This amendment provides for the payment of up front fees of $25,000, an increase
of twenty-five basis points on the interest rate and an increase of twelve and
one half basis points in the commitment fee.
The Company believes, based on its current financial projections, that it will
maintain compliance with the amended covenants throughout the fiscal year 2000
and that the Credit Facility should be adequate to meet the Company's short-term
liquidity needs.
The Company in 1999 paid annual Class A common stock dividends totaling $.08 per
share and Class B common stock dividends totaling $.04 per share. Payment of any
future dividends will be dependent upon, among other things, earnings, debt
covenants, future growth plans, legal restrictions, and the financial condition
of the Company.
The Company had minimal exposure to interest rates as of December 31, 1999, as
substantially all of its outstanding long-term debt bears fixed rates. The
Credit Facility mentioned above bears variable interest rates based on either a
Federal Funds rate or the Eurodollar rate. Accordingly, borrowings under the
Credit Facility 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.
Impact of Year 2000
Some of the Company's existing computer systems, applications, and other
non-computer control devices were initially designed to use two digits rather
than four digits to define the applicable year. If not modified, that software
or system was likely to interpret a date using "00" as the year 1900 rather than
the year 2000, which could have resulted in erroneous results or system failure.
Through March 30, 2000, the Company has experienced no significant problems
resulting from the Year 2000 issue. The company believes that we have identified
and corrected substantially all of the major systems, software applications and
related equipment used in connection with our internal operations that required
modification or upgrading in order to minimize the possibility of a material
disruption to our business. The Company expended approximately $336,000 on the
project.
During 1999, the Company evaluated its customers and suppliers to determine if
they had taken adequate measures to ensure that necessary modifications were
made to the software and hardware prior to the year 2000. As of this date, there
has been no measurable impact resulting from Year 2000 failures by any of the
Company's major customers or vendors. We have developed contingency plans to
address Year 2000 issues that may arise and pose significant risk to our
business.
Inflation
Most of the Company's expenses are affected by inflation, which generally
results in increased costs. During 1999, the effect of inflation on the
Company's results of operation was minimal.
The transportation industry is dependent upon the availability and cost of fuel.
Although fuel costs are paid by the Company's owner-operators, increases in fuel
prices may have significant adverse effects on the Company's operations for
various reasons. Since fuel costs vary between regions, drivers may become more
selective as to which regions they will transport goods resulting in diminished
driver availability. Also, the Company would experience adverse effects during
the time period from when fuel costs begin to increase until the time when
scheduled rate increases to customers are enacted. Increases in fuel prices may
also affect the sale of recreational vehicles by making the purchase less
attractive to consumers. A decrease in the sale of recreational vehicles would
be accompanied by a decrease in the transportation of recreational vehicles and
a decrease in the need for Driver Outsourcing services.
<PAGE>
Long-Lived Assets
The Company periodically assesses the net realizable value of its long-lived
assets and evaluates such assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
The Company continues to assess the recoverability of the goodwill associated
with two recent acquisitions. The total amount under review is $5.6 million. The
Company does not believe there is an impairment of long-lived assets, including
goodwill.
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 Information
Forward-looking statements in this report, including, without limitation,
statements relating to future events or the future financial performance of the
Company appear in the preceding Management's Discussion and Analysis of
Financial Condition and Results of Operations and in other written and oral
statements made by or on behalf of the Company, including, without limitation,
statements relating to the Company's goals, strategies, expectations,
competitive environment, regulation and availability of resources. Such
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that such forward-looking statements involve risks and uncertainties that could
cause actual events and results to be materially different from those expressed
or implied herein, including, but not limited to, the following: (1) dependence
on the Manufactured Housing industry; (2) costs of accident claims and
insurance; (3) customer contracts and concentration; (4) the competition for
qualified drivers; (5) independent contractors, labor matters; (6) risks of
acquisitions; (7) seasonality and general economic conditions; (8) the Company's
ability to locate and correct relevant year 2000 compliance problems and the
ability of the Company's customers and suppliers to address their year 2000
compliance issues; and (9) other risks and uncertainties indicated from time to
time in the Company's filings with the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 7A of Form 10-K appears in Item 7 of this
report under the heading "Liquidity and Capital Resources" and is incorporated
herein by this reference.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Morgan Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,847 $ 1,490
Trade accounts receivable, less allowances
of $313 in 1999 and $208 in 1998 10,130 12,188
Accounts receivable, other 313 1,214
Prepaid expenses and other current assets 1,960 2,467
Deferred income taxes 1,475 1,230
-------- --------
Total current assets 17,725 18,589
-------- --------
Property and equipment, net 4,309 4,117
Intangible assets, net 7,361 8,030
Deferred income taxes 2,172 1,997
Other assets 697 654
-------- --------
Total assets $ 32,264 $ 33,387
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 3,907 $ 4,304
Accrued liabilities 4,852 3,566
Income taxes payable 278 878
Accrued claims payable 3,071 3,553
Refundable deposits 1,752 1,830
Current portion of long-term debt and capital lease obligations 676 652
-------- --------
Total current liabilities 14,536 14,783
-------- --------
Long-term debt and capital lease obligations, less current portion 289 828
Long-term accrued claims payable 5,347 4,555
Commitments and contingencies -- --
Shareholders' equity:
Common stock, $.015 par value
Class A: Authorized shares - 7,500,000
Issued shares - 1,607,303 23 23
Class B: Authorized shares - 2,500,000
Issued and outstanding shares - 1,200,000 18 18
Additional paid-in capital 12,459 12,459
Retained earnings 2,775 2,898
-------- --------
Total capital and retained earnings 15,275 15,398
Less - treasury stock at cost (359,146 in 1999 and
253,218 in 1998 Class A shares) (3,183) (2,177)
-------- --------
Total shareholders' equity 12,092 13,221
-------- --------
Total liabilities and shareholders' equity $ 32,264 $ 33,387
======== ========
</TABLE>
See accompanying notes.
<PAGE>
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
For the year ended December 31
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Operating revenues $ 145,629 $ 150,454 $ 146,154
Costs and expenses:
Operating costs 133,774 136,963 133,732
Selling, general and administration 10,090 10,254 9,708
Depreciation and amortization 1,215 1,230 1,075
Special charges -- -- 624
---------- ---------- ----------
145,079 148,447 145,139
---------- ---------- ----------
Operating income 550 2,007 1,015
Interest expense, net 338 545 719
---------- ---------- ----------
Income before income taxes 212 1,462 296
Income tax expense 193 559 100
---------- ---------- ----------
Net income $ 19 $ 903 $ 196
========== ========== ==========
Net income per basic and diluted share $ 0.01 $ 0.35 $ 0.07
========== ========== ==========
Basic weighted average shares outstanding 2,469,675 2,606,237 2,656,690
========== ========== ==========
</TABLE>
See accompanying notes.
