-----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, FQegI42E5eVes97k69gDWcGjKmOBV3Z41XF2CTGtmMG7pvxoVckKAyrAnVMHjPqq QqN/z2ZL2sD7Vu0KRf2JhA== 0000908834-01-500164.txt : 20010817 0000908834-01-500164.hdr.sgml : 20010817 ACCESSION NUMBER: 0000908834-01-500164 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20010816 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: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-63188 FILM NUMBER: 1716419 BUSINESS ADDRESS: STREET 1: 2746 OLD U S 20 W STREET 2: PO BOX 1168 CITY: ELKHART STATE: IN ZIP: 46514 BUSINESS PHONE: 2192952200 S-2/A 1 mor_s2a.txt FORM S-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON August 15, 2001 REGISTRATION NO. 333-63188 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 1 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- THE MORGAN GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------------ DELAWARE 22-2902315 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.) OF INCORPORATION) -------------------------- 2746 Old U.S. 20 West Elkhart, Indiana 46514 (219) 295-2200 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ------------------------------ Gary J. Klusman The Morgan Group, Inc. 2746 Old U.S. 20 West Elkhart, Indiana 46514 (219) 295-2200 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) ------------------------------ COPIES TO: Eric R. Moy Barnes & Thornburg 11 South Meridian Street Indianapolis, Indiana 46204 (317) 231-7298 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] --------------------------
CALCULATION OF REGISTRATION FEE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE(1) Class A Common Stock, 1,248,157 $9.00 $11,233,413.00 $2,808.35 $.015 par value
(1) The registration fee, previously paid, has been calculated in accordance with Rule 457(g) under the Securities Act of 1933, as amended, based on the proposed maximum aggregate offering price. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED AUGUST 15, 2001 1,248,157 SHARES OF CLASS A COMMON STOCK [MG LOGO] ISSUABLE UPON EXERCISE OF WARRANTS We currently have two classes of common stock issued and outstanding, Class A common stock, $.015 par value, and Class B common stock, $.015 par value. We have no other equity securities outstanding. We are distributing to holders of our Class A common stock, Class A warrants to purchase additional shares of our Class A common stock; and to holders of our Class B common stock, Class B warrants to purchase additional shares of our Class B common stock. This prospectus relates to the Class A common stock issuable upon exercise of the Class A warrants. Our Class A common stock trades on the American Stock Exchange under the symbol "MG" and there is no public market for our Class B common stock. o For each share of our Class A common stock which you own on the record date of ___________, 2001 you will receive one Class A warrant. The number of Class A warrants to be issued to each holder of our Class A common stock will be rounded down to the nearest whole Class A warrant. For each Class A warrant that you exercise you will be able to purchase, subject to certain adjustments, one share of our Class A common stock at the warrant exercise price of $9.00 per share. The exercise price for the Class A warrants will be reduced to $6.00 per share during a reduction period of at least 30 days to be set by our Board of Directors. o The Class A warrants may not be transferred. We do not intend to apply, and are not obligated to apply, for listing of the warrants on any securities exchange. However, we intend to apply for listing of the Class A common stock underlying the Class A warrants on the American Stock Exchange. o We will not issue fractional shares, and we will not pay cash in place of warrants or fractional shares. If the number of warrants which you own on the record date would result, when exercised, in your receipt of fractional shares, the number of shares which you will be able to purchase pursuant to such warrants will be rounded down to the next whole number. o The warrants are exercisable for a 5-year period beginning on the date of this prospectus, when completed, and continuing until 5:00 p.m., New York City time, on ____________, 2006. To exercise warrants, you must submit the appropriate purchase documents and payment to us before the warrants expire. o Warrants are irrevocable once exercised.
Maximum Maximum Maximum Number Warrant Underwriting Discounts Proceeds of Shares Issuable Exercise Price and Commissions (1) to Company (2) Per Share of Class A Common Stock 1,248,157 $9.00 (3) None $9.00 (3) Total (4) 1,248,157 $11,233,413 (3) None $11,233,413 (3)
(1) We are distributing the warrants directly to our stockholders and do not intend to pay any commissions or other remuneration to any person for soliciting purchasers of the shares of Class A common stock underlying the warrants. (2) Before estimated expenses of $182,808.35. The warrant exercise price is considerably higher than the recent trading price of the Class A common stock as of the date of this Prospectus. There is no minimum offering. There is no assurance that any of the warrants will be exercised. (3) The exercise price for the Class A warrants will be reduced to $6.00 per share during a reduction period of at least 30 days to be set by our Board of Directors. If such period is not set prior to the date 60 days before the expiration date, such period will comprise the final 30 days before the expiration date. (4) Assumes exercise of all warrants to be issued in this offering. This investment involves risk. See "Risk Factors" beginning on page 6 to read about risks that you should consider carefully before buying shares of our Class A Common Stock. - -------------------------------------------------------------------------------- Neither the Securities and Exchange Commission nor any State Securities Commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- The date of this Prospectus is _________________, 2001. TABLE OF CONTENTS Page ---- PROSPECTUS SUMMARY.............................................................1 THE MORGAN GROUP, INC..........................................................1 THE OFFERING...................................................................5 RISK FACTORS...................................................................7 RISKS RELATED TO THE OFFERING..................................................7 RISKS RELATED TO US AND OUR INDUSTRY...........................................8 RISKS RELATED TO FACTORS OUTSIDE OUR CONTROL..................................10 Increases in interest rates and fuel prices may reduce profitability.10 CAPITALIZATION................................................................11 SUMMARY FINANCIAL DATA........................................................12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................13 RESULTS OF OPERATIONS FOR THE YEAR 2000 COMPARED WITH 1999...........13 INTERIM RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2001....17 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................20 Market Information...................................................20 Dividend Policy......................................................20 USE OF PROCEEDS...............................................................20 THE OFFERING..................................................................21 Exercising Your Warrants.............................................21 Warrant Exercise Price...............................................21 Expiration Time......................................................22 Warrant Agent........................................................22 Determination of the Warrant Exercise Price..........................22 Lynch Interactive Corporation........................................22 Plan of Distribution.................................................22 Warrant Payments.....................................................23 Anti-Dilution Protection.............................................23 Warrant Amendments...................................................24 Nominee Holders......................................................24 Ambiguities in Exercise of the Warrants..............................24 Interpretation.......................................................24 Risk of Loss on Delivery of Warrant Certificates and Payments........24 Exercise of Less Than All Warrants...................................25 Warrants Are Not Transferable........................................25 Signature Guarantees.................................................25 Procedures for Depository Trust Company Participants.................25 No Revocation........................................................25 No Board Recommendation..............................................25 Issuance of Stock Certificates.......................................25 Foreign Stockholders; Stockholders with APO or FPO Addresses.........26 State and Foreign Securities Law.....................................26 Regulatory Limitation................................................26 Questions or Requests for Assistance.................................26 DILUTION......................................................................26 DESCRIPTION OF CAPITAL STOCK..................................................26 Class A and Class B Common Stock.....................................27 Preferred Stock......................................................28 Certain Statutory, Charter and ByLaw Provisions......................28 CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......................................30 INDEMNIFICATION OF DIRECTORS AND OFFICERS -- DISCLOSURE OF COMMISSION'S POSITION ON INDEMNIFICATION........................31 LEGAL MATTERS.................................................................31 EXPERTS.......................................................................31 FORWARD LOOKING STATEMENTS....................................................31 WHERE YOU CAN FIND MORE INFORMATION...........................................32 INCORPORATION BY REFERENCE....................................................32 i PROSPECTUS SUMMARY This summary highlights material information found in greater detail elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks involved in our Class A common stock discussed under "Risk Factors" before deciding to invest in shares of our Class A common stock. THE MORGAN GROUP, INC. The Morgan Group, Inc., a majority owned subsidiary of Lynch Interactive Corporation, is the nation's largest publicly owned service company managing the delivery of manufactured homes, commercial vehicles and specialized equipment in the United States, and, through its wholly owned and principal subsidiary, Morgan Drive Away, Inc., has been operating since 1936. We primarily provide outsourcing transportation services through a national network of approximately 1,007 independent owner-operators and approximately 1,166 other drivers as of June 30, 2001. We dispatch our drivers from 71 locations in 27 states, as of such date. We also provide certain insurance services to the independent owner-operators through our insurance subsidiaries. As further described below, our strategy is to grow through expansion in our niche businesses while pursuing appropriate acquisitions or joint ventures in related industries. In addition, we will seek to expand insurance product offerings to drivers and owner-operators. Our Services We operate in four business segments: Manufactured Housing, Driver Outsourcing, Specialized Outsourcing Services, and Insurance and Finance. o Manufactured Housing Segment. We derive the largest portion of our operating revenues from transportation of manufactured housing, primarily new manufactured homes, modular homes, and office trailers. We also transport used manufactured homes and offices for individuals, businesses, and the U.S. Government. We are the largest transporter of manufactured homes in the United States. As of June 30, 2001, we utilize approximately 641 independent owner-operators to transport manufactured homes for our customers. The number of independent owner-operators decreased approximately 22% from June 30, 2000, principally due to the decrease in shipments. To serve the regional structure of this industry, we position each of our dispatch offices close to the production facility it serves. Each of our 22 dispatch offices at June 30, 2001, is substantially dedicated to serving a single facility. In 2000, for the second consecutive year, the manufactured housing industry experienced a decline in shipments and production. However, we believe that the manufactured housing industry over the long-term should grow, but there is no assurance that manufactured housing sales will increase. o Driver Outsourcing Segment. Our driver outsourcing segment provides outsourcing transportation services primarily to manufacturers of recreational vehicles, commercial trucks, and other specialized vehicles through a network of service centers in nine states. In 2000, we delivered approximately 36,900 units through the use of these drivers. While the number of deliveries decreased, operating revenue per unit delivered increased in 2000. o Specialized Outsourcing Services Segment. Our specialized outsourcing services segment delivers large trailers ("Towaway Services") and travel and other small trailers. As of June 30, 2001, we had contracts with approximately 138 independent owner-operators who drive semi-tractors to provide Towaway Services compared to 85 independent owner-operators at June 30, 2000. As of June 30, 2001, we deliver travel and other small trailers through 228 independent owner-operators. o Insurance and Finance Segment. Our insurance and finance segment provides insurance and financing to our drivers and independent owner-operators. Our insurance subsidiary may accept a limited portion or all of the underwriting risk, retaining the appropriate proportion of the premiums. This segment administers our cargo, bodily injury and property damage insurance programs. Customers and Marketing Our customers are located in various parts of the United States. Our largest manufactured housing customers include Oakwood Homes Corporation, and Fleetwood Enterprises, Inc. Our largest driver outsourcing customer is Winnebago Industries, Inc. Our largest specialized outsourcing services customer is Fleetwood Enterprises, Inc. While most manufacturers rely solely on carriers such as us, other manufacturers operate their own equipment and may employ outside carriers on a limited basis. Our operating revenues primarily include linehaul revenues derived by multiplying the miles of a given shipment by the stated mileage rate. Operating revenues also include charges for permits, insurance, escorts and other items. A substantial portion of our operating revenues are generated under one, two, or three-year contracts with producers of manufactured homes, recreational vehicles, and the other products. In these contracts, the manufacturers agree that we will provide a specific percentage (up to 100%) of their transportation service requirements from a particular location on the basis of a prescribed rate schedule, subject to certain adjustments to accommodate increases in our transportation costs. Linehaul revenues generated under customer contracts in 2000, 1999 and 1998 were 69%, 71%, and 64% of total linehaul revenues, respectively. Our ten largest customers all have been served for at least three years and accounted for approximately 67%, 68% and 69% of linehaul revenues in 2000, 1999 and 1998, respectively. Linehaul revenues under contract with Fleetwood Enterprises, Inc. accounted for over 15% of linehaul revenues in 2000. Linehaul revenues with Oakwood Homes Corporation accounted for over 20% of linehaul revenues in 2000. The Fleetwood manufactured housing contract is continuous except that it may be terminated upon thirty (30) days written notice by either party if the other party has repeatedly failed to perform, persistently disregarded applicable laws or regulations, or otherwise committed a substantial violation of the contract. The Oakwood manufactured housing contract is renewed annually. We have been servicing Fleetwood for over 25 years and Oakwood for ten years. Most of our contracts provide for scheduled rate increases based upon regional fuel prices. These increases are generally passed on to the independent owner-operators who purchase fuel. We market services through 71 locations in 27 states at June 30, 2001, concentrated where manufactured housing and recreational vehicle production facilities are located. Marketing support personnel are located both at our Elkhart, Indiana headquarters and regionally. Our sales personnel meet periodically with manufacturers to review production schedules, requirements and maintain contact with customers' shipping personnel. Our senior management maintains personal contact with corporate officers of our largest customers. Regional and terminal personnel also develop relationships with manufactured home park owners, retailers, finance companies and others to promote our services for shipment of used manufactured homes. We also participate in industry trade shows throughout the country and advertise in trade magazines, newspapers, and telephone directories. Growth Strategy Our strategy is to focus on our core transportation services. We will also look for opportunities to capitalize and/or grow our market in manufactured housing and driver outsourcing through acquisitions, if suitable opportunities arise. o Manufactured Housing. We believe we can take better advantage of our position in the manufactured housing industry by expanding the services we offer within our specialized business. We will also pursue other national contracts with manufacturers. While the manufactured housing industry has been in recession, we are seeking to position ourselves to take advantage of growth opportunities as this industry recovers. o Driver Outsourcing. We have focused our driver outsourcing operations in two broad markets, recreational and commercial vehicles. Given the softness in the recreational vehicle industry, we are seeking to expand in the delivery of commercial vehicles, such as commercial trucks, school buses, ambulances, dump trucks and shuttle buses. o Specialized Outsourcing Services. We believe we can grow our Towaway business by increasing the number of available drivers and through the use of transportation brokers. We have not been able to take full advantage of large trailer delivery opportunities because we have not had a sufficient number of Towaway drivers or our drivers were not in the required locations. o Acquisitions/Joint Ventures. We regularly consider acquisition opportunities. We may consider acquiring regional or national firms that service the manufactured housing and/or the outsourcing industry as well as logistics, transportation, or related industries. o Insurance and Finance. We may seek to expand our insurance services to our independent contractors and others. We currently have no plans to grow the finance portion of our business. Lynch Interactive Corporation As of May 31, 2001, our controlling stockholder, Lynch Interactive Corporation ("Interactive"), owned 161,000 shares of our outstanding Class A common stock and all 1,200,000 shares of our outstanding Class B common stock. On July 12, 2001, we issued 1,000,000 shares of our Class B common stock to Interactive for a purchase price of $2.00 per share. The additional issuance to Interactive increased its percentage of the voting power of our common stock from approximately 70% to greater than 80%. There is a significant disparity between the price per share offered to Interactive in the sale of our Class B common stock and the warrant exercise price of $9.00, subject to adjustment, for the warrants distributed in this offering. This disparity is primarily due to the following considerations: o On January 28, 2001, our credit facility expired. To support our operations, we were obliged to establish a replacement credit facility. We determined that, in order to obtain a new credit facility, we must raise additional equity capital. We considered various methods for raising additional equity capital including a traditional public offering, and determined that the sale of equity capital to Interactive was the most favorable alternative that could be accomplished in a timely manner. o In order to enhance its internal corporate structuring objectives, Interactive deemed that, in connection with any additional equity investment in us, it was essential to, among other things, gain at least 80% of the voting power of our common stock. o Unlike our Class A common stock, the shares of our Class B commons stock are not listed on any stock exchange or traded in any market. o Our Class B common stock is subject to significant transfer restrictions. Any transfer in violation of the transfer restrictions will result in the automatic conversion of such transferred shares of Class A common stock and substantially dilute the voting control of the Class B common stock. o Our Certificate of Incorporation provides for dividends paid on shares of our Class A common stock to be up to twice the amount of dividends paid on shares of our Class B common stock. o Although the warrants are currently out-of-the-money, they have a five-year term and have the potential to provide holders with value over the long-term. Summary Historical Financial Data The following table sets forth certain selected consolidated financial information reflecting our consolidated operations for each year in the three year period ended December 31, 2000 (and as of each year end) and the six month period ended June 30, 2001. This data should be read in conjunction with our consolidated financial statements and related notes thereto as well as Management's Discussion and Analysis of Results of Operations and Financial Condition included herein.
Six Months Ended June 30, 2001 (Unaudited) Year Ended December 31, ---------------------------- ----------------------------------------------------- 2001 2000 1999 1998 ---------------------------- ----------------------------------------------------- Operations Operating Revenues $46,120 $108,024 $145,629 $150,545 Operating Income (Loss) (77) (2,038) 550 2,007 Pre-tax Income (Loss) (170) (2,348) 212 1,462 Net Income (Loss) 85 (4,799) 19 903
Our Address Our principal office is located at 2746 Old U.S. 20 West, Elkhart, Indiana 46514-1168. THE OFFERING The Offering We are offering to sell an aggregate of up to 1,248,157 shares of our Class A common stock upon the exercise of the Class A warrants being distributed to holders of our Class A common stock. Record Date ______________, 2001 The Warrants We are distributing to each record holder of our Class A common stock on the record date one Class A warrant for each share of our Class A common stock held on that date, for a total of 1,248,157 Class A warrants. We are also distributing to the holder of our Class B common stock on the record date one Class B warrant for each share of our Class B common stock held on that date, for a total of 2,200,000 Class B warrants. No warrants to purchase fractional shares will be issued and the number of warrants to be issued to each holder will be rounded down to the nearest whole warrant. Each Class A warrant entitles the holder to purchase one share of our Class A common stock at an exercise price of $9.00 per share, subject to adjustment upon the occurrence of certain dilutive events. Please see "The Offering-Anti-Dilution Protection." The exercise price for the Class A warrants will be reduced to $6.00 per share during a period of not less than 30 days to be set by our Board of Directors. Please see "The Offering - Warrant Exercise Price". Each Class B warrant entitles the holder to purchase one share of our Class B common stock at an exercise price of $9.00 per share, subject to adjustment upon the occurrence of certain dilutive events. The Class B warrants will not carry any right to a reduction in their exercise price. There is no minimum amount of shares you must purchase to exercise warrants. No Minimum Offering There is no minimum offering. We are distributing the warrants to give our stockholders a fixed opportunity to purchase additional shares of our common stock. As of _____________, 2001, the closing price of our shares of Class A common stock was $________. Because the warrant exercise price is $9.00, subject to adjustment, the warrants are "out-of-the-money" on the date hereof and are likely to be out-of-the-money for an indefinite period of time, there is no assurance that any of the warrants will be exercised. Expiration Time The warrants have a five-year term. You may exercise your warrants commencing on the date of this prospectus, when completed. The warrants will expire on ______________, 2006 at 5:00 p.m., New York City time. How Warrants will be We will distribute to each record holder of our Class Evidenced A common stock on the record date a warrant certificate representing such holder's Class A warrants. We will also distribute to each record holder of our Class B common stock on the record date a warrant certificate representing such holder's Class B warrants. Exercising Your Warrants You may exercise your warrants at any time beginning on the date of this prospectus and continuing until the expiration time by properly completing and signing your warrant certificate and returning it, with full payment for the total number of shares you are purchasing, to our warrant agent by the expiration time. Your payment should be made by bank certified check, cashier's check or wire transfer. You may elect to exercise all or a portion of your warrants. See "The Offering--Exercise of Warrants" and "--Method of Payment" for details about delivery and payment. Any warrants that you do not exercise by the expiration time will become null and void after the expiration time. Warrants Are Not The Class A warrants may not be sold or transferred Transferable except in limited circumstances. We do not intend to apply, and are not obligated to apply, for listing of the warrants on any securities exchange. However, we intend to apply for listing of the Class A common stock underlying the Class A warrants on the American Stock Exchange. Irrevocability of Your exercise of warrants is irrevocable after you Warrants submit the warrant certificate and the warrant exercise price. Warrant Agent American Stock Transfer & Trust Company 59 Maiden Lane, 9 Plaza Level New York, New York 10038 Attention: Shareholder Relations Questions If you have any questions about the offering, including questions about exercising your warrants and requests for additional copies of this prospectus or other documents, please contact the warrant agent, toll free at (800) 777-0800. Stock Certificates Certificates representing shares of our Class A common stock purchased in this offering will be delivered to purchasers as soon as practicable after we receive a properly completed warrant certificate and payment of the warrant exercise price. Federal Income Tax Your receipt or exercise of warrants should not be Consequences treated as a taxable event for United States federal income tax purposes. Please see "Certain Federal Income Tax Consequences." Risk Factors An investment in shares of our common stock involves a high degree of risk. Please see "Risk Factors." Use of Proceeds Any net proceeds of this offering will be used by us for general corporate purposes. Because there is no minimum offering, and the warrant exercise price of $9.00 per share significantly exceeds the recent trading price of the Class A common stock at the date of this prospectus, we do not expect to receive proceeds from this offering for an indefinite period of time. RISK FACTORS This offering involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus before deciding to invest in shares of our common stock. Our business, operating results and financial condition could be affected by any of the following risks. The trading price of our common stock could decline due to any of these risks or for unforeseen reasons, and you could lose all or part of your investment. You should also refer to the other information set forth in this prospectus, including our consolidated financial statements and the related notes included elsewhere in this prospectus. This prospectus also contains forward-looking statements that involve risks and uncertainties. These statements relate to our future plans, objectives, expectations and intentions, and the assumptions underlying or relating to any of these statements. These statements may be identified by the use of words such as "expects," "anticipates," "intends," "plans," "objectives," "should" and similar expressions. Our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed below and elsewhere in this prospectus. RISKS RELATED TO THE OFFERING The warrants are "out-of-the-money." The warrant exercise price is substantially higher than the recent trading prices of our Class A common stock at the date of this Prospectus. In light of our expectation to sell additional shares of our Class B common stock to our controlling stockholder, our Board of Directors determined the warrant exercise price (including the Class A warrant exercise price reduction to $6.00 per share during a period of at least 30 days) and approved the distribution of warrants to give our stockholders a fixed opportunity to buy additional shares without brokerage fees and with a view that the warrants may prove to be of value to our stockholders over the long-term. However, there is no assurance that the public market will develop in the warrants or that the market price of our common stock will equal or exceed the exercise price of the warrants at any time before or after the expiration time. The offering price was determined by our Board of Directors and bears no direct relationship to the value of our assets, financial condition or other established criteria for value. Our Class A common stock may trade at prices above or below this price. Our Board of Directors determined the warrant exercise price after considering a number of factors including: o past and recent trading prices of our Class A common stock; o book value of our stock; o past operations; o past and potential future cash flows and earnings and losses; o our overall financial condition; and o our future prospects. The Board of Directors did not assign weighting to any one factor in setting the warrant exercise price. Your interest in us may be diluted to the extent other warrant holders exercise warrants and you do not. If you do not exercise your warrants in full, your percentage ownership Iand voting rights will decrease to the extent that warrants are exercised by others. After submitting your warrant certificate and exercise price, you may not revoke your exercise and could be committed to buy shares above the prevailing market price. As of _________________, 2001, the trading price of the Class A common stock was $______. Because the warrant exercise price is $9.00 per share, subject to adjustment, the warrants are "out-of-the-money" on the date hereof and are likely to be out-of-the-money for an indefinite period of time. We can give no assurance that the trading price of our Class A common stock will ever meet or exceed the warrant exercise price and, consequently, whether it will ever be profitable for the holders of warrants to exercise the warrants. If you exercise your warrants while the trading price of our Class A common stock is less than the warrant exercise price, then you will have committed to buy shares of our common stock at a price above the prevailing market price. Once you have exercised your warrants, you may not revoke your exercise. Moreover, you may be unable to sell your shares of common stock at a price equal to or greater than the warrant exercise price you pay. RISKS RELATED TO US AND OUR INDUSTRY Our credit facilities may not be adequate to support our current letter of credit and working capital requirements. The availability and sufficiency of such credit facilities depends on our financial condition and operating performance, which is affected by the other factors described herein, as well as the willingness of lenders to provide credit support in the transportation and manufactured housing sector. Our operations could be adversely affected by inadequate credit availability. We are controlled by Lynch Interactive Corporation. As of the date of this prospectus, our principal stockholder, Lynch Interactive Corporation ("Interactive"), was the beneficial owner of 161,000 shares of our Class A common stock and 2,200,000 shares of our Class B common stock. Shares of our Class A common stock carry one vote per share while shares of our Class B common stock carry two votes per share. Interactive's voting control currently exceeds 80% of the voting power of all classes of our common stock. The stock ownership of Interactive enables it to elect all of our directors other than the director elected by the holders of our Class A common stock and effectively control the vote on all matters submitted to a vote of our stockholders other than those subject to approval by holders of Class A common stock voting separately as a class. Interactive can be expected to exercise its voting control in its best interests which may result in stockholder actions which, though favored by Interactive, are not favored by all other stockholders. In addition, as a result of Interactive's voting control we may enter into transactions with Interactive in the future which are less favorable to us than might be reflected in a comparable transaction between independent parties dealing at arms' length. We cannot assure you that we will pay dividends. Payment of dividends is within the discretion of our Board of Directors and will depend, among other factors, upon our earnings, financial condition, and capital requirements. Our ability to pay dividends is limited by covenants with our lenders. We cannot assure you that we will pay any dividends. We are dependent on the manufactured housing industry. Shipments of manufactured housing have historically accounted for a majority of our operating revenues. Therefore, our prospects are substantially dependent upon this industry, which is subject to broad production cycles. Currently, manufactured housing is experiencing an industry-wide decline in shipments, which is having an adverse impact on our operating revenues and profitability. The costs of accident claims and insurance could reduce our profitability. Motor vehicle accidents occur in the ordinary course of our business. Although we maintain liability and cargo insurance, the number and severity of the accidents involving our independent owner-operators and drivers can have significant adverse effects on the profitability of our business through premium increases and amounts of loss retained by us below deductible limits or above total coverage. Our results of operations would be adversely affected if we lose any of our major customers. Historically, a majority of our operating revenues have been derived under contracts with customers. Our top ten customers have historically accounted for a majority of our operating revenues, and the loss of one or more of these significant customers could adversely affect our results of operations. A number of our major customers are experiencing financial difficulty as a result of the softness in the manufactured housing and recreational vehicle markets. The competition for qualified drivers is intense and we may not be able to recruit enough drivers. Recruitment and retention of qualified drivers and independent owner-operators is highly competitive. There is no assurance that our drivers will continue to maintain their contracts with us or that we will be able to recruit a sufficient number of new drivers on terms similar to those presently in force. If our owner-operators were considered employees rather than independent contractors, our costs would increase. From time to time, tax authorities have sought to assert that independent contractors in the transportation service industry are employees, rather than independent contractors. We maintain that our owner-operators are not employees. If our independent contractors were determined to be employees, such determination could materially increase our tax and workers' compensation exposure. Our future acquisitions and expansions may not be profitable. We will continue to seek favorable acquisition opportunities. Our strategic plans may also include the initiation of new services or products, either directly or through acquisition, within existing business lines or which complement our business. There is no assurance that the we will be able to identify favorable acquisition opportunities in the future or that our future acquisitions will be successfully integrated into operations or that they will prove to be profitable for us. The seasonality of our business may cause significant variation in quarterly results. Our operations have historically been seasonal, with generally higher operating revenues generated in the second and third quarters than in the first and fourth quarters. The seasonality of our business may cause a significant variation in our quarterly operating results. Our chief executive officer holds management positions in other companies. Our chief executive officer, Anthony T. Castor, III, is also the interim chief executive officer of Spinnaker Industries, Inc., as well as a director and vice chairman of Lynch Corporation. Such companies are affiliates of Morgan and Interactive. Consequently, Mr. Castor does not devote his full business time and attention to managing our affairs, which could have an adverse impact on our operations. RISKS RELATED TO FACTORS OUTSIDE OUR CONTROL Economic slowdowns or recessions, especially in the manufactured housing industry, adversely affect our business. Periods of economic slowdown or recession, whether general, regional or industry-related, may have a great impact on our business. The present downturn in manufactured housing sales and the financial difficulty of our customers has had a significant adverse impact on our profitability. We cannot assure you that we can achieve or sustain profitability under these conditions. Such conditions could result in such severe reductions in the cash flows available to us that our ability to meet all our financial obligations and cash flow requirements could be impaired. Additionally, there are no assurances that the manufactured housing industry will rebound. Changes in government regulation could increase our costs. Motor carriers are subject to regulation by various federal and state governmental agencies, including the United States Department of Transportation. These regulatory agencies have broad powers, and the motor carrier industry is subject to regulatory and legislative changes that can affect the economics of the industry by requiring changes in the operating practices or influencing the demand for, and the costs of providing, services to shippers. We may not be able to pass such increased costs on to our customers, which could impair our profitability. Increases in interest rates and fuel prices may reduce profitability. Our operations are affected by fluctuations in interest rates. Demand for our services is affected by the availability of credit to purchasers of manufactured homes and recreational vehicles. Additionally, the price of fuel is an expense over which we have little or no control. An increase in these costs could have an adverse impact on profitability. Current increases in the cost of insurance premiums may reduce profitability. Increases in the cost of insurance premiums will increase our expenses and will have an adverse impact on our profitability to the extent we are unable to pass such increases through to our customers. We are in a competitive industry that could reduce the rates we can charge. We are participating in a highly competitive industry and rates offered by competitors affect the rates that we can charge for our services. If competitors' rates are reduced, such reduction may have the effect of reducing the rates we can charge, thereby impairing our profitability. CAPITALIZATION The following table sets forth our consolidated debt and capitalization as of June 30, 2001, and on a pro forma basis to give effect to (i) the issuance of 1,000,000 shares of our Class B common stock to our majority stockholder, Lynch Interactive, Corporation ("Interactive") on July 12, 2001, at a price of $2.00 per share, and (ii) the approval by our stockholders of a charter amendment to increase the number of authorized shares of Class B common stock at our 2001 annual meeting. Please see "The Offering-Lynch Interactive Corporation" for a discussion of the sale of shares of Class B common stock to Interactive. This table should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this prospectus.
At June 30, 2001 Liabilities: Actual Pro Forma(1) ------ --------- Current Liabilities: (In thousands, except share data) Trade accounts payable $ 3,776 $ 3,776 Accrued liabilities 3,186 3,186 Accrued claims payable 4,158 4,158 Refundable deposits 1,183 1,183 Current portion of long-term debt and capital lease obligations 173 173 ------ ------ Total current liabilities 12,476 12,476 ------ ------ Long-term debt and capital lease obligations, less current portion 31 31 Long-term accrued claims payable 4,199 4,199 ------ ------ Total Liabilities 16,706 16,706 ------ ------ Shareholders' Equity: Common stock, $.015 par value Class A: Authorized shares - 7,500,000 Issued shares - 1,607,303 23 23 Class B: Authorized shares - 2,500,000 (4,400,000 pro forma) Issued and outstanding shares - 1,200,000 (2,200,000 pro forma) 18 33 Additional paid-in capital 12,459 14,444 Retained earnings (2,012) (2,012) ------- ------- Total capital and retained earnings 10,488 12,488 Less - treasury stock at cost (359,146 Class A shares) (3,183) (3,183) ------- ------- Total shareholders' equity 7,305 9,305 ------ ------ Total Liabilities and Shareholders' Equity $24,011 $26,011 ======= =======
(1) Pro forma, as of June 30, 2001, adjusted to give effect to the issuance of 1,000,000 shares of our Class B common stock to Lynch Interactive Corporation on July 12, 2001, at a purchase price of $2.00 per share and amendment of our charter to increase our authorized shares of Class B common stock from 2,500,000 to 4,400,000. SUMMARY FINANCIAL DATA The following table sets forth certain selected consolidated financial information reflecting our consolidated operations and financial condition for each year in the five year period ended December 31, 2000 (and as of each year end) and the six month periods ended June 30, 2001 and 2000. This data should be read in conjunction with our consolidated financial statements and related notes thereto as well as Management's Discussion and Analysis of Results of Operations and Financial Condition included herein.
