UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Special Financial Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2001
The Registrant's Registration Statement on Form S-1 (Registration Number
333-73996) became effective on January 18, 2002, and did not contain certified
financial statements for the fiscal year ended December 31, 2001, the
Registrant's last full fiscal year. This special financial report is filed
pursuant to Rule 15d-2 and contains only financial statements for the fiscal
year ended December 31, 2001.
MORGAN GROUP HOLDING CO.
-----------------------
401 Theodore Fremd Avenue
Rye, New York 10580
(914) 921-7601
Commission File Number 333-73996
Delaware 13-4196940
- ------------------------ -----------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
Securities Registered Pursuant to Section 12(b) of the Act:
None
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 NO X
(Registrant only became subject to Section 15(d) filing requirements on January
18, 2002, pursuant to the filing of a Registration Statement on Form S-1 that
was declared effective on such date (Registration Number 333-73996).)
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. [X]
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of April 5, 2002, was $2,713,084. The number of shares of the Registrant's
Common Stock $.001 par value outstanding as of April 5, 2002, was 3,055,345.
DOCUMENTS INCORPORATED BY REFERENCE
None
This annual report on Form 10-K for the fiscal year ended December 31, 2001, is
being filed pursuant to Rule 15d-2 under the Securities Exchange Act of 1934, as
amended, and contains only certified financial statements as required by Rule
15d-2. Rule 15d-2 provides generally that, if a registrant files a registration
statement under the Securities Act of 1933, as amended, which does not contain
certified financial statements for the registrant's last full fiscal year (or
the life of the registrant if less than a full fiscal year), then the registrant
shall, within 90 days of the effective date of the registration statement, file
a special report furnishing certified financial statements for such last fiscal
year or other period, as the case may be, meeting the requirements of the form
appropriate for annual reports of the registrant. Rule 15d-2 further provides
that such special financial report is to be filed under cover of the facing
sheet appropriate for the annual report of the registrant. Morgan Group Holding
Co.'s Registration on Form S-1 referenced above did not contain certified
financial statements for the year ended December 31, 2001, Registrant's last
full fiscal year. Therefore, as required by Rule 15d-2, certified financial
statements for the year ended December 31, 2001, are filed herewith under cover
of the facing page of an Annual Report on Form 10-K.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
The Board of Directors and Shareholders
Morgan Group Holding Co.
We have audited the accompanying balance sheets of the net assets and operations
contributed to Morgan Group Holding Co. (the "Company") (see Note 1) as of
December 31, 2001 and 2000, and the related statements of operations, equity,
investments by and advances from Lynch Interactive Corporation and cash flows
for each of the three years in the period ended December 31, 2001. Our audits
also included Schedule II-Valuation and Qualifying Accounts included in this
Annual Report on Form 10-K. These financial statements and schedule are the
responsibility of the management of Lynch Interactive Corporation. 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 financial position of the net assets and operations
contributed to Morgan Group Holding Co. (See Note 1) at December 31, 2001 and
2000, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company's only subsidiary, The Morgan Group, Inc. ("Morgan"), incurred operating
losses and negative operating cash flows during the past two years and was in
payment default on its real estate mortgage. In addition, Morgan's ability to
meet its quarterly financial covenant requirements contained in its debt
agreements in 2002 is uncertain. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are more fully described in Note 2. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Stamford, Connecticut
February 22, 2002
except for Note 2,
as to which the date
is March 29, 2002
Morgan Group Holding Co.
Balance Sheets
(Dollars in thousands)
December 31,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 1,517 $ 2,092
Investments - restricted ..................................... 2,624 --
Accounts receivable, less allowances
of $439 in 2001 and $248 in 2000 .......................... 6,322 7,881
Refundable taxes ............................................. 591 499
Prepaid insurance ............................................ 890 96
Other current assets ......................................... 1,313 1,051
Deferred income taxes ........................................ -- 319
-------- --------
Total current assets ............................................ 13,257 11,938
-------- --------
Property and equipment, net ..................................... 3,339 3,688
Goodwill and other intangibles, net ............................. 6,256 7,124
Deferred income taxes ........................................... -- 282
Other assets .................................................... 132 634
-------- --------
Total assets .................................................... $ 22,984 $ 23,666
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Notes payable, banks ......................................... $ 580 $ --
Trade accounts payable ....................................... 4,505 2,373
Accrued liabilities .......................................... 2,500 3,704
Accrued claims payable ....................................... 3,028 3,224
Refundable deposits .......................................... 675 1,357
Current portion of long-term debt ............................ 169 217
-------- --------
Total current liabilities ....................................... 11,457 10,875
Long-term debt, less current portion ............................ 13 71
Deferred income taxes ........................................... -- 744
Long-term accrued claims payable ................................ 4,078 5,122
Commitments and contingencies (Note 14) ......................... -- --
Minority interest ............................................... 2,201 3,193
Shareholder's Equity
Preferred stock, $0.01 value, 1,000,000
shares authorized, none outstanding ......................... -- --
Common stock, $0.01 par value, 10,000,000 shares
authorized, 3,055,345 outstanding ........................... 30 --
Additional paid-in capital .................................... 5,614 --
Accumulated deficit ........................................... (409) --
Equity, investments by and advances from
Lynch Interactive Corporation ............................... -- 3,661
-------- --------
Total ........................................................... 5,235 3,661
-------- --------
Total liabilities and equity .................................... $ 22,984 $ 23,666
======== ========
See accompanying notes.