<PAGE>
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Class A Class B Additional
Common Common Paid-in Officer Treasury Retained
Stock Stock Capital Loan Stock Earnings Total
----- ----- ------- ---- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 23 $ 18 $12,441 $(504) $(1,000) $2,126 $13,104
Net income -- -- -- -- -- 196 196
Purchase of treasury stock -- -- -- -- (426) -- (426)
Common stock dividends:
Class A ($.08 per share) -- -- -- -- -- (114) (114)
Class B ($.04 per share) -- -- -- -- -- (48) (48)
Issuance of a director's stock options -- -- 12 -- -- -- 12
------- ------- -------- ------- ------- ------- --------
Balance at December 31, 1997 23 18 12,453 (504) (1,426) 2,160 12,724
Net income -- -- -- -- -- 903 903
Purchase of treasury stock -- -- -- 504 (813) -- (309)
Common stock dividends:
Class A ($.08 per share) -- -- -- -- -- (117) (117)
Class B ($.04 per share) -- -- -- -- -- (48) (48)
Options exercised -- -- 6 -- 62 -- 68
------- ------- -------- ------- -------- ------- --------
Balance at December 31, 1998 $23 $18 $12,459 $ -- $(2,177) $2,898 $13,221
Net income -- -- -- -- -- 19 19
Purchase of treasury stock -- -- -- -- (1,006) -- (1,006)
Common stock dividends:
Class A ($.08 per share) -- -- -- -- -- (94) (94)
Class B ($.04 per share) -- -- -- -- -- (48) (48)
------- ------- -------- ------- -------- ------- --------
Balance at December 31, 1999 $23 $18 $12,459 $ -- $(3,183) $2,775 $12,092
====== ====== ======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
<PAGE>
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
For the year ended December 31
1999 1998 1997
------- ------- -------
Operating activities:
<S> <C> <C> <C>
Net income $ 19 $ 903 $ 196
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,215 1,246 1,108
Deferred income taxes (420) (713) (179)
Special charges -- -- 624
Non-cash compensation expense for stock options -- -- 12
(Gain) loss on disposal of property and equipment 101 20 (37)
Changes in operating assets and liabilities:
Trade accounts receivable 2,058 1,174 (2,050)
Other accounts receivable 901 (1,088) 148
Refundable taxes -- -- 321
Prepaid expenses and other current assets 507 139 795
Other assets (43) 810 (1,053)
Trade accounts payable (397) 207 1,770
Accrued liabilities 1,286 (612) (2,486)
Income taxes payable (600) 489 --
Accrued claims payable 310 2,785 663
Refundable deposits (78) 164 (242)
------- ------- -------
Net cash provided by (used in) operating activities 4,859 5,524 (410)
Investing activities:
Purchases of property and equipment (811) (585) (825)
Proceeds from sale of property and equipment 7 88 159
Proceeds from disposal of assets held -- -- 1,656
Business acquisitions (35) (228) (227)
------- ------- -------
Net cash (used in) provided by investing activities (839) (725) 763
Financing activities:
Net (payment) proceeds from revolving credit agreement -- (2,250) 1,000
Principle payments on long-term debt (664) (1,168) (2,366)
Proceeds from long-term debt 149 135 673
Purchase of treasury stock, net of officer loan of $504 in 1998 (1,006) (309) (426)
Proceeds from exercise of stock options -- 68 --
Common stock dividends paid (142) (165) (162)
------- ------- -------
Net cash used in financing activities (1,663) (3,689) (1,281)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 2,357 1,110 (928)
Cash and cash equivalents at beginning of period 1,490 380 1,308
------- ------- -------
Cash and cash equivalents at end of period $ 3,847 $ 1,490 $ 380
======= ======= =======
</TABLE>
See accompanying notes.
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Morgan Group, Inc. ("Company"), through its wholly owned subsidiaries,
Morgan Drive Away, Inc. ("Morgan") and TDI, Inc. ("TDI"), provides outsourced
transportation and logistical services to the manufactured housing and
recreational vehicle industries and is a leading provider of delivery services
to the commercial truck and trailer industries in the United States. Lynch
Interactive Corporation and its wholly owned subsidiaries ("Lynch Interactive")
owns all of the 1,200,000 shares of the Company's Class B common stock and
155,900 shares of the Company's Class A common stock, which in the aggregate
represents 70% of the combined voting power of the combined classes of the
Company's common stock.
The Company's other significant wholly owned subsidiaries are Interstate
Indemnity Company ("Interstate") and Morgan Finance, Inc. ("Finance"), which
provide insurance and financial services to its owner operators.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, Morgan, TDI, Interstate, and Finance. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of operating revenues and expenses during the reporting
period. Actual results could materially differ from those estimates.
Operating Revenues and Expense Recognition
Operating revenues and related driver pay are recognized when movement of the
product is completed. Other operating expenses are recognized when incurred.
Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the property and
equipment.
Intangible Assets
Intangible assets are comprised primarily of goodwill, which is stated at the
excess of purchase price over net asset acquired, net of accumulated
amortization of $3,547,000 and $2,843,000 at December 31, 1999 and 1998,
respectively. Intangible assets are being amortized by the straight-line method
over their estimated useful lives, which range from three to forty years.
<PAGE>
Impairment of Assets
The Company periodically assesses the net realizable value of its long-lived
assets and evaluates such assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
For assets to be held and used, impairment is determined to exist if estimated
undiscounted future cash flows are less than the carrying amount. For assets to
be disposed of, impairment is determined to exist if the estimated net
realizable value is less than the carrying amount.
Insurance and Claim Reserves
The Company maintains personal injury and property damage insurance with a
deductible of $250,000, $150,000 and $250,000 for the policy periods of April 1
to March 31, for the years of 1999, 1998, 1997 and prior, respectively. The
Company maintains cargo damage insurance with a deductible of $1,000,000,
$150,000, $250,000 for the policy periods of April 1 to March 31, for the years
of 1999, 1998, 1997 and prior, respectively. The insurance policy for the period
of April 1, 1998 to March 31, 1999 included a stop-loss provision, under which
the Company has recorded a receivable of $30,900 at December 31, 1999. The
Company carries statutory insurance limits on workers' compensation with a
deductible of $50,000. Claims and insurance accruals reflect the estimated
ultimate cost of claims for cargo loss and damage, personal injury and property
damage not covered by insurance. The Company believes that its current insurance
coverage is adequate to cover its liability risks. The Company accrues its
self-insurance liability using a case reserve method based upon claims incurred
and estimates of unasserted and unsettled claims. These liabilities have not
been discounted.
Stock-Based Compensation
The Company accounts for stock-based compensation under Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25").
Because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Net Income (Loss) Per Common Share
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 all
the years presented.
Fair Values of Financial Instruments
The carrying value of financial instruments such as cash and cash equivalents,
trade and other receivables, trade payables and long-term debt approximate their
fair values. Fair value is determined based on expected future cash flows,
discounted at market interest rates, and other appropriate valuation
methodologies.
Comprehensive Income
There were no items of comprehensive income for the years presented, as defined
under SFAS No. 130, "Reporting Comprehensive Income". Accordingly, comprehensive
income is equal to net income.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in fiscal
years beginning after June 15, 2000. Under the statement, all derivatives will
be required to be recognized on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. Under the statement, any ineffective portion of a derivative's change
<PAGE>
in fair value must be immediately recognized in earnings. The Company has not
yet determined what the effect of SFAS No. 133 will have on the earnings and
financial position of the Company.
2. PROPERTY AND EQUIPMENT
The components of property and equipment and their estimated useful lives are as
follows (in thousands):
Estimated December 31
Useful Life 1999 1998
----------- ---- ----
(Years)
Land -- $873 $873
Buildings 25 2,241 2,052
Transportation equipment 3 to 5 419 478
Office and service equipment 3 to 8 3,491 3,535
----- -----
7,024 6,938
Less accumulated depreciation 2,715 2,821
----- -----
Property and equipment, net $4,309 $4,117
====== ======
Depreciation expense was $511,000, $581,000 and $495,000 for 1999, 1998 and
1997, respectively.
3. INDEBTEDNESS
The Company has $20,000,000 revolving credit facility ("Credit Facility") which
expires February 28, 2001, and is subject to renewal annually, thereafter. If
not renewed, the Credit Facility shall convert to a three-year term loan. The
interest rate will be calculated, at the Company's option, on either the
lender's base rate, or Eurodollar rate, all of which are adjusted on a quarterly
basis and include a margin based upon performance ratios. A commitment fee of
.375% is required on the unused portion. Total borrowings and outstanding
letters of credit are limited to qualified trade accounts receivable, qualified
owner-operator loans, and cash investments (the "Borrowing Base"). The Credit
facility also provides for excess short-term borrowings of up to $5,000,000
based on a leverage test. This facility provides financing for working capital
and general corporate needs. At December 31, 1999, the Company had no
outstanding debt under its Credit Facility. The Company had $8,100,000 of
letters of credit outstanding on December 31, 1999. Letters of credit are
required for self-insurance retention reserves and other corporate needs.
