-----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, W2cvN9Z/e5eZ7QA6eEH75CsPa41sbNt12CVTgSQMHUTHgJdjv0h8ybQN9TbCb5AF isjarLc3MaMxKnpIWh0LpQ== 0000908834-98-000086.txt : 19980401 0000908834-98-000086.hdr.sgml : 19980401 ACCESSION NUMBER: 0000908834-98-000086 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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: SEC FILE NUMBER: 001-13586 FILM NUMBER: 98582228 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. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 THE MORGAN GROUP, INC. 2746 Old U.S. 20 West Elkhart, Indiana 46514 (219) 295-2200 Commission File Number 1-13586 Delaware 22-2902315 (State of Incorporation) (I.R.S. Employer Identification Number) Securities Registered Pursuant to Section 12(b) of the Act: American Stock Exchange Class A Common Stock, without par value Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the issuer's voting stock held by non-affiliates, as of March 25, 1998 was $9,834,999. 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 25 1998, was 1,434,810 shares, and 1,200,000 shares, respectively. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 1998 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 nation's largest publicly owned service company in managing the delivery of manufactured homes, trucks, specialized vehicles, and trailers 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 1,560 independent owner operators and approximately 1,350 other drivers. The Company dispatches its drivers from 123 locations in 35 states. The Company's largest customers include Fleetwood Enterprises, Inc., Oakwood Homes Corporation, Champion Enterprises, Inc., Winnebago Industries, Inc., Clayton Homes, Inc., Cavalier Homes, Inc., Schult Homes Corporation, Four Seasons Housing, Inc., Palm Harbor Homes, Inc., and United Parcel Service. The Company's services also include 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 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 1942. The Morgan Group, Inc. is a Delaware corporation formed by Lynch Corporation to acquire Morgan and Interstate. 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 outsourcing company. TDI is a market leader in the fragmented truck delivery business focusing on relocation of consumer and commercial vehicles for customers, including United Parcel Service, Ryder System, Inc., Automotive Rentals, Inc., Budget One-Way Rental, and Grumman Corp. In December 1996, the Company acquired the assets of Transit Homes of America, Inc. ("Transit"), a national outsourcing company located in Boise, Idaho. Transit, with 1997 operating revenues of $21.2 million, provides outsourcing transportation services to Fleetwood Enterprises, Inc., Champion Enterprises, Inc., Palm Harbor, and Cavalier Homes, Inc. The Company decided in the fourth quarter of 1996 to discontinue the "truckaway" operation of the Specialized Transport Group. Truckaway was a line of business that transported van conversions, tent campers, and other automotive products on company-owned equipment. The Company, in the fourth quarter of 1996, recorded a special charge of $2,675,000 ($1,605,000 after tax) comprised principally of the anticipated loss on the sale of the company-owned equipment, projected losses through April 30, 1997, and write-downs of accounts receivable and other assets. The equipment was principally sold by May 1997. 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 Manufactured Housing. The largest portion of the Company's operating 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 6% to 558,000 in 1997 from 553,000 in 1996, after 9% and 12% increases in 1996 and 1995, 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, truck and van conversions) ("RV's") declined 4% in 1997 to 363,000 from 376,000 shipments in 1996 after declines of 1% in 1996, and 11% in 1995. This data is obtained from the Recreational Vehicle Industry Association ("RVIA"). RV's are discretionary purchases, sales of which are cyclical. Consumer interest rates remain relatively low which make RV's 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 is the largest publicly owned transporter of manufactured homes and provider of outsourcing services to the motor home and commercial vehicle markets in the United States. In addition to new manufactured housing and motor homes, 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 ("Manufactured Housing"), which includes Transit Homes acquired in 1996, provides specialized transportation to companies which produce new manufactured homes, modular homes, and office trailers. In addition, Manufactured Housing transports used manufactured homes and offices for individuals, businesses, and the U.S. Government. Manufactured Housing ships products through approximately 1,250 independent owner operators who drive specially modified 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 19 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. In 1997, Manufactured Housing delivered approximately 179,000 units. Driver Outsourcing Group. The Driver Outsourcing Group ("Outsourcing"), which includes TDI acquired in May 1995, engages the services of approximately 1,350 drivers which are outsourced to customers to drive commercial and recreational vehicles. In 1997, Outsourcing delivered approximately 46,000 units through the use of these drivers. Specialized Transport Group. In 1997, the Specialized Transport Group ("Specialized Transport") moved a variety of specialized vehicles, including semi-trailers, military vehicles, travel trailers and other commodities by utilizing specialized equipment. A decision was made in 1996 to discontinue the truckaway sector of Specialized Transport, which moved van conversions, automobiles, and tent campers by utilizing company-owned trailers. In 1997, Specialized Transport delivered approximately 34,000 units. Other Services. Other services provided include permit ordering services principally for manufactured housing customers and, to a lessor degree, installation services related to the set up of manufactured homes. The Company also currently provides physical damage insurance to the owners of equipment under lease to the Company through a captive insurance subsidiary. 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, 1997.
Years Ended December 31, 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Manufactured Housing Group: Shipments 95,184 121,604 135,750 144,601 178,533 Operating revenues (in thousands) $39,930 $53,520 $63,353 $72,616 $93,092 Driver Outsourcing: Shipments 30,978 32,060 49,885 58,368 45,857 Operating revenues (in thousands) $13,416 $15,197 $19,842 $23,090 $20,163 Specialized Transport: Shipments 38,618 41,934 44,406 41,255 34,457 Operating revenues (in thousands) $25,835 $28,246 $29,494 $26,169 $19,173 Other service revenues $3,612 $4,917 $9,614 $10,333 $13,726 ------ ------ ------ ------- ------- Total operating revenues (in thousands) $82,793 $101,880 $122,303 $132,208 $146,154 ======= ======== ======== ======== ========
Industry Participation. The following tables set forth participation in the two principal markets the Company operates in where industry information is available:
Manufactured Homes 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Industry production (1) 374,126 451,646 505,819 553,133 558,435 Shipments 76,188 98,181 114,890 121,136 154,389 Shares of units shipped 20.4% 21.7% 22.7% 21.9% 27.6% Recreational Vehicles Industry production (2) 406,300 426,100 380,300 376,400 362,700 Units moved (3) 71,792 67,502 64,303 57,703 39,102 Shares of units shipped (3) 17.7% 15.8% 16.9% 15.3% 10.8%
(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 home. (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 - 1997. 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 shipment. Growth Strategy The Company's strategy is to focus on the profitable core transportation services (Manufactured Housing and Outsourcing) so that operating revenues and profitability can grow in its area of dominant market position. The Company will also look for opportunities to capitalize and/or grow its market in manufactured housing and outsourcing through acquisitions if suitable opportunities arise. To enhance its profitability, the Company is continuing the process of reconstructing its organization to reduce centralized overhead and redundant field expense. Manufactured Housing Growth. The Company believes it can take better advantage of its position in the manufactured housing industry and its relationship with manufacturers, retailers, and independent owner operators, by expanding the service it offers within its specialized business. The Company proposes to pursue opportunities to offer new services, which may include financial, insurance, and to a lessor degree, manufactured housing set up services. The Company will also consider acquisition opportunities. The Company may also pursue the purchase of certain manufacturers' private transport fleets. In such a case, the Company would typically purchase the customer's tractors, sell the equipment to interested drivers, and then engage these drivers as independent owner operators. Outsourcing. The Company believes it can capitalize on the growing trend in the outsourcing of specialized vehicle transportation and delivery by manufacturers. It is estimated that approximately 750,000 vehicles are delivered each year through driveaway services, a delivery market estimated at $500 million or more. The number of vehicles to be outsourced is expected to increase substantially as companies calculate the cost benefits of not maintaining their own driver corps, paying salaries and benefits, running dispatch points, and maintaining an equipment base. Unlike companies with drivers on their payroll, Morgan's drivers are paid only when deliveries are made. Morgan's growth strategy within this market is to expand its market position in this highly fragmented delivery transportation market. The future growth rate of the Company's outsourcing business is dependent upon continuing to add major vehicle customers and expanding the Company's driver force. Reconstruct for Margin Improvement. In the fourth quarter of 1996, the Company made a decision to exit the Truckaway operation which transported van conversions, tent campers, and other automotive products utilizing company-owned equipment. This decision was in line with the Company's growth strategy to focus on profitable operations where the Company has a market position. The Company is continuing the process of reconstructing its organization to reduce centralized overhead and redundant field expense. It 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 considering acquisition opportunities within the manufactured housing and outsourcing lines of business. Thus, the Company may consider acquiring regional or national firms which service the manufactured housing and/or the 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 motor home industries, and its relationships with manufacturers, retailers, 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. 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 operating 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 1998, the Company could benefit from better pricing, reduction of overhead through corporate restructuring, elimination of redundant field expense, and improvement of its 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 and the discussion of growth strategy above. From time to time, the Company may make other oral or written forward-looking statements regarding its anticipated 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 following: Dependence on Manufactured Housing. Shipments of manufactured housing have historically accounted for a substantial majority of the Company's operating revenues. Therefore, the Company's prospects are substantially dependent upon this industry which is subject to broad production cycles. Shipments by the manufactured housing industry could decline in the future relative to historical levels which could have adverse impact on the Company's operating 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 and cargo 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 operating revenues have been derived under contracts with customers. Such contracts generally have one, two, or three year terms. There is no assurance that customers will agree to renew their contracts on acceptable terms or on terms as favorable as these currently in force. The Company's top ten customers have historically accounted for a majority of the Company's operating revenues. The loss of one or more of these significant customers could adversely affect the Company's results of operations. 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 operating revenues 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. The Company has sought and will continue to seek favorable acquisition opportunities. Its strategic plans may also include the initiation of new services or products, either directly or through acquisition, within its existing business lines or which complement its business. There is no assurance that the Company will be able to identify favorable acquisition opportunities in the future. There is no assurance that the Company's future acquisitions will be successfully integrated into its operations or that they will prove to be profitable for the Company. 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 operating revenues generated in the second and third quarters than in the first and fourth quarters. A smaller percentage of the Company's operating revenues are generated in the winter months in areas where weather conditions limit highway use. The seasonality of the Company's business may cause a significant variation in its quarterly operating results. Additionally, the Company's operations are affected by fluctuations in interest rates and the availability of credit to purchasers of manufactured homes and motor homes, general economic conditions, and the availability and price of motor fuels. Customers and Marketing The Company's customers requiring transportation of new manufactured homes, motor homes, commercial vehicles, and specialized vehicles are located in various parts of the United States. The Company's largest manufactured housing customers include Fleetwood Enterprises, Inc., Oakwood Homes Corporation, Champion Enterprises, Inc., Clayton Homes, Inc., Cavalier Homes, Inc., Schult Homes Corporation, Four Seasons Housing, Inc., and Palm Harbor. The Company's largest outsourcing customers include Winnebago Industries, Inc., United Parcel Service, Ryder System, Inc., Automotive Rentals, Inc., and Fleetwood Enterprises, Inc. Specialized Transport customers include Utility Trailer Mfg. Co., United Parcel Service, Thor Industries, Inc., Great Dane, and Xtra Lease, Inc. While most manufacturers rely solely on carriers such as the Company, other manufacturers operate their own equipment and may employ outside carriers on a limited basis. A substantial portion of the Company's operating revenues are generated under one, two, or three year contracts with producers of manufactured homes, motor homes, 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. Operating revenues generated under customer contracts in 1995, 1996, and 1997 were 58%, 62%, 68% of total operating revenues, respectively. The Company's ten largest customers all have been served for at least three years and accounted for approximately 59%, 59%, and 66% of its operating revenues in 1995, 1996, and 1997, respectively. Operating revenues under contract with Fleetwood Enterprises, Inc. ("Fleetwood"), accounted for 24%, 20%, and 21% of operating revenues in 1995, 1996, and 1997, respectively. Operating revenues with Oakwood Homes Corporation ("Oakwood") accounted for 9%, 11%, and 16% of operating revenues in 1995, 1996, and 1997, respectively. The Fleetwood motor home contracts are re-negotiated on a regional basis when they expire and the Fleetwood and Oakwood manufactured housing contracts are continuous until canceled. The Company has been servicing Oakwood for nine years and Fleetwood for over 25 years. The Company markets and sells its services through 13 regional offices and 123 locations in 35 states, concentrated where manufactured housing and motor home production facilities are located. Marketing support personnel are located both at the Company's Elkhart, Indiana headquarters and at regional offices. Dispatch offices are supervised by regional offices. The Company has 26 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, requirements and maintain contact with customers' shipping personnel. Senior management maintains personal contact with corporate officers of the Company's largest customers. Regional and terminal personnel also develop relationships with manufactured home park owners, retailers, 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 Manufactured Housing and Specialized Transport is conducted by contracting for the use of the equipment of independent owner operators. Owner operators are independent contractors who own toters, tractors or pick-up trucks which they contract to, and operate for, the Company on a long-term basis. Independent owner operators are not generally approved to transport commodities on their own in interstate or intrastate commerce. The Company, however, possesses such approvals and/or authorities (see "Business-Regulation"), and provides marketing, insurance, communication, administrative, and other support required for such transportation. The Company attracts owner operators mainly through driver recruiters, trade magazines, referrals, 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 day's notice by either party. The average length of service of the Company's current owner operators is approximately 2.5 years, compared to 3.2 years in 1996. At December 31, 1997, 1,560 owner operators were under contract to the Company, including 1,250 operating toters, 132 operating semi-tractors, and 178 operating pick-up trucks. In Manufactured Housing, independent owner operators utilizing toter equipment tend to exclusively transport manufactured housing, modular structures, or office trailers. Once modified from a semi-tractor, a toter has limited applications for hauling general freight. Toter drivers are, therefore, unlikely to be engaged by transport firms that do not specialize in manufactured housing. This gives the Company an advantage in retaining toter independent owner operators. The average tenure with the Company of its toter independent owner operators is 2.8 years, compared to 3.3 years in 1996. The change in tenure is due in part to the addition of drivers from the Transit Acquisition. In Specialized Transport, 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 1.8 years, compared to 2.7 years in 1996. The average length of service among the Pickup owner operators is 2.9 years, compared to 3.0 years in 1996. The change in the tenure of owner operators is due, in part, to the discontinuance of the truckaway operation and was offset by the effective recruiting efforts by the Company. 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 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. Outsourcing The Company utilizes both independent contractors and employees in its outsourcing operations. The Company outsources its over 1,350 drivers on a trip-by-trip basis for delivery to retailers and rental truck agencies, commercial and recreational vehicles such as motor homes, buses, tractors, rental trucks, and commercial vans. These individuals are recruited through driver recruiters, trade magazines, brochures, and referrals. Prospective drivers are required to possess at least a chauffeur's license and are encouraged to obtain a commercial driver's license. They must also meet and maintain compliance with requirements of the U.S. Department of Transportation and standards established by the Company. Outsourcing drivers are utilized as needed, depending on the Company's transportation volume and driver availability. Outsourcing drivers are paid on a per mile basis. The driver is responsible for most operating expenses, including fuel, return travel, lodging, and meals. The Company provides licenses, cargo and liability insurance, communications, sales, and administrative services. Agents and Employees The Company has 140 terminal managers and assistant terminal managers who are involved directly with the management of equipment and drivers. Of these 140 staff, approximately 120 are full-time employees and the remainder are independent contractors who earn commissions. The terminal personnel are responsible for the Company's terminal operations including safety, customer relations, equipment assignment, invoicing, and other matters. Because terminal personnel develop close relationships with the Company's customers and drivers, from time to time the Company has suffered a terminal personnel defection, following which the former staff has sought to exploit such relationships in competition with the Company. The Company does not expect that future defections, if any, would have a material affect on its operations. In addition to the 140 terminal personnel, the Company employs approximately 232 full-time employees. The Company also has 17 employee drivers in Manufactured housing and six in Outsourcing. Seasonality Shipments of manufactured homes tend to decline in the winter months in areas where poor weather conditions inhibit transport. This usually reduces operating revenues in the first and fourth quarters of the year. Motor home and travel trailer 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 operating revenues, therefore, tend to be stronger in the second and third quarters. Risk Management, Safety and Insurance The risk of substantial losses arising from traffic accidents is inherent in any transportation business. The Company carries insurance to cover such losses up to $25 million per occurrence with a deductible of up to $250,000 per occurrence for personal injury and property damage. The Company carries cargo insurance of $1 million per occurrence 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 $25 million or below its $250,000 deductibles, its results could be materially adversely affected. The Company does have an "aggregate stop loss" insurance policy for the period July 1, 1997 through June 30, 1998 whereby personal injury, property damage, and worker's compensation losses below its $250,000 deductible cannot exceed $4.3 million (could be adjusted up dependent on operating 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, 1995, 1996, and 1997, respectively. Bodily Injury/Property Damage and Cargo Claims Reserve History Years Ended December 31, (in thousands) 1995 1996 1997 ------- ------- ------- Beginning Reserve Balance $3,326 $3,623 $4,564 Provision for Claims 4,849 6,080 6,591 Payments, net (4,552) (5,139) (5,938) ------- ------- ------- Ending Reserve Balance $3,623 $4,564 $5,217 ====== ====== ====== 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 1997, over 1,340 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 $213,000 in 1997 to owner operators). The Company has a Senior Vice President of Risk Management and Safety, Director of Compliance and Legalization, four Safety Directors, and a Driver Trainer dedicated to assist the operating groups in training and highway safety. The Company has incentives for dispatchers based upon accident free miles. In 1997, over $77,000 was paid out under this program and it is expected that over $80,000 will be paid in 1998 for 1997 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. 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 large national carriers and numerous small regional or local carriers. The Company's principal competitors in the Manufactured Housing and 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, and insurance coverage. The availability of tractor equipment and the possession of appropriate registration approvals permitting shipments between points required by the customer may also be influential. Regulation The Company's interstate operations (Morgan and TDI) are subject to regulation by the Federal Highway Administration ("FHWA") 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 former Interstate Commerce Commission. 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. Carriers normally are required to obtain approval and/or authority from the FHWA as well as various state agencies. Morgan is approved and/or holds authority to provide transportation services from, to, and between all points in the continental United States. The Company provides services to certain specific customers under contract and non-contract services to the shipping public pursuant to governing rates and charges maintained at its corporate and various dispatching offices. Transportation services provided pursuant to a written contract are designed to meet a customer's specific shipping needs 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 and cargo insurance; requires carriers to enforce limitations on drivers' hours of service; prescribes parts, accessories and maintenance procedures for safe operation of commercial/motor 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. 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 motor homes throughout most of Canada. Most manufactured homes, when being transported by a toter, exceed the maximum dimensions allowed on state highways without a special permit. The Company obtains these permits for its 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 to be audited annually and to have its loss reserves certified by an approved actuary. The Company believes Interstate is in substantial compliance with Vermont insurance regulations. Finance, the Company's finance subsidiary, is incorporated under Indiana law. Finance is subject to Indiana's Equal Credit Opportunity Laws and other state and federal laws relating generally to fair financing practices. Item 2. PROPERTIES The Company owns approximately 24 acres of land with improvements in Elkhart, Indiana. The improvements include a 23,000 square foot office building housing the Company's principal office and Manufactured Housing; a 7,000 square foot building housing Outsourcing; a 9,000 square foot building used for the Company's safety and driver service departments; and an 8,000 square foot building partially used for driver training and licensing. Most of the Company's 13 regional and 123 locations are situated on leased property. The Company also owns and leases property for parking and storage of equipment at various locations throughout the United States, usually in proximity to manufacturers of products moved by the Company. The property leases have term commitments of a minimum of thirty days and a maximum of five years, at monthly rentals ranging from $100 to $11,048. 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 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 The Company's Common Stock is traded on the American Stock Exchange under the symbol MG. As of March 25, 1998, the approximate number of shareholders of record of the Company's Class A Common Stock was 161. This figure does not include shareholders with shares held under beneficial ownership in nominee name or within clearinghouse position of brokerage firms and banks. The Class B Common Stock is held of record by Lynch Corporation. Market Price of Class A Common Stock:
1997 1996 Quarter Ended High Low High Low March 31 $ 8.38 $7.00 $9.38 $7.56 June 30 10.25 8.25 9.75 8.00 September 30 10.25 8.38 9.19 7.25 December 31 10.38 8.88 7.75 7.13
Dividends Declared:
Class A Class B Cash Dividends Cash Dividends Quarter Ended 1997 1996 1997 1996 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 THE MORGAN GROUP, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS (Dollars in thousands, except per share amounts)
1997 1996 1995 1994 1993 Operations Operating Revenues $ 146,154 $ 132,208 $ 122,303 $ 101,880 $ 82,793 Operating Income (Loss)(1) 1,015 (3,263) 3,371 3,435 2,267 Pre-tax Income (Loss) 296 (3,615) 3,284 3,367 1,714 Net Income (Loss) before Extraordinary Item 196 (2,070) 2,269 2,212 1,595 Net Income (Loss) 196 (2,070) 2,269 2,212 1,595 Per Share Basic Net Income (Loss) Class A Common Stock $ 0.09 $ (0.76) $ 0.81 $ 0.79 $ 0.75 Class B Common Stock 0.05 (0.80) 0.77 0.75 0.72 Diluted Net Income (Loss) Class A Common Stock 0.09 (0.76) 0.79 0.76 0.70 Class B Common Stock 0.05 (0.80) 0.77 0.72 0.68 Cash Dividends Declared Class A Common Stock 0.08 0.08 0.08 0.08 0.02 Class B Common Stock 0.04 0.04 0.04 0.04 0.01 Financial Position Total Assets $ 32,746 $ 33,066 $ 30,795 $ 28,978 $ 24,399 Working Capital 2,129 1,635 8,293 11,045 9,600 Long-term Debt 2,513 4,206 3,275 1,925 2,347 Redeemable Preferred Stock -- -- -- 3,104 3,089 Common Shareholders' Equity 12,724 13,104 15,578 12,980 11,170 Common Shares Outstanding at Year End Class A Common Stock 1,437,910 1,485,520 1,449,554 1,366,665 1,366,665 Class B Common Stock 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 Weighted Average Shares Outstanding: Class A Common Stock Basic 1,456,690 1,484,242 1,382,548 1,366,665 680,730 Diluted 1,463,184 1,486,272 1,422,445 1,447,179 834,816 Class B Common Stock Basic and Diluted 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 Other Information Company Unit Moves New Manufactured Homes 154,389 121,136 114,821 98,181 76,188 Driver Outsourcing 45,857 58,368 49,885 32,060 30,978 - --------------
(1) Operating Income (Loss) in 1997 and 1996 is after special charges of $624,000 and $3,500,000, respectively. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year 1997 Compared to 1996 Operating results for the year ended December 31, 1997, compared to 1996 were significantly impacted by the acquisition of Transit Homes of America ("Transit") in December of 1996 and the discontinuance of the Truckaway operation in May of 1997. Transit is a provider of outsourcing services primarily to the Manufactured housing and Specialized transport industries. Operating revenues increased 11% from $132.2 million in 1996 to $146.2 million in 1997. Transit contributed $21.2 million of the 1997 operating revenues. Revenues from continued operations, including Transit and excluding the Truckaway operating revenues of $3.3 million, increased 19% in 1997 over 1996. Manufactured housing operating revenues are generated from arranging delivery services for new manufactured homes, modular homes and office trailers. The increase in Manufactured housing operating revenues of 28% was primarily due to the Transit acquisition. Driver outsourcing operating revenues consist of the relocation of consumer rental trucks, delivery of motor homes, and delivery of new commercial vehicles. Decreases in relocation of rental trucks, principally due to management's decision to de-emphasize participation in this cyclical industry segment and competitive pressures, was a significant factor contributing to the 13% decline in Driver outsourcing operating revenues. Additionally, motor home operating revenues decreased through a combination of reduced production from a major customer and other competitive issues. Operating revenues from the delivery of new commercial vehicles declined slightly in 1997 primarily due to the realignment of our customer base in order to better position this product line for greater profitability. The discontinuance of the Truckaway operation in May of 1997 resulted in a decline in comparable Specialized transport operating revenues. The Specialized transport operating revenues increased $2.6 million after giving effect to the discontinuance of the Truckaway operation. This increase was attributed to a renewed focus on the Towaway business and the Transit acquisition which brought new travel trailer operating revenues. The increase in other service revenues of 32% relates primarily to highway permits and labor billings added through the Transit acquisition. Operating income increased from a loss of $3.3 million in 1996 to operating income of $1.0 million in 1997. The operating loss in 1996 included a special charge of $3.5 million taken in connection with the closing of unprofitable operations. 1996 operating income before the special charge was $0.2 million. The 1997 operating income included two special items, for a net charge to income of $0.6 million. The first item was for a change in accounting of $1.0 million; the second item was a special credit of $0.4 million. The change in accounting was to account for certain components of driver pay on an accrual rather than a cash basis. The special credit related primarily to the gain on the sale of Truckaway assets in excess of reserves established in the prior year. 1997 operating income before the net special charge was $1.6 million. Operating income in 1997 was aided by the Transit acquisition and the discontinuance of the Truckaway operation, which had an operating loss of $1.8 million in 1996. The discontinuance of the Truckaway operation was in line with the Company's plan to exit lines of business which are unrewarding. Operating income was negatively impacted by reduced profits from the Company's Driver outsourcing business. Additionally, operating costs and expenses increased due to terminal manager training, safety training for all Morgan's employees and drivers, and an increase in employee-related health benefit cost. The investment in safety training was in line with the Company's objective of improving its safety performance. Claims costs in 1997, as a percent of operating revenues, increased slightly from 4.6% in 1996 to 4.7% in 1997. Selling, general and administrative expenses increased from $8.2 million in 1996 to $9.7 million in 1997 of which approximately $0.6 million related to costs associated with the addition of the Transit operation. Additionally, expenses increased because of higher computer lease costs and higher employee related benefit costs. These increased expenses were partially offset by lower corporate compensation costs as a result of a partial restructuring of the corporate office. The decrease in depreciation and amortization expenses in 1997 related to the discontinuance of the Truckaway operation partially offset by increased amortization from the Transit acquisition. Net interest expense increased from $0.4 million to $0.7 million primarily due to increases in debt related to the Transit operation and increased borrowing on the credit facility. In 1997, the income tax provision of $0.1 million resulted in an effective tax rate of 34%, a more normalized rate than the 43% effective tax benefit in 1996. Net income for the Company in 1997 was $0.2 million (Class A $0.09 and Class B $0.05 per basic share). The net loss in 1996 was $2.1 million (Class A $0.76 loss and Class B $0.80 loss per basic share). Year 1996 Compared to 1995 Operating revenues rose by 8% to $132.2 million in 1996 from $122.3 million in 1995. Prior to giving effect to the TDI acquisition, which closed on May 22, 1995, comparable operating revenues increased 6%. Morgan's Manufactured housing operating revenues increased 15%, outpacing the 1996 national production growth of 9%. The growth in Manufactured housing was partially offset by an 11% decline in the Company's Specialized transport operations. Specialized transport was impacted by weakened demand which drove down the Company's utilization of equipment and rates. The Truckaway operation of Specialized transport was discontinued in 1997. During 1996, the Company reported an operating loss, after special charges of $3.3 million and a net loss of $2.1 million. In 1995, the Company reported operating income of $3.4 million and net income of $2.3 million (Class A $0.81 and Class B $0.77 per basic share). The special charge for 1996 amounted to $3.5 million before taxes ($2.1 million after tax or $0.78 per share of Class A and Class B) and resulted from the discontinuance of the Truckaway operation and the write down of four properties. The Truckaway operation generated approximately 10% of the Company's 1996 total revenue. The operating loss from this operation was approximately $1.8 million in 1996. During 1996, the Company also initiated a plan to dispose of certain land and buildings, two of which were associated with the Truckaway operation, that were carried at values which prove to be higher than fair market value. Excluding the special charges of $3.5 million, operating income declined from $3.4 million in 1995 to $0.2 million in 1996. The decline in operating income in 1996 was attributed to (i) weakened freight demand in the Specialized transport, (ii) increases of $1.3 million in claims costs, especially in the Driver outsourcing and Specialized transport, 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 $7.3 million in 1995 to $8.2 million 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 $0.1 million to $0.4 million primarily due to increases in debt related to the TDI acquisition and reduced cash on hand during the year. In 1996, the income tax benefit of $1.5 million, including federal and state tax benefits, resulted in an effective tax benefit of 43% compared to an effective tax rate of 31 % in 1995. Liquidity and Capital Resources Operating activities used $0.3 million of cash in 1997. Net income plus the non-cash special charge and depreciation and amortization were more than offset by increases primarily in trade accounts receivable. Trade accounts receivables increased $2.1 million due to the increase in 1997 fourth quarter operating revenues of 17% and an increase in days sales outstanding to 37 days. The Company is focused on reducing overhead, including selling, general and administration expense, and redundant operating costs. Management has also initiated processes to expedite customer billings and collections to improve cash flow. Investing activities provided cash of $0.7 million in 1997. Proceeds from the sale of property and equipment principally from the Truckaway operation were greater than capital expenditures and acquisitions expenditures. 1997 capital expenditures were $0.9 million. Presently, the 1998 capital expenditure plan approximates $1.0 million which will be primarily funded through revolving credit notes. Net cash used in financing activities increased to $1.3 million in 1997. An increase of $1.0 million in revolving credit notes, additional financing of $0.7 million, and cash were used for payments on term and promissory notes, purchases of 47,600 shares of Class A common stock, and the regular dividend payments. Payments on term and promissory notes were $2.4 million in 1997. Payments on term and promissory notes for 1998 will approximate $1.2 million. Outstanding revolving credit notes increased to $2.5 million at December 31, 1997. The Company, at December 31, 1997, had total borrowings available for revolving credit notes and letters of credit of $10.0 million, of which there was $3.3 million available. On March 25, 1998, the Company replaced this facility with a $15.0 million revolving line of credit with a bank which matures on April 30, 2001. Additionally, the Company also obtained from the same bank an $8.0 million facility for letters of credit which expires on April 30, 1999. Revolving credit borrowings are limited to 80% of qualified trade accounts receivable. These facilities provide financing for working capital needs, letters of credit, and general corporate needs. It is the current policy of the Company to pay annual Class A common stock dividends totaling $.08 per share and Class B common stock dividends totaling $.04 per share. Payment of any future dividends will be dependent, among other things, upon earnings, capital expenditure requirements, financing agreement covenants, future growth plans, legal restrictions, and the financial condition of the Company. It is management's opinion that the Company's foreseeable cash requirement will be met through a combination of improved internally generated funds and the credit available from the new facility. 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 operating revenues in the first and fourth quarters of the year. Motor home and travel trailer 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 operating revenues, therefore, tend to be stronger in the second and third quarters. Impact of Year 2000 Some of the Company's older purchased software applications were written using two digits rather than four digits to define the applicable year. As a result, that software may interpret a date using "00" as the year 1900 rather than the year 2000. This could possibly cause a system failure or miscalculations, causing disruptions of operations, including, among other things, a temporary inability to process transactions, or engage in normal business activities. The Company is in the process of completing an assessment and will have to modify or replace portions of its software to ensure that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total cost of this year 2000 project has not been fully quantified, but preliminary assessments are that conversion costs will be immaterial to the Company. The Company believes that with the necessary modifications to existing software and any necessary conversions to new software, the year 2000 issue does not pose significant operational problems for its computer systems. The cost of the project and the date on which the Company believes it will complete the year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. The Company has not completed an evaluation of its major customers and suppliers to determine if they have taken adequate measures to ensure that necessary modifications are made to their software prior to the year 2000. While the Company is not dependent on any one customer or supplier, failure to make necessary year 2000 modifications by any large group of customers or suppliers could result in a material adverse impact on the Company. Forward-Looking Discussion This report contains a number of forward-looking statements. From time to time, the Company may make other oral or written forward-looking statements regarding its anticipated operating revenues, costs and expenses, earning and other matters affecting its operations and condition. Such forward-looking statements are subject to a number of material factors which could cause the statements or projections contained therein to be materially inaccurate. Such factors include, without limitation, the risk of declining production in the Manufactured housing industry; the risk of losses or insurance premium increases from traffic accidents; the risk of loss of major customers; risks of competition in the recruitment and retention of qualified drivers 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 1997 under Part I, Item 1, Business.7 Item 8. Financial Statements and Supplementary Data The Morgan Group, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands, except share amounts)
December 31 1997 1996 ASSETS Current assets: Cash and cash equivalents $ 380 $ 1,308 Trade accounts receivable, less allowance for doubtful 13,362 11,312 accounts of $183 in 1997 and $59 in 1996 Accounts receivable, other 126 274 Refundable taxes 263 584 Prepaid expenses and other current assets 2,523 2,985 Deferred income taxes 1,095 -- -------- -------- Total current assets 17,749 16,463 Property and equipment, net 4,315 2,763 Assets held for sale -- 2,375 Intangible assets, net 8,451 8,911 Deferred income taxes 767 1,683 Other assets 1,464 871 -------- -------- Total assets $ 32,746 $ 33,066 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Note payable to bank $ 2,250 $ 1,250 Trade accounts payable 3,410 3,226 Accrued liabilities 4,966 4,808 Accrued claims payable 2,175 1,744 Refundable deposits 1,666 1,908 Current portion of long-term debt 1,153 1,892 -------- -------- Total current liabilities 15,620 14,828 Long-term debt, less current portion 1,360 2,314 Long-term accrued claims payable 3,042 2,820 Commitments and contingencies -- -- Shareholders' equity: Common stock, $.015 par value Class A: Authorized shares - 7,500,000 23 23 Issued shares - 1,605,553 Class B: Authorized shares - 2,500,000 18 18 Issued and outstanding shares - 1,200,000 Additional paid-in capital 12,453 12,441 Retained earnings 2,160 2,126 -------- -------- Total capital and retained earnings 14,654 14,608 Less - treasury stock at cost; 167,643 and (1,426) (1,000) 120,043 Class A shares - loan to officer for stock purchase (504) (504) -------- -------- Total shareholders' equity 12,724 13,104 -------- -------- Total liabilities and shareholders' equity $ 32,746 $ 33,066 ======== ========
See accompanying notes. The Morgan Group, Inc. and Subsidiaries Consolidated Statements of Operations (Dollars in thousands, except share amounts)
For the twelve months ended December 31 1997 1996 1995 --------- --------- --------- Operating revenues: Manufactured housing $ 93,092 $ 72,616 $ 63,353 Driver outsourcing 20,163 23,090 19,842 Specialized transport 19,173 26,169 29,494 Other service revenues 13,726 10,333 9,614 --------- --------- --------- 146,154 132,208 122,303 Costs and expenses: Operating costs 133,732 122,238 110,408 Special charges 624 3,500 -- Selling, general and administration 9,708 8,235 7,260 Depreciation and amortization 1,075 1,498 1,264 --------- --------- --------- 145,139 135,471 118,932 --------- --------- --------- Operating income (loss) 1,015 (3,263) 3,371 Net interest expense 719 352 87 --------- --------- --------- Income (loss) before income taxes 296 (3,615) 3,284 Total Income tax expense (benefit): Current 279 268 859 Deferred (179) (1,813) 156 --------- --------- --------- Total income tax expense (benefit) 100 (1,545) 1,015 --------- --------- --------- Net income (loss) 196 (2,070) 2,269 Less preferred dividends -- -- 221 --------- --------- --------- Net income (loss) applicable to common stocks $ 196 ($ 2,070) $ 2,048 ========= ========= ========= Net income (loss) per common share: Basic: Class A common stock $ 0.09 ($ 0.76) $ 0.81 Class B common stock $ 0.05 ($ 0.80) $ 0.77 Diluted: Class A common stock $ 0.09 ($ 0.76) $ 0.79 Class B common stock $ 0.05 ($ 0.80) $ 0.77
See accompanying notes. The Morgan Group, Inc. and Subsidiaries Consolidated Statements of Changes in Redeemable Preferred Stock, Common Stocks, 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 Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 $ 3,104 $20 $18 $ 10,459 $ 2,483 $ 16,084 Net income 2,269 2,269 Redeemable preferred Stock dividends: Accrued 221 (221) -- Paid (337) (337) Redemption of Series A Preferred stock (2,988) 2 1,686 (1,300) Conversion of warrants, including tax benefit 1 296 297 Purchase of treasury stock (1,274) (1,274) Common stock dividends: Class A ($.08 per share) (113) (113) Class B ($.04 per share) (48) (48) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 23 18 12,441 (1,274) 4,370 15,578 Net (loss) (2,070) (2,070) Sale of treasury stock, net (504) 274 (230) Common stock dividends: Class A ($.08 per share) (126) (126) Class B ($.04 per share) (48) (48) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 23 18 12,441 (504) (1,000) 2,126 13,104 Net income 196 196 Purchase of treasury stock (426) (426) Common stock dividends: Class A ($.08 per share) (114) (114) Class B ($.04 per share) (48) (48) Issuance of a director's stock options 12 12 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 $ 23 $ 18 $ 12,453 ($ 504) ($ 1,426) $ 2,160 $ 12,724 ===================================================================================================================================
See accompanying notes. The Morgan Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands)
For the twelve months ended December 31 1997 1996 1995 ------- ------- ------- Operating activities: Net income (loss) $ 196 ($2,070) $ 2,269 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 1,108 1,533 1,304 Deferred income taxes (179) (1,719) 156 Special charges 624 3,500 -- Non-cash compensation expense for stock options 12 (Gain) loss on disposal of property and equipment (37) 37 (19) Changes in operating assets and liabilities: Trade accounts receivable (2,050) (27) (1,743) Other accounts receivable 148 240 (92) Refundable taxes 321 (584) -- Prepaid expenses and other current assets 429 (431) (372) Other assets (593) (374) (44) Trade accounts payable 184 (779) 45 Accrued liabilities (890) 86 433 Accrued claims payable 653 341 297 Refundable deposits (242) 363 157 ------- ------- ------- Net cash (used in) provided by operating activities (316) 116 2,391 Investing activities: Purchases of property and equipment (919) (780) (1,955) Proceeds from sale of property and equipment 159 94 28 Proceeds from disposal of assets held 1,656 -- -- Business acquisitions (227) (895) (1,018) ------- ------- ------- Net cash provided by (used in) investing activities 669 (1,581) (2,945) Financing activities: Net proceeds from notes payable to bank 1,000 1,250 -- Principle payments on long-term debt (2,366) (924) (514) Proceeds from long-term debt 673 -- -- Conversion of warrants -- -- 297 Purchase of treasury stock (426) (286) (1,274) Proceeds from sale of treasury stock -- 56 -- Redemption of series A preferred stock -- -- (1,300) Common stock dividends paid (162) (174) (161) Redeemable preferred stock dividends paid -- -- (337) ------- ------- ------- Net cash used in financing activities (1,281) (78) (3,289) ------- ------- ------- Net decrease in cash and cash equivalents (928) (1,543) (3,843) Cash and cash equivalents at beginning of period 1,308 2,851 6,694 ------- ------- ------- Cash and cash equivalents at end of period $ 380 $ 1,308 $ 2,851 ===================================================================================================
See accompanying notes. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business The Morgan Group, Inc. ("Company"), through its wholly owned subsidiaries, Morgan Drive Away, Inc. ("Morgan") and TDI, Inc. ("TDI"), provides outsourced transportation and logistical services to the manufactured housing and motor home industries and is a leading provider of delivery services to the commercial truck and trailer industries in the United States. Lynch Corporation ("Lynch") owns all of the 1,200,000 shares of the Company's Class B Common stock and 155,000 shares of the Company's Class A Common stock, which in the aggregate represents 67% of the combined voting power of the combined classes of the Company's Common Stock. The Company's services also include certain insurance and financing services to its owner operators through Interstate Indemnity Company ("Interstate") and Morgan Finance, Inc. ("Finance"), both wholly owned subsidiaries. Operating revenues, operating profits, or identified assets of these subsidiaries do not account for over 10% of the Company's operating revenues, operating profits, or identifiable assets, and accordingly, no segment information is required. A majority of the Company's accounts receivable are due from companies in the manufactured housing, motor home, and commercial truck and trailer 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 21%, 20%, and 24% of operating revenues in 1997, 1996, and 1995 and 15% and 12% of gross accounts receivables at December 31, 1997 and 1996, respectively. In addition, Oakwood Homes Corporation accounted for approximately 16% of operating revenues in 1997, and 10% of gross accounts receivables at December 31, 1997. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, Morgan, TDI, Interstate, and Finance. Significant inter-company accounts and transactions have been eliminated in consolidation. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect (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 operating revenues and expenses during the reporting period. Actual results could materially differ from those estimates. Recognition of Operating Revenues Operating revenues and related driver pay are recognized when movement of the product is completed. Other operating expenses are recognized when incurred. Cash Equivalents All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Property and Equipment Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the property and equipment. Intangible Assets Intangible assets, including goodwill, are being amortized by the straight-line method over their estimated useful lives. 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 the carrying amount. For assets to be disposed of, impairment is determined to exist if the estimated net realizable value is less than the carrying amount. As discussed in Note 17, the Company recognized an adjustment during 1996 for write-downs of certain assets. Insurance and Claim Reserves The Company maintains liability insurance coverage of up to $25,000,000 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 $50,000. Claims and insurance accruals reflect the estimated ultimate cost of claims for cargo loss and damage, personal injury and property damage not covered by insurance. The Company accrues its self-insurance liability using a case reserve method based upon claims incurred and estimates of unasserted and unsettled claims and these reserves have not been discounted. Stock Based Compensation The Company accounts for stock based compensation under Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees". 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. Net Income (Loss) Per Common Share Effective for the Company's consolidated financial statements for the year ended December 31, 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which replaces the presentation of primary earnings per share ("EPS") and fully diluted EPS with a presentation of basic EPS and diluted EPS, respectively. Basic EPS excludes dilution and is computed by dividing earnings available to each class of common stock by the weighted average number of common shares outstanding for the period. Similar to fully diluted EPS, diluted EPS assumes the issuance of common stock for all potentially dilutive equivalent shares outstanding. All prior-period EPS data have been restated. The adoption of this new accounting standard did not have a material effect on the Company's reported EPS amounts other than disclosing EPS for each class of common stock. Earnings available to each class of common stock are computed by reducing net income by the amount of dividends declared in the current period for each class of stock and by the contractual amounts that must be paid to preferred stockholders, if any. The remaining undistributed earnings are allocated to each class of common stock equally per share. The earnings available to each class of common stock are determined by adding together the amount allocated for dividends and the amount of undistributed earnings allocated. The net income (loss) applicable to common stocks is the same for the basic and diluted EPS computations for 1997 and 1996. For 1995, the difference between the net income applicable to common stocks used in the EPS calculations is the reallocation of undistributed earnings of $13,000 between Class A common stock and Class B common stock. The following table reconciles the differences between basic and diluted weighted average shares outstanding.