Six Months Ended June 30, (Unaudited) Year Ended December 31, ------------------------- ---------------------------------------------------------------- 2001 2000 2000 1999 1998 1997 1996 -------------------------- ---------------------------------------------------------------- (Dollars in thousands, except share amounts) Operations Operating Revenues $46,120 $58,818 $108,024 $145,629 $150,545 $146,154 $132,208 Operating Income (Loss) (77) (785) (2,038) 550 2,007 1,015 (3,263) Pre-tax Income (Loss) (170) (918) (2,348) 212 1,462 296 (3,615) Net Income (Loss) 85 (599) (4,799) 19 903 196 (2,070) Net Income (Loss) Per Share: Basic ($0.03) ($0.24) ($1.96) $0.01 $0.35 $0.07 ($0.77) Diluted ($0.03) ($0.24) ($1.96) $0.01 $0.35 $0.07 ($0.77) Cash Dividends Declared: Class A - $0.04 $0.05 $0.08 $0.08 $0.08 $0.08 Class B - $0.02 $0.025 $0.04 $0.04 $0.04 $0.04 Financial Position Total Assets $24,011 $31,139 $23,269 $32,264 $33,387 $33,135 $33,066 Working Capital 969 2,241 1,063 3,189 3,806 1,613 1,635 Long-term Debt 204 762 288 965 1,480 2,513 4,206 Shareholders' Equity 7,305 11,419 7,201 12,092 13,221 12,724 13,104 Common shares outstanding at 2,448,157 2,448,157 2,448,157 2,448,157 2,554,085 2,637,910 2,685,520 period end Basic weighted average shares 2,448,157 2,452,905 2,448,157 2,469,675 2,606,237 2,656,690 2,684,242 outstanding
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE YEAR 2000 COMPARED WITH 1999 Consolidated Results The year 2000 was characterized by the continued downturn in manufactured housing production, which began in 1999. Industrial production of new manufactured homes decreased 26% in 2000. We were also affected by the decline in activity in other markets we serve, including delivery of recreational vehicles and large trailers. As a result of these declines, our revenues decreased 26% from 1999 levels. To combat this severe decline in revenues, in March 2000 we instituted significant cost reduction initiatives in all areas with primary focus on staff reduction and consolidation of facilities. The effects of these initiatives were savings of $1.8 million in 2000. We estimate that the effects of these initiatives will continue and will approximate savings of $3.2 million in 2001. In spite of these significant efforts, operating costs as a percentage of revenue were 102% for the year ended December 31, 2000, compared to 99% in the prior year, resulting in a loss from operations of $2.0 million. Because of the existence of significant non-cash expenses, such as depreciation of fixed assets and amortization of intangible assets, we believe that EBITDA contributes to a better understanding of our ability to satisfy our obligations and to utilize cash for other purposes. EBITDA should not be considered in isolation from or as a substitute for operating income, cash flow from operating activities, and other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles. The loss before interest, taxes, depreciation and amortization (EBITDA loss) was $971,000 in 2000, as compared to positive EBITDA of $1.8 million in 1999. In the fourth quarter 2000, we recorded a non-cash charge of $3.2 million relating to the valuation of deferred tax assets. Because we have a cumulative loss in our three most recent fiscal years and are in default on our credit facility (see "Liquidity and Capital Resources" below and Note 3 of the Notes to Consolidated Financial Statements), our management believes that it would be inconsistent with the technical provisions of Statement of Financial Accounting Standard No. 109, to rely on future taxable income to support realization of the deferred tax assets. We therefore wrote off deferred tax assets that were not currently realizable. For additional information concerning the provision for income taxes as well as information regarding differences between effective tax rates and statutory rates, see Note 5 of the Notes to Consolidated Financial Statements. We experienced net loss for 2000 of $4.8 million compared to net income of $19,000 in 1999. Segment Results We conduct our operations in four principal segments as discussed below. The following discussion sets forth certain information about the segment results. Manufactured Housing Manufactured Housing operating revenues are generated from providing transportation and logistical services to manufacturers of manufactured homes. Manufactured Housing operating revenues decreased 29% from 1999 to $70.6 million in 2000. The manufactured housing industry as a whole continued to decline in 2000, with industry shipments down by 26%. The decline is due in large part to the combined impact of tightened consumer credit standards, increased industry repossessions and excess inventory. We are highly dependent upon the manufactured housing industry generally and on certain major customers within that industry. Some of our customers are financially stressed by continued weakness in the industry. Our unit deliveries in Manufactured Housing declined by 31% in 2000, indicating a loss of market share due primarily to competitive pricing pressures. EBITDA decreased $4.5 million to $5.8 million due to the decrease in business. The decrease in revenue of $6.9 million was partially offset by $2.2 million in reduced costs. We closed some terminals due to plant closures and consolidated terminals in other areas to serve the needs of more than one customer from a single location. Our focus in Manufactured Housing is on large national contracts. During 2001, we obtained significant additional contracts with Fleetwood and Clayton Homes, Inc. under which we will provide for each client a significantly higher percentage of the shipments, for terms of one year and two years, respectively. Our management will continue to pursue these efforts. Driver Outsourcing Our Driver Outsourcing segment provides outsourcing transportation services primarily to manufacturers of recreational vehicles, commercial trucks and other specialized vehicles. Driver Outsourcing operating revenues decreased 10% in 2000 to $20.9 million. The decrease was primarily the result of softness in the recreational vehicle market. However, Driver Outsourcing EBITDA increased $900,000 to $1.3 million from improved operating efficiencies, consolidations and other reductions in overhead costs. Specialized Outsourcing Services Specialized Outsourcing Services consists of delivering large trailers, travel and other small trailers. We discontinued a specialized transport service ("Decking") in 2000. Operating revenues decreased 28% to $15.3 million in 2000. This decrease was primarily caused by a reduction in available drivers and discontinuing the Decking deliveries. Specialized Outsourcing Services incurred an EBITDA loss of $140,000 in 2000 compared to an EBITDA of $469,000 in 1999. This loss was caused primarily by the reduction in the delivery of large trailers ($1.1 million) and Decking ($360,000) partially offset by improved operating efficiencies and overhead cost reductions representing an aggregate savings of $882,000. Insurance/Finance Our Insurance/Finance segment provides insurance and financing services to our drivers and independent owner-operators. This segment also acts as a cost center because we account for all bodily injury, property damage and cargo loss costs under this segment. Insurance/Finance operating revenues decreased $1.0 million to $2.9 million in 2000 reflecting a decrease in owner-operator insurance premiums relating to the decline in the manufactured housing industry. However, Insurance/Finance EBITDA loss decreased $2.2 million to $6.8 million due to improved bodily injury, property damage and cargo loss claims experience. The deductible for personal injury and property damage is $250,000 per occurrence. The cargo deductible is $1,000,000. Accordingly, we are essentially self-insured for cargo losses. As a part of continuing efforts to contain claims expense, we are expanding our safety awareness as well as formal safety training efforts among both owner-operators and terminal personnel. Cargo claims as a percent of operating revenue decreased from 2.3% in 1999 to 1.9% in 2000. Similarly, bodily injury and property damage claims decreased from 3.6% to 3.3% of operating revenue. Our management believes that our focus on driver safety is having, and may continue to have, a favorable impact. Based on current insurance market conditions, we expect significant increases in premium expense as our insurance programs renew in 2001. We plan to pass increased premium expense to customers through increased rates to the extent possible. Year 1999 Compared with 1998 Consolidated Results During 1999, we experienced a decrease in the number of Manufactured Housing shipments and a continued increase in insurance and claims costs. We also experienced a reduction in operating revenues and profitability in the Specialized Outsourcing Services segment. Industrial shipment of new manufactured homes decreased approximately 4% in 1999. We were more severely impacted as our largest customer experienced an approximate 21% decline in retail sales of new homes. As a result, we sustained an 8% decrease in shipments of new homes in 1999. Our total operating revenues in 1999 decreased $4.9 million to $145.6 million from $150.5 million in 1998. Our operating income before interest, taxes, depreciation and amortization (EBITDA) decreased from $3.2 million in 1998 to $1.8 million in 1999. Net interest expense decreased from $545,000 in 1998 to $338,000 in 1999 as a result of improved cash management which reduced the amount of our borrowings from the credit facility. For information concerning the provision for income taxes as well as information regarding differences between effective tax rates and statutory rates, see Note 5 of the Notes to Consolidated Financial Statements. Accordingly, net income for 1999 was $19,000 compared to $903,000 in 1998. Segment Results Manufactured Housing Manufactured Housing operating revenues began decreasing in the second quarter, and ended the year at $99.5 million, or a 6% reduction from 1998. In spite of this reduction, EBITDA for 1999 ended at $10.3 million compared to $10.8 million for 1998 because of cost reduction measures instituted by our management that largely mitigated the revenue decline. Driver Outsourcing The Driver Outsourcing segment of our business demonstrated good growth in 1999. Operating revenues increased 18% to $23.4 million in 1999 while EBITDA increased by $301,000. However, high driver recruiting and other overhead costs continued to depress the profitability of this segment in 1999. Accrued expenses in this segment for 1999 were $1.0 million, representing an increase of $200,000 from 1998, and overhead costs of $2.1 million, representing an increase of $128,000 from 1998. Specialized Outsourcing Services Specialized Outsourcing Services operating revenues decreased 8% to $21.2 million in 1999. We received $1.0 million less revenue from pick-up shipments by one customer and $673,000 less revenue from Decking operations as a result of a general market decline. Specialized Outsourcing Services EBITDA decreased $542,000 primarily on the lower volume and an increase in overhead costs of $460,000 associated with large trailer delivery. Insurance/Finance Insurance/Finance operating revenues decreased less than 3% in 1999, particularly in the latter months of the year reflecting a decrease in owner-operator insurance premiums relating to the slow-down in the manufactured housing industry. During 1999, we continued to be affected by increasing claims costs. Claim costs in 1999, as a percent of operating revenue increased to 5.9% from 5.1% in 1998. Effective April 1, 1999, the deductible for personal injury and property damage increased to $250,000 per occurrence. Additionally, the cargo stop-loss insurance policy provision terminated and the deductible was increased to $1,000,000. Accordingly, we are essentially self-insured for cargo losses. Liquidity and Capital Resources at December 31, 2000 Operating activities used $0.9 million of cash in 2000 compared to a $4.9 million cash generation in 1999. The 2000 net loss and reductions in working capital liabilities was partially offset by the deferred tax assets valuation reserve and by reductions in trade accounts receivable and other working capital assets. We recorded an income tax receivable of $499,000 as of December 31, 2000 as we intend to file for tax refunds based on prior year payments. Trade accounts receivable decreased $2.4 million primarily due to the decline in operating revenue. Day's sales outstanding ("DSO") increased to 33 days at December 31, 2000 as compared to 28 days at December 31, 1999. Our investment in property and equipment decreased in 2000 to $106,000 with expenditures for an optical scanning system and other new information systems. Our 2001 capital expenditure plan approximates $150,000. At December 31, 2000, we had a $7.7 million revolving credit facility, with a $6.7 million letter of credit sub- limit. At December 31, 2000, we had no outstanding debt under our credit facility, and $6.6 million of letters of credit were outstanding under the credit facility. Letters of credit are required for self-insurance retention reserves and other corporate needs. Our credit facility matured on January 28, 2001, at which time we had no outstanding debt and $6.6 million outstanding letters of credit. As a result of the credit facility not being renewed, we had a payment default arising from the lender's right to demand cash to meet outstanding obligations under the letters of credit and the bank had discretion whether to make any loans to us or issue additional letters of credit for us. In July 2001, we established two credit facilities to replace the matured credit facility. Please see "Interim Results of Operations for the Quarter Ending June 30, 2001 Liquidity and Capital Resources" below. During 2000, we declared quarterly dividends on our Class A common stock of $.05 per share and dividends of $.025 per share on our Class B common stock through the first three quarters. No dividends were declared in the fourth quarter. Payment of dividends is within the discretion of the board of directors. Payment of future dividends will be dependent upon, among other things, earnings, debt covenants, future growth plans, legal restrictions, and our financial condition. We had minimal exposure to interest rates as of December 31, 2000, because our outstanding long-term debt was not significant. Our new credit facilities mentioned above bear interest at variable rates based on either The Bank of New York Alternate Base Rate or the one month LIBOR, or, in the case of the new mortgage facility, the prime rate. Accordingly, borrowings under the credit facilities have exposure to changes in interest rates. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. Also, we currently are not using any fuel hedging instruments. Inflation Most of our expenses are affected by inflation, which generally results in increased costs. During 2000, the effect of inflation on our results of operation was minimal. The transportation industry is dependent upon the availability and cost of fuel. Although fuel costs are paid by our owner-operators, increases in fuel prices may have significant adverse effects on our operations for various reasons. Since fuel costs vary between regions, drivers may become more selective as to regions in which they will transport goods resulting in diminished driver availability. Also, we would experience adverse effects during the time period from when fuel costs begin to increase until the time when scheduled rate increases to customers are enacted. Increases in fuel prices may also affect the sale of recreational vehicles by making the purchase less attractive to consumers. A decrease in the sale of recreational vehicles would be accompanied by a decrease in the transportation of recreational vehicles and a decrease in the need for Driver Outsourcing services. Impact of Seasonality Shipments of manufactured homes tend to decline in the winter months in areas where poor weather conditions inhibit transport. This usually reduces operating revenues in the first and fourth quarters of the year. Our operating revenues, therefore, tend to be stronger in the second and third quarters. INTERIM RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2001 Consolidated Results Our revenues for the second quarter of 2001 decreased by 16% to $25.4 million from $30.4 million in the second quarter of 2000. This $5.0 million decline in the second quarter included a decrease of $5.9 million (29%) in revenue from our Manufactured Housing segment. The manufactured housing industry has been in a significant slump since 1999. Based on a report from the Manufactured Housing Institute, shipments of manufactured homes declined by 30% in April and May of 2001 compared to 2000. Information on shipments of manufactured homes during the month of June 2001 was not available. The second quarter was an improvement from the first quarter of 2001 when year over year shipments were down 41%. We have implemented cost-cutting programs in 2001 designed to match our expenses with reduced revenue levels. For example, in March 2001, we implemented a driver pay decrease in Manufactured Housing. In April 2001, we eliminated an additional 20 support positions. In May 2001, we installed new fuel surcharge initiatives to more closely match customer fuel surcharges with driver pay for this charge. We benefitted from these initiatives at the operating income level. Our operating income in the second quarter improved to $398,000 or 1.6% of revenue compared to $113,000 or .4% of revenue in 2000. Our pre-tax income improved to $371,000 in the second quarter from $37,000 in the prior year. We reported an income tax benefit of $255,000 in the second quarter primarily relating to income tax refunds due from net operating loss carry-backs filed with the 2000 income tax returns. Segment Results The following discussion sets forth certain information about segment results. Manufactured Housing We continue to maintain market share in the Manufactured Housing segment with the revenue decrease in the second quarter resulting from fewer shipments of manufactured homes in the industry. Shipments of manufactured homes were down 30% in the second quarter compared to 2000 while our revenues for Manufactured Housing were down 29% for the quarter. Home manufacturers have reported weaker financial results during the past eight quarters as a result of weakened demand, tightened consumer credit standards, and increased industry repossessions. Certain of the manufacturers have reported large operating losses that have stressed their financial position. These manufacturers, including some of our customers, have closed a number of plants and retail centers and may contemplate additional closings. The impact that this industry cycle will have on our revenues cannot be predicted, but we may experience decreases in revenue from some of our largest customers. One customer in particular, which has represented less than 17% of our revenues for the year to date, has recently announced continuing losses and plans to close numerous retail locations. We believe that it is in our best interest to reduce our dependence on this customer. Based on correspondence and discussion with this customer, we expect the customer will reduce its use of our services in the coming year. Our management believes, however, that there are new business opportunities that will offset attrition of existing customer business. Driver Outsourcing Driver Outsourcing operating revenues for the quarter decreased by $1.1 million or 19% from the prior year as a result of lower sales in the recreational vehicle markets. We have been successful in reducing costs in Driver Outsourcing to match the reduced revenue levels. Driver Outsourcing EBITDA was 8.6% of revenue in the quarter compared to EBITDA of 7.5% of revenue in 2000. Specialized Outsourcing Services Specialized Outsourcing Services operating revenues increased by $2.1 million or 54% in the second quarter. Revenues from our towaway division that leases independent contractors with Class 8 tractors grew by 67% compared to the prior year. Our pick-up division, which utilizes independent contractors with dual-axle pick-up trucks to move travel trailers and boats, reported 33% revenue growth despite the down market in recreational vehicles. Insurance and Finance Our Insurance and Finance segment provides insurance and financing services to our drivers and independent owner-operators. This segment also acts as a cost center because we account for all bodily injury, property damage and cargo loss costs under this segment. Insurance and Finance operating revenues decreased $68,000 or 9% in the second quarter of 2001 as a result of decreases in the number of drivers and independent owner-operators. For the Six Months Ended June 30, 2001 Consolidated Results Our revenues for the first six months of 2001 decreased by $12.7 million or 22% compared to 2000. The decrease is primarily related to the previously discussed weak market for shipments of new manufactured homes. According to the Manufactured Housing Institute, shipments of new manufactured homes from January through May of 2001 were 75,052, a decrease of 36% compared to the same period in 2000. For the six months ended June 30, 2001, revenues for our Manufactured Housing segment decreased by 33%. Our cost-cutting initiatives have resulted in a significant improvement in operating income compared to the prior year. We reported an operating loss of $77,000 in the first six months of 2001 compared to a loss of $785,000 in 2000. The following discussion sets forth certain information about our other segment results. Driver Outsourcing Driver Outsourcing operating revenues for the first six months of 2001 declined by 19% compared to 2000. This decline is primarily a result of weak demand for recreational vehicles in 2001 compared to 2000. Specialized Outsourcing Services Specialized Outsourcing Services operating revenues increased during the first six months of 2001 to $10.1 million from $7.6 million. This was a result of an increase in the number of independent owner-operators that we used in 2001. Liquidity and Capital Resources On July 12, 2001, we completed a previously announced $2.0 million capital infusion from our majority stockholder Lynch Interactive Corporation ("Interactive"). We issued one million shares of our Class B common stock in exchange for a $2.0 million cash investment, thereby increasing Interactive's ownership position in us from 55.6% to 68.5%. The proceeds from the transaction are invested in U.S. Treasury backed instruments and are pledged as collateral for the credit facility we established with GMAC Commercial Credit LLC. On July 27, 2001, we obtained a new three-year $12.5 million credit facility with GMAC Commercial Credit LLC. The new credit facility replaces our previous credit facility that expired on January 28, 2001 and was not renewed. The new credit facility will be used for working capital purposes and to post letters of credit for insurance contracts. At this time, we have no outstanding debt and $7.6 million outstanding letters of credit. Borrowings will bear interest at a rate per annum equal to either The Bank of New York Alternate Base Rate plus one-half percent or, at our option, absent an event of default, the one month LIBOR, averaged monthly, plus three percent. Borrowings and posted letters of credit under the new credit facility are limited to a borrowing base calculation that includes 85% of eligible receivables and 95% of eligible investments, and are subject to certain financial covenants including minimum tangible net worth, maximum funded debt, minimum fixed interest coverage and maximum capital expenditures. The new credit facility is secured by our accounts receivable, investments, inventory, equipment and general intangibles. The new credit facility may be prepaid anytime with prepayment being subject to a 3%, .75% and .25% prepayment penalty if accomplished during years 1, 2 or 3, respectively. The previous credit facility matured on January 28, 2001, at which time we had no outstanding debt and $6.6 million outstanding letters of credit. We were in default of the financial covenants of the matured credit facility, resulting in the bank failing to renew it. As a result of the matured credit facility not being renewed, we had a payment default. On July 31, 2001, we closed on a new real estate mortgage for $500,000 that is secured by our land and buildings located in Elkhart, Indiana. The proceeds from the loan will be used for short-term working capital purposes. The mortgage bears interest at prime rate plus 0.75%, and is for a six-month term with outstanding principal due on February 1, 2002. The loan may be prepaid at any time with no penalties, and is subject to the same covenants as the new credit facility. Our application for additional capacity under this facility is under consideration. In addition, we anticipate receiving an income tax refund of $664,000 from filing a federal net operating loss carry-back return for the 2000 tax year. Effective July 1, 2001, we renewed our primary liability insurance, workers compensation, cargo, and property insurance. Acquisition of liability insurance in the trucking industry has become increasingly more difficult and expensive over the past year. As a result, our insurance premiums effective July 1, 2001 will increase significantly. We will recover much of this increase from customers in the form of apportioned insurance charges. The net impact on our operating results for the next twelve months cannot be determined at this time. We have posted increased letters of credit to the insurance carriers through the new credit facility as collateral for the payment of claim reimbursements. Our management believes the combination of the above financial transactions will be adequate to allow us to post all required letters of credit for insurance contracts. Our financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our ability to continue as a going concern is dependent upon our ability to successfully maintain our financing arrangements and to comply with the terms thereof. Our management believes that internally generated funds together with the recent equity infusion and resources available under the replacement credit and mortgage facilities will be sufficient to provide our capital and liquidity requirements for the next twelve months. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information Shares of our Class A common stock are quoted on the American Stock Exchange under the symbol "MG." The following table sets forth the high and low sales price per share of our Class A common stock for each quarter in fiscal 2000 and 1999, and the first two quarters of fiscal 2001.
Year Ended December 31, 2001 2000 1999 ------------------------------ -------------------------------- ---------------------------------- High Low High Low High Low ------------- ------------- ------------- -------------- -------------- ---------------- First Quarter $4.75 $3.80 $8.50 $5.38 $9.13 $6.63 Second Quarter 4.20 3.65 7.88 6.13 8.75 6.75 Third Quarter N/A N/A 7.25 5.25 9.88 7.00 Fourth Quarter N/A N/A 6.06 3.75 7.88 5.44
As of August 8, 2001, there were 150 holders of record of Class A common stock and one holder of record of our Class B common stock. We estimate that our Class A common stock is owned beneficially by approximately 289 persons. There is no market for our Class B common stock, and our management has no plans to list the Class B common stock on any exchange. As of August 8, 2001, there were 1,248,157 shares of our Class A common stock outstanding and 2,200,000 shares of our Class B common stock outstanding for an aggregate of 3,448,157 shares of our common stock issued and outstanding. Dividend Policy In 1999, we declared a dividend of $0.02 each quarter, and in 2000, we declared a dividend of $0.02 in the first and second quarter. In the third quarter 2000, we reduced the dividend rate to $0.01, and we did not declare a dividend in the fourth quarter of 2000. Our charter provides that dividends of the Class A common stock may be up to 100% more than dividends on the Class B common stock. Historically, dividends paid on the Class A common stock have been twice the amount paid on the Class B common stock. We expect this will continue to be true of future dividends, if any. The payment of dividends is within the discretion of our Board of Directors and will depend, among other things, upon earnings, capital requirements, any financing agreement covenants and our financial condition. Our ability to pay dividends is limited by covenants with our lenders. USE OF PROCEEDS The maximum net proceeds that we may receive from this offering could be up to approximately $31.0 million if all warrants are exercised. However, it is unlikely that all warrants will be exercised and no assurance can be given as to when or whether any warrants will be exercised, nor as to the timing of receipt or amount of proceeds therefrom. The warrants are intended to provide stockholders a fixed, long-term opportunity to acquire additional shares of our common stock. We are not dependent upon, nor do we expect, any material amount of proceeds from the warrants at any given time, if ever. Although there is no accurate way to determine the number of warrants that will be exercised, if any, we will use any net proceeds of the sale of our common stock from this offering for general corporate purposes (and, in particular, to reduce outstanding revolving credit borrowings). THE OFFERING We are distributing to holders of our Class A common stock, one Class A warrant for each share of our Class A common stock that they own on the record date of _____________, 2001. In addition, we are distributing to the holder of our Class B common stock, one Class B warrant for each share of our Class B common stock that it owns on the record date. Only those record holders who own our common stock on the record date will receive warrants directly from us. You are a record holder for this purpose only if your name is registered as a stockholder with our transfer agent, American Stock Transfer & Trust Company, as of the record date. As a warrant holder, you may purchase shares of our Class A common stock through exercise of your Class A warrants, or allow your Class A warrants to expire unexercised. To purchase shares of our Class A common stock, you must deliver one Class A warrant for each share of our Class A common stock you intend to purchase. We are issuing warrants to purchase an aggregate of 1,248,157 shares of our Class A common stock and warrants to purchase an aggregate of 2,200,000 shares of our Class B common stock. Exercising Your Warrants Each Class A warrant entitles the holder to purchase one share of our Class A common stock. Commencing on the date of this prospectus, you may exercise your warrants by properly completing and signing your warrant certificate, including, if required, a signature guarantee from an eligible institution. Mail or deliver the properly executed warrant certificate to the warrant agent, together with payment of the aggregate warrant exercise price in full. Please see "-Warrant Exercise Price" below. There is no minimum amount of shares that you must purchase. You may exercise your warrants in whole or in part, but no warrants may be exercised for fractional shares. We are required to keep available a sufficient number of authorized shares of our common stock to permit exercise of the warrants. A holder of warrants will not have any rights, privileges or liabilities as a stockholder prior to exercise of the warrants. Warrant Exercise Price The exercise price for the Class A warrants is $9.00 per share, payable in cash. Please see "--Anti-Dilution Protection" for a discussion of certain adjustments to the warrant exercise price and number of shares issuable upon the occurrence of certain dilutive events. The exercise price for the Class A warrants will be reduced to $6.00 per share for a reduction period of at least 30 days to be set by our Board of Directors. If the price reduction period has not been set prior to the date 60 days before the expiration date, such period will comprise the final 30 days prior to the date upon which the Class A warrants expire. In the event the reduction period is set by our Board of Directors, we will cause a written notice to all record holders of Class A warrants indicating the dates upon which the reduction period shall commence and end. To exercise your Class A warrants to purchase shares of our Class A common stock, you must deliver a properly completed and signed Class A warrant certificate together with payment of the aggregate warrant exercise price to the warrant agent within the reduction period. We will not be obligated to honor any purported exercise of Class A warrants at the reduced exercise price of $6.00 if the documents and/or payment relating to such exercise are received by the warrant agent before or after the reduction period, regardless of when such documents and/or payment were sent. The Class B warrants will not carry any corresponding right to a reduction in their exercise price. Expiration Time The warrants have a 5-year term. The warrants will expire at 5:00 p.m., New York City Time, on _________________, 2006, the expiration time. After expiration of the warrants, all unexercised warrants will be null and void and no longer exercisable by the holder. We will not be obligated to honor any purported exercise of warrants received by the warrant agent after the expiration time, regardless of when the documents relating to such exercise were sent. Warrant Agent The warrant agent is American Stock Transfer & Trust Company. The address to which you must make any required deliveries is: American Stock Transfer & Trust Company 59 Maiden Lane, Plaza Level New York, New York 10038 Determination of the Warrant Exercise Price Our Board of Directors determined the warrant exercise price on May 9, 2001. In setting the warrant exercise price, our board of directors considered, among other things, the factors set forth above under "Risks Related to the Offering," as well as our business potential and prospects and current market conditions. The warrant exercise price was determined by our Board of Directors and bears no direct relationship to the value of our assets, financial condition or other established criteria for value. In light of our sale of additional shares of our Class B common stock to our principal stockholder, our Board of Directors determined the warrant exercise price (including the Class A warrant exercise price reduction to $6.00 per share during a 30-day period) and approved the distribution of warrants to give our stockholders a fixed opportunity to buy additional shares without brokerage fees and with a view that the warrants may prove to be of value to our stockholders over the long-term. As of _______________, 2001, the closing price of our Class A common stock was $________. Because the warrant exercise price is $9.00 per share, subject to adjustment, the warrants are out-of-the-money on the date hereof and are likely to be out-of-the-money for an indefinite period of time. We can give no assurance that the trading price for our Class A common stock will ever equal or exceed the warrant exercise price. Lynch Interactive Corporation As of May 31, 2001, our controlling stockholder, Lynch Interactive Corporation ("Interactive"), owned 161,000 shares of our outstanding Class A common stock and all 1,200,000 shares of our outstanding Class B common stock. On July 12, 2001, we issued 1,000,000 additional shares of our Class B common stock to Interactive. Shares of our Class A common stock carry one vote per share while shares of our Class B common stock carry two votes per share. As a result of the issuance, Interactive's voting control currently exceeds 80% of the voting power of our common stock and allows Interactive to exercise control over matters submitted to a vote of our stockholders. We expect to issue 2,200,000 Class B warrants to Interactive in addition to 161,000 Class A warrants. Any exercise of such Class B warrants by Interactive will further enhance Interactive's voting power and control over matters submitted to a vote of our stockholders. The Class B warrant exercise price is $9.00 per share. The Class B warrants do not provide for a reduction of the exercise price as the Class A warrants do. Plan of Distribution We are distributing the warrants at no cost to those persons who are holders of outstanding shares of our common stock on the record date. Where shares are held indirectly through a broker, bank or other institution, we will reimburse the institution's reasonable out-of-pocket costs in distributing this prospectus and other materials to beneficial owners of our common stock. No commission or fee will be paid to any person in connection with the issuance of the warrants or upon issuance of our common stock upon exercise of the warrants. No warrants will be exercisable unless at the time of exercise there is a current prospectus covering the shares of common stock issuable upon exercise of such warrants under an effective registration statement filed with the Securities and Exchange Commission and such shares have been qualified for sale or are exempt from qualification under the securities laws of the state or residence of the holder of such warrants. Although we intend to seek to have the shares of our common stock so qualified in the states where the warrants are being offered and to maintain a current prospectus relating thereto, until the expiration of the warrants, there can be no assurance that we will be able to do so. We have appointed American Stock Transfer & Trust Company, to assist with the offering. To exercise your warrants, you should deliver your warrant certificate together with payment of the warrant exercise price to the warrant agent. Please see "-The Warrant Agent" above for the address to which the warrant certificate and payment should be delivered. The warrant agent will be responsible for, among other things, delivering warrant certificates to our stockholders, stock certificates to warrant holders whose exercise is accepted, and delivering refunds to warrant holders who have over-paid their aggregate warrant exercise price or whose exercise is rejected. We will pay the fees and expenses of the warrant agent in connection with the offering. Warrant Payments You must pay the warrant exercise price in full for all shares you intend to purchase by: (1) check or bank draft drawn upon a U.S. bank, or postal, telegraphic or express money order, payable to American Stock Transfer & Trust Company, as warrant agent; or (2) wire transfer of immediately available funds to an account which the warrant agent maintains for this purpose. Please contact the warrant agent at (800) 777-0800 to obtain appropriate wiring instructions. The warrant exercise price will be deemed to have been received by the warrant agent only upon: (1) clearance of any uncertified check; (2) receipt by the warrant agent of any certified check or bank draft drawn upon a U.S. bank or of a postal, telegraphic or express money order; or (3) receipt of good funds in the warrant agent's account designated in the wiring instructions provided by the warrant agent. Anti-Dilution Protection The warrant exercise price and the number of shares of Class A common stock issuable upon exercise of the each warrant will be subject to adjustment to protect against dilution in the event of stock dividends, stock splits, combinations, subdivisions, reclassifications, reorganizations, mergers, and similar corporate transactions. However, the warrants are not subject to adjustment for issuance of shares of our common stock (or securities convertible into or exercisable for our common stock) at prices below the exercise price of the warrants. Any adjustment required by the foregoing events will be determined by our Board of Directors. Warrant Amendments We reserve the right (by action of our Board of Directors, including approval of our director elected by holders of Class A common stock) to make any modification to the terms of the warrants that is not materially adverse to the holders of the warrants, including, without limitation, decreasing the warrant exercise price. Any such modification will be determined by our Board of Directors and we will cause written notice of any such modification to be sent to all record holders of Class A warrants which describes the modification and its effective date. Nominee Holders Holders on the record date who hold shares of our common stock for the account of others, such as brokers, trustees or depositories for securities, should contact the respective beneficial owners of such shares to ascertain the intentions of the beneficial owners of such shares and to obtain instructions with respect to their warrants. If a beneficial owner so instructs, the nominee should properly complete the applicable warrant certificate and submit it to the warrant agent with the proper payment. In addition, beneficial owners of our common stock or warrants held through such nominee should contact the nominee and request the nominee to effect transactions in accordance with the beneficial owner's instructions. Ambiguities in Exercise of the Warrants If you do not specify the number of warrants being exercised on your warrant certificate, or if your payment is not sufficient to pay the total warrant exercise price for all of the shares that you indicate you wish to purchase, you will be deemed to have exercised the maximum number of warrants that could be exercised for the amount of the payment that the warrant agent receives from you. If your payment exceeds the number of warrants you specify are being exercised on your warrant certificate, you will be deemed to have exercised the maximum number of warrants that could be exercised for the amount of payment the warrant agent receives from you, up to the aggregate number of warrants exercisable by your warrant certificate. Any excess payment remaining after the foregoing allocation will be returned to you by mail as soon as practicable following processing of your warrant certificate, without interest or deduction. Interpretation All questions concerning the timeliness, validity, form and eligibility of any exercise of warrants will be determined by us and our determinations will be final and binding. We reserve the right, in our sole discretion, to waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as we may determine, or reject the purported exercise of any warrant. Warrants will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as we determine in our sole discretion. We reserve the right, in our sole discretion, to reject any exercise or related documents or payment not properly submitted or the acceptance of which would, in the opinion of our counsel, be unlawful. Neither we nor the warrant agent will be under any duty to give notification of any defect or irregularity in connection with the exercise of warrant certificates or incur any liability for failure to give such notification. Risk of Loss on Delivery of Warrant Certificates and Payments The instructions contained in the warrant certificate should be read carefully and followed in detail. Do not send subscription certificates to us. The method of delivery of warrant certificates and payment of the warrant exercise price to the warrant agent will be at the election and risk of the warrant holders but, if sent by mail it is recommended that warrant certificates and payments be sent by registered mail, properly insured, with return receipt requested, and that a sufficient number of days be allowed to ensure delivery to the warrant agent and clearance of payment at or prior to