-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D8fIIZsflVM0zbIn9FvHLmy60MtGQEiS5k5cpmPQErQidJlildkley2un00q1doZ CKGBxVZyCYHxdr7uW6cJhg== 0000908834-97-000081.txt : 19970401 0000908834-97-000081.hdr.sgml : 19970401 ACCESSION NUMBER: 0000908834-97-000081 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN GROUP INC CENTRAL INDEX KEY: 0000906609 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 222902315 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13586 FILM NUMBER: 97571845 BUSINESS ADDRESS: STREET 1: 2746 OLD U S 20 W STREET 2: PO BOX 1168 CITY: ELKHART STATE: IN ZIP: 46514 BUSINESS PHONE: 2192952200 10-K 1 10-K FOR THE MORGAN GROUP, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission File Number 1-13586 THE MORGAN GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 22-2902315 (State or other Jurisdiction (I.R.S. Employer Identification of Incorporation or Organization) Number) 2746 Old U.S. 20 West Elkhart, Indiana 46515-1168 Registrants telephone number include area code: (219) 295-2200 Securities Registered Pursuant to Section 12(b) of the Act: Class A Common Stock, without par value (Title of Class) 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 (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. YES X NO ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants 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 March 27, 1997 was _______________. The number of shares of the Registrant's Class A Common Stock $.015 par value and Class B Common Stock $.015 par value, outstanding as of March 27 1997, was _________ shares, and _______ shares, respectively. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders are incorporated into Part III of this report. Exhibit Index on Pages ________ Page 1 of Pages Part I Item 1. BUSINESS Overview The Morgan Group, Inc. (The Company) is the leading provider of outsourcing transportation services to the manufactured housing, motor homes, and commercial truck industries in the United States and through its wholly owned subsidiary, Morgan Drive Away, Inc. (Morgan) has been operating since 1936. The Company provides outsourcing transportation services through a national network of approximately 1,720 independent owner operators and approximately 1,300 driveaway drivers. The Company dispatches its drivers from 115 offices located in 35 states. The Company's largest customers include Fleetwood Enterprises, Inc., Oakwood Homes Corporation, Winnebago Industries, Inc., Champion Enterprises, Cavalier Homes, Inc., Clayton Homes, Schult Homes, Ryder Systems, and Skyline Corporation. The Company's services also include transporting other products, including commercial vehicles and office trailers, and providing certain insurance and financing services to its owner operators. As further described below, the Company's strategy is to grow through expansion in the niche businesses already being serviced with heavy emphasis on driver outsourcing, along with pursuing acquisitions of niche transportation carriers who are servicing their customer base with unique service and/or equipment. In addition, the Company will look to expand insurance product offerings to drivers through its subsidiary Interstate Indemnity Company (Interstate) and to broaden its financing activities through Morgan Finance, Inc. (Finance). Morgan, the Company's principal subsidiary, was founded in 1936 in Elkhart Indiana and incorporated in 1943. The Morgan Group, Inc. is a Delaware corporation formed by Lynch Corporation in 1988 to acquire Morgan and Interstate, a wholly owned captive insurance company. In 1994, the Company formed Finance for the purpose of offering financing to owner operators. In 1995, the Company acquired the assets of Transfer Drivers, Inc. (TDI), a Northern Indiana-based driver outsourcing company. TDI, with revenue in excess of $8.5 million and more than 265 drivers, is a market leader in the fragmented outsourcing service business focusing on relocation of rental equipment for customers such as Ryder Systems, Budget Rentals, and Penske Leasing, and also delivering new equipment from manufacturers including Utilimaster, Grumman Olson, and Bluebird Bus. On December 30, 1996, Morgan acquired the assets of Transit Homes of America, Inc., a national outsourcing company of manufactured housing located in Boise, Idaho. Transit, with revenue in excess of $25 million and 358 drivers, provides outsourcing transportation services to Fleetwood Enterprises, Champion Enterprises, Palm Harbor, Schult Homes, and Cavalier Homes. The Company decided in the fourth quarter of 1996 to discontinue the truckaway operation of the Specialized Transport Division. Truckaway is a line of business that transported van conversions, tent campers, and other automotive products on company-owned equipment. The equipment being held for sale includes 6 tractors, 74 drop deck trailers, 15 car carrier trailers, 22 tent camper trailers, and 112 lowboy and miscellaneous trailers. In addition, there are 13 tractors and 9 tent camper trailers currently financed under operating leases. As of December 31, 1996, there were approximately 110 independent contractors and 19 company drivers assigned to the truckaway operation. The truckaway operation had revenues of $12,900,000, $14,400,000, and $20,600,000 and estimated losses of $1,800,000, $1,200,000, and estimated profits of $1,200,000 for the years ending December 31, 1996, 1995, and 1994, respectively. The Company's principal office is located at 2746 Old U.S. 20 West, Elkhart, Indiana 46514; the telephone number is (219) 295-2200. Industry Information The Company's business is substantially dependent upon the manufactured housing industry which experienced its fifth successive year of growth in 1996. The recent decision to discontinue the truckaway operation, which transported van conversions and tent campers, has resulted in the Company being less dependent on the recreational vehicle industry. Manufactured Housing. The largest portion of the Company's carrier revenues are derived from transportation of manufactured housing, primarily new manufactured homes. Unit shipments by the manufactured housing industry (considering double-wide homes as two shipments) in the U.S. increased by approximately 9% to 553,000 in 1996 from 506,000 in 1995, after 12% and 21% increases in 1995 and 1994, respectively, according to data from the Manufactured Housing Institute (MHI). A manufactured home is an affordable housing alternative. The Company believes the manufactured housing industry production should continue to grow along with the general economy, especially while employment statistics and consumer confidence remain strong. The Company believes that the principal economic consideration of the typical manufactured home buyer is the monthly payment required to purchase a manufactured home and that purchasers are generally less affected by incremental increases in interest rates than those purchasers of site built homes. There is no assurance, however, that manufactured housing production will continue to increase. Recreational Vehicles. Recreational Vehicles (defined as travel trailers, motor homes, tent campers, and truck and van conversions) declined 1% in 1996 to 376,000 from 380,000 shipments in 1995 after declines of 11% in 1995, and a 5% increase in 1996. This data is obtained from the Recreational Vehicle Industry Association (RVIA). RVs are discretionary purchases, sales of which are cyclical and tied closely with overall consumer confidence in the economy, and, in particular, consumers expectations as to the availability and price of motor fuel. Consumer interest rates remain relatively low which make RVs easier for purchasers to finance. There is no assurance, however, that the current economic environment will continue to support RV production. Company Services Based on industry shipment data available from the MHI and RVIA, and the Company's knowledge of the industry and its principal competitors, the Company believes that it is the largest transporter of both manufactured homes and provider of driver outsourcing services to the motor home markets in the United States. In addition to new manufactured housing and RVs, the Company transports used manufactured homes, commercial vehicles, rental trucks, office trailers, new and used semi-trailers and other miscellaneous commodities. The Company provides its specialized transportation services as follows: Manufactured Housing Group. The Manufactured Housing Group (Housing Group) which includes Transamerican Carriers acquired in 1993 and Transit Homes acquired in 1996, provides specialized transportation to companies which produce new manufactured homes, modular homes, and office trailers. In addition, the Housing Group transports used manufactured homes and offices for individuals, businesses, and the U.S. Government. The Housing Group ships product through approximately 1,300 independent owner operators who drive compact semi-tractors, referred to as toters, used in manufactured housing transportation to reduce combined vehicle length. Makers of manufactured housing generally ship their products no more than a few hundred miles from their production facilities. Therefore, to serve the regional structure of this industry, the Company positions its dispatch offices close to the production facilities it is serving. Approximately 28 of the Company's dispatch offices are located in such a manner to serve the needs of a single manufactured housing producer. Most manufactured housing units, when transported by a toter require a special permit prescribing the time and manner of transport for over-dimensional loads. See Business-Regulation. The Company obtains for its owner operators the permits required for each shipment from each state through which the shipment will pass. Driver Outsourcing Group. The Driver Outsourcing Group (Outsourcing Group) engages the services of approximately 1,300 drivers which are outsourced to customers to drive motor homes (RVs), new commercial vehicles, and rental units. The TDI acquisition, which occurred in May of 1995, added over 265 drivers to Morgans existing driver outsourcing base. In 1996, the Outsourcing Group delivered approximately 58,000 units through the use of these drivers. Specialized Transport Group. In 1996, the Specialized Transport Division moved a variety of specialized vehicles, including automobiles, semi-trailers, military vehicles, travel trailers and other commodities by utilizing specialized equipment. A decision was made in the fourth quarter to discontinue the truckaway sector of the Specialized Transport Division, which moved van conversions, automobiles, and tent campers by utilizing company-owned trailers. Subsequent to the discontinuation of the truckaway business, the Company will have 70 owner operators who own tractors and 185 pick-up truck owner operators assigned to Specialized Transport. These independent owner operator dispatches are coordinated through ten offices. Other Services. Other services provided include permit ordering services principally for manufactured housing customers and, to a lesser degree, installation services related to the set up of relocated manufactured homes. The Company also currently provides physical damage insurance and certain other insurance protection to the owners of equipment under lease to the Company through a captive insurance subsidiary. Since the primary risk for the most part is then re-insured, the Company service is primarily that of a broker. In addition, the Company provides financing and certain guarantees of equipment loans through its finance subsidiary. Selected Operating Information The following tables set forth operating information with respect to the aforementioned Company services for each of the five years ended December 31, 1996.
Years Ended December 31, 1992 1993 1994 1995 1996 Manufactured Housing Group: Shipments 80,587 95,184 121,604 135,750 144,601 Revenues (in thousands) $ 32,324 $ 39,930 $ 53,520 $ 63,353 $ 72,616 Driver Outsourcing: Shipments 23,636 30,978 32,060 49,885 58,368 Revenues (in thousands) $ 8,055 $ 13,416 $ 15,197 $ 19,842 $ 23,090 Specialized Transport: Shipments 39,706 38,618 41,934 44,406 41,255 Revenues (in thousands) $ 24,016 $ 25,835 $ 28,246 $ 29,494 $ 26,169 Other service revenues $ 2,721 $ 3,612 $ 4,917 $ 9,614 $ 10,333 Total operating revenues (in thousands) $ 67,116 $ 82,793 $101,880 $122,303 $132,208
Industry Participation. The following tables set forth participation in the two principal markets the Company operates in where industry information is available:
Manufactured Homes 1992 1993 1994 1995 1996 Industry production (1) 309,457 374,126 451,646 505,819 553,133 Shipments 60,381 76,188 98,181 114,890 121,136 Shares of units shipped 19.5% 20.4% 21.7% 22.7% 21.9% Recreational Vehicles Industry production (2) 369,200 406,300 426,100 380,300 376,400 Units moved (3 62,012 71,792 67,502 64,303 57,703 Shares of units shipped (3) 16.8% 17.7% 15.8% 16.9% 15.3%
(1) Based on reports of Manufactured Housing Institute (MHI). To calculate shares of homes shipped, the company assumes two unit shipments for each multi-section homes. (2) Based on reports of Recreational Vehicle Industry Association (RVIA), excluding van campers, truck campers, pick-up truck conversions, and sport utility vehicle conversion. RVIA began reporting truck and sport utility vehicle conversions in their industry shipment data in 1994. (3) Shares of units shipped calculation includes travel trailers, two types of motor homes, van conversions, and tent campers and truck conversions in 1994, 1995, and 1996. The Company's shares of units shipped are based on units moved compared to industry production rather than shipments because certain RV shipments include more than one unit per move. Growth Strategy The Company's strategy is to focus on the profitable core transportation services (manufactured housing and driver outsourcing) so that revenues and profitability can grow in its area of substantial market position. The Company will also look for opportunities to capitalize and/or grow its strong market position in manufactured housing and driver outsourcing through acquisitions if suitable opportunities arise. In addition, to enhance the Company's profitability, it plans to reconstruct the corporate organization with the purpose of giving higher focus to the two major operating groups and reducing costs. Manufactured Housing Growth. The Company believes it can take better advantage of its position in the manufactured housing industry in its relationship with manufacturers, retailers, dealers, and independent owner operators, by expanding the service it offers within its specialized business. The Company proposes to pursue opportunities to offer new services, which may include financial, insurance, and to a lessor degree, manufactured housing set up services. The recent Morgan/Transit combination expands opportunities to increase revenues, improve margins and further strengthen customer relationships. Morgan and Transit now combined can serve the market better and operate more efficiently. The acquisition of Transit could lead to additional operating efficiencies and economies of scale from Morgan's ability to apply information technology, administrative processes, driver and staff training, safety and other programs across a larger operation. These expanded capabilities should also enable the Company to make more efficient use of our operating equipment. The Company may also pursue the purchase of certain manufacturers' private transport fleets. In such a case, the Company would typically purchase the customers' tractors, sell the equipment to interested drivers, and then engage these drivers as independent owner operators. Driver Outsourcing. It is estimated that approximately 750,000 vehicles are delivered each year through driveaway services, a delivery market estimated at $500 million or more. The number of vehicles to be outsourced are expected to increase substantially as companies calculate the cost benefits in not maintaining their own driver corps, paying salaries and benefits, running dispatch points, and maintaining an equipment base. Unlike companies with drivers on their payroll, Morgan's drivers are paid only when deliveries are made. Morgan's growth strategy within this market is to expand its leading market position in this highly fragmented delivery transportation market. The future growth rate of the Company's driver outsourcing business, which has a 36% average growth rate over the last five years, is dependent upon continuing to add major vehicle manufacturer customers and utilization of the Company's 1,300 driveaway drivers. Reconstruct for Margin Improvement. In the fourth quarter of 1996, the Company made a decision to exit the truckaway division which transported van conversions, tent campers, and other automotive products utilizing company-owned equipment. The decision to sell the truckaway division was in line with the Company's growth strategy to focus on profitable operations where the Company has a dominant market position. The Company is in the process of reconstructing its organization to change the emphasis from a centralized operation to a profit driven divisional and field operation focused on bottom line management. This reconstruction could lead to reduced overhead, especially in centralized corporate operations, management will continue to scrutinize every facet of operations as the Company searches for ways to run the business with greater efficiency, both to enhance management processes and customer relationships, and to reduce or eliminate costs wherever possible. Acquisitions. The Company is actively considering acquisition opportunities within the manufactured housing and driver outsourcing lines of business. Thus, the Company may consider acquiring regional or national firms which service the manufactured housing and/or the driver outsourcing industry. The Company is continuously reviewing potential acquisitions and is engaged in negotiations from time to time. There can be no assurance that any future acquisitions will be effected, or, if effected, can be successfully integrated with the Company's business. Expansion of Related Services. The Company believes it can take better advantage of its position in the manufactured housing and RV industries, and its relationships with manufacturers, retailers, dealers, and independent owner operators, by expanding the services it offers within its specialized business. The Company proposes to pursue opportunities to offer new financial, insurance or other services. The Company is currently offering financing opportunities to selected existing and new owner operators, through Morgan Finance, a financial subsidiary created in 1994 to support these activities. In 1995, Morgan formed an alliance with a financial institution which is providing financing to Morgan owner operators for tractor purchases, and in return, Morgan has entered into a limited guarantee agreement. These equipment financing programs are expected to solidify the Company's relationships with independent owner operators, increase its fleet, and further expand the Company's transportation capacity. The Company also offers insurance services to independent owner operators. The Company may begin offering new insurance products as a managing general agent. The Company's insurance subsidiary may determine to accept a limited portion of the underwriting risk, retaining an appropriate proportion of the premiums. The Company will carefully consider the feasibility of these and similar opportunities over the next year. If the Company is successful in offering new services such as these, it expects to enhance and diversify its revenues and may reduce its vulnerability to broad production cycles in the industries it serves. The Company cannot give any assurance that new services, if any, will be profitable and such new services may result in operating losses. Forward-Looking Discussion In 1997, the Company could benefit from (i) the acquisition of Transit Homes of America which consolidates our long-standing position as the absolute leader in the delivery of outsourcing transportation services to the manufactured housing industry, (ii) the closing of the Truckaway Division, which cost the Company approximately $1,800,000 in 1996, (iii) reduction of overhead through corporate restructuring, and (iv) improvement of our safety record. Business expansion, including possible acquisitions, could augment operating revenue gains. While the Company remains optimistic over the long term, near term results could be affected by a number of internal and external economic conditions. This report contains a number of forward-looking statements, including those contained in the preceding and growth stragey paragraph. From time to time, the Company may make other oral or written forward-looking statements regarding its anticipated sales, costs, expenses, earnings and matter affecting its condition and operations. Such forward-looking statements are subject to a number of material factors which could cause the statements or projections contained therein to be materially inaccurate. Such factors include, without limitation, the following: Dependent on Manufactured Housing. Shipments of manufactured housing have historically accounted for a substantial majority of the Company's operating revenues. Therefore, the Company's prospects are substantially dependent upon this industry which is subject to broad production cycles. Shipments by the manufactured housing industry could decline in the future relative to historical levels which could have adverse impact on the Company's revenues. Costs of Accident Claims and Insurance. Traffic accidents occur in the ordinary course of the Company's business. Claims arising from such accidents can be significant. Although the Company maintains liability insurance and cargo damage insurance, the number and severity of the accidents involving the Company's owner operators and drivers can have significant adverse effect on the profitability of the Company through premium increases and amounts of loss retained by the Company below deductible limits or above its total coverage. There can be no assurance that the Company can continue to maintain its present insurance coverage on acceptable terms nor that the cost of such coverage will not increase significantly. Customer Contracts and Concentration. Historically, a majority of the Company's revenues have been derived under contracts with customers. Such contracts generally have one to three year terms. There is no assurance that customers will agree to renew their contracts on acceptable terms or on terms as favorable as these currently in force. The Company's top ten customers have historically accounted for a majority of the Company's revenues. The loss of one or more of these significant customers could adversely affect the Company's results of operations. Competition for Qualified Drivers. Recruitment and retention of qualified drivers and owner operators is highly competitive. The Company's contracts with owner operators are terminable by either party on ten days notice. There is no assurance that the Company's drivers will continue to maintain their contracts in force or that the Company will be able to recruit a sufficient number of new drivers on terms similar to those presently in force. The Company may not be able to engage a sufficient number of new drivers to meet customer shipment demands from time to time, resulting in loss of revenue that might otherwise be available to the Company. Independent Contractors, Labor Matters. From time to time, tax authorities have sought to assert that independent contractors in the transportation service industry are employees, rather than independent contractors. Under existing interpretations of federal and state tax laws, the Company maintains that its independent contractors are not employees. There can be no assurance that tax authorities will not challenge this position, or that such tax laws or interpretations thereof will not change. If the independent contractors were determined to be employees, such determination could materially increase the Company's tax and workers compensation exposure. Risks of Acquisitions and Diversification. The Company has sought and will continue to seek favorable acquisition opportunities. Its strategic plans may also include the initiation of new services or products, either directly or through acquisition, within its existing business lines or which complement its business. There is no assurance that the Company will be able to identify favorable acquisition opportunities in the future or as to the terms of any such acquisition. There is no assurance that the Company's recent or future acquisitions will be successfully integrated into its operations or that they will prove to be profitable for the Company. Similarly, there is no assurance that any new products or services, individually or in the aggregate, could materially change the Company's results of operations, financial condition and capital requirements. Such changes could have a material adverse effect on the Company. Seasonality and General Economic Conditions. The Company's operations have historically been seasonal, with generally higher revenues generated in the second and third quarters than in the first and fourth quarters. A smaller percentage of the Company's revenues are generated in the winter months in areas where weather conditions limit highway use. The seasonality of the Company's business may cause a significant variation in its quarterly operating results. Additionally, the Company's operations are affected by fluctuations in interest rates and the availability of credit to purchasers of manufactured homes and motor homes, general economic conditions, and the availability and price of motor fuels. Regulation. The Company's insurance subsidiary is regulated by the Vermont Department of Banking, Insurance and Securities. There can be no assurance that changes in state or federal regulations will not adversely affect the Company. Customers and Marketing The Company's customers for transport of new manufactured homes, recreational vehicles, and commercial vehicles are located in various parts of the United States. The Company's largest manufactured housing customers include Fleetwood Enterprises, Inc., Oakwood Homes Corporation, Cavalier Homes, Inc., Skyline Corporation, Clayton Homes, Champion Enterprises, Inc., Patriot Homes, and Schult Homes. The Company's largest driver outsourcing customers include Fleetwood Enterprises, Winnebago Industries, Inc., Thor Industries, Holiday Rambler, and Ryder Systems. The specialized transport division customers, after the discontinuance of the truckaway operation, include Utility Trailer, Great Dane, Strick Corporation, Hale Trailer, Fleetwood Enterprises, Thor Industries, Skyline Corporation, and Coachmen Industries. While most manufacturers rely solely on carriers such as the Company, other manufacturers operate their own equipment and may employ outside carriers only for that portion of their needs. A substantial portion of the Company's revenues are generated under one - five year contracts with producers of manufactured homes, RVs, and other products. In these contracts, the manufacturers agree that a specific percentage (up to 100%) of their transportation service requirements from a particular location will be performed by the Company on the basis of a prescribed rate schedule, subject to certain adjustments to accommodate increases in the Company's transportation costs. Revenues generated under customer contracts in 1994, 1995, and 1996 were 57%, 58%, and 62% of total revenues, respectively. The Company's ten largest customers all have been served for at least three years and account for approximately 68% of its revenues. Revenues under contract with one such customer, Fleetwood Enterprises, Inc. (Fleetwood), accounted for 27%, 24%, and 20% of revenues in 1994, 1995, and 1996, respectively. The Fleetwood RV contracts are re-negotiated on a regional basis when they expire and the Fleetwood manufactured housing contracts are continuous until canceled. The Company has been servicing Fleetwood for over 25 years. The Company markets and sells its services through 11 regional offices and 127 dispatch offices located in 35 states, concentrated where manufactured housing and RV production facilities are located. Marketing support personnel are located both at the Company's Elkhart, Indiana headquarters and at regional offices. Dispatch offices are supervised by regional offices. The Company has 34 dispatch offices devoted primarily to a single customer facility. This allows the dispatching agent and local personnel to focus on the needs of each individual customer while remaining supported by the Company's nationwide operating structure. Sales personnel at regional offices and at the corporate headquarters meet periodically with manufacturers to review production schedules and requirements and maintain contact with customers shipping personnel. Senior management maintains personal contact with corporate officers of the Company's largest customers. Regional and terminal personnel also develop relationships with manufactured home park owners, retail dealers, military installation officials and others to promote the Company's shipments of used manufactured homes. The Company also participates in industry trade shows throughout the country and advertises in trade magazines, newspapers, and telephone directories. Independent Owner Operators The shipment of product by both the Manufactured Housing Group and Specialized Transport Group is conducted by contracting for the use of the equipment of independent owner operators. Owner operators are independent contractors who own toters, tractors or pick-up trucks which they contract to, and operate for, the Company on a long-term basis. Independent owner operators are not generally approved to transport commodities on their own in interstate or intrastate commerce. The Company, however, possess such approvals and/or authorities (see Business-Regulation), and provides marketing, insurance, communication, administrative, and other support required for such transportation. The Company attracts owner operators mainly through driver referrals, local newspaper advertising, trade magazines, and truck stop brochures. The Company has in the past been able to attract new owner operators primarily because of its competitive compensation structure, its ability to provide loads and its reputation in the industry. Recruitment and retention of qualified drivers is highly competitive and there can be no assurance that the Company will be able to attract a sufficient number of qualified owner operators in the future. The contract between the Company and each owner operator can be canceled upon ten days notice by either party. The average length of service of the Company's current owner operators is approximately 3.2 years. At December 31, 1996, 1,720 owner operators were under contract to the Company, including 1,307 operating toters, 228 operating semi-tractors, and 185 operating pick-up trucks. Upon completion of the sale or disposition of the truckaway line of business, the number of semi-tractor owner operators is expected to reduce to approximately 75. In the Manufactured Housing Group, independent owner operators utilizing toter equipment tend to exclusively transport manufactured housing, modular structures, or office trailers. Once modified from a semi-tractor, a toter has limited applications for hauling general freight. Toter drivers are, therefore, unlikely to be engaged by transport firms that do not specialize in manufactured housing. This gives the Company an advantage in retaining toter independent owner operators and the average tenure with the Company of its toter independent owner operators is 3.3 years, which is longer than the average tenure of its other independent owner operators. In the Specialized Transport Group, Morgan is competing with national carriers for the recruitment and retention of independent owner operators who own tractors. The average length of service of the Company's tractor owner operators is approximately 2.7 years. Pick-up truck owner operators are difficult to retain because of the seasonality of business does not guarantee consistent loads. Accordingly, the average length of service among this group of drivers is 3.0 years. Independent owner operators are generally compensated for each trip on a per mile basis. Owner operators are responsible for operating expenses, including fuel, maintenance, lodging, meals, and certain insurance coverages. The Company provides required operating licenses and permits, cargo and liability insurance (coverage while transporting goods for the Company), and communications, sales and administrative services. Independent owner operators, except for owners of certain pick-up trucks, are required to possess a commercial drivers license and to meet and maintain compliance with requirements of the U.S. Department of Transportation and standards established by the Company. From time to time, tax authorities have sought to assert that independent owner operators in the trucking industry are employees, rather than independent contractors. No such tax claims have been successfully made with respect to owner operators of the Company. Under existing industry practice and interpretations of federal and state tax laws, as well as the Company's current method of operation, the Company believes that its owner operators are not employees. Whether an owner operator is an independent contractor or employee is, however, generally a fact-sensitive determination and the laws and their interpretations can vary from state to state. There can be no assurance that tax authorities will not successfully challenge this position, or that such tax laws or interpretations thereof will not change. If the owner operators were determined to be employees, such determination could materially increase the Company's