For the twelve months ended December 31 1997 1996 1995 --------- --------- --------- Weighted average shares outstanding Class A stock: Basic 1,456,690 1,484,242 1,382,548 Dilutive effect of stock options 6,494 2,030 4,742 Dilutive effect of warrants -- -- 35,155 --------- --------- --------- Diluted 1,463,184 1,486,272 1,422,445 ========= ========= ========= Class B stock - basic and diluted 1,200,000 1,200,000 1,200,000 ========= ========= =========
Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income," which is effective beginning in 1998. SFAS No. 130 establishes standards for reporting and display for comprehensive income and its components in a full set of general purpose financial statements. Comparative periods are required to be reclassified to reflect the provisions of the statement. The adoption of this SFAS will not affect earnings as previously reported. In June 1997, the FASB also issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This SFAS requires disclosure of selected financial and descriptive information for each operating segment based on management's internal organizational decision-making structure. Additional information is required on a company-wide basis for operating revenues by product or service, operating revenues and identifiable assets by geographic location and information about significant customers. The Company will begin presenting any additional information as required by SFAS No. 131 in its financial statements for the year ending December 31, 1998. 2. PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands): Estimated December 31 Useful Life 1997 1996 - -------------------------------------------------------------------------------- (Years) Land -- $925 $487 Buildings 25 1,763 524 Transportation equipment 3 to 5 620 1,470 Office and service equipment 5 to 8 3,293 3,145 - -------------------------------------------------------------------------------- 6,601 5,626 Less accumulated depreciation 2,286 2,863 - -------------------------------------------------------------------------------- Property and equipment, net $4,315 $2,763 - -------------------------------------------------------------------------------- 3. INTANGIBLE ASSETS The components of intangible assets and their estimated useful lives are as follows (in thousands): Estimated December 31 Useful Life 1997 1996 - -------------------------------------------------------------------------------- (Years) Trained work force 3 to 12 $ 880 $ 880 Covenants not to compete 5 to 15 1,206 1,170 Trade name and goodwill - original 40 1,660 1,660 Trade name and goodwill - purchased 20 6,894 6,812 - -------------------------------------------------------------------------------- 10,640 10,522 Less accumulated amortization 2,189 1,611 - -------------------------------------------------------------------------------- Intangible assets, net $8,451 $8,911 - -------------------------------------------------------------------------------- 4. INDEBTEDNESS The Company at December 31, 1997 had credit facilities of $10,000,000, of which $2,250,00 of revolving credit notes (bearing interest at 8.5% per annum), and $4,490,000 of letters of credit were outstanding. The remaining $3,260,000 was available for borrowing. On March 25, 1998, the Company replaced this facility with a $15,000,000 revolving line of credit that matures on April 30, 2001. Additionally, the Company obtained from the same bank an $8,000,000 facility for letters of credit which expires on April 30, 1999. Revolving credit borrowings are limited to 80% of qualified trade accounts receivable. These facilities provide financing for working capital needs, letters of credit, and general corporate needs. Interest on the line of credit is determined at the Company's option at the time of the borrowing, based on the bank's prime rate or until December 31, 1998 at the London Interbank Offering Rate ("LIBOR"), plus 165 basis points. The LIBOR rate will be adjusted after December 31, 1998. The letter of credit rate is the applicable LIBOR margin rate. The agreement requires payment of a closing fee of $25,000 and a facility fee of 25 basis points payable quarterly on the $15,000,000 revolving line of credit. The Company, beginning in 1998, is to maintain certain minimum levels of net worth and a debt to net worth and interest coverage ratio. Borrowings are secured by the trade accounts receivable, transportation equipment, office and service equipment, and general intangible assets. As of December 31, 1997 and 1996, long-term debt consisted of the following (in thousands): December 31 1997 1996 ------ ------ Promissory note, principal due on January 2, 1997 -- $ 697 Real estate note with principal and interest payable monthly through November 1, 1997 -- 330 Term note with imputed interest at 6.509%, principal and interest payments due monthly through April 25, 1998 $ 303 -- Promissory note with imputed interest at 8.0%, principal and interest payments due annually through September 1, 1998 112 270 Term note with principal and interest payable monthly at 8.25% through July 31, 2000 232 341 Promissory note with imputed interest at 7.81%, principal and interest payments due annually through August 11, 2000 914 1,154 Promissory note with imputed interest at 7.0%, principal and interest payments due monthly through October 31, 2001 205 256 Promissory note with imputed interest at 6.31%, principal and interest payments due quarterly through December 31, 2001 747 1,158 ------ ------ 2,513 4,206 Less current portion 1,153 1,892 ------ ------ Long-term debt, net $1,360 $2,314 ====== ====== Maturities on long-term debt for the five succeeding years are as follows: 1998 $1,153 1999 627 2000 545 2001 140 2002 48 ------ $2,513 ====== Cash payments for interest were $717,000 in 1997, $482,000 in 1996, and $308,000 in 1995. 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): 1997 1996 1995 ---- ---- ---- Current: State -- $ 28 $ 180 Federal $279 240 679 ------ ------- ------ 279 268 859 Deferred State 45 (267) -- Federal (224) (1,546) 156 ------ ------- ------ (179) (1,813) 156 ------ ------- ------ $ 100 $(1,545) $1,015 ====== ======= ====== Deferred tax assets (liabilities) are comprised of the following at December 31 (in thousands): 1997 1996 ------- ------- Deferred tax assets: Accrued insurance claims $ 2,080 $ 1,595 Special charges 734 1,260 Minimum tax carryforward 42 96 ------- ------- 2,856 2,951 Deferred tax liabilities: Depreciation (684) (709) Prepaid expenses (290) (482) Other (20) (77) ------- ------- (994) (1,268) ------- ------- $ 1,862 $ 1,683 ======= ======= A reconciliation of the income tax provisions and the amounts computed by applying the statutory federal income tax rate to income before income taxes follows (in thousands): 1997 1996 1995 ------- ------- ------- Income tax provision (benefit) at federal statutory rate $ 101 $(1,229) $ 1,117 Increases (decreases): State income tax, net of federal tax benefit 3 (155) 118 Reduction attributable to special election by captive insurance company (155) (216) (223) Permanent differences 94 50 -- Other 57 5 3 ------- ------- ------- $ 100 $(1,545) $ 1,015 ======= ======= ======= Cash payments for income taxes were $54,000 in 1997, $934,000 in 1996, and $736,000 in 1995. 6. COMMON STOCKS The Company has two classes of common stock outstanding, Class A and Class B. Under the bylaws of the Company: (i) each share of Class A is entitled to one vote and each share of Class B is entitled to two votes; (ii) Class A stockholders are entitled to a dividend ranging from one to two times the dividend declared on Class B stock; (iii) any stock distributions will maintain the same relative percentages outstanding of Class A and Class B; (iv) any liquidation of the Company will be ratably made to Class A and Class B stockholders after satisfaction of the Company's other obligations; and (v) Class B stock is convertible into Class A stock at the discretion of the holder; Class A stock is not convertible into Class B stock. 7. 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 Series A Redeemable Preferred Stock cash dividends pursuant to its terms. Accordingly, $337,000 of cash dividends were paid to Lynch during 1995. 8. STOCK WARRANTS In June 1995, an officer exercised 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 cancelled. 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. 9. 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. Although the exercise period is determined when options are actually granted, an option shall not be exercised later than ten years and one day after it is granted. Stock options granted will terminate if the grantee's employment terminates prior to exercise for reasons other than retirement, death, or disability. Stock options vest over a four year period pursuant to the terms of the plan, except for stock options granted to a non-employee director, which are immediately vested. Employees have been granted non-qualified stock options to purchase 118,000 shares of Class A Common stock, net of cancellations and exercises, at prices ranging from $7.38 to $9.38 per share. Non-employee directors have been granted non-qualified stock options to purchase 49,000 shares of Class A Common stock, net of cancellations and exercises, at prices ranging from $6.20 to $9.00 per share. As of December 31, 1997, there were 110,625 options to purchase shares granted to employees and non-employee directors which were exercisable based upon the vesting terms, of which all shares had option prices less than the December 31, 1997 closing price of $9.25. The following table summarizes activity under the option plan: Shares Option Price - -------------------------------------------------------------------------------- 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 Grants 25,500 $6.20 - $9.38 Exercises ------ Cancellations (34,000) - -------------------------------------------------------------------------------- Outstanding at December 31, 1997 167,000 10. SPECIAL EMPLOYEE STOCK PURCHASE PLAN In February of 1996, the Company adopted a Special Employee Stock Purchase Plan ("Plan") under which an 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. Interest for 1997 was forgiven. The Plan allows for repayment of the note using shares at $8.00 per share. 11. TREASURY STOCK The Company's Board of Directors has approved the purchase of up to 250,000 shares of Class A Common stock for its Treasury at various dates and market prices. As of December 31, 1997, 149,255 shares had been repurchased at prices between $7.25 and $10.25 per share for a total of $1,266,000. In addition to these purchases, the 22,660 shares tendered to the Company as a result of the exercise of warrants (see Note 8) were placed in the Treasury at a value of $190,000. 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 $530,000. 12. BENEFIT PLAN The Company has a 401(k) Savings Plan covering substantially all employees, which matches 25% of the employee contributions up to a designated amount. The Company's contributions to the Plan were $38,000 in 1997, $27,000 in 1996, and $23,000 in 1995. 13. TRANSACTIONS WITH LYNCH The Company pays Lynch an annual service fee of $100,000 for executive, financial and accounting, planning, budgeting, tax, legal, and insurance services. Additionally, Lynch charged the Company for officers' and directors' liability insurance $16,000 in 1997, $15,000 in 1996, and $15,000 in 1995. As discussed in Note 7, the Redeemable Preferred Stock owned by Lynch Corporation was redeemed during 1995 at a discount. The Company's Class A and Class B Common Stock owned by Lynch is pledged to secure a Lynch Corporation line of credit. 14. LEASES The Company leases certain land, buildings, computer equipment, computer software, and motor equipment under non-cancelable operating leases that expire in various years through 2002. Several land and building leases contain monthly renewal options. Total rental expenses were $2,531,000 in 1997, $2,087,000 in 1996, and $1,804,000 in 1995. Future payments under non-cancelable operating leases with initial terms of one year or more consisted of the following at December 31, 1997 (in thousands): 1998 $1,732 1999 813 2000 260 2001 6 2002 1 -------------------------------------------- Total lease payments $2,812 ============================================ 15. ACQUISITIONS Effective May 22, 1995, the Company purchased the assets of TDI, a market leader in the driver outsourcing services business focusing on relocating rental equipment for a total purchase price of $2,750,000. 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. 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 from 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 $914,000 at December 31, 1997. Effective December 30, 1996, the Company purchased the assets of Transit Homes of America, Inc., a provider of outsourcing services to the manufactured housing and specialized transport industries. The aggregate purchase price was $4,417,000 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 $300,000 and $200,000 in years 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 $4,091,000 and is being amortized over twenty years. In connection with the acquisition, liabilities assumed were as follows (in thousands): Fair value of assets acquired $326 Goodwill acquired 4,091 Cash paid (940) Note issued due January 2, 1997 (697) Note issued at acquisition date (1,158) ------- Liabilities assumed $ 1,622 ======= 16. 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. 17. SPECIAL CHARGES In the fourth quarter of 1996, the Company recorded special charges of $2,675,000 ($1,605,000 after tax) associated with exiting the truckaway operation. The special charges were comprised 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. Additionally, the Company recognized an adjustment to the carrying value of four properties of $825,000 ($495,000 after tax). A pretax special charge for 1997 of $624,000 ($412,000 after tax or $0.16 per Class A and Class B share) is comprised of gains in excess of the estimated net realizable value associated with exiting the truckaway operation discussed above of $361,000, offset by charges related to driver pay. During 1997, management concluded that certain components of driver pay were being accounted for on a cash basis. Accordingly, the Company recorded total charges of $1.2 million ($985,000 in special charges and $215,000 as operating costs) in the fourth quarter of 1997 to account for all components of driver pay on an accrual basis. It is the opinion of management that the effects of this change in accounting are immaterial to the results of operations of the previous years presented. 18. OPERATING COSTS AND EXPENSES (in thousands)
1997 1996 1995 - ------------------------------------------------------------------------------------------------ Purchased transportation costs $100,453 $ 92,037 $84,315 Operating taxes and licenses 7,284 6,460 6,052 Insurance 3,524 3,502 4,000 Claims 6,913 6,080 4,797 Dispatch costs 9,492 8,204 6,997 Regional costs 4,917 3,733 2,900 Repairs and maintenance 350 918 770 Other 799 1,304 577 - ------------------------------------------------------------------------------------------------ $133,732 $122,238 $110,408 ================================================================================================
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of unaudited quarterly results of operations for the years ended December 31, 1997 and 1996 (in thousands, except share data):
1997 ----- Three Months Ended March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- Operating revenues $33,633 $39,211 $38,290 $35,020 Operating income (loss) 431 1,286 1,251 (1,953) Net income (loss) 266 699 705 (1,474) Net income (loss) per common share: Class A common stock Basic 0.10 0.27 0.27 (0.55) Diluted 0.10 0.27 0.26 (0.55) Class B common stock Basic 0.09 0.26 0.26 (0.56) Diluted 0.09 0.26 0.25 (0.56)
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) Net income (loss) per common share: Class A common stock Basic 0.01 0.16 0.19 (1.11) Diluted 0.01 0.16 0.19 (1.11) Class B common stock Basic 0.00 0.15 0.18 (1.12) Diluted 0.00 0.15 0.18 (1.12)
In the fourth quarter of 1997, the Company recorded special charges of $624,000 ($412,000 after tax, or $0.16 per Class A and Class B share). In the fourth quarter of 1996, the Company recorded special charges of $3,500,000 ($2,100,000 after taxes, or $0.78 per Class A and Class B share). See Note 17. Report of Independent Auditors The Board of Directors The Morgan Group, Inc. We have audited the accompanying consolidated balance sheets of The Morgan Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in redeemable preferred stock, common stocks and other shareholders' equity and cash flows for each of the two years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Morgan Group, Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Greensboro, North Carolina March 4, 1998, except for Note 4, as to which the date is March 25, 1998 To the Shareholders and Board of Directors of The Morgan Group, Inc.: We have audited the accompanying consolidated statements of operations, changes in redeemable preferred stock, common stocks and other shareholders' equity and cash flows of The Morgan Group, Inc. (a Delaware Corporation) and Subsidiaries for the year ended December 31, 1995. 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 results of operations and cash flows of The Morgan Group, Inc. and Subsidiaries for the year ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Chicago, Illinois February 5, 1996 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to the section entitled "Proposal One - Election of Directors" of the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders expected to be filed with the Commission on or about April 30, 1998 (the "1998 Proxy Statement"). Item 11. EXECUTIVE COMPENSATION The information required by this item with respect to executive compensation is incorporated by reference to the section entitled "Management Remuneration" of the 1998 Proxy Statement. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the sections entitled "Voting Securities and Principal Holders Thereof" and entitled "Proposal One - Election of Directors" of the 1998 Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the section entitled "Certain Transactions with Related Persons" of the 1998 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following consolidated financial statements are included in Item 8: Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Change in Redeemable Preferred Stock, Common Stocks and Other Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Reports of Independent Auditors (a)(2) Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts (a)(3) Exhibits Filed. The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index. Included in those exhibits are management contracts and compensatory plans and arrangements which are identified as Exhibits 10.1 through 10.10. (b) Reports on Form 8-K Registrant filed no reports on Form 8-K during the quarter ending December 31, 1997. (c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index. Schedule II The Morgan Group Inc. and Subsidiaries Valuation and Qualifying Accounts
Allowance for Doubtful Accounts ----------------------------------------------------------------------------------- Additions Amounts Beginning Charged to Costs Written Off Ending Description Balance and Expenses Net of Recoveries Balance - ------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1997 $59,000 $336,000 $212,000 $183,000 Year ended December 31, 1996 $102,000 $244,000 $287,000 $59,000 Year ended December 31, 1995 $171,000 $184,000 $253,000 $102,000
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 31, 1998 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 27th day of March, 1998. 1) Chief Executive Officer: By: /s/ Charles C. Baum ------------------------------- Charles C. Baum 2) Chief Financial Officer and Chief Accounting Officer By: /s/ Dennis R. Duerksen ------------------------------- Dennis R. Duerksen 3) A Majority of the Board of Directors: /s/ Charles C. Baum Director ------------------------------- Charles C. Baum /s/ Bradely J. Bell Director ------------------------------- Bradley J. Bell Director ------------------------------- Richard B. Black /s/ Frank E. Grzelecki Director ------------------------------- Frank E. Grzelecki /s/ Robert S. Prather, Jr. Director ------------------------------- Robert S. Prather, Jr. EXHIBIT INDEX Exhibit No. Description Page - -------------------------------------------------------------------------------- 3.1 Registrant's Restated Certificate of Incorporation, as amended, is incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 3.2 Registrant's Code of By-Laws, as restated and amended, is incorporated by reference to Exhibit 3.2 of the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 4.1 Form of Class A Stock Certificate is incorporated by reference to Exhibit 3.3 of the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 4.2 Fourth Article - "Common Stock" of the Registrant's Certificate of Incorporation, is incorporated by reference to the Registrant's Certificate of Incorporation, as amended, filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 4.3 Article II - "Meeting of Stockholders," Article VI - "Certificate for Shares" and Article VII - "General Provisions" of the Registrant's Code of By-Laws, incorporated by reference to the Registrant's Code of By-Laws, as amended, filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 4.4 Loan Agreements, dated September 13, 1994, between the Registrant and Subsidiaries and Society National Bank, are incorporated by reference to Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1994, filed November 15, 1994. 4.5 Amended and Restated Credit and Security Agreement, effective March 25, 1998, among the Registrant, Morgan Drive Away, Inc., TDI, Inc., Interstate Indemnity Company and KeyBank National Association. _____ 4.6 Revolving Credit Facility Agreement, effective March 27, 1997, among Morgan Drive Away, Inc., TDI, Inc., Interstate Indemnity Company and KeyBank National Association is incorporated by reference to Exhibit 4.5(a) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, filed March 31, 1997. 4.7 Master Revolving Note, dated March 27, 1997, among Morgan Drive Away, Inc., TDI, Inc., and Interstate Indemnity Company to KeyBank National Association is incorporated by reference to Exhibit 4.5(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, filed March 31, 1997. 4.8 Amended and Restated Revolving Credit Note, dated March 31, 1998, among Morgan Drive Away, Inc., TDI, Inc., Interstate Indemnity Company to KeyBank National Association is incorporated by reference to Exhibit A to the Amended and Restated Credit and Security Agreement, effective March 25, 1998, among the Registrant, Morgan Drive Away, Inc., TDI, Inc., Interstate Indemnity Company and KeyBank National Association, filed herewith as Exhibit 4.5. 4.9 Security Agreement, effective as of March 27, 1997, between Morgan Drive Away, Inc. and KeyBank National Association is incorporated by reference to Exhibit 4.5(c) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, filed March 31, 1997. 4.10 Absolute, Unconditional and Continuing Guaranty, effective as of March 27, 1997, by the Registrant to Key Bank National Association is incorporated by reference to Exhibit 4.5(d) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, filed March 31, 1997. 4.11 Amended and Restated Continuing Guaranty, effective as of March 31, 1998, by the Registrant to KeyBank National Association is incorporated by reference to Exhibit D to the Amended and Restated Credit and Security Agreement, effective March 25, 1998, among the Registrant, Morgan Drive Away, Inc., TDI, Inc., Interstate Indemnity Company and KeyBank National Association, filed herewith as Exhibit 4.5. _____ 10.1 The Morgan Group, Inc. Incentive Stock Plan is incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.2 First Amendment to the Morgan Group, Inc. Incentive Stock Plan is incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1997, filed November 14, 1997. 10.3 Memorandum to Charles Baum and Philip Ringo from Lynch Corporation, dated December 8, 1992, respecting Bonus Pool, is incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.4 Term Life Policy from Northwestern Mutual Life Insurance Company insuring Paul D. Borghesani, dated August 1, 1991, is incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.5 Long Term Disability Insurance Policy from Northwestern Mutual Life Insurance Company, dated March 1, 1990, is incorporated by reference to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.6 Long Term Disability Insurance Policy from CNA Insurance Companies, effective January 1, 1998. _____ 10.7 The Morgan Group, Inc. Employee Stock Purchase Plan, as amended, is incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, filed on March 30, 1995. 10.8 Consulting Agreement between Morgan Drive Away, Inc. and Paul D. Borghesani, effective as of April 1, 1996, is incorporated by reference to Exhibit 10.19 the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed on April 1, 1996. 10.9 Employment Agreement between Morgan Drive Away, Inc. and Terence L. Russell is incorporated by reference to Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed on April 1, 1996. 10.10 Stock Purchase Agreement between Morgan Drive Away, Inc. and Terence L. Russell is incorporated by reference to Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed on April 1, 1996. 10.11 Asset Purchase Agreement, dated May 21, 1993, between Registrant, Transamerican Carriers, Inc., Ruby and Billy Davis and Morgan Drive Away, Inc., is incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.12 Management Agreement between Skandia International and Risk Management (Vermont), Inc. and Interstate Indemnity Company, dated December 15, 1992, is incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.13 Agreement for the Allocation of Income Tax Liability between Lynch Corporation and its Consolidated Subsidiaries, including the Registrant (formerly Lynch Services Corporation), dated December 13, 1988, as amended, is incorporated by reference to Exhibit 10.13 the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.14 MCI Corporate Service Agreement, dated December 12, 1994, between MCI Telecommunications Corporation and Morgan Drive Away, Inc., is incorporated by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, filed on March 30, 1995. 10.15 First Amendment to MCI Corporate Service Plan and other service agreements dated May 7, 1996 and September 30, 1997. _____ 10.16 Certain Services Agreement, dated January 1, 1995, between Lynch Corporation and the Registrant is incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, filed on March 30, 1995. 10.17 Asset Purchase Agreement for Transfer Drivers Inc. and List of Schedules is incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed on April 1, 1996. 10.18 Asset Purchase Agreement between Registrant and Transit Homes of America, Inc., dated as of November 19, 1996, as amended as of December 30, 1996, is incorporated by reference to Exhibit (2)-1 to the Registrant's Form 8-K filed January 14, 1997. 10.19 Amendment to Asset Purchase Agreement between Registrant and Transit, Inc., dated as of December 29, 1996 is incorporated by reference to Exhibit (2)-2 to the Registrant's Form 8-K filed January 14, 1997. 11 Statement Re: Computation of Per Share Earnings _____ 21 Subsidiaries of the Registrant _____ 23.1 Consent of Arthur Andersen LLP _____ 23.2 Consent of Ernst & Young LLP _____ 27.1 Financial Data Schedule (1997) _____ 27.2 Restated Financial Data Schedule (1996) _____ EX-4.4 2 AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT THIS AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT ("Agreement") is made as of the 25th day of March, 1998, by and among KEYBANK NATIONAL ASSOCIATION, a national banking association (the "Bank"), with an office at 127 Public Square, Cleveland, Ohio 44114; MORGAN DRIVE AWAY, INC., an Indiana corporation with offices at 2746 Old U.S. Route 20 West, Elkhart, Indiana 46515 ("Morgan"); TDI, INC., an Indiana corporation with offices at 2746 Old U.S. Route 20 West, Elkhart, Indiana 46515 ("TDI") and INTERSTATE INDEMNITY COMPANY, a Vermont corporation with offices at 2746 Old U.S. Route 20 West, Elkhart, Indiana 46515 ("Interstate" and, collectively with Morgan and TDI, the "Borrowers", with each being a "Borrower"); and THE MORGAN GROUP, INC., a Delaware corporation with offices at 2746 Old U.S. Route 20 West, Elkhart, Indiana 46515 ("Group"). R E C I T A L S: A. The Borrowers and the Bank are the parties to that certain Revolving Credit Facility Agreement dated March 27, 1997 (as amended by a First Amendment thereto dated March 6, 1998, the "Original Credit Agreement"). B. The Borrowers' loan indebtedness to the Bank pursuant to the Original Credit Agreement, is evidenced by a Master Revolving Note dated March 27, 1997 and amended March 6, 1998 in the principal amount of $13,000,000 (the "Existing Revolving Loans"), and such loan indebtedness, together with all of the Borrowers' other indebtedness and obligations to the Bank, is secured by the Security Agreements of Morgan and TDI in favor of the Bank and dated March 27, 1997 (collectively, as amended, the "Existing Security Agreements"). C. The Borrowers have requested the Bank to increase the aggregate principal amount of loans available to the Borrowers, to extend the maturity of such indebtedness to the Bank and to amend and restate the terms and conditions of the Original Credit Agreement. D. Subject to the terms and conditions hereinafter set forth, the Bank has indicated its willingness to increase such availability, to extend said maturity and amend and restate the Original Credit Agreement. E. In addition to the foregoing, from time to time the Borrowers may request the Bank to issue letters of credit on behalf of some or all of the Borrowers; however, the Bank has made no commitment to do so. F. None of the Borrowers' indebtedness and obligations in respect of the Existing Revolving Loans outstanding as of the date hereof shall be deemed repaid or otherwise satisfied upon the execution and closing of the transactions contemplated by this Agreement; but, instead, the loans hereunder are and shall be deemed to be the same indebtedness as that of the Borrowers under the Existing Revolving Loans. A G R E E M E N T S: NOW, THEREFORE, in consideration of the terms and conditions contained herein, and of any extension of credit heretofore, now or hereafter made by the Bank to or for the benefit of the Borrowers and Group, the parties hereto hereby agree that the Original Credit Agreement and the Existing Security Agreements are hereby amended and restated in their entirety to provide as follows: 1. GENERAL DEFINITIONS When used herein, the following terms shall have the following meanings: Account(s): Account(s) and any other right to payment for goods sold or leased or for services rendered which is not a General Intangible or evidenced by an Instrument, Document or Chattel Paper, whether or not it has been earned by performance, and includes, without limitation, all rights to payment earned or unearned under a charter or other contract involving the use or hire of a vessel and all rights incident to the charter or contract. Account Debtor: Any Person who, or any of whose property, shall at the time in question be obligated in respect of all or any part of a Receivable or any part thereof and includes, without limitation, co-makers, indorsers, guarantors, pledgors, hypothecators, mortgagors, and any other Person who agrees, conditionally or otherwise, to make any loan to, purchase from, or investment in, any other Account Debtor or otherwise assure or guaranty against loss on any Receivable in which a Borrower now has or hereafter acquires any rights. Adjusted LIBOR: A rate per annum equal to the quotient obtained (rounded upwards, if necessary, to the nearest 1/100th of 1%) by dividing (i) the applicable LIBOR rate by (ii) 1.00 minus the Reserve Percentage, and which Adjusted LIBOR shall be automatically adjusted on and as of the effective date of any change in the Reserve Percentage. Affiliate: When used with reference to any Person (the "subject"), a Person that is in control of, under the control of, or under common control with, the subject, the term "control" meaning the possession, directly or indirectly, legally or beneficially, of the power to direct the management or policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. For the purposes of this Agreement, and without limiting the generality of the foregoing, any holder of Stock in a Borrower or their parent, Group, shall be deemed to be an Affiliate of a Borrower. Annualized EBIT: As of the end of any fiscal quarter, EBIT for such fiscal quarter, plus EBIT for the three (3) immediately preceding fiscal quarters; provided, however, that (i) as at the end of the fiscal quarter ending June 30, 1998 only, Annualized EBIT shall be deemed to mean EBIT for such fiscal quarter, plus EBIT for the immediately preceding fiscal quarter, and (ii) as at the end of the fiscal quarter ending September 30, 1998 only, Annualized EBIT shall be deemed to mean EBIT for such fiscal quarter, plus EBIT for the two (2) immediately preceding fiscal quarters. Annualized Interest Expense: As of the end of any fiscal quarter, the aggregate of Consolidated interest expense (including without limitation, that attributable to capitalized leases in accordance with GAAP) on all Funded Debt, on a Consolidated basis, for such fiscal quarter, plus Consolidated interest expense for the three (3) immediately preceding fiscal quarters; provided, however, that (i) as at the end of the fiscal quarter ending June 30, 1998 only, Annualized Interest Expense shall be deemed to mean Consolidated interest expense for such fiscal quarter, plus Consolidated interest expense for the immediately preceding fiscal quarter, and (ii) as at the end of the fiscal quarter ending September 30, 1998 only, Annualized Interest Expense shall be deemed to mean Consolidated interest expense for such fiscal quarter, plus Consolidated interest expense for the two (2) immediately preceding fiscal quarters. Bank Debt: Collectively, all Debt of the Borrowers to the Bank, whether incurred directly to the Bank or acquired by it by purchase, pledge, or otherwise, and whether participated to or from the Bank in whole or in part, including, without limitation, the Borrowers' Debt to the Bank in respect of letters of credit from time to time issued for a Borrower and any reimbursement agreement in connection therewith, interest, charges, expenses, attorneys' fees and other sums chargeable to the Borrowers by the Bank and future advances made to or for the benefit of a Borrower, whether arising under this Agreement, under any of the Other Agreements or acquired by the Bank from any other source, whether evidenced by the Revolving Note or any other instrument, or any note or instrument in modification, replacement, supplement or substitution thereof, whether heretofore, now or hereafter owing, arising, due or payable from any Borrower to the Bank and howsoever evidenced, created, incurred, acquired or owing, whether primary, secondary, direct, contingent, fixed or otherwise, including obligations of performance. Banking Day: Any day of the week, other than Saturday or Sunday, on which the Bank is open for business in Cleveland, Ohio; provided, however, that, when used in connection with a LIBOR Loan (other than in the definition of LIBOR Margin), "Banking Day" shall mean any such day on which banks are open for dealings in or quoting deposit rates for dollar deposits in the London interbank market. Basis Point: One one-hundredth of one percent (0.01%) per annum. Borrowing Base: At any time and from time to time, an amount equal to eighty percent (80%) of the sum of (i) the aggregate face value of the Borrowers' Eligible Accounts at such time, plus (ii) the amount equal to the remainder of (a) the In Transit Amount at such time, minus (b) the Eligible Reserve at such time. Change in Control: After the Closing Date, (i) the acquisition by any Person or group of Persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended), of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under such Act) or control of __% or more of the outstanding shares of the Stock (on a fully diluted basis) of any Obligor or (b) during any period of twelve (12) consecutive calendar months, the ceasing of individuals who were directors of Group on the first day of such period to constitute a majority of the board of directors of Group. Charges: As defined in Section 6.1(D). Chattel Paper: A writing or writings (other than a charter or other contract involving the use or hire of a vessel) which evidence both a monetary obligation and a security interest in or a lease of specific goods, and, when a transaction is evidenced both by such a security agreement or lease and by an Instrument or series of Instruments, the group of writings taken together constitutes Chattel Paper. Closing Date: As defined in Section 3.3. Collateral: All of the property and interests in property described in Section 5.1 and all other property and interests in property which shall, from time to time, secure the Bank Debt, including, without limitation, the Accounts and other Receivables, the General Intangibles, the Inventory, and the Equipment. Consolidated: Group and its Subsidiaries, including, without limitation, the Borrowers, taken as a whole. Consolidated Net Worth: The excess of the net book value of Group's Consolidated assets over all of Group's Consolidated liabilities, as determined on an accrual basis and in accordance with GAAP. Controlled Group: All members of a controlled group of corporations and all trades or businesses (whether or not incorporated), if any, under common control which, together with a Borrower, are treated as a single employer under Section 414(b) or 414(c) of the Internal Revenue Code of 1986, as amended. Debt: Collectively, all liabilities, indebtedness and other obligations of the Person or Persons in question, including, without limitation, every such obligation whether owing by one such Person alone or with one or more other Persons in a joint, several, or joint and several capacity, whether now owing or hereafter arising, whether owing absolutely or contingently, whether created by lease, loan, overdraft, guaranty of payment, or other contract, or by quasi-contract, tort, statute, other operation of law, or otherwise. Without in any way limiting the generality of the foregoing, Debt of an Obligor specifically includes (i) all obligations or liabilities of any Person that are secured by any Lien upon property owned by such Obligor, even though such Obligor has not assumed or become liable for the payment thereof; (ii) all obligations or liabilities created or arising under any lease of real or personal property, or conditional sale or other title retention agreement in respect of property used and/or acquired by such Obligor, even though the rights and remedies of the lessor, seller and/or lender thereunder are limited to repossession of such property; (iii) all unfunded pension fund obligations and liabilities; and (iv) deferred taxes. Debt Service: For any period, the sum of all interest, principal, fees and other charges, if any, including the current maturities thereof, due and payable by an Obligor during such period on Funded Debt. Default Interest Rate: As defined in Section 8.4. Document: (a) A document that purports to be issued by or addressed to a bailee and that purports to cover goods that are in the bailee's possession that are either identified or fungible portions of an identified mass, and includes a bill of lading, dock warrant, dock receipt, warehouse receipt, or order for the delivery of goods, and any other document that in the regular course of business or financing is treated as adequately evidencing that the Person in possession of it is entitled to receive, hold, and dispose of the document and the goods it covers or (b) a receipt issued by the owner of goods including distilled spirits or agricultural commodities that are stored under a statute requiring a bond against withdrawal or a license for the issuance of receipts in the nature of a warehouse receipt EBIT: For any period, net income of Group and its Subsidiaries on a Consolidated basis determined in accordance with GAAP but (i) before deduction for interest expense on all Funded Debt, (ii) before provision for taxes based on income, if any, and (iii) excluding the effect of any (a) non-recurring, non-cash gains and (b) gains and losses from the sale or other disposition of assets, other than Inventory in the ordinary course of business. Eligible Accounts: Those Accounts determined by the Bank to be Eligible Accounts as provided in Section 4.1. Eligible Reserve: As of any date on which a Borrowing Base certificate or report of Accounts is delivered to the Bank that portion of those Accounts included in the In Transit Amount contained in such certificate or report which, in the Borrowers' reasonable and prudent judgment based upon the Borrowers' experience with Accounts of such type (but at all times subject to the approval of the Bank in its sole discretion) are out of period (i.e., as to which, on such delivery date, the applicable transportation services have not been completed, necessary Documents in respect thereof have not been delivered, or both) and which were identified in the Borrower's Borrowing Base Certificate or report of Accounts (as required by Section 7.1(B)(iv) hereof) as of the end of the immediately preceding month. Equipment: All goods that (a) are used or bought for use primarily in business, including, without limitation, farming or a profession, or by a Person who is a non-profit organization or a governmental subdivision or agency or (b) are not Inventory, farm products, or consumer goods, it being the intention that the term Equipment include, without limitation, machinery, equipment, tools, furniture, furnishings and fixtures, including, but not limited to, all manufacturing, fabricating, processing, transporting and packaging equipment, power systems, heating, cooling and ventilating systems, lighting and communication systems, fire prevention, alarm and security systems, laundry systems, and computing and data processing systems. ERISA: Title IV of the Employee Retirement Income Security Act of 1974, as amended. Eurocurrency Liabilities: As that term is defined in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. Event of Default: As defined in Section 8.1. Existing Revolving Loans: As defined in Recital B, above. Existing Security Agreements: As defined in Recital B above. Fed Funds Rate: For any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Banking Day, for the next preceding Banking Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Banking Day, the average of the quotations for such day on such transactions received by the Bank from three (3) federal funds brokers of recognized standing selected by it. Financials: Those financial statements of Borrowers listed on Schedule 1A hereto, all of which financial statements have been delivered to the Bank in connection with its review of the Borrowers' request for credit. Funded Debt: With respect to any Person, without duplication, (a) obligations for money borrowed including, without limitation, all capitalized leases, notes payable, drafts accepted representing extensions of credit, obligations evidenced by bonds, debentures, notes or other similar instruments, and obligations upon which interest charges are customarily paid or discounted, (b) obligations to pay the deferred purchase price of property or services, (c) obligations secured by any Lien on the properties or assets of the Person, (d) obligations of such Person in respect of currency or interest rate swap or comparable transactions and (e) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (a) through (d) above, the amount of which indebtedness or obligation under this clause (e) shall be deemed to be an amount equal to the stated or determinable amount of such primary obligation, or if less, the maximum amount of such primary obligation for which such Person may be liable, or if not stated or determinable, the maximum reasonably anticipated in respect thereof (assuming such Person is required to perform thereunder). GAAP: Generally accepted accounting principles as from time to time in effect which shall include the official interpretations thereof by the Financial Accounting Standards Board or any successor accounting authority of comparable standing, consistently applied. General Intangible: Any personal property, including things in action, other than goods, Accounts, Chattel Paper, Documents, Instruments, money, and all other contract rights, choses in action, causes of action, company or other business records, inventions, designs, patents, patent applications, trademarks, trade names, trade secrets, good will, copyrights, registrations, licenses, franchises, permits, tax claims, computer programs, and any guarantee claims, security interests or other security held by or granted to a Borrower to secure payment by an Account Debtor of any of the Accounts and all other intangible personal