Morgan Group Holding Co.
Statements of Operations
(Dollars in thousands, except per share amounts)
For the years ended December 31,
2001 2000 1999
---- ---- ----
Operating revenues .............................................. $ 101,168 $ 128,367 $ 172,491
Costs and expenses:
Operating costs .............................................. 93,933 119,895 160,636
Selling, general and administration .......................... 8,229 9,443 10,090
Depreciation and amortization ................................ 1,100 1,067 1,215
----------- ----------- -----------
103,262 130,405 171,941
----------- ----------- -----------
Operating income (loss) ......................................... (2,094) (2,038) 550
Interest expense ................................................ 273 310 338
----------- ----------- -----------
Income (loss) before income taxes ............................... (2,367) (2,238) 212
Income tax (expense) benefit .................................... 910 (2,277) (187)
Minority interest ............................................... 603 2,133 (28)
----------- ----------- -----------
Net loss ........................................................ $ (854) $ (2,492) $ (3)
=========== =========== ===========
Net loss per share:
Basic and diluted ............................................. $ (0.28) $ (0.82) $ (0.00)
=========== =========== ===========
Weighted average shares outstanding ............................. 3,055,345 3,055,345 3,055,345
=========== =========== ===========
See accompanying notes.
Morgan Group Holding Co.
Statements of Equity, Investments by and
Advances from Lynch Interactive Corporation
(Dollars in thousands)
Equity,
Investments
by and
Advances
Common Additional from Lynch
Stock Common Paid-in Accumulated Interactive
Outstanding Stock Capital Deficit Corporation Total
Balance at January 1, 1999 ........................... $ -- $ -- $ -- $ -- $ 6,486 $ 6,486
Capital transactions of The Morgan
Group, Inc. ..................................... -- -- -- -- (252) (252)
Advances to Lynch Interactive Corporation .......... -- -- -- -- (60) (60)
Net loss ........................................... -- -- -- -- (3) (3)
------- ------- ------- ------- ------- ------
Balance at December 31, 1999 ......................... -- -- -- -- 6,171 6,171
Advances to Lynch Interactive Corporation .......... -- -- -- -- (18) (18)
Net loss ........................................... -- -- -- -- (2,492) (2,492)
------- ------- ------- ------- -------- -------
Balance at December 31, 2000 ......................... -- -- -- -- $ 3,661 $ 3,661
Capital transactions of The Morgan
Group, Inc. ...................................... -- -- -- -- (72) (72)
Investment by Lynch Interactive Corporation ........ -- -- -- -- 2,000 2,000
Net loss through December 18, 2001 ................. -- -- -- -- (445) (445)
Issuance of shares to Lynch Interactive
Corporation ...................................... 3,055,345 30 5,614 -- (5,144) 500
Net loss subsequent to December 18, 2001 ........... -- -- -- (409) -- (409)
------- ------- ------- ------- ------- ------
Balance at December 31, 2001 ......................... 3,055,345 $ 30 $ 5,614 $ (409) $ 0 $ 5,235
======== ======= ======= ======= ======= ======
See accompanying notes.
Morgan Group Holding Co.
Statements of Cash Flows
(Dollars in thousands)
For the years ended December 31,
2001 2000 1999
---- ---- ----
Operating activities:
Net income (loss) .................................................... $ (854) $(2,492) $ (3)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................................ 1,100 1,067 1,215
Deferred income taxes ................................................ (143) 2,872 (426)
Minority interests ................................................... (603) (2,133) 28
Loss on disposal of property and equipment ........................... 15 292 101
Changes in operating assets and liabilities:
Accounts receivable .................................................. 1,559 2,562 2,959
Refundable taxes ..................................................... (92) (499) --
Prepaid insurance and other current assets ........................... (1,056) 813 507
Other assets ......................................................... 502 63 (43)
Trade accounts payable ............................................... 2,132 (1,534) (397)
Accrued liabilities .................................................. (1,204) (1,148) 1,286
Income taxes payable ................................................. -- (278) (600)
Accrued claims payable ............................................... (1,240) (72) 310
Refundable deposits .................................................. (682) (395) (78)
------- ------- -------
Net cash provided by (used in) operating activities .................. (566) (882) 4,859
Investing activities:
Purchases of restricted investments .................................. (2,624) -- --
Purchases of property and equipment .................................. (99) (106) (811)
Proceeds from sale of property and equipment ......................... 15 2 7
Non-compete agreements ............................................... (45) -- --
Other ................................................................ -- (20) (35)
------- ------- -------
Net cash used in investing activities ................................ (2,753) (124) (839)
Financing activities:
Principal payments on long-term debt ................................. (106) (677) (664)
Net proceeds from credit facility .................................... 80 -- 149
Proceeds from mortgage note .......................................... 500 -- --
Expenses incurred in connection with issuance
of common stock of The Morgan Group, Inc. ......................... (230) -- --
Minority interest transactions ....................................... -- (54) (1,088)
Investment by and advances from (to) Lynch
Interactive Corporation ............................................ 2,500 (18) (60)
------- ------- -------
Net cash provided by (used in) financing activities .................. 2,744 (749) (1,663)
------- ------- -------
Net increase (decrease) in cash and cash equivalents ......................... (575) (1,755) 2,357
Cash and cash equivalents at beginning of year ............................... 2,092 3,847 1,490
------- ------- -------
Cash and cash equivalents at end of year ..................................... $ 1,517 $ 2,092 $ 3,847
======= ======= =======
Cash payments for interest ................................................... $ 434 $ 379 $ 406
======= ======= =======
See accompanying notes.