employment tax and workers compensation exposure. Driveaway Drivers The Company outsources its over 1,300 driveaway drivers on a trip-by-trip basis for delivery to retailers and rental truck agencies, certain vehicles such as recreational vehicles, buses, tractors, rental trucks, and commercial vans that are too large or the distance of the trip too short to transport economically on a trailer. These individuals are recruited through local newspaper advertising, trade magazines, brochures, and referrals. Prospective drivers are required to possess at least a chauffeurs license and are encouraged to obtain a commercial drivers license. They must also meet and maintain compliance with requirements of the U.S. Department of Transportation and standards established by the Company. Driveaway drivers are utilized as needed, depending on the Company's transportation volume and driver availability. Driveaway drivers are paid on a per mile basis. The driver is responsible for most operating expenses, including fuel, return travel, lodging, and meals. The Company provides licenses, cargo and liability insurance, communications, sales, and administrative services. In addition to the 1,300 driveaway drivers, the Company employees 35 full time drivers using company owned or leased tractors to deliver tent campers and manufactured homes. The impending sale or disposition of the truckaway line of business will reduce the full time drivers to 16 delivering manufactured homes. Agents and Employees The Company has 198 dispatchers and dispatch assistants who are involved directly with the management of equipment and drivers. Of these 198 dispatchers, approximately 164 are full-time employees, 12 are part-time employees and the remainder are independent contractors who earn commissions. The dispatch personnel are responsible for the Company's dispatch operations, including safety, customer relations, equipment assignment, invoicing, and other matters. Because dispatch personnel develop close relationships with the Company's customers and drivers, from time to time the Company has suffered a dispatching personnel defection, following which the former dispatcher has sought to exploit such relationships in competition with the Company. The Company does not expect that any future defection, if any, would have a material effect on its operations. Excluding these dispatching personnel and drivers, the Company has approximately 175 full-time employees and 35 full time employee drivers. Seasonality Shipments of manufactured homes tend to decline in the winter months in areas where poor weather conditions inhibit transport. This usually reduces revenues in the first and fourth quarters of the year. RV movements are generally stronger in the spring, when dealers build stock in anticipation of the summer vacation season, and late summer and early fall when new vehicle models are introduced. The Company's revenues, therefore, tend to be stronger in the second and third quarters. Risk Management, Safety and Insurance The risk of substantial losses arising from traffic accidents is inherent in any transportation business. The Company carries insurance to cover such losses up to $20 million per occurrence with a deductible of up to $250,000 per occurrence for personal injury and property damage. The Company maintains a cargo damage insurance policy of $1,000,000 with a $250,000 deductible. The frequency and severity of claims under the Company's liability insurance affects the cost and potentially the availability of such insurance. If the Company is required to pay substantially greater insurance premiums, or incurs substantial losses above $20 million or below its $250,000 deductible, its results could be materially adversely affected. The Company does have an aggregate stop loss insurance policy for the period July 1, 1996 through June 30, 1997 whereby personal injury, property damage, and workers compensation losses below its $250,000 deductible cannot exceed $4,000,000 (could be adjusted up dependent on revenues). The Company has been approved for self-insurance authority of up to $1 million. There are no immediate plans to institute this self-insurance. The granting of self-insurance would provide the Company alternatives if insurance pricing levels do not meet the Company's expectations. There can be no assurance that the Company can continue to maintain its present insurance coverage on acceptable terms. The following table sets forth information with respect to bodily injury and property damage and cargo claims reserves for the years ended December 31, 1994, 1995, and 1996, respectively. Bodily Injury/Property Damage and Cargo Claims Reserve History Years Ended December 31, (In Thousands) 1994 1995 1996 Beginning Reserve Balance $ 2,830 $ 3,326 $ 3,623 Provision for Claims 4,761 4,849 6,080 Payments, net (4,265) (4,552) (5.139) Ending Reserve Balance $ 3,326 $ 3,623 $ 4,654 The Company has implemented and is enhancing driver screening and training procedures to promote safe driver practices and enhance compliance with Department of Transportation regulations. The Company's driver recognition programs emphasize safety and provide for equipment maintenance, helping to enhance the Company's overall safety record. In 1996, over 1,350 drivers were honored and obtained recognition for accident free driving. In addition to periodic recognition for safe operations and regulatory compliance, the Company has implemented several award programs associated with particular customers. These programs are intended to provide incentives for drivers to drive safely, perform well and maintain their equipment. One such program provides certain toter drivers with a credit for miles traveled while meeting standards for safety and professional performance. The owner operator is entitled to use the amount credited to obtain reimbursement from the Company for equipment purchases, maintenance, or upgrade expenses. (This program paid out $315,000 in 1996 to owner operators). The Company has a Senior Vice President of Safety, Director of Training, four Safety Directors, a Driver Trainer, and a Compliance Manager dedicated to assist the operating groups in training and highway safety. The Company has incentives for dispatchers based upon accident free miles. In 1996, over $100,000 was paid out under this program and it is expected that over $100,000 will be paid in 1997 for 1996 performance. Interstate, a wholly-owned insurance subsidiary of the Company, makes available physical damage insurance coverage for the Company's owner operators. Interstate also writes performance surety bonds for Morgan Drive Away, Inc. The Company may also utilize its wholly-owned insurance subsidiary to secure business insurance for Morgan through re-insurance contracts. Interstate may begin offering new insurance products as a managing general agent. Interstate may determine to accept a limited portion of the underwriting risk, retaining an appropriate proportion of the premiums. Competition All of the Company's activities are highly competitive. In addition to fleets operated by manufacturers, the Company competes with a large national carrier and numerous small regional or local carriers. The Company's principal competitors in the housing and driver outsourcing marketplaces are privately owned. In the specialized transport market, the Company competes with large national interstate carriers, many of whom have substantially greater resources than the Company. No assurance can be given that the Company will be able to maintain its competitive position in the future. Competition among carriers is based on the rate charged for services, quality of service, financial strength, insurance coverage and the geographic scope of the carriers authority and operational structure. The availability of tractor equipment and the possession of appropriate registration approvals permitting shipments between points required by the customer may also be influential. Regulation The Company's interstate operations (Morgan Drive Away, Inc. and TDI) are subject to regulation by the Federal Highway Administration which is an agency of the United States Department of Transportation (D.O.T.). Effective August 26, 1994, essentially all motor common carriers were no longer required to file individually determined rates, classifications, rules or practices with the I.C.C. Effective January 1, 1995, the economic regulation of certain intrastate operations by various state agencies was preempted by federal law. The states will continue to have jurisdiction primarily to insure that carriers providing intrastate transportation services maintain required insurance coverage, comply with all applicable safety regulations, and conform to regulations governing size and weight of shipments on state highways. Most states have adopted D.O.T. safety regulations and actively enforce them in conjunction with D.O.T. personnel. The Company was regulated by the Interstate Commerce Commission (the "ICC") until passage of the ICC Termination Act of 1995, which abolished the ICC on December 31, 1995. The Surface Transportation Board, an independent entity within the D.O.T., assumed many of the responsibilities of the ICC. The Company is also regulated by various state agencies. These regulatory authorities have broad powers, generally governing matters such as authority to engage in motor carrier operations, rates, certain mergers, consolidations and acquisitions, and periodic financial reporting. The trucking industry is subject to regulatory and legislative changes that can affect the economics of the industry by requiring changes in operating practices or influencing the demand for, and the costs of providing services to, shippers. Morgan is approved and/or holds authority to provide transportation services from, to, and between all points in the continental United States. The Company provides services to certain specific customers under contract and non-contract services to the shipping public pursuant to governing rates and charges maintained at its corporate and various dispatching offices. Transportation services provided pursuant to a written contract are designed to meet a customers specific shipping needs or by dedicating equipment exclusively to a given customer for the movement of a series of shipments during a specified period of time. Federal regulations govern not only operating authority and registration, but also such matters as the content of agreements with owner operators, required procedures for processing of cargo loss and damage claims, and financial reporting. The Company believes that it is in substantial compliance with all material regulations applicable to its operations. The D.O.T. regulates safety matters with respect to the interstate operations of the Company. Among other things, the D.O.T. regulates commercial driver qualifications and licensing, sets minimum levels of carrier liability insurance; requires carriers to enforce limitations on drivers hours of service; prescribes parts, accessories and maintenance procedures for safe operation of freight vehicles; establishes noise emission and employee health and safety standards for commercial motor vehicle operators; and utilizes audits, roadside inspections and other enforcement procedures to monitor compliance with all such regulations. Recently, the D.O.T. has established regulations which mandate random, periodic, pre-employment, post-accident and reasonable cause drug testing for commercial drivers. The D.O.T. has also established similar regulations for alcohol testing. The Company believes that it is in substantial compliance with all material D.O.T. requirements applicable to its operations. In Canada, provincial agencies grant both intraprovincial and extraprovincial authority; the latter permits transborder operations to and from the United States. The Company has obtained from Canadian provincial agencies all required extraprovincial authority to provide transborder transportation of manufactured homes and RVs throughout most of Canada. Most manufactured homes, when being transported by a toter, exceed the maximum dimensions allowed on state highways without a special permit. The Company obtains these permits for its owner operators from each state which allows the Company to transport their manufactured homes on state highways. The states and Canadian provinces have special requirements for over-dimensional loads detailing permitted routes, timing required, signage, escorts, warning lights and similar matters. Most states and provinces also require operators to pay fuel taxes, comply with a variety of other tax and/or registration requirements, and keep evidence of such compliance in their vehicles while in transit. The Company coordinates compliance with these requirements by its drivers and owner operators, and monitors their compliance with all applicable safety regulations. Interstate, the Company's insurance subsidiary, is a captive insurance company incorporated under Vermont law. It is required to report annually to the Vermont Department of Banking Insurance & Securities and must submit to an examination by this Department on a triennial basis. Vermont regulations require Interstate Indemnity to be audited annually and to have its loss reserves certified by an approved actuary. The Company believes Interstate is in substantial compliance with Vermont insurance regulations. Morgan Finance, Inc., the Company's finance subsidiary, is incorporated under Indiana law. Morgan Finance is subject to Indianas Equal Credit Opportunity Laws and other state and federal laws relating generally to fair financing practices. Item 2. PROPERTIES The Company owns approximately 24 acres of land with improvements in Elkhart, Indiana. The improvements include a 23,000 square foot office building used as the Company's principal office, a 7,000 square foot leased building containing additional offices leased to one of the Company's customers, a 9,000 square foot building used for the Company's safety and driver service departments and also for storage, and an 8,000 square foot building used as a garage to service company-owned vehicles. Most of the Company's 8 regional and 108 dispatch offices are situated on leased property. The Company also owns and leases property for parking and storage of equipment at various locations throughout the United States, usually in proximity to manufacturers of products moved by the Company. The property leases have term commitments of a minimum of thirty days and a maximum of three years, at monthly rentals ranging from $100 to $8,950. The Elkhart facility is currently mortgaged to one of the Company's lenders. The following table summarizes the Company's owned real property. Property Location Property Description Approximate Acreage - ----------------- -------------------- ------------------- Elkhart, Indiana Corporate and region 24 Wakarusa, Indiana Terminal and storage 4 Middlebury, Indiana Terminal and storage 13 Mocksville, North Carolina Terminal and storage 8 Edgerton, Ohio Terminal and storage 2 Woodburn, Oregon Storage 4 Woodburn, Oregon Region and storage 1 Fort Worth, Texas Region and storage 6 Waco, Texas Storage 4 Ocala, Florida Terminal and storage 4 Montevideo, Minnesota Terminal and storage 3 Item 3. LEGAL PROCEEDINGS The Company and its subsidiaries are party to litigation in the ordinary course of business, generally involving liability claims in connection with traffic accidents incidental to its transport business. From time to time the Company may become party to litigation arising outside the ordinary course of business. The Company does not expect such pending suits to have a material adverse effect on the Company or its results of operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS In February of 1996, the Company adopted a Special Employee Stock Purchase Plan (Plan) under which Morgan Drive Away's President and Chief Executive Officer purchased 70,000 shares of Class A Common stock from treasury stock at the then current market value price of $560,000. Under the terms of the Plan, $56,000 was delivered to the Company and a promissory note was executed in the amount of $504,000 bearing an interest rate of five (5%) percent per annum due in 2003. The Plan allows for repayment of the note using shares at $8.00 per share. The Company has the right to repurchase, at $8.00 per share, 56,000 shares during the first year of the agreement and 28,000 during the second year. Such issuance was exempt from Registration under Section 4(2) of the Securities Act of 1983, as amended. Price Range of Common Stock The Company's Common Stock is traded on the American Stock Exchange under the symbol MG. 1996 1995 --------------------------------- Quarter Ended High Low High Low March 31 $9.38 $7.56 $9.25 $7.00 June 30 9.75 8.00 9.00 7.87 September 30 9.19 7.25 10.62 7.69 December 31 7.75 7.13 9.62 7.69 As of March 25, 1997, the approximate number of shareholders of record of the Company's Class A Common Stock was 174. These figures do not include shareholders with shares held under beneficial ownership in nominee name or within clearinghouse position of brokerage firms and banks. The Class B Common Stock is held of record by Lynch Corporation. Dividend Information Class A Class B Cash Dividends Cash Dividends - -------------------------------------------------------------------------------- Quarter Ended 1996 1995 1996 1995 - -------------------------------------------------------------------------------- March 31 .02 .02 .01 .01 June 30 .02 .02 .01 .01 September 30 .02 .02 .01 .01 December 31 .02 .02 .01 .01 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA FINANCIAL HIGHLIGHTS (Dollars in thousands, except per share amounts)
1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------ Operations Operating Revenues $ 132,208 $ 122,303 $ 101,880 $ 82,793 $ 67,116 Operating Income (Loss) (3,263)(1) 3,371 3,435 2,267 1,774 Pre-tax Income (Loss) (3,615) 3,284 3,367 1,714 709 Net Income (Loss) before Extraordinary Item (2,070) 2,269 2,212 1,595 275 Net Income (Loss) (2,070) 2,269 2,212 1,595 645 Per Share Primary Net Income (Loss) $ (.77) $ .80 $ .75 $ .71 $ .40 Fully Diluted Net Income (Loss) (.77) .80 .73 .67 .37 Cash Dividends Declared Class A Common Stock .08 .08 .08 .02 --- Class B Common Stock .04 .04 .04 .01 --- Financial Position Total Assets $ 33,066 $ 30,795 $ 28,978 $ 24,399 $ 15,605 Working Capital 2,095 8,293 11,045 9,600 2,771 Long-term Debt 4,206 3,275 1,925 2,347 4,917 Redeemable Preferred Stock --- --- 3,104 3,089 3,801 Common Shareholders Equity 13,104 15,578 12,980 11,170 339 Common Shares Outstanding at Year-end 2,685,520 2,649,554 2,566,665 2,566,665 1,333,333 Average Common Shares or Equivalents Outstanding During the Year 2,684,242 2,557,516 2,626,926 1,970,343 1,466,665 Other Information Company Unit Moves New Manufactured Homes 121,136 114,821 98,181 76,188 60,381 Driver Outsourcing 58,368 49,885 32,060 30,978 23,636
(1) Operating Loss in 1996 is after special charges of $3,500,000. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF OPERATIONS AND FINANCIAL CONDITIONS Year 1996 Compared to 1995 Operating revenues rose by 8% to $132,208,000 in 1996 from $122,303,000 in 1995. Prior to giving effect to the TDI acquisition, which, closed on May 22, 1995, comparable operating revenues increased 5.5%. Morgan's manufactured housing outsourcing operating revenues increased 15% out-pacingthe 1996 national production growth of 9%. The growth in manufactured housing was partially offset by an 11% decline in the Company's Specialized Transport Division. The Company's Specialized Transport Division was impacted by weakened demand which drove down the Company's utilization of equipment and rates. The truckaway operation of the Specialized Transport Division will be sold in 1997. The truckaway operation transports automotive products on company-owned trailers for van conversion, tent camper and automotive customers. The acquisition of Transit Homes of America, Inc. on December 30, 1996 should more than offset the lost operating revenues from the closing of the truckaway line of business. During 1996, the Company reported an operating loss, after special charges, of $3,263,000 and a net loss of $2,070,000 ($.77 loss per share). In 1995, the Company reported operating income of $3,371,000 and net income of $2,269,000 ($.80 income per share). The special charge for 1996 amounted to $3,500,000 before taxes ($2,100,000 after tax or $.78 per share) and resulted from the sale of the truckaway operation and the write-down of four properties, two of which are associated with the creating of the truckaway operation. The carrying value of assets being held for sale was reduced in accordance with SFAS No. 121. While the truckaway operation generated approximately 10% of the Company's 1996 total revenue, the operating loss from this operation was approximately $1,800,000 in 1996. Thus management expects the withdrawal from these unprofitable activities should have a positive impact on the results of operations in 1997 (see Note 16, Consolidated Financial Statements). During 1996, the Company also initiated a plan to dispose of certain land and buildings, two of which are associated with the exiting of the truckaway operation, that were recorded on the books at values higher than fair market value. Excluding the special charges of $3,500,000, operating income declined from $3,371,000 in 1995 to $237,000 in 1996. The decline in operating income in 1996 was attributed to (i) weakened freight demand in the Specialized Transport Division, (ii) increases of $1,250,000 in claims costs especially in the driver outsourcing and specialized transport divisions, and (iii) an increase in operating costs specifically to build infrastructure and to invest in the operating structure. The investment in operating costs included, but were not limited to, dispatch personnel, regional personnel, and driver retention programs. Selling, general and administrative costs increased from $7,260,000 in 1995 to $8,235,000 in 1996. Investments in 1996 were made in automation of dispatch facilities and personnel. In addition, the Company had a full year of selling, general and administrative expenses for the TDI organization. Net interest expense increased from $87,000 to $352,000 primarily due to increases in debt related to the TDI acquisition and reduced cash on hand during the year. The Company expects interest expenses will increase slightly during 1997 as interest charges will be incurred on the Transit acquisition debt added in late 1996. In 1996, the income tax benefit of $1,545,000, including federal and state tax benefits, resulted in an effective tax benefit of 42.7% compared to an effective tax rate of 30.9% in 1995. The Company anticipates a decrease in the 1997 effective tax rate to approximately 34%. Year 1995 Compared to 1994 Operating revenues rose by 20% to $122,303,000 in 1995 from $101,880,000 in 1994. Prior to giving effect to the TDI acquisition, which closed on May 22, 1995, comparable operating revenues increased 14.9%. Morgan benefited from growth of its primary market, manufactured housing, where national production was up 12% compared to 1994, and from seven months of revenue from the TDI acquisition. The 1995 growth in sales was partially stunted by an industry-wide decline in recreational vehicle production of 11%. Operating income declined from $3,435,000 in 1994 to $3,371,000 in 1995. The decline in operating income at Morgan Drive Away, Inc. of approximately $500,000 was partially offset by operating income from TDI, Inc. of $350,000 and increased profits from the Company's wholly-owned insurance company, Interstate Indemnity. The decrease in Morgan Drive Away, Inc.'s operating income in 1995 was attributed to a slow-down in certain segments of the recreational vehicle market which affected margins, and an increase in operating costs including, but not limited to, increased fuel taxes, road taxes, recruiting costs, driver retention, and safety programs. The Company's continued emphasis on safety produced over $650,000 of claim cost savings calculated as a percentage of revenue during the year. These savings were offset to some degree by higher trucking liability premiums, in part due to one major claim which was resolved during the year. Selling, general and administrative expenses increased from $6,290,000 in 1994 to $7,260,000 in 1995. The higher general and administrative costs were attributed to investment in personnel, increased lease costs for the automation of dispatch facilities, and TDI, Inc. general and administrative costs of $330,000. Net interest expense increased from $68,000 to $87,000 primarily due to an increase in debt related to the TDI acquisition. The 1995 income tax provision of $1,015,000, including federal and state taxes, resulted in an effective tax rate of 30.9% compared to 34.3% in 1994. Net income increased from $2,212,000 in 1994 to $2,269,000 in 1995. As a result of the earnings growth and the buy back of shares of Class A Common stock, fully diluted earnings per share reached $.80 in 1995, up from $.73 per share in 1994. Liquidity and Capital Resources Cash generated from operations decreased to $217,000 in 1996 from $2,503,000 in 1995. The net loss during 1996 of $2,070,000 was in large part due to the non-cash special charge net of tax of $2,100,000 (special charge of $3,500,000 net of deferred tax effect of $1,400,000). The sale of the truckaway operation along with the related operating equipment, land and buildings, and collection of outstanding truckaway receivables, all net of cost, and related tax benefits will produce additional cash estimated to be in excess of $3,000,000. The increase in prepaid expenses in 1996 stems from an increase in prepaid drivers pay. The decline in other accrued liabilities in 1996 is related to decreases in accrued wages, fuel taxes, operating permits, and tax liabilities. The accounts payable decline during 1996 is a result of reduced cash overdrafts. Cash used in investing activities decreased from $2,945,000 in 1995 to $1,581,000 in 1996. In 1996, the Company invested $686,000 in net capital expenditures and had initial acquisition payments to Transit of $895,000. This compares to $1,927,000 of net capital expenditures in 1995 and initial acquisition payments on TDI of $1,018,000. In 1996, approximately $200,000 of the Company's capital expenditures were spent on Company-owned equipment in the truckaway division. The decision to close the truckaway division will reduce future needs for capital expenditures for Company-owned trailers. Net cash used in financing activities decreased from $3,401,000 in 1995 to $179,000 in 1996. In 1995, the Company bought over 156,000 shares of Class A Common stock for $1,274,000. In addition, the Company expended $1,300,000 in cash related to early redemption of preferred stock. During 1996, the Company bought over 34,000 shares of Class A Common stock for $286,000. Outstanding borrowings under the revolver increased to $1,250,000 at December 31, 1996, as compared to no borrowings under the revolver as of December 31, 1995. The Company has total borrowing facility available of $10,000,000, of which there was $5,842,000 outstanding as of December 31, 1996. The Company paid to the previous owner of Transit $895,000 on December 30, 1996, which was the closing date of the acquisition. In addition, $1,987,000 was financed through a note due on January 2, 1997 of $697,000 and a five year note for $1,300,000 (present value of $1,158,000) which requires annual payments of $475,000, $375,000, $175,000, $175,000 and $100,000 in 1997, 1998, 1999, 2000, and 2001, respectively. It is the current policy of the Company to pay annual Class A Common stock dividends totaling $.08 per share per year and Class B Common stock dividends totaling $.04 per share. Payment of any future dividends will be dependent, among other things, upon earnings, capital requirements, financing agreement covenants, terms of other outstanding securities, future growth plans, legal restrictions, and the financial condition of the Company. Impact of Seasonality Shipments of manufactured homes tend to decline in the winter months in areas where poor weather conditions inhibit sales and transport. This usually reduces revenues in the first and fourth quarters of the year. RV movements are generally strong in the spring, when dealers build stock in anticipation of the summer vacation season, and late summer and early fall when new vehicle models are introduced. The Company's revenues, therefore, tend to be stronger in the second and third quarters. Impact of Inflation Inflation can be expected to have an impact on the Company's operating costs. While the effect of inflation has been moderate since 1990, a prolonged period of inflation would adversely affect the Company's results unless rates charged to customers could be increased accordingly. Forward-Looking Discussion In 1997, the Company could benefit from (i) the acquisition of Transit Homes of America which consolidates Morgan's long-standing position as the leader in the delivery of outsourcing transportation services to the manufactured housing industry, (ii) the closing of the Truckaway Division, which cost the Company approximately $1,800,000 in 1996, (iii) reduction of overhead through corporate restructuring, and (iv) improvement of our safety record. Business expansion, including possible acquisitions, could augment operating revenue gains. While the Company remains optimistic over the long term, near term results could be affected by a number of internal and external economic conditions. This report contains a number of forward-looking statements, including those contained in the preceding paragraph. From time to time, the Company may make other oral or written forward-looking statements regarding its anticipated sales, costs, expenses, earnings and matters affecting its condition and operations. Such forward-looking statements are subject to a number of material factors which could cause the statements or projections contained therein to be materially inaccurate. Such factors include, without limitation, the risk of declining production in the manufactured housing industry; the risk of losses or insurance premium increases from traffic accidents; the risk of loss of major customers; risks of competition in the recruitment and retention of qualified drivers and 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 1996 under Part I, Item 1, Business. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Morgan Group, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
December 31 - ---------------------------------------------------------------------------------------------------- 1996 1995 Assets Current assets: Cash and cash equivalents $ 1,308 $ 2,851 Trade accounts receivable, less allowance for doubtful accounts of $59,000 in 1996 and $102,000 in 1995 11,312 11,285 Accounts receivable, other 274 514 Refundable taxes 584 --- Prepaid expenses and other current assets 3,445 2,875 Deferred income taxes --- 586 - ---------------------------------------------------------------------------------------------------- Total current assets 16,923 18,111 Property and equipment, net 2,763 6,902 Assets held for sale 2,375 -- Intangible assets, net 8,911 5,285 Deferred income taxes 1,683 -- Other assets 411 497 - ---------------------------------------------------------------------------------------------------- Total assets $ 33,066 $ 30,795 ==================================================================================================== Liabilities and shareholders' equity Current liabilities: Note payable to bank $1,250 $ -- Trade accounts payable 3,226 3,845 Accrued liabilities 4,808 2,245 Accrued claims payable 1,744 1,337 Refundable deposits 1,908 1,607 Current portion of long-term debt 1,892 784 - ---------------------------------------------------------------------------------------------------- Total current liabilities 14,828 9,818 Long-term debt, less current portion 2,314 2,491 Deferred income taxes -- 622 Long term accrued claims payable 2,820 2,286 Commitments and contingencies --- --- Shareholders' equity Common stock, $.015 par value Class A: Authorized shares 7,500,000; 23 23 Issued and outstanding shares 1,485,520 and 1,449,554 Class B: Authorized shares 2,500,000; 18 18 Issued and outstanding shares 1,200,000 Additional paid-in capital 12,441 12,441 Retained earnings 2,126 4,370 - ---------------------------------------------------------------------------------------------------- Total capital and retained earnings 14,608 16,852 Less treasury stock, 120,043 and 156,009 shares, at cost (1,000) (1,274) loan to officer for stock purchase (504) -- - ---------------------------------------------------------------------------------------------------- Total shareholders' equity 13,104 15,578 - ---------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 33,066 $ 30,795 ====================================================================================================
See accompanying notes The Morgan Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts)