the expiration time. In addition, if you request reissuance of a warrant certificate, the delivery will be at your risk. Exercise of Less Than All Warrants If you exercise your warrants for fewer than all of the shares represented by your warrant certificate, you may receive from the warrant agent a new warrant certificate representing the unexercised warrants. A new warrant certificate for the remaining warrants will be issued to you only if the warrant agent receives a properly endorsed warrant certificate from you no later than 5:00 p.m., New York City Time, on the fifth business day prior to the expiration time. The warrant agent will not issue new warrant certificates for partially exercised warrant certificates submitted after that date and time. If you do submit a warrant certificate after that date and time, you will not be able to exercise the unexercised warrants. Unless you make other arrangements with the agent, a new warrant certificate issued after 5:00 p.m., New York City Time, on the fifth business day before the expiration time will be held for pick-up by you at the offices of the transfer agent at 59 Maiden Lane, Plaza Level, New York, New York 10028. Warrants Are Not Transferable You may not sell your Class A warrants. You may not transfer your Class A warrants except (i) if you are, or if you are the beneficial owner of Class A warrants that are held by an entity that merges or consolidates with another entity, or otherwise by operation of law, pursuant to court order or pursuant to the laws of descent and distribution; or (ii) with our express prior written consent, which we may give or withhold in our sole discretion. You may transfer your warrant certificate if such transfer does not represent any change of the beneficial ownership of your Class A warrants. The warrant agent shall not give effect to any transfer in violation of these restrictions. Upon presentation of your warrant certificate for transfer, the warrant agent shall require you to deliver such written representations and/or other evidence as it deems reasonable to substantiate that the transfer does not violate the restrictions of your warrant certificate. In the event you desire to present your warrant certificate for registration of transfer, the Exercise Form included therein shall be duly endorsed, or be accompanied by a written instrument or instruments of transfer, in form satisfactory to us and the warrant agent, duly executed by you or your attorney-in-fact duly authorized in writing. Moreover, your signature on your warrant certificate must be guaranteed by an Eligible Guarantor Institution. Please see "-Signature Guarantees" below for a discussions regarding Eligible Guarantor Institutions and guaranteed signatures. The warrant agent may impose a reasonable service charge against you for any registration of transfer of your warrant certificate. You may also be required you to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any such transfer. In addition, we do not intend to apply, and are not obligated to apply, for listing of the warrants on any securities exchange, the Nasdaq Stock Market, or any other market. Signature Guarantees Signatures on your warrant certificate do not need to be guaranteed unless you desire to transfer any or all of your Class A warrants in a manner permitted in this offering. Please see "-Warrants Are Not Transferable" above. If your shares are being transferred in a manner permitted, then your signature on each warrant certificate must be guaranteed by an Eligible Guarantor Institution, as defined in Rule 17Ad-15 of the Securities Exchange Act of 1934, and required under the standards and procedures adopted by the warrant agent. Eligible Guarantor Institutions include banks, brokers, dealers, credit unions, national securities exchanges and savings associations, each as defined. Procedures for Depository Trust Company Participants We expect that you will be able to exercise your Class A warrants through the facilities of Depository Trust Company. If your Class A warrants are held of record through the Depository Trust Company, you may exercise your warrants by instructing the Depository Trust Company to transfer your Class A warrants from your account to the account of the transfer agent, together with instructions as to the aggregate number of warrants you are exercising, the number of shares of our common stock you are purchasing, the warrant exercise price for each share of our common stock that you intend to purchase, and the identification of the transferee to whom your Class A warrants are to be ultimately transferred by the transfer agent. No Revocation Once you exercise your warrants, you may not revoke that exercise. Warrants not exercised prior to their expiration will be null and void as of and after such time. No Board Recommendation Our Board of Directors does not make any recommendation to you about whether you should exercise any warrants. If you exercise warrants, you risk investment loss on money invested. We cannot assure you that anyone purchasing shares of our Class A common stock will be able to sell those shares in the future at a higher price. An investment in our Class A common stock must be made in accordance with your evaluation of your own best interest. Issuance of Stock Certificates Stock certificates for shares purchased in the offering will be issued to you as soon as practicable after your due exercise of your warrants. American Stock Transfer & Trust Company will deliver payment of the warrant exercise price to us only after the issuance of stock certificates to those exercising warrants. If you exercise warrants, you will have no rights as a stockholder until certificates representing the shares you purchased are issued. Shares purchased by the exercise of warrants will be registered in the name of the person exercising the warrants. Foreign Stockholders; Stockholders with APO or FPO Addresses If you are a holder of record and your address is outside the United States, or if you have no APO or FPO address, a warrant certificate will not be mailed to you, but rather will be held by the warrant agent for your account. To exercise the warrants, you must notify the warrant agent prior to 11:00 a.m., New York City Time, on the second trading day before the expiration time. State and Foreign Securities Law The warrants may not be exercised by any person, and neither this prospectus nor the warrant certificate shall constitute an offer to sell or a solicitation of an offer to purchase any shares of our common stock, in any jurisdiction in which such transactions would be unlawful. We believe that no action has been taken in any jurisdiction outside the United States to permit offers and sales of the warrants or the offer, sale or distribution of the shares of our common stock outside the United States. Consequently, we may reject the exercise of warrants by any holder of warrants outside the United States. We may also reject the exercise of warrants by holders in jurisdictions within the United States, and we may refuse to distribute warrants to any person, if we should determine that we may not lawfully issue securities to such person. We may do so even if we could qualify the securities for sale or distribution by taking other actions or modifying the terms of the offering or the distribution in such jurisdictions, which we may decline to do in our sole discretion. In such event, warrant holders who are residents of these jurisdictions will not be eligible to exercise the warrants or participate in the offering. Regulatory Limitation We will not be required to issue shares pursuant to this offering to anyone who, in our opinion, would be required to obtain prior clearance or authorization from any state or federal regulatory authorities to own or control such shares if such clearance or authorization has not been obtained at the expiration of this offering. Questions or Requests for Assistance If you have questions about this offering, including questions about the procedure for exercising warrants or requests for additional copies of this prospectus, please contact the warrant agent toll free at (800) 777-0800. DILUTION Stockholders that do not exercise their warrants in full may experience substantial dilution of their percentage of equity ownership interest and voting power in us to the extent that other stockholders exercise their warrants. In addition, it is possible that in the future we may find it necessary or appropriate for us to issue additional capital stock to raise capital or for compensatory purposes. In that event, the relative voting power and equity interests of persons purchasing shares of our Class A common stock in this offering could be reduced. DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of (a) 7,500,000 shares of Class A common stock, $.015 par value per share, (b) 4,400,000 shares of Class B common stock, $.015 par value per share, and (c) 2,100,000 shares of preferred stock, $.01 par value per share. We have submitted to our stockholders a proposal to authorize the designation of an additional 1,900,000 shares of Class B common stock. If the proposal is approved by the stockholders there will be 4,400,000 authorized shares of Class B common stock. As of August 8, 2001, there are 1,248,157 shares of Class A common stock outstanding held of record by 150 stockholders, and 2,200,000 shares of Class B common stock outstanding held of record by one stockholder, Lynch Interactive, Inc. ("Interactive"). No shares of preferred stock have been designated and there are no outstanding shares of preferred stock. If all warrants are exercised, there would be 2,496,314 shares of Class A common stock outstanding and 4,400,000 shares of Class B common stock outstanding. See "Risk Factors." The relative rights, privileges and limitations of our capital stock are summarized below. Class A and Class B Common Stock Class A Common Stock. The shares of Class A common stock are listed on the American Stock Exchange. The shares of Class A common stock are entitled to one vote per share on all matters presented to the stockholders, and the holders of shares of Class A common stock are entitled, voting separately as a class, to elect one member of our Board of Directors. The holders of the Class A and Class B common stock vote together as a single class upon the election of all remaining directors and on all other matters presented to stockholders, except that the Class A and Class B common stock also each vote separately as a class when required by our charter or bylaws, or the Delaware General Corporation Law, as amended ("DGCL"). See- "Certain Statutory, Charter and By-Law Provisions" below. The shares of Class A common stock are freely transferable by the holder. Class B Common Stock. The shares of Class B common stock are entitled to two votes per share on all matters presented to the stockholders. The holders of Class A and Class B common stock vote together as a single class on all matters presented to the stockholders, except that the holders of Class A common stock elect one director exclusively and except where voting by class is required by our charter or bylaws, or the DGCL. The Class B common stock is not listed on any exchange or traded in any market. The shares of Class B common stock automatically convert to shares of Class A common stock upon any transfer, except for transfers to an "affiliate" of the transferor. An "affiliate" is defined as a person that, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, the transferring holder of such Class B warrants. "Control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise, and specifically includes direct or indirect ownership of at least 5% of the voting equity of such person. Common Stock Generally. Holders of both classes of common stock are entitled to receive ratably such dividends, if any, as are declared by our Board of Directors from legally available funds, subject to any preferential dividend owing to outstanding preferred stock. See "--Preferred Stock", below. No cash dividend may be paid on either class of our common stock unless a cash dividend is also paid on the other class; provided that any dividend paid on Class B common stock may not be greater than 100%, nor less than 50%, of any dividend paid on shares of Class A common stock. If holders of our Class A common stock receive shares of our Class A common stock distributed in connection with stock dividends or stock splits, holders of our Class B common stock will receive shares of our Class B common stock in the same per-share proportion as holders of our Class A common stock receive shares of our Class A common stock. Pursuant to our charter, we may not issue any additional shares of Class B common stock without the approval of a majority of the votes of the outstanding shares of Class A common stock and Class B common stock, each voting separately as a class. We may, however, issue additional shares of Class B common stock in the event of pro rata stock splits or stock dividends. Any shares of Class B common stock received by us upon conversion of the shares to Class A common stock will be retired and not reissued. Upon our liquidation, dissolution or winding up, the holders of both classes of our common stock are entitled to receive ratably our net assets available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of our common stock have no preemptive, subscription or redemption rights. All outstanding shares of our common stock are fully paid and nonassessable. The rights, preferences and privileges of holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of any shares of our preferred stock which we may designate and issue in the future. Preferred Stock Our Board of Directors has the authority to issue preferred stock and to determine its rights and preferences to eliminate delays associated with a stockholder vote on specific issuances. There are 2,100,000 authorized shares of preferred stock which may be designated and issued pursuant to these provisions. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding voting stock. We have no present plans to designate or issue any classes or series of preferred stock. Certain Statutory, Charter and ByLaw Provisions The following discussion is a general summary of material provisions of our charter and bylaws and the DGCL, certain of which may be likely to have an effect of delaying, deferring or preventing a change in control. The following description of the material provisions is general and not complete. You should read our charter and bylaws and the DGCL. We are subject to Section 203 of the DGCL, which prohibits a Delaware corporation from engaging in a wide range of specified transactions with any interested stockholder, defined to include, among others, any person or entity who in the last three years obtained 15% or more of any class or series of stock entitled to vote in the election of directors, unless, among other exceptions, the transaction is approved by (a) our Board of Directors prior to the date the interested stockholder obtained such status or (b) the holders of two-thirds of the outstanding shares of each class or series of stock entitled to vote generally in the election of directors, not including those shares of the interested stockholder. Section 203 is intended to discourage certain transactions with the target company. Our charter contains certain provisions permitted under the DGCL relating to the liability of our directors and officers. The provisions provide that we will indemnify our directors and officers against all expense, liability and loss suffered by our director or officer in connection with his service as a director or officer to the fullest extent authorized by the DGCL, and includes the right of the director or officer to require us to pay the expenses incurred in defending any such proceeding in advance of its final disposition. Therefore, the directors and officers are protected from monetary damages for breach of fiduciary duty, except in certain circumstances involving wrongful acts, such as the breach of a director's duty of loyalty or acts or omissions which involve intentional misconduct or a knowing violation of law. Our bylaws provide that any action required or permitted to be taken by our stockholders may be taken only at a duly called annual or special meeting of stockholders, and special meetings may be called only by the Chairman of our Board of Directors, a majority of the members of the Board of Directors or the holders of a majority of the voting power of our outstanding common stock. Our bylaws also impose certain notice and information requirements in connection with the nomination by stockholders of candidates for election to our Board of Directors or the proposal by our stockholders of business to be acted upon at our annual meeting of our stockholders. These provisions could have the effect of delaying until the next annual stockholders' meeting stockholder actions which are not favored by the holders of a majority of the voting power of our outstanding common stock. The DGCL provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter, and the affirmative vote of each class entitled to vote on any matter as a separate class, is required to amend our charter. Each class of our common stock is entitled to vote on any amendment to the charter which would (a) increase or decrease the aggregate number of authorized shares of such class, (b) increase or decrease the par value of the shares of such class, or (c) alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely. Our charter and bylaws allow our stockholders and Board of Directors the power to amend, repeal and adopt our bylaws. Under Delaware law, the vote of a simple majority of the outstanding shares of the capital stock entitled to vote thereon is required to approve a merger or consolidation, or the sale, lease, or exchange of substantially all of the assets of a company. With respect to a merger, no vote of our stockholders is required if we are the surviving corporation and (a) the related agreement of merger does not amend our charter, (b) each share of our stock outstanding immediately before the merger is an identical outstanding or treasury share after the merger, and (c) the number of shares of our common stock to be issued in the merger (or to be issuable upon conversion of any convertible instruments to be issued in the merger) does not exceed 20% of the shares of our common stock outstanding immediately before the merger. Our Board of Directors is authorized, without shareholder approval, to issue preferred stock in series and to fix and state the voting rights and powers, designation, preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. Preferred stock may rank prior to the Class A common stock and the Class B common stock as to dividend rights, liquidation preferences, or both, and may have full or limited voting rights. Accordingly, issuance of shares of preferred stock could adversely affect the voting power of holders of Class A common stock and Class B common stock or could have the effect of deterring or delaying an attempt to obtain control over us. Certain of the foregoing provisions of our charter, our bylaws and the DGCL could have the effect of preventing or delaying a person from acquiring or seeking to acquire a substantial equity interest in, or control of, our equity securities. CERTAIN FEDERAL INCOME TAX CONSEQUENCES This section discusses certain federal income tax consequences of the offering to: o beneficial owners of common stock upon distribution of the warrants, and o holders upon the exercise of warrants. This discussion is based on the Internal Revenue Code of 1986, as amended, the Treasury regulations thereunder, judicial authority, and current administrative rulings and practice, all of which are subject to change. This discussion is limiIted to U.S. taxpayers who hold our common stock and will hold the warrants and any shares acquired upon the exercise of rights as capital assets. This discussion does not include any tax consequences under state, local and foreign law. You should consult with your own tax advisor concerning your own tax situation or special tax considerations that may apply to you, including without limitation foreign, state and local laws that may apply. No Gain on Receipt of Warrants. As an owner of Class A common stock, you will not recognize taxable income as a result of our distribution of the warrants to you. Basis and Holding Period of Warrants. Your tax basis in the warrants distributed to you by us will be zero, unless (1) you exercise the warrants, and (2) either: o the fair market value of the warrants on the date of distribution is 15% or more of the fair market value on that date of our common stock you already own, in which case you will be required to allocate a portion of your basis in the shares of our common stock you already own to the warrants we are distributing to you, based upon the relative fair market value of the warrants and common stock on the date of distribution, or o you elect under Section 307 of the Internal Revenue Code of 1986, as amended, to allocate a portion of your basis in the shares of our common stock you already own to the warrants we are distributing to you, based upon the relative fair market value of the warrants and common stock on the date of distribution. Your holding period with respect to the warrants we are distributing to you will include your holding period for the common stock with respect to which the warrants were distributed. Exercise of Warrants. You will not recognize any gain or loss upon the exercise of warrants. Your basis in the shares you acquire through your exercise of the warrants will be equal to the sum of the subscription price you pay for such shares and your basis in those warrants (if any). The holding period for the shares you acquire through your exercise of the warrants will begin on the day following the date of acquisition. Expiration of Warrants. If the warrants we are distributing to you as a holder of our common stock expire unexercised, you will not recognize any gain or loss, and no adjustment will be made to the basis of the common stock you own. INDEMNIFICATION OF DIRECTORS AND OFFICERS -- DISCLOSURE OF COMMISSION'S POSITION ON INDEMNIFICATION Under provisions of our charter, any person made a party to any lawsuit by reason of being a director or officer of The Morgan Group, Inc., or any parent or subsidiary thereof, may be indemnified by us to the full extent authorized by the General Corporation Law of the State of Delaware. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable. LEGAL MATTERS Certain legal matters with respect to the authorization and issuance of our common stock offered hereby will be passed upon for us by Barnes & Thornburg, Indianapolis, Indiana. EXPERTS The consolidated financial statements of The Morgan Group, Inc. at December 31, 2000 and 1999, and for each of the three years in the period ended December 31, 2000, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. FORWARD LOOKING STATEMENTS Included in the prospectus summary and elsewhere in this prospectus are several "forward-looking statements." Forward-looking statements are those which use words such as "believe," "expect," "anticipate," "intend," "plan," "may," "will," "should," "estimate," "continue," or other comparable expressions. These words indicate future events and trends. Forward-looking statements are our current views with respect to future events and financial performance. These forward-looking statements are subject to many risks and uncertainties that could cause actual results to differ significantly from historical results or from those anticipated by us. The most significant risks and uncertainties we face are: o cyclicality of the manufactured housing industry, which is currently experiencing a substantial downturn, because our revenues have been largely dependent on the industry; o the continued availability and sufficiency of credit facilities and other sources of funding for our operations; and o accident claims which can materially adversely affect our result of operations and the cost and availability of our insurance arrangements. There are other risks and uncertainties we face, including the effect of changes in general economic conditions and the effect of new laws, regulations and court decisions and those risks described under the caption "Risk Factors." You are cautioned not to place undue reliance on our forward looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form S-2 under the Securities Act of 1933 with respect to the Class A common stock offered hereby. This prospectus, which constitutes part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules relating to the registration statement. You may read and copy any document we file at the SEC's public reference room at 450 Fifth Street, N.W., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public from the SEC's Web site at http://www.sec.gov. INCORPORATION BY REFERENCE The following documents, all of which were previously filed with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Exchange Act of 1934, are hereby incorporated by reference in this prospectus: o our Annual Report on Form 10-K for the year ended December 31, 2000 and amendment thereto on Form 10-K/A filed on April 27, 2001; o our definitive Proxy Statement for our annual meeting held on July 12, 2001; o our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001; and o our Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. All other reports and documents filed by us after the date of this prospectus pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934 prior to the termination of the offering of the common stock covered by this prospectus are also incorporated by reference in this prospectus and are considered to be part of this prospectus from the date those documents are filed. In any statement contained in a document incorporated by reference herein conflicts with or is modified by a statement contained in this prospectus or in any other subsequently filed document that is incorporated by reference into this prospectus, the statement made at the latest point in time should control. Any previous statements that have been subsequently altered should therefore not be considered to be a part of this prospectus. We will provide a copy of any or all of the documents referred to above that have been or may be incorporated by reference in this prospectus to any person, including any beneficial owner, to whom a copy of this prospectus has been delivered free of charge upon request. Exhibits to such documents will not be provided unless the exhibits are specifically incorporated by reference into the information that the prospectus incorporates. Written requests for copies of any documents incorporated by reference should be directed to Gary J. Klusman, 219-295-2200. THE MORGAN GROUP, INC. INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements: Page Report of Ernst & Young LLP, Independent Auditors......................F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999...........F-3 Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998...............................F-4 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2000, 1999 and 1998...........F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998...............................F-6 Notes to Consolidated Financial Statements.............................F-7 F-1 Report of Independent Auditors The Board of Directors and Shareholders The Morgan Group, Inc. We have audited the accompanying consolidated balance sheets of The Morgan Group, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Morgan Group, Inc. and subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 4, the Company, incurred operating losses during the year ended December 31, 2000, and was not in compliance with its credit facility, which expired on January 28, 2001. Under the terms of the expired credit facility, the bank has the right to demand cash to meet outstanding obligations of the letters of credits. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters, including raising additional equity and replacing the expired credit facility, are more fully described in Note 4. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP Greensboro, North Carolina February 9, 2001 CONSOLIDATED FINANCIAL STATEMENTS: The Morgan Group, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands, except share amounts) December 31 2000 1999 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 2,092 $ 3,847 Trade accounts receivable, less allowances of $248 in 2000 and $313 in 1999 7,748 10,130 Accounts receivable, other 133 313 Refundable taxes 499 -- Prepaid expenses and other current assets 1,147 1,960 Deferred income taxes 319 1,475 ------- ------- Total current assets 11,938 17,725 ------- ------- Property and equipment, net 3,688 4,309 Goodwill and other intangibles, net 6,727 7,361 Deferred income taxes 282 2,172 Other assets 634 697 ------- ------- Total assets $23,269 $32,264 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 2,373 $ 3,907 Accrued liabilities 3,704 4,852 Income taxes payable -- 278 Accrued claims payable 3,224 3,071 Refundable deposits 1,357 1,752 Current portion of long-term debt and capital lease obligations 217 676 ------- ------- Total current liabilities 10,875 14,536 ------- ------- Long-term debt and capital lease obligations, less current portion 71 289 Long-term accrued claims payable 5,122 5,347 Commitments and contingencies -- -- Shareholders' equity: Common stock, $.015 par value: Class A: Authorized shares - 7,500,000 Issued shares - 1,607,303 23 23 Class B: Authorized shares - 2,500,000 Issued and outstanding shares - 1,200,000 18 18 Additional paid-in capital 12,459 12,459 Retained (deficit) earnings (2,116) 2,775 ------- ------- Total capital and retained earnings 10,384 15,275 Less - treasury stock at cost (359,146 Class A Shares in 2000 and 1999) (3,183) (3,183) ------- ------- Total shareholders' equity 7,201 12,092 ------- ------- Total liabilities and shareholders' equity $23,269 $32,264 ======= ======= See accompanying notes.
The Morgan Group, Inc. and Subsidiaries Consolidated Statements of Operations (Dollars in thousands, except share amounts) For the year ended December 31 2000 1999 1998 ---- ---- ---- Operating revenues $ 108,024 $ 145,629 $ 150,454 Costs and expenses: Operating costs 99,552 133,774 136,963 Selling, general and administration 9,443 10,090 10,254 Depreciation and amortization 1,067 1,215 1,230 --------- --------- --------- 110,062 145,079 148,447 --------- --------- --------- Operating (loss) income (2,038) 550 2,007 Interest expense, net 310 338 545 --------- --------- --------- (Loss) income before income taxes (2,348) 212 1,462 Income tax expense 2,451 193 559 ---------- --------- --------- Net (loss) income ($4,799) $ 19 $ 903 ========== ========= ========= Net (loss) income per basic and diluted share ($1.96) $ 0.01 $ 0.35 ========== ========= ========= Basic weighted average shares outstanding 2,448,157 2,469,675 2,606,237 ========= ========= =========
See accompanying notes.
The Morgan Group, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (Dollars in thousands, except per share amounts) Class A Class B Additional Retained Common Common Paid-in Officer Treasury (Deficit) Stock Stock Capital Loan Stock Earnings Total ----- ----- ------- ---- ----- -------- ----- Balance at December 31, 1997 $23 $ 18 $ 12,453 $ (504) $ (1,426) $ 2,160 $ 12,724 Net income -- -- -- -- -- 903 903 Purchase of treasury stock -- -- -- 504 (813) -- (309) Common stock dividends: Class A ($.08 per share) -- -- -- -- -- (117) (117) Class B ($.04 per share) -- -- -- -- -- (48) (48) Options exercised -- -- 6 -- 62 -- 68 ----- ------ -------- ------ -------- ------- -------- Balance at December 31, 1998 $23 $ 18 $ 12,459 $ -- $ (2,177) $ 2,898 $ 13,221 Net income -- -- -- -- -- 19 19 Purchase of treasury stock -- -- -- -- (1,006) -- (1,006) Common stock dividends: Class A ($.08 per share) -- -- -- -- -- (94) (94) Class B ($.04 per share) -- -- -- -- -- (48) (48) ----- ------ -------- ------ -------- ------- -------- Balance at December 31, 1999 $23 $ 18 $ 12,459 $ -- $ (3,183) $ 2,775 $ 12,092 Net loss -- -- -- -- -- (4,799) (4,799) Common stock dividends: Class A ($.05 per share) -- -- -- -- -- (62) (62) Class B ($.025 per share) -- -- -- -- -- (30) (30) ----- ------ -------- ------ -------- ------- -------- Balance at December 31, 2000 $23 $ 18 $ 12,459 $ -- $ (3,183) $(2,116) $ 7,201 ===== ====== ======== ====== ======== ======= ========
See accompanying notes.
The Morgan Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands) For the year ended December 31 2000 1999 1998 ---- ---- ---- Operating activities: Net (loss) income $(4,799) $ 19 $ 903 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 1,067 1,215 1,246 Deferred income taxes 3,046 (420) (713) Loss on disposal of property and equipment 292 101 20 Changes in operating assets and liabilities: Trade accounts receivable 2,382 2,058 1,174 Other accounts receivable 180 901 (1,088) Refundable taxes (499) -- -- Prepaid expenses and other current assets 813 507 139 Other assets 63 (43) 810 Trade accounts payable (1,534) (397) 207 Accrued liabilities (1,148) 1,286 (612) Income taxes payable (278) (600) 489 Accrued claims payable (72) 310 2,785 Refundable deposits (395) (78) 164 -------- ------- ------- Net cash (used in) provided by operating activities (882) 4,859 5,524 Investing activities: Purchases of property and equipment (106) (811) (585) Proceeds from sale of property and equipment 2 7 88 Business acquisitions -- (35) (228) -------- ------- ------- Net cash used in investing activities (104) (839) (725) Financing activities: Principle payments on long-term debt (677) (664) (3,418) Proceeds from long-term debt -- 149 135 Purchase of treasury stock, net of officer loan of $504 -- (1,006) (309) in 1998 Proceeds from exercise of stock options -- -- 68 Common stock dividends paid (92) (142) (165) -------- ------- ------- Net cash used in financing activities (769) (1,663) (3,689) -------- ------- ------- Net (decrease) increase in cash and cash equivalents (1,755) 2,357 1,110 Cash and cash equivalents at beginning of period 3,847 1,490 380 -------- ------- ------- Cash and cash equivalents at end of period $ 2,092 $3,847 $ 1,490 ======== ======= ========
Cash payments for interest were $379,000 in 2000, $406,000 in 1999 and $566,000 in 1998. 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 recreational vehicle industries and is a leading provider of delivery services to the commercial truck and trailer industries in the United States. Lynch Interactive Corporation and its wholly owned subsidiaries ("Lynch Interactive") owns all of the 1,200,000 shares of the Company's Class B common stock and 161,100 shares of the Company's Class A common stock, which in the aggregate represents 70% of the combined voting power of the combined classes of the Company's common stock. The Company's other significant wholly owned subsidiaries are Interstate Indemnity Company ("Interstate") and Morgan Finance, Inc. ("Finance"), which provide insurance and financial services to its owner-operators. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires Management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Operating Revenues and Expense Recognition Operating revenues, including ancillary fees for permits, escort services and insurance premiums, 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 maturity of three months or less when purchased are considered to be cash equivalents. Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of customer receivables. As discussed in Note 9, two customers represent 33% of total customer receivables. The remaining credit risk is generally diversified due to the large number of entities comprising the Company's remaining customer base and their dispersion across many different industries and geographic regions. As noted on the consolidated balance sheets, the Company maintains an allowance for doubtful accounts to cover estimated credit losses. Property and Equipment Property and equipment is stated at cost. Major additions and improvements are capitalized, while maintenance and repairs that do not improve or extend the lives of the respective assets are charged to expense as incurred. Depreciation is computed using the straight-line method over the following estimated useful lives: Buildings 25 years Transportation Equipment 3 to 5 years Office and Service Equipment 3 to 8 years Goodwill and Other Intangibles Goodwill and other intangibles are comprised primarily of goodwill, which is stated at the excess of purchase price over net asset acquired, net of accumulated amortization of $4,181,000 and $3,547,000 at December 31, 2000 and 1999, respectively. Intangible assets are being amortized by the straight-line method over their estimated useful lives, which range from three to forty years. Impairment of Assets The Company periodically assesses the net realizable value of its long-lived assets, including intangibles, and evaluates such assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Goodwill is evaluated for impairment whenever such events as a loss of a significant customer, a permanent decline in the manufactured housing industry, or other negative trends occur. For assets to be held and used, including goodwill and other intangible assets, 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. The Company, as a result of the recent negative trends, has performed an assessment of potential goodwill impairment and does not believe that an impairment, or a change in estimated useful lives exist at December 31, 2000. Insurance and Claim Reserves Claims and insurance accruals reflect the estimated ultimate cost of claims, including amounts for claims incurred but not reported, for cargo loss and damage, bodily injury and property damage, workers' compensation, long-term disability and group health not covered by insurance. These costs are charged to operating costs. Stock-Based Compensation Stock based compensation expense for the Company's employee stock option plan is recognized under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related interpretations. Consistent with APB 25, the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant; therefore, no compensation expense is recognized. Net Income (Loss) Per Common Share Net income (loss) per common share ("EPS") is computed using the weighted average number of common shares outstanding during the period. Since each share of Class B common stock is freely convertible into one share of Class A common stock, the total of the weighted average number of common shares for both classes of common stock is considered in the computation of EPS. Fair Values of Financial Instruments At December 31, 2000 and 1999, the carrying value of financial instruments such as cash and cash equivalents, trade and other receivables, trade payables and long-term debt approximate their fair values. Fair value is determined based on expected future cash flows, discounted at market interest rates, and other appropriate valuation methodologies. Comprehensive Income There were no items of comprehensive income for the years presented, as defined under SFAS No. 130, "Reporting Comprehensive Income". Accordingly, comprehensive income is equal to net income. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in fiscal years beginning after June 15, 2000. Under the statement, all derivatives will be required to be recognized on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Under the statement, any ineffective portion of a derivative's change in fair value must be immediately recognized in earnings. The Company has evaluated the effect of SFAS No. 133 and determined that the adoption of SFAS No. 133 will have no effect on the earnings and financial position of the Company. 2. PROPERTY AND EQUIPMENT The components of property and equipment are as follows (in thousands): December 31 2000 1999 ---- ---- Land $ 873 $ 873 Buildings 2,186 2,241 Transportation equipment 146 419 Office and service equipment 2,288 3,491 ----- ----- 5,493 7,024 Less accumulated depreciation 1,805 2,715 ----- ----- Property and equipment, net $3,688 $4,309 ====== ====== Depreciation expense was $433,000, $511,000 and $581,000 for 2000, 1999 and 1998, respectively. 3. GOODWILL AND OTHER INTANGIBLES, NET The components of goodwill and other intangibles, net are as follows (in thousands):
December 31, 2000 Useful Accumulated Net Book Life Cost Amortization Value ---- ---- ------------ ----- Goodwill 40 Year $1,660 $518 $1,142 Goodwill 20 Year 6,734 1,567 5,167 Goodwill 3-5 Year 335 273 62 Non-Compete agreements 3-20 Year 2,179 1,823 356 ----- ----- --- $10,908 $4,181 $6,727 ====== ===== ===== December 31, 1999 Useful Accumulated Net Book Life Cost Amortization Value ---- ---- ------------ ----- Goodwill 40 Year $1,660 $477 $1,183 Goodwill 20 Year 6,734 1,229 5,505 Goodwill 3-5 Year 335 196 139 Non-Compete agreements 3-20 Year 2,179 1,645 534 ----- ----- --- $10,908 $3,547 $7,361 ====== ===== =====
4. INDEBTEDNESS At December 31, 2000, the Company had a $7.7 million revolving credit facility ("Credit Facility"), with a $6.7 million letter of credit sub-limit. The Credit Facility bears interest at the Company's option, on either the applicable Eurodollar Rate Margin or the applicable Base Rate Margin, all of which are adjusted over the term of the Credit Facility. Total borrowings and outstanding letters of credit are limited to qualified trade accounts receivable, qualified in-transit amounts, contractor loans, and qualified investments. The Credit Facility contains financial covenants, the most restrictive of which are a cash flow coverage ratio, interest expense coverage ratio, and minimum net income. At December 31, 2000, the Company had no outstanding debt under its Credit Facility, and $6.6 million of letters of credit were outstanding under the Credit Facility. Letters of credit are required for self-insurance retention reserves and other corporate needs. The Credit Facility matured on January 28, 2001, at which time the Company had no outstanding debt and $6.6 million outstanding letters of credit. The Company was in default of the financial covenants, resulting in the bank failing to renew the Credit Facility. As a result of the Credit Facility not being renewed, the Company has a payment default and the financial institution has the right to demand cash to meet outstanding obligations under the letters of credit. The bank has discretion as to whether to make any loans or issue additional letters of credit for the Company. The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is actively seeking alternative financial institutions to replace the existing Credit Facility as well as seeking additional capital resources. Currently, negotiations are being held with several financial institutions regarding a replacement facility. In connection with these potential replacement facilities, the Company is anticipating raising equity capital up to $3.0 million. The Company has engaged in discussions with its principal shareholder, Lynch Interactive, regarding these matters. Based on preliminary discussions, Lynch Interactive has expressed interest in providing a portion of the capital support the Company will require, but no terms have been agreed upon. The Company expects to seek to raise the equity capital it will require from Lynch Interactive, other stockholders, or, if necessary, privately from other sources. The Company's ability to continue as a going concern is dependent upon its ability to successfully maintain its financing arrangements and to comply with the terms thereof. However, although no assurances can be given, management remains confident that the Company will be able to continue operating as a going concern.