NOTES TO THE FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Morgan Group Holding Co. ("Holding" or "the Company") was incorporated in
November 2001 as a wholly-owned subsidiary of Lynch Interactive Corporation
("Interactive") to serve as a holding company for Interactive's controlling
interest in The Morgan Group, Inc. ("Morgan"). On January 24, 2002, Interactive
spun off 2,820,051 shares of our common stock through a pro rata distribution
("Spin-Off") to its stockholders. Interactive retained 235,294 shares of our
common stock to be distributed in connection with potential conversion of a
convertible note that has been issued by Interactive.
The accompanying financial statements represents the combination through
December 18, 2001, on a retroactive basis, of all of Interactive's interest in
Morgan and the consolidated financial statements of Morgan as if the transfer by
Interactive to Holding occurred on January 1, 1999. On December 18, 2001,
Interactive's controlling interest in Morgan was transferred to Holding and the
financials represent the consolidated results of Holding after that date.
The financial statements have been prepared using the historical basis of assets
and liabilities and historical results of Interactive's interest in Morgan,
which were contributed to the Company on December 18, 2001. However, the
historical financial information presented herein reflects periods during which
the Company did not operate as an independent public company and accordingly,
certain assumptions were made in preparing such financial information. Such
information, therefore, may not necessarily reflect the results of operations,
financial condition or cash flows of the Company in the future or what they
would have been had the Company been an independent public company during the
reporting periods.
Description of Business
The Company's only significant asset (other than $500,000 in cash and cash
equivalents) is its controlling interest in Morgan, which through its wholly
owned subsidiaries, Morgan Drive Away, Inc. ("MDA") and TDI, Inc. ("TDI"),
provides specialized transportation services to the manufactured housing,
recreational vehicle, bus, van, commercial truck and trailer industries. At
December 31, 2001, the Company owned all of the 2,200,000 outstanding shares of
Morgan's Class B common stock and 161,100 shares of Morgan's Class A common
stock, which in aggregate represented 68.5% of the combined equity and 80.7% of
the combined voting power of the combined classes of Morgan's common stock.
Morgan's other significant wholly owned subsidiaries are Interstate Indemnity
Company ("Interstate") and Morgan Finance, Inc. ("Finance"), which provide
insurance and financial services to its drivers and owner-operators.
Principles of Combination/Consolidation
The financial statements represent combined financial statements through
December 18, 2001 and include the accounts of Holding, Morgan and its
subsidiaries. Subsequent to December 31, 2001, the financial statements
represent the consolidated results of those entities. Significant intercompany
accounts and transactions have been eliminated in combination/consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could materially differ from those estimates.
Operating Revenues and Expense Recognition
Operating revenues, including accessorial charges and related driver pay are
recognized when movement of the product is completed. Other operating expenses
are recognized when incurred.
Reclassifications
Gross operating revenues and operating expenses for 2000 and prior years were
reclassified to conform to the current year presentation. This consisted of
reclassifying escort and insurance billings to operating revenue that were
previously recorded as offsets against escort and insurance expense in the
operating costs section. The reclassification increased operating revenues and
operating expenses proportionately. There was no impact on operating results
from this reclassification.
Certain other reclassifications were made to conform to current year
presentation.
Cash Equivalents
All highly liquid investments with maturity of three months or less when
purchased are considered to be cash equivalents.
Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of customer receivables. As discussed in Note 7,
two customers represented 21% of total customer receivables at December 31,
2001. The remaining credit risk is generally diversified due to the large number
of entities comprising the Company's remaining customer base and their
dispersion across many different industries and geographic regions. As noted in
the balance sheets, the Company maintains an allowance for doubtful accounts to
cover estimated credit losses.
Property and Equipment
Property and equipment is stated at cost. Major additions and improvements are
capitalized, while maintenance and repairs that do not improve or extend the
lives of the respective assets are charged to expense as incurred. Depreciation
is computed using the straight-line method over the following estimated useful
lives:
Buildings 25 years
Transportation Equipment 3 to 5 years
Office and Service Equipment 3 to 8 years
Goodwill and Other Intangibles
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 $4,863,000 and $4,181,000 at December 31, 2001 and 2000,
respectively. Intangible assets are being amortized by the straight-line method
over their estimated useful lives, which range from three to forty years.
Impairment of Assets
Morgan periodically assesses the net realizable value of its long-lived assets,
including intangibles, 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
Claims and insurance accruals reflect the estimated ultimate cost of claims,
including amounts for claims incurred but not reported, for cargo loss and
damage, bodily injury and property damage, workers' compensation, long-term
disability and group health not covered by insurance. These costs are charged to
operating costs.