December 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------ Operating revenues: Manufactured housing $ 72,616 $ 63,353 $ 53,520 Specialized transport 26,169 29,494 28,246 Driver outsourcing 23,090 19,842 15,197 Other service revenue 10,333 9,614 4,917 - ------------------------------------------------------------------------------------------------------ Total operating revenues: 132,208 122,303 101,880 Cost and expenses: Operating costs 122,238 110,408 91,241 Special charges 3,500 --- --- Selling, general and administration 8,235 7,260 6,290 Depreciation and amortization 1,498 1,264 914 - ------------------------------------------------------------------------------------------------------ Total costs and expenses 135,471 118,932 98,445 - ------------------------------------------------------------------------------------------------------ Operating (loss) income (3,263) 3,371 3,435 Interest expense, net 352 87 68 - ------------------------------------------------------------------------------------------------------ (Loss) income before taxes (3,615) 3,284 3,367 Total income tax (benefit) expense Current 268 859 1,031 Deferred (1,813) 156 124 - ------------------------------------------------------------------------------------------------------ Total income tax (benefit) expense (1,545) 1,015 1,155 - ------------------------------------------------------------------------------------------------------ Net (loss) income (2,070) 2,269 2,212 Less preferred dividend -- 221 244 - ------------------------------------------------------------------------------------------------------ Net (loss) income applicable to Common stock $ (2,070) $ 2,048 $ 1,968 ====================================================================================================== Net (loss) income per share: Primary $ (0.77) $ 0.80 $ 0.75 ====================================================================================================== Fully diluted $ (0.77) $ 0.80 $ 0.73 ====================================================================================================== Average number of common shares and common stock equivalents 2,684,242 2,557,516 2,626,926 ======================================================================================================
See accompanying notes The Morgan Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
December 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ Net income (loss) $(2,070) $ 2,269 $ 2,212 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 1,101 901 630 Amortization 396 363 284 Deferred income taxes (1,719) 156 124 Special charges 3,500 -- -- Imputed non-cash interest on acquisition debt 101 112 71 Amortization of debt issuance costs 36 40 40 Gain (loss) on sale of equipment 37 (19) 8 Changes in operating assets and liabilities: Accounts receivable 213 (1,835) (1,976) Refundable taxes (584) -- -- Prepaid expenses and other current assets (891) (372) (939) Other assets 86 (44) 9 Accounts payable (779) 45 1,324 Accrued liabilities 86 433 806 Accrued claims payable 341 297 496 Refundable deposits 363 157 409 - ------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 217 2,503 3,498 Investing Activities Purchases of property and equipment (780) (1,955) (1,433) Proceeds from disposal of property and equipment 94 28 183 Acquisition of businesses (895) (1,018) -- - ------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (1,581) (2,945) (1,250) Financing Activities Net proceeds from (payments on) bank and seller-financed notes and credit lines $ 225 (626) (493) Conversion of warrants -- 297 -- Purchase of treasury stock (286) (1,274) -- Proceeds from sale of treasury stock 56 -- -- Redemption of Series A preferred stock -- (1,300) -- Common stock dividends paid (174) (161) (158) Redeemable preferred stock dividends paid -- (337) (229) - ------------------------------------------------------------------------------------------------------------ Net cash used in financing activities (179) (3,401) (880) - ------------------------------------------------------------------------------------------------------------ Net increase in (decrease in) cash and cash equivalents (1,543) (3,843) 1,368 Cash and cash equivalents at beginning of year 2,851 6,694 5,326 - ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 1,308 $ 2,851 $ 6,694 ============================================================================================================
See accompanying notes The Morgan Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK, COMMON STOCK, AND OTHER SHAREHOLDERS EQUITY (Dollars in thousands, except per share amounts)
Redeemable Series A Class A Class B Additional Preferred Common Common Paid-in Officer Treasury Retained Stock Stock Stock Capital Loan Stock Earnings Balance December 31, 1993 $ 3,089 $ 20 $ 18 $ 10,459 $--- $--- $ 673 Net income --- --- --- --- --- --- 2,212 Redeemable Preferred Stock dividends: Accrued 244 --- --- --- --- --- (244) Paid (229) --- --- --- --- --- --- Common stock dividends: Class A ($.08 per share) --- --- --- --- --- --- (110) Class B ($.04 per share) --- --- --- --- --- --- (48) ------------------------------------------------------------------------------- Balance, December 31, 1994 3,104 20 18 10,459 --- --- 2,483 Net income --- --- --- --- --- --- 2,269 Redeemable Preferred Stock dividends: Accrued 221 --- --- --- --- --- (221) Paid (337) --- --- --- --- --- --- Redemption of Series A Preferred Stock (2,988) 2 --- 1,686 --- --- --- Conversion of Warrants, including tax benefit --- 1 --- 296 --- --- --- Purchase of Treasury Stock --- --- --- --- --- (1,274) --- Common stock dividends: Class A ($.08 per share) --- --- --- --- --- --- (113) Class B ($.04 per share) --- --- --- --- --- --- (48) ------------------------------------------------------------------------------- Balance, December 31, 1995 --- 23 18 12,441 --- (1,274) 4,370 Net (loss) --- --- --- --- --- --- (2,070) Sale of Treasury Stock, net --- --- --- --- (504) 274 --- Common stock dividends: Class A ($.08 per share) --- --- --- --- --- --- (126) Class B ($.04 per share) --- --- --- --- --- --- (48) ------------------------------------------------------------------------------- Balance, December 31, 1996 $ 0 $ 23 $ 18 $ 12,441 $ (504) $ (1,000) $ 2,126 ===============================================================================
See accompanying notes NOTES TO CONSOLIDATED STATEMENTS 1. Summary of Significant Accounting Policies Description of Business The Morgan Group, Inc. (Company), formerly Lynch Services Corporation, was incorporated in 1988 for the purpose of acquiring Morgan Drive Away, Inc. (Morgan), and Interstate Indemnity Company (Interstate). In 1994 the Company formed Morgan Finance, Inc. (Finance), in 1995 acquired the assets of Transfer Drivers, Inc. (TDI), and on December 30, 1996, purchased the assets of Transit Homes of America, Inc. (Transit). Lynch Corporation (Lynch) owns all of the 1,200,000 shares of the Company's Class B Common stock and 150,000 shares of the Company's Class A Common stock, which in the aggregate represent 66% of the combined voting power of both classes of the Company's Common stock. The Company is the nation's leader in arranging for transportation services for the manufactured housing and motor home industries and is building a strong market presence in providing outsourcing services for a wide range of vehicle manufacturers and fleet users. The Company provides outsourcing transportation services through a national network of drivers. A majority of the Company's accounts receivable are due from companies in the manufactured housing, motor home, and commercial truck industries located throughout the United States. While the Company does not consider its business to be dependent upon any one customer, services provided to Fleetwood Enterprises, Inc. accounted for approximately 20%, 24%, and 27% of operating revenues in 1996, 1995, and 1994, and 12% and 17% of gross accounts receivables at December 31, 1996 and 1995, respectively. The Company's services also include delivering other products, including office trailers, and providing certain insurance and financing services to its owner operators through Interstate and Finance. Revenues, operating profits, or identified assets of these subsidiaries do not account for over 10% of the Company's revenues, operating profits, or identifiable assets, and accordingly, no segment information is required. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, Morgan, Interstate, TDI, and Finance, all of which are wholly owned. Significant intercompany accounts and transactions have been eliminated in consolidation. Recognition of Revenues Operating revenues and related estimated costs of movements are recognized when movement of the manufactured housing, recreational vehicles, or other products is completed. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the property and equipment. Impairment of Assets The Company periodically assesses the net realizable value of its long-lived assets and evaluates such assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. For assets to be held, impairment is determined to exist if estimated undiscounted future cash flows are less than 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. As discussed in Note 16, the Company recognized an adjustment during 1996 for write-downs of assets to be disposed of. Stock-Based Compensation The Company accounts for stock-based compensation under Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method, which is required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," is immaterial. Cash Equivalents All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Intangible Assets Intangible assets, including goodwill, are being amortized by the straight-line method over their estimated useful lives. The Company continually evaluates the performance of acquired companies by using the undiscounted cash flow method to identify whether events and circumstances have occurred that indicate the value of recorded goodwill may be impaired. Insurance and Claim Reserves The Company maintains liability insurance coverage of up to $20,000,000 per occurrence, with a deductible of $250,000 per occurrence for personal injury and property damage. The Company currently maintains cargo damage insurance of $1,000,000 per occurrence with a deductible of $250,000. The Company carries statutory insurance limits on workers compensation with a deductible of $250,000. Claims and insurance accruals reflect the estimated cost of claims for cargo loss and damage, bodily injury and property damage not covered by insurance. The Company accrues its self-insurance liability using a case reserve method based upon claims incurred and estimates of unasserted and unsettled claims, and no portion of these reserves have been discounted. Net Income Per Common Share In 1995, primary net income per common share has been computed by dividing net income, after reduction for (the now retired) Series A Redeemable Preferred Stock dividends, by the average number of shares outstanding during each year, as adjusted for stock splits. For periods prior to 1995, fully diluted net income per common share includes the dilutive effect of the warrants issued in 1992 as computed by application of the treasury stock method. In 1995 net income per common share reflects the conversion of the warrants into shares of Class A Common stock. Because each share of the Company's Class B Common stock is freely convertible into one share of Class A Common stock, the total of the average number of common shares and Common stock equivalents outstanding for both classes of Common stock are considered in the computation of income per share. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclsssifications Certain amounts in the financial statements have been reclassified to conform to the 1996 presentation. Such reclassifications had no effect on total assets or net income. 2. Property and Equipment Property and equipment consisted of the following: Estimated December 31 Useful Life 1996 1995 - ----------------------------------------------------------------------- (Years) (In thousands) Land -- $ 487 $ 1,263 Buildings 25 524 2,368 Transportation equipment 3 to 5 1,470 5,022 Office and service equipment 5 to 8 3,145 3,058 - ----------------------------------------------------------------------- 5,626 11,711 Less accumulated depreciation 2,863 4,809 - ----------------------------------------------------------------------- Property and equipment, net $ 2,763 $ 6,902 ======================================================================= 3. Intangible Assets The components of intangible assets and their estimated useful lives are as follows: Estimated December 31 Useful Life 1996 1995 - ----------------------------------------------------------------------- (Years) (In thousands) Contractor network 3 $1,210 $1,210 Trained work force 3 to 12 1,030 1,030 Covenants not to compete 5 to 15 1,152 1,152 Trade name and goodwill--original 40 1,660 1,660 Trade name and goodwill--purchased 20 6,828 2,806 Other 3 to 5 800 800 - ----------------------------------------------------------------------- 12,680 8,658 Less accumulated amortization 3,769 3,373 - ----------------------------------------------------------------------- Intangible assets, net $8,911 $5,285 ======================================================================= 4. Indebtedness On March 27, 1997, the Company entered into a credit facility with a bank. The credit facility, which replaced a similar facility with the same bank, provides financing for working capital needs, equipment leasing, letters of credit, and general corporate needs. The Company pays a fee of .125% on the unused line of credit facilities, and may fix interest rates over the short term LIBOR plus 150 basis points. All letters of credit expire at various dates throughout 1997. The Company has total available credit facilities of $10,000,000 of which there are available borrowings of $4,158,000 as of December 31, 1996. In addition, the Company has available borrowing of $400,000 under its mortgage debt agreements. The key provisions of the credit arrangements are summarized in the following table:
Key Provisions Credit Interest of Credit Expiration Arrangements Rate Interest Arrangements Dates Outstanding Basis Rate - ------------------------------------------------------------------------------------------------------ Working capital line of credit 4-30-99 $1,250,000 Prime 8.25% Lease line of credit 4-30-99 833,000 Various 6.27% to 7.48% Letter of credit facility 4-30-99 3,418,000 Fixed 1.00% Term note 7-31-00 341,000 Fixed 8.25% - ------------------------------------------------------------------------------------------------------ Bank borrowing (non-mortgage) 5,842,000 Revolving real estate note 10-1-98 330,000 Prime +.75% 9.00% - ------------------------------------------------------------------------------------------------------ Total bank credit arrangements $6,172,000 ======================================================================================================
The lines of credit, notes, and letters of credit are collateralized by the assets of Interstate, Morgan, Finance, and TDI, and the accounts receivable, inventory, and motor equipment of Morgan and TDI. The revolving real estate note is collateralized by approximately 24 acres of property and structures in Elkhart, Indiana. The Company's Class B Common stock has been collateralized to secure a Lynch Corporation line of credit. As of December 31, 1996, long-term debt consisted of the following: December 31 1996 1995 - -------------------------------------------------------------------------------- (In thousands) Real estate note with principal and interest payable monthly through October 1, 1998 $ 330 $ 690 Promissory note with imputed interest at 8%, principal and interest payments due monthly through September 1, 1998 270 426 Promissory note with imputed interest at 7%, principal and interest payments due annually through October 31, 2001 256 295 Promissory note with imputed interest at 7.81%, principal and interest payments due annually through August 11, 2000 1,154 1,414 Term note with principal and interest payable monthly through July 31, 2000 341 450 Promissory note with imputed interest at 6.31%, principal and interest payments due quarterly through December 31, 2001 1,158 --- Promissory note principal due on January 2, 1997 697 --- - -------------------------------------------------------------------------------- 4,206 3,275 Less current portion 1,892 784 - -------------------------------------------------------------------------------- Long-term debt, net $2,314 $2,491 ================================================================================ Maturities on long-term debt for the five succeeding years are as follows (in thousands): 1997 $1,892 1998 977 1999 686 2000 448 2001 153 Thereafter 50 ------------------------------------------ $4,206 ========================================== The Company, pursuant to a loan agreement with a bank, has agreed to comply with certain covenants including minimum net worth, maximum ratio of funded debt to net worth, minimum of interest ratio coverage, and incurrence of additional debt. Cash payments for interest were $381,000 in 1996, $278,000 in 1995, and $202,000 in 1994. 5. Income Taxes Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The income tax provisions (benefits) are summarized as follows (in thousands): 1996 1995 1994 - -------------------------------------------------------------------------------- Current: State $ 28 $ 180 $ 219 Federal 240 679 812 - -------------------------------------------------------------------------------- 268 859 1,031 Deferred: State (267) --- --- Federal (1,546) 156 124 - -------------------------------------------------------------------------------- (1,813) 156 124 - -------------------------------------------------------------------------------- $(1,545) $ 1,015 $ 1,155 ================================================================================ Deferred tax assets and (liabilities) are comprised of the following at December 31: 1996 1995 - -------------------------------------------------------------------- (In thousands) Deferred tax assets: Accrued insurance claims $ 1,595 $ 1,016 Special charges 1,260 -- Minimum tax carryforward 96 -- - -------------------------------------------------------------------- 2,951 1,016 Deferred tax liabilities: Depreciation (709) (507) Prepaid expenses (482) (465) Other (77) (80) - -------------------------------------------------------------------- (1,268) (1,052) - -------------------------------------------------------------------- $ 1,683 $ (36) ==================================================================== A reconciliation of the income tax provisions and the amount computed by applying the statutory federal income tax rate to income before income taxes follows: 1996 1995 1994 - -------------------------------------------------------------------------------- (In thousands) Income tax provision (benefit) at federal statutory rate $(1,229) $ 1,117 $ 1,145 Increases (decreases): State income tax, net of federal tax benefit (155) 118 144 Reduction attributable to special election by captive insurance company (216) (223) (202) Other 55 3 68 - -------------------------------------------------------------------------------- $(1,545) $ 1,015 $ 1,155 ================================================================================ Cash payments for income taxes were $934,000 in 1996, $736,000 in 1995, and $685,000 in 1994. 6. Redeemable Preferred Stock The Company redeemed the Series A Redeemable Preferred Stock in a transaction approved by a special meeting of the Board of Directors on November 22, 1995. The transaction involved the redemption of the 1,493,942 preferred shares owned by Lynch Corporation in exchange for $1,300,000 in cash and 150,000 shares of Class A Common stock. The consideration received in exchange for the shares of Class A Common stock exceeded the book value at the date of the exchange by $450,000. The resulting premium was recorded as an increase to the paid-in capital account in the Company's shareholders equity. On December 7, 1994, June 22, 1995, and November 22, 1995, the Board of Directors declared a Series A Redeemable Preferred Stock cash dividend pursuant to its terms. Accordingly, $120,498, $118,533, and $97,577 of cash dividends were paid to Lynch during 1995. 7. Stock Warrants In November 1992, the Company granted an officer warrants to purchase 133,333 shares of Class A Common stock at an option price of $.75 per share. The warrants were exercisable over a three year vesting period beginning in August, 1993. In June 1995, the officer exercised the warrants to purchase 88,888 shares of Class A Common stock at an option price of $.75 per share. This exercise represented two thirds of the total outstanding warrants. The final third of the warrants, representing 44,445 shares, were canceled. The Company accepted 22,660 shares of stock from the officer to satisfy the federal income tax withholding resulting from the warrant exercise. The stock price on the warrant exercise date was $8.375 per share. 8. Stock Option Plan On June 4, 1993, the Board of Directors approved the adoption of a stock option plan which provides for the granting of incentive or non-qualified stock options to purchase up to 200,000 shares of Class A Common stock to officers, including members of the Board of Directors, 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, except for certain non-employee directors. Three non-employee directors were granted non-qualified stock options to purchase a total of 24,000 shares of Class A Common stock at prices ranging from $6.80 to $9.00 per shares. Although the exercise period is determined when options are actually granted, an option shall not be exercised later than ten years and one day after it is granted. Stock options granted will terminate if the grantees employment terminates prior to exercise for reasons other than retirement, death, or disability. Employees have been granted non-qualified stock options to purchase 175,500 shares of Class A Common stock, net of cancellations and exercises, at prices ranging from $7.38 to $8.75 per share. Stock options vest over a four year period pursuant to the terms of the plan. As of December 31, 1996, there were 88,375 options to purchase shares granted to employees and non-employee directors which were exercisable based upon the vesting terms, and 4,000 shares had option prices less than the December 31, 1996 closing price of $7.50. The following table summarizes activity under the option plan: Shares Option Price - -------------------------------------------------------------------------------- Outstanding at December 31, 1993 152,000 $8.75 - $9.00 Grants 16,500 $6.80 - $7.75 Exercises --- Cancellations (8,000) - -------------------------------------------------------------------------------- Outstanding at December 31, 1994 160,500 Grants 15,000 $7.88 - $8.38 Exercises (1,250) Cancellations (35,250) - -------------------------------------------------------------------------------- Outstanding at December 31, 1995 139,000 Grants 48,500 $7.38 - $8.69 Exercises --- Cancellations (12,000) - -------------------------------------------------------------------------------- Outstanding at December 31, 1996 175,500 9. Special Employee Stock Purchase Plan In February of 1996, the Company adopted a Special Employee Stock Purchase Plan (Plan) under which Morgan Drive Away's President and Chief Executive Officer purchased 70,000 shares of Class A Common stock from treasury stock at the then current market value price of $560,000. Under the terms of the Plan, $56,000 was delivered to the Company and a promissory note was executed in the amount of $504,000 bearing an interest rate of five (5%) percent per annum due in 2003. The Plan allows for repayment of the note using shares at $8.00 per share. The Company has the right to repurchase, at $8.00 per share, 56,000 shares during the first year of the agreement and 28,000 during the second year. 10. Benefit Plans In 1994, the Company adopted a 401(k) Savings Plan which matches 25% of employee contributions up to a designated amount. The Company's contribution to the Plan was $27,000 in 1996, $23,000 in 1995, and $19,000 in 1994. The Company has established a non-qualified Compensation Plan applicable to highly compensated employees. The Plan provides tax deferred savings for executives unfavorably impacted by IRS restrictions. The rate of return is predicated on rates available from life insurance products. For the years ended December 31, 1996 and 1995, $12,000 and $10,000 were recognized as premium expense under this Plan. 11. Transactions with Lynch Lynch provides certain services to the Company which include executive, financial and accounting, planning, budgeting, tax, legal, and insurance services. As discussed in Note 6, the Redeemable Preferred Stock owned by Lynch Corporation was redeemed during 1995 at a discount. The Company incurred service fees of $100,000 in 1996, $100,000 in 1995, and $0 in 1994. 12. Leases The Company leases certain buildings and equipment under non-cancelable operating leases that expire in various years through 2001. Rental expenses were $830,000 in 1996, $727,000 in 1995, and $564,000 in 1994. Equipment leases totaled $1,259,000 in 1996, $1,077,000 in 1995, and 641,000 in 1994. Future payments under non-cancelable operating leases with initial terms of one year or more consisted of the following at December 31, 1996 (in thousands): 1997 $1,518 1998 990 1999 268 2000 163 2001 65 ------------------------------------------- Total lease payments $3,004 =========================================== 13. Treasury Stock On March 9, 1995, June 22, 1995, and July 31, 1996, the Company's Board of Directors approved the purchase of up to 150,000 shares of Class A Common stock for its Treasury at dates and market prices determined by the Company's Chairman. As of December 31, 1996, 101,155 shares had been repurchased at prices between $7.25 and $9.625 per share for a total of $843,215. In addition to these purchases, the 22,660 shares tendered to the Company as a result of the exercise of warrants (see Footnote 7) were placed in the Treasury at a value of $189,778. On December 15, 1995, the Company's Board of Directors approved the repurchase of 66,228 shares from a prior officer of the Company at a market price of $8.00 per share totaling $529,824. In addition, in February of 1996, Morgan Drive Away's President and Chief Executive Officer purchased 70,000 shares of stock from Treasury stock at the then current market value of $560,000. 14. Acquisitions Effective May 22, 1995, the Company purchased the assets of TDI, a market leader in the fragmented outsourcing services business for a total purchase price of $2,725,000. The acquisition was financed through a payment of $1,000,000 on May 11, 1995, with the balance of $1,725,000 financed with the seller over five years with the payments beginning August 10, 1996. The present value of the acquisition was $2,462,000, $75,000 of which related to the operating assets purchased and $2,387,000 to the purchase of intangible assets. In addition, the Company entered into a consulting agreement with two of the principals of the seller, pursuant to which the principals agreed to provide consulting services to the Company for sixty-three months for consideration totaling $202,500, payable over the consulting period. The book value of the promissory note in this transaction was $1,154,000 at December 31, 1996. Effective December 30, 1996, the Company purchased the assets of Transit Homes of America, Inc., a provider of outsourcing transportation services to the manufactured housing industry. The aggregate purchase price was $4,372,000 which includes the cost of the acquisition and certain limited liabilities assumed as part of the acquisition. The acquisition was financed through available cash resources and issuance of a promissory note. In addition, the Company entered into an employment agreement with the seller which provides for incentive payments up to $400,000, $300,000, and $200,000 in years 1997, 1998, and 1999, respectively, and $100,000 in each of the years 2000 and 2001. The incentive payments are based upon achieving certain profit levels in the Company's Manufactured Housing Group and will be treated as compensation expense if earned. The excess purchase price over assets acquired was approximately $3,988,000 and is being amortized over twenty years. In connection with the acquisition, liabilities assumed were as follows: Fair value of assets acquired $ 350,000 Goodwill acquired 4,022,000 Cash paid December 30, 1996 (895,000) Note issued due January 2, 1997 (697,000) Note issued at acquisition date (1,158,000) ------------------------------------------------------ Liabilities assumed $ 1,622,000 ====================================================== The following unaudited pro forma condensed combined results of operations of Transit and the Company have been prepared as if the acquisition of Transit had occurred at the beginning of 1995. The following table incorporates the special charges of $3,500,000 ($2,100,000 after tax or $.78 per share) related to exiting the truckaway operation and write down of properties in accordance with SFAS No. 121 (See Note 16): Pro Forma Years Ended Dec. 31 Dec. 31 1996 1995 - ------------------------------------------------------------------ (Dollars in thousands except per share data) Net Sales $162,000 $154,000 Operating income (loss) (2,510) 3,600 Net income (loss) (1,625) 2,200 Net income (loss) per share (.61) .77 The pro forma consolidated results do not purport to be indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor do they purport to be indicative of the results that will be obtained in the future. 15. Contingencies The Company has general liabilities claims pending, incurred 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. On August 4, 1995, Finance entered into a Commercial Paper Purchase Agreement with a lender whereby the lender has provided an equipment financing facility for Morgans independent contractors. Under the Agreement, Finance has a limited guarantee of twenty five percent (25%) of the original amount financed on each loan purchased. As of December 31, 1996, the lender had extended $238,000 of financing and Finance had limited guarantees outstanding of $59,500. 16. Special Charges In the fourth quarter of 1996, the Company recorded special charges of $2,675,000 ($1,605,000 after tax or $.60 per share) associated with exiting the truckaway operation. The special charges comprise principally of the anticipated loss on sales of revenue equipment, projected losses through April 30, 1997, and write-downs of accounts receivable and other assets. In addition, the Company is in the process of selling four properties, two of which are associated with the exiting of the truckaway operation. The Company has recognized an adjustment to the extent the carrying value of the affected assets (which was $2,200,000 as of December 31, 1996), exceeds the estimated realizable value (which was estimated at $1,375,000 as of December 31, 1996). Accordingly, an adjustment of $825,000 ($495,000 net of taxes or $.18 per share) is included as special charges. The truckaway operation had revenues of $12.9 million and $14.4 million, and operating losses of approximately $1.8 million and $1.2 million for the years ended December 31, 1996, and 1995, respectively. In addition, truckaway had revenues of $20.6 million and operating income of $1.2 million in 1994. 17. Operating Costs and Expenses (in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Purchased transportation costs $ 92,037 $ 84,314 $ 70,137 Operating taxes and licenses 6,460 6,052 4,269 Insurance 3,502 4,000 3,064 Claims 6,080 4,797 4,761 Dispatch costs 7,676 6,637 5,896 Regional costs 2,948 2,492 2,141 Repairs and maintenance 918 770 799 TDI, Inc. 1,356 823 -- Other 1,261 523 174 - -------------------------------------------------------------------------------- $122,238 $110,408 $ 91,241 ================================================================================ The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 1996, and 1995 (in thousands, except per share data): 1996--Three Months Ended - -------------------------------------------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 - -------------------------------------------------------------------------------- Operating revenues $30,506 $36,698 $35,305 $29,699 Operating income (loss) (48) 678 788 (4,681) Net income (loss) 9 417 495 (2,991) Earnings (loss) per share Primary --- .15 .18 (1.11) Fully diluted $ --- $.15 $.18 $ (1.11) 1995--Three Months Ended - -------------------------------------------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 - -------------------------------------------------------------------------------- Operating revenues $26,803 $31,554 $33,251 $30,695 Operating income (loss) 737 1,242 1,103 289 Net income 463 764 814 228 Earnings per share Primary .15 .27 .29 .07 Fully diluted $ .15 $ .27 $ .29 $ .07 In the fourth quarter of 1996, the Company recorded special charges of $3,500,000 ($2,100,000 after taxes or $.78 per share) related to exiting the truckaway operation and a write down of properties in accordance with SFAS No. 121. In addition, in the fourth quarter, the Company recorded $750,000 ($.17 per share) of increased insurance reserves and insurance costs primarily related to 1996 accidents. In the fourth quarter of 1995, the Company recorded $300,000 ($0.08 per share) of insurance costs after beng notified of a significant jury award against the Company. This charge reflects the uninsured portion of the award. Report of Independent Auditors Board of Directors The Morgan Group, Inc. We have audited the accompanying consolidated balance sheet of The Morgan Group, Inc. and subsidiaries as of December 31, 1996, and the related consolidated statements of operations, changes in redeemable preferred stock, common stock and other shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Morgan Group, Inc. and subsidiaries at December 31, 1996, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Greensboro, North Carolina March 27, 1997 The Board of Directors, The Morgan Group, Inc. We have audited the accompanying balance sheets of The Morgan Group, Inc. (A Delaware Corporation) and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, changes in redeemable preferred stock, Common stock and other shareholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides 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 Morgan Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of its operations and cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Chicago, Illinois February 5, 1996 SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS THE MORGAN GROUP, INC.