The Credit Facility contains financial covenants, the most restrictive of which
are a debt service to cash flow coverage ratio and an interest expense coverage
ratio. The Company projected it was probable that a violation of one or more of
the financial covenants would occur at each of the measurement dates during
2000. The Company and the bank, on March 30, 2000, agreed to modify the affected
covenants. The Company believes that compliance with the amended covenants will
be maintained throughout the year 2000. This amendment will limit the payment of
dividends to $120,000 annually ($142,000 was declared in 1999), prohibits the
acquisition of Company's common stock, and limits borrowings and letters of
credit to the Borrowing Base. This amendment provides for the payment of up
front fees of $25,000, an increase of twenty-five basis points in the interest
rate and an increase of twelve and one half basis points in the commitment fee.
<PAGE>
Long-term debt and capital lease obligations consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31
1999 1998
---- ----
<S> <C> <C>
Term note with principal and interest payable monthly at 8.25% through
February 29, 2000 $ 13 $123
Promissory note with imputed interest at 7.81%, principal and interest
payments due annually through August 11, 2000 329 657
Promissory note with imputed interest at 10.0%, principal and interest payments
due monthly through September 6, 2000 29 --
Capital lease obligations with imputed interest from 10.29% to 11.04%, lease
payments due monthly 115 --
Promissory note with imputed interest at 7.0%, principal and interest payments
due annually through October 31, 2001 131 169
Promissory note with imputed interest at 6.31%, principal and interest
payments due quarterly through December 31, 2001 259 411
Promissory note with imputed interest at 8.5%, principal and interest payments
due quarterly through June 30, 2002 89 120
---- ------
965 1,480
Less current portion 676 652
----- ------
Long-term debt and capital lease obligations, net $289 $ 828
==== ======
</TABLE>
Maturities on long-term debt are $676,000 in 2000, $217,000 in 2001, and $72,000
in 2002.
Cash payments for interest were $406,000 in 1999, $566,000 in 1998, and $717,000
in 1997.
4. LEASES
The Company leases certain service equipment under capital leases. These assets
are included in property and equipment as follows (in thousands):
December 31,
1999
Service equipment $ 90
Less accumulated amortization (4)
-------
$ 86
=======
Future minimum annual lease payments as of December 31, 1999, are as follows (in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Lease Leases Total
<S> <C> <C> <C>
2000 $ 78 $ 889 $ 967
2001 44 553 597
2002 4 186 190
------- -------- --------
Total minimum lease payments 126 $ 1,628 $1,754
======= ========
Less amount representing interest 11
------
Present value of capitalized lease obligations $ 115
======
</TABLE>
Aggregate expense under operating leases approximated $2,115,000, $2,578,000,
and $2,817,000 for 1999, 1998 and 1997, respectively.
5. INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
The income tax provisions (benefits) are summarized as follows (in thousands):
For the Year Ended December 31
1999 1998 1997
------- ------- -------
Current:
State $ 98 $ 201 $ --
Federal 515 1,071 279
------- ------- -------
613 1,272 279
Deferred:
State (67) (203) 45
Federal (353) (510) (224)
------- ------- -------
(420) (713) (179)
------- ------- -------
$ 193 $ 559 $ 100
======= ======= =======
Deferred tax assets (liabilities) are comprised of the following (in thousands):
December 31
1999 1998
------- -------
Deferred tax assets:
Accrued insurance claims $ 3,232 $ 3,029
Special charges and accrued expenses 487 379
Depreciation 163 146
Other 125 62
------- -------
4,007 3,616
Deferred tax liabilities:
Prepaid expenses (360) (389)
Other -- --
------- -------
(360) (389)
------- -------
$ 3,647 $ 3,227
======= =======
<PAGE>
A reconciliation of the income tax provisions and the amounts computed by
applying the statutory federal income tax rate to income before income taxes
follows (in thousands):
For the Year Ended December 31
1999 1998 1997
----- ----- -----
Income tax provision at
federal statutory rate $ 72 $ 497 $ 101
State income tax, net of
federal tax benefit 20 48 3
Reduction attributable to
special election by captive -- -- (155)
insurance company
Changes in estimated state
tax rates on beginning -- (70) --
temporary differences
Permanent differences 101 84 94
Other -- -- 57
----- ----- -----
$ 193 $ 559 $ 100
===== ===== =====
Net cash payments for income taxes were $1,205,000, $810,000 and $54,000 in
1999, 1998 and 1997 respectively.
6. SHAREHOLDERS' EQUITY
The Company has two classes of common stock outstanding, Class A and Class B.
Under the bylaws of the Company: (i) each share of Class A is entitled to one
vote and each share of Class B is entitled to two votes; (ii) Class A
shareholders are entitled to a dividend ranging from one to two times the
dividend declared on Class B stock; (iii) any stock distributions will maintain
the same relative percentages outstanding of Class A and Class B; (iv) any
liquidation of the Company will be ratably made to Class A and Class B
shareholders after satisfaction of the Company's other obligations; and (v)
Class B stock is convertible into Class A stock at the discretion of the holder;
Class A stock is not convertible into Class B stock.
The Company's Board of Directors has approved the purchase of up to 250,000
shares of Class A Common Stock for its Treasury at various dates and market
prices. During the year ended December 31, 1999, the Company repurchased 2,900
shares totaling $22,000 under this plan. As of December 31, 1999, 186,618 shares
had been repurchased at prices between $6.875 and $11.375 per share for a total
of $1,561,000 under this plan.
In July 1998, the Company purchased 70,000 shares of Class A stock from a former
officer for $637,000 under a special stock purchase approved by the Board of
Directors.
In March 1999, the Company repurchased 102,528 shares of Class A stock in a
Dutch Auction for $985,000, which includes $62,000 of fees and expenses
associated with the transaction.
7. STOCK OPTION PLAN
The Company has a stock option plan which provides for the granting of incentive
or non-qualified stock options to purchase up to 200,000 shares of Class A
common stock to directors, officers, and other key employees. No options may be
granted under this plan for less than the fair market value of the common stock
at the date of the grant. Although the exercise period is determined when
options are actually granted, an option shall not be exercised later than ten
years and one day after it is granted. Stock options granted will terminate if
the grantee's employment terminates prior to exercise for reasons other than
retirement, death, or disability. Stock options vest over a four year period
pursuant to the terms of the plan, except for stock options granted to a
non-employee director, which are immediately vested. Employees and non-employee
directors have been granted non-qualified stock options to purchase 140,875 and
40,000 shares, respectively, of Class A common stock, net of cancellations and
shares exercised. There are 10,750 options reserved for future issuance.
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 170 $8.28 167 $8.32 176 $8.40
Granted 11 7.52 23 8.11 25 8.13
Exercised -- -- (7) 8.25 (26) 8.73
Canceled -- -- (13) 8.59 (8) 8.07
---- ------- --- ----
Outstanding at end of year 181 $8.23 170 $8.28 167 $8.32
=== === ===
Exercisable at end of year 149 $8.31 124 $8.42 109 $8.35
=== === ===
</TABLE>
Exercise prices for options outstanding as of December 31, 1999, ranged from
$6.20 to $10.19. The weighted-average remaining contractual life of those
options is 5.8 years. The weighted-average fair value of options granted during
each year was immaterial.
The following pro forma information regarding net income (loss) and net income
(loss) per share is required when APB 25 accounting is elected, and was
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123, "Accounting for Stock-Based
Compensation." The fair values for these options were estimated at the date of
grant using a Black-Scholes option pricing model with the following assumptions:
dividend yield of 0.1%; expected life of 10 years; expected volatility of .316
in 1999 and .250 in 1998 and 1997, and a risk-free interest rate of 5.0% in 1999
and 6.0% in 1998 and 1997. For purposes of pro forma disclosures, the estimated
fair values of the options are amortized to expense over the option's vesting
periods (in thousands except for per share information):
1999 1998 1997
---- ---- ----
Net income (loss):
As reported $19 $903 $ 196
Pro forma $(24) $ 861 $ 174
Diluted earnings (loss) per share:
As reported $0.01 $ 0.35 $ 0.07
Pro forma $(0.01) $ 0.33 $ 0.07
During the initial phase-in period, as required by SFAS No. 123, the pro forma
amounts were determined based on stock options granted after the 1995 fiscal
year only. Therefore, the pro forma amounts for compensation cost may not be
indicative of the effects on pro forma net income and pro forma net income per
share for future years.