Stock-Based Compensation
Stock-based compensation expense for Morgan's employee stock option plan is
recognized under the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations. Consistent with APB 25, the exercise price of Morgan's employee
stock options equals the market price of the underlying stock on the date of
grant; therefore, no compensation expense is recognized.
Net Income (Loss) Per Common Share
Net income (loss) per common share ("EPS") is computed using the number of
common shares issued in connection with the Spin-Off as if such shares had been
outstanding for all periods presented.
Fair Values of Financial Instruments
At December 31, 2001 and 2000, the carrying value of financial instruments such
as cash and cash equivalents, accounts receivable, trade payables and long-term
debt approximates 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 Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income". Accordingly, comprehensive income (loss) is equal to net
income (loss).
Impairment of Goodwill and other Intangible Long-Lived Assets
In July 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards, No. 141, Business Combinations (SFAS No.
141), and No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). These
Statements change the accounting for business combinations, goodwill, and
intangible assets. SFAS No. 142 requires a discounted cash flow approach to
estimate potential impairment of intangible assets.
Under SFAS No. 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed for impairment annually or more frequently if
impairment indicators arise. Separable intangible assets that are deemed to have
definite lives will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to both goodwill and intangible
assets acquired after June 30, 2001.
The Company adopted SFAS No. 141 and 142 in the third quarter of 2001 except
with respect to the provisions of SFAS No. 142 relating to goodwill and
intangibles acquired prior to July 1, 2001. Those provisions of SFAS No. 142
will be adopted January 1, 2002.
In 2001, significant negative indicators existed for the Company, including, but
not limited to, significant revenue declines as well as operating and cash flow
losses and the loss of a significant customer on October 1, 2001. As a result,
management deemed it appropriate to obtain an independent valuation of the
Company's intangible assets to determine if impairment existed in 2001. This
valuation was performed under the current accounting pronouncement on
impairment, SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of that utilizes an undiscounted cash flow
approach to estimate any potential impairment.
The independent valuation based upon the Company's estimated future cash flow
concluded that there was no impairment of the Company's intangible assets under
SFAS No. 121. However, there was a projected impairment under SFAS No. 142 of
approximately $325,000 to $600,000, which was disclosed, in the Company's third
quarter Form 10-Q. The Company is currently in the process of updating the
valuation analysis under SFAS No. 142 in anticipation of adoption on January 1,
2002. Any impairment charge resulted from this analysis will be recognized in
the first quarter of 2002.
Recent Accounting Pronouncements
On October 3, 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement addresses the financial
accounting and reporting for the impairment and disposal of long-lived assets.
It supercedes and addresses significant issues relating to the implementation of
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. SFAS No. 144 retains many of the
fundamental provisions of SFAS No. 121 and establishes a single accounting
model, based on the framework established in SFAS No. 121, for long-lived assets
to be disposed of by sale, whether previously held and used or newly acquired.
The Company will adopt this standard on January 1, 2002 and is currently
evaluating the impact of SFAS No. 144 on the Company's results of operations and
financial position.
2. LIQUIDITY
The financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Morgan incurred operating losses and negative
operating cash flows during the past two years, and was in payment default on
its real estate mortgage at February 1, 2002. Note: this facility was refinanced
on February 7, 2002. In addition, Morgan's lender waived the financial covenant
defaults on the Credit Facility (see Note 5) for only the fiscal period ended
December 31, 2001. Without an additional waiver or amendment to the Credit
Facility, Morgan will likely be in default of its financial covenants for the
period ended March 31, 2002. These conditions raise substantial doubt about
Morgan and, as its ownership of Morgan is substantially the Company's only
asset, the Company's ability to continue as a going concern. Morgan is actively
seeking amendments to the existing Credit Facility as well as seeking additional
capital resources. Currently, negotiations are being held with several financial
institutions regarding a replacement mortgage.
The Company and Morgan's ability to continue as a going concern is dependent
upon Morgan's ability to successfully maintain its financing arrangements and to
comply with the terms thereof. However, although no assurances can be given,
management of Morgan remains confident that it will be able to continue as a
going concern.
3. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
December 31,
2001 2000
---- ----
Land ............................................ $ 873 $ 873
Buildings ....................................... 2,250 2,186
Transportation equipment ........................ 124 146
Office and computer equipment ................... 2,221 2,288
------- -------
5,468 5,493
Less accumulated depreciation ................... (2,129) (1,805)
------- -------
Property and equipment, net ..................... $ 3,339 $ 3,688
======= =======
Depreciation expense was $373,000, $433,000 and $511,000 for 2001, 2000 and
1999, respectively.