Col. A Col. B Col. C Col. D Col. E Additions Description Balance at Charges to Costs Charges to Other Deductions- Balance at End Beginning of Period and Expenses Accounts-Describe Describe (1) of Period Year ended December 31, 1996 Allowance for doubtbul $102,000 $244,000 $287,000 $59,000 account Year ended December 31, 1995 Allowance for doubtbul $171,000 $184,000 $253,000 $102,000 account Year ended December 31, 1994 Allowance for doubtbul $137,000 $106,000 $72,000 $171,000 account
(1) Uncollectible accounts written-off, net of recoveries. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No information is required to be reported in this Form 10-K. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item with respect to directors is incorporated by reference to pages 2 through 5 of the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders expected to be filed with the Commission on or about April 12, 1997 (the 1997 Proxy Statement). Item 11. EXECUTIVE COMPENSATION The information required by this item with respect to executive compensation is incorporated by reference to pages 6 through 12 of the 1997 Proxy Statement. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to pages 1 through 4 of the 1997 Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information under Certain Transactions with Related Persons on page 12 of the 1997 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K a) List the following documents filed as part of the report: Included in Item 8. Financial Statements Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Cash Flows Consolidated Statements of Change in Redeemable Preferred Stock, Common Stock and Other Shareholders Equity Notes to Consolidated Financial Statements Reports of Independent Auditors Schedule VIII b) Reports on Form 8-K Registrant filed no reports on Form 8-K during the quarter ending December 31, 1996. c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page E-1. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on behalf of the undersigned, thereto duly authorized. THE MORGAN GROUP, INC. Date: March 28, 1997 BY: /s/ Charles C. Baum ------------------------------------- Charles C. Baum, Chairman and Chief Executive 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 28th day of March, 1997. 1) Principal Executive Officer: By:/s/ Charles C. Baum Chairman, Chief Executive Officer ------------------------------ Charles C. Baum 2) Principal Financial Officer: By: /s/ Richard B. Deboer Chief Financial Officer and ----------------------------- Treasurer Richard B. DeBoer A Majority of the Board of Directors: /s/ Charles C. Baum Director ------------------------------ Charles C. Baum /s/ Bradley J. Bell Director ------------------------------ Bradley J. Bell /s/ Richard B. Black Director ------------------------------ Richard B. Black /s/ Frank E. Grzelecki Director ------------------------------ Frank E. Grzelecki /s/ Todd L. Parchman Director ------------------------------ Todd L. Parchman EXHIBIT INDEX Exhibit No. Description Page 3.1 Registrant's Restated Certificate of Incorporation, as amended. * 3.2 Registrant's Code of By-Laws, as restated and amended. * 3.3 Form of Class A Common Stock Certificate. * 4.1 Fourth Articles - "Common Stock" of the Registrant's * Certificate of Incorporation, incorporated by reference to the Registrant's Certificate of Incorporation, as amended, filed hereunder as Exhibit 3.1. 4.2 Article II - "Meeting of Stockholders," Article VI - * "Certificate for Shares" and Article VII - "General Provisions" of the Registrant's Code of By-Laws, incorporated by reference to the Registrant's Code of By-Laws, as amended, filed hereunder as Exhibit 3.2. 4.4 Loan Agreements dated September 13, 1994 between The Morgan *** Group and Subsidiaries and Society National Bank. 4.5(a) Revolving Credit Facility Agreement effective March 27, 1997 among Morgan Drive Away Inc., TDI, Inc., Interstate Indemnity Company and KeyBank National Association. 4.5(b) Master Revolving Note dated March 27, 1997 by Morgan Drive Away, Inc., TDI, Inc. and Interstate Indemnity Company to KeyBank National Association. 4.5(c) Security Agreement effective as of March 27, 1997 between Morgan Drive Away, Inc. and KeyBank National Association. 4.5(d) Absolute, Unconditional and Continuing Guaranty effective as of March 27, 1997 by the Morgan Group, Inc. to KeyBank National Association. 10.1 The Morgan Group, Inc. Incentive Stock Plan. * 10.2 Memorandum to Charles Baum and Philip Ringo from Lynch * Corporation, dated December 8, 1992, respecting Bonus Pool. 10.3 Employment Agreement between Morgan Drive Away, Inc. and Paul * D. Borghesani dated July 26, 1988. 10.4 Term Life Policy from Northwestern Mutual Life Insurance * Company insuring Paul D. Borghesani dated August 1, 1991. 10.5 Long Term Disability Insurance Policy from Northwestern Mutual * Life Insurance Company dated March 1, 1990. 10.6 Letter Agreement from Philip J. Ringo to The Morgan Group, Inc., (formerly * Lynch Services Corporation), dated August 3, 1993. 10.7 Warrants to Purchase Class A Common Stock of The Morgan Group, Inc. * (formerly Lynch Services Corporation), dated November 10, 1992, issued to Philip J. Ringo, and amended June 7, 1993. 10.10 Asset Purchase Agreement, dated May 21, 1993, between The Morgan Group, Inc., Transamerican Carriers, Inc., Ruby and Billy Davis and Morgan Drive Away, Inc. 10.12 Management Agreement between Skandia International and Risk * Management (Vermont), Inc. and Interstate Indemnity Company dated December 15, 1992. 10.13 Agreement for the Allocation of Income Tax Liability between * Lynch Corporation and its Consolidated Subsidiaries, Including The Morgan Group, Inc. (formerly Lynch Services Corporation), dated December 13, 1988, as amended. 10.16 The Morgan Group, Inc. Employee Stock Purchase Plan as amended. **** Exhibit No. Description Page ----------- ----------- ---- 10.17 MCI Corporate Service Agreement dated December 12, 1994 **** between MCI Telecommunications Corporation and Morgan Drive Away, Inc. 10.8 Certain Services Agreement dated January 1, 1995 between Lynch **** Corporation and The Morgan Group, Inc. 10.9 Consulting Agreement between Morgan Drive Away, Inc. and Paul ****** D. Borghesani effective as of April 1, 1996. 10.20 Employment Agreement between Morgan Drive Away, Inc. and Terence L. Russell ****** 10.21 Stock Purchase Agreement between Morgan Drive Away, Inc. and ****** Terence L. Russell 10.22 Asset Purchase Agreement for Transfer Drivers Inc. and List of Schedules ****** 10.21 Asset Purchase Agreement between Registrant and Transit Homes ******* of America, Inc. as of November 19, 1996, as amended as of December 30, 1996. 10.24 Amendment to Asset Purchase Agreement between Registrant and Transit, Inc. as of December 29, 1996. ******* 11 Statement Re: Computations of Per Share Earnings 16.1 Letter Re: Change in Accountants ***** 21 Subsidiaries of the Registrant * 23.1 Consent of Ernst & Young LLP ****** 23.2 Consent of Arthur Andersen LLP 27 Financial Data Schedule * Incorporated by reference to the corresponding Exhibit to Registrant's registration statement on Form S-1, Reg. No. 33-641-22. ** Incorporated by reference to Registrant's Form 8-K/A filed March 29, 1984. *** Incorporated by reference to Registrant's Form 10-Q filed November 15, 1994. **** Incorporated by reference to Registrant's Form 10-K filed March 30, 1995. ***** Incorporated by reference to Registrant's Form 8-K filed March 19, 1996. ****** Incorporated by reference to Registrant's Form 10-K filed on April 1, 1996. ******* Incorporated by reference to Registrant's Form 8-K filed January 14, 1997. EX-4.5(A) 2 REVOLVING CREDIT FACILITY AGREEMENT REVOLVING CREDIT FACILITY AGREEMENT THIS REVOLVING CREDIT FACILITY AGREEMENT ("this Agreement"), to be effective March 27, 1997, is entered into by and between MORGAN DRIVE AWAY, INC., an Indiana corporation ("Morgan"), TDI, INC., an Indiana corporation ("TDI"), INTERSTATE INDEMNITY COMPANY, a Vermont Corporation ("Interstate") and KEYBANK NATIONAL ASSOCIATION, a national banking association ("Bank"). In consideration of the covenants and agreements contained herein, Morgan, Interstate and TDI and the Bank hereby mutually agree as follows: ARTICLE I. DEFINITIONS Section 1.1. General. Any accounting term used but not specifically defined herein shall be construed in accordance with GAAP. The definition of each agreement, document, and instrument set forth in Section 1.2 hereof shall be deemed to mean and include such agreement, document, or instrument as amended, restated, or modified from time to time. Interstate is a party to this Agreement as it will be entitled to request letters of credit in accordance with the terms, conditions, and restrictions set forth herein. The liability of Interstate under this Agreement is limited at any given time to the then aggregate dollar amount of letters of credit which have been issued at Interstate's request or for the benefit of Interstate, plus related interest, fees and costs hereunder. Section 1.2. Defined Terms. As used in this Agreement: "Affiliate" shall mean any Person (other than a Subsidiary): (a) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Companies; or (b) Five percent (5%) or more of the equity interest of which is held beneficially or of record by the Companies or a Subsidiary. The term "control" means the possession, directly or indirectly, of the power to cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Affiliate Bank" shall mean any one or more bank subsidiaries (other than the Bank) of KeyCorp and its successors. "Bank" shall mean KeyBank National Association, a national banking association with an office at 127 Public Square, Cleveland, Ohio 44114, and its successors and assigns. 1 "Beneficiary" shall mean one or more insurance companies or regulatory bodies which are, or may become, beneficiaries of standby letter(s) of credit. Companies have entered into and/or may enter into agreements with various insurance companies (each, "Beneficiary") under which Beneficiary is contingently liable for or may initially pay on behalf of Companies amounts attributable to the deductible portion of Companies' insurance program with Beneficiary, and under which Companies are obligated to repay Beneficiary for any such payments made by Beneficiary on behalf of Companies. Beneficiary has required Companies to provide a standby payment facility for payments made by Beneficiary on behalf of Companies attributable to the deductible portion of Companies' insurance program with Beneficiary. Additionally, Companies are or may be obligated to deposit money or pledge some other form of guaranty of payment with various state authorities wherein Companies are liable for excise or use taxes as a result of their use of the public roads for commercial trans portation in said states. To the extent Companies are or may be required to deposit money or pledge some other form of guaranty of payment, the appropriate state agency responsible for collection of such use taxes or bonding company shall be deemed to be a Beneficiary herein. "Business Day" means a day of the year on which banks are not required or authorized to close in Cleveland, Ohio and, if the applicable Business Day relates to any Libor Rate Loan, on which dealings are carried on in the London interbank Eurodollar market. "Companies" shall mean Morgan Drive Away, Inc., an Indiana corporation, with its principal office located at Elkhart, Indiana; TDI, Inc., an Indiana corporation, with its principal office located in Elkhart, Indiana; and Interstate Indemnity Company and their successors. "Consolidated Net Worth" is defined as the net book value of Morgan Group's assets less all liabilities as determined on a consolidated basis for the Morgan Group and its Subsidiaries in accordance with GAAP. "Consolidated Pre-Tax Earnings" is defined as earnings (or losses) experienced by the Morgan Group and its subsidiaries as determined on a consolidated basis and as determined by GAAP. Consolidated Pre-Tax Earnings shall not include any extraordinary gains experienced by the Morgan Group and its subsidiaries. "EBIT" shall mean Consolidated Pre-Tax Earnings plus Net Interest Expense. "Environmental Law" means any federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability upon a Person in connection with the use, release or disposal of any hazardous, toxic or dangerous substance, waste or material. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. 2 "ERISA Affiliate" means each Person (whether or not incorporated) which together with Companies would be treated as a single employer under ERISA. "Event of Default" shall mean any one or more of the occurrences described in Article VII hereof. "Expiration Date" as to a Standby Letter of Credit means the earliest of: (1) 4:45 p.m. (Elkhart, Indiana time) on the Expiry Date of that Standby Letter of Credit; or (2) when the full stated amount of the Standby Letter of Credit has been drawn upon in a single drawing or aggregate of drawings; or (3) the day on which the Standby Letter of Credit is surrendered. "Funded Debt" is defined as the sum of funds provided by KeyBank to the Morgan Group and its Subsidiaries and the sum of all other borrowed debt of the Morgan Group and its subsidiaries, including capitalized lease obligations and corporate guaranties. "GAAP" shall mean generally accepted accounting principles as then in effect, which shall include the official interpretations thereof by the Financial Accounting Standards Board, consistently applied. "Guarantor" shall mean each Person that now or hereafter guarantees any portion of the Companies' Indebtedness payable to the Bank, and such Person's successors and shall include Morgan Group and all existing and to be created operating Subsidiaries of Morgan Group. "Indebtedness" shall mean for any Person: (1) all obligations to repay borrowed money, direct or indirect, incurred, assumed or guaranteed; (2) all obligations for the deferred purchase price of capital assets excluding trade payables; (3) all obligations under conditional sales or other title retention agreements; and (4) all lease obligations which have been or should be capitalized on the books of such Person. "Interest Coverage" shall mean the ratio of Consolidated Pre-Tax Earnings plus Net Interest Expense divided by Net Interest Expense. "Interest Period" means, with respect to any Libor Rate Loan, the period commencing on the date such Loan is made, continued, or converted and ending on the last day of such period as selected by Morgan or TDI (for purposes of this definition ("the Company") pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of such period as selected by the Company pursuant to the provisions below. The duration of each Interest Period for any Libor Rate Loan shall be one (1) month, two (2) months, three (3) months, or six (6) months, in each case as the Company may select upon notice, as set forth in Section 2.1(b), provided that: 3 (1) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall occur on the next succeeding Business Day, provided that if such extension of time would cause the last day of such Interest Period for a Libor Rate Loan to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; (2) if the Company fails to so select the duration of any Interest Period, the duration of such Interest Period shall be three (3) months in the case of a Libor Rate Loan; and (3) the Company may not select any Interest Period which both begins before and ends after the principal installment payment date set forth in Section 2.1(c). "Interstate" shall mean Interstate Indemnity Company, also a subsidiary of Morgan Group. "Leasing Company" shall mean Key Corp Leasing Company, and its successors. "Leverage" is defined as Funded Debt divided by the sum of Funded Debt plus Consolidated Net Worth. "Libor Rate" means, for any Interest Period for any Libor Rate Loan, an interest rate per annum (rounded upwards to the next higher whole multiple of 1/16% if such rate is not such a multiple) equal at all times during such Interest Period to the quotient of: (1) the rate per annum (rounded upwards to the next higher whole multiple of 1/16% if such rate is not such a multiple) at which deposits in United States dollars are offered at 11:00 a.m. (London, England time) (or as soon thereafter as is reasonably practicable) by prime banks in the London interbank Eurodollar market two (2) Business Days prior to the first day of such Interest Period in an amount and maturity of such Libor Rate Loan, divided by: (2) a number equal to 1.00 minus the aggregate (without duplication) of the rates (expressed as a decimal fraction) of the Libor Reserve Requirements current on the date two (2) Business Days prior to the first day of such Interest Period. "Libor Rate Loan" means any Loan that bears interest with reference to the Libor Rate. "Libor Reserve Requirements" means, for any Interest Period for any Libor Rate Loan, the maximum reserves (whether basic, supplemental, marginal, emergency or otherwise) prescribed by the Board of Governors of the Federal Reserve System (or any successor) with respect to liabilities or assets consisting of or including "Eurocurrency liabilities" (as defined in Regulation D of the Board of Governors of the Federal Reserve System) having a term equal to such Interest Period. 4 "Lien" shall mean any mortgage, security interest, lien, charge, encumbrance on, pledge or deposit of, or conditional sale or other title retention agreement with respect to any property or asset. "Loan" or "Loans" shall mean the Revolving Loans. "Loan Documents" shall mean this Agreement, the Note, the Security Agreements of even date herewith, and any other documents relating thereto. "Margin Stock" shall have the meaning given to it under Regulation U of the Board of Governors of the Federal Reserve System, as amended from time to time. "Morgan Group" shall mean The Morgan Group, Inc., a Delaware corporation, of which the Companies are a subsidiary. "Multiemployer Plan" means a plan described in ERISA which covers employees of the Companies or an ERISA Affiliate. "Net Interest Expense" is interest expense as defined by GAAP less interest income as defined by GAAP. "Note" shall mean the Promissory Note, in the form of Exhibit "A" attached hereto, signed and delivered by the Companies to evidence their obligation to the Bank in accordance with Section 2.1 hereof (including all extensions, renewals, and modifications). "Other Collateral Documents" shall mean each and every document executed and delivered by any third person or entity in favor of Bank, pledging, securing or guaranteeing any indebtedness owed to Bank or otherwise obligating such third person or entity to Bank on behalf of Companies. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Title IV of ERISA. "Person" shall mean any natural person, corporation (which shall be deemed to include business trust), association, partnership, joint venture, political entity or political subdivision thereof. "Plan" shall mean any plan (other than a Multiemployer Plan) defined in ERISA in which the Companies or any subsidiary are, or has been at any time during the preceding two (2) years, an "employer" or a "substantial employer" as such terms are defined in ERISA. 5 "Potential Default" shall mean any condition, action or failure to act which, with the passage of time, service of notice, or both, will constitute an Event of Default under this Agreement. "Prime Rate" shall mean that interest rate established from time to time by the Bank as the Bank's Prime Rate, whether or not such rate is publicly announced; the Prime Rate may not be the lowest interest rate charged by Bank for commercial or other extensions of credit. "Prime Rate Loan" means any Loan that bears interest with reference to the Prime Rate. "Prohibited Transaction" shall mean any prohibited transaction as that term is defined for purposes of ERISA. "Reportable Event" shall mean any reportable event as that term is defined for purposes of ERISA. "Revolving Loan(s)" means the revolving credit extended by the Bank under the Master Revolving Loan Note pursuant to Article II hereof. "Security Agreement" shall mean each and every security agreement related to this Agreement, executed and delivered by Companies in favor of Bank, including, but not limited to, the Security Agreements dated this date and executed and delivered by Companies to Bank, and any and all security agreements ratified pursuant to Section 4.4. "Standby Letter of Credit" shall mean a letter of credit issued by the Bank pursuant to this Agreement and shall include the letters of credit issued by the Bank that are listed on Exhibit "B," and shall also include any amended Standby Letter of Credit or any replacement Standby Letter of Credit, and any other Standby Letter of Credit issued by Bank under this Agreement. "Subordinated Debt" shall mean Indebtedness of a Person which is subordinated in writing, in a manner satisfactory to the Bank, to all Indebtedness owing to the Bank. "Subsidiary" shall mean any corporation fifty-one percent (51%) of the outstanding voting stock of which is at the time directly or indirectly owned by Companies or by one or more of their Subsidiaries, or by the Morgan Group. "Termination Date" shall mean April 30, 1999, or such earlier date on which the commitment of the Bank to make loans pursuant to Section 2.1(a) hereof shall have been terminated pursuant to Article VIII of this Agreement. 6 "Total Indebtedness" shall mean the total of all items of indebtedness or liability which in accordance with GAAP would be included in determining total liabilities on the liability side of the balance sheet as of the date of determination. The foregoing definitions shall be applicable to the singulars and plurals of the fore going defined terms. ARTICLE II. REVOLVING CREDIT AND STANDBY LETTER OF CREDIT FACILITY REVOLVING CREDIT Section 2.1. Amount of Revolving Credit. The Bank hereby agrees, subject to the terms and conditions of this Agreement, to make, continue, and convert Revolving Loans to Morgan and TDI as follows: (a) The Bank will, subject to the terms and conditions of this Agreement, make one or more Revolving Loans to Morgan and TDI from time to time on and after the date of this Agreement through and including the Termination Date, in an aggregate principal amount not to exceed Ten Million Dollars ($10,000,000.00) outstanding at any one time (Revolving Credit). All issued Standby Letters of Credit, whether issued at the request of Morgan, Interstate or TDI, shall be included in the calculation of the unpaid aggregate principal outstanding and shall reduce the amount of the Revolving Loans available dollar for dollar. Morgan and TDI may borrow, prepay, and reborrow such maximum amount of credit; provided, however, that except as otherwise provided in this Agreement, Morgan and TDI may prepay any Libor Rate Loan only on the last day of the applicable Interest Period for such Loan. The Companies may from time to time, upon not less than three (3) Business Days' prior notice made by telegraph, Telex or telephone and confirmed in a writing delivered to the Bank, terminate or reduce permanently, the commitment of the Bank to make Revolving Loans pursuant to this Section 2.1(a) hereof by the amount of Five Hundred Thousand Dollars ($500,000.00) or any integral multiple thereof; provided that Morgan and TDI shall immediately pay to the Bank the amount, if any, by which the aggregate principal amount of such Revolving Loans outstanding plus the stated amount of the Standby Letters of Credit exceeds such reduced commitment of the Bank at that time. If, however, after giving effect to any such payment any Libor Rate Loans would be prepaid prior to the end of their respective Interest Periods, the notice of the termination or permanent reduction in the commitment of the Bank to make Revolving Loans pursuant to Section 2.1(a) shall be deemed to be Morgan and TDI's request that such termination or reduction be effective on the last day of such Interest Periods. 7 (b) Each Revolving Loan that is made as or converted into a Prime Rate Loan shall be made or converted on such Business Day and in such amount (equal to One Hundred Thousand Dollars ($100,000.00) or any integral multiple thereof) as Morgan or TDI, jointly or individually, shall request by written notice given to the Bank no later than 11:00 a.m. (Cleveland, Ohio time) on the date of disbursement of or conversion into the requested Prime Rate Loan; provided, however, that a Libor Rate Loan may be converted into a Prime Rate Loan only upon the expiration of the Libor Rate Loan's Interest Period except in situations covered by Sections 2.7 and 2.8 of this Agreement. Each Revolving Loan that is made or continued as or converted into a Libor Rate Loan shall be made, continued, or converted on such Business Day, in such amount (equal to One Hundred Thousand Dollars ($100,000.00) or an integral multiple thereof), and with such an Interest Period as Morgan or TDI shall request by written notice given to the Bank no later than 11:00 a.m. (Cleveland, Ohio time) on the third Business Day prior to the date of disbursement or continuation of or conversion into the requested Libor Rate Loan. Each written notice of any Libor Rate Loan shall be irrevocable and binding on Morgan and TDI and Morgan and TDI shall indemnify the Bank against any loss or expense incurred by the Bank as a result of any failure by Morgan or TDI to consummate such Revolving Loan, including, without limitation, any loss (including loss of anticipated profits) or expense incurred by reason of liquidation or re-employment of deposits or other funds acquired by the Bank to fund the Revolving Loan. A certificate as to the amount of such loss or expense submitted by the Bank to Morgan and TDI shall be conclusive and binding for all purposes, absent manifest error. In the event that Morgan or TDI fails to provide the Bank with the required written notice, Morgan or TDI shall be deemed to have given a written notice that such Revolving Loan shall be converted to a Prime Rate Loan on the last day of the applicable Interest Period. All Revolving Loans under this Section shall be evidenced by the Master Revolving Note, dated the date hereof. The Note shall be a master note, and the principal amount of all Revolving Loans outstanding shall be evidenced by the Note or any ledger or other record of the Bank, which shall be presumptive evidence of the principal owing and unpaid on the Note. (c) Morgan and TDI shall repay to the Bank on the Termination Date, the principal amount of all Revolving Loans evidenced by the Master Revolving Note that are outstanding on the Termination Date. Section 2.2. Interest Rate. (a) Each Revolving Loan that is a Libor Rate Loan shall bear interest during each Interest Period at a fixed rate per annum equal to the Libor Rate for such Interest Period plus the Libor Margin. The Libor Margin as of the date of this Agreement shall be one hundred fifty (150) basis points. The Libor Margin 8 shall be adjusted on a quarterly basis as follows: Upon submission of Morgan Group's consolidated quarterly financial statements the Libor Margin shall be determined for the succeeding quarter by KeyBank using the following matrix: EBIT Libor Margin Less than $3,000,000.00 150 basis points Greater than or equal to $3,000,000.00 but less than $4,500,000.00 125 basis points Greater than or equal to $4,500,000.00 100 basis points This matrix is based upon certain levels of Morgan Group's EBIT on a rolling four (4) quarter basis. The special charges included in the 1996 audited financial statements related to the closing of the Truckaway segment of the specialized transport division of Morgan shall be excluded for testing purposes in an amount not to exceed Three Million Five Hundred Thousand Dollars ($3,500,000.00) for special charges and Seven Hundred Fifty Thousand Dollars ($750,000.00) for insurance claim reserves. Each Revolving Loan that is a Prime Rate Loan shall bear interest at a floating rate per annum equal to the Prime Rate. In the event of any change in the Prime Rate, the rate of interest upon each Prime Rate Loan shall be adjusted to immediately correspond with such change, except such interest rate shall not exceed the highest rate permitted by law. (b) After the maturity of any Revolving Loan, the unpaid principal amount of the Revolving Loan, and accrued interest thereon, or any fees or any other sum payable hereunder, shall thereafter until paid in full bear interest at a rate per annum equal to three percent (3%) in excess of the Prime Rate in effect from time to time, which rate shall be adjusted in the manner described in Section 2.2(a) above. Section 2.3. Interest Payments. Morgan and TDI shall pay to the Bank interest on the unpaid principal balance of each Prime Rate Loan on: (1) the date such Loan is converted to a Libor Rate Loan; and (2) on the last day of each month hereafter and at maturity. Morgan and TDI shall pay to the Bank interest on the unpaid principal balance of each Libor Rate Loan on: (1) the date such Loan is converted to a Prime Rate Loan; (2) the last day of the applicable Interest Period of such Loan; or (3) each date an installment of principal becomes due and payable in accordance with Section 2.1 hereof, whichever is earlier. Additionally, if the 9 applicable Interest Period exceeds three (3) months, interest shall also be paid at quarterly intervals during the course of the applicable Interest Period. Section 2.4. Payment. Morgan and TDI may pay any Prime Rate Loans in whole, or in part, in the principal amount of One Hundred Thousand Dollars ($100,000.00) or any integral multiple thereof, at any time or times upon same day by 11:00 a.m. Cleveland time notice made by telephone to the Bank. Morgan and TDI may pay any Libor Rate Loan in whole or in part, in the principal amount of One Hundred Thousand Dollars ($100,000.00) or any integral multiple thereof only on the last day of the Interest Period applicable to such Loan upon not less than three (3) Business Days' prior written notice given to the Bank. Section 2.5. Fees. Morgan and TDI shall pay to the Bank a total yearly fee of one-fourth percent (1/4%) of the total amount of the Revolving Credit ($10,0000,000.00) set forth in Section 2.1 whether or not the entire amount of the Revolving Credit is available or used. This fee shall be paid quarterly, in advance. Morgan and TDI shall also pay to the Bank; prior to maturity (whether by acceleration or otherwise), for each payment of principal or interest not paid when due, a late fee equal to the greater of five percent (5%) of such payment or One Hundred Dollars ($100.00). Section 2.6. Computation of Interest and Fees. Interest on Loans shall be computed on the basis of a year of three hundred sixty (360) days and paid for the actual number of days elapsed. Interest on unpaid fees, if any, hereunder shall be computed on the basis of a year of three hundred sixty (360) days and paid for the actual number of days elapsed. Section 2.7. Additional Costs. (a) If, due to either: (1) the introduction of, or any change in, or in the interpre tation of, any law or regulation; or (2) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to the Bank of making, funding or maintaining Loans, then Morgan and TDI shall from time to time, upon demand by the Bank, pay to the Bank additional amounts sufficient to reimburse the Bank for any such additional costs. A certificate of the Bank submitted to Morgan and TDI as to the amount of such additional costs, shall be conclusive and binding for all purposes, absent manifest error. Upon notice from Morgan or TDI to the Bank within five (5) Business Days after the Bank notifies Morgan and TDI of any such additional costs pursuant to this Section 2.8(a), Morgan and TDI may either: (1) prepay in full all Loans of any types so affected then outstanding, together with interest accrued thereon to the date of such prepayment; or (2) convert all Loans of any types so affected then out standing into Loans of any other type not so affected upon not less than four (4) Business Days' notice to the Bank. If any such prepayment or conversion of 10 any Libor Rate Loan occurs on any day other than the last day of the applicable Interest Period for such Loan, Morgan and TDI also shall pay to the Bank such additional amounts sufficient to indemnify the Bank against any loss, cost or expense incurred by the Bank as a result of such prepayment or conversion, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or re-employment of deposits or other funds acquired by the Bank to fund any such Loan, and a certificate as to the amount of any such loss, cost or expense submitted by the Bank to Morgan and TDI shall be conclusive and binding for all purposes, absent manifest error. (b) If either: (1) the introduction of, or any change in, or in the interpretation of, any law or regulation; or (2) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and the Bank determines that the amount of such capital is increased by or based upon the existence of the Loans (or commitment to make the Loans) and other extensions of credit (or commitments to extend credit) of similar type, then, upon demand by the Bank, Morgan and TDI shall pay to the Bank from time to time as specified by the Bank additional amounts sufficient to compensate the Bank in the light of such circumstances, to the extent that the Bank reasonably determines such increase in capital to be allocable to the existence of the Bank's Loans (or commitment to make the Loans). A certificate of the Bank submitted to Morgan and TDI as to such amounts shall be conclusive and binding for all purposes, absent manifest error. Upon notice from Morgan or TDI to the Bank within five (5) Business Days after the Bank notifies Morgan or TDI of any such additional costs pursuant to this Section 2.8(b), Morgan or TDI may either: (1) prepay in full all Loans of any types so affected then outstanding, together with interest accrued thereon to the date of such prepayment; or (2) convert all Loans of any types so affected then outstanding into Loans of any other type not so affected upon not less than four (4) Business Days' notice to the Bank. If any such prepayment or conversion of any Libor Rate Loan occurs on any day other than the last day of the applicable Interest Period for such Loan, Morgan and TDI also shall pay to the Bank such additional amounts sufficient to indemnify the Bank against any loss, cost or expense incurred by the Bank as a result of such prepayment or conversion, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Bank to fund any such Loan, and a certificate as to the amount of any such loss, cost or expense submitted by the Bank to Morgan or TDI shall be conclusive and binding for all purposes, absent manifest error. 