property of every kind and nature whatsoever. All licenses, patents, patent applications, copyrights, trademarks and trade names now owned by the Borrowers which, as of the date hereof, shall serve as Collateral are listed on Schedule 1B hereto. Guaranty: As defined in Section 3.1(Q). In Transit Amount: As of any date during a month, an amount equal to the lesser of (i) the aggregate amount of Accounts for transportation services of a Borrower which the Borrowers have included in their Borrowing Base certificate or report of Accounts (as required by Section 7.1(B)(iv) hereof) as of the end of the immediately preceding month, which otherwise meet all of the criteria to be Eligible Accounts, but as to which, although transportation services in respect thereof were commenced to be performed as of such month end, not all such transportation services were completed as of such month end or, if such services were completed as of such month end, not all necessary Documents were received as of such month end by such Borrower or (ii) $3,500,000. Instrument: A negotiable instrument, or a certificated security, or any other writing which evidences a right to the payment of money and is not itself a security agreement or lease and is of a type which is in the ordinary course of business transferred by delivery with any necessary indorsement or assignment. Interest Coverage Ratio: As of any date, the ratio of (i) Annualized EBIT as of such date to (ii) Annualized Interest Expense as of such date. Interest Period: For each LIBOR Loan, the period commencing on the date of such LIBOR Loan or the date of the Rate Conversion or Rate Continuation of a Revolving Loan into such LIBOR Loan and ending on the numerically corresponding day of the period selected by the Borrowers pursuant to the provisions hereof and each subsequent period commencing on the last day of the immediately preceding Interest Period in respect of such Revolving Loan and ending on the last day of the period selected by the Borrowers pursuant to the provisions hereof. The duration of each such Interest Period shall be one (1), two (2), three (3) or six (6) months, in each case as the Borrowers may select, upon delivery to the Bank of a notice therefor in accordance with this Agreement; provided, however, that: (i) no Interest Period may end on a date later than the Revolving Facility Termination Date; (ii) if there is no such numerically corresponding day in the month that is such, as the case may be, first, second, third or sixth month after the commencement of an Interest Period, such Interest Period shall end on the last day of such month; and (iii) whenever the last day of any Interest Period in respect of a LIBOR Loan would otherwise occur on a day other than a Banking Day, the last day of such Interest Period shall be extended to occur on the next succeeding Banking Day; provided, however, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the immediately preceding Banking Day. Inventory: Goods that are held by a Person who holds them for sale or lease or to be furnished under contracts of service or if that Person has so furnished them, or if they are parts, supplies, raw materials, work in process, or materials used or consumed in a business, repossessed goods, returned goods and goods in transit, except that Inventory does not include Equipment. Leverage Ratio: As of any date, the percentage equivalent of the number resulting from dividing (i) the amount of Consolidated Funded Debt on such date by (ii) an amount equal to the sum of (a) the amount of Consolidated Funded Debt on such date, plus (b) Consolidated Net Worth on such date. LIBOR: With respect to any LIBOR Loan for any Interest Period, the per annum rate of interest, determined by the Bank in accordance with its usual procedures (which determination shall be conclusive absent manifest error) as of approximately 11:00 A.M. (London time) two (2) Banking Days prior to the beginning of such Interest Period pertaining to such LIBOR Loan, appearing on page 3750 of the Telerate Service (or any successor to or substitute page of such Service, or any successor to or substitute for such Service providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Bank from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) as the rate in the London interbank market for dollar deposits in immediately available funds with a maturity comparable to such Interest Period. In the event that such a rate quotation is not available for any reason, then the rate shall be the rate, determined by the Bank as of approximately 11:00 A.M. (London time) two (2) Banking Days prior to the beginning of such Interest Period pertaining to such LIBOR Loan, to be the average (rounded upwards, if necessary, to the nearest one sixteenth of one percent (1/16th of 1%) of the per annum rates of interest at which dollar deposits in immediately available funds approximately equal in principal amount to such LIBOR Loan and for a maturity comparable to the Interest Period are offered to the Reference Bank by prime banks in the London interbank market. LIBOR Loan: Those Revolving Loans described in Sections 2.1(A) and 2.3 hereof on which the Borrowers shall pay interest at a rate based on LIBOR. LIBOR Margin: (a) Until five (5) Banking Days (or such lesser period as the Bank may determine in its discretion) after the Borrowers have delivered to the Bank the Consolidated financial statements and related certificates in respect of the fiscal year ending December 31, 1998 pursuant to Section 7.1(B), below, one hundred sixty-five (165) Basis Points, and (b) thereafter, at such time(s), and from time to time, as Interest Coverage Ratio as at the end of the immediately preceding fiscal quarter (commencing with the fiscal quarter ending December 31, 1998) is any of the following ratios, the number of Basis Points set forth opposite such ratio: Interest Coverage Ratio LIBOR Margin Less than 3.00 to 1 LIBOR Loans not available Equal to or greater than 3.00 to 1 and less than 3.50 to 1 One hundred fifty (150) Basis Points Equal to or greater than 3.50 to 1 and less than 4.50 to 1 One hundred twenty-five (125) Basis Points Equal to or greater than 4.50 to 1 One hundred (100) Basis Points. Decreases in the LIBOR Margin shall be made effective five (5) Banking Days (or such lesser period as the Bank may determine in its discretion) after the Bank's receipt of the Obligors' financial statements and related certificates pursuant to Section 7.1(B), below,; increases in the LIBOR Margin shall be made effective as of the earlier of (i) five (5) Banking Days (or such lesser period as the Bank may determine in its discretion) after the Bank's receipt of the Obligors' financial statements and related certificates pursuant to Section 7.1(B), below, or (ii) the date on which such statements are due to be delivered to the Bank pursuant to said Section. LIBOR Prepayment Compensation Rate: As defined in Section 2.8, below. Lien: Any mortgage, pledge, assignment, lien, claim, charge, encumbrance, or security interest of any kind, or the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. Lock box Agreement: As defined in Section 5.9(D). Maximum Commitment: Fifteen Million Dollars ($15,000,000), as such amount may from time to time be reduced pursuant to Section 2.5, below. Maximum Revolving Credit: At any time and from time to time, the lesser of (i) the Maximum Commitment or (ii) the Borrowing Base at such time. Multiemployer Plan: A "multiemployer plan" as defined in Section 4001(a)(3) of ERISA, under which a Borrower is an employer. Obligors: Collectively, Morgan, TDI, Interstate, and Group, each being an "Obligor". Original Credit Agreement: As defined in Recital A, above. Other Agreements: The Revolving Note, the Guaranty, subordination or intercreditor agreements, patent and trademark security agreements and all Supplemental Documentation and all other documents or writings executed by or on behalf of any Obligor or delivered to the Bank in connection with the transaction contemplated hereby. PBGC: Pension Benefit Guaranty Corporation or any governmental entity succeeding to the functions thereof. Permitted Encumbrances: As defined in Section 6.1(B). Person: Any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, entity, party, or government (whether national, federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency body or department thereof). Plan: Any employee pension benefit plan subject to ERISA established or maintained by a Borrower or any member of the Controlled Group, or any such Plan to which such Borrower or any member of the Controlled Group is required to contribute on behalf of any of its employees. Possible Default: Any event, situation or thing which, with the lapse of any applicable grace period or the giving of notice or both, would constitute an Event of Default and which has not been consented to by the Bank in writing. Prepayment LIBOR: As defined in Section 2.8, below. Previous Minimum: As at the end of any fiscal quarter, the minimum Consolidated Net Worth required to be maintained by the Obligors as at the end of the immediately preceding fiscal quarter pursuant to the provisions of Section 7.2(G), below. Prime Rate: The higher of (i) the per annum rate equal to the Fed Funds Rate plus one hundred fifty (150) Basis Points or (ii) that variable interest rate established from time to time by the Bank as the Bank's Prime Rate (or equivalent rate otherwise named), whether or not such rate is publicly announced; the Prime Rate may not necessarily be the lowest interest rate charged by Bank for commercial or other extensions of credit. Prime Rate Loans: Those loans described in Sections 2.1(A) and 2.3 hereof on which the Borrowers shall pay interest at the rate based on the Prime Rate. Proceeds: Whatever is received or receivable upon sale, exchange, collection, or other disposition of any property (including, without limitation, Collateral) or Proceeds, whether directly or indirectly, and includes, without limitation, the proceeds of any casualty, liability, or title insurance relating to any such property and any goods or other property returned after any such sale, exchange, collection, or other disposition. Products: Property directly or indirectly resulting from any manufacturing, processing, assembling, or commingling of any goods. Quarterly Increase: As at the end of any fiscal quarter, the greater of (i) an amount equal to fifty percent (50%) of Consolidated net income for such quarter determined in accordance with GAAP or (ii) zero dollars ($0). Rate Continuation: A continuation of a LIBOR Loan having a particular Interest Period as a LIBOR Loan having an Interest Period of the same duration pursuant to Section 2.1(B) hereof. Rate Conversion: A conversion pursuant to Section 2.1(B) of a Revolving Loan of one Type into a Revolving Loan of another Type and, with respect to LIBOR Loans, from one permissible Interest Period to another permissible Interest Period. Rate Conversion/Continuation Request: A request for Rate Conversion or Rate Continuation made pursuant to Section 2.1(B). Receivable: Any claim for or right to payment, however arising, whether classified as an Account, a General Intangible, or otherwise, whether contingent or fixed, whether or not evidenced by any writing, and, if so evidenced, whether evidenced by Chattel Paper, one or more Instruments, or otherwise. Reference Bank: The Cayman Islands branch office of the Bank. Regulatory Change: As to the Bank, any change in United States federal, state or foreign laws or regulations or the adoption or making of any interpretations, directives or requests of or under any United States federal, state or foreign laws or regulations (whether or not having the force of law) by any court or governmental authority charged with the interpretation or administration thereof. Request: Any of the borrowing request for a Revolving Loan described in Section 2.1(A), below., or a Rate Conversion or Rate Continuation Request. Reserve Percentage: For any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, all basic, supplemental, marginal and other reserves and taking into account any transitional adjustments or other scheduled changes in reserve requirements) for a member bank of the Federal Reserve System in Cleveland, Ohio, in respect of "Eurocurrency Liabilities". Revolving Credit Facility: As defined in Section 2.1(A). Revolving Facility Termination Date: As defined in Section 2.1(E). Revolving Loan(s): As defined in Section 2.1(A). Revolving Note: As defined in Section 2.1(D). Special Collateral: As defined in Section 5.2. Stock: All shares, options, membership interests, partnership interests, participation or other equivalents or equity interests (howsoever designated) of or in, as the case may be, a corporation or a limited liability company, whether voting or non-voting, including without limitation, warrants, convertible debentures and all agreements, instruments and documents convertible, in whole or in part, into any one or more or all of the foregoing. Subordinated Debt: That portion of the Debt of an Obligor which is subordinated in a manner satisfactory in form and substance to the Bank as to right and time of payment of principal and interest thereon to any and all of the Bank Debt. Subsidiary: Any corporation, limited liability company, partnership, entity or other Person of which more than 50% of the outstanding capital Stock having ordinary voting power to vote for directors of such Person (irrespective of whether, at the time, stock of any other class or classes of such Person shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned by a Person and/or one or more Subsidiaries of such Person. Supplemental Documentation: Agreements, instruments, documents, certificates of title, financing statements, warehouse receipts, bills of lading, notices of assignment of accounts, schedules of accounts assigned, mortgages and other written matter necessary or requested by the Bank to perfect and maintain perfected the Bank's Liens in the Collateral. Type: When used in respect of any Revolving Loan, LIBOR or Prime Rate as applicable to such Revolving Loan. Other Terms. Other terms contained in this Agreement shall, unless the context indicates otherwise, have the meanings provided for by the Uniform Commercial Code (the "Code") of the State of Ohio to the extent the same are used or defined therein. Any accounting terms used in this Agreement which are not specifically defined herein shall have the meanings customarily given such terms in accordance with GAAP. The terms "fiscal year" and "fiscal quarter" shall refer to the fiscal year of the Obligors ending December 31 of each year and the quarters thereof ending March 31, June 30, September 30 and December 31 of each year. Unless otherwise expressly stated, all references to a time of day shall be deemed to mean Cleveland, Ohio time. 2. LOANS: GENERAL TERMS 2.1. Revolving Credit; Revolving Note. (A) Advance of Loans. Subject to the terms and conditions of this Agreement, on the Closing Date the terms and conditions of the Original Credit Agreement and the Existing Security Agreements shall be amended and restated in their entirety to provide for an amended and restated revolving credit facility (the "Revolving Credit Facility") under which, subject to the terms and conditions hereof, the Bank shall, from time to time, upon written or oral (confirmed promptly in writing) request of a Borrower therefor, advance loans to one or more of the Borrowers (each a "Revolving Loan" and, collectively, the "Revolving Loans") in the maximum aggregate principal amount at any time outstanding of not more than the Maximum Revolving Credit. The Borrowers' requests for Revolving Loans shall be in form and content from time to time prescribed by the Bank and shall be delivered to the Bank not later than 12:00 noon of the Banking Day on which a Prime Rate Loan is to be advanced and not later than 12:00 noon three (3) Banking Days prior to the Banking Day on which a LIBOR Loan is to be advanced. Unless otherwise requested by a Borrower in writing (and approved by the Bank), all Revolving Loans shall be advanced into demand deposit account No. ___________, maintained by the Borrowers at an office of the Bank designated by the Bank and reasonably satisfactory to Borrowers. Subject to the terms and conditions set forth in this Agreement, the Borrowers shall have the option to request Revolving Loans comprised of (i) Prime Rate Loans maturing on or before the Revolving Facility Termination Date, in aggregate amounts of not less than One Hundred Thousand Dollars ($100,000) or (ii) LIBOR Loans in aggregate amounts of not less than Two Hundred Fifty Thousand Dollars ($250,000). Subject to the terms and conditions of this Agreement, the Borrowers may, during the term of the Revolving Credit Facility, repay and reborrow the Revolving Loans advanced thereunder. (B) Rate Conversion and Continuation. The Borrowers shall have the right to cause a Rate Conversion or Rate Continuation in respect of Revolving Loans then outstanding, upon request delivered by the Borrowers to the Bank not later than 12:00 noon (i) on the day which is the Banking Day that the Borrowers desire to convert any LIBOR Loans into a Prime Rate Loan, (ii) on the day that is three (3) Banking Days prior to the Banking Day upon which the Borrowers desire to convert any Prime Rate Loan into a LIBOR Loan for a given Interest Period, (iii) on the day which is three (3) Banking Days prior to the Banking Day upon which the Borrowers desire to continue any LIBOR Loan as a LIBOR Loan for an additional Interest Period of the same duration, (iv) on the day which is three (3) Banking Days prior to the Banking Day upon which the Borrowers desire to convert any LIBOR Loan having a particular Interest Period into a LIBOR Loan having a different permissible Interest Period, provided, however, that each such Rate Conversion or Rate Continuation shall be subject to the following: (1) if less than all the outstanding principal amount of a Revolving Loan is converted or continued, the aggregate principal amount of such Revolving Credit Loans converted or continued shall be, (i) in the case of LIBOR Loans, not less than Two Hundred Fifty Thousand Dollars ($250,000), and (ii) in the case of Prime Rate Loans, not less than One Hundred Thousand Dollars ($100,000); (2) each Rate Conversion or Rate Continuation shall be effected by the Bank's applying the proceeds of the Revolving Loan resulting from such Rate Conversion or Rate Continuation to the Revolving Loan being converted or continued, as the case may be, and the accrued interest on any such Revolving Loan (or portion thereof) being converted or continued shall be paid to the Bank by the Borrowers at the time of such Rate Conversion or Rate Continuation; (3) LIBOR Loans may not be converted or continued at a time other than the end of the Interest Period applicable thereto unless the Borrowers shall pay, upon demand, any amounts due to the Bank pursuant to Section 2.8; (4) Revolving Loans may not be converted into or continued as LIBOR Loans (a) at any time during which an Event of Default exists (provided that this clause shall not be construed to limit any other right or remedy of the Bank) or (b) less than one month prior to the Revolving Facility Termination Date or for an Interest Period which would continue after the Revolving Facility Termination Date; (5) any LIBOR Loan that cannot be converted into or continued as a LIBOR Loan by reason of clause (4) shall be automatically converted at the end of the Interest Period in effect for such LIBOR Loan into a Prime Rate Loan. Each such request for a conversion or continuation (a "Rate Conversion/Continuation Request") in respect of a Revolving Loan shall be transmitted by the Borrowers to the Bank, by telecopier, telex or cable (in the case of telex or cable, confirmed in writing prior to the effective date of the Rate Conversion or Rate Continuation requested), in form and content prescribed by the Bank, specifying (i) the identity and amount of the Revolving Loan that the Borrowers request be converted or continued, (ii) the Type of Revolving Credit Loan into which such Revolving Loan is to be converted or continued, (iii) if such notice requests a Rate Conversion, the date of the Rate Conversion (which shall be a Banking Day) and (iv) in the case of a Revolving Loan being converted into or continued as a LIBOR Loan, the Interest Period for such LIBOR Loan. The Borrowers may make a Rate Conversion/Continuation Request telephonically so long as written confirmation thereof is received by the Bank by 1:00 p.m. on the same day of such telephonic Rate Conversion/Continuation Request. The Bank may rely on such telephonic Rate Conversion/Continuation Request to the same extent that the Bank may rely on a written Rate Conversion/ Continuation Request. Each Rate Conversion/Continuation Request, whether telephonic or written, shall be irrevocable and binding on the Borrowers and subject to the indemnification provisions of this Article 2. The Borrowers shall bear all risks related to their giving any Rate Conversion/Continuation Request telephonically or by such other method of transmission as any Borrower shall elect. (C) Failure Of Borrowers To Elect. If no Interest Period is specified in any Request for a LIBOR Loan, the Borrowers shall be deemed to have selected an Interest Period with a duration of one (1) month with respect to such LIBOR Loan. If the Borrowers shall not have given notice in accordance with Section 2.1(B) to continue any LIBOR Loan into a subsequent Interest Period (and shall not have otherwise delivered a Rate Conversion/Continuation Request in accordance with Section 2.1(B) to convert such LIBOR Loan), subject to the limitations set forth in Sections 2.1 and 2.3, such LIBOR Loan shall, at the end of the Interest Period applicable thereto (unless repaid pursuant to the terms hereof), automatically shall be converted to a Prime Rate Loan. (D) Revolving Note. The Borrowers' joint and several Debt under the Revolving Loans shall be evidenced by an amended and restated promissory note executed and delivered by the Borrowers to evidence the Revolving Loans (the "Revolving Note", which term, for the purposes of this Agreement and the Other Agreements, shall include any and all amendments, modifications, replacements, supplements and substitutions thereof), which shall be in the form of Exhibit A attached hereto and made a part hereof. (E) Term. The Revolving Credit Facility shall have an initial term commencing on the Closing Date and terminating on April 30, 2001 (as such date may be extended pursuant to a writing executed by the Borrowers and the Bank, in the Bank's sole and absolute discretion, the "Revolving Facility Termination Date"). 2.2. Security; Guaranty. The payment of the Bank Debt, including, without limitation, the Revolving Loans, shall be secured by Liens in favor of the Bank in the Collateral and shall be guaranteed by Group pursuant to the Guaranty. 2.3. Interest Rates. The Revolving Loans shall be advanced as Prime Rate Loans or LIBOR Loans pursuant to Section 2.1, above. The Borrowers shall pay interest on the unpaid principal amount of each Revolving Loan made by the Bank from the date of such Revolving Loan until such principal amount shall be paid in full at the following times and rates per annum: (i) Prime Rate Loans. During such periods as a Revolving Loan is a Prime Rate Loan, a rate per annum equal at all times to the Prime Rate, payable quarterly, in arrears, on the last day of each calendar quarter and at maturity (whether by reason of acceleration or otherwise). (ii) LIBOR Loans. During such periods as a Revolving Loan is a LIBOR Loan, a rate per annum equal to the sum of the Adjusted LIBOR, plus the LIBOR Margin from time to time in effect, payable (a) on the last day of each Interest Period and (b) if such Interest Period has a duration of more than three months, three months after the first day of such Interest Period and (c) on the date such LIBOR Loan shall be converted to a Prime Rate Loan or to a LIBOR Loan of a different Interest Period or paid in full and at maturity (whether by reason of acceleration or otherwise). Interest on Prime Rate Loans shall be calculated daily on the basis of a 365-day year, or when applicable 366-day year (that is, computed by obtaining a daily interest factor at the applicable rate based upon a 365-day (or 366-day) year and multiplying such factor by the actual number of days elapsed) Interest on LIBOR Loans shall be calculated daily on the basis of a 360-day year (that is, computed by obtaining a daily interest factor at the applicable rate based upon a 360-day year and multiplying such factor by the actual number of days elapsed). Subject to any maximum interest rate limitation specified by applicable law, the variable rate of interest provided for herein shall change automatically without notice to the Borrowers with each change in the Prime Rate. In no contingency or event whatsoever shall the interest rate charged pursuant to the terms of this Agreement exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that the Bank has received interest hereunder in excess of the highest applicable rate, the Bank shall promptly refund such excess interest to the Borrowers; and the Borrowers hereby agrees that the refund of such excess shall be the Borrowers' sole remedy or claim, at law and in equity, in respect of the Bank's charging or receipt of interest in excess of that permitted by law. 2.4. Payments. Except as otherwise provided in Section 5.9, all payments to the Bank shall be payable at the Bank's address set forth above or at such other place or places as the Bank may designate from time to time in writing to the Borrowers. Subject always to the provisions of Article 8, the Bank Debt shall be payable as follows: (A) Interest. Interest payable pursuant to this Agreement shall be due on the dates specified in Section 2.3, above, or, at the Bank's option, the amount of interest payable under the Revolving Note shall be added to the principal balance of the Revolving Note and be deemed an additional Revolving Loan thereunder; provided, however, that, in addition, all accrued and unpaid interest in respect of the Revolving Note not theretofore paid shall be due and payable at maturity, whether by acceleration or otherwise; (B) Costs, Fees. Costs, fees and expenses payable pursuant to this Agreement shall be payable as and when provided in this Agreement and, if not specified, then on demand; (C) Principal. From and after the Closing Date, principal payable on account of Revolving Loans shall be due and payable to the extent required pursuant to Section 7.1(A), below; and, without limiting any other remedy available to the Bank, upon and during the continuance of an Event of Default, to the extent and on the date of any collections received with respect to any Proceeds of the Collateral and not applied to interest, and the entire unpaid principal balance of all Revolving Loans shall be payable in full on the Revolving Facility Termination Date; (D) Other Bank Debt. The balance of the Bank Debt, if any, shall be payable as and when provided in this Agreement or the Other Agreements and, if not specified, then on demand. To the extent, if any, that the Bank renders statements of account relating to the Revolving Loans and other Bank Debt (and the Bank shall have no obligation to do so), such statements shall be presumed correct and accurate and shall, except for the Bank's right to reapply payments, constitute an account stated between the Borrowers and the Bank, unless thereafter waived in writing by the Bank or unless, within thirty (30) days after the Bank's mailing thereof, the Borrowers deliver to the Bank, by registered or certified mail, written objection thereto specifying the error or errors, if any, contained therein. Except as provided in the definition of Interest Period, whenever any payment to be made hereunder, including without limitation any payment to be made on the Revolving Note, shall be stated to be due on a day which is not a Banking Day, such payment shall be made on the next succeeding Banking Day and such extension of time shall in each case be included in the computation of the interest payable on the Revolving Note. Each Borrower hereby authorizes the Bank, automatically and without further instruction from such Borrower, to withdraw from and charge any demand deposit or other account of such Borrower maintained at the Bank to pay to the Bank any principal, interest or other Bank Debt on the date on which the same are due and payable, whether at stated maturity or acceleration. 2.5. Optional Reduction of Commitment. The Borrowers may, at their option from time to time, reduce the amount of the Maximum Commitment by an amount which is One Million Dollars ($1,000,000) or an integral multiple thereof; provided that (i) the Borrowers shall deliver to the Bank written notice of the amount and effective date of any requested reduction at least three (3) Banking Days prior to such proposed effective, and (ii) on or prior to the date on which such reduction is effective, the Borrowers shall have (a) paid to the Bank such portion of the principal of the Revolving Loans as may be required by the terms of Section 7.1(A) of this Agreement and (b) executed and delivered to the Bank such amendments to this Agreement, the Revolving Note and the Other Agreements as the Bank may reasonably request to reflect such reduction. 2.6. Closing Fee. On the Closing Date, the Borrowers shall pay to the Bank a closing fee in the amount of Twenty-five Thousand Dollars ($25,000). 2.7. Facility Fee. The Borrowers agree to pay to the Bank, on the last day of each calendar quarter during the term of the Revolving Credit Facility and at earlier maturity, whether by acceleration or otherwise, as a facility fee, in arrears in respect of the immediately preceding quarter or portion thereof, an amount equal to twenty-five (25) Basis Points of the Maximum Commitment, calculated on the basis of a 360-day year (that is, computed by obtaining a daily factor at such per annum rate based upon a 360-day year and multiplying such factor by the actual number of days elapsed). In addition to the foregoing, the Borrowers shall pay, on the quarter end next following the Closing Date, any and all unpaid facility fee payments accrued under the Original Credit Agreement as of the Closing Date. 2.8. Prepayment Compensation for LIBOR Loans. In any case of prepayment of any LIBOR Loan, the Borrowers agree that if Adjusted LIBOR as determined as of 11:00 a.m. London time, two (2) Banking Days prior to the date of prepayment of any LIBOR Loan (hereafter, "Prepayment LIBOR") shall be lower than the last Adjusted LIBOR previously determined for such LIBOR Loan with respect to which prepayment is intended to be made (hereinafter, "Last LIBOR"), then the Borrowers shall, upon written notice by the Bank, promptly pay to the Bank, in immediately available funds, compensation for such prepayment measured by a rate (the "LIBOR Prepayment Compensation Rate") which shall be equal to the difference between the Last LIBOR and the Prepayment LIBOR. In determining the Prepayment LIBOR, the Bank shall apply a rate equal to Adjusted LIBOR for a deposit approximately equal to the amount of such prepayment which would be applicable to an Interest Period commencing on the date of such prepayment and having a duration as nearly equal as practicable to the remaining duration of the actual Interest Period during which such prepayment is to be made. The LIBOR Prepayment Compensation Rate shall be applied to all or such part of the principal amount of the Revolving Note as related to the LIBOR Loan to be prepaid, and the prepayment compensation shall be computed for the period commencing with the date on which such prepayment is to be made to that date which coincides with the last day of the Interest Period previously established when the LIBOR Loan which is to be prepaid was made. In the event a Borrower cancels a Request with respect to a LIBOR Loan subsequent to the delivery to the Bank of such notice, such cancellation shall be treated as a prepayment as to which the Bank shall be entitled to the aforementioned prepayment compensation for the full Interest Period which would have been in effect had such Request not been canceled; provided that, in such case, Prepayment LIBOR shall be measured on the date on which the Bank receives notice of cancellation and not two (2) Banking Days prior thereto. 2.9 Reserves; Taxes; Indemnities. (A) Reserves or Deposit Requirements. If at any time any law, treaty or regulation (including, without limitation, Regulation D of the Board of Governors of the Federal Reserve System) or the interpretation thereof by any governmental authority charged with the administration thereof or any central bank or other fiscal, monetary or other authority shall impose (whether or not having the force of law), modify or deem applicable any reserve and/or special deposit requirement (other than reserves included in the Reserve Percentage, the effect of which is reflected in the interest rate(s) of the LIBOR Loan(s) in question) against assets held by, or deposits in or for the amount of any loans by, the Bank, and the result of the foregoing is to increase the cost (whether by incurring a cost or adding to a cost) to the Bank of making or maintaining hereunder LIBOR Loans or to reduce the amount of principal or interest received by the Bank with respect to such LIBOR Loans, then upon demand by the Bank the Borrowers shall pay to the Bank from time to time on the dates on which interest is otherwise due with respect to such loans, as additional consideration hereunder, additional amounts sufficient to fully compensate and indemnify the Bank for such increased cost or reduced amount, assuming (which assumption the Bank need not corroborate) such additional cost or reduced amount was allocable to such LIBOR Loans. A certificate as to the increased cost or reduced amount as a result of any event mentioned in this Section 2.9(A), setting forth the calculations therefor, shall be promptly submitted by the Bank to the Borrowers and shall, in the absence of manifest error, be conclusive and binding as to the amount thereof. Notwithstanding any other provision of this Agreement, after any such demand for compensation by the Bank, the Borrowers, upon at least three (3) Banking Days' prior written notice to the Bank, may prepay the affected LIBOR Loans in full or convert all LIBOR Loans to Prime Rate Loans regardless of the Interest Period of any thereof. Any such prepayment or conversion shall entitle the Bank to the prepayment compensation provided for in Section 2.8 hereof. The Bank will notify the Borrowers as promptly as practicable of the existence of any event which will likely require the payment by the Borrowers of any such additional amount under this Section. (B) Imposition Of Taxes. In the event that by reason of any law, regulation or requirement or in the interpretation thereof by an official authority, or the imposition of any requirement of any central bank whether or not having the force of law, the Bank shall, with respect to this Agreement or any transaction under this Agreement, be subjected to any tax, levy, impost, charge, fee, duty, deduction or withholding of any kind whatsoever (other than any tax imposed upon the total net income of the Bank) and if any such measures or any other similar measure shall result in an increase in the cost to the Bank of making or maintaining any LIBOR Loan or in a reduction in the amount of principal, interest or commitment fee receivable by the Bank in respect thereof, then the Bank shall promptly notify the Borrowers stating the reasons therefor. The Borrowers shall thereafter pay to the Bank upon demand from time to time on the dates on which interest is otherwise due with respect to such LIBOR Loans, as additional consideration hereunder, such additional amounts as will fully compensate the Bank for such increased cost or reduced amount. A certificate as to any such increased cost or reduced amount, setting forth the calculations therefor, shall be submitted by the Bank to the Borrowers and shall, in the absence of manifest error, be conclusive and binding as to the amount thereof. Notwithstanding any other provision of this Agreement, after any such demand for compensation by the Bank, the Borrowers, upon at least three (3) Banking Days prior written notice to the Bank, may prepay the affected LIBOR Loans in full or convert all LIBOR Loans to Prime Rate Loans regardless of the Interest Period of any thereof. Any such prepayment or conversion shall entitle the Bank to prepayment compensation provided for in Section 2.8 hereof. (C) Eurodollar Deposit Unavailable or Interest Rate Unascertainable. In respect of any LIBOR Loan, in the event that the Bank shall have determined that dollar deposits of the relevant amount for the relevant Interest Period for such LIBOR Loan are not available to the Reference Bank in the applicable Eurodollar market or that, by reason of circumstances affecting such market, adequate and reasonable means do not exist for ascertaining the LIBOR rate applicable to such Interest Period, the Bank shall promptly give notice of such determination to the Borrowers and (i) any notice of a new LIBOR Loan (or conversion or continuation of an existing loan to a LIBOR Loan) previously given by the Borrowers and not yet borrowed (or converted or continued, as the case may be) shall be deemed a notice to make a Prime Rate Loan, and (ii) the Borrowers shall be obligated either to prepay or to convert any outstanding LIBOR Loans on the last day of the then current Interest Period or Periods with respect thereto. Any such prepayment or conversion shall entitle the Bank to prepayment compensation provided for in Section 2.8 hereof. (D) Indemnity. Without prejudice to any other provisions of this Article 2, the Borrowers hereby jointly and severally 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 Borrowers in payment when due of any amount due hereunder in respect of any LIBOR 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 such LIBOR 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 Borrowers and shall, in the absence of manifest error, be conclusive and binding as to the amount thereof. (E) Changes in Law Rendering LIBOR Loans Unlawful. If at any time any new law, treaty or regulation, or any change in any existing law, treaty or regulation, or any interpretation thereof by any governmental or other regulatory authority charged with the administration thereof, shall make it unlawful for the Bank to fund any LIBOR Loan which it is committed to make hereunder with moneys obtained in the Eurodollar market, the commitment of the Bank to fund LIBOR Loans shall, upon the happening of such event forthwith be suspended for the duration of such illegality, and the Bank shall by written notice to the Borrowers declare that its commitment with respect to such LIBOR Loans has been so suspended; and, if and when such illegality ceases to exist, such suspension shall cease, and the Bank shall similarly notify the Borrowers. If any such change shall make it unlawful for the Bank to continue in effect the funding in the applicable Eurodollar market of any LIBOR Loan previously made by it hereunder, the Bank shall, upon the happening of such event, notify the Borrowers thereof in writing stating the reasons therefor, and the Borrowers shall, on the earlier of (i) the last day of the then current Interest Period or (ii) if required by such law, regulation or interpretation, on such date as shall be specified in such notice, either convert all LIBOR Loans to Prime Rate Loans to the extent permissible under this Agreement or prepay all LIBOR Loans to the Bank in full. Any such prepayment or conversion shall entitle the Bank to prepayment compensation as provided in Section 2.8 hereof. (F) Funding. The Bank may, but shall not be required to, make LIBOR Loans hereunder with funds obtained outside the United States. 2.10. Capital Adequacy. If the Bank shall have determined, that, whether in effect at the date of this Agreement or hereafter in effect, any applicable law, rule, regulation or guideline regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital allocated to the transactions contemplated by this Agreement (or the capital of its holding company) as a consequence of its obligations hereunder to a level below that which the Bank (or its holding company) could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies or the policies of its holding company with respect to capital adequacy) by an amount deemed by the Bank to be material, then from time to time, within fifteen (15) days after demand by the Bank, the Borrowers shall pay to the Bank such additional amount or amounts as will compensate the Bank (or its holding company) for such reduction. The Bank will designate a different lending office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of the Bank, be otherwise disadvantageous to the Bank. A certificate of the Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, the Bank may use any reasonable averaging and attribution methods. Failure on the part of the Bank to demand compensation for any reduction in return on capital with respect to any period shall not constitute a waiver of the Bank's rights to demand compensation for any reduction in return on capital in such period or in any other period. The protection of this Section 2.10 shall be available to the Bank regardless of any possible contention of the invalidity or inapplicability of the law, regulation or other condition which shall have been imposed. 2.11. All Advances to Constitute One Debt; Same Debt. (A) Single Indebtedness. All Revolving Loans and other advances of credit by the Bank to or for the benefit of any or all of the Borrowers under this Agreement and the Other Agreements shall constitute one Debt, and all Debt and obligations of the Borrowers to the Bank under this Agreement and all Other Agreements shall constitute one general obligation, (i) secured by the Bank's Lien in the Collateral and by other Liens heretofore, now, or at any time or times hereafter granted to the Bank by the Borrowers or others, and (ii) guaranteed by the Guaranty. The Borrowers and Group agree that all of the rights of the Bank set forth in this Agreement shall apply to any modification of or supplement to this Agreement and the Other Agreements, unless such rights are expressly modified by any such modification or supplement. (B) Same Indebtedness. This Agreement and the Other Agreements shall not be deemed to provide for or effect a repayment and re-advance of any portion of the Existing Revolving Loans now outstanding, it being the intention of both the Borrowers and the Bank hereby that the Indebtedness owing under this Agreement be and hereby is the same Indebtedness as that owing under the Original Credit Agreement immediately prior to the effectiveness hereof. 