Long-term debt and capital lease obligations consisted of the following (in thousands): December 31 2000 1999 ---- ---- Promissory notes with imputed interest rates from 6.31% to 10.0%, principal and interest payments due from monthly to annually, through June 30, 2002 $242 $837 Term note and capital leases with imputed interest rates of 8.25% to 11.04% with principal and interest payments due monthly through April 26, 2002 46 128 ---- --- 288 965 Less current portion 217 676 --- --- Long-term debt and capital lease obligations, net $ 71 $289 ==== ====
Maturities on long-term debt are $217,000 in 2001 and $71,000 in 2002. 5. LEASES Future minimum annual operating lease payments as of December 31, 2000, are as follows (in thousands): Operating Leases ------ 2001 $ 641 2002 173 2003 60 2004 11 2005 1 ------ Total minimum lease payments $ 886 ====== Aggregate expense under operating leases approximated $1,672,000, $2,115,000, and $2,578,000 for 2000, 1999 and 1998, respectively. 6. INCOME TAXES Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The income tax provisions (benefits) are summarized as follows (in thousands): For the Year Ended December 31 2000 1999 1998 ---- ---- ---- Current: State $ - $ 98 $ 201 Federal (595) 515 1,071 ------- ----- ------ (595) 613 1,272 Deferred: State 488 (67) (203) Federal 2,558 (353) (510) ------- ------ ------- 3,046 (420) (713) ------- ------ ------- $2,451 $ 193 $ 559 ======= ====== ======= Deferred tax assets (liabilities) are comprised of the following (in thousands): December 31 2000 1999 ---- ---- Deferred tax assets: Accrued insurance claims $3,323 $3,232 Special charges and accrued expenses 367 487 Depreciation 199 163 Other 84 125 ------ ------ 3,973 4,007 Deferred tax liabilities: Prepaid expenses (184) (360) ------- ------- (184) (360) ------- ------- $3,789 $3,647 Valuation allowance for deferred tax assets ($3,188) -- ------ ------ $ 601 $3,647 ====== ====== A reconciliation of the income tax provisions and the amounts computed by applying the statutory federal income tax rate to income before income taxes follows (in thousands): For the Year Ended December 31 2000 1999 1998 ---- ---- ---- Income tax provision (benefits) at federal statutory rate $(772) $ 72 $497 State income tax (benefit), net of federal tax benefit (44) 20 48 Changes in estimated state tax rates on beginning temporary differences -- -- (70) Change in Valuation Allowance 3,188 -- -- Permanent differences 79 101 84 ------- ---- -- $2,451 $193 $559 ======= ==== ==== Net cash payments for income taxes were $181,000, $1,205,000 and $810,000 in 2000, 1999 and 1998, respectively. In assessing the realization of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which the temporary differences become deductible. A valuation allowance of $3,188,000 was recorded in 2000 to reduce the deferred tax asset as the Company has experienced cumulative losses for financial reporting for the last three years. Management considered, in reaching the conclusion on the required valuation allowance, given the cumulative losses, combined with the current default on its Credit Facility, that it would be inconsistent with applicable accounting rules to rely on future taxable income to support full realization of the deferred tax assets. Accordingly, the remaining deferred tax assets of $601,000 relate to federal income tax carrybacks available to the Company. 7. SHAREHOLDERS' EQUITY The Company has two classes of common stock outstanding, Class A and Class B. Under the bylaws of the Company: (i) each share of Class A is entitled to one vote and each share of Class B is entitled to two votes; (ii) Class A shareholders are entitled to a dividend ranging from one to two times the dividend declared on Class B stock; (iii) any stock distributions will maintain the same relative percentages outstanding of Class A and Class B; (iv) any liquidation of the Company will be ratably made to Class A and Class B shareholders after satisfaction of the Company's other obligations; and (v) Class B stock is convertible into Class A stock at the discretion of the holder; Class A stock is not convertible into Class B stock. The Company's Board of Directors has approved the purchase of up to 250,000 shares of Class A Common Stock for its Treasury at various dates and market prices. During the year ended December 31, 2000, the Company did not repurchase any shares under this plan. As of December 31, 2000, 186,618 shares had been repurchased at prices between $6.875 and $11.375 per share for a total of $1,561,000 under this plan. In March 1999, the Company repurchased 102,528 shares of Class A stock in a Dutch Auction for $985,000, which includes $62,000 of fees and expenses associated with the transaction. In July 1998, the Company purchased 70,000 shares of Class A stock from a former officer for $637,000 under a special stock purchase approved by the Board of Directors. 8. STOCK OPTION PLAN AND BENEFIT PLAN The Company has an incentive stock option plan which provides for the granting of incentive or non-qualified stock options to purchase up to 200,000 shares of Class A common stock to directors, officers, and other key employees. No options may be granted under this plan for less than the fair market value of the common stock at the date of the grant. Although the exercise period is determined when options are actually granted, an option shall not be exercised later than ten years and one day after it is granted. Stock options granted will terminate if the grantee's employment terminates prior to exercise for reasons other than retirement, death, or disability. Stock options vest over a four-year period pursuant to the terms of the plan, except for stock options granted to a non-employee director, which are immediately vested. Employees and non-employee directors have been granted non-qualified stock options to purchase 96,375 and 32,000 shares, respectively, of Class A common stock, net of cancellations and shares exercised. There are 63,250 options reserved for future issuance. In January 2000, the President and Chief Executive Officer entered into a special stock option plan and agreement with the Company which provides for the granting of options to purchase 120,000 shares of Class A Common Stock in three separate installments. The first installment is for 40,000 shares at an exercise price of $5.625, exercisable 6 months from the date of the agreement. The second installment is for 40,000 shares at an exercise price of $7.625, exercisable 18 months after the date of the agreement. The third installment is for 40,000 shares at an exercise price of $9.625, exercisable 30 months after the date of the agreement. The options granted under this stock option plan and agreement are not granted pursuant to the Incentive Stock Option Plan described above; but they are subject to the same general terms and conditions of the Incentive Stock Option Plan. A summary of the Company's stock option activity and related information follows:
Year Ended December 31 2000 1999 1998 ---- ---- ---- Weighted Weighted Weighted Average Average Average Options Exercise Options Exercise Options Exercise (000) Price (000) Price (000) Price ----- ----- ----- ----- ----- ----- Outstanding at beginning of year 181 $8.23 170 $8.28 167 $8.32 Granted 120 7.63 11 7.52 23 8.11 Exercised -- -- -- -- (7) 8.25 Canceled (53) 7.79 -- -- (13) 8.59 ---- ----- --- ----- ---- ---- Outstanding at end of year 128 $8.42 181 $8.23 170 $8.28 === ===== === ----- === ===== Exercisable at end of year 124 $8.41 149 $8.31 124 $8.42 === ===== === ===== === =====
Exercise prices for options outstanding as of December 31, 2000, ranged from $6.80 to $10.19. The weighted-average remaining contractual life of those options is 4.6 years. The weighted-average fair value of options granted during each year was immaterial. The following pro forma information regarding net income (loss) and net income (loss) per share is required when APB 25 accounting is elected, and was determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123, "Accounting for Stock-Based Compensation." The fair values for these options were estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: dividend yield of 0.1%; expected life of 10 years; expected volatility of .596 in 2000 and .316 in 1999 and .250 in 1998, and a risk-free interest rate of 6.5% in 2000 and 5.0% in 1999 and 6.0% in 1998. For purposes of pro forma disclosures, the estimated fair values of the options are amortized to expense over the option's vesting periods (in thousands except for per share information): 2000 1999 1998 ---- ---- ---- Net (loss) income: As reported ($4,799) $ 19 $ 903 Pro forma ($5,024) (24) 861 Diluted (loss) earnings per share: As reported ($1.96) $0.01 $0.35 Pro forma ($2.05) (0.01) 0.33 During the initial phase-in period, as required by SFAS No. 123, the pro forma amounts were determined based on stock options granted after the 1995 fiscal year only. Therefore, the pro forma amounts for compensation cost may not be indicative of the effects on pro forma net income and pro forma net income per share for future years. The Company has a 401(k) Savings Plan covering substantially all employees, which matches 25% of the employee contributions up to a designated amount. The Company's contributions to the Plan for 2000, 1999 and 1998 were $18,000, $23,000 and $29,000, respectively. 9. TRANSACTIONS WITH LYNCH INTERACTIVE CORPORATION The Company has paid Lynch Interactive Corporation ("Lynch Interactive") an annual service fee of $100,000 for executive, financial and accounting, planning, budgeting, tax, legal, and insurance services. Additionally, Lynch Interactive charges the Company for officers' and directors' liability insurance, which totaled $20,000 in 2000, and $16,000 in 1999 and 1998. The Company's Class A and Class B common stock owned by Lynch Interactive is pledged to secure a Lynch Interactive line of credit. 10. SEGMENT REPORTING Description of Services by Segment The Company operates in four business segments: manufactured housing, driver outsourcing, specialized outsourcing services, and insurance and finance. The manufactured housing segment primarily provides specialized transportation to companies which produce new manufactured homes and modular homes through a network of terminals located in twenty-eight states. The driver outsourcing segment provides outsourcing transportation primarily to manufacturers of recreational vehicles, commercial trucks, and other specialized vehicles through a network of service centers in six states. The specialized outsourcing services segment consists of a large trailer, travel and small trailer delivery and another Specialized Service "Decking" (discontinued in 2000). The last segment, insurance and finance, provides insurance and financing to the Company's drivers and independent owner-operators. This segment also acts as a cost center whereby all property damage and bodily injury and cargo costs are captured. The Company's segments are strategic business units that offer different services and are managed separately based on the differences in these services. The driver outsourcing segment and the specialized outsourcing services were reported as one segment titled "SOS" in 1998. The year of 1998 has been restated to show corresponding segment information. Measurement of Segment (Loss) and Segment Assets The Company evaluates performance and allocates resources based on several factors, of which the primary financial measure is business segment operating income, defined as earnings before interest, taxes, depreciation and amortization (EBITDA). The accounting policies of the segments are the same as those described in the summary of significant accounting policies (See Note 1). There are no significant intersegment revenues.
The following table presents the financial information for the Company's reportable segments for the years ended December 31 (in thousands): 2000 1999 1998 ---- ---- ---- Operating revenues Manufactured Housing $ 70,631 $ 99,491 $ 106,145 Driver Outsourcing 20,939 23,351 19,710 Specialized Outsourcing Services 15,260 21,172 23,064 Insurance and Finance 2,933 3,958 4,072 All Other (3) 148 48 -------- -------- --------- 109,760 148,120 153,039 Total intersegment insurance revenues (1,736) (2,491) (2,585) -------- -------- --------- Total operating revenues $108,024 $145,629 $ 150,454 ======== ======== ========= Segment (loss) profit - EBITDA Manufactured Housing $ 5,784 $ 10,265 $ 10,836 Driver Outsourcing 1,324 416 115 Specialized Outsourcing Services (140) 469 1,011 Insurance and Finance (6,765) (9,058) (8,358) All Other (1,174) (327) (367) -------- -------- --------- (971) 1,765 3,237 Depreciation and amortization (1,067) (1,215) (1,230) Interest expense (310) (338) (545) -------- -------- --------- (Loss) income before taxes $( 2,348) $ 212 $ 1,462 ======== ======== ========= Identifiable assets Manufactured Housing $ 11,255 $ 16,956 $ 18,764 Driver Outsourcing 4,561 5,438 6,055 Specialized Outsourcing Services 2,078 2,724 3,015 Insurance and Finance 1,433 1,801 1,864 All Other (1) 3,942 5,345 3,689 -------- -------- --------- Total $ 23,269 $ 32,264 $ 33,387 ======== ======== =========
(1) All other represents corporate assets comprised of cash, fixed assets and goodwill. A majority of the Company's accounts receivable are due from companies in the manufactured housing, recreational vehicle, and commercial truck and trailer industries located throughout the United States. Services provided to Oakwood Homes Corporation accounted for approximately $22.5 million, $28.8 million and $31.8 million of revenues in 2000, 1999 and 1998, respectively. The Company's gross accounts receivables from Oakwood were 23% and 16% of total receivables at December 31, 2000 and 1999, respectively. In addition, Fleetwood Enterprises, Inc., accounted for approximately $16.9 million, $23.9 million and $26.0 million, of revenues in 2000, 1999 and 1998, respectively. The Company's gross accounts receivables from Fleetwood were 10% and 17% of total receivables at December 31, 2000 and 1999, respectively. 11. OPERATING COSTS AND EXPENSES (in thousands) 2000 1999 1998 ---- ---- ---- Purchased transportation costs $75,411 $ 101,046 $103,820 Operating supplies and expenses 10,826 13,559 14,092 Claims 5,658 8,633 7,698 Insurance 2,733 3,178 3,375 Operating taxes and licenses 4,924 7,358 7,978 ------- --------- -------- $99,552 $ 133,774 $136,963 ======= ========= ======== 12. COMMITMENTS AND CONTINGENCIES The Company is involved in various legal proceedings and claims that have arisen in the normal course of business for which the Company maintains liability insurance covering amounts in excess of its self-insured retention. Management believes that adequate reserves have been established on its self-insured claims and that their ultimate resolution will not have a material adverse effect on the consolidated financial position, liquidity, or operating results of the Company. The Company leases certain land, buildings, computer equipment, computer software, and motor equipment under non-cancelable operating leases that expire in various years through 2005. Several land and building leases contain monthly renewal options. 13. QUARTERLY RESULTS OF OPERATIONS (Unaudited) The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2000 and 1999 (in thousands, except share data):
Three Months Ended March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- 2000 - ---- Operating revenues $27,867 $29,961 $28,164 $ 22,032 Operating income (loss) (898) 113 178 (1,431) Net income (loss) (616) 17 75 (4,275) Net income (loss) per basic and diluted share ($ 0.25) $ 0.01 $ 0.03 ($1.75) 1999 - ---- Operating revenues $35,325 $40,270 $37,312 $ 32,722 Operating income (loss) 325 436 208 (419) Net income (loss) 118 169 34 (302) Net income (loss) per basic and diluted share $ 0.05 $ 0.07 $ 0.01 ($ 0.12)
THE MORGAN GROUP, INC. INDEX TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited) Consolidated Interim Financial Statements (unaudited): Page Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000...............................................F-17 Consolidated Statements of Operations for the Six Months Ended June 30, 2001 and 2000..........................................F-18 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000..........................................F-19 Notes to Consolidated Interim Financial Statements (unaudited)..........F-20 F-16
The Morgan Group, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands, except share amounts) June 30 December 31 2001 2000 ---- ---- ASSETS (Note 1) (Unaudited) Current assets: Cash and cash equivalents $ 932 $ 2,092 Trade accounts receivable, less allowances of $176 in 2001 and $254 in 2000 9,555 7,748 Accounts receivable, other 352 133 Refundable taxes 721 499 Prepaid expenses and other current assets 1,566 1,147 Deferred income taxes 319 319 ------- ------- Total current assets 13,445 11,938 ------- ------- Property and equipment, net 3,574 3,688 Goodwill and other intangibles, net 6,495 6,727 Deferred income taxes 282 282 Other assets 215 634 ------- ------- Total assets $24,011 $23,269 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 3,776 $ 2,373 Accrued liabilities 3,186 3,704 Accrued claims payable 4,158 3,224 Refundable deposits 1,183 1,357 Current portion of long-term debt and capital lease obligations 173 217 ------- ------- Total current liabilities 12,476 10,875 ------- ------- Long-term debt and capital lease obligations, less current portion 31 71 Long-term accrued claims payable 4,199 5,122 Commitments and contingencies -- -- Shareholders' equity: Common stock, $.015 par value Class A: Authorized shares - 7,500,000 Issued shares - 1,607,303 23 23 Class B: Authorized shares - 2,500,000 Issued and outstanding shares - 1,200,000 18 18 Additional paid-in capital 12,459 12,459 Retained earnings (2,012) (2,116) Less - treasury stock at cost (359,146 Class A shares) (3,183) (3,183) -------- -------- Total shareholders' equity 7,305 7,201 ------- ------- Total liabilities and shareholders' equity $24,011 $23,269 ======= =======
See notes to interim consolidated financial statements
The Morgan Group, Inc. and Subsidiaries Consolidated Statements of Operations (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended June 30 June 30 2001 2000 2001 2000 ---- ---- ---- ---- Operating revenues $25,432 $30,432 $46,120 $58,818 Costs and expenses: Operating costs 22,761 27,758 41,640 54,390 Selling, general and administration 2,023 2,273 4,080 4,632 Depreciation and amortization 250 288 477 581 ------- ------- ------- ------- 25,034 30,319 46,197 59,603 Operating income (loss) 398 113 (77) (785) Interest expense, net 27 76 93 133 ------- ------- ------- ------- Income (loss) before income taxes 371 37 (170) (918) Income tax expense (benefit) (255) 20 (255) (319) ------- ------- ------- ------- Net income (loss) $626 $ 17 $ 85 $(599) ======= ======= ======= ======= Net income (loss) per common share: Basic $0.26 $0.01 $0.03 $(0.24) ======= ======= ======= ======= Diluted $0.26 $0.01 $0.03 $(0.24) ======= ======= ======= ======= Weighted average shares outstanding (thousands) Basic 2,448 2,448 2,448 2,448 ======= ======= ======= ======= Diluted 2,448 2,453 2,448 2,453 ======= ======= ======= ======= Cash dividends declared per common share Class A: $ 0.00 $ 0.02 $ 0.00 $ 0.04 ======= ======= ======= ======= Class B: $ 0.00 $ 0.01 $ 0.00 $ 0.02 ======= ======= ======= =======
See notes to interim consolidated financial statements
The Morgan Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited) Three Months Ended Six Months Ended June 30 June 30 2001 2000 2001 2000 ------------ ------------ ---------- ---------- Operating activities: Net income (loss) $ 626 $ 17 $ 85 $( 599) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 250 288 477 581 Loss on disposal of property and equipment - 19 3 41 Changes in operating assets and liabilities: Trade accounts receivable (1,729) (1,251) (1,807) (1,733) Other accounts receivable (225) (252) (219) (47) Refundable taxes (199) --- (203) - Prepaid expenses and other current assets (367) 220 (419) 126 Other assets 167 (52) 419 66 Trade accounts payable 236 (154) 1,403 34 Accrued liabilities 263 390 (518) 93 Income taxes payable -- (3) - (584) Accrued claims payable 537 (45) 11 57 Refundable deposits 91 186 (174) (155) ------- ------- ------- ------- Net cash used in operating activities (350) (637) (942) (2,120) Investing activities: Purchases of property and equipment (12) (26) (89) (103) Other - 2 (10) 2 ------- ------- ------- ------- Net cash used in investing activities (12) (24) (99) (101) Financing activities: Principal payments on long-term debt (77) (116) (119) (203) Common stock dividends paid - (37) - (74) ------- ------- ------- ------- Net cash used in financing activities (77) (153) (119) (277) ------- ------- ------- ------- Net decrease in cash and equivalents (439) (814) (1,160) (2,498) Cash & cash equivalents at beginning of period 1,371 2,163 2,092 3,847 ------- ------- ------- ------- Cash and cash equivalents at end of period $932 $1,349 $932 $1,349 ======= ======= ======= =======
See notes to interim consolidated financial statements. The Morgan Group, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) June 30, 2001 Note 1. Basis of Presentation The accompanying consolidated interim financial statements have been prepared by The Morgan Group, Inc. and Subsidiaries (the "Company"), in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included for complete financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated interim financial statements should be read in conjunction with the financial statements, notes thereto and other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Net income per common share ("EPS") is computed using the weighted average number of common shares outstanding during the period. Since each share of Class B common stock is freely convertible into one share of Class A common stock, the total of the weighted average number of shares for both classes of common stock is considered in the computation of EPS. The accompanying unaudited consolidated interim financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair presentation, in all material respects, of the financial position and results of operations for the periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. The consolidated financial statements include the accounts of the Company and its subsidiaries, Morgan Drive Away, Inc., TDI, Inc., Interstate Indemnity Company, and Morgan Finance, Inc., all of which are wholly owned. Significant intercompany accounts and transactions have been eliminated in consolidation. Certain 2000 amounts have been reclassified to conform to the 2001 presentation. Note 2. Subsequent Events Long Term Debt On July 27, 2001, the Company obtained a new three-year $12.5 million credit facility with GMAC Commercial Credit LLC. The GMAC Credit Facility replaces the Company's previous credit line that had expired on January 28, 2001 and was not renewed. The GMAC Credit Facility will be used for working capital purposes and to post letters of credit for insurance contracts. At this time, the company has no outstanding debt and $7.6 million outstanding letters of credit. Borrowings will bear interest at a rate per annum equal to either Bank of New York Alternate Base Rate ("ABR") plus one-half percent or, at the option of Company, absent an event of default, the one month London Interbank Offered Rate ("LIBOR") as published in The Wall Street Journal, averaged monthly, plus three percent. Borrowings and posted letters of credit on the GMAC Credit Facility are limited to a borrowing base calculation that includes 85% of eligible receivables and 95% of eligible investments, and are subject to certain financial covenants including minimum tangible net worth, maximum funded debt, minimum fixed interest coverage and maximum capital expenditures. The facility is secured by accounts receivable, investments, inventory, equipment and general intangibles. The facility may be prepaid anytime with prepayment being subject to a 3%, .75% and .25% prepayment penalty during year 1, 2 and 3, respectively. The prior Credit Facility matured on January 28, 2001, at which time the Company had no outstanding debt and $6.6 million outstanding letters of credit. The Company was in default of the financial covenants, resulting in the bank failing to renew the Credit Facility. As a result of the Credit Facility not being renewed, the Company had a payment default. Short Term Debt On July 31, 2001, the Company closed on a new real estate mortgage for $500,000 that is secured by the Company's land and buildings in Elkhart, Indiana. The loan will be used for short-term working capital purposes. The mortgage bears interest at prime rate plus 0.75%, and is for a six-month term with outstanding principal due on February 1, 2002. The loan may be prepaid at any time with no penalties, and is subject to the same covenants as the GMAC Credit Facility. The Company's application for additional capacity under this facility is under consideration. Equity On July 12, 2001, the Company completed a previously announced $2 million capital infusion from its majority stockholder Lynch Interactive Corporation. Morgan issued one million new Class B shares of common stock in exchange for a $2 million cash investment, thereby increasing Lynch's ownership position in the Company from 55.6% to 68.5%. The proceeds from the transaction are invested in U.S. Treasury backed instruments and are pledged as collateral for the GMAC Credit Facility. Note 3.Income Taxes In assessing the realization of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which the temporary differences become deductible. A valuation allowance of $3.2 million was recorded in 2000 to reduce the deferred tax assets, as the Company has experienced cumulative losses for financial reporting for the last three years. Management considered, in reaching the conclusion on the required valuation allowance, given the cumulative losses, that it would be inconsistent with applicable accounting rules to rely on future taxable income to support full realization of the deferred tax assets. Accordingly, the remaining deferred tax assets relate to federal income tax carry backs available to the Company. Note 4. Segment Reporting Description of Services by Segment The Company operates in four business segments: Manufactured Housing, Driver Outsourcing, Specialized Outsourcing Services, and Insurance and Finance. The Manufactured Housing segment primarily provides specialized transportation to companies, which produce new manufactured homes and modular homes through a network of terminals located in twenty-eight states. The Driver Outsourcing segment provides outsourcing transportation primarily to manufacturers of recreational vehicles, commercial trucks, and other specialized vehicles through a network of service centers in six states. The Specialized Outsourcing Services segment consists of large trailer, travel and small trailer delivery. The last segment, Insurance and Finance, provides insurance and financing to the Company's drivers and independent owner-operators. This segment also acts as a cost center whereby all property damage, bodily injury and cargo costs are captured. The Company's segments are strategic business units that offer different services and are managed separately based on the differences in these services. Measurement of Segment Income (Loss) The Company evaluates performance and allocates resources based on several factors, of which the primary financial measure is business segment operating income, defined as earnings before interest, taxes, depreciation and amortization (EBITDA). The accounting policies of the segments are the same as those described in the Company's Annual Report on Form 10-K. The following table presents the financial information for the Company's reportable segments for the three and six-month periods ended June 30, (in thousands):
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Operating revenues Manufactured Housing $14,103 $19,995 $ 25,464 $38,201 Driver Outsourcing 4,695 5,820 9,227 11,431 Specialized Outsourcing Services 5,968 3,883 10,103 7,640 Insurance and Finance 666 734 1,326 1,549 All Other - - - (3) ------- ------- ------- -------- Total operating revenues $25,432 $30,432 $46,120 $58,818 ======= ======= ======= ======= Segment profit (loss) - EBITDA Manufactured Housing $ 1,626 $ 1,896 $ 2,120 $ 3,638 Driver Outsourcing 406 436 720 906 Specialized Outsourcing Services 304 24 347 (119) Insurance and Finance (1,400) (1,703) (2,133) (3,964) All Other (288) (252) (654) (665) -------- -------- -------- -------- 648 401 400 (204) Depreciation and amortization (250) (288) (477) (581) Interest expense (27) (76) (93) (133) -------- -------- -------- -------- Income (loss) before taxes $ 371 $ 37 $ (170) $ (918) ======= ======= ======== ========
Note 5. Pending Accounting Pronouncements In July, 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations (Statement 141), and No. 142, Goodwill and Other Intangible Assets (Statement 142). These Statements change the accounting for business combinations, goodwill, and intangible assets. Statement 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. Statement 141 further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of Statement 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. Under Statement 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives, but with no maximum life. The amortization provisions of Statement 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt Statement 142 in their fiscal year beginning after December 15, 2001. Because of the different transition dates for goodwill and intangible assets acquired on or before June 30, 2001 and those acquired after that date, pre-existing goodwill and intangibles will be amortized during this transition period until adoption whereas new goodwill and indefinite lived intangible assets acquired after June 30, 2001 will not. The Company is required to and will adopt Statements 141 and 142 in the third quarter of 2001 except with respect to the provisions of Statement 142 relating to goodwill and intangibles acquired prior to July 1, 2001 that will be adopted in the first quarter of 2002. Management is evaluating Statements 141 and 142 and believes that the adoptions will not have a significant effect on its consolidated results of operations or financial position. 1,248,157 SHARES OF CLASS A COMMON STOCK [MG LOGO] ISSUABLE UPON EXERCISE OF WARRANTS ------------------------- PROSPECTUS ------------------------- ________________, 2001 - -------------------------------------------------------------------------------- You may rely on the information contained in this prospectus. The Morgan Group, Inc. has not authorized anyone to provide prospective investors with different or additional information. This prospectus is not an offer to sell nor is it seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is correct only as of the date of this prospectus, regardless of the time of the delivery of this prospectus or any sale of these securities. - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses payable by us in connection with the sale and distribution of the securities being registered. All of the amounts shown are estimated except the Securities and Exchange Commission registration fee. Registration Fee ...............................................$ 2,808.35 Printing, Engraving and Mailing ................................ 10,000.00 Legal Fees ..................................................... 90,000.00 Accounting Fees ................................................ 40,000.00 Fees of Warrant Agent .......................................... 15,000.00 Miscellaneous Fees ............................................. 25,000.00 ------------- Total..................................................$ 182,808.35 ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. INDEMNIFICATION Section 145(a) of the General Corporation Law of Delaware (the "DGCL") empowers a corporation to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, employee or agent of the corporation or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no cause to believe his conduct was unlawful. Subsection 145(b) of the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted under similar standards, except that no indemnification may be made in respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine that despite the adjudication of liability such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 further provides that to the extent a director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to in subsections (a) and (b) or in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith, and that indemnification provided for by Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled. It empowers the corporation to purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him or incurred by him in any such capacity or arising out of his status as such whether or not the corporation would have the power to indemnify him against such liabilities under Section 145. Our Restated Certificate of Incorporation provides that we shall indemnify and hold harmless any person who was or is made a party, or is threatened to be made a party, or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (the "Action"), by reason of the fact that he or she is or was a director or officer of ours, or is or was serving or has agreed to serve at our request as a director, officer, employee or agent of another entity, to the fullest extent authorized by the DGCL. In addition, we maintain directors' and officers' liability insurance to protect us against specified liabilities and acts where corporate reimbursement is required. ITEM 16. EXHIBITS. Exhibit No. Description - ----------- --------------------------------------------------------------- 3.1 Registrant's Restated Certificate of Incorporation, as amended.* 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 Restated Certificate of Incorporation, contained in the Registrant's Restated Certificate of Incorporation, as amended, filed as Exhibit 3.1 herewith. 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 Revolving Credit and Term Loan Agreement, dated January 28, 1999, among the Registrant and Subsidiaries and Bank Boston, N.A., is incorporated by reference to Exhibit 4(1) to the Registrant's Current Report on Form 8-K filed February 12, 1999. 4.5 Guaranty, dated January 28, 1999, among the Registrant and Subsidiaries and BankBoston, N.A. is incorporated by reference to Exhibit 4(2) to the Registrant's Current Report on Form 8-K filed February 12, 1999. 4.6 Security Agreement, dated January 28, 1999, among the Registrant and Subsidiaries and BankBoston, N.A. is incorporated by reference to Exhibit 4(3) to the Registrant's Current Report on Form 8-K filed February 12, 1999. 4.7 Stock Pledge Agreement, dated January 28, 1999, among the Registrant and Subsidiaries and BankBoston, N.A. is incorporated by reference to Exhibit 4(4) to the Registrant's Current Report on Form 8-K filed February 12, 1999. 4.8 Revolving Credit Note, dated January 28, 1999, among the Registrant and Subsidiaries and BankBoston, N.A. is incorporated by reference to Exhibit 4(5) to the Registrant's Current Report on Form 8-K filed February 12,1999. 4.9 Amendment Agreement No. 1 to that Certain Revolving Credit Agreement and Term Loan Agreement among the Registrant and its Subsidiaries and BankBoston dated as of March 31, 2000, is incorporated by reference to Exhibit 4.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000. 4.10 Amendment Agreement No. 2 to that Certain Revolving Credit Agreement and Term Loan Agreement among the Registrant and its Subsidiaries and BankBoston dated as of November 10, 2000, is incorporated by reference to Exhibit 4.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000. 4.11 Form of Class A Warrant Certificate.* 4.12 Form of Warrant Services Agreement between the Registrant and American Stock Transfer and Trust Company.* 4.13 Revolving Credit and Security Agreement, dated July 27, 2001, among GMAC Commercial Credit LLC, Morgan Drive Away, Inc. and TDI, Inc., is incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001, filed August 14, 2001. 4.14 Guaranty, dated July 27, 2001, between Registrant and GMAC Commercial Credit LLC, is incorporated by reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001, filed August 14, 2001. 4.15 Mortgage, dated July 31, 2001, between Morgan Drive Away, Inc. and Old Kent Bank, is incorporated by reference to Exhibit 4.3 to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001, filed August 14, 2001. 4.16 Guaranty, dated July 31, 2001, between Registrant and Old Kent Bank, is incorporated by reference to Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001, filed August 14, 2001. 5 Opinion of Barnes & Thornburg.* 10.1 The Morgan Group, Inc. Incentive Stock Plan is incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.2 First Amendment to the Morgan Group, Inc. Incentive Stock Plan is incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1997, filed November 14, 1997. 10.3 Memorandum to Charles Baum and Philip Ringo from Lynch Corporation, dated December 8, 1992, respecting Bonus Pool, is incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.4 Term Life Policy from Northwestern Mutual Life Insurance Company insuring Paul D. Borghesani, dated August 1, 1991, is incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.5 Long Term Disability Insurance Policy from Northwestern Mutual Life Insurance Company, dated March 1, 1990, is incorporated by reference to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.6 Long Term Disability Insurance Policy from CNA Insurance Companies, effective January 1, 1998 is incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, filed March 31, 1998. 10.7 The Morgan Group, Inc. Employee Stock Purchase Plan, as amended, is incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, filed on March 30, 1995. 10.8 Consulting Agreement between Morgan Drive Away, Inc. and Paul D. Borghesani, effective as of April 1, 1996, is incorporated by reference to Exhibit 10.19 the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed on April 1, 1996. 10.9 Employment Agreement, dated January 12, 2000 between Registrant and Anthony T. Castor, III is incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999. 10.10 Non-Qualified Stock Option Plan and Agreement, dated January 11, 2000, between Registrant and Anthony T. Castor, III is incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999. 