11 Section 2.8. Illegality. Notwithstanding any other provision of this Agreement, if the introduction of or any change in or in the interpretation of any law or regulation shall make it unlawful, or any central bank or other governmental authority shall assert that it is unlawful, for the Bank to perform its obligations hereunder to make, continue or convert Libor Rate Loans hereunder, then: (1) on notice thereof by the Bank to Morgan or TDI, the obligation of the Bank to make or continue a Loan of a type so affected or to convert any type of Loan into a Loan of a type so affected shall terminate and the Bank shall thereafter be obligated to make Prime Rate Loans whenever any written notice requests any type of Loans so affected; and (2) upon demand therefor by the Bank to Morgan or TDI, Morgan or TDI shall either, (a) forth with prepay in full all Loans of the type so affected then outstanding, together with interest accrued thereon, or (b) request that the Bank, upon four (4) Business Days' notice, convert all Loans of the type so affected then outstanding into Loans of a type not so affected. If any such prepayment or conversion of any Libor Rate Loan occurs on any day other than the last day of the applicable Interest Period for such Loan, Morgan and TDI also shall pay to the Bank such additional amounts sufficient to indemnify the Bank against any loss, cost or expense incurred by the Bank as a result of such prepayment or conversion, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or re-employment of deposits or other funds acquired by the Bank to fund any such Loan, and a certificate as to the amount of any such loss, cost or expense submitted by the Bank to Morgan or TDI shall be conclusive and binding for all purposes, absent manifest error. Section 2.9. Renewals/Extensions. In 1998 and in each year thereafter, Morgan and TDI may request in writing an extension of the Termination Date for an additional one-year period. Such written request must be accompanied by the Morgan Group's preceding fiscal year's audited financial statements and any other financial information reasonably requested by Bank. Any such extension shall be in each instance, made in the Bank's sole discretion. Upon such extension, the Termination Date shall be changed to reflect the extension. Section 2.10. Liability of Morgan and TDI. Morgan and TDI shall each be jointly, severally, and unconditionally liable for all payments owing under the Revolving Credit without regard to which of the Companies actually draws down or received the proceeds from the Revolving Loan. STANDBY LETTER OF CREDIT FACILITY Section 2.11. Amount and Terms of Standby Letter of Credit Facility. The Bank hereby agrees, subject to the terms and conditions of this Agreement, to issue one or more standby letters of credit as follows: (a) The Bank agrees, subject to the terms and conditions of this Agreement, to issue one or more standby letters of credit to the Beneficiary for account of the Companies from time to time, to cover payments made by Beneficiary on behalf of Companies and attributable to the deductible portion of Companies' insurance 12 program with the Beneficiary; provided, however, the total of all issued Standby Letters of Credit shall not exceed, in the aggregate, Seven Million Dollars ($7,000,000.00) (the stated amount). Of the Seven Million Dollar ($7,000,000.00) aggregate amount, Bank agrees, subject to all other terms and provisions of this Agreement to issue up to Five Hundred Thousand Dollars ($500,000.00) in Standby Letters of Credit outstanding at any one time at the request of or for use by Interstate. As set forth in Section 2.1, issued Standby Letters of Credit shall reduce the amount of the Revolving Credit available hereunder by the stated amount of the Standby Letter of Credit, dollar for dollar. (b) Drawings under the Standby Letter of Credit shall be made only by Beneficiary pursuant to the terms and provisions of, and subject to the conditions set forth in, the Standby Letter of Credit. (c) No Standby Letter of Credit shall be issued for a period of time exceeding one year and no Standby Letter of Credit shall be issued with an expiration date which is later than the date which is fifteen (15) business days prior to the Termination Date. Section 2.12. Reimbursement and Other Payment Obligations. (a) Companies shall pay Bank, on demand and in lawful United States funds, the amount paid by Bank on each draft or other order, instrument or demand drawn or presented under the Letter of Credit. (b) Companies shall pay Bank interest at a floating rate per annum equal to the Bank's Prime Rate on all amounts paid by Bank in connection with a Letter of Credit from the date of such payment until Bank receives Companies' reimbursement therefor. In the event of any change in the Prime Rate, the rate of interest upon each Prime Rate Loan shall be adjusted to immediately correspond to such change, except such interest rate shall not exceed the highest rate permitted by law. Interest shall be calculated on the basis of a three hundred sixty (360) day year and paid for actual days elapsed and shall be paid on the last day of each month beginning with the first month following a payment by Bank in connection with a Letter of Credit. (c) No interest shall be payable on drawings which are reimbursed on or prior to 1:00 p.m. (Cleveland, Ohio time) on the day on which the Bank honors such drawings. After such time, interest shall be payable by the Companies on such reimbursable amounts at a floating rate per annum equal to the Bank's Prime Rate. 13 Section 2.13. Increased Cost. If any law or regulation hereinafter enacted or, any change in any law or regulation, or any interpretation by any court or administrative, banking or governmental authority charged or claiming to be charged with the administration applicable to the Bank, shall: (a) impose, modify or make applicable any reserve, special deposit, risk/capital ratio or similar requirement against letters of credit issued by the Bank; (b) impose on the Bank any other condition regarding this Agreement or the Standby Letter of Credit; or (c) subject the Bank to any tax (other than taxes based upon gross revenues or income), charge, deduction or withholding of any kind whatsoever; and the result of any event referred to in clause (a), (b) or (c) above shall be to increase the cost to the Bank issuing or maintaining the Standby Letter of Credit (which increase in cost shall be the result of a reasonable allocation of the aggregate of such cost increase as resulting from such events), or to reduce the amount of principal, interest or any fee or compensation to be paid to the Bank under this Agreement or the Standby Letter of Credit or the Note, then, not later than five (5) business days following demand for payment by the Bank, the Companies shall pay to the Bank, from time to time as specified by the Bank, additional amounts which shall be sufficient to compensate the Bank for such increased cost or reduction. Any such amounts that remain unpaid as of the end of said fifth business day shall accrue interest after such date at a floating rate of the prime rate plus one percent (1%). A certificate setting forth in reasonable detail such increased cost or reduction incurred by the Bank as a result of any event referred to in clause (a), (b) or (c) above, submitted by the Bank to the Companies, shall be conclusive, absent manifest error, as to the amount. The obligations of the Companies under this section shall survive the termination of this Agreement. Section 2.14. Note and Payments. As soon as practicable under the circumstances (which sometimes may be after a draw under the Standby Letter of Credit is honored by the Bank) the Bank will make an attempt to notify telephonically the appropriate Company (Morgan, TDI or Interstate) that it has received a demand for a draw under the Standby Letter of Credit and in any event the Bank will notify the Company forthwith after a draw under the Standby Letter of Credit is honored by the Bank. Upon demand, all payments by the Companies to the Bank with respect to the Standby Letters of Credit shall be made in lawful currency of the United States in immediately available funds at the Bank's office at 127 Public Square, Cleveland, Ohio. In the event that the date specified for any payment is not a business day, such payment shall be made not later than the next following business day and interest shall be paid at the rate provided for in this Agreement on any such payment. Obligations of Companies to Bank shall be evidenced by the Note or any ledger or other record of the Bank, which shall be presumptive evidence of the principal owing and unpaid on the Note. 14 Section 2.15. Letter of Credit Fee. Companies shall pay Bank an annual fee based on the stated amount of each Standby Letter of Credit on or before the date of issuance and on each anniversary date of the date of issuance of that Standby Letter of Credit. The fee for the entire year shall be determined and paid on the date of issuance based upon the Letter of Credit fee in effect on the date of issuance, and on each anniversary date. The fee for Standby Letters of Credit shall be adjusted on a quarterly basis as follows: Upon submission of Morgan Group's consolidated quarterly financial statements, the Standby Letter of Credit fee shall be determined for Letters of Credit issued in the succeeding quarter by KeyBank using the following matrix: EBIT Letter of Credit Fee Less than $3,000,000.00 150 basis points Greater than or equal to $3,000,000.00 but less than $4,500,000.00 125 basis points Greater than or equal to $4,500,000.00 100 basis points This matrix is based upon certain levels of Morgan Group's EBIT on a rolling four (4) quarter basis. The special charges included in the 1996 audited financial statements related to the closing of the Truckaway segment of the specialized transport division of Morgan shall be excluded for testing purposes in an amount not to exceed Three Million Five Hundred Thousand Dollars ($3,500,000.00) for special charges and Seven Hundred Fifty Thousand Dollars ($750,000.00) for insurance claim reserves. Also, Companies agree to pay an issuance fee equal to the Bank's standard issuance fee at the time of issuance and the Bank's standard amendment fee for each amendment. Companies shall also pay the fees of Bank for review of any draw of a letter of credit. Section 2.16. Indemnification. In addition to any other amounts payable by the Companies under this Agreement, the Companies hereby agree to pay and indemnify the Bank from and against any and all claims, liabilities, losses, costs, and expenses (including, without limitation, reasonable attorney's fees) which the Bank may incur or be subject to as a consequence, directly or indirectly, of: (a) the issuance of, or payment or failure to pay under the Standby Letter of Credit; (b) any breach by the Companies of any warranty term or condition in, or the occurrence of any default under, this Agreement, including all reasonable fees 15 or expenses resulting from the settlement or defense of any claim or liabilities arising as a result of any such breach or default; and (c) any suit, investigation or proceeding as to which the Bank is involved as a consequence, direct or indirect, of its issuance of the Standby Letter of Credit or its execution of this Agreement or any other event or transaction contemplated by any of these matters. The obligations of the Companies under this section shall survive the termination of this Agreement. Section 2.17. Nature of Bank's Duties. The Companies assume all risks of the acts, omissions or misuse of the Standby Letter of Credit by Beneficiary or any successor; and except for instances of willful misconduct by Bank, the Bank shall not be responsible: (a) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted in connection with the application for and issuance of, or the making of a drawing under, the Standby Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (b) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign the Standby Letter of Credit or the rights or benefits under it or proceeds of it, in whole or in part, which may prove to be invalid or ineffective for any reason; (c) for failure of the Beneficiary to comply fully with conditions required in order to effect a drawing; (d) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, telecopier, Telex or otherwise; (e) for any loss or delay in the transmission or otherwise of any document or draft required in order to make a drawing; and (f) for any consequences arising from causes beyond the control of the Bank. Any action taken or omitted by the Bank, under or in connection with the Standby Letter of Credit or any related certificates or other documents, if taken or omitted in good faith, shall be binding upon the Companies and shall not put the Bank under any resulting liability to the Companies. Section 2.18. Liability of Companies. Morgan and TDI shall each be jointly, severally and unconditionally liable for all reimbursements under any Letter of Credit without regard as to which of the Companies requested the Letter of Credit. The liability of Interstate hereunder is limited at any given time to the then aggregate Letters of Credit which have been 16 issued at Interstate's request, or for the benefit of Interstate plus related interest, fees and costs hereunder. ARTICLE III. WARRANTIES The Companies represent and warrant to the Bank (which representations and warran ties will survive the delivery of the Note and all extensions of credit under this Agreement) that: Section 3.1. Organization; Corporate Power. (a) The Companies are corporations duly organized, validly existing, and in good standing under the laws of the jurisdiction in which they are incorporated; (b) The Companies have the corporate power and authority to own their properties and assets and to carry on their business as now being conducted; (c) The Companies are qualified to do business in every jurisdiction in which the ownership or leasing of their property or the doing of business requires such qualification; and (d) The Companies have the corporate power to execute, deliver, and perform their Loan Documents and to borrow hereunder. Section 3.2. Authorization of Borrowing. The execution, delivery, and performance of the Loan Documents have been duly authorized by all requisite corporate action. Section 3.3. No Conflict. The execution, delivery, and performance of the Loan Documents will not: (1) violate any provision of law, the Articles of Incorporation, the Code of Regulations or Bylaws of the Companies; (2) violate any order of any court or other agency of any federal or state government or any provision of any indenture, agreement, or other instrument to which the Companies are parties or by which they or any of their properties or assets are bound; (3) conflict with, result in a breach of, or constitute (with passage of time or delivery of notice, or both), a default under any such indenture, agreement or other instrument; or (4) result in the creation or imposition of any Lien or other encumbrance of any nature whatsoever upon any of the properties or assets of the Companies except in favor of the Bank. Section 3.4. Execution of Loan Documents. The Loan Documents have been duly executed and are valid and binding obligations of the Companies fully enforceable in accor dance with their respective terms. Section 3.5. Financial Condition. The Companies have furnished to the Bank true and correct financial statements of Morgan Group prepared by a certified public accountant as 17 of the end of the Companies' calendar year which ended December 31, 1996, which audited financial statements present fairly Morgan Group's financial condition at such date, and there has been no material adverse change in Morgan Group's financial condition since that date. Section 3.6. Liabilities; Liens. The Companies have made no investment in, advance to, or guarantee of, the obligations of any Person nor are the Companies' assets and properties subject to any claims, liabilities, Liens or other encumbrances, except as disclosed in the finan cial statements and related notes thereto referred to in Section 3.5 hereof. Section 3.7. Litigation. There is no action, suit, examination, review or proceeding by or before any governmental instrumentality or agency now pending or, to the knowledge of the Companies, threatened against the Companies or against any property or rights of the Companies, which, if adversely determined, would materially impair the right of the Companies to carry on business as now being conducted or which would materially adversely affect the financial condition of the Companies, except for the litigation, if any, described in the notes to the financial statements referred to in Section 3.5 hereof. Section 3.8. Payment of Taxes. Federal income tax returns of the Companies have been examined by the Internal Revenue Service for all years prior to and including their calendar year which ended December 31, 1993, and all deficiencies finally resulting from such examinations have been discharged or proper amounts have been set aside on the Companies' books to cover such deficiencies. The Companies have filed, or caused to be filed, all federal, state, local, and foreign tax returns required to be filed, and has paid, or caused to be paid, all taxes as are shown on such returns, or on any assessment received by the Companies, to the extent that such taxes become due, except as otherwise contested in good faith. The Companies have set aside proper amounts on their books, determined in accordance with GAAP, for the payment of all taxes for the years that have not been audited by the respective tax authorities or for taxes being contested by the Companies. Section 3.9. Agreements. The Companies are not in default in the performance, observance, or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which it is a party, which default materially adversely affects the business, properties, assets or financial condition of the Companies. Section 3.10. Regulatory Status. Neither the making nor the performance of this Agreement, nor any extension of credit hereunder, requires the consent or approval of any governmental instrumentality or political subdivision thereof, any other regulatory or adminis trative agency, or any court of competent jurisdiction. Section 3.11. Federal Reserve Regulations; Use of Loan Proceeds. The Companies are not engaged principally, or as one of their important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. No part of the proceeds of the Loans will be used, directly or indirectly, for a purpose which violates any law, rule or 18 regulation of any governmental body, including, without limitation, the provisions of Regulations G, U or X of the Board of Governors of the Federal Reserve System, as amended. No part of the proceeds of the Loans will be used, directly or indirectly, to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock. Following application of the proceeds of each Loan, not more than ten percent (10%) of the value of the assets of the Companies and their subsidiaries on a consolidated basis will be Margin Stock. Section 3.12. Subsidiaries. Morgan has three (3) subsidiaries, Transport Services Unlimited, Inc., Advertising Associates, Inc., MDA Corporation and Interstate and TDI have no subsidiaries and neither will form, purchase, or otherwise hold additional subsidiaries without written consent of the Bank. The Morgan Group has four (4) subsidiaries, Morgan Drive Away, Inc., Interstate Indemnity Company, Morgan Finance, Inc., TDI, Inc., and will not form, purchase or otherwise hold additional subsidiaries without written consent of Bank. Section 3.13. Licenses. The Companies have all licenses, franchises, consents, approvals or authorizations required in connection with the conduct of the business of the Companies, the absence of which would have a material adverse affect on the conduct of the Companies' business, and all such licenses, franchises, consents, approvals, and authorizations are in full force and effect. Section 3.14. ERISA. No Reportable Event or Prohibited Transaction has occurred and is continuing with respect to any Plan, and the Companies have incurred no "accumulated funding deficiency" (as that term is defined by ERISA) since the effective date of ERISA. Section 3.15. Environmental Matters. The Companies are in compliance with all Environmental Laws and all applicable federal, state, and local health and safety laws, regula tions, ordinances or rules. Section 3.16. Solvency. The Companies have received consideration which is the reasonable equivalent value of the obligations and liabilities that the Companies have incurred to Bank. The Companies are not insolvent as defined in any applicable state or federal statute, nor will the Companies be rendered insolvent by the execution and delivery of this Agreement or the Note to Bank. The Companies are not engaged or about to engage in any business or transaction for which the assets retained by it shall be an unreasonably small capital, taking into consideration the obligations to Bank incurred hereunder. The Companies do not intend to, nor do they believe that they will, incur debts beyond their ability to pay them as they mature. ARTICLE IV. CONDITIONS OF LENDING AND COLLATERAL Section 4.1. Credit Facility. The obligation of the Bank to make a Loan or issue a Standby Letter of Credit shall be subject to satisfaction of the following conditions, unless 19 waived in writing by the Bank: (1) all legal matters and Loan Documents incident to the trans actions contemplated hereby shall be satisfactory, in form and substance, to Bank's counsel; (2) the Bank shall have received, (a) certificates by an authorized officer of the Companies, upon which the Bank may conclusively rely until superseded by similar certificates delivered to the Bank, certifying, (i) all requisite action taken in connection with the transactions contemplated hereby, and (ii) the names, signatures, and authority of the Companies' authorized signers executing the Loan Documents; and (b) such other documents as the Bank may reasonably require to be executed by, or delivered on behalf of, the Companies; (3) the Bank shall have received the Note with all blanks appropriately completed, executed by an authorized signer of the Companies; (4) the Companies shall have paid to the Bank the fee(s) then due and payable in accordance with Article II and Article IX of this Agreement and a closing fee of Thirty Thousand Dollars ($30,000.00); (5) all existing credit facilities to Morgan Group and its Subsidiaries are canceled ; (6) there is no Event of Default or Potential Event of Default; (7) the Bank shall have received the written opinion of legal counsel selected by the Companies and satisfactory to the Bank, dated the date of this Agreement, in form and substance satisfactory to the Bank, to the effect that: (i) this Agreement has been duly authorized, executed and delivered by the Companies and constitutes a legal, valid and binding obligation of the Companies enforceable in accordance with its terms except to the extent that such enforceability is limited by bankruptcy, insolvency, moratorium or similar laws or equitable principles relating to the enforcement of creditors' rights; (ii) the Note delivered to Bank on the Closing Date has been duly author ized, executed and delivered by the Companies and is a legal, valid and binding obligation of the Companies enforceable in accordance with its terms except to the extent that such enforceability is limited by bankruptcy, insolvency, moratorium or similar laws or equitable principles relating to the enforcement of creditors' rights; (iii) it is not necessary, in connection with the making and delivery of the Note under the circumstances contemplated by this Agreement, to register the Note under the Securities Act of 1933, as amended, or to qualify an indenture in respect thereof under the Trust Indenture Act of 1939, as amended; (iv) no order, permission, consent or approval of any federal or state com mission, board of regulatory authority is required for the execution and delivery or performance of this Agreement and of the Note; (v) neither the consummation of the Agreement nor the use by the Companies of any financial accommodation hereunder will violate the Securities Exchange Act of 1934, as amended, or applicable regulations thereunder; 20 (vi) the Companies are corporations duly organized, existing and in good standing under the laws of the state as set forth in Section 3.1 with full corporate power and authority to carry on the business, to enter into this Agreement, to borrow money as contemplated by them, to issue the Note and to carry out the provisions of this Agreement and the Note; (vii) the Companies are duly qualified as foreign corporations to do business in each of the states, other than the state of their incorporation, in which the character of the properties owned by them or the nature of the business trans acted by them makes such qualification necessary, and is in good standing in each of such states; (viii) there is no charter, bylaw or preferred or common stock provision, nor any indenture, contract or agreement to which the Companies are to the knowledge of such counsel parties, nor any statute, rule or regulation binding on the Companies, which would be contravened by the execution and delivery of this Agreement or of the Note or by the performance of any terms, provisions, conditions, agreements, covenants or obligations of the Companies contained herein or therein; (ix) there are no actions, suits, investigations or proceedings (whether or not purportedly on behalf of the Companies) pending or, to the knowledge and belief of said counsel, threatened against or affecting the Companies, or the business or properties of the Companies, or before or by any governmental agency, or any court, arbitrator or grand jury, which can reasonably be expected to result in any material adverse change in the business, operations, properties or assets or in the condition, financial or otherwise, of the Companies or in the ability of the Companies to perform this Agreement. The Companies are not, to the knowledge and belief of said counsel, in default with respect to any judgment, order, writ, injunction, decree, demand, rule or regulation of any court, arbitrator, grand jury, or any of the governmental agency, default under which might have consequences which would materially and adversely affect the business, properties or assets or the condition, financial or otherwise, of the Companies; (x) the consummation of the Agreement and the execution and delivery of the Note will not involve any prohibited transaction under the Internal Revenue Code or ERISA; and (6) the Bank shall have received a guarantee, satisfactory in form and substance to Bank's counsel, by The Morgan Group, Inc. and Morgan Finance in favor of Bank guaranteeing all indebtedness of Companies to Bank and from Morgan and TDI guaranteeing all indebtedness of Interstate to Bank, and an opinion letter of legal counsel selected by the Guarantor and 21 satisfactory to the Bank in the form of Exhibit "C" attached to this Agreement and covering such additional matters as Bank may reasonably require. Section 4.2. Each Loan. The obligation of the Bank to make any Loan or to issue any Standby Letter of Credit shall be subject to compliance with Section 4.1 herein and also subject to satisfaction of the following conditions that at the date of making such Loan or issuing any Standby Letter of Credit, and after giving effect thereto: (1) no Event of Default or Potential Default shall have occurred and be then continuing; and (2) each representation and warranty set forth in Article III above is true and correct as if then made. Section 4.3. Collateral. The obligations of Companies, hereunder shall be secured by the Master Revolving Note, and by the collateral described in the Security Agreements executed on even date herewith, and any and all security agreements ratified pursuant to Section 4.4 herein, and by the Other Collateral Documents and by any and all collateral securing any obligation of Companies to Bank. Section 4.4. Ratification and Confirmation. All security agreements, financing statements, evidence of liens, and other security documents, executed by the Companies in favor of Bank, are hereby ratified and confirmed, and adopted by and to the uses of this Agreement, and shall continue in full force and effect, and shall hereafter be related to this Agreement. ARTICLE V. AFFIRMATIVE COVENANTS As long as financial accommodation is available hereunder and until the Expiration Date of all Letters of Credit shall have passed and until all principal of and interest on the Note have been paid in full: Section 5.1. Accounting; Financial Statements; and Other Information. The Companies will maintain a standard system of accounting, established and administered in accordance with GAAP consistently followed throughout the periods involved, and will set aside on their books for each fiscal quarter the proper amounts or accruals for depreciation, obsolescence, amortization, bad debts, current and deferred taxes, prepaid expenses, and for other purposes as shall be required by GAAP. The Companies will deliver to the Bank: (a) As soon as practicable after the end of each month, and in any event within thirty (30) days thereafter, a balance sheet of the Companies as of the end of such month, and statements of income, certified as complete and correct by the principal financial officer of the Companies, accompanied by a certificate by the chief financial officer stating whether or not there exists any Event of Default or Potential Default. 22 (b) Quarterly 10Q reports of Morgan Group within forty-five (45) days of the quarter end. (c) As soon as practicable after the end of each fiscal year, and in any event within one hundred twenty (120) days thereafter, the Annual 10K Report, and an audited consolidated financial statement for The Morgan Group, audited by certified public accountants of recognized standing, selected by the Companies and satisfactory to the Bank prepared in accordance with GAAP. In addition, a consolidating balance sheet as of the end of such year, and statements of income of Companies, Interstate, Morgan Finance, and the Morgan Group for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail certified as complete and correct by the principal financial officer of each entity. (d) Annual budgeted financial statements within ninety (90) days of year end. (e) Together with each set of financial statements required by subparagraphs (b) and (c) above and, in addition, upon request of the Bank at any other times, a certifi cate by the chief financial officer or other authorized officer of the Companies stating whether or not there exists any Event of Default or Potential Default (including the calculations pursuant to Sections 6.7, 6.10 and 6.11 hereunder) and if there is an Event of Default or Potential Default, specifying the nature and period of existence thereof and what action, if any, the Companies are taking or proposes to take with respect thereto. (f) With reasonable promptness, such other data and information as from time to time may be reasonably requested by the Bank. (g) Promptly and in any event within ten (10) days after the occurrence of a Reportable Event with respect to a Plan, copies of any materials required to be filed with the PBGC with respect to such Reportable Event or those that would have been required to be filed if the thirty (30) day notice requirement to the PBGC were not waived. (h) Promptly upon receipt, and in no event more than three (3) days after receipt, of a notice by the Companies or any ERISA Affiliate or any administrator of any Plan or Multiemployer Plan that the PBGC has instituted proceedings to terminate such Plan or to appoint a trustee to administer such Plan, a copy of such notice. Section 5.2. Insurance; Maintenance of Properties. The Companies will maintain with financially sound and reputable insurers, insurance with coverage and limits as may be required by law or as may be reasonably required by the Bank. The Companies will, upon 23 request from time to time, furnish to the Bank a schedule of all insurance carried by it, setting forth in detail the amount and type of such insurance. The Companies will maintain in good repair, working order, and condition, all properties used or useful in the business of the Companies. Section 5.3. Existence; Business. The Companies will cause to be done all things necessary to preserve and keep in full force and effect their existence and rights, to conduct their business in a prudent manner, to maintain in full force and effect, and renew from time to time, their franchises, permits, licenses, patents, and trademarks that are necessary to operate their businesses. The Companies will comply in all material respects with all valid laws and regulations now in effect or hereafter promulgated by any properly constituted governmental authority having jurisdiction; provided, however, the Companies shall not be required to comply with any law or regulation which it is contesting in good faith by appropriate proceedings as long as either the effect of such law or regulation is stayed pending the resolution of such proceedings or the effect of not complying with such law or regulation is not to jeopardize any franchise, license, permit patent or trademark necessary to conduct the Companies' business. Section 5.4. Payment of Taxes. The Companies will pay all taxes, assessments, and other governmental charges levied upon any of their properties or assets or in respect of their franchises, business, income or profits before the same become delinquent, except that no such taxes, assessments, or other charges need be paid if contested by the Companies in good faith and by appropriate proceedings promptly initiated and diligently conducted and if the Companies has set aside proper amounts, determined in accordance with GAAP, for the payment of all such taxes, charges, and assessments. Section 5.5. Litigation; Adverse Changes. The Companies will promptly notify the Bank in writing of: (1) any future event which, if it had existed on the date of this Agreement, would have required qualification of the representations and warranties set forth in Article III hereof; and (2) any material adverse change in the condition, business or prospects, financial or otherwise, of the Companies. Section 5.6. Notice of Default. The Companies will promptly notify the Bank of any Event of Default or Potential Default hereunder and any demands made upon the Companies by any Person for the acceleration and immediate payment of any Indebtedness owed to such Person. Section 5.7. Inspection. The Companies will make available for inspection by duly authorized representatives of the Bank, or its designated agent, the Companies' books, records, and properties when reasonably requested to do so, and will furnish the Bank such information regarding their business affairs and financial condition within a reasonable time after written request therefor. 