3. CONDITIONS TO ADVANCE OF LOANS 3.1. Conditions to Initial Advance of Revolving Loans. The initial advance of Revolving Loans, and the performance by the Bank of the other actions to be taken by it hereunder, are subject to the fulfillment (unless waived by the Bank) of each of the following conditions precedent: (A) Representations and Warranties. All of the representations and warranties in Article 6 shall have been true on the date when made and shall be true on and as of the Closing Date. (B) Compliance. The Borrowers shall be in compliance on the Closing Date with all the applicable terms and provisions of this Agreement and the Other Agreements to be observed or performed by it, and no Event of Default or Possible Default shall have occurred and be continuing. (C) Closing Certificate. The Borrowers shall have delivered to the Bank a certificate, dated as of the Closing Date and signed by their respective President or Treasurer certifying compliance with the conditions of subsections 3.1(A) and (B). (D) Note. The Borrowers shall have executed and delivered to the Bank the Revolving Note. (E) Opinion. The Bank shall have received the favorable written opinion of Barnes & Thornburg, counsel to the Obligors, dated the Closing Date and addressed to the Bank and substantially to the effect set forth in Exhibit B hereto, and covering such other matters as the Bank may reasonably request. (F) Perfection. The Bank shall have received evidence satisfactory to it of the perfection and priority of the Bank's security interest in the Collateral by the filing of appropriate financing statements with the Secretaries of State of Indiana and Vermont and the Recorder of Elkhart County, Indiana. (G) Insurance. The Borrowers shall have furnished a certificate or other satisfactory evidence that the insurance required by Section 7.4 is in full force and effect. (H) Entity Certificates. On or before the Closing Date, each Obligor shall deliver to the Bank the following (provided, however, that at the option of the Borrowers, the documents required by clauses (ii) and (iii), below, may be delivered to the Bank not later than sixty (60) days following the Closing Date): (i) a certificate of existence for such Obligor from the Secretary of the state of its incorporation and certificates of qualification for such Obligor from the Secretary of State of each other state with which such Obligor is required to qualify to do business as a foreign corporation, all dated as of a date as near to the Closing Date as practicable; (ii) a true and complete copy of such Obligor's Articles of Incorporation/Charter certified by the Secretary of State of the state of its incorporation as of a date as near to the Closing Date as practicable; (iii) a certificate of such Obligor signed by its Secretary dated as of the Closing Date certifying that attached thereto are true and complete copies of its Code of Regulations/Bylaws; (iv) a certificate of such Obligor signed by its Secretary dated as of the Closing Date certifying (a) that attached thereto is a complete copy of resolutions adopted by the directors of such Obligor, authorizing the execution, delivery and performance of this Agreement and the Other Agreements to be performed by such Obligor hereunder, (b) that such resolutions are in full force and effect, without modification thereto and (c) the names and signatures of the officers of such Obligor; and (v) such other documents as the Bank may reasonably request in connection with the company proceedings taken by such Obligor authorizing this Agreement and the transactions contemplated hereby. (I) Special Counsel. All legal matters incident to this Agreement and the consummation of the transactions contemplated hereby shall be reasonably satisfactory to Berick, Pearlman & Mills Co., L.P.A., Cleveland, Ohio, special counsel to the Bank. (J) Landlord Waivers. Each Borrower shall have delivered to the Bank a landlord consent and waiver agreement in the form of Exhibit C hereto from each lessor or licensor of real property occupied by such Borrower or at which any Collateral is located. (K) Guaranty. Group shall have executed and delivered to the Bank its Amended and Restated Continuing Guaranty in the form of Exhibit D hereto (the "Guaranty"). (L) Opening Eligible Accounts. The Borrowers shall have delivered to the Bank an opening borrowing base certificate, in form prescribed by the Bank, attached to which shall be an aging of the Borrowers' Accounts meeting the criteria set forth in Section 7.1(B)(iv), reflecting such Accounts as of the close of business February 28, 1998. (M) Closing Fee. The Bank shall have received the closing fee required by Section 2.6 hereof in immediately available funds. (N) Other Matters. The Bank shall have received such other certificates, opinions, agreements and documents, in form and substance satisfactory to it, as the Bank may request. 3.2. Conditions Precedent to Subsequent Revolving Loans. The advance of Revolving Loans after the Closing Date shall be subject to the fulfillment of each of the following conditions precedent: (A) Representations and Warranties. The representations and warranties contained in this Agreement shall be true in all material respects on and as of the date of such subsequent Revolving Loan, with the same effect as if made on and as of such date. (B) No Default. No Event of Default or Possible Default shall have occurred and be continuing. (C) Documents. The Bank shall have received such Requests, other certificates (including, without limitation, borrowing certificates), agreements and documents, in form and substance satisfactory to it, as the Bank may reasonably request. 3.3. Closing. The closing of the initial advance of Revolving Loans hereunder shall, subject to the terms and conditions of this Agreement, including, without limitation, Section 3.1, take place at the offices of Berick, Pearlman & Mills Co., L.P.A., 1350 Eaton Center, 1111 Superior Avenue, Cleveland, Ohio, on a date mutually agreed upon by the Borrowers and the Bank, but not later than April 3, 1998, at 11:00 a.m., or at such other time and place as the parties may agree (such date of initial advance being referred to as the "Closing Date"). 4. ELIGIBLE ACCOUNTS 4.1. Eligible Accounts. On the report of Accounts (delivered to the Bank monthly pursuant to Section 7.1(B)(iv) and as provided in Section 5.6), the Borrowers shall designate which of the Accounts listed thereon the Borrowers believe to be Eligible Accounts pursuant to the criteria (other than that set forth on clause (J), below). The Bank shall review such report and determine, in its sole discretion (exercised in good faith), which Accounts listed thereon shall be deemed an "Eligible Account"; the Bank shall have no obligation whatsoever to accept the designations of the Borrowers. In determining which Accounts will be "Eligible Accounts", the Bank may, inter alia, consider the following requirements: The Account is subject to a perfected first priority Lien in favor of the Bank and is due no more than thirty (30) days from the date of invoice under the original terms of shipment or service, arises from the delivery of goods or performance of services by a Borrower in the ordinary course of its business, conforms to the warranties and representations set forth in Section 6.2 and: (A) is an Account upon which such Borrower's right to receive payment is absolute and not contingent upon any further performance or delivery or the fulfillment of any condition whatsoever (e.g., consignment or guaranteed sale) and does not include any sales or other taxes, and such Borrower has possession of, or has delivered or will deliver as required hereunder to the Bank, copies of invoices, shipping and delivery receipts evidencing such performance or shipment; (B) is unpaid for not more than thirty (30) days following the due date of the invoice therefor; (C) does not arise from a sale or sales to an Affiliate or from a consumer transaction (being one for primarily personal, family or household purposes); (D) is not the obligation of an Account Debtor located in a foreign country other than Canada, except those foreign Accounts supported by a letter of credit acceptable to the Bank which letter of credit is confirmed or issued by a United States bank or other bank acceptable to the Bank or is an Eligible Account insured by the Foreign Credit Insurance Association, provided that the letter of credit or insurance in respect of such foreign Accounts is assigned to the Bank by assignments in form and substance satisfactory to the Bank; (E) does not arise from a contract containing a prohibition against the assignment or grant of a security interest therein; (F) is not an Account from the United States of America or any state thereof, or any department, administration, agency or instrumentality of any thereof, unless the Bank is satisfied that its security interest in such Account has been perfected pursuant to the Federal Assignment of Claims Act or equivalent state statute; (G) is not an Account of an Account Debtor who has suspended business, made a general assignment for the benefit of creditors, committed any act of insolvency, filed or has had filed against it any petition under any bankruptcy law or any other law or laws for the relief of debtors; (H) is not evidenced by an Instrument, Chattel Paper or other written agreement (other than invoices), unless the Instrument or Chattel Paper evidencing the Account has been delivered to and endorsed in favor of the Bank; (I) is not an Account of an Account Debtor who shall have objected to paying such Account, or any portion thereof, as a result of an objection to the quality or quantity of goods or services provided by such Borrower, or shall have rejected, returned or refused to accept such goods or services; (J) is not an Account which is, in the Bank's good faith judgment, (i) the Account of an Account Debtor which is an undue credit risk or (ii) otherwise unacceptable to the Bank. 5. COLLATERAL: GENERAL TERMS 5.1. Security Interest. (A) Grant. To secure the prompt payment to the Bank and performance of the Bank Debt, on the Closing Date, (1) all of the terms, conditions and provisions of each Security Agreement are hereby merged into, and amended and restated in their entirety by, this Agreement, and (2) each Borrower hereby regrants (or, in the case of Interstate, grants) to the Bank a continuing security interest in and to all of the following property and interests in property of such Borrower, whether now owned or existing, hereafter acquired or arising, or in which such Borrower now or hereafter has any rights, and wheresoever located: (i) All Accounts and other Receivables, Instruments, Documents, Chattel Paper and General Intangibles; (ii) All Equipment; (iii) All Inventory; (iv) All monies, residues and property of any kind, now or at any time or times hereafter, in the possession or under control of the Bank or a bailee of the Bank; (v) All accessions to, substitutions for and all replacements, Products and Proceeds of the foregoing, including, without limitation, proceeds of insurance policies insuring the Collateral; and (vi) All books and records (including, without limitation, customer lists, credit files, computer programs, print-outs and other computer materials and records) of such Borrower pertaining to any of the foregoing. 5.2. Special Collateral. Immediately upon a Borrower's receipt of that portion of the Collateral which is or becomes evidenced by an agreement, instrument and/or document, including, without limitation, promissory notes, trade acceptances, documents of title and warehouse receipts (the "Special Collateral"), such Borrower shall deliver the original thereof to the Bank, together with appropriate endorsements and/or other specific evidence (in form and substance acceptable to the Bank) of assignment thereof to the Bank. 5.3. Further Assurances. At the Bank's request, each Borrower shall execute and/or deliver to the Bank, at any time hereafter, all Supplemental Documentation that the Bank may reasonably request, in form and substance acceptable to the Bank, and pay the costs of any recording or filing of the same. Without limiting the generality of the foregoing, at the Bank's request, each Borrower shall execute and deliver for filing a Patent and Trademark Security Agreement in form and substance satisfactory to the Bank upon such Borrower's acquisition of any patent or registered mark or interest therein or rights thereto. The Borrowers agree that a carbon, photographic, or other reproduction of a financing statement, is sufficient as a financing statement. Each Borrower immediately on demand therefor by the Bank, shall deliver to the Bank evidence of ownership, if any, of any of the Collateral. 5.4. Preservation of Collateral. The Borrowers will keep the Collateral and all rights with respect thereto and proceeds of both free from any adverse Lien, except for Permitted Encumbrances, and, subject to ordinary wear and tear and obsolescence, in good condition, and will not waste or destroy any of the same. The Borrowers will not use the Collateral in violation of any applicable statute or ordinance. 5.5. Verification of Collateral; Inspections; Audit. (A) Any of the Bank's officers, employees or agents shall have the right, at any time or times hereafter, in the Bank's name or in the name of a Borrower to verify the validity, amount or any other matter relating to any Collateral by mail, telephone, telegraph or otherwise. The Bank shall endeavor to give the Borrowers prompt notice of the names of Account Debtors with whom the Bank has conducted such verification, provided that the Bank's failure to do so shall not give rise to any claim or defense against the Bank. (B) The Bank (by any of its officers, employees and/or agents) shall have the right, at any time or times during usual business hours, to inspect the Collateral, all records related thereto (and to make extracts from such records) and the premises upon which any of the Collateral is located, to discuss Borrower's affairs and finances with any attorney, accountant, Account Debtor or creditor of a Borrower and to verify the amount, quality, quantity, value and condition of, or any other matter relating to, the Collateral. 5.6. Assignments; Records and Reports of Accounts. Each Borrower shall keep accurate and complete records of its Accounts; and, on the date specified in Section 7.1(B)(iii) below (and upon earlier demand by the Bank), each Borrower shall deliver to the Bank, in form and substance acceptable to the Bank, a detailed aged trial balance of all then existing Accounts specifying the names, face value and dates of invoice(s) for each Account Debtor obligated on an Account so listed and, upon demand by the Bank, the original copy of all documents, including, without limitation, repayment histories and present status reports, relating to the Accounts so scheduled and such other matters and information relating to the status of the Accounts as the Bank shall in its discretion request. 5.7. Federal and State Accounts. Upon the Bank's request, the Borrowers shall, if any Accounts arise out of contracts with the United States of America or any state thereof or any department, administration, agency or instrumentality of any thereof, immediately notify the Bank thereof in writing and execute any and all instruments and take all steps required by the Bank in order that all monies due and to become due under such contract shall be assigned to the Bank and notice thereof given to the Government under the Federal Assignment of Claims Act, as amended. Or equivalent state statute. 5.8. Inventory and Equipment. The Borrowers shall at all reasonable times and from time to time allow the Bank, by or through any of its officers, agents, attorneys or accountants, to examine or inspect the Inventory and the Equipment and all records concerning the same wherever located and shall furnish to the Bank such other information with respect thereto as the Bank may reasonably request. 5.9. Collections; Notice of Assignment; Lock Box. Upon and during the continuance of an Event of Default, without limiting or otherwise impairing the Bank's right to exercise any other right or remedy which may be available to the Bank, the Bank may, upon notice to the Borrowers, require that the following provisions shall become effective: (A) So long as the Bank does not request that the Account Debtors on the Accounts be notified of the assignment thereof to the Bank, the Borrowers may make collections on the Accounts, and hold the proceeds for the Bank in the exact form in which they are received from collections in trust for the Bank, and turn over such proceeds to the Bank in the exact form in which they are received, together with endorsements in favor of the Bank and a collection report in a form acceptable to the Bank. Said proceeds shall be deposited with the Bank in a collections account(s) maintained with the Bank or other nationally chartered bank acceptable to the Bank over which the Bank alone shall have power of withdrawal, pursuant to an account agreement in form and substance satisfactory to the Bank. The Bank may in its discretion at least once a Banking Day apply the whole or any part of the funds on deposit in such collections account(s) against the principal and/or interest of any Revolving Loans or any other Bank Debt which is then due, and any portion of said funds on deposit in such collection account(s) which the Bank elects not to apply to such Bank Debt shall be paid over and deposited by the Bank to the Borrowers' commercial account, provided, however, that no such transfer from the collections account(s) will be made of funds deposited in the collections account(s) less than one (1) Banking Day before the date of such transfer. (B) The Bank may notify Account Debtors on any Accounts that the Accounts have been assigned to the Bank and shall be paid to the Bank. Upon request of the Bank at any time, the Borrowers will so notify such Account Debtors and will indicate on all billings to such Account Debtors that the Accounts are payable to the Bank. The Bank is hereby authorized to make any endorsement on any collection on a Borrower's behalf. (C) To evidence the Bank's rights hereunder, each Borrower will upon request of the Bank assign or endorse the Accounts or proceeds thereof to the Bank as the Bank may request. The Bank shall have full power to collect, compromise, endorse, sell or otherwise deal with the Accounts or proceeds thereof in its own name or that of a Borrower. The cost of collection and enforcement of Accounts, or any Instrument belonging to a Borrower for goods sold or services rendered, including attorneys' fees and out-of-pocket expenses, shall be borne solely by the Borrowers, whether the same are incurred by the Bank or a Borrower. (D) Each Borrower shall cause all Accounts to be collected through a lock-box arrangement with the Bank and shall execute a lock-box agreement in form and substance satisfactory to the Bank (the "Lock-box Agreement"). In the event that a Borrower shall default on its obligation to have Accounts collected through a lock-box arrangement, the Bank may forthwith notify all or any Account Debtors of the security interest granted to the Bank and request said Account Debtors to send all payments to be made in respect of Accounts to said lock box, or to otherwise remit the same to the Bank. The Bank in such event shall have full power and authority to endorse Borrower's name on any check, draft, note or other instrument for the payment of money which shall be received from an Account Debtor. Each Borrower also agrees upon the Bank's request to execute and deliver to the Bank a power of attorney in form satisfactory to the Bank authorizing any officer of the Bank to notify postal authorities to change the address for delivery of such Borrower's mail to an address designated by the Bank, and authorizing the Bank to open all such mail delivered to the designated address with full power to endorse such Borrower's name on any check, draft or other instrument for the payment of money from an Account Debtor for collection, provided that the Bank promptly provides a list of all such instruments for the payment of money endorsed by the Bank and delivers all other unrelated mail promptly to such Borrower. 5.10. Additional Collateral. Any and all deposits or other sums at any time credited by or due from the Bank to the Borrowers or any of them shall at all times constitute additional security for the Bank Debt and may be set off against any such Bank Debt at any time, whether or not it is then due, or whether or not other security held by the Bank is considered by the Bank to be adequate. Any and all Instruments, documents, policies, certificates of insurance, securities, goods, accounts receivable, choses in action, Chattel Paper, cash, property and the proceeds thereof (whether or not the same are Collateral or the proceeds thereof) owned by a Borrower or in which a Borrower has an interest, which now or hereafter are at any time in possession or control of the Bank, in transit by mail or carrier to or from the Bank, or in the possession of any third party acting in the Bank's behalf, without regard to whether the Bank received the same in pledge for safekeeping, as agent for collection or transmission or otherwise, or whether the Bank has conditionally released the same, shall constitute additional security for the Bank Debt and may be applied at any time to any such Bank Debt which is then due, whether by acceleration or otherwise. In addition, all other collateral security given by a Borrower in favor of the Bank, whether by pledge, mortgage lien or security interest, shall secure all of the Bank Debt as if expressly stated in the agreement or document relating to such collateral security. 5.11. Proceeds of Collateral. The Borrowers shall not, without the prior written consent of the Bank, sell, lease, grant a security interest in or otherwise dispose of or encumber (other than Permitted Encumbrances) the Collateral, or any part thereof or interest therein, except for the sale of Inventory in the normal course of the Borrowers' business and the sale or other disposition of Equipment which is obsolete or otherwise in need of replacement. In the event any Collateral is sold, transferred or otherwise disposed of as herein provided, the Borrowers shall deliver all of the cash proceeds of any such sale, transfer or disposition to the Bank, which proceeds shall be applied to the repayment of the Bank Debt in such order as the Bank may determine; provided that, so long as no Event of Default or Possible Default then exists, the Borrowers may utilize such proceeds for the acquisition of replacement Equipment of like kind and utility. 6. WARRANTIES AND REPRESENTATIONS 6.1. General Warranties and Representations. Each Obligor hereby warrants and represents that: (A) Organization. Each Obligor is a corporation duly organized, validly existing and in good standing under the laws of the State of its incorporation and is qualified or licensed to do business and is in good standing in every other jurisdiction wherein failure to so qualify would have a material adverse effect on the financial condition, operations, business or property of such Obligor; (B) Title. Each Borrower has good, indefeasible and merchantable title to and ownership of all Collateral, free and clear of all Liens except those of the Bank and those, if any, listed on Schedule 6.1(B) hereto (the "Permitted Encumbrances"); (C) ERISA. No Obligor has received any notice to the effect that it is not in full compliance with any of the requirements of ERISA, and the regulations promulgated thereunder and, to the best of its knowledge there exists no event described in Section 4043(b)(3) thereof ("Reportable Event"). No Obligor now has, or ever has had, any obligation to contribute to a Multiemployer Plan; (D) Taxes. Each Obligor has filed all federal, state and local tax returns and other reports required by law and has paid, to the extent due and payable, all federal, state, county, municipal, and other governmental (including, but not limited to, the PBGC) taxes, levies, assessments, or Liens upon or relating to the Collateral, the Bank Debt, its employees, payroll, income and gross receipts, its ownership or use of any of its assets, and any other aspect of its business (hereinafter referred to collectively as the "Charges"); (E) Locations. The offices and/or locations where each Borrower keeps its respective Inventory, Equipment and books and records relating to Collateral, including, without limitation, computer programs, printouts and other computer materials and records concerning the Collateral, are at the locations listed on Schedule 6.1(E) hereto; the chief executive office of each Borrower is located at 2746 Old U.S. Route 20 West, Elkhart, Indiana 46515, except that c/o Skandia International Risk Management, 346 Shelburne Road, P.O. Box 64649, Burlington, Vermont 05406-4649 is also an address at which certain records of Interstate may be located from time to time. (F) Other Names. No Borrower has, during the preceding five (5) years, been known as or used any other company or fictitious name; no Borrower has any Subsidiaries; (G) Stock. 100% of all outstanding shares or units of Stock of each Borrower are owned by Group, and all such shares or units have been duly authorized and are validly issued, fully paid for and non-assessable and have been issued in compliance with all applicable federal and state laws, rules and regulations, including, without limitation, all so-called "Blue-Sky" laws; (H) Real Property. Certain of the Borrowers own parcels of real property at various locations throughout the United States; however, none is deemed by the Borrowers to be material on a Consolidated basis, other than the premises owned by Morgan known as 2746 Old U.S. Route 20 West, Elkhart, Indiana 46515; and no Borrower is a party to any material lease for real property; (I) Authorization; Valid and Binding. Each Obligor has full power and authority and is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and the Other Agreements to which it is a party, and its officers executing and delivering this Agreement and the Other Agreements are duly authorized and empowered to do so; and each of this Agreement and the Other Agreements upon delivery to the Bank, will be valid and binding obligation of such Obligor enforceable in accordance with its respective terms; provided, however, such enforceability may be (i) limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally (except that the Bank Debt and Liens in favor of the Bank described or set forth in or created by this Agreement and the Other Agreements are not void ab initio or voidable), and (ii) subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); (J) No Violation. The execution, delivery and performance by each Obligor of this Agreement and the Other Agreements to which it is a party shall not, by the lapse of time, the giving of notice or otherwise, constitute a violation of any applicable law or a breach of any provision contained in such Obligor's Articles of Incorporation/Charter or Code of Regulations/Bylaws or contained in any agreement, instrument or document to which such Obligor is now a party or by which it is bound; (K) Financials. The Financials have been prepared in accordance with GAAP and fairly present in all material respects the assets, liabilities and financial condition and results of operations of each Borrower and Group as of the dates thereof; there are no omissions or other facts or circumstances which are or may be material and there has been no material and adverse change in the assets, liabilities or financial condition of any Obligor since the date of the Financials; there exist no equity or long-term investments in, or outstanding advances to, any Person by any Obligor not reflected in the Financials; there exist no actions or proceedings pending or threatened against any Obligor, nor has any Obligor guaranteed the obligations of any other Person; (L) Judgments; Decrees. No Obligor is in default in respect of any judgment, order, writ, injunction, decree or decision of any governmental body, which default would have a material adverse effect on the financial condition, operations, business or property of such Obligor; and each Obligor is in compliance in all material respects with all applicable statutes and regulations, a violation of which would have a material adverse effect upon the financial condition, operations, business or property of such Obligor; (M) Valid Liens. Upon execution and delivery of this Agreement and the Other Agreements, the Liens in favor of the Bank provided for hereunder and thereunder will constitute a duly perfected first priority Lien in the property described therein (to the extent, as to personal property, that a security interest therein can be perfected by the filing of financing statements) subject to no prior or equal Liens, except for the Permitted Encumbrances; and (N) Fed Regulations. Each Obligor's execution and delivery of this Agreement and the Other Agreements to which it is a party does not directly or indirectly violate or result in a violation of Regulations G, U or X of the Board of Governors of the Federal Reserve System, and no Borrower owns nor intends to purchase or carry any "margin security", as defined in said Regulations. 6.2. Account Warranties and Representations. Each Borrower hereby warrants and represents to the Bank, that the Bank may, in determining which Accounts listed on or included or reflected in any borrowing certificate or report of Accounts are Eligible Accounts, rely on all statements or representations made by the Borrowers on or with respect to any such Certificate or report and, unless otherwise indicated in writing by a Borrower, that: (A) Genuine. They are genuine, are in all respects what they purport to be, are not evidenced by a judgment and are evidenced by only one, if any, executed original instrument, agreement, contract or document, which has been delivered to the Bank; (B) Complete Transactions. Except for Accounts included in the In Transit Amount, they represent bona fide transactions completed in accordance with the terms and provisions contained in any documents related thereto; (C) Due and Owing. The face amounts included in or shown on any schedule of Accounts provided to the Bank, and/or all invoices and statements delivered to the Bank with respect to any Account are, except for Accounts included in the In Transit Amount, actually and absolutely owing to a Borrower and are not contingent for any reason; (D) No Setoff. To the best of such Borrower's knowledge, there are no setoffs, counterclaims or disputes existing or asserted in respect thereof, and such Borrower has not made any agreement with any Account Debtor thereunder for any deduction therefrom, except a discount or allowance allowed in the ordinary course of business for prompt payment, all of which discounts or allowances are reflected in the calculation of the face value of each respective invoice related thereto; (E) No Impairment. To the best of such Borrower's knowledge, except for Accounts included in the Eligible Reserve, there are no facts, events or occurrences which in any way impair the validity or enforcement thereof or tend to reduce the amount payable thereunder included in or shown on any borrowing certificate or report of Accounts, and on all contracts, invoices and statements delivered to the Bank in respect thereof; (F) Capacity. To the best of such Borrower's knowledge, all Account Debtors thereunder had the capacity to contract at the time any contract or other document giving rise to the Account was executed; (G) No Liens. They are not subject to any Lien except for the security interest in favor of the Bank created hereby; and (H) Valid. Such Borrower has no knowledge of any fact of circumstance which would impair the validity or collectibility thereof, except for Accounts included in the Eligible Reserve. 6.3. Warranty and Reaffirmation of Warranties and Representations; Survival of Warranties and Representations. Except as otherwise disclosed in writing by the Borrowers to the Bank, each request for an advance made by a Borrower pursuant to this Agreement shall constitute (i) a warranty and representation by the Borrowers to the Bank that there does not then exist an Event of Default or Possible Default, and (ii) a reaffirmation by the Borrowers as of the date of said request of the representations and warranties contained in Sections 6.1 and 6.2 with respect to Collateral then existing. All representations and warranties of the Borrowers and the other Obligors contained in this Agreement and the Other Agreements shall survive the execution, delivery and acceptance thereof by the parties thereto and the closing of the transactions described therein or related thereto. 7. COVENANTS AND CONTINUING AGREEMENTS 7.1. Affirmative Covenants. The Borrowers jointly and severally covenant and agree, and where indicated the other Obligors jointly and severally covenant and agree, that they shall: (A) Collateral Maintenance. The Borrowers shall maintain as minimum security for the Revolving Loans, Eligible Accounts having, in the aggregate, a Borrowing Base (as determined pursuant to the definition thereof, above) not less than the aggregate unpaid principal of all Revolving Loans; and, if not, immediately pay to the Bank the difference between the Borrowing Base at such time and the aggregate unpaid principal amount of the Revolving Loans; (B) Financial Reporting. The Obligors shall keep and maintain accurate books of account and financial records in respect of their respective businesses and property and cause to be furnished to the Bank the following: (i) as soon as available, but not later than ninety (90) days after the close of each fiscal year of Group hereafter, audited financial statements of Group on a Consolidated basis and of Interstate as at the end of such year prepared in accordance with generally accepted auditing principles by a firm of independent certified public accountants of recognized standing, acceptable to the Bank and selected by Group or Interstate, as the case may be, which financial statements shall include a balance sheet, statements of income and surplus, statements of cash flow, a reconciliation of capital accounts, any management letters written by such accountants and consolidating financial statements for each of the other Obligors; (ii) concurrently with the delivery of the financial statements described in Subsection (i) above, a certificate of such certified public accountants certifying to the Bank that, based upon their examination of the affairs of Group and its Subsidiaries or of Interstate, as the case may be, performed in connection with the preparation of said financial statements, they are not aware of the existence of any Event of Default or Possible Default, or, if they are aware of such condition or event, the nature thereof; (iii) as soon as available, but not later than forty-five (45) days after the end of each fiscal quarter of Group, as of the end of such quarter (a) unaudited interim financial statements of Group on a Consolidated basis, including a balance sheet and statements of income and surplus (together with consolidating statements for each of the other Obligors), fairly representing in all material respects Group's Consolidated financial condition as of the end of such month and (b) a certificate in form and substance satisfactory to the Bank executed by the chief financial officer of each Borrower, certifying as to compliance by the Borrowers with the covenants contained in Sections 7.2 (F), (G) and (H) of this Agreement, which certificate shall set forth in detail satisfactory to the Bank calculations evidencing such compliance; (iv) as soon as available, but not later than twenty (20) days after the end of each month, (a) a Borrowing Base certificate (in form and substance designated by the Bank from time to time) duly completed and which shall contain the In Transit Amount and the Eligible Reserve as of such month end and (b) upon the Bank's request, a report as to each Borrower's Accounts with a supporting aged trial balance listing for each Account Debtor, the number and dollar amount of the Accounts due from such Account Debtor that are past due for not more than thirty (30) days, past due for not more than sixty (60) days, past due for not more than ninety (90) days, and past due for more than ninety (90) days, with the total dollar amount of each of the foregoing; (v) not later than thirty (30) days after the end of each fiscal year of the Borrowers, a business plan of each Borrower in respect of the immediately succeeding fiscal year, which shall have been approved by the Board of Directors of such Borrower, and which shall include a projection of such Borrower's balance sheet, earnings/loss and cash flow for each fiscal quarter during such succeeding fiscal year; (vi) immediately upon becoming aware of the existence of an Event of Default, a written notice specifying the nature and period of existence thereof and what action the Obligor in question is taking or proposing to take in respect thereof; and (vii) promptly, such other data and information (financial and otherwise) as the Bank, from time to time, reasonably may require; (C) Existence; Qualification. Each Obligor shall maintain (i) its corporate existence in the jurisdiction of its formation and (ii) its qualification in each other jurisdiction in which the failure so to do would have a material adverse effect on its financial condition, business, operations or property; (D) Charges. The Obligors shall pay and discharge promptly when due (i) all Charges and (ii) all lawful Debt, obligations and claims for labor, materials and supplies or otherwise which, if unpaid, might have a material adverse effect on its financial condition, operations, business or property, provided that Obligors shall not be required to pay and discharge or cause to be paid and discharged any such Charges, Debt (other than the Bank Debt), obligations or claims so long as the validity thereof shall be contested in good faith and by appropriate proceedings diligently conducted, and further provided that a reserve or other appropriate provision as shall be in accordance with GAAP shall have been made therefor; (E) Compliance with Laws. The Obligors shall observe and comply in all material respects with all laws (including ERISA), ordinances, orders, judgments, rules, regulations, certifications, franchises, permits, licenses, directions and requirements of all governmental bodies, which now or at any time hereafter may be applicable to it, a violation of which might have a material adverse effect on its financial condition, operations, business or property; (F) Inspection. Each Obligor shall permit representatives of the Bank to visit its offices during normal business hours to examine the books and records thereof and accountants' reports relating thereto, and to make copies or extracts therefrom, and to discuss the affairs of such Obligor with the officers thereof, at all reasonable times, and, at all reasonable times, to meet and discuss the affairs of such Obligor with Group's accountants; (G) Material Commitments. Each Borrower shall maintain in full force and effect, all material agreements, including, without limitation, all leases, franchises, copyrights, patents, licenses, permits, applications, reports, authorizations and other rights, as are necessary for the conduct of its business; (H) Account Notification. The Borrowers shall, immediately upon a Borrower's learning thereof, inform the Bank, in writing, of (i) any material delay in a Borrower's performance of any of its obligations to any Account Debtor and of any assertion of any material claims, offsets or counterclaims by any Account Debtor and of any allowances, credits (other than as permitted in Section 6.2(D)) or other monies granted by a Borrower to any Account Debtor; (ii) all material adverse information relating to the financial condition of any Account Debtor; (iii) any facts relating to any Account which would render untrue, in any material respects, any representation or warranty made pursuant to Section 6.2; (iv) any litigation affecting a Borrower, whether or not the claim is considered by the Borrowers to be covered by insurance, and of the institution of any suit or administrative proceeding which may materially and adversely affect the operations, financial condition or business of a Borrower or the Bank's security interest in the Collateral; (I) Taxes. The Borrowers shall pay all stamp and any other similar excise taxes claimed payable by any Federal or state authority with respect to this Agreement or the Revolving Note, which obligation shall survive the termination of this Agreement and payment of the Bank Debt; (J) Discharge Liens. The Borrowers shall promptly after discovery of existence discharge any Liens against the Collateral, other than the Permitted Encumbrances; (K) Repair. The Borrowers shall keep and maintain all tangible Collateral in good operating order and repair, ordinary wear and tear and obsolescence excepted; and (L) Other Covenants. The Borrowers shall perform, observe and comply with such other covenants as the Bank may from time to time reasonably require of the Borrowers to assure the repayment in full of all of the Bank Debt or the complete and timely performance by the Borrowers of all the provisions of the Borrowers hereunder. 7.2. Negative Covenants. The Borrowers jointly and severally covenant and agree, and where indicated the other Obligors jointly and severally covenant and agree, that they shall not: (A) Other Debt. No Borrower shall incur, create, assume, or have outstanding any Funded Debt, except (i) instruments creating or securing Permitted Encumbrances, (ii) the Revolving Note, (iii) notes for Debt otherwise owing to the Bank, (iv) Subordinated Debt, (v) Funded Debt shown as liabilities of one or more of the Obligors on the Consolidated balance sheet of Group as of December 31, 1997 delivered to the Bank prior to the Closing Date, and (vi) Funded Debt, in addition to that described in clauses (i) through (v), above, which does not at any time in the aggregate exceed $750,000 on a Consolidated basis; (B) Sale and Leaseback; Liens. Except as provided in Section 5.11, no Borrower shall enter into any sale and leaseback transaction or arrangement with any Person with respect to any of the assets of such Borrower or its Subsidiaries, or grant a security interest, mortgage, pledge, hypothecate or otherwise voluntarily place a Lien upon any assets for any obligation of such Borrower, except for Permitted Encumbrances; (C) Merger; Consolidation; Sale. No Obligor shall merge or consolidate with or into, or enter into any merger agreement with any other entity, or lease, sell or transfer all or substantially all its property, assets and business to any other entity, other than another Obligor; (D) Investments. No Obligor shall make any advance to, or investment of any kind in, or loan any money to, or guarantee any obligation of any other Person or purchase any evidence of Debt or securities (including Stock) or the business or substantially all of the property of any other Person or hereafter make prepayments or advances to others except for (i) endorsements of instruments or items of payment for deposit to the general account of such Obligor in the ordinary course of business or for delivery to the Bank on account of the Bank Debt, (ii) loans to officers of a Borrower the proceeds of which are used to fund his or her obligations in connection with his or her exercise of rights under an employee stock option plan, so long as the aggregate amount of all such loans at any time outstanding does not exceed $600,000 on a Consolidated basis, (iii) advances to employees (other than of the type described in clause (ii), above) made in the ordinary course of such Obligor's business in the aggregate amount of not more than $150,000 at any time outstanding on a Consolidated basis, (iv) the obligations of such Obligor under and pursuant to this Agreement and the Other Agreements and (v) Subsidiaries of Group which are guarantors of the Bank Debt pursuant to a Guaranty in the form of Exhibit D hereto; (E) Assignment of Accounts. No Obligor shall sell, assign or transfer any notes, accounts receivable or money due or to become due either as security or otherwise, except to secure the Debt of the Obligors hereunder or other Debt now or hereafter owing to the Bank; (F) Leverage. The Obligors shall not allow the Leverage Ratio as at the end of any fiscal quarter to be greater than forty-five percent (45%). (G) Net Worth. The Obligors shall not allow Consolidated Net Worth (i) as at the end of the fiscal quarter ending March 31, 1998 to be less than an amount equal to the sum of (a) $12,000,000, plus (b) the Quarterly Increase for such fiscal quarter; and (ii) as at the end of any fiscal quarter thereafter to be less than an amount equal to the sum of (a) the Previous Minimum for such fiscal quarter, plus (b) the Quarterly Increase for such fiscal quarter. (H) Interest Coverage. The Obligors shall not allow the Interest Coverage Ratio as of the end of any fiscal quarter, commencing June 30, 1998, to be less than (a) as at the end of the fiscal quarters ending June 30, and September 30, 1998, 2.50 to 1, and (b) as at the end of any fiscal quarter thereafter, 3.00 to 1; (I) Drafts; Trade Acceptances. No Obligor shall accept any drafts or trade acceptances against it; (J) Records and Collateral Locations. No Borrower shall remove its books and records and/or the Collateral from the location(s) set forth in Schedule 6.1(E) or keep any of such books and records and/or the Collateral at any other office(s) or location(s) unless (i) such Borrower gives the Bank written notice thereof and of the new location of said books and records and/or the Collateral at least thirty (30) days prior thereto and (ii) the other office or location is within the continental United States of America; or (K) Plans. No Obligor shall terminate any Plan which would (i) result in any liability of any Obligor to the PBGC, or (ii) permit the occurrence of any Reportable Event (as defined in Section 6.1(C)), or any other event or condition, which presents a risk of such a termination by the PBGC of any Plan, or (iii) withdraw or effect a partial withdrawal from a Multiemployer Plan if such withdrawal would result in any Obligor's incurring any withdrawal liability in excess of $100,000. 7.3. Payment of Charges and Claims. If an Obligor at any time or times hereafter, shall fail to pay the Charges when due or promptly obtain the discharge of such Charges or of any Lien asserted against the Collateral, the Bank may, without waiving or releasing any obligation or liability of the Obligors or any Event of Default, in its sole discretion, at any time or times thereafter, make such payment, or any part thereof, or obtain such discharge and take any other action with respect thereto which the Bank deems advisable. All sums paid by the Bank hereunder and any expenses, including reasonable attorneys' fees, court costs, expenses and other charges relating thereto, shall be payable, upon demand, by the Borrowers to the Bank and shall be additional Bank Debt hereunder secured by the Collateral. 