10.11 Management Agreement between Skandia International and Risk Management (Vermont), Inc. and Interstate Indemnity Company, dated December 15, 1992, is incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.12 Agreement for the Allocation of Income Tax Liability between Lynch Corporation and its Consolidated Subsidiaries, including the Registrant (formerly Lynch Services Corporation), dated December 13, 1988, as amended, is incorporated by reference to Exhibit 10.13 the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.13 Certain Services Agreement, dated January 1, 1995, between Lynch Corporation and the Registrant is incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, filed on March 30, 1995. 23.1 Consent of Ernst & Young LLP.* 23.2 Consent of Barnes & Thornburg (contained in Exhibit 5 filed herewith).* 99.1 Form of Letter To Class A Stockholders of Record.* 99.2 Form of Letter from Brokers or Other Nominees to Beneficial Owners of Class A Common Stock.* 99.3 Form of Instructions by Beneficial Owners to Brokers or Other Nominees.* 99.4 Form of Instructions As to Use of Warrant Certificates.* - --------------------- *Filed herewith. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) (ss. 230.424(b) of this chapter) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; Provided, however, That paragraphs (a)(1)(i) and (a)(1)(ii) of this section do not apply if the registration statement is on Form S-3 (ss. 239.13 of this chapter), Form S-8 (ss. 239.16b of this chapter) or Form F-3 (ss. 239.33 of this chapter), and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post- effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Amendment No. 1 to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Elkhart, State of Indiana, on August 15, 2001. THE MORGAN GROUP, INC. By: /s/ Anthony T. Castor, III ------------------------------------- Anthony T. Castor, III President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Anthony T. Castor, III Director, President August 15, 2001 - ------------------------------- and Chief Executive Officer Anthony T. Castor, III (Principal Executive Officer) /s/ Gary J. Klusman Executive Vice President August 15, 2001 - ------------------------------- of Finance and Administration Gary J. Klusman (Chief Financial and Accounting Officer) /s/ Charles C. Baum* Chairman of the Board August 15, 2001 - ------------------------------- Charles C. Baum /s/ Richard B. Black* Director August 15, 2001 - ------------------------------- Richard B. Black /s/ Richard L. Haydon* Director August 15, 2001 - ------------------------------- Richard L. Haydon /s/ Robert S. Prather, Jr.* Director August 15, 2001 - ------------------------------- Robert S. Prather, Jr. *By: /s/ Gary J. Klusman --------------------------------- Gary J. Klusman, Attorney-in-Fact EXHIBIT INDEX Exhibit No. Description - ----------- --------------------------------------------------------------- 3.1 Registrant's Restated Certificate of Incorporation, as amended.* 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 Restated Certificate of Incorporation, contained in the Registrant's Restated Certificate of Incorporation, as amended, filed as Exhibit 3.1 herewith. 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 Revolving Credit and Term Loan Agreement, dated January 28, 1999, among the Registrant and Subsidiaries and Bank Boston, N.A., is incorporated by reference to Exhibit 4(1) to the Registrant's Current Report on Form 8-K filed February 12, 1999. 4.5 Guaranty, dated January 28, 1999, among the Registrant and Subsidiaries and BankBoston, N.A. is incorporated by reference to Exhibit 4(2) to the Registrant's Current Report on Form 8-K filed February 12, 1999. 4.6 Security Agreement, dated January 28, 1999, among the Registrant and Subsidiaries and BankBoston, N.A. is incorporated by reference to Exhibit 4(3) to the Registrant's Current Report on Form 8-K filed February 12, 1999. 4.7 Stock Pledge Agreement, dated January 28, 1999, among the Registrant and Subsidiaries and BankBoston, N.A. is incorporated by reference to Exhibit 4(4) to the Registrant's Current Report on Form 8-K filed February 12, 1999. 4.8 Revolving Credit Note, dated January 28, 1999, among the Registrant and Subsidiaries and BankBoston, N.A. is incorporated by reference to Exhibit 4(5) to the Registrant's Current Report on Form 8-K filed February 12,1999. 4.9 Amendment Agreement No. 1 to that Certain Revolving Credit Agreement and Term Loan Agreement among the Registrant and its Subsidiaries and BankBoston dated as of March 31, 2000, is incorporated by reference to Exhibit 4.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000. 4.10 Amendment Agreement No. 2 to that Certain Revolving Credit Agreement and Term Loan Agreement among the Registrant and its Subsidiaries and BankBoston dated as of November 10, 2000, is incorporated by reference to Exhibit 4.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000. 4.11 Form of Class A Warrant Certificate.* 4.12 Form of Warrant Services Agreement between the Registrant and American Stock Transfer and Trust Company.* 4.13 Revolving Credit and Security Agreement, dated July 27, 2001, among GMAC Commercial Credit LLC, Morgan Drive Away, Inc. and TDI, Inc., is incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001, filed August 14, 2001. 4.14 Guaranty, dated July 27, 2001, between Registrant and GMAC Commercial Credit LLC, is incorporated by reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001, filed August 14, 2001. 4.15 Mortgage, dated July 31, 2001, between Morgan Drive Away, Inc. and Old Kent Bank, is incorporated by reference to Exhibit 4.3 to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001, filed August 14, 2001. 4.16 Guaranty, dated July 31, 2001, between Registrant and Old Kent Bank, is incorporated by reference to Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001, filed August 14, 2001. 5 Opinion of Barnes & Thornburg.* 10.1 The Morgan Group, Inc. Incentive Stock Plan is incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.2 First Amendment to the Morgan Group, Inc. Incentive Stock Plan is incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1997, filed November 14, 1997. 10.3 Memorandum to Charles Baum and Philip Ringo from Lynch Corporation, dated December 8, 1992, respecting Bonus Pool, is incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.4 Term Life Policy from Northwestern Mutual Life Insurance Company insuring Paul D. Borghesani, dated August 1, 1991, is incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.5 Long Term Disability Insurance Policy from Northwestern Mutual Life Insurance Company, dated March 1, 1990, is incorporated by reference to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.6 Long Term Disability Insurance Policy from CNA Insurance Companies, effective January 1, 1998 is incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, filed March 31, 1998. 10.7 The Morgan Group, Inc. Employee Stock Purchase Plan, as amended, is incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, filed on March 30, 1995. 10.8 Consulting Agreement between Morgan Drive Away, Inc. and Paul D. Borghesani, effective as of April 1, 1996, is incorporated by reference to Exhibit 10.19 the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed on April 1, 1996. 10.9 Employment Agreement, dated January 12, 2000 between Registrant and Anthony T. Castor, III is incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999. 10.10 Non-Qualified Stock Option Plan and Agreement, dated January 11, 2000, between Registrant and Anthony T. Castor, III is incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999. 10.11 Management Agreement between Skandia International and Risk Management (Vermont), Inc. and Interstate Indemnity Company, dated December 15, 1992, is incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.12 Agreement for the Allocation of Income Tax Liability between Lynch Corporation and its Consolidated Subsidiaries, including the Registrant (formerly Lynch Services Corporation), dated December 13, 1988, as amended, is incorporated by reference to Exhibit 10.13 the Registrant's Registration Statement on Form S-1, File No. 33-641-22, effective July 22, 1993. 10.13 Certain Services Agreement, dated January 1, 1995, between Lynch Corporation and the Registrant is incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, filed on March 30, 1995. 23.1 Consent of Ernst & Young LLP.* 23.2 Consent of Barnes & Thornburg (contained in Exhibit 5 filed herewith).* 99.1 Form of Letter To Class A Stockholders of Record.* 99.2 Form of Letter from Brokers or Other Nominees to Beneficial Owners of Class A Common Stock.* 99.3 Form of Instructions by Beneficial Owners to Brokers or Other Nominees.* 99.4 Form of Instructions As To Use of Warrant Certificates.* - --------------------- *Filed herewith. EX-3.1 3 ex_s2a.txt RESTATED CERTIFICATE OF INCORPORATION Exhibit 3.1 ----------- RESTATED CERTIFICATE OF INCORPORATION OF LYNCH SERVICES CORPORATION Lynch Services Corporation (the "Corporation"), a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the Corporation is Lynch Services Corporation. The date of filing of its original Certificate of Incorporation with the Secretary of State was June 15, 1988. 2. This Restated Certificate of Incorporation restates, integrates and further amends the Certificate of Incorporation of the Corporation to read as herein set forth in full: FIRST: The name of the Corporation is Lynch Services Corporation. SECOND: The address of the Corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address in The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The aggregate number of shares of all classes of capital stock which the Corporation shall have the authority to issue is 4,600,000 shares of capital stock, divided into two classes, of which 2,100,000 shares shall be Preferred Stock, par value $0.01 per share, and 2,500,000 shares shall be Common Stock, par value $0.01 per share. Preferred Stock. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Corporation is hereby expressly authorized to provide, by resolution or resolutions duly adopted by it prior to issuance, for the creation of each such series and to fix the designation and the powers, preferences, rights, qualifications, limitations and restrictions relating to the shares of each such series. The authority of the Board of Directors with respect to each series of Preferred Stock shall include, but not be limited to, determining the following: (a) the designation of such series, the number of shares to constitute such series and the stated value if different from the par value thereof; (b) whether the shares of such series shall have voting rights, in addition to any voting rights provided by law, and, if do, the terms of such voting rights, which may be general or limited; (c) the dividends, if any, payable an such series, whether any such dividends shall be cumulative, and, if so, from what dates the conditions and dates upon which such dividends shall be payable, and the preference or relation which such dividends shall bear to the dividends payable on any shares of stock of any other class or any other class or any other series of Preferred Stock; d. whether the shares of such series shall be subject to redemption by the Corporation, and, if so, the times, prices and other conditions of such redemption; e. the amount or amounts payable upon shares of such series upon, and the rights of the holders of such series in, the voluntary or involuntary liquidation, dissolution or winding up, or upon any distribution of the assets, of the Corporation; f. whether the shares of such series shall be subject to the operation of a retirement or sinking fund and, if so, the extent to and the manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or other corporate purposes and the terms and provisions relating to the operation thereof; g. whether the shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or any other series of Preferred Stock or any other securities and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of conversion or exchange: h. the limitations and restrictions, if any, to be effective while any shares of such series are outstanding upon the payment of dividends or the making of other distributions on, and upon the purchase, redemption or other acquisition by the Corporation of, the Common Stock or shares of stock of any other class or any other series of Preferred Stock; i. the conditions or restrictions, if any, upon the creation of indebtedness of the Corporation or upon the issue of any additional stock, including additional shares of such series or of any other series of Preferred stock or of any other class; and -2- j. any other powers, preferences and relative, participating, optional and other special rights, and any qualifications, limitations and restrictions, thereof. The powers, preferences and relative, participating, optional and other special rights of each series of Preferred Stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. All shares of any one series of Preferred Stock shall be identical in all respects with all other shares of such series, except that shares of any one series issued at different times may differ as to the dates from which dividends thereof, shall be cumulative. Common Stock. Subject to the preferential rights, if any, of the Preferred Stock, the powers, preferences and rights of the shares of the common Stock, and the qualifications, limitations or restrictions thereof, are an follows: 1. Dividends Following the preference distribution of dividends to holders of outstanding shares of Preferred Stock, the record holders of shares of Common Stock shall be entitled to receive on a pro rata such dividends and distributions, payable in cash or otherwise, when and as may be declared thereon by the Board of Directors from time to time out of the assets or funds of the Corporation legally available therefor. 2. Liquidation In the event of a liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, following the payment of all indebtedness and any applicable preferential distribution to the holders of the outstanding shares of Preferred Stock, holders of Common Stock shall receive on a pro rata basis the remaining available assets of the Corporation available for distribution. 3. Voting Rights Each record holder of shares of Common Stock shall have one (1) vote for each such share held of record in his or her name on the stock transfer records of the Corporation. 4. Pre-Emptive Rights. The holders of Common Stock shall have no pre-emptive rights. -3- FIFTH: The Board of Directors is expressly authorized to adopt, amend, or repeal the By-laws of the Corporation. SIXTH: Elections of directors need not be by written ballot unless the By-laws of the Corporation shall otherwise provide. SEVENTH: A director of the corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director; provided, however, that the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or emissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of Delaware is hereafter amended to permit further elimination or limitation of the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of Delaware as so amended. Any repeal or modification of this Article Seventh by the stockholders of the Corporation or otherwise shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. EIGHTH: The Corporation reserves the right to amend, alter, change, or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders heroin are granted subject to this reservation. This Restated Certificate of Incorporation was duly adopted by unanimous written consent of the stockholders in accordance with the applicable provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Lynch Services Corporation has caused this certificate to be signed by Paul J. Evanson, its Chairman, and attested to by Daniel E. Miller, its Secretary, this 13th day of August, 1992. ATTEST: LYNCH SERVICES CORPORATION By: /s/ Daniel E. Miller By: /s/ Paul J. Evanson ----------------------- ------------------------- Daniel E. Miller Paul J. Evanson Secretary Chairman -4- CERTIFICATE OF DESIGNATIONS, RIGHTS AND PREFERENCES OF SERIES A PREFERRED STOCK (Pursuant to Section 151(q) of the General Corporation Law of the State of Delaware) We, the undersigned duly authorized officers of LYNCH SERVICES CORPORATION, a corporation organized and existing under the laws of the State of Delaware, do hereby certify that: A. LYNCH SERVICES CORPORATION (the "Corporation") was incorporated in the State of Delaware on June 15, 1988. B. Pursuant to authority conferred upon the Board of Directors pursuant to the Restated Certificate of Incorporation of the Corporation and the provisions of Sections 141 and 151 of the General Corporation Law of the State of Delaware, the Board of Directors has duly adopted the following recitals and resolutions, which are still in full force and effect and are not in conflict with any provisions of the Corporation's Restated Certificate of Incorporation or its By-Laws, an amended, setting forth the number, terms, designation, relative rights, preferences and limitations of a series of the Preferred Stock, $.01 par value per share, of the Corporation: WHEREAS, the Restated Certificate of incorporation of the Corporation provides for a class of shares known an Preferred Stock, consisting of 2,100,000 shares; and WHEREAS, said Restated Certificate of Incorporation authorizes issuance of the Preferred Stock from time to time in on* or more series and authorizes the Board of Directors to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, to fix the number of shares constituting any such series, and to determine the designation thereof, or any of them; and WHEREAS, the Corporation has not issued any shares of such Preferred Stock and the Board of Directors of the Corporation desires, pursuant to its authority as aforesaid, to determine and fix the rights, preferences, privileges, and restrictions relating to the initial series of said Preferred Stock and the number of shares constituting, and the designation of, said series: NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby fixes and determines the designation of, the number of shares constituting, and the rights, preferences, privileges, and restrictions relating to, said initial series of Preferred Stock as follows; 1. Designation. 1,600,000 shares of Preferred Stock are hereby designated "Series A Preferred Stock" (hereinafter referred to as the "Series A Preferred Stock") with the rights, preferences, privileges and restrictions specified herein. 2. Voting Rights. Except as may be provided under applicable law, the holders of the Series A Preferred Stock, as such, shall not be entitled to notice of any stockholders' meeting or to vote upon the election of directors or upon any other matter. 3. Dividends. (a) The holders of shares of Series A Preferred Stock shall be entitled to receive dividends an the shares of Series A Preferred Stork held by them, on the terms and conditions hereinafter set forth when and as declared by the Board of Directors out of funds legally available therefore Dividends shall be payable semi-annually in arrears beginning January 15, 1993, by the issuance of additional shares of Series A Preferred Stock (the "Additional Shares") , at an annual rate of six Additional Shares, for each one hundred shares owned by such holder immediately prior to the date of such dividend, until the earlier of (i) the consummation of an initial public offering registered under the Securities Act of 1933 of the common stock of the Corporation (an "IPO") and (ii) July 15, 1994 (such date shall hereinafter be referred to as the "Dividend Conversion Date"). From and after the Dividend Conversion Date, holders of shares of Series A Preferred Stock shall be entitled to receive cash dividends at an annual rate equal to $.16 per share, payable semi-annually in arrears beginning an such date exactly six months following the Dividend Conversion Date. All such dividends shall be cumulative and shall accrue continuously from day to day, whether or not earned or declared. (b) Any Additional Shares issued shall be subject to the terms, provisions and conditions of this certificate of Designation. (c) No dividends or other distributions, other than dividends payable solely in shares of common stock or other capital stock of the Corporation ranking junior as to dividends or rights upon dissolution or liquidation to the Series A Preferred Stock (the "Junior Dividend Stock"), shall be paid or set apart for payment on, and no purchase, redemption or other acquisition shall be made by the corporation of, any shares of common stock or Junior Dividend Stock unless and until all accrued dividends on the Series A Preferred stock shall have been paid or met apart for payment. -2- (d) Any reference to "distribution" contained in this Section 3 shall not be doomed to include any stock dividend or distributions made in connection with any liquidation, dissolution or winding-up of the corporation, whether voluntary or involuntary. 4. Liquidation Preference. In the event of a liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the holders of Series A Preferred Stock shall be entitled to receive out of the available assets of the Corporation, whether such assets are stated capital or surplus of any nature, an amount equal to all dividends (whether or not declared) accrued and unpaid thereon as of the date of final distribution to such holders, without interest, and a sum equal to $2.00 per share, before any payment shall be made or any assets distributed to the holders of Common Stock or any other class or series of the Corporation's capital stock ranking junior as to liquidation rights of the Series A Preferred Stock (the "Junior Liquidation Stock") now or hereafter outstanding; provided, however, that, such rights shall accrue to the holders of Series A Preferred Stock only in the event that the Corporation's payments with respect to the liquidation preferences of any holders of capital stock of the Corporation ranking senior as to liquidation rights to the Series A Preferred Stock (the "Senior Liquidation Stock") are fully met. The entire assets of the Corporation available for distribution after the liquidation preferences of the Senior Liquidation Stock have been fully met shall be distributed ratably among the holders of the Series A Preferred Stock and any other class or series of the Corporation's capital stock which may hereafter be created having parity as to liquidation rights with the Series A Preferred Stock in proportion to the respective preferential amounts to which each is entitled. Neither a consolidation or merger of the Corporation with another corporation nor a sale or transfer of all or part of the Corporation's assets for cash, securities or other property will be considered a liquidation, dissolution or winding-up of the Corporation. 5. Redemption at Option of Corporation. The Corporation may not redeem shares of the Series A Preferred Stock prior to September 16, 1997. The Corporation shall have the right and option, if funds are legally available therefor, to redeem any or all of the outstanding shares of Series A Preferred Stock, on a data set by the Board of Directors any time after September 16, 1997, at a price per share of $2.00, plus the per share amount of all accrued but unpaid dividends an the Series A Preferred Stock (whether or not declared) to the date of redemption (the "Redemption Price"). If the Company redeem less than all of the shares of Series A Preferred Stock, such redemption shall be completed on a pro rate basis in accordance with the number of shares of Series A Preferred Stock owned by the holder immediately prior to such redemption. -3- 6. Exchange at Option of the Corporation. The Series A Preferred Stock in exchangeable at the option of the Corporation in wholes but not in part, at any time upon or after the consummation of an IPO, for a promissory note (or notes) of the Corporation (the "Note') in an aggregate principal amount equal to $2.00 per share, plus all accrued but unpaid dividends on the Series A Preferred stock (whether or not declared) to the date of exchange (the "Exchange"). Such Note shall accrue and pay interest at the annual rate of ton percent, payable quarterly in arrears. The Note shall mature and the unpaid principal thereof and accrued but unpaid interact thereon shall become due and payable on the third anniversary of the issuance of the Note in the Exchange. The indebtedness represented by the Note and the payment of the principal of and interest on the Note shall be expressly made subordinate to any indebtedness whatsoever of the Corporation, whether outstanding an the date hereof or hereafter created, incurred or assumed, to any bank, insurance company or other lending or financial institution, to the extent the instrument creating or evidencing the same provides that such indebtedness is superior in right to the Note. In addition to any events described in the Note, the following events shall constitute a default under the Note (all as more fully described in the Note) : (i) the failure by the Corporation to pay when due any interest an the Note; (ii) the failure by the Corporation to pay when due the principal amount of the Note; or (iii) the bankruptcy or insolvency of the Corporation. Whenever there is a default under the Note, the holder thereof may, at its option, declare the amounts due under the Note immediately due and payable and exercise any or all rights available to it thereunder or under applicable law. 7. Redemption at Option of Holder. Each holder of Series A Preferred Stock may, at such holder's option, require the Corporation to redeem any or all of the shares of Series A Preferred Stock held by him, at a price par share equal to the Redemption Price, at any time and from time to time, after the occurrence of any of the following events: (i) after September 16, 1997, so long as any holder of Series B Preferred Stock of the Corporation ("Series B Preferred Stock") shall exercise his right to redeem any issued and outstanding shares of the Series B Preferred Stock, (ii) at such time as Lynch Corporation shall no longer beneficially own 50.1% of the issued and outstanding Voting Stock, or (iii) on or after July 15, 2000. The Corporation shall make payment for the shares of Series A Preferred Stock surrendered for redemption within thirty days of the Corporation's receipt of notice of the holder's exercise of its option to redeem such shares (the "Redemption Notice") ; provided, however, that when funds are not legally available to redeem all of the Series A Preferred Stock surrendered for redemption, the Corporation shall redeem that number of shares for which funds are legally available in proportion to the aggregate redemption price for all of the Series A Preferred Stock surrendered for redemption and in the order of receipt by the Corporation of the Redemption Notices Call Redemption Notices received by the Corporation on the same day shall be deemed to be received at the same time). The Corporation shall be required to redeem the remaining shares of Series A Preferred Stock surrendered for redemption at such time or times thereafter as funds for redemption become legally available on the foregoing basis and in the order of receipt by the Corporation of the Redemption Notices. -4- 8. Status at Reacquired Shares. Shares of Series A Preferred Stock reacquired by the Corporation pursuant to Sections 5, 6 or 7 hereof or otherwise and cancelled, shall have the status of authorized and unissued shares of Series A Preferred Stock. 9. Pre-Emptive Rights. The holders of shares of Series A Preferred Stock shall have no pre-emptive rights. 10. Number of Shares. The number of shares constituting the Series A Preferred Stock shall be, and the same is hereby fixed as, 1,600,000 and shall not be increased, except with the consent of holders of a majority of the outstanding shares of Series A Preferred Stock. 11 Staled Capital. The amount to be capital at all times for each share of Series A Preferred Stock shall be its par value or S.01 per share. 12. Bank. The Series A Preferred Stock shall, with respect to dividend rights and rights on liquidation, rank (i) senior to, junior to or an parity with, as the case may be, any other class of the Preferred Stock established by the, Board of Directors, the terms of which shall specifically provide that such class shall rank senior to, junior to or on parity with, as the case may be, the Series A Preferred Stock with respect to dividend rights and rights on liquidation; and (ii) senior to any other capital Stock of the Corporation, including all classes of the common stock of the Corporation. -5- RESOLVED, FURTHER, that the President. and the Secretary of the Corporation be, and they hereby are, authorized and directed to prepare and file a Certificate of Designation in accordance with this resolution and as required IN WITNESS WHEREOF, we have executed this Certificate of Designation and do affirm the foregoing as true under the penalties of perjury this 13th day of August, 1992. By: /s/ Daniel E. Miller By: /s/ Paul J. Evanson ----------------------- ------------------------- Daniel E.Miller Paul J. Evanson Secretary Chairman of the Board of Directors -6- CERTIFICATE OF DESIGNATIONS, RIGHTS AND PREFERENCES OF SERIES B PREFERRED STOCK (Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware) We, the undersigned duly authorized officers of LYNCH SERVICES CORPORATION, a corporation organized and existing under the laws of the State of Delaware, do hereby certify that: A. LYNCH SERVICES CORPORATION (the "Corporation") was incorporated in the State of Delaware an June 15, 1988. B. Pursuant to authority conferred upon the Board of Directors pursuant to the Restated Certificate of Incorporation of the Corporation and the provisions of Sections 141 and 151 of the General Corporation Law of the State of Delaware, the Board of Directors has duly adopted the following recitals and resolutions, which are still in full force and effect and are not in conflict with any provisions of the Corporations Restated Certificate of Incorporation or its By-Laws, an amended, setting forth the number, terms, designation, relative rights, preferences and limitations of a series of the Preferred Stock, $.01 par value par share, of the corporation: WHEREAS, the Restated Certificate of Incorporation of the Corporation provides for a class of shares known as Preferred Stock, consisting of 2,100,000 shares; and WHEREAS, said Restated Certificate of Incorporation authorizes issuance of the Preferred Stock from time to time in one or more series and authorizes the Board of Directors to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, to fix the number of shares constituting any such series, and to determine the designation thereof, or any of them; and WHEREAS, the Corporation has designated a series of Preferred Stock as the Series A Preferred Stock and the Board of Directors of the Corporation desires, pursuant to its authority as aforesaid, to determine and fix the rights, preferences, privileges, and restrictions relating to a second series of said Preferred Stock and the number of shares constituting, and the designation of, said series: NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby fixes and determines the designation of, the number of shares constituting, and the rights, preferences, privileges, and restrictions relating to., said second series of Preferred Stock, as follows: 1. Designation. 450,000 shares of Preferred Stock are hereby designated "Series B Preferred Stock" (hereinafter referred to as the "Series B Preferred Stock") with the rights, preferences, privileges and restrictions specified herein. 2. Voting Rights. The holders of the Shares of Series B Preferred Stock, as such, shall be entitled to one vote per share of Series B Preferred Stock on all matters submitted to a vote or consent of stockholders of the corporation. 3. Rank. The Series B Preferred Stock shall, with respect to dividend rights and rights on liquidation, rank: (i) junior to the Series A Preferred Stock; (ii) senior to, junior to or on parity with, as the case may be, any other class of the Preferred Stock established by the Board of Directors, the terms of which shall specifically provide that such class shall rank senior to, junior to or on parity with, as the case may be, the Series B Preferred Stock with respect to dividend rights and rights on liquidation; and (iii) senior to any other capital stock of the Corporation including all classes of the Common Stock, par value $.01 per share (collectively, the "Common Stock"). 4. Dividends. (a) The holders of shares of Series B Preferred Stock shall be entitled to receive dividends, and such dividends shall be cumulative and shall accrue continuously from day to day, whether or not earned or declared, at an annual rate equal to $.08 per share (the "Dividend Rate"), payable annually in arrears on each July 15, when and as declared by the Board of Directors out of funds legally available therefor. The Board of Directors shall declare such dividends to the extent funds are legally available for such purpose. All dividends shall be paid in cash. (b) No dividends or other distributions, other than dividends payable solely in shares of Common Stock or other capital stock of the Corporation ranking junior as to dividends or rights upon dissolution or liquidation to the Series B Preferred Stock (the "Junior Dividend Stock"), shall be paid or set apart for payment on, and no purchase, redemption or other acquisition shall be made by the Corporation of, any shares of Common Stock or Junior Dividend Stock unless and until all accrued and unpaid dividends on the Series B Preferred Stock shall have been paid or set apart for payment in cash. -2- (c) Any reference to "distribution" contained in this Section 4 shall not be deemed to include any stock dividend or distributions made in connection with any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary. 5. Liquidation Preference. in the event of a liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the holders of Series B Preferred Stock shall be entitled to receive out of the available assets of the Corporation, whether such assets are stated capital or surplus of any nature, an amount equal to all dividends (whether or not declared) accrued and unpaid thereon as of the date of final distribution to such holders, without interest, and a sum equal to $2.00 par share (the "Liquidation Value"), before any payment shall be made or any assets distributed to the holders of Common Stock or any other class or series of the Corporation's capital stock ranking junior as to liquidation rights of the Series B Preferred Stock (the "Junior Liquidation Stock") now or hereafter outstanding; provided, however, that, such rights shall accrue to the holders of Series B Preferred Stock only in the event that the Corporation's payments with respect to the liquidation preferences of any holders of capital stock of the Corporation ranking senior as to liquidation rights to the Series B Preferred Stock (the "Senior Liquidation Stock") are fully met. The entire assets of the Corporation available for distribution, after the liquidation preferences of the Senior Liquidation Stock have been fully met shall be distributed ratably among the holders of the Series B Preferred Stock and any other class or series of the Corporation's capital stock which may hereafter be created having parity as to liquidation rights with the Series B Preferred Stock in proportion to the respective preferential amounts to which each is entitled. Neither a consolidation or merger of the Corporation with another corporation nor a sale or transfer of all or part of the Corporation's assets for cash, securities or other property will be considered a liquidation, dissolution or winding-up of the Corporation. 