The Company in January 2000 in connection with the employment arrangements for a
new President and Chief Executive Officer grantd such executive ten year options
to acquire 120,000 shares of Morgan's Class A Common stock, 40,000 of which have
an exercise price of $5.625 per share, 40,000 of which have an exercise price of
$7.625 per share, and 40,000 which have an exercise price of $9.625 per share.
8. BENEFIT PLAN
The Company has a 401(k) Savings Plan covering substantially all employees,
which matches 25% of the employee contributions up to a designated amount. The
Company's contributions to the Plan for 1999, 1998 and 1997 were $23,000,
$29,000 and $38,000, respectively.
9. TRANSACTIONS WITH LYNCH
The Company has paid Lynch Interactive Corporation ("Lynch Interactive") an
annual service fee of $100,000 for executive, financial and accounting,
planning, budgeting, tax, legal, and insurance services. Additionally, Lynch
Interactive has charged the Company $16,000 for officers' and directors'
liability insurance for all years presented.
The Company's Class A and Class B common stock owned by Lynch Interactive is
pledged to secure a Lynch Interactive line of credit.
10. SPECIAL CHARGES
The Company recorded a pretax special charge for 1997 of $624,000 ($412,000
after tax) which is comprised of gains in excess of the estimated net realizable
value associated with exiting the truckaway operation of $361,000, offset by
charges related to driver pay. During 1997, management concluded that certain
components of driver pay were being accounted for on a cash basis. Accordingly,
the Company recorded total charges of $1.2 million ($985,000 in special charges
and $215,000 as operating costs) in the fourth quarter of 1997 to account for
all components of driver pay on an accrual basis. It is the opinion of
management that the effects of this change in accounting are immaterial to the
results of operations of the previous years presented.
11. SEGMENT REPORTING
The Company has adopted FASB Statement No. 131 "Disclosure about Segments of a
Business Enterprise and Related Information".
Description of Services by Segment
The Company operates in four business segments: manufactured housing, driver
outsourcing, specialized outsourcing services, and insurance and finance. The
manufactured housing segment primarily provides specialized transportation to
companies which produce new manufactured homes and modular homes through a
network of terminals located in thirty-one states. The driver outsourcing
segment provides outsourcing transportation primarily to manufacturers of
recreational vehicles, commercial trucks, and other specialized vehicles through
a network of service centers in nine states. The specialized outsourcing
services segment consists of a large trailer, travel and small trailer delivery
and another Specialized Service "Decking". 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.
The driver outsourcing segment and the specialized outsourcing services were
reported as one segment titled Specialiized Outsourcing Services in the prior
year. All years shown below have been restated to show the corresponding segment
information for the earlier years.
Measurement of Segment (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). The accounting policies of the segments are the same as
those described in the summary of significant accounting policies (See Note 1).
There are no significant intersegment revenues.
The following table presents the financial information for the Company's
reportable segments for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
Operating revenues
<S> <C> <C> <C>
Manufactured Housing $ 99,491 $ 106,145 $ 105,383
Driver Outsourcing 23,351 19,710 19,524
Specialized Outsourcing Services 21,172 23,064 19,712
Insurance and Finance 3,958 4,072 4,085
All Other 148 48 9
--------- --------- ---------
148,120 153,039 148,713
Total intersegment insurance revenues (2,491) (2,585) (2,559)
--------- --------- ---------
Total operating revenues $ 145,629 $ 150,454 $ 146,154
========= ========= =========
Segment profit (loss) - EBITDA
Manufactured Housing $ 10,265 $ 10,836 $ 8,715
Driver Outsourcing 416 115 (47)
Specialized Outsourcing Services 469 1,011 1,292
Insurance and Finance (9,058) (8,358) (7,825)
All Other (327) (367) (45)
--------- --------- ---------
1,765 3,237 2,090
Depreciation and amortization (1,215) (1,230) (1,075)
Interest expense (338) (545) (719)
--------- --------- ---------
Income before taxes $ 212 $ 1,462 $ 296
========= ========= =========
Identifiable assets
Manufactured Housing $ 16,956 $ 18,764 $ 17,741
Driver Outsourcing 5,438 6,055 5,415
Specialized Outsourcing Services 2,724 3,015 2,240
Insurance and Finance 1,801 1,864 1,949
All Other 5,345 3,689 5,790
--------- --------- ---------
Total $ 32,264 $ 33,387 $ 33,135
========= ========= =========
Special charges included in segment profit (loss)
Manufactured Housing $ -- $ -- $ 571
Driver Outsourcing -- -- 180
Specialized Outsourcing Services -- -- (127)
Insurance and Finance -- -- --
All Other -- -- --
--------- --------- ---------
Total $ -- $ -- $ 624
========= ========= =========
</TABLE>
A majority of the Company's accounts receivable are due from companies in the
manufactured housing, recreational vehicle, and commercial truck and trailer
industries located throughout the United States. Services provided to Oakwood
Homes Corporation accounted for approximately $28.8 million, $31.8 million and
$21.6 million of revenues in 1999, 1998 and 1997, respectively. The Company's
<PAGE>
gross accounts receivables from Oakwood were 16% and 20% of total receivables at
December 31, 1999 and 1998, respectively. In addition, Fleetwood Enterprises,
Inc., accounted for approximately $23.9 million, $26.0 million and $28.1
million, of revenues in 1999, 1998 and 1997, respectively. The Company's gross
accounts receivables from Fleetwood were 17% and 15% of total receivables at
December 31, 1999 and 1998, respectively.
12. OPERATING COSTS AND EXPENSES (in thousands)
1999 1998 1997
-------- -------- --------
Purchased transportation costs $101,046 $103,820 $100,453
Operating supplies and expenses 13,559 14,092 15,267
Claims 8,633 7,698 7,204
Insurance 3,178 3,375 3,524
Operating taxes and licenses 7,358 7,978 7,284
-------- -------- --------
$133,774 $136,963 $133,732
======== ======== ========
13. 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.
The Company leases certain land, buildings, computer equipment, computer
software, and motor equipment under non-cancelable operating leases that expire
in various years through 2003. Several land and building leases contain monthly
renewal options
14. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 1999 and 1998 (in thousands, except share data):
<TABLE>
<CAPTION>
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
1999
<S> <C> <C> <C> <C>
Operating revenues $ 35,325 $ 40,270 $ 37,312 $ 32,722
Operating income (loss) 325 436 208 (419)
Net income (loss) 118 169 34 (302)
Net income (loss) per basic and diluted share $ 0.05 $ 0.07 $ 0.01 $ (0.12)
1998
Operating revenues $ 33,971 $ 41,523 $ 39,135 $ 35,825
Operating income (loss) (347) 1,239 699 416
Net income (loss) (231) 617 321 196
Net income (loss) per basic and diluted share $ (0.09) $ 0.23 $ 0.12 $ 0.08
</TABLE>
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
The Morgan Group, Inc.
We have audited the accompanying consolidated balance sheets of The Morgan
Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedule of The Morgan Group, Inc.
and subsidiaries listed in Item 14(a). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Morgan Group,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Greensboro, North Carolina
February 11, 2000,
except for the second paragraph of Note 3, as to which the date is
March 30, 2000
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
section entitled "Proposal One - Election of Directors" of the Company's Proxy
Statement for its 2000 Annual Meeting of Stockholders expected to be filed with
the Commission on or about April 28, 2000 (the "2000 Proxy Statement").
Item 11. EXECUTIVE COMPENSATION
The information required by this item with respect to executive compensation is
incorporated by reference to the section entitled "Management Remuneration" of
the 2000 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference to the
sections entitled "Voting Securities and Principal Holders Thereof" and entitled
"Proposal One - Election of Directors" of the 2000 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
section entitled "Certain Transactions with Related Persons" of the 2000 Proxy
Statement.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements are included
in Item 8:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
(a)(2) Financial Statement Schedules Schedule II - Valuation and Qualifying
Accounts
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the instructions or
are inapplicable and, therefore, have been omitted.