4. GOODWILL AND OTHER INTANGIBLES
The components of goodwill and other intangibles, net are as follows (in
thousands):
December 31, 2001
Useful Accumulated Net Book
Life Cost Amortization Value
--------- --------- ------------ --------
Goodwill ............. 40 Years $ 1,660 $ 560 $1,100
Goodwill ............. 20 Years 6,900 2,071 4,829
Goodwill ............. 3-5 Years 345 318 27
Non-Compete agreements 3-20 Years 2,214 1,914 300
------- ------ ------
$11,119 $4,863 $6,256
======= ====== ======
December 31, 2000
Useful Accumulated Net Book
Life Cost Amortization Value
--------- --------- --------- --------
Goodwill ............. 40 Years $ 1,660 $ 518 $1,142
Goodwill ............. 20 Years 7,131 1,567 5,564
Goodwill ............. 3-5 Years 335 273 62
Non-Compete agreements 3-20 Years 2,179 1,823 356
------- ------ ------
$11,305 $4,181 $7,124
======= ====== ======
5. INDEBTEDNESS
Credit Facility
On July 27, 2001, Morgan obtained a new $12.5 million Credit Facility. The
Credit Facility is used for working capital purposes and to post letters of
credit for insurance contracts. As of December 31, 2001, Morgan had outstanding
borrowings of $80,000 for working capital purposes and $7.0 million outstanding
letters of credit. Borrowings bear interest at a rate per annum equal to either
the Bank of New York Alternate Base Rate ("ABR") plus one-half percent or, at
the option of Morgan, absent an event of default, the one month London Interbank
Offered Rate ("LIBOR") as published in The Wall Street Journal, averaged
monthly, plus three percent. Borrowings and posted letters of credit on the
Credit Facility are limited to a borrowing base calculation that includes 85% of
eligible receivables and 95% of eligible investments. The Credit Facility is
subject to certain financial covenants including minimum tangible net worth,
maximum funded debt to EBITDA, minimum fixed interest coverage and maximum
capital expenditures as well as restriction on the payment of dividends. Morgan
was in violation of certain of these covenants at December 31, 2001. See waiver
discussion in Note 2. The facility is secured by accounts receivable,
investments, inventory, equipment and general intangibles. The facility may be
prepaid anytime with prepayment being subject to a 3%, .75% and .25% prepayment
penalty during year 1, 2 and 3, respectively.
The prior credit facility matured on January 28, 2001, at which time Morgan had
no outstanding debt and $6.6 million outstanding letters of credit. Morgan was
in default of its financial covenants at maturity and the bank decided not to
renew the prior credit facility.
Real Estate Loan
On July 31, 2001, Morgan closed on a real estate mortgage for $500,000 that is
secured by Morgan's land and buildings in Elkhart, Indiana. The loan proceeds
are invested in U.S. Treasury backed instruments and are pledged as collateral
for $600,000 in letters of credit issued by the Bank. The mortgage bears
interest at prime rate plus 0.75%, and is for a six-month term with outstanding
principal, which matured on February 1, 2002. Morgan has a payment default on
this scheduled principal payment and is currently seeking a replacement lender.
The loan is subject to the same covenants as the Credit Facility.
Long Term Debt
Long-term debt, all of which was issued by Morgan, consisted of the following
(in thousands):
December 31,
2001 2000
---- ----
Promissory notes with imputed interest rates from 6.31% to 10.0%,
principal and interest payments due from monthly to annually,
through March 31, 2004 ...................................................... $178 $242
Term notes with imputed interest rates of 8.25% to 11.04%
with principal and interest payments due monthly through
April 26, 2002 ............................................................. 4 46
---- ----
182 288
Less current portion ......................................................... 169 217
---- ----
Long-term debt, net of current portion ....................................... $ 13 $ 71
==== ====
Insurance Premium Financing
In 2001, Morgan utilized a third party to finance its insurance premiums. In
conjunction with this financing arrangement, the Company borrowed $2,210,000 and
prepaid its annual premiums to its insurance underwriter. The terms of the
financing allow for the financier to have a first security interest in unearned
premiums. The financing was for a nine-month period at an interest rate of 5.84%
with the final payment due on April 2, 2002. At December 31, 2001, the net
transaction is recorded as prepaid insurance in the current assets section of
the balance sheet as follows (in thousands):
Unamortized prepaid premiums $1,784
Amount due under financing arrangement (894)
--------
Net prepaid insurance $ 890
========
6. LEASES
The Company leases certain land, buildings, computer equipment, computer
software, and transportation equipment under non-cancelable operating leases
that expire in various years through 2005. Several land and building leases
contain monthly renewal options.
Future minimum annual operating lease payments as of December 31, 2001, are as
follows (in thousands):
2002 $228
2003 139
2004 11
2005 1
----
Total minimum lease payments $379
====
Aggregate expense under operating leases approximated $888,000, $1,672,000, and
$2,115,000 for 2001, 2000 and 1999.
7. CREDIT RISK
A majority of the Company's accounts receivable are due from companies in the
manufactured housing, recreational vehicle, bus, van and commercial truck and
trailer industries located throughout the United States. Fleetwood Enterprises,
Inc., accounted for approximately $10.9 million, $16.9 million and $23.9 million
of revenues in 2001, 2000 and 1999, respectively. The Company's gross accounts
receivables from Fleetwood Enterprises, Inc. were 19% and 10% of total
receivables at December 31, 2001 and 2000, respectively.
Effective October 1, 2001, the Company was no longer the primary carrier for its
largest customer, Oakwood Homes Corporation. Services provided to Oakwood Homes
Corporation accounted for approximately $10.9 million, $22.5 million and $28.8
million of revenues in 2001, 2000 and 1999, respectively. The Company's gross
accounts receivables from Oakwood Homes Corporation were 2% and 23% of total
receivables at December 31, 2001 and 2000, respectively.