6. Conversion. (a) Holders of the Series B Preferred Stork may, at any time and at their option, upon surrender of the certificates therefor, convert any or all of the Series B Preferred Stock hold by them into shares of t1he Corporation's Common Stock at the conversion rate in affect at the time of such conversion (an "Optional Conversion") . Each two and one-quarter (2.25) shares of Series B Preferred Stock shall initially be convertible into one share of Common Stock, subject to adjustment as provided in subparagraph (d) hereof (the "Conversion Rate"). Holders of the Series B Preferred stock shall surrender the shares of Series B Preferred Stock hold by them for conversion (a "Mandatory Conversion") upon the consummation of a public offering registered under the securities Act of 1933 of the Common Stock of the Corporation(an "IPO"), if the offering price of the Common Stock in the IPO equals or exceeds $6.75 par share; provided, however, that the holders shall not be required to surrender a number of shares greater than that number of shares of Series B Preferred Stock which, when multiplied by the Conversion Rate then in affect, equals or exceeds fifty -3- percent of the dollar amount raised in the IPO. Any Mandatory Conversion shall be made by the holders in proportion to the number of shares of Series B Preferred Stock held by them immediately prior to such conversion. Payment or adjustment shall be made upon such conversion for unpaid and accrued dividends on any shares of Series B Preferred Stock which shall be converted. The Corporation shall not be required to issue fractional shares of Common Stock upon any conversion, but shall pay in lieu thereof, as soon as practicable after the date the Series B Preferred Stork is surrendered for conversion pursuant to subparagraph (b) hereof, an amount in cash equal to the same fraction of the market value of a full share of Common Stock. For such purposes, the market value of a share of Common Stock shall be the fair market value thereof, as reasonably determined by the Corporation's Board of Directors or as determined by reference to the price par share of the Common Stock in the IPO ("Fair Value"). All shares of Common Stock which may be issued upon the conversion of the Series B Preferred Stock will, upon issuance, be validly issued, fully paid and nonassessable. (b) In order to exercise the optional conversion rights set forth herein, a holder of record of shares of Series B Preferred Stock shall surrender the certificate or certificates representing such shares, duly endorsed to the Corporation or in blank, at the principal office of the Corporation, or at such other office as the Corporation may designate, including notice to the Corporation of such holder's election to convert the Series B Preferred Stock, and the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued. In the case of a Mandatory Conversion, the Corporation shall deliver notice to the holders of the Series B Preferred Stock that such shares must be surrendered for conversion, setting forth the holder's pro rata conversion obligation and the holders shall deliver certificates representing the Series B Preferred Stock to the Company within fifteen days of such notice. As promptly as practicable after receipt of the certificate or certificates representing the Series B Preferred Stock and the accompanying notice, receipt of properly executed instruments of transfer reasonably satisfactory to the Corporation, if repeated by the Corporation, and payment by the holder of any applicable transfer taxes, the Corporation shall issue and deliver (i) a certificate or certificates for the number of full shares of Common Stock issuable upon conversion, in the name or names and to the address or addresses specified in the notice, and (ii) cash in respect of any fractional shares, as set forth in subsection (a) above. -4- (c) Conversion shall be deemed to have been affected at the close of business on the date on which the certificate or certificates of Series 3 Preferred Stock shall have bean surrendered in an optional Conversion or, in the case of a Mandatory Conversion, upon the closing of the IPO (the "Conversion"); the holder thereof shall cease to be stockholders with respect thereto and all rights whatsoever with respect to such shares (except the rights of the holders to receive shares of Common Stock and cash in respect of fractional shares) shall terminate, and the person or persons in whose name any certificate or certificates for Common Stock are issuable upon such Conversion shall be deemed to have become the holder of record of the shares represented thereby on such date. Upon a conversion, all shares of Series B Preferred Stork which shall have been deemed converted as herein provided shall no longer be deemed outstanding. (d) The Conversion Rate shall be subject to adjustment from time to time as follows: (i) If, on or following the date hereof, the Corporation shall, at any time or from time to time while shares of Series B Preferred Stock shall be outstanding, (1) pay a dividend or make a distribution in Common Stock (or securities convertible into or exchangeable for shares of Common Stock), (2) subdivide its outstanding shares of Common Stock into a greater number of shares, (3) make a distribution on its Common Stock in shares of its capital stock other than Common Stock, (4) combine its outstanding shares of Common Stock into a small or number of shares, or (5) issue by reclassification of its Common Stock any shares of its capital stock, then the number of shares of Common Stock into which shares of Series B Preferred Stock may be converted shall be proportionately increased or decreased, as the case may be, and the Conversion Rate in effect immediately prior to the record date fixed for the determination of shareholders entitled to such dividend or distribution, or immediately prior to such subdivision, combination or reclassification, as the case may be, shall be correspondingly increased or promptly as practicable after receipt of the certificate or decreased, as the case may be, to produce such results (taking into account fractional interest in shares of the Common Stock to the nearest tenth of a share, and for the purposes of the foregoing, considering such fractional interests as outstanding fractional shares). Similar adjustments shall be made if any of the events described herein above shall thereafter occur or recur. An adjustment made pursuant hereto shall become effective immediately after the record date, in the case of a dividend payable in Common Stork (or other securities) and immediately after the effective date, in the case of a subdivision, distribution, combination or reclassification thereof. -5- (ii) Whenever any adjustment is made in the number of shares of Common Stock into which shares of Series B Preferred Stock may be converted pursuant to the foregoing provision, the Corporation shall, as soon as reasonably practicable thereafter, prepare a written statement signed by an executive officer of the Corporation, setting forth the adjusted Conversion Rate, determined as provided herein, and, in reasonable detail, the facts requiring such adjustment. The Corporation shall mail such statement to all holders of record of shares of Series B Preferred Stock then outstanding at their respective addresses appearing on the stock records of the Corporation. (a) In the event of any merger or consolidation of the Corporation in which the Corporation does not survive, sale of all or substantially all of the Corporation's assets, or substantial reorganization of the Corporation, all the outstanding Series B Preferred Stock shall be converted into Common Stock immediately prior to such merger, consolidation, sale or reorganization (subject to any voting rights of the holders of the Series B Preferred Stock), in accordance with the provisions of this subsection (e). Upon any such conversion, each share of Series B Preferred Stock shall be converted into a number of shares of Common Stock equal to the greater of (i) the number of shares of Common Stock that would have been received had such share of Series B Preferred Stock been converted into Common Stock at the Conversion Rate in effect pursuant to subsection (d) hereof immediately prior to such merger, consolidation, sale or other reorganization, or (ii) the number of shares of Common Stock determined by dividing the liquidation preference such share of Series B Preferred Stock would than have been entitled to receive pursuant to Section 5 hereof upon a liquidation of the Corporation, by the Fair Value of a share of Common Stock on the day preceding the effective date of such merger, consolidation, sale or other reorganization. -6- (f) The Corporation shall at all times reserve and keep available out of authorized Common Stock, solely for the purpose of effecting the conversion of the Series B Preferred stock, the full number of shares of Common Stock issuable upon conversion of all Series B Preferred Stock at any time outstanding. 7. Redemption at Option of Corporation. The Corporation shall have the right and option, if funds are legally available therefor, to redeem any or all of the outstanding shares of Series B Preferred Stock, on a date set by the Board of Directors any time on or after July 15, 1997, at a price per share of $2.00, plus the per share amount of all accrued but unpaid dividends on the Series B Preferred Stock (whether or not declared) to the date or redemption (the "Redemption Price"). If the Company redeems less than all of the shares of Series B Preferred Stock, such redemption shall be completed on a pro rata basis in accordance with the number of shares of Series B Preferred Stock owned by each holder immediately prior to such redemption. 8. Redemption at Option of Holder. Each holder of Series B Preferred Stock may, at such holder's option, require the Corporation to redeem any or all of the shares of Series B Preferred Stock held by him, at a per share price equal to the Redemption Price, at any time during the sixty day period commencing July 16, 1997 and ending September 16, 1997. The Corporation shall make payment for the shares of Series B Preferred Stock surrendered for redemption within thirty days of the Corporation's receipt of notice of the holder's exercise of its option to redeem such shares (the "Redemption Notice"); provided, however, that when funds are not legally available to redeem all of the outstanding Series B Preferred Stock surrendered for redemption, the Corporation shall redeem that number of shares for which funds are legally available in proportion to the aggregate redemption price for all of the Series B Preferred Stock surrendered for redemption and in the order of receipt by the Corporation of the Redemption Notices (all Redemption Notices received on the same day shall be deemed to be received at the same time). The Corporation shall be required to redeem the remaining shares of Series B Preferred Stock surrendered for redemption at such time or times thereafter as funds for redemption become legally available on the foregoing basis as in the order of receipt by the Corporation of the Redemption Notices. 9. Status of Reacquired Shares. Shares of Series B Preferred Stock redeemed, purchased, converted into Common Stock or otherwise acquired by the Corporation and cancelled, shall have the status of authorized and unissued shares of Series B Preferred Stock. -7- 10. Pre-emptive Rights. The holders of shares of Series B Preferred Stock shall have no pre-emptive rights. 11. Number of Shares. The number of shares constituting the Series B Preferred Stock shall be, and the same is hereby fixed as, 450,000 and shall not be increased, except in accordance with the consent of holders of a majority of the outstanding shares of Series B Preferred Stock. 12. Stated Capital. The amount to be capital at all times for each share of Series B Preferred Stock shall be its par value or $.01 per share. RESOLVED, FURTHER, that the President and the Secretary of the Corporation be, and they hereby are, authorized and directed to prepare and file a Certificate of Designation in accordance with this resolution and as required by lav. IN WITNESS WHERE0F, we have executed this Certificate of Designation and do affirm the foregoing as true under the penalties of perjury this 13th day of August, 1992. By: /s/ Daniel E. Miller By: /s/ Paul J. Evanson ----------------------- ------------------------- Daniel E.Miller Paul J. Evanson Secretary Chairman of the Board of Directors -8- CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION LYNCH SERVICES CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware ("Corporation"), DOES HEREBY CERTIFY: FIRST: That the Board of Directors of the Corporation, by the unanimous written consent of its members, filed with the minutes of the Board, adopted a resolution proposing and declaring advisable the following amendment to the Restated certificate of Incorporation of the Corporation: RESOLVED, that the Restated Certificate of Incorporation of Lynch Services Corporation be amended by changing the First Article thereof so that, as amended, said Article shall be and read as follows: "The name of the Corporation is THE MORGAN GROUP, INC." SECOND: That in lieu of a meeting and vote of stockholders, the stockholders have given unanimous written consent to said amendment in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Sections 141, 242 and 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said Lynch Services Corporation has caused this Certificate of Amendment to be signed by Charles Baum, its chairman, and attested by Daniel E. Miller, its Secretary, this 5th day of March, 1993. LYNCH SERVICES CORPORATION By: /s/ Charles Baum ---------------------------- Charles Baum Chairman ATTEST: By: /s/ Daniel E. Miller -------------------------- Daniel E. Miller Secretary CERTIFICATE OF AMENDMENT OF RESTATED AND AMENDED CERTIFICATE OF INCORPORATION OF THE MORGAN GROUP, INC. THE MORGAN GROUP, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware ("Corporation'), DOES HEREBY CERTIFY: FIRST: That the Board of Directors of the Corporation, by the unanimous written consent of its members, filed with the minutes of the Board, adopted resolutions proposing and declaring advisable the following amendments to the Restated and Amended Certificate of Incorporation of the Corporation: I. RESOLVED, that the Restated and Amended Certificate of Incorporation of The Morgan Group, Inc. be amended by changing the first paragraph of the Fourth Article thereof so that, as amended, said paragraph of said Article shall be and read as follows: "The aggregate number of shares of a classes of capital stock which the Corporation shall have the authority to issue is 12,100,000 shares of capital stock, consisting of 2,100,000 shares of Preferred Stock, par value $.01 per share, and 10,000,000 shares of Common Stock, par value $.015 per share." II. RESOLVED, that the Restated and Amended Certificate of Incorporation of The Morgan Group, Inc. be amended by changing the subsection entitled "Common Stock" of the Fourth Article thereof so that, as amended, said subsection of said Article shall be and read as follows: "Common Stock. "Subject to the preferential rights, if any, of the Preferred Stock, the powers, preferences and rights of the shares of the Common Stock, and the qualifications, limitations or restrictions thereof, are as follows: "1. Designation "(a) Seven million five hundred thousand (7,500,000) shares of Common Stock are hereby designated "Class A Common Stock" and two million five hundred thousand (2,500,000) shares of Common Stock are hereby designed "Class B Common Stock", each class having the rights, preferences, privileges and restrictions specified herein. "(b) Immediately upon the filing of this Certificate of Amendment of the Restated and Amended Certificate of Incorporation of The Morgan Group, Inc. ("Certificate of Amendment") by the Secretary of State of the State of Delaware every three (3) issued and outstanding shares of stock of the Corporation heretofore designated "Common Stock, par value $0.01 per share," shall become and be deemed to be, and shall automatically convert into, two (2) shares of Class A Common Stock, par value $.015 per share, except that the 1,800,000 issued and outstanding shares of Common Stock, par value $.01 per share, owned by Lynch Corporation shall become and be deemed to be, and shall automatically convert into 1,200,000 shares of Class B Common Stock par value $.015 per share. (c) Certificates for shares of Common Stock, .01 par value per share, outstanding upon filing of this Certificate of Amendment, shall thereafter represent only shares of Class A Common Stock, par value $.015 per share, or, in the case of shares held by Lynch Corporation, Class B Common Stock, par value $.015 per share, as provided in the foregoing Section l(b). -2- "2. Voting "(a) At every meeting of the stockholders, every holder of Class A Common Stock shall be entitled to one (1) vote in person or by proxy for each share of Class A Common Stock standing in his name on the transfer books of the Corporation and every holder of Class B Common Stock shall be entitled to two (2) votes in person or by proxy for each share of Class B Common Stock standing in his name on the transfer books of the Corporation; provided, that (i) the holders of shares of Class A Common Stock are entitled, voting separately as a class, to elect one member of the Board of Directors and (ii) the holders of shares of Class A and Class B Common Stock vote together as a single class upon the election of all remaining directors. Except as may be otherwise required by law or by this Article Fourth, the holders of Class A Common Stock and Class B Common Stock shall vote together as a single class, subject to any voting rights which may be granted to holders of Preferred Stock. "(b) Unless otherwise provided by statute, any action required to be taken at any annual or special meeting of the Stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may not be taken by holders of Class A Common Stock by means of any form of written consent. The holders of all other classes of capital stock of the Corporation may take such action without a meeting by means of a written consent that meets the requirements set forth in the Corporation's By-laws, as amended or restated from time to time. "(c) The Corporation shall not issue any additional shares of Class B Common Stock after the date of filing of this Certificate of Amendment (except in connection with pro rata stock splits and stock dividends as hereinafter provided) unless and until such issuance is authorized by the holders of a majority of the voting power of the shares of Class A Common Stock and of Class B Common Stock entitled to vote, each voting separately as a class. "(d) Every reference in this Certificate of Amendment to a majority or other proportion of shares of stock shall refer to such majority or other proportion of the votes of such shares of stock. "3. Transfer "(a) No person holding shares of Class B Common Stock of record (hereinafter called a "Class B Holder") may transfer, and the Corporation shall not register the transfer of, such shares of Class B Common Stock, whether by sale, assignment, gift, bequest, appointment or otherwise, and any transfer of shares not permitted hereunder shall cause such shares automatically to be converted into Class A Common Stock as provided by subsection (b) of this Subsection 3. -3- "(b) Any transfer of shares of Class B Common Stock not permitted hereunder shall result in the automatic conversion of the transferee's shares of Class B Common Stock into shares of Class A Common Stock effective on the date on which certificates representing such shares are presented for transfer on the books of the Corporation or on such earlier date that the if Corporation receives notice of such attempted transfer. "(c) Shares of Class B Common Stock shall be registered in the name of the beneficial owners thereof and not in "street" or "nominee" name. For this purpose, a "beneficial owner" of any shares of Class B Common Stock shall mean an entity which possesses the power, either singly or jointly, to direct the voting or disposition of such shares. "(d) Share of Class A Common Stock are transferable without restriction, subject to applicable law. "4. Conversion Rights "(a) Subject to the terms and conditions of this subsection 4, each share of Class B Common Stock shall be convertible at any time or from time to time, at the option of the holder thereof, at the office of any transfer agent for Class B Common Stock, and at such other place or places, if any, as the Board of Directors may designate, or if the Board of Directors shall fail so to designate, at the principal office of the Corporation (attention of the Secretary of the Corporation), into one (1) fully paid and nonassessable share of Class A Common Stock. Before any holder of Class B Common Stock shall be entitled to convert the same into Class A Common Stock, be shall surrender the certificate or certificates for such Class B Common Stock at the office of said transfer agent (or other place as provided above), which certificate or certificates, if the Corporation shall so request, shall be duly endorsed to the Corporation or in blank or accompanied by proper instruments of transfer to the Corporation or in blank (such endorsements or instruments of transfer to be in form satisfactory to the Corporation), and shall give written notice to the Corporation at said office that he elects so to convert said Class B Common Stock in accordance with the terms of this subsection 4, and shall state in writing therein the name or names in which he wishes the certificate or certificates for Class A Common Stock to be issued. Every such notice of election to convert shall constitute a contract between the holder of such Class B Common Stock and the Corporation, whereby the holder of such Class B Common Stock shall be deemed to subscribe for the amount of Class A Common Stock which he shall be entitled to receive upon such conversion, and, in satisfaction of such subscription, to deposit the Class B Common Stock to be converted and to release the Corporation from all liability thereunder, and thereby the Corporation shall be deemed to agree that the surrender of the certificate or certificates therefor and the extinguishment of liability thereon shall constitute full payment of such subscription for Class A Common Stock to be issued upon such conversion. The Corporation will as soon as practicable after such deposit of a certificate or certificates for Class B Common Stock, -4- accompanied by the written notice and the statement above prescribed, issue and deliver at the office of said transfer agent (or other place as provided above) to the person for whose account such Class B Common Stock was so surrendered, or to his nominee(s) or transferee(s), a certificate or certificates for the number of full shares of Class A Common Stock to which be shall be entitled as aforesaid. Subject to the provisions of clause (c) of this subsection 4, such conversion shall be deemed to have been made as of the date of such surrender of the Class B Common Stock to be converted; and the person or persons entitled to receive the Class A Common Stock issuable upon conversion of such Class B Common Stock shall be treated for all purposes as the record holder or holders of such Class A Common Stock on such date. "(b) The issuance of certificates for shares of Class A Common Stock upon conversion of shares of Class B Common Stock shall be made without charge for any stamp or other similar tax in respect of such issuance. However, if any such certificate is to be issued in a name other than that of the holder of the share or shares of Class B Common Stock converted, the person or persons requesting the issuance thereof shall pay to the Corporation the amount of any tax which may be payable in respect of any transfer involved in such issuance or shall establish to the satisfaction of the Corporation that such tax has been paid. "(c) The Corporation shall not be required to convert Class B Common Stock, and no surrender of Class B Common Stock shall be effective for that purpose, while the stock transfer books of the Corporation are closed for any purpose; but the surrender of Class B Common Stock for conversion during any period while such books are so closed shall become effective for conversion immediately upon the reopening of such books, as if the conversion had been made on the date such Class B Common Stock was surrendered. "(d) The Corporation shall reserve and keep available, solely for the purpose of issue upon conversion of the outstanding shares of Class B Common Stock, such number of shares of Class A Common Stock as shall be issuable upon the conversion of all such outstanding shares of Class B Common Stock, provided that nothing contained herein shall be construed to preclude the Corporation from satisfying its obligations in respect of the conversion of the outstanding shares of Class B Common Stock by delivery of shares of Class A Common Stock which are held in the treasury of the Corporation. If any shares of Class A Common Stock, required to be reserved for purposes of conversion hereunder, require registration with or approval of any governmental -5- authority under any federal or state law before such shares of Class A Common Stock may be issued upon conversion the Corporation will use reasonable efforts to cause such shares to be duly registered or approved to permit such issuance upon conversion, as the case may be. All shares of Class A Common Stock issued upon conversion of shares of Class B Common Stock, will, upon issue, be fully paid and nonassessable and not entitled to any preemptive rights. "(e) All shares of Class B Common Stock received by the Corporation upon conversion thereof into Class A Common Stock will be retired and not reissued except as provided elsewhere in the Corporation's Restated and Amended Certificate of Incorporation. "5. Dividends and Other Distributions. Subject to the rights of the holders of Preferred Stock, and subject to any other provisions of the Corporation's Restated and Amended Certificate of Incorporation, as amended from time to time, holders of Class A Common Stock and Class B Common Stock shall be entitled to receive such dividends and other distributions in cash, stock or property of the Corporation as may be declared thereon by the Board of Directors from time to time out of assets or funds of the Corporation legally available therefor; provided that in the case of cash dividends, (i) if, at any time, a cash dividend is paid on the Class A Common Stock, a cash dividend must also be paid on the Class B Common Stock in an amount per share of Class B Common Stock that is not greater than 100%, nor less than 50%, of the amount of the cash dividend paid on each share of the Class A Common Stock or (ii) if, at any time, a cash dividend is paid on the Class B Common Stock, a cash dividend must also be paid on the Class A Common Stock in an amount that is not greater than 200%, nor less than 100%, of the amount of the cash dividend paid on each share of the Class B Common Stock, such that a cash dividend may not be paid on either the Class A Common Stock or the Class B Common Stock unless a cash dividend is also paid on the other as aforesaid; and provided, further, that in the case of dividends or other distributions payable in stock of the Corporation other than Preferred Stock, including distributions pursuant to stock splits or divisions of stock of the Corporation other than Preferred Stock, which occur after the initial issuance of shares of Class B Common Stock by the Corporation, only shares of Class A Common Stock shall be distributed with respect to Class A Common Stock and only shares of Class B Common Stock in an amount per share equal to the amount per share paid with respect to the Class A Common Stock shall be distributed with respect to Class B Common Stock, and that, in the case of any combination or reclassification of the Class A Common Stock, the shares of Class B Common Stock shall also be combined or reclassified so that the number of shares of Class B Common Stock outstanding immediately following such combination or reclassification shall bear the same relationship to the number of shares outstanding immediately prior to such combination or reclassification as the number of shares of Class A Common Stock outstanding immediately following such combination or reclassification bears to the number of shares of Class A Common Stock outstanding immediately prior to such combination or reclassification. -6- "6. Liquidation Rights. In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation, and subject to prior payment in full of all amounts payable to the holders of Preferred Stock, the remaining assets and funds of the Corporation, if any still exist, shall be divided among and paid ratably to the holders of Class A Common Stock and Class B Common Stock. A merger or consolidation of the Corporation with or into any other corporation or a sale or conveyance of all or any part of the assets of the Corporation (which shall not in fact result in the liquidation of the Corporation and the distribution of assets to stockholders) shall not be deemed to be a voluntary or involuntary liquidation or dissolution or winding up of the Corporation within the meaning of this subsection 6. "7. Preemptive, Subscription and Redemption Rights. The holders of Class A Common Stock and Class B Common Stock shall have no preemptive, subscription or redemption rights." III. RESOLVED, that the Restated and Amended Certificate of Incorporation of The Morgan Group, Inc. be amended by inserting a new Eighth Article thereof so that, as amended, said new Article shall be and read as follows: "EIGHTH: "1. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or an officer of the Corporation or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee or agent of another corporation, including, without limitation, any subsidiary, partnership, joint venture, trust or other enterprise, including service with respect to any employee benefit plan (hereinafter an `indemnitee'), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section 3 hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with the proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. -7- "2. The right to indemnification conferred in Section I of this Article shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement Of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of the undertaking (hereinafter an `undertaking'), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections 1 and 2 of this Article shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. "3. If a claim under Section I or 2 of this Article is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such Suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall also be entitled to be paid the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses), it shall be a defense that, and (ii) in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard or conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article or otherwise shall be on the Corporation. -8- "4. The rights to indemnification and to the advancement of expenses conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Restated and Amended Certificate of Incorporation, By-laws, agreement, vote of stockholders or disinterested directors or otherwise. "5. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, Liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. "6. The Corporation may, to the extent authorized from time to time by a majority vote of the disinterested directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation or any per-son who is or was serving or has agreed to serve at the request of the Corporation as an employee or agent of another corporation, including, without limitation, any subsidiary of the Corporation, partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, to the fullest extent of the provisions of this Article with respect to the indemnification and advancement of the expenses of directors and officers of the Corporation." -9- IV. RESOLVED that the Restated and Amended Certificate of Incorporation of The Morgan Group, Inc. be amended by redesignating the Eighth Article thereof so that, as amended, said Article shall be the Ninth Article. V. RESOLVED, that Section 2 of the Certificate of Designations, Rights and Preferences of Series B Preferred Stock of the Corporation be amended so that, as amended, said Section shall be and read as follows: "2. Voting Rights. The holders of the Shares of Series B Preferred Stock, as such, shall, subject to the right of holders of Class A Common Stock, voting as a separate class, to elect one (1) director, be entitled to one vote per share of Series B Preferred Stock on all matters submitted to a vote or consent of stockholders of the Corporation." VI. RESOLVED, that Sections 6(a) and (d) of the Certificate of Designations, Rights and Preferences of Series B Preferred Stock of the Corporation be amended so that, as amended, said Sections shall be and read as follows: "6. Conversion "(a) Holders of the Series B Preferred Stock may, at any time and at their option, upon surrender of the certificates therefor, convert any or all of the Series B Preferred Stock held by them into shares of the Corporation's Class A Common Stock at the conversion rate in effect at the time of such conversion (an "Optional Conversion"). Each three and three-eighths (3-375) shares of Series B Preferred Stock shall initially be convertible into one share of Class A Common Stock. The shares of Series B Preferred Stock shall be converted automatically, and holders of the Series B Preferred Stock shall surrender the shares of Series B Preferred Stock held by them for conversion (a "Mandatory Conversion") upon the declaration by the Securities and Exchange Commission (the "SEC") of the effectiveness of a registration statement filed by the Corporation with respect to a public offering of Class A Common Stock under the Securities Act of 1933, as amended, if the offering price of the Class A Common Stock in the public offering equals or exceeds $4.50 per share; provided, however, that (i) the holders shall not be required to surrender a number of shares greater than that number of shares of Series B Preferred Stock which, when multiplied by the Conversion Rate then in effect, equals or exceeds fifty percent of the dollar amount raised in the public offering, and (ii) if the public offering is not consummated within thirty (30) days after the registration statement is declared effective by the SEC; any holder of the Series B Preferred Stock may rescind the Mandatory Conversion upon delivery of written notice of rescission to the Secretary of the Corporation. Any Mandatory Conversion shall be made by the holders in proportion to the number of shards of Series B Preferred Stock held by them immediately prior to such -10- conversion. Payment or adjustment shall be made upon such conversion for unpaid and accrued dividends of any shares of Series B Preferred Stock which shall be converted. The Corporation shall not be required to issue fractional shares of Class A Common Stock upon any conversion, but shall pay in lieu thereof, as soon as practicable after the date the Series B Preferred Stock is surrendered for conversion pursuant to subparagraph (b) hereof, an amount in cash equal to the same fraction of the market value of a full share of Class A Common Stock. For such purposes, the market value of a share of Class A Common Stock shall be the fair market value thereof, as reasonably determined by the Corporation's Board of Directors or as determined by reference to the price per share of the Class A Common Stock in the public offering ("Fair Value"). All shares of Class A Common Stock which may be issued upon the conversion of the Series B Preferred Stock will, upon issuance, be validly issued, fully paid and nonassessable." "(d) The Conversion Rate shall be subject to adjustment from time to time as follows: "(i) If, on or following the date hereof, the Corporation shall, at any time or from time to time, while shares of Series B Preferred Stock shall be outstanding, (1) pay a dividend or make a distribution in Class A Common Stock (or securities convertible into or exchangeable for shares of Class A Common Stock), (2) subdivide its outstanding shares of Class A Common Stock into a greater number of shares, (3) make a distribution on its Class A Common Stock in shares of its capital stock other than Class A Common Stock, (4) combine its outstanding shares of Class A Common Stock into a smaller number of shares, or (5) issue by reclassification of its Class A Common Stock any shares of its capital stock (provided , that the original reclassification of Common Stock, par value $.01 per share, into shares of Class A Common Stock and shares of Cass B Common Stock, par value $.015 per share, effectuated by the Certificate of Amendment of which this provision is a part shall require no adjustment), then the number of shoes of Class A Common Stock into which shares of Series B Preferred Stock may be converted shall be proportionately increased or decreased, as the case may be, and the Conversion rate in effect immediately prior to the record date fixed for the determination of shareholders entitled to such dividend or distribution, or immediately prior to such subdivision, combination or reclassification, as the case may be, shall be correspondingly increased or decreased, as the case may be, to produce such results (taking into account fractional interest in shares of the Class A Common Stock to the nearest tenth of a share, and for the purposes of the foregoing, considering such fractional interests as outstanding fractional shares). Similar adjustments shall be made if any of the events described hereinabove shall thereafter occur or recur. An adjustment made pursuant hereto shall become effective immediately after the record date, in the case of a dividend payable in Class A Common Stock (or other securities) and immediately after the effective date, in the case of a subdivision, distribution, combination or reclassification thereof. -11- (ii) Whenever any adjustment is made in the number of shares of Class A Common Stock into which shares of Series B Preferred Stock may be converted pursuant to the foregoing provision, the Corporation shall, as soon as reasonably practicable thereafter, prepare a written statement signed by an executive officer of the Corporation, setting forth the adjusted Conversion Rate, determined as provided herein, and, in reasonable detail, the facts requiring such adjustment. The Corporation shall mail such statement to all holders of record of shares of Series B Preferred Stock then outstanding at their respective addresses appearing on the stock records of the Corporation." VII. RESOLVED, that Sections 6(b), (c), (e) and (f) and Section 9 of the Certificate of Designations, Rights and Preferences of Series B Preferred Stock of the Corporation be amended by replacing each reference to "Common Stock" with the term "Class A Common Stock" and the reference in Section 3(iii) of the Certificate of Designations, Rights and Preferences of Series B Preferred Stock of the Corporation to "Common Stock, par value $.01 per share" be replaced with a reference to "Common Stock, par value $.015 per share." -12- SECOND: That in lieu of a meeting and vote of stockholders, the stockholders have given unanimous written consent to said amendment in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Sections 141, 242 and 228 of the General Corporation Law of the State of Delaware. [The remainder of this page intentionally left blank.] -13- IN WITNESS WHEREOF, The Morgan Group, Inc. has caused this Certificate of Amendment to be signed by Philip J. Ringo, its President, and attested by John Paul Hoyer, its Assistant Secretary, this 4th day of June,1993. THE MORGAN GROUP, INC. By: /s/ Philip J. Ringo -------------------------------- Philip J. Ringo, President ATTEST: By: /s/ John Paul Hoyer ---------------------------- John Paul Hoyer Assistant Secretary -14- CERTIFICATE OF AMENDMENT OF RESTATED AND AMENDED CERTIFICATE OF INCORPORATION OF THE MORGAN GROUP, INC. THE MORGAN GROUP, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware ("Corporation"), DOES HEREBY CERTIFY: FIRST: That the Board of Directors of the Corporation, by the unanimous written consent of its members, filed with the minutes of the Board, adopted resolutions proposing and declaring advisable the following amendments to the Restated and Amended Certificate of Incorporation of the Corporation: RESOLVED, that, subject to the approval of the shareholders as hereinafter described, the Restated and Amended Certificate of Incorporation of the Morgan Group, Inc. be amended by changing Section 3(a) to read as follows: (a) No person holding shares of Class B Common Stock of record (hereinafter called a "Class B Holder") may transfer, and the Corporation shall not register the transfer of, such shares of Class B Common Stock, whether by sale, assignment, gift, bequest, appointment or otherwise, and any transfer of shares not permitted hereunder shall cause such shares automatically to be converted into Class A Common Stock as provided by subsection (b) of this Subsection 3; provided, however, (1) that the shares of Class B Common Stock may be transferred without being converted into shares of Class A Common Stock to (i) a corporation or other business entity by which the Class B Holder is Wholly-Owned, (ii) a direct or indirect Wholly-Owned subsidiary of the Class B Holder, or (iii) a Wholly-Owned subsidiary of a corporation or other business entity of which the Class B Holder is a Wholly-Owned subsidiary, provided such transfer is not made with a view toward disposing of a transferee subsidiary to an unrelated party in order to avoid the effect of the conversion of the shares, and (2) that the shares of Class B Common Stock may be transferred to Lynch Interactive Corporation, in order to effect the spin-off of Lynch Interactive Corporation to the shareholders of Lynch Corporation, and may be subsequently transferred to Brighton Communications Corporation, a Wholly-Owned subsidiary of Lynch Interactive Corporation, all without the shares of Class B Common Stock being converted to shares of Class A Common Stock. The term Wholly-Owned shall mean ownership of all common equity interests of a business entity. SECOND: That at the annual meeting of the stockholders, held on April 29, 1999, the shareholders entitled to vote in respect of the amendment approved the amendment. THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Sections 141, 211 and 242 of the General Corporation Law of the State of Delaware. [The remainder of this page intentionally left blank.] IN WITNESS WHEREOF, The Morgan Group, Inc. has caused this Certificate of Amendment to be signed by Dennis Duerksen, Treasurer, Vice President and Chief Financial Officer, this 21st day of June, 1999. THE MORGAN GROUP, INC. By: /s/ Dennis Duerksen ----------------------------------------- Dennis Duerksen, Treasurer, Vice President and Chief Financial Officer. CERTIFICATE OF AMENDMENT OF RESTATED AND AMENDED CERTIFICATE OF INCORPORATION OF THE MORGAN GROUP, INC. THE MORGAN GROUP, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware ("Corporation"), DOES HEREBY CERTIFY: FIRST: That the Board of Directors of the Corporation, by the unanimous written consent of its members, filed with the minutes of the Board, adopted resolutions proposing and declaring advisable the following amendments to the Restated and Amended Certificate of Incorporation of the Corporation: I. RESOLVED, that, subject to the approval of the stockholders, the Restated and Amended Certificate of Incorporation of The Morgan Group, Inc. be amended by changing the subsection entitled "Transfer" of the Fourth Article, Section 3(a) to read as follows: (a) No person holding shares of Class B Common Stock of record (hereinafter called a "Class B Holder") may transfer, and the Corporation shall not register the transfer of, such shares of Class B Common Stock, whether by sale, assignment, gift, bequest, appointment or otherwise, and any transfer of shares not permitted hereunder shall cause such shares automatically to be converted into Class A Common Stock as provided by subsection (b) of this Subsection 3; provided, however, that the shares of Class B Common Stock may be transferred without being converted into shares of Class A Common Stock to an "Affiliate" of the Class B Holder. "Affiliate" shall mean a person (including any business entity or trust) that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Class B Holder. "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise, and shall include the direct or indirect ownership of at least 5% of the voting equity securities of such person. RESOLVED, that, subject to the approval of the stockholders, the Restated and Amended Certificate of Incorporation of The Morgan Group, Inc., be amended by changing the subsection entitled "Designation" of the Fourth Article, Section 1(a) to read as follows: (a) Seven million five hundred thousand (7,500,000) shares of Common Stock are hereby designated "Class A Common Stock" and four million four hundred (4,400,000) shares are hereby designated "Class B Common Stock," each class having the rights, preferences, privileges and restrictions specified herein. SECOND: That at the annual meeting of the stockholders, held on July 12, 2001, the stockholders entitled to vote in respect of the amendment approved the amendment. THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Sections 141, 211 and 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, I have executed this Certificate of Amendment and do affirm the foregoing as true under penalties of perjury this 12th day of July, 2001. /s/ Anthony T. Castor III ------------------------------------ Anthony T. Castor III, President & Chief Executive Officer EX-4.11 4 ex4_11.txt FORM OF CLASS A WARRANT CERTIFICATE Exhibit 4.11 ------------ Certificate No. WA-________ __________ Warrants THE MORGAN GROUP, INC. WARRANT CERTIFICATE For Class A Warrants To Purchase Class A Common Stock THIS CERTIFIES THAT, ----------------------------------- Name of Registered Holder ----------------------------------- Address of Registered Holder ----------------------------------- ----------------------------------- is the registered holder (the "Registered Holder") of the number of warrants (the "Warrants") set forth above. Each Warrant entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this certificate, one fully paid and nonassessable share of Class A Common Stock, $0.15 par value per share (the "Common Stock"), of The Morgan Group, Inc., a Delaware Corporation (the "Corporation"), during the period commencing the date hereof and ending at 5:00 p.m. (New York City time) on ____________, 2006 (the "Expiration Time"), upon the presentation and surrender of this Warrant Certificate with the Exercise Form attached hereto duly executed, at the corporate office of American Stock Transfer & Trust Company, as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of the Warrant Exercise Price (defined below), and any and all applicable taxes due in connection with the exercise of the Warrant in lawful money of the United States of America by wire transfer, certified or official bank check, bank draft or money order. The "Warrant Exercise Price" shall be $9.00 per share, provided, that the Warrant Exercise Price will be reduced to $6.00 per share during a reduction period of at least 30 days (the "Reduction Period") to be determined by the Board of Directors of the Corporation. If the Reduction Period has not been set prior to the date 60 days before the Expiration Time, such period will comprise the final 30 days prior to the date upon which the Warrants expire (the "Default Reduction Period"). In the event the Reduction Period is set by the Board of Directors, the Corporation will provide a written notice to all holders of Warrants indicating the dates upon which the Reduction Period shall commence and end. By acceptance of this Warrant Certificate, the holder hereof consents and agrees with the Corporation, its Warrant Agent and every other holder of a Warrant, to the terms of this Warrant Certificate, and to any adjustments to the terms of the Warrants, the Warrant Exercise Price, the number of Warrants and the number of shares of Common Stock purchasable pursuant to each Warrant, made as follows: (a) The Corporation may, by action of its board of directors (including the favorable vote of its director elected solely by holders of its Class A common stock), make any changes or corrections to terms of the Warrant that it shall deem appropriate to cure any ambiguity or to correct any inconsistency or manifest mistake or desirable and which shall not materially adversely affect the interest of the holders of Warrant Certificates including, without limitation, decreasing the Warrant Exercise Price. (b) In the event the Corporation shall hereafter issue any shares of Common Stock as a stock dividend to the holders of Common Stock, or subdivide or combine the outstanding shares of Common Stock into a greater or lesser number of shares (any such issuance, subdivision or combination being herein called a "Change of Shares"), then, and thereafter upon each further Change of Shares, the applicable Warrant Exercise Price in effect immediately prior to such Change of Shares shall be changed to a price (including any applicable fraction of a cent) determined by multiplying the Warrant Exercise Price in effect immediately prior thereto by a fraction, the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such Change of Shares and the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such Change of Shares. The number of shares of Common Stock outstanding at any given time shall include shares of Common Stock owned or held by or for the account of the Corporation and the sale or issuance of such treasury shares or the distribution of any such treasury shares shall not be considered a Change of Shares for purposes of said sections. Upon each adjustment of the applicable Warrant Exercise Price pursuant to this subsection (b) above, the total number of shares of Common Stock purchasable upon the exercise of each Warrant shall (subject to the provisions contained in subsection (c) below) be such number of shares (calculated to the nearest hundredth) purchasable at the applicable Warrant Exercise Price immediately prior to such adjustment multiplied by a fraction, the numerator of which shall be the applicable Warrant Exercise Price in effect immediately prior to such adjustment and the denominator of which shall be the applicable Warrant Exercise Price in effect immediately after such adjustment. (c) In case of any reclassification or capital reorganization of outstanding shares of Common Stock, or in case of any consolidation or merger of the Corporation with or into another corporation (other than a consolidation or merger in which the Corporation is the continuing corporation and which does not result in any reclassification or capital reorganization of outstanding shares of Common Stock), the Corporation shall cause effective provision to be made so that the Registered Holder shall have the right thereafter to purchase the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification or capital reorganization, consolidation or merger by a holder of the number of shares of Common Stock that might have been purchased by the Registered Holder upon exercise of the Warrants, immediately prior to such reclassification or capital reorganization, consolidation or merger. The foregoing provisions shall similarly apply to successive reclassifications or capital reorganizations of outstanding shares of Common Stock and to successive consolidations or mergers. (d) Irrespective of any adjustments or changes in the Warrant Exercise Price or the number of shares of Common Stock purchasable upon exercise of any Warrant, this Warrant Certificate shall, unless the Corporation shall exercise its option to issue new warrant certificates to each holder of warrants, continue to express the applicable Warrant Exercise Price per share and the number of shares purchasable thereunder as expressed in this Warrant Certificate when originally issued, but shall nevertheless represent the rights of the Registered Holder after giving effect to all adjustments provided in the Warrant Services Agreement. If the number of shares of Common Stock purchasable, upon the exercise of each Warrant is adjusted pursuant hereto; the Corporation shall nevertheless not be required to issue fractional shares upon exercise of the Warrants or otherwise, or to distribute certificates that evidence fractional shares or Warrants to purchase fractional shares. The Corporation shall not pay any cash in lieu of fractional shares or fractional Warrants. (e) Except with respect to the Default Reduction Period, promptly after each adjustment of the Warrant Exercise Price or other modification of the terms of the Warrants, as authorized or provided herein, the Corporation will cause a notice describing such adjustments or modifications to be sent by ordinary first class mail to the Registered Holder at such Registered Holder's last address as it shall appear on the registry books of the Warrant Agent. (f) No adjustment of the Warrant Exercise Price shall be made unless such adjustment would require an increase or decrease of at least $.01 in such price; provided that any adjustments which by reason of this clause (f) are not required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment(s) so carried forward, shall require an increase or decrease of at least $.01 in the Warrant Exercise Price then in effect hereunder. (g) Any determination as to whether an adjustment in the Warrant Exercise Price or other terms of the Warrant in effect hereunder is required or as to the terms of any such adjustment, shall be binding upon the holders of the Warrants and the Corporation if made in good faith by the Board of Directors of the Corporation. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional shares of Common Stock will be issued. In the case of the exercise of less than all the Warrants represented hereby, the Corporation shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor for the balance of such Warrants. The Warrants may not be transferred except (i) in connection with a merger or consolidation or otherwise by operation of law, pursuant to court order or pursuant to the laws of descent and distribution; or (ii) with the express prior written consent of the Company, in the Company's sole discretion. The Warrants may be transferred by the Registered Holder if such transfer does not represent any change of the beneficial ownership of the Warrant (to be evidenced by written certification to the Warrant Agent). Any attempted transfer in violation of this provision shall be void and the Company shall have no obligation to give effect to any transfer in violation of this provision. The Company and the Warrant Agent may require written representations or other evidence as they deem necessary to substantiate compliance herewith before permitting any transfer hereof. This Warrant Certificate is exchangeable and (subject to the limitations set forth herein) transferable, upon the surrender hereof by the Registered Holder at the corporate offices of the Warrant Agent, American Stock Transfer & Trust Company, located at 59 Maiden Lane, Plaza Level, New York, New York 10038, or such other locations provided by written notice to the Registered Holder, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon due presentment of this Warrant Certificate for registration of transfer in accordance with the provisions hereof, together with any tax or other governmental charge imposed in connection therewith, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor. If this Warrant Certificate shall be surrendered for exercise within any period during which the transfer books for the Common Stock or other securities purchasable upon the exercise of this Warrant Certificate are closed for any purpose, the Corporation shall not be required to make delivery of certificates for the securities purchasable upon such exercise until the date of the reopening of said transfer books. The Corporation shall not be obligated to deliver any securities pursuant to the exercise or sale of this Warrant Certificate unless a registration statement under the Securities Act of 1933, as amended, is effective and a current form of prospectus is available with respect to such securities. The Corporation has filed a registration statement with the Securities and Exchange Commission and shall use its reasonable best efforts to keep such registration statement effective while any of the Warrants are outstanding. This Warrant Certificate may not be exercised or transferred by a Registered Holder in any state where such exercise or transfer would be unlawful. Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Corporation, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Corporation. Prior to due presentment for registration of transfer of this Warrant Certificate, the Corporation and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Corporation or the Warrant Agent), for all purposes and shall not be affected by any notice to the contrary. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of Delaware. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Corporation has caused this Warrant Certificate to be duly executed, manually or in facsimile, on its behalf by its duly authorized officer. Dated: ---------------------------- THE MORGAN GROUP, INC. By:________________________________ Anthony T. Castor, III President and Chief Executive Officer COUNTERSIGNED: AMERICAN STOCK TRANSFER & TRUST COMPANY, As Warrant Agent BY: -------------------------------- Name: Title: Exercise Form EXERCISE OF WARRANTS: The undersigned Registered Holder hereby irrevocably elects to exercise one or more Warrants represented by this Warrant Certificate for shares of Class A Common Stock as indicated below, on the terms and subject to the conditions specified in the Prospectus, receipt of which is hereby acknowledged. (a) Please indicate below the number shares of Class A Common Stock you desire to purchase and the requisite payment for such shares: NUMBER OF WARRANT PAYMENT WARRANTS TO EXERCISE ------- BE EXERCISED* PRICE** -------------- ------- X $.900 = $ --------- * You are initially entitled to purchase one (1) share of Class A Common Stock per Warrant. ** The warrant exercise price shall be reduced to $6.00 during a reduction period of at least 30 days (the "Reduction Period") to be set by the Board of Directors of the Company or, if the Reduction Period has not been set prior to the date 60 days before the Expiration Time, such period will comprise the last 30 days prior to the date upon which the Warrants expire. The Corporation will deliver notice to all registered holders of Warrants in the event the Reduction Period is set by the Board of Directors. METHOD OF PAYMENT (check only one box): (b) [ ] Certificated or uncertified check, bank draft or U.S. postal money order payable to "American Stock Transfer and Trust Company, as warrant agent" or [ ] Wire transfer directed to ________________________, ABA No. _________, for the account of American Stock Transfer and Trust Company, as Warrant Agent for The Morgan Group, Inc., for further credit to Account No. ---------------. DELIVERY OF REMAINING WARRANTS: (c) [ ] Do not deliver to the undersigned a new Warrant Certificate evidencing the remaining Warrants to which the undersigned is entitled. [ ] Deliver a new Warrant Certificate in accordance with the instructions below. DELIVERY INSTRUCTIONS Please provide the address for mailing of a certificate representing shares of Class A Common Stock purchased hereby or a new Warrant Certificate if different from the address shown on the face of this Warrant Certificate. Name: ____________________________________________ Address: _________________________________________ _________________________________________ _________________________________________ S I G N A T U R E Signature(s) of Registered Holder(s): _____________________ Date: ___________ --------------------- (Please sign exactly as your name appears on the face of this Warrant Certificate. Joint owners should each sign personally. Where applicable, indicate your official position or representative capacity.) TRANSFER OF WARRANTS: TRANSFER OF WARRANTS IS NOT PERMITTED EXCEPT IN LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT CERTIFICATE. THE COMPANY AND THE WARRANT AGENT WILL REQUIRE THE HOLDER TO SUBMIT WRITTEN REPRESENTATIONS AND EVIDENCE TO DEMONSTRATE THAT ANY TRANSFER IS PERMITTED BY THE TERMS OF THE WARRANT. For value received the Registered Holder sells, assigns and transfers the number of Warrants to the transferee indicated below: Number of Warrants to be Transferred: __________________________ Address of Transferee: _________________________________________ _________________________________________ Social Security Number or Taxpayer Identification Number of Transferee: __________________________ Signature(s) of Registered Holder(s): _____________________ Date: ___________ _____________________ (Please sign exactly as your name appears on the face of this Warrant Certificate. Joint owners should each sign personally. Where applicable, indicate your official position or representative capacity.) YOU MUST HAVE YOUR SIGNATURE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION IF YOU WISH TO HAVE YOUR WARRANTS TRANSFERRED. Please refer to the Prospectus for discussions regarding Eligible Guarantor Institutions and Guaranteed Signatures. Signature Guaranteed By: _______________________________ EX-4.12 5 ex4_12.txt FORM OF WARRANT SERVICES AGREEMENT EXHIBIT 4.12 ------------ FORM OF WARRANT SERVICES AGREEMENT This WARRANT SERVICES AGREEMENT (the "Agreement"), dated as of ________, 2001, by and among THE MORGAN GROUP, INC., a Delaware corporation (the "Corporation"), and AMERICAN STOCK TRANSFER & TRUST COMPANY, a New York corporation, as warrant agent (the "Warrant Agent"). W I T N E S S E T H ------------------- WHEREAS, each record holder of the Corporation's Class A common stock, $.015 par value (the "Class A Common Stock"), on the record date of _____________, 2001 (the "Record Date"), will receive one warrant to purchase an additional share of our Class A common stock (a "Warrant") for each share of Class A common stock held on the Record Date at an exercise price of $9.00 per share (the "Warrant Exercise Price"), subject to adjustment; WHEREAS, the Warrant Exercise Price for the Class A Warrants will be reduced to $6.00 during a reduction period of at least 30 days to be set by the Corporation's Board of Directors; WHEREAS, the Corporation has filed with the Securities Exchange Commission a Registration Statement (Reg. No. 333-63188) on Form S-2 (the "Registration Statement") for the registration of the Common Stock under the Securities Act of 1933, as amended, issuable upon exercise of the Warrants; WHEREAS, the Corporation plans to distribute the Warrants to be exercisable for a 5-year period from the date (the "Effective Date") of the Prospectus (the "Prospectus") dated ___________, 2001 and forming part of the Registration Statement, and continuing until the Expiration Time (as hereinafter defined); WHEREAS, the Corporation desires the Warrant Agent to act on behalf of the Corporation, and the Warrant Agent is willing to so act, in connection with the issuance, registration, permitted transfer and exchange of the Warrants, the issuance of certificates representing the Warrants, the exercise of the Warrants, and the rights of the holders thereof; and WHEREAS, all acts and things have been done and performed which are necessary to make the Warrants, when executed on behalf of the Corporation and countersigned by or on behalf of the Warrant Agent, as provided herein, the valid, binding and legal obligations of the Corporation, and to authorize the execution and delivery of this Agreement. NOW THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth, the Parties hereto agree as follows: SECTION 1. Definitions. As used herein, the following terms shall have the following meanings, unless the context shall otherwise require: (a) "Common Stock" shall mean the authorized shares of Class A Common Stock, $.015 per value per share, of the Corporation. (b) "Corporate Office" shall mean the office of the Warrant Agent (or its successor) at which at any particular time its principal business shall be administered, which office is located on the date hereof at 59 Maiden Lane, New York, New York 10038. (c) "Effective Date" shall mean, as to each Warrant, the date of the Prospectus pursuant to which the Warrants may be exercised and Common Stock issued. (d) "Exercise Date" shall mean, as to any Warrant, the date on which the Warrant Agent shall have received both (a) the Warrant Certificate representing such Warrant, with the Exercise Form thereon duly executed by the Registered Holder thereof or his attorney duly authorized in writing, and (b) payment in cash, by wire transfer or by official bank or certified check (if payment is made by uncertified check, then payment is not considered received until clearance of the uncertified check) made payable to the Warrant Agent, of an amount in lawful money of the United States of America equal to the aggregate Warrant Exercise Price for the Common Stock purchased. (e) "Registered Holder" shall mean the person in whose name any certificate representing a Warrant or Warrants shall be registered on the books maintained by the Warrant Agent pursuant to Section 6. (f) "Warrant Agent" shall mean American Stock Transfer & Trust Company, as the Corporation's warrant agent, or its authorized successor, as such. (g) "Expiration Time" shall mean 5:00 p.m., New York City time, on ___________, 2006. (h) "Warrant Exercise Price" has the meaning set forth in the Warrant Certificate, the form of which is attached as Exhibit A. SECTION 2. Warrants and Issuance of Warrant Certificates. (a) The Warrant Agent shall initially countersign and issue Warrant Certificates in appropriate denominations to the Registered Holders thereof as of the Effective Date. (b) Each Warrant shall initially entitle the Registered Holder of the Warrant Certificate representing such Warrant to purchase one share of Common Stock upon the exercise thereof, in accordance with the terms hereof, subject to modification and adjustment as provided in the Warrant Certificate. (c) From time to time, up to the Expiration Time, the Warrant Agent shall countersign and deliver stock certificates in required whole number denominations upon the exercise of Warrants in accordance with this Agreement. (d) From time to time, up to the Expiration Time, the Warrant Agent shall execute and deliver Warrant Certificates in required whole number denominations to the individuals or entities entitled thereto in connection with any permitted transfer or exchange permitted under this Agreement; provided that no Warrant Certificates shall be issued except (i) those initially issued hereunder, (ii) those issued on or after the Effective Date, upon the exercise of fewer than all Warrants represented by any Warrant Certificate, to evidence any unexercised Warrants held by the exercising Registered Holder, (iii) those issued upon any transfer or exchange pursuant to Section 6; (iv) those issued in replacement of lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7; and (v) at the option of the Corporation, in such form as may be approved by its Board of Directors, to reflect any adjustment or change in the applicable Warrant Exercise Price or the number of shares of Common Stock purchasable upon exercise of the Warrants made pursuant to the Warrants. (e) The Corporation is simultaneously issuing 2,200,000 warrants to purchase Class B common stock on the Effective Date to its holder of Class B common stock. The Warrant Agent shall have no obligations or responsibility respecting such Class B warrants. SECTION 3. Form and Execution of Warrant Certificates. (a) The Warrant Certificates representing the Warrants shall be substantially in the form annexed hereto as Exhibit A, the terms of which are incorporated herein by reference. The Warrant Certificates may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Corporation may deem appropriate and as are not inconsistent with the provisions of this Agreement or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any securities exchange on which the Warrants may be listed, or to conform to usage. The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, permitted transfer, exchange or issuance in lieu of mutilated, lost, stolen, or destroyed Warrant Certificates) and issued in registered form. Warrants shall be numbered serially following the letters "WA". (b) Warrant Certificates shall be executed on behalf of the Corporation by its Chairman of the Board, President or any Vice President by manual signature or by facsimile signatures printed thereon. Warrant Certificates shall be manually countersigned and authenticated by the Warrant Agent, and shall not be valid for any purpose unless so countersigned. In case any officer of the Corporation who shall have signed any of the Warrant Certificates shall cease to be such officer of the Corporation before the date of issuance of the Warrant Certificates or before countersigned by the Warrant Agent and issue and delivery thereof, such Warrant Certificates may nevertheless be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be such officer of the Corporation. After countersignature by the Warrant Agent, the Warrant Certificate may be delivered to the Registered Holder as provided herein without further action by the Corporation, except as otherwise provided by Section 4(a) hereof. SECTION 4. Exercise. (a) Each Warrant may be exercised by the Registered Holder thereof at any time on or after the Effective Date, but not after the Expiration Time, upon the terms and subject to the conditions set forth in the applicable Warrant Certificate. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date and the person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder upon exercise thereof as of the close at business on the Exercise Date. As soon as practicable on or after the Exercise Date the Warrant Agent shall deposit the proceeds received from the exercise of a Warrant and shall notify the Corporation in writing of the exercise of such Warrant and the name and address of the person exercising the warrant. As soon as practicable after the date of such notice, the Warrant Agent, on behalf of the Corporation, shall cause to be issued and delivered to the party or parties entitled to receive the certificate or certificates representing the securities deliverable upon such exercise (plus a Warrant Certificate for any remaining unexercised Warrants of the Registered Holder), unless prior to the date of issuance of such certificates the Corporation shall instruct the Warrant Agent to refrain from causing such issuance of certificates for any reason. Upon the exercise of any Warrant and clearance of the funds received, the Warrant Agent shall promptly, and in no event later than three business days following the day in which the funds clear, remit the payment received for the Warrants to the Corporation or as the Corporation may direct in writing. SECTION 5. Reservation of Shares; Registration of Warrants; Listing of Securities; Payment of Taxes; etc. (a) The Corporation covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for issuance upon exercise of Warrants, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Corporation covenants that all shares of Common Stock which shall be issuable upon exercise of the Warrants shall, at the time of issuance and delivery against payment therefor of the aggregate Warrant Exercise Price for the Common Stock purchased, be duly and validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issuance thereof (other than those which the Corporation shall promptly pay or discharge). (b) The Corporation covenants that if the distribution of any Warrants hereunder require registration with, or approval of, any governmental authority under any federal securities law before such Warrants may be validly delivered upon such distribution, then the Corporation will in good faith and as expeditiously as reasonably possible, endeavor to secure such registration or approval. The Corporation will use reasonable efforts to obtain appropriate approvals or registrations with respect to such Warrants under the "blue sky" securities laws of the states in which they are issued. (c) The Corporation covenants that if any securities to be reserved for the purpose of exercise of Warrants hereunder require registration with, or approval of, any governmental authority under any federal securities law before such securities may be validly issued or delivered upon such exercise, then the Corporation will in good faith and as expeditiously as reasonably possible, endeavor to secure such registration or approval. However, Warrants may not be exercised or sold by, or shares of Common Stock issued to, any Registered Holder in any state in which such exercise or sale would be unlawful. (d) The Corporation shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance or delivery of any shares upon exercise of the Warrants; provided, however, that if the shares of Common Stock are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any. (e) The Warrant Agent is hereby authorized to requisition the Corporation's stock transfer agent from time to time for certificates representing shares of Common Stock required upon exercise of the Warrants, and the Corporation will authorize the stock transfer agent to comply with such proper requisitions, if the warrant agent and the stock transfer agent are not the same entity. (f) The Corporation shall give the Warrant Agent written notice within five (5) business days of any action or determination modifying the terms of the Warrants or adjusting the Warrant Exercise Price or determining the securities or other property for which the Warrants are exercisable, in accordance with the terms of the Warrants. SECTION 6. Exchange of Warrant Certificates. (a) Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants of the same class. Warrant Certificates to be exchanged shall be surrendered to the Warrant Agent at its Corporate Office or, with respect to deliveries other than by mail or hand, at such other locations set forth in the Prospectus, and upon satisfaction of the terms and provisions hereof, the Warrant Agent shall execute, issue and deliver in exchange therefor the Warrant Certificates which the Registered Holder making the exchange shall be entitled to receive. (b) The Warrant Agent shall keep at its office books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and the permitted transfer thereof in accordance with its regular practice. Upon due presentment for registration of transfer of any Warrant Certificate at such office in accordance with the terms of the Warrant and this Agreement the Transfer Agent shall issue and deliver to the transferee or transferees new Warrant Certificates representing an equal aggregate number of Warrants of the same class. (c) The Warrants shall not be transferred except (i) in connection with a merger or consolidation of the Registered Holder or beneficial owner or otherwise by operation of law, pursuant to court order or pursuant to the laws of descent and distribution; or (ii) with the express prior written consent of the Corporation, in the Corporation's sole discretion. A Warrant Certificate may be transferred by a Registered Holder if such transfer does not represent any change of the beneficial ownership of the Warrant. The Warrant Agent shall not give effect to any transfer in violation of this provision. Upon presentation of any Warrant Certificate for transfer, the Warrant Agent shall require delivery by the Registered Holder of such written representations and or other evidence as it deems reasonable to substantiate that the transfer does not violate the restrictions of the Warrant Certificate. (d) With respect to all Warrant Certificates presented for registration of transfer, or for exchange or exercise, the Exercise Form included therein shall be duly endorsed, or be accompanied by a written instrument or instruments of transfer and subscription, in form satisfactory to the Corporation and the Warrant Agent, duly executed by the Registered Holder or his attorney-in-fact duly authorized in writing. With respect to all Warrant Certificates presented for registration of transfer, the signature of the Register Holder thereon must be guaranteed by an Eligible Guarantor Institution, as defined in Rule 17Ad-15 of the Securities Exchange Act of 1934, as amended. (e) A reasonable service charge may be imposed by the Warrant Agent against a Registered Holder for any exchange or registration of transfer of Warrant Certificates. In addition, the Corporation may require payment by such holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. (f) All Warrant Certificates surrendered for exercise or for exchange shall be promptly canceled by the Warrant Agent and thereafter retained by the Warrant Agent until termination of this Agreement or resignation as Warrant Agent, or disposed of or destroyed, at the direction of the Corporation. If the Corporation shall purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant Certificates evidencing the same shall thereupon be delivered to the Warrant Agent and canceled by it and retired. SECTION 7. Loss or Mutilation. Upon receipt by the Corporation and the Warrant Agent of evidence satisfactory to them of the ownership of and loss, theft, destruction or mutilation of any Warrant Certificate, and (in case of loss, theft or destruction) of indemnity satisfactory to them, and (in the case of mutilation) upon surrender and cancellation thereof, the Warrant Agent shall (in the absence of notice to the Corporation and/or Warrant Agent that the Warrant Certificate has been acquired by a bonafide purchaser) execute and deliver to the Registered Holder in lieu thereof a new Warrant Certificate of like tenor representing an equal aggregate number of Warrants. Applicants for a substitute Warrant Certificate shall comply with such other reasonable regulations, provide such reasonable indemnification and pay such other reasonable charges as the Warrant Agent or the Corporation may prescribe. SECTION 8. Concerning the Warrant Agent. The Warrant Agent acts hereunder as agent and in a ministerial capacity for the Corporation, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not, by issuing and delivering Warrant Certificates or by any other act hereunder be deemed to make any representations as to the validity, value or authorization of the Warrant Certificates or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any Warrant is fully paid and nonassessable. Except as expressly provided in this Agreement, the Warrant Agent shall not at any time be under any duty or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the applicable Warrant Exercise Price, or to determine whether any fact exists which may require any such adjustments, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. It shall not (i) be liable for any recital or statement of facts contained herein or for any action taken, suffered or omitted by it in reliance on any Warrant Certificate or other document of instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, except for any action taken, suffered or omitted by it due to its negligence, willful misconduct or bad faith, (ii) be responsible for any failure on the part of the Corporation to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) be liable for any act or omission in connection with this Agreement except for its own negligence or willful misconduct. The Warrant Agent may at any time consult with counsel to it and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. Any notice, statement, instruction, request, direction, order or demand of the Corporation shall be sufficiently evidenced by an instrument signed by the Chairman of the Board, President, any Vice President, its Secretary, or Assistant Secretary (unless other evidence in respect thereof is herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand believed by it to be genuine. The Corporation agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder; it further agrees to indemnify the Warrant Agent and save it harmless against any and all losses, expenses and liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, expenses and liabilities arising as a result of the Warrant Agent's negligence, willful misconduct or bad faith. The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's own negligence or wilful misconduct or bad faith), after giving 30 days, prior written notice to the Corporation. At least 15 days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to each Registered Holder at the Corporation's expense. Upon such resignation, or any inability of the Warrant Agent to act as such hereunder, the Corporation shall appoint a new warrant agent in writing. In connection with the appointment of a new warrant agent, the Warrant Agent shall execute and deliver any further assurance, conveyance, act or deed requested by the Corporation, at the Corporation's expense. Any corporation into which the Warrant Agent or any new warrant agent may be converted or merged or any corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party or any corporation succeeding to the trust business of the Warrant Agent shall be a successor warrant agent under this Agreement without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Corporation and to each Registered Holder. SECTION 9. Modification of Agreement. The Warrant Agent and the Corporation may modify or amend this Agreement from time to time, provided, however, that this Agreement shall not be modified, supplemented or altered in any manner materially adverse to the interests of the holders of the Warrant Certificates except with the consent in writing of the Registered Holders of Warrant Certificates representing not less than 50% of the Warrants then outstanding. SECTION 10. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first class registered or certified mail, postage prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the address of such holder as shown on the registry books maintained by the Warrant Agent; if to the Corporation, at 2746 Old U.S. 20 West, Elkhart, Indiana 46514, Attention: Gary J. Klusman, Executive Vice President, or at such other address as may have been furnished to the Warrant Agent in writing by the Corporation; if to the Warrant Agent, at 59 Maiden Lane, New York, New York 10038, Attention: Shareholder Relations. SECTION 11. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. SECTION 12. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Corporation and the Warrant Agent and their respective successors and assigns. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. SECTION 13. Termination. This Agreement shall terminate at the Expiration Time or such earlier date upon which all Warrants have been exercised or surrendered, except that the Warrant Agent shall account to the Corporation for cash held by it and the provisions of Section 8 hereof shall survive such termination. SECTION 14. Counterparts. This Agreement may be executed in counterparts, which taken together shall constitute a single document. [signature page follows] IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be duly executed as of the date first above written. The "Corporation" THE MORGAN GROUP, INC. By: ---------------------------------------- Gary J. Klusman Executive Vice President of Finance and Administration The "Warrant Agent" AMERICAN STOCK TRANSFER & TRUST COMPANY By: ---------------------------------------- Name: Title: EXHIBIT A Certificate No. WA-________ __________ Warrants THE MORGAN GROUP, INC. WARRANT CERTIFICATE For Class A Warrants To Purchase Class A Common Stock THIS CERTIFIES THAT, ----------------------------------- Name of Registered Holder ----------------------------------- Address of Registered Holder ----------------------------------- ----------------------------------- is the registered holder (the "Registered Holder") of the number of warrants (the "Warrants") set forth above. Each Warrant entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this certificate, one fully paid and nonassessable share of Class A Common Stock, $0.15 par value per share (the "Common Stock"), of The Morgan Group, Inc., a Delaware Corporation (the "Corporation"), during the period commencing the date hereof and ending at 5:00 p.m. (New York City time) on ____________, 2006 (the "Expiration Time"), upon the presentation and surrender of this Warrant Certificate with the Exercise Form attached hereto duly executed, at the corporate office of American Stock Transfer & Trust Company, as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of the Warrant Exercise Price (defined below), and any and all applicable taxes due in connection with the exercise of the Warrant in lawful money of the United States of America by wire transfer, certified or official bank check, bank draft or money order. The "Warrant Exercise Price" shall be $9.00 per share, provided, that the Warrant Exercise Price will be reduced to $6.00 per share during a reduction period of at least 30 days (the "Reduction Period") to be determined by the Board of Directors of the Corporation. If the Reduction Period has not been set prior to the date 60 days before the Expiration Time, such period will comprise the final 30 days prior to the date upon which the Warrants expire (the "Default Reduction Period"). In the event the Reduction Period is set by the Board of Directors, the Corporation will provide a written notice to all holders of Warrants indicating the dates upon which the Reduction Period shall commence and end. By acceptance of this Warrant Certificate, the holder hereof consents and agrees with the Corporation, its Warrant Agent and every other holder of a Warrant, to the terms of this Warrant Certificate, and to any adjustments to the terms of the Warrants, the Warrant Exercise Price, the number of Warrants and the number of shares of Common Stock purchasable pursuant to each Warrant, made as follows: (a) The Corporation may, by action of its board of directors (including the favorable vote of its director elected solely by holders of its Class A common stock), make any changes or corrections to terms of the Warrant that it shall deem appropriate to cure any ambiguity or to correct any inconsistency or manifest mistake or desirable and which shall not materially adversely affect the interest of the holders of Warrant Certificates including, without limitation, decreasing the Warrant Exercise Price. (b) In the event the Corporation shall hereafter issue any shares of Common Stock as a stock dividend to the holders of Common Stock, or subdivide or combine the outstanding shares of Common Stock into a greater or lesser number of shares (any such issuance, subdivision or combination being herein called a "Change of Shares"), then, and thereafter upon each further Change of Shares, the applicable Warrant Exercise Price in effect immediately prior to such Change of Shares shall be changed to a price (including any applicable fraction of a cent) determined by multiplying the Warrant Exercise Price in effect immediately prior thereto by a fraction, the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such Change of Shares and the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such Change of Shares. The number of shares of Common Stock outstanding at any given time shall include shares of Common Stock owned or held by or for the account of the Corporation and the sale or issuance of such treasury shares or the distribution of any such treasury shares shall not be considered a Change of Shares for purposes of said sections. Upon each adjustment of the applicable Warrant Exercise Price pursuant to this subsection (b) above, the total number of shares of Common Stock purchasable upon the exercise of each Warrant shall (subject to the provisions contained in subsection (c) below) be such number of shares (calculated to the nearest hundredth) purchasable at the applicable Warrant Exercise Price immediately prior to such adjustment multiplied by a fraction, the numerator of which shall be the applicable Warrant Exercise Price in effect immediately prior to such adjustment and the denominator of which shall be the applicable Warrant Exercise Price in effect immediately after such adjustment. (c) In case of any reclassification or capital reorganization of outstanding shares of Common Stock, or in case of any consolidation or merger of the Corporation with or into another corporation (other than a consolidation or merger in which the Corporation is the continuing corporation and which does not result in any reclassification or capital reorganization of outstanding shares of Common Stock), the Corporation shall cause effective provision to be made so that the Registered Holder shall have the right thereafter to purchase the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification or capital reorganization, consolidation or merger by a holder of the number of shares of Common Stock that might have been purchased by the Registered Holder upon exercise of the Warrants, immediately prior to such reclassification or capital reorganization, consolidation or merger. The foregoing provisions shall similarly apply to successive reclassifications or capital reorganizations of outstanding shares of Common Stock and to successive consolidations or mergers. (d) Irrespective of any adjustments or changes in the Warrant Exercise Price or the number of shares of Common Stock purchasable upon exercise of any Warrant, this Warrant Certificate shall, unless the Corporation shall exercise its option to issue new warrant certificates to each holder of warrants, continue to express the applicable Warrant Exercise Price per share and the number of shares purchasable thereunder as expressed in this Warrant Certificate when originally issued, but shall nevertheless represent the rights of the Registered Holder after giving effect to all adjustments provided in the Warrant Services Agreement. If the number of shares of Common Stock purchasable, upon the exercise of each Warrant is adjusted pursuant hereto; the Corporation shall nevertheless not be required to issue fractional shares upon exercise of the Warrants or otherwise, or to distribute certificates that evidence fractional shares or Warrants to purchase fractional shares. The Corporation shall not pay any cash in lieu of fractional shares or fractional Warrants. (e) Except with respect to the Default Reduction Period, promptly after each adjustment of the Warrant Exercise Price or other modification of the terms of the Warrants, as authorized or provided herein, the Corporation will cause a notice describing such adjustments or modifications to be sent by ordinary first class mail to the Registered Holder at such Registered Holder's last address as it shall appear on the registry books of the Warrant Agent. (f) No adjustment of the Warrant Exercise Price shall be made unless such adjustment would require an increase or decrease of at least $.01 in such price; provided that any adjustments which by reason of this clause (f) are not required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment(s) so carried forward, shall require an increase or decrease of at least $.01 in the Warrant Exercise Price then in effect hereunder. (g) Any determination as to whether an adjustment in the Warrant Exercise Price or other terms of the Warrant in effect hereunder is required or as to the terms of any such adjustment, shall be binding upon the holders of the Warrants and the Corporation if made in good faith by the Board of Directors of the Corporation. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional shares of Common Stock will be issued. In the case of the exercise of less than all the Warrants represented hereby, the Corporation shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor for the balance of such Warrants. The Warrants may not be transferred except (i) in connection with a merger or consolidation or otherwise by operation of law, pursuant to court order or pursuant to the laws of descent and distribution; or (ii) with the express prior written consent of the Company, in the Company's sole discretion. The Warrants may be transferred by the Registered Holder if such transfer does not represent any change of the beneficial ownership of the Warrant (to be evidenced by written certification to the Warrant Agent). Any attempted transfer in violation of this provision shall be void and the Company shall have no obligation to give effect to any transfer in violation of this provision. The Company and the Warrant Agent may require written representations or other evidence as they deem necessary to substantiate compliance herewith before permitting any transfer hereof. This Warrant Certificate is exchangeable and (subject to the limitations set forth herein) transferable, upon the surrender hereof by the Registered Holder at the corporate offices of the Warrant Agent, American Stock Transfer & Trust Company, located at 59 Maiden Lane, Plaza Level, New York, New York 10038, or such other locations provided by written notice to the Registered Holder, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon due presentment of this Warrant Certificate for registration of transfer in accordance with the provisions hereof, together with any tax or other governmental charge imposed in connection therewith, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor. If this Warrant Certificate shall be surrendered for exercise within any period during which the transfer books for the Common Stock or other securities purchasable upon the exercise of this Warrant Certificate are closed for any purpose, the Corporation shall not be required to make delivery of certificates for the securities purchasable upon such exercise until the date of the reopening of said transfer books. The Corporation shall not be obligated to deliver any securities pursuant to the exercise or sale of this Warrant Certificate unless a registration statement under the Securities Act of 1933, as amended, is effective and a current form of prospectus is available with respect to such securities. The Corporation has filed a registration statement with the Securities and Exchange Commission and shall use its reasonable best efforts to keep such registration statement effective while any of the Warrants are outstanding. This Warrant Certificate may not be exercised or transferred by a Registered Holder in any state where such exercise or transfer would be unlawful. Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Corporation, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Corporation. Prior to due presentment for registration of transfer of this Warrant Certificate, the Corporation and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Corporation or the Warrant Agent), for all purposes and shall not be affected by any notice to the contrary. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of Delaware. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Corporation has caused this Warrant Certificate to be duly executed, manually or in facsimile, on its behalf by its duly authorized officer. Dated: ---------------------------- THE MORGAN GROUP, INC. By:________________________________ Anthony T. Castor, III President and Chief Executive Officer COUNTERSIGNED: AMERICAN STOCK TRANSFER & TRUST COMPANY, As Warrant Agent BY: -------------------------------- Name: Title: Exercise Form EXERCISE OF WARRANTS: The undersigned Registered Holder hereby irrevocably elects to exercise one or more Warrants represented by this Warrant Certificate for shares of Class A Common Stock as indicated below, on the terms and subject to the conditions specified in the Prospectus, receipt of which is hereby acknowledged. (a) Please indicate below the number shares of Class A Common Stock you desire to purchase and the requisite payment for such shares: NUMBER OF WARRANT PAYMENT WARRANTS TO EXERCISE ------- BE EXERCISED* PRICE** -------------- ------- X $.900 = $ --------- * You are initially entitled to purchase one (1) share of Class A Common Stock per Warrant. ** The warrant exercise price shall be reduced to $6.00 during a reduction period of at least 30 days (the "Reduction Period") to be set by the Board of Directors of the Company or, if the Reduction Period has not been set prior to the date 60 days before the Expiration Time, such period will comprise the last 30 days prior to the date upon which the Warrants expire. The Corporation will deliver notice to all registered holders of Warrants in the event the Reduction Period is set by the Board of Directors. METHOD OF PAYMENT (check only one box): (b) [ ] Certificated or uncertified check, bank draft or U.S. postal money order payable to "American Stock Transfer and Trust Company, as warrant agent" or [ ] Wire transfer directed to ________________________, ABA No. _________, for the account of American Stock Transfer and Trust Company, as Warrant Agent for The Morgan Group, Inc., for further credit to Account No. ---------------. DELIVERY OF REMAINING WARRANTS: (c) [ ] Do not deliver to the undersigned a new Warrant Certificate evidencing the remaining Warrants to which the undersigned is entitled. [ ] Deliver a new Warrant Certificate in accordance with the instructions below. DELIVERY INSTRUCTIONS Please provide the address for mailing of a certificate representing shares of Class A Common Stock purchased hereby or a new Warrant Certificate if different from the address shown on the face of this Warrant Certificate. Name: ____________________________________________ Address: _________________________________________ _________________________________________ _________________________________________ S I G N A T U R E Signature(s) of Registered Holder(s): _____________________ Date: ___________ --------------------- (Please sign exactly as your name appears on the face of this Warrant Certificate. Joint owners should each sign personally. Where applicable, indicate your official position or representative capacity.) TRANSFER OF WARRANTS: TRANSFER OF WARRANTS IS NOT PERMITTED EXCEPT IN LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT CERTIFICATE. THE COMPANY AND THE WARRANT AGENT WILL REQUIRE THE HOLDER TO SUBMIT WRITTEN REPRESENTATIONS AND EVIDENCE TO DEMONSTRATE THAT ANY TRANSFER IS PERMITTED BY THE TERMS OF THE WARRANT. For value received the Registered Holder sells, assigns and transfers the number of Warrants to the transferee indicated below: Number of Warrants to be Transferred: __________________________ Address of Transferee: _________________________________________ _________________________________________ Social Security Number or Taxpayer Identification Number of Transferee: __________________________ Signature(s) of Registered Holder(s): _____________________ Date: ___________ _____________________ (Please sign exactly as your name appears on the face of this Warrant Certificate. Joint owners should each sign personally. Where applicable, indicate your official position or representative capacity.) YOU MUST HAVE YOUR SIGNATURE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION IF YOU WISH TO HAVE YOUR WARRANTS TRANSFERRED. Please refer to the Prospectus for discussions regarding Eligible Guarantor Institutions and Guaranteed Signatures. Signature Guaranteed By: _______________________________ EX-5 6 ex_5.txt OPINION OF BARNES & THORNBURG Exhibit 5 --------- August 15, 2001 via EDGAR - --------- The Morgan Group, Inc. 2746 Old U.S. 20 West Elkhart, Indiana 46514 Re: The Morgan Group, Inc. Registration Statement on Form S-2 Ladies and Gentlemen: You have requested our opinion in connection with the proposed offering of up to 1,248,157 shares of Class A common stock (the "Securities") by The Morgan Group, Inc. (the "Company"), which are to be registered for sale pursuant to the Registration Statement on Form S-2 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"), upon the exercise of warrants (the "Warrants") described therein. We have examined such corporate records, certificates, and other documents, and have reviewed such questions of law as we have considered necessary or appropriate for the purposes of this opinion. On the basis of such examination and review, we advise you that, in our opinion, the Securities have been duly authorized, and, when (i) the Registration Statement filed by the Company with respect to the Securities shall have become effective under the Act, and (ii) the Securities shall have been executed, authenticated, issued, and delivered to and paid for by the holders exercising Warrants in accordance with their terms, will be validly and legally issued, fully paid and non- assessable. The foregoing is limited to the application of the General Corporation Law of the State of Delaware, the internal laws of the State of Indiana and applicable federal law, and no opinion is expressed herein as to any matter governed by the laws of any other jurisdiction. We hereby consent to the filing of this opinion as Exhibit 5 to the Registration Statement and to the reference to us under the heading "Legal Matters" in the Prospectus forming part of the Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ BARNES & THORNBURG BARNES & THORNBURG EX-23.1 7 ex23_1.txt CONSENT OF ERNST & YOUNG Exhibit 23.1 ------------ Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 9, 2001, in Amendment No. 1 to the Registration Statement (Form S-2/A No. 333-63188) and related Prospectus of The Morgan Group, Inc. for the registration of 1,248,157 shares of its Class A common stock and 2,200,000 shares of its Class B common stock and to the incorporation by reference therein of our report dated February 9, 2001, with respect to the consolidated financial statements and schedule of The Morgan Group, Inc. included in its Annual Report (Form 10-K) for the year ended December 31, 2000, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Ernst & Young LLP Greensboro, North Carolina June 13, 2001 EX-99.1 8 ex99_1.txt LETTER TO CLASS A STOCKHOLDERS Exhibit 99.1 ------------ LETTER TO CLASS A STOCKHOLDERS OF RECORD THE MORGAN GROUP, INC. UP TO 1,248,157 SHARES OF CLASS A COMMON STOCK OFFERED PURSUANT TO WARRANTS DISTRIBUTED TO STOCKHOLDERS OF THE MORGAN GROUP, INC. Dear Stockholders: This letter is being provided to all holders of Class A common stock, of record on _________, 2001 (the "Record Date"), of The Morgan Group, Inc. (the "Company"), in connection with the distribution of warrants ("Warrants") to purchase shares of the Company's Class A Common Stock, $.015 par value (the "Class A Common Stock"), at the warrant exercise price of $9.00 per share (the "Warrant Exercise Price"). The warrants are further described in the Prospectus dated ________, 2001 (the "Prospectus"). In addition, the Warrant Exercise Price will be reduced to $6.00 during a reduction period of at least 30 days to be set by our Board of Directors. Each beneficial owner of shares of the Company's Class A Common Stock is entitled to receive one Warrant for each share of Class A Common Stock owned as of the Record Date, and to purchase one (1) share of the Class A Common Stock for each Warrant held. Enclosed are copies of the following documents: 1. The Prospectus; 2. The Warrant Certificate; and 3. Instructions. The Warrants have a five-year term and will expire at 5:00 p.m., New York City Time, on ___________, 2006, unless extended by the Company (the "Expiration Time"). To exercise the Warrants, a properly completed and executed Warrant Certificate and payment in full of the aggregate Warrants Exercise Price for all of the Warrants exercised must be delivered to American Stock Transfer & Trust Company, as indicated in the Prospectus, prior to the Expiration Time. Additional copies of the Prospectus may be obtained from American Stock Transfer & Trust Company. Its toll-free telephone number is (800) 777-0800. Very truly yours, THE MORGAN GROUP, INC. EX-99.2 9 ex99_2.txt LETTER FROM BROKERS TO BENEFICIAL OWNERS Exhibit 99.2 ------------ LETTER FROM BROKERS OR OTHER NOMINEES TO BENEFICIAL OWNERS UP TO 1,248,157 SHARES OF CLASS A COMMON STOCK OFFERED PURSUANT TO WARRANTS DISTRIBUTED TO STOCKHOLDERS OF THE MORGAN GROUP, INC. To Our Clients: Enclosed for your consideration is a Prospectus, dated _________, 2001, relating to the offer by The Morgan Group, Inc.(the "Company") of shares of Class A Common Stock, $.015 par value (the "Class A Common Stock"), pursuant to warrants (the "Warrants") distributed to holders of record ("Record Holders") of shares of the Company's Class A Common Stock as of the close of business on ___________, 2001 (the "Record Date"). The Warrants are described in the Prospectus and are evidenced by a Warrant Certificate registered in our name and held for your account. As described in the Prospectus, you will receive one Warrant for each share of Class A Common Stock held by us in your account as of the Record Date. You are entitled to purchase one (1) share of the Class A Common Stock for each Warrant granted to you at the exercise price of $9.00 per share (the "Warrant Exercise Price"). The Warrant Exercise price will be reduced to $6.00 per share during a reduction period of at least 30 days to be set by the Company's Board of Directors. THE MATERIALS ENCLOSED ARE BEING FORWARDED TO YOU AS THE BENEFICIAL OWNER OF THE SHARES OF CLASS A COMMON STOCK HELD BY US IN YOUR ACCOUNT BUT NOT REGISTERED IN YOUR NAME. ANY EXERCISE OF THE WARRANTS MAY ONLY BE MADE BY US AS THE RECORD HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. Accordingly, we request instructions as to whether you wish us to elect to exercise your warrants and purchase any shares of Class A Common Stock pursuant to the terms and subject to the conditions set forth in the enclosed Prospectus. However, we urge you to read these documents carefully before instructing us to exercise any Warrants. The Warrants cannot be sold. The Warrants will expire at 5:00 p.m., New York City Time, on ____________, 2006, unless extended by the Company. Once you have exercised a Warrant, such exercise may not be revoked. If you wish to have us, on your behalf, exercise Warrants for any shares of the Class A Common Stock to which you are entitled, please so instruct us by completing, executing and returning to us the instruction form on the accompanying this letter. ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE OFFERING SHOULD BE DIRECTED TO AMERICAN STOCK TRANSFER & TRUST COMPANY, THE TRANSFER AGENT, TOLL FREE AT (800) 777-0800. EX-99.3 10 ex99_3.txt INSTRUCTIONS BY BENEFICIAL OWNERS Exhibit 99.3 ------------ INSTRUCTIONS BY BENEFICIAL OWNERS TO BROKERS OR OTHER NOMINEES (accompanying letter from brokers or other nominees to beneficial owners) The undersigned acknowledge(s) receipt of your letter and the enclosed materials referred to therein relating to the offering of warrants (the "Warrants") to purchase shares of Class A Common Stock, $.015 par value (the "Class A Common Stock"), of The Morgan Group, Inc. (the "Company"). This will instruct you regarding exercising Warrants to purchase the Class A Common Stock, which were distributed with respect to each share of the Company's Class A Common Stock held by you for the account of the undersigned, pursuant to the terms and subject to the conditions set forth in the Prospectus dated _____________, 2001. Please exercise Warrants for shares of the Class A Common Stock as set forth below: NUMBER OF WARRANT WARRANTS TO EXERCISE BE EXERCISED* PRICE PAYMENT --------------- ------------- --------- _______________ X $9.00** = $________________ * YOU MAY PURCHASE ONE (1) SHARE OF CLASS A COMMON STOCK FOR EACH WARRANT YOU HOLD. **THE WARRANT EXERCISE PRICE WILL BE REDUCED TO $6.00 DURING A PERIOD OF AT LEAST 30 DAYS. PLEASE SEE THE PROSPECTUS DATED __________, 2001 FOR FURTHER DETAILS. Signature(s) of Beneficial Owner(s): _________________________ Date: ___________ ------------------------------- (Please sign exactly as your name appears on the enclosed materials. Joint owners should each sign personally. Where applicable, please indicate your official position or representative capacity.) EX-99.4 11 ex99_4.txt FORM OF INSTRUCTIONS Exhibit 99.4 ------------ FORM OF INSTRUCTIONS AS TO USE OF WARRANT CERTIFICATES INSTRUCTIONS AS TO USE OF THE MORGAN GROUP, INC. WARRANT CERTIFICATES CONSULT AMERICAN STOCK TRANSFER & TRUST COMPANY, YOUR BANK OR BROKER WITH ANY QUESTIONS The following instructions relate to a warrant offering (the "Warrant Offering") by The Morgan Group, Inc., a Delaware corporation (the "Corporation"), to the holders of its Class A Common Stock, $.015 par value (the "Class A Common Stock"), as described in the Corporation's Prospectus dated ________, 2001 (the "Prospectus"). Holders of record of shares of the Class A Common Stock at the close of business on __________, 2001 (the "Record Date") are receiving one (1) warrant (collectively, the "Warrants") for each share of the Class A Common Stock held on the Record Date. Holders of Warrants are entitled to purchase one (1) share of Class A Common Stock for each Warrant held, upon payment of $9.00 in cash per share of Class A Common Stock purchased (the "Warrant Exercise Price"). The Warrant Exercise Price will be reduced to $6.00 during a reduction period of at least 30 days to be set by the Corporation's Board of Directors. In this Warrant Offering, the Corporation is distributing an aggregate of 1,248,157 Warrants exercisable to purchase up to an aggregate of 1,248,157 shares of Class A Common Stock (the "Shares"). The Warrants will expire at 5:00 p.m., New York City time, on ___________, 2006, unless extended (the "Expiration Time"). After the Expiration Time, all unexercised Warrants will be null and void and no longer exercisable by the holder. The number of Warrants to which you are entitled is printed on the face of your Warrant Certificate. You should indicate your wishes with regard to the exercise of your Warrants by completing, or instructing the bank or broker that holds the Warrants relating to shares that you beneficially own to properly complete the appropriate form or forms on your Warrant Certificate and return the completed Warrant Certificate to American Stock Transfer and Trust Company, as warrant agent (the "Warrant Agent"), at the address indicated below. 1. Exercise Procedure. To exercise Warrants, complete the Exercise Form set forth in your Warrant Certificate and send your properly completed and executed Warrant Certificate, together with payment in full of the aggregate Warrant Exercise Price for each share of Class A Common Stock you wish to purchase, to the Warrant Agent at the address set forth below. You may not revoke your election to exercise your Warrants once made. Payment of the Warrant Exercise Price must be made in U.S. dollars for the full number of shares to be purchased by (a) check or bank draft drawn upon a U.S. bank or U.S. postal money order payable to American Stock Transfer And Trust Company, as Warrant Agent, or (b) wire transfer of same day funds to the account maintained by the Warrant Agent for such purpose. If you would like to pay the Warrant Exercise Price by wire transfer, please contact the Warrant Agent at (800) 777-0800 to obtain appropriate wiring instructions. The Warrant Exercise Price will be deemed to have been received by the Warrant Agent only upon (i) the clearance of any uncertified check, (ii) the receipt by the Warrant Agent of any certified check or bank draft drawn upon a U.S. bank or any U.S. postal money order, or (iii) the receipt of good funds in the account of the Warrant Agent designated above. If you are paying by uncertified personal check, please note that the funds paid thereby may take at least five business days to clear. Accordingly, holders of Warrants that wish to pay the Warrant Exercise Price by means of uncertified personal check are urged to make payment sufficiently in advance of the Expiration Time to ensure that such payment is received and clears by such date and are urged to consider payment by means of certified or cashier's check, U.S. postal money order or wire transfer of funds. You may not transfer your Warrants. The Warrant Agent will not give effect to any attempted transfer of Warrants, other than a transfer by operation of law, court order or the laws of descent and distribution. The address and telephone numbers of the Warrant Agent are as follows: American Stock Transfer & Trust Company 59 Maiden Lane, 9 Plaza Level New York, New York 10038 Attention: Shareholder Relations Telephone number: (800) 777-0800 If you exercise less than all of the Warrants evidenced by your Warrant Certificate by so indicating in your Exercise Form, the Warrant Agent will issue to you a new Warrant Certificate evidencing the unexercised Warrants. However, if you choose to have a new Warrant Certificate sent to you, you may not receive the new Warrant Rights Certificate in sufficient time to permit you to exercise the Warrant evidenced thereby. If you have not indicated the number of Warrants being exercised, or if you have not forwarded full payment of the Warrant Exercise Price for the number of shares and common stock to be purchased according to the number of Warrants that you have indicated are being exercised, you will be deemed to have exercised the maximum number of Warrants which may be exercised for the Warrant Exercise Price payment delivered by you up to the number of Warrants represented by your Warrant Certificate. 2. Warrant Certificate May Be Divided Into Smaller Denominations. In order to have your Warrant Certificate divided into smaller denominations, send your Warrant Certificate, together with complete separate instructions (including specification of the denominations into which you wish your Warrants to be divided) signed by you, to American Stock Transfer & Trust Company. Please allow a sufficient amount time for new Warrant Certificates to be issued and returned so that they can be used prior to the Expiration Time. Alternatively, you may ask a bank or broker to effect such actions on your behalf. Warrant Certificates may not be exercised in a manner that would result in the purchase of a fractional share, and any instruction to do so will be rejected and rounded down to the nearest whole share to the extent of payment actually received (with a refund to you of any excess payment actually received for any fractional share by American Stock Transfer & Trust Company). Please allow for possible delays in the mail, the time of the transmittal, the necessary processing time and other factors, to assure that you will timely receive such new Warrant Certificates in time to enable you to exercise the associated Warrants by the Expiration Time. Neither the Corporation nor American Stock Transfer & Trust Company will be liable to either you or a transferee for any such delays. 3. Execution. (a) Execution by Registered Holder. The signature on the Exercise Form must correspond with the name of the registered holder exactly as it appears on the face of the Warrant Certificate without any alteration or change whatsoever. Persons who sign the Warrant Certificate in a representative or other fiduciary capacity must indicate their capacity when signing and, unless waived by American Stock Transfer & Trust Company in its sole and absolute discretion, must present to American Stock Transfer & Trust Company satisfactory evidence of their authority to so act. (b) Execution by Person Other than Registered Holder. If the Warrant Certificate is executed by a person other than the holder named on the face of the Warrant Certificate, proper evidence of authority of the person executing the Warrant Certificate must accompany the same unless, for good cause, American Stock Transfer & Trust Company dispenses with proof of authority. 4. Method of Delivery. The method of delivery of Warrant Certificates and payment of the Warrant Exercise Price to American Stock Transfer & Trust Company will be at the election and risk of the holder of Warrants, but, if sent by mail, it is recommended that they be sent by registered mail, properly insured, with return receipt requested, and that a sufficient number of days be allowed to ensure delivery to American Stock Transfer & Trust Company and the clearance of any checks sent in payment of the Warrant Exercise Price prior to the Expiration Time. 5. Special Provisions Relating to the Delivery of Rights Through the Depository Trust Company. In the case of Warrants that are held of record through The Depository Trust Company ("DTC"), exercises of the Warrants may be effected by instructing DTC to transfer Warrants from the DTC account of such holder to the DTC account of American Stock Transfer & Trust Company, and making payment of the Warrant Exercise Price for each Share of Class A Common Stock to be purchased to the Warrant Agent. 6. Transfer Restrictions. You may not transfer your Warrants except (i) if you are, or you are the beneficial owner of Warrants that are held by, an entity that merges or consolidates with another entity, or otherwise by operation of law, pursuant to court order or pursuant to the laws of descent and distribution; or (ii) with the express prior written consent of the Corporation, in the Corporation's sole discretion. You may transfer your Warrant Certificate if such transfer does not represent any change of the beneficial ownership of your Warrants. The Warrant Agent shall not give effect to any transfer in violation of these restrictions. Upon presentation of your Warrant Certificate for transfer, the Warrant Agent shall require you to deliver such written representations and/or other evidence as it deems reasonable to substantiate that the transfer does not violate the restrictions of your Warrant Certificate. In the event you desire to present your Warrant Certificate for registration of transfer, the Exercise Form included therein shall be duly endorsed, or be accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation and the Warrant Agent, duly executed by you or your attorney-in-fact duly authorized in writing. Moreover, your signature on your Warrant Certificate must be guaranteed by an Eligible Guarantor Institution, as defined in Rule 17Ad-15 of the Securities Exchange Act of 1934, as amended. The Warrant Agent may impose a reasonable service charge against you for any registration of transfer of your Warrant Certificate. In addition, the Corporation may require you to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. -----END PRIVACY-ENHANCED MESSAGE-----