(a)(3) Exhibits Filed.
The exhibits filed herewith or incorporated by reference
herein are set forth on the Exhibit Index. Included in those
exhibits are management contracts and compensatory plans and
arrangements which are identified as Exhibits 10.1 through
10.8.
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the quarter
ending December 31, 1999.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index.
<PAGE>
Schedule II
The Morgan Group Inc. and Subsidiaries
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Allowance for Doubtful Accounts
Additions Amounts
Beginning Charged to Costs Written Ending
Description Balance and Expenses Net of Recoveries Balance
<S> <C> <C> <C> <C>
Year ended December 31, 1999 $208,000 $415,000 $310,000 $313,000
Year ended December 31, 1998 $183,000 $301,000 $276,000 $208,000
Year ended December 31, 1997 $ 59,000 $336,000 $212,000 $183,000
Morgan Finance, Inc.
Allowance for Loans Receivable
Year ended December 31, 1999 $ 40,000 $ 60,000 $ 50,000 $ 50,000
Year ended December 31, 1998 $ 80,000 $ 156,000 $196,000 $ 40,000
Year ended December 31, 1997 $ 48,000 $ 50,000 $ 18,000 $ 80,000
Allowance for Receivable from Independent Contractors
Year ended December 31, 1999 $ 82,000 $300,000 $301,000 $ 81,000
Year ended December 31, 1998 $ 41,000 $341,000 $300,000 $ 82,000
Year ended December 31, 1997 $ 62,000 $180,000 $201,000 $ 41,000
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
3.1 Registrant's Restated Certificate of Incorporation, as
amended, is incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, File No.
33-641-22, effective July 22, 1993.
3.2 Registrant's Code of By-Laws, as restated and amended, is
incorporated by reference to Exhibit 3.2 of the
Registrant's Registration Statement on Form S-1, File No.
33-641-22, effective July 22, 1993.
4.1 Form of Class A Stock Certificate is incorporated by
reference to Exhibit 3.3 of the Registrant's Registration
Statement on Form S-1, File No. 33-641-22, effective July
22, 1993.
4.2 Fourth Article - "Common Stock" of the Registrant's
Certificate of Incorporation, is incorporated by reference
to the Registrant's Certificate of Incorporation, as
amended, filed as Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1, File No. 33-641-22,
effective July 22, 1993.
4.3 Article II - "Meeting of Stockholders," Article VI -
"Certificate for Shares" and Article VII - "General
Provisions" of the Registrant's Code of By-Laws,
incorporated by reference to the Registrant's Code of
By-Laws, as amended, filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1, File No.
33-641-22, effective July 22, 1993.
4.4 Loan Agreements, dated September 13, 1994, between the
Registrant and Subsidiaries and Society National Bank, are
incorporated by reference to Exhibit 4.4 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 1994, filed November 15, 1994.
4.5 Amended and Restated Credit and Security Agreement,
effective March 25, 1998, among the Registrant, Morgan
Drive Away, Inc., TDI, Inc., Interstate Indemnity Company
and KeyBank National Association is incorporated by
reference to Exhibit 4.5 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1997, filed
March 31, 1998.
4.6 Revolving Credit Facility Agreement, effective March 27,
1997, among Morgan Drive Away, Inc., TDI, Inc., Interstate
Indemnity Company and KeyBank National Association is
incorporated by reference to Exhibit 4.5(a) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, filed March 31, 1997.
4.7 Master Revolving Note, dated March 27, 1997, among Morgan
Drive Away, Inc., TDI, Inc., and Interstate Indemnity
Company to KeyBank National Association is incorporated by
reference to Exhibit 4.5(b) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996,
filed March 31, 1997.
4.8 Amended and Restated Revolving Credit Note, dated March 31,
1998, among Morgan Drive Away, Inc., TDI, Inc., Interstate
Indemnity Company to KeyBank National Association is
incorporated by reference to Exhibit A to the Amended and
Restated Credit and Security Agreement, effective March 25,
1998, among the Registrant, Morgan Drive Away, Inc., TDI,
Inc., Interstate Indemnity Company and KeyBank National
Association, filed herewith as Exhibit 4.5.
4.9 Security Agreement, effective as of March 27, 1997, between
Morgan Drive Away, Inc. and KeyBank National Association is
incorporated by reference to Exhibit 4.5(c) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, filed March 31, 1997.
4.10 Absolute, Unconditional and Continuing Guaranty, effective
as of March 27, 1997, by the Registrant to Key Bank
National Association is incorporated by reference to
Exhibit 4.5(d) to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996, filed March 31,
1997.
4.11 Amended and Restated Continuing Guaranty, effective as of
March 31, 1998, by the Registrant to KeyBank National
Association is incorporated by reference to Exhibit D to
the Amended and Restated Credit and Security Agreement,
effective March 25, 1998, among the Registrant, Morgan
Drive Away, Inc., TDI, Inc., Interstate Indemnity Company
and KeyBank National Association, filed herewith as Exhibit
4.5.
4.12 Revolving Credit and Term Loan Agreement, dated January 28,
1999, among the Registrant and Subsidiaries and Bank
Boston, N.A., is incorporated by reference to Exhibit 4(1)
to the Registrant's Current Report on Form 8-K filed
February 12, 1999.
4.13 Guaranty, dated January 28, 1999, among the Registrant and
Subsidiaries and BankBoston, N.A. is incorporated by
reference to Exhibit 4(2) to the Registrant's Current
Report on Form 8-K filed February 12, 1999.
4.14 Security Agreement, dated January 28, 1999, among the
Registrant and Subsidiaries and BankBoston, N.A. is
incorporated by reference to Exhibit 4(3) to the
Registrant's Current Report on Form 8-K filed February 12,
1999.
4.15 Stock Pledge Agreement, dated January 28, 1999, among the
Registrant and Subsidiaries and BankBoston, N.A. is
incorporated by reference to Exhibit 4(4) to the
Registrant's Current Report on Form 8-K filed February 12,
1999.
4.16 Revolving Credit Note, dated January 28, 1999, among the
Registrant and Subsidiaries and BankBoston, N.A. is
incorporated by reference to Exhibit 4(5) to the
Registrant's Current Report on Form 8-K filed February 12,
1999.
10.1 The Morgan Group, Inc. Incentive Stock Plan is incorporated
by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1, File No. 33-641-22,
effective July 22, 1993.
10.2 First Amendment to the Morgan Group, Inc. Incentive Stock
Plan is incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 1997, filed November 14, 1997.
10.3 Memorandum to Charles Baum and Philip Ringo from Lynch
Corporation, dated December 8, 1992, respecting Bonus Pool,
is incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1, File No.
33-641-22, effective July 22, 1993.
10.4 Term Life Policy from Northwestern Mutual Life Insurance
Company insuring Paul D. Borghesani, dated August 1, 1991,
is incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1, File No.
33-641-22, effective July 22, 1993.
10.5 Long Term Disability Insurance Policy from Northwestern
Mutual Life Insurance Company, dated March 1, 1990, is
incorporated by reference to the Registrant's Registration
Statement on Form S-1, File No. 33-641-22, effective July
22, 1993.
10.6 Long Term Disability Insurance Policy from CNA Insurance
Companies, effective January 1, 1998 is incorporated by
reference to Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1997, filed
March 31, 1998.
10.7 The Morgan Group, Inc. Employee Stock Purchase Plan, as
amended, is incorporated by reference to Exhibit 10.16 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994, filed on March 30, 1995.
10.8 Consulting Agreement between Morgan Drive Away, Inc. and
Paul D. Borghesani, effective as of April 1, 1996, is
incorporated by reference to Exhibit 10.19 the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995, filed on April 1, 1996.
10.9 Employment Agreement, dated January 12, 2000 between
Registrant and Anthony T. Castor, III
10.10 Non-Qualified Stock Option Plan and Agreement, dated
January 11, 2000, between Registrant and Anthony T.