24 Section 5.8. Environmental Matters. The Companies and each of their subsidiaries: (a) Shall comply with all Environmental Laws. (b) Shall deliver promptly to Bank notice of the receipt of any document received from the United States Environmental Protection Agency or any state, county or municipal environmental or health agency and, upon request of Bank: (1) copies of any documents received from the United States Environmental Pro tection Agency or any state, county or municipal environmental or health agency; and (2) copies of any documents submitted by Companies or any of their Subsidiaries to the United States Environmental Protection Agency or any state, county or municipal environmental or health agency concerning their operations. Section 5.9. Depository Accounts. Companies shall maintain all of their primary depository accounts with the Bank, and Companies grant Bank the right to offset Companies' funds on deposit with the Bank against Indebtedness owed by Companies to the Bank. ARTICLE VI. NEGATIVE COVENANTS As long as credit is available hereunder and until all principal of and interest on the Note have been paid in full: Section 6.1. Sale or Purchase of Assets. Morgan Group and the Companies (indivi dually or collectively) will not, nor will they allow any Subsidiary to, directly or indirectly: (1) purchase, lease or otherwise acquire any assets except in the ordinary course of business or as otherwise permitted by any provision of this Agreement; or (2) sell, lease, transfer or otherwise dispose of any facility (for purposes of this provision, sales of assets associated with the closing of the Truckaway segment shall be excluded in an amount not to exceed Two Million One Hundred Twenty-Five Thousand Dollars ($2,125,000.00); or (3) sell, lease, transfer or otherwise dispose of in any transaction or series of related transactions any of their property or assets (except in the ordinary course of business) without written consent of Bank. Section 6.2. Liens. Morgan Group and the Companies (individually or collectively) will not, nor will they allow any Subsidiary to, directly or indirectly, create, incur, assume, or permit to exist any Lien with respect to any property or asset of the Companies now owned or hereafter acquired other than: (a) Liens for taxes or governmental assessments, charges or levies the payment of which is not at the time required by Section 5.4 hereof; (b) Liens imposed by law, such as Liens of landlords, carriers, warehousemen, mechanics, and materialmen arising in the ordinary course of business for sums 25 not yet due or being contested by appropriate proceedings promptly initiated and diligently conducted, provided the Companies have set aside proper amounts, determined in accordance with GAAP, for the payment of all such Liens; (c) Liens incurred or deposits made in the ordinary course of business in connection with worker's compensation, unemployment insurance, and other types of social security, or to secure the performance of tenders, statutory obligations, and surety and appeal bonds, or to secure the performance and return of money, bonds, and other similar obligations, but excluding Indebtedness; and (d) Liens in respect of judgments or awards with respect to which the Companies shall, in good faith, be prosecuting an appeal or proceeding for review and with respect to which a stay of execution upon such appeal or proceeding for review shall have been obtained; (e) Liens that secure the Companies' Indebtedness for the purchase price of any real or personal property and that only encumber the property purchased; provided the aggregate amount of all such purchase money Liens shall not exceed an aggregate amount outstanding at any time of Two Hundred Thousand Dollars ($200,000.00) (For purposes of calculating said $200,000.00 figure, all purchase money Liens of the Morgan Group, Companies, Interstate, Morgan Finance, and the Subsidiaries of Companies will be included so that the combined purchase money Liens shall not exceed Two Hundred Thousand Dollars ($200,000.00); (f) Liens in favor of the Bank or any Affiliate Bank. Section 6.3. Indebtedness. Morgan Group and the Companies (individually or collectively) will not, nor will they allow any Subsidiary to, directly or indirectly, create, incur or assume Indebtedness, or otherwise become liable with respect to, any Indebtedness other than: (a) Indebtedness now or hereafter payable, directly or indirectly, by the Companies to the Bank or any Affiliate Bank; (b) Subordinated Debt of the Companies; (c) To the extent permitted by this Agreement, Indebtedness for the purchase price of any real or personal property, which is secured only by a Lien on the Property purchased; (d) Unsecured current Indebtedness and deferred liabilities (other than for borrowed money or represented by bonds, notes, or other securities) incurred in the 26 ordinary course of business (except that Companies may enter into agreements with their insurance providers for payment of premiums over a period of time not to exceed one (1) year); and (e) Indebtedness for taxes, assessments, governmental charges, Liens, or similar claims to the extent not yet due and payable. Section 6.4. Investments; Loans. Morgan Group and the Companies (individually or collectively) will not, nor will they allow any Subsidiary to, directly or indirectly, without written approval of the Bank: (1) purchase or otherwise acquire any stock or other securities of any other Person (except that it shall not be a violation of this agreement if Companies receive, following a bankruptcy or other insolvency proceeding by one of Companies' debtors, stock in exchange for or settlement of the unpaid account of that debtor to Companies); or (2) make or permit to be outstanding any loan (other than loans to officers in relation to or for the purpose of the special employee stock purchase plan) or advance (other than trade advances in the ordinary course of business and extensions of credit by Companies or Morgan Finance to owner-operators for the purchase of a piece of equipment so long as the advances do not exceed the value of the collateral pledged by the owner-operator to Companies or Morgan Finance and assigned by Companies or Morgan Finance to Bank) or enter into any arrange ment to provide funds or credit, to any other Person, except that the Companies may purchase or otherwise acquire and own marketable United States Treasury and Agency obligations, and certificates of deposit and bankers' acceptances issued or created by any domestic commercial bank. Section 6.5. Guaranties. Except for the guarantees given to Bank, Morgan Group and the Companies (individually or collectively) will not, nor will they allow any Subsidiary to, guarantee, directly or indirectly, or otherwise become surety (including, without limitation, liability by way of agreement, contingent or otherwise, to purchase, to provide funds for payment, to supply funds to, or otherwise invest in, any Person, or enter into any working capital maintenance or similar agreement) in respect of any obligation or Indebtedness of any other Person, except guaranties by endorsement of negotiable instruments for deposit, collection, or similar transactions in the ordinary course of business; provided, however, Morgan Group and/or its Subsidiaries may guarantee the debt of Persons in an amount not to exceed, in the aggregate, Five Hundred Thousand Dollars ($500,000.00). Section 6.6. Mergers; Consolidation; Acquisitions. Morgan Group and the Companies (individually or collectively) will not, nor will they allow any Subsidiaries to, merge or consolidate with any Person or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions), all or substantially all of their assets (whether now owned or hereafter acquired). Nor will Morgan Group, or Companies, or any Subsidiaries purchase or otherwise acquire (whether in one transaction or in a series of trans actions) all or substantially all of the assets of any Person (whether through an asset or stock purchase) without prior written consent of Bank. 27 Section 6.7. Consolidated Net Worth. Morgan Group will not permit at any time its Consolidated Net Worth to be less than Twelve Million Five Hundred Thousand Dollars ($12,500,000.00). The required Consolidated Net Worth shall increase quarterly by an amount equal to fifty percent (50%) of Morgan Group's consolidated quarterly positive net earnings beginning with the first quarter end that occurs following execution of this Agreement. The required Consolidated Net Worth shall not decrease below the amount established in the prior quarter even if there is a quarter in which the Morgan Group does not have positive net earnings. The required Consolidated Net Worth shall also be increased by the amount of any equity issued or subordinated debt converted to equity by the Morgan Group over the term of this Revolving Credit Facility Agreement, excluding stock offerings under any of the Morgan Group's or its Subsidiaries' employee benefit plan. Section 6.9. Subordinated Debt. Morgan Group and the Companies (individually or collectively) will not, nor will they allow any Subsidiaries to, make any payment upon outstanding Subordinated Debt, except in such manner and amounts as may be expressly authorized in any subordination agreement presently or hereafter held by the Bank. Section 6.10. Leverage. Morgan Group will not permit its Leverage, on a consolidated basis, to be at any time more than forty-five percent (45%), calculated at closing and quarterly thereafter beginning with the first quarter end that occurs following execution of this Agreement. Section 6.11. Interest Coverage. Morgan Group will not permit its Interest Coverage, on a consolidated basis, to fall below 2.0 to 1.0. This covenant will be measured on a year-to-date basis for fiscal year 1997, until a rolling four-quarter period is established. Section 6.12. Transactions With Affiliates. Morgan Group and the Companies (individually or collectively) will not, nor will they allow any Subsidiary to, enter into any transaction including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate except in the ordinary course of business (or as otherwise allowed herein) and pursuant to the reasonable requirements of the Companies' business and upon terms found by the Board of Directors to be fair and reasonable and no less favorable to the Companies than would obtain in a comparable arm's-length transaction with a Person not an Affiliate. Section 6.13. Name Change. Morgan Group and the Companies (individually or collectively) will not change their name or location without written notification to Bank. Section 6.14. Use of Proceeds. Proceeds from the Loans hereunder shall be used solely for proper corporate purposes. 28 ARTICLE VII. EVENTS OF DEFAULT The occurrence of any one or more of the following events shall constitute an Event of Default under this Agreement: Section 7.1. Principal or Interest. If the Companies fail to pay any installment of principal of or interest on the Note or any other sums of money upon demand or when otherwise due and payable under this Agreement or fail to pay any installment of principal of or interest on any other obligation of Companies to Bank, an Affiliate Bank or Leasing Company when due and payable; or Section 7.2. Misrepresentation. If any representation or warranty made herein by the Companies or in any written statement, certificate, report or financial statement at any time furnished by, or on behalf of, the Companies in connection herewith, is incorrect or misleading in any material respect when made; or Section 7.3. Failure of Performance of this Agreement. If the Companies or the Morgan Group or any Affiliate or Subsidiary fails to perform or observe any covenant or agreement contained in this Agreement, or in any other agreement between Companies and Bank, an Affiliate Bank or Leasing Company other than any sums of money payable, and such failure remains unremedied for ten (10) calendar days after the Bank, Affiliate Bank or Leasing Company shall have given written notice thereof to the Companies; or Section 7.4. Default by Morgan Group. Any action which would constitute a default by Morgan Group in the performance or observation of any covenants, conditions or agreements contained in any agreement entered into by Morgan Group and Bank, an Affiliate Bank or Leasing Company or in any note, guaranty or mortgage or other security instrument signed by Morgan Group and given to Bank, an Affiliate Bank or Leasing Company; or Section 7.5. Default by Morgan Finance. Any action which would constitute a default by Morgan Finance in the performance or observation of any covenants, conditions or agreements contained in any agreement entered into by Morgan Finance and Bank, an Affiliate Bank or Leasing Company or in any note, guaranty or mortgage or other security instrument signed by Morgan Finance and given to Bank, an Affiliate Bank or Leasing Company; or Section 7.6. Cross-Default. If the Companies (or any Guarantor or any Affiliate or Subsidiary): (1) fails to pay any Indebtedness (other than as evidenced by the Note) owing by the Companies (or such Guarantor or any Affiliate or Subsidiary) when due, whether at matur ity, by acceleration, or otherwise; or (2) fails to perform any term, covenant or agreement on their part to be performed under any agreement or instrument (other than the Loan Documents) evidencing, securing or relating to such Indebtedness when required to be performed, or is otherwise in default thereunder, if the effect of such failure is to accelerate, or to permit the holder(s) of such Indebtedness or the trustee(s) under any such agreement or instrument to 29 accelerate, the maturity of such Indebtedness, whether or not such failure shall be waived by such holder(s) or trustee(s); or Section 7.7. Event of Default Under Any Security Agreement. If any Event of Default occurs (with passage of time or service of notice, or both) under the terms of any Security Agreement; or Section 7.8. ERISA. If any of the following events occur: (1) any Plan incurs any "accumulated funding deficiency" (as such term is defined in ERISA) whether waived or not; (2) the Companies engage in any Prohibited Transaction; (3) any Plan is terminated; (4) a trustee is appointed by an appropriate United States district court to administer any Plan; or (5) the PBGC institutes proceedings to terminate any Plan or to appoint a trustee to administer any Plan; or Section 7.9. Guaranty. Failure by any Guarantor to maintain in effect guarantees of all obligations of Companies to Bank, an Affiliate Bank, and Leasing Company, including, but not limited to, obligations under this Agreement, or failure of any Guarantor to deliver to Bank any financial statements or documents required under Section 5.1 hereunder. Section 7.10. Insolvency. If the Companies (or any Guarantor) shall discontinue business or if the Companies or any Guarantor or Subsidiary: (1) is adjudicated bankrupt or insolvent under any law of any existing jurisdiction, domestic or foreign, or ceases, is unable, or admits in writing their inability to pay their debts generally as they mature, or makes a general assignment for the benefit of creditors; (2) applies for, or consents to, the appointment of any receiver, trustee or similar officer for it or for any substantial part of their property, or any such receiver, trustee or similar officer is appointed without the application or consent of the Companies (or such Guarantor or Subsidiary), and such appointment continues thereafter undischarged for a period of thirty (30) days; (3) institutes, or consents to the institution of any bankruptcy, insolvency, reorganization, arrangement, readjustment or debt, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction; (4) any such proceeding is instituted against the Companies (or such Guarantor or Subsidiary) and remains thereafter undismissed for a period of thirty (30) days; or (5) any judgment, writ, warrant of attachment or execution, or similar process is issued or levied against a substantial part of the property of the Companies or any subsidiary (or Guarantor or Subsidiary) and such judgment, writ or similar process is not effectively stayed within thirty (30) days after its issue or levy, or any Guarantor becomes deceased. ARTICLE VIII. REMEDIES UPON DEFAULT Section 8.1. Optional Acceleration. In the event that one or more of the Events of Default set forth in Sections 7.1 through 7.9 above occurs and is not waived by the Bank, then, in any such event, and at any time thereafter, the Bank may, it its option, terminate its commitment to issue any Loan and any Standby Letter of Credit and declare the unpaid 30 principal of, and all accrued interest on, the Note, and any other liabilities hereunder, and all other Indebtedness of the Companies to the Bank forthwith due and payable, whereupon the same will forthwith become due and payable without presentment, demand, protest or other notice of any kind, all of which the Companies hereby expressly waive, anything contained herein or in the Note to the contrary notwithstanding. Section 8.2. Automatic Acceleration. Upon the happening of an Event of Default referred to in Section 7.10 above, the unpaid principal of, and all accrued interest on, the Note, and any other liabilities hereunder and all other Indebtedness of the Companies to the Bank then existing will thereupon become immediately due and payable in full and the commitment, if any, of the Bank to issue Loans or any Standby Letter of Credit, if not previously terminated, will thereupon immediately terminate without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Companies, anything contained herein or in the Note to the contrary notwithstanding. Section 8.3. Right of Setoff; Security. Upon the occurrence of an Event of Default, the Bank has the right, in addition to all other rights and remedies available to it, to set off the unpaid balance of the Note and any other Indebtedness payable to the Bank held by it against any debt owing to the Companies by the Bank or by an Affiliate Bank, including, without limitation, any obligation under a repurchase agreement or any funds held at any time by the Bank or any Affiliate Bank, whether collected or in the process of collection, or in any time or demand deposit account maintained by the Companies at, or evidenced by any certificate of deposit issued by, the Bank or any Affiliate Bank. The Companies hereby grant, pledge, and assign to the Bank a security interest in, or Lien upon, all cash, negotiable instruments, securities, deposit accounts, and other cash equivalents, whether collected or in the process of collection, whether matured or unmatured, now or hereafter in the possession of the Bank or any Affiliate Bank and upon which the Companies have or may hereafter have any claim. The Companies acknowledge and agree that all of the foregoing shall constitute "cash collateral" for purposes of this Agreement. The Companies agree, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in the Note may exercise rights of setoff or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Companies pursuant to this Agreement in the amount of such participation. Section 8.4. No Waiver. The remedies in this Article VIII are in addition to, not in limitation of, any other right, power, privilege or remedy, either in law, in equity, or other wise, to which the Bank may be entitled. No failure or delay on the part of the Bank in exercising any right, power or remedy will operate as a waiver thereof, nor will any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right hereunder. Section 8.5. Waiver of Surety Defenses. Each and every guarantor, surety, endorser, and accommodation party of the obligations contained herein shall be deemed to and shall have 31 irrevocably waived and relinquished (1) the benefit of any and all defenses to enforcement of the Note, any counterclaim, offset or claim in recoupment, based upon contract, arising at equity, or under any state or federal law regarding suretyship or guaranty generally; and (2) any discharge provided in Indiana Code 26-1-3.1-605, or other state or federal statute of similar import. Consistent with this waiver, and not by way of limitation, the person or persons entitled to enforce the Note may, at any time and without notice to any guarantor, surety, endorser or accommodation party of the obligations contained in the Note, (i) extend the maturity date of the Note; (ii) adjust any and all terms of the Note, even if such adjustment materially alters the obligation; (iii) take any action (or not take any action) with respect to any collateral for the Note, including without limitation, releasing or diminishing (intentionally or otherwise) the extent or value of such collateral. Section 8.6. Additional Waivers. Each and every guarantor, surety, endorser, and accommodation party of the obligations contained herein, or in the Note, hereby waives each of the following: (a) presentment, demand and protest, and notice of dishonor, nonpayment or other default with respect to any of the obligations hereunder; (b) any and all defenses, claims and discharges of Companies or any other obligor, except the defense of discharge by payment in full; and, without limiting the generality of the foregoing, will not assert, plead or enforce against the Bank any defense of waiver, release, discharge in bankruptcy, statute of limitations, respondent judicata, statute of frauds, anti-deficiency statute, incapacity, minority, usury, illegality or unenforceability which may be available to the Companies or any setoff available to the Companies or any other person against Bank; and (c) any requirement that Bank take action, realize, institute suit, or exercise or exhaust its rights or remedies against any of the Companies or against any other person or guarantor, or collateral securing and/or guaranteeing all or any part of the obligations, prior to enforcing any rights it has against said guarantor, surety, endorser or accommodation party. (d) the invalidity of any instruments evidencing any obligation hereunder or the disability or legal incapacity of any person in whole or in part, at any time; (e) the fact that the amount or value of any of the property constituting a part of the Collateral, may at any time have been or be incorrectly estimated; (f) the deterioration in market or other values, waste, loss by fire, theft, loss, non- existence or substitution of any property constituting a part of the Collateral; 32 (g) relief from valuation and appraisement laws; and (h) any right that a guarantor, surety, endorser or accommodation party has, or might hereafter have, to recover from any of the Companies the monies that any such guarantor, surety, endorser or accommodation party is obligated to pay to Bank hereunder. Until Bank is paid in full and until no commitment by Bank to provide Loans or financial accommodations hereunder remains, the undersigned will not exercise or enforce, and expressly waives, any right of contribution, reimbursement, indemnification, recourse or subrogation available to the undersigned against any person liable for payment of the obligations hereunder, including, but not limited to, each of the Companies or as to any collateral security therefor. Section 8.7. Information Concerning Financial Conditions of Borrower. Each and every guarantor, surety, endorser and accommodation party of the obligations contained herein acknowledges that it is capable of, and hereby assumes responsibility for keeping informed of the financial conditions of the Companies, and of all other circumstances bearing upon the risk of nonpayment of the obligations that diligent inquiry would reveal, and hereby agree that Bank shall have no duty to advise them of information known to Bank regarding such conditions or any such circumstances. ARTICLE IX. MISCELLANEOUS Section 9.1. Amendments. No waiver of any provision of this Agreement or the Note, or consent to departure therefrom, is effective unless in writing and signed by the Bank. No such consent or waiver extends beyond the particular case and purpose involved. No amendment to this Agreement is effective unless in writing and signed by the Companies and the Bank. Section 9.2. Expenses; Documentary Taxes. The Companies shall pay: (1) all out-of-pocket expenses of the Bank, including, but not limited to, all filing fees and costs related thereto and all legal fees and disbursements of special counsel for the Bank, in connection with the preparation of this Agreement and the related documents; (2) any out-of-pocket expenses of the Bank, including fees and disbursements of special counsel for the Bank related to any waiver or consent hereunder or any amendment hereof or any Event of Default hereunder; and (3) if an Event of Default or Potential Default occurs, all out-of-pocket expenses incurred by the Bank, including reasonable fees and disbursements of counsel, in connection with such Event of Default or Potential Default and collection and other enforcement proceedings result ing therefrom. The Companies shall reimburse the Bank for its payment of all transfer taxes, documentary taxes, assessments or charges made by any governmental authority be reason of the execution and delivery of this Agreement or the Note. Provided, however, nothing contained herein shall be construed as requiring Companies to pay income taxes of Bank incurred as a result of the Revolving Loan relationship. 33 Section 9.3. Indemnification. The Companies shall indemnify and hold the Bank harmless against any and all liabilities, losses, damages, costs, and expenses of any kind (including, without limitation, the reasonable fees and disbursements of counsel in connection with any investigative, administrative or judicial proceeding, whether or not the Bank shall be designated a party thereto) which may be incurred by the Bank relating to or arising out of this Agreement or any actual or proposed use of proceeds of any Loan hereunder; provided, however, that the Bank shall have no right to be indemnified hereunder for its own bad faith or willful misconduct as determined by a court of competent jurisdiction. The Companies further agree to indemnify the Bank against any loss or expense which the Bank may sustain or incur as a consequence of any default by the Companies in payment when due of any amount due hereunder in respect of any Libor Rate Loan, including, but not limited to, any loss of profit, premium or penalty incurred by the Bank in respect of funds borrowed by it for the purpose of making or maintaining any such Loan, as determined by the Bank in the exercise of its sole but reasonable discretion. A certificate as to any such loss or expense shall be promptly submitted by the Bank to the Companies and shall, in the absence of manifest error, be conclusive and binding as to the amount thereof. Section 9.4. Construction. This Agreement and the Note will be governed by and construed in accordance with the laws of the state of Indiana without regard to principles of conflict of laws. The several captions to different sections of this Agreement are inserted for convenience only and shall be ignored in interpreting the provisions hereof. Section 9.5. Extension of Time. Whenever any payment hereunder or under the Note becomes due on a date which the Bank is not open for the transaction of business, such payment will be due on the next succeeding Business Day and such extension of time will be included in computing interest in connection with such payment. Section 9.6. Notices. All written notices, requests or other communications herein provided for must be addressed to the Companies as follows: Morgan Drive Away, Inc. 2746 Old U.S. 20 West Elkhart, IN 46514 Attn: Richard B. DeBoer, Chief Financial Officer TDI, Inc. 10920 East McKinley Osceola, IN 46561-9786 Attn: Richard B. DeBoer, Chief Financial Officer 34 Interstate Indemnity Company 2746 Old U.S. 20 West Elkhart, IN 46514 Attn: Richard B. DeBoer, Chief Financial Officer to the Bank as follows: KeyBank National Association 127 Public Square Cleveland, OH 44114 Attn: Mr. Matthew P. Tuohey, Assistant Vice President Service of all written notices under this Agreement shall be sufficient if hand delivered, or delivered or mailed to the party at its respective address as set forth above or at such address as such party may provide in writing from time to time. Any such notice shall be effective when hand delivered, delivered by overnight carrier or received by United States mail, certified mail, return receipt requested at the address provided herein or at such address designated to the other in writing. Section 9.7. Survival of Agreements; Relationship. All agreements, representations, and warranties made in this Agreement will survive the making of the extension of credit hereunder, and will bind and inure to the benefit of the Companies and the Bank, and their respective successors and assigns; provided, that no subsequent holder of the Note shall by reason of acquiring that Note become obligated to make any Loan hereunder and no successor to or assignee of the Companies may borrow hereunder without the Bank's written assent. The relationship between the Companies and the Bank with respect to this Agreement, the Note and any other Loan Document is and shall be solely that of debtor and creditor, respectively, and the Bank has no fiduciary obligation toward the Companies with respect to any such document or the transactions contemplated thereby. Section 9.8. Severability. If any provision of this Agreement or the Note, or any action taken hereunder, or any application thereof, is for any reason held to be illegal or invalid, such illegality or invalidity shall not affect any other provision of this Agreement or the Note, each of which shall be construed and enforced without reference to such illegal or invalid portion and shall be deemed to be effective or taken in the manner and to the full extent permitted by law. Section 9.9. Entire Agreement. This Agreement, the Note, and any other Loan Document integrate all the terms and conditions mentioned herein or incidental hereto and supersede all oral representations and negotiations and prior writings with respect to the subject matter hereof. 35 Section 9.10. Submission to Jurisdiction; Venue. As part of the consideration for the financial accommodation extended to Companies by Bank, Companies consent to the juris diction of any local, state or federal court located within Elkhart County, Indiana, (or in the case of a federal court, the jurisdiction of which includes Elkhart County, Indiana) and consent that all such service of process be made by registered mail directed to the parties at the address stated in this Agreement and service so made shall be deemed to be completed five (5) days after such mailing. Section 9.11. Jury Trial Waiver. COMPANIES WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, BETWEEN BANK AND COMPANIES ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELA TIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREE MENT OR ANY NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED THERETO. IN WITNESS WHEREOF, the Companies and the Bank have each caused this Agree ment to be executed by their duly authorized officers this 27 day of March, 1997. COMPANIES: MORGAN DRIVE AWAY, INC. By:/s/ Richard B. DeBoer ------------------------------------------ (Signature) Richard B. DeBoer, Chief Financial Officer and Treasurer ------------------------------------------ (Typed or Printed Name and Office) TDI, INC. By:/s/ Richard B. DeBoer ------------------------------------------ (Signature) Richard B. DeBoer, Chief Financial Officer and Treasurer ------------------------------------------ (Typed or Printed Name and Office) INTERSTATE INDEMNITY COMPANY By:/s/ Richard B. DeBoer ------------------------------------------ (Signature) Richard B. DeBoer, Chief Financial Officer and Treasurer ------------------------------------------ (Typed or Printed Name and Office) SIGNATURES CONTINUED ON PAGE 37 36 BANK: KEYBANK NATIONAL ASSOCIATION By:_________________________________________ (Signature) ------------------------------------------ (Typed or Printed Name and Office) The undersigned, The Morgan Group, Inc. represents and warrants that it has read and reviewed this Agreement and that it consents to the execution of this document by Morgan Drive Away, Inc., TDI, Inc., and Interstate Indemnity Company and agrees to be bound by the terms and conditions contained herein. THE MORGAN GROUP, INC.: By:/s/ Richard B. DeBoer ------------------------------------------ (Signature) Richard B. DeBoer, Chief Financial Officer and Treasurer ------------------------------------------ (Typed or Printed Name and Office) 37 LIST OF EXHIBITS TO MORGAN DRIVE AWAY, INC.'S REVOLVING CREDIT FACILITY AGREEMENT Exhibit "A" Promissory Note........................................5 Exhibit "B" Letters of Credit......................................6 Exhibit "C" Opinion Letter........................................22 38 EX-4.5(B) 3 MASTER REVOLVING NOTE MASTER REVOLVING NOTE $10,000,000.00 March 27, 1997 For value received, MORGAN DRIVE AWAY, INC., TDI, INC. and INTERSTATE INDEMNITY COMPANY (the "Companies") promise to pay to the order of KEYBANK NATIONAL ASSOCIATION (the "Bank"), its successors and assigns, on the date or dates and in the manner specified in Article II of the Loan Agreement (as defined below), the sum of Ten Million Dollars ($10,000,000.00) or such amount which may be advanced by Bank under the terms and conditions of the Loan Agreement as shown on any ledger or other record of the Bank, which shall be rebuttably presumptive evidence of the principal amount owing and unpaid on this Note. The Companies promise to pay to the order of the Bank interest at such times as are specified in Article II of the Loan Agreement. This Note is the Master Revolving Note referred to in, and is entitled to the benefits of, the Revolving Credit Facility Agreement by and between the Bank and the Companies to be effective March 27, 1997, as the same may be hereafter amended from time to time (the "Loan Agreement"). This Note may be declared forthwith due and payable in accordance with the terms and conditions of the Loan Agreement which contains provisions for payment upon maturity, and upon demand, and also contains provisions for acceleration upon default. Each defined term used in this Note shall have the meaning ascribed thereto in Section 1.2 of the Loan Agreement. This Note is secured by Security Agreements of even date herewith and any and all security agreements ratified pursuant to the Loan Agreement, Other Collateral Documents, and by any and all collateral securing any obligation of Companies to Bank. As security for the payment of the obligations evidenced by this Note and the other liabilities and obligations of Companies to Bank, however and whenever created or acquired, direct or contingent, which now or after the date of this Note may exist, in addition to all other security for such payment, Companies grant to Bank a continuing lien and security interest in all Companies' personal property, or Companies' interest in personal property, which now is or which may after the date of this Note be in the possession of Bank, and a continuing lien and security interest in Companies' interest in all amounts on deposit at Bank and upon the occurrence of an Event of Default (as that is defined in the Loan Agreement), Bank may apply such property, interests, and/or amounts upon any and all liabilities and obligations of Companies to Bank, without prior notice to Companies. 