UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 2002
MORGAN GROUP HOLDING CO.
401 Theodore Fremd Avenue
Rye, New York 10580
(914) 921-1877
Delaware 333-73996 13-4196940
(State of (Commission File Number) (IRS Employer
Incorporation)
Identification Number)
The Company (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
The number of shares outstanding of each of the Company's classes of common
stock at July 31, 2002 was 3,055,345.
Morgan Group Holding Co.
INDEX
PAGE
NUMBER
Basis of Presentation 1
Parent Company Data 2
PART I FINANCIAL INFORMATION
Item 1 Financial Statements 4
Consolidated Balance Sheets as of
une 30, 2002 and December 31, 2001 5
Consolidated Statements of Operations for the
Three-Month and Six-Month Periods
Ended June 30, 2002 and 2001 6
Consolidated Statements of Cash Flows for the
Six-Month Periods
Ended June 30, 2002 and 2001 7
Notes to Consolidated Financial
Statements as of June 30, 2002 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
PART II OTHER INFORMATION
Item 1 Legal Proceedings 24
Item 6 Exhibits and Reports on Form 8-K 24
SIGNATURES 25
i
BASIS OF PRESENTATION
The attached presentation of Parent Company Only data has not been prepared
under general accounting principles but is a more economic analysis. Generally
accepted accounting principles require the financial statements of Morgan Group
Holding Co. to be consolidated with the financial statements of The Morgan
Group, Inc. Currently Morgan Holding Co. owns 166,100 out of 1,486,082 shares of
The Morgan Group, Inc. Class A Common Stock outstanding and all of the 2,200,000
shares of Class B Common Stock outstanding. This equates to a 64.2% equity
interest and a 77.6% voting interest. Following the Parent Company Only data are
the consolidated financial statements of Morgan Group Holding Co., which have
been prepared under general accepted accounting principles.
The Chief Executive Officer and Chief Financial Officer of Morgan Group Holding
Co. are not providing a certification to this Form 10-Q. Please see the
Company's Current Report on Form 8-K filed concurrently with this Form 10-Q for
an explanation.
1
Morgan Group Holding Co.
Parent Company Only (Non GAAP)
Assets, Liabilities and Shareholders' Equity
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
June 30 December 31
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents .............................. $439 $500
Investment in The Morgan Group, Inc. (ASE:MG) (represents
166,100 out of 1,486,082 of Class A Common Stock and all
of the 2,200,000 of Class B Common Stock outstanding )
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities (none)
Shareholders' 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.
2
Morgan Group Holding Co.
Parent Company Only (Non GAAP)
Expenses/Income
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
------- ------- ------- -------
Administration expenses ................................. $ (18) $ -- $ (55) $ --
Interest income ......................................... 4 -- 5 --
------ ------ ------ -------
$ (14) $ -- $ (50) $ --
------ ------ ------ -------
Weighted average shares outstanding ..................... 3,055 3,055 3,055 3,055
3
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
The following are Morgan Group Holding Co.'s consolidated financial
statements.
4
Morgan Group Holding Co.
Consolidated Balance Sheets
(Dollars and shares in thousands, except per share amounts)
June 30 December 31
2002 2001
-------- -----------
ASSETS .............................................................................................. (Unaudited) (Note 1)
Current assets:
Cash and cash equivalents ........................................................................ $ 1,167 $ 1,517
Investments - restricted ......................................................................... 2,642 2,624
Accounts receivable, net of allowances
Of $336 in 2002 and $439 in 2001 ............................................................ 7,002 6,322
Refundable taxes ................................................................................. 57 591
Prepaid insurance ................................................................................ 199 890
Other current assets ............................................................................. 1,547 1,313
----- -----
Total current assets ................................................................................ 12,614 13,257
Property and equipment, net ......................................................................... 3,029 3,339
Goodwill and non-compete agreements, net ............................................................ 1,895 6,256
Other assets ........................................................................................ 133 132
-------- --------
Total assets ........................................................................................ $ 17,671 $ 22,984
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current debt (in default) ........................................................................ $ 1,934 $ 580
Trade accounts payable ........................................................................... 4,854 4,505
Accrued liabilities .............................................................................. 2,076 2,500
Accrued claims payable ........................................................................... 2,965 3,028
Refundable deposits .............................................................................. 782 675
Current portion of long-term debt ................................................................ 165 169
-------- --------
Total current liabilities ........................................................................... 12,776 11,457
Long-term debt, less current portion ................................................................ 13 13
Long-term accrued claims payable .................................................................... 3,836 4,078
Minority interests .................................................................................. 234 2,201
Shareholders' equity:
Preferred stock, $0.01 par value,
1,000,000 shares authorized,
none outstanding .................................................................................. -- --
Common stock, $0.01 par value,
10,000,000 shares authorized,
3,055,345 outstanding ............................................................................. 30 30
Additional paid-in-capital .......................................................................... 5,612 5,614
Accumulated deficit ................................................................................. (4,830) (409)
-------- ---------
Total shareholders' equity .......................................................................... 812 5,235
-------- ---------
Total liabilities and shareholders' equity .......................................................... $ 17,671 $ 22,984
========= =========
See notes to consolidated financial statements
5
Morgan Group Holding Co.