Castor, III
10.11 Management Agreement between Skandia International and Risk
Management (Vermont), Inc. and Interstate Indemnity
Company, dated December 15, 1992, is incorporated by
reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-1, File No. 33-641-22, effective July
22, 1993.
10.12 Agreement for the Allocation of Income Tax Liability
between Lynch Corporation and its Consolidated
Subsidiaries, including the Registrant (formerly Lynch
Services Corporation), dated December 13, 1988, as amended,
is incorporated by reference to Exhibit 10.13 the
Registrant's Registration Statement on Form S-1, File No.
33-641-22, effective July 22, 1993.
10.13 Certain Services Agreement, dated January 1, 1995, between
Lynch Corporation and the Registrant is incorporated by
reference to Exhibit 10.18 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994,
filed on March 30, 1995.
21 Subsidiaries of the Registrant is incorporated by reference
to Exhibit 21 to the Registrant Form 10-K for the year
ended December 31, 1998
23 Consent of Ernst & Young LLP
27 Financial Data Schedule (year ended December 31, 1999)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
THE MORGAN GROUP, INC.
Date: March 30, 2000 By: /s/ Charles C. Baum
--------------------
Charles C. Baum
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated on this 30th day of March,
2000.
1) Chairman:
By: /s/ Charles C. Baum
-------------------------
Charles C. Baum
2) Director, President and Chief Executive Officer:
By: /s/ Anthony T. Castor, III
--------------------------
Anthony T. Castor, III
3) Chief Financial Officer and
Chief Accounting Officer
By: /s/ Dennis R. Duerksen
--------------------------
Dennis R. Duerksen
4) A Majority of the Board of Directors:
/s/ Charles C. Baum Director
--------------------
Charles C. Baum
/s/ Bradley J. Bell Director
--------------------
Bradley J. Bell
/s/ Richard B. Black Director
--------------------
Richard B. Black
/s/ Richard L. Haydon Director
---------------------
Richard L. Haydon
/s/ Robert S. Prather, Jr. Director
---------------------------
Robert S. Prather, Jr.
THE MORGAN GROUP, INC.
2545 WILKENS AVENUE
BALTIMORE, MARYLAND 21223
January 12, 2000
Mr. Anthony T. Castor, III
2702 Hemmingway Lane
Mahwah, New Jersey 07430
Re: Anthony T. Castor, III/
The Morgan Group, Inc.
Dear Tony:
This letter will serve to confirm our offer and mutual agreement
pursuant to which you will serve as President and Chief Executive Officer of The
Morgan Group, Inc. ("Morgan") reporting directly to the Board of Directors of
Morgan ("Board"), and responsible to the Board for carrying out its primary
directives. You agree to devote substantially all of your business time and
energies to the business of the Company and to faithfully, diligently and
competently perform your duties hereunder. Such mutual agreement shall encompass
the following principal terms and conditions:
1. Your annual base salary will be Two Hundred Fifty Thousand
($250,000.00) Dollars (the "Base Salary") which will be paid to you in
accordance with Morgan's standard payment policies. The Base Salary
shall be reviewed annually by the Board of Directors and shall be
subject to (a) increases to reflect inflation and (b) increases to
reflect your performance, as may be reasonably determined by the Board
of Directors.
2. In addition to your Base Salary, you will be eligible to
receive a non-capped annual performance-related bonus, upon
accomplishment of corporate goals and objectives, the identity of which
shall be jointly determined by the Board and you. The bonus equal to
fifty (50%) percent of your base salary in the event that your targeted
corporate goals and objectives are satisfied (the "Target Bonus"). For
calendar year 2000, the bonus shall be not less than One Hundred
Thousand (100,000.00) Dollars.
3. Om addition to your Base Salary and Bonus as set forth in
Sections 1 and 2 hereof, you shall receive options allowing for the
acquisition by you of 120,000 shares of Morgan stock in accordance with
the terms of the Non-Qualified Stock Option Plan and Agreement
simultaneously entered into between you and Morgan.
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<PAGE>
4. Salary, bonus, options and benefits shall be reviewed
annually. In the event that the 2000 EBITDA target is achieved, it is
anticipated you will receive a favorable review relative to increases
in each of the foregoing.
5. In the event that your employment with Morgan shall, at any
time, be terminated by Morgan without "cause", Morgan will pay to you
(or, in the event of your medical disability or death subsequent to the
termination of your employment by Morgan without cause, to your legal
representative), an amount to be calculated as follows:
(a) For the date of commencement of your employment
until your first anniversary date, one times your
"total compensation" (i.e. Base Salary plus your
Target Bonus);
(b) From your first anniversary date until your second
anniversary date, one and one-half times your "total
compensation" (i.e. Base Salary plus your Target
Bonus); or
(c) From and after your second anniversary date, two
times your "total compensation" (i.e. Base Salary
plus your Target Bonus).
Such amount will be payable to you in equal monthly installments over
the following "Severance Periods" (which for purposes of this Section
shall be twelve (12) months in the event that the term of your
employment is governed by the Section 5(a) of this Agreement; and
twenty-four (24) months in the event that the term of your employment
is governed by Section 5(c) of this Agreement. In addition, during the
applicable Severance Periods, Morgan will (i) continue to permit you to
participate in those medical and other insurance benefit plans the
currently provided by Morgan to its executive officers on the same
terms and conditions (including employee contributions) as are made
available to its executive officers and (ii) continue to (a) provide
you with the use of the company car split dollar insurance policy
described in Section 9 (such benefits being referred to as the
"Continued Benefits". Notwithstanding the foregoing, if continuation
coverage under Morgan's medical and other insurance benefit plans for
any portion of the Severance Periods is not permitted by such plants,
in lieu of such continued coverage, Morgan shall pay you an amount in
cash equal to the premium cost that would otherwise have been incurred
by Morgan in providing you with such coverage during such remaining
portion of the Severance Periods. Following such a termination of
employment, you shall not be entitled to any other compensation or
benefits hereunder. Any other benefits payable during the Severance
Periods, will be determined under the employee benefit plans and
programs of Morgan as in effect from time to time.
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<PAGE>
For the purposes of this agreement, termination for "cause"
shall be limited to the following:
(a) The willful and continued failure by you to
substantially perform your duties hereunder;
(b) Gross misconduct which is or could reasonably be
expected to become materially injurious to Morgan,
including, without limitation, fraud,
misappropriation of Morgan property, or opportunity
or unauthorized disclosure of confidential
information;
(c) Any act or acts of dishonesty constituting a felony
under the laws of the United States or any state
thereof;
(d) Your substantial and material breach of loyalty to
Morgan including, but not limited to, dishonesty
resulting or intending to result, directly or
indirectly, in personal gain or enrichment at the
expense of Morgan;
(e) A final adjudication by a Court of competent
jurisdiction that you are mentally "incapacitated",
as that term is defined in accordance with the
statute or case law of the State of New York.
(f) Any other circumstances which would constitute
termination for cause under the laws of the State of
New York.
Any and all other circumstances giving rise to a termination of
employment shall be deemed termination "without cause".
In the event of the termination of your employment for cause,
or due to your voluntary resignation, or your death or disability, your
entitlement to compensation hereunder will be limited to the payment of
any accrued but unpaid Base Salary for the period preceding your
termination and any Bonus earned, but not yet paid, with respect to any
previously completed year. Any other benefits payable following such a
termination of employment will be determined under the employee benefit
plans and programs of Morgan as in effect from time to time.
-3-
<PAGE>
6. Notwithstanding the foregoing, in the event of the
termination of your employment by Morgan or its successor without
cause, or due to your "constructive termination", in either case,
within the twelve months next subsequent to a "change of control" of
Morgan, you will receive, by way of lump sum payment, in lieu of the
cash payments described in Section 3, upon such termination or
constructive termination, an amount equal to the greater of two times:
(i) your then-current Base Salary plus fifty (50%
percent of your then-current Base Salary; or
(ii) your total compensation (Base Salary plus bonus)
for the prior calendar year preceding the date of your
termination.
In addition to the foregoing, those options granted to you pursuant to
Section 3 of this Agreement plus any additional options which may
hereafter be awarded to you, if not already vested, shall immediately
vested and be exercisable by you.