1 The holder of this Note, in its sole discretion, may renew this Note, accept a renewal note or notes, extend the time for the payment of the indebtedness evidenced by this Note, reduce the payments under this Note, or do any combination of such actions on any number of occasions; provided, however, any such action shall not release the Companies or any endorser, accommodation party or guarantor from any liability on the obligation evidenced by this Note. Companies and any endorser, accommodation party or guarantor of this Note each waive presentment for payment, protest, notice of protest, notice of nonpayment or dishonor of this Note and diligence in the collection of this Note; and each of them consents to any actions by Bank or any holder of this Note as set forth in this paragraph. By signing or guaranteeing this Note, each and every guarantor, surety, endorser, and accommodation party of the obligations contained herein shall be deemed to and shall have irrevocably waived and relinquished (i) the benefit of any and all defenses to enforcement of this Note, any counterclaim, offset or claim in recoupment, based upon contract, arising at equity, or under any state or federal law regarding suretyship or guaranty generally; or (ii) any discharge provided in Indiana Code ss. 26-1-3.1-605, or other state or federal statute of similar import. Consistent with this waiver, and not by way of limitation, the person or persons entitled to enforce this instrument may, at any time and without notice to any guarantor, surety, endorser or accommodation party of the obligations contained in this Note, (i) extend the maturity date of this Note; (ii) adjust any and all terms of this Note, even if such adjustment materially alters the obligation; (iii) take any action (or not take any action) with respect to any collateral for this Note, including without limitation, releasing or diminishing (intentionally or otherwise) the extent or value of such collateral. No failure by Bank to exercise any right under this Note, including any rights resulting from an Event of Default (as that term is defined in the Loan Agreement), shall operate as a waiver or otherwise prevent Bank from exercising any of its rights under this Note at any other time, including the exercise by Bank of any rights at any time during the continuance of such Event of Default or on the occurrence of a subsequent Event of Default. Companies agree that Bank shall be entitled to rely on any written, oral or telephonic communication requesting a financial accommodation under this Note which may be received by Bank from any person reasonably believed by Bank to be an authorized representative of Morgan Drive Away, Inc., TDI, Inc. or Interstate Indemnity Company. Records of Bank shall be deemed by Companies and Bank to be sufficient evidence of credit extended under this Note. This Note and any extensions or renewals of this Note relates to and is subject to all of the terms, conditions, and provisions of the Loan Agreement and any extensions, renewals, modifications or amendments of or to the Loan Agreement; and this Note and any extensions or renewals of this Note is related to any mortgage, pledge, financing statement, guaranty, security agreement and other document required under or related to the Loan Agreement. 2 This Note is made and shall be governed by the laws of the state of Indiana and the Companies consent to the jurisdiction of any local, state or federal court located within Elkhart County, Indiana (or in the case of a federal court, the jurisdiction of which includes Elkhart County, Indiana). IN WITNESS WHEREOF, the Companies have hereunto set their hands by their duly authorized officers on the day and the year first above mentioned. "COMPANIES": Morgan Drive Away, Inc. By:/s/ Richard B. DeBoer ------------------------------------------ (Signature) Richard B. DeBoer, Chief Financial Officer and Treasurer ------------------------------------------ (Typed or Printed Name and Office) TDI, Inc. By:/s/ Richard B. DeBoer ------------------------------------------ (Signature) Richard B. DeBoer, Chief Financial Officer and Treasurer ------------------------------------------ (Typed or Printed Name and Office) Interstate Indemnity Company By:/s/ Richard B. DeBoer ------------------------------------------ (Signature) Richard B. DeBoer, Chief Financial Officer and Treasurer ------------------------------------------ (Typed or Printed Name and Office) 3 EX-4.5(C) 4 SECURITY AGREEMENT Security Agreements in substantially the following form secruing indebtedness under the Master Revolving Note (Exhibit 4.5(b)) have been executed by Morgan Drive Away, Inc. Morgan Finance, Inc., TDI, Inc. and Interstate Indemnity Company. KEYBANK NATIONAL ASSOCIATION MORGAN DRIVE AWAY, INC. SECURITY AGREEMENT THIS SECURITY AGREEMENT ("Agreement") executed and to be effective the 27 day of March, 1997, by MORGAN DRIVE AWAY, INC. ("Company"), whose address is 2746 Old U.S. 20 West, Elkhart, Indiana 46514, to and in favor of KEYBANK NATIONAL ASSOCIATION ("Bank"), whose address is 127 Public Square, Cleveland, Ohio 44114, in consideration of credit extended or to be extended, or financial accommodation given or to be given by Bank to Company, Company agrees with Bank as follows: 1.0 Grant of Security Interest by Company. Company grants to Bank a continu ing security interest in: (a) All of the Company's accounts (the "Accounts"), which term includes, but is not limited to, the Company's accounts, contract rights, notes, drafts, accep tances and other forms of receivables, now existing and all such as may hereafter come into existence and any security held by the Company for any of the foregoing; (b) All of the Company's inventory (the "Inventory"), which term includes, but is not limited to, all goods, merchandise and other personal property now owned and hereafter acquired by the Company, wherever located, which are held for sale or lease or are furnished or to be furnished under a contract of service and/or raw materials, part, finished goods, work in process and materials used or consumed or to be used or consumed in the Company's business, including all contract rights relating to, and documents representing, the above; (c) All of the Company's equipment now owned and hereafter acquired (the "Equipment"), which term includes, but is not limited to, all of the Company's machinery, parts, tools, furniture, and accessories, of whatever name, nature, kind or description and wherever located, together with all attachments, additions and accessions thereto, and added and substituted parts, equipment and repairs now or hereafter placed upon such property, whether because of necessary repairs or otherwise; (d) All of the Company's general intangibles now owned and hereafter acquired (the "General Intangibles"), including, but not limited to, (i) all contracts (whether completed or not); (ii) all judgments, patents, trademarks, trade styles, trade or business names, service marks, bids and proposals, logos, copyrights, trade secrets, engineering reports, plans, blueprints, drafting papers, licenses, permits, tax or other refunds, programs, inventions, models, business or technical data, processes, product formulas, mailing and customer lists, books and records (including research and development costs and records and accounting records), and goodwill; (iii) all rights, 1 applications, continuations, renewals, substitutions, improvements, modifications and extensions in any manner related thereto; and (iv) all proceeds and products thereof, including but not limited to all license royalties and royalty rights, payments made under insurance policies, unliquidated claims, publication rights, and proceeds of infringement suits and any other suits; (e) All monies, credits, documents, instruments, chattel paper and other property of any nature whatsoever of the Company now or hereafter in the possession of, in transit to or from, under the custody or control of, or on deposit with (whether held by the Company individually or jointly with another), the Secured Party or any affiliate of the Secured Party, including but not limited to cash collateral accounts; and (f) The proceeds and products of the foregoing in whatever form the same may be, including, but not limited to, proceeds from insurance policies (including, without limitation, proceeds of credit insurance policies). All of the above property in which a continuing security interest has been granted to Bank by Company is collectively referred to as the "Collateral". 2.0 Indebtedness Secured by Agreement. 2.1 Indebtedness. The continuing security interest granted to Bank by Company in this Agreement is to secure the payment of: All obligations, liabilities and indebtedness of Company to or in favor of Bank of every kind and description, direct or indirect, absolute or contingent, primary or secondary, liquidated or unliquidated, joint, several or joint and several, due or to become due, now existing or hereafter arising, and howsoever evidenced, including, but not limited to, principal, interest, future advances, any duty to act or refrain from acting, and any and all extensions or renewals of all the foregoing, and all costs and expenses incurred by Bank in collecting any of the foregoing and in protecting or enforcing Bank's rights under this Agreement, including reasonable attorneys' fees (the "Indebtedness"). 2.2 Note Legends. Each loan or advance made by Bank to Company to be secured hereby, upon request of Bank, may be evidenced by certain Notes of Company to Bank, and all such notes may bear a legend referring to this Security agreement. The omission of the legend from any note shall not affect its secured status and it shall be secured under this Agreement. 2.3 Payment of Indebtedness. Company agrees to pay all Indebtedness to Bank when due, whether at maturity or by acceleration, all without relief from valua tion and appraisement laws and with the costs and expenses of collection, and reason able attorneys' fees. 3.0 Representations and Warranties of Company. Company represents and warrants to Bank the following, all of which shall survive the execution and delivery of this Agreement and the making of any and all extensions of credit and/or granting of financial accommodations secured by this Agreement. 3.1 Organization and Location. Company is a corporation duly organized, existing and in good standing under the laws of the State of Indiana and is in good standing as a foreign corporation authorized to do business in each jurisdiction where failure to qualify would have a material adverse effect on Company or Company's business, or any adverse effect on Bank's rights or interests under this Agreement. Company's principle place of business and corporate headquarters is at the address indicated for Company at the beginning of this Agreement, and Company has its sole and only place of business at such address or, if Company has more than one place of business, its chief executive office is at such address. 3.2 Authority. Company has incurred the Indebtedness for its business operations, and the Collateral is now or will, when acquired, be only used in such business operations and for no other purpose without the prior written consent of Bank; none of the provisions of this Agreement contravenes or is in conflict with the provisions of any existing loan, loan agreement or other agreement of Company, and Company has taken all necessary action to authorize the Indebtedness, the execution and delivery of this Agreement and all other things, as may be required under this Agreement. 3.3 Financial Information. Subject to any limitations stated in or in con nection with them, all balance sheets, earnings statements and other financial data which have been or may hereafter be furnished to Bank to induce Bank to make extensions of credit and/or financial accommodations to or for the benefit of Company, do and shall fairly represent the financial condition of Company as of the dates indicated and all results of Company's operations for the periods for which they are furnished, and all other information, reports and other papers and data furnished to Bank are or shall be, at the time they are so furnished, accurate and correct in all material respects and complete insofar as completeness may be necessary to give Bank a true and accurate knowledge of the subject matter. There has been no material adverse change, financial or otherwise, in the condition of Company from the period for which such financial data has been provided and the date of this Agreement, except as disclosed in such data provided to Bank. 3.4 No Adverse Litigation or Proceedings. No litigation or proceedings of any governmental body are pending or threatened, to the knowledge of Company 2 against Company, which, if adversely determined, could materially affect the opera tions or properties of Company, or any of the Collateral or the rights or interests of Bank in the Collateral. Company will immediately notify Bank of any litigation or proceedings instituted or threatened after the date of this Agreement. 3.5 Agreement Binding and Enforceable. This Agreement is a legal, valid and binding obligation of Company, enforceable in accordance with its terms. 3.6 Collateral Ownership. Company is the sole owner of all existing Collateral and will be the sole owner of all Collateral hereafter arising or acquired. 3.7 Collateral Free of Lien. Other than the security interests granted by this Agreement and prior security agreements executed by Company in favor of Bank, all existing Collateral and Collateral hereafter arising or acquired is and shall be free and clear of any security interests, liens, encumbrances, claims or rights of others, and Company does and shall warrant and defend the Collateral against any person, firm or entity claiming an interest in the Collateral adverse to the interest of Bank. 3.8 No Conflicting Filing. Other than the filings by First National Bank and Society National Bank, Indiana, predecessors in interest to Bank, no security agree ment, financing statement, or equivalent security or lien document covering all or any part of the Collateral is on file or of record, or will be placed on file or of record, in any public office other than the security interest granted by the Company in favor of Bank. 3.9 Validity of Rights to Payment for Collateral. Each Account and other right of payment to Company is and will be a valid, legal and enforceable obligation of the account debtor or other obligor to Company, is not subject to any agreement in which the account debtor or other obligor may claim a deduction or discount, and the amount represented by Company to Bank from time to time as owing by each account debtor or other obligor or by all account debtors and other obligors with respect to the Accounts and other Rights to Payment will at such time be the correct amount actually and unconditionally owing by such account debtors and other obligors. 3.10 Location and Use of Collateral. All of the records pertaining to the Collateral are and will be kept at the address of Company indicated at the beginning of this Agreement, and Company will not remove any material part of the Collateral without the prior express written consent of Bank: and the Collateral will only be used for the business operations of Company and in a manner not inconsistent with any of the terms of this Agreement. 3 4.0 Agreements of Company. Company covenants and agrees with Bank from and after the date of this Agreement, and until all of the Indebtedness is fully paid and satisfied and this Agreement is terminated in accordance with paragraph 8.10. 4.1 General Protection of Collateral. Company will keep all items of Collateral reasonably protected from the elements and in safe storage places. Company shall not waste or destroy the Collateral or any part of it. Company will comply in all material respects with all rules, regulations, orders, decrees and acts of any governmental authority, and provisions or requirements of all policies of insurance applicable to the Collateral or any part of it, or to Company's operations. 4.2 Records and Inspection. Company will keep and maintain satisfactory, accurate and complete records of the Collateral now existing and hereafter arising or acquired, including a record of all payments received and all credits granted with respect to the Collateral, and all other dealings with the Collateral and Company's operations. Company will permit Bank and its designees from time to time upon reasonable request to inspect the Collateral and to inspect, audit and make copies and extracts of all records and other papers in possession of Company or its accountants or other representatives pertaining to the Collateral and the operations of Company and will, upon request of Bank, deliver all such records and papers to Bank. Company will upon request furnish to Bank such balance sheets, earnings statements and other financial data concerning Company's operations as Bank shall require. Company will immediately notify Bank of any event causing a loss or depreciation in the value of the Collateral and of any event pending or threatened affecting the condition of affairs of Company, financial or otherwise, which if adversely determined, could materially adversely affect Company, the operations of Company or the Collateral or other properties of Company. Bank will endeavor not to interfere unreasonably with Company's business in connection with the inspection of records or Collateral. 4.3 Taxes and Other Claims. Company will promptly pay when due all taxes, assessments and governmental charges or levies imposed on Company, and/or the Collateral or other properties, or with respect to the income and profits from the Collateral or other properties, including, but not limited to, all income, sales and use, withholding, unemployment and other taxes and assessments, and will promptly pay when due all claims for labor, materials, services and supplies, excepting that any such amount need not be paid if the validity is being contested in good faith by Company in appropriate proceedings, and such proceedings do not involve any danger of the sale, forfeiture or loss of any of the Collateral or to the operations of Company, and such amounts have been adequately reserved against in accordance with generally accepted accounting principles or fully bonded. 4.4 Insurance. Company will maintain at all times, with respect to Company, its operations and business and the Collateral, fire, extended, all risk, 4 sprinkler leakage, liability, and other risk coverage customarily insured against by persons, firms and entities in operations and businesses similar to that of Company, such coverages, the amounts, terms, form, period of coverage and insuring companies to be satisfactory to Bank. All policies shall contain appropriate loss payable clauses in favor of Bank as its interests may appear and shall provide that no cancellation of coverage shall be effective until at least thirty (30) days after receipt by Bank of written notice from the insuring companies. Company shall inform Bank of any reductions or changes in coverage. Company shall furnish policies, certificates or other evidence satisfactory to Bank of compliance with these insurance provisions. Any sums received as compensation for loss or damage to the Collateral shall be paid to Bank in partial payment of the Indebtedness or, at Bank's option, any part or all of such payments may be used to restore or repair the damage to the Collateral with respect to which the payments are received. 4.5 Protection of Claims of Bank's Secured Interest. (1) Except for the security interest granted herein, Company will not create, permit or suffer to exist, and will take such action as is necessary to remove, and will defend the Collateral against any security interest, lien, encumbrance, claim or other adverse interest in and to the Collateral against all persons, firms and entities, and will defend the right, title and interest of Bank in and to all the Collateral. (2) Company will advise Bank promptly in reasonable detail of any security interest, lien, encumbrance, claim or other interest made or asserted in or against any of the Collateral, of any material change in the composition of the Collateral, of any change in the state issuing title to motor vehicles which is Collateral or of any other change in the location of Collateral with an aggregate value in excess of Twenty-Five Thousand Dollars ($25,000.00) in any calendar year, or of any occurrence of any other event which would have a material adverse affect on the value of the Collateral, the security interest created in this Agreement, or Company, its operations and business, or other properties. (3) Company will not sell, transfer or otherwise dispose of or enter into any agreement concerning the sale, transfer or other disposition of any asset or assets which in the aggregate total an amount in excess of Twenty-Five Thousand Dollars ($25,000.00) in any calendar year which constitute Collateral without the written consent of Bank. (4) In any suit, proceeding or action brought by Bank under any Account, other right of payment or General Intangible, for any sum owing, Company will save and hold harmless Bank from any and all expense, loss or damage suffered by reason of any defense, set off, counterclaim, or reduction of 5 liability whatsoever of the obligor arising out of a breach by Company of any obligation. (5) Company shall not change its address without prior written notice to Bank. 4.6 Advances by Bank to Protect its Secured Position. Bank may, in its discretion, pay or otherwise discharge taxes, governmental charges, other liens charges and/or encumbrances at any time levied or placed, on or against, any of the Collateral, or on or against Company, its operations or business, or other properties, if Bank determines that such matters could affect the Collateral, or pay or acquire and pay any insurance required under this Agreement, or pay, or procure and pay, any and all costs and expenses for the repair, maintenance and preservation of the Collateral or the other properties of Company. Any and all advances made by Bank for any of these items shall constitute Indebtedness secured by this Agreement and shall bear interest at the same rate as the highest rate provided in any of the notes then outstanding, or if no note is then outstanding but this Agreement has not been terminated as provided in paragraph 8.10, the highest rate permitted by law, and Company shall reimburse and/or pay bank on demand for any payment made, or cost and expense incurred by Bank pursuant to the authorization contained in this paragraph. 4.7 Perfection of Security Interests. (l) Company will, upon request of Bank to secure the payment of the Indebtedness, execute and deliver such financing statements and other documents, including, but not limited to, title to motor vehicles, and pay the reasonable cost of preparation, filing or recording the same, in all public offices deemed necessary by Bank, and do such other acts and things as Bank may, from time to time, request to establish and maintain valid security interests in the Collateral free of all other security interests, encumbrances, liens, claims and rights of third parties whatsoever. (2) Company authorizes Bank to execute and file or record such financing statements or other documents signed only by Bank, as Secured Party, and without the signature of Company in any public office deemed necessary by Bank to perfect or continue the perfection of Bank's security interests in the Collateral. 4.8 Assembly of Collateral. Company agrees to assemble and make avail able the Collateral to Bank at such times and such places as may be reasonably desig nated by Bank. 6 4.9 Processing, Sale and Collections (1) Until such time as Bank shall notify Company of the revocation of such authority, Company may, in the ordinary course of business, at its own expense, sell, lease or furnish under contracts of service, any of the Inventory normally held by Company for such purpose (a sale in the ordinary course of business does not include a transfer in total or partial satisfaction of a debt), and use and consume, in the ordinary course of its business, any raw materials, work in process or materials normally held by it for such purpose: (2) Company will, at its own expense, endeavor to collect, as and when due, all amounts due with respect to any Collateral, including the taking of such action with respect to such collection as Bank may reasonably request or, in the absence of such request, as Company may deem advisable: (3) Company may grant, in the ordinary course of business, to any person purchasing goods from Company ("Account Debtor"), any rebate, refund or adjustment to which such Account Debtor may be lawfully entitled, and may accept the return of goods, the sale or lease of which shall have given rise to the obligation of the Account Debtor: (4) Upon written notice from Bank, Company will upon receipt of all checks, drafts, cash and other remittances in payment of inventory sold or in payment of Accounts Receivable of Company, deposit them in a special collateral account ("Collateral Account") maintained with Bank. Such proceeds shall be deposited in the form received except for the endorsement of Company where required, which endorsement Bank is authorized to make on Company's behalf and shall be held by Bank as security for all Liabilities of Company in favor of Bank; (a) Upon written notice from Bank, Company will deliver to Bank all chattel paper which constitutes proceeds from the sale of Collateral subject to delivery of the proceeds resulting from the sale of such chattel paper which shall be deposited in the Colla teral Account; (b) Company agrees that prior to the time of any deposit or delivery, it will keep segregated any such checks, drafts, cash, chattel paper or other remittances from any of Company's funds or property. Company agrees to hold such checks, drafts, cash, chattel paper or other remittances in trust for the benefit of Bank until delivery or deposit into the Collateral Account. Bank may charge the Collateral Account at any time and, at its sole discre tion, apply the funds in payment of notes executed and delivered by Company pursuant to the provisions of this Agreement, and/or any other Liability of Company in favor of Bank, or upon receipt of a statement duly certified by an authorized officer or agent of Company in the form then specified by or acceptable to Bank, may release funds to the general account of Company. 4.10 Payment to Bank by Account Debtors. Company agrees that Bank may, at any time before or after the maturity of any Indebtedness, notify any Account Debtor to make payment directly to Bank of any amounts due or to become due and enforce the collection of any Account by suit or otherwise and surrender, release or exchange all or any part, or compromise or extend or renew for any period (whether or not longer than the original period) any Indebtedness under or evidenced by any Account. 4.11 Noting Security Interest of Bank on Company's Records. Company will, if requested by Bank, note the security interest of Bank on all records relating to the Collateral. 5.0 Events of Default. Company will be in default under this Agreement upon the occurrence of any of the following events or conditions, each of which shall constitute an event of default ("Event of Default"): 5.1 Default on Indebtedness. Default in the payment or performance, when due or payable of any Indebtedness of Company, or of any accommodation party, endorser, guarantor, or surety for any Indebtedness of Company to Bank. 5.2 Default on this or other Agreement. Default under any provision in this Agreement, or in any loan agreement, mortgage, security agreement, guaranty or other instrument or document executed by Company or any accommodation party, endorser, guarantor or surety of any liability of Company to Bank which is not cured or as to which Company has not taken actions satisfactory to Bank within ten (10) days after written notice of such default. 5.4 Misrepresentation or False or Misleading Information. The making by Company of any misrepresentation to Bank for the purpose of obtaining credit or an extension of credit or inducing Bank to take any action or refrain from any action or the furnishing of any financial information to Bank which is false or misleading in any material respect. 5.5 Failure to Furnish Financial Information or Allow Inspection. Failure of Company after reasonable request by Bank to furnish financial information or to permit the inspection of books and records and/or Collateral. 7 5.6 Injunction or Attachment. Issuance of an injunction against Company or property of Company, or attachment, levy or seizure against property of Company. 5.7 Creditors' Proceedings. Calling of a meeting of creditors, appointment of a committee of creditors or liquidating agents, offering of a composition or extension to creditors by, for or of Company. 5.8 Insolvency. Insolvency of Company, of any endorser, guarantor or surety for any Indebtedness of Company to Bank or of the grantor of any collateral security for any Indebtedness of Company to Bank. 5.9 Change Respecting Company or Others. Such a change in the condition or affairs (financial or otherwise) of Company, of any endorser, guarantor or surety for any Indebtedness of Company to Bank or of the grantor of any collateral security for any Indebtedness of Company to Bank, as in the opinion of Bank impairs Bank's security or increases its risk. 5.10 Change respecting Collateral. An agreement to or a sale, transfer or use, or an attempted sale, transfer or use, of the Collateral, in contravention of this Agreement: loss, theft, substantial damage, destruction, encumbrance or granting any security interest in the Collateral without the consent of Bank: and the filing of any suit for the purpose of or the making of any attachment, levy or seizure of any of the Collateral. 5.11 Insecurity of Bank. Bank reasonably deems itself insecure for any reason whatsoever. 6.0 Rights and Remedies of Bank. In the Event of Default, Bank shall have all the rights and remedies permitted under the Uniform Commercial Code of Indiana and in effect in each jurisdiction in which Collateral is located, permitted under other laws and authorized under this Agreement, and without limitation of other rights and remedies, the following: 6.1 Accelerate Indebtedness. Bank may, without notice or demand, at Bank's option and notwithstanding any time or credit allowed by an instrument evidencing an Indebtedness, accelerate and declare the entire unpaid balance of any and all Indebtedness immediately due and payable. 6.2 Take Possession of Collateral. Bank may take possession of the Colla teral and, for that purpose, Bank may enter in or on to any premises on which the Collateral or any part of it may be situated and remove the Collateral or store it on such premises, and if such premises are owned by Company, Bank shall have the right to store any of the Collateral for a reasonable period of time rent-free. If Bank stores Collateral on any premises owned by Company, Bank may segregate such Collateral, 8 lock buildings and do whatever else may be necessary for the preservation or protection of the Collateral, or Bank's rights. 6.3 Require Collateral to be Made Available. Bank may require Company to make the Collateral available to Bank at a place to be designated by Bank that is reasonably convenient to Bank and Company. 6.4 Preservation of Collateral. Bank may, but in no way is obligated to, take steps to preserve rights in the Collateral against any third party. 6.5 Use of Collateral while in Bank's Possession. When in possession of the Collateral, Bank may use it for any purpose or in any manner or cause it to lose its identity without an obligation to account for such use, except when used for a purpose not connected with performing Company's obligations with respect to it, preservation or disposal of the Collateral unless otherwise authorized by law. Bank may use, without charge, any and all equipment, machinery or appliances necessary to unload and remove any Collateral from storage facilities in the event that the removal of the Collateral is necessary for purposes of repossession by Bank to realize on Bank's security interest. The standard of care imposed upon Bank as to the use of the Collateral in its possession is that of a prudent person without any special skill or knowledge. 6.6 Collection of Collateral. Bank may: (1) Notify any party liable for payment under any Account, Right of Payment, General Intangible, Miscellaneous Property in possession or control of Bank, or Proceeds, including insurance and tort claims, and ask, demand, collect, receive and give acquittances and receipts to such party for any and all monies due or to become due under any such Collateral. (2) Bank may, in the name of Company or in Bank's name or otherwise, take possession of, endorse and collect all checks, drafts, notes, cash and other remittances due under any Collateral. (3) Bank may commence and prosecute any suits, actions or other proceedings to collect any part or all of the Collateral or to enforce any other rights with respect to the Collateral: defend any suit brought against Company with respect to any Collateral: settle, compromise or adjust any such suit, action or proceeding, and give such discharges and releases as Bank may deem appropriate: sell, transfer, pledge (including executing instruments and other documents), make any agreement with respect to, or otherwise deal, with any of the Collateral as fully and completely as though the Bank was the owner for all purposes: and generally do all acts and things which Bank deems appropriate to 9 protect, preserve, collect and/or realize upon the Collateral and the security interests granted by this Agreement, all as fully and effectively as the Company might do. In connection with the exercise of all these rights and remedies, Company, as a power coupled with an interest, irrevocably appoints Bank as its attorney in fact to exercise any and all rights described in this paragraph 6.6. 6.7 Disposition of Collateral on Credit. Bank disposing of Collateral may dispose of it upon credit secured by a security interest in the Collateral taken from the purchaser. Such disposal may be upon such terms and under such a form of security agreement as is customarily employed in such purchases. Bank shall continue to hold a security interest in the proceeds, including cash and non-cash proceeds of the sale, as Proceeds of the Collateral covered by this Agreement. 6.8 Sale of Collateral. Unless the Collateral is perishable, threatens to decline speedily in value or of a type customarily sold on a recognized market, Bank shall give Company at least ten (10) days prior written notice of the time and place of any public sale or of the time after which any private sale or other intended disposition is to be made. Bank may sell any of the Collateral, at public or private sales, or a combination, for cash or on credit as a unit or in lots. The order of sale of times in lots shall be as Bank shall determine. Bank may become purchaser at any sale. 6.9 Expenses Incurred in Connection with a Sale of Collateral. Expenses of retaking, holding, preparing for sale, selling or the like shall include Bank's costs, expenses and reasonable attorneys' fees which are secured under this Agreement and all such expenses shall be first paid out of the proceeds of any disposition of Collateral. 6.10 Deficiency. Company will pay to Bank upon demand any deficiency on the Indebtedness remaining after any disposition of the Collateral and the application of the proceeds to the expenses described in paragraph 6.9 and in partial satisfaction of the Indebtedness. 