7.4. Insurance, Payment of Premiums. (A) Maintenance of Insurance. Each Borrower shall, at its sole cost and expense, keep and maintain (i) the tangible Collateral and the records relating to the Accounts insured for their full insurable value against loss or damage by fire (including so-called "extended coverage"), theft, explosion, sprinkler leakage and all other hazards and risks ordinarily insured against by other prudent owners or users of such properties in similar businesses (sometimes referred to herein as "casualty insurance"), and (ii) insurance for liability from personal injury and property damage in such amounts as similar businesses maintain. The Borrowers shall notify the Bank promptly of any event or occurrence causing a material loss or decline in value of such Collateral and the estimated (or actual, if available) amount of such loss or decline. All policies of insurance on such Collateral shall be in form and with insurers recognized as adequate by prudent business persons and all such policies shall provide such coverages and be in such amounts as may be reasonably satisfactory to the Bank. (B) Evidence; Requirements; Power of Attorney. At the Bank's request, the Borrowers shall deliver to the Bank the original (or certified copy) of each policy of insurance required hereunder and evidence of payment of all premiums therefor. Such policies of casualty insurance shall contain a mortgagee endorsement or provision, in form and substance acceptable to the Bank, and shall show loss payable to the Bank. Such policies, or an independent instrument furnished to the Bank, shall provide that the insurance companies will give the Bank at least thirty (30) days prior written notice before any such policy or policies of insurance shall be altered or canceled and that no act or default of a Borrower, or any other Person shall affect the right of the Bank to recover under such policy or policies of insurance in case of loss or damage. Each Borrower hereby directs all insurers under such policies of casualty insurance to pay all proceeds payable thereunder directly to the Bank. Each Borrower irrevocably makes, constitutes and appoints the Bank (and all officers, employees or agents designated by the Bank) as such Borrower's true and lawful attorney and agent-in-fact for the purpose of making, settling and adjusting claims under such policies of casualty insurance, endorsing the name of such Borrower on any check, draft, instrument or other items of payment for the proceeds of such policies of casualty insurance and for making all determinations and decisions with respect to such policies of casualty insurance. In the event a Borrower, at any time hereafter, shall fail to obtain or maintain any of the policies of insurance required above or to pay any premium in whole or in part relating thereto, then the Bank, without waiving or releasing any obligations or Event of Default, may at any time thereafter (but shall be under no obligation to) obtain and maintain such policies of insurance and pay such premium and take any other action with respect thereto which the Bank deems advisable. All sums so disbursed by the Bank, including reasonable attorneys' fees, court costs, expenses and other charges relating thereto, shall be payable on demand by the Borrowers to the Bank and shall be additional Bank Debt hereunder secured by the Collateral. 7.5. Use of Proceeds. The Borrowers covenant and agree that the proceeds of the Revolving Loans for working capital for corporate purposes and the conduct of their respective businesses. 7.6. Survival of Obligations Upon Termination of Agreement. Except as otherwise expressly provided for in this Agreement and in the Other Agreements, no termination or cancellation (regardless of cause or procedure) of this Agreement or the Other Agreements shall in any way affect or impair the powers, obligations, duties, rights, and liabilities of the Obligors or the Bank relating to any transaction or event occurring prior to such termination or cancellation. 8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT 8.1. Events of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default": (A) Payment. If the Borrowers shall fail to pay (i) when due, or within five (5) days thereafter, any principal (including, without limitation, principal due pursuant to Section 7.1(A), above) or interest under the Revolving Note or (ii) any other portion of the Bank Debt within ten (10) days after the Bank sends to the Borrowers written demand therefor; (B) Other Covenants. If an Obligor (i) shall fail or omit to perform, observe or satisfy any of the warranties, covenants, agreements or conditions contained in Section 7.2, above or (ii) shall fail or omit to perform, observe or satisfy any of the warranties, covenants, agreements or conditions (other than those referred to in Paragraph (A) or in clause (i) of this Paragraph (B)) contained in this Agreement or any of the Other Agreements and such failure or omission shall not have been fully corrected within thirty (30) days after the giving of written notice thereof to the Borrowers by the Bank that the specified Possible Default is to be remedied; provided, however, that if any such failure or omission is not of the type which is susceptible to correction within said 30 day period, then such failure or omission shall be deemed an Event of Default as of the date of occurrence thereof; (C) Representations and Warranties. Any warranty, representation or written statement made or furnished to the Bank by or on behalf of an Obligor proves to have been false in any material respect when made or furnished; (D) Cross Default. If any event occurs which allows the acceleration of the maturity of the Debt of any Obligor for Funded Debt owing to Persons other than the Bank in excess of $500,000, including, without limitation, the Subordinated Debt; (E) Levy. If any Collateral is levied upon, seized or attached judicially, and, in any of such events, the Bank does not immediately receive substitute or replacement Collateral satisfactory to the Bank in its sole discretion; (F) Obligor Insolvency. If any Obligor shall suspend business, or if any Obligor shall become insolvent or shall file a voluntary petition in bankruptcy, or shall file a voluntary petition or an answer admitting the jurisdiction of the court and the material allegations of, or shall consent to, any involuntary petition pursuant to or purporting to be pursuant to any bankruptcy, reorganization or insolvency law of any jurisdiction, or shall make an assignment for the benefit of creditors, or shall apply for or consent to the appointment of any receiver or trustee of all or a substantial part of the property of such Obligor; (G) Obligor Involuntary Proceedings. If an order shall be entered against any Obligor (without the application, approval or consent of such Obligor) and shall not be dismissed or stayed within thirty (30) days from its entry pursuant to or purporting to be pursuant to any bankruptcy, reorganization or insolvency law of any jurisdiction (i) approving an involuntary petition seeking reorganization or liquidation; or (ii) approving an involuntary petition seeking an arrangement with creditors of such Obligor; or (iii) appointing any receiver or trustee of all or a substantial part of the property of such Obligor; (H) Other Insolvency. Default by any other surety or guarantor for an Obligor in any obligation or liability to the Bank or the occurrence of any event described in Section 8.1(F) or (G) in respect of any such guarantor or surety; (I) Loss of Collateral. Any material portion of the Collateral is damaged or lost by fire, theft or other casualty which is uninsured, and the Borrowers do not immediately, upon demand, furnish additional security satisfactory to the Bank; (J) Change of Control. A Change of Control shall occur; (K) Judgments. Final judgment for the payment of money in excess of $100,000 shall be rendered against any Obligor, and the same shall remain undischarged for a period of thirty (30) days during which execution shall not be effectively stayed; (L) Subordinated Default. Any obligee of Subordinated Debt shall (i) fail to materially comply with the subordination provisions of the instruments evidencing such Subordinated Debt or any separate subordination agreement, or (ii) initiate judicial proceedings against a Borrower or take any action seeking to obtain possession of any assets of a Borrower without the consent of the Bank; or (M) ERISA. If (i) any Reportable Event occurs and the Bank in its reasonable determination deems such Reportable Event to constitute grounds (A) for the termination of any Plan by the PBGC or (B) for the appointment by the appropriate United States district court of a trustee to administer any Plan and such Reportable Event shall not have been fully corrected or remedied to the full satisfaction of the Bank within thirty (30) days after giving of written notice of such determination to the Borrowers by the Bank or (ii) any Plan shall be terminated within the meaning of title IV of ERISA, or (iii) a trustee shall be appointed by the appropriate United States district court to administer any Plan, or (iv) the PBGC shall institute proceedings to terminate any Plan or to appoint a trustee to administer any Plan. 8.2. Acceleration of the Bank Debt. (A) Optional Acceleration. Upon the occurrence of an Event of Default described in Section 8.1(A), (B), (C), (D), (E), (H), (I), (J), (K), (L), or (M) and at any time thereafter, if any such Event of Default shall then be continuing, the Revolving Loans and all other Bank Debt shall, at the option of the Bank and without demand, notice, or legal process of any kind, be declared, and thereupon immediately shall become, due and payable in full, and the Bank shall have no further obligation to advance Revolving Loans hereunder. (B) Automatic Acceleration. Upon the occurrence of an Event of Default described in Section 8.1(F) or (G), all of the Bank Debt shall automatically without any declaration or other action by the Bank, and without demand, notice or legal process of any kind, be declared, and immediately shall become, due and payable, and the Bank shall have no further obligation to advance Revolving Loans hereunder. 8.3. Remedies. Upon, and thereafter during the continuance of, an Event of Default, the Bank shall have the following other rights and remedies: (A) Cumulative Remedies. In addition to any other rights and remedies contained in this Agreement and in all of the Other Agreements, all of the rights and remedies of a secured party under the Code or other applicable law, all of which rights and remedies (under this Agreement, the Other Agreements, the Code and at law and in equity) shall be cumulative and nonexclusive, to the extent permitted by law; (B) Mail. The right to open the mail of the Borrowers and collect any and all amounts due from the Account Debtors; (C) Entry; Assembly of Collateral. The right to (i) enter upon the premises of the Borrowers without any obligation to pay rent, through self-help and without judicial process, without first obtaining a final judgment or giving notice and opportunity for a hearing on the validity of the Bank's claim, or any other place or places where the Collateral is located and kept, and remove the Collateral therefrom to the premises of the Bank or any agent of the Bank, for such time as the Bank may desire, in order to collect or liquidate effectively the Collateral, or (ii) require the Borrowers to assemble the Collateral and make it available to the Bank at a place to be designated by the Bank, in its sole discretion; (D) Collection, Compromise of Accounts. The right to (i) demand payment of the Accounts; (ii) enforce payment of the Accounts, by legal proceedings or otherwise; (iii) exercise all of a Borrower's rights and remedies with respect to the collection of the Accounts and Special Collateral; (iv) settle, adjust, compromise, extend or renew the Accounts; (v) settle, adjust or compromise any legal proceedings brought to collect the Accounts; (vi) if permitted by applicable law, sell or assign the Accounts and Special Collateral upon such terms, for such amounts and at such time or times as the Bank deems advisable; (vii) discharge and release the Accounts and Special Collateral; (viii) take control, in any manner, of any item of payment or proceeds referred to in Section 5.9; (ix) prepare, file and sign each Borrower's name on any Proof of Claim in bankruptcy or similar document against any Account Debtor; (x) prepare, file and sign each Borrower's name on any Notice of Lien, Assignment or Satisfaction of Lien or similar document in connection with the Accounts and Special Collateral; (xi) do all acts and things necessary in the Bank's sole discretion, and at its option to fulfill each Borrower's obligations under this Agreement; (xii) endorse the name of each Borrower upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Collateral; (xiii) use each Borrower's stationery and sign the name of such Borrower to verifications of the Accounts and notices thereof to Account Debtors and (xiv) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Collateral to which such Borrower has access; and (E) Sale; Disposition. The right to (i) sell or to otherwise dispose of all or any Collateral in its then condition or after any further modification or processing thereof, at public or private sale or sales, in lots or in bulk, for cash or on credit, all as the Bank, in its sole discretion, may deem advisable; (ii) adjourn such sales from time to time with or without notice; (iii) conduct such sales on a Borrower's premises or elsewhere and use a Borrower's premises without charge for such sales for such time or times as the Bank may see fit. The Bank is hereby granted a license or other right to use, without charge, each Borrower's labels, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any property of a similar nature as it pertains to the Collateral, in advertising for sale and selling any Collateral, and each Borrower's rights under all licenses, permits and all franchise agreements which are Collateral shall inure to the Bank's benefit. The Bank shall have the right to sell, lease or otherwise dispose of the Collateral, or any part thereof, for cash, credit or any combination thereof, and the Bank may purchase all or any part of the Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may setoff the amount of such price against the Bank Debt. The proceeds realized from the sale of any Collateral shall be applied first to the reasonable costs, expenses and attorneys' fees and expenses incurred by the Bank for collection and for acquisition, completion, protection, removal, storage, sale and delivery of the Collateral; second to interest due upon any of the Bank Debt; third to the principal of the Revolving Loans; and fourth to the remaining Bank Debt, if any. Subject to any applicable order of court or other requirement of law, any surplus shall be paid to the Borrowers or other claimants as their interests may appear. If any deficiency shall arise, the Borrowers shall remain liable to the Bank therefor. 8.4. Interest Rate in the Event of Default. Upon the occurrence and during the continuance of an Event of Default, the rate of interest accruing on the Bank Debt (the "Default Interest Rate") shall, at the Bank's option, be increased to a rate per annum which shall be three hundred (300) Basis Points in excess of the rate of interest which would otherwise accrue pursuant to Section 2.3. 8.5. Notice. Any notice required to be given by the Bank of a sale, lease, other disposition of the Collateral or any other intended action by the Bank, if given five (5) days prior to such proposed action, shall constitute commercially reasonable and fair notice thereof to the Borrowers. 8.6. Rights Cumulative. The Bank's rights and remedies herein are cumulative and non-exclusive; and no such right or remedy specified in this Article 8 shall be deemed to limit, before or after the occurrence of an Event of Default, the exercise of any right of the Bank provided for elsewhere in this Agreement or in the Other Agreements, including, without limitation Article 5, above, or at law or in equity. 9. MISCELLANEOUS 9.1. Appointment of the Bank as Lawful Attorney. Each Borrower irrevocably designates, makes, constitutes and appoints the Bank (and all persons designated by the Bank) as such Borrower's true and lawful attorney (and agent-in-fact) and the Bank, or the Bank's agent, may, without notice to such Borrower: (A) At such time or times hereafter as the Bank or said agent, in its sole discretion, may determine, in such Borrower's or the Bank's name, endorse such Borrower's name on any checks, notes, drafts or any other payment relating to and/or proceeds of the Collateral which come into the possession of the Bank or under the Bank's control; and (B) Sign the name of such Borrower on any of the Supplemental Documentation and deliver any of the Supplemental Documentation to such Persons as the Bank, in its sole discretion, may elect. 9.2. Modification of Agreement; Sale of Interest. This Agreement and the Other Agreements may not be modified, altered or amended, except by an agreement in writing signed by the Obligors and the Bank. No Borrower may sell, assign or transfer this Agreement, or the Other Agreements or any portion thereof, including, without limitation, such Borrower's rights, title, interest, remedies, powers, and/or duties hereunder or thereunder. Each Obligor hereby consents to the Bank's participation, sale, assignment, transfer or other disposition, at any time or times hereafter of this Agreement, or the Other Agreements, or of any portion hereof or thereof, including, without limitation, the Bank's rights, title, interest, remedies, powers, and/or duties hereunder or thereunder. 9.3. Expenses (Including Attorneys' Fees). The Borrowers shall pay, and upon demand reimburse the Bank, for all of the Bank's costs and expenses incidental to the extension of credit and the administration or modification thereof (including, without limitation, the collection of any and all Bank Debt and the negotiation, preparation and enforcement of this Agreement and all of the Other Agreements) provided for in this Agreement or any Other Agreement including reasonable fees and out-of-pocket expenses of the Bank's counsel, title fees, survey fees, inspection fees, revenue, stamp, excise, note and mortgage taxes claimed payable by any federal, state or local authority, with obligation to pay all such costs to survive the termination of this Agreement and payment of the Bank Debt. All such expenses paid by the Bank hereunder shall be additional Bank Debt secured by the Collateral. 9.4. Waiver by the Bank. The Bank's failure, at any time or times hereafter, to require strict performance by an Obligor of any provision of this Agreement or the Other Agreements shall not waive, affect or diminish any right of the Bank thereafter to demand strict compliance and performance. Any suspension or waiver by the Bank of an Event of Default under this Agreement or the Other Agreements shall not suspend, waive or affect any other Event of Default under this Agreement or the Other Agreements, and no Event of Default under this Agreement or the Other Agreements shall be deemed to have been suspended or waived by the Bank, unless such suspension or waiver is by an instrument in writing signed by an officer of the Bank, directed to the Borrowers and specifying such suspension or waiver. 9.5. Severability. Wherever possible, each provision of this Agreement and the Other Agreements shall be interpreted in such manner as to be effective and valid under applicable law. If, however, any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement, unless the ineffectiveness of such provision materially and adversely alters the benefits accruing to any party hereunder. 9.6. Parties. This Agreement and the Other Agreements shall be binding upon and inure to the benefit of the Obligors and the Bank and their respective successors and assigns. This provision, however, shall not be deemed to modify Section 9.2 hereof. 9.7. Conflict of Terms. The Other Agreements and all Exhibits hereto are incorporated in this Agreement by this reference thereto. Except as otherwise provided in this Agreement and except as otherwise provided in the Other Agreements by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision in the Other Agreements, the provision contained in this Agreement shall govern and control. 9.8. Waivers by Obligors. Except as otherwise provided for in this Agreement, each Obligor waives (i) presentment, demand and protest and notice of presentment, protest, default, non-payment, maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, contract rights, documents, instruments, chattel paper and guaranties at any time held by the Bank on which such Obligor may in any way be liable and hereby ratifies and confirms whatever the Bank may do in this regard; (ii) all rights to notice of a hearing prior to the Bank's taking possession or control of, or to the Bank's replevy, attachment or levy upon, the Collateral or any bond or security which might be required by any court prior to allowing the Bank to exercise any of the Bank's remedies; and (iii) the benefit of all valuation, appraisement and exemption laws. Each Obligor acknowledges that it has been advised by counsel of its choice with respect to this Agreement and the transactions evidenced by this Agreement. 9.9. Governing Law. THIS AGREEMENT IS EXECUTED AND DELIVERED IN THE STATE OF OHIO, THE LAWS OF WHICH SHALL GOVERN THE VALIDITY, ENFORCEMENT, AND INTERPRETATION HEREOF AND OF THE OTHER AGREEMENTS. EACH OBLIGOR HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE STATE OF OHIO OR ANY JURISDICTION IN WHICH COLLATERAL IS LOCATED, AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON ITSELF, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY REGISTERED OR CERTIFIED MAIL DIRECTED TO SUCH OBLIGOR AT THE ADDRESS OF SUCH OBLIGOR SET FORTH IN SECTION 9.11, BELOW, AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF. 9.10. WAIVER OF JURY TRIAL. EACH OF THE BANK, MORGAN, TDI, INTERSTATE AND GROUP, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN THE BANK AND ANY OF THE OBLIGORS ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN ANY AND ALL OF THE OBLIGORS AND THE BANK IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER AGREEMENTS OR THE TRANSACTIONS RELATED THERETO. THIS WAIVER SHALL NOT IN ANY WAY AFFECT, WAIVE, LIMIT, AMEND OR MODIFY THE BANK'S ABILITY TO PURSUE REMEDIES PURSUANT TO ANY CONFESSION OF JUDGMENT OR COGNOVIT PROVISION CONTAINED IN THE REVOLVING NOTE, ANY GUARANTY OF PAYMENT OR ANY OTHER AGREEMENT, INSTRUMENT OR DOCUMENT RELATED THERETO. 9.11. Notice. All notices, requests, demands, directions and other communications given to or made upon any party hereto under the provisions of this Agreement shall be in writing (including telecopied communication) and shall be hand delivered or sent by certified mail, return receipt requested, or first class "Express Mail" or overnight courier service, with receipt for delivery thereof, or by telex, telecopy or telegram with confirmation in writing by certified mail, return receipt requested or Express Mail or overnight courier service, with receipt for delivery thereof, in all cases with postage or charges prepaid, to the applicable party, addressed as follows: If to the Bank: KeyBank National Association 127 Public Square Cleveland, Ohio 44114 Attn: Mark A. LoSchiavo With a copy to: Berick, Pearlman & Mills Co., L.P.A. 1350 Eaton Center 1111 Superior Avenue Cleveland, Ohio 44114 Osborne Mills, Jr., Esq. If to an Obligor: c/o The Morgan Group, Inc. 2746 Old U.S. Route 20 West Elkhart, Indiana 46515 Attn: Dennis Duerksen With a copy to: Barnes & Thornburg 600 1st Source Bank Center 100 North Michigan South Bend, Indiana 46601 Attn: Brian J. Lake, Esq. or in accordance with any unrevoked written direction from any party to each of the other parties hereto. Each such notice shall be deemed to have been given or received on the date received, except when sent by Express Mail or overnight courier service, in which case such notice shall be deemed to have been received on the next business day thereafter, and except further when sent by certified mail, in which case such notice shall be deemed to have been received on the third business day thereafter. 9.12. Section Titles. The Section titles contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 9.13. No Assurance of Extension or Renewal. The Borrowers confirm that the Bank has not made or given any agreement, understanding or other assurance that the Bank will agree to extend or renew the term of the Revolving Credit Facility beyond its maturity stated above. Without limiting the generality of the foregoing sentence, the Borrowers also confirm that the inclusion in this Agreement of certain covenants or other provisions containing or contemplating dates which are after such stated maturity of the Revolving Credit Facility were included herein solely for convenience in the event that such term is extended or renewed and shall not be construed to imply that the Bank has made or given any agreement, understanding or other assurance that it will extend or renew such term. 10. JOINT AND SEVERAL The Borrowers agree and acknowledge that their liability to pay all Bank Debt and to perform all other obligations under this Agreement and each Other Agreement to which they are a party is and shall be joint and several. No Borrower shall have any right of subrogation, reimbursement or similar right in respect of its payment of any sum or its performance of any other obligation hereunder unless and until all Bank Debt has been paid in full and the Bank has no further obligation hereunder. In addition, each Borrower confirms that upon the Bank's advance of the Revolving Loans, it will have received adequate consideration and reasonably equivalent value for the Debt incurred and other agreements made in the this Agreement and the Other Agreements in that (i) their businesses are operated as an integrated group, (ii) due to the nature of such businesses, it is highly unlikely that the Borrowers could be financed separately upon terms as favorable as they are under a unified credit facility, and (iii) without the financing provided by the Bank hereunder to the Borrowers jointly, no Borrower could reasonably expect to obtain financing separately on terms as favorable as those provided for herein. IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year first set forth above. BANK BORROWERS KEYBANK NATIONAL ASSOCIATION MORGAN DRIVE AWAY, INC. By:/s/ Richard A. Pohle By:/s/ Dennis Duerksen -------------------------- ---------------------------- Richard A. Pohle, Dennis Duerksen, Vice President Chief Financial Officer GUARANTOR THE MORGAN GROUP, INC. TDI, INC. By:/s/ Dennis Duerksen By: /s/ Dennis Duerksen -------------------------- ---------------------------- Dennis Duerksen, Dennis Duerksen, Chief Financial Officer Chief Financial Officer INTERSTATE INDEMNITY COMPANY By:/s/ Dennis Duerksen ---------------------------- Dennis Duerksen, Vice President SCHEDULES AND EXHIBITS Schedules: Schedule 1A Financials Schedule 1B Licenses, Patents, Etc. Schedule 6.1(B) Permitted Encumbrances Schedule 6.1(E) Locations of Inventory, Equipment, Books and Records Relating to Collateral Exhibits: Exhibit A Form of Revolving Note Exhibit B Form of Opinion of Borrower's Counsel Exhibit C Form of Landlord Waiver Exhibit D Form of Continuing Guaranty EXHIBIT A AMENDED AND RESTATED REVOLVING CREDIT NOTE $15,000,000 Cleveland, Ohio March 31, 1998 FOR VALUE RECEIVED, the undersigned MORGAN DRIVE AWAY, INC., TDI, INC., and INTERSTATE INDEMNITY COMPANY (each a "Borrower" and, collectively, the "Borrowers"), jointly and severally, promise to pay to the order of KEYBANK NATIONAL ASSOCIATION (together with any subsequent holder of all or any portion of this Note, the "Bank"), at 127 Public Square, Cleveland, Ohio 44114 or such other address as the Bank may from time to time designate in writing, on April 30, 2001 the principal sum of FIFTEEN MILLION DOLLARS ($15,000,000) or the aggregate unpaid principal amount of all loans evidenced by this Note made by the Bank to the Borrowers or any of them pursuant to the Credit Agreement (as hereinafter defined), whichever is less, in lawful money of the United States of America. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in that certain Amended and Restated Credit Agreement and Security Agreement dated March 25, 1998 (as the same may from time to time be amended, supplemented, restated or otherwise modified, the "Credit Agreement"), among the Borrowers, the Bank and The Morgan Group, Inc. The Borrowers jointly and severally promise to pay interest on the unpaid principal amount of each Revolving Loan evidenced hereby from the date of such Revolving Loan until principal amount is paid in full, at such interest rates, computed in such manner, and payable at such times, as are specified in the Credit Agreement. The Borrowers jointly and severally promise to pay on demand interest on any overdue principal and, to the extent permitted by law, overdue interest from their due dates at the rate or rates set forth in the Credit Agreement; and upon and during the continuance of an Event of Default, the indebtedness evidenced hereby shall bear interest at the Default Interest Rate. The portions of the principal sum hereof from time to time representing Prime Rate Loans and LIBOR Loans, and payments of principal of any thereof, will be shown on a ledger or other record of the Bank or by such other method as the Bank may generally employ; provided, however, that failure to make any such entry or any error in such entries shall in no way detract from the Borrowers' obligations under this Note. This Note is the Revolving Note referred to in the Credit Agreement. Reference is made to the Credit Agreement for a description of the right of the Borrowers to anticipate payments hereof, the right of the Bank to declare this Note due prior to its stated maturity, and other terms and conditions upon which this Note is issued. Without limiting the generality of the foregoing, upon the occurrence of an Event of Default of the type described in Section 8.1(F) or (G) of the Credit Agreement, the maturity of the obligations evidenced hereby shall, automatically and without any action by the Bank, be accelerated, and such obligations shall be immediately due and payable. Upon the occurrence of any other Event of Default, the Bank may, at its option, without notice or demand, accelerate the maturity of the obligations evidenced hereby, which obligations shall become immediately due and payable. In the event the Bank shall institute any action for the enforcement or collection of the obligations evidenced hereby, the undersigned agrees to pay all costs and expenses of such action, including reasonable attorneys' fees, to the extent permitted by law. The indebtedness evidenced by this Note is secured by a Lien in the Collateral pursuant to the Credit Agreement and is guaranteed by the Guaranty of The Morgan Group, Inc. This Note evidences the Borrowers' indebtedness for Revolving Loans and amends and restates in its entirety the Master Revolving Note of Morgan and TDI in the face amount of $13,000,000 in favor of the Bank dated March 27, 1997 (as amended by an amendment dated March 6, 1998, the "Prior Note")(with Interstate joining in this Note pursuant to the Credit Agreement), provided that this Note shall not be construed to evidence a payment and readvance of the Revolving Loans evidenced thereby and hereby, it being the intention of the Borrowers and, by its acceptance hereof, the Bank that both such Notes evidence the same indebtedness. In addition to the foregoing, this Note also evidences the indebtedness of the Borrowers for accrued and unpaid interest due under the Prior Note which remains unpaid on the date hereof, all of which interest shall be due and payable in full on March 31, 1998. The Borrowers and each endorser, surety and guarantor hereby waive diligence, presentment, demand, protest and notice of any kind whatsoever. The failure to exercise or delay in exercise by the Bank of any of its rights hereunder in any particular instance shall not constitute a waiver in that or any subsequent instance. The joint and several obligations of each of the Borrowers under this Note shall be absolute and unconditional and shall remain in full force and effect until all of the obligations hereunder shall have been paid or deemed paid and, until such payment has been made, shall not be discharged, affected, modified or impaired upon the happening from time to time of any event, including without limitation, any of the following, whether or not with notice to or the consent of any of the Borrowers: (a) the waiver, compromise, indulgence, settlement, release, termination, modification or amendment (including, without limitation, any extension or postponement of the time for payment or performance or renewal or refinancing) of any or all of the obligations, covenants or agreements of any of the Borrowers under this Note, the Credit Agreement or any of the Other Agreements; (b) the failure to give notice to any or all of the Borrowers of the occurrence of an Event of Default; (c) the release, substitution or exchange by the Bank of any security held by it for the payment of any of the Liabilities or the acceptance by the Bank of any additional security for the Bank Debt or the availability, or claimed availability, of any other security, collateral or source of repayment; (d) the voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all of the assets, marshaling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition with creditors or readjustment of, or other similar proceedings affecting, any or all of the Borrowers or any other person or entity who, or any of whose property, shall at any time in question be obligated in respect of the Liabilities or any part thereof; (e) any failure, omission, delay or neglect by the Bank in enforcing asserting or exercising any right, power or remedy under this Note, the Credit Agreement or any of the Other Agreements or at law or in equity; (f) the release of any person primarily or secondarily liable for all or any part of the Bank Debt; (g) any nonperfection or other impairment of any security; (h) any assignment or transfer by the Bank of all or any interest in this Note; (i) the invalidity or unenforceability of any term or provision in this Note, the Credit Agreement or any of the Other Agreements; or (j) to the extent permitted by law, any event or action that would, in the absence of the provisions hereof, result in the release or discharge of any or all of the Borrowers from the performance or observance of any obligation, covenant or agreement contained in this Note, the Credit Agreement or any of the Other Agreements. Without limiting the foregoing, it is the intention of the parties that any modification, limitation, or discharge of the obligations of any of the Borrowers arising out of or by virtue of any bankruptcy, reorganization, or similar proceeding for relief of debtors under federal or state law shall not affect, modify, limit or discharge the liability of any other co-Obligor in any manner whatsoever, and this Note shall remain and continue in full force and effect and shall be enforceable against such co-Obligors to the same extent and with the same force and effect as if any such proceedings had not been instituted, and the other co-Obligors shall be jointly and severally liable to the Bank under this Note for the full amount payable hereunder, irrespective of any modification, limitation, or discharge of the liability of any co-Obligor that may result from any such proceeding. The obligations of the Borrowers to the Bank pursuant hereto include and apply to any payment or repayments received by the Bank on account of the liabilities evidenced hereby which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be paid to a trustee, receiver, or any other person or entity under any bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar law or equitable doctrine. If any action or proceeding seeking such repayment is pending or, in the Bank's sole judgment, threatened, this Note and, any security interest herefor, shall remain in full force and effect notwithstanding that one, or more or all of the Borrowers may not then be obligated to the Bank. The joint and several obligations of the Borrowers to the Bank under and pursuant to this Note and any security therefor, shall remain in full force and effect until the Bank has received payment in full of all obligations hereunder and the expiration of any applicable preference or similar period pursuant of any bankruptcy, insolvency, reorganization, moratorium or similar law, or at law or in equity, without any claim having been made before the expiration of such period asserting an interest in all or any part of any payments received by the Bank. If any of the terms or provisions of this Note shall be deemed unenforceable, the enforceability of the remaining terms and provisions shall not be affected. This Note shall be governed by and construed in accordance with the law of the State of Ohio. Each Borrower (a) hereby irrevocably submits to the jurisdiction of the state courts of the State of Ohio and to the jurisdiction of the United States District Court for the Northern District of Ohio, for the purpose of any suit, action or other proceeding arising out of or based upon this Note or the subject matter hereof brought by the Bank or its successors or assigns and (b) hereby waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Note or the subject matter hereof may not be enforced in or by such court and (c) hereby waives and agrees not to seek any review by any court of any other jurisdiction which may be called upon to grant an enforcement of the judgment of any such Ohio state or federal court. Each Borrower agrees that its submission to jurisdiction and its consent to service of process by mail is made for the express benefit of the Bank. Final judgment against any Borrower in any such action, suit or proceeding may be enforced in other jurisdictions (a) by suit, action or proceeding on the judgment, or (b) in any other manner provided by or pursuant to the laws of such other jurisdiction; provided, however, that the Bank may at its option bring suit, or institute other judicial proceedings, against a Borrower in any state or federal court of the United States or of any country or place where such Borrower or its property may be found. EACH BORROWER AND, BY ACCEPTANCE HEREOF, THE BANK , TO THE EXTENT PERMITTED BY LAW WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE BANK AND SUCH BORROWER ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN SUCH BORROWER (AND, IF APPLICABLE, THE OTHER BORROWERS AND MORGAN GROUP, INC.) AND THE BANK IN CONNECTION WITH THIS NOTE, THE CREDIT AGREEMENT OR ANY OTHER AGREEMENT, INSTRUMENT, OR DOCUMENT EXECUTED OR DELIVERED IN CONNECTION THEREWITH OR THE TRANSACTIONS RELATED THERETO. MORGAN DRIVE TDI, INC. INTERSTATE INDEMNITY AWAY, INC. COMPANY By /s/ Dennis Duerksen By /s/ Dennis Duerksen By /s/ Dennis Duerksen -------------------- --------------------- ---------------------- Dennis Duerksen, Dennis Duerksen, Dennis Duerksen, Chief Financial Chief Financial Vice President Officer Officer EXHIBIT C LANDLORD ESTOPPEL CERTIFICATE, WAIVER AND CONSENT This Landlord Estoppel Certificate, Waiver and Consent is made this __ day of March, 1998, by ____________________________, a _______________________ ("Landlord"), for the benefit of KEYBANK NATIONAL ASSOCIATION, a national banking association, and its successors and assigns ("Bank"). Landlord has entered into a certain Lease Agreement dated _____________, 199__ ("Lease") with ______________________, a __________ corporation ("Borrower"), as lessee or tenant, for certain premises consisting of _______ square feet located at ________________________________, ___________, _______, ___________ County, _____ _____ ("Premises"). Bank is about to enter into a financing arrangement with Borrower and as a condition to Bank's financing, Bank requires, among other things, certain liens and security interests in and to all of Borrower's personal property, now owned or hereafter acquired, including, without limitation, all of Borrower's existing and future contract rights, accounts, accounts receivable, general intangibles and all goods, inventory, machinery, equipment, fixtures, cash, documents, instruments and chattel paper now owned or hereafter acquired by Borrower, wherever located, including all proceeds of any and all of the foregoing and all payments under insurance policies with respect to any of the foregoing (collectively, the "Personal Property"). In addition, Bank requires, as a condition to its agreement to enter into the above-referenced transaction, among other things, certain agreements from Landlord with respect to the Lease and the Premises. In consideration of the foregoing and of Landlord's ongoing business relationship with Borrower, Landlord hereby represents and agrees as follows: 1. The Lease, a true and complete copy of which is attached hereto as Exhibit A, is at present in full force and effect on the date hereof; it has not been amended, supplemented, extended or renewed in any respect except for such amendments as may be included in said Exhibit; and there is no other agreement or instrument to which Landlord is a party, which is binding upon Borrower and which relates to the Premises, including any assignment of the Lease. The terms of the Lease include the following: a. The term of the Lease is __ (__) years. The commencement date is ____________________. The expiration date is ________________. b. The Lease provides for the following renewal or expansion options: ============================ c. The initial annual base rent payable under the Lease is $____________ payable in equal monthly installments of $_____________. d. The Lease provides for payment by Borrower of additional rent as follows: ----------------------------- e. The amount of the security deposit or any other deposit of Borrower being held by Landlord tinder the Lease is: $___________ 2. There is no action, whether voluntary or otherwise, pending against Landlord under bankruptcy or insolvency laws of the United States or any state thereof which would prevent Landlord from fulfilling its obligations under the Lease. 3. Landlord represents that Landlord is not in default under the Lease and that Landlord has no knowledge that Borrower is currently in default thereunder. 4. Landlord waives and relinquishes all rights of levy or distraint for rent. 5. The Personal Property may be stored, utilized and/or installed in the Premises and will not be deemed to be a fixture, real property or part of the Premises, but rather will at all times be considered personal property. 6. Landlord disclaims any interest in the Personal Property and agrees to assert no claim to the Personal Property while Borrower is indebted to Bank. Landlord represents and warrants to Bank that the Personal Property is not subject to any lien or claim in favor of any mortgagee of the Premises, and Landlord agrees that any future mortgage or lien in favor of any mortgagee of the Premises will not create a security interest or lien against the Personal Property. 7. Bank or its representatives may enter upon the Premises at any reasonable time to inspect or remove the Personal Property provided, however, that Bank shall repair at its own expense any injury to the Premises caused by such removal, and may advertise and conduct a public auction or private sale on the Premises. 8. In the event of a default by Borrower under any of its agreements or other financial arrangements with Bank and notice of such default having been given to the Landlord, at the option of Bank, the Personal Property may remain on the Premises for up to one hundred eighty (180) days at the base rental provided under the Lease, without Bank incurring any other obligations of Borrower under the Lease and without Bank being deemed to be in possession of the Premises. 9. Landlord agrees that simultaneously with any written notice to Borrower of any default by Borrower of any of the provisions of the Lease, the Landlord will give a copy of such written notice to Bank at: KeyBank National Association 127 Public Square Cleveland, Ohio 44114 Attention: Mark A. LoSchiavo Upon receipt of the notice, Bank will have at least thirty (30) days to cure the default (in which event the Lease shall remain in full force and effect), but Bank will have no obligation to do so. 10. Landlord consents to the grant by Borrower of an assignment of Borrower's leasehold interest in the Lease in favor of Bank as security for the financing extended to Borrower. Landlord hereby further consents to acquisition by Bank, at Bank's option (which option is to be exercised in writing within thirty (30) days of Bank's receipt of notice of default as provided in Section 9, above, with notice to the Landlord), of the absolute ownership of Borrower's interest in the Lease, and does hereby agree that if Bank (or any purchaser under or through Bank, including a purchaser by foreclosure or deed in lieu thereof) takes possession of the leasehold estate, Bank (or such purchaser) will, pursuant to the aforementioned notice, be recognized as the lessee under the Lease. If Bank shall become the lessee hereunder, Bank may sublease or assign the Lease for any lawful purpose, subject to Landlord's consent as to the sublessee or assignee, and the assignment of the Lease shall release and relieve Bank of all obligations under the Lease. 