You shall also receive during the twenty-four (24) month period
following the exercise by you of this "change of control" provision the
Continued Benefits as described in Section 5 hereof.
For this purposes of this provision:
(i) a "change of control" shall be deemed to have occurred (a)
only on the date, if any, of any event, immediately after
which any entity has the right to appoint a majority of the
representatives to the Board of Directors of Morgan or
otherwise direct or control the affairs of Morgan but shall
not include Morgan "going private" or any change pursuant to
which Mario J. Gabelli, or an entity controlled by Mario J.
Gabelli, remains in control of Morgan; or (b) in the event
that an entity not controlled by Mario J. Gabelli changes your
reporting status so that you are no longer directly reporting
to the Board and charged with the responsibility for carrying
out its primary directives; or (c) in the event that an entity
controlled by Mario J. Gabelli changes your reporting status
so that you are no longer directly reporting to a Board of a
Gabelli-controlled entity and charged with the responsibility
for carrying out its primary directives; and
(ii) "constructive termination" shall mean your resignation
due to (a) a substantial diminution of your position or
responsibilities with Morgan, including, without limitation, a
change in your reporting status so that you are no longer
directly reporting to the Board and charged with the
responsibility for carrying out its primary directives or (b)
Morgan's failure to pay you any of the compensation to which
you are entitled hereunder, in either case, which is not cured
within ten
-4-
<PAGE>
(10) days following Morgan's receipt of written notice from
you detailing such diminution or failure.
7. Certain Covenants.
You acknowledge that: (i) Morgan conducts its business
throughout the United States and; (ii) your work for Morgan will bring
you into close contact with many confidential affairs not readily
available to the public; and (iii) Morgan would not execute this
agreement but for your agreements and covenants contained herein. In
order for Morgan to enter into this letter agreement, you covenant and
agree that:
7.1. Covenant Not to Compete. You hereby agree that during the
term of this Agreement, and following the termination of your
employment for any reason (other than your death), you shall not, for a
period of eighteen (18) months (the :"Restrictive Period"), directly or
indirectly, as an officer, director, stockholder, partner, associate,
employee, consultant, owner, agent, creditor, co-venturer or otherwise,
become or be interested in or be associated with, nor accept any
gratuity from, any other corporation, firm or business engaged in a
business which is competitive with any material business operated by
Morgan or any of its subsidiaries or affiliates in any region where, on
the date on which your employment is terminated, Morgan or any of its
subsidiaries or affiliates is doing business or, to your knowledge has
developed plans to do business.
7.2 Nonsolicitation. Except with the prior written permission
of Morgan, you shall not, directly or indirectly, during the term of
your employment and during the Restrictive Period (a) entice away or in
any manner cause, persuade or attempt to cause or persuade any officer,
employee or agent of Morgan, or any of its subsidiaries or affiliates,
to discontinue his or her relationship with Morgan, such subsidiaries
or affiliates, or (b) employ any person who is then or had been an
employee of Morgan or any of its subsidiaries or affiliates at any time
within the one-year period immediately preceding the date of the
termination of your employment. In addition, during that period you
shall not directly or indirectly approach or attempt to approach any
customer or vendor of Morgan, its subsidiaries or affiliates in an
attempt to change the relationship between Morgan, its subsidiaries or
affiliates and any customer or vendor.
7.3 Confidentiality. You acknowledge that any information
constituting a trade secret or otherwise of a proprietary, secret or
confidential nature of or relating to the business of Morgan or any of
its affiliates acquired by you during your employment by Morgan is the
exclusive property of and of great value to Morgan and its affiliates.
You agree that you will not at any time (whether during or
after your employment with Morgan disclose or use for your own benefit
or purposes or the benefit or purposes of any other person, firm,
partnership, joint venture, association, corporation or other business
organization, entity or enterprise other than Morgan and any of its
subsidiaries or
-5-
<PAGE>
affiliates, any trade secrets, information, data, or other confidential
information relating to customers, development programs, costs,
marketing, trading, investment, sales activities, promotion, credit and
financial data, manufacturing processes, financing methods, plans, or
the business and affairs of Morgan generally, or of any subsidiary or
affiliate of Morgan, provided that the foregoing shall not apply to
information which is not unique to Morgan or which is generally known
to the industry or the public other than as a result of your breach of
this covenant. You agree that upon termination of your employment with
Morgan for any reason, you will return to Morgan immediately all
memoranda, books, papers, plans, information, letters and other data,
and all copies thereof or therefrom, in any way relating to the
business of Morgan and its affiliates, except that you may retain
personal notes, notebooks, and diaries. You further agree that you will
not retain or use for your account at any time any trade names,
trademark or other proprietary business designation used or owned in
connection with the business of Morgan or its affiliates.
7.4 In the event the Restrictive Period, as defined in Section
7.1, is determined to be unenforceable, the Restrictive Period shall be
for a period of nine (9) months.
8. Upon the Commencement Date and during the term of your
employment hereunder, Morgan will have you nominated for and will use
its best efforts to have you elected to the Morgan Board of Directors.
9. You will be entitled to participate in all benefits made
available to Morgan executive officers as may be in effect from time to
time. In addition, Morgan will continue to maintain for your benefit
the Split-Dollar Life Insurance Plan ("Plan") in which you currently
participate. It is understood that Morgan's agreement to fund the Plan
is governed by the following terms:
(a) The annual premiums to be paid by Morgan shall be
equal to twelve and one half percent (12.5%) of your
base salary and cash bonus not to exceed Fifty
Thousand Dollars ($50,000) annually;
(b) Six (6) points of the twelve and one half percent
(12.5%) are understood to be a Morgan contribution
that will be matched by you on an annual basis;
(c) The balance of the points (six and one half percent
(6.5%)) will be contributed by Morgan with the
understanding that such amounts will be repaid to
Morgan in accordance with the terms of the Plan;
(d) In the event you contribute less than six (6) points
of the twelve and one half percent (12.5%) as
provided in Section (b), Morgan's contribution will
be reduced to an amount equal thereto; however, this
will not relieve Morgan's obligation in Section 9(c).
-6-
<PAGE>
(e) Your failure to contribute two (2%) or more percent
to the Plan for three (3) consecutive years will
relieve Morgan of any obligation to contribute to the
Plan.
10. During the term of your employment, you will be provided
with the use of a Morgan company car appropriate to your position and
consistent with Morgan's policy or, at your choosing, with an allowance
of approximately One Thousand Dollars ($1,000) per month.
11. During the term of your employment, all travel taken by
you in connection with the business and affairs of Morgan will be paid
by Morgan or reimbursed to you in a manner appropriate to your position
and consistent with Morgan's policy.
12. As of the date of execution of this Agreement, the
Executive Offices of Morgan shall be located in Rye, New York. You
shall be provided with administrative and support staff at such
location. In addition, an office for you, with staffing, shall be
provided at Morgan's facility in Elkhart, Indiana. Hereafter, you will
be permitted to choose a location for the Executive Offices of Morgan,
with the reasonable approval of the Board.
13. You will be reimbursed the sum of Five Thousand Dollars
($5,000) for attorneys' fees and costs incurred by you in connection
with the negotiation and preparation of this Agreement.
14. Entire Agreement/Amendments. This Agreement contains the
entire understanding of the parties with respect to your employment by
Morgan. There are no restrictions, agreements, promises, warranties,
covenants or undertakings between the parties with respect to the
subject matter herein other than those expressly set forth herein. This
agreement may not be altered, modified, or amended except by written
instrument signed by the parties hereto.
15. No Waiver. The failure of a party to insist upon strict
adherence to any term of this Agreement on any occasion shall not be
considered a waiver of such party's rights or deprive such party of the
right thereafter to insist upon strict adherence to that term or any
other term of this Agreement.