As of December 31, 2001, 46% of the open trade accounts receivable was with five
customers of which over 91% was within 60 days of invoice. In total, 91% of the
open trade receivables are also within 60 days of invoice.
8. INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis 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 (expense) benefit provisions are summarized as follows (in
thousands):
For the Year Ended December 31,
2001 2000 1999
---- ---- ----
Current:
State ............................... $ 95 $ -- $ (98)
Federal ............................. 672 595 (515)
------- ------- ------
767 595 (613)
------- ------- -------
Deferred:
State ............................... 72 (448) 68
Federal ............................. 71 (2,424) 358
------- ------- -------
143 (2,872) 426
------- ------- -------
$ 910 $(2,277) $ (187)
======= ======= =======
Deferred tax assets (liabilities) of Morgan are comprised of the following (in
thousands):
December 31,
2001 2000
---- ----
Deferred tax assets:
Accrued insurance claims ....................................... $ 2,510 $ 3,323
Net operating losses ........................................... 1,596 --
Accrued expenses ............................................... 148 367
Depreciation ................................................... 285 199
Other .......................................................... 342 84
------- -------
4,881 3,973
Deferred tax liabilities:
Prepaid expenses ............................................... (886) (184)
------- -------
Net deferred tax assets ........................................... 3,995 3,789
Valuation allowance for net deferred tax assets ................... (3,995) (3,188)
------- -------
Deferred tax assets of Morgan ..................................... $ -- $ 601
======= =======
In addition, at December 31, 2000, Holding had a basis difference in the stock
of Morgan which resulted in a deferred tax liability of $744,000. Such liability
was reduced to zero during 2001 as a result of the recording of additional
losses of Morgan.
A reconciliation of the income tax provisions and the amounts computed by
applying the statutory federal income tax rate to income (loss) before income
tax (expense) benefit follows (in thousands):
For the Year Ended
December 31,
2001 2000 1999
---- ---- ----
Income tax (expense) benefit at
federal statutory rate ................................. $ 805 $ 772 $ (72)
State income tax benefit (expense), net of
federal tax benefit .................................... 82 44 (20)
Change in valuation allowance ............................. (601) (3,188) --
Other ..................................................... 744 174 6
Permanent differences ..................................... (120) (79) (101)
----- ------- -----
Income tax (expense) benefit .............................. $ 910 $(2,277) $(187)
===== ======= =====
Net cash payments (refunds) for income taxes were ($677,000), $181,000 and
$1,205,000 in 2001, 2000 and 1999, respectively.
In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the period in
which the temporary differences become deductible. A valuation allowance of
$3,188,000 was recorded in 2000 to reduce the deferred tax asset as Morgan had
experienced a loss. As financial results have not improved in 2001, the
valuation allowance was increased to the full amount of Morgan's net deferred
tax assets at December 31, 2001. Management considered, in reaching the
conclusion on the required valuation allowance, given the cumulative losses that
it would be inconsistent with applicable accounting rules to rely on future
taxable income to support realization of any of the net deferred tax assets.
At December 31, 2001, Morgan had unused federal net operating loss carryforwards
of approximately $3,989,000 that expire in 2021.
9. MORGAN SHAREHOLDERS' EQUITY
Morgan 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
Morgan will be ratably made to Class A and Class B shareholders after
satisfaction of the Morgan '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.
Morgan'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, 2001, Morgan did not repurchase any shares under
this plan. As of December 31, 2001, 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 March 1999, Morgan 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.
Capital Infusions
On July 12, 2001, the Company received a $2 million capital infusion from its
majority stockholder Lynch Interactive Corporation. The Company used the cash to
acquire one million new Class B shares of common stock of Morgan, thereby
increasing the Company's ownership position in Morgan from 55.6% to 68.5%.
Proceeds from the transaction are invested by Morgan in U.S. Treasury backed
instruments and are restricted as they are pledged as collateral for its Credit
Facility.
On December 20, 2001, the Company received $500,000 from Interactive, which is
expected to be used to cover the operating expenses of Holding for a period of
time.
Issuance of Non-transferable Warrants
On December 12, 2001, Morgan issued non-transferable warrants to purchase shares
of common stock to the holders of its Class A and Class B common stock. Each
warrant entitles the holder to purchase one share of their same class of common
stock at an exercise price of $9.00 per share through the expiration date of
December 12, 2006. The Class A warrants provide that the exercise price will be
reduced to $6.00 per share during a Reduction Period of at least 30 days during
the five-year exercise period. See Note 16.
10. STOCK OPTION PLAN AND BENEFIT PLAN
Morgan has an incentive stock option plan, which provides for the granting of
incentive or non-qualified stock options to purchase up to 200,000 shares 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. 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 76,375 and 24,000 shares, respectively,
of Class A common stock, net of cancellations and shares exercised. There are
91,250 options reserved for future issuance.
Morgan has entered into separate non-qualified stock option agreements with
certain members of its management. Options to purchase 220,000 shares of Class A
Common Stock have been authorized and granted under the agreements. These
options are not granted pursuant to the Incentive Stock Option Plan described
above, but they are subject to the same general terms and conditions of the
Incentive Stock Option Plan.