11. This Waiver and Consent is binding on Landlord and the heirs, personal representatives, successors and assigns of Landlord and inures to the benefit of Bank and the successors and assigns of Bank. 12. The agreements contained herein shall continue in force until all of Borrower's obligations and liabilities to Bank are paid and satisfied in full and Bank's financing commitments to Borrower have been terminated. 13. Landlord will notify all successor owners, transferees, purchasers and mortgagees of the Premises of which Landlord is aware of the existence of this Waiver and Consent. Landlord shall not agree to subordinate the Lease to the right of any present or future lender or mortgagee of Landlord unless such subordination includes a provision that in the event of foreclosure or other right asserted under the mortgage, the Lease and the rights of Borrower thereunder shall continue in full force and effect and shall not be disturbed unless Borrower is in default under the Lease. 14. The agreements contained herein may not be modified or terminated orally. IN WITNESS WHEREOF, Landlord has hereunto set its hand as of the date first above written. LANDLORD: ------------------------ By:_______________________ Its:_________________ BORROWER'S ACKNOWLEDGMENT Borrower hereby acknowledges and concurs with the foregoing agreements by Landlord as of this ___ day of March, 1998 ------------------------ By:_____________________ Its:_______________ Acknowledgment STATE OF ______________ ) ) COUNTY OF ____________ ) BEFORE ME, a Notary Public for said county and state, personally appeared _______________________________, a ________________, by its _____________, ______________________, who acknowledged that he/she signed the foregoing Waiver and Consent and that the same is the free act and deed of said ___________ and of him/her personally and as such ___________. Witness my hand at _______________, _________, this ____ day of March, 1998. ----------------------------- NOTARY PUBLIC My Commission expires: EXHIBIT D AMENDED AND RESTATED CONTINUING GUARANTY WHEREAS, MORGAN DRIVE AWAY, INC., TDI, INC., and INTERSTATE INDEMNITY COMPANY (each a "Company" and, collectively, the "Companies"), have entered into a certain Amended and Restated Credit and Security Agreement dated March 25, 1998 (as hereafter amended and supplemented, the "Credit Agreement") with KeyBank National Association, a national banking association (the "Bank"), pursuant to which the Companies have executed and delivered the Revolving Note (as this and other capitalized terms not otherwise herein are defined in the Credit Agreement) in evidence of its obligations thereunder to the Bank; WHEREAS, the undersigned (the "Guarantor") is the record and beneficial holder of all of the issued and outstanding Voting Stock of each Company; and the Guarantor will derive benefits as a result of the Credit Agreement and the Revolving Loans to be advanced thereunder; and WHEREAS, it is a condition precedent to the effectiveness of the Credit Agreement that the Guarantor execute and deliver this Guaranty; and the Guarantor desires that the Credit Agreement become effective; NOW, THEREFORE, in order to induce the Bank to enter into the Credit Agreement, and in consideration of the benefits expected to accrue to the Guarantor by reason thereof, and for other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the Guarantor hereby represents and warrants to, and covenants and agrees with the Bank, as follows: The Guarantor does hereby irrevocably and unconditionally guarantee to the Bank the punctual payment of the full amount, when due (whether by demand, acceleration or otherwise), of (i) the principal and interest on the Revolving Note issued by the Companies pursuant to the Credit Agreement, and any amendment or supplement thereto whether now outstanding or hereafter issued (including interest accruing thereon after the commencement of any case or proceeding under any federal or state bankruptcy, insolvency or similar law (a "Proceeding") whether or not a claim for such interest is allowable in such Proceeding ("Post-Petition Interest")), and (ii) all other obligations and liabilities of the Companies to the Bank under the Credit Agreement or under any other agreement or instrument, including, without limitation, in respect of any letter of credit or any reimbursement agreement in connection therewith, whether now or hereafter existing, due or to become due, direct or contingent, joint, several or independent, secured or unsecured and whether matured or unmatured (including Post-Petition Interest ) (all of the liabilities included in clauses (i) and (ii) of this Paragraph are hereinafter collectively referred to as the "Guaranteed Obligations"). This is a guaranty of payment and not of collection and is the primary obligation of the Guarantor; and the Bank may enforce this Guaranty against the Guarantor without any prior pursuit or enforcement of the Guaranteed Obligations against the Companies, any collateral, any right of set-off or similar right, any other guarantor or other obligor or any other recourse or remedy in the power of the Bank. All payments made by the Guarantor under or by virtue of this Guaranty shall be paid to the Bank at its office at 127 Public Square, Cleveland, Ohio 44114 or such other place as the Bank may hereafter designate in writing. The Guarantor hereby agrees to make all payments under or by virtue of this Guaranty to the Bank as aforesaid no later than ten (10) days following the date on which the Bank sends written demand hereunder to the Guarantor. The Guarantor hereby waives (i) notice of acceptance of this Guaranty, notice of the creation, renewal or accrual of any of the Guaranteed Obligations and notice of any other liability to which it may apply, and notice of or proof of reliance by the Bank upon this Guaranty, (ii) diligence, protest, notice of protest, presentment, demand of payment, notice of dishonor or nonpayment of any of the Guaranteed Obligations, suit or taking other action or making any demand against, and any other notice to the Companies or any other party liable thereon, (iii) any defense based upon any statute or rule of law to the effect that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal, (iv) any defense based upon the Bank's administration or handling of the Guaranteed Obligations, except behavior which amounts to bad faith, and (v) to the fullest extent permitted by law, any defenses or benefits which may be derived from or afforded by law which limit the liability of or exonerate guarantors or sureties, or which may conflict with terms of this Guaranty. So far as the Guarantor is concerned, the Bank may, at any time and from time to time, without the consent of, or notice to, the Guarantor, and without impairing or releasing any of the Guaranteed Obligations hereunder, upon or without any terms or conditions and in whole or in part: 1. modify or change the manner, place or terms of, and/or change or extend the time of payment of, renew or alter, any of the Guaranteed Obligations, any security therefor, or any liability incurred directly or indirectly in respect thereof, and this Guaranty shall apply to the Guaranteed Obligations as so modified, changed, extended, renewed or altered; 2. request, accept, sell, exchange, release, subordinate, surrender, realize upon or otherwise deal with, in any manner and in any order, (a) any other guaranty by whomsoever at any time made of the Guaranteed Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset or right with respect thereto, and (b) any property by whomsoever at any time pledged, mortgaged or otherwise encumbered to secure, or howsoever securing, the Guaranteed Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset or right with respect thereto; 3. exercise or refrain from exercising any rights against the Companies or against any collateral or others (including, without limitation, any other guarantor) or otherwise act or refrain from acting; 4. settle or compromise any of the Guaranteed Obligations, and security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and subordinate the payment of all or any part thereof to the payment of any liability (whether due or not) of any Company to creditors of such Company other than the Bank when, in the Bank's sole judgment, it considers such subordination necessary or helpful in the protection of its interest or the exercise of its remedies, including, without limitation, the sale or other realization upon collateral; 5. apply in the manner determined by the Bank any sums by whomsoever paid or howsoever realized to any of the Guaranteed Obligations, regardless of what liability or liabilities of the Companies remain unpaid; and 6. amend or otherwise modify, consent to or waive any breach of, or any act, omission or default or Event of Default under the Credit Agreement or the Revolving Note, or any agreements, instruments or documents referred to therein or executed and delivered pursuant thereto or in connection therewith. This Guaranty and the obligations of the Guarantor hereunder shall be valid and enforceable and shall not be subject to limitation, impairment or discharge for any reason (other than the payment in full of the Guaranteed Obligations), including, without limitation, the occurrence of any of the following, whether or not the Guarantor shall have had notice or knowledge of any of them: (i) any failure to assert or enforce or agreement not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand of any right power or remedy with respect to the Guaranteed Obligations or any agreement relating thereto or with respect to any other guaranty thereof or security therefor, (ii) any waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including, without limitation, provisions relating to Events of Default) of the Credit Agreement, the Revolving Note or any other agreement at any time executed in connection therewith, (iii) the Guaranteed Obligations or any portion thereof at any time being found to be illegal, invalid or unenforceable in any respect, (iv) the application of payments received from any source to the payment of indebtedness other than the Guaranteed Obligations, even though the Bank might have elected to apply such payment to the payment of all or any part of the Guaranteed Obligations, (v) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guaranteed Obligations, (vi) any defenses, set-offs or counterclaims which any Company may allege or assert against the Bank in respect of the Guaranteed Obligations, (vii) the avoidance or voidability of the Guaranteed Obligations under the Bankruptcy Code or other applicable laws, and (viii) any other act or thing or omission which may or might in any manner or to any extent vary the risk of the Guarantor as an obligor in respect of the Guaranteed Obligations. The Guarantor makes the following representations and warranties, which shall survive the execution and delivery of this Guaranty: The execution, delivery and performance of this Guaranty has been duly authorized by all necessary action of the Guarantor's shareholders and directors. Neither the execution and delivery of this Guaranty nor the consummation of the transactions herein contemplated, nor compliance with the terms and provisions hereof, will contravene any provision of the Guarantor's charter or by-laws or of any law, statute, rule or regulation to which the Guarantor is subject or any judgment, decree, award, franchise, order or permit, or will conflict or will be inconsistent with, or will result in any breach of, any of the terms, covenants or provisions of, or constitute a default under, or result in the creation or imposition of any lien, security interest, charge or other encumbrance upon any of the properties or assets of the Guarantor pursuant to the terms of any indenture, mortgage, deed of trust, agreement or other instrument to which the Guarantor is a party or by which it is bound or to which it may be subject. Any and all rights and claims of the Guarantor against any Company or any of its property, arising by reason of any payment by the Guarantor to the Bank pursuant to the provisions of this Guaranty, shall be subordinate and subject in right of payment to the prior and indefeasible payment in full of all Guaranteed Obligations to the Bank, and until such time, the Guarantor shall have no right of subrogation, contribution, reimbursement or similar right and hereby waives any right to enforce any remedy the Bank or the Guarantor may now or hereafter have against the Companies, any endorser or any other guarantor of all or any part of the Guaranteed Obligations of the Companies and any right to participate in, or benefit from, any security given to the Bank to secure any Guaranteed Obligations. Any promissory note evidencing such liability of any Company to the undersigned shall be non-negotiable and shall expressly state that it is subordinated pursuant to this Guaranty. All liens and security interests of the Guarantor, whether now or hereafter arising and however existing, in any assets of any Company or any assets securing Guaranteed Obligations shall be and hereby are subordinated to the rights and interests of the Bank in those assets until the prior and indefeasible payment in full of all Guaranteed Obligations to the Bank and termination of all financing arrangements between the Companies and the Bank, provided that the provisions of this sentence shall not be construed as a waiver or modification of the provisions of Section 7.2 of the Credit Agreement restricting each Company's right to grant or permit liens or encumbrances on its property. The Guarantor hereby agrees to indemnify and hold harmless the Bank from and against any losses, costs or expenses (including, without limitation, reasonable attorneys' fees and litigation costs) ("Loss and Expense") incurred by the Bank in connection with the Bank's collection of any sum due hereunder or its enforcement of its rights hereunder. All notices, requests, demands or other communications hereunder shall be in writing, either by letter (delivered by hand or commercial delivery service or sent by certified mail, return receipt requested), addressed as follows: If to the Guarantor: 2746 Old U.S. Route 20 West Elkhart, Indiana 46515 Attn: Dennis Duerksen If to the Bank: 127 Public Square Cleveland, Ohio 44114 Attn: Mark A. LoSchiavo Any notice, request, demand or other communication hereunder shall be deemed to have been duly given when delivered, in the case of hand delivery or commercial delivery service, and three (3) business days following deposit in the mails, postage prepaid. The Bank and any Guarantor may change the person or address to whom or which notices are to be given hereunder, by notice duly given hereunder. No delay on the part of the Bank in exercising any of its options, powers or rights, and no partial or single exercise thereof, whether arising hereunder, under the Credit Agreement, the Revolving Note, or otherwise, shall constitute a waiver thereof or affect any right hereunder. No waiver of any such rights and no modification, amendment or discharge of this Guaranty shall be deemed to be made by the Bank or shall be effective unless the same shall be in writing signed by the Bank, and then such waiver shall apply only with respect to the specific instance involved and shall in no way impair the rights of the Bank or the obligations of the Guarantor to the Bank in any other respect at any other time. Whenever the Bank shall credit any payment to the Guaranteed Obligations or any part thereof, whatever the source or form of payment, the credit shall be conditional as to the Guarantor unless and until the payment shall be final and valid and indefeasible as to all the world. Without limiting the generality of the foregoing, the Guarantor agrees that if any check or other instrument so applied shall be dishonored by the drawer or any party thereto, or if any proceeds of collateral so applied shall thereafter be recovered by any trustee in bankruptcy or anyone else, the Bank in each case may reverse any entry relating thereto in its books, and the Guarantor shall remain liable therefor even if the Bank may no longer have in its possession any evidence of the Guaranteed Obligations to which the payment in question was applied. This Guaranty and the respective rights and obligations of the Bank and the Guarantor hereunder shall be construed and enforced in accordance with the laws of the State of Ohio applicable to contracts made and to be performed wholly within such state. The Guarantor irrevocably consents that service of notice, summons or other process in any action or suit in any court of record to enforce this Guaranty may be made upon the Guarantor by mailing a copy of the summons to the Guarantor by certified or registered mail, at the address specified above. The Guarantor hereby waives the right to interpose counterclaims or set-offs of any kind and description in any such action or suit arising hereunder or in connection herewith. It is the intention of the Guarantor hereby, and by acceptance of this Guaranty the Lender agrees, that this Guaranty amends and restates in its entirety the existing guaranty of the Guarantor in favor of the Bank dated March 27, 1997, which, subject to the effectiveness of this Guaranty, shall be deemed to be superseded and of no further effect. This Guaranty shall be binding upon the Guarantor and its successors and assigns, and shall inure to the benefit of the Bank and its successors and assigns. This Guaranty embodies the entire agreement and understanding between the Bank and the Guarantor and supersedes all prior agreements and understandings relating to the subject matter hereof. If this Guaranty by the Guarantor is held or determined to be void, invalid or unenforceable, in whole or in part, such holding or determination shall not impair or affect the validity and enforceability of any clause or provision not so held to be void, invalid or unenforceable. If this Guaranty as to the Guarantor would be held or determined by a court or tribunal having compe-tent jurisdiction to be void, invalid or unenforceable on account of the amount of its aggregate liability under this Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the aggregate amount of the liability of the Guarantor under this Guaranty shall, without any further action by the Guarantor, the Bank or any other person, be automatically limited and reduced to an amount which is valid and enforceable. The Guarantor (a) hereby irrevocably submits to the jurisdiction of the state courts of the State of Ohio and to the jurisdiction of the United States District Court for the Northern District of Ohio, for the purpose of any suit, action or other proceeding arising out of or based upon this Guaranty or the subject matter hereof brought by the Bank or its successors or assigns and (b) hereby waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Guaranty or the subject matter hereof may not be enforced in or by such court and (c) hereby waives and agrees not to seek any review by any court of any other jurisdiction which may be called upon to grant an enforcement of the judgment of any such Ohio state or federal court. The Guarantor agrees that its submission to jurisdiction and its consent to service of process by mail is made for the express benefit of the Bank. Final judgment against the Guarantor in any such action, suit or proceeding may be enforced in other jurisdictions (a) by suit, action or proceeding on the judgment, or (b) in any other manner provided by or pursuant to the laws of such other jurisdiction; provided, however, that the Bank may at its option bring suit, or institute other judicial proceedings, against the Guarantor in any state or federal court of the United States or of any country or place where the Guarantor or its property may be found. Unless the context otherwise requires, all capitalized terms used in this Guaranty without definition shall have the meanings provided therefor in the Credit Agreement. Without limiting the effect or intentions of the warrant of attorney contained in the following paragraph, THE GUARANTOR AND, BY ITS ACCEPTANCE OF THIS GUARANTY, THE BANK HEREBY IRREVOCABLY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THE CREDIT AGREEMENT, ANY NOTE, OR THIS GUARANTY OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THE CREDIT AGREEMENT, ANY NOTE OR THIS GUARANTY AND THE RELATIONSHIPS THEREBY ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including, without limitation, contract claims, tort claims, breach of duty claims, and all other statutory and common law claims. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS OF THIS GUARANTY. In the event of litigation, this provision may be filed as a written consent to a trial by the court. IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly executed as fully written above as of this 31st day of March, 1998. THE MORGAN GROUP, INC. By /s/ Dennis Duerksen --------------------------- Dennis Duerksen, Chief Financial Officer EX-10.6 3 INSURANCE CONTRACT CNA INSURANCE COMPANIES [LETTERHEAD] Continental Casualty Company [LETTERHEAD] Policy Number, SR-83099599 Application is hereby made to the Continental Casualty Company for a policy of group disability income insurance based on the following statements and representations: 1. Employer: The Morgan Group, Inc. Address: 2746 US 20 West City: Elkhart State: IN Zip Code: 46514 Nature of Business: Transportation Services 2. What period of time must elapse before an employee is eligible for this coverage? Present Employees: 0 days New Employees: 0 days The following group or groups of employees are eligible: DESCRIPTION OF ELIGIBLE EMPLOYEES Class 1: All active, full-time* Officers and Management. Class II: All active, full-time* Employees excluding Truck Drivers, Warehouse Employees, Officers and Management. *"Active, full-time" means an employee works at least 30 hours per week. Part-time, temporary or seasonal employees are not eligible. 3. Total Number of Employees on Payroll: 341 Total Number Eligible: 341 4. Insured Employee Occupation Period: Class 1: To the end of the Maximum Period Payable. Class 11: 24 months 5. Premium is calculated by: SEE ADDENDUM 1. 6. Premium is payable in the following manner: SEE ADDENDUM 1. 7. What percent of the premium is to be paid by the Employer? 100% 8. This policy shall be made effective at 12:01 A.M., Standard Time at the above address of the Employer on January 1, 1998. The insurance of Employees who become eligible after the effective date of this policy shall become effective on the first day of the month that falls on or next follows the date the employee becomes eligible for this insurance. 9. Schedule of Benefits MONTHLY BENEFIT 67% of the Insured Employee's salary (1) or $10,000, whichever is the lesser amount, minus the reductions in (2) below. 60% of the Insured Employee's salary (1) or $4,000, whichever is the lesser amount, minus the reductions in (2) below. MAXIMUM PERIOD PAYABLE See Addendum 3. ELIMINATION PERIOD 180 days Includes Features Checked [ ] PARTIAL DISABILITY BENEFIT - REDUCTION. [ ] REHABILITATIVE EMPLOYMENT BENEFIT - REDUCTION: [X] RESIDUAL DISABILITY BENEFIT [X] SURVIVOR INCOME BENEFIT - MAXIMUM PERIOD PAYABLE: 6 MONTHS [ ] COST OF LIVING ADJUSTMENT BENEFIT (1) See Addendum 2 (2) See Addendum 2 AGENT OR BROKER EMPLOYER Name of Firm: Financial Name: Lyle C. Haws Partners, Inc. ---------------------- (please print) Name of agent or broker (please print): Title: VP-Human Resources Melvin Jacobson Signature: /s/ Melvin Jacobson Signature: /s/ Lyle C. Haws ------------------- Date: March 30, 1998 Date: March 9, 1998 ADDENDUM 1 SR-83099599 Policy Number The Morgan Group, Inc. January 1, 1998 Employer Effective Date 5. Premium is calculated by: Multiplying the total insured salary by .0033. Do not include salary for any individual in excess of per month in the premium calculation. Class I: $15,000 Class II: $ 6,667 6. Premium is payable in the following manner: The policy is issued in consideration of the payment in arrears of the monthly premium. The monthly premium is calculated at the premium rate stated above. Such payment shall be made within 20 days after the end of each monthly premium accounting period and shall be accompanied by a premium adjustment report. If an addition, termination or change in insurance takes place other than on a regular due date, any premium adjustment will take effect on the next due date. If notice of termination or change is received more than six months after the termination or change became effective, We are not required to give a refund or credit for the period in excess of six months. "Salary" as used in Statements 5 and 6 shall mean the monthly wage or salary paid to the Insured Employee by the Employer excluding commissions, overtime earnings, incentive pay, bonuses or other compensation. ADDENDUM 2 SR-83099599 Policy Number The Morgan Group, Inc. January 1, 1998 Employer Effective Date (1) "Salary" means the monthly wage or salary that the Insured Employee was receiving from the Employer on the date the Disability began. It excludes commissions, overtime earnings, incentive pay, bonuses or other compensation. (2) The Monthly Benefit under this policy shall be reduced by: 1. Disability benefits paid, payable, or for which there is a right under: a. The Social Security Act, including any amounts for which the Insured Employee's dependents may qualify because of the Insured Employee's Disability, b. Any Workers Compensation or Occupational Disease Act or Law, or any other law which provides compensation for an occupational injury or sickness, or c. Any State Disability Benefit Law: 2. Disability benefits paid under: a. Any group insurance plan provided by or through the Employer: b. Any formal sick leave plan provided by the Employer; c. Any Retirement Plan provided by the Employer; or 3. Retirement benefits paid under the Social Security Act including any amounts for which the Insured Employee's dependents may qualify because of the Insured Employee's retirement; 4. Retirement benefits paid under a Retirement Plan provided by the Employer except for amounts attributable to the Insured Employee's contributions. If any benefit described above is paid in a single sum through compromise settlement or as an advance on future liability, the amount which pertains to the Insured Employee's Disability will be divided by the number of months from the date of its receipt to the end of the benefit period applicable to the Insured Employee. The result shall be deducted from the Insured Employee's Monthly Benefit. The Monthly Benefit, after the reductions stated above, if any, will not be further reduced for subsequent cost-of-living increases which are paid, payable, or for which there is a right under any other benefit described above. "Retirement Plan" means a plan which provides retirement benefits to employees and is not funded wholly by employee contributions. It does not include: 1) a profit sharing plan, a thrift or savings plan; 2) an individual retirement account (IRA); 3) a tax sheltered annuity (TSA); 4) a stock ownership plan; or 5) a deferred compensation plan. In no event will the Monthly Benefit payable for Total Disability (but not for Residual Disability) be reduced to less than $100 or 10% of the Insured Employee's Monthly Benefit prior to the reductions stated above, whichever is greater. ADDENDUM 3 The Morgan Group, Inc. Employer Applicable to Class 1: MAXIMUM PERIOD PAYABLE Age on Date Disability Commences 61 years or younger 62 years 63 years 64 years 65 years 66 years 67 years 68 years 69 years or older Applicable to Class II: 65 years 66 years 67 years 68 years 69 years or older SR-83099599 Policy Number January 1, 1998 Effective Date To the Insured Employee's 65th birthday 42 months 36 months 30 months 24 months 21 months 18 months 15 months 12 months 24 months 21 months 18 months 15 months 12 months ADDENDUM 4 SR-83099599 Policy Number The Morgan Group, Inc. January 1, 1998 Employer Effective Date Listed below are the Subsidiaries and/or Affiliates insured under this policy: Morgan Drive Away Interstate Indemnity Transfer Drivers, Inc. (T.D.I.) Morgan Financial, Inc. EX-10.15 4 FIRST AMENDMENT TO MCI CORPORATE SERVICE PLAN MCI MCI Telecommunications Corporation 205 N. Michigan Avenue Chicago, IL 60601 312 856 2121 FIRST AMENDMENT TO MCI CORPORATE SERVICE PLAN THIS FIRST AMENDMENT TO MCI CORPORATE SERVICE PLAN (hereinafter referred to as the "Amendment") is entered into as of the dates set forth below, by and between MCI Telecommunications Corporation ("MCI") and Morgan Group, Inc. and its wholly owned subsidiaries (identified in Exhibit A, attached hereto and incorporated herein) ("collectively, the Customer "), effective as of the first day of the fire full month after the tariff governing the offering under this First Amendment becomes effective or the first day of the month if the tariff effective date is the same date (such date is hereinafter referred to as the "First Amendment Effective Date"). WITNESSETH: WHEREAS, heretofore, Customer and MCI entered into that certain MCI Corporate Service Plan dated December 5, 1994 (the "Agreement") with respect to certain services to be provided to Customer by MCI, as more particularly described therein; and WHEREAS, Customer and MCI wish to amend the Agreement to reflect certain changes; NOW, THEREFORE, in consideration of the premises, the terms and conditions stated herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms used herein and not expressly defined herein shall have the respective meanings given to such terms in the Agreement. 2. CSP Definitions. Section I of the Agreement is hereby amended by adding the following: "For purposes of this Agreement, the collective term "Customer" shall also include (i) Morgan Group, Inc. and (ii) Morgan Group, Inc.'s wholly owned subsidiaries identified in Exhibit A. The monthly recurring usage charges for Representatives of Morgan Drive Away who chose to participate under this Agreement pursuant to Section 22 below ("Representatives") shall be included in the calculation of the Annual Minimum under this Agreement." 3. Term. The Agreement is hereby amended by deleting Section 5 in its entirety and replacing it with the following new Section 5: -1- "5. The initial term of this Agreement shall be for a period of thirty (30) months commencing on the First Amendment Effective Date. After the initial term, this Agreement shall remain in effect on a month to month basis, unless terminated by Morgan Group, Inc. or MCI on thirty (30) days prior written notice; provided, however, that during the period of usage following the initial service term Morgan Group, Inc. shall not receive any discounts or credits in any month in which Customer's use of MCI services does not equal or exceed one-twelfth (1/12th) of the Annual Minimum ("Monthly Minimum"). In the event Morgan Group, Inc.'s usage meets the Monthly Minimum during the each month following the initial service term, Morgan Group, Inc. shall be entitled to receive the rates and discounts provided pursuant to this Agreement." 4. Annual Minimum. The Agreement is hereby amended by deleting Section 6 in its entirety and replacing it with the following new Section 6: "6. ANNUAL MINIMUM. (a) Customer agrees that during each consecutive twelve (12) month period of the initial term ("Annual Period"), Customer will purchase from MCI at least Nine Hundred Thousand Dollars ($900,000), or a pro rata portion thereof for any partial Annual Period ("Annual Minimum") in the MCI services set forth in Attachments I and 2 (as more fully time elect to convert the balance remaining in the Fund to invoice credits. Such credits will be applied within two (2) invoices following Customer's request. (e) In the event Customer's MCI account is in arrears at any time during the initial term of this Agreement, MCI may elect in its sole discretion to convert Customer's outstanding Fund balance, at any time, into invoice credits in order to offset amounts owed to MCI, including without limitation underutilization charges and charges arising from early termination. In the event this Agreement is terminated pursuant to Section 7 hereof, any credit balances remaining in the Fund at the date of early termination will be forfeited, and any amount which was used towards participating vendor products or MCI invoice credits will be charged back to Customer. (f) The Fund balance will be unavailable to Customer during any period in which Customer has failed to comply with any payment arrangement pursuant to the Tariff, or has failed to pay invoices in a timely manner. 6. Representatives Program. The Agreement is hereby amended by adding the following new Section 22: "22. (a) in order to remain eligible to participate under this Agreement, each Morgan Drive Away Representative must fulfill all the requirements to be considered a Representative according to Morgan Drive Away's terms and conditions. The parts of this agreement that relate to the provision of telecommunications services and any -2- related discounts and credits to Representatives shall constitute the "Program." Morgan Drive Away shall notify MCI in a mutually agreed upon manner of the Representatives which elect to participate under this Agreement. Morgan Drive Away shall make reasonable efforts to notify MCI on or before the tenth (10th) day of each month of the term of this Agreement of any changes, modifications or alterations to the Representatives participating under this Agreement for such month. Such changes, alterations, or modifications shall be effective on the first day of the next month. Any changes, modifications or alterations received by MCI after the fifteenth (15th) day of a month shall be effective on the first day of the second full billing month after the date of the written or electronic notification to MCI. (b) Morgan Group, Inc. agrees to actively promote participation under this Agreement to the Morgan Drive Away Representatives. Morgan Group, Inc. will not during the term of this Agreement enter into or promote participation with any other programs for the provision of interstate, intrastate, or international telecommunications services. This provision shall not apply to any existing written arrangements currently in place at the time of execution of this First Amendment." 7. Payment. The Agreement is hereby amended by adding the following new Section 23: "23. Payment. (a) Morgan Group, Inc. Services. For any MCI Services purchased by Morgan Group, Inc. during the Service term, Morgan Group, Inc. shall pay MCI the total invoiced amount for such MCI Service(s) within twenty-five (25) days of the MCI invoice date. (b) Morgan Drive Away Representatives' Services. In addition to Paragraph 23(a) above, Morgan Group, Inc. assumes responsibility for payment of MCI's invoices to Representatives. Notwithstanding the foregoing, MCI shall directly bill the Representatives who participate in the Program. MCI will attempt to collect the invoiced amounts directly from such Representatives in accordance with its standard business practices. In the event that MCI is unable to collect any of such invoiced amounts within thirty (30) days from the MCI invoice date, MCI will invoice Morgan Group, Inc. for the unpaid invoice amounts. Morgan Group, Inc. shall pay MCI the total amounts invoiced to Morgan Group, Inc. under this Paragraph within twenty-five (25) days of the MCI invoice date." 8. The Agreement is hereby amended by adding the following new Section 24: -3- "24. Commencing on the First Amendment Effective Date and through expiration of the initial term: (a) Customer shall have no less than ten (10) locations purchasing MCI Vision Services pursuant to this Agreement. If Customer fails to meet the requirement identified in this Section 24(a), Customer shall pay standard tariff rates for MCI Vision Services, excluding any discount provided herein; (b) No less than 9% of Customer's total outbound Vision usage (excluding access/egress charges, feature charges, tax and tax related surcharges), as measured in minutes, shall occur during OFF-Peak hours (as defined in the Tariff). If Customer's actual outbound Vision usage is less than the 9% threshold, Customer shall be charged a per minute surcharge of $0.03 on each minute below the 9% threshold; (c) No less than 25% of Customer's total usage of MCI Services provided herein (excluding access/egress charges, feature charges, tax and tax related surcharges), as measured in minutes, shall originate via dedicated access facilities. If Customer's actual usage of MCI Services provided herein originating via dedicated access facilities is less than the 25% threshold, Customer shall be charged a per minute surcharge of $0.03 on each minute below the 25% threshold; (d) No less than 50% of Customer's total MCI Vision usage (excluding access/egress charges, feature charges, tax and tax related surcharges), as measured in minutes, shall be interstate usage. If Customer's actual usage of interstate MCI Vision Service is less than the 50% threshold, Customer shall be charged a per minute surcharge of $0.03 on each minute below the 50% threshold." 9. Pricing/Discounts. The Agreement is hereby amended by deleting Section 2.A.(I) in its entirety and replacing it with the following new Section 2.A.(l): "2.A. MCI Vision Service and MCI Vision 800 Service. (1) Morgan Group, Inc. shall receive the rates and charges on MCI Vision Service and MCI Vision 800 Service associated with the Vision Value Insurance Plan Plus ("Vision VIP Plus"), a and the discounts below. Morgan Group, Inc. will receive the rates and charges associated with the thirty-six (36) month Vision VIP Plus at the Four Hundred Eighty Thousand Dollar ($480,000) commitment level, but minimum volume and term requirements in MCI Tariff FCC No. 1 ("Tariff') will not apply. In addition, the following discounts will apply to domestic interstate charges only. MCI Vision Service 29% MCI Vision 800 Service 29% -4- No other discounts shall apply to domestic MCI Vision and MCI Vision 800 services. Morgan Drive Away Representatives shall not be eligible for the discounts identified in this Section 2.A(l). " 10. Credits. Attachment 1 of the Agreement is hereby amended by deleting subsections 2.F(l), 2.F.(2) and 2.F.(3) in their entirety and replacing them with the following new subsections 2.F.(I) and 2.F. (2): "F. (1) Domestic Intrastate Vision Service. For domestic intrastate Vision Service, Morgan Group, Inc. shall pay standard tariffed rates. In addition, Morgan Group, Inc. shall receive a monthly credit in an amount equal to thirty-three percent (331/6) times Morgan Group, Inc.'s domestic intrastate Vision monthly usage charges (exclusive of taxes, surcharges, pass-through access/egress or related charges) at standard tariffed rates after application of applicable tariffed discounts based on Morgan Group, Inc.'s domestic intrastate Vision usage charges. The resulting credit shall be applied to Morgan Group, Inc.'s domestic interstate usage charges (excluding taxes, surcharges and pass-through access/egress or related charges). Morgan Drive Away Representatives shall not be eligible for the discounts identified in this Section 2.F. (2) Domestic Intrastate Vision 800 Service. For domestic intrastate Vision 800 Service, Morgan Group, Inc. shall pay standard tariffed rates. In addition, Morgan Group, Inc. shall receive a monthly credit in an amount equal to thirty-two percent (32%) times Morgan Group, Inc.'s domestic intrastate Vision 800 monthly usage charges (exclusive of taxes, surcharges, pass-through access/egress or related charges) at standard tariffed rates after application of applicable tariffed discounts based on Morgan Group, Inc.'s domestic intrastate Vision 800 usage charges. The resulting credit shall be applied to Morgan Group Inc.'s domestic interstate usage charges (excluding taxes, surcharges and pass-through access/egress or related charges). Morgan Drive Away Representatives shall not be eligible for the discounts identified in this Section 2.F." 11. Dedicated Leased Line Services. Attachment 1 of the Agreement is hereby amended by adding the following new Section 2.H.: "H. For each type of MCI Dedicated Leased Line Service, Morgan Group, Inc. shall receive the discounts associated with a corresponding three (3) year Twenty Five Thousand Dollar ($25,000) Network Pricing Plan (NPP). Morgan Drive Away Representatives shall not be eligible for the discounts identified in this Section 2.H." 12. Rate Stabilization. Attachment 1 of the Agreement is hereby amended by adding the following new Section 2.1.: "I. To the extent that the effective tariffed rates for MCI Vision Service and/or MCI Vision 800 Service subscribed to by Morgan Group), Inc, increase during the initial service term of this Agreement, Morgan Group, Inc, will be subject to any applicable tariff increase, -5- provided, however, that Morgan Group, Inc. will only be subject to a maximum increase of four percent (4%) for MCI Vision Service and four percent (4%) for MCI Vision 800 Service during each year of the initial service term. For purposes of this Section 2.1. of Attachment 1, the term "effective tariffed rate" shall mean the tariffed base rate in effect on the First Amendment Effective Date." 13. Representative Pricing and Discounts. Attachment 1 of the Agreement is hereby amended by adding the following new Section 3: "3. Rates and Discounts for MCI Services Provided to Morgan Drive Away Representatives. The rates identified below are in lieu of all other rates and discounts provided by MCL Except as provided in this Section 3 of Attachment 1, Morgan Drive Away Representatives shall not be eligible for any other services, rates or discounts provided in this Agreement. (a) MCI Vision Service. For domestic MCI Vision Service, Representatives will receive the following postalized per minute rates for switched interstate usage: Switched/Interstate $0.145 (b) MCI Vision 800 Service. For domestic MCI Vision 800 Service, Representatives will receive the following postalized per minute rates for switched interstate usage: Switched/Interstate $0.1625 14. Revenue Achievement Credits. Attachment 1 of the Agreement is hereby amended by adding the following new Section 4: "4. Revenue Achievement Credits. Morgan Group, Inc. shall receive the applicable one- time credit in the event it meets the following requirements. Morgan Group, Inc. shall notify MCI in writing, within thirty days such requirements are met, of the option it selects. Option Number 1: (a) In the event Customer's usage (excluding tax and tax-related surcharges), attributable to end-users participating in the Morgan Drive Away Representatives Program. equals or exceeds One Hundred Thousand ($100,000) in either the first six (6) month period or second six (6) month period of the first Annual Period of the initial term commencing on the First Amendment Effective Date, Morgan Group, Inc. shall receive a credit equal to Twelve -6- Thousand Five Hundred Dollars ($12,500), which shall be applied to Morgan Group, Inc.'s sixth monthly invoice following the applicable period in which such credit is earned; provided however, if the credit earned is due after expiration of the initial term, such amount shall be added to the Customer's final invoice. (b) In the event Customer's usage (excluding tax and tax-related surcharges), attributable to end-users participating in the Morgan Drive Away Representatives Program, equals or exceeds One Hundred Fifty Thousand ($150,000) in either the first six (6) month period or second six (6) month period of the second Annual Period of the initial term, commencing on the First Amendment Effective Date, Morgan Group, Inc. shall receive a credit equal to Seventeen Thousand Five Hundred Dollars ($17,500), which shall be applied to Morgan Group, Inc.'s sixth monthly invoice following the applicable period in which such credit is earned; provided however, if the credit earned is due after expiration of the initial term, such amount shall be added to the Customer's final invoice. or Option Number 2: (a) In the event Customer's usage (excluding tax and tax-related surcharges), attributable to end-users participating in the Morgan Drive Away Representatives Program, equals or exceeds One Hundred Thousand ($100,000) in either the first six (6) month period or second six (6) month period of the first Annual Period of the initial term commencing on the First Amendment Effective Date, Morgan Group, Inc. shall receive a discount in the form of a credit equal to 1.75% on Customer's total domestic interstate usage for MCI Services purchased hereunder. Such credit shall be applied to Morgan Group, Inc.'s sixth monthly invoice following the applicable period in which such credit is earned; provided however, if the credit earned is due after expiration of the initial term, such amount shall be added to the Customer's final invoice. (b) In the event Customer's usage (excluding tax and tax-related surcharges) , attributable to end-users participating in the Morgan Drive Away Representatives Program, equals or exceeds One Hundred Fifty Thousand ($150,000) in either the first six (6) month period or second six (6) month period of the second Annual Period of the initial term, commencing on the First Amendment Effective Date, Morgan Group, Inc. shall receive a discount in the form of a credit equal to 2.25% on Customer's total domestic interstate usage for MCI Services purchased hereunder. Such credit shall be applied to Morgan Group, Inc.'s sixth monthly invoice following the applicable period in which such credit is earned; provided however, if the credit earned is due after expiration of the initial term, such amount shall be added to the Customer's final invoice. In the event Customer meets the requirements identified in this Section 4 of Attachment 1, Morgan Group, Inc. shall not be entitled to the credits set forth in both options. Morgan -7- Group, Inc. shall only be entitled to one (1) credit per sixth month period if Customer meets the applicable requirements. The discount in Option Number 2 shall only apply to usage charges for domestic interstate traffic (excluding access/egress charges, non-recurring charges, taxes or tax-related surcharges)." 