Consolidated Statements of Operations
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------- --------- ------ --------
Operating revenues ....................................................................$ 18,042 $ 29,309 $ 34,350 $ 53,010
Costs and expenses:
Operating costs .................................................................... 17,486 26,638 32,990 48,530
Selling, general and administration ................................................ 2,497 2,023 4,680 4,080
Loss on Impairment of Assets ....................................................... 2,070 -- 2,070 --
Depreciation and amortization ...................................................... 86 250 172 477
-------- -------- --------- --------
22,139 28,911 39,912 53,087
Operating income (loss) ............................................................... (4,097) 398 (5,562) (77)
Interest expense, net ................................................................. (99) (27) (173) (93)
Gain on sale of subsidiary stock ...................................................... 162 -- 162 --
-------- ------- ------- ------
Income (loss) before income taxes, minority
interests and cumulative effect of change in accounting
principle ........................................................................... (4,034) 371 (5,573) (170)
Income tax benefit .................................................................... -- 255 1,125 255
Minority interests .................................................................... 1,476 (278) 1,595 (38)
-------- -------- -------- -------
Income (loss) before cumulative effect of
change in accounting principle ..................................................... (2,558) 348 (2,853) 47
Cumulative effect of change in accounting principle, net of
minority interest of $722 (Note 2) .................................................... -- -- (1,568) --
-------- --------- --------- --------
Net income (loss) .................................................................... $ (2,558) $ 348 $ (4,421) $ 47
========= ========= ========== =========
Basic and diluted income (loss) per share:
Income (loss) before cumulative effect of change
in accounting principle ......................................................... $ (0.84) $ 0.11 $ (0.93) $ 0.02
Cumulative effect of change in accounting principle .............................. -- -- (0.52) --
--------- -------- --------- ---------
Net income (loss) per common share ............................................... $ (0.84) $ 0.11 $ (1.45) $ 0.02
========= ========= ========= ==========
Weighted average shares outstanding .................................................. 3,055 3,055 3,055 3,055
See notes to consolidated financial statements
6
Morgan Group Holding Co.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30
2002 2001
------- -------
Operating activities:
Net income (loss) ................................................................................ $(4,421) $ 47
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Cumulative effect of change in accounting
Principle .................................................................................... 1,568 --
Depreciation and amortization .................................................................. 172 477
Loss on disposal of property and equipment ..................................................... 72 3
Impairment of assets ........................................................................... 2,070 --
Gain on sale of subsidiary stock ............................................................... (162) --
Minority interests ............................................................................. (1,595) 38
Changes in operating assets and liabilities:
Accounts receivable ............................................................................ (680) (2,026)
Refundable taxes ............................................................................... 534 (203)
Prepaid expenses and other current assets ...................................................... 457 (419)
Other assets ................................................................................... (1) 419
Trade accounts payable ......................................................................... 349 1,403
Accrued liabilities ............................................................................ (424) (518)
Accrued claims payable ......................................................................... (305) 11
Refundable deposits ............................................................................ 107 (174)
------- -------
Net cash used in operating activities .......................................................... (2,259) (942)
Investing activities:
Income from restricted investments ............................................................... (18) --
Purchases of property and equipment .............................................................. (16) (89)
Proceeds from sale of property and equipment ..................................................... 109 --
Non-compete agreements ........................................................................... (25) (45)
------- -------
Net cash provided by (used in) investing activities .............................................. 50 (134)
Financing activities:
Net proceeds from credit facility ................................................................ 454 --
Net proceeds from real estate loan ............................................................... 900 --
Principal payments on long-term debt ............................................................. (4) (84)
Minority interest transactions ................................................................... 509
-------- --------
Net cash provided by (used in) financing activities ................................................. 1,859 (84)
------- -------
Net decrease in cash and equivalents ................................................................ (350) (1,160)
Cash and cash equivalents at beginning of period .................................................... 1,517 2,092
-------- -------
Cash and cash equivalents at end of period .......................................................... $ 1,167 $ 932
======= =======
See notes to consolidated financial statements
7
Morgan Group Holding Co.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1.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 December 18, 2001, Interactive's controlling interest
in Morgan was transferred to Holding. At the time, Holding owned 68.5%
of Morgan's equity interest and 80.8% of Morgan's voting interest. 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 the potential conversion of a
convertible note that has been issued by Interactive.
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.
The financial statements represent combined financial statements
through December 18, 2001 and include the accounts of Holding, Morgan
and its subsidiaries. Subsequent to December 18, 2001, the financial
statements represent the consolidated results of those entities.
Significant intercompany accounts and transactions have been
eliminated in combination/consolidation.
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 the first six months of 2002. These conditions raise
substantial doubt about Morgan'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.
The accompanying unaudited consolidated financial statements have been
prepared by the Company, in accordance with generally accepted
accounting principles for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally
included for complete financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to
such rules and regulations. The balance sheet at December 31, 2001 has
been derived from the audited consolidated financial statements at
that date but does not include all of the information and footnotes
required by generally accepted accounting principles for complete
consolidated financial statements. The consolidated financial
statements should be read in conjunction with the consolidated
financial statements, notes thereto and other information included in
the Company's Annual Report on Form 10-K for the year ended December
31, 2001.
8
Net 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.
The accompanying unaudited consolidated financial statements reflect,
in the opinion of management, all adjustments (consisting of normal
recurring items) necessary for a fair presentation, in all material
respects, of the financial position and results of operations for the
periods presented. The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions. Such estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.