A summary of the Morgan's stock option activity and related information follows:
2001 2000 1999
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
----- ----- ----- ----- ----- -----
Outstanding at beginning of year .................. 248 $ 8.04 181 $ 8.23 170 $ 8.28
Granted ........................................... 120 4.61 120 7.63 11 7.52
Canceled .......................................... (49) 8.14 (53) 7.79 -- --
---- ----- ---- ----- ---- -----
Outstanding at end of year ........................ 319 $ 4.40 248 $ 8.04 181 $ 8.23
==== ===== ==== ===== ===== -
Exercisable at end of year ........................ 280 $ 5.98 164 $ 7.73 149 $ 8.31
==== ===== ==== ===== ====== =====
Exercise prices for options outstanding as of December 31, 2001, ranged from
$3.20 to $10.19. The weighted-average remaining contractual life of those
options is 8.4 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 Morgan's 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 volatilities of
0.338, 0.596, and 0.316 in 2001, 2000, and 1999, respectively, and risk-free
interest rates of 6.0%, 6.5%, and 5.0% in 2001, 2000, and 1999, respectively.
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):
2001 2000 1999
---- ---- ----
Net income (loss):
As reported .................... $ (854) $ (2,492) $ (3 )
Pro forma ...................... (901) (2,617) (22)
Diluted earnings (loss) per share:
As reported .................... $ (0.28) $ (0.82) $ (0.00)
Pro forma ...................... (0.29) (0.86) (0.01)
The pro forma amounts for compensation cost above may not be indicative of the
effects on pro forma net income (loss) and pro forma net income (loss) per share
for future years.
Morgan has a 401(k) Savings Plan covering substantially all employees, which
matches 25% of the employee contributions up to a designated amount. Morgan's
contributions to the Plan for 2001, 2000 and 1999 were $12,000, $18,000 and
$23,000, respectively.
11. TRANSACTIONS WITH LYNCH INTERACTIVE CORPORATION
For each of the three years in the period ended December 31, 2001, Interactive
allocated $100,000 of expenses for executive, financial and accounting,
planning, budgeting, tax, legal, and insurance services to the Company.
Additionally, Interactive charges the Company for officers' and directors'
liability insurance, which totaled $20,000 in 2001 and 2000 and $16,000 in 1999.
It is anticipated that when the Company becomes an independent public company,
which occurred on January 24, 2002, administrative expenses will increase by
approximately $.1-.2 million (unaudited) per year as a result of additional
financial reporting requirements, stock transfer fees, directors' fees,
insurance, compensation and other costs.
12. SEGMENT REPORTING
Description of Services by Segment
Morgan 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 23 states. The Driver Outsourcing segment
provides outsourcing transportation primarily to manufacturers of recreational
vehicles, buses, vans, commercial trucks, and other specialized vehicles through
a network of service centers in 5 states. The
Specialized Outsourcing Services segment consists of a large trailer, travel and
small trailer delivery. The last segment, Insurance and Finance, provides
insurance and financing to the Company's drivers and independent
owner-operators. This segment also acts as a cost center whereby all property
damage, bodily injury, and cargo claims are captured. The Company's segments are
strategic business units that offer different services and are managed
separately based on the differences in these services.
Measurement of Segment Profit 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 inter-segment revenues. The following table presents
the financial information for the Company's reportable segments for the years
ended December 31, (in thousands):
2001 2000 1999
---- ---- ----
Operating revenues
Manufactured Housing ............................ $ 60,169 $ 89,238 $ 123,862
Driver Outsourcing .............................. 17,581 20,939 23,351
Specialized Outsourcing Services ................ 20,999 15,260 21,172
Insurance and Finance ........................... 2,419 2,933 3,958
All Other ....................................... -- (3) 148
--------- --------- ---------
Total operating revenues ............................. $ 101,168 $ 128,367 $ 172,491
========= ========= =========
Segment profit (loss) - EBITDA
Manufactured Housing ............................ $ 2,964 $ 5,784 $ 10,265
Driver Outsourcing .............................. 1,316 1,324 416
Specialized Outsourcing Services ................ 925 (140) 469
Insurance and Finance ........................... (5,296) (6,765) (9,058)
All Other (1) ................................... (903) (1,174) (327)
--------- --------- ---------
(994) (971) 1,765
Depreciation and amortization ........................ (1,100) (1,067) (1,215)
Interest expense ..................................... (273) (310) (338)
--------- --------- ---------
Income (loss) before income taxes .................... $ (2,367) $ ( 2,348) $ 212
========= ========= =========
Identifiable assets
Manufactured Housing ............................ $ 10,643 $ 11,652 $ 17,345
Driver Outsourcing .............................. 4,662 4,561 5,438
Specialized Outsourcing Services ................ 2,084 2,078 2,724
Insurance and Finance ........................... 960 1,433 1,801
All Other (1) ................................... 4,635 3,942 5,345
--------- --------- ---------
Total ........................................... $ 22,984 $ 23,666 $ 32,653
========= ========= =========
(1) All other segment loss primarily represents general and administrative
expenses not allocated to operating segments. All other identifiable assets
primarily include corporate assets comprised of cash, fixed assets and
goodwill.