15. HyperStream Frame Relay Services. The Agreement is hereby amended by adding the following new Section 25: "25. Commencing on the First Amendment Effective Date and through expiration of the initial term, during each monthly billing period of the initial tern, Customer shall purchase no less than Ten Thousand Dollars ($10,000) of monthly recurring port and PVC charges associated with MCI HyperStream Frame Relay Service, as more fully described in the Tariff, ("HyperStream Subminimum"), in accordance with the terms and conditions, including, but not limited to any underutilization and early termination charges, set forth in Attachment 2. For purposes of calculating the Annual Minimum, monthly recurring port and PVC charges associated with basic HyperStream Frame Relay Service shall be included in such calculation, however, any charges for Customer Premise Equipment associated with HyperStream Frame Services shall not contribute to the Annual Minimum or HyperStream Subminimum identified herein. In addition, monthly recurring charges associated with HyperStream Frame Relay Service shall in no way contribute to the Revenue Achievement Credits identified in Section 4 of Attachment 1." 16. Entire Agreement. Except as expressly modified by this Amendment, the Agreement shall be and remain in full force and effect in accordance with its terms and shall constitute the legal, valid, binding and enforceable obligations of Customer and MCI. This Amendment, including the Agreement and the applicable MCI tariffs, is the complete agreement of the parties and supersedes any prior agreements of representations, whether oral or written, with respect thereto. 17. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties hereto. 18. Section References. Section titles and references used in this Amendment shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreements among the parties hereto evidenced hereby. -8- IN WITNESS WHEREOF, MCI and Customer have caused this Amendment to be duly executed by their authorized representatives as of the dates set forth below, effective as of the Effective Date. MCI Telecommunications Corporation By: /s/ Tom Schilling --------------------------- Tom Schilling, Director Date: May 7, 1996 Morgan Group, Inc. By: /s/ JohnPaul H. Hoyer Name: JohnPaul H. Hoyer Title: CFO Date: April 11, 1996 -9- EXHIBIT A Customer's Wholly Owned Subsidiaries The following entities shall be eligible for the Morgan Group, Inc. rates and discounts identified herein: TDI, Inc. Morgan Drive Away -10- ATTACHMENT 2 HyperStream(sm) Frame Relay services MCI will furnish the HyperStream(sm) Frame Relay services (the "Services") to Morgan Group, Inc. pursuant to the terms set forth in MCI Tariff F.C.C. No. 1 ("Tariff"), as revised from time to time. This HyperStream(sm) Frame Relay Attachment incorporates by reference the Tariff, as it may be amended or modified from time to time. In the event of any inconsistency between the terms of the Tariff and this Attachment 2, the Tariff shall be deemed controlling. MCI will furnish the service to Customer pursuant to the terms of this Attachment 2 and the Tariff, and any other applicable interstate, international or state tariffs, of MCI and its affiliates. Rates and Charges. Schedules 2 and 3 to this Agreement, which are incorporated herein by reference, contain the applicable rates and charges for the Services provided hereunder. Revisions of the applicable rates and charges may become effective upon revisions of any applicable tariff provisions. Any other service customer orders from MCI or any of its affiliates will not be subject to the terms of this Attachment 2. SCHEDULE 1 HyperStream Frame Relay Service Description Overview HyperStream Frame Relay Service is a packet-oriented interLATA data transport service. At the originating customer premises Motorola provided equipment (equipment provided pursuant to a separate agreement) places the data into packets and gives each packet a terminating address. MCI routes the packets over the MCI network to the terminating address. HyperStream Frame Relay is available at speeds up to 1.544Mbps (where clear channel access is available). Technical Description HyperStream Frame Relay operates at layer two of the OSI model and is designed to conform to the ANSI T1.617 Annex D Standard. Access Customers obtain access to HyperStream Frame Relay via dedicated digital facilities, only. MCI will provide access under the terms of its filed and effective tariffs or customer may obtain access via alternate access vendors. Availability HyperStream Frame Relay is available between cities listed in MCI Tariff FCC No. 1, Section C.12, Table IV, Part A, as amended from time to time, or any successor tariff. Performance Criteria MCI shall provide Customer certain performance criteria for domestic HyperStream Frame Relay Service as identified in Schedule 4, hereto attached and incorporated by reference. SCHEDULE 2 DOMESTIC HYPERSTREAM FRAME RELAY RATES AND CHARGES HYPERSTREAM FRAME RELAY DOMESTIC PRICING A. RATES AND CHARGES: Basic Month-to-Month Rates and Charges. 1. Installation Changes. (a) Access Lines -- Per Tariff (if MCI provided) or alternate access vendor (b) Per Port (each location) -- $300.00 (c) Per Permanent Virtual Circuit (PVC) -- $15 simplex 2. Reconfiguration Charges. (a) Access Lines -- Per Tariff (if MCI provided) or alternate vendor (b) Per Port (each Location) -- $300.00 (c) Per PVC - $1 5.00 simplex 3. Monthly Recurring Charges. (a) Access line charges -- Per Tariff (if MCI provided) or alternate vendor (b) Port Charges -- All port charges are applicable per port (per location). Port charges depend upon the port speed selected by you. Port Speed Selected Rate/Month 56/64 Kbps $ 180.00 112/128 Kbps $ 336.00 224/256 Kbps $ 394.00 336/384 Kbps $ 578.00 448/512 Kbps $ 735.00 672/768 Kbps $ 946.00 896/1024 Kbps $1,178.00 1344/1536 Kbps $1,470.00 (c) PVC Charges -- PVC rates are either fixed or usage based. Usage based charges are either on a committed information rate (CIR) or zero CIR basis. (1) Fixed CIR PVC Rates. You select the fixed CIR per simplex PVC and pay one monthly usage charge per PVC. CIR Speed Selected Rate/Month 16 Kbps $ 37.00 32 Kbps $ 57.00 48 Kbps $ 77.00 64 Kbps $ 97.00 128 Kbps $ 177.00 192 Kbps $ 257.00 256 Kbps $ 337.00 320 Kbps $ 417.00 384 Kbps $ 497.00 448 Kbps $ 577.00 512 Kbps $ 657.00 576 Kbps $ 729.00 640 Kbps $ 801.00 704 Kbps $ 873.00 768 Kbps $ 945.00 832 Kbps $1,010.00 896 Kbps $1,075.00 960 Kbps $1,140.00 1,024 Kbps $1,205.00 (2) Usage-based PVC Rates. All usage-based rates are per delivered megabyte. (i) CIR Usage-based PVC Rates. (a) You select the CIR for each PVC to be rated. Frames within the CIR selected will be rated at the CIR Usage rate of Forty-one Cents ($0.4100) per megabyte of delivered data. Frames in excess of the CIR selected by you will be discarded eligible (DE) and rated at the DE Usage rate of Twenty-one Cents ($0.21 00) per megabyte of delivered data. Sampling intervals for measuring bandwidth usage will be 0.4 seconds for CIR at or below 256 Kbps and 1.5 seconds for CIR over 256 Kbps. MCI reserves the right to revise the sampling intervals. Rates are simplex based. (b) Cost Capping. CIR Usage-based PVC rates are capped at one hundred percent (1 00%) of the corresponding Fixed CIR PVC rates that are set forth in Section A.3.c.1 above. (c) CIR Usage-based PVC Monthly Minimum. If your usage charges for a PVC in a month are less than forty percent (40%) of the Fixed CIR PVC rate selected from the chart set forth in Section A.3.c.1 above, your charge for said PVC will be forty percent (40%) of the Fixed CIR PVC rate (which charges are set forth below). Minimums count toward HyperStream Network Pricing Plan Monthly Minimums (see B below). CIR Speed Selected Minimum Rate/Month 16 Kbps $ 15.00 32 Kbps $ 23.00 48 Kbps $ 31.00 64 Kbps $ 39.00 128 Kbps $ 71.00 192 Kbps $103.00 256 Kbps $135.00 320 Kbps $167.00 384 Kbps $199.00 448 Kbps $231.00 512 Kbps $263.00 576 Kbps $292.00 640 Kbps $320.00 704 Kbps $349.00 768 Kbps $378.00 832 Kbps $404.00 896 Kbps $430.00 960 Kbps $456.00 1,024 Kbps $482.00 (iii) Zero CIR PVC Rates. All frames will be marked DE. All usage is at the rate of Three Cents ($0.0300) per megabyte of delivered data. Monthly minimum charges per simplex PVC will be Seven Dollars ($7.00). There will be no usage charge cap. B. TERM AND VOLUME COMMITMENTS RATE PLANS: You may select from the following rate plans: 1. Month to Month. No term or volume commitments will apply, except PVC monthly minimums. or 2. HyperStream Pricing Plan. (a) if you order HS-FR under the HyperStream Pricing Plan, you will receive discounts on certain HS-FR service elements as follows: Monthly HyperStream Term (years) Subminimum 1 2 3 4 5 ---------- --- --- --- ---- --- $ 2,000 5% 6% 7% 8% 9% $ 5,000 8% 10% 12% 14% 16% X $ 10,000 12% 14% 17% 19% 21% $ 25,000 14% 17% 20% 23% 25% $ 50,000 16% 19% 22% 25% 27% $100,000 18% 21% 24% 27% 30% X identified above in bold determines Customer's term and volume commitment (i.e.2 year-14% discount). (b) If a HyperStream Pricing Plan is selected, then commencing with the seventh full monthly billing cycle if your monthly usage charges for the HS-FR recurring charges fall below the HyperStream Subminimum, then you will pay an underutilization charge equal to one hundred percent (1 00%) of the difference between the amount you purchased in such month and the HyperStream Subminimum. (c) The discount applies to basic month to month charges for the following recurring HS-FR service elements: PVC charges and Port charges (excludes access charges, access coordination charges, taxes and- tax related surcharges). Taxes, tax-related surcharges, access charges, and access coordination charges do not count toward the HyperStream Subminimum. (d) Under the HyperStream Pricing Plan, the start of the term is from implementation of the first service element and lasts through the end of the term selected. The HS-FR term commitment is independent of the terms committed to in individual Access Pricing Plans. (e) In addition to any other early termination charges identified in this Agreement, if you terminate this Agreement before the end of the term selected under the HyperStream Pricing Plan, you will pay an early termination charge equal to a portion of the discounts from the month-to-month basic rates provided to you under this Attachment 2, as follows: For a three (3) year term, 100% of the discount if you terminate in the first year, 75% if you terminate in the second year, or 50% if you terminate in the third year. For a two (2) year term, 1 00% of the discount if you terminate in the first year, 50% if you terminate in the second year. For a one (1) year term, 50% of the discount if you terminate in the first year. SCHEDULE 3 MCI HyperStream(sm) Frame Relay SATISFACTION GUARANTEE If for any reason Customer is not completely satisfied with HyperStream(sm) Frame Relay at any time before the completion of three (3) full billing months, Customer may: o Discontinue HyperStream(sm) Frame Relay with MCI without liability for termination charges; o Receive a credit or refund for HyperStream(sm) Frame Relay and associated MCI installation charges; and o Receive a credit for or refund of recurring usage charges for HyperStream(sm) Frame Relay and associated service Customer incurred during the Satisfaction Guarantee three 13) month period in an amount up to the amount of reasonable re-installation charges Customer may incur from another carrier for re-installation of the service that Customer had replaced with HyperStream(sm) Frame Relay. Covered MCI Charges: o Installation charges: o Installation of access circuits associated with HyperStream(sm) Frame Relay o Recurring charges: o HyperStream(sm) Frame Relay Ports o HyperStream(sm) Frame Relay Permanent Virtual Circuits (PVCs) o Access coordination To exercise Customer's rights under this Satisfaction Guarantee, please notify Customer's MCI account representative in writing not later than the close of the third full billing month after initial installation of HyperStream(sm) Frame Relay. MCI's offer of Satisfaction Guarantee expires if not exercised on or prior to the earlier of (i) three full billing months after initial installation of HyperStream(sm) Frame Relay or (ii) July 31, 1996. Other than the rights expressly granted in this Satisfaction Guarantee, this Satisfaction Guarantee shall not be construed to create any rights or remedies not otherwise expressly provided for nor expand MCI's obligations under the Attachment 2 for HyperStream(sm) Frame Relay to which this Satisfaction Guarantee is attached. SCHEDULE 4 HyperStream Frame Relay Service Level Guarantee MCI is committed to providing its customers with quality Domestic HyperStream Frame Relay services. This document defines the specific quality of service levels MCI will seek to maintain while providing Domestic HyperStream Frame Relay Services to Morgan Group, Inc.; herein referred to as Customer. In the event MCI's HyperStream Frame Relay Services fail to perform to the quality of the applicable service levels as defined herein, MCI's sole and exclusive obligations, and Customer's sole and exclusive remedies, shall be as set forth in this Schedule 4. 1.0 Definition A Service Level Guarantee (SLG) is a commitment on the part of MCI to attempt to meet specific network and service performance levels. 2.0 Network Availability 2.1 Description The HyperStream(sm) Frame Relay (HSFR) network availability measurement is equal to the total number of minutes in a calendar month during which core network PVC routes are available to exchange data between the two network infrastructure node end points divided by the total number of minutes in a calendar month ("Network Availability Time"). Network Availability Time is calculated commencing with the date on which the trouble ticket is opened by the customer and ending upon confirmation of resolution with the customer. For purposes of measuring Network Availability Time, the PVC route referenced above includes the HSFR network infrastructure connectivity from infrastructure port to infrastructure port, excluding Customer Premise Equipment and local access lines. 2.2 Network Availability Objective MCI will attempt to achieve a Network Availability Time of 99.5 % for networks designed with all of the following: o fully meshed network topology or a star network topology in which each remote site has PVCs connected to at least two network hubs engineered to separate infrastructure node , and o 10 or more customer sites are involved in the network MCI will attempt to achieve a Network Availability Time of 99% for any networks not meeting the above requirements. 2.3 Exclusions Network Availability Time measurements exclude HSFR unavailability resulting in whole or in part from one or more of the following causes: o Any act or omission on the part of Customer, customer contractors, and customer vendors (including, but not limited to Motorola) o Scheduled maintenance o Labor strikes o Natural disasters o Force majeure events beyond the reasonable control of MCI (i.e. acts of God, government regulation, national emergency, etc.) 2.4 Calculation Customer HSFR Network Availability Time is calculated on a monthly basis Monthly Network Availability Time (%) = 1 - [Total minutes of PVC downtime per month or "Unavailability Percentage"] Total # PVCs x #days in month x 24 hrs x 60min 2.5 Components of Calculation Total minutes in month, total minutes available, total minutes unavailable, total minutes unavailable due to exclusions, unavailable minutes due to excluded causes, broken down by occurrence (exception) category. 2.6 Credits o In the event MCI is unable to satisfy the HSFR Availability Time objective of 99.5% for two (2) consecutive months, during the service term, Customer will receive a credit equal to five percent (5%) multiplied by the fixed rates for all Port and PVC charges for both the first(1st) and the second (2nd ) month. o In the event MCI in unable to satisfy the HSFR Availability Time objective of 99.5 % for a third (3rd) consecutive month, during the service term. Customer will receive a credit equal to ten percent (10%) multiplied by the fixed rates for all Port and PVC charges for the given month. o In the event MCI is unable to satisfy the HSFR Network Availability Time objective of 99.5% for a fourth (4th) consecutive month, Customer will have the option to discontinue MCI Service on the Service Element that has failed to satisfy the HSFR Availability Time objective and MCI will reduce the HyperStream. Subminimum by the amount of charges associated with the discontinued Service Element. 3.0 Frame Delivery 3.1 Description The HyperStream(sm) Frame Relay Frame Delivery is the percentage of frames which are successfully delivered. HSFR Frame Delivery encompasses the successful delivery of frames through the network based on certain factors. The calculations are based on total frames sent through the network according to the following parameters: The percentage of all non-CIR frames that are successfully delivered. The percentage of all CIR frames that are successfully delivered. 3.2 Frame Delivery Objective 99.99% of all frames that do not exceed the Committed Information Rate (CIR) are targeted to be successfully delivered. End to end CIR packet delivery only applies to frames not marked discard eligible. 99% of all non-CIR frames are targeted to be successfully delivered. Non-CIR packet delivery only applies to frames marked discard eligible, (i.e.; traffic exceeding the subscribed CIR and all zero CIR PVC traffic). 3.3 Frequency of Calculation HSFR Frame Delivery is calculated monthly based upon the frame delivery statistics as stated in the HyperScope reports minus any applicable exclusions below. 3.4 Exclusions HyperStream(sm) Frame Relay Service frame delivery measurements exclude: o Frames dropped at the infrastructure egress due to improper customer specification of customer's port speeds o Local access and CPE (CPE-upon contract execution provided by Motorola) o Force majeure events beyond the reasonable control of MCI (i.e. acts of God, government regulation, national emergency, etc.) 3.5 Credits o In the event MCI is unable to satisfy the HSFR Frame Delivery objective for two (2) consecutive months, during the service term, Customer will receive a credit equal to five percent (5%) multiplied by the fixed rates for all Port and PVC charges for both the first(1st) and the second (2nd ) month. o In the event MCI in unable to satisfy the HSFR Frame Delivery objective for a third (31) consecutive month, during the service term. Customer will receive a credit equal to ten percent (10%) multiplied by the fixed rates for all Port and PVC charges for the given month. o In the event MCI is unable to satisfy the HSFR Frame Delivery objective for a fourth (41) consecutive month, Customer will have the option to discontinue MCI Service on the Service Element that has failed to satisfy the HSFR MTTR objective and MCI will reduce the HyperStream Subminimum by the amount of charges associated with the discontinued Service Element. 4.0 Mean Time To Restore (MTTR) 4.1 Description Mean-Time-To-Restore ("MTTR") is the period of time commencing on the date customer opens on trouble ticket and ending on the date of service restoration (closing of a trouble ticket), calculated as an average of all trouble tickets having the same severity level (as set forth below). MTTR measurements are reported based on the percentage of trouble tickets closed within specific time intervals, grouped by severity level. MCI will assign each trouble ticket a severity level based upon the impact of the service issue on the customer's business: Severity 1 - System down or degraded (limited or no ability to conduct business) Severity 4 - Problem circumvented / Inquiries (no impact to customer business) 4.2 MTTR Objective HyperStream(sm) Frame Relay MTTR objectives are based upon the severity level of the trouble ticket and proximity to an MCI terminal or field service point of presence "POP" broken down by ticket severity as follows: Severity 1 -MTTR Objective is 4 hrs if within 50-mile radius of MCI terminal and field service POP, or 24 hrs or best-effort basis if outside 50-mile radius of MCI terminal and field service POP Severity 4 - not measured 4.3 Frequency of Calculation Customer network MTTR will be calculated on a monthly basis. 4.4 Exclusions MTTR measurements will exclude the following: o Trouble tickets associated with new installations (before new service acceptance by the customer) o Trouble tickets that are not associated with MCI-provided service o Required customer premise access is not available o Required customer circuit release for testing is disallowed o Trouble tickets opened by customer for circuit monitoring purposes only o Force majeure events beyond the reasonable control of MCI (i.e. acts of God, government regulation, national emergency, etc.) 4.5 Calculation Monthly MTTR Average = Sum of minutes between opening and closing of Severity 1 trouble tickets within 30 days Total number of trouble tickets per month 4.6 Components for Calculations Total number of trouble tickets, total time between opening of trouble tickets and applicable service restoration, with total time of opened trouble tickets subtracting total time of each exclusion category. 4.7 Credits o In the event MCI is unable to satisfy the HSFR MTTR objective for two (2) consecutive months, during the service term, Customer will receive a credit equal to five percent (5 %) multiplied by the fixed rates for all Port and PVC charges for the given month. o In the event MCI in unable to satisfy the HSFR MTTR objective for a third (3rd) consecutive month, during the service term. Customer will receive a credit equal to ten percent (10%) multiplied by the fixed rates for all Port and PVC charges for the given month. o In the event MCI is unable to satisfy the HSFR MTTR objective for a fourth (4th) consecutive month, Customer will have the option to discontinue MCI Service on the Service Element that has failed to satisfy the HSFR MTTR objective and MCI will reduce the HyperStream Subminimum by the amount of charges associated with the discontinued Service Element. 5.0 Network Transit Delay 5.1 Description The HyperStream(sm) Frame Relay Network Transit Delay measures one-way delay between the origination and destination infrastructure ports. It is defined as the time between the LAST bit of a ping packet being sent from the origination infrastructure port to the FIRST bit of the packet received by the destination infrastructure port, in other words between the two MCI HyperStream frame relay points of presence. 5.2 Network Transit Delay Guarantee Average HSFR one way network transit delay of 70 milliseconds or less in the domestic U.S. and 250 milliseconds or less internationally. 5.3 Frequency of Calculation Customer gateway to customer gateway network transit delay is tested monthly by MCI as part of standard performance monitoring and capacity planning methodologies. Any customer incident where network transit delay is measured or suspected to be greater than the levels stated above will be considered an abnormal situation and will be addressed through established trouble handling procedures (e.g., a ticket opened and technicians work through the problem until the performance is back to acceptable levels). 5.4 Exclusions The network transit delay parameters are not guaranteed during disaster situations where a major network component such as a backbone link or gateway switch is down hard and the network is in an emergency reroute configuration. Also, HyperStream Network Transit Delay measurements exclude ping packets that are not returned, and ports over which the transit delay is measured can not be more than 5% utilized during any hour over which transit delay measurements are taken. Customer calculations of end to end network transit delay must exclude access serialization delay (calculated as defined below), access circuit propagation delay, any delay induced by congestion on the access link, and any CPE induced delay such as that caused by high router utilization levels. The frame size for the test must be no more than two hundred (200) bytes in length, including protocol overhead. Customer tests must also consist of a minimum of 60 ping tests evenly distributed over a 6 hour period. 5.5 Components for Calculations If you are attempting to calculate cpe to cpe delay, the following are components you will have to consider in addition to the MCI published network delay: o access/egress link utilization o cpe nodal processing time at each end. o local loop propagation factor = .008 ms/mile o backhaul (mci pop to frame switch) = .008 ms/mile o INGRESS/EGRESS SERIAL DELAY (ms) = (Packet size in bytes)x8xI000 ------------------------------ Access speed in bps 5.6 Credits o In the event MCI is unable to satisfy the HSFR Transit Delay objective for two (2) consecutive months, during the service term, Customer will receive a credit equal to five percent (5%) multiplied by the fixed rates for all Port and PVC charges for the given month. o In the event MCI in unable to satisfy the HSFR Transit Delay objective for a third (3rd) consecutive month, during the service term. Customer will receive a credit equal to ten percent (10%) multiplied by the fixed rates for all Port and PVC charges for the given month. o In the event MCI is unable to satisfy the HSFR Transit Delay objective for a fourth (4th) consecutive month, Customer will have the option to discontinue MCI Service on the Service Element that has failed to satisfy the HSFR MTTR objective and MCI will reduce the HyperStream Subminimum by the amount of charges associated with the discontinued Service Element. 6.0 Credit Limitation In the event the customer experiences network or service performance for HSFR at levels below stated MCI objectives for Network Availability Time, MTTR, Network Transit Delay, or HSFR Frame Delivery during the same month, customer shall only be entitled to receive credits, if any, pursuant to one (1) of the applicable credit sections. networkMCI ONE SPECIAL CUSTOMER ARRANGEMENT This networkMCI ONE Special Customer Arrangement together with all Attachments hereto (this "Agreement") is made by and between MCI TELECOMMUNICATIONS CORPORATION ("MCI") and MORGAN DRIVE AWAY, INC. ("Customer"), is binding on Customer upon execution and delivery of this Agreement by Customer to MCI (the "Effective Date"). Provided that this Agreement is subsequently accepted by MCI, the rates, discounts, charges and credits set forth herein shall be effective the first day of the second billing cycle following the Effective Date (the "Commencement Date"). All capitalized terms used in this Agreement and not defined herein will have the meaning ascribed to them in MCI Tariff FCC No. 1. 1. Service Provisioning and Receipt. MCI will provide to Customer international, interstate, intrastate and local telecommunications "service(s)" (as hereinafter defined) pursuant to the applicable tariffs and price lists of MCI and its U.S.-based affiliates (individuals, a "Tariff" and collectively, the "Tariffs"), each as supplemented by this Agreement to the extent permitted by law. This Agreement incorporates by reference the terms of each such Tariff. MCI may modify its Tariff from time to time in accordance with law and thereby affect the services furnished to Customer. This Agreement is a "Specialized Customer Arrangement" as defined in Section B-17.03 of the Tariff. If prior to the expiration of the "Term" (as hereinafter defined) of this Agreement, MCI voluntarily or involuntarily as a result of government or judicial action cancels, in whole or in part, any tariff on file with the Federal Communications Commission ("FCC"), where the affected provisions prior to such cancellation applied to any service(s) MCI provides under this Agreement, then effective on such cancellation and for the remainder of the Term, this Agreement shall consist of the following, in order of precedence from (a) through (c): (a) MCI Tariff provisions that remain in effect ("Effective Tariffs"), as MCI may amend from time to time in accordance with law, and (b) Specific provisions contained in this Agreement that expressly apply in lieu of, or that apply in addition to, provisions contained in Effective Tariffs and/or in MCI's standard Guide to Services and Pricing ("Price Guide"), and (c) Provisions contained in the Price Guide to the extent that (a) and (b) above are not applicable. MCI may amend the Price Guide from time to time and will maintain the Price Guide open for public inspection at one or more offices during normal business hours. Immediately prior to the cancellation of any tariff provisions applicable to service(s) provided under this Agreement, MCI shall incorporate such provisions into the Price Guide and if MCI fails to incorporate any such provisions, such provisions shall be deemed incorporated -1- into this Agreement as if MCI had so incorporated such provisions in the Price Guide. In all events, the applicable rates and rate schedules shall continue to be subject to any discounts, waivers, credits, of restrictions on rate changes that may be contained in this Agreement. Where rate and/or discount adjustments would have been made by reference to any canceled tariff rate, rate schedule, discount and/or discount schedule, these adjustments shall instead be made by reference to the Price Guide. To the extent that any adjustment to tariffed rates, rate schedules, discounts and/or discount schedules is permitted under this Agreement, such adjustment may be made by MCI to its Price Guide. 2. Tariff Option. MCI shall, if required, file a Tariff option (a "Tariff Option") consistent with the terms of Attachment A, which is incorporated into this Agreement by this reference, and applicable regulatory authority. 3. Confidential Information. Customer will not disclose to any third party during the Term, or during the three (3) year period after expiration or termination of this Agreement, any of the terms and conditions of this Agreement unless such disclosure is lawfully required by any federal governmental agency or is otherwise required to be disclosed by law or is necessary in any legal proceeding establishing rights and obligations under this Agreement. MCI reserves the right to terminate this Agreement by giving written notice to Customer in the event of any unpermitted disclosure hereunder. 4. Governing Law. This Agreement, and all causes of action arising out of this Agreement, will be subject to the Communications Act of 1934, as amended (the "Act"), or, if any part of this Agreement is not governed by the Act, by the domestic law of the State of New York without regard to its choice of law principles. 5. Waiver. No waiver of any of the provisions of this Agreement shall be binding unless it is in writing and signed by the party making the waiver. No waiver shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, and no waiver shall be deemed, or shall constitute, a continuing waiver. 6. Notices. All notices, requests, or other communications (excluding invoices) hereunder will be in writing and either transmitted via facsimile, overnight courier, hand delivery or certified or registered mail, postage prepaid and return receipt requested to the parties at the addresses below or such other addresses as may be specified by written notice. All notices will be effective when received. 7. Severability. All provisions of this Agreement are severable, and the unenforceability or invalidity of any of the provisions will not affect the validity or enforceability of the -2- remaining provisions. The remaining provisions will be construed in such a manner as to carry out the full intention of the parties. Section titles or references used in this Agreement will not have substantive meaning or content and are not a part of this Agreement. 8. Entire Agreement. This Agreement, together with the Tariffs, the Attachments to this Agreement, and any optional cellular, paging HyperStream Frame Relay, an Local Service agreements entered into by Customer, constitutes the entire agreement between the parties with respect to its subject matter and supersedes all other representations, understandings or agreements which are not expressed herein, whether oral or written. No amendment to this Agreement will be valid unless in writing and signed by both parties. 9. Optional Cellular and Paging Services. Should Customer choose to order networkMCI Cellular Service or networkMCI Paging Service, subject to availability and Customer's enrollment under an MCI approved and accepted month to month cellular or paging term plan agreement, Customer shall receive during the term of this Agreement only (and in lieu of all other discounts): (i) a discount equal to ten percent (10%) on all paging service elements eligible for discount under the terms of MCI's paging agreement, and (ii) a discount equal to ten percent (10%) on all cellular service elements eligible for discount under the terms of MCI's cellular agreement. Separate credit and payment terms may apply. 10. Domestic MCI HyperStream Frame Relay Service. (a) During each month of the Term, the Customer agrees to purchase not less than the amount identified in Section 3.1 below of MCI HyperStream Frame Relay Service. (b) During each month of the Term, the Customer shall receive a discount equal to seventeen percent (17%) which will be applied to Customer's recurring MCI HyperStream Frame Relay Service port and PVC usage charges (exclusive of applicable taxes, surcharges, access/egress (or related) charges). 11. Optional MCI Local Service. Where MCI has received applicable regulatory approval and filed the necessary tariff(s), and Customer elects to enroll in an MCI Local Service Term Plan, Customer will receive a 10%, 15%, or 20% discount (based upon the length of the Term herein) on its eligible monthly charges for MCI facilities based on local exchange service. MCI Local Service is provided by MCImetro Access Transmission Services, Inc., and is subject to the terms and conditions of the MCI Local Service Term Plan program set forth in the applicable tariffs or price lists. -3- 12. Acceptance Deadline. This Agreement shall be of no force and effect and the offer contained herein shall be withdrawn unless this Agreement is executed by Customer and delivered to MCI on or before September 30, 1997. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the dates set forth below. MORGAN DRIVE MCI TELECOMMUNICATIONS AWAY, INC. CORPORATION 2746 U.S. 20 West, P.O. Box 1168 Three Ravinia Drive Elkhart, Indiana 46515 Atlanta, Georgia 30346 /s/ Richard B. DeBoer Richard B. DeBoer Jon McGuire, Vice President September 30, 1997 Date Date -4- ATTACHMENT A TO AGREEMENT This Attachment A to the Agreement contains the rates, discounts and certain other provisions applicable to the Services provided to Customer pursuant to the Agreement. 1. Term; Ramp Period; Contract Year. The "Term" will begin on the Effective Date and end two (2) years following the Commencement Date. Each consecutive twelve (12) month period of the Term commencing on the Commencement Date and on each anniversary thereof will be a "Contract Year". 2. Selected Definitions. 2.1 "Base Rates" shall mean the rates as reduced by the discounts (if any) provided to Customer pursuant to this Agreement or for "Services" (as hereinafter defined) not specifically set forth herein, the rates set forth in the Tariffs following application of all applicable tariffed discounts. 2.2 "Postalized Rates" shall refer to per minute rates for Services that are nondistance- sensitive. 2.3 "Services" shall refer to any one or more of those telecommunications services provided to Customer pursuant to the Tariffs. 2.4 "Usage Charges" shall mean Customer's recurring usage charges for the Services calculated at Base Rates. Usage Charges do not include the following: (i) taxes and tax related surcharges; (ii) charges for any non-Tariffed services; (iii) charges for equipment and collocation; and (iv) charges incurred where MCI or an MCI affiliate acts as agent for Customer in the acquisition of goods or services. 3. Annual Minimum. During each Contract Year, Customer's Usage Charges must equal or exceed Eight Hundred Forty Thousand Dollars ($840,000) (the "Annual Minimum"). 3.1 During each month of the Contract Years, Customer's MCI HyperStream Frame Relay port and PVC Usage Charges must equal or exceed Ten Thousand Dollars ($10,000) (the "Monthly HyperStream Subminimum"). 4. Rates and Discounts for the Services. Except as expressly provided to the contrary, the rates, charges, discounts and/or credits set forth herein are in lieu of, and not in addition to, any other rates, charges, discounts and/or credits (tariffed or otherwise). For Services not specifically set forth herein, Customer will be charged MCI's standard Tariffed rates. References in this Attachment A to standard Tariffed rates and/or discounts refer to the corresponding standard rates and/or discounts set forth in the applicable Tariffs for such Service(s) and in the event that MCI voluntarily or involuntarily as a result of government or judicial action cancels in whole or in part any tariff on file with the Federal Communications Commission, such references shall refer to the corresponding, rates and/or discounts set forth -1- in the Price Guide for such Service(s). All references to "intrastate" and "interstate" contained herein shall refer to domestic Services only. 4.1 networkMCI One Service. Customer will pay the following rates for networkMCI One Service: 4.1.1 Interstate networkMCI One Service. Customer will pay the following Postalized Rates for networks One Outbound Service, including interstate networkMCI One Card Service, based on call type. These Postalized Rates will be adjusted on the first day of each January during each calendar year of the Term by an amount equal to the same percentage by which standard Tariffed interstate networkMCI One Service rates were adjusted during the immediately preceding calendar year. These Postalized Rates will fluctuate with changes in the Tariff, not to exceed a maximum increase or decrease of three percent (3%) per annual period. Such adjustments shall be made on a prospective basis only. No retroactive adjustments will be made to previous years during the Term of this Agreement. Call Type Rate Per Minute Dedicated/Dedicated $0.0870 Switched/Dedicated $0.1070 Dedicated/Switched $0.1070 Switched/Switched $0.1570 4.1.1.1 Customer will receive a fixed discount of thirty seven percent (37%) off the Postalized Rates described in Section 4.1.1 above to be applied to Customer's monthly Usage Charges for said Service. 4.1.2 Customer will pay the following Postalized Rates for networkMCI One Toll Free Service, based on termination type. These Postalized Rates will be adjusted on the first day of each January during each calendar year of the Term by an amount equal to the same percentage by which standard Tariffed interstate networkMCI One Service rates were adjusted during the immediately preceding calendar year. These Postalized Rates will fluctuate with changes in the Tariff, not to exceed a maximum increase or decrease of three percent (3%) per annual period. Such adjustments shall be made on a prospective basis only. No retroactive adjustments will be made to previous years during the Term of this Agreement. Termination Rate Per Minute Direct Access Line $0.1070 Business Line $0.1570 -2- 4.1.2.1 Customer will receive a fixed discount of thirty seven percent (37%) off the Postalized Rates described in Section 4.1.2 above and off Dynamic Routing Charges as described in the Tariff, to be applied to Customer's monthly Usage Charges for said Service. 4.1.3 International networkMCI One and networkMCI One Toll Free Service. For international [toll free and/or outbound] networkMCI One Service, including international networkMCI One Card Service, Customer will pay standard Tariffed rates less a fixed ten percent (10%) discount off standard Tariffed rates, including Canada. 4.1.4 Intrastate networkMCI One and networkMCI One Toll Free Service. For intrastate [toll free and/or outbound] networkMCI One Service, including intrastate networkMCI One Card Service, Customer will pay standard Tariffed rates without application of any discounts (tariffed or otherwise). except as described in Section 5.2 below. 4.1.5 networkMCI One Card Surcharge. Notwithstanding anything herein to the contrary, Customer will pay a thirty five cent ($0.35) per call surcharge for all networkMCI One Card calls. 4.2 networkMCI Audio Conferencing. Customer will pay the following rates for networkMCI Audio Conferencing Service. In lieu of standard Tariffed rates, for all networkMCI Audio Conferencing Service, Customer will be charged the following, per-minute per bridge port rates (with rounding to the next higher full minute). In addition, MCI will waive per bridge port set-up fees. Service Rate Attended Meet-Me Service* $.3500 Unattended Meet-Me Service $.3400 Attended Toll Meet-Me Service $.2300 Unattended Toll Meet-Me Service $.2100 * includes Dial-Out Service, Personal Toll Free Meet-Me Service, and Toll Free Meet-Me Service 4.3 Dedicated Access Services. Customer subscribes to and will receive the discounts off local loop charges only for channelized and unchannelized T-1 access, DSO access and DDS access and analog access provided pursuant to MCI's three (3) year Access Pricing Plan ("APP"). -3- 4.3.1 In addition to the discount described in Section 4.3 above, the Customer will receive a thirty percent (30%) discount on its MCI monthly recurring charges under this Agreement for up to ten (10) MCI provided T-1 digital access channels and associated access coordination and central office connection charges, provided such channels are installed for use with MCI Services and are billed on MCI invoices. This monthly discount will be applied to Customer's T-1 carrier charges for domestic interstate service (as long as Customer makes payment pursuant to this Agreement). Customer shall also be eligible for the T-1 Digital Access Install Waiver Promotion, pursuant to the Tariff. 4.4 Dedicated Leased Line Services. For MCI Dedicated Leased Line Services, Customer will pay standard Tariffed rates less the discounts associated with the three (3) year and Fifty Thousand Dollar ($50,000) Network Pricing Plan as set forth in the Tariff. The standard term and volume commitments set forth in the Tariff will not apply. 4.5 Charges Not Eligible For Discount. The rates and discounts set forth in this Section 4 do not apply to the following: charges for MCI Services other than those set forth in Section 4; non-Tariffed products; access or egress (or related) charges imposed by third parties; standard Tariffed non-recurring charges, calling card surcharges and taxes or tax-like surcharges. 5. Credits. 5.1 Installation Credit. Customer shall receive credits in the aggregate of up to Forty Five Thousand Dollars ($45,000) Dollars for the one-time installation and other one-time, nonrecurring, standard (non-expedite) charges associated with the implementation of domestic Services under this Agreement. Such credits will be issued from time to time throughout the Term as MCI services are installed by Customer and shall be applied following, application of all standard Tariffed installation promotions. 5.2 Interstate Service Credits. Customer will receive a monthly recurring credit (the "Interstate Service Credit") to be applied to Customer's interstate Usage Charges of Services hereunder equal to the sum of. (i) the product of a fixed twenty five percent (25%) discount multiplied by Customer's intrastate networkMCI One Usage Charges for the immediately preceding month at standard Tariffed rates plus (ii) a fixed discount of twenty five percent (25%) multiplied by Customer's intrastate networkMCI One Toll Free Usage Charges for the immediately preceding month at standard Tariffed rates. Notwithstanding the foregoing, in no event shall the amount of any such Interstate Service Credit exceed Customer's interstate Usage Charges for the month in which such credit is to be applied. -4- 5.3 Revenue Stimulation Credits. At the end of each Contract Year, the Customer will receive a one-time credit for that year that corresponds to the Annual Usage Amounts* identified below. Such credit shall be applied in the form of a dollar amount to Customer's domestic interstate Usage Charges (exclusive of applicable taxes, surcharges, access/egress (or related) charges) in the thirteenth (13th) and twenty fifth (25th) months of the Term. Annual Usage Amounts Credit Amount ------- ------------- 125% of Annual Minimum 1% of annual usage 140% of Annual Minimum 1.75% of annual usage *For purposes of this Section 5.3, only revenue that counts towards the satisfaction of the Annual Minimum will be measured. 