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. Our operating revenues, therefore, tend to be stronger in the
second and third quarters.
The consolidated financial statements include the accounts of the
Company and its majority owned subsidiary, Morgan. Morgan has the
following subsidiaries: Morgan Drive Away, Inc., TDI, Inc., Interstate
Indemnity Company, and Morgan Finance, Inc., all of which are wholly
owned. Morgan Drive Away, Inc. has two subsidiaries, Transport
Services Unlimited, Inc. and MDA Corp. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Certain 2001 amounts have been reclassified to conform to the 2002
presentation.
Note 2.Goodwill Impairment
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS
No. 142). This Standard eliminates goodwill amortization and requires
an evaluation of goodwill for impairment (at the reporting unit level)
upon adoption of the Standard, as well as subsequent evaluations on an
annual basis, and more frequently if circumstances indicate a possible
impairment. This impairment test is comprised of two steps. The initial
step is designed to identify potential goodwill impairment by comparing
an estimate of the fair value of the applicable reporting unit to its
carrying value, including goodwill. If the carrying value exceeds fair
value, a second step is performed, which compares the implied fair
value of the applicable reporting unit's goodwill with the carrying
amount of that goodwill, to measure the amount of goodwill impairment,
if any.
The Company's reporting units under SFAS No. 142 are equivalent to its
reportable segments as the Company does not maintain accurate,
supportable and reliable financial data at lower operating levels
within these segments that management relies upon in making operating
decisions. The carrying amount of goodwill has been allocated to the
Company's reporting units at December 31, 2001 as follows (in
thousands):
9
Manufactured housing $4,100
Vehicle delivery ... 1,850
Towaway ............ 6
------
$5,956
Upon adoption, the Company performed the transitional impairment test
which resulted in an impairment of $1,806,000 in the manufactured
housing reporting unit and $484,000 in the vehicle delivery reporting
unit which is classified as a cumulative effect of a change in
accounting principle for the three months ended March 31, 2002, as
required by SFAS No. 142. Subsequent impairments, if any, would be
classified as an operating expense.
The Company's measurement of fair values was based on an evaluation of
future discounted cash flows. This evaluation utilized the best
information available in the circumstances, including reasonable and
supportable assumptions and projections and was management's best
estimate of projected future cash flows.
The discount rate used was based on the estimated rate of return
expected by an investor considering the perceived investment risk.
Projected cash flows were determined based on a five-year period after
which time cash flow was normalized and projected to grow at a
constant rate. Management believes that five years is the appropriate
period to forecast prior to normalizing cash flows based on the
industry cycles of the Company's businesses and the Company's
long-term strategies. The Company's business model and strategy for
the future is not asset intensive and the Company has no plans to
acquire significant transportation equipment, real estate or other
business property.
There can be no assurance at this time that the projections or any of
the key assumptions will remain the same as business conditions may
dictate significant changes in the estimated cash flows or other key
assumptions. The Company will update the impairment analysis on at
least an annual basis as required by SFAS No. 142 as long as material
goodwill exists on the balance sheet.
Note 3. Goodwill and Non-Compete Agreements
The reconciliation of reported net income (loss) per share to adjusted
net income (loss) per share for the periods ended June 30, 2002 and
2001 was as follows (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------- ------- ------- -------
Reported net income (loss) ..................................................... $(2,558) $ 348 $(4,421) $ 47
Add back: Goodwill amortization ............................................... -- 62 -- 141
------- ------- ------- -------
Adjusted net income (loss) ..................................................... $(2,558) $ 410 $(4,421) $ 188
======= ======= ======= =======
Basic and diluted income (loss) per share:
Reported income (loss) per share ............................................... $ (0.84) $ 0.11 $ (0.93) $ 0.02
Add back: Goodwill amortization ............................................... -- 0.02 -- 0.04
------- ------- ------- -------
Adjusted income (loss) per share ............................................... $(0.84) $ 0.13 $ (0.93) $ 0.06
======= ======= ======== =======
10
During the first six months of 2002, Morgan paid $25,000 for non-compete
agreements. Excluding goodwill, amortization expense of the non-compete
agreements was $26,000 and $22,000 for the first six months of 2002 and 2001,
respectively. The annual estimated amortization expense for the non-compete
agreements for the five-year period ending December 31, 2006, ranges from
$33,000 to $55,000 per year.
Note 4. Debt
Credit Facility
The $12.5 million, three-year Credit Facility is used for working capital
purposes and to post letters of credit for insurance contracts. As of June
30, 2002, Morgan had outstanding borrowings of $534,000 and $7.0 million
outstanding letters of credit on the Credit Facility. Credit Facility
borrowings bear interest at a rate per annum equal to either 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, and are subject to
certain financial covenants including minimum tangible net worth, maximum
funded debt, minimum fixed interest coverage and maximum capital
expenditures. The facility is secured by accounts receivable, investments,
inventory, equipment, general intangibles and a second mortgage on land and
buildings in Elkhart, Indiana. The facility may be prepaid anytime with
prepayment being subject to a .75% and .25% prepayment penalty during years
2 and 3, respectively.
As of June 30, 2002, Morgan was in violation of the following covenants
under the Credit Facility: minimum tangible net worth, maximum funded debt
and letters of credit to EBITDA and minimum fixed charge coverage. Morgan
has not requested a waiver of these covenant violations and the lender has
continued to advance on the Credit Facility.