16. Notice. For the purpose of this Agreement, notices and
other communications provided for in the Agreement shall be in writing
and shall be deemed to have been duly given when delivered or mailed by
United States registered mail, return receipt requested, postage
prepaid, addressed to (i) with respect to you, to Wiss, Cooke &
Santomauro, P.C., Attention Raymond R. Wiss, Esq., Three University
Plaza, Suite 207, Hackensack, New Jersey 07601; and (ii) with respect
to Morgan, to Morgan's principal Executive Offices, to the attention of
the Corporate Secretary; or to such other address as
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<PAGE>
either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective
only upon receipt.
17. Withholding Taxes. Morgan may withhold from any amounts
payable under this agreement such Federal, state and local taxes as may
be required to be withheld pursuant to any applicable law or
regulation.
18. Governing Law. This agreement shall be governed and
construed in accordance with the laws of the State of New York.
19. Arbitration of Disputes. The parties agree that any
controversy or claim arising out of or relating to this Agreement, or
any dispute arising out of this interpretation of this Agreement, which
the parties are unable to resolve, shall be finally resolved and
settled exclusively by binding arbitration in New York City, New York
by a single arbitrator acting under the Commercial Arbitration Rules of
the American Arbitration Association ("AAA") then in effect. If the
parties cannot agree upon an arbitrator from the panel provided by the
AAA, then each party shall choose its own independent representative
and such representatives shall choose the arbitrator within thirty (30)
days of the date of the selection of the first independent
representative.
20. Counterparts. This agreement may be signed in
counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument.
It is my understanding that it is your intention to commence your
employment with Morgan at a mutually agreeable time, but in no event later than
January 15, 2000 (the "Commencement Date").
I trust that this letter accurately reflects our discussions and that
the terms and conditions set forth herein are acceptable. If you are agreeable,
please execute the copy of this letter where indicated, and send two fully
executed copies back to me acknowledging your acceptance of the offer.
Very truly yours,
THE MORGAN GROUP, INC.
By: /s/ Charles C. Baum
------------------------------
Charles C. Baum,
Chairman of the Board and
Chief Executive Officer
-8-
Accepted and Agreed this 12th day of January, 2000.
ANTHONY T. CASTOR, III
-9-
January 11, 2000
NON-QUALIFIED STOCK OPTION PLAN AND AGREEMENT
Anthony T. Castor, III
2702 Hemmingway Lane
Mahwah, New Jersey 07430
Dear Mr. Castor:
To induce you to agree to become employed by The Morgan Group, Inc.
("Morgan") as its Chief Executive Officer, you are hereby granted the option to
purchase a total of 120,000 shares of Morgan's Class A Common Stock, $.015 par
value per share ("Class A Common Stock"). This agreement is a separate stock
option plan and agreement not made pursuant to Morgan's Incentive Stock Plan
(the "Plan"); provided, that the terms and conditions of that Plan which govern
grants thereunder shall nevertheless govern the terms of this plan and
agreement, except as otherwise expressly provided herein, and, for such purpose,
the Plan is incorporated herein by reference.
1. The term of this option (the "Option Term") shall be for a period of
ten years and one day from the date of this letter, subject to earlier
termination as provided in paragraphs 3 and 4 hereof. This option shall vest and
become exercisable in three installments with different prices as follows:
INSTALLMENT ONE:
For 40,000 shares shall have an exercise price of $5.625, exercisable
after the date 6 months from the date of this agreement.
INSTALLMENT TWO:
For 40,000 shares shall have an exercise price of $7.625, exercisable
after the date 18 months from the date of this agreement.
INSTALLMENT THREE:
For 40,000 shares shall have an exercise price of $9.625, exercisable
after the date 30 months from the date of this agreement.
Notwithstanding the forgoing, this option may not be exercised unless and until
this plan and agreement has been approved by Morgan's stockholders in the manner
and to the extent required by the rules of the American Stock Exchange. Except
as otherwise provided above, the option may be
<PAGE>
exercised at any time, or from time to time, in whole or in part, until the
Option Term expires, but in no case may fewer than 100 such shares be purchased
at any one time, except to purchase a residue of fewer than 100 shares.
2. You must pay the exercise price in cash at the time this option is
exercised; provided, however that, with the approval of Morgan's Compensation
Committee (the "Committee"), you may exercise your option by tendering to Morgan
whole shares of Morgan's Class A Common Stock owned by you, or any combination
of whole shares of Morgan's Class A Common Stock owned by you and cash, having a
fair market value equal to the cash exercise price of the shares with respect to
which the option is exercised by you. For this purpose, any shares so tendered
shall be deemed to have a fair market value as determined by the Committee
consistent with the requirements of Treas. Reg. ss.20.2031-2 and ss.422 of the
Internal Revenue Code of 1986, as amended. To exercise this option, you must
send written notice to Morgan's Secretary at the address noted in Section 10
hereof. Such notice shall state the number of shares in respect of which the
option is being exercised, shall identify the option exercised as a
non-qualified stock option, and shall be signed by the person or persons so
exercising the option. Such notice shall be accompanied by payment of the full
cash option price for such shares or, if the Committee has authorized the use of
the stock swap feature provided for above, such notice shall be followed as soon
as practicable by the delivery of the option price for such shares. Certificates
evidencing shares of Class A Common Stock will not be delivered to you until
payment has been made.
3. If you are no longer an employee of Morgan (or its subsidiary)
because of any reason other than death or permanent disability, this option
shall automatically terminate on the date sixty (60) days after your termination
of employment.
Any installment of this option that is not vested in accordance with
paragraph 1 at the time of your termination of employment shall terminate and be
forfeited; provided, that if your employment is terminated by Morgan without
cause (as defined in your employment agreement with Morgan dated on or about the
date hereof ("Employment Letter")):
(a) prior to the date 6 months after the date of this agreement,
Installment One shall become and remain exercisable until the
date sixty (60) days after your termination of employment;
(b) after the date 12 months after the date of this agreement,
Installment Two shall become and remain exercisable until the
date sixty (60) days after your termination of employment;
(c) after the date 24 months after the date of this agreement,
Installment Three shall become and remain exercisable until
the date sixty (60) days after your termination of employment.
4. If you die while serving as an employee of Morgan (or its
subsidiary), this option, to the extent otherwise vested and exercisable at the
time of your death, may be exercised in whole or in part by your executor,
administrator, or estate beneficiaries at any time within one (1) year after
<PAGE>
the date of your death but not later than the date upon which this option would
otherwise expire. If your employment with Morgan (or its subsidiary) should
terminate by reason of permanent disability (as determined by the Committee)
this option, to the extent otherwise vested and exercisable at the time of such
termination, may be exercised in whole or in part at any time within six (6)
months after your date of termination, but not later than the date upon which
this option would otherwise expire.
5. This option is non-transferable otherwise than by will or the laws
of descent and distribution or pursuant to a qualified domestic relations order.
It may be exercised only by you or your guardian, if any, or, if you die, by
your executor, administrator, or beneficiaries of your estate who are entitled
to your option.
6. All rights to exercise this option will expire, in any event, ten
years and one day from the date of this letter.
7. Certificates evidencing shares issued upon exercise of this option
may bear a legend setting forth among other things such restrictions on the
disposition or transfer of the shares of Morgan as Morgan may deem consistent
with applicable federal and state laws.
8. Nothing in this option plan and agreement shall restrict the right
of Morgan (or its subsidiary by which you are employed) to terminate your
employment at any time with or without cause, subject to the terms of your
Employment Letter.
9. This option plan and agreement is subject to such regulations as may
from time to time be adopted by the Committee. A copy of The Morgan Group, Inc.
Incentive Stock Plan has been furnished to you and an additional copy may be
obtained from Morgan. No amendment to such Plan shall be deemed to apply to this
plan and agreement if such amendment would conflict with the express terms
hereof.
10. All notices by you to Morgan and your exercise of the option herein
granted, shall be addressed to The Morgan Group, Inc., 28651 U.S. 20 West,
Elkhart, Indiana 46514, Attention: Secretary, or such other address as Morgan
may, from time to time, specify.
Very truly yours,
THE MORGAN GROUP, INC.
By:/s/ Charles C. Baum
---------------------------------
Charles C. Baum, Chairman of the
Board and Chief Executive Officer
Accepted as of the date above written
Anthony T. Castor, III
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