6. Underutilization. If in any Contract Year, Customer's Usage Charges are less than the applicable Annual Minimum, then Customer will pay: (1) all accrued but unpaid usage and other charges incurred by Customer; and (2) an underutilization charge (which Customer agrees is reasonable) equal to one hundred percent, (100%) of the difference between Customer's Usage Charges during such Contract Year and the applicable Annual Minimum. 6.1 HyperStream Underutilization. If in any month of the Contract Years, Customer's MCI HyperStream Frame Relay Usage Charges are less than the applicable Monthly HyperStream Subminimum, then Customer will pay: (1) all accrued but unpaid usage and other charges incurred by Customer; and (2) an underutilization charge (which Customer agrees is reasonable) equal to one hundred percent (100%) of the difference between Customer's MCI HyperStream Frame Relay Usage Charges during such month of the Contract Year and the applicable Monthly HyperStream Subminimum. 7. Termination Liability. If (1) Customer terminates this Agreement during the Term, for reasons other than (i) for "Cause" (as hereinafter defined) or (ii) to take service under another arrangement with MCI having equal or greater term and volume requirements or (2) MCI terminates this Agreement for Cause, Customer will pay within thirty (30) days after such termination: (a) all accrued but unpaid usage and other charges incurred through the date of such termination (b) an amount equal to one hundred percent (100%) of the aggregate of the Annual Minimum(s) (or pro rata portion thereof for partial Contract Year) that would have been applicable for the remaining unexpired portion of the Term on the date of such termination and (c) any and all credits received by Customer hereunder (exclusive of credits for the Interstate Service Credits), in full, without setoff or deduction. As used herein, "Cause" shall mean a failure of the other party to perform a material obligation under this Agreement which failure is not remedied by the defaulting party within thirty (30) days after receipt of written notice thereof. -5- 8. Payment Arrangements. Customer is required to pay MCI for Services within twenty-five (25) days after Customer's receipt of MCI's invoice. 9. Exclusivity Requirement. 9.1 Customer agrees it shall use MCI exclusively as its interexchange carrier ("IXC") during the Term hereof for ninety five percent (95%) of all IXC services for which Customer is not contractually committed at the execution of this Agreement [including, without limitation, inbound toll free services, outbound voice services, conference calling services, domestic and international outbound, and domestic and international data services.] Compliance with the foregoing exclusivity covenant shall be measured on a monthly basis based on Customer's dollar usage of all IXC services. 9.2 After the Effective Date of this Agreement, but not more than once annually, MCI may request, and Customer shall provide to MCI in writing, Customer records, data and invoices pertaining to its total IXC service usage for the most recent twelve (12) month period preceding the request. MCI may review this information for the sole purpose of determining Customer's compliance with the exclusivity covenant set forth in this Section. 10. MCI Local Service. (i) From time to time during the Term, MCI or an MCI affiliate may offer local access or local exchange telephone services (collectively, "Local Service"). As of the Effective Date, Local Service is provided by MCImetro Access Transmission Services, Inc. "Local Service Charges" (as defined below) will contribute to Customer's Annual Minimum, but will not be eligible to receive any discounts under this Agreement unless otherwise expressly stated. For purposes of this Agreement, "Local Service Charges" means MCI's tariffed or standard rates and charges for Local Service, net of associated credits or discounts, and includes applicable monthly usage and monthly recurring, charges, local line charges, analog and digital trunk charges, and Direct-Inward Dialing analog, digital and number charges. Local Service Charges do not include charges for Bell Operating Company resold local exchange services within the meaning of Section 251(c)(4) of the Telecommunications Act of 1996, Directory Assistance charges and surcharges, charges for enhanced services (such as charges for voice mail or call manager), non-recurring charges, Operator Services charges and surcharges, access/egress (or related) charges imposed by a third party other than MCI or an MCI affiliate, applicable sales, use, excise, utility, and gross receipts taxes and other similar tax-like surcharges. (ii) Where MCI has received the applicable regulatory approval and filed the necessary tariff(s), Customer will be automatically enrolled in an MCI Local Service Term Plan and will receive a twenty percent (20%) discount on its eligible monthly charges for -6- MCI facilities-based local exchange service. Enrollment in the MCI Local Service Term Plan is subject to the terms and conditions of the MCI Local Service Term Plan program set forth in the applicable tariffs or price lists. 11. Quality Assurance. Notwithstanding the provisions of Section 7 ("Termination Liability") above, Customer shall be permitted to terminate during the Term, without liability or further obligation, except for charges incurred up to the date of termination, a circuit that experiences "MCI-caused" quality deficiencies that are demonstrated by Customer to affect adversely and materially Customer's telecommunications applications (such a termination under this clause shall constitute a "Termination for Quality Assurance"). As used herein, "MCI-caused" shall mean MCI acts or omissions regarding the provision of a circuit to Customer. A Termination for Quality Assurance shall not be effective unless Customer has reported troubles on a circuit-specific, ANI basis to (and received a corresponding trouble ticket number from) MCI's Support Center and a period of not less than thirty (30) days after receipt of Customer's written notice of termination has elapsed during which time MCI fails to correct such MCI-caused quality deficiencies for such circuit. Such thirty (30) day period shall commence upon MCI's receipt of Customer's written notice and will not re-commence if the same MCI-caused quality deficiencies occur again for such circuit during said thirty (30) day period. 12. Provisions for Service Interruptions. (a) Credit Allowance for Service Interruptions. Customer shall be entitled to Credit Allowances for Service Interruptions in accordance with Section B.15 of the Tariff. A Service Interruption begins when Customer reports the interruption to MCI and releases the "Service Element" (as hereinafter defined) for testing and repair and ends when MCI retenders the Service Element to Customer. For the purpose of determining compliance with the Annual Minimum, MCI will not reduce monthly charges by the amount of Credit Allowances applied. For purposes of this Agreement, "Service Element" refers to the specific MCI service affected at the specific geographic Customer location affected. (b) Partial Discontinuance without Liability. Customer may discontinue receipt of service on a Service Element at any time without liability except as otherwise expressly provided for in the applicable Tariff or this Agreement (an example of such a provision might be where a private line installation charge is waived but is to be assessed if the line is not in place for a minimum period). If Customer discontinues receipt of service on a Service Element having chronic Service Interruptions and does not take substitute service from MCI, the Annual Minimum for purposes of assessing underutilization charges shall be reduced by the average monthly charges for the discontinued Service Element measured over the last -7- three (3) billing months prior to discontinuation multiplied by twelve (12). A Service Element with chronic Service Interruptions is one on which there have been three (3) or more Service Interruptions, each consisting of thirty (30) or more minutes, totaling twenty-four (24) or more hours within three (3) consecutive calendar months. 13. Technology Upgrade. (a) In the event that: (i) Customer is unable to satisfy the Annual Minimum solely as a result of a Customer's migration from Services to enhanced services of MCI which are not includable in determining Customer's compliance with the Annual Minimum ("MCI Enhanced Services") and (ii) Customer certifies to MCI in writing that: (x) it has not substituted services provided by other vendors in place of the Services and (y) it is not able to substitute for such migrated usage other telecommunications services provided to Customer by other vendors, then MCI agrees to reduce the Annual Minimum by the Customer's minimum volume requirement, calculated on an annual basis, for such MCI Enhanced Service(s) pursuant to its agreement with MCI governing such usage. (b) Following the establishment by MCI of a revised Annual Minimum as set forth above in Section 13(a), the revised Annual Minimum shall replace the Annual Minimum throughout this Agreement and Customer shall remain liable for charges pursuant to this Agreement, including, without limitation, those charges set forth in Sections 6 and 7 hereof, based on the revised Annual Minimum. Notwithstanding anything herein to the contrary, in the event of the establishment of a revised Annual Minimum, MCI may increase the rates provided and/or lower the discounts to Customer hereunder by sending at least thirty (30) days' prior written notice thereof to Customer. 14. Business Downturn. (a) In the event that Customer is unable to meet the Annual Minimum, notwithstanding Customer's best efforts to do so, or anticipates that it will be unable to meet the Annual Minimum, notwithstanding Customer's best efforts to do so, and Customer establishes the foregoing to MCI's satisfaction and such failure results solely from a business downturn beyond Customer's control, which materially and permanently reduces the size or scope of Customer's operations and the volume of Services required by Customer hereunder, then MCI agrees to reduce the Annual Minimum by the product of the average monthly demonstrated purchases displaced by such business downturn multiplied by twelve (12). By way of illustration and not by limitation, business downturn shall not include a change in Customer's usage of Services hereunder resulting from a decision by Customer to: (i) reduce its overall use of telecommunications services; (ii) alter its telecommunications network architecture; or (iii) transfer portions of its telecommunications traffic or projected -8- growth to carriers other than MCI. This Section 14(a) shall also not apply during the first Contract Year of the Term, and thereafter, may only be used one (1) time during the Tenn. Customer shall give MCI immediate notice of the conditions it believes will require the application of this Section 14(a) and provide copies of documentation and/or data demonstrating the resulting decrease in usage of Services hereunder. (b) Following the establishment by MCI of a revised Annual Minimum as set forth above in Section 14(a), the revised Annual Minimum shall replace the Annual Minimum throughout this Agreement and Customer shall remain liable for charges pursuant to this Agreement, including, without limitation, those charges set forth in Sections 6 and 7 hereof, based on the revised Annual Minimum. Notwithstanding anything herein to the contrary, in the event of the establishment of a revised Annual Minimum, MCI may increase the rates and/or lower the discounts provided to Customer hereunder by sending at least thirty (30) days' prior written notice thereof to Customer. 15. Business Divestiture. (a) In the event that (i) Customer is unable to satisfy the Annual Minimum solely as a result of a "Business Divestiture" (as such term is hereinafter defined) and (ii) Customer certifies to MCI in writing that it has not substituted services provided by other vendors in place of the Services and it is not able to substitute for such diminished MCI usage other telecommunications services provided to Customer by other vendors, then MCI agrees to reduce the Annual Minimum by the product of the average monthly purchases attributable to such Business Divestiture during the six (6) months (or in the event that such Business Divestiture occurs prior to the sixth (6th) monthly billing cycle of the Term, during the monthly billing cycles since the Commencement Date) preceding such Business Divestiture multiplied by twelve (12). For purposes of this provision, "Business Divestiture" shall mean the sale or divestiture by Customer of a subsidiary, affiliate or significant operating unit that uses Services hereunder. Customer shall give MCI immediate notice of a Business Divestiture and shall promptly provide to MCI in writing, documentation satisfactory to MCI which establishes that a Business Divestiture has occurred. (b) Following the establishment by MCI of a revised Annual Minimum as set forth above in Section 15(a), the revised Annual Minimum shall replace the Annual Minimum throughout this Agreement and Customer shall remain liable for charges pursuant to this Agreement, including, without limitation, those charges set forth in Sections 6 and 7 hereof, based on the revised Annual Minimum. Notwithstanding anything herein to the contrary, in the event of the establishment of a revised Annual Minimum, MCI may increase the rates and/or lower the discounts provided to Customer hereunder by sending at least thirty (30) days' prior written notice thereof to Customer. -9- MCI HyperStream(sm) Frame Relay Service ENROLLMENT FORM AND AGREEMENT MCI MCI HyperStream(sm) Frame Relay Service is subject to the terms of this Enrollment Form and Agreement ("Agreement"), including any attachments and documents incorporated by reference. Morgan Group, Inc. MCI Telecommunications Corporation Customer Name 28651 U.S. 20 West Street Address Authorized MCI Signature Elkhart, IN 46515 City/State/Zip Print Name and Title Customer Signature MCI Acceptance Date Valid only if executed by Customer and returned to MCI by January 19, 1996 Print Name and Title and subsequently accepted by MCI. Customer Signature Date - -------------------------------------------------------------------------------- TERMS AND CONDITIONS 1. Definitions. "MCI" refers to MCI Telecommunications Corporation. "HyperStream(sm) Frame Relay" means MCI's frame-based data networking service, an enhanced service, as described in the HyperStream(sm) Frame Relay Service Description, as revised from time to time, which is attached hereto as Attachment 1. 2. Service Terms. a. MCI will furnish the HyperStream(sm) Frame Relay services (the "Services") to Customer pursuant to the terms of this Agreement. This Agreement incorporates by reference the Rules and Regulations contained in MCI Tariff FCC No. 1 (the "Tariff"), with specific reference to Section 8.4.02 thereof, as the Tariff may be modified from time to time by MCI in accordance with applicable law, except as expressly varied or supplemented herein. Other than as expressly set forth herein, MCI DISCLAIMS ALL WARRANTIES, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. In no event shall MCI be liable to Customer or any third party for indirect, incidental or consequential damages, even if aware of the possibility thereof. In the event of any inconsistency between this Agreement and the terms the Tariff, the terms of this Agreement shall govern. This Agreement is the complete agreement between Customer and MCI for the services subject to this Agreement and supersedes any prior written or oral agreements and understandings concerning the Services. b. Customer acknowledges that MCI has been ordered by the Federal Communications Commission (the "FCC") to provide the Services pursuant to a tariff filed with the FCC. MCI and Customer agrees that as of the date that MCI tariffs the Service: (1) This Agreement is subject to said tariff; and (2) the parties will promptly execute appropriate additional agreements and amendments to this Agreement, the effect of which shall be to eliminate the Services from this Agreement and to incorporate the Services into an agreement for MCI tariffed services. Customer acknowledges and agrees that MCI shall have no obligation to include any other nontariffed service or equipment provided under this Agreement or any charges payable for such service or equipment in any such agreement for tariffed services. In the event the FCC significantly and materially alters the terms and conditions contained herein, MCI and Customer will cooperate in efforts to develop a mutually agreeable alternative proposal that will address the concerns of both parties and comply with all applicable legal and regulatory requirements and restrictions. c. With the exception of revisions to the Tariff made in accordance with applicable law, this Agreement may only be amended ir writing signed by authorized representatives of the parties. 3. Rates and Charges. Attachments 2 and 3 to this Agreement, which are incorporated herein by reference, contain the applicable rates and charges for the Services provided hereunder. Revisions of the applicable rates and charges may become effective upon revisions of any applicable tariff provisions (if the service is offered under tariff) or upon notification that MCI has revised the applicable rates and charges (if the service is not offered under tariff). Any other service Customer orders from MCI or any of its affiliates will not be subject to the terms of this Agreement. 4. Term. The initial term of this Agreement shall commence on the MCI Acceptance Date and shall be coterminous with the MCI Corporate Service Plan Agreement, signed by the Customer on December 5, 1994 and subsequently accepted by MCI on January 4, 1995, as amended. After the initial term, the service arrangement shall continue month to month, unless terminated by Customer or MCI on thirty 130) days' written notice. 5. Governing Law. The provision of service under this Agreement is subject to and shall be interpreted in accordance with the terms of the Communications Act of 1934, as administered by the Federal Communications Commission. 6. Nondisclosure. Customer agrees not to disclose the financial provisions of this Agreement to any third party during the term and for one (1) year after termination, except that this provision does not apply to information in the public domain or information which is lawfully required to be disclosed. MCI reserves the right to terminate the provision of service under this Agreement if there is any unpermitted disclosure. ATTACHMENT 1 HyperStream Frame Relay Service Description Overview HyperStream Frame Relay Service is a packet-oriented interLATA data transport service. At the originating customer promises Motorola provided equipment (equipment provided pursuant to a separate agreement) places the data into packets and gives each packet a terminating address. MCI routes the packets over the MCI network to the terminating address. HyperStream Frame Relay is available at speeds up to 1.544Mbps (where clear channel access is available). Technical Description HyperStream Frame Relay operates at layer two of the OSI model and is designed to conform to the ANSI T1.617 Annex D Standard. Access Customers obtain access to HyperStream Frame Relay via dedicated digital facilities, only. MCI will provide access under the terms of its filed and effective tariffs or customer may obtain access via alternate access vendors. Customer Promises Equipment (CPE) Customer may provide required CPE or may obtain CPE from MCI under separate agreement. Availability HyperStream Frame Relay is available between cities listed in MCI Tariff FCC No. 1, Section C. 1 2, Table IV, Part A, as amended from time to time, or any successor tariff. Performance Criteria MCI shall provide Customer certain performance criteria for domestic HyperStream Frame Relay Service as identified in Attachment 4, hereto attached and incorporated by reference. ATTACHMENT 2 DOMESTIC HYPERSTREAM FRAME RELAY RATES AND CHARGES HYPERSTREAM FRAME RELAY DOMESTIC PRICING A. RATES AND CHARGES: Basic Month-to-Month Rates and Charges. 1. Installation Charges. (a) Access Lines -- Per Tariff (if MCI provided) or alternate access vendor (b) Per Port (each location) -- $300.00 (c) Per Permanent Virtual Circuit (PVC) -- $15 simplex 2. Reconfiguration Charges. (a) Access Lines - Per Tariff (if MCI provided) or alternate vendor (b) Per Port (each Location) -- $300.00 (c) Per PVC - $15.00 simplex 3. Monthly Recurring Charges. (a) Access line charges -- Per Tariff (if MCI provided) or alternate vendor (b) Port Charges -- All port charges are applicable per port (per location). Port charges depend upon the port speed selected by you. Port Speed Selected Rate/Month 56/64 Kbps $ 180.00 112/128 Kbps $ 336.00 224/256 Kbps $ 394.00 336/384 Kbps $ 578.00 448/512 Kbps $ 735.00 672/768 Kbps $ 946.00 896/1024 Kbps $1,178.00 1344/1536 Kbps $1,470.00 (c) PVC Charges -- PVC rates are either fixed or usage based. Usage based charges are either on a committed information rate (CIR) or zero CIR basis. (1) Fixed CIR PVC Rates. You select the fixed CIR per simplex PVC and pay one monthly usage charge per PVC. CIR Speed Selected Rate/Month 16 Kbps $ 37.00 32 Kbps $ 57.00 48 Kbps $ 77.00 64 Kbps $ 97.00 128 Kbps $ 177.00 192 Kbps $ 257.00 256 Kbps $ 337.00 320 Kbps $ 417.00 384 Kbps $ 497.00 448 Kbps $ 577.00 512 Kbps $ 657.00 576 Kbps $ 729.00 640 Kbps $ 801.00 704 Kbps $ 873.00 768 Kbps $ 945.00 832 Kbps $1,010.00 896 Kbps $1,075.00 960 Kbps $1,140.00 1,024 Kbps $1,205.00 (2) Usage-based PVC Rates. All usage-based rates are per delivered megabyte. (i) CIR Usage-based PVC Rates. (a) You select the CIR for each PVC to be rated. Frames within the CIR selected will be rated at the CIR Usage rate of Forty-one Cents ($0.4100) per megabyte of delivered data. Frames in excess of the CIR selected by you will be discarded eligible (DE) and rated at the DE Usage rate of Twenty-one Cents ($0.2100) per megabyte of delivered data. Sampling intervals for measuring bandwidth usage will be 0.4 seconds for CIR at or below 256 Kbps and 1.5 seconds for CIR over 256 Kbps. MCI reserves the right to revise the sampling intervals. Rates are simplex based. (b) Cost Capping. CIR Usage-based PVC rates are capped at one hundred percent (100%) of the corresponding Fixed CIR PVC rates that are set forth in Section A.3.c.1 above. (c) CIR Usage-based PVC Monthly Minimum. If your usage charges for a PVC in a month are less than forty percent (40%) of the Fixed CIR PVC rate selected from the chart set forth in Section A.3.c.1 above, your charge for said PVC will be forty percent (40%) of the Fixed CIR PVC rate (which charges are set forth below). Minimums count toward Network Pricing Plan Monthly Minimums (see B below). CIR Speed Selected Minimum Rate/Month 16 Kbps $ 15.00 32 Kbps $ 23.00 48 Kbps $ 31.00 64 Kbps $ 39.00 128 Kbps $ 71.00 192 Kbps $103.00 256 Kbps $135.00 320 Kbps $167.00 384 Kbps $199.00 448 Kbps $231.00 512 Kbps $263.00 576 Kbps $292.00 640 Kbps $320.00 704 Kbps $349.00 768 Kbps $378.00 832 Kbps $404.00 896 Kbps $430.00 960 Kbps $456.00 1,024 Kbps $482.00 (ii) Zero CIR PVC Rates. All frames will be marked DE. All usage is at the rate of Three Cents ($0.0300) per megabyte of delivered data. Monthly minimum charges per simplex PVC will be Seven Dollars ($7.00). There will be no usage charge cap. B. TERM AND VOLUME COMMITMENTS RATE PLANS: You may select from the following rate plans: 1. Month to Month. No term or volume commitments will apply, except PVC monthly minimums. or 2. Network Pricing Plan. (a) If you order HS-FR under the Network Pricing Plan, you will receive discounts on certain HS-FR service elements as follows: Monthly Term (years) Minimum 1 2 3 4 5 - - - - - $ 2,000 5% 6% 7% 8% 9% $ 5,000 8% 10% 12% 14% 16% X $ 10,000 12% 14% 17% 19% 21% $ 25,000 14% 17% 20% 23% 25% $ 50,000 16% 19% 22% 25% 27% $100,000 18% 21% 24% 27% 30% (b) If a Network Pricing Plan is selected, then commencing with the fourth full monthly billing cycle if your monthly usage charges for the HS-FR recurring charges fall below the monthly minimum selected ("Monthly Minimum"), then you will pay an underutilization charge equal to one hundred percent (100%) of the difference between the amount you purchased in such month and the Monthly Minimum. (c) The discount applies to basic month to month charges for the following recurring HS-FR service elements: PVC charges and Port charges (excludes network management, CPE, access charges, access coordination charges, taxes and tax related surcharges). Taxes, tax-related surcharges, access charges, access coordination charges, network management and CPE charges do not count toward the Monthly Minimum. (d) In the event you have a signed Annex to this Agreement for the provision of HyperStream International Frame Relay Service ("HSI-FR"), the following recurring HSIFR service elements shall count toward the HS-FR Monthly Minimum: Overseas PVC charges and Overseas Port Charges. (e) Under the Network Pricing Plan, the start of the term is from implementation of the first service element and lasts through the end of the term selected. The HS-FR term commitment is independent of the terms committed to in individual Access Pricing Plans. (f) Except as otherwise provided in this Agreement, if you terminate this Agreement before the and of the term selected under the Network Pricing Plan, you will pay an early termination charge equal to a portion of the discounts from the month-to-month basic rates provided to you under this Agreement, as follows: For a three (3) year term, 100% of the discount if you terminate in the first year, 75% if you terminate in the second year, or 50% if you terminate in the third year. For a two (2) year term, 100% of the discount if you terminate in the first year, 50% if you terminate in the second year. For a one (1) year term, 50% of the discount if you terminate in the first year. ATTACHMENT 3 MCI HyperStream(sm) Frame Relay SATISFACTION GUARANTEE If for any reason Customer is not completely satisfied with HyperStream(sm) Frame Relay at any time before the completion of three (3) full billing months, Customer may: o Discontinue HyperStream(sm) Frame Relay and any associated customer premises equipment and network management agreements with MCI without liability for termination charges; o Receive a credit or refund for HyperStream(sm) Frame Relay and associated MCI installation charges; and o Receive a credit for or refund of recurring usage charges for HyperStream(sm) Frame Relay and associated service Customer incurred during the Satisfaction Guarantee three (3) month period in an amount up to the amount of reasonable re-installation charges Customer may incur from another carrier for re-installation of the service that Customer had replaced with HyperStream(sm) Frame Relay. Covered MCI Charges: o Installation charges: o Installation of access circuits associated with HyperStream(sm) Frame Relay o Recurring charges: o HyperStream(sm) Frame Relay Ports o HyperStream(sm) Frame Relay Permanent Virtual Circuits (PVCs) o Access coordination To exercise Customer's rights under this Satisfaction Guarantee, please notify Customer's MCI account representative in writing not later than the close of the third full billing month after initial installation of HyperStream(sm) Frame Relay. MCI's offer of Satisfaction Guarantee expires if not exercised on or prior to the earlier of 10 three full billing months after initial installation of HyperStream(sm) Frame Relay or (ii) March 30, 1996. Other than the rights expressly granted in this Satisfaction Guarantee, this Satisfaction Guarantee shall not be construed to create any rights or remedies not otherwise expressly provided for nor expand MCI's obligations under the Agreement for HyperStream(sm) Frame Relay to which this Satisfaction Guarantee is attached. ATTACHMENT 4 HyperStream Frame Relay Service Level Guarantee MCI is committed to providing its customers with quality Domestic HyperStream Frame Relay services. This document defines the specific quality of service levels MCI will seek to maintain while providing Domestic HyperStream Frame Relay Services to Morgan Group, Inc.; herein referred to as Customer. In the event MCI's HyperStream. Frame Relay Services fail to perform to the quality of the applicable service levels as defined herein, MCI's sole and exclusive obligations, and Customer's sole and exclusive remedies, shall be as set forth in this Attachment 3. 1.0 Definition A Service Level Guarantee (SLG) is a commitment on the part of MCI to attempt to meet specific network and service performance levels. 2.0 Network Availability 2.1 Description The HyperStream(sm) Frame Relay (HSFR)network availability measurement is equal to the total number of minutes in a calendar month during which core network PVC routes are available to exchange data between the two network infrastructure node end points divided by the total number of minutes in a calendar month ("Network Availability Time"). Network Availability Time is calculated commencing with the date on which the trouble ticket is opened by the customer and ending upon confirmation of resolution with the customer. For purposes of measuring Network Availability Time, the PVC route referenced above includes the HSFR network infrastructure connectivity from infrastructure port to infrastructure port, excluding Customer Premise Equipment and local access lines. Customer Premise Equipment ("CPE") refers to the telecommunications hardware located at the customer site and supplied by MCI (i.e. modem, router, or multiplexer) or supplied by the customer. 2.2 Network Availability Objective MCI will attempt to achieve a Network Availability Time of 99.5% for networks designed with all of the following: o fully meshed network topology or a star network topology in which each remote site has PVCs connected to at least two network hubs engineered to separate infrastructure node , and o 10 or more, customer sites are involved in the network MCI will attempt to achieve a Network Availability Time of 99% for any networks not meeting the above requirements. 2.3 Exclusions Network Availability Time measurements exclude HSFR unavailability resulting in whole or in part from one or more of the following causes: o Any act or omission on the part of Customer, customer contractors, and customer vendors o Scheduled maintenance o Labor strikes o Natural disasters o Force majeure events beyond the reasonable control of MCI (i.e. acts of God, government regulation, national emergency, etc.) 2.3 Calculation Customer HSFR Network Availability Time is calculated on a monthly basis Monthly Network Availability Time (%) = 1 - [ Total minutes of PVC downtime per month or "Unavailability Percentage"] Total # PVCs x #days in month x 24 hrs x 60min 2.4 Components of Calculation Total minutes in month, total minutes available, total minutes unavailable, total minutes unavailable due to exclusions, unavailable minutes due to excluded causes, broken down by occurrence (exception) category. 2.5 Credits o In the event MCI is unable to satisfy the HSFR Availability Time objective for two (2) consecutive months, during the Service Term, Customer will receive a credit equal to five percent (5%) multiplied by the fixed rates for all Port and PVC charges for both the first(lst) and the second (2nd) month. o In the event MCI in unable to satisfy the HSFR Availability Time objective for a third (3rd) consecutive month, during the Service Term. Customer will receive a credit equal to ten percent (10 %) multiplied by the fixed rates for all Port and PVC charges for the given month. o In the event MCI is unable to satisfy the HSFR Network Availability Time objective for a fourth (4th) consecutive month, Customer will have the option to discontinue MCI Service on the Service Element that has failed to satisfy the HSFR Availability Time objective and MCI will reduce the Minimum Volume Requirement (MVR) by the amount of charges associated with the discontinued Service Element. 3.0 Frame Delivery 3.1 Description The HyperStream(sm) Frame Relay Frame Delivery is the percentage of frames which are successfully delivered. HSFR Frame Delivery encompasses the successful delivery of frames through the network based on certain factors. The calculations are based on total frames sent through the network according to the following parameters: The percentage of all non-CIR frames that are successfully delivered. The percentage of all CIR frames that are successfully delivered. 3.2 Frame Delivery Objective 99.99% of all frames that do not exceed the Committed Information Rate (CIR) are targeted to be successfully delivered. End to end CIR packet delivery only applies to frames not marked discard eligible. 99 % of all non-CIR frames are targeted to be successfully delivered. Non-CIR packet delivery only applies to frames marked discard eligible, (i.e.; traffic exceeding the subscribed CIR and all zero CIR PVC traffic). 3.3 Frequency of Calculation HSFR Frame Delivery is calculated monthly based upon the frame delivery statistics as stated in the HyperScope reports minus any applicable exclusions below. 3.4 Exclusions HyperStream(sm) Frame Relay Service frame delivery measurements exclude: o Frames dropped at the infrastructure egress due to improper customer specification of customer's port speeds o Local access and CPE o Force majeure events beyond the reasonable control of MCI (i.e. acts of God, government regulation, national emergency, etc.) 3.5 Credits o In the event MCI is unable to satisfy the HSFR Frame Delivery objective for two (2) consecutive months, during the Service Term, Customer will receive a credit equal to five percent (5%) multiplied by the fixed rates for all Port and PVC charges for both the first (lst) and the second (2nd) month. o In the event MCI in unable to satisfy the HSFR Frame Delivery objective for a third (3rd) consecutive month, during the Service Term. Customer will receive a credit equal to ten percent (10%) multiplied by the fixed rates for all Port and PVC charges for the given month. o In the event MCI is unable to satisfy the HSFR Frame Delivery objective for a fourth (4th) consecutive month, Customer will have the option to discontinue MCI Service on the Service Element that has failed to satisfy the HSFR MTTR objective and MCI will reduce the Minimum Volume Requirement (MVR) by the amount of charges associated with the discontinued Service Element. 4.0 Mean Time To Restore (MTTR) 4.1 Description Mean-Time-To-Restore ("MTTR") is the period of time commencing on the date customer opens on trouble ticket and ending on the date of service restoration (closing of a trouble ticket), calculated as an average of all trouble tickets having the same severity level (as set forth below). MTTR measurements are reported based on the percentage of trouble tickets closed within specific time intervals, grouped by severity level. MCI will assign each trouble ticket a severity level based upon the impact of the service issue on the customer's business: Severity 1 - System down or degraded (limited or no ability to conduct business) Severity 4 - Problem circumvented / Inquiries (no impact to customer business) 4.2 MTTR Objective HyperStream(sm) Frame Relay MTTR objectives are based upon the severity level of the trouble ticket and proximity to an MCI terminal or field service point of presence "POP" broken down by ticket severity as follows: Severity 1 -MTTR Objective is 4 hrs if within 50-mile radius of MCI terminal and field service POP, or 24 hrs or best-effort basis if outside 50-mile radius of MCI terminal and field service POP Severity 4 - not measured 4.3 Frequency of Calculation Customer network MTTR will be calculated on a monthly basis. 4.4 Exclusions MTTR measurements will exclude the following: o Trouble tickets associated with now installations (before new service acceptance by the customer) o Trouble tickets that are not associated with MCI-provided service o Required customer premise access is not available o Required customer circuit release for testing is disallowed o Trouble tickets opened by customer for circuit monitoring purposes only o Force majeure events beyond the reasonable control of MCI (i.e. acts of God, government regulation, national emergency, etc.) 4.5 Calculation Monthly MTTR Average = Sum of minutes between opening and closing of Severity within 30 days Total number of trouble tickets per month 4.5 Components for Calculations Total number of trouble tickets, total time between opening of trouble tickets and applicable service restoration, with total time of opened trouble tickets subtracting total time of each exclusion category. 4.6 Credits o In the event MCI is unable to satisfy the HSFR MTTR objective for two (2) consecutive months, during the Service Term, Customer will receive a credit equal to five percent (5 %) multiplied by the fixed rates for all Port and PVC charges for the given month. o In the event MCI in unable to satisfy the HSFR MTTR objective for a third (3) consecutive month, during the Service Term. Customer will receive a credit equal to ten percent (10%) multiplied by the fixed rates for all Port and PVC charges for the given month. o In the event MCI is unable to satisfy the HSFR MTTR objective for a fourth (4) consecutive month, Customer will have the option to discontinue MCI Service on the Service Element that has failed to satisfy the HSFR MTTR objective and MCI will reduce the Minimum Volume Requirement (MVR) by the amount of charges associated with the discontinued Service Element. 5.0 Network Transit Delay 5.1 Description The HyperStream(sm) Frame Relay Network Transit Delay measures one-way delay between the origination and destination infrastructure ports. It is defined as the time between the LAST bit of a ping packet being sent from the origination infrastructure port to the FIRST bit of the packet received by the destination infrastructure port, in other words between the two MCI HyperStream frame relay points of presence. 5.2 Network Transit Delay Guarantee Average HSFR one way network transit delay of 70 milliseconds or less in the domestic U.S. and 250 milliseconds or less internationally. 5.3 Frequency of Calculation Customer gateway to customer gateway network transit delay is tested monthly by MCI as part of standard performance monitoring and capacity planning methodologies. Any customer incident where network transit delay is measured or suspected to be greater than the levels stated above will be considered an abnormal situation and will be addressed through established trouble handling procedures (e.g., a ticket opened and technicians work through the problem until the performance is back to acceptable levels). 5.4 Exclusions The network transit delay parameters are not guaranteed during disaster situations where a major network component such as a backbone link or gateway switch is down hard and the network is in an emergency reroute configuration. Also, HyperStream. Network Transit Delay measurements exclude ping packets that are not returned, and ports over which the transit delay is measured can not be more than 5% utilized during any hour over which transit delay measurements are taken. Customer calculations of end to end network transit delay must exclude access serialization delay (calculated as defined below), access circuit propagation delay, any delay induced by congestion on the access link, and any CPE induced delay such as that caused by high router utilization levels. The frame size for the test must be no more than two hundred (200) bytes in length, including protocol overhead. Customer tests must also consist of a minimum of 60 ping tests evenly distributed over a 6 hour period. 5.5 Components for Calculations If you are attempting to calculate cpe to cpe delay, the following are components you will have to consider in addition to the MCI published network delay: o access/egress link utilization o cpe nodal processing time at each end. o local loop propagation factor = .008 ms/mile o backhaul (mci pop to frame switch) = .008 ms/mile o INGRESS/EGRESS SERIAL DELAY (ms) = (Packet size in bytes)x8x1000 ---------------------------- Access speed in bps 5.6 Credits o In the event MCI is unable to satisfy the HSFR Transit Delay objective for two (2) consecutive months, during the Service Term, Customer will receive a credit equal to five percent (5%) multiplied by the fixed rates for all Port and PVC charges for the given month. o In the event MCI in unable to satisfy the HSFR Transit Delay objective for a third (3rd) consecutive month, during the Service Term. Customer will receive a credit equal to ten percent (10%) multiplied by the fixed rates for all Port and PVC charges for the given month. o In the event MCI is unable to satisfy the HSFR Transit Delay objective for a fourth (4th) consecutive month, Customer will have the option to discontinue MCI Service on the Service Element that has failed to satisfy the HSFR MTTR objective and MCI will reduce the Minimum Volume Requirement (MVR) by the amount of charges associated with the discontinued Service Element. 6.0 Credit Limitation In the event the customer experiences network or service performance for HSFR at levels below stated MCI objectives for Network Availability Time, MTTR, Network Transit Delay, or HSFR Frame Delivery during the same month, customer shall only be entitled to receive credits, if any, pursuant to one (1) of the applicable credit sections. EX-11 5 COMPUTATION OF PER SHARE EARNINGS The Morgan Group, Inc. Exhibit 11 - Statement Re: Computation of Per Share Earnings
For Years Ended December 31 1997 1996 1995 ---------- ---------- ---------- Reconciliation of basic to diluted earnings per share: Net income (loss) $ 196 ($ 2,070) $ 2,269 Less preferred dividends -- -- 221 ---------- ---------- ---------- Net income (loss) applicable to common stocks: $ 196 ($ 2,070) $ 2,048 ========== ========== ========== Class A Stock: Dividends $ 114 $ 126 $ 113 Allocation of undistributed earnings 19 (1,241) 1,011 ---------- ---------- ---------- Net income (loss) applicable to Class A stock-basic 133 (1,115) 1,124 Effect of reallocating undistributed earnings -- -- 13 ---------- ---------- ---------- Net income (loss) applicable to Class A stock-diluted $ 133 ($ 1,115) $ 1,137 ========== ========== ========== Class B Stock: Dividends $ 48 $ 48 $ 48 Allocation of undistributed earnings 15 (1,003) 876 ---------- ---------- ---------- Net income (loss) applicable to Class B stock-basic 63 (955) 924 Effect of reallocating undistributed earnings -- -- (13) ---------- ---------- ---------- Net income (loss) applicable to Class B stock-diluted $ 63 ($ 955) $ 911 ========== ========== ========== Net income (loss) applicable to common stocks $ 196 ($ 2,070) $ 2,048 ========== ========== ========== Weighted average shares outstanding: Class A stock: Basic 1,456,690 1,484,242 1,382,548 Dilutive effect of stock options 6,494 2,030 4,742 Dilutive effect of warrants -- -- 35,155 ---------- ---------- ---------- Diluted 1,463,184 1,486,272 1,422,445 Class B stock-basic and diluted 1,200,000 1,200,000 1,200,000 ========== ========== ========== Class A basic EPS $ 0.09 ($ 0.76) $ 0.81 Class B basic EPS $ 0.05 ($ 0.80) $ 0.77 Class A diluted EPS $ 0.09 ($ 0.76) $ 0.79 Class B diluted EPS $ 0.05 ($ 0.80) $ 0.77
EX-21 6 SUBSIDIARIES OF THE REGISTRANT The Morgan Group, Inc. (Delaware) 100% 100% Morgan Drive Away, Inc. Interstate Indemnity Company (Indiana) (Vermont) 100% TDI, Inc. (Indiana) Subsidiaries of Morgan Drive Away, Inc. 100% 100% MDA Corporation Morgan Finance, Inc. (Oregon) (Indiana) 100% Transporation Services Unlimited, Inc. (Indiana) EX-23.1 7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion of our report dated February 5, 1996 in this Form 10-K and to the incorporation by reference 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, 1995 or performed any audit procedures subsequent to the date of our report. /s/ ARTHUR ANDERSEN LLP Chicago, Illinois, March 25, 1998 EX-23.2 8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 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 4, 1997, except for Note 4, as to which the date is March 25, 1998, 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, 1997. /s/ Ernst & Young LLP Greensboro, North Carolina March 25, 1997 EX-27.1 9 THE MORGAN GROUP FDS WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 This schedule contains summary financial information extracted from the Regisrant's unaudited consolidated financial statements for the 12 months ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 0000906609 The Morgan Group, Inc. 1,000 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1.000 380 0 13,545 183 0 17,749 6,601 2,286 32,746 15,620 0 41 0 0 12,724 32,746 146,154 146,154 133,732 145,139 0 0 719 296 100 196 0 0 0 196 .09 .09 .05 .05
EX-27.2 10 RESTATED FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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 JAN-01-1996 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) (.76) (.76) (.80) (.80)
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