At June 30, 2002, advances against the Credit Facility were greater than
the formula borrowing base calculation by $1.4 million. Morgan is seeking
to obtain an agreement with the lender to continue to over advance on the
Credit Facility by up to $1.5 million in exchange for security interests in
all unsecured real estate and specified future cash payments. All advances
under the Credit Facility would continue to be at the lenders sole
discretion as a result of covenant violations and the agreement. The $1.5
million over advance would be reduced by $600,000 on September 30, 2002,
$200,000 on October 31, 2002, $350,000 on November 30, 2002, and $350,000
on December 31, 2002 under the proposed agreement. The maximum amount of
the Credit Facility would be reduced to $8.0 million and the facility would
expire on December 31, 2002. The documentation has been prepared with the
lender but has not been executed pending resolution of collateral issues.
Morgan cannot give assurance that an agreement will be executed. In the
event an agreement is not reached, the lender may exercise its remedies
under the Facility, including immediate demand of outstanding borrowings.
Morgan is cooperating with an investigation initiated by Morgan Group
Holding Co., which owns 64.2% of Morgan's common stock and 77.6% of
Morgan's voting stock, to determine facts associated with the origination,
reporting and resolution of the over advance on the Credit Facility and any
resulting financial statement consequences.
11
Mortgage Note Payable
On April 5, 2002, Morgan obtained a $1,400,000 mortgage secured by Morgan's
land and buildings in Elkhart, Indiana. Loan proceeds were used to retire
the previous first mortgage of $500,000 and repay a $500,000 over-advance
on the Credit Facility. The remaining proceeds were used for short-term
working capital purposes to the extent they were not restricted. The
mortgage is due April 5, 2003 and bears a blended interest rate of 13.5% on
the first $1.25 million of principal and 8% on the remaining $150,000 of
principal. The loan contains a minimum interest requirement of $101,000 and
otherwise may be prepaid at any time with no penalties.
Morgan was delinquent in making an interest payment on this mortgage loan
on August 1, 2002. The lender did not accept the subsequent late payment.
On August 8, 2002, the lender declared Morgan in default on the note and
issued a demand letter for immediate payment of full principal and interest
of $1.48 million. Morgan cannot comply with the demand for payment and is
currently seeking to negotiate a forbearance agreement with the lender. The
resolution of this default and impact on Morgan cannot be determined at
this time. If a forbearance agreement cannot be obtained, the lender may
exercise its remedies including foreclosure on the real estate.
Long Term Debt
Long-term debt consisted of the following (in thousands):
June 30 December 31
2002 2001
---- ----
Promissory notes with imputed interest rates from 6.31% to 9.0%,
principal and interest payments due from monthly to annually, through
March 31, 2004 ................................................................... $178 $182
Less current portion ................................................................ 165 169
---- ----
Long-term debt, net of current portion .............................................. $ 13 $ 13
==== ====
Insurance Premium Financing
In July 2002, Morgan utilized a third party to finance its insurance
premiums. In conjunction with this financing arrangement, Morgan borrowed
$5.0 million 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 6.0% with the final payment due on April 1, 2003. This
transaction was not recorded in the June 30, 2002 financial statements.
Note 5. Credit Risk
With the downturn in the national economy, Morgan's management is
continually reviewing credit worthiness of its customers and taking
appropriate steps to ensure the quality of the receivables. As of June 30,
2002, 47% of the open trade accounts receivable was with six customers of
which over 98% was within 60 days of invoice. In total, 95% of the open
trade receivables are also within 60 days of invoice.
12
Note 6. Operating Costs and Accruals
Components of operating costs are as follows (in thousands):
Six Months Ended
June 30,
2002 2001
Purchased transportation costs ................................. $25,838 $38,579
Operating supplies and expenses ................................ 2,970 4,805
Claims ......................................................... 696 1,657
Insurance ...................................................... 2,366 1,560
Operating taxes and licenses ................................... 1,120 1,929
------- -------
$32,990 $48,530
======= =======
Material components of accrued liabilities are as follows (in thousands):
June 30 December 31
2002 2001
------- -----------
Government fees ..................................................... $ 211 $ 283
Workers' compensation ............................................... 549 405
Customer incentives ................................................. 287 150
Real estate taxes ................................................... 104 107
Other accrued liabilities ........................................... 925 1,555
------ ------
$2,076 $2,500
====== ======
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 Morgan employee-drivers. These
claim amounts due are established by the Morgan'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 consist of various accruals for professional
services, group health insurance, payroll and payroll taxes, and other
items, which individually are less than 5% of total current liabilities.
13
Note 7.Stockholders' Equity
Capital Infusions
On July 12, 2001, Morgan received a $2 million capital infusion from its
majority stockholder Lynch Interactive Corporation. The investment was used
to acquire one million new Class B shares of common stock of Morgan thereby
increasing Lynch's ownership position in Morgan from 55.6% to 68.5%.
Proceeds from the transaction are invested in U.S. Treasury backed
instruments and are pledged as collateral for the Credit Facility.
On December 20, 2001, the Company received $500,000 from Interactive, which
is being 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 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 provided that
the exercise price would be reduced to $6.00 per share during a Reduction
Period of at least 30 days during the five-year exercise period.