6.11 Remedies Cumulative. All remedies, to the full extent provided by law, shall be cumulative. Pursuit by the Bank of its judicial or other remedies with respect to part of all of the Indebtedness shall not abate or bar its judicial and other remedies with respect to the Collateral or other portions of the Indebtedness, and pursuit by Bank of its judicial or other remedies with respect to part or all of the Collateral shall not bar its judicial and other remedies with respect to the Indebtedness or other portions of the Collateral. 7.0 Deposits. Any and all deposits of other sums at any time credited by or due from Bank to Company shall at all times constitute security for any and all Indebtedness and Bank may apply or set off such deposits or other sums against Indebtedness at any time 10 whether or not the Indebtedness is then due or other Collateral is considered by Bank to be adequate. 8.0 General. 8.1 Waivers by Company. Company waives notice of acceptance of this Agreement, presentment, demand, notice of dishonor and protest of any Indebtedness or under this Agreement, notice of loans made or credit extended, Collateral received or delivered or other action taken in reliance on this Agreement, and all other demands and notices of any description whatsoever. With respect to both the Indebtedness and the Collateral, Company assents to any and all extensions, renewals or postponements of the time of payment or any other indulgence, to any substitutions, exchanges, or releases of Collateral, to the additions or releases of any party or person primarily or secondarily liable, to the acceptance of partial payments and the settlement, compromising or adjusting of any of them, all in such manner and at such time or times as Bank may deem advisable. A Company who is or becomes an accommodation party, surety, guarantor or endorser or other person whose obligation is conditioned upon this Agreement waives any requirement of notice of acceptance and defenses arising from releases of, extensions of time to, renewals and alterations of the contract with the principal; from lack of presentment, demand, notice, notice of dishonor and protest of any Indebtedness or under this Agreement: from failure of Bank to proceed with diligence against the principal after notice or under any requirement of law; and from releases of Collateral or other security. 8.2 Company not Released. No transfers, renewals, extensions or assign ments of this Agreement or the Indebtedness, or any interest thereunder, and no loss, damage or destruction of the Collateral, and no taking of security in other Collateral shall release Company from this Agreement or the Indebtedness secured under this Agreement. 8.3 Waivers of Default by Bank. No waiver of any default by Bank shall be effective, unless in writing, nor shall any such waiver operate as a waiver of any other default or of the same default on a future occasion. 8.4 Delays by Bank. No delay on the part of Bank in the exercise of any right or remedy shall operate as a waiver, and no single or partial release by Bank of any right or remedy shall preclude other or further exercise or the exercise of any other right or remedy. 8.5 No Duty of Bank to Act on Collateral. Bank shall have no duty: (1) To take possession of any of the Collateral or to take any action for the care, preservation, protection or insurance of any of the Collateral: 11 (2) To collect, foreclose on or otherwise realize on the Collateral; or (3) To collect, foreclose on or otherwise realize on the Collateral in any particular manner, in any particular sequence or at all. 8.6 Limitations on the Care, Preservation and Protection of Collateral. Bank shall be deemed to have exercised reasonable care in the care, preservation and protection of any of the Collateral in Bank's possession if it takes action for that purpose as Company requests in writing, but failure of Bank to comply with any such request shall not be deemed a failure to exercise reasonable care, and no failure of Bank to preserve or protect any rights with respect to such Collateral against prior or subsequent parties, or to do any act with respect to the care, preservation or protection of such Collateral not reasonably requested by Company as provided in this paragraph shall be deemed a failure to exercise reasonable care in the care, preservation or protection of such Collateral. 8.7 Notices. Any demand upon or notice to Company that Bank may elect to give shall be effective if personally delivered: sent by ordinary mail, certified or registered mail; transmitted by telegraph, wireless or radio company and/or sent by overnight courier addressed to Company at the address identified at the beginning of this Agreement as Company's address or, if Company has notified Bank in writing of a change of address noted in its records, to Company's last address so notified. Demands or notices addressed to Company's address at which Bank customarily communicates with Company shall also be effective. Notices and demands of Bank to Company shall be effective upon their personal delivery, mailing, transmission, or delivery to an overnight courier, as the case may be, whether or not actually received by Company. 8.8 Joint and Several Obligation of Company. If there is more than one company, the obligations of each and every company under this Agreement are joint and several. 8.9 Transfers of Indebtedness or Collateral. If at any time or times by assignment or otherwise Bank transfers any part of the Indebtedness or Collateral, such transfer shall carry with it the Bank's power and rights under this Agreement with respect to the part of the Indebtedness or Collateral transferred and the transferee shall become vested with such powers and rights whether or not they are specifically referred to in the transfer. If and to the extent Bank retains any other part of the Indebtedness or Collateral, Bank will continue to have the rights and powers in this Agreement set forth by Company with respect to the same. 8.10 Termination by Company and Effect. Provided that all Indebtedness secured under this Agreement shall have been paid in full and there shall be no commitments by Bank to extend credit or grant financial accommodation to be secured 12 by this Agreement, whether to Company or any other party whose Indebtedness is to be secured by this Agreement, Company may terminate this Agreement and the security interest in the Collateral granted by this Agreement, by giving written notice to Bank, actually received by Bank and acknowledged in writing by an officer of Bank, that Company is terminating this Agreement. Otherwise, even though no Indebtedness is outstanding at the time, this Agreement shall continue in full force and effect to secure credit which may be extended or financial accommodations which may be given by Bank to Company. No notice of termination shall in any way effect this Agreement or any transactions entered into, Indebtedness incurred by Company, or rights and powers created in favor of Bank prior to the receipt of notice of termination given in accordance with this subparagraph. 8.11 Meaning of the Term Insolvency. "Insolvency" of Company, or any other person or entity, means that there shall have occurred with' respect to Company, or such person or entity, one or more of the following events: death, dissolution, termination of existence, insolvency, inability to pay debts as they come due, business failure, appointment of a receiver of any part of the property of, assignment for the benefit of creditors by, or the filing of a petition in bankruptcy or the commencement of any proceedings under any bankruptcy or insolvency laws, or any laws relating to the relief of debtors, readjustment of Indebtedness, reorganization, composition, or extension, by or against, Company, or such person or entity. 8.12 Titles in Agreement. Titles of the several paragraphs and subparagraphs of this Agreement are for convenience of reference only and do not have any substantial effect or limit the contents of such paragraphs. 8.13 Participations. Company consents to the assignment or granting of participation interests in all or part of the Indebtedness and the Collateral. 8.14 Form of Words. When applicable, use of the singular form of any word shall also mean or apply to the plural, and the masculine form shall mean and apply to the feminine or the neuter. 8.15 Severability of Agreement. If and to the extent that applicable law confers any rights or imposes any duties inconsistent with or in addition to any of the provisions of this Agreement, the affected provisions shall be amended to conform to such law, and if any provision of this Agreement shall be invalidated, all other provi sions shall remain in full force and effect. 8.16 Successors and Assigns. All rights of Bank shall inure to the benefit of its successors and assigns, and obligations of Company shall bind the Company's successors and assigns. 13 8.17 Governing Law. This Agreement and all rights and obligations under it, including matters of construction, value and performance, shall be governed by the Uniform Commercial Code, as amended from time to time, in effect in the State of Indiana and by other applicable laws of the State of Indiana. EXECUTED AND DELIVERED by Company and Bank to be effective as of the date first written above. COMPANY: Morgan Drive Away, Inc. By:/s/ Richard B. DeBoer ------------------------------------------ (Signature) Richard B. DeBoer, Chief Financial Officer and Treasurer ------------------------------------------ (Typed or Printed Name and Office) BANK: KeyBank National Association By:_________________________________________ (Signature) ------------------------------------------ (Typed or Printed Name and Office) 14 EX-4.5(D) 5 ABSOLUTE, UNCONDITIONAL AND CONTINUING GUARANTY Guaranties in substantially the following form respecting the indebtedness of Morgan Drive Away, Inc., TDI, Inc. and Interstate Indemnity Company, have been provided by The Morgan Group, Inc., and Morgan Finance, Inc., as well as by Morgan Drive Away, Inc. (respecting indebtedness of Morgan Drive Away, Inc. and Interstate Indemnity Company. ABSOLUTE, UNCONDITIONAL AND CONTINUING GUARANTY THIS ABSOLUTE, UNCONDITIONAL AND CONTINUING GUARANTY ("Guaranty") is made and entered into, to be effective the 27th day of March, 1997, by THE MORGAN GROUP, INC., a Delaware corporation, whose address is 2746 Old U.S. 20 West, Elkhart, Indiana 46514 ("Guarantor"), to and in favor of KEYBANK NATIONAL ASSOCIATION, 127 Public Square, Cleveland, Ohio 44114, and any Affiliate Bank (which shall hereinafter be referred to individually or collectively as "Bank"). RECITALS A. Morgan Drive Away, Inc., an Indiana corporation with an address at 2746 Old U.S. 20 West, Elkhart, Indiana 46514 ("Morgan"), is a wholly-owned subsidiary of The Morgan Group, Inc. ("Guarantor"). B. Morgan has and shall become liable and indebted to Bank. C. Morgan shall hereinafter be referred to as "Borrower." D. "Affiliate Bank" shall mean any one or more bank subsidiaries of KeyCorp and its successors. E. As a condition to the loans, extensions of credit and/or other financial accommodations made by Bank to Borrower concurrently with the delivery of this Guaranty, and as a condition to any loans, extensions of credit and/or other financial accommodations made by Bank to Borrower from time to time hereafter, Bank requires that Guarantor guarantee on an absolute, unconditional and continuing basis the payment of all of the present and future liabilities and indebtedness of Borrower to Bank. F. Guarantor expects to derive an economic benefit from any loans, extensions of credit and/or other financial accommodations made by Bank to Borrower, and in consideration of such expected benefit and to induce Bank to make loans, extend credit and/or make other financial accommodations to Borrower, Guarantor is willing to guarantee all such liabilities and indebtedness of Borrower to Bank. NOW, THEREFORE, for value received and as an inducement for and in consideration of the loans, extensions of credit and/or other financial accommodations made by Bank to Borrower concurrently with the delivery of this Guaranty, and of other loans, other extensions of credit and/or other financial accommodations to Borrower which Bank, at its sole option and subject to its credit policies and practices, may grant to Borrower from time to time hereafter, Guarantor does now hereby agree to and for the benefit of Bank as follows: 1 AGREEMENT ARTICLE 1. Inclusion of Recitals The Recitals above set forth are a part of this Guaranty for all purposes. ARTICLE 2. Statement of Guaranty Section 2.1. Liabilities and Indebtedness Guaranteed. Guarantor guarantees, on an absolute, unconditional and continuing basis, the full and prompt payment when due, whether by lapse of time or acceleration, of each one and all of the existing and future loans, extensions of credit and/or other financial accommodations of every kind and type whatsoever, now or hereafter owing by Borrower to Bank including, but not limited to, the following: 1. all loans, and extensions of credit and other financial accommodations previously, currently or hereafter made by Bank to Borrower and any and all extensions or renewals of them; and 2. all other obligations, liabilities and indebtedness of Borrower to and in favor of Bank, direct or indirect, absolute or contingent, now existing or hereafter arising, of every kind and type whatsoever and however evidenced (including, but not limited to, all existing and future loans, advances, indebtednesses, liabilities, guarantees of the obligations of others, and obligations to reimburse payments made under letters of credit), whether secured or unsecured; (the "Guaranteed Obligations"). Section 2.2. No Limitation. No act or thing need occur to establish the liability of the undersigned hereunder, and no act or thing, except full payment and discharge of all Indebtedness, shall in any way exonerate the undersigned or modify, reduce, limit or release the liability of the undersigned hereunder. Section 2.3. Absolute, Unconditional and Continuing. The liabilities of Guarantor under this Guaranty are absolute, unconditional and continuing, and irrespective of the regularity of any writing, document or instrument evidencing any of the Guaranteed Obligations; and, to the extent any Guaranteed Obligations are secured, irrespective of the validity, regularity or enforceability of any writing, document or instrument evidencing such security for the Guaran teed Obligations; and irrespective of the value of the security itself. 2 Section 2.4. Severable. This Guaranty may be enforced from time to time as to any part or all of the Guaranteed Obligations, and the enforcement of this Guaranty as to part of the Guaranteed Obligations shall not terminate or eliminate in any manner the liabilities of Guarantor for the other Guaranteed Obligations. ARTICLE 3. Payment by Guarantor Section 3.1. Default. If the Borrower should fail at any time fully and promptly to pay when due, whether by lapse of time or acceleration, all or any part of the Guaranteed Obligations, Guarantor, upon written demand by Bank, will immediately pay such Guaranteed Obligations to Bank in the same manner as if such Guaranteed Obligations constituted the direct and primary obligation or obligations of Guarantor to Bank. Section 3.2. Notice. The written demand of Bank for payment of the Guaranteed Obligations, or any of the Guaranteed Obligations, shall be given in writing and personally delivered to Guarantor, or sent by telegraph, facsimile transmission, or overnight courier, or by U.S. Mail, postage prepaid, Registered or Certified, Return Receipt Requested, to the Guarantor's address set forth above in this Guaranty. If there is any address change, Bank shall be notified by Guarantor in writing, and until such notice is received by Bank, Bank may rely upon the above address. Section 3.3. Obligation of Guarantor. Bank is not required, prior to the enforcement of the Guaranty, to take any action or realize against the Borrower or against any other persons, guarantors or collateral, guaranteeing or securing any of the Guaranteed Obligations. Section 3.4. Valuation and Appraisement Laws. The liability of Guarantor with respect to the Guaranteed Obligations in all cases shall be without relief from valuation and appraisement laws. ARTICLE 4. Waiver by Guarantor Section 4.1. Waiver. Guarantor hereby waives each of the following: 1. notice of acceptance of this Guaranty, of each and every loan, extension of credit, or other financial accommodation by Bank (including extensions or renewals) to Borrower, and of the amount or nature of the Guaranteed Obligations which may exist from time to time; 3 2. presentment, demand and protest, and notice of dishonor, non-payment or other default with respect to any of the Guaranteed Obligations; 3. any and all defenses, claims and discharges of Borrower or any other obligor, pertaining to the Guaranteed Obligations, except the defense of discharge by payment by Guarantor in full; and, without limiting the generality of the foregoing, the Guarantor will not assert, plead or enforce against the Bank any defense of waiver, release, discharge in bankruptcy, statute of limitations, res judicata, statute of frauds, anti-deficiency statute, fraud, incapacity, minority, usury, illegality or unenforceability which may be available to the Borrower or any other person liable with respect to any Guaranteed Obligations, or any setoff available to the Borrower or any other person against Bank; and Guarantor waives any and all claims or rights to assert claims of discharge under I.C. 26- 1-3.1-605; 4. any requirement that Bank take action, realize, institute suit, or exercise or exhaust its rights or remedies against the Borrower or against any other person or guarantor, or collateral securing and/or guaranteeing all or any part of the Guaranteed Obligations [the obligations of any such other person or guarantor, and any such collateral are referred to as ("Collateral")], prior to enforcing any rights it has under this Guaranty or otherwise against Guarantor; 5. the invalidity of any instruments evidencing Guaranteed Obligations or the disability or legal incapacity of any person in whole or in part, at any time; 6. the fact that the amount or value of any of the property constituting a part of the Collateral, may at any time have been or be incorrectly estimated; 7. the deterioration in market or other values, waste, loss by fire, theft, loss, non- existence or substitution of any property constituting a part of the Collateral; 8. relief from valuation and appraisement laws; and 9. any right that Guarantor has, or might hereafter have, to recover from the Borrower the monies that Guarantor is obligated to pay to Bank hereunder. The undersigned will not exercise or enforce, and expressly waives, any right of contribution, reimbursement, indemnification, recourse or subrogation available to the undersigned against any person liable for payment of the Indebtedness, including, but not limited to, the Borrower, or as to any collateral security therefor. 4 Section 4.2. Failure of Bank to Act. The failure of Bank or any other persons to take any of the actions authorized in this Guaranty, or the existence of any conditions, waived above, shall in no way affect or release the obligations of the Guarantor under this Guaranty. ARTICLE 5. Rights of Bank Section 5.1. Rights of Bank with Respect to the Obligations Guaranteed. Bank shall have the right, without releasing Guarantor from its liabilities hereunder and without notice to the Guarantor, to deal in any manner with any of the Guaranteed Obligations or the Collateral including, but not limited to, the following rights: 1. to, on any number of occasions, modify or otherwise change any terms or alter any part of the Guaranteed Obligations, including, but not limited to, changing the rate of interest, or affecting any release, compromise or settlement; 2. to extend or renew any or all of the Guaranteed Obligations on any number of occasions and to forbear to take steps to enforce the payment of all or any part of them against Borrower; 3. to obtain Collateral or to not obtain Collateral (including rights of setoff), to release or to forbear to proceed against all or any part of the Collateral, or to substitute any new Collateral for any existing Collateral; 4. to apply payments received from Borrower, from Guarantor, from others or from realization upon any Collateral in such manner and order in priority as Bank sees fit; 5. to make any election against the Borrower or the Collateral under the United States Bankruptcy Code, as amended; 6. to add or release any other guarantor, surety, endorser or accommodation party whether primarily or secondarily liable, to proceed against all or any one or none of such persons or entities, to accept partial payments from them and to settle, compromise or adjust with any of them, all in such manner and at such time or times as Bank may deem advisable; and 7. to assign or grant participation interests in all or part of the Guaranteed Obligations. Section 5.2. Guarantor not Released or Discharged by Bank's Acts or Omissions. The obligations of Guarantor hereunder shall not be released, discharged, or affected in any way, 5 nor shall Guarantor have any recourse against Bank by reason of any action which Bank may take or omit to take under this Guaranty or otherwise with respect to the Guaranteed Obligations or the Collateral. Guarantor expressly agrees that Guarantor shall be and remain liable for any deficiency remaining after the foreclosure of any mortgage, security interest or other property interest securing the Guaranteed Obligations, whether or not the liability of the Borrower or any other obligor for such deficiency is discharged pursuant to statute or judicial decision. Section 5.3. Guaranty Extends to Amounts Applied on Obligation and Then Returned. If any payment applied by Bank to the Guaranteed Obligations is set aside, recovered, rescinded or required to be returned for any reason (including, without limitation, the bankruptcy, insolvency or reorganization of the Borrower or any other obligor), the Guaranteed Obligations to which such payment was applied shall for the purposes of this Guaranty be deemed to have continued in existence, notwithstanding such application, and this Guaranty shall be enforceable as to such Guaranteed Obligations as fully as if such application had never been made and notwithstanding the fact that prior to such payment being so set aside, recovered, rescinded or required to be returned, the Guarantor shall have terminated this Guaranty under Section 6.2 below. Section 5.4. Assignment. The Bank may, without any notice whatsoever to Guarantor or to the Borrower, sell, assign or transfer the Guaranteed Obligations and any Collateral, or any part of them, and any part or all of this Guaranty, and, in such event, each and every immediate and successive assignee, transferee or holder of all or any part of the Guaranteed Obligations and Guaranty, shall have the right to enforce this Guaranty (to the extent so sold, assigned, transferred) by suit or otherwise for the benefit of such assignee, transferee or holder, as if such assignee, transferee or holder were by name specifically given such rights, powers and benefits; but the Bank shall continue to have the unimpaired and absolute right to enforce this Guaranty, for its own benefit, as to so much of the Guaranteed Obligations owed it that the Bank shall not have sold, assigned or transferred. ARTICLE 6. Termination Section 6.1. Guaranty is Continuing until Full Payment. This Guaranty shall be on a continuing basis and shall remain in full force and effect until all Guaranteed Obligations are paid in full and termination is accomplished in accordance with the provisions of paragraph 6.2 below. Section 6.2. Termination. Guarantor may terminate Guarantor's obligation as to payment of future obligations of the Borrower to Bank (excepting, however, those with respect to which there is an outstanding commitment or agreement on the part of Bank to make further loans or advances), by delivering to an officer of Bank, at the offices of Bank, during banking hours, 6 written notice of termination signed by the Guarantor, and by receiving from such officer written acknowledgment of such delivery. Any such termination shall be effective on the next banking day of Bank following such written acknowledgment of delivery. Section 6.3. Termination not Effective for Obligations Existing at Time of Termination. Termination of this Guaranty under Section 6.2 above shall have no affect whatsoever on the obligations of the Guarantor to pay Guaranteed Obligations existing at the time of termination whether or not they are then due, nor shall such termination have any affect whatsoever on any extensions or renewals of such existing Guaranteed Obligations which are effectuated after such termination. Termination of this Guaranty under Section 6.2 above shall also have no affect whatsoever on the obligations of Guarantor to pay Guaranteed Obligations which spring from commitments or agreements on the part of Bank which were outstanding at the time of the termination. Section 6.4. Guaranty not Terminated because Borrower is not Indebted to Bank. This Guaranty shall not be terminated by virtue of the fact that at any time hereafter the Borrower is not indebted to Bank at any such time, unless termination is accomplished in accordance with Section 6.2 above. ARTICLE 7. Miscellaneous Section 7.1. Insolvency of Borrower does not Discharge Guarantor. This Guaranty shall not be discharged by the dissolution or insolvency (however defined) of the Borrower. Section 7.2. Dissolution or Insolvency of Guarantor. If Guarantor shall be dissolved or shall become insolvent (however defined) then Bank shall have the right to declare immediately due and payable, and Guarantor shall forthwith pay to Bank, the full amount of all Guaranteed Obligations, whether or not they are otherwise due and payable, and if the Guarantor voluntarily commences or there is commenced involuntarily against the Guarantor a case under the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency statute or law, the full amount of all Guaranteed Obligations, whether or not they are otherwise due and payable, shall be immediately due and payable to Bank without demand or notice. Section 7.3. This Agreement is not a Suretyship. This is an agreement of guaranty, not of suretyship. Section 7.4. Representations and Warranties of Guarantor. Guarantor represents and warrants to Bank that: 1. Guarantor is a corporation duly organized and existing in good standing and has full power and authority to make and deliver this Guaranty. 7 2. The execution, delivery and performance of this Guaranty by Guarantor has been duly authorized by all necessary actions of its officers, directors and share holders and do not and will not violate the provisions of, or constitute a default under, any presently applicable law or its Articles of Incorporation or By-Laws, or any agreement presently binding upon the Guarantor. 3. This Guaranty has been duly executed and delivered by the authorized officers of Guarantor and constitutes Guarantor's lawful, binding and legally enforceable obligation. 4. The authorization, execution, delivery and performance of this Guaranty do not require notification to, registration with, or consent or approval by any federal, state, local or foreign regulatory body or administrative agency. 5. All financial data provided to the Bank by Guarantor in connection with the execution of this Guaranty are true and accurate and are not materially misleading. Section 7.5. Representation and Warranty of Economic Benefit Derived by Guarantor. Guarantor represents and warrants to Bank that Guarantor has a direct and substantial economic interest in Borrower and expects to derive substantial business, economic and other benefits from any loans, extension of credit and/or other financial accommodations which result in the creation of Guaranteed Obligations, and this Guaranty is given for a corporate purpose. Guarantor agrees to rely exclusively on the right to terminate this Guaranty in accordance with the provisions of Section 6.2 above, if at any time, in the opinion of the officers, directors or shareholders of Guarantor, the corporate benefits then being received by the Guarantor in connection with this Guaranty are not sufficient to warrant the continuance of this Guaranty as to future Guaranteed Obligations. Section 7.6. Bank may Refuse to Loan. This Guaranty shall not in any way prevent the Bank from refusing to loan any additional sums, or extend additional credit, or make any other additional financial accommodations to the Borrower at any time from and after the date of this Guaranty, and any such refusal by the Bank shall not terminate this Guaranty nor diminish or discharge any liability of the Guarantor. Section 7.7. Severability of Provisions. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall be ineffective to the extent of such prohibition or unenforceability without affecting the validity or enforceability of such provision in any other jurisdiction, and without affecting the validity or enforceability of the remaining provisions of this Guaranty in any jurisdiction. 8 Section 7.8. Writing Requirement. This Guaranty may not be modified, amended, or otherwise changed except by a writing signed by Guarantor and Bank. Section 7.9. Governing Law. Guarantor agrees that for all purposes this Guaranty shall be considered to have been executed and delivered at Elkhart, Indiana, and that it shall be governed, interpreted and construed in accordance with the internal laws (and not the law of conflicts) of the state of Indiana. Section 7.10. Successors and Assigns. This Guaranty is binding upon Guarantor, and Guarantor's successors and assigns, and shall inure to the benefit of Bank, and its successors and assigns. Section 7.11. Merger Clause. This instrument is the final, complete and exclusive statement of the agreement between the Bank and the Guarantor with respect to Guarantor's guaranty of the payment of the Guaranteed Obligations, and all prior negotiations, representations, promises and conditions related thereto are merged into this instrument. Section 7.12. Information Concerning Financial Conditions of Borrower. Guarantor acknowledges that it is capable of, and hereby assumes responsibility for keeping informed of the financial conditions of Borrower, any and all endorsers and any and all guarantors of the Guaranteed Obligations and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations that diligent inquiry would reveal, and Guarantor hereby agrees that Bank shall have no duty to advise Guarantor of information known to Bank regarding such conditions or any such circumstances. Section 7.13. Headings. Article and Section headings in this Guaranty are inserted for convenience only. They shall not be considered part of this Guaranty, they shall not affect the construction or interpretation hereof, and they shall not define or limit any of the terms or provisions herein. Section 7.14. Submission to Jurisdiction; Venue. Guarantor consents to the jurisdiction of any local, state or federal court located within Elkhart County, Indiana, (or in the case of a federal court, the jurisdiction of which includes Elkhart County, Indiana) and consents that all such service of process be made by registered mail directed to the parties at the address stated in this Agreement and service so made shall be deemed to be completed five (5) days after such mailing. SECTION 7.15. WAIVER OF JURY TRIAL. REGARDING ALL SUITS AND ACTIONS ARISING OUT OF OR RELATING TO THIS GUARANTY IN ANY WAY, MANNER OR RESPECT, GUARANTOR WAIVES, AT THE OPTION OF BANK, TRIAL BY JURY. 9 IN WITNESS WHEREOF, the Guarantor has hereunto set its hand by its duly authorized officer to be effective the day and year first above mentioned. GUARANTOR: The Morgan Group, Inc. By:/s/ Richard B. DeBoer ------------------------------------------ (Signature) Richard B. DeBoer, Chief Financial Officer and Treasurer ------------------------------------------ ACCEPTANCE This Guaranty is hereby accepted by KeyBank National Association, by its undersigned duly authorized officer, to be effective the 27th day of March, 1997. BANK: KeyBank National Association By:______________________________________ (Signature) Its:_____________________________________ (Printed Name and Office) 10 EX-11 6 COMPUTATION OF PER SHARE EARNINGS The Morgan Group, Inc. Exhibit 11 - Statement Re: Computation of Per Share Earnings Year Ended December 31 1994 1995 1996 --------- --------- -------- Fully Diluted Average Shares Outstanding 1,333,333 1,333,333 1,333,33 Issuance of 1.1 million shares of Class A Common stock on July 22, 1993 1,100,000 1,100,000 1,100,000 Net effect of exercisable warrants, price based upon the Treasury Stock Method using average stock prices 120,730 0 0 Exercise of warrants, net of tax benefit 0 34,469 88,888 Redemption of shares of Series A Preferred Stock 0 4,932 150,000 Effect of non-qualified options outstanding, price based upon the Treasury Stock method using average price 0 1,520 0 Treasury stock repurchased 0 (50,070) (121,311) Automatic conversion of Series B Redeemable Preferred Stock into Class A Common Stock effected contemporaneously with the initial public offering 133,332 133,332 133,332 --------- --------- -------- Total 2,687,395 2,557,516 2,684,242 ========= ========= ========= Net income (loss) $ 2,212,000 $ 2,269,000 ($2,069,543) Series A Redeemable Preferred Stock dividends (244,273) (220,691) 0 ----------- ----------- ----------- $ 1,968,035 $ 2,048,707 ($2,069,543) =========== =========== =========== Per share amount $ 0.73 $ .80 ($ .77) =========== =========== =========== EX-23.1 7 CONSENT OF INDEPENDENT AUDITORS Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-72996) pertaining to The Morgan Group, Inc. Incentive Stock Plan and in the Registration Statement (Form S-8 No. 33-72998) pertaining to The Morgan Group, Inc. 401(k) Profit Sharing Plan of our report dated March 27, 1997, with respect to the consolidated financial statements of The Morgan Group, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ Ernst & Young LLP Greensboro, North Carolina March 27, 1997 EX-23.2 8 CONSENT OF INDEPENDENT AUDITORS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated February 5, 1996 in his Form 10-K into the Morgan Group, Inc.'s previously filed Registration Statements on Form S-8 (Registration Nos. 33-72996, 33-72998). It should be noted that we have not audited any financial statements of The Morgan Group, Inc. subsequent to December 31, 195 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Chicago, Illinois March 27, 1997 EX-27 9 FDS FOR THE MORGAN GROUP, INC.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE 12 MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000906609 THE MORGAN GROUP 1,000 U.S. DOLLARS 12-MOS DEC-31-1996 SEP-30-1996 DEC-31-1996 1.000 354 954 11,312 59 0 16,923 5,626 2,863 33,066 14,828 0 41 0 0 13,104 33,066 132,208 132,208 122,238 135,471 0 0 352 (3,615) (1,545) (2,070) 0 0 0 (2,070) (.77) (.77)
-----END PRIVACY-ENHANCED MESSAGE-----