13. OPERATING COSTS AND ACCRUALS
Components of operating costs are as follows (in thousands):
2001 2000 1999
---- ---- ----
Purchased transportation costs .......................................... $ 74,461 $ 95,754 $127,908
Operating supplies and expenses ......................................... 8,862 10,826 13,559
Claims .................................................................. 2,496 5,658 8,633
Insurance ............................................................... 4,552 2,733 3,178
Operating taxes and licenses ............................................ 3,562 4,924 7,358
-------- -------- --------
$ 93,933 $119,895 $160,636
======== ======== ========
Significant Accruals
Material components of accrued liabilities are as follows (in thousands):
December 31
2001 2000
---- ----
Government fees ......................................................... $ 283 $ 759
Workers' compensation ................................................... 405 839
Customer incentives ..................................................... 150 588
Other accrued liabilities ............................................... 1,662 1,518
------ ------
$2,500 $3,704
====== ======
Government fees represent amounts due for fuel taxes, permits and use taxes
related to linehaul transportation costs.
Workers' compensation represents estimated amounts due claimants related to
unsettled claims for injuries incurred by Company employee-drivers. These claim
amounts due are established by the Company's insurance carrier and reviewed by
management on a monthly basis.
Customer incentives represent volume discounts earned by certain customers. The
customer incentives earned are computed and recorded monthly based upon linehaul
revenue for each respective customer. The incentives are generally paid
quarterly and are recorded as a contra-revenue account in the Consolidated
Statements of Operations.
Other accrued liabilities consists of various accruals for professional
services, group health insurance, payroll and payroll taxes, real estate taxes
and other items, which individually are less than 5% of total current
liabilities.
14. 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.
15. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 2001 and 2000 (in thousands, except per share data):
Three Months Ended
Mar 31 June 30 Sep 30 Dec 31
------ ------- ------ ------
2001
Operating revenues .......................... $ 23,701 $29,309 $ 28,701 $ 19,457
Operating income (loss) ..................... (475) 398 (169) (1,848)
Net income (loss) ........................... (301) 348 (190) (711)
Net income (loss) per basic and diluted share $ (0.10) $ 0.11 $ (0.06) $ (0.23)
2000
Operating revenues .......................... $ 32,831 $35,736 $ 33,590 $ 26,210
Operating income (loss) ..................... (898) 113 178 (1,431)
Net income (loss) ........................... (292) 8 38 (2,246)
Net income (loss) per basic and diluted share $ (0.10) $ 0.00 $ 0.01 $ (0.74)
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.
In the fourth quarter of 2000, the Company recorded non-cash charges of $3.2
million relatiing to the valuation of deferred tax assets.
16. SUBSEQUENT EVENTS
Expansion of Credit Facility
On February 7, 2002, Morgan obtained an increase in its availability under the
Credit Facility of $1,000,000. Morgan provided the lender a second mortgage on
Morgan's real estate in Elkhart, Indiana. The $1,000,000 increase in
availability will be eliminated on May 31, 2002.
Reduction of Warrant Exercise Price
On February 19, 2002, the Board of Directors of Morgan agreed to reduce the
exercise price of its Class A warrants outstanding to $2.25 per share, from the
stated $9.00 per share, during a specified period of time as permitted under the
warrant certificates. This period began on February 26, 2002 and is to extend
for 63 days, expiring on April 30, 2002. All other terms regarding the warrants,
including the expiration date of the warrants, will remain the same.
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.
MORGAN GROUP HOLDING CO.
Date: April 18, 2002 By: /s/ Robert E. Dolan
----------------------
Robert E. Dolan
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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 18th day of April, 2002.
SIGNATURE CAPACITY DATE
- --------- -------- ----
/s/ Mario J. Gabelli Chairman of the Board of April 18, 2002
-------------------- Directors and Chief Executive
Mario J. Gabelli Officer (Principal Executive
Officer)
/s/ Robert E. Dolan Director April 18, 2002
-------------------
Robert E. Dolan
/s/ John Fikre Director April 18, 2002
---------------
John Fikre
SCHEDULE II
Morgan Group Holding Co.
Valuation and Qualifying Accounts
Allowance for Doubtful Accounts
Additions Amounts
Charged to Written Off
Beginning Costs and Net of Ending
Description Balance Expenses Recoveries Balance
---------- --------- ---------- ---------- -------
Year ended December 31, 2001 $248,000 $447,000 $256,000 $439,000
Year ended December 31, 2000 $313,000 $249,000 $314,000 $248,000
Year ended December 31, 1999 $208,000 $415,000 $310,000 $313,000
Morgan Finance, Inc.
Allowance for Loans Receivable
Year ended December 31, 2001 $165,000 $200,000 $271,000 $ 94,000
Year ended December 31, 2000 $ 50,000 $211,000 $ 96,000 $165,000
Year ended December 31, 1999 $ 40,000 $ 60,000 $ 50,000 $ 50,000
Allowance for Receivable from Independent Contractors
Year ended December 31, 2001 $77,000 $139,000 $145,000 $71,000
Year ended December 31, 2000 $81,000 $246,000 $250,000 $77,000
Year ended December 31, 1999 $82,000 $300,000 $301,000 $81,000