On February 19, 2002, Morgan's Board of Directors agreed to set the
exercise price reduction period on the Class A warrants to begin on
February 26, 2002 and to extend for 63 days, expiring on April 30, 2002
(the "Reduction Period"). Morgan's Board of Directors agreed to reduce the
exercise price of the warrants to $2.25 per share, instead of $6.00 per
share, during the Reduction Period. Morgan's Board of Directors reduced the
exercise price to $2.25 to give warrant holders the opportunity to purchase
shares at a price in the range of recent trading prices of the Class A
common stock. All other terms regarding the warrants, including the
expiration date of the warrants, remain the same. As of the close of the
temporary Reduction Period on April 30, 2002, Morgan received $535,331 with
the exercise of 237,925 warrants at $2.25 each. The Company exercised 5,000
of its warrants. Subsequent to the exercise, the Company owned 64.2% of
Morgan's equity interest and 77.6% of Morgan's voting ownership.
Unexercised warrants remain outstanding and exercisable at $9.00 each.
Note 8.Income Taxes
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 was recorded in 2001 to reduce the net deferred tax assets to
zero as the Company has experienced cumulative losses for financial
reporting for the last three years. 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 full realization of the deferred
tax asset. As of June 30, 2002, the Company had no net deferred tax assets
recorded.
14
As of December 31, 2001, the Company recorded an income tax refund
receivable of $591,000. During the first quarter, 2002, as a result of a
new tax law, the Company qualified for a five year carry back of its net
operating losses versus a previously allowed two year carry back. The
impact of this tax law change resulted in a $1,047,000 increase in the
income tax refund receivable recorded during the first quarter. The total
income tax refund of $1,638,000 was received in May 2002.
Note 9.Segment Reporting
Description of Services by Segment
The Company operates in five business segments: Manufactured Housing,
Vehicle Delivery, Pickup, Towaway, and Insurance and Finance. The
Manufactured Housing segment primarily provides specialized transportation
to companies which produce manufactured homes and modular homes through a
network of terminals located in seventeen states. The Vehicle Delivery
segment provides outsourcing transportation primarily to manufacturers of
recreational vehicles, commercial trucks, and other specialized vehicles
through a network of service centers in four states. The Pickup and Towaway
segments consist of 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. 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 Income (Loss)
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 Company's Annual Report on Form 10-K.
The following table presents the financial information for the Company's
reportable segments for the three-month and six-month periods ended June
30, (in thousands):
15
Three Months Ended Six Months Ended June
June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Operating revenues:
Manufactured housing ......................................................... $ 8,521 $ 17,972 $ 16,238 $ 32,344
Vehicle delivery ............................................................. 5,114 4,695 9,752 9,227
Pickup ....................................................................... 2,621 2,291 4,888 4,109
Towaway ...................................................................... 1,403 3,686 2,674 6,005
Insurance and finance ........................................................ 383 665 798 1,325
-------- -------- -------- --------
Total operating revenues ........................................................ $ 18,042 $ 29,309 $ 34,350 $ 53,010
======== ======== ======== ========
Segment income (loss) - EBITDA:
Manufactured housing ......................................................... $ (3,045) $ 587 $ (3,975) $ 165
Vehicle delivery ............................................................. (599) (195) (869) (364)
Pickup ....................................................................... (24) 157 (163) 108
Towaway ...................................................................... (113) 25 (216) (23)
Insurance and finance ........................................................ (212) 74 (112)
514
Holding's administrative expenses ............................................... (18) -- (55) --
-------- -------- -------- --------
(4,011) 648 (5,390) 400
Depreciation and amortization ................................................... (86) (250) (172) (477)
Interest expense ................................................................ (99) (27) (173) (93)
Gain on sale of subsidiary stock ................................................ 162 -- 162
-------- -------- -------- --------
Income (loss) before income taxes, minority interest, and cumulative
effect of change in accounting principle
$ (4,034) $ 371 $ (5,573) $ (170)
======== ======== ======== ========
Note 10. Commitments and Contingencies
Morgan is involved in various legal proceedings and claims that have arisen
in the normal course of business for which Morgan maintains liability
insurance covering amounts in excess of its self-insured retention.
Morgan's 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.
Note 11. Subsequent Events
In August 2002, Morgan decided to exit the business of providing
transportation services to the manufactured housing industry. On August 14,
2002 Morgan sold the manufactured housing transportation division of the
company to Bennett Truck Transport, L.L.C., ("Bennett") a privately held
company headquartered in McDonough, Georgia. The assets included in the
sale are substantially all personal property, customer lists, driver files,
and certain vehicles and vehicle finance contracts. The sale excludes real
property, computer and copier equipment, and personal property at Morgan's
headquarters in Elkhart, Indiana. The agreement calls for Bennett to pay
Morgan $1,050,000. As a result of the sale of the manufactured housing
division, Morgan has recorded an impairment of assets in the accompanying
financial statements to record the expected loss on the sale of this
division as calculated in the below table. The impairment of assets is
recorded on the balance sheet as a reduction of goodwill.
16
Sale proceeds ............... $ 1,050,000
Net book value of assets sold (550,000)
Net book value of goodwill .. (2,570,000)
-----------
Net gain / (loss) on disposal ($2,070,000)
===========
Note 12. Review by Independent Accountant
On May 14, 2002 Morgan named a new independent accountant. The transition
from the previous accountant to the successor accountant has not been
completed to permit the successor accountant to complete a review of the
financial statements contained in Morgan's Form 10-Q for the period ended
June 30, 2002 because the prior accountant has not made certain work papers
available to the successor accountant. For the same reason, the
accompanying Form 10-Q for the period ended June 30, 2002 has not been
reviewed by the Company's independent accountants.
17
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
For the Quarter Ended June 30, 2002
Consolidated Results
Revenues for the second quarter 2002 were down 38% to $18.0 million versus $29.3
million reported in the year-ago quarter. The Company reported revenue
improvements of 14% in the pickup division and 9% in the vehicle delivery
division. These increases were offset by a 53% decline in revenue from the
manufactured housing division and 62% in the towaway division.
The Company renewed its liability and workers compensation insurance on July 1,
2002 resulting in increased expense primarily driven by insurance market
conditions. The liability insurance market for trucking companies has been
negatively impacted by increased loss ratios, higher credit risks and a decrease
in available capacity in the excess reinsurance market. The Company is
attempting to recover as much of this increase as possible in the form of
apportioned insurance charges to customers.
Operating costs were 96.9% of total revenues for the quarter compared to 90.9%
in prior year. Insurance premiums increased from 2.6% in 2001 to 6.5% of
operating revenues in 2002 due to increased premium rates. Selling, general and
administrative expenses were 13.8% of revenue compared to 6.9% of revenue in the
second quarter of 2001. The Company recorded a $2.0 million impairment on assets
in conjunction with the sale of a division in August 2002.
The reduced revenue and increased insurance expense and impairment of assets
charge resulted in an operating loss of $4.1 million in the current period
compared to operating income of $371,000 in 2001.
Segment Results
The following discussion sets forth certain information about segment results.
Manufactured Housing
Revenues for the manufactured housing division decreased by $9.4 million or 53%
in the second quarter compared to the prior year. This decrease in revenue is
driven by a continued industry recession and the loss of the Company's largest
customer, Oakwood Homes Corporation (NYSE: OH) effective October 1, 2001.
Revenues from Oakwood declined by $3.7 million in the second quarter of 2002 as
compared to 2001. Industry shipments of manufactured homes declined by 10% in
the second quarter of 2002 according to the Manufactured Housing Institute.
Effective August 14, 2002, Morgan disposed of its manufactured housing division.
See Part II, Item 1 below for a description of this transaction. After August
14, 2002, the revenue and expenses from this division will no longer be
reflected in the statements of operations.
For the six months ended June 30, 2002, the manufactured housing division EBITDA
loss of $4.0 million includes an asset impairment charge of $2.1 million
associated with the sale of the division in August, 2002.
For the quarter, the manufactured housing division EBITDA loss of $4.0 million
includes an asset impairment charge of $2.1 million associated with the sale of
the division in August, 2002.
18
In September, Morgan filed a lawsuit alleging that one of its former senior
officers had conspired with a competitor to misappropriate Morgan's drivers,
employees, customers and trade secrets both during that officer's employment
with Morgan and after she left Morgan. The court issued a preliminary injunction
in favor of the Company on September 28, 2001. In addition, Morgan is seeking
monetary damages as well as a permanent injunction against unfair competition
and unlawful interference with Morgan's contracts. Competition with the parties
named in the lawsuit has resulted in decreased revenues and operating margin for
the Company's manufactured housing division.
Vehicle Delivery
Operating revenues for the vehicle delivery division in the quarter increased by
$420,000 or 9% from prior year as a result of an increase in demand for new
recreational vehicles. Revenues in this division are anticipated to increase
driven by stronger customer outlook and production of recreational vehicles.
Pickup
The pickup division, which utilizes independent contractors with dual-axle
pick-up trucks to move travel trailers and boats, reported 14% revenue growth
compared to the prior year. The increase was attributable to an increase in
demand for new recreational vehicles and an increase in the size of the
Company's fleet.
Towaway
Operating revenues for the towaway division that leases independent contractors
with Class 8 tractors decreased 62% compared to the prior year. The decrease was
the result of a 48% decrease in the Company's fleet size of trucks from 113 to
59.
Insurance and Finance
Our Insurance and Finance segment provides insurance and financing services to
our drivers and independent owner-operators. Insurance and Finance operating
revenues decreased $284,000 or 43% in the second quarter of 2002 as a result of
decreases in the number of drivers and independent owner-operators.
For the Six Months Ended June 30, 2002
Consolidated Results
Revenues for the first six months of 2002 decreased $18.7 million or 35%
compared to 2001. The Company reported revenue improvements of 19% in the pickup
division and a 6.0% in the vehicle delivery division. The revenue improvements
were offset by a 50% decline in revenue from the manufactured housing division
and 56% in the towaway division.
Operating costs were 96.0% of total revenues for the six months ended June 30,
2002 compared to 91.5% for the prior year. Insurance premiums increased from
2.7% in 2001 to 7.1% of operating revenues in 2002 due to increased premium
rates. Selling, general and administrative expenses were 13.5% of revenue
compared to 7.7% of revenue for the prior year.
19
Manufactured Housing
Revenues for the manufactured housing division declined by $16.1 million or 50%
for the first six months of 2002 as compared to the prior year. The decrease in
revenue is the result of a continued industry recession and the loss of the
Company's largest customer, Oakwood Homes Corporation effective October 1, 2001.
Revenues from Oakwood declined by $7.4 million in the first six months of 2002
as compared to 2001. Industry shipments of manufactured homes declined by 5% in
the first six months of 2002 according to the Manufactured Housing Institute.
Vehicle Delivery
Operating revenues in the vehicle delivery division for the first six months of
2002 increased $525,000 or 6% compared to 2001. This increase is primarily a
result of increased demand for recreational vehicles in 2002 as compared to
2001.
Pickup
Operating revenues in the pickup division increased 19% during the first six
months of 2002 to $4.8 million. The increase was attributable to an increase in
demand for new recreational vehicles and an increase in the size of the
Company's fleet.
Towaway
Operating revenues for the towaway division for the first six months of 2002
decreased to $2.7 million from $6.0 million in 2001. The 56% decrease was the
result of a decrease in the size of the Company's fleet.
Insurance and Finance
Insurance and finance operating revenues for the first six months of 2002
decreased $527,000 or 66% compared to 2001. The decrease was the result of a
decrease in the number of drivers and independent owner operators utilizing the
insurance services.
LIQUIDITY AND CAPITAL RESOURCES
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. The Company incurred operating losses and
negative operating cash flows during the past two years and the first two
quarters of 2002. These conditions raise substantial doubt about the Companys
ability to continue as a going concern. The Company is actively seeking
additional capital resources.
20
Morgan's ability to continue as a going concern is dependent upon its ability to
successfully maintain its financing arrangements and to comply with the terms
thereof. In the event that Morgan cannot maintain its borrowing capacity under
the Credit Facility or meet other cash flow obligations, Morgan will be required
to consider its options including potentially discontinuing operations or
voluntary insolvency proceedings.
Effective July 1, 2002, Morgan renewed its primary liability insurance, workers
compensation, cargo, and property insurance. Acquisition of liability insurance
in the trucking industry has become increasingly more difficult and expensive
over the past two years. As a result, Morgans insurance premiums have increased
significantly in each of the insurance periods beginning July 1, 2001 and 2002.
Morgan is attempting to recover as much of this increase as possible from
customers in the form of apportioned insurance charges. The net impact on
Morgans operating results for the next 12 months cannot be determined at this
time.
Morgan had a $600,000 premium finance payment due on August 19, 2002, which
Morgan was not able to pay. The finance company intends to initiate cancellation
of the Morgans current insurance program which will take 10 to 30 days.
Based on Morgans sale of its manufactured housing division on August 14, 2002,
Morgan is seeking new liability and workers compensation insurance programs.
Morgan plans to reduce the total cost of the program as Morgan will be running
significantly fewer miles and overall accident risk will decrease. The
manufactured housing division has historically generated the vast majority of
Morgans liability claims. The remaining three divisions have experienced less
claim cost per mile over the past six years. Morgans ability to obtain an
affordable liability and workers compensation insurance program before the
existing program expires is uncertain. In the event Morgan does not have
liability and workers compensation insurance, the Company would be forced to
cease operations.
The $12.5 million, three-year Credit Facility is used for working capital
purposes and to post letters of credit for insurance contracts. As of June 30,
2002, Morgan had outstanding borrowing of $534,000 and $7.0 million outstanding
letters of credit on the Credit Facility. Credit Facility borrowings bear
interest at a rate per annum equal to either Bank of New York Alternate Base
Rate ("ABR") plus one-half percent or, at the option of Company, 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, and are subject to certain financial covenants including minimum
tangible net worth, maximum funded debt, minimum fixed interest coverage and
maximum capital expenditures. 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.
On February 7, 2002, Morgan obtained a temporary over-advance on its credit
availability on the Credit Facility of $1 million and provided the lender a
second mortgage on real estate in Elkhart, Indiana. On April 5, 2002 Morgan
repaid $500,000 of the over-advance. The remaining $500,000 over-advance was
eliminated on May 31, 2002. Morgan used the proceeds from the exercise of the
warrants of $535,000 and income tax refund of $1,638,000 million to repay this
advance.
21
As of March 31, 2002 and June 30, 2002, Morgan was in violation of the following
covenants under the Credit Facility: minimum tangible net worth, maximum funded
debt and letters of credit to EBITDA and minimum fixed charge coverage. Morgan
has not requested a waiver of these covenant violations and the lender has
continued to advance on the Credit Facility.
At June 30, 2002, advances against the Credit Facility were greater than the
formula borrowing base calculation by $1.4 million. Morgan is seeking to obtain
an agreement with the lender to continue to over advance on the Credit Facility
by up to $1.5 million in exchange for security interests in all unsecured real
estate and specified future cash payments. All advances under the Credit
Facility would continue to be at the lenders sole discretion as a result of
covenant violations and the agreement. The $1.5 million over advance would be
reduced by $600,000 on September 30, 2002, $200,000 on October 31, 2002,
$350,000 on November 30, 2002, and $350,000 on December 31, 2002 under the
proposed agreement. The maximum amount of the Credit Facility would be reduced
to $8.0 million and the facility would expire on December 31, 2002. The
documentation has been prepared with the lender but has not been executed
pending resolution of collateral issues. Morgan cannot give assurance that an
agreement will be executed. In the event an agreement is not reached, the lender
may exercise its remedies under the Facility, including immediate demand of
outstanding borrowings.
Morgan is cooperating with an investigation initiated by Morgan Group Holding
Co., which owns 64.2% of the Companys common stock and 77.6% of the Companys
voting stock, to determine facts associated with the origination, reporting and
resolution of the over advance on the Credit Facility and any resulting
financial statement consequences.
On April 5, 2002, Morgan obtained a new $1,400,000 mortgage secured by the
Company's land and buildings in Elkhart, Indiana. Loan proceeds were used to
retire the previous first mortgage of $500,000 and repay a $500,000 over-advance
on the Credit Facility. The remaining proceeds were used for short-term working
capital purposes to the extent they were not restricted. The mortgage is for a
one-year period due April 5, 2003 and bears a blended interest rate of 13.5% on
the first $1.25 million of principal and 8% on the remaining $150,000 of
principal. The loan contains a minimum interest requirement of $101,000 and
otherwise may be prepaid at any time with no penalties.
Morgan was delinquent in making an interest payment on this mortgage loan on
August 1, 2002. The lender did not accept the subsequent late payment. On August
8, 2002, the lender declared Morgan in default on the note and issued a demand
letter for immediate payment of full principle and interest of $1.48 million.
Morgan cannot comply with the demand for payment and is currently seeking to
negotiate a forbearance agreement with the lender. The resolution of this
default and impact on Morgan cannot be determined at this time. If a forbearance
agreement cannot be obtained, the lender may exercise its remedies including
foreclosure on the real estate.
Effective July 1, 2002, Morgan renewed its primary liability incurance, workers
compensation, cargo, and property insurance. Acquisition of liability insurance
in the trucking industry has become increasingly more difficult and expensive
over the past two years. As a result, the Company' insurance premiums have
increased significantly in each of the insurance periods beginning July 1, 2001
and 2002. Morgan is attempting to recover as much of this increase as possible
from customers in the form of apportioned insurance charges. The net impact on
the Company's operating results for the next 12 months cannot be determined at
this time.
22
As of December 31, 2001, the Company recorded an income tax refund due of
$591,000. During the first quarter, 2002, as a result of a new tax law, the
Company qualified for a five year carry back of its net operating losses versus
a previously allowed two year carry back. The impact of this tax law change
resulted in a $1,047,000 increase in the income tax refund recorded during the
first quarter. The total income tax refund of $1,638,000 million was received in
May 2002.
On February 19, 2002, Morgan's Board of Directors agreed to set the exercise
price reduction period on the Class A warrants to begin on February 26, 2002 and
to extend for 63 days, expiring on April 30, 2002 (the "Reduction Period").
Morgan's Board of Directors agreed to reduce the exercise price of the warrants
to $2.25 per share, instead of $6.00 per share, during the Reduction Period.
Morgan's Board of Directors reduced the exercise price to $2.25 to give warrant
holders the opportunity to purchase shares at a price in the range of recent
trading prices of the Class A common stock. All other terms regarding the
warrants, including the expiration date of the warrants, remain the same. As of
the close of the temporary Reduction Period on April 30, 2002, the Company
received $535,331 with the exercise of 237,925 warrants at $2.25 each. Holding
exercised 5,000 of its warrants. Subsequent to the exercised, the Company owned
64.5% of Morgan's equity interest and 77.6% of Morgan's voting ownership.
Unexercised warrants remain outstanding and exercisable at $9.00 each.
Morgan accounts receivable provide much of the collateral base for the credit
facility, which supports outstanding letters of credit and provides borrowing
capacity for working capital. The impact of decreased revenues and accounts
receivable have, therefore, reduced the borrowing capacity and liquidity to
minimal levels. Morgan's management continues to aggressively pursue financing
options allowing Morgan to meet its liquidity requirements during this slow
period until accounts receivable recover to stronger levels. Morgan's management
is working with its lenders to maintain existing credit arrangements and to
obtain additional financing. In addition, management will continue to consider
strategic alternatives, potentially including sales of assets.
The Company's and Morgan's ability to continue as a going concern is dependent
upon its ability to successfully maintain its financing arrangements and to
comply with the terms thereof.
At this time, Morgan's ability to successfully cover its financial obligations
is uncertain; however, management believes that internally generated funds
together with the recent equity infusion, income tax refund and resources
available under the credit and mortgage facilities will increase the likelihood
that Morgan will be able to meet its capital and liquidity requirements through
the end of the year.
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. Our operating revenues,
therefore, tend to be stronger in the second and third quarters.
23
FORWARD LOOKING DISCUSSION
This report contains a number of forward-looking statements, including
statements regarding the prospective adequacy of the Company's liquidity and
capital resources in the near term. From time to time, the Company may make
other oral or written forward-looking statements regarding its anticipated
operating revenues, costs and expenses, earnings and other matters affecting its
operations and condition. Such forward-looking statements are subject to a
number of material factors, which could cause the statements or projections
contained therein, to be materially inaccurate. Such factors include, without
limitation, the risk of declining production in the manufactured housing
industry; the risk of losses or insurance premium increases from traffic
accidents; the risk of loss of major customers; risks that the Company will not
be able to attract and maintain adequate capital resources; risks of competition
in the recruitment and retention of qualified drivers in the transportation
industry generally; risks of acquisitions or expansion into new business lines
that may not be profitable; risks of changes in regulation and seasonality of
the Company's business. Such factors are discussed in greater detail in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
No New Developments.
Item 4 - Submission of Matters to Vote of Security Holders
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Report on Form 8-K: None
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MORGAN GROUP HOLDING CO.
BY: /s/ Robert E. Dolan
--------------------
Chief Financial